Sequencing for Success Cambodia’s Public Financial Management Reform Program – The Platform Approach

1. Sequencing for SuccessCambodia’s Public Financial Management Reform Program – The Platform Approach ‘Sequencing and Politics in PFM Reform’ March 21, 2008 Rob Taliercio, Sr. Economist, ECSPE

2. The Public Financial Management Reform Program in Cambodia • Launched in December 2004 • Over its first three years of implementation, the PFMRP has yielded major achievements, including: • significant streamlining of budget execution procedures • introduction of program budgeting pilots • adoption of a new chart of accounts • much greater use of the banking system for revenue collection and payments, including civil service salaries • reduction in the stock of old expenditure arrears by more than 2/3 • procurement process has been streamlined, tightened, and made more competitive with the passing of a new sub-decree • establishment of internal audit departments in a dozen line ministries

3. Explaining a good outcome • Outcome: Consistent implementation of a PFM reform program in a low income, post conflict setting (in this case Cambodia) • This is interesting because of failures of: • PFM programs in many countries • Other reform programs in Cambodia (CSR) • Previous PFM reform program in Cambodia

4. Pre-PFMRP situation • Technical Cooperation Assistance Program • 2001-2004, $ 6.7 million, division of labor approach by donors • Largely unsuccessful in PFM • Reasons (from IMF and UNDP ex post reports): • Lack of a functioning civil service/incentives • Lack of political will? (weak ownership) • Problem: separate, non-prioritized, and voluminous lists of recommendations

5. The approach • 2003 Integrated Fiduciary Assessment and Public Expenditure Review (IFAPER) • Consensual problem definition – analysis of constraints • This should be the role of the PER • Consensus building by participatory approach with Government and other donors • Top down and bottom up approaches

6. IFAPER – four key findings • Fiscal revenue ratios among the lowest in the world (revenue/GDP at 11.7 in 2001) • Weaknesses in PFM system have high costs in terms of allocative and operational efficiency and have created unacceptably high levels of fiduciary risk to public funds (corruption) • Poverty reduction is severely hampered by the limited effectiveness of public spending due to weak link between policy and the budget • Civil service is plagued by low pay and poor management, and thus low capacity

7. Where to begin? • IFAPER findings are fairly typical of LICUS PFM systems in that the systemic weaknesses pervade the public sector • But given low capacity all weaknesses cannot be addressed at once • Typical approach is to compile a priority list of reforms in each PFM sub-system/stage, but no sense of priorities across sub-systems • E.g. formulation, execution, reporting, audit • Often leads to development of a fairly predictable list of recommended reforms over a three year period • E.g. 21 page matrix of reforms over 2 years (LICUS)

8. Strategy Development 1– Envisioning reform: where to and how fast? • The PFMRP put forth the objective of instilling much higher standards of accountability and management in the mobilization of public resources and effectiveness and efficiency in their use to implement the PRSP. • Long term objective to exceed regional standards and meet best international standards. • PFM Vision 2015 (ten year program)

9. Strategy Development 2 – Laying out the route: how to prioritize? • The binding constraint in 2003 was that frontline budget managers did not have any reliability or predictability with regard to the receipt of budget funds • Macro and revenue forecasts were unreliable • Significant revenue and expenditure were not on budget (managed through informal or parallel procedures) • Commitment and payment approval processes were very cumbersome • Procurement procedures were complicated • No effective means of managing cash; most payments in cash • Large stock of arrears built up

10. Evidence of dysfunction: back-loading and salary payments

11. Priority # 1 – Deliver funds predictably and reliably • Make the budget credible as an instrument of strategic and day to day management of public resources by delivering funds to managers in a reliable and predictable manner • This became Platform 1 (and the reform mantra)

12. Platform 1 activities (A) • Improve budget comprehensiveness and integration • Identify and capture off-budget resources • Integrate: capital/recurrent, special execution procedures, and central/provincial • Improve budget realism and sustainability • Develop overarching resource mobilization policy • Improve macro-fiscal framework and revenue forecasts • Strengthen debt management • Streamline spending process • Streamline approval processes • Progressively deconcentrate commitment and payment authority • Make greater use of banking system (reduce cash use) • Consolidate accounts into TSA • Eliminate stock of arrears

13. Platform 1 activities (B) • Ensure control of arrears • Strengthen commitment control in line with budget and cash management plan • Revise procurement procedures • Strengthen legal framework and increase reliance on competitive procedures • Reengineer processes • Control and improve budget supplementaries • Ensure supplementary spending based on realistic financing options • Initial organizational reform of MEF • Integrate/abolish/create some departments • Capacity development, including pilot civil service reform

