How To Assess Public Financial Management (PFM)
How To Assess Public Financial Management (PFM)
How To Assess Public Financial Management (PFM)
February 2014
Japan International Cooperation Agency
Industrial Development and Public Policy Department
Preamble
In recent years, there has been increasing awareness within the international development
community of the importance of public financial management (PFM) in developing countries.
Behind this, there is a recognition that fiscal management stability and sustainability are necessary to
achieve the Millennium Development Goals (MDGs) and other development goals set forth in the
national development policy of the developing country. To this end, ensuring the three principles, i.e.,
aggregate fiscal discipline, strategic allocation of resources, and efficient service delivery, is
necessary, and PFM is the necessary institutional framework. The Fourth High Level Forum on Aid
Effectiveness (HLF-4, November 29 to December 1, 2011) in Busan, Korea, brought even greater
recognition of the importance of a strong PFM system for effective and efficient use of aid.
Additionally, in January 2013, the Public Expenditure and Financial Accountability (PEFA) Program,
a multi-donor partnership by seven bilateral and multilateral donors including the World Bank,
produced a Good Practice Note on Sequencing PFM Reforms that has brought a fresh dimension to
the work on assessing the PFM reform process.
In February 2013, the Japan International Cooperation Agency (JICA) developed thematic guidelines
and a position paper on PFM. These documents stated that PFM reform is: a major reform process
with the potential to affect the entire public sector. PFM reforms constitute a key development issue
that has ramifications for everything from the formulation of a blueprint for reform to the details of
its execution, and from development planning to new paradigms for public sector management in the
country in question. In providing assistance to address the development challenges faced by
developing countries, JICA views PFM as one of the key institutional arrangements to be established
and strengthened in all sectors and programs/projects.
As these two documents state, JICA staff and experts, who are engaged in its development
cooperation activities, should be keen to PFM system in the partner country regardless of their level
of understanding and experience of PFM in general. If possible, they should be able to see whether
or not PFM institutional arrangements in the recipient countries are good. In the case of PFM
assistance, when they formulate and design programs and projects, they should do so from the
medium- and long-term perspectives. They should not pursue tangible outputs and outcomes in the
short term. In the case of non-PFM assistance, we may face problems that would affect the smooth
implementation of JICA projects and the sustainability of the outputs and outcomes of those projects.
Good or bad, they may consider simply how the PFM system should be changed only for the benefit
of JICA projects and programs. However, primarily they should consider how the PFM system
should be in the country from a neutral and well-balanced position.
However, assessments of PFM reform progress in a particular country are daunting tasks for many
people. They require both background knowledge and experience of PFM. Against this background
situation, JICA has developed this Handbook with a view to assisting its staff and experts to become
familiar with PFM system performance measurement. This Handbook is intended to offer some
practical guidance for future assessments in this area. It will be revised as JICA accumulates more
experience in PFM and discrepancies in the Handbook come to light.
We would like to acknowledge the many useful opinions and comments received from all those
involved in this work. Special mention should be made of Prof. Shinji Asanuma (Visiting Professor,
School of International and Public Policy, Hitotsubashi University), Prof. Hisanobu Shishido
(Professor, Department of Economics, Tokyo Womans Christian University), and Prof. Hideaki
Tanaka (Professor, Graduate School of Governance Studies, Meiji University) who made valuable
contributions to the JICA Working Committee on PFM, to all the JICA project stakeholders who
supplied comments and diagrams, and all those who participated in internal PFM working group
meetings here at JICA (specifically, members of the Southeast Asia and Pacific Department, South
Asia Department, Latin America and the Caribbean Department, Africa Department, Middle East
and Europe Department, Financial Cooperation Implementation Department, Credit Risk Analysis
and Environmental Review Department, Loan and Administration Department, and the Evaluation
Department) for their work on this project study. Special thanks in particular should be made to
Taichi Sakano (Senior Researcher, Department of International Studies, Mitsubishi UFJ Research
and Consulting Co. Ltd.) who played a prominent role in the writing of this Handbook as an
outsourcing consultant of this project study.
February 2014
Takumi Ueshima,
Director General
Industrial Development and Public Policy Department
Japan International Cooperation Agency (JICA)
Contents
Preamble ..................................................................................................................................2
User Guide ...............................................................................................................................1
Part I. Introduction ..................................................................................................................3
Chapter 1. Background and Objectives ........................................................................................4
1-1. Background ........................................................................................................................4
1-2. Objectives ...........................................................................................................................5
Chapter 2. The Importance of PFM knowledge and Assessment.....................................................7
2-1. Background ........................................................................................................................7
2-2. Approaches to PFM Assessment ...........................................................................................9
2-3. Improving PFM Literacy ....................................................................................................10
Part II. An Eye to Assess PFM ............................................................................................11
Chapter 3. Acquiring a Proper, Balanced Understanding of PFM: The Basics ...............................12
3-1. What is PFM? ...................................................................................................................12
3-2. Is it Necessary to Know all the PFM Functions? ..................................................................14
3-3. Sequencing PFM Reforms ..................................................................................................16
Chapter 4. An Overview of PFM Functions ................................................................................20
4-1. Leadership and Motivation of PFM Reform in the Country...................................................20
4-2. Legal and Institutional Budgetary Frameworks ....................................................................20
4-3. Budget Credibility and Execution .......................................................................................22
4-4. Budget Comprehensiveness ................................................................................................25
4-5. Budget Classification .........................................................................................................27
4-6. Budget Preparation and Budget Allocation ..........................................................................31
4-7. Medium-Term Perspectives in Budgeting ............................................................................36
4-8. Performance Evaluation in the Budgeting Process ................................................................39
4-9. Cash Management and Planning, and Disbursement .............................................................43
4-10. Debt Management ...........................................................................................................47
4-11. Asset Management ...........................................................................................................50
4-12. Revenue Management ......................................................................................................51
4-13. Accounting System and Procedures ...................................................................................52
4-14. Public Procurement..........................................................................................................55
4-15. Internal Controls and Internal Audits .................................................................................57
4-16. Reporting ........................................................................................................................59
4-17. Financial Management Information System (FMIS) ...........................................................62
4-18. External Audits and Parliamentary Scrutiny .......................................................................63
Part III. A Practical Guide to PFM .........................................................................................66
Chapter 5. Tracking the Progress of PFM Reforms .....................................................................67
5-1. Getting a Snapshot of PFM System Performance .................................................................68
5-2. Tracking Progress on PFM Reforms by Function .................................................................69
Part IV. Challenges for the Future ..........................................................................................74
Chapter 6. Challenges for the Future ..........................................................................................75
Appendix 1: Matrix for Measuring Progress on PFM Reforms ........................................77
Appendix 2: List of Key Questions......................................................................................91
Major Bibliographic References ....................................................................................... 127
User Guide
PFM is essential to address the development challenges faced by the developing countries. All of us
should bear in mind PFM in our development cooperation activities. All of us should cultivate an
eye for seeing PFM. However, there may be few people who will have the time to read through
this Handbook. For those readers, we suggest going through the necessary parts according to the
following guide. At the very least, be sure to read Chapters 2 and 3, as they are indispensible to any
assessment of PFM system performance.
Application scenario 1: You need to understand the mechanisms that are giving rise to PFM-related
problems in the implementation of development cooperation projects.
l
At project identification/formation and appraisal: Start by reading sections 4-3, 4-4, 4-5, 4-6,
4-7, 4-8, and 4-16 of Chapter 4 to brief yourself on budget allocation decisions and budgetary
outlooks as upstream processes in the PFM cycle. Next, read sections 4-9, 4-10, and 4-17 on
treasury management and sections 4-13 and 4-14 on budget execution to understand what
problems are likely to occur in service delivery with the implementing agency in the recipient
country.
At project implementation: The failure of the implementing agency in the recipient country to
disburse funds as initially agreed is a frequent problem at this stage of the project cycle; thus,
you should start by reading sections 4-9, 4-10, and 4-17 of Chapter 4 on treasury management
to get an understanding of whether or not the recipient government has the mechanisms in place
to facilitate the smooth flow of funds. Next, read sections 4-3, 4-4, 4-5, 4-6, 4-7, 4-8, and 4-16
on budget preparation and sections 4-13 and 4-14 on budget execution to understand the
upstream stages of the PFM cycle.
At other common stages: Sections 4-15, 4-16, and 4-18 on internal and external audits should
offer some important insights on PFM during each of the phases of the project cycle given
above.
Application scenario 2: You need to get a general idea of progress in PFM reforms in the recipient
country.
STEP 1: Where a PFM Performance Report is available, start by rating progress towards PFM
reforms in the recipient country by PFM function, using the Matrix for Measuring Progress in PFM
Reforms in Appendix 1 as a guide.
STEP 2: Read the relevant sections of Chapter 4.
STEP 3: Assess progress in PFM reforms in the recipient country using 3-3. Sequencing PFM
Reforms in Chapter 3 as a guide.
Application scenario 3: Multiple donor agencies are to present a joint roadmap for PFM reforms to
the recipient government. Prior to this, you need to know the basic reform priorities in order to
generate a viable reform path. You also need to understand the significance of the reform agendas
being pushed by other donor agencies.
STEP 1: Where a PFM Performance Report is available, start by rating progress towards PFM
reforms in the recipient country by PFM function, using the Matrix for Measuring Progress in PFM
Reforms in Appendix 1 as a guide.
STEP 2: Clarify which of the performance indicators given in Appendix 1 corresponds to the PFM
reform proposals being pushed by other donors. Also read the relevant sections of Chapter 4.
STEP 3: Assess progress in PFM reforms in the recipient country using 3-3. Sequencing PFM
Reforms in Chapter 3 as a guide.
Figure 1: User Guide
Problems observed through the implementation of JICA projects
No budget
allocation for the
JICA project
Handbook
4-34-44-54-6474-84-16
Budget
preparation
Handbook
4-94-104-17
Treasury management
(commitments, cash control,
etc.)
Handbook
4-134-14
Improvement in execution
(accounting,
procurement)
(1) No standard accounting
procedures
(2) Improper budget
execution (misused
and/or unaccounted-for
funds)
(3) Improperly executed
procurement
procedures
No brake on
improper use
of funds under
JICA project
auspices
Weak external
audit functions
and no checks on
inadequate and/or
improper PFM by
the counterpart
organization, etc.
Handbook
4-154-16
Internal
controls,
audits
(1) No internal control
mechanisms to
ensure proper
execution
(2) Internal controls,
but the internal
audit mechanisms
needed to monitor
them are either
non-existent or
inadequate
Handbook
4-164-18
External
audits
External audits
are not
functioning
effectively
Part I. Introduction
Since the late 1980s, through the accumulation of various efforts up to the current PEFA, the basic
concepts and framework have been standardized, such as: (1) the three basic principles that support
fiscal management stability and sustainability (i.e., aggregate fiscal discipline, strategic allocation of
resources, and efficient service delivery); (2) what PFM is; (3) the elements of the PFM functions
(i.e., budget planning, preparation and execution, reporting and monitoring, audits, etc.); and (4) how
progress in PFM reform in specific countries is assessed. In this context, when JICA staff and
experts participate in discussions on PFM either at the international or the partner country level, it is
an important prerequisite for them to be able to discuss PFM using the same terminology and logic
as colleagues from the partner country and donors.
1-2. Objectives
Potential Users
This Handbook is designed to be used mainly by both JICA staff and experts who are engaged in
specific JICA projects (hereinafter referred to as JICA staff and experts).
Objectives
This Handbook aims to accomplish the following through improving PFM literacy:
l
The ability to understand progress and achievements in PFM reforms in the recipient
government from a neutral and broad perspective;
The ability to discuss PFM with the partner country and donors using the same terminology and
logic; and
The ability to build both technical perspectives (on education, health, agriculture, etc.) and PFM
perspectives, and to engage these perspectives in the operation of individual JICA projects (i.e.,
critical policy and institutional factors which would affect implementation and the level of
outputs and outcomes).
