Diagnostic work records the state of public financial management at a point in time. Partner countries and donors have a shared interest in being able to monitor progress over time in improving public financial management systems. A performance measurement framework-and an associated set of reform measures-assist them in this by building on the information set out in diagnostic reviews.

Much of the formal diagnostic work in the area of public financial management is still evolving. A number of diagnostic tools are used. The main instruments with a brief description of their purpose are listed in Box A2.2. In addition to these formal reviews, important diagnostic work is often carried out through specific technical assistance projects or as part of the preparation and implementation of donor financed activities.

PURPOSE

The purpose of this paper is to put forward a set of good practices on how donors and governments can collaborate to make diagnostic reviews and measurement of performance in public financial management more effective. In pursuing this goal it seeks to achieve four specific objectives:

Maximise developmental benefits-Diagnostic reviews are a valuable input to government efforts to improve public financial management systems. Their quality and impact can be improved by encouraging stronger country ownership and in-country consultation, and by integrating the reviews into both government and donor decision-making cycles, programmes of country assistance and poverty reduction strategies.

Make information more readily available-Sharing the information and knowledge they provide with both donors and partner governments enhances the impact of diagnostic reviews.

Rationalise diagnostic reviews-Diagnostic reviews should provide full coverage of public financial management issues without unnecessary duplication. Donors should reduce the burden on developing countries through fewer and better co-ordinated diagnostic reviews.

Provide a framework for performance measurement in public financial management- Partner countries and donors have a shared interest in being able to monitor progress over time in improving public financial management systems, as reflected in diagnostic reviews. This paper provides

Box A2.2

Current diagnostic tools

Country Financial Accountability Assessment (World Bank)

CFAAs are a diagnostic tool designed to enhance knowledge of public

financial management and accountability arrangements in client countries.

Public Expenditure Review (World Bank)

PERs analyse the recipient countrys fiscal position, its expenditure policies-in particular the extent to which they are pro-poor-and its public expenditure management systems.

Country Procurement Assessment Review (World Bank)

CPARs examine public procurement institutions and practices in borrower countries.

HIPC Expenditure Tracking Assessment (World Bank & IMF) These assess the ability of the public financial management systems in highly indebted poor countries (HIPCs) to track poverty-reducing expenditures, using fifteen public financial management benchmarks.

Fiscal Transparency Review (IMF)

This is a module of the Reports on Observance of Standards and Codes (ROSC) which uses the Code of Good Practices on Fiscal Transparency adopted by the IMF in 1998.

Diagnostic Study of Accounting and Auditing (Asian Development Bank) These examine financial management and governance practices in the public and private sectors of borrower countries.

Ex ante assessment of country financial management (European Commission) Traditionally, the EC has carried out audits of its targeted budgetary support with a view to determining expenditures eligible or ineligible . For future budget support, however, it is developing a new approach using ex ante PFM assessments based on a mix of diagnostic work completed by other donors/governments and a compliance test to provide an empirical evidence of performance of the PFM systems.

Country Assessment in Accountability and Transparency (UNDP) CONTACT is a toolkit to assist governments and consultants in conducting missions to assess public financial accountability systems.

broad guidance on how donors might address this emerging issue in individual partner countries.

The practices set out in this paper are consistent with those described in the Good Practice Paper entitled Country Analytic Work and Preparation of Projects and Programmes.

GUIDING PRINCIPLES

Diagnostic work

The following principles guide the elaboration of good practices in diagnostic work in this paper:

Partner country governments should be fully involved in and have ownership of diagnostic reviews-There is scope for partner governments to be increasingly involved in the conduct of diagnostic reviews and this paper suggests a number of good practices to that end. This should improve the quality of these reviews and provide greater incentives for donors and partner governments to strengthen public financial management systems.

Harmonised diagnostic reviews alleviate the burden on partner countries- Donors should rationalise the scope, timing and conduct of diagnostic reviews so as to avoid unnecessary duplication of work, and should rely as far as possible on other donors diagnostic reviews to satisfy their requirements.

Harmonisation does not mean standardisation-In many countries receiving development assistance, public financial management systems may fall well below international good practices. This does not mean that financial assistance should not be provided to these countries: each donor must decide what level of risk it accepts in providing funds through the partner countrys budget, in relation to developmental benefits. Thus, different donors may make different decisions on the basis of the same diagnostic review.

Diagnostic reviews should be responsive to country development context- Improvement in public financial management systems is part of the overall development agenda, driven by the partner country and supported by donors. Undertaking of diagnostic work will be influenced by and