69964 Public Financial ManageMent ReFoRMs in Post-conFlict countRies synthesis RePoRt Public Financial ManageMent ReFoRMs in Contents Post-conFlict countRies page 3 acknowledgMents 4 acRonyMs and abbReviations 5 executive suMMaRy 10 1. intRoduction 11 1.1 Approach and country selection for the report 13 1.2 Relevance of the existing PFM literature for post-conflict contexts 15 2. suMMaRy oF case study Findings 17 3. what dRives and inhibits PFM ReFoRMs in Post-conFlict contexts? 17 3.1 The implications of fragility and post-conflict legacies 18 3.2 The role of income levels, domestic political commitment, and external incentives 22 3.3 The impact of institutional legacies and political regimes 25 4. aPPRoaches to PFM ReFoRM in Post-conFlict contexts 25 4.1 Starting points, donor assessments, and reform coordination 29 4.2 Development of legal rules and institutional arrangements 32 4.3 Approaches to capacity development 34 5. PRogRess and challenges in ReFoRMing PFM 34 5.1 Areas of progress across the budget cycle 39 5.2 Challenging reforms 45 5.3 PFM reforms’ reach to line ministries and subnational levels 47 6. Results and iMPacts oF PFM ReFoRM 47 6.1 Time horizons and the PFM results chain 49 6.2 Assessing the cross-case evidence against the PFM results chain 53 6.3 Exploring gains in government effectiveness and accountability 56 6.4 Exploring the relationship of PFM reforms with service delivery gains 59 7. conclusions: lessons and iMPlications FoR FutuRe engageMent 59 7.1 Key findings and lessons learned 61 7.2 Emerging operational implications 67 annex i: net oFFicial develoPMent assistance and oFFicial aid Received 68 annex ii: case study executive suMMaRies 86 ReFeRences The World Bank 1 Boxes page 16 box 2.1: Overview of case studies on PFM reform in eight post-conflict environments 20 box 3.1: Selection and roles of ministers of finance 36 box 5.1: Definition of Financial Management Information Systems 40 box 5.2: Definition of Medium-Term Expenditure Frameworks 53 box 6.1: Challenges in assessing achievements across the PFM results chain Figures page 11 FiguRe 1.1: Analytical Framework 27 FiguRe 4.1: The Cambodian Platform Approach 47 FiguRe 6.1: PEFA score gaps between fragile and non-fragile countries 48 FiguRe 6.2: Results Chain for External Support to PFM reforms 50 FiguRe 6.3: Scores from Latest PEFA PFM Performance Reports 54 FiguRe 6.4: Government Effectiveness and Control of Corruption: Worldwide Goverance Indicators and Bertelsmann Transformation Index taBles 15 table 2.1: Starting points and relative progress on PFM rebuilding and reforms 17 table 3.1: Population, income levels, and human development index (HDI) 21 table 3.2: Levels of aid and domestic revenue performance, and relative progress on PFM rebuilding and reform 23 table 3.3: Legal-administrative legacies and post-conflict evolution 24 table 3.4: Regime developments 25 table 4.1: PFM diagnostic assessments and major PFM reform plans 29 table 4.2: Timeline for reforming PFM laws 30 table 4.3: Institutional configuration of central finance functions 31 table 4.4: Share of ODA using Country PFM Systems 34 table 5.1: Budget planning-related PEFA scores 37 table 5.2: Progress with Implementation of Treasury Single Accounts and Computerized FMIS 38 table 5.3: PEFA scores for the effectiveness of internal audit 39 table 5.4: Open Budget Index Ratings and Estimates 40 table 5.5: MTEF Country Scores, 2002–2010, against Scoring Framework 41 table 5.6: Progress with Implementation of MTEF and Program-based Budgeting 42 table 5.7: PEFA scores on the integration of recurrent and investment expenditure, aid managed by use of national procedures 43 table 5.8: PEFA scores for accountability indicators 44 table 5.9: Progress with development of external audit and Supreme Audit Institutions 45 table 5.10: PEFA scores related to sectoral PFM 46 table 5.11: Decentralization and efforts to strengthen PFM at subnational levels 51 table 6.1: Fiscal balances 2004–2008 55 table 6.2: Matrix of PFM reform progress and gains on state capacity and accountability 57 table 6.3: Primary school gross enrolment rates (%) 57 table 6.4: Measles immunization, % of children aged 12–23 months 2 Public Financial ManageMent ReFoRMs in Post-conFlict countRies acknowledgMents T his report was prepared by a team comprising Verena countries covered, especially to Paul Sisk (Afghanistan), Peter Fritz and Ana Paula Fialho Lopes, with Edward Hedger Murphy, Rob Taliercio, Leah April and Sodeth Ly (Cambodia), and Heidi Tavakoli (Overseas Development Institute), Jean Mabi Mulumba (the DR Congo), Clelia Rontoyanni and Philipp Krause (World Bank). The case studies on which (Kosovo), Ismaila Ceesay (Liberia and Sierra Leone), Vivek this synthesis report is based were prepared by Geraldine Srivastava (Sierra Leone), Svetlana Proskurovska (Tajikistan), Baudienville (Afghanistan and the DR Congo), Ed Hedger and Mark Ahern (West Bank and Gaza), and to the World Bank (Liberia), Philipp Krause (West Bank and Gaza), Samuel Moon and IMF staff who agreed to be interviewed for this work. (Cambodia and Tajikistan), and Heidi Tavakoli (Kosovo and The report benefitted at various stages from the valuable Sierra Leone). Summaries of the case studies are included in guidance of Matt Andrews, Richard Allen, Chiara Bronchi, Bill this synthesis report as Annex II. Byrd, Ismaila Ceesay, Stephane Guimbert, Bernard Harborne, The work was supported by the Multi-Donor Trust Fund Markus Kostner, Duncan Last, Allister J. Moon, Kathrin A. on Partnership and Knowledge (Australia, UK, Netherlands, Plangemann, Douglas J. Porter, Svetlana I. Proskurovska, Canada, Norway). Francesca Recanatini, Renaud Seligmann, Vivek Srivastava, Overall guidance was provided by Linda Van Gelder, James Graham Teskey, Sanjay N. Vani and Debbie Wetzel. Further A. Brumby, PRMPS, and Joel Hellman, Stephen N. Ndegwa, comments and helpful suggestions were received during a OPCFN. The team is also very grateful for the support and peer-learning workshop held in Nairobi in June 2011. comments received from country and sector teams of the eight The World Bank 3 acRonyMs and abbReviations AfDB African Development Bank MBPI Merit-Based Pay Initiative (Cambodia) AFMIS Afghanistan Financial Management Information MTBF Medium-term budgetary framework System MTEF Medium-term expenditure framework AFROSAI African Organization of English-Speaking MTFF Medium-term fiscal framework Supreme Audit Institutions NATO North Atlantic Treaty Organization ARTF Afghanistan Reconstruction Trust Fund NGO Nongovernmental organization BTI Bertelsmann Transformation Index ODA Overseas development assistance CFAA Country Financial Accountability Assessment ODI Overseas development institute CPAR Country Procurement Assessment Report OPCFC Fragile and Conflict-Affected States Unit CSR Civil Service Reform (World Bank) DR Congo Democratic Republic of Congo PEFA Public Expenditure and Financial Accountability EU European Union PEIR Public Expenditure and Institutional Review FMIS Financial management information system PER Public Expenditure Review GAC General Auditing Commission (Liberia) PETS Public Expenditure Tracking Survey GDP Gross Domestic Product PFM Public Financial Management GNI Gross National Index PISG Provisional Institutions of Self-Government GEMAP Governance and Economic Management PRMPS Public Sector Governance Unit (World Bank) Assistance Program PRSP Poverty Reduction Strategy Paper HIPC Heavily Indebted Poor Country SAI Supreme Audit Institution IFAPER Integrated Fiduciary Assessment and Public SRSG Special Representative of the Secretary General Expenditure Review TSA Treasury single account IFI International financial institution UN United Nations IFMIS Integrated Financial Management Information UNAMSIL United Nations Mission in Sierra Leone System UNDP United Nations Development Program IMF International Monetary Fund UNMIK United Nations Interim Administration Mission INTOSAI International Organization of Supreme Audit in Kosovo Institutions UNTAC United Nations Transitional Administration in KFMIS Kosovo Financial Management Information Cambodia System USAID United States Agency for International LICUS Low Income Country Under Stress Development MDA Ministries, departments, agencies WGI World Governance Indicators MOF Ministry of Finance WDR World Development Report MOFED Ministry of Finance and Economic Development 4 Public Financial ManageMent ReFoRMs in Post-conFlict countRies executive suMMaRy P key Findings: aRe PFM ReFoRMs ublic financial management (PFM) is frequently a key pillar in reforms to build more capable and accountable states in post-conflict environments. It is the focus Possible? do they Pay oFF? of attention of international financial institutions as well as other bilateral aid agencies, and in many cases drives the Overall, significant progress with improving public financial financial support provided by key donors. PFM reforms are management is possible in post-conflict countries despite post- expected to contribute to the wider state-building goals that conflict legacies, including very low human capacity, levels of are tantamount to the post-conflict phase, including a more continuing insecurity, absence of any prehistory of independent transparent management of public finances, regular payment statehood, and acute levels of underdevelopment. Six of the of salaries of civil servants, better service delivery, and better eight cases reviewed showed “intermediate� (Cambodia and allocation of resources in support of reconstruction priorities. Liberia) to “substantial� (Afghanistan, Kosovo, Sierra Leone, the expectations linked to PFM reforms in post-conflict and West Bank and Gaza) progress on PFM reforms, while contexts raise a number of questions: What PFM reforms are progress remained “limited� in two (Democratic Republic of feasible in post-conflict environments? Are there specific Congo and Tajikistan). At the same time, progress has been country conditions, or specific approaches to PFM reform that uneven across the dimensions of the budget cycle, and the make success more likely? How fast can progress be achieved, sustainability of PFM reforms frequently remains uncertain and what does progress look like in light of a country’s due to capacity challenges as well as political and security starting points? Moreover, do PFM reforms to the degree that reasons. they succeed actually contribute to state-building efforts as a key determinant of PFM reform success is the degree of expected? These questions are particularly relev political commitment, which in turn is driven by donor incentives ant for the World Bank, which is frequently being asked and governments’ goals. Governments that seek international to play a role in implementing PFM reforms in post-conflict recognition or access to major provision of aid or debt relief environments. (such as HIPC) are more likely to let or make PFM reform this synthesis report addresses those questions regarding happen. Relative to governments’ motivation, constraints the feasibility and constraints to PFM reforms in post-conflict related to capacity and continuing fragility exist but are contexts. It discusses the findings from a cross-country secondary at least in the short term. These constraints can be analysis of the design, implementation, and impact of PFM circumvented. Progress on PFM reforms is still possible even reforms in eight post-conflict environments. The report— where these constraints are significant. However, the incentives reviewing these eight post-conflict experiences during a 7–10 that motivate political commitment can be temporary and year period in the early 2000s —focuses on what has worked 1 could decrease once goals such as international recognition and why, and what effects can be discerned with regards to or HIPC completion have been achieved. wider state-building goals. No single study on this topic can the patterns emerging from the analysis of how reforms hope to address all relevant issues. However, this effort aims have been pursued do not suggest one single best practice or to contribute to building relevant evidence and to drawing sequence. However, four practices are worth highlighting: (a) lessons learned that can inform policy decisions as well as shared analysis and coordination among development partners operational practice. supporting PFM reforms typically emerges late and should be considered earlier; (b) reforms of organic budget laws tend to happen over a period of time rather than early in the process, so rushing adoption of new laws too early is not necessary in many cases; (c) budget execution reforms tend to be more successful, while some rethinking of reform approaches 1. With the exception of Cambodia where the post-conflict period started close targeting budget planning on the one hand, and control and to 20 years ago. The World Bank 5 accountability on the other hand may be needed; and (d) while and Sierra Leone jointly with the prospect of budget support. capacity can be short-circuited through substitution (such as Government reliance on international security provision donor-funded staff in line positions), developing sustainable through UN peacekeepers or NATO appears as a factor capacity remains a challenge and needs greater and more influencing reform commitment in Liberia, Afghanistan, sustained attention. Sierra Leone, and Kosovo. An exception, in part, has been the importantly, success of PFM reforms is less clearly DR Congo, where overall limited progress on PFM reforms was associated with progress on broader state-building goals and made despite an initial strong reliance on aid. service delivery improvements than expected. In some of the Political commitment to higher order objectives such as countries, PFM progress has gone hand-in-hand with wider independence or statehood provided space for PFM reforms. In state strengthening and better control of corruption; in others, West Bank and Gaza, for example, a clearly stated objective of however, PFM progress has been made, but overall governance the Palestinian National Authority was to demonstrate to the and state capacity did not improve. Furthermore, there is no international community its viability as an independent state, clear relationship between strengthening PFM and achieving including through its capability in managing public finances. A improved service delivery. Improvements in service delivery similar driver was present in Kosovo, which was also pursuing tend to happen across the board and do not correlate with independence and was focused on developing capability in PFM reform progress. This report draws attention to these public administration through the Provisional Institutions of discrepancies, yet exploring the underlying reasons for these Self Government. A variant of this pursuit of greater autonomy discrepancies needs to be relegated to future analysis. requiring improved PFM was the Government’s objective in Liberia to increase its discretion in fiscal policy and to secure context: oPPoRtunities and debt relief. Contrary to expectations, levels of domestic revenue do not constRaints to ReFoRM success show a correlation with stronger progress on PFM—at least over the short- to medium-term coverage of this report. Among the PFM reforms in post-conflict environments are motivated eight case studies, some show strong PFM progress with low by (a) the development of a close relationship between the domestic revenue levels and vice versa. Afghanistan shows national authorities and the international community and (b) good progress despite revenue to GDP levels below 10 domestic commitment to state building. Greatest progress percent, while the DR Congo and Tajikistan, which both lag has been achieved when these two factors are aligned. The in PFM reform, have relatively strong revenue to GDP ratios.3 nature of these key drivers for PFM reforms poses problems as well as opportunities. On one hand, progress is possible despite challenging post-conflict contexts when there is ReFoRM design and iMPleMentation domestic commitment; on the other hand, reforms are to an While approaches to PFM reforms in post-conflict environment extent donor driven and pursued to reach specific goals such have not differed fundamentally from those pursued in non- as international recognition or HIPC completion. fragile contexts, differences are notable with how assistance Countries dependent on external actors for development aid, is delivered as well as regarding areas of greater and lesser security provision, and civil administration made faster progress success. Most countries’ initiation of various PFM reform on PFM reforms. In the cases of Tajikistan and Cambodia where elements has covered the entire budget cycle. Typical these dependencies are present but are not as strong, PFM reform elements, which are also frequently part of reform reforms have progressed at a slower pace.2 By contrast, rapid packages pursued in non-fragile contexts, have included reform was observed in Afghanistan, Kosovo, Sierra Leone, the introduction of treasury single accounts and financial and more recently in Liberia. HIPC debt relief triggers are management information systems (FMIS) at the execution important drivers of PFM reforms in Liberia, Afghanistan, 3. Kosovo and West Bank and Gaza have relatively strong domestic revenue 2. In Cambodia, the ratio of overseas development assistance to GDP was levels around 25 percent of GDP combined with substantial/intermediate highest in the mid-1990s, peaking at 16 percent in 1995, and in Tajikistan, progress on PFM reforms. However, especially in West Bank and Gaza these the peak level was at 15 percent in 2001; these levels in both cases have depend on customs receipts received via Israel—involving high risks of since fallen to single digits, compared to over 30 percent and higher ratios in stoppage, for example. Kosovo is highly dependent on remittances and related the highly aid dependent countries (World Bank Central Databases). taxation of consumption. 6 Public Financial ManageMent ReFoRMs in Post-conFlict countRies stages, and medium-term expenditure frameworks (MTEFs) for overall, most countries made greater progress in strengthening budget planning. Such systems’ reform efforts were generally budget execution than in budget formulation and accountability, started soon after the initial phase of emergency budgets and but important areas of weakness also remain. Cash management, of re-establishing basic functionality in budget preparation fiscal/financial reporting, accounting systems, and treasury and execution. A key difference compared to approaches in automation frequently improved. Somewhat surprisingly, non-fragile environments is the fact that capacity substitution advanced reform components such as introducing treasury and supplementation (donor-paid staff in line positions and single accounts and financial management information use of top-ups) have been used to a significant extent in a systems proved feasible in a number of cases. However, majority of post-conflict environments. weak areas in budget execution also remain, in particular effective coordination of donor PFM reform efforts emerges procurement practices, internal controls, and internal audit. rather late. There was typically a loose division of labor under While a basic re-establishment of budget planning processes which various donors assume responsibility for strengthening took place, more advanced budget planning reforms were different parts of the budget cycle but without a coherent or initiated but did not gain much traction. Progress was made integrated approach to re-building the entire PFM system. This in most countries in basic multi-year fiscal forecasting, the fragmentation of donor efforts in the early period resulted, for orderliness/timeliness of annual budget preparation, and example, in weak integration of the Budget Development and revision of chart of accounts. Efforts at establishing MTEF Management System and the Kosovo Financial Management were initiated in most of the eight countries, and about System (KFMIS) in Kosovo, and in ad hoc measures in half the cases took some steps toward developing program Afghanistan driven by the fiduciary requirements of individual budgets. However, only in Afghanistan and to some extent in donors. Kosovo are MTEF reforms seen as having gained real traction. Comprehensive PFM reform strategies and action plans only Program budgeting remained at an embryonic stage or, when emerge after broad-based PFM assessments, notably using the pushed further as in Afghanistan, became too challenging and PeFa framework from 2005 onwards. Despite substantial use of was quickly rolled back. other analytical tools (Public Expenditure Reviews and Country efforts at improving budget accountability have been patchy in Financial and Accountability Assessments, for example), post-conflict environments. Average PEFA scores are the lowest PEFA assessments formed the first coordinated multi-donor for this aspect of the budget cycle (see Figure 6.3 in Chapter effort and became an important driver of donor harmonization 6); however, there are also instances of progress. In Liberia, in designing external assistance to PFM reform. However, the General Auditing Commission was strengthened after the while valuable, PEFA assessments also have limitations such 2006 elections. In Sierra Leone, the Audit Service and the as giving no specific attention to capacity issues and offering Public Accounts Committee of the Parliament have become little guidance on the prioritization of reforms, which are both more capable and active in recent years. In Afghanistan and in particularly relevant in post-conflict environments. Kosovo, in particular, the auditing function has been partially new budget legislation was not needed to initiate PFM reforms outsourced to international agents, which has both benefits but did help consolidate the reform effort. The cross-country and risks. Challenges with strengthening budget accountability evidence reveals a focus on building core systems before appear to be rooted in limited political incentives (both within introducing a comprehensive new PFM law. In some cases, the executive and the legislative branches) as well as donor specific piecemeal amendments were made to existing laws attention, which tend to prioritize fiduciary controls for aid and directives to permit changes in PFM practices. Wholesale flows. revisions to organic budget legislation took several years to overall, sequencing of PFM reform measures varied across emerge in some cases and required extensive engagement the countries. Some general patterns emerged in terms of among government, donors, and legislatures. This focus the relative attention to budget formulation, execution, and on strengthening systems and procedures prior to passing accountability, and the relative complexity of reform measures comprehensive PFM laws modifies earlier proposals that legal attempted. Across the budget cycle, ‘basic’ reform measures reforms be the first step in re-building fiscal systems in post- such as the introduction of a new budget classification and conflict countries (IMF 2004). The World Bank 7 chart of accounts were started first but most often remained affected by high turnover levels and a limited number of incomplete before ‘advanced’ measures were introduced. skilled people. The flux in intergovernmental relations poses the widespread (albeit not universal) use of capacity challenges for establishing clear PFM systems across levels substitution and supplementation is a notable difference of PFM of government, especially in those countries that have sought reform approaches in post-conflict environments. In post-conflict decentralization but with limited progress (especially the environments, capacity is frequently depleted, especially at DR Congo and Liberia) or where significant decentralization early stages. In several countries making significant PFM has been undertaken despite weak local-level capacity (as in reform progress, particularly in Afghanistan, Kosovo, Liberia, Sierra Leone). and Sierra Leone, capacity substitution has been used PFM reforms can contribute to state building but cannot extensively as a way to short-circuit capacity constraints. ensure progress, especially where strong countervailing factors While this has provided an opportunity to move forward with are present. Three of the four cases in which significant PFM reforms, it poses challenges to longer-term sustainability, improvements took place also show some gains in the overall particularly in the lower-income cases. capacity of state institutions and control of corruption, as measured by available cross-country data and other evidence. sustainability and wideR iMPacts At the opposite end, countries such as the DR Congo continue to experience very poor government effectiveness and continuing The sustainability of PFM reforms is challenged by the heavy high corruption. However, Afghanistan significantly departs reliance on externally financed support, which combines from this pattern: there, substantial progress on PFM reforms policy conditions, extensive use of international consultants, on the one hand has been associated with virtually no progress and salary incentives for staff working in key areas. The places on government effectiveness or control of corruption on the showing greater progress in their PFM performance (Kosovo, other hand. The most likely explanation is that countervailing Afghanistan, Sierra Leone, and West Bank and Gaza) benefited factors—insecurity and a drug-based economy—have been from powerful external drivers and engagement. With the dominant (while PFM reforms and improvements such as exception of Tajikistan and West Bank and Gaza, capacity being able to pay civil servants and soldiers on time may still substitution and supplementation were used extensively in have contributed to preventing a slide back into full-fledged the other six countries. West Bank and Gaza made significant conflict). reform progress in the absence of significant external capacity improvements in service delivery and PFM reforms have supplementation. However, like Kosovo, its middle-income evolved on parallel tracks, with little apparent gain from initial situation offered a greater pool of general skills than was PFM strengthening. Improvements in service delivery can be available in other countries. observed across all eight post-conflict cases, including those Developing and funding sufficient capacity within the regular undertaking the least PFM reforms. There is no indication civil service remains a challenge, especially in lower-income, that more reforms resulted in any greater improvements in post-conflict countries. Slow progress with overall civil service service delivery. In fact, PFM reforms tend to target central reforms reinforces this challenge, while solutions appear to agencies and functions, while efforts to target improvements have been more feasible in the two middle-income cases, throughout the expenditure chain within sectors and across Kosovo and West Bank and Gaza. The evidence across levels of government—which is essential for effective service the cases also indicates that limiting the use of capacity delivery—are still relatively scarce. Somewhat greater efforts substitution on its own does not translate into greater domestic to roll out central PFM reforms to lower tiers of government capacity. Rather, longer-term capacity investments combined were made in Afghanistan, Kosovo, and Sierra Leone (in these with improvements at least in the management of the core cases including a roll-out of automated treasury systems). The civil service appear necessary. general tendency of the observed reforms was to increase the in most of the eight cases, civil service and other public centralized control of the budget and to reduce the discretion sector reforms—such as defining clear intergovernmental over financial management given to line ministries and relations—are still ongoing and have made less progress than government agencies, which on its own appears insufficient PFM reforms. In several countries the civil service remains to deliver tangible improvements. Examples of direct 8 Public Financial ManageMent ReFoRMs in Post-conFlict countRies strengthening of PFM capability in line ministries (such as the during the Governance and Economic Management Assistance Ministry of Health and Social Welfare in Liberia) are relatively Program (GEMAP) period, at a time when the Government of few. While a central focus is a sensible initial priority, Liberia invigorated its PFM reform efforts and was striving the connection to service delivery should be consciously for HIPC completion in 2010. The 2011 Paris Declaration strengthened as PFM reforms progress. monitoring survey shows that close to 40 percent of aid received engaging with international financial institutions and donors in Liberia, Sierra Leone, and West Bank and Gaza is spent in a program of PFM reforms can help post-conflict states to using country systems (up from 20–30 percent in 2008), while access and maintain significant aid funds, and to become eligible the DR Congo received only 13 percent of aid in such form.4 for more aligned aid modalities. For example, the front-runners However, countries with poorer performance on PFM reforms in PFM reform—Afghanistan, Kosovo, Sierra Leone, and West also saw some upward trend in this regard, albeit mostly at Bank and Gaza—received among the highest levels of aid (as lower levels. a percentage of GDP and/or in per capita terms). Moreover, Liberia, which achieved overall intermediate progress on PFM reforms, registered the largest increase of aid inflows after the 4. The upper range of aid using country systems in non-fragile states is around change in government in 2006. This development occurred 60–70 percent (OECD 2011). The World Bank 9 1. intRoduction P ublic finances are a central component of state-building leaves practitioners with little guidance on how to sequence, and peace-building efforts. Governments need control prioritize, and promote implementation of reforms in post- over public resources for funding national priorities. conflict environments. How does a country take advantage of States need resources for providing public services—ranging windows of opportunity to reform? How do PFM reforms relate from security, to water and sanitation, to education and to other reforms of the state? How can PFM reforms support health—and fulfilling their fiscal commitments such as paying peace- and state-building objectives? These are important but staff salaries. These are essential for building legitimacy and still unanswered questions. resilience, which have typically been eroded in fragile and this report addresses the existing knowledge gap through conflict-affected situations. a systematic review of PFM reform experiences in post-conflict Public financial management (PFM) has become a primary environments. The report presents a synthesis of cross-regional area of donor engagement in post-conflict environments. Progress findings based on a set of eight case studies in Afghanistan, in PFM reform is seen as a confidence-building measure and Cambodia, Democratic Republic of (DR) Congo, Kosovo, an important signal of governments’ willingness to re-orient Liberia, Sierra Leone, Tajikistan, and West Bank and Gaza. often scarce resources toward fighting poverty and achieving Two overarching questions guided this review: greater resilience. Because of its signaling role, progress in n How were PFM reforms affected by the challenges PFM reforms is also considered as a country’s quid pro quo for associated with state fragility? receiving sustained and significant aid flows. The World Bank n Did the design and implementation of PFM reforms is one of the leading international institutions supporting PFM contribute to achieving sustainable progress in the reforms in post-conflict situations.5 development of PFM systems, as well as to supporting Post-conflict environments present challenging contexts for wider state- and peace-building objectives? reform. New and unstable political settlements,6 persistent The review focuses primarily on the design and insecurity and weak institutional capacity in some cases, a implementation of PFM reforms. Chapter 2 provides a limited pool of skilled people in most cases, and a lack of summary of the case study findings (with extended summaries citizen confidence in state institutions are all frequent markers in Annex II), including a tentative classification of the eight of such environments. An equally important characteristic cases with regard to their relative progress in reforming of fragile and conflict-affected countries, particularly post- PFM, as well as a brief summary of key elements of their conflict transitions—and one that distinguishes these PFM reforms. Chapter 3 discusses the influence of post- environments from other developing countries—is the level conflict legacies and evolving contexts on PFM reforms and of international engagement, including significant technical analyzes the factors that appear to influence reform progress. assistance, external aid, and security support. Chapter 4 reviews PFM legacies in the case studies and the the special characteristics of post-conflict countries prompt strategies and approaches that were adopted for reform. questions about what and how reforms work in these contexts. Chapter 5 focuses on implementation of PFM reforms across In the realm of public financial management, the paucity the eight cases with the intent to understand “what works,� of reviews of experience or compilation of lessons learned which reforms have the greatest traction, and which are the most challenging ones. Chapter 6 reviews the reach of results 5. The focus of this report is on countries that have undergone post-conflict transitions, focusing on a period of around 10 years. As the WDR 2011 (World achieved and the contributions of PFM reform to broader Bank 2011b) points out, most state-building efforts should be expected governance goals, state-building efforts, and service delivery. to extend over several decades. Some of the issues explored here are also relevant for other types of fragile states or for low-income countries, but Chapter 7 discusses the implications of the key findings and the differences and similarities with these other groups of countries are not the main elements of an enhanced approach to PFM in post- covered systematically. 6. “The concept of political settlement exhibits two different dimensions: conflict contexts. Annex I provides a table of the net official the fixed outcome of a certain historical event and a particular characteristic development assistance and official aid received in the eight or property of a society, reflected in the conduct of political actors� (OECD 2011: 9). post-conflict cases from 2000–08. 