The purpose of this Handbook: As stated above, this Handbook has primarily been designed
to assist JICA staff and experts in diagnosing progress in PFM reforms in developing countries
and the strengths and weaknesses of core PFM functions. It is not intended to be used as a tool
for designing PFM reform programs. The design of a PFM reform program will depend largely
on the context and political motivation for PFM reforms in the recipient country. This will also
depend on the institutional capacity of the relevant organizations, as well as on various factors
other than technological factors. Such design cannot be determined when it is based only on the
strengths and weaknesses of the PFM functions that were observed using diagnostic tools such
as PEFA. Finally, users of this Handbook are strongly encouraged to always bear in mind (1)
the condition under which the recipient government started PFM reforms, and (2) how the
reform process is being managed in the country.
l
PFM development issues versus risk factors which would affect JICA project
implementation: The Japanese ODA community has been enhancing its level of undertaking
with regard to PFM, but it is still evolving. Therefore, this Handbook tries to discuss PFM
issues from the aspect of risk factors at first, i.e., how a poor-quality PFM system in a recipient
country would affect smooth operations and the achievement of project outputs and outcomes.
This approach is much easier for many people to become familiar with PFM, although it is not
common in the international development community. At the same time, we would like to
remind you that a good PFM system that meets the expectations of donors (including JICA)
does not always mean a good PFM system that is actually required in the country context.
Therefore, donors should primarily consider how appropriate the PFM system should be for the
partner country and try to see the current situation from a neutral position without any
preconceptions. Accordingly, while the majority of readers will read this Handbook from the
perspective of benefits to JICA projects, it is hoped that you will always consider how a
desirable PFM system should be for the partner country and what kinds of policy measures
should be taken in the PFM reform program.
Addressing PFM issues in the operation cycle of individual projects as a risk factor that would
impede the smooth implementation of JICA projects and affect the sustainability of aid
effectiveness and development outcomes.
Pillar
Abstract
Cases
As illustrated, when JICA is extending a development policy loan (DPL) or poverty reduction
support credit (PRSC), JICA designs a reform agenda policy matrix together with other co-financers.
PFM-related issues are usually included in the matrix. Thus, JICA staff and experts need to
understand the significance of these PFM-related issues in the whole picture of the PFM reform
program in the partner country. They should then be involved in the process of designing the policy
matrix, and understand the final version of the matrix. In that process, an option for JICA is to
propose including PFM related issues that actually affect the operation of the yen loan project.
In the case of technical cooperation, when JICA examines project requests from the partner country,
it tends to examine it and design the project framework mainly from the technical perspective based
on the approach proposed in the request document. However, if JICA can identify the potential risk
factors from past experience, it should consider risk control measures in the project design stage, and
formulate other projects for addressing those identified risks.
Once the recipient government has finalized its Medium-Term Expenditure Framework
(MTEF) and budget preparation work (for the subject fiscal year), it is too late to ask for money
to fund a JICA project. (To prevent this, JICA staff and experts need to know the budget
preparation process and the timing of budget decisions and to take appropriate actions at the
right time, though it goes without saying that this does not guarantee getting a result.)
While the counterpart organization is asked to secure funds to cover its portion of the expenses
in a JICA project, it will naturally prove difficult for the organization to secure the requisite
appropriation unless the project in which JICA is involved can be kept on budget. (To prevent
projects from going over budget, JICA staff and experts need to manage the necessary expenses
on budget in the partner country. Of course, there are cases in which the funds are secured
and the counterparts portion of the expenses is covered even if the project is not on budget.)
It is hoped that readers of this Handbook are not simply bemoaning the failure of counterpart
organizations to release their portion of project expenses on a timely basis without first ascertaining
when the fiscal year begins and ends in the recipient country, how the budget preparation process
and the timing of budget decisions work, and how these synchronize with the JICA project cycle.
In practical terms, it is possible to design a project framework to assist specific PFM functions even
if we do not know the current status of the recipient countrys overall PFM system. However, in the
process of identifying, formulating, and designing technical assistance projects, for example, for
performance-based budgets and internal audits, it is critical to understand the entire overview of the
recipient countrys PFM system and to clarify designated roles that are intricately intertwined with
other functions, comprising the one system of PFM.
Again, where PFM is perceived as a potential risk factor for the implementation of a JICA project,
one option could be to concentrate on the potential risks and take risk control measures. However,
we need to recognize that profound PFM-related problems are just the tip of the iceberg, and deep
problems exist below the surface. Problems regarding PFM functions are intricately intertwined with
each other. Thus, it is desirable to look at the fundamental background of these problems before
concentrating on specific issues. Even if you assume that you have identified PFM-related causes,
you need to carefully examine: (1) whether this is a systemic issue; (2) if so, whether the current
situation should be accepted or reformed for the recipient countrys ideal PFM system; and (3) if a
need for reform is identified, whether it can be improved in the short term. While the existing PFM
system may not be welcomed for the JICA project in question, it may well be entirely justifiable in
the context of the recipient countrys ideal PFM system. You may accept the current situation or
reject it. This is an issue for your balance, for example, between PFM for the partner country and
PFM for the operation of the individual aid project. To manage this properly, you are required to
have an eye to see the PFM system of the partner country from neutral and holistic perspectives.
With this in mind, JICA staff and experts are encouraged to read this Handbook and ultimately to
improve their PFM literacy as follows.
1. You will become aware that PFM reform is a process that will affect the public sector as a
whole. Consequently, it is linked with the blueprint for the entire reform process and its
implementation. It also has a close relation with development planning and public sector
management.
2. As someone involved in development cooperation, you will become aware of the negative
effects of ignoring the PFM issue.
3. You will foster an eye to assess PFM in terms of the following:
(1) An eye to see progress in PFM reforms; and
(2) An eye to see the current status of individual PFM functions.
As stated above, this Handbook hopes that you do not just talk about PFM-related issues as
interesting topics during coffee breaks in the office, but that you try to understand the background of
PFM-related bottlenecks and take action against these risks.
10
POINTS
When you read this chapter, you can build a basic foundation necessary to discuss PFM with the
partner country government and donors using same wording and the same logic, and you can
understand the PFM aspect of the development process and activities in the partner country along
with technical aspects such as education and health. You can consider development processes and
activities from a wider angle.
11
Development
goals
MDGs, PRSP,
political manifesto
Fiscal &
expenditure
policy & goals
Budgetary outcomes
Aggregate fiscal discipline: Maintaining fiscal discipline over total expenditure on the basis of
explicit and enforceable decisions and based on realistic revenue projections and sustainable
debt levels.
Strategic allocation of resources (allocation efficiency): The most strategic allocation of
Excerpted from Thematic Guidelines on Financial Administration and Public Financial Management, February 2013 (JICA
2013a).
12
The PFM system exists to ensure that these three principles are adhered to.
PFM systems are composed of upstream, midstream, and downstream processes that include the
functions given in Figure 5 below. It is important to obtain a holistic understanding of the overall
PFM system and its individual functions, as well as the problems that might occur in developing
countries if these functions are not effectively working. In such cases, it is also important to take into
account the links between PFM system performance and development goals, high-level fiscal
management objectives, and the interim targets illustrated in Figure 4.
Figure 5: Upstream, Midstream, and Downstream PFM processes
Budget
Preparatio
n
Midstream/Downstream
Budget
Allocation
Accounting
and
Procureme
nt
Budget
Execution
Reporting
Audits
ICT System
The international development community is getting closer to reaching a consensus on PFM-related
issues. Accordingly, it is important for JICA staff and experts to bear in mind the triangular structure
shown above, the three principles (i.e., aggregate fiscal discipline, strategic allocation of resources,
and efficient service delivery), and the upstream, midstream and downstream PFM processes when
they participate in discussions on PFM and read the relevant literature. You are encouraged to gather
the intelligence you need on the subject from the seemingly disorderly profusion of information that
is available.
13
Classification
Contents
The necessary budget for the JICA project has not been allocated.
The appropriations are not allocated at the time necessary for JICA project activities.
No spending plan corresponding to the schedule of JICA project activities and ODA loan
repayments has been drafted, and the requisite funds are not forthcoming as a result.
Budgetary funds allocated to cover counterpart expenses are being spent inappropriately in
the name of JICA project activities, creating reputation risk for JICA.
The public procurement system is defective and poorly operated, leaving the recipient
government unable to procure adequate funding.
Misuse of funds in the name of JICA project activities is unchecked.
The external audit function is poor, and inappropriate and improper PFM on the part of
counterpart organizations of the JICA project is inevitable.
14
Budget
preparation
Treasury management
(commitments, cash control,
etc.)
Improvement in
execution (accounting,
procurement)
No brake on
improper use of
funds under JICA
project auspices
Internal controls,
audits
(1) No internal control
mechanisms to
ensure proper
execution
(2) Internal controls,
but the internal
audit mechanisms
needed to monitor
them are either
non-existent or
inadequate
External
audits
External audits
are not
functioning
effectively
A realistic approach to major human resource and time constraints could be to focus on immediate
needs and to undertake a current state analysis of the relevant PFM functions. However, since all the
functions are connected to a greater or lesser extent, up to a point it will be necessary to assess the
PFM system in its entirety.
Where, for example, problems relating to the downstream functions of PFM hinder the smooth
implementation of a JICA project, the further downstream in the PFM cycle you move, the more it
will be necessary to understand the current state of upstream processes. If the budget for counterpart
expenses has not been executed, it will be necessary not only to establish whether or not the
allocation of appropriations process is functioning properly, but also to look at the earlier stages in
the budget cycle, i.e., the budget preparation processes, to determine whether the counterpart
organization has in fact put in the relevant budget request. By contrast, if the problems are related to
upstream PFM processes and there are no functions any further upstream, it would be inadvisable to
limit your assessment to midstream processes at the neglect of those further downstream in the PFM
cycle. As Figure 4 illustrates, given that PFM system performance is ultimately the platform that
enables governments to achieve their development goals, it is undesirable to disregard the current
status of the downstream PFM functions that are necessary to (realize) efficient service delivery.
Again, no individual PFM function is independent of other functions; the functions all form part of
an integrated PFM system. For example, a poorly functioning internal audit system may be
admissible insofar as the external audit system functions effectively, thereby complementing internal
audit functions and ensuring the financial accountability of government. The goal of PFM reforms is
15
not to have all countries achieving an aggregate PEFA score equivalent to an (A), which is the
ultimate and most difficult challenge; rather, it is important to look at the PFM systems of individual
countries with a view to establishing how the respective functions fit together and whether the
system facilitates the necessary functioning of these individual processes.
Insofar as there are no such constraints, readers are encouraged to use this Handbook to acquire a
broad-based understanding of PFM such that they are able to assess the current status of PFM
performance across the entire system in the recipient country, rather than viewing it simply in terms
of potential risk factors for a specific JICA project.
16
In January 2013, PEFA completed the Good Practice Note on Sequencing PFM Reforms (GPN). The
GPN argues that the order of reform actions should follow a hierarchy determined by the three main
deliverables of a well-functioning PFM system, which are, in order, management systems to ensure
(1) financial compliance and fiscal control, (2) macro-fiscal stability and sustainability, and (3)
efficiency and effectiveness. While all three deliverables are equally important, the GPN argues that
the PFM functions necessary for securing financial compliance and fiscal control are core
functions and thus that establishing these should be the leading priority for reform.
Macro-fiscal stability
& sustainability
Core
functions
Source: PEFA Good Practice Note on Sequencing PFM Reforms, January 2013 (Diamond 2013).
17
connection with the budget preparation process, including MTEF, program budgeting,
and performance budget. However, from a sequencing perspective, donors should avoid
proposals advocating the introduction of these budget systems before the traditional budget
with input control has been successfully implemented based on the annual orientation. In the
case of proposals, the details should be realistic and attainable.
When discussing or making proposals on PFM issues, readers are encouraged to avoid being
swayed by changing concepts and to explore what they want to say first in terms of PFM
reform sequencing and other dimensions before making statements or committing their
thoughts to paper. Regarding the issue of donor common sense, readers should avoid proposals
for reforms that would be difficult to achieve even in an advanced economy.
