Assessments of Public Expenditure Management: Rationale and Context

This study-carried out under the auspices of the Public Expenditure and Financial Accountability (PEFA) Program, a multi-donor partnership-is intended to help international development agencies generate more coordinated, effective instruments and procedures for assessing and strengthening public expenditure, procurement, and financial accountability systems in developing countries-especially countries that receive international aid for budget support.1 It analyzes instruments and approaches used by the World Bank, International Monetary Fund (IMF), European Commission (EC), U.K. Department for International Development (DFID), and other agencies, identifies gaps and overlaps by mapping each instruments coverage of the various elements of expenditure management, and provides recommendations for strengthening and integrating the instruments.

The main assessment instruments reviewed are World Bank Public Expenditure Reviews (PERs), Country Financial Accountability Assessments (CFAAs), and Country Procurement Assessment Reports (CPARs), IMF Reports on the Observance of Standards and Codes of Fiscal Transparency (Fiscal ROSCs), IMF-World Bank Public Expenditure Tracking Assessments and Action Plans (AAPs) for Heavily Indebted Poor Countries (HIPCs), EC audits of public financial management systems, and DFID assessments of fiduciary risk.

WHAT IS PUBLIC EXPENDITURE MANAGEMENT?

Public expenditure management includes all the components of a countrys budget process-both upstream (preparation and programming) and downstream (execution, accounting, control, reporting, monitoring and evaluation)-including the legal and organizational framework and arrangements for:

Forecasting revenues and expenditures.

Formulating medium-term expenditure frameworks.

Linking the budget to policymaking.

Preparing the budget.

Managing cash and monitoring expenditures.

Performing internal control and audits.

Accounting and reporting.

Procuring public goods and services and managing assets.

Assessing performance.

Conducting external audits.

Ensuring oversight by the legislature and other bodies.

The broad objectives of public expenditure management are to achieve fiscal discipline, allocate resources to uses that reflect government policy priorities, and deliver public services efficiently and effectively.

The terms public financial management and public expenditure management are often used interchangeably. But for the purposes of this study, public financial management has a narrower definition, involving issues related mainly to the downstream phase of the budget cycle, and the term public expenditure management is used more often.

THIS STUDYS PURPOSE AND OBJECTIVES

The main concerns driving this study include the scope and coverage of the assessment instruments, adequacy of the institutional and governance analysis in the assessments, attention paid to fiduciary risk and its relationship

with development objectives, availability of questionnaires, checklists, and other tools to support assessment work, adequacy of review and quality control procedures, and fit between the experience and skills of teams that conduct assessments and the technical and institutional issues being assessed.

A consultative approach was used to prepare the study, including with staff of the development agencies concerned-especially task leaders-and with government officials in some recipient countries. This approach was vital because balanced conclusions in this complex area require the informed judgments of those involved in actual assessments.

To understand the context for both the PEFA program and this study, the next section reviews the evolution in approaches to assessing public expenditure, procurement, and financial accountability, protecting the integrity of financial resources (by containing fiduciary risk), and achieving development objectives. The study then provides a conceptual framework for assessing fiduciary risk, financial accountability, and public expenditure management, summarizes the coverage and content of various instruments that do so, describes available questionnaires and other tools, explains the studys methodology and information sources, presents findings from the technical mapping of the instruments coverage, the review of staff guidelines and sample reports, and interviews with experts from donor agencies and government officials, and offers recommendations and identifies issues meriting future attention.

GENESIS OF ASSESSMENTS OF PUBLIC EXPENDITURE MANAGEMENT AND FINANCIAL ACCOUNTABILITY

Until the late 1970s most external assistance to developing countries focused on individual projects, including efforts to increase financial integrity and aid effectiveness. Moreover, the literature on development made a clear distinction between development and nondevelopment spending, with development spending usually identified as investment and non-development as current spending. This approach to aid corresponded to the golden rule of budgeting, which calls for all government borrowing to be used for investment and for current spending to be fully financed by domestic receipts. This approach was considered essential to assessing whether the debt service incurred by new investment would be more than offset by the increase in debt servicing capacity it made possible-both measured in foreign currency terms.