10 Public Financial ManageMent ReFoRMs in Post-conFlict countRies 1.1 achieved. The analysis addresses how post-conflict legacies and PFM starting points and the evolving local context affect the commitment and approaches to PFM reforms and the aPPRoach ability to achieve results. An important point of the review was and to explore how post-conflict legacies and PFM starting points possibly enable or undermine PFM reforms, and whether countRy such legacies and starting points are associated with specific selection reform approaches (arrows 1 and 2). The interaction between PFM reform commitment and approaches and actual reform FoR the results are at the center of the analytic effort (arrow 3). RePoRt accordingly, in Figure 1.1, the two top-level boxes map out the starting points of the eight post-conflict areas and the trends of key contextual factors over the post-conflict time period reviewed the analytiCal FraMeWork sets out the key issues that (ranging from 7 to 10 years for most countries, and up to were explored in the eight case studies and in this synthesis 17 years in the case of Cambodia). Legacies refer to the key report. The framework (Figure 1.1) guides systematic characteristics of the local context when the state-(re)building collection of information (both qualitative and quantitative) effort commenced, including the degree of state functionality, and enables a comparative analysis of findings. It focuses prevalence of security concerns as well as the nature of the on understanding the contextual factors that influence PFM political settlement. The PFM starting points refer to the reforms in post-conflict environments, the content, sequence specific institutional legacies, main characteristics, and and implementation of reforms, and the outputs and outcomes degree of functionality of PFM systems at the outset of reform FiguRe 1.1. analytical FRaMewoRk Legacies and PFM starting points Evolving context 1 2 Approaches and commitment to PFM reforms and PFM reform their implementation 3 results/achievements 5 4 Interaction with other features of the public administration (especially CSR, decentralization) Impacts on state building and on service delivery Source: Authors. The World Bank 11 efforts. The evolving context refers to how key contextual among the larger group of fragile states, the focus of the review factors evolve over time, in particular the security situation, and this report is on post-conflict transitions. The selection of the political regime, income levels, and the relationship with the eight cases was informed by the following criteria: the international community. n All countries or territories are currently or were formerly Within the PFM domain, the focus is on issues and processes classified as fragile states according to the World Bank’s related to public expenditure management. This covers the key criteria—a low score on the Bank-administered legal and institutional framework for budgeting and public Country Policy and Institutional Assessment (CPIA)9 and finance; the various stage of the budget cycle, including the their inclusion in the World Bank LICUS and fragile states formulation of the budget and its execution; the transparency lists during the period 2006–10. and accountability of the budget process; and the available n All cases were categorized as post-conflict states or skills and capacity of budget institutions (e.g., the finance territories with an elapsed period of at least seven years ministry). The review does not examine revenue generation since the formal end of the conflict.10 and management, or the agencies responsible for the n All countries or territories have been recipients of collection of revenues. However, the report includes a brief 7 significant external financial and/or technical support to discussion of revenue levels as a potential driving factor for PFM reform, including from the World Bank.11 the development of PFM systems in Chapter 3. n The countries or territories exhibited a range of aid- the review also touches on the interaction of PFM reforms dependency levels, with inclusion among the sample of with other (evolving) features of the public administration system those both above and below an ODA-to-GDP ratio of 15 in a country (arrow 4 in Figure 1.1), in particular civil service percent.12 reforms and intergovernmental relations. Both of these n There was a broad geographical spread among the cases aspects also tend to be in need of or undergoing major reforms selected from across different Regions (Africa, East Asia in post-conflict situations. The review explores in particular and Pacific, Europe and Central Asia, Middle East and how the slow pace of civil service reforms in post-conflict North Africa, and South Asia). environments affects the ability to achieve and sustain PFM n The cases reflected a range of heritage and cultural reform progress. Section 5.3 explores the specific reach of systems (Anglophone, Francophone, Soviet, and Arabic). PFM reforms to central and decentralized agencies (e.g., finance ministries, line ministries, and subnational entities). addressing the wider impact of PFM reforms on overall state- and peace-building efforts and on service delivery is crucial since progress on these wider dimensions is a key motivating factor in the pursuit of PFM reforms in post-conflict environments. This point is illustrated with arrow 5 in Figure 1.1 and more fully explored in Chapter 6. However, the treatment of these important issues can only be tentative within the scope of the work presented here, with the main purpose to highlight whether the patterns observed are consistent with expectations 9. Different aid agencies as well as think tanks have proposed various ways that successful PFM reforms will support improvements in of classifying “fragile states.� The World Bank uses its CPIA, which is carried out annually, Countries with a combined score of 3.2 or below on a scale of 1 service delivery.8 (low) to 6 (high) are included in the institution’s list of fragile states. 10. All eight countries are considered post-conflict fragile states, which have benefited from sustained World Bank support to reforms over time. Countries experiencing protracted crises or deteriorating situations were not included among the sample. Challenges and opportunities in that group of countries are fundamentally different and should be the focus of a separate analytic effort. 7. Although these issues are also important, they were beyond the feasible 11. This implies some potential bias in the sample away from countries that scope of this review. received little such assistance. However, it was decided that a concentration 8. Further analysis of how PFM reforms matter relative to other factors such as on countries with considerable support focusing on PFM reforms was war- NGO and aid-funded service delivery, and wider service delivery legacies and ranted in view of the goal of learning lessons for operational practice. trends are highly desirable, but exceed the scope of this review. 12. See Table 3.3 for detailed figures on ODA-to-GDP ratios. 12 Public Financial ManageMent ReFoRMs in Post-conFlict countRies 1.2 these “strong basics� are in fact challenging to develop de facto in many countries because they curtail rent-seeking and discretion, and that they therefore often remain incomplete to Relevance various degrees. the more flexible position—which views budgetary basics oF the as the start of a reform sequence that should lead quite rapidly existing PFM to a more advanced PFM system—is also of potential relevance liteRatuRe to post-conflict countries. The “platform approach� developed first in Cambodia sees the objectives of budgeting from this FoR more inclusive perspective, where reformers should quickly Post-conFlict develop mechanisms to address efficiency and accountability concerns (Brooke 2003; DFID 2005). It suggests a contexts methodology for the sequencing of reforms through staggered phases based on joint problem identification by government and donors and political feasibility of reform. A variant of the DesPite a ProliFeration oF FraMeWorks and approaches platform approach might accept that reforms across different to PFM reforms the PFM literature does not focus on fragile PFM dimensions could proceed in parallel and advance at states specifically (Hedger and Krause 2009; Pretorius and different speeds between platforms (Tommasi 2009; Schiavo- Pretorius 2008). Possibly the key proposition in the literature, Campo 2007). which is of relevance to post-conflict countries, is the idea there are two broad camps on the matter of how rapidly reform that every budget system needs a basic foundation, namely progress can be made. Schick (1998) and others emphasize a minimal set of budget institutions, to operate. The authors the difficulty of short-term reforms and the need for internally cited in this section broadly agree that at the heart of this basic consistent basic budget structures that reflect their equally level lies a budget that is credible (i.e., is a reliable predictor basic public sector context. Similarly, Allen (2009) sees many of actual expenditure) and controllable (i.e., the finance advanced reforms that try to import international best practice ministry can keep overall spending levels under control and as actively harmful because they overlook the extended time can oversee budget execution in spending ministries). There horizon necessary for implementation.14 The other camp looks is also general agreement that, in most developing countries at PFM reforms as having a relatively clear end point that is with weak capacity in the finance area, many budget processes achievable within the scope and timeframe of contemporary should be centralized within the finance ministry before they budget reforms (DFID, 2005). The platform approach is a can be devolved to line ministries and local governments, as departure from Schick because it implies that substantial capacity grows in these entities. progress toward a more advanced PFM system is possible an emphasis on first getting the basics right seems, in over the medium term—within 5–8 years according to Brooke principal, appealing in the post-conflict contexts, which (2003). The IMF (2004) affirms that fragile states must are characterized by weak institutions, weak capacity, and follow a three-step sequence, starting with a reformed legal rudimentary levels of fiscal governance.13 The development of framework, then establishing a strong central fiscal authority, basic budgeting systems offers an approach in which strong and finally designing appropriate fiscal policies. controls, formal rules, and enforcement mechanisms all serve to increase the stability and reliability of the system. Schick’s (1998) prioritization of control-oriented measures would result in future efforts building progressively upon strong 14. In practice, attempts to establish a binary distinction between basic and advanced measures may be misleading. In their efforts to deliver simulta- foundational elements. However, the main challenges are that neously their policy objectives and to reform their public administration/ management systems, it is likely that all governments (whether of fragile states or otherwise) will engage to some degree with a range of more and less 13. See Schick (1998) for an explication of the ‘basics first’ approach. ‘sophisticated’ PFM practices (McKenzie 2009). The World Bank 13 the main point of contention in this literature is over the the literature offers little guidance to the question of which feasibility and sequencing of reforms that might eventually lead approaches should be preferred based on evidence of greater PFM up to a “modern� budget system. More fundamental alternatives, reform progress, stronger PFM systems, or better PFM outcomes. for instance how countries might lead reforms in a certain However, three propositions are of particular interest for this direction without necessarily following an OECD model of review: (a) that “basic� elements of PFM should be prioritized budgetary development, are not discussed. Allen’s argument ahead of more technically complex PFM measures; (b) that is based on the extended time it took Western budget PFM reforms take a long time and that expectations of short- systems to evolve; but there is no simple way to deduct the term results are not realistic; and (c) that good practice implications of 18th and 19th century Europe for today’s post- models based on OECD experiences and reform challenges conflict countries. Schick’s warning against advanced reforms may not translate successfully in non-OECD contexts. relies on the argument that PFM institutions depend on the wider state-building literature tends to treat the profound societal and institutional characteristics, making it re-establishment of functioning PFM systems as an integral part highly unlikely for such progress to come about over the short of building the credibility and effectiveness of states (World Bank and even medium term. Against this, the proponents of much 2011b; Ghani and Lockhart 2005). In the wake of violent more optimistic timelines and specific reform sequences conflict, Boyce and O’Donnell (2007) argue that a key element are founded on a selection of suitable cases and anecdotal of building a durable peace is building a state with the ability evidence (Brooke 2003; IMF 2004). to collect and manage public resources. To implement peace recent research suggests a possible bridge between those accords and to provide public services, the government must two camps that is of pertinence to reforms in post-conflict be able to collect revenue, allocate resources, and manage countries. Andrews (2007) argues against the notion that all expenditure in a manner that is regarded by its citizens as budget reforms should have a direction that leads ultimately effective and equitable. However, these broader discussions from the basics to what is essentially a Western ideal-type about state building and international support offer little system. With regards to post-conflict contexts specifically, granular exploration to the why, what, and how of PFM reform Porter and others (2010) underscore the importance of efforts. enabling such states to develop autonomous capacity to While cognizant of the existing body of work on PFM reforms negotiate with various stakeholders and to reach a political briefly summarized here, this review takes an inductive rather settlement over how to fund public finances and on what to than a deductive approach. It is based on the analytic framework spend resources. They note that superficial reforms that only and a set of guiding questions that reflect both conceptual change the legal-formal PFM framework without affecting the as well as operational concerns and issues of interest. The underlying institutional setting are fated to be ineffective or review seeks to tease out commonalities and differences counterproductive. Collier (2007) suggests that a selective across countries and across PFM reform sub-streams, and focus on results orientation and contracting out of services to understand what accounts for emerging patterns. Where may also have some relevance to service delivery and peace- appropriate, the synthesis report discusses how these building objectives. Such perspectives dispense with a long- empirically grounded findings from the case studies “speak term vision for the ideal budget and focus on a feasible set to� the earlier findings as documented in the literature. of PFM processes consistent with the existing country context and the immediate government policy objectives. However, the guidance that they offer for concrete operational interventions remains limited. 14 Public Financial ManageMent ReFoRMs in Post-conFlict countRies 2. suMMaRy oF case study Findings A cross the eight case studies reviewed, progress in at least initial progress across the board and performs well on PFM reform as of mid-2010 ranges from “limited� several sub-dimensions. Intermediate progress can entail either to “substantial.� Table 2.1 shows the cross-country just initial progress across PFM sub-dimensions or progress variation in PFM reform progress. Afghanistan, Kosovo, Sierra that is good in some areas but much less so in others. Limited Leone, and West Bank and Gaza have shown substantial progress implies that reform efforts have not yet resulted in progress between the start of post-conflict reconstruction and at least minimal progress across PFM sub-dimensions and/ the 2010 cut-off date. Cambodia and Liberia have achieved or that progress in some areas is matched by very little or no intermediate progress with signs of further progress toward progress in a number of other dimensions. These summary substantial reforms. In Tajikistan, progress has been clearly ratings should be interpreted as approximations rather than limited thus far. In the DR Congo, the prospects for future absolutes. Their purpose is to facilitate the investigation of progress remain limited. The contrasts between Sierra Leone which types of countries are more likely to see overall progress and the DR Congo and between Kosovo and Tajikistan are on PFM reforms and why. Assessments were made in mid- especially notable given similarities in starting points but very 2010 when most case study research was carried out. different reform progress. Across all eight post-conflict areas, a brief storyline for each of the cases covered is provided in reform efforts remain ongoing, while to various degrees risks Box 2.1. These give a synopsis of how the PFM systems evolved with regards to sustainability and irreversibility of improvements from an initial post-conflict “starting point� to their status as also continue to be present (as discussed in Chapter 6). of 2010. Further aspects of each of the cases are discussed the summary assessments for each case are based on case in Chapters 3 through 5, including in summary boxes covering study findings and also draw on most recently available PeFa specific aspects of PFM reforms. Executive summaries of the scores. Substantial progress implies that a country has shown eight case study reports are provided in Annex II. taBle 2.1. starting Points anD relative Progress on PFM reBuilDing anD reForMs approximate starting point(s) Relative progress on PFM of current state- and peace-building rebuilding and reforms by 2010* Afghanistan 2001–02 Substantial progress Cambodia 1991–93 Intermediate progress DR Congo 2001 Limited progress Kosovo 1999 Substantial progress Liberia 2003 Intermediate progress Sierra Leone 2002 Substantial progress Tajikistan 1997 Limited progress West Bank and Gaza** 1993/2002 Substantial progress * Assessment is based on most recent PEFA scores plus authors’ assessments based on case study information. ** For West Bank and Gaza, an initial starting point was the Oslo agreements of 1993, while reforms to the Palestinian National Authority and associated PFM reforms commenced in 2002. The World Bank 15 Box 2.1 oveRview oF case studies on PFM ReFoRM in eight Post-conFlict enviRonMents afghanistan achieved substantial progress in PFM reforms between since independence. Reforms were most successful in budget 2002 and 2010. While the initial focus was on emergency measures execution, especially treasury functions, but reform efforts covered to establish central fiscal functions, reforms were successively all aspects of budgeting. extended to cover the entire budget cycle. However, amidst continuing violence and political instability as well as continuing high levels of PFM reforms in liberia initially proceeded rather slowly but became corruption, the impact of PFM reforms on state resilience has been a priority under the government elected in 2006. Reforms, built limited. Overall, international engagement in Afghanistan has been on prior efforts to strengthen cash management, included heavy very strong on PFM reforms. donor involvement and capacity substitution, including “shared sovereignty� arrangements, which established co-signatory Since conflict ended in cambodia in the early 1990s, economic authority of international experts over expenditures (GEMAP)— growth has been strong and sustained, while political power as well as the incentive of HIPC completion (achieved in 2010). was consolidated in the hands of the prime minister. After initial Horizontal accountability has grown stronger since 2007 under PFM reforms during the initial post-conflict decade, a renewed the leadership of the Auditor General, but from a very weak level. effort emerged in the 2000s. In 2004, the Royal Government of The Government’s ability to develop beyond capacity substitution Cambodia and development partners jointly developed a platform remains a persistent challenge. approach, setting out a multi-step PFM reform process. Significant improvements in cash management were made, and a medium- The PFM system in sierra leone has seen strong donor involvement term fiscal framework (MTFF) was established.* These reforms were and external capacity substitution. Sierra Leone has benefited from accompanied by a major reduction in the use of cash for treasury, direct budget support and achieved HIPC completion in early 2007. tax, and customs transactions and by significant consolidation Several elections, including at local level, have been held since of myriad government accounts into a treasury single account. the end of the civil war. Reform measures have covered all areas These measures, together with better budget and cash planning, of the budget process, including fiscal decentralization, although implemented over a three-year period went a long way in eliminating many challenges in central-local relations remain. PFM reform the budget backlog problems experienced in 2003. Progress on and re-building efforts have strongly relied on externally funded several other planned reform measures such as the introduction of local consultants in the Ministry of Finance and in ministries, a financial management information system (FMIS) remains to be departments, and agencies. made. In tajikistan, PFM reforms have been slow and limited in scope to In the dR congo, PFM reforms have proceeded intermittently the treasury function and relatively simple, uncontroversial areas, since 2003, with only limited traction achieved by the incentive while efforts at establishing an MTEF did not gain much traction by of HIPC completion (in 2010). PFM capabilities remain weak and 2010. The political environment is generally not favorable to more concentrated in the central finance and budget ministries only. comprehensive efforts. The state apparatus suffers from human The political settlement in the country remains fragile. There have capacity shortage, weak management systems, and widespread been some improvements in recording and reporting expenditures, corruption. but formal PFM systems are frequently undermined by informal practices driven by short-term political needs. In west bank and gaza, PFM reforms were pursued as a central element of a broader state-building agenda. The Palestinian In kosovo, a middle-income country, the most salient political issue National Authority relies on large donor contributions. Progress has been progress toward internationally recognized statehood has been substantial in budget execution, and donors view the (achieved in 2008) and the “shared sovereignty� arrangements Palestinian National Authority as capable of channeling budget that were in place for several years. On balance, this has facilitated support through its own systems. However, the precarious political PFM strengthening, while at times state- and peace-building situation in West Bank and Gaza casts doubt on the reforms’ issues were also challenging and distracting. Initial self-governing sustainability, and external accountability remained truncated in institutions were established after 2002. The once strong role of the absence of a sitting legislature. international actors in PFM reforms has been gradually declining * Box 5.2 gives definitions of different types of medium-term frameworks of which an MTEF represents the most basic level. Sources: Country case study reports, Annex II. 16 Public Financial ManageMent ReFoRMs in Post-conFlict countRies 3. 3.1 what dRives and the iMPlications oF FRagility and Post-conFlict legacies inhibits PFM ReFoRMs With varying intensity, the eight case studies were in Post-conFlict burdened by legacies of longstanding political instability, weak institutions, a narrow fiscal base, and threats of violence. contexts? In each of the eight cases, conflict had exacerbated already weak institutions and eroded state revenues, putting a heavy burden on governments’ ability to manage reconstruction. In Afghanistan and the DR Congo, persistent violence and T his chapter explores the main drivers and inhibitors a disputed political settlement continue to challenge the of PFM reforms and how those factors influenced governments’ capability to expand reforms across the territory. the progress achieved in the eight case studies. It in the early post-conflict period, severely depleted human starts by laying out the impact of post-conflict legacies on capacity and physical infrastructure left very weak institutions. reform efforts, followed by an analysis of how starting points Migration out of Liberia during the conflict years depleted the and contextual factors—institutional legacies, levels of skilled cadres of government staff who sought better, safer development, international aid dependency versus domestic jobs abroad. In a new country such as Kosovo, the pre-conflict revenues, political leaders and emerging political regimes, pool of PFM-knowledgeable staff was almost non-existent at as well as donor influences and the relationship between the end of the conflict. Serbian policies in the decade up external influences and domestic leadership—have enabled to 1999 led to many bright Kosovars leaving jobs in the or inhibited the implementation and progress of reforms. administration, exiting the formal education system, and migrating abroad. taBle 3.1. PoPulation, inCoMe levels, anD huMan DeveloPMent inDex (hDi) west bank afghanistan cambodia dR congo kosovo liberia sierra leone tajikistan and gaza Population (2005) 26.8 13.9 59.1 1.8 3.3 5.1 6.5 3.6 GDP per capita 246a 456 125 2119 182 248 387 1072b (average for 2000–09) HDI 2007 valuec .352 .593 .389 n/a .442 .365 .688 .737 HDI 2007 rank 181/182 137/182 176/182 n/a 169/182 180/182 127/182 110/182 a. Average for 2001–08. b. Average for 2000–05 only. c. HDI values range from 0 to 1 (lowest rated country: Niger at .340). Sources: World Bank, Development Data Platform, and UNDP. The World Bank 17 in addition to the loss of talent and knowledge from government offices, levels of corruption were (very) high in all 3.2 eight cases in the early stages of the post-conflict period. Reform efforts had to face the challenge of a demoralized civil service, the Role oF incoMe levels, a widespread culture of impunity, and the use of public office for private gain. On the one hand, the perception of doMestic Political coMMitMent, endemic corruption was an early stated motivation for seeking and exteRnal incentives PFM reform in many cases (although less so in Cambodia and the DR Congo), pushed by internal reform champions, international donors, and domestic pressure groups; while one Potential FaCtor inFluenCing opportunities for PFM on the other hand, a culture of acceptance toward corrupted reform progress is per capita income levels, which vary practices posed challenges that put the reform efforts on an substantially across post-conflict countries. The two middle- uphill battle to proceed. income economies covered in the review, Kosovo and West given the scale of challenges confronting PFM reform, parts Bank and Gaza, have both performed well on PFM reforms. of the discourse on fragile states suggest that countries are As indicated in Table 3.1, the two cases have significantly “trapped� in a negative equilibrium driven by conflict, poverty, higher income levels than the other cases (and fragile states and other mutually reinforcing factors (e.g., Collier 2007). in general). A potential explanation for the role played by Countries can become trapped in a cycle of violence, where income levels for reform progress may be related to the conflicts feed into weak institutions, low trust, and repeated higher levels of human capacity and domestic resources in outbreaks of violence (World Bank 2011b). Porter and others these environments—even though the starting public sector (2010) analyzed PEFA data across 64 countries (19 fragile institutions were very weak in both cases. and 45 non-fragile) and suggest that fragile countries on While a higher income level seems to facilitate reforms and, average tend to perform worse across all PEFA dimensions. in particular, capacity development, the comparison across cases However, this review of the eight post-conflict environments indicates that the relationship between income levels and PFM shows a more nuanced picture. reform progress is not linear. Afghanistan and Sierra Leone, success has been possible even in countries with highly with very low per capita incomes and at the very bottom in adverse starting conditions. As indicated in chapter 2, six terms of human development indicators, have progressed out of the eight cases were able to make some or significant further and faster than Cambodia or Tajikistan with relatively progress on strengthening PFM.15 This includes significant higher per capita incomes as well as human development progress made in Afghanistan and Sierra Leone, which both indices. Consequently, higher income levels are neither a experienced long and destructive conflicts that resulted in necessary nor a sufficient condition for PFM strengthening very low levels of human development at early post-conflict to succeed—but they can facilitate capacity development if stages (Table 3.1). The following sub-sections explore factors other factors are in place to enable progress more broadly.16 that contributed to these somewhat unexpected results. across the case studies, political commitment was of critical importance to move PFM reforms forward. Overall political commitment was typically focused on some “higher goal�; PFM reforms were part of the means to achieving these 16. The broad observation is clear from the data, but there is insufficient data on detailed linkages (such as the prevalence of relevant skills) to enable rigorous exploration of the underlying chain of causality. The evidence on capacity development (set out in section 4.2.3) suggests that in low-income 15. While this is not a representative “ratio� for all post-conflict countries, a but significantly committed post-conflict countries, capacity substitution has number of other post-conflict countries that are not included in this review been used to a significant extent to bolster PFM, which gets around capacity also fall into this range of “some� to “substantial� progress on PFM reforms gaps that are frequently associated with very low income levels and conflict over a longer period of time since end of conflict (including Mozambique, legacies. Conversely, somewhat higher income levels but limited commitment Rwanda, and Uganda). can be associated with stagnation in capacity. 18 Public Financial ManageMent ReFoRMs in Post-conFlict countRies goals.17 Thus, in Kosovo and West Bank and Gaza, reform cases (Afghanistan, DR Congo, Liberia, Sierra Leone, and agendas benefited not only from higher income levels but were West Bank and Gaza), the appointees formerly worked for strongly influenced by the ambition of the political leadership international financial institutions for a period of time. From to develop the structures and capabilities of a sovereign state a government’s perspective, such appointments serve a dual and to achieve international recognition. In Afghanistan, purpose. A minister with an international background may be Liberia, and Sierra Leone, improvements in PFM have been expected to serve as a champion of PFM reforms while at considered as important to sustaining the commitment of the same time being expected to liaise effectively with the international actors in providing substantial development international community and to ensure external assistance assistance and security support. flows. In Afghanistan and the DR Congo, in particular, such it is important to note that PFM reform is typically supported by appointments were made during early post-conflict years the political leadership in order to achieve broader policy goals when relations with the international (aid) community needed rather than as an objective in its own right. In Kosovo, the top to be established. performer among the eight cases, PFM reforms were at first in line with the importance of external dimensions, higher directly implemented by international agencies but continue levels of overseas development assistance are associated with to be pursued by domestic stakeholders as they successively greater progress on PFM reforms across the eight cases. This assumed the reins of government—with a view toward is illustrated in Table 3.2. Levels of ODA per capita are achieving independence. The reforms have been continued particularly high in five of the six countries with “intermediate� since post-independence in 2008 with the intent of helping or “substantial� PFM progress. This is a two-way relationship: Kosovo bring its institutions closer in line with the EU. governments engage in PFM reforms as an incentive for in contexts where political leadership has been less focused attracting more aid while donors appear to be more willing to on the relationship with the international community, there continue or increase aid flows to countries that show progress tends to be more limited reform progress as well as less space in PFM reforms. Thus, the DR Congo—where progress on for development partners to become involved in PFM reforms. PFM reforms has shown least advance—is the only country Especially in the DR Congo and Tajikistan, reforms of PFM for which aid flows have declined rather than increased or were overshadowed by other political priorities, which limited held steady over the review period (see Annex I). the space for donor engagement. For instance, Tajikistan in contrast, domestic revenue performance does not appear received the lowest levels of PFM-directed aid across the as a driver for better PFM systems. While increased levels of cases studied. In Cambodia, engagement between the domestic revenues could eventually become an incentive for government and donors has been substantial on PFM reforms, stronger management of public resources, data in Table 3.3 while political and management concerns favored gradual implies that the share of domestic revenue as a percentage rather than more rapid change. Overall, the evolution of PFM of GDP is not associated with overall PFM performance over systems was less rapid in the DR Congo and Tajikistan, and the time periods analyzed. For instance, some of the fastest even relatively simple reform steps, such as introducing an reforms took place in Afghanistan and in Sierra Leone where administrative budget classification or adopting a new chart levels of domestic revenue have been the lowest in the group. of accounts, took considerable time. Conversely, higher revenue collection in Tajikistan did not spur With regard to political leadership and PFM reform, one greater PFM reform.18 The only country in the group that has mechanism that can transform high-level political commitment achieved substantial progress on both revenue performance into concrete action is the choice of the country’s finance and PFM improvement is Kosovo.19 Furthermore, it is arguable minister. Box 3.1 shows who in the eight case studies were that in countries where a large proportion of domestic revenue appointed to ministries of finance or related institutions is derived from extractive industries, the incentives to pursue and their starting dates in office. Two observations emerge: 18. The DR Congo also has relatively high revenue performance but primarily (a) the position of minister of finance has a relatively high as the result of low GDP and substantial natural resource revenue. turnover in a majority of cases; and (b) in five of the eight 19. West Bank and Gaza also shows relatively strong domestic revenues, but a large proportion of these are customs and tax revenues collected by the Israeli Government on behalf of the Palestinian National Authority and transferred 17. The real (mix of) preferences of political leaders cannot be observed on a regular basis. These revenues are vulnerable to political disruptions directly. What can be observed are concrete actions and patterns of actions and have not been sufficient to ease West Bank and Gaza’s dependence on across countries. substantial donor support. The World Bank 19 Box 3.1 selection and Roles oF MinisteRs oF Finance The relatively high turnover of finance ministers in a majority of the post-conflict cases suggests that donor efforts have to contend with a high likelihood that any minister perceived as a reform champion will leave his or her position within a few years. While there is great variation across countries and time periods, many ministers have only stayed in office for one to three years—particularly in countries with greater overall reform progress. Among the eight cases, Cambodia and Tajikistan have had the longest serving ministers of finance, within the context of more authoritarian political regimes. West Bank and Gaza is an interesting exception; a reformist technocrat with a background in international financial institutions became not only the finance minister but also over time a central political figure (and prime minister) who has been in office for nearly a decade. This unusual combination of professional expertise, political skill, and longevity is seen as a crucial ingredient of West Bank and Gaza’s relative success in achieving substantial progress on PFM reforms in a challenging context. Formerly with iFi? Finance Minister and period in office (i.e., world bank, iMF) Afghanistan Hedayat Arsala—2001 to June 2002 Y Ashraf Ghani—June 2002 to December 2004 Y Anwar Ul-Haq Ahady—December 2004 to late 2008 N Omar Zakhilwal—since February 2009 N Cambodia Keat Chhon—since 1994 N (formerly with UN ) DR Congo Minister of Budget and Finance Mbuyamu I. Matungulu—April 2001 to February 2003 Y Ministers of Budget: N M.F. Muamba Tshishimbi—2003 to 2006 N Jean-Claude Mulipe—2006 to 2007 N Adolphe Muzito—2007 to 2008 N Michel Lokola—2008 to 2010 N Jean-Baptiste Ntahwa Kuderwa Batumike—as of 2010 N Ministers of Finance: Y (briefly) André-Philippe Futa—2005 N Marco Banguli—2005 to 2007 N Athanase Matenda Kyelu—2007 to 2010 Matata Ponyo Mapon—as of 2010 Kosovo Ali Sadriu—2002 to 2004 N Hakim Shatri—2004 to 2008 N Ahmet Shala—2008 to 2011 N Bedri Hamza—2011 - N Liberia Lusinee Kamara—2003 to 2005 N Antoinette Sayeh—January 2006 to mid-2008 Y Augustine Ngafua—since 2008 N Sierra Leone Joseph Dauda—2002 to 2005 N Joseph Oponjo Benjamin—2005 to 2007 N David Carew—2007 to 2009 Former managing partner, KPMG Samura Kamara Y (briefly) Tajikistan Safarali Najmuddinov—since 2000 N West Bank and Mohammad Zuhdi Nashashibi (Fatah)—1994 to 2002 N Gaza Salam Fayyad—2002–2005 and again since March 2007 Y Interim (November 2005 to March 2007): N Ahmad Qurei (Fatah), Omar Abd al-Razaq (Hamas), Yousef Rizqa (Hamas), Samir Abu Eisheh (Hamas) 20 Public Financial ManageMent ReFoRMs in Post-conFlict countRies taBle 3.2. levels oF aiD anD DoMestiC revenue PerForManCe, anD relative Progress on PFM reBuilDing anD reForM afghanistan cambodia dR congo kosovoa liberia sierra leone tajikistan west bank and gazaa ODA/GNI % 38.3 9.3 33.3 10.9b 74.7 31.6 9.9 31.3 (average 2002–08)d ODA per capita in current US$ 103 41 37 95c 112 76 34 423 (average 2002–08) Domestic revenue in % of GDP, excl. 6.9 12 18.5 24.5 24.4 11.5 20.5 25.7 grants (2008)e Overall PFM reform Substantial Intermediate Limited Substantial Intermediate Substantial Limited Substantial performance Note: All data for fragile states is subject to high levels of uncertainty and should hence only be seen as approximate. a Data is particularly uncertain for Kosovo and West Bank and Gaza. b Aid to GDP levels for 2001 to 2006 (excluding costs for international administration). c Average for 2005 and 2006 only. d Averages give impression of overall level of aid dependency; year-to-year, most fragile states experience considerable volatility in commitments and disbursements. e Domestic revenue includes taxes on international trade and revenue from resource sectors. Sources: World Bank, Development Data Platform; IMF; OECD (2008). PFM reforms may be reduced, as appears to be the case in arrangements made use of internationally appointed experts the DR Congo. 