19
Overview
Those countries that have made progress towards PFM reforms have, in general, had laws in place
since the late 1990s stipulating basic policies on public financial management, with the aim of
restoring fiscal health. Such laws go by several names, including organic budget law, fiscal
responsibility law, budget system law, and so forth. However, they all establish: (1) the basic
principles of budgeting (annual orientation, etc.); (2) the budget preparation process (including the
budget planning schedule, etc.); (3) budget execution and audit procedures; and (4) the alignment of
authority and responsibility for the budgeting process within parliament and the central government
ministries and/or agencies charged with its execution. Some countries have included budget and
financial provisions in the constitution.
Again, with regard to the rules to ensure aggregate fiscal discipline, some countries have determined
ratios for the budget deficit and outstanding central government public debt as a share of GDP, and
have established organizational structures and/or institutional frameworks to oversee compliance.
20
Depending on the country, the rules on aggregate fiscal discipline may be enshrined in law or subject
to approval by the legislature. A famous example is the EUs Maastricht Treaty, which established
stringent criteria for Eurozone members, who were required to limit their budget deficit to within 3
percent of GDP and outstanding public debt to within 60 percent of GDP, subject to penalties.
Mongolian budget law imposes limits of 3 percent and 40 percent, respectively, on budget deficits
and outstanding public debt, while in Indonesia the government is required to keep its budget deficit
to within 3 percent and outstanding public debt within 60 percent of GDP.
Reference: Nigerias Fiscal Responsibility Act of 2007
http://frc-nigeria.org/Fiscal%20Responsibility%20Act.pdf
Level 3
Level 2
Level 1
Contents
PFM related laws and regulations are established and basic functions of PFM and
its supervisory authorities are specified. Rules concerning fiscal discipline are
established and organizational settings exist. Those have become conscious.
PFM related laws and regulations are established and basic functions of PFM and
its supervisory authorities are specified. Rules concerning fiscal discipline are
established and organizational settings exist. But those have not become
conscious.
PFM related laws and regulations are established and basic functions of PFM and
its supervisory authorities are specified. Rules concerning fiscal discipline are
established, but organizational settings do not exist.
PFM related laws and regulations are established and basic functions of PFM and
its supervisory authorities are specified. Rules concerning fiscal discipline are not
established.
21
Overview
Budget credibility is a key element of expenditure policy analysis. Generally, budget appropriations
(funds for programs, etc., that have been voted on by the legislature) and final accounts are
compared on an aggregate basis and against a breakdown of major budget items. Smaller deviations
between appropriated and executed budgets are considered to be indicative of greater budget
credibility. Data on fluctuations in budget credibility indicators (the percentage and frequency of
such deviations) contain a considerable volume of consolidated information regarding, for example:
(1) whether the budget preparation is realistic, (2) whether authorization and appropriation have
control over their cash flows, and (3) whether expenditures are managed during execution. Where
budget credibility indicators are deteriorating, it is essential to investigate the causes.
22
current fiscal year and expenditure forecasts from the government and check that the necessary funds
have been included; however, this analysis cannot be undertaken appropriately if there are frequent
deviations between the budget at the beginning of the fiscal year and final accounts.
For JICA, compliance in budget execution, both that of the whole government and that of the
implementing agency, is critical. Even if project funds are shown in the budget, there is no way of
knowing whether the amounts will be disbursed in accordance with the JICA project schedule. It is
possible that the entire budget for the year will be executed in the final two months of the fiscal year.
Accordingly, due caution needs to be exercised in countries and/or counterpart organizations with
high levels of arrears. As stated above, this may be indicative of some degree of non-compliance in
budget execution. On a large-scale infrastructure project, for example, this could give rise to budget
execution problems even if construction expenditure and post-construction operation and
maintenance expenditure have been planned for in accordance with the original plan, resulting in
delays in construction work.
23
In two or all of the last three years the actual expenditure deviated from
budgeted expenditure by an amount equivalent to more than 15% of budgeted
expenditure.
Note: Equivalent to PEFA performance indicator PI-1.
Level 1
[Variance in expenditure composition between the budgeted expenditure and actual expenditure]
A score of Level 3 and above indicates the core level of PFM functionality given in Figure 8 has
been reached.
Level
Contents
Variance in expenditure composition (administrative) between the budgeted
Level 4
expenditure and actual expenditure exceeded 5% in no more than one of the last
three years.
Variance in expenditure composition (administrative) between the budgeted
Level 3
expenditure and actual expenditure exceeded 10% in no more than one of the
last three years.
Variance in expenditure composition (administrative) between the budgeted
Level 2
expenditure and actual expenditure exceeded 15% in no more than one of the
last three years.
Variance in expenditure composition (administrative) between the budgeted
Level 1
expenditure and actual expenditure exceeded 15% in at least two of the last
three years.
Note: Equivalent to PEFA performance indicator PI-2.
[Variance in aggregate revenue out-turn and original approved budget]
Level
Contents
Actual domestic revenue was between 97% and 106% of budgeted
Level 4
revenue in at least two of the last three years.
Actual domestic revenue was between 94% and 112% of budgeted
Level 3
revenue in at least two of the last three years.
Actual domestic revenue was between 92% and 116% of budgeted
Level 2
revenue in at least two of the last three years.
Actual domestic revenue was below 92% or above 116% of budgeted
Level 1
revenue in two or all of the last three years.
Note: Equivalent to PEFA performance indicator PI-3.
domestic
domestic
domestic
domestic
[Stock of arrears]
A score of Level 3 and above indicates the core level of PFM functionality given in Figure 8 has
been reached.
Level
Contents
The stock of arrears is low (i.e., is below 2% of total expenditure). Reliable and
Level 4
complete data on the stock of arrears is generated through routine procedures at
least at the end of each fiscal year (and includes an age profile).
The stock of arrears constitutes 2-10% of total expenditure, and there is evidence
Level 3
that it has been reduced significantly (i.e., more than 25%) in the last two
years. Data on the stock of arrears is generated annually, but may not be
24
Overview
Where possible, a countrys budget should be consolidated into a general account that offers a
comprehensive overview of its policies for the fiscal year. This is known as budget
comprehensiveness and is one of the basic principles of budgeting. With government activities
becoming increasingly wide-ranging and complicated, however, there are some public funds that are
managed independently of the general account. Separate accounts may be established for a specific
purpose or because there is a need to earmark specific revenue for a specific expenditure item, and
these accounts are referred to as extra-budgetary funds (EBFs). EBFs include social security and the
funds used for road maintenance (road funds), among others. Japans Special Accounts are another
example of extra-budgetary funds. Other examples are the quasi-fiscal activities of state-run or
public financial institutions using internal generated funds.
25
duplication. The budget may be referred to as comprehensive, but if the actual allocation methods for
appropriations and other procedures are not standardized across the board, appropriation allocation
cannot be predicted. Where fund use is obscure, it will be obvious that it can lead to the development
of corrupt practices. Moreover, if aggregate budget data is unavailable, it will affect the reliability of
macro-economic projections. However, where a degree of discipline is assured through cabinet or
parliamentary oversight, the existence of extra-budgetary funds and quasi-fiscal activities may be
justified.
26
expenditure (equivalent to the general budget) are established and cover all of
the operation of extra-budgetary funds.
The level of unreported extra-budgetary expenditure, which should be covered
Level 3
in budgeted expenditure, in-year budget reports, and final accounts, constitutes
1-5% of total expenditure. Rules to manage extra-budgetary expenditure
(equivalent to general budget) are established and cover most of the
operation of extra-budgetary funds.
The level of unreported extra-budgetary expenditure, which should be covered
Level 2
in budgeted expenditure, in-year budget reports, and final accounts, constitutes
5-10% of total expenditure. Minimum basic rules to manage extra-budgetary
expenditure (equivalent to general budget) are established and applied to main
extra-budgetary funds.
The level of unreported extra-budgetary expenditure, which should be covered
Level 1
in budgeted expenditure, in-year budget reports, and final accounts, constitutes
10% or more of total expenditure. Rules to manage extra-budgetary expenditure
(equivalent to general budget) are not established or not widely understood.
Note: Equivalent to PEFA performance indicator PI-7.
Reference: Findings of tendencies from PEFA Indicators.
The PEFA indicator for this parameter measures the percentage occupied by extra-budgetary funds
and quasi-fiscal activities that are not included in the general account in the annual budget, in-year
financial statements, or final statements among total expenditures. An analysis of the PEFA
indicators in terms of income levels reveals the following trend. (Note: The trend is not absolute, and
the finding should not be taken as categorical.)
l
Overview
Government budgets are assigned several classification codes, which are used to present various
dimensions or in discussions on allocation, such as an administrative classification (which states a
given percentage decrease in the budgets available for specific ministries) and functional
classifications (which state a given percentage increase in military spending for the current year, for
example).
The agriculture ministry budget for a country, for example, will use the expense code 233418 for
the wages and salaries of the ministrys employees. A careful examination of the items listed in
budget documentation will reveal that it includes classifications such as those shown below.
Generally speaking, a line-item budget uses economic classification 5 to identify expense items,
5
Economic classification identifies the type of category of expense, e.g., payroll or travel expenses, etc. Japan uses the
following economic classifications in its budget: payroll, travel expenses, housing expenses, facility expenses, subsidies
27
where the supplementary information category shown under economic classification in the table
below corresponds to the project account classification used in the Japanese national budget.
Figure 10: Budget Classification (1) Administrative Classification and Economic Classification
Administrative
Classification
Ministry
Agriculture
ministry
23
(2 characters)
Main
classification
Expenses
3
(1 character)
Economic
Classification
Sub
classification
Compensation of
employees
4
(1 character)
Supplementary
information
Wages and
salaries in cash
18
(2 characters)
In addition, budget and appendix documentation will frequently provide functional classifications,
which provide information on the governments policy intentions. Some examples of functional
classification are given below.
Figure 11: Budget Classification (2) Functional Classifications
Functional Classifications
Main function
Function
Secondary
function
Economic
Agriculture
Agriculture
Affairs
Forestry Fishing
04
3
1
(2 characters)
(1 character)
(1 character)
In contrast to administrative and economic classifications, many countries have not introduced
functional classifications. In many cases, the United Nations Classification of the Functions of
Government (COFOG) has been adopted in the context of assistance to developing countries, and
functional classifications are introduced in the IMFs Government Financial Statistics Manual
(GFSM). 6 The COFOG codes for major government expenditures are listed below (10 divisions).
01
02
03
04
05
Standard COFOG codes are not necessarily introduced in assistance to developing countries; instead,
the classifications may be adjusted to accommodate the reality in such countries. For reference, the
Japanese government uses the following ten functional classifications: national agencies, local
and commissions, transfers to other accounts, and other expenses.
6
COFOG codes are also used in the System of National Accounts (SNA).
28
01
02
03
04
The ten standard first-level functional classifications used to classify government expenditure
(COFOG) are given below.
01
02
03
04
05
These budget classifications provide a framework for fiscal policy decisions and accountability (see
below) and contribute to greater efficiency in budget allocation.
l Budget allocations in line with stated policy objectives.
l Compliance with allocation ceilings under the budget appropriation.
l Reviews of policy and performance after budgets are executed.
l Routine payment operations.
29
Level 3
Level 2
Level 1
Contents
Budget formulation and execution are based on administrative, economic, and
sub-functional classifications, using GFS/COFOG standards. (Program
classification may substitute for sub-functional classification, if it is applied with
a level of detail at least corresponding to sub-functional classification.)
Budget formulation and execution are based on administrative, economic, and
functional classification (using at least the 10 main COFOG functions).
Budget formulation and execution are based on administrative and economic
classifications using GFS standards.
Budget formulation and execution are based on a different classification (e.g., not
30
Overview
All countries, whether advanced or developing, adopt budget preparation methods of some form or
another to enable the formulation of budgets that ensure aggregate fiscal discipline and are in line
with forward estimates. The budget preparation work is mainly driven by the finance ministry.
However, participation in this process by the majority of public entities means that large numbers of
people are involved, and all are intent on securing as much of the budget as possible. Therefore,
effective mechanisms and methods need to be put into practice to coordinate the various participants
and to ensure that the budget can be prepared in accordance with a pre-determined budget calendar.
