Challenges to successful PFM reform

15 Jan 21

Alastair Swarbrick outlines the issues faced by developing countries embarking on public financial management reform.

The current economic climate has provided an opportunity to reflect on some of the challenges and opportunities that face public sector reform. It’s a particularly interesting moment to consider public financial management (PFM) reform in developing countries, for example those countries that have aspirations of membership or closer economic ties with the EU.

The success of PFM reform is driven by a variety of factors. Success is not only linked to the culture and context of an individual country, but also senior management commitment and political will. When there is political determination and engagement among senior managers, the chances of effective implementation and success of reform programmes improve. A key challenge is that at the political and senior management level, lip service is often paid to the reform agenda. Likewise, calls for increased transparency and accountability might be driven by other objectives and motives. However, there are other obstacles to consider for those aiming to effectively implement PFM reform agendas. I’d like to highlight a few.

First, with respect to the strategic planning and programming of reforms, we often see PFM strategies or programmes that generally articulate the goals, objectives and the broad activities reasonably well. However, these strategies are frequently overly ambitious, without a clear path of how those ambitions will be realised. This in conjunction with less developed monitoring and results frameworks means that many goals and objectives are not achieved. Furthermore, strategies can also turn out to be mere ‘box ticking’ exercises, with administrations being driven by other, alternative objectives.

“Countries might appear on paper to have implemented reforms and developed their PFM systems, but in practice nothing has fundamentally changed”

So what makes strategies less effective? Plans might indeed reflect the aspirations of the government and country at hand, but there is no doubt that efforts are influenced by the objectives and expectations of external institutions, donors and development partners. For example, those countries now working towards a closer relationship with the EU strive to meet various international and European standards or expectations. While in itself this is not a problem, the trajectory feeds into the development of programmes and projects often with unrealistic expectations. Ultimately, this can undermine the effectiveness of reform efforts.

Another challenge often present when implementing PFM reform centres around practical implementation. Far too often, countries focus their activities on developing (and trying to perfect) legal and operational frameworks, and less on the implementation of reforms and day-to-day practice. Reform can often follow a formalistic approach, being overly focused on prescriptive institutional measures rather than focusing on the results. Pursuing solutions that take into account the local culture and context of the country is an important part of an effective strategy that is often overlooked.

As a result of this trend, countries might appear on paper to have implemented reforms and developed their PFM systems, but in practice nothing has fundamentally changed in their day-to-day operations or the delivery of services. For example, there are instances where countries appear on the surface to have developed programme budgeting. But if you dig deeper, the structure behind the façade isn’t there: no real change in behaviour or practice, no impact on budget management nor the delivery of better outcomes and value for money.

A key issue is the sequencing of reforms. Increasingly, we are seeing projects within PFM reform programmes focused on supporting the development of programme/performance budgeting and accrual accounting/reporting. While the objectives of these projects are sound, the timing and sequencing of such projects is key. The likelihood of successful implementation of more advanced reforms is less likely when the underlying PFM systems are not well established, stable and reliable. The reality is that the financial systems, capacity and skills in the public sector in many countries are not sufficiently developed and reliable to implement these more sophisticated systems and practices effectively.

It is important to put the building blocks in place before engaging in more advanced reforms. For example, countries should first work to create a PFM system that delivers financial compliance/fiscal discipline, before moving on to develop PFM processes that support and ensure macroeconomic stability/sustainability. Once this financial foundation is achieved, efforts can then focus on achieving better value for money in terms of strengthening policy objectives and making service delivery more efficient.

Finally, it all comes back to people. It’s vital to recognise that PFM is ultimately a management responsibility. It is a function of the abilities of the individual managers. Therefore, an essential building block is ensuring reforms are sustainable, as well as developing merit-based and objective recruitment practices alongside staff development programmes. Ultimately, this will work to support and expand management capacity, as well as the skills necessary for implementing reforms. For example, the development of accrual accounting and reporting is no simple task – it requires trained and qualified staff.

Although it’s difficult to address these issues, it’s vital that PFM reforms also take into account wider public administration reform, so that human resource policies and practices that support the recruitment, retainment and development of staff with the requisite skills for the challenge.

  • Alastair Swarbrick

    Senior Policy Advisor at the OECD and member of CIPFA’s Public Finance International Advisory Panel

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