20 who share authority over key PFM positions with government the influence of donors in promoting reforms has been officials. Kosovo and Liberia exemplify in different ways the significant, exercised through policy dialogue as well as grants experience (and challenges) of temporary shared sovereignty and other support operations. Strong external influence on arrangements—the Governance and Economic Management reform drivers, measures, and approaches has been achieved Assistance Program (GEMAP) in Liberia, and the United through various combinations of financing mechanisms (such Nations Interim Administration Mission in Kosovo (UNMIK) as multi-donor trust funds) and policy conditions (linked to and Special Representative of the Secretary General (SRSG) IMF staff monitored programs and poverty reduction growth reserved powers in Kosovo. Kosovo has achieved substantial facilities, donor budget support, HIPC conditions, and others) reform progress over a longer period of time; Liberia, with a as well as by providing technical assistance. The design of the more recent starting point, has shown intermediate progress. different operations and the analytical work underlying them, The Kosovo experience has been the most far-reaching as well as the policy dialogue associated with the preparation mechanism of shared sovereignty in a way that is only possible of those programs, provided the basis for establishing PFM in a newly emerging state, while the Liberian example is reform priorities. 21 potentially relevant for a wider range of post-conflict countries. Shared sovereignty arrangements in kosovo and liberia offered hiPC debt relief was also a significant driver of PFM reforms, unique approaches by the donor community to strengthen country especially in afghanistan, liberia, and sierra leone. The PFM systems with relatively good results. Shared sovereignty accession to debt relief through HIPC was a powerful incentive for governments to implement PFM reforms that were often 20. The DR Congo combines a relatively high share of ODA relative to gross included as HIPC conditions (discussed further in Chapter 4). national income with significant donor efforts but thus far little progress on HIPC was instrumental by helping governments and (most) PFM reforms. At the same time, the DR Congo has a relatively high ratio of own revenue to GDP—and the potential for this to become much higher over donors focus and act on a jointly agreed platform. In the DR time given its vast natural resource wealth—while its government is caught in Congo, the impact of the HIPC process was also relevant, but a constant struggle for survival. 21. The relatively greatest degree of ‘autonomous’ agenda setting for PFM its impact was shorter lived and more limited. As Easterly reforms occurred in West Bank and Gaza under the leadership of a technically (2001) argues, the granting of debt relief is a one-off event and politically strong Minister of Finance, Salam Fayyad. The World Bank 21 that can lead to a significant reform effort followed by a sharp decline once the goal is achieved. 3.3 the provision of budget support also seems to be an incentive for governments to pursue PFM reform, and it can provide a more the iMPact oF institutional continuous incentive. A concerted policy dialogue and jointly agreed policy matrices related to budget support facilitated legacies and Political RegiMes reforms by identifying key priorities and attaching a direct benefit to implementation. In Sierra Leone, donors maintained soMeWhat Contrary to exPeCtations, the degree of reform a sustained focus on PFM reforms as prior actions for the progress achieved across the case studies does not seem to be disbursement of budget support. However, the case studies associated with any specific sort of institutional legacy. Even in show that across the board the use of country PFM systems countries where the state had been barely functional for some in the form of budget support has been quite limited; while time, as in Afghanistan, Liberia, the DR Congo, and Sierra 2008 data and the 2011 Paris Declaration Monitoring Survey Leone, the remaining institutions still preserved some degree show a significant increase in the percentage of aid using of functionality; and at the early stages of re-engagement, country systems in all case studies, except for Afghanistan, reforms were built on those legacies. This was the case with the for the most recent years. One challenge is that increases in Soviet administrative heritage in Afghanistan and Tajikistan, budget support can be a reflection of geopolitical interests or the Yugoslav heritage in Kosovo, and the combination of other considerations, rather than a response to improvements Israeli, Egyptian and Jordanian influences in West Bank and in PFM systems. Budget support was provided in the DR Gaza. Progress has been possible in countries that departed Congo, for instance, despite it being considered high risk. from their prior institutional legacies, as well as in several in half or more of the aid to the post-conflict countries and which change involves a gradual evolution of existing legacies territories reviewed continues to be provided using parallel (Liberia and Sierra Leone). Institutional legacies are most systems and avoiding government systems in an attempt to reduce likely to pose an obstacle when there is a lack of agreement on fiduciary risks.22 External funding flows especially for public institutional models to follow, as was the case in Cambodia, investments still mostly remain off-budget, although a recent or when there is a generally low commitment to reform as in trend to increase the use of country systems is discernable the DR Congo. among the group of eight (see Table 4.4 in Chapter 4). For Progress of PFM reforms was achieved in some countries the time being, these continue to receive 50–80 percent involving a fundamental departure away from prior institutional of aid off budget, which in turn remains a major driver of legacies, as well as in other cases involving greater continuity de-linking capital and recurrent budgets, especially in or a more step-wise change. In Kosovo the reform process more aid-dependent environments.23 Thus, while higher departed most significantly and deliberately from its prior levels of ODA work as an incentive for strengthening PFM legacy, as local stakeholders were keen to depart from Yugoslav systems, maintaining a predominant share of aid off-budget models.24 In West Bank and Gaza, the strengthened revenue, works against the full effect of such efforts, especially with cash, and payroll controls were in no small part an attempt regards to budget planning but also regarding execution and to distinguish the administration of the Palestinian National accountability. Shifting more aid on budget—while possibly Authority from its reputation as a neo-patrimonial state that still using special accounts, as is done for on-budget aid for could not be trusted with large budget support from donors. public investments in Afghanistan—is therefore an important In the DR Congo, in contrast, a greater degree of institutional part of a longer-term support strategy for post-conflict continuity of a Francophone system has not been associated countries. with greater PFM reform success; while in Sierra Leone, a degree of continuity with previous legacies was associated with relatively rapid progress. The new PFM laws adopted 22. Typically the use of parallel systems involves separate funding flows, the application of donor-specific fiduciary procedures, and the use of project management units. 23. There is also some debate whether fiduciary controls in donor-executed assistance are consistently more effective de facto. However, this issue cannot 24. It is now considered a positive outlier among its neighbors that have main- be assessed empirically in this review. tained administrative trajectories staying closer to Yugoslav legacies. 22 Public Financial ManageMent ReFoRMs in Post-conFlict countRies taBle 3.3. legal-aDMinistrative legaCies anD Post-ConFliCt evolution legal-administrative legacies Post-conflict institutional-legal trajectory Afghanistan Soviet-Communist, Taliban Current law inspired by international/Anglophone practice Cambodia Francophone, Communist Soviet and Vietnamese influence in the 1980s; reversion to Francophone PFM in the 1990s; gradual move toward international (Anglophone inspired) practice in the 2000s DR Congo Francophone Updated Francophone system Kosovo Yugoslav-communist International practice Liberia US-Anglophone Updated US-Anglophone with international practice (separate Bureau of Budget abolished) Sierra Leone UK-Anglophone Updated UK-Anglophone on with international practice Tajikistan Soviet-Communist Mix of post-Soviet and international practice West Bank and Gaza Jordan/Egypt International practice in selected areas, while the composition of reforms was domestically inspired Source: Authors. across the cases all entail departures from prior legacies—and those case studies with hybrid political regimes have tended to infusion of variations of “international practice.� see a greater degree of PFM reforms than those with authoritarian however, problems can emerge in cases where competing regimes. Afghanistan, Kosovo, Liberia, Sierra Leone, and West institutional traditions come into play. Cambodia in particular Bank and Gaza hold competitive elections and have had is an example where different institutional traditions have hybrid regimes for part or most of the post-conflict period. coincided. The 1990s saw the re-establishment of many In the DR Congo and Tajikistan, the authoritarian regimes Francophone institutional PFM elements, while later on the emerging in the post-conflict period have concentrated more influence of an Anglophone approach has grown, leading to energy on regime survival and less on institution re-building. contradictory institutional elements and prolonged debates As an intermediate case, the Cambodia’s People Party, the over specific reform steps. Over time, these issues can be country’s dominant party, has focused on consolidating power resolved, but reforms pulling in different directions carry costs, while pursuing gradual public sector reforms. Looking beyond including the need for subsequent legal and institutional the case studies, there are several authoritarian regimes that revisions and clarifications (Table 3.3). have progressed significantly in reforming PFM systems, as at the political level, the initial political settlement of the early in Rwanda (Lewis 2011) and post-conflict Uganda (Kuteesa transition period evolved toward different political regimes over 2010), usually during periods when the leadership enjoyed time. As Table 3.4 illustrates, initial power-sharing settlements widespread support and was less pre-occupied with regime or the establishment of new political entities (Kosovo, West survival (Leftwich 2000). Bank and Gaza) developed either into hybrid regimes that the need to accommodate the interests of elite groups and combine authoritarian and more democratic elements, or into former warring factions can limit the discretion of reformers, more fully authoritarian systems. Five of the countries are especially in cases with insecure political settlements. Budget currently classified as authoritarian political regimes and the reforms that affect spending profiles are inherently political remaining three have hybrid regimes. None of the cases has and can unsettle groups with vested interests in the existing achieved an institutionalized multi-party government during distribution of public resources. While this is the case in all the post-conflict period. 25 countries, post-conflict countries are even more constrained by the risk of violence from certain elite groups. Where the 25. A few of the Balkan countries less affected by conflict (e.g., Croatia, resumption of violence was a substantive threat, political Slovenia) have moved toward democratic regimes. The World Bank 23 taBle 3.4. regiMe DeveloPMents legal-administrative legacies start of post-conflict Peace settlement trajectory of political regime Afghanistan Soviet-Communist, Late 2001 Power-sharing; External Hybrid to authoritarian; Taliban involvement—security driven Competitive elections, but undermined by violence Cambodia Francophone, 1991 Power-sharing; External involvement Authoritarian; Competitive elections, Communist (UNTAC) 16,000 peace-keepers but de facto one-party rule DR Congo Francophone 2003 Power-sharing Authoritarian External involvement (MONUC) Elections, but de facto one-man rule Kosovo Yugoslav-Communist 1999 New polity Authoritarian to hybrid; International protectorate 1999–2008 Competitive elections Liberia US-Anglophone 2003 Multi-party power-sharing Authoritarian to hybrid; External involvement (UNMIL) Competitive elections 15,000 peace-keepers Sierra Leone UK-Anglophone 2002 1999 Lome Peace Agreement (failed) Hybrid regime; External involvement (UNAMSIL) Competitive elections 17,000 peace-keepers Tajikistan Soviet-Communist 1997 Power-sharing Authoritarian; One-man rule West Bank Jordan/Egypt 1993 Oslo Agreements; New polity Authoritarian to hybrid regime to and Gaza 2002 Start of reforms authoritarian; Competitive elections; to Palestinian National Two party, non-competitive rule Authority Sources: Authors drawing on public information. negotiations with powerful actors undermined the impetus for opportunities for non-executive actors to oversee or scrutinize reform or made reforms in politically sensitive areas unfeasible, the executive. Typically, parliaments in post-conflict countries as was the case at times in the DR Congo and Tajikistan. In have lacked technical and administrative capacity as well as Liberia, reforms were undertaken on a much larger scale after political incentives to hold the executive accountable. Strong the transitional government handed over power following the executives in hybrid and authoritarian regimes perpetuate first democratic elections in 2006, signaling the weakening of that situation through co-optation of parliamentarians potential peace spoilers. 26 and by starving parliaments of the necessary resources establishing effective transparency and accountability and information. As is discussed in section 5.2.3, budget mechanisms appears to be particularly challenging in accountability has been a challenging reform area across the authoritarian and potentially also in hybrid regimes that result in eight case studies, with some greater progress in the more (overly) dominant executives. These regimes tend to limit the open ones. 26. Liberia also benefited from a high level of international security provision relative to the size of the country, involving up to 15,000 UN military per- sonnel and over 1,000 police officers from 2003 onwards, assuring domestic stakeholders that threats of renewed violence could be contained. 24 Public Financial ManageMent ReFoRMs in Post-conFlict countRies 4. aPPRoaches to PFM 4.1 ReFoRM in Post-conFlict staRting Points, donoR assessMents, and ReFoRM contexts cooRdination W ith varying starting points for PFM reforms in the Case stuDies shoW signiFiCant variation in terms of post-conflict contexts, local stakeholders as PFM starting points and the degree of functionality of PFM well as development partners require suitable system at the outset of reforms. In Sierra Leone, the central approaches. The eight case studies show some variation PFM system had recovered some core functionality within of starting points while the approaches to strengthen PFM three months after the official declaration to the civil war’s systems present a high degree of similarity. Along with the end. Donor support to the Ministry of Finance had continued PFM starting points, the following topics are discussed in this during the conflict period in the context of a stop-start nature chapter: the tools that were used to assess PFM performance of the conflict and relative security around the capital city (and at the outset of reforms, reform and donor coordination efforts, the Freetown peninsula). At the other end of the spectrum the PFM institutional arrangements, the timing of the reform in Kosovo, the challenge was to build PFM systems virtually of legal frameworks, and the challenges and approaches to from scratch in a newly emerging entity and without recent build local capacity. public administration experience since ethnic Albanians had taBle 4.1. PFM DiagnostiC assessMents anD Major PFM reForM Plans PFM reform programs and action plans country standard PFM diagnostics (world bank, iMF, and PeFa) (comprehensive strategies/plans shown in bold) Afghanistan PER and CFAA (2005), PEFA (2005), Study on Public Sector PFM roadmap (2010), PFM action Plan (2007), Accounting and Auditing (2007), PEFA (2008), ROSC (2009), MOF Five-Year Strategic Plan (2006), Emergency Public PER (2010) Administration Project (2002) Cambodia PER (1999), IFAPER (2003), CPAR (2004), PETS (primary PFM reform strategy and Consolidated action Plan (2004), education) 2005, ROSC (2007), PEFA (2010), IFAPER (2011) Technical Cooperation Assistance Plan (2001), Priority Action Programs (2000), Accelerated District Development (1996) DR Congo CPAR (2004), PER (2006), Joint PER (World Bank, DFID, SIDA) strategic Plan for Public Finance reform (2010), (2008), PEFA (2008), policy note on infrastructure investments Government Economic Program 2 (2009), Government (2009) Economic Program (2002) Kosovo Report on medium-term public expenditure priorities (2002), PFM reform action Plan (2009). Programs prior to this Operational procurement review (2004), CFAA (2005), ROSC were tied to specific donor projects rather than being (2006), PEIR (2006), PEFA (2007), Health Financing Reform coordinated by the government. (2008), PEFA (2009), PER (2010) Liberia PEFA (2007), PER and CFAA (2009) PFM reform action Plan (2009), Governance and Economic Management Assistance Program (2005) Sierra CFAA (2002), PER (2004), PEFA (2007), PER (2010), integrated PFM reform Program (2008), National Action Plan Leone PEFA (2010) (2006), Common Action Plan (2004) Tajikistan CFAA (2004), PER (2005), PER (2007), PEFA (2007), PER Public administration reform strategy (2006); PFM strategy (2008), PEFA (2012) (2008) West Bank CPAR (2004), CFAA (2004), PEFA (2006), PER (2007) PFM Sector Reform Strategy (2010) and Gaza Source: Compiled by the authors based on the case studies; World Bank reports database. The World Bank 25 been excluded from public office during Milosevic’s rule in The density of diagnostic work generally increased several the 1990s. years into the post-conflict period (as shown in Table 4.1 existing PFM activities across the countries involved many summarizing World Bank diagnostic assessments and PEFA informal practices. The conflict period allowed such practices reports for each of the eight post-conflict cases). The first major to flourish despite the fact that in most cases some legal and PFM reports in Afghanistan were completed three years after regulatory frameworks had been formally in place. In West the end of conflict, while for Kosovo a comprehensive PER was Bank and Gaza, the Palestinian National Authority allowed completed in 2006, seven years into the post-conflict period. a high degree of discretionary space for the Office of the While a pragmatic response to post-conflict environments, the President, and frequently responded to short-term requests initially uncoordinated approach to diagnostics contributed to for expenditures or staff hiring. During the long conflict in weak coordination of PFM reform efforts in the first 2–3 years. Afghanistan, many key stakeholders developed a patronage In addition, it delayed the formation of a consensus on reform approach to foreign assistance in which cash payments were priorities. frequently made by the authorities to individuals, resulting in the array of diagnostic work fed into successive PFM reform a lack of transparency and predictability. By contrast in Sierra plans covering the post-conflict period. These plans covered a Leone, the use of informal PFM practices appears to have wide range of reform objectives. In Cambodia, for example, been more constrained as the highly centralized management immediate reform efforts focused on strengthening revenue system maintained a degree of expenditure control, and the collection systems and later on cash management. In the legal and regulatory framework for PFM was upheld to a DR Congo the focus was on strengthening basic budget greater extent at least at central levels. procedures within the Ministry of Finance. Many key aspects of the budget cycle did not function the development of systematic procedures for coordinating effectively or at all. In many of the cases, budgets were PFM reforms in most cases emerged rather late—5 to 7 years not adopted, fiscal reports were not produced, and ex post into the post-conflict period. The many donors involved in oversight of spending was not carried out. Hence, at the the reconstruction process are an explanation for this. reform starting point in most cases, there was no credible and Fragmentation of donor support to PFM through multiple reliable budget to provide resources for service delivery. In projects has led to the duplication of reform efforts and response to these early conditions, getting the annual budget weak coordination in PFM design and outputs. In Kosovo, for process up and running was an immediate priority. In most example, the poor alignment of objectives between the Kosovo cases, the approach was to re-establish a basic functioning Financial Management Information System (KFMIS) and the budget process so that government expenditure could be Budget Development and Management System, which were authorized, executed, and recorded. In other cases, such as funded by different donors, resulted in their weak integration. Liberia and the DR Congo, parliamentary budget approval Poor donor coordination has also led to a multiplicity of was reintroduced early to establish legitimacy for planned program frameworks that resulted in additional transaction spending; while in other cases, such as Afghanistan, the costs for the partner country.27 initial budget was approved by presidential decree because in a majority of cases, PeFa assessments (which have been the legislature was not yet constituted. In Liberia, the first rolled-out since 2005) eventually became an important impetus post-conflict budget introduced in 2003 covered only a four- for more comprehensive reform plans and improved coordination month period. of reform support. PFM assessments using PEFA indicators initial (externally led) PFM assessments tended to be rather were completed in all eight post-conflict cases with some light, followed by varied assessments undertaken by different reassessments having already taken place.28 A number of agencies. Over time, a range of PFM diagnostic assessments reform plans emerged one to two years after the conclusion were implemented during the post-war period, including of initial PEFA assessments (Table 4.1), facilitated by the IMF Fiscal Affairs Department mission assessments, PEFA fact that PEFA assessments are more broadly owned across assessments, Public Expenditure Reviews (PER), Country 27. Better donor coordination in itself does not lead to stronger reform, Financial Accountability Assessments (CFAA), Country but lack of donor coordination contributes to undermining a coherent reform effort (i.e., it may best be viewed as a necessary but not sufficient condition). Procurement Assessment Reports (CPAR), and Reports on the 28. An informal assessment was carried out in West Bank and Gaza. Observation of Standards and Codes (ROSC) for fiscal issues. Re-assessments have already taken place in Kosovo and Sierra Leone. 26 Public Financial ManageMent ReFoRMs in Post-conFlict countRies FiguRe 4.1. the caMbodian PlatFoRM aPPRoach SEQUENCE OF PLATFORMS Rewarding performance as well as discipline PLATFORM 4 Basis for stronger deconcentration Integration of accountability and Greater external transparency review processes for both finance and performance ENABLES Accountability for performance Opportunities for efficiency PLATFORM 3 Re-alignment of resources with priorities Improved linkage of priorities and Scope for in-depth review service targets to budget planning and implementation ENABLES Around here that: Focus on what is • Regional standards start to be beaten done with money • Donors consider more budget support PLATFORM 2 Credible common data Initial improvements in internal Effective discipline control and holding managers Basis for reward and sanction accountable Greater internal transparency ENABLES Basis for accountability PLATFORM 1 Matching of resources used to period in which consumed Budget is credible because Control over arrears delivers reliable and predictable Better basis for procurement efficiency resource to budget managers Source: Royal Government of Cambodia, Ministry of Economy and Finance, www.mef.gov.kh/pfmrp.php. development partners. At the same time, the assessments Cambodia provided an early case of greater coordination when provide an overview of PFM functionalities, while other a comprehensive platform-approach reform plan was developed analytic work tends to be more partial (focused on particular in 2004.29 The Cambodian platform approach deliberately areas only) and/or not widely shared (reports by the IMF Fiscal staggered PFM reforms over four stages (Figure 4.1). These Affairs Department, for example). PEFA led to the formulation four stages of PFM reforms were initially envisaged for of reform programs that tended to attract multi-donor support implementation over a period of about 10 years (December and in some cases were closely linked to donor budget support 2004 to 2015). The development of the platform approach operations. was motivated by the government’s and donors’ desire to 29. This effort was developed prior to the launch of PEFA assessments since 2005. The World Bank 27 move beyond a more ad hoc and fragmented approach of focus on typical post-conflict constraints. While PEFA reform recommendations and actions. The first platform—to assessments provide value for post-conflict countries, their deliver resources to budget managers more reliably—aimed universal aim means that they do not focus on issues of to mitigate the significant problems with cash management particular relevance to post-conflict transitions, such as PFM and payment arrears that were present at the time (2003/04). capacity. Coverage of intergovernmental relations is rather the platform approach is broadly modeled on moving from thin in PEFA assessments (addressed by one indicator, PI–8). basics first to more advanced areas of reform, but within a However, building viable intergovernmental fiscal systems and relatively short period of time, as discussed in section 1.2.30 developing subnational and sector PFM capacities pose crucial For example, Platform 1 focused on budget credibility and challenges in many post-conflict environments. Regarding the was implemented from late 2004 to late 2008. Platform 2, platform approach, Allen (2009) cautions that it places too launched in late 2008, focused on improved internal controls many demands on still-limited local capacity. While platform and (upward) managerial accountability. Platform 3 will focus approaches stagger reforms and are effective in providing a on linking policies, budgets, and service delivery targets, and basis for coordination, it is inevitably challenging to define Platform 4 on greater external transparency, performance, and realistic time-horizons for multiple key reform strands ex ante. deconcentration by the targeted overall end-date of 2015. Furthermore, the case studies indicate that coherent The actual implementation of the reform platforms has been approaches to public sector reforms also pose a challenge. slower than anticipated, with the likely start of Platform 3 The overarching aim of improving the public sector and only by 2013 or later. However, government ownership of the governance is included in some poverty reduction strategy strategy has been maintained over time—facilitated by a high papers (PRSPs) as in Liberia for 2006 to 2008, for degree of continuity of key participants, and the absence of a example, or similar broad strategic government plans (as the change in government. Governance Compact adopted in the DR Congo in 2007). the platform approach seems to enhance donor coordination However, for implementation, responsibilities for PFM reforms and coordinated support to government reforms, albeit areas of and for public sector reforms are usually separate—with the friction always remain. Several other countries have adopted PFM reforms typically led by the Ministry of Finance while the platform-approach concept for recent reform plans, other public sector reforms have been led by commissions including Sierra Leone in 2008 and Kosovo in 2009. In or units closely linked to the top executive (as in Liberia and Kosovo, the platform approach, although adopted ten years Sierra Leone) or left to a variety of agencies without a central into the post-conflict period when budget credibility and other unit. The review of the case studies did not systematically basics was already relatively well established, facilitated explore if and what efforts were made to coordinate support greater coordination among donors to the sector. by development partners across various areas of public sector While the introduction of PeFa assessments and the design reforms. Generally, there are no analytic instruments routinely of more comprehensive and coordinated reform plans that used to assess public sector reform progress that could serve include various platform approaches have brought improvements, as a platform for possible public “sector-wide� coordination challenges still remain. Among these challenges is a greater (with the partial exception of Kosovo benefiting from the OECD’s SIGMA assessments). 