In order to ensure aggregate fiscal discipline while budget preparation work is in progress, explicit
provision must be made for the process and timetable of the annual budget preparation in laws and
regulations. The following provides an example of an illustrative timetable for budget preparation.
Figure 12: An Example of an Illustrative Timetable for Budget Preparation
Months to
Budget Approval
8 months
7 months
6 months
5 months
4 months
2 months
0 months
31
The finance ministry needs to set clear budget ceilings for all ministries in the early stages of the
budget preparation process using a top-down approach. These ceilings are shown to the line
ministries in the form of a budget circular (or budget call) and are then officially announced.
The format of the budget also has important implications for the budget preparation process.
Generally speaking, the aforementioned ceilings set upper limits on specific economic or functional
classifications. Line-item budgets refer to budgets that place particular emphasis on the economic
classification of expenses, and such budgets have traditionally been widely used. However, PFM
reforms stress the links between budget and fiscal policy; some countries are being encouraged to
move from functional classifications (i.e., classifications linked to policy objectives), to program
budgeting, which classifies expenditures in terms of the programs to which they are devoted, and
ultimately to performance budgeting, in which results indicators are assigned to specific programs.
32
It is also important to establish whether or not the JICA project cycle (i.e., the Japanese fiscal year)
is in sync with the budget year (i.e., from what month to what month) and the budget preparation
calendar of the recipient country, and what relationships they have with one another. If there is no
synchronization, it will not be possible to secure the necessary funding for the JICA project once the
budget preparation process is complete and the budget has been passed, even if a budget request is
submitted to the recipient government. Special caution is required if the JICA project becomes
off-budget.
l
l
In terms of (1), even if the fiscal year, organizational roles, and budget preparation timetable are
provided for in the organic budget law, fiscal responsibility law, or their equivalent, this is no
guarantee of compliance. It is necessary to establish the existence of a fixed budget preparation
timetable (this is usually provided for in the organic budget law) and, given this, whether delays
in the fixed timetable are systematic or not.
For (2), the issue is to establish the timing and accuracy of the ceilings submitted to line
ministries by the finance ministry, whether or not there is cabinet involvement in the setting of
budget ceilings, and whether the budget requests submitted by line ministries on the basis of
these budget ceilings are subject to cabinet review. The reliability of the budget ceilings
presented to line ministries by the finance ministry and the scope of budgetary expenditures to
which the ceilings apply (in other words, whether they apply to specific functional or
administrative classifications) is a measure of the progress of reform. The boundary lines are:
whether budget ceilings are actually being set or not; if so, whether the ceilings are set for
specific administrative units (e.g., Ministry A, Ministry B) or for specific functions (e.g.,
agriculture, forestry and fisheries, healthcare, etc.), or are all-inclusive. As for the timing of
presenting budget ceilings, the boundary lines are: whether the budget ceilings that have been
approved by cabinet are presented to line ministries before the work on budget requests
commences; and if not, whether sufficient time is available between the coordination of budget
requests from individual line ministries and the submission of the draft budget to the legislature
for the addition of cabinet revisions.
For (3), the issue is to establish whether the budget has been approved before the start of the
fiscal year.
For (4), the issue is to establish the extent to which the legislatures reviews are conducted in
accordance with a pre-determined process and timetable. Each of these represents a key
dimension for assessing the progress of PFM reforms in this area.
The following scale is used to measure the progress of PFM reforms. A score of Level 3 and above
indicates the core level of PFM functionality given in Figure 8 has been reached.
33
34
35
l
l
Furthermore, from the perspective of ensuring the smooth implementation of JICA projects and the
sustainability of aid effectiveness and development outcomes, it is also important to confirm that the
counterpart organization of the recipient government is preparing its budget requests in accordance
with a pre-determined process and timetable. You should also determine whether the counterpart is
resigned to the fact that any budget requests it submits will be rejected, since this is an undesirable
state of affairs.
Overview
Most countries formulate annual-orientation budgets. Although an annual orientation is effective in
terms of budgetary control, it can lead to short-term policy making and contribute to difficulties in
the economic management of fiscal policy over the longer term. To compensate for these weaknesses,
the integration of a medium-term perspective in budgeting has come into focus in recent years,
though this has proved to be a difficult experiment for both advanced economies and developing
countries alike.
The integration of a medium-term perspective in budget preparation work involves the reconciliation
of indicative budgetary ceilings and forward estimates. Here, indicative budgetary ceilings refers
to the ceilings that have been set for each budget year on the basis of a medium-term fiscal
framework based on macro-economic projections including debt estimates. Forward estimates
refers to estimates in which the medium-term expenditures have been calculated. In reality, the fiscal
policy frameworks compiled by government economic agencies on the basis of macro-economic
projections tend to be fairly inaccurate, meaning that the multi-year budget ceilings derived from
such inaccurate projections are not particularly reliable. Line ministries are subsequently required to
generate their forward estimates on the basis of these unreliable budget ceilings, but since the
funding needs of individual ministries are simply tallied together, in many cases it would be difficult
to refer to this as national fiscal policy.
Moreover, in some cases the methods used by individual ministries to generate their detailed
expenditure estimates for new fiscal policies and/or programs have not been standardized. In
developing countries, the estimates of revenue and forward expenditure used in the budget
preparation work with a medium-term perspective are in general inaccurate, and this has a negative
effect on the credibility of the medium-term expenditure frameworks (MTEFs) that consolidate this
data. This means that while a great number of countries have introduced the framework, it is proving
troublesome to ensure the workability of the MTEF approach to budgeting.
However, if, for example, an infrastructure project involves construction work or an operation and
maintenance period spanning multiple fiscal years, the budget process needs to incorporate some
form of medium-term perspective in order to ensure that multi-year funding needs are met, even if
the introduction and execution of MTEF are problematic. In such instances, it is necessary to ensure
36
that the recurrent budget is consistent with the investment budget. In establishing whether or not a
medium-term perspective has been incorporated into the budget, the first task, for the reasons
mentioned above, is to assess the indicators that measure the recipient countrys macro-economic
framework, the scope and frequency of debt sustainability analysis, and the linkages between
investment budgets and recurrent budgets, rather than simply looking at whether it has introduced
MTEF per se.
37
38
Overview
There are two budgeting formats that enable information on budget performance to be reflected in
the budget preparation work: program budgets and performance budgets. From the perspective of
sequencing PFM reforms, the first task is to ensure that the country is capable of properly managing
a line-item budget before making the transition to a program budget and eventually to a performance
budget.
Figure 13: A Comparison of Line-Item, Program and Performance Budget Formats
Feature
Line item
Program
Performance
Content
Expenditures by
objects (inputs and
resources)
Expenditures for a
cluster of activities
supporting a
common objective
Presentation of a
results-based chain
to achieve a specific
objective
Format
Operating and
capital inputs
purchased
Expenditures by
program
Data on inputs,
outputs, effects,
and reach for each
Objective
Orientation
Input controls
Input controls
A focus on results
Associated
management
paradigm
Hierarchical controls
with little
managerial
discretion
Hierarchical controls
with managerial
flexibility over
allocation to
activities within
the program
Managerial
flexibility over
inputs and program
design, but
accountability for
service delivery and
output performance
Source: Adapted from Table 5.1: Features of Alternative Budget Formats in Shah (2007)
Budgeting and Budgetary Institutions.
There are four types of performance budget, which are distinguished on the basis of the extent of
feedback on performance each incorporates into the budget preparation dialogue. The ultimate
challenge in the budget preparation process is to reflect feedback on performance into adjustments to
budget allocations. However, since all government departments are competing for government funds
in a bid to expand their own department, robust systems and strong political leadership are essential
to ensuring that any adjustments to budget allocations reflect the feedback on actual budget
39
performance. For this reason, many countries struggle to utilize budget allocations for anything other
than improving the efficiency of performance evaluations.
Figure 14: Types of Performance Budget
Name
Performance-reported
budgeting (PRB)
Performance-informed
budgeting (PIB)
Performance-based budgeting
(PBB)
Performance-determined
budgeting (PDB)
Contents
Information on performance evaluation is attached as budget
supporting documents, but this information is not actually used
for budget allocation by the budget authority.
Information on performance evaluation is attached as budget
supporting documents, but this information does not play a
main role in budget allocation.
Information on performance evaluation is attached as budget
supporting documents and to some extent plays an important
role in budget allocation.
Information on performance evaluation plays a more important
role for budget allocation than in PBB.
40
Level 3
Level 2
Level 1
Contents
There is a performance evaluation system for performance budgets. Based on
performance information, performance evaluation is conducted by all the
ministries and agencies. The results are reported to the public. The results are
used depending on the type of performance budget. Internal audits and external
audits consider the results.
There is a performance evaluation system for performance budgets. Based on
performance information, performance evaluation is conducted by major
ministries and agencies. The results are reported to the public. The results are
used depending on the type of performance budget.
There is a performance evaluation system for performance budgets. Based on
performance information, performance evaluation is conducted by major
ministries and agencies. The results are reported but not used as intended.
There is not an effective performance evaluation system intended for
performance budgets. Based on performance information, performance evaluation
is conducted by all ministries and agencies (e.g., a result-chain system and
effective indicators are not introduced).
41
For reference, for both program budgets and performance budgets, the incorporation of a
results-based framework into national development plans and/or sector development strategies
alongside the introduction and effective application of budget classifications are essential
prerequisites to the utilization of performance evaluation outcomes in the budget preparation work.
Reference: Findings of tendencies from PEFA Indicators.
PEFA has not established an indicator for performance budgets. For reference, according to
Performance and Programme-Based Budgeting in Africa: A Status Report, which was published by
the Collaborative Africa Budget Reform Initiative (CABRI) in 2012, of the 46 countries in
Sub-Saharan Africa that have adopted or attempted to introduce either a program budget or a
performance budget, only two have succeeded: South Africa and Mauritius.
42
Overview
In deliberating the issue of PFM for a specific country, the treasury function (treasury management),
which includes cash management and various other activities, is of critical importance to operational
efficiency.
Insofar as the treasury is functioning properly, firstly, correspondence between the balance of cash
and deposits as booked and the balance of government bank accounts will provide a proper indicator
of current treasury funds. Secondly, there will be proper forecasting of future cash flows,
clarification on cash surpluses and/or shortfalls, financial planning of cash flows, and measures in
place to deal with any shortfalls or surpluses (operational procedures for budgetary surpluses,
procurement methods to deal with revenue shortfalls, and strategy and policy on debt management to
ensure discipline).
This means that, insofar as the allocation of appropriations process is functioning effectively,
individual line ministries are able to submit requests for treasury funds to the finance ministry every
quarter or in accordance with the fixed budget calendar for the year, and the finance ministry will
disburse funds accordingly, thus enabling the line ministries to execute their budgets in a coordinated
and timely manner.
However, since the term treasury is not one that is generally encountered in everyday life, it may
prove difficult to develop a sense of affinity with this function. In the simplest of terms, it involves:
(1) recording cash and deposit balances in the governments books; (2) reconciling this data on
treasury funds with the balances held in government bank accounts; (3) generating a bank
reconciliation statement to address any discrepancies created by the timing of check clearance; (4)
generating estimates of revenue and expenditure and checking whether there will be any surpluses or
shortfalls; and (5) then devising financing and/or procurement methods to deal with projected
shortfalls (e.g., expenditure cuts or a loan from a domestic/foreign bank) or operational procedures
to deal with budgetary surpluses.
43
Managing
payments
and
receives of
cash and
savings
The
amount in
accounting
legers
Actual
amount of
cash and
savings
Reconciliations
Expected
amount of
payments
and
receives
Compreh
end
deficienc
y and
excess
Deficiency
expected, then
consider filling
the gap with
various
financial
resources
Excess
expected, then
consider
investment
months of the end of each quarter, or within one month of the end of each quarter? Does the
reconciliation cover only treasury-managed bank accounts or all central government bank
accounts? In terms of cash management, are cash flow forecasts prepared and monitored (i.e.,
data is kept on actual cash inflows and outflows)? If so, are these cash flow forecasts updated
even after implementation at the beginning of the year, and, if so, are they updated regularly or
irregularly, and at what intervals?