14. Priority # 2 – Improve financial accountability • The budget was widely regarded as rife with corruption • Taxation, spending, payroll • Reform measures needed to • Clarify lines of accountability • Improve accounting • Improve reporting • Improve auditing • Platform 2 (Medium Term) – Provide effective financial accountability by strengthening internal controls and accountability systems at all levels (better data, disciplines, transparency)

15. Platforms 3 and 4 • Platform 3 (Medium Term) – Link policies with the budget: develop capacity to connect policy priorities and service delivery targets with budget formulation and execution. • MTEF, program budgeting, budget analysis • Platform 4 (Long Term) – Hold managers accountable for program performance by integrating processes of accountability and review of financial and performance management, resulting in greater external transparency and more effective feedback • IFMIS, accrual accounting, annual budget reports

16. Addressing lead time in reform measure development • Some measures are complex and will take years to develop (e.g., FMIS and program budgeting), so preparation must start in earlier platforms • Concept of ‘stages’ to encompass key platform measures as well as to support installation of subsequent platform measures • Stage 1 = Platform 1 measures + necessary preparatory work for Platforms 2-4 • E.g. Stage 1 included CoA redesign, core FMIS design, MTEF phasing, and program budget pilot

17. Cambodia’s PFMRP: Four Platforms/Stages

18. Why sequencing? The logic of prioritization • Some measures are prerequisites for others • Given limited capacity, reform activities must be manageable so senior officials can lead and staff can design and implementation • Success will depend in part on the pace of reform • Balance building momentum with time for internalization • Annual budget cycle impacts pace • Keep sharply focused (temptation to overload)

19. Why the platform approach? • Useful metaphor: platforms are constructed one at a time and on top of each another; each platform is the base on which to build the next one • Idea is to first remedy key operational deficiencies and then address system upgrades • ‘Platform approach’ developed by Peter Brooke for PEFA Secretariat (2002)

20. Sequencing: issues and challenges • There’s not usually a tabula rasa • There are existing reform programs of one sort or another, as well as existing Government and donor commitments (have to make some compromises) • Importance of capacity building and organizational change strategy • Need to design pilot civil service reform to support PFMRP • Defining the boundaries of ‘PFM’ • Can be quite expansive, so need to tailor prioritization to make it manageable (e.g., tax administration, customs, external audit, parliament) • Pressure from donors to include measures that are inconsistent with the logic of prioritization • E.g. gender budgeting, decentralization

21. Importance of the process • Building on IFAPER, developed detailed action plan and deepened ownership • Consolidated Action Plan • Matrix of Platform 1 actions and sub-actions with timetable, responsible MEF department, and TA needs • Performance Measurement Framework • Based on PEFA but adopted to Platform 1 • Pilot civil service reform (Merit Based Pay Initiative) and capacity development strategy • SWAp: formal coordination architecture • Partnership Principles • MEF Reform Committee and Development Partner Committee (and Multi Donor Trust Fund), both with Secretariats

22. Developing the action plan: joint missions • Started Dec. 2003—WB, ADB, DFID, Govt. Facilitation Team • Other donors joined on an associated basis—IMF, EC, AusAID, JICA, France, UNDP, Sida • Support from PEFA and AusAID • Donor support grew over time and reluctance faded

23. Key MEF concerns – unlocking demand • Need for ownership not only at management level but also at technical level • MEF creates RC and RCS • Bottom up and top down engagement • Centrality of incentive problem • Need for a ‘significant departure from past practice’

24. The approach • Building on IFAPER, develop detailed action plan and deepen ownership • CAP • Performance Measurement Framework • MBPI and capacity development strategy • SWAp: coordination mechanisms

25. Launch by Prime Minister in Dec. 2004 • Sees SWAp as way to strengthen ownership and responsibility, improve efficiency and reduce waste, and strengthen coordination • ‘we need to reform the way we implement the reform program’—PFM built on accumulated experiences • ‘seize this rare opportunity’ – different way of doing business

26. Process design lessons • High investment costs: time (2.5 years) and $$ • Problem definition phase – IFAPER (18 months), central and sectoral • Solution design phase (post-PER) – joint missions (12 months) • Process was exceedingly important • Creating critical mass on donor side – use of political capital • High maintenance costs – institutionalizing DPC and Partnership Principles • RCS and MDTF/DPCS