30. Ideas related to the platform approach have also fed into the “strength- ened approach to supporting PFM reforms� espoused in the PEFA initiative. The three principles of the strengthened approach are (a) country-led agenda; (b) coordinated program of support from donors and international finance; and (c) shared information pool on PFM. 28 Public Financial ManageMent ReFoRMs in Post-conFlict countRies 4.2 legal reforms took between 3 and 10 years to complete after the end of conflict in the eight post-conflict situations (Table 4.2). Even in Afghanistan, Kosovo, and Sierra Leone with develoPMent oF the overall fastest pace of PFM reforms, comprehensive legal reform happened after a period of 3 to 4 years.31 This finding legal Rules and contrasts with the recommendation of an earlier IMF study, institutional which concluded that the legal framework should be the aRRangeMents starting point for PFM reform in post-conflict countries (IMF 2004) and the fact that in several cases, development partners were advising for earlier adoption of new legal frameworks. the legal FraMeWork anD institutional arrangements have some countries initially used amendments to the existing been important considerations in overall PFM reform efforts. PFM legal framework. Such an approach proved beneficial in Afghanistan, Liberia, and Sierra Leone because it permitted officials and advisers to concentrate first on tackling urgent functional improvements and to adopt a more gradual approach 4.2.1 to formalizing these practices in law. A less conventional legal framework reform approach was followed in West Bank and Gaza where the annual budget law was used to pass specific amendments to CoMPrehensive reForM oF the legal PFM framework has 31. Cambodia is a partial exception where new PFM legislation was adopted typically happened several years into the post-conflict period, almost immediately after the end of conflict in the early 1990s. In West Bank and Gaza, which also made substantial progress on PFM reforms, the organic rather than at the outset. The adoption of comprehensive PFM legislation adopted in 1998 remained in place and was not revised. taBle 4.2. tiMeline For reForMing PFM laWs country / territory end of conflict Prior PFM laws date of constitution new organic budget law Afghanistan 2001/2002 Budget Law 1983 2004 Public Finance and Expenditure Accounting Manual 1960s Management Law 2005 Cambodia 1991–93 Not known 1993 First Budget System Law 1993; new Law on Public Finance System 2008 DR Congo 2001 Public Finance Framework Law 1983 2006 Public Financial Management (amended 1987) Law 2011 General Public Accounting Regulations 1952 Kosovo 1999 Kosovo did not previously exist as a 2001 (Constitutional Law on Public Financial separate entity Framework) and Management and Accountability 2008 (Independence) 2003; amendments made in 2008 Liberia 2003 Executive Law 1972 1986 Public Financial Management Act 2009 Sierra Leone 2002 Public Budgeting and Accountability 1991 Government Budgeting and Act 1992 (amended 1996) Accountability Act 2005 Tajikistan 1997 Soviet era legislation 1994 (amended Law on State Finances 2002 1999, 2003) (amended 2007) West Bank and 1993 Oslo Agreements Organic Budget Law 1998 Basic Law (passed None during review period Gaza 2002 Start of reforms 1997, ratified 2002) to Palestinian National Authority Source: Compiled by the authors, based on the case study reports. The World Bank 29 the legal framework. In Liberia, the new organic budget law a case with significant reform success, institutional divisions provided for lagged implementation of more ambitious reform remain (Table 4.3). Furthermore, a particular situation measures. prevailed in Kosovo from 2001 to 2008 when government responsibilities, including those for PFM, were divided between the United Nations Interim Administration Mission in Kosovo (UNMIK) and the Provisional Institutions of Self- 4.2.2 Government (PISG).32 In the DR Congo, the split of the institutional arrangements and reforms Ministry of Economy, Finance, and Budget into three separate ministries in 2002 was particularly detrimental to the reform progress.33 at the Post-ConFliCt starting Point, responsibility for 32. During that time, the incentives on the provisional governing authorities to public financial management was shared among two or more improve budgeting and PFM were weakened by the substantial constraints on their autonomy. For example, the arrangements for “reserved power� institu- ministries. There has been some tendency to merge these tions and “fair share� financing reduced PISG budgetary discretion. responsibilities in a single ministry of finance especially 33. Comparison may be drawn to the amalgamation of portfolios in Uganda to create the Ministry of Finance, Planning and Economic Development, which in countries progressing further with PFM reforms overall. became a very strong “super ministry� capable of leading the PFM reform However, in several cases, including West Bank and Gaza as agenda. taBle 4.3. institutional ConFiguration oF Central FinanCe FunCtions country institutional configuration of central finance functions Afghanistan Ministry of Finance with unified responsibility for recurrent budgets and on-budget investment expenditures.a Cambodia The main responsibility for recurrent and capital budgeting rests with separate departments within the Ministry of Economy and Finance. The Ministry of Planning compiles a three-year rolling Public Investment Program based on line-ministries’ proposals that are passed on to the Ministry of Economy and Planning after approval by the Council of Ministers. DR Congo Single unified ‘mega ministry’ (Economy, Finance and Budget) at 2001 starting point. Split into three ministries (Plan, Budget and Finance) under terms of 2002 peace agreement. Kosovo A Central Finance Authority was established in 1999 and a separate Department for Reconstruction in 2000. The latter focused on the use of donor funds for public investment expenditures. With the development of a Ministry of Economy and Finance since 2002 (and the gradual transfer of functions from UNMIK to Kosovar institutions), responsibilities for recurrent and capital expenditures were integrated into one ministry.b Liberia Separate Bureau of Budget and Ministry of Finance at post-conflict starting point, formally merged in 2009. Separate Ministry of Finance and Ministry of Planning 2009 to 2012. Merged into a single Ministry of Finance, Planning and Economic Affairs in 2012. Sierra Leone Single unified Ministry of Planning and Economic Development at starting point and throughout post-conflict period. Ministry of Development and Economic Planning and Ministry of Finance were previously separate. Tajikistan Separate Ministry of Finance and Ministry of Economy and Trade (formerly Central Planning Authority), but with relative dominance of Ministry of Finance in planning and budgeting. West Bank and Separate Ministry of Finance and Ministry of Planning, with latter responsible for investment planning and budget and with Gaza former responsible for recurrent expenditure. Separation of public administration between West Bank and Gaza territories in 2007, with parallel finance ministries. a. Afghanistan Aid Coordination Authority (AACA) was established to coordinate external assistance from 2001. AACA has been transformed over time into an Aid Management Directorate within the Ministry of Finance with which it merged in 2003. b. The post-conflict administration of Kosovo by the UN created a specific set of arrangements especially during the early post-conflict period. In 1999, UNMIK created a Central Fiscal Authority under its authority responsibility for PFM functions. Responsibilities began to be transferred to the Ministry of Economy and Finance under the Provisional Institutions of Self Government in 2001 and the Central Fiscal Authority was abolished in 2002. Source: Compiled by the authors, based on the case study reports. 30 Public Financial ManageMent ReFoRMs in Post-conFlict countRies over time, several countries have taken steps to create a more measures under HIPC and IMF were needed to secure unified budget process. In Liberia, for example, the merger of the merger in 2009. In the DR Congo, the separation into the Bureau of Budget with the Ministry of Finance streamlined three ministries served the logic of a tenuous multi-party the budgeting process and addressed the bifurcation of compromise, requiring a distribution of positions and rendering reporting lines to the president on budget policy. The it the case with the strongest institutional fragmentation at integration of Liberia’s Ministry of Finance and the Ministry the end-point of the study period of 2010 (after starting with of Planning has also been proposed.34 The assumption of full a unified ministry at the outset). PFM responsibilities by the Ministry of Economy and Finance a considerable challenge in terms of PFM integration has in Kosovo in 2008 started to reduce distortions in the budget been the fact that significant shares of investment expenditures allocation process. are directly donor funded and remain off-budget. In Afghanistan, efforts to consolidate PFM functions and responsibilities met for example, external financing accounted for 90 percent of with various degrees of resistance. Vested interests favoring total public expenditures on average over the period 2003 to separate institutions were prone to emerge within government 2008, and the share of external funds spent using country as well as on the side of donors. The merger of the Bureau systems has fluctuated. Across all case studies for which data of Budget and Ministry of Finance in Liberia was opposed by is available (Table 4.4), less than 50 percent of aid funds senior Bureau officials as well as by some donor agencies. to central government are managed through national budget Strong pressure by the finance minister and through policy procedures.35 34. This merger was eventually undertaken in 2012, after a general election 35. No score was provided for the 2006 informal assessment in West Bank in 2011 in which the incumbent president was re-elected. and Gaza. taBle 4.4. share oF oDa using Country PFM systeMs sierra west bank afghanistan cambodia dR congo kosovo liberia leone tajikistan and gaza % of aid using country PFM systems 48 14 0 3 32 20 n/a n/a according to 2008 Paris Declaration Monitoring Survey % of aid using country PFM systems 25 21 13 20 42 37 31 37 according to 2011 Paris Declaration Monitoring Survey Source: OECD Survey on Monitoring the Paris Declaration (2008) and (2011). The World Bank 31 4.3 governments have limited room for maneuver given that wages and salaries consume a significant share of total expenditures. in some of the case studies, top-up schemes were adopted aPPRoaches to caPacity by governments to attract and retain skilled civil servants, but develoPMent such schemes encountered political and governance challenges. Top-up schemes are designed for the payment of more competitive wages to a limited number of civil servants while reform efforts were directed primarily at improving the avoiding fiscally unsustainable wage raises across the civil performance of PFM systems while building local capacity was a service. However, they have caused tensions with regards to secondary concern. Capacity substitution and supplementation eligibility and triggered pressures for wider improvements approaches supported by donors were important in the in public sector pay. In Kosovo, an attempt was made to implementation of PFM reforms in all the case studies, shortcut wider civil service pay reform by increasing the wages with the exception of Tajikistan and West Bank and Gaza.36 of a limited number of middle- and senior-level government Capacity substitution constitutes the use of externally funded officials through the payment of merit-based top-ups that technical assistants or advisers in line positions. Capacity were partially or fully funded by donors. However, there have supplementation schemes refer to partially or fully donor- been doubts about whether candidates for the scheme are funded, salary top-up arrangements for civil servants or use indeed selected on an appropriate merit basis. of external consultants to perform substantive PFM advisory strengthening the capacity for improved PFM was easier in functions. the middle-income than in low-income cases. Kosovo and West in four of six cases showing significant or intermediate Bank and Gaza, both middle income, took different routes but PFM progress, technical advisors paid by donors introduced both have been able to develop some degree of local capacity key reforms and performed the functions that allowed reforms to run PFM systems within a 10-year period. In Kosovo, to be effectively implemented. However, technical advisors capacity substitution was the norm in the early post-conflict were not equally effective at training local staff. The 2005– period with a gradual transfer of roles to a civil service that 10 GEMAP in Liberia is an example of a comprehensive had to be largely developed from scratch. In contrast, West approach using technical assistants that failed to achieve its Bank and Gaza avoided capacity substitution and relied on capacity development objective. Despite the stated emphasis its own civil servants but had to reform a pervasive patronage- on capacity building, the primary objective of GEMAP was and corruption-encumbered system. In both cases, their to strengthen (external) fiduciary control, and the goal for middle-income status has mattered, combined with a strong building local capacity was not effectively operationalized. political motivation to gain international recognition. One the challenge of establishing greater domestic PFM capacity, key middle-income advantage is that a larger pool of general especially in fragile states relates to systemic weaknesses skills is typically available. This availability facilitates the within the civil service. Capacity development is constrained development of technical capacity in the civil service and by the limited pool of skilled people in-country and in the reduces the pressure of competing recruitment by donors. civil service and by the low wages paid to civil servants, Furthermore, limited private sector opportunities contributed particularly middle- and senior-level officials. Low salaries for to low turnover in the civil service in Kosovo as well as West key PFM positions result in high staff turnover (as experienced Bank and Gaza. in Afghanistan and Tajikistan), or in an inability to move in some cases, technical assistance did succeed in away from technical assistance arrangements and to bring transferring skills to civil servants, but only under a concerted donor-funded staff onto the public pay roll (Sierra Leone and effort to build the capacity of local staff. In Liberia, while the Liberia). At the same time, donors offer substantial salaries envisaged skills transfer under GEMAP largely failed, the to their locally hired staff, further undermining the ability secondment of expertise from neighboring countries achieved of the public sector to attract the most skilled people. Most relatively better results. Knowledge of the local context and 36. Cambodia only used supplementation (i.e., top-up schemes). 32 Public Financial ManageMent ReFoRMs in Post-conFlict countRies language enhanced the ability of such technical assistance because of the likely increase in the overall wage bill. In to involve local staff in the reform process. In Kosovo, the Afghanistan, the Priority Reform and Restructuring Program gradual transfer of skills and capacities between 2003 and introduced a new pay-grade structure and merit-based 2008 (with a number of technical assistants remaining as recruitment, but effective implementation was countered advisors beyond independence) also worked reasonably well. by lack of government interest in civil service reform. That In Liberia and Sierra Leone, the donors provided financial was further undermined by ongoing donor-funded technical support to the supreme audit institution (SAI) to allow pairing assistance on the one hand and by allegations of continued of externally recruited public audit specialists with local staff patronage in the recruitment process of civil servants on the in the execution of joint audits. other. In Sierra Leone, accommodating the hundreds of local Phased approaches that gradually transfer responsibilities technical advisors into a common pay structure uniform with to local staff while reducing dependence on technical advisors the rest of the civil service has been particularly problematic proved effective in building local capacity. In Afghanistan, the and remains an unresolved issue. In Cambodia, after the Treasury Department started an internship program to attract cancellation of the Merit-Based Pay Initiative (MBPI), donors university graduates and train them on the job. This allowed agreed on a Priority Operating Costs policy as an interim the Department to fill some donor-funded positions with new scheme in 2010, while a wider pay-and-grading reform policy recruits and trained civil servants while reducing the number was to be formulated by the government. However, limited of external advisers in the Department. The “Kosovarization� progress achieved by government in formulating a salary of the Kosovo public administration also adopted a progressive reform subsequently prompted some donors to announce their approach by replacing international advisors with Kosovars, intent to stop supporting the Priority Operating Costs policy many having worked alongside the international advisors. by mid-2012. To secure the continuity of functions and reforms, the same attempts at longer-term and more coordinated capacity technical advisors continued to assist the local staff in their development require more sustained and comprehensive new positions, but the number of international advisors attention. An overall greater effort is needed to develop significantly decreased over the years. capacity over time, including expanding the available skills the limited focus on capacity development and the challenges pool and upgrading the capacity of those already in the civil associated with pay reform continue to undermine the transition service, while at the same time improving pay, recruiting from extensive use of technical advisors toward increased reliance effective middle managers, and improving human resource on local staff in most of the cases studied. Civil service reform management. Resorting to capacity substitution has proved measures such as decompression of salaries, revision of pay necessary to enhance the performance of existing and new and grading levels, redesign of organizational structures, and systems, but it has not sufficiently translated into sustainable introduction of training opportunities for professional staff capacity development in most cases. The ability to phase out have received limited attention from government and donors capacity substitution depends on a concerted and dedicated in most of the eight cases. Where civil service and especially effort by national stakeholders and donors to address these pay-related reforms were attempted, they have often lacked the underlying components of capacity development within a political buy-in or raised concerns about fiscal sustainability medium- to long-term horizon. The World Bank 33 5. PRogRess and 5.1 challenges in aReas oF PRogRess acRoss ReFoRMing PFM the budget cycle T he findings from the eight case studies suggest what a key Priority in the early post-conflict period was to has worked in the various efforts to reform PFM re-create formal budget processes often in the context of as well as the reform areas that have experienced limited public resources. greater challenges. The degree of progress achieved in some reform areas—basic re-establishment of budgeting cycles and especially improved cash management, reporting, and computerization on the budget execution side—are explained 5.1.1 by greater attention and support shown from national budget formulation stakeholders as well as from donors. The more advanced reforms in budget formulation on the one hand and efforts to strengthen budget accountability on the other hand, as well initial BuDgets in the iMMeDiate post-conflict periods were as firming up internal control and audit, have proven to be typically sketchy. They sought to match limited domestic more challenging. resources and some amounts of donor funds with priority The chapter begins with discussion of the more successful spending needs and to re-establish a formal system of budget reform areas across the budget cycle. The chapter continues by preparation and approval as the basis for budget execution addressing the reform areas that have been more challenging and reporting. An early focus was to ensure there was a and exploring reasons for the variation in traction. It concludes reliable flow of funds in support of essential items such as with a look at the reach of PFM reforms into sectors and civil service salaries and peace- and state-building objectives. subnational levels, which is typically a challenging and under- Progress on basic aspects of orderliness in the annual budget assisted dimension. process has been achieved in most of the reviewed cases—with notable exceptions—while progress on more advanced measures has been limited. As Table 5.1 reflects, a majority of the cases achieved a B or C+ PEFA score reflecting the existence and taBle 5.1. BuDget Planning-relateD PeFa sCores sierra afghanistan cambodia dR congo kosovo liberia leone tajikistan west bank and PeFa performance indicator (2007) (2010) (2008) (2009) (2007) (2010) (2007) gaza (2006) PI–11 Orderliness and participation B [C]a A D+ B [B+]b B D+ [C+]c B C+ in the annual budget process PI–12 Multi-year perspective in B [D+]a B D C [D+]b D+ C [D+]c D+ D fiscal planning, expenditure policy and budgeting PI–2 composition of expenditure D [C]a D D A [N/A]b D C [C]c C C out-turn compared to original budget Note: *For West Bank and Gaza, PEFA scores were informally prepared for a World Bank-conducted PER. a. Scores in brackets are from the previous 2005 PEFA assessment for Afghanistan. b. Scores in brackets are from the previous 2007 PEFA assessment for Kosovo. c. Scores in brackets are from the previous 2007 PEFA assessment for Sierra Leone. 34 Public Financial ManageMent ReFoRMs in Post-conFlict countRies adherence to a budget calendar, clarity of the guidance to allocations in the approved budget. Available evidence ministries, departments, and agencies (via a budget circular) suggests that credibility decreases further as one moves down and timely approval by the legislature. An exception to the the expenditure chain, especially toward front-line spending expected performance pattern is the D+ score on this aspect units at subnational levels.39 for Sierra Leone in the 2010 PEFA assessment, assigned in part due to significantly delayed budget approvals by Parliament. Cambodia scores best on the two budget planning indicators. In particular, it established an orderly budget 5.1.2 process based on its 2008 organic budget law and an MTFF. budget execution It also introduced budget strategy plans, and some ministries prepared costed sector strategies; but budget credibility still remains a concern. BuDget exeCution reForMs saw relatively strong progress, initial progress on multi-year budgeting was made in a majority which also included more advanced reform measures. Starting of cases, but cross-country performance is weaker compared to with more elementary steps toward re-regularizing budget improvements with basic orderliness of budget processes. In execution, a number of cases moved relatively quickly to reform general, progress was good where a specialized unit in the elements such as treasury single accounts and computerized finance ministry supported this function. The Macroeconomic accounting systems, which can be considered as advanced and Fiscal Policy Unit of the Ministry of Economy and reform measures. At the same time, challenges still continue Finance in Kosovo, for example, achieved strong capacity in several areas, in particular with regards to internal control with its development of a competent core staff, through and audit and improvements in public procurement practices. many years of substantive dialogue with the IMF on forecasts, as with budget formulation, establishing basic systems of and through incentives such as salary top-ups. Similarly, budget execution was an early and consistent priority across the in Sierra Leone, the Macroeconomic and Fiscal Framework cases that showed positive results. Five areas where progress was produced from 2007 onwards by a macro-fiscal section was made were (a) the chart of accounts, (b) introducing a in the Economic Policy and Research Unit of the Ministry centralized cash management system, (c) automating the of Finance and Economic Development (MOFED) with IMF treasury systems, (d) strengthening commitment controls, support. Conversely, one of the more advanced cases in which and (e) improving financial reporting. Progress achieved in no real effort at developing a medium-term framework was these areas stands in contrast with lessons from non-fragile, made is West Bank and Gaza.37 Traction of existing MTFF/ low-income countries where budget execution reforms have MTEF efforts remained limited in Tajikistan.38 tended to achieve less traction, apparently due to resistance although orderliness in the budget process improved, progress from domestic stakeholders compared to post-conflict in the credibility of budget plans as evidenced by comparing contexts (Andrews 2010). plans to actual out-turns was limited. While Cambodia scores the revision of the chart of accounts and the centralization of well on the process indicators, for example, these have yet cash management were among the strongest dimensions of PFM to translate effectively into a credible budget in terms of a reform in most cases. The revision of the chart of accounts has composition of actual expenditures in line with the original often been linked to revising budget classifications as well budget, for which it scored a D (on PI–2). Kosovo stands as the introduction of a FMIS as experienced in Afghanistan, out as the only country that achieved improved scores for Kosovo, Liberia, and Sierra Leone (See Box 5.1 for definition budget processes as well as for credibility in terms of actual of FMIS.) In some cases there have been several rounds of expenditure composition, while all other countries scored D revision, such as in Afghanistan, where the chart of accounts or C in this regard. Weakness in this dimension reveals the eventually became compliant with the Government Finance still limited credibility of inter-sectoral and inter-ministerial Statistics Manual (GFSM) 2001. Sierra Leone’s chart of 37. For West Bank and Gaza, the IMF produces a MTFF. See case study sum- mary for West Bank and Gaza in Annex II. 39. Given that there is little systematic application of Public Expenditure 38. However, more advanced efforts at developing MTEFs and a programmatic Tracking Survey in the group of countries analyzed, it is hard to quantify the approach to budgeting were generally not successful. These challenging prevalence and extent of this problem. See e.g., Afghanistan PER 2010, aspects are discussed in section 5.5. Public Expenditure Tracking Survey, carried out for Sierra Leone. The World Bank 35 Box 5.1 deFinition oF Financial ManageMent inFoRMation systeMs “Financial management information systems (FMIS) can be broadly the only reason for developing FMIS. More importantly, FMIS solutions defined as a set of automation solutions that enable governments are used to support informed decisions on policies and programs, to plan, execute, and monitor the budget by assisting in the and publish reliable information on budget performance.� prioritization, execution, and reporting of expenditures, as well as the custodianship and reporting of revenues.� typical components of a core FMis “A core FMIS generally refers to automating the financial operations n Budget systems (budget planning and preparation) including: of both the budget and treasury units. The system tracks financial – budget planning/formulation events and records all transactions; summarizes information; – medium-term frameworks (e.g. MTFF, MTBF, MTEF) supports reporting and policy decisions; and incorporates the – public investment management elements of ICT, personnel, procedures, controls, and data. An FMIS is – program-based budgeting and/or performance-informed usually built around a core treasury system that supports key budget budgeting execution functions, such as accounts payable and receivables, commitment and cash management, and the general ledger and n Treasury systems (budget execution) supporting: financial reporting, combined with budget formulation (multi-year), – management of budget authorizations/releases debt management, and public investment management modules. – commitment of funds The non-core systems sometimes linked with FMIS solutions are – payment/revenue management (mostly based on treasury personnel management/payroll, revenue administrations (tax and single accounts) customs), public procurement, inventory and property management, – cash forecasting and management and performance management information. Financial control is not – accounting and reporting. accounts is still only compliant with GFSM 1986. The Initially it covered only execution of the operating budget for centralization of cash management—and the implementation central government but it was gradually extended to other of treasury single accounts more precisely—were established functions and to cover the provincial operations of the central in the immediate post-war period in Kosovo, the DR Congo, government. The FMIS in Sierra Leone was unusual in that it and Tajikistan.40 From a political-economy point of view, superseded a previous, automated financial management and treasury single accounts may be simpler to implement early accounting system. It helped to strengthen budget control by on in a post-conflict environment when ministerial structures restricting spending in excess of quarterly budget allocations. are still weak. Somewhat similarly in Liberia, successive partial systems were Computerization of treasury systems was a widely sought developed (LECAP and SunSystems) before the development reform measure and was successfully implemented in four of the of a fully-fledged FMIS was started. See Table 5.2 for progress cases: afghanistan, kosovo, sierra leone, and West Bank and in implementing FMIS and treasury single accounts. 41 gaza. The systems focused on core payment and financial Control was achieved by not only focusing on concentrated reporting operations, which contributed to making their agencies, but also by reducing the discretion of deconcentrated introduction feasible. In Kosovo, for example, the KFMIS agencies. In West Bank and Gaza’s first year of reform, for (implemented since 2001) was considered a major reform example, the Government established a treasury single account achievement and was assessed as “well developed and 41. The implementation of an effective treasury single account is considered operational� for all aspects of budget execution and reporting. a precondition for an FMIS. Dener and others (2010) identify five such func- The AFMIS in Afghanistan was introduced in 2002 as a basic tional pre-requisites: (a) improvement of budget classification; (b) develop- ment of a unified chart of accounts integrated with the budget classification; centralized control system that could be developed over time. (c) improvement of treasury single account operations; (d) development of commitment control and monitoring mechanisms; and (e) establishment of cash management functions. The progress with treasury single account 40. No treasury single account was established in Liberia, apparently due to a implementation is highlighted in Table 5.2 solely for purposes of comparison lack focus on this issue rather than a failed reform effort. across the cases. 36 Public Financial ManageMent ReFoRMs in Post-conFlict countRies taBle 5.2. Progress With iMPleMentation oF treasury single aCCounts anD CoMPuterizeD FMis country computerized FMis (budget, treasury, and other systems) treasury single account (tsa) Afghanistan Cash-based AFMIS implemented in 2002 for execution of operating budget, covering central TSA used since 2002/03. government. Modified to record approved budget and MDA allotments 2003/04. Sole source TSA covers all core budget of allotment information 2005/06 and established automated controls over allotments, operations. However, on-budget commitments, and payments. Roll out to all 46 MDAs and 34 subnational-level governments donor investment funds use from 2004 to 2010. special accounts, not TSA. Highly centralized control in MOF. Automated controls to ensure consistency among allotments, commitments, cash availability, and disbursements. Uses Freebalance software. Cambodia Introduction of FMIS built into platform-approach action plan. Efforts since 2006; but to date TSA implementation started no system in place. Donor procurement procedures contributed to delays. Still in preparatory in 2005 and has since been phase. completed. Separate donor accounts remain. DR Congo Basic computerized expenditure management system from 2003/04. Monthly reports on Closure of 240 line-ministry budget execution and treasury balance. New payroll systems from 2006. bank accounts progressively over 2003–2006. More transparent information available on expenditure process and bottlenecks, but weaknesses in budget implementation caused by use of ‘emergency’ procedures. Kosovo KFMIS introduced in 2000 using FreeBalance software and ‘Go live’ from 2001. Cash-based Established TSA in the accounting system from 2004. immediate post-conflict period. Recorded all government Supported production of regular, timely, comprehensive, and accurate in-year and annual revenues and expenditures. financial reporting. Liberia Implementation of customized budget management package and interim commitment control TSA implementation system (LECAP) in 2007. Separate financial management software package (Sun Accounting incomplete. system) in 2008. Plans to extend Sun Accounting package to cover commitment control and budget module were dropped in 2009 in favor of move to comprehensive new FMIS. ‘Go live’ date for FMIS postponed repeatedly because MOF not ready for implementation. Sierra Leone Financial Management Accounting System in use from 1998 replaced by FMIS in 2003 TSA implemented in 2007. and ‘Go live’ from 2005 starting in the Accountant-General’s department. Payroll module implemented 2006. Module on bank reconciliations 2007. Initiation of rollout to MDAs, but separate FMIS in use for local councils. Strengthened the hard budget control by MOFED. But expenditure control not comprehensive because personnel, statutories, and imprests all outside the system. Tajikistan FoxPro treasury software package procured, installed, and made operational in 2001. Notional TSA, but not fully Introduction and installation of complementary budget information system in 2004. System consolidated. Separate local upgraded in 2009 for rollout to subnational-level governments, but full FMIS not attempted— government, capital budget, prior work required first on classifications, chart of accounts, and IT infrastructure. and ‘Republican’ (central government) accounts. Budget credibility in execution remained low because of weak commitment control, broad virement limits, limited oversight, and weak cash flow monitoring. West Bank New FMIS designed and implemented after 2007 (from local solution already in use in Virtually all government and Gaza education sector). Processing of payments through FMIS re-started from 2008. Covered revenues, expenditures, and accounting functions first and rolled out to sector ministries 2009. From 2010 FMIS used for extra-budgetary sources all cash payments and commitment controls established at spending units, as well as budget successively centralized and module for preparation of annual budget. consolidated in TSA between 2002 and 2005. TSA fell out of use under Hamas in 2006–07 but reinstated by Fatah from 2007. Source: Compiled by the authors, based on the case study reports. The World Bank 37 and closed down all the commercial bank accounts used by (including budget support and major debt relief through ministries. This policy was also implemented in Kosovo, albeit HIPC). Governments interested in maintaining a good at a somewhat later stage in the reforms. In addition, in West relationship with the international community were likely to Bank and Gaza spending discretion was moved from the “go along� with these reforms, even though the reinforcement line ministries to the Ministry of Finance, including control of a centralized control over finance can entail losers among of salary payments. This led to strong improvements in cash government stakeholders—such as sector ministers whose management as well as in the predictability of expenditures. discretion over the use of funds is reduced. Given substantial Budget recording and reporting improved, even in those capacity substitution and/or new recruitment into the civil countries that made least PFM reform progress overall. service, bureaucratic practices at the implementation level Improvements to in-year and end-of-year financial reporting appear to be less entrenched than in non-fragile countries. were most apparent in Kosovo and Sierra Leone, with some at the same time, progress in budget execution reforms rapid gains in Liberia following pressure from the Auditor was not uniform and shows variation across countries as well General. In-year reporting was prioritized in Sierra Leone as across sub-components. In the DR Congo and Tajikistan, from 2003 onwards, and the introduction of a new automated central governments have been either unwilling or unable to treasury system further improved the regularity, quality, and reform budget execution to a more significant extent. While timeliness of those reports. The implementation of the KFMIS some reform steps, such as improved chart of accounts and in Kosovo—underpinned by the treasury single account— budget reporting regulations, were eventually adopted even supported similarly substantial gains in financial reporting in these countries, the nature of reforms remained limited. there. Tajikistan introduced quarterly budget performance In the DR Congo in particular, frequent use of exceptional reports from 2008 onwards as means to provide better procedures (deviating from the formal expenditure chain, information on government expenditure to budget-support the chaine des dépenses in Francophone budgeting systems) donors. Production of budget execution reports in the DR remains a significant problem. Furthermore, some elements Congo was irregular; data quality was weak, but capacity within budget execution proved harder to reform across most to produce monthly reports was established through a new countries. This is in particular the case for internal audit and accounting system implemented between 2004 and 2007. public procurement (see also Porter and others 2010). In the overall, the progress made on budget execution across a more advanced reforming countries—notably Kosovo, Sierra number of countries indicates the feasibility of reforms against Leone, and West Bank and Gaza—internal audit received these dimensions, including some relatively advanced measures. increasing attention in later years. Traction of a reform focus Improvements in budget execution were a priority for donors, on internal audit has been greatest thus far in Kosovo (Table in particular when providing or contemplating program aid 5.3). taBle 5.3. PeFa sCores For the eFFeCtiveness oF internal auDit sierra west bank afghanistan cambodia dR congo kosovo** liberia leone tajikistan and gaza* PeFa Performance indicator (2007) (2010) (2008) (2009) (2007) (2010) (2007) (2006) PI–21 Effectiveness of internal audit C [C]a D+ D+ B+ [C]b D+ D+ [D+]c D C Note: *For West Bank and Gaza, PEFA scores were informally prepared for a World Bank-conducted PER. a. Scores in brackets are from the previous 2005 PEFA assessment for Afghanistan. b. Scores in brackets are from the previous 2007 PEFA assessment for Kosovo. c. Scores in brackets are from the previous 2007 PEFA assessment for Sierra Leone. 