In terms of the allocation of the authorized budget, (1) how accurate are the ceilings for
expenditure commitments and what rules govern such commitments, and (2) how frequently are
in-year adjustments made to budget allocations? With (1), it is important to establish whether
the treasury (finance ministry) sets commitment ceilings for line ministries. If so, is the
information on the ceilings accurate and is it released to line ministries at pre-determined
intervals throughout the fiscal year? If line ministries are given no indication of in-year ceilings
on expenditure commitments, it will lead to uncertainty over the amount of the allocation of
appropriations for that year. Again, frequent in-year adjustments to budget allocations will mean
that line ministries have no indication of actual resource availability for commitments during
the year.
The following criteria are used to measure the progress of PFM reforms in this area. They assess the
frequency of government cash balance calculations and bank reconciliations, whether the
reconciliations cover all or only some of the governments accounts, the timing of the presentation of
commitment ceilings to line ministries by the finance ministry, and the frequency of in-year
adjustments to budget allocations.
[Frequency of government cash balance calculations]
A score of Level 3 and above indicates the core level of PFM functionality given in Figure 8 has
been reached.
Level
Level 4
Level 3
Contents
All cash balances are calculated daily and consolidated.
Most cash balances are calculated and consolidated at least weekly, but some
extra-budgetary funds remain outside the arrangement.
Calculation and consolidation of most government cash balances take place at
Level 2
least monthly.
Calculation of balances takes place irregularly.
Level 1
Note: Equivalent to PEFA performance indicator PI-17 (ii).
[Frequency of bank reconciliations]
A score of Level 3 and above indicates the core level of PFM functionality given in Figure 8 has
been reached.
Level
Level 4
Level 3
Level 2
Contents
Reconciliation and clearance of suspense accounts and advances take place at
least quarterly, within a month from end of period.
Reconciliation and clearance of suspense accounts and advances take place at
least annually within two months of end of period.
Reconciliation and clearance of suspense accounts and advances take place
45
Contents
A cash flow forecast is prepared for the fiscal year, and updated monthly on
the basis of actual cash inflows and outflows.
Level 3
A cash flow forecast is prepared for the fiscal year and updated at least
quarterly, on the basis of actual cash inflows and outflows.
A cash flow forecast is prepared for the fiscal year, but is not (or only partially
Level 2
and infrequently) updated.
Cash flow planning and monitoring are not undertaken or are of very poor
Level 1
quality.
Note: Equivalent to PEFA performance indicator PI-16 (i).
[Accuracy of information on commitment ceilings and commitment rules]
A score of Level 2 and above indicates the core level of PFM functionality given in Figure 8 has
been reached.
Level
Level 4
Contents
MDAs are able to plan and commit expenditure for at least six months in
advance in accordance with the budgeted appropriations.
MDAs are provided reliable information on commitment ceilings at least
Level 3
quarterly in advance.
MDAs are provided reliable information for one or two months in advance.
Level 2
MDAs are provided commitment ceilings for less than a month OR no reliable
Level 1
indication at all of actual resource availability for commitment.
Note: Equivalent to PEFA performance indicator PI-16 (ii).
[Frequency and transparency of in-year adjustments to budget allocations]
A score of Level 2 and above indicates the core level of PFM functionality given in Figure 8 has
been reached.
Level
Level 4
Level 3
Level 2
Contents
Significant in-year adjustments to budget allocations take place only once or
twice in a year and are done in a transparent and predictable way.
Significant in-year adjustments to budget allocations take place only once or
twice in a year and are done in a fairly transparent way.
Significant in-year budget adjustments are frequent, but undertaken with some
transparency.
46
Overview
In examining the PFM of a specific country, effective debt management strategies and practices are
crucial to the maintenance of aggregate fiscal discipline. It is also important to have an awareness of
government guarantees and contingent liabilities and to manage the risks associated with them. In
principle, debt management involves managing public debt as a portfolio on the basis of a
sustainable debt management policy that takes into account the amounts and due dates of individual
repayments, interest rates, and the currencies of foreign loans, among other things. However, since
there is a lag between the contracting of a loan and the servicing of that debt, irrespective of whether
it is short-term or medium- to long-term debt, and because events that affect the repayment terms
may occur during the term of the loan, due consideration of these risks is an essential element of
sustainable debt management. Again, data needs to be kept on government guarantees and other
contingent liabilities that may not require servicing, in addition to the explicit debt described above,
as part of the debt management process.
47
making it more difficult for Japan to extend ODA loans. To be able to identify this state of affairs, it
is necessary to assess the countrys debt management system and the current status of public debt
armed with a basic knowledge of debt management strategies and systems.
48
annually for all levels of sub-national (SN) government, and central government
consolidates overall fiscal risk into annual (or more frequent) reports.
All major AGAs/PEs submit fiscal reports including audited accounts to central
Level 3
government at least annually, and central government consolidates overall fiscal
risk issues into a report. The net fiscal position is monitored at least annually
for the most important level of SN government, and central government
consolidates overall fiscal risk into a report.
Most major AGAs/PEs submit fiscal reports to central government at least
Level 2
annually, but a consolidated overview is missing or significantly incomplete.
The net fiscal position is monitored at least annually for the most important
level of SN government, but a consolidated overview is missing or significantly
incomplete.
No annual monitoring of AGAs and PEs takes place, or it is significantly
Level 1
incomplete. No annual monitoring of SN governments fiscal position takes
place or it is significantly incomplete.
Note: Equivalent to PEFA performance indicator PI-9.
[Maintenance of discipline over the contracting of loans and the issuance of guarantees]
Level
Contents
Central governments contracting of loans and issuance of guarantees are made
Level 4
against transparent criteria and fiscal targets, and always approved by a single
responsible government entity.
Central governments contracting of loans and issuance of guarantees are made
Level 3
within limits for total debt and total guarantees, and always approved by a
single responsible government entity.
Central governments contracting of loans and issuance of guarantees are always
Level 2
approved by a single responsible government entity, but are not decided on the
basis of clear guidelines, criteria, or overall ceilings.
Central governments contracting of loans and issuance of guarantees are
Level 1
approved by different government entities, without a unified overview
mechanism.
Note: Equivalent to PEFA performance indicator PI-17 (iii).
Reference: Findings of tendencies from PEFA Indicators.
An analysis of the PEFA indicators in terms of income levels reveals the following trends. (Note:
None of these trends is absolute, and these findings should not be taken as categorical.)
l
l
49
Overview
In examining the PFM of a specific country, effective management of state-owned and public assets
and the prevention of the loss and/or leakage of such assets are crucial to the maintenance of
aggregate fiscal discipline. There are two dimensions to asset management. The first involves the
maintenance of an asset management ledger and the collection and recording of asset data; the
second involves ensuring that land, buildings, and other state-owned assets are utilized effectively
for their designated administrative purposes through the coordination of their usage with the relevant
ministries and agencies, and by promoting the transfer and/or disposal of public assets that are not
being effectively utilized; the third involves making fair value assessments of state-owned assets and
the consolidation of such data for accounting reports.
Contents
Recording of asset data is complete and updated. Records of asset data in an
asset ledger and the actual amounts are reconciled quarterly. There are no
material concerns regarding data accuracy and its reconciliation. The record
of asset data is published at least once a year.
50
Level 3
Level 2
Level 1
Overview
Revenue management involves establishing general procedures for tax payment, ensuring fairness,
and pursuing procedural effectiveness. General tax payment procedures should provide clarity on the
tax liabilities of taxpayers, and taxpayers must be convinced of the fairness of the tax assessment
system. Governments also need to ensure that the procedures for tax payment are clear and easy to
understand. The transparency of the tax inquiries conducted to determine tax liability must also be
assured.
In order to ensure clarity and fairness in taxation, taxpayers need easy access to information on their
tax liabilities. There also needs to be a functioning tax appeals mechanism that will dispel any
concerns taxpayers may have about biased decisions and cultivate a sense of fairness and security.
Appropriate penalties also need to be installed to ensure against tax avoidance.
Measures also need to be taken to promote fairness in taxation and the streamlining of payment and
collection procedures, which can be facilitated by the introduction of a taxpayer registration system.
51
Overview
Accounting procedures cover: (1) approvals by the appropriation of spending ministry and agency
budgets and the allocation of budgeted expenditures, (2) expenditure commitments, (3) acquisitions
and inspections, (4) the issuing of payment orders, and (5) payments. Note that authorization is
generally granted on the basis of budget appropriations that have been approved by the legislature,
though there are cases in which the scope of appropriation over actual expenditure is limited to
specific quarterly periods or months, and the authorization and appropriation may not be carried out
by the same entity. 8
These procedures are underpinned by accounting rules. Cash basis accounting is generally used in
the public sector, whereas modified cash basis accounting is the most widely adopted system, since it
takes into account the transfer consolidation period.
Authorization determines policy implementation authority and budgetary ceilings, and is generally granted on the basis of budget
appropriations. By contrast, appropriation confers the authority to make actual disbursements. Generally speaking, the finance
ministry, for example, will allocate appropriations to spending ministries and agencies on a quarterly or monthly basis in accordance
with fiscal policy, with appropriation limited to the scope of this fiscal policy.
52
Figure 16: A Flow Chart of the Allocation of Budget and Accounting Procedures
53
procure goods at the most appropriate time or by preventing the counterpart organization from
providing its portion of the funds required for project activities. Again, appropriations allocated to
cover the counterparts portion of expenses on a JICA project may be diverted to other uses resulting
in a shortfall in funding for the project in question. In short, adequate accounting procedures are
critical to the smooth implementation of JICA projects.
54
Commitment control systems are generally lacking OR they are routinely violated.
Level 1
Note: Equivalent to PEFA performance indicator PI-20 (i).
Reference: Findings of tendencies from PEFA Indicators.
An analysis of the PEFA indicators in terms of income levels reveals the following trend. (Note: The
trend is not absolute, and the finding should not be taken as categorical.)
l
Overview
Public procurement can be centralized or decentralized. In the first instance, the government will
establish a central public procurement agency, such as a public procurement management agency. In
the second instance, public procurement procedures and authority are transferred to individual
ministries and public entities (i.e., decentralized), with their supervision charged to a public
procurement oversight organization. In order to ensure the transparency of the procurement process,
many procurement systems guarantee the principle of openness and public access to information in
respect of contracts above a certain value.
The procurement procedure includes: (1) the establishment of explicit procurement procedures that
lay stress on ensuring the transparency of the procurement process; (2) promoting the establishment
of the relevant institutional mechanisms, such as the creation of a public procurement management
agency; and (3) effective operation of these institutional mechanisms (including the provision of
training for both public and private-sector stakeholders). Generally speaking, the legal and
regulatory framework for public procurement is enshrined in public procurement legislation.
55
and clearly defined and internal and external audit functions are ineffectual (see below), it inevitably
becomes a breeding ground for corruption.
Contents
The legal framework meets all six of the following listed requirements: (1) the
organizational hierarchy and procedures of public procurement are clear; (2)
access to procurement information by the public is secured; (3) public
procurement rules are applied to all government entities; (4) competitive public
procurement is the first principle and exceptional ways with reasons are the
second principle; (5) all of the required items of procurement information
(government procurement plans, bidding opportunities, contract awards, and data
on resolution of procurement complaints) are provided for the public; and (6) an
independent administrative procurement review process for handling procurement
complaints by participants prior to contract signature is secured.
The legal framework meets four or five of the above six listed requirements.
Level 3
The legal framework meets two or three of the above six listed requirements.
Level 2
The legal framework meets one or none of the above six listed requirements.
Level 1
Note: Equivalent to PEFA performance indicator PI-19 (i).
Reference: Findings of tendencies from PEFA Indicators.
56
An analysis of the PEFA indicators in terms of income levels reveals the following trend. (Note: The
trend is not absolute, and the finding should not be taken as categorical.)
l
Overview
Basic internal audit functions can be broadly divided into two types, as follows: (1) compliance
audits, which assess adherence to the laws on appropriations of public funds and other applicable
laws and regulations; and (2) financial audits, which look for consistency between government
expenditure reports (accounts) and government finances. In recent years, some countries have
introduced audits with a more inclusive function that audit the social and economic outcomes and
performance of government programs and services (so-called value-for-money audits and
performance audits). Note that due caution is needed since there are respectively different internal
audit systems in English-speaking, French-speaking, and Spanish-speaking countries.