38 Public Financial ManageMent ReFoRMs in Post-conFlict countRies 5.1.3 budget transparency 5.2 challenging ReFoRMs the Degree oF BuDget transParenCy varied across the eight cases, but there was some evidence of increased civil society this seCtion DisCusses PFM reforms aspects that remained engagement and public scrutiny in some cases (Table 5.4). challenging, including more advanced budget planning Hearings by legislative committees on PFM issues, notably processes, integrating public expenditures, and improving draft budgets and external audit reports, were opened up to budget accountability. public participation and media reporting in Liberia and Sierra Leone, but not in Afghanistan. Publication of external audit reports was made a standard practice in Kosovo, Liberia, and Sierra Leone—which are the stronger performers on budget 5.2.1 accountability among the case studies—whereas Tajikistan only started publishing budget performance reports in 2009 advanced budget planning reforms despite provisions in the 2002 PFM law requiring wide-ranging budget transparency. Liberia made the greatest progress in building links to the media and to civil society organizations In some of the case studies, more advanced budget planning after the Auditor General began to engage directly with reforms were attempted—sometimes under pressure from the the media to create pressure on the Government to release donors—yet these remained relatively unsuccessful for the financial information and to encourage public interest in most part. Variations of medium-term fiscal and expenditure financial scrutiny of the executive. However, the sustainability frameworks were initiated across seven countries, but mostly of this approach remains to be seen.42 with limited traction (see Box 5.2 for definitions of the different stages of medium-term expenditure frameworks, and 42. The non-renewal of the Auditor General’s appointment in 2011 has since Tables 5.5 and 5.6 on country-by-country status).43 Greatest called into question the sustainability of his approach in the context of strong vested interests unsupportive of greater accountability. formal progress was made in Kosovo where elements of an MTEF featured in the budget process from 2003 and where several full MTEFs have been developed since 2006–08. taBle 5.4. oPen BuDget inDex ratings Some progress has also been made in Afghanistan, although anD estiMates donor demands for excessively detailed multi-year spending plans and remaining problems with government control over estimated quintile for budget execution have still negatively affected the credibility open budget index countries not scored by score 2010 the open budget index of these rolling MTEFs. Cambodia established an MTFF (i.e., three-year rolling projection of the overall resource envelope) Afghanistan 21 with continuing efforts to strengthen macro-fiscal forecasting Cambodia 15 and revenue projections. Attempts but little or limited traction DR Congo 6 were made in the DR Congo, Liberia, and Sierra Leone. World Kosovo -- (40–60) Bank-led technical assistance support in Tajikistan included the objective of medium-term budgeting from 1999, but Liberia 40 coverage was limited to the social sectors and basic pre- Sierra Leone -- (40–60) conditions for an MTEF were not achieved after 12 years and Tajikistan -- (0–20) successive donor projects. West Bank and Gaza -- (40–60) 43. The administrative burden generated by an MTEF can vary considerably. Source: Open Budget Index, 2010 rankings; authors estimated scores for For example, a MTFF is mainly produced and updated by a macro-forecasting countries not scored by the Index based on case study evidence. unit, while the production of costed multi-year strategies by all line ministries can imply a considerable administrative cost. The World Bank 39 Box 5.2 deFinition oF MediuM-teRM exPendituRe FRaMewoRks An MTEF is a whole-of-government strategic policy and expenditure externally imposed MTFF may or may not provide a basis for framework within which ministers and line ministries are provided budget formulation. MTFF indicators include budget or other with greater responsibility for resource allocation decisions and reports that contain the government’s medium-term, macro- resource use. The key to a successful MTEF is that institutional fiscal strategy, macroeconomic and fiscal forecasts, debt mechanisms assist and require relevant decision makers to balance sustainability analysis, and/or details of an IMF program, PRSP, what is affordable in aggregate against the policy priorities of or other. the country. The MTEF consists of a top-down resource envelope, n Medium-term budgetary framework (MtbF). An MTBF specifies a bottom-up estimation of the current and medium-term costs of spending agency expenditure ceilings based on a compromise existing policy and, ultimately, the matching of these costs with between top-down resource availability as indicated by the available resources. The matching of costs should normally occur in MTFF, and bottom-up resource needs to finance sector spending the context of the annual budget process, which should focus on the plans. MTBF indicators include budget, spending agency or need for policy change to reflect changing macroeconomic conditions other reports explaining aggregate and sector expenditure as well as changes in strategic priorities of the government (World objectives and strategies, budget circulars detailing medium- Bank 1998). term expenditure ceilings, and budget documents containing expenditure medium-term estimates. An MTEF is a multi-year public expenditure-planning framework, n Medium-term program (or performance) framework (MtPF). which allows expenditures to be both driven by policy priorities and An MTPF shifts the focus of attention from spending agency disciplined by budget realities. The MTEF can be unbundled into to spending program inputs and/or program/agency outputs, three distinct forms: outcomes and performance. MTPF indicators include budget, spending agency or other reports explaining program objectives n Medium-term fiscal framework (MtFF), An internally generated and strategies, listing specific agency and/or program output or MTFF provides a macro-fiscal basis for budget formulation; an outcome targets, and explaining results (World Bank 2011). taBle 5.5. MteF Country sCores, 2002–2010, against sCoring FraMeWork country 2002 2003 2004 2005 2006 2007 2008 2009 2010 Afghanistan 0 0 0 1 1 1 1 1 1 Cambodia 0 1 1 1 1 1 1 1 1 DR Congo 0 0 0 0 1 1 1 n/a n/a Kosovo 0 0 0 0 2 2 2 n/a n/a Liberia 0 0 0 0 0 0 0 0 0 Sierra Leone 0 0 0 0 1 1 1 n/a n/a Tajikistan 0 0 0 0 0 1 1 n/a n/a West Bank and Gaza 0 0 0 0 0 0 1* 1* 1* Note: A country’s MTEF status is defined by the highest MTEF stage achieved. 0 = no MTEF, 1 = MTFF, 1* = IMF produced MTFF, 2 = MTBF, Source: World Bank (2011a). 40 Public Financial ManageMent ReFoRMs in Post-conFlict countRies taBle 5.6. Progress With iMPleMentation oF MteF anD PrograM-BaseD BuDgeting country developments with MteF and Program-based budgeting Afghanistan n First MTFF in 2005; has gained some traction as credible fiscal planning instrument with remaining challenges n Costed sector strategies from 2004; first program-based budgeting piloted in 2007/08; criticized as poorly conceived, rushed, too complex; too much focus on budget preparation side, insufficient attention to consequences for budget execution and accountability Cambodia n An MTFF has been in place since the early 2000s, while move towards an MTEF is still to come. Costed sector plans exist for social sectors. Good PEFA rating for PI–12 is based on debt sustainability analysis and sector strategies, but not sector ceilings component n Development of program-based budget information piloted in eight ministries since 2006, but actual allocations continue to be line-item based; real introduction foreseen for platforms 3–4 DR Congo n MTFF initiated since 2006; no clear traction thus far n No attempt at introducing program-based budgets thus far Kosovo n Efforts since 2003, first full MTEF in late 2005, legal requirement since 2008; but still limited traction n No attempts at program-based budgeting Liberia n MTEF recommended by IMF, but not introduced thus far; MTFF developed from 2009 by newly formed Macro- Fiscal Analysis Unit in Ministry of Finance n IMF Fiscal Affairs Department recommendation in 2007 and again in 2009; initial attempts made in 2007/08 but limited traction until 2009; World Bank support for basic program-based budgeting since 2008/09 (Economic Governance and Institutional Reform Project) Sierra Leone n First MTEF introduced in 2001 (prior to end of war) guidelines; but still weak links between MTEFs and annual budgets n MDAs asked to submit program-based budget estimates since 2009; unclear traction thus far, appears limited Tajikistan n First attempts at establishing MTEF from 1999 had very limited traction, gradual progress more recently n No attempt at introducing program-based budgeting thus far West Bank and Gaza n Idea of medium-term projections floated in 2005/06 but no follow through at the time or thus far n Plans to develop program-based budgeting over 2011–13 Note: Reform efforts for medium-term budgeting, where initiated, often use the general heading ‘MTEF’ and usually combine efforts at establishing MTFFs and MTBFs (usually targeting initial pilot ministries or sectors). Source: Compiled by the authors, based on the case study reports Program-based budgeting was a problematic reform measure Liberia was discontinued after the first efforts failed to move in the cases where it was tried. The introduction of program- beyond administrative structures and organizational mission based budgeting was attempted in Afghanistan, Cambodia, statements. The experience in Afghanistan suggested that a Liberia, and Sierra Leone (Table 5.6). However, there is as yet serious but muddled attempt at introducing program-based little evidence of real benefits emerging from those incipient budgeting can be quite costly—to the extent that it negatively efforts. The earliest efforts relative to a country’s post-conflict affected the ability to execute the budget in 2008/09. starting point were made in Liberia (four years into the post- Discussions with practitioners suggested that there is conflict period for the 2007/08 budget), with slightly later considerable interest in moving beyond traditional line-item initiatives in Afghanistan (six years after post-conflict in budgets but that approaches to program-based budgeting tend 2007/08) and Sierra Leone (six years after post-conflict in to be too complex.44 The case study experiences suggest that 2008/09). Since 2006 Cambodia has introduced program- attempting to introduce program-based budgeting can impose based budgeting pilots in 8 line ministries, which had earlier a considerable compliance burden on spending ministries and been defined as areas of priority expenditures. However, these agencies and can risk disrupting both budget formulation and are limited to a share of recurrent expenditures, and there execution. At the same time, traditional line-item budgets has not yet been a switch to actually allocating funds based on a programmatic breakdown. Program-based budgeting in 44. Comments made during a workshop with World Bank and government practitioners, June 20 2011 in Nairobi. The World Bank 41 are also seen as suboptimal because they can be difficult In Cambodia, the Ministry of Planning still has some limited to interpret and can focus attention on inputs rather than role in developing public investment plans. Furthermore, even achievements. This hampers accountability relationships where these functions are jointly located in a single ministry, between political decision-makers and bureaucrats as well as development and recurrent budgeting frequently continue between government and citizens. Given that the case studies to operate as semi-distinct processes. The cases reveal show that the approach to program-based budgeting reforms significant interdepartmental coordination challenges. was too complex even in the best-performing, post-conflict sub-dimensions of PeFa indicator Pi–12 reveal the weakness situations, there may be a need to further re-think options for with development of forward expenditure estimates and linkages budget formats that are sufficiently simple while at the same to sector strategies. This pattern is confirmed by qualitative time able to effectively capture and convey more valuable evidence from case studies. Reform efforts that have targeted information. strengthening this link do not show thus far significant traction (Table 5.7). an added powerful driver for non-integration of public expenditures is the fact that significant donor funds dedicated 5.2.2 to reconstruction are mainly planned and executed outside integrating public expenditures government systems. The high volumes of foreign aid for reconstruction and development projects make this an especially critical issue for fragile states. The separate integrating the ManageMent of recurrent and capital specification and provision of external support to different budgets has been a challenge in most of the eight cases. government ministries compounded the coordination challenge A standard premise of good PFM is the development of a for government. As shown in Table 4.4, on average, only one- unified and comprehensive budget that captures all forms of quarter of external aid has been spent using country systems revenue and expenditure (Webber 2007). Evidence from the in recent years. PEFA indicator DI–3 (shown in Table 5.7), cases suggests this principle is complicated by the tendency addressing the proportion of aid that is managed by use of for fragmented budget management arrangements centrally national procedures, is the worst performing of the entire set. (between ministries of finance and planning) as well as within On a positive note (as reflected in Table 4.4), use of country line ministries and sectors. Ministries of Finance and Planning systems increased somewhat between the assessments in exist as separate entities responsible for recurrent and capital 2008 and in 2011. Donors may be willing to pursue this trend expenditures respectively in the DR Congo, Liberia, Tajikistan, further, particularly in those post-conflict countries that show and West Bank and Gaza (refer to Table 4.3 in Chapter 4). significant progress on PFM reforms. taBle 5.7. PeFa sCores on the integration oF reCurrent anD investMent exPenDiture, aiD ManageD By use oF national ProCeDures afghanistan cambodia dR congo kosovo liberia sierra leone tajikistan west bank and PeFa performance indicator and specific dimensions (2007) (2010) (2008) (2009) (2007) (2010) (2007) gaza* (2006) PI–12, dimension (iii) Existence of sector strategies with multi-year costing of recurrent B B D C C D C D and investment expenditure PI–12, dimension (iv) Linkages between investment budgets and forward expenditure C C D D D D D D estimates DI–3, dimension Proportion of aid that is D D D D D D D No score managed by use of national procedures * For West Bank and Gaza, PEFA scores were informally prepared for a World Bank-conducted PER. 42 Public Financial ManageMent ReFoRMs in Post-conFlict countRies outsourcing of the external audit function was used to varying 5.2.3 degrees in several cases. One rationale was to compensate for the lack of residual capacity and the absence of exposure to budget accountability more advanced audit practices. Another was to provide an additional safeguard to donors that substantial external aid flows and growing domestic revenues were spent in accordance reForM oF ForMal oversight mechanisms and strengthening with procedures. The appointment of an international of horizontal accountability lagged behind the progress made firm as “audit agent� in Afghanistan from 2002 led to the in other PFM dimensions. This is in part because budget introduction of joint audits by teams comprising international accountability received relatively less attention in reform audit managers and Afghan audit staff. That model was also programs, but also because it is a challenging area politically. developed in Sierra Leone under an international technical Across the cases, parliamentary scrutiny remains the weakest assistance contract. In Kosovo, the external audit function of functions. was outsourced entirely during the initial pre-state-building external audit and ex post legislative scrutiny showed period 1999–2003. Since the establishment of an Office of limited improvements. Table 5.8 summarizes the PEFA scores Auditor General in 2003, its head has been an international on “quality and timeliness of annual financial statements� appointment, an arrangement that continued even beyond (PI–25); “scope, nature, and follow-up on external audit� independence in 2008. A hybrid approach was pursued in (PI–26); and “legislative scrutiny of external audit reports� Liberia where the auditor general was a Liberian repatriate (PI–28). PEFA scores demonstrate that in cases such as working under a direct EU-funded contract, which accorded Liberia, Tajikistan, and West Bank and Gaza, the weakness in the officeholder a degree of independence.45 In West Bank external audit and legislative scrutiny were also attributable to and Gaza, the first external audit of government financial weakness in the quality and timeliness of financial statements. statements for 2008 was outsourced to a private sector firm. However, the scoring differentials in Afghanistan, the DR Congo, Kosovo, and Sierra Leone show the dependency on financial reporting to be only a partial explanation for low scores in the accountability domain. As Table 5.9 reflects, building independent and effective SAIs has been challenging 45. The contract of the Auditor General who was appointed in 2006 was not and/or has come relatively late even in countries progressing renewed at the end of his 4-year term amid considerable controversy and after well on overall PFM reforms (especially in Afghanistan and having been highly critical of the government’s use of funds. Overall, however, the audit office is still seen as having made considerable progress in recent West Bank and Gaza). years. taBle 5.8. PeFa sCores For aCCountaBility inDiCators afghanistan cambodia dR congo kosovo liberia* sierra leone tajikistan west bank and indicator (2007) (2010) (2008) (2009) (2007) (2010) (2007) gaza** (2006) PI–25 Quality and timeliness of B+ [C]a D+ C+ A [A]b D C+ [D+]c D D+ annual financial statements PI–26 Scope, nature and follow up C [C]a D+ D+ B [D+]b D C [D+]c D D of external audit PI–28 Legislative scrutiny of C+ [D]a No score D C+ [D+]b No score D+ [D+]c D D external audit reports * Note that the score for Liberia does not yet reflect the post-2006 improvements. ** For West Bank and Gaza, PEFA scores were informally prepared for a World Bank-conducted PER. a. Scores in brackets are from the previous 2005 PEFA assessment for Afghanistan. b. Scores in brackets are from the previous 2007 PEFA assessment for Kosovo. c. Scores in brackets are from the previous 2007 PEFA assessment for Sierra Leone. The World Bank 43 taBle 5.9. Progress With DeveloPMent oF external auDit anD suPreMe auDit institutions country development of supreme audit institution (sai) and external audit function Afghanistan Control and Audit Office established in pre-conflict period. No constitutional provision for an independent SAI and limited independence from the executive; Auditor General may be removed by the President without reference to legislature/judiciary. Support provided to CAO through international-local ‘joint audits’ with international specialists leading CAO teams. Drafting of new legislation has started, but has not been adopted. Cambodia National Audit Authority (NAA), reporting to the National Assembly established in 2000 by the Audit Law. Independence from the executive still limited. The number of annual audits performed has risen from single digits to over 90 in 2010. A first summary report (covering 2006) was published in 2009; another, for 2007, was published in October 2011. The law stipulates that publication of reports is at the discretion of the auditor general and that public or commercial interests should not be negatively affected by any published details. Still in early stages of development. DR Congo Permanent judicial control of public finance by SAI. Lack of financial autonomy and lack of political independence. Government accounts audited and presented to Parliament, but not voted. Recommendations by SAI usually not published and with little follow-up. Kosovo External audit outsourced to Netherlands 1999–2003. Office of the Auditor-General established in 2003, with successive international Auditors General under EU funding. Improvements in number and timeliness of audits but use of audit information weak. Lack of parliamentary follow-up. Liberia General Auditing Commission replaced the General Auditing Office in 2007. Commission legally independent of executive, with reporting line to the legislature. Auditor General appointed in 2007 under EU contract for salary costs. Use of staff from other African SAIs on secondment basis through INTOSAI contacts, and international specialists to lead General Auditing Office teams. Sierra Leone Audit Services Act adopted prior to the end of conflict (1998). Backlog of audits cleared and reports published. Improvement in follow-up on recommendations. Partnership with AFROSAI. Development of new terms and conditions of service. 2009 removal of embargo on publishing auditor general reports before Public Accounts Committee report. Progress Assessment Framework review 2010 found significant improvements in external audit. Tajikistan State Financial Control Committee formed 2001 but operating under president and not independent. Lack of clear differentiation between internal and external audit. Dissolution of Committee in 2006 and establishment of State Committee on Financial Control and Fighting Corruption (SCFCFC) to supervise revenue/expenditure. No public access to SCFCFC reports. West Bank and External audit law passed 2004. SAI established in 2005 but only operational from 2008 and slowly building capacity. First audit Gaza of final accounts for FY08 but initially outsourced to private sector. Key mechanisms of formal democratic accountability are suspended—no quorum in legislative council. Source: Compiled by the authors, based on the case study reports. 44 Public Financial ManageMent ReFoRMs in Post-conFlict countRies 5.3 an Office of Financial Management within the Ministry. An external financial management agent was appointed to build systems and capacity for the management of a pooled fund for PFM ReFoRMs’ Reach to the health sector through this office. the ministries of finance in some countries took steps to line MinistRies and strengthen financial management practices in line ministries. The subnational levels Ministry of Budget in the DR Congo, for example, deployed some of its staff to ministries to support budget formation and to train the line-ministry budget officers responsible for PFM reForMs have FoCuseD PriMarily on central PFM this function. A similar program was established in West Bank ministries and agencies with a view to establish centralized and Gaza, whereby financial controllers from the Ministry control and fiscal discipline.46 By focusing on central finance of Finance were deployed to Financial Control Units in line agencies, central systems and processes were strengthened ministries. before they were rolled-out to lower levels. This approach was achieving traction on improvements throughout the PFM consistent with the focus on strengthening budget execution expenditure chain in sectors remains a challenge. Cross-country and supported the objective of releasing funds in a controlled performance of PEFA indicators PI–2 on the credibility way. of budget composition and PI–23 on the availability of in countries where emphasis was given to strengthening PFM information on resources received by service delivery units systems in line ministries, the focus was on ministries responsible is still low, reflecting these challenges (Table 5.10). As for priority service delivery functions or the implementation of discussed in Chapter 6, for the time period investigated critical policy agendas. In Kosovo, for example, the World in this review, no correlation between better or worse PFM Bank’s 2005 Public Expenditure Management Technical systems and improvements in service delivery in health and Assistance Program (PEMTAG) focused on the Ministries of education can be observed. Fluidity around intergovernmental Health, Transport and Communications, and Labor and Social relations and the allocation of responsibilities for front-line Welfare. In Tajikistan, the ministries responsible for health, service delivery between sector ministries and subnational education, and social protection were selected for additional governments contribute to these challenges. PFM support, while in the DR Congo this was the case for the Measures to strengthen PFM in subnational entities were HIPC sectors, such as education, health, agriculture, and rural not an early post-conflict priority in most of the case studies. development. These ministries received support to develop Most PFM reform programs drew heavily on the results of sector strategies and medium-term budget plans. Targeted preliminary diagnostic assessments by the IMF and World efforts to strengthen the Ministry of Health and Social Welfare Bank, which focused primarily on central PFM systems. in Liberia were implemented through the establishment of In many cases, an important reason for the limited focus on PFM at the subnational level was that choices about 46. The plural for ministry and agency is given because in some countries central finance agency functions are spilt across several ministries/agencies, intergovernmental relations remained in flux following the e.g. the DR Congo, Tajikistan, and Liberia. taBle 5.10. PeFa sCores relateD to seCtoral PFM afghanistan cambodia dR congo kosovo liberia* sierra leone tajikistan west bank and indicator (2007) (2010) (2008) (2009) (2007) (2010) (2007) gaza** (2006) PI–2 Composition of expenditure out-turn D [C]a D D A [N/A]b D C [C]c C C compared to original budget PI–23 Availability of information on D [D]a C D D [D]b D A [A]C C D resources received by service delivery units * Note that the score for Liberia does not yet reflect the post-2006 improvements. ** For West Bank and Gaza, PEFA scores were informally prepared for a World Bank-conducted PER. a. Scores in brackets are from the previous 2005 PEFA assessment for Afghanistan. b. Scores in brackets are from the previous 2007 PEFA assessment for Kosovo. c. Scores in brackets are from the previous 2007 PEFA assessment for Sierra Leone. The World Bank 45 taBle 5.11. DeCentralization anD eFForts to strengthen PFM at suBnational levels PeFa score country Progress with decentralization Pi–8* (year) Afghanistan Decision in favor of a unitary state in, limited decentralization. De facto considerable role of provincial D (2007) governors (including signing off on budget spending) [D (2005)] Cambodia Initial post-conflict emphasis on building a centralized system. Gradual decentralization and deconcentration C+ (2010) reforms over the past decade, including 2002 and 2007 commune council elections, and new legislation adopted in 2008. DR Congo Decentralization envisaged but has been complex and highly political with little progress thus far. D (2008) Kosovo Decentralized with two-tier system. One of the most strongly decentralized among small countries. B (2009) [A (2007)] Liberia Adoption of decentralization strategy in 2009. Still rather unclear role of subnational governments plus No score traditional leaders. (2007) Sierra Leone Decentralization pursued since early post-conflict period, strongly emphasized. But declining citizen views of A (2010) local government. [B (2007)] Tajikistan Limited decentralization combined with political control by the president. B (2007) West Bank and Only local governments exist apart from the central Palestinian National Authority, and their role remains D+ (2006)** Gaza limited. Note: * PEFA Performance Indicator PI–8 measures the transparency of intergovernmental fiscal relations. ** For West Bank and Gaza, PEFA scores were informally prepared for a World Bank-conducted PER. Source: Compiled by the authors, based on the case study reports; PEFA reports. conflict. Sierra Leone and Kosovo were two exceptions (Table and concentrated system has persisted despite the adoption 5.11). In Kosovo, the gradual decentralization of budget of a decentralization strategy in 2009. execution processes started in 2000, while more extensive Deconcentration of payment functions and establishment of support to the municipalities took place from 2007 following local-level capacity were second-round priorities even where the revision of the intergovernmental fiscal transfer scheme. decentralization was not a major theme. AFMIS is an example In Sierra Leone, where a decentralization policy was adopted in Afghanistan of rolling out reforms to subnational levels of and actively implemented, a separate program was established government in a formally centralized state. The AFMIS rollout in 2004 to provide financial and technical assistance to to regions was completed by 2010 despite ongoing security decentralization reform.47 A large component of the project challenges. focused on PFM strengthening; one of the most significant remaining challenges in building PFM capacity in line achievements was to establish budgeting, procurement, and ministries and local governments underlines the interdependence accounting procedures in local governments. Sierra Leone of different elements of budgeting systems. In Sierra Leone, also completed subnational audits in 2007. for example, local-level budget execution has continued to lack of clear political direction and decision-making suffer from cash rationing undertaken by central government, over decentralization processes has further hampered efforts as well as cumbersome procedures for releases. Thus, at improving local-level capacities. In the DR Congo, while aggregate budget out-turns were kept in line with decentralization was identified as a priority in the 2006 budget plans (promoting aggregate fiscal discipline), local Constitution; some attempts were made to deconcentrate the governments have had to cope with uncertain resource flows. PFM reform process. However, the system remained highly In Afghanistan, insecurity did not prevent a rollout of the centralized and the legal framework and institutional rules for AFMIS to all provinces. However, insecurity hindered the PFM were not aligned with the principles of decentralization implementation of spending decisions taken in the budget, in the Constitution. In Liberia, strengthening subnational especially capital expenditures, contributing to a significant PFM was not a priority for the Government, and a centralized under-execution of the core development budget. 47. The Institutional Reform and Capacity Building Project was supported by DFID, EU, and the World Bank. 46 Public Financial ManageMent ReFoRMs in Post-conFlict countRies 6. 