57
The following are optional dimensions for assessing the progress of PFM reforms in this area: (1)
audit type; (2) the locus of accountability (who is accountable to whom); and (3) what, if any,
follow-up mechanisms are in place, and what actions are being taken.
The following criteria are used to measure the progress of PFM reforms. The indicator looks at the
internal audit functions of government as a whole, whether or not internal audit rules and guidelines
have been developed, whether the various government organs have installed the internal audit
committees necessary to support the internal audit process, the type of audits performed, the
existence of reporting lines, the extent to which such lines are functioning effectively, whether audit
committees discuss internal audit findings, and whether there are adequate follow-up mechanisms in
place to track the progress of audit findings and recommendations.
Level
Level 4
Level 3
Level 2
Level 1
Contents
Rules and guidelines for internal auditing for all government entities are
established. An internal audit committee is established in all the ministries,
departments, and agencies. Compliance audits, financial audits, and other types of
internal audits are operational, practically following IIA (the Institute of Internal
Auditors) standards. Risk-based audits have been introduced. Internal audit reports
adhere to a fixed schedule are submitted to the finance ministry or the SAI
periodically and deliberated by its audit committee. Based on audit results, action
is prompt and comprehensive across central government entities.
Rules and guidelines for internal auditing for all government entities are
established. An internal audit committee is under establishment in half or more
than half of the ministries, departments, and agencies. Compliance audits,
financial audits, and other types of internal audits are operational by the majority
of central government entities, practically following IIA (the Institute of Internal
Auditors) standards. Risk-based audits have been partially introduced. Internal
audit reports adhere to a fixed schedule are submitted to the finance ministry or
the SAI periodically and deliberated by its audit committee. Based on audit
results, action is prompt and comprehensive across central government entities in
many cases.
Rules and guidelines for internal auditing for all government entities are
established. An internal audit committee is under establishment in each
government entity. Compliance audits, financial audits, and other types of internal
audits are operational by major central government entities, but they are not
following IIA (the Institute of Internal Auditors) standards. Risk-based audits have
been partially introduced. Internal audit reports are issued regularly for most
government entities, but may not be submitted to the finance ministry and the SAI.
Based on audit results, a fair degree of action is taken on major issues but often
with delay.
Rules and guidelines for internal auditing for all government entities are not
established. An internal audit committee has not been established in most
government entities. Even where a committee has been established, compliance
audits and financial audits are not operational systematically. Internal audit reports
are not issued, or are issued irregularly, and are insufficiently deliberated by its
audit committee. The results are not reported, or are reported but action is not
58
4-16. Reporting
The disclosure to the general public of fiscal reports in appropriate formats and in a timely manner
is a necessary condition for ascertaining information on the past and present finances and budget
allocations of the recipient government and counterpart organizations and on the current state of the
budget execution process.
Overview
In examining the PFM of a specific country, fiscal reports (reporting) are the cornerstone of
aggregate fiscal discipline, strategic allocation of resources, and operational efficiency. Reporting is
also critical in terms of transparency and accountability in the PFM system. It is a time-honored
truism that fiscal reports are intended to demonstrate the compliance of expenditure with the budget
(i.e., whether the budget is on track).
In many developing countries, however, expenditure is not always in compliance with the budget
and the fiscal reports produced are not meeting their objectives in this respect. Broadly speaking, the
fiscal reports published by governments can be divided into two types: in-year financial reports and
annual final statements. These are released at daily, monthly, quarterly, or yearly intervals as
appropriate, with the monthly reports containing data on the execution of the budget in the relevant
month, including amounts that have yet to be disbursed. Annual final statements, meanwhile, are
consolidated by the finance ministry on the basis of reports prepared by individual ministries and
executing agencies, and reported to the Supreme Audit Institution (SAI). The number of months
from the end of the fiscal year within which such reports must be submitted to the SAI is prescribed
by applicable laws in individual countries.
59
reports contain ambiguous information, it becomes difficult to ensure fund accountability using the
recipient governments fiscal system.
Level 3
Contents
Classification of data allows direct comparison to the original budget. Information
includes all items of budget estimates. Expenditure is covered at both commitment
and payment stages. Reports are prepared quarterly or more frequently, and issued
within four weeks of end of period. There are no material concerns regarding data
accuracy.
Classification allows comparison to budget but only with some aggregation.
Expenditure is covered at both commitment and payment stages. Reports are
prepared quarterly, and issued within six weeks of end of quarter. There are some
60
concerns about accuracy, but data issues are generally highlighted in the reports
and do not compromise overall consistency/usefulness.
Comparison to budget is possible only for main administrative headings.
Level 2
Expenditure is captured either at commitment or at payment stage (not both).
Reports are prepared quarterly (possibly excluding first quarter), and issued within
eight weeks of end of quarter. There are some concerns about the accuracy of
information, which may not always be highlighted in the reports, but this does not
fundamentally undermine their basic usefulness.
Comparison to the budget may not be possible across all main administrative
Level 1
headings. Quarterly reports are either not prepared or often issued with more than
eight weeks delay. Data is too inaccurate to be of any real use.
Note: Equivalent to PEFA performance indicator PI-24.
[Quality and timeliness of final statements]
A score of Level 2 and above indicates the core level of PFM functionality given in Figure 8 has
been reached.
Level
Level 4
Contents
A consolidated government statement is prepared annually and includes full
information on revenue, expenditure and financial assets/liabilities. The statement
is submitted for external audit within six months of the end of the fiscal year.
International Public Sector Accounting Standards (IPSAS) or corresponding
national standards are applied for all statements.
A consolidated government statement is prepared annually. It includes, with few
Level 3
exceptions, full information on revenue, expenditure, and financial
assets/liabilities. The consolidated government statement is submitted for external
audit within 10 months of the end of the fiscal year. IPSAS or corresponding
national standards are applied.
A consolidated government statement is prepared annually. Information on
Level 2
revenue, expenditure, and bank account balances may not always be complete, but
the omissions are not significant. The statements are submitted for external audit
within 15 months of the end of the fiscal year. Statements are presented in a
consistent format over time with some disclosure of accounting standards.
A consolidated government statement is not prepared annually, OR essential
Level 1
information is missing from the financial statements, OR the financial records are
too poor to enable auditing. If annual statements are prepared, they are generally
not submitted for external audit within 15 months of the end of the fiscal year.
Statements are not presented in a consistent format over time, OR accounting
standards are not disclosed.
Note: Equivalent to PEFA performance indicator PI-25.
Reference: Findings of tendencies from PEFA Indicators.
An analysis of the PEFA indicators in terms of income levels reveals the following trends. (Note:
None of these trends is absolute, and these findings should not be taken as categorical.)
61
l
l
l
Overview
Generally speaking, there are two systems that support the automation of PFM processes: a Financial
Management Information System (FMIS) and the more advanced Integrated Financial Management
Information System (IFMIS). Both are computer-based information systems that are designed to
bundle the financial systems of governments and public entities. The majority of countries have an
operative FMIS (i.e., information systems that monitor treasury accounts payable and accounts
receivable), with an IFMIS being introduced as a replacement solution. An IFMIS is configured to
deliver separate modules of fiscal information (e.g., covering budget preparation to budget execution,
or revenue to execution), which are purchased by sub-national levels of governments, etc., as
required. Accordingly, the first task is to identify which PFM processes (systems) are covered by the
recipient countrys FMIS. Again, since an IFMIS is designed to process accounts data, the
integration of budget items and the chart of accounts is an essential prerequisite for the introduction
of an IFMIS solution. An IFMIS also has embedded commitment controls that are necessary to
ascertaining future expenditure.
62
system, how effectively the system is functioning, and what arrangements have been made in terms
of staff assignment and securing the necessary budgetary funding.
It is worth noting that while the introduction of an IFMIS has been singled out as one of the leading
causes of failure in donor support for PFM reforms, given that commitment control, cash
management and other processes cannot feasibly be undertaken effectively as manual processes, the
need for some form of automated system, even in low-income countries, needs to be appreciated.
Level
Level 4
Level 3
Level 2
Level 1
Contents
All or partial IFMIS functions have been introduced in all entities of central
government and most of them are operational. Human resources are well allocated
to an IT department and financial resources for O&M are almost secured.
All or partial IFMIS functions have been introduced in major entities of central
government (big spenders) and most of them are operational. Human resources are
partially allocated to an IT department and financial resources for O&M are
secured to some extent.
All or partial IFMIS functions have been introduced in some departments of major
entities of central government (big spenders). Allocation of human resources to an
IT department and financial resource for O&M are progressing.
A basic accounting system has been introduced and is operational to some extent.
Prerequisites for introducing an IFMIS (e.g., accounting items, accounting
procedures and practices, human resources for IT department, financial resources
for O&M, etc.) are not well satisfied.
Overview
Many countries conduct their external audits in the form of compliance and/or financial audits. Some
countries are attempting to introduce value-for-money audits. The auditing of final accounts is a
major part of the work undertaken by the Supreme Audit Institution (SAI; equivalent to the Board of
Audit of Japan), which they use to confirm adherence with auditing standards and consistency
between budget appropriations and actual expenditure. The audits conducted by the SAI do not stop
at annual final statements; they include examinations of samples to check that the accounting
methods used to generate these data are producing accurate data on the incomings and outgoings
given in the governments annual budget reports. In such instances, some of the audit work may be
outsourced to a private-sector auditing organization due to SAI staffing constraints. In many
countries, the number of months from the end of the fiscal year within which such statements must
be submitted to the legislature is prescribed by the applicable laws. Accordingly, it is important to
establish whether final statements are being appropriately audited for compliance and financial
63
integrity, whether there are clear reporting lines for the submission of these statements to the
legislature, the cabinet or other pre-determined body, and whether the statements are being submitted
in a timely manner.
64
For reference, the International Organization of Supreme Audit Institutions (INTOSAI), which
operates as an umbrella organization for the external government audit community in both advanced
and developing nations, has developed a framework for measuring the performance of the SAI. The
pilot version of this performance measurement framework was released in January 2014.
SAI Performance Measurement Framework
http://www.idi.no/artikkel.aspx?MId1=102&AId=704
65
POINTS
This section classifies the Key Questions under three headings, some information desirable, more
information desirable, and specific information desirable, in order to effectively conduct the
process of information gathering and analysis during interviews with finance ministry officials and
other donors in partner country governments on progress towards Public Financial Management
(PFM) reform. Through the careful selection of the level of questioning based on the purpose of and
time available for interviews, users of this Handbook will realize the following benefits.
l
l
It allows interviewers to plan their interviews effectively by selecting ahead of time which of
the Key Questions they intend to ask, etc.
Concentrating on a set of well-targeted Key Questions makes for a more efficient and effective
interview process. It also means that analytical reports can be tailored to purpose.
Additionally, where the process involves attending donor conferences on PFM reform, having a
mental list of Key Questions that correspond to your awareness of the issues at hand as you listen to
the discussions can be expected to facilitate your consideration and understanding of the various
issues. Similarly, having a mental list of Key Questions in your head as you read the literature on
PFM will make it easier to isolate the relevant information.
66
Establish the state of the core PFM framework in the partner country
Sophisticated understanding
of the overview of PFM
snapshot
67
PER/PEFA diagnostics
Budget preparation methods
Medium-term
in budgeting
perspectives
Internal
audits
audits,
external
Integrated
Financial
Management
Information
System (IFMIS)
Here, the column dealing with the budget preparation process includes information on whether the
timing of the JCC (Joint Coordination Committee) and interim review and/or terminal evaluation of
68
JICA projects is synchronized with the budget preparation process in the recipient country, since this
is relevant to the implementation of such projects.
69
[Step 2] Get specific information on the current status of individual PFM functions
Once you have a broad-based picture of progress towards PFM reforms in the recipient
country, the next step is to select which category of information is best suited to your specific
goals, based on the purpose of the interview and the time available to you for conducting it:
Some Information Desirable, More Information Desirable, or Specific Information
Desirable. The List of Key Questions presented in Appendix 2 is designed to facilitate the
interview planning process and the efficient conduct of PFM interviews, and should be used to
formulate a list of questions to be asked during the interview, thereby expediting the planning
process. The following offers a guide to selecting the correct interview category.
Interview
Category
Some
information
desirable
More information
desirable
Second Indicator
(Time Available)
1 hour
2 hours
Specific
information
PFM diagnostics, project review
More than 2 hours
desirable
Source: Basic Information Necessary to Formulating Interview Plans and Conducting PFM
Interviews
In fact, few people are capable of understanding at a glance what can be gained by asking
government officials in the recipient country the Key Questions on PFM functions (e.g., budgeting,
treasury, execution, accounting rules, audits, etc.). To understand these questions without additional
input you would need to have an academic or practical background in PFM plus considerable
experience in this field.
For the large majority who do not possess an academic or practical background in PFM nor have
extensive experience in PFM work, in order to be able to formulate effective interview plans and use
these as the basis for conducting their PFM interviews and analyzing the findings gained from them,
the following points should be seen as essential to the interview process.
Apprehending the bottlenecks to the smooth implementation of JICA projects and the
sustainability of aid effectiveness and development outcomes (see Figure 19).
Sorting out which of the bottlenecks are related to PFM in the recipient country (see
Figure 20).
Classifying these bottlenecks according to the PFM function to which they relate (e.g.,
budgeting, treasury, execution, accounting rules, audits, etc.) (see Figure 21).
Next, determining what defects in PFM functions (e.g., budgeting, treasury, execution,
accounting rules, audits, etc.) have the potential to impede the smooth implementation of
JICA projects and the sustainability of aid effectiveness and development outcomes (see
Figure 21).
Once an interviewer has succeeded in organizing the key points to the interview process, each of the
70
seemingly innocuous Key Questions will rapidly take on meaning during the planning and conduct
of PFM interviews.
Figure 19: Risks to JICA Project Implementation
3
3
Problems caused by
insufficient PFM
71
Figure 21: Correlating the Risks to JICA Projects to Respective PFM Functions
(repeated)
Problems observed through the implementation of JICA projects
No budget
allocation for the
JICA project
Budget
preparation
Treasury management
(commitments, cash control,
etc.)
Improvement in
execution (accounting,
procurement)
No brake on
improper use of
funds under JICA
project auspices
Internal controls,
audits
External
audits
External audits
are not
functioning
effectively
[Step 3] Document your findings (on the current state of PFM system performance
in the recipient country)
Document your findings according to the type of interview you are conducting. Sample reports are
given in Appendix 3. In documenting interview findings on the basis of the materials presented in
Appendix 1, the report will likely focus on the current status of respective PFM functions and call
attention to specific issues, but it is also important to include information on the non-technical
aspects of the PFM process discussed in 4-1: Leadership and Motivation of PFM Reform in the
Country.
[Column] Giving meaning to JICA assistance projects within the context of a medium- to
long-term PFM reform roadmap
PFM is an essential part of the development process. It is an issue that relates both to core
administrative systems in the recipient country and to issues that are influenced by non-technical
determinants external to PFM that are recognized as critical to the success of reform. This means
that it is essentially unrealistic to expect PFM assistance to bear fruit in the short to medium term.
Accordingly, our task is to visualize a medium- to long-term roadmap towards PFM reforms, to
identify what stage the recipient country has reached in the PFM reform process, and to think about
what stage in that process the targets of the countrys PFM reform program will allow it to progress
to.
72
Where, for example, a line ministry (Ministry A) in a certain country has not developed a
standardized financial accounting manual, its departments and regional offices will all be using
divergent accounting procedures. In this instance, it would be useful to design a JICA technical
assistance project that has the development of a financial accounting manual as its goal. The
implications for project formulation will differ substantially depending on whether the country has a
standardized financial accounting manual and whether the central and regional departments of
Ministry A are putting standardized accounting procedures into practice based on the standardized
financial accounting manual in the context of that countrys medium- to long-term PFM reform
roadmap, and whether its financial accounting manual has been developed in isolation.
Train
AGB users
at front-line
Put together
Improved AGB
AGB
ver. x
Year 2
Train
AGB users
at front-line
Put together
Improved AGB
Plan based on
assessment of
- front-line feedback;
- policy
requirements
AGB
ver. 2
Year 1
Put together
Initial AGB
AGB
ver. 1
Plan based on
assessment of:
- front-line
conditions;
- gaps vis-a-vis policy
requirements
Train
AGB users
at front-line
Plan based on
evaluation of:
- front-line feedback;
- gaps vis-a-vis policy
requirements
r
Collect feedback
from front-line
and review
Internal Audit
enhancement
Collect
feedback from
front-line and
review
Internal Audit
enhancement
Collect
feedback from
front-line and
review
Ownership
of
MOFA
Core
People to
implement
MOFAs
PFM
reform
Internal Audit
enhancement
The outcomes of PFM assistance may not be visible in the short to medium term, but, from the
former perspective, the impact on JICA project outcomes is significant all the same.
The color-coded table on progress towards PFM reforms in recipient countries given in the Matrix
for Measuring Progress on PFM Reforms (Appendix 1) offers useful pointers on the significance of
JICA project assistance in the context of a specific countrys medium- to long-term roadmap for
PFM reforms.
Source: Taken from PFM Capacity Building Seminar held in November 2013 (Introductory Seminar
(2) Materials for the Presentation on Case Study Reporting), Koei Research Institute (KRI
International Corporation).
73
74
75
practical know-how on input controls, there is a need for research into methods to facilitate the
systematic ordering of this knowledge.
76
PFM function
01.
Legislative
and
Institutional
Budgetary
Frameworks
Assessment
point
PEFA
indica
tors
PFM core
standard
(indicativ
e)
Level 2 (PEFAC)
Level 3 (PEFAB)
Level 4 (PEFAA)
Written basic
principles, basic
exist.
become conscious.
rules, and
authorities of PFM;
procedures of
compliance
conscious.
Variance in the
original budgeted
expenditure and
02. Budget
Credibility
and
Execution
final accounts
expenditure by an amount
budgeted expenditure by an
by an amount equivalent to
of budgeted expenditure.
of budgeted expenditure.
Variance in
expenditure
composition
between the
budgeted
expenditure and
Variance in expenditure
Variance in expenditure
Variance in expenditure
Variance in expenditure
composition (administrative)
composition (administrative)
composition (administrative)
composition (administrative)
(indicative
expenditure exceeded 5%
2(i)
2
expenditure.
77
actual expenditure
years.
three years.
Variance in
original approved
budget
years.
three years.
years.
aggregate revenue
out-turn and
4(ii)
Stock of arrears
03. Budget
Comprehensi
veness
Coverage of
budget and its
discipline
of arrears is generated
B or
above
comprehensive ad hoc
age profile).
years.
institutions.
extra-budgetary expenditure,
extra-budgetary expenditure,
extra-budgetary expenditure,
extra-budgetary
budgeted expenditure,
be covered in budgeted
is insignificant (below 1% of
Rules to manage
manage extra-budgetary
extra-budgetary expenditure
manage extra-budgetary
expenditure (equivalent to
manage extra-budgetary
expenditure (equivalent to
expenditure (equivalent to
widely understood.
the operation of
extra-budgetary funds.
the operation of
B or
above
78
extra-budgetary funds.
04. Budget
Classification
*
Application of GFS
and its level
C or
administrative, economic,
and sub-functional
administrative break-down
standards.
classifications, using
functions).
GFS/COFOG standards.
only).
above
Existence of and
adherence to a
fixed budget
11(i)
B or
above
calendar
05. Budget
Preparation
Methods and
Budget
Allocation*
Effective budget
ceilings
prepared OR it is generally
preparation is clearly
insufficient to make
meaningful submissions.
11(ii)
B or
above
cabinet is involved in
ceilings approved by
immediately before
79
submission of detailed
submission.
for adjustment.
to MDAs.
to make adjustments.
Timely budget
approval by the
11(iii)
legislature
B or
above
Legislative
scrutiny of the
annual budget
(procedure/timing)
27
B or
above
fiscal year.
non-existent or extremely
limited, OR there is no
medium-term fiscal
functioning legislature.
detailed estimates of
framework, and
medium-term priorities as
well as details of
The legislatures
rudimentary or unclear, OR
extensive administrative
extensive administrative
reallocations.
amendments by the
respected.
reallocation as well as
expansion of total
expenditure.
80
Accuracy of
macro-economic
12(i)
forecasts
06.
Medium-Term
Perspectives
in Budgeting
*
Forecasts of fiscal
Forecasts of fiscal
main categories of
functional/sector classification)
economic and
functional/sector
basis.
between multi-year
C or
above
12(ii)
C or
budgets and
12(iii)
above
Linkages between
investment
C or
above
years.
Investments are
being shared.
cost implications in
cases.
the sector.
recurrent budgets
Performance
budget procedures
and applicability
There is a performance
There is a performance
There is a performance
performance evaluation
performance budgets.
on performance information,
on performance information,
Based on performance
81
Budget
Preparation
*
on performance information,
performance evaluation is
performance evaluation is
information, performance
performance evaluation is
conducted by major
evaluation is conducted by
used as intended.
introduced).
budget.
Frequency of
government cash
balance
17(ii)
B or
place irregularly.
consolidated.
monthly.
above
calculations
Frequency of bank
08. Cash
Management
and Planning,
and
Disbursemen
t*
reconciliations
22(ii)
Reconciliation and
clearance of suspense
B or
above
of end of year.
end of period.
and outflows.
and outflows.
frequently.
Cash
management
16(i)
C or
above
Accuracy of
information on
commitment
ceilings and
16(ii)
period.
C or
information on commitment
above
months in advance.
advance.
82
commitment rules
budgeted appropriations.
commitment.
Frequency and
transparency of
in-year
16(iii)
adjustments to
C or
above
Significant in-year
adjustments to budget
manner.
transparency.
way.
budget allocations
Accuracy of debt
data recording
17(i)
a significant degree.
considered to be of high
integrity. Comprehensive
Comprehensive management
content.
least annually.
least quarterly.
No annual monitoring of
government agencies
or it is significantly
incomplete. No annual
monitoring of SN
overview is missing or
government consolidates
to central government at
takes place or it is
significantly incomplete.
SN government, but a
B or
above
09. Debt
Management
*
Frequency and
quality of
monitoring of
sub-national levels
of government,
autonomous
government
agencies, and
public enterprises
B or
above
83
consolidated overview is
government consolidates
missing or significantly
position is monitored at
incomplete.
Maintenance of
discipline over the
contracting of
loans and the
17(iii)
B or
above
issuance of
Central governments
Central governments
Central governments
Central governments
approved by different
responsible government
single responsible
guarantees
inaccurate.
reconciliation.
Frequency and
10. Asset
Management
accuracy of asset
government entity.
data recording
ad-hoc basis.
11. Revenue
Management
12.
Development and
20(ii)(ii
B or
The record
(Note) Use the matrix produced as a collaboration between the National Tax Agency and JICA.
Internal control rules and
84
Accounting
System and
Procedures
practice of
procedures incorporate a
accounting
i)
above
and incorporate a
procedures
comprehensive and
understood.
procedures may be
Scope and
effectiveness of
expenditure
20(i)
B or
Expenditure commitment
Expenditure commitment
Comprehensive expenditure
budget allocations.
above
commitment rules
occasionally be violated.
listed requirements.
listed requirements.
requirements.
Comprehensivene
ss and
13. Public
Procurement
competitiveness of
public
19(i)
B or
access to procurement
above
procurement
system
85
Types of internal
14. Internal
Controls and
Internal
Audits (Note:
Use with IIA
Capacity
Matrix)
(reference
responsibility for
accountability to
whom; operation of
follow-ups and
actions
)
-
PI-21
C or
above
established. An internal
committee is under
committee is under
audit committee is
established in most
establishment in each
government entity.
agencies. Compliance
established, compliance
operational systematically.