6.1 Results and iMPacts oF tiMe hoRizons and the PFM Results chain PFM ReFoRM turning to a BroaDer vieW oF achievements requires a reflection on the expectations for PFM reforms in post- T his chapter summarizes the results and impacts of conflict environments. Accordingly, this subsection briefly PFM reforms as observed in the eight case studies. captures two useful and complementary approaches: the time The discussion focuses initially on the reach of horizons needed for institutional transformations set out in results within the PFM domain along a chain of outputs the 2011 WDR (World Bank 2011b) and a PFM results chain and intermediate and final outcomes. Then, it turns to the proposed by Lawson and de Renzio (2010) building on wider expected contributions of PFM reforms to the overarching discussions about the fundamental goals of PFM reforms. goals of state-building efforts and improved governance as Fragile states are considered very challenging reform well as to improved service delivery. environments. For PFM specifically, fragile states consistently The discussion of the broader impact of PFM reforms is perform worse across PEFA dimensions than non-fragile exploratory since it was not investigated at length in the eight countries (Porter and others 2010; Figure 6.1). Post-conflict case studies. However, it is important to address the question countries, as a sub-set of fragile states, can be expected of these wider impacts as they are part of the fundamental to have particularly challenging starting points—but also motivation for engaging on PFM reforms. Sections 6.2 and potentially a more dynamic evolution over time than other 6.3 draw on available comparative data, provide a simple fragile states. Post-conflict countries often receive significant check on how overall progress on these wider impacts relates attention and aid, and may have political leadership intent to relative progress with PFM reforms, and briefly discuss on making a fresh start and on establishing a beneficial implications of the findings.48 relationship with the international community (as noted 48. It is hoped that further work will be undertaken in future, as development in Chapter 3). As discussed in the previous chapters, such policy decision-making on how to aid post-conflict countries as well as opera- tional practice could significantly benefit from such further investigation. relative reform dynamism has been observable at least in FiguRe 6.1. PeFa scoRe gaPs between FRagile and non-FRagile countRies 3.5 Fragile Avg. PEFA Score (1–4) Not fragile 3.0 2.5 2.0 1.5 1.0 5 7.ii 8.iii 10 11.iii 12.iii 13.ii 14.ii 15.ii 16.ii 17.ii 18.ii 19.i 20.i 21.i 22.i 24.i 25.i 26.i 27.i 27.iv 28.iii PEFA Process Dimensions Source: Porter and others (2010: 4). The World Bank 47 FiguRe 6.2. Results chain FoR exteRnal suPPoRt to PFM ReFoRMs 1 2 3 4 Inputs Outputs Intermediate outcomes Final outcomes Impacts Changes in Laws, Rules Greater provision and & Procedures good management of Government Inputs Transparency & budget support Direct DP Support to Improved Information Fiscal Discipline Comprehensiveness Improvements in PFM reform efforts Systems & Business Strategic Allocation Links to Policy, Planning service delivery Harmonisation & Processes of Resources & Delivery Improvements of state Alignment of DP Support Changes in People, Operational Efficiency Control, Oversight & capacity, accountability Complementary DP Skills & Organisations in Public Spending and legitimacy Accountability Inputs Changes in Incentives Progress on state- and & Controls peace-building Contextual Factors (income levels, domestic-international relationship, government goals and motivations, domestic demands/expectations, legacies and institutional trajectories, etc.) Source: Adapted from Lawson and de Renzio (2009). some of the case study environments, underlining the fact in formal norms and rules are the direct targets (outputs) that some post-conflict countries can offer rather propitious of PFM reforms. These are expected to generate changes reform environments compared to fragile states overall. in actual behavior and practices (intermediate outcomes) the 2011 WDr proposes that institutional transformations and, ultimately, changes and improvements in the allocation toward greater state resilience tend to evolve over time horizons and management of public funds (final outcomes). For the of two to four decades. It emphasizes that the processes of purposes of this review, the results chain is extended to the institutional transformation and of strengthening confidence impact of PFM reforms on service delivery and improvements in can be mutually reinforcing while also being cumulative state capacity, accountability, and legitimacy, as well as good over time. The risk is that countries either do not enter management of budget support.50 Ultimately, investments in such virtuous circles in the first place or get stuck at low- PFM reforms are undertaken with an aim of contributing to level stages. The 2011 WDR stresses that even in countries these impacts; although, as discussed below, final outcomes progressing continuously, transformative improvements of and impacts and the causal attribution to changes in PFM bureaucratic quality and government effectiveness—of which systems can be challenging to capture empirically. PFM systems are key pillars—are expected to take 20 to 36 Furthermore, different schools of thought on PFM reforms take years (World Bank 2011b: 11). The 2011 WDR thus provides somewhat different views on which “results aspects� to prioritize a useful way of defining the expected degrees of progress. in early to medium-term stages of re-building PFM systems Within the time period of around 10 years considered here, 49 (as discussed in section 1.2). A “basics first� approach, for progress should be well underway in countries headed toward instance, and its variations emphasize sequencing that improved institutions but would still be expected to be only focuses on control of input and effective oversight. An half-way completed even in the best cases. approach emphasizing the need for improving state legitimacy generally for progress on PFM reforms, a proposed results implies prioritizing transparency; and approaches prioritizing chain takes the reform inputs and final outcomes and breaks service delivery imply a strong emphasis on linking policy, them down into several steps as shown in Figure 6.2 (lawson planning, and delivery. and de renzio 2009). According to this results chain, changes 50. Improvements at the impact stage of the results chain are also influ- enced by a number of other factors, not least the ability to mobilize resources 49. With a range from 7 years (Liberia) to 17 years (Cambodia). (domestic revenue, borrowing, aid) to spend on service delivery. 48 Public Financial ManageMent ReFoRMs in Post-conFlict countRies 6.2 assessments. Within budget execution, improvements in cash management and treasury functions have tended to be greater than on payroll controls, procurement, and internal assessing the audit. In contrast (as noted in chapter 4), progress in budget cRoss-case evidence accountability has been relatively rare and limited but has been possible in some cases (notably Kosovo and Liberia).51 against the Budget comprehensiveness and budget credibility also show PFM Results chain some progress while generating policy-based budgeting is another area of notably limited progress. However, an area of further limited progress is payroll, procurement, and internal the FolloWing seCtion assesses the cross-country evidence control. This indicates that while several basics have been on achievements and challenges against the framework of the successfully pursued in the case studies, particularly within PFM results chain. Such a perspective helps to clarify the execution elements of the budget cycle, none of the cases reach of the achievements in terms of outputs, intermediate had fully established a system of input controls (i.e., of and final outcomes and expected wider impacts. “budget basics�) over the review period (with Kosovo coming closest).52 This underlines the fact that while there is a rationale for prioritizing PFM “basics� in early post-conflict phases, effective input controls are challenging to complete 6.2.1 de facto. outputs and intermediate outcomes 6.2.2 aCross the Cases revieWeD, there has been a relatively substantial set of changes in laws, rules, and procedures Final PFM outcomes (notably PFM laws). This includes at least minimal progress achieved even in those countries where PFM reforms overall have been challenging and slow (Tajikistan and the DR Congo). regarDing Final outCoMes (step 3 in Figure 6.2), progress Furthermore, especially in the countries where PFM reforms on macro-fiscal stability is apparent across the eight case have progressed furthest overall (Afghanistan, Kosovo, Sierra studies, but this stability itself remains uncertain (Table 6.1). Leone, and West Bank and Gaza), information systems and While fiscal deficits have been controlled across the eight case business processes (such as FMIS) have shown considerable studies, a clear caveat is that grants from development partners progress at a procedural level. still play a significant role in funding public expenditures and, in contrast, changes related to people and skills and with hence, current stability does not necessarily imply long-run regards to improving incentive systems have shown less progress. fiscal sustainability. Such changes have received less systematic attention and Furthermore and somewhat unexpectedly, there is no clear have proven challenging. Progress on these aspects has been relationship between overall progress made on strengthening PFM limited even in several better performing countries (refer to systems and processes and achievements on budget credibility section 4.3). Kosovo and West Bank and Gaza have shown across cases. As expected, the DR Congo has the worst greatest progress relatively with regards to people and skills, credibility measures of the group. However, Tajikistan, also indicating that a country’s income levels play a particular role lagging in PFM reform, has a similar or better performance on for this aspect. regarding the intermediate outcomes link of the results chain, 51. Given that Liberia’s progress on accountability was mainly made since evidence indicates progress on aspects of budget execution (as 2006, these gains are not yet reflected in the 2007 PEFA report. 52. Interestingly, despite the platform approach adopted in Cambodia since discussed in chapter 5). Figure 6.3 illustrates this trend by 2004, which is a variation of emphasizing basics first, the 2010 PEFA data comparing progress across the main sub-dimensions of PEFA for that country actually indicate greatest progress on policy-based budgeting rather than on budget execution—the key arena for controlling inputs. The World Bank 49 FiguRe 6.3. scoRes FRoM latest PeFa PFM PeRFoRMance RePoRts 4.0 Areas of relatively strong progress 3.5 Afghanistan (2007) 3.0 Cambodia (2010) DR Congo (2008) PEFA Score Kosovo (2009) 2.5 Liberia (2007) Sierra Leone (2010) Tajikistan (2007) 2.0 West Bank & Gaza (2006) 1.5 1.0 BudCred CompTran PolBud RevMan CashMan PayProCon AccRecRep ExtAud PFM Dimension Areas of relatively weak progress Source: PEFA assessments, authors’ analysis. aggregate and cross-sectoral budget credibility compared to in negative directions even where PFM systems as such are Afghanistan, Liberia, or Sierra Leone. Afghanistan and Sierra improved. Even where PFM systems have seen intermediate Leone, which have had repeated PEFA assessments, show no or substantial improvements, discretion in decision-making improvements of credibility measures over time. Kosovo— throughout the budget cycle frequently remains significant, at the reform front-runner on overall PFM reforms among the least in part due to executive dominance in most post-conflict eight cases—shows a contradictory pattern of relatively poor environments (as noted in Chapter 3). An implication is that aggregate but good sector-by-sector credibility.53 Declining donors supporting PFM reforms in post-conflict environments aggregate budget credibility in Kosovo has primarily been should engage in a more continuous effort of monitoring key due to the fact that since post-independence (i.e., 2008) the fiscal indicators and of dialogue, to support fiscal credibility Government has rapidly expanded spending, by more than and judicious use of discretionary decision-making powers. planned at the beginning of fiscal years. the second final outcome area, the strategic allocation of the observed pattern suggests that outcomes such as budget resources, is rarely a direct object of donor-supported efforts at credibility are substantially influenced by political incentives strengthening PFM systems, while it may be targeted by lending and considerations and that these can fluctuate and change triggers. The main efforts included in PFM operations are establishment of MTFFs and MTEFs (as discussed in section 5.2), but these have developed real effectiveness only in one 53. PEFA indicator P–2 measuring cross-sectoral credibility is defined as the degree to which the latter deviates more than aggregate credibility (measured or two countries thus far. As Boyce and O’Donnell (2007) note, by P1). 50 Public Financial ManageMent ReFoRMs in Post-conFlict countRies taBle 6.1. FisCal BalanCes 2004–2008 afghanistan cambodia dR congo kosovo liberia sierra leone tajikistan west bank and indicator (2007) (2010) (2008) (2009) (2007) (2010) (2007) gaza (2006) PI–1 aggregate expenditure outturn compared D [C]a B D C B B [B]b B B to original budget PI–2 composition of expenditure out-turn D [C]a D D A D C [C]b C C compared to original budget Fiscal balance, including grants -1.4% -0.7% -2.2% 0.5% 1.2% 4.9% -3.0% -4.0% (average 2004–08) a. Scores in bracket from 2005 PEFA assessment for Afghanistan. b. Scores in bracket from 2007 PEFA assessment for Sierra Leone. Sources: PEFA assessment reports and IMF data (for fiscal balance). post-conflict countries face difficult choices about spending Most cases showing overall progress on PFM reforms also for security, for public investments, and for improving service report regular wage payments. According to data gathered by delivery. To the extent that donors engage on these issues, Global Integrity and other sources, timely payments have they do so primarily as part of their general policy dialogue become routine in Kosovo and in West Bank and Gaza.54 with governments and about their lending conditionality (e.g., In Afghanistan there has been an emphasis on increasing for budget support and policy lending) rather than as part of electronic transfers of salary payments to individual bank PFM advice and operations, which tend to be intentionally accounts, which increased from 10 percent of public sector technical. employees in FY06/07 to 56 percent receiving their wages this the continuing, rather-poor integration of donor funds into way in FY09/10.55 In Sierra Leone, reports suggest that public overall public finance management in post-conflict countries also sector salary payments are regular at central government but negatively affects the potential for a strategic allocation of funds not at local government levels; and the situation is similar in (as discussed in section 5.2). Given that a majority of post- Liberia.56 In Tajikistan, reports indicate regular wage payments conflict countries are significantly or highly aid dependent at least at the central level.57 For Cambodia, problems with the implies that many allocation decisions are not consolidated in timeliness and with kickbacks were still reported by 2008,58 the budget. Governments influence donor allocation decisions but there has since been a shift to paying wages into bank accounts and payments by check rather than in cash, which to various degrees (across countries and funding sources), but is reducing discretion and the need for kickbacks. this does not happen in a consolidated and comprehensive way. Problems with actual budget execution rates within specific there are indications that progress on PFM reforms help to spending categories still persist. Capital spending execution improve operational efficiency (the final outcome reflected in rates in Afghanistan have been low due to the combination Figure 6.2), but the available evidence is patchy and the effects appear incomplete. Better payment systems and better cash 54. Global Integrity Report (2009a). A number of systemic challenges in civil management make it more likely that payments can be service management persist. For West Bank and Gaza, this is under threat when Israel withholds the customs duties it collects. made on time, including for wages, transfers, operations and 55. ARTF Performance Assessment Matrix (PAM)—SY1388. management, and investments. However, much depends on 56. Global Integrity Report (2009c). In September 2009, the Sierra Leone Teachers Union claimed that about 4,000 teachers have not been paid for the fiscal situation of the country, which can be volatile and about a year. highly constrained or relatively stable and well funded, for 57. Global Integrity Report (2007). example, due to ample revenue from natural resource wealth. 58. Global Integrity Report (2008). The World Bank 51 of tight controls and high insecurity in many regions. A or declining PEFA assessments. In West Bank and Gaza, the detailed examination finds that deviation in spending from treasury single account established in the early 2000s fell original budget allocations in Sierra Leone by more than 5 out of use during the Hamas Government in 2005/06, but percent are frequent in most ministries and agencies and for was rapidly resurrected (for West Bank) from 2007 onwards. most expenditure categories—with the most significant and Afghanistan appears at some risk of backsliding due to the frequent deviations in capital expenditures. These weaknesses upcoming transition in the level of international support, and appear to have been less significant in some of the other some key PEFA indicators show a decline between the two better performers, like Kosovo and Liberia. assessments in 2005 and 2007 (refer to Table 6.1). the dynamic of improvements is likely to wax and wane judged in light of the experience of states that have emerged from conflict a longer time ago, such as Cambodia, Mozambique, 6.2.3 rwanda, or uganda. In Cambodia, PFM reforms were invigorated sustainability and likely with the platform approach several years after the end of conflict and violence. In Mozambique, progress has been continuation of strengthening achieved despite continuing significant capacity challenges PFM particularly on budget execution reforms (de Renzio 2010). Rwanda made significant additional progress between its two recent PEFA assessments in 2007 and 2010 (i.e., 13 and 16 vital to the reForM DisCussion is the sustainability of results years, respectively, after the end of conflict). In Uganda, PFM and the likeliness that PFM strengthening will continue. In reforms progressed considerably over the first 20 years after countries with the least amount of progress achieved to date the end of the conflict in 1986 but have stagnated in recent (the DR Congo and Tajikistan), the ability to move forward years. remains in question. Especially in Afghanistan and West Bank the key motivating drivers (identified in chapter 3) remain and Gaza, substantial progress has been achieved but remains relevant in determining whether successive governments will vulnerable to a collapse of the security situation or diminished continue to support PFM strengthening. In Liberia the president commitment by political leaders. Across the case studies, elected in 2006 provided an important impulse for PFM the PFM systems are still operating with ongoing support strengthening, coinciding with incentives provided by the HIPC to PFM performance and to further reforms. There is also a process and GEMAP. The durability of these gains will only be general risk that after a period of initial improvements the proven if they persist even after these incentives, constraints, PFM quality will be found stagnating rather than improving and individuals change. Similarly, in West Bank and Gaza, further; the degree of potential improvements will reach its it remains to be seen whether achievements made will stick feasible limits within given political-economy contexts and even beyond an eventual turnover of the minister of finance within unresolved capacity constraints particularly in the who has played a crucial role. In Afghanistan the approaching lower-income countries. withdrawal of United States and international security support over the 7- to 10-year time horizons observed in this review, will be a decisive change in context and incentives implying there is no evidence of backsliding. Potential indicators of a test of the durability of reforms achieved and the ability to backsliding are declining usage of new systems (such as FMIS) achieve the type of institutional transformation envisaged by or a clear worsening of budget credibility, as well as stagnating the 2011 WDR. 52 Public Financial ManageMent ReFoRMs in Post-conFlict countRies 6.3 effectiveness and control of corruption over the past decade. The causal linkages between PFM reforms and wider state- building efforts are difficult to track empirically, as highlighted exPloRing gains in in Box 6.1. However, matching the outcome data on state- goveRnMent eFFectiveness building efforts with the detailed information on PFM reforms generated by this review allows some valuable observations. and accountability If the expected positive relationship between PFM reforms and state-building progress indeed exists, the two dimensions should correlate, either directly or with some time lags.59 To a CruCial rationale For unDertaking PFM reforms is the measure overall government and levels of corruption, two expectation that they will contribute to wider state-building main sources of data—the World Governance Indicators efforts. As set out in the analytic framework in Chapter 1, (WGI) and the Bertelsmann Transformation Index (BTI)—are there is an expected reciprocal relationship: overall state- available and both are used here to explore whether there is building progress enables PFM reforms, and PFM progress a correlation between PFM reform progress and these wider supports building more capable and more legitimate states. improvements (Figures 6.4 a–c). This section touches on the interactions with and contributions to government effectiveness and accountability. 59. While data on government effectiveness and on corruption is still facing to explore this wider relationship, this section draws on methodological challenges, it has ‘matured’ over more than a decade and given the absence of alternatives is worth exploring for the purposes of this available data mapping progression regarding government review. However, results should be treated as approximations rather than absolutes. Box 6.1 challenges in assessing achieveMents acRoss the PFM Results chain Assessing linkages between PFM reform progress and final outcomes and information limitations make it challenging to assess the and impacts is challenging due to limitations in current monitoring contribution that PFM reforms are making to the overall ability of efforts. PEFA assessments have become a valuable source of governments to operate and to deliver services. monitoring progress in countries over time, as well as creating a more systematic base for comparison across countries, including In some areas, the way that outcomes are monitored via PEFA is not post-conflict situations. However, PEFA assessments only provide well aligned with key priorities from a state- and peace-building some information across outputs and intermediate and final outcome perspective. With regards to the payroll, for example, the relevant areas as defined by Lawson and de Renzio (2009). Regarding PFM PEFA indicator (P 18) covers issues of data consistency, allocation output areas, PEFA assessments do not focus explicitly on people, of authority and timeliness in making changes, and existence of skills, and incentives. Moreover, PEFA assessments are limited effective audits. However, it does not capture whether payments are in their explicit coverage of final outcomes, and do not capture actually being made or what share of public servants receive their expected impacts of PFM reforms. Some supplementary tools exist pay on time (and without having to pay portions of income to those and have been used in some of the case study countries—notably distributing payments). Also, the fact that PEFA assessments do not Public Expenditure Tracking Surveys in Sierra Leone.* However, address changes in people, skills, and incentives may reinforce the there are no standard tools for monitoring indicators such as the tendency for relatively low attention to these areas in PFM reform regularity of public sector wage payments, budget execution rates plans based on PEFAs, even though these areas are crucial for at disaggregated levels, or tracking of changes made in response developing sustainable progress in post-conflict situations. to findings by internal and external audits. Furthermore, data * Sierra Leone has undertaken Public Expenditure Tracking Surveys of multiple service delivery sectors annually or bi-annually. However, the quality and ultimate usefulness of these surveys has been limited (see section 6.4). The World Bank 53 FiguRe 6.4 a–c. goveRnMent eFFectiveness and contRol oF coRRuPtion: woRldwide goveRance indicatoRs and beRtelsMann tRansFoRMation index Worldwide Governance Indicators: Government Effectiveness Worldwide Governance Indicators: Control of Corruption Comparison between 2010, 2008, 2006, 2002 (top-bottom order) Comparison between 2010, 2008, 2006, 2002 (top-bottom order) West Bank Gaza West Bank Gaza Kosovo Liberia No data Subsaharan Africa Subsaharan Africa Cambodia Kosovo No data Tajikistan Sierra Leone Sierra Leone Tajikistan Liberia Cambodia Afghanistan Congo, Dem. Rep. Congo, Dem. Rep. Afghanistan 0 25 50 75 100 0 25 50 75 100 Country’s Percentile Rank (0–100) Country’s Percentile Rank (0–100) Bertelsmann Transformation Index Government Management Performance Liberia Kosovo Sierra Leone 2010 Cambodia 2008 2006 Afghanistan 2003 Tajikistan DRC 0 2 4 6 8 10 Country Performance Score (0–10) Source: Kaufmann, D., A. Kraay, and M. Mastruzzi, Worldwide Governance Indicators (2010); and Bertelsmann Transformation Index, Bertelsmann Foundation. Notes: WGI country scorings range from 0 (worst) to 100 (best). The statistically likely range of the governance indicator is shown as a think black line. For details on the methodology refer to Kaufmann et al. (2010). BTI ratings range form 0 (worst) to 10 (best). For details on the methodology refer to: http://www.bti-project.org/uploads/ tx_jpdownloads/Methodology.pdf. 54 Public Financial ManageMent ReFoRMs in Post-conFlict countRies taBle 6.2. Matrix oF PFM reForM Progress anD gains on state CaPaCity anD aCCountaBility consistency between PFM progress and overall government control of corruption trajectory of government effectiveness PFM reform progress effectiveness (by 2010) (by 2010) and control of corruption? Afghanistan Substantial Weak Poor No Cambodia Intermediate Weak to intermediate Poor Yes (although limited) DR Congo Limited Extremely weak Poor Yes Kosovo Substantial Intermediate Intermediate Yes Liberia Intermediate Weak to intermediate Intermediate Yes Sierra Leone Substantial Weak to intermediate Intermediate Yes Tajikistan Limited Weak Poor Yes West Bank and Gaza Substantial Intermediate Intermediate Yes Sources: PFM reform progress was assessed as part of the review; the assessments for overall government effectiveness and control of corruption summarize the WGI and BTI data reflected in Figures 6.4 a–c. Progress on overall government effectiveness and control of prevent such reforms from contributing effectively to state- corruption broadly correlates with the degree of PFM progress building progress. Regarding the lack of bringing corruption achieved in most of the cases (as shown in Figures 6.4 a-c and under control, one possible explanation is that significant summarized in table 6.2). Both Kosovo and West Bank and corruption occurs primarily outside the public expenditure Gaza are assessed as having acquired substantial capacity. system, linked to the drug economy, land titling, insider There is indication of overall gains in Liberia and Sierra Leone. lending by banks, and aid flowing outside the country’s PFM For Liberia the data diverges between sources and dimensions system. For Cambodia, which has been assessed as having with the WGI data showing much greater gains on control achieved intermediate progress on PFM reforms since 2004, of corruption and less gains on effectiveness while the BTI the aggregate governance indicators show the country to be data suggests also substantial capacity gains. Conversely, the at a lower-to-medium level of government effectiveness— countries with the most limited progress on PFM reforms, the still higher than for several other case studies—in line with DR Congo and Tajikistan, also show the expected relationship, its longer post-conflict experience. However, the indicators with low ratings for overall government effectiveness and suggest a slippage on corruption over the past decade. For control of corruption. Kosovo, which overall has developed the strongest PFM in contrast to these expected relationships, the data for system of the group, also shows substantial government afghanistan shows strong divergence; some divergence is also effectiveness, but especially the WGI on overall government observable for other countries. Across the data on government effectiveness suggest some weakening during the post- effectiveness and control of corruption, Afghanistan performs independence period. near the bottom despite having made substantial gains on the case studies suggest that PFM reforms are not uniformly PFM reforms during its post-conflict period. An interpretation effective at increasing accountability but indicate that targeted is that in Afghanistan, contextual dynamics such as continuing attention to probity as part of PFM reforms can have an impact. insecurity and a brittle political settlement did not prevent Liberia is the strongest case in point where recognition of progress on PFM reforms (as noted in chapter 3) but did out-of-control corruption, including in the fiscal sphere, was The World Bank 55 followed with external actors and the new government after the 2006 elections pursuing strong and dedicated efforts. 6.4 While it is too early to pass judgment on sustainability, available data suggest that perceived corruption has declined. exPloRing the RelationshiP Similarly, robust efforts in Kosovo focused on strengthening internal controls and external audit have shown effects in oF PFM ReFoRMs with terms of improving perceived overall control of corruption. seRvice deliveRy gains West Bank and Gaza and to a lesser extent Sierra Leone have also seen gains. In contrast, in Afghanistan and in Cambodia, corruption levels have stayed high or are perceived to have Making anD ConsoliDating gains in service delivery is worsened despite progress with PFM reforms according to a second wider aim to which PFM reforms are ultimately cross-country indicators. In both countries, steps to better expected to make a contribution.61 Strengthened PFM address corruption have been taken in recent years, which systems are expected to allow more reliable service delivery, may show results in the short to medium term.60 and to make spending on service delivery more transparent the generally positive relationship is encouraging. While the and monitorable. Similar to gains on overall state capacity causal mechanisms are hard to trace in detail, a majority of and accountability, the detailed causal chains between cases seem to reap some wider benefit from making progress PFM reforms and service delivery are challenging to trace with PFM reforms, and/or the factors that enable such reforms systematically. However, some comparative data on service also contribute to progress with increasing government delivery gains is available across countries. As for wider effectiveness. However, as this data also indicate, progress in state capacity and accountability, an initial question can be government effectiveness is still very tentative. The relatively explored: Can a correlation between gains on PFM reforms greatest overall progress made in Kosovo and West Bank and and gains on service delivery be observed? If the expected Gaza supports the earlier discussion that gains in capacity relationship holds, countries making greater progress on PFM may be more easily achievable in middle-income, post- reforms should also show greater gains on service delivery. conflict environments—even if these territories had never available data suggests that improvements in service delivery been independent entities before and accordingly started with took place across the case studies, with no apparent relationship weak or absent institutions and capacities. to relative progress on PFM reforms. Improvements in some basic services for which comparative data is available occurred across all case studies regardless of their level of progress on PFM reforms.62 The cases for which data is available on immunization rates all show improvements compared to the year of the post-conflict “starting point� (highlighted in grey in Tables 6.3 and 6.4). Data on primary school enrolment suggests that significant progress has been made early on and within a short period of time in several cases. For example, 61. There was a limited extent to which case studies were tasked and able to investigate this issue while cross-country data was reviewed for this synthesis report specifically. 62. No comparative data is available for Kosovo. Available evidence from the case study suggests that service delivery in Kosovo re-bounded during the post-conflict period and is at high levels in line with its middle-income status. For other aspects of service delivery, including more capital-intensive services such as water and sanitation, available data is too patchy to allow a 60. In Cambodia, efforts to reduce corruption were strengthened in 2010, cross-country comparison. There are likely to be many weaknesses still in the with the adoption of an anti-corruption law (under discussion since 1995) and quality of services both in health care and in education which are likewise the establishment of an Anti-Corruption Unit as a separate agency. more challenging to capture, and for which comparative data is not available. 56 Public Financial ManageMent ReFoRMs in Post-conFlict countRies taBle 6.3. PriMary sChool gross enrolMent rates (%) 8 case studies 1994 1997 1999 2000 2002 2003 2005 2007 2008 2009 2010 Afghanistan 42 .. 26 19 64 86 90 92 95 92 97 Cambodia 98a 90 101 106 125 128 130 129 126 126 127 DR Congo 68 .. 48 .. 60 .. .. 85 93 93 .. Kosovo .. .. .. .. .. .. .. .. .. .. .. Liberia .. .. 94 112 .. .. .. 101 96 .. .. Sierra Leone .. .. .. 70 .. .. .. 158 b .. .. .. Tajikistan 90 93 96 97 98 100 101 100 102 102 102 West Bank and Gaza .. c 99 100 98 93d 91 88 88 89 90 91 For comparison Tanzania 69 68 67 68 89 96 105 111 111 106 102 Timor-Leste .. .. .. .. 117 111 97 .. 103 109 117 Uganda 67 115 130 131 138 138 123 121 123 124 121 Note: Post-conflict starting years are marked in grey. a. Figure closest to post-conflict starting date (1991) b. Development Data Platform figure as of 06/2011; c. Post-Oslo Agreements 1993; d. Start of reforms to Palestinian National Authority. taBle 6.4. Measles iMMunization, % oF ChilDren ageD 12–23 Months 8 case studies 1994 1997 1999 2000 2002 2003 2005 2007 2008 2009 2010 Afghanistan 40 38 31 27 35 39 50 55 59 60 62 Cambodia 50 a 50 63 65 52 65 79 79 89 92 93 DR Congo 39 20 15 46 42 49 61 66 61 67 68 Kosovo .. .. .. .. .. .. .. .. .. .. .. Liberia .. .. 69 63 52 47 63 64 64 64 64 Sierra Leone .. .. 62 37 62 73 71 60 69 78 82 Tajikistan 73 84 79 88 89 91 85 85 86 89 94 West Bank and Gaza .. b .. .. .. .. c .. .. .. .. .. .. For comparison Tanzania 79 73 72 78 89 97 91 90 88 91 92 Timor-Leste .. .. .. .. 56 55 48 63 73 70 66 Uganda 59 54 55 57 62 64 68 68 59 63 55 Note: Post-conflict starting years are marked in grey. a. Figure closest to post-conflict starting date (1991). b. Post-Oslo agreements 1993. c. Start of reforms to Palestinian National Authority. The World Bank 57 primary school enrolment jumped by 90 percent within three 2000 to track the link between the central allocation of funds years in Afghanistan between 2001 and 2004 before most of and front-line service delivery. This is a laudable effort aimed the PFM progress took hold. Furthermore, the data on service at monitoring and strengthening front-line service delivery, and delivery shows substantial improvements even in the DR Congo an important complement to the external audits undertaken by despite the minimal progress on PFM reforms as well as other the Audit Service (Sierra Leone’s SAI).63 However, there are still challenging factors, such as continuing insecurity. The data many limitations of this effort in terms of the methodology of also reflects the fact that some post-conflict countries such these Public Expenditure Tracking Surveys, and the relevance as Tajikistan had historically higher coverage rates for basic and actual use of the findings they generate. Overall, efforts services than others. to improve PFM in sectors have been relatively scarce; those in light of this evidence, it is not clear if and when progress few have mostly focused on selected service delivery areas with PFM reforms will make a contribution to state’s participation (such as health in Liberia). This disconnect between sector in service delivery. The observed early gains in the delivery and PFM efforts was also raised as a concern during expert of basic services suggests that they were primarily driven by discussions.64 factors other than improved PFM, such as improving security given that the expectation of improved service delivery is a (compared to the conflict period) and population mobility, key motivation for donor support to PFM and other components of reintegration of refugees and displaced populations, increased public sector reforms, further investigation of this link is highly aid flows, and NGO activities in the territory. Furthermore, on desirable. Such further work could explore how and when immunization rates, the DR Congo shows a greater degree of different factors matter with regards to improving service progress than Liberia or Sierra Leone by 2009—underlining delivery. It may also be possible to include a more in-depth the impression that greater progress on PFM reforms does analysis of detailed causal linkages (e.g., how money flows not feed into additional service delivery gains within the time from central levels to front-line service delivery units) and of periods covered. the results not only in terms of quantitative but possibly also a possible contributing factor to this finding is that PFM qualitative improvements, or perceptions of fairness in how reforms have focused primarily on central systems and functions the coverage of service delivery is improved across regions (as discussed in section 5.3), although the case studies also and for different groups. Such work would also be needed to indicate some initiatives to enhance links to service delivery. In generate more specific contributions to inform choices about Tajikistan, reforms that introduced per capita financing in the how to structure PFM interventions in ways that are indeed education sector have achieved a degree of streamlining the effective in supporting (further) improvements in service funding flows between the center and local government for delivery. the sector while allowing a more flexible allocation between wage and non-wage expenditures. However, weak financial controls, inconsistent financial reporting, and tracking and 63. Public Expenditure Tracking Surveys fall under the oversight of the Economic Policy and Research Unit in the Ministry of Finance and Economic controlling the finances for service delivery sectors at local Development. government have hampered the reform effort. In Sierra Leone, 64. Dissemination workshop, June 19, 2011, Nairobi. Sector colleagues pointed out that they often feel left out of discussions about PFM reforms, the Government has undertaken annual Public Expenditure while PFM experts pointed out that sector experts often care little about fund- Tracking Surveys (PETS), covering multiple sectors, since ing streams from national budgets. 58 Public Financial ManageMent ReFoRMs in Post-conFlict countRies 7. conclusions: lessons 7.1 and iMPlications FoR key Findings and lessons leaRned FutuRe engageMent signiFiCant PFM reForM Progress can be made in post- conflict situations, despite post-conflict legacies and fragility T his review has sought to capture experiences factors. While reform progress varies greatly, six of the with strengthening PFM reforms in post-conflict eight cases achieved intermediate to significant progress. environments, motivated by the widespread support This PFM reform progress has been possible despite post- and the considerable expectations linked to such reforms. conflict legacies and fragility factors such as very low human The review set out to answer two overall questions: How were capacity and weak administrative capability, especially in PFM reforms affected by the challenges associated with state the lower-income countries (Afghanistan, Cambodia, the DR fragility? and Did the design and implementation of PFM Congo, Liberia, Sierra Leone, and Tajikistan); high levels of reforms contribute to achieving sustainable progress in the continuing insecurity, particularly in Afghanistan and in parts development of PFM systems, as well as to supporting wider of the DR Congo and West Bank and Gaza; the absence of state- and peace-building objectives? To answer these broad any prehistory of independent statehood in Kosovo (similar questions, the review has sought to develop a more granular to Timor-Leste); and acute levels of underdevelopment (the understanding of how PFM reforms have been approached DR Congo, Liberia, and Sierra Leone) as measured by the and what has worked—and where, why, and how?—in post- UN Human Development Index. Thus the notion that post- conflict environments. conflict countries may be caught in a low-level fragility trap this concluding chapter draws together key lessons from the that renders PFM improvements highly unlikely is rejected by cases reviewed and sets out implications for future engagement this report. in post-conflict environments. Section 7.1 summarizes the main Countries dependent on external actors for development aid findings and lessons learned from conducting this review, (and wider international support) made generally faster progress followed by section 7.2 that develops the key implications on PFM reforms. Particularly rapid reform progress was of this analysis for an enhanced approach to strengthening observed in Afghanistan, Kosovo, Sierra Leone, and to some PFM in post-conflict environments as well as some wider extent Liberia. The HIPC debt relief triggers were important implications that emerge for approaching overall state building drivers of specific reforms in Afghanistan, Liberia, Sierra and strengthening service delivery. More detailed operational Leone, and also the DR Congo despite its relatively limited implications are forthcoming in a separate guidance note to progress overall. Budget support was also a significant driver staff. in Afghanistan, Liberia, and Sierra Leone. Policy measures by the IMF and donor agencies were influential in pushing PFM engagement and results. In the cases of Tajikistan and the DR Congo, external dependencies have been less important, and PFM reforms were pursued more gradually, with limited achievements. Political commitment to higher-order objectives such as independence or statehood provided a particularly strong driver for PFM reforms. In West Bank and Gaza a clearly stated objective of the Palestinian National Authority was to demonstrate to the international community its viability as an The World Bank 59 independent state, including through its PFM capability. The such reform elements centrally (for example, a revised chart same driver was present to a lesser extent in Kosovo, which was of accounts or strengthened reporting requirements). The also pursuing independence and was focused on developing more advanced reforming cases (Afghanistan, Kosovo, Sierra capability across the range of public administration through Leone, and West Bank and Gaza) established treasury single the Provisional Institutions of Self Government (including the accounts, overriding potential resistance from line ministries, Ministry of Economy and Finance).65 agencies, and subnational levels of government. the PFM reform recommendations provided to fragile states Despite relative success in the area of budget execution, are overall similar to those provided to non-fragile countries. effective strengthening of controls still remains a challenge. While especially early efforts are informed by exceptional post- Within the area of budget execution, internal controls and conflict circumstances, over time many of the PFM reform improved procurement practices are persistent challenges— recommendations provided by development partners are with greater but still incomplete progress in the four best similar to those on the agenda in other low- and middle-income performing cases. countries, including the development of new legislation and attempts to pursue advanced budget formulation measures institutional reforms as well as reforms reaching across the such as multi-year budget planning and program-based budgeting budget cycle. were less successful. Even among the four more advanced across the reform areas, one observes successes as well cases, only Afghanistan and Kosovo show more tangible as challenges and continuing change. Seven of the eight traction of an MTEF while program-based budgeting reforms cases adopted new organic budget laws during the post- have not been successful in the cases where various types of conflict period, albeit mostly several years into the process of attempts were made. Various stakeholders would like to move strengthening PFM systems. Reform suggestions to integrate toward budgets that contain more information on policy goals ministries of finance and ministries of planning found less and actual performance than traditional line-item budgets; resonance initially, with four of the eight cases maintaining but simpler approaches may yet need to be devised to fit the separate ministries and responsibilities for budgeting by mid- needs and capacity constraints of post-conflict states. 2010.66 However, as part of its continued effort to implement strengthening budget accountability showed some progress PFM reforms, Liberia became the fifth country of the group only in kosovo and liberia that combined greater attention and to create an integrated Ministry of Finance, Planning, and a degree of government commitment.67 Formal accountability Economic Affairs in early 2012 (after general election in late mechanisms such as external audit offices and legislative 2011 in which the previous president was re-elected). scrutiny received less attention compared to budget execution reform implementation shows a pattern of relatively greater reforms. At the same time, success in this area depends most success with budget execution reforms than with either budget strongly on a political commitment to improvements and planning or accountability. Reforms of budget execution faces risks of reversals. included centralization of cash management by the Ministry a shortcoming of PFM reform efforts has been the limited of Finance, and strengthening of budget reporting (in-year reach into sectors and subnational levels of government. Some fiscal reports and end-of-year financial statements). Several efforts were made in this regard, notably in Sierra Leone where cases succeeded at more advanced computerization of the the country’s decentralization process is more advanced, but government’s payments and accounting systems. less so in other cases. Extending PFM reforms into sectors Development partners’ interest as well as domestic incentives and subnational levels implies capacity building of a wider and opportunities appear to enable success in reforming elements range of staff and strengthening a wider range of institutions, of budget execution. Budget execution reforms are seen as a which poses challenges of scale and complexity. Furthermore, crucial ingredient to strengthening the fiduciary environment. a lack of clarity over intergovernmental arrangements and At the same time, a Ministry of Finance can implement several contradictions between formal provisions and de facto practices poses difficulties for the effective provision of 65.A particular feature of Kosovo was the fact that the international commu- nity was strongly focused on the entity’s treatment of minorities, making the 67. As discussed in chapter 5, this pattern of success differs from that found development of PFM systems and other state institutions a still important, but by Andrews (2010) for non-fragile low-income countries) where progress with somewhat secondary concern. budget planning reforms has been relatively more frequent. However, Andrews 66.A further case, Cambodia, has a separate Ministry of Planning, with some does not distinguish between budget execution and budget accountability but very limited involvement in capital budgeting (see Table 4.3). dimensions. 60 Public Financial ManageMent ReFoRMs in Post-conFlict countRies external support at strengthening PFM systems in ways that support improving service delivery.68 7.2 the post-conflict experiences reviewed indicate the need to continuously monitor what is working and whether reforms are eMeRging oPeRational achieving their intended impact. Importantly, even when reform outputs show success—such as changed procedures and iMPlications systems—this does not automatically result in better overall PFM as defined by three key principles (aggregate fiscal given these FinDings anD lessons learned across the eight discipline, strategic allocation of resources, and operational post-conflict states reviewed, the question arises, What can efficiency) or deliver improved accountability and governance. national counterparts and development partners—including Thus, there are challenges to consider in terms of getting the World Bank—do to further strengthen the progress of from making PFM reforms happen to achieving the ultimate PFM reforms and their positive impacts in post-conflict results in terms of contributing to state- and peace-building countries? Across the aspects covered in this review, a range objectives (and good management of aid), which are the of implications and recommendations emerge. underlying motivation for donor engagement with PFM in The recommendations are not prescriptive but are post-conflict states. suggestions emanating from this review. Each specific in a majority of countries, progress on PFM reforms has situation requires consideration of which changes are likely been associated with progress on government effectiveness and to be feasible and to have the greatest impact. A number accountability—although afghanistan is a case of divergence. of the implications set out here are directly relevant and An exploration of relevant indicators on government “actionable� for PFM experts who design and supervise PFM effectiveness and accountability show that the six countries operations, while others are pertinent for overall programming making some or substantial gains on PFM reforms also gained of assistance to post-conflict countries. Continued monitoring in terms of overall progress; while countries with little PFM of support to PFM strengthening will add to the lessons gains also saw no progress on government effectiveness and learned about what works best as countries move past their accountability. However, Afghanistan is a significant outlier post-conflict stages. with substantial gains on PFM reforms matched by one of the worst performances on government effectiveness and 1. Consider country context (and existing incentives for accountability dimensions. A lesser divergence was also local stakeholders) systematically in deciding if and how to noticeable for Cambodia, in particular, on accountability. intervene on strengthening PFM systems. Some post-conflict the PFM reforms proceed on a parallel track to service environments offer substantial opportunities for reform; while delivery improvements. Basic service delivery improved across in other environments with very little commitment, a focus all eight post-conflict cases with no obvious relationship to on selected small steps may be the most sensible approach. relative progress on PFM reforms. The most likely cause is Such considerations, if possible, should be made jointly by all a re-starting and scaling-up of aid flows to service sectors, development partners seeking to support PFM reforms. which largely bypass government systems. However, this Implications of country context for PFM reform leaves a significant challenge to create a connection between opportunities (four stylized situations) the two over time to ensure that service delivery improvements n Where incentives and commitment for reform are can be maintained as the main source of funding shifts from substantial, stakeholders can seek the fastest gains. Locking international donor aid to domestic funds. in gains in budget execution systems (e.g., establishing a treasury single account, putting a comprehensive and compatible budget classification and chart of accounts in place, starting to build a FMIS) are options combined with steps on budget planning. Pursuing gains on budget 68. At the same time, external support that is uncoordinated between support accountability, including a sound legal framework for an to central PFM reforms, to decentralization and to sectors can also contribute to confusion and a lack of clarity in intergovernmental arrangements and SAI, can help sustain the demand and momentum for responsibilities. The World Bank 61 reforms. Even in environments with substantial opportunity significant progress on PFM reforms. Development partners for seeking improvements, there should be caution not to can go a long way in terms of aligning their ex ante and ex post outpace local capacity and willingness to pursue reforms. reporting as well as their project planning and execution cycles n In many post-conflict countries motivated by the need to with country systems while maintaining fiduciary controls. access significant aid flows, there is partial and fluctuating Furthermore, development partners could selectively engage commitment to improving PFM. Appropriate strategies more seriously in improvements of domestic accountability include a mix of re-building institutions and re-establishing systems and match that with relevant incentives, such as the basic processes such as written and approved budget and provision of budget support. Overall, a more strategic use of budget-execution reporting, while simultaneously investing aid support could provide added value for ensuring that PFM in the demand for reforms by building understanding reforms progress and are sustained over time by governments and buy-in among technical experts, political decision- in post-conflict environments. makers, and civil society. It may be possible to develop Implications with regards to aid mechanisms more advanced reforms, especially in budget execution, n Focus on harmonized policy dialogue and the use of joint including FMIS, while importantly keeping an eye on their policy reform matrices can help leverage the adoption and actual use and sustainability. implementation of PFM reforms. n Where signals of government commitment are weak or n Sustained and predictable budget support against the absent, an approach that focuses on gradual progress, adoption of a common policy reform matrix can provide an including fostering an understanding of international incentive for governments to maintain the pace of reforms. practice in PFM, may still generate limited and incremental n The use of MDTFs to channel aid to the national budget gains over time. However, the short-run impact on overall increases chances of alignment of aid to policy priorities. improvements in governance and government effectiveness is likely to be limited in such an environment. Furthermore, 3. Developing clear reform plans based on emerging analysis with little government commitment, reforms of budget and the periodic updating of such plans will help ensure that accountability are likely to be a particularly challenging approaches to PFM reforms and the provision of support are area. strategic and focused. A problem that has been observed in n In exceptional circumstances in post-conflict contexts the case studies is the relatively late emergence of clear where fiduciary concerns are a brake to greater reform plans that are shared among stakeholders (the national international engagement and where national stakeholders government, development partners, and possibly others such and development partners agree to an enhanced reform as different stakeholders within government or civil society). approach, shared sovereignty arrangements can be The result has been weak coordination of PFM support considered for a limited period of time. Under such especially at early post-conflict stages, leading to some arrangements, national government officials share authority duplicative efforts as well as some reform initiatives that were over PFM functions with internationally appointed experts. overly ambitious. These exceptional arrangements require domestic buy-in Implications with regards to developing reform plans, as well as a strong commitment by the international sequencing, and coordination community to share responsibility over PFM and to n Shared but relatively simple reform plans could be invest substantively in building the systems that allow developed earlier than previous practice in most countries. transitioning beyond these exceptional arrangements in External support by multiple donors that is un-coordinated due course. over a critical post-conflict period of 5 to 7 years is likely to 2. Development partners have an opportunity to use be wasteful. However, overly complex coordination efforts aid allocations and aid modalities in ways that incentivize may also entail substantial and possibly excessive costs. sustained PFM improvements and can also make a fundamental n Reform plans have to be grounded in an understanding of contribution to reducing fragmentation of public finances. Budget the evolving status quo. The initial status quo may be a fragmentation due to limited aid harmonization is a problem near absence of PFM systems, or a system created by an in post-conflict countries, including some that have made international agency (as UN administered in Kosovo), or a 62 Public Financial ManageMent ReFoRMs in Post-conFlict countRies mix of some existing functionalities combined with a variety of budget execution are likely to remain challenging and of gaps (as in post-conflict Sierra Leone). PFM support require more continuous attention. This includes the should start with a rapid stocktaking of what basic systems execution of capital spending and public investment are operational and what initial short-term incremental management (including procurement), the establishment improvements are possible to put the basic building blocks and proper use of effective controls, and the development of a PFM system in place. At later stages, the status quo of budget execution capacities at subnational levels. may be a mix of some reform achievements combined with n Re-establishing basic processes across the budget cycle persistent gaps (e.g., in controls or procurement or in more is generally an early priority, followed by improvements in strategic budget planning), requiring a reform plan that budget execution system and practices. not only targets the next level of reforms but also focuses n Early windows of opportunity for budget execution reforms on existing gaps and weaknesses. should be used where available. Efforts to improve budget n Reform steps outlined in each phase should be digestible execution have worked reasonably well, particularly in on the one hand and should be assessed against their cash management and with regards to re-establishing wider impacts on state building and service delivery on regular recording and reporting. There is frequently the other. an interest by governments to regain control over basic n Reform plans need to include capacity development as a macro-fiscal management and cash flows. There may distinctive objective, while also being realistic about how be opportunities to centralize funds in a treasury single and to what degree reforms can be implemented within account before the interests of ministries, departments, currently available capacity. and agencies to control their own accounts become more n A longer-term vision can be combined with more detailed deeply entrenched. medium-term planning to maintain realism for each stage. n In the medium term, FMIS implementation has been Especially in more democratic environments, it may be pursued successfully in a number of post-conflict sensible to align reform plans to political cycles with an environments, and other countries can benefit from the emphasis on actual implementation and gains made accumulating practical experience (e.g., in Afghanistan, prior to potential changes in government, as well as Kosovo, or Sierra Leone). Keeping systems relatively potentially using the renewed reform momentum of simple but also expandable and adjustable for a range incoming governments. of sector needs is appropriate. Pursuing a roll-out to subnational levels is important to bring budget execution 4. there are distinct reform challenges and opportunities capabilities sufficiently close to front-line service provision across the three key phases of the budget cycle (budget planning, and to enable good reporting. execution, and accountability). In order to achieve the expected n Efforts at strengthening budget planning practices overall outcomes and impacts of PFM reforms, progress may need a fresh approach. There seems to be a desire across the budget cycle (as well as in capacity-building and among governments as well as development partners institutional aspects) is needed. In high potential environments and civil society to have budgets that are more strategic, it is desirable to pursue reforms across the budget cycle informative, and flexible than traditional line-item while keeping a digestible pace in terms of sophistication. In budgets. However, existing reform attempts—notably environments with more limited commitment, it is sensible at introducing program budgets—have led to limited to target reform support to selected elements of budget progress and frustration. Greater experimentation may be execution and budget planning (with realistic expectations needed in this area, possibly by focusing on (a) simpler, about the wider impact of partial reforms). more feasible approaches; (b) complementary efforts at Key implications for balancing budget execution, planning, supporting stronger overall government decision-making and accountability focused reforms (as has been provided for Kosovo); and (c) more systematic n Strengthening budget execution aspects is generally an area strengthening of relevant capacities in at least a few that can be pursued in many post-conflict environments. important line ministries and at subnational levels. It is worth pursuing these reforms, particularly cash n Budget planning reforms should be kept simple in early management and strengthening reporting. Some aspects post-conflict phases. This includes re-establishing a The World Bank 63 regular budget process and a clear budget classification good auditing practice can be important intermediate system. See IMF (2009 and 2011) for useful notes on steps. budget classification systems. 5. legal and institutional reforms are an integral part of n Establishing a medium-term perspective can be initiated strengthening PFM systems in post-conflict environments, but some time into the post-conflict period. In most cases a there is less of a need to front-load these reforms than has been realistic approach is a focus on establishing a core MTFF suggested by previous analysis. Legal reforms are likely to before possibly starting to develop medium-term plans happen over a 3–5 year time horizon rather than at the start and spending frameworks for sectors. of re-building PFM systems. Legal reforms may need to await n Paramount to efforts at developing MTEFs and program- the re-constitution of legislatures. Also, government and other based budgeting initiatives is to involve both budget stakeholders should well understand the new legal framework users and policymakers, including parliament, rather being developed and have time to decide the extent of than treating budget-planning reforms as purely technical departure from existing administrative traditions. Provisional reforms that can be driven by a Ministry of Finance. amendments may bridge gaps in formal rules for an interim n Where basic PFM reforms have progressed, some period. In terms of institutional arrangements, a standard experimentation with how best to go beyond traditional, recommendation is to merge ministries of finance and of single-year line-item budgeting may be explored with planning. In the eight cases reviewed, most but not all better- a view to strengthening fiscal management as well as performing countries have moved in this direction, or had transparency and accountability. Experience clearly joint ministries from the start. However, a fuller integration implies to avoid excessive complexity and isomorphic of aid-funded public investments remains a crucial challenge. (“cookie-cutter�) program-based budgeting reforms but to engage rather in carefully calibrated experimentation, Implications for approaching legal and institutional reforms focused on what might work to deliver better results. n When new regulations or organic budget law are developed, n Efforts at strengthening budget accountability should be this should be balanced by a strong and continuous focus expanded but cognizant of the political context. The fact on improving systems and actual practice. that accountability did show progress when greater effort n When addressing institutional arrangements, teams should was made suggests that there can be opportunities for be attentive to how aid programming is linked to overall greater attention and engagement, and such opportunities public expenditure planning in terms of institutional are worth exploiting, given that greater accountability in responsibilities and processes as well as to the issue turn can make important contributions to state legitimacy of integrating finance and planning ministries since in post-conflict environments. However, an important domestic capital spending is frequently small compared consideration to keep in mind is that reforms aimed at to international aid-funded investments. Where it exists, strengthening accountability are particularly dependent on separation of ministries is often rooted in a political logic the political economy context and that they run counter to that can be hard to overcome. the interests of rent-seeking elites. 6. strengthening capacity development requires a phased and n Budget accountability reforms should be pursued to the layered approach that includes addressing capacity constraints degree feasible (i.e., within the given degree of political in the short term as well as pursuing longer-term improvements. commitment) as they are crucial for developing state Addressing capacity constraints (more) effectively requires legitimacy. a multi-pronged approach that will often involve capacity n A degree of external anchoring of budget accountability substitution and supplementation, creating transitional (e.g., through an inclusion of internationally recruited schemes to enhance existing capacity, as well as tackling staff) may be useful as an arrangement for some time systemic issues by investing in skill formation and retention when such an arrangement is acceptable. over the medium and long term. Continuing capacity n Parliamentary follow-up on audit reports is typically the challenges are one of the key threats to the sustainability weakest link within the budget accountability dimension, of PFM reforms in post-conflict countries. There are no and improvements may be hardest to achieve in this area. easy solutions. However, there can be a more concerted Allowing the publication of audit reports while promoting 64 Public Financial ManageMent ReFoRMs in Post-conFlict countRies emphasis on transferring skills from technical assistants to complex to implement.69 However, some relatively simple civil servants, developing transitional and coordinated top-up indicators (e.g., disaggregated measures of budget credibility schemes and more systematic approaches to training and and budget execution rates by sector and subnational unit) building sets of necessary skills, and addressing the systemic could enable better monitoring of the full results chain from a challenges associated with civil service performance. The relatively early stage. issue of wider civil service and pay reforms might benefit from Key implication for strengthening and monitoring a consideration of second-best approaches. For instance, the impacts of PFM reforms on service delivery and the use of coordinated salary supplements to attract skilled wider state-building efforts people into the civil service is an approach that could be n Monitoring indicators for PFM reforms in post-conflict explored further in post-conflict environments. countries should include indicators pertinent for measuring Key implications for capacity development wider effects and impacts. Country management units n Start planning for capacity development early and and PFM reform teams should work together to determine remain engaged for the long term; seek coordinated how PFM reforms can best support wider state-building approach and funding. objectives by focusing, for example, on aspects such n Revisit progress and problems for capacity improvements as budget accountability or a transparent and well- periodically; understand what is working and why (including grounded allocation of resources across regions. Country through a greater emphasis on capacity development management units and PFM reform teams should develop issues in PFM assessments). monitoring efforts that include these wider aspects. n Consider capacity substitution for general line positions 8. a more structured inclusion of sectors and subnational separately from use for fiduciary reinforcement. levels—going beyond a focus on ministries of finance—should n Explore more comprehensive yet flexible plans to develop be emphasized to ensure impact of efforts at strengthening local capacity, including joint visions for institutional PFM systems. Development partners have supported efforts transformation, skills training, rapid results approaches, involving sectors and subnational levels—notably in Sierra and institutional twinning. Leone—but the bulk of PFM reform approaches focus on n Explore innovative and second-best approaches to civil the core ministries. However, over the medium term (3 to service and pay reforms and link these to capacity- 10 years) into the post-conflict period, a more deliberate development efforts with a view to reducing turnover and structured engagement with sectors and subnational where this is a key driver for (continuously) low levels is highly desirable. Inevitably, this poses challenges capacity. for the coordination of reform efforts and entails additional 7. Development partners and governments should consider efforts at developing local capacities. Also, for real impact monitoring tools that complement PeFa reports to provide on sector performance, efforts at PFM strengthening need a stronger focus on results chains and on the impact of to be complemented by efforts targeting related drivers of strengthened PFM systems on service delivery and state building. sector performance, including a better reflection of aid in Repeat PEFA assessments allow monitoring of PFM systems sector budgets, improvements to sector-specific monitoring development over time. However, PEFA assessments are more and evaluation, as well as to staff management and clarity focused on the attributes and functioning of systems than about the intergovernmental division of responsibilities in on their outcomes and impacts (e.g., on service delivery). each sector. This leaves important gaps in terms of monitoring whether Key implications regarding sector and strengthened systems contribute to wider goals of state subnational engagement building and service delivery while monitoring these impacts n PFM reform teams and sector teams should liaise closely is particularly important for post-conflict situations. Public to discuss important PFM bottlenecks in sectors as part Expenditure Tracking Surveys have not been used widely in of each reform stage and when designing new operations post-conflict countries, given that they tend to be costly and 69. With the partial exception of regular use of Public Expenditure Tracking Survey in Sierra Leone, as discussed in chapter 6. The World Bank 65 (e.g., integration of aid, budget execution bottlenecks, n Anticipate a long time horizon in the design of PFM support. sector issues related to chart of accounts, and public Current donor structures do not allow programming of procurement reform implications for sectors). assistance beyond a three to five year time horizon at n Once initial core PFM improvements have been addressed, most. However, the actions programmed within those time design PFM operations in ways that deliberately reach into periods can be cognizant of the fact that further PFM sectors and subnational levels as these are crucial for the support and reform efforts will continue over a decade or intended impacts of PFM strengthening on service delivery more. A more or less formal long-term vision (of which and state building. a platform approach is one possible version) can help to n Development partners and country stakeholders should distinguish between short-term priorities and longer-term initiate analysis of complementary changes that are reform goals; as well as to clarify what foundation for needed in order to achieve impact and develop appropriate longer-term goals (e.g., on capacity development centrally complementary support. and at subnational levels) need to be addressed in the short to medium term. 9. as emphasized in the 2011 WDr, institutional trans- formations require a time horizon of at least 20 years, underlining 10. the reasons for the lack of a clearer link between the the long-term support needed for achieving and consolidating level and pace of PFM improvements and service delivery im- strengthened PFM systems. Post-conflict countries have to provements need to be better understood to enable more targeted achieve institutional strengthening, progressive change, engagement. This is an area that urgently needs further and consolidation frequently beginning at very low levels. A investments in generating relevant evidence that can guide realistic time horizon for effective PFM strengthening is 10 to operational practice. In the immediate future, those providing 20 years, and possibly more to complete interacting reforms support to strengthening PFM should include a greater focus such as establishing and consolidating intergovernmental on sectors and subnational levels and on monitoring of the systems. To achieve such institutional transformations, strategic targeting of funds, and actual flows between the reform efforts must be sustained across potential changes in center and front-line service delivery units. governments as well as across major macro-political changes Key implications for strengthening service delivery impacts such as gaining independence or phasing out external security of PFM reforms support. Sustainability also requires that capacity bottlenecks n Implement relevant monitoring efforts into PFM and/or into be effectively addressed over time. service delivery sector operations where feasible within Implications for achieving sustained change and given parameters such as focusing on budget execution consolidation of institutional transformations rates through the sector chain (payroll, non-wage recurrent n Foster political commitment through dialogue, and capital expenditures in the sector); and the quality of responsiveness to areas of concern in fiscal policy/PFM, sector reporting against budget allocations. and smart use of wider aid incentives to the extent possible. n Analyze and monitor accountability challenges for public The goal should be to foster commitment to strengthened (and aid) funds in service delivery sectors and work on PFM across elite groups and voters to sustain commitment relevant and feasible accountability mechanisms (e.g., irrespective of potential changes in government. sector-focused audits, and/or social accountability n Recognize wider macro-political and security risks with mechanisms and/or improving public information on potential significant repercussions for PFM reforms and sector accountability issues through Public Expenditure reform impacts that cannot be mitigated/addressed Tracking Survey, etc.) directly. n For the overall aid effectiveness agenda, invest in efforts to better understand linkages between PFM and service delivery improvements in post-conflict environments across countries. 