86
Internal Auditors)
standards. Risk-based
comprehensive across
with delay.
many cases.
Public access to
fiscal information
10
15. Reporting
*
year-end financial
service units.
resources available to
primary service units.
Quality and
timeliness of
in-year financial
statements
24
Comparison to budget is
Classification allows
C or
above
administrative headings.
Expenditure is captured
87
either at commitment or at
estimates. Expenditure is
covered at both
overall consistency/usefulness.
data accuracy.
Quality and
timeliness of final
25
statements
C or
above
A consolidated government
A consolidated government
A consolidated government
A consolidated government
statement is prepared
statement is prepared
annually, OR essential
annually. Information on
information on revenue,
assets/liabilities. The
assets/liabilities. The
consolidated government
IPSAS or corresponding
corresponding national
time, OR accounting
accounting standards.
statements.
Operation and
88
Management
Information
System
(FMIS)
application of
accounting system
entities of central
human resources to an IT
allocated to an IT department
allocated to an IT
progressing.
extent.
almost secured.
26
performed
C or
above
government entities
expenditure, and
predominantly comprise
issues.
aspects of performance
be disclosed to a limited
extent only.
systemic issues.
standards, focusing on
17. External
Audits and
Parliamentary
Scrutiny*
Timeliness of
submission of
case of financial
audit reports to
legislature and
evidence of
28
C or
above
follow-up on audit
recommendations
response or follow-up.
evidence of systematic
89
follow-up.
follow-up.
Notes:
1. (*) are equivalent to PEFA performance indicators.
2. On utilizing PEFA indicators, M1 and M2 are not separated strictly.
On utilizing PEFA indicators, Level 1, Level 2, Level 3, and Level 4 respectively correspond to D, C, B, and A in the PEFA rating.
Capacity diagnostic matrices of Tax Administration, Customs Administration, Internal Audits, and External Audits
These four capacity diagnostic matrices are prepared as supplementary volumes. The capacity diagnostic matrix for Internal Audits uses the
matrix prepared by the Institute of Internal Auditors (IIA) as a capacity matrix as well.
In order to measure performance of an external auditor (SAI), refer to the framework below.
SAI Performance Measurement Framework
http://www.idi.no/artikkel.aspx?MId1=102&AId=704
90
Basics
91
Basics
92
Composition of expenditure
Total revenue
What
percentage
of
total
expenditure is taken up by the
stock of arrears? Are reliable and
complete data generated on the
stock of arrears? With what
frequency? Is this on an ad hoc
basis or routine work?
Basics
94
[Extra-budgetary funds]
n How many extra-budgetary funds
are provided for under the law?
n How many extra-budgetary funds
are not provided for under the law?
Are these funds included in the
general account?
n Is an extra-budgetary fund subject
to a resolution of parliament?
n What provision is made for
decisions regarding the execution
of extra-budgetary funds,
accounting rules, reporting, audits,
information disclosure, and so
forth? Is this taken care of through
parliamentary monitoring?
[Extra-budgetary funds]
n Do the extra-budgetary funds
include funds to finance statutory
funds (funds that the government is
required by law to provide), the use
of which is predetermined, and
special funds, the use of which is at
the discretion of the competent
ministry or agency?
n What legal provision is made for the
setting up of special funds?
n Does the budget include both items
that are subject to annual voting and
permanent appropriations
(pensions, etc.), which can be
executed without a parliamentary
vote?
[Extra-budgetary funds]
n Is the finance ministry the legally
mandated administrator of statutory
funds? Are statutory funds listed in
the budget? If not, is there a legal
requirement to report transfers of
statutory funds from the general
account to the government (finance
minister) and parliament?
n Are special funds listed in the
budget? If not, is explicit provision
made for the transfer and/or carrying
forward of special funds from the
budget by government ministries?
What reporting obligations are in
place?
[Extra-budgetary funds]
n When the general account is
submitted to parliament, is a
revenue/expenditure plan (including
both fund flows and
revenue/expenditure plans) for extra
budgetary funds submitted
simultaneously?
[Applicable PEFA indicators]
PI-7
Basics
Advanced
issues
[Budget classification]
n Do the budget classifications
correspond to the chart of
accounts?
n Are any other budget
classifications used besides the
functional, economic, and
administrative categories? For
example: fund classification
and/or program classification.
[Budget classification]
n To what purpose are the five budget
classifications listed to the left
utilized?
n What attempts are made to gear
policy issues to functional
classifications? Are correspondence
tables created, for example?
Basics
performance budgeting?
If a program or performance
budgeting system is used, what
type of budgeting system is
involved?
n
[Applicable PEFA indicators]
PI-11
[Budget ceilings]
n Is a document issued stating the
budget ceiling to government
ministries? When is this document
issued? (Note: This normally
comes in the form of a budget
circular or budget call, for
example.)
n What level of government is
responsible for giving the budget
circular/call the final go-ahead
prior to its official release (e.g., the
finance minister, cabinet, or
parliament)?
[Budget ceilings]
n What information is contained in the
budget circular/call? (Does it specify
a budget preparation process
schedule and/or budget ceilings, for
example?)
n What was the percentage difference
between initial budget ceilings and
actual budget appropriations in the
current fiscal year? If budget
appropriations were higher than the
ceiling, were the final approval
decisions made by the finance
minister?
[Expenditure analysis]
[Expenditure analysis]
99
[Budget ceilings]
n Of the budget ceilings applied, which
ceiling takes precedence? Is it (1)
program ceilings, (2) portfolio
ceilings, (3) ceilings on current
policies, (4) ceilings on new policies,
(5) ceilings on forward estimates, or
(6) equal precedence on all five?
n Are budget ceilings set uniformly on
the basis of a year-to-year
comparison, uniformly minus any
permanent appropriations, or using
another method? (If an alternative
method is used, do ceilings apply to
both or just one of the investment
and/or the recurrent budget? When
compared, do budget allocations for
different ministries and programs
increase/decrease by the same
percentage?)
[Applicable PEFA indicators]
PI-11
PI-12
[Expenditure analysis]
n
n
n
Fluctuation/movement between
major budget items: What degree of
fluctuation/movement was there
between major budget items? (By
functional or program classification
where the budget classifications
correspond to the categories
presented in the budget execution
report, or by administrative
classification otherwise.)
What percentage of total
expenditure is accounted for by
liabilities accrued since the
beginning of the financial year?
PI-12
101
Advanced
10
[MTEF preparation]
[MTEF preparation]
[MTEF preparation]
issues
n
n
n
n
Tax expenditure
Basics
11
Forward estimates are a rolling plan for budget expenditure. They are generally premised on the assumption of the continuation of existing
policy (i.e., of no change to current policy) and project the level and composition of government expenditure on the basis of economic forecasts,
etc., over the medium term (three years). Although these budget projections are referred to as forward estimates, in practice they tend to be
put to different uses around the world.
103
n
n
Basics
105
[Budget allocation]
n Is the budget allocation procedure
clearly documented? How does it
work in practice?
n Are budget allocations made on a
monthly or a quarterly basis? Does
this vary from ministry to ministry?
n Viewed on a quarterly basis, what
percentage of the scheduled
allocations is actually allocated
each quarter? (Look at data for the
past three years.) What
percentage of the scheduled
allocations is ultimately allocated?
[Budget allocation]
n Where revenues are less than
planned, has explicit regulatory
provision been made for the
distribution of budget allocations?
Are budget ceilings cut by the same
percentage across the board, by a
uniform percentage minus
permanent appropriations, or
according to an alternative method?
n Are such decisions made by the
competent ministry or are they
subject to finance ministry and/or
cabinet approval? Is the matter
[Budget allocation]
n Since the various ministries commit
funds on the allocations given in the
fiscal plan, which reflects official
budget appropriations, have there
been instances in which ministries
have been unable to make good on
their commitments due to lower than
expected budget allocations? (Check
to confirm whether the monthly cash
flow forecasts compiled by individual
ministries are shared with the finance
ministry.)
n Are such outstanding expenses
106
reported to parliament?
What percentage of the total budget
allocation is allocated automatically,
i.e., without a demand from the
ministry concerned? (Where
possible, ascertain the percentage
of the total for each ministry.)
Basics
Basics
109
n
n
Advanced
issues
110
Basics
n
n
n
111
112
Basics
12
[Accounting rules]
n Has the country introduced the
International Public Sector
Accounting Standards (IPSAS)
established by the International
Federation of Accountants (IFAC)?
[Applicable PEFA indicators]
PI-25
114
115
Basics
[Training]
n Has the public procurement
agency or oversight organization
developed training programs for
procurement officers? Does it
provide the relevant training?
[Training]
n Are procurement specialists
employed and have the relevant
training programs been developed
for such personnel?
n Have special programs been
developed to keep potential private
sector bidders informed and offer
them the relevant training?
training?
[Applicable PEFA indicators]
PI-19
Basics
Advanced
issues
Are
there
internal
mechanisms in place?
control
[Types of audit]
n
Are performance
(value-for-money) audits
119
conducted?
[Applicable PEFA indicators]
PI-21
15. Reporting
Basics
13
Generally speaking, reports on budget execution (both quarterly and annual) include the following: in-year budget reports (which report on
budget progress and government liabilities (note that the budget reports submitted by individual government ministries and agencies at the end
of the financial year are normally referred to as final account reports by government ministries and agencies); final account statements (Final
Accounts); financial reports (on the governments fiscal position and fiscal performance: Financial Reports); and (IMF-compliant) Government
Finance Statistics (GFS) reports.
120
of expenses accurate?
Is the gap between the initial budget
and the amount executed clearly
stated in the various reports that deal
with budget execution?
[Report categories and their institutional [Report categories and their institutional
frameworks]
frameworks]
n Are
documents
containing n Are execution reports corresponding
information
on
extra-budgetary
to the budget classifications reported
funds and contingent liabilities made
on a daily or monthly basis? Who are
available to the general public?
these reports submitted to?
n Is information disclosure mandatory
14
In Japan, the Ministry of Finance (MoF) compiles final accounts of the expenditures and revenues of the State on the basis of the final
account reports of government ministries and agencies, which it submits to the Board of Audit of Japan. This statement is audited by the
Board of Audit, which submits an Audit Report to the Cabinet. Ultimately, the final accounts of the expenditures and revenues of the State
submitted by the MoF to the Board of Audit (i.e., the externally audited final accounts) and the Audit Report are submitted by the Cabinet to
the National Diet.
121
Basics
n
n
123
Basics
124
[Parliamentary scrutiny]
n Are audit reports subject to
parliamentary scrutiny?
n Does parliament instruct the
relevant ministries and agencies to
respond to audit report
recommendations?
n Are members of parliament (the
public accounts committee)
capable of properly reviewing the
audit reports they receive?
n Are the mechanisms in place for
following up on external audit
recommendations?
n Is there an organization charged
with advising parliament on the
external audit process?
[Applicable PEFA indicators]
PI-28
Advanced
issues
[External audits]
n Are audit reports made available to
the general public at the same time
as they are submitted to
parliament?
n Are they made available in a form
that the general public is able to
125
understand?
[Applicable PEFA indicators]
PI-28
[Value for Money audits]
n What percentage of programs has
been audited in the past five
years?
n Are Value for Money (VFM) audits
conducted?
126
Diamond, J. 2013. Good Practice Note on Sequencing PFM Reform. Washington, DC:
International Monetary Fund.
JICA. 2013a. Thematic Guidelines on Financial Administration and Public
Financial Management. Tokyo: JICA.
JICA. 2013b. PFM Position Paper. Tokyo: JICA.
JICA. 2013c. An Inquiry into Good Practice in Public Financial Management by
Developing Country Governments to Ensure the Sustainability of Development
Outcomes. Tokyo: JICA.
PEFA. 2011. The Public Expenditure and Financial Accountability (PEFA)
Framework. Washington, DC: PEFA Secretariat.
Shah, A., ed. 2007. Budgeting and Budgetary Institutions. Washington, DC: World
Bank.
World Bank. 1998. Public Expenditure Management Handbook. Washington, DC:
World Bank.
127