66 Public Financial ManageMent ReFoRMs in Post-conFlict countRies annex i: net oFFicial develoPMent assistance and oFFicial aid Received net oFFiCial DeveloPMent assistanCe anD oFFiCial aiD reCeiveD (Current us$) 2000 2001 2002 2003 2004 2005 2006 2007 2008 Afghanistan 135,970,000 404,640,000 1,300,490,000 1,590,700,000 2,303,100,000 2,817,890,000 2,955,780,000 3,964,600,000 4,865,080,000 Cambodia 395,720,000 420,880,000 485,240,000 518,300,000 485,340,000 535,580,000 529,340,000 674,520,000 742,810,000 DR Congo 177,120,000 245,310,000 1,174,940,000 5,416,900,000 1,825,710,000 1,774,380,000 2,080,230,000 1,240,820,000 1,648,320,000 Kosovo Liberia 67,420,000 38,480,000 55,160,000 106,930,000 213,240,000 222,440,000 260,400,000 700,790,000 1,250,370,000 Sierra Leone 180,640,000 334,820,000 383,120,000 337,080,000 376,280,000 339,660,000 347,460,000 545,290,000 366,820,000 Tajikistan 123,500,000 165,290,000 168,320,000 148,090,000 248,290,000 251,480,000 241,210,000 222,080,000 290,640,000 West Bank and 637,300,000 869,400,000 1,616,350,000 971,560,000 1,115,240,000 1,116,130,000 1,450,160,000 1,872,300,000 2,592,750,000 Gaza Source: World Bank Development Data Platform. The World Bank 67 annex ii: case study executive suMMaRies and internal control processes to meet basic fiduciary aFghanistan requirements. Further reforms were introduced after the basic PFM system was in place and the first PEFA assessment was Geraldine Baudienville conducted in 2005. These reforms covered a broad span— centering on the preparation of a new legal framework for PFM a. Reform context and political economy by 2005, strengthening of budget preparation and budget execution procedures, introducing sector strategies and a Afghanistan meets every criterion of the fragile state budget framework report, establishing external audit, and classification: deep structural poverty coupled with difficult further strengthening of procurement and control systems. access to many regions in the country; a dysfunctional AFMIS was progressively rolled out to all primary budget units state compounded by 30 years of war resulting in a deep in Kabul and in all provincial mustofiats. Efforts to introduce disconnection between the state and its citizens; growing MTEF and program budgets, though pushed by some donors, insurgency fuelled by external elements and insufficient proved more challenging. economic and employment opportunities; and an illicit The reform effort has almost exclusively focused at the economy that thrives and fuels conflicts. In addition, despite central level, especially the Ministry of Finance. While the strong economic growth over the past 7 years, Afghanistan highly centralized budget system has been successful in remains highly dependent on the international community strengthening overall budgetary discipline, it also results in for aid and security: over 50 percent of the core budget is rigidities during budget execution. In addition, capacity in externally financed, notably through a multi-donor trust fund, line ministries and subnational governments remains weak, the Afghanistan Reconstruction Trust Fund (ARTF). and the Government has made limited progress in improving As a result, both the Government and donors identified the quality of public services delivered at local level. PFM reforms as an early priority to ensure sustained aid Donors have provided substantial quantities of technical flows for reconstruction. Budget support provided through assistance to support PFM operations and to meet agreed the ARTF created the incentives and benchmarks to improve benchmarks. Although it has been intended that technical PFM systems while successive ministers of finance provided assistants would progressively support capacity and strong leadership within the Government. Despite the decades institution building, the number of external-financed advisors of conflict that affected basic administrative functions, many and assistants within the Ministry of Finance—many of whom elements of a sound underlying PFM system survived and are carrying out operational functions—has remained broadly provided a basis for reform efforts. stable since 2002. One reason for this continuing heavy B. Design and implementation of PFM reforms reliance on external advisors to conduct PFM operations lies Initial PFM reforms focused on strengthening budget in the poor results achieved on wider public service reform. In execution at the central level, in the Ministry of Finance, with particular, attempts at administrative and civil service reforms the implementation of the Afghanistan Financial Management (2004 Priority Reform and Restructuring Program), focusing Information System (AFMIS). The creation of the treasury on ministry restructuring and merit-based recruitment, have single account (TSA) helped centralize the payment and so far failed to improve human resources management. As a recording of government transactions through the Treasury. result, only limited progress has been made in the effort to Early initiatives also focused on strengthening procurement replace external capacity by sustainable domestic capacity. 68 Public Financial ManageMent ReFoRMs in Post-conFlict countRies C. Reform outcomes and sustainability generally weaknesses in governance and the transparency of Progress made on building Afghan PFM systems and PFM systems. capacities, underpinned by fiscal discipline and respect of D. Links to wider public sector and governance issues the no-overdraft rule, has contributed to progress made Corruption remains a severe threat to increased direct toward fiscal sustainability of the Government through support from donors to the Government budget on the one increased revenue collection to cover recurrent costs and to hand and improved state–society relationships on the other. the relatively stable macroeconomic environment from which Weak governance raises questions about capacity constraints Afghanistan has benefited since 2002. These achievements at all levels of government and whether the implementation are notable when compared to the experience in other post- framework is robust enough to handle additional resources conflict countries as shown in the 2008 PEFA assessment in effectively. Indeed, donors are reluctant to change the way they which Afghanistan’s ratings are better than the average for deliver aid because of perceived weaknesses in expenditure other low-income countries and in some areas better even prioritization. It would be helpful if future technical assistance than the average for middle-income countries. could help address the heavy financial costs of corruption and However, according to available data collected for the leakage of public funds, and thus lowered effectiveness of 2011 OECD Paris Declaration Monitoring Survey, these public services. In particular, it is likely that improvements improvements in PFM performance have not yet translated in strategic expenditure prioritization as well as in the control into an increased share of aid channeled through government arrangements, including internal and external audit, will be systems or a shift from ARTF to direct budget support. This required before a broader movement toward budget support apparent contradiction reflects specific concerns about the can be undertaken. weakness of PFM systems and service delivery at sector and subnational levels, the high levels of corruption, and more The World Bank 69 B. Design and implementation of PFM reforms caMbodia In the late 1990s, PFM reform efforts focused on improving revenue performance and centralizing much of the tax administration. Subsequently, a focus on expanding and Samuel Moon improving service delivery led to the 2000 Priority Action A. Reform context and political economy Plan, an explicit strategy of large service delivery provision Over the past 20 years, Cambodia has seen the emergence of a that circumvented the national budget, fragmenting the relatively stable Government after decades of turbulent politics budget process and establishing large parallel development and violence. The civil war officially ended in 1993. Since funds. then, the Cambodian People’s Party (CPP) has consolidated An initial attempt at a multi-donor coordinated approach to political power, albeit at the cost of marginalizing the other PFM reform emerged as the Technical Cooperation Assistance parties to the peace settlement. Following the examples of Plan (TCAP), implemented from 2001 to 2004. While an China and Vietnam, Cambodia experienced a remarkable improvement over preceding fragmented PFM assistance, the transformation from an isolated, state-managed economy to TCAP fell short of introducing an integrated strategy due to the an open economy with strong economic growth averaging 8 fact that it was based on reform recommendations developed percent during the 2000s. Growth has included employment- by different advisory teams that were not fully integrated into intensive sectors such as garments and more recently has a coherent approach. Furthermore, limited involvement in brought higher incomes for rural populations in a context of the design and subsequent buy-in by Government ministries increasing rice prices and other opportunities, leading to a made implementation of TCAP difficult, and a longer-term decline in poverty. The country had, and still has, one of the vision was felt to be missing. A smaller group of donors smallest public sectors in the world. persevered with establishing a collaborative approach through The conflict had significant implications for institutional an Integrated Fiduciary Assessment and Public Expenditure development and the civil service. The Khmer Rouge followed Review (IFAPER) process in 2003 and deepened collaboration a policy of destroying human and institutional capacity, with the Ministry of Economy and Finance. leaving over two million dead during the regime and very National elections in 2003 led to further political limited human resource capacity in the country. With the consolidation under the CPP. Subsequent to the elections, peace settlement and coalition agreements during the 1990s, the Government saw a window for political engagement and a complex and fragmented institutional structure developed championing of the PFM reform program. The combination and civil service recruitment was dominated by patronage, of politically opportune timing and a convincing technical reflecting the power-sharing arrangements in the post-war consensus between stakeholders provided a momentum period. that drove the design and implementation of a collaborative The Government has engaged in a gradual process of reform effort. The PFM Reform Program emerged. It included reforms with a continuing strong emphasis on the need for the 10-year platform approach adopted in late 2004 as the stability, although the de facto risk of a return to conflict technical approach for core PFM reform, as well as a deep and is considered low. Areas of ongoing state reform include intensive management and oversight structure for the reform, public financial management, public administration reform, and the Merit-Based Pay Initiative (MBPI) as an integrated decentralization and deconcentration, and the armed forces. mechanism to improve civil service incentives. Greater efforts to curtail corruption have emerged recently, The platform approach enabled the Government and including the adoption of an anti-corruption law in 2010 donor stakeholders to prioritize the reform focus over time. that had been under discussion since 1995, and measures Platform 1 of the approach (launched in late 2004) focused to reduce petty corruption by making payments by check or on improving the effectiveness of existing structures; through bank transfers and by publishing fees for government strengthening the revenue administration; streamlining the services. budget management processes; consolidating government accounts; and establishing a legal framework, an internal 70 Public Financial ManageMent ReFoRMs in Post-conFlict countRies audit function, and revised chart of accounts. The progression Another key outcome of the platform approach has been to Platform 2 was delayed with implementation progressing the cohesion between stakeholders that it has triggered. slower than expected. Platform 2 was eventually launched in The strong brand was developed slowly and methodically, late 2008 targeting the establishment of an FMIS as well as underpinned by the rigorous process to build consensus achieving more substantial capacity building and rolling out on problem definition and the policy instrument to address reform activities to line ministries and local governments. it. Securing a consensus between a core of stakeholders within the Government and among donors provided enough C. Reform outcomes and sustainability political capital to pull through stragglers in each of those Some improvement was achieved in tackling poor revenue communities. The long-term commitment to a PFM reform performance, a key objective in early PFM reform efforts in strategy was facilitated by the continuity in Government—in Cambodia. By 1998 revenue to GDP ratio was 8.9 percent and terms of both the ruling party and key public officials. improved to 12.5 percent by 2008 according to IMF data, still After significant progress on Platform 1 measures, the below the average for low-income countries. Low and volatile implementation of Platform 2 measures has been slow, while revenue and cash management problems led to the adoption of preparatory efforts for this broader and demanding phase a Priority Action Plan in 2000 to ensure payments for service of reforms continue. Key targeted reforms include a new delivery systems. While this helped to improve public funding chart of accounts and corresponding budget classification, flows to social sectors, it fragmented budgeting systems. A strengthened and effective internal audit and audit follow-up, more re-integrated approach to budgeting has been pursued the introduction of an FMIS, and moving decision-making and in more recent years as improvements to revenue collection accountability from the Ministry of Economy and Finance to and cash management were achieved. line ministries and budget entities. Progress on Platform 2 The wealth of analytical studies emerging in the late reforms has been incremental. The FMIS is still in a planning 1990s and early 2000s, including the 2003 IFAPER, stage, having experienced significant delays due to problems cultivated increasing interest in building a more collaborative within Government as well as with the support provided by approach to PFM reform among certain donors. At a political development partners. Further improvements in the chart of level, the Government drew on key PER recommendations accounts and the budget classification are being discussed and the proposed platform strategy as part of its prospectus since the 2007 reforms only fully established an economic for the 2003 elections. This political engagement, along with classification. However, reaching agreement on the extent the growing coalition of support for a coherent PFM Reform of further changes has been protracted. On the positive Program, helped persuade the less-willing donors to engage in side, gains made during Platform 1 have continued to be a single collective effort. consolidated, including implementation of the 2008 organic Views on the key successes of the PFM Reform Program budget law and improved cash management. differ. Reform efforts have undoubtedly contributed to a strengthened PFM system. During the first stage of the PFM D. Links to wider public sector and governance issues Reform Program, the progress made was uneven, but there The merit-based pay initiative (piloted in 2006) was designed were key improvements in revenue collection and overall as a key factor in enabling PFM reform implementation through budget credibility and alignment between policy priorities improving incentives and tackling the related issues of public and the budget as the key outcomes of Platform 1. Severe administration reform. Initially agreed as a comprehensive cash shortages typical of the early 2000s were addressed, top-up scheme approach within the Ministry of Economy and expenditure arrears were eliminated by 2007. While and Finance to complement reform efforts, the mechanism budget credibility has been established in the aggregate and was designed for Government to provide increasing funding in terms of cash management, the credibility of expenditure (to reach 35 percent of the total by 2011). Despite some composition has remained limited, with significant in-year setbacks in implementation and Government co-financing variations against the budgeted composition. falling short, the scheme was generally considered successful in improving incentives and critical in building support for the PFM Reform Program. The World Bank 71 In 2008 the scheme started being rolled out to other re-established incentives for civil servants to engage on ministries in a piloted attempt to introduce a comprehensive reform measures, and puts emphasis on making these more incentives scheme and in effect broach a broader civil service uniform across different ministries and agencies. However, reform effort. The concept gained traction; by 2009 eight development partners have exclusively funded the priority more MBPI-like schemes had emerged in other ministries. operating costs scheme. Wider pay and civil service reforms However, by the end of that year, and with no warning, the continued to be delayed while the Government has undertaken Government suspended the MBPI scheme. across-the-board salary increases in recent years (from a low A follow-up scheme to unify top-up practices was agreed initial base). These challenges related to civil service and pay between the Government and development partners in the reforms have also had some negative effects for the roll-out of second half of 2010. This priority operating costs scheme Platform 2 PFM reform measures. 72 Public Financial ManageMent ReFoRMs in Post-conFlict countRies Nevertheless, some useful changes in PFM occurred the deMocRatic between 2003 and 2010, spurred by triggers under the RePublic oF congo HIPC debt relief process, conditions attached to donor aid programs, and technical assistance financed by donors. Donor support is still crucially needed to maintain the momentum Geraldine Baudienville of the PFM reform process, compensating for weak internal accountability mechanisms and a political debate that is A. Reform context and political economy largely focused on the decentralization agenda. After independence from Belgium in 1960, Col. Joseph Mobutu seized power, declared himself president in a B. Design and implementation of PFM reforms November 1965 coup, and retained his position for 32 years. Years of conflict, lack of transparency, and problems of In 1996, a rebel movement supported by Rwanda and Uganda governance led to the collapse of the expenditure control began an offensive that led to the 1997 overthrow of Mobutu system and of fiscal revenue. Still, the legal and institutional and the installment of Laurent Kabila as Head of State. It framework, based on a French PFM system legacy, was was soon followed by a resurgence of civil war in 1998, which used as a basis for reform even if it had been virtually non- ended through a cease-fire (the Lusaka Peace Agreement) operational for years. signed on July 10, 1999. Yet, sporadic fighting continued; Initial measures were aimed at restoring macroeconomic after the assassination of Laurent Kabila in January 2001, his stability and breaking hyperinflation by first installing a son, Joseph Kabila, succeeded to the Presidency. strictly enforced system of cash management. Subsequent Early impetus for reform between 2001 and 2003 came reforms focused on developing basic procedures and from the alliance of President Joseph Kabila and his finance mechanisms of expenditure execution and oversight, followed minister, seconded from the IMF, who showed strong political by establishment of a simplified double-entry accounting will to re-establish links with the international financial system together with reforms that were of particular concern institutions after years of suspension of structural aid. The to donors (debt management, procurement, and civil service existence of one strong “mega� ministry in charge of economy, payroll). These measures were concentrated at the central finance, and budget also facilitated the reform process, as did government level, and especially on the Ministry of Finance, the hiring of two resident experts from the IMF and World the Ministry of Budget, and the Central Bank). Measures to Bank to support the minister. reform the legal framework were postponed until after a new Despite this promising start, subsequent developments Constitution was adopted (2005) and further delayed by the indicate that the overall political environment was not debate around the decentralization process, which touches conducive to reform. Both the transitional Government upon the wider reform of the public service and notably PFM. (2003–05) and the succeeding coalition Government (elected The legal and institutional framework also needs to be in 2006) were marked by political tensions among different modernized, in particular taking into account the major interest groups and lack of progress in key areas of reform. changes introduced in the 2006 Constitution regarding In addition, fragmented central-level institutions and political government structure at the subnational level, transfer of considerations have complicated policy management and, revenues, and resulting new responsibilities to be handled at in particular, the bifurcation of the ministries in charge of the provincial level. The adoption of the new organic finance finance and budget in 2003, which impedes efficiency and law in July 2011 after a lengthy approval process is a major coordination of fiscal policy. first step toward this modernization process. The World Bank 73 Due to weak capacities, provision of technical assistance Duplication of responsibility for controls on spending, which has been a major tool for reform implementation even if are executed both by the Ministry of Finance and the Ministry most of it has been provided through short-term posting of of Budget, slows down the expenditure cycle and prompts international consultants to address specific issues without line ministries to resort to informal procedures to maintain coordination among donors. spending on vital services. The main challenges regarding PFM are now to identify and C. Reform outcomes and sustainability leverage new internal and external incentives to implement Despite some achievements in PFM reform efforts, the 2008 reforms. Decentralization is central to the state-building PEFA assessment and PER highlight the system’s still severe process as a means to maintain the country’s unity and should shortcomings. While technical improvements have been receive increased attention considering presidential elections made in budget classification, cash management, budget are looming. This goal could constitute the main entry point execution, and computerization, strong political interference and domestic driver for future PFM reforms. Additionally, has undermined these achievements. Improvements in public donors could further push for reforms by establishing more service delivery and poverty-reduction goals have not been clearly the linkages between PFM reforms and increased achieved, as noted by traditionally under-executed budgets. budget support. Sector-level reforms aimed at improving In addition, the frequent use of exceptional procedures service delivery could be used as an entry point to sector weakens the credibility of budget authorizations and budget support. commitment plans, and makes it very difficult to control and monitor public spending by category of expenditure. 74 Public Financial ManageMent ReFoRMs in Post-conFlict countRies functions and mandates. As such, this ambiguous governance kosovo and decision-making structure weakened the development of national accountability structures and is one of the reasons the international community still maintains considerable Heidi Tavakoli influence on Kosovo’s development. A. Reform context and political economy B. Design and implementation of PFM reforms Following the end of the conflict in 1999, the United Nations The PFM systems in Kosovo developed from a modest was tasked to govern Kosovo through its Interim Administration base. Although Kosovo had the legal authority to some Mission (UNMIK). Initially UNMIK was given a mandate for PFM functions within the Yugoslavian Federal System, full executive, legislative, and judicial responsibilities in constitutional amendments in 1989 resulted in this autonomy Kosovo. Over time, these responsibilities were transferred to being disbanded and many PFM functions were transferred to the Provisional Institutions of Self-Government (PISG), which Belgrade. As a consequence, there was limited physical and became known as the Kosovar Government. human capital necessary for managing PFM at the beginning Kosovo is a young state that has successfully been able of the reform period. Establishing core finance functions was to maintain political stability and security while fostering a priority in the immediate aftermath of the war, illustrated international recognition, and reaching independence in 2008. by the first UNMIK regulation, which established the Central This has in part been due to strong post-war economic growth, Finance Agency (later the Ministry of Economy and Finance) which is expected to continue, though some uncertainties and shortly followed by the first PFM rules, in which little was exist. Despite such promising growth rates, Kosovo is one of carried over from the pre-1999 Yugoslavian PFM systems. the poorest countries in Europe, with persistently high rates PFM reforms went through several phases that coincided of poverty and unemployment and relatively poor results on with changes to the power-sharing arrangements. As with human development indicators—although better than for many of other cases in this review, a comprehensive and other select post-conflict countries in this review. integrated PFM reform program emerged late in the reform Over the post-war period, the framework and institutions effort. Between 1999 and 2002 PFM reforms focused mostly of governance were developed alongside the gradual transfer on controlling inputs and accounting for cash, together with of functions and responsibilities to the PISG. The nature of strengthening of budget planning. Between 2003 and 2007 the peace resolution meant that constitutional, legal, and the implementation of the Constitutional Framework and the institutional structures essentially started from the beginning Law on Public Financial Management Accountability allowed in 1999. Ministerial responsibilities, including economy and the PISG greater autonomy over PFM functions. The reform finance, were gradually transferred to the PISG starting a year effort continued to target budget execution and planning after it was first created in 2002. At the same time UNMIK, functions but was also extended to develop competencies under the authority of the Special Representative of the related to external audit, capital budgeting, and procurement. Secretary General (SRSG), retained control of certain “reserved Since 2008, the reform effort has shifted from the central powers� and a hybrid governance structure necessary to allow level toward municipalities and line ministries. Weak donor a power-sharing arrangement to exist was created. coordination over the majority of the reform period led, in Even within the domain of finance and economy, fiscal some cases, to the duplication of reform effort and the weak responsibilities existed in a power-sharing context. This hybrid integration of reform outputs. governance structure created a lack of clarity in the policy- making process. This led to a weak policy-setting environment, C. Reform outcomes and sustainability a legacy that affects public management and PFM performance Although Kosovo’s PFM system is relatively young and to this day. These issues arose not only because the SRSG competencies will take time to develop, a range of basic and retained the responsibility of crucial executive functions but advanced reforms has been implemented, the performance of because the power-sharing arrangement between UNMIK which is comparable to achievements elsewhere in the region and PISG was intricate, fluid, and marked by overlapping (Tandberg and Pavesic-Skerlep, 2009). The World Bank 75 The legislative framework for PFM is fairly advanced in organizational level, the budget preparation process varies Kosovo (FRIDOM, 2008b). Most interviewees felt that the legal and there is limited technical appreciation of the MTEF. framework was appropriate for its purpose. In addition, there is also general agreement that the procedures and processes D. Links to wider public sector and governance issues underlying the legal framework have progressed well although In contrast to other countries emerging from the former the current Public Investment Program procedures are seen to Yugoslavia, Kosovo’s current constitutional and legal be an exception. Despite the sound framework, the challenge framework surrounding public sector management is not of implementing these procedures was consistently raised and closely related to its Yugoslavian predecessor. Although it was frequently attributed to the still relatively weak administrative formed from practices that have worked well in other countries, capacity across government (FRIDOM, 2008a) and the lack the process of re-building the administration after the war has of political will to implement the laws, procedures, and been criticized. According to the 2008 functional review, the processes consistently. Kosovo administration was re-built in an ad-hoc fashion after PFM performance has been strengthened across the three dimensions of the budget cycle (planning, execution, the war in Balkans and “some ministries have responsibilities and accountability). The PFM background paper to the 2011 which duplicate each other, others have a structure that is not World Development Report (Porter and others 2010) shows relevant to their mandate, and human resources are not always that across a range of fragile countries, countries perform located where they are the most needed� (FRIDOM 2008c). better on average against a set of upstream functions than In addition, vis-a-vis its neighbors, public administration downstream functions. It also suggests that budget preparation absorbs a considerable amount of resources. By the time is stronger than execution in fragile states. Kosovo’s the power-sharing arrangements were established in the performance deviates from this finding. As acknowledged by beginning of the 2000s, there was a limited pool of qualified various diagnostic assessments (PEFA, SIGMA, FRIDOM), the treasury system is sophisticated and functions well. The main Kosovars with experience of public administration. However, assets of the Treasury Department include its strong KFMIS, Kosovo has transitioned comparatively well from being heavily a single treasury account, and a fully staffed and capable managed by international bodies and experts to one run by team (FRIDOM 2008a). Not only have treasury activities local civil servants. worked well since 1999, relative to other areas of PFM in The state remains the sole provider of public services, Kosovo, but their effectiveness continues to grow, illustrated except for the small parallel services that exist in some Serb- by a comparison of performance between the two recent PEFA majority municipalities. Challenges to improve service delivery assessments that show “improvements in the PFM system.� and the demand for funding for ambitious spending plans are Overall, the most significant improvements were made in driving forward the Government’s privatization agenda. the budget execution system where the 2009 PEFA scores improved in cash management and accounting recording and Decentralization is considered to be an important tool reporting. In addition to the treasury function, the small but for achieving future state security and state building in well-resourced Macro-Economic and Fiscal Policy Unit is Kosovo and as a result is a cornerstone of the peace- and functioning well. The main challenges that exist in the down- state-building process in Kosovo, including the northern and up-stream parts of the budget cycle relate to activities with municipalities in which ethnic Serbs are a majority. According the largest scope for political involvement: budget planning, to the 2008 functional review, once the Government fully particularly the MTEF and Public Investment Program, implements the decentralization along the lines suggested which is undermined by weak strategic policy direction at by the Ahtisaari plan,70 Kosovo will have an unusually high the beginning of the budget cycle; and poor parliamentary oversight and audit. Improvements in the audit functions are level of decentralization for a country of its size. Decentralized not yet being reflected in parliamentary oversight. functions are increasingly becoming the main focus of The PFM performance of deconcentrated entities is international support to PFM. weaker than that of the Ministry of Economy and Finance, 70. The Ahtisaari plan was a proposal made by the UN Special Envoy in reflecting the concentration of reform effort. At the budget 2007, as a way to reconcile Serbian and Kosovar interests. 76 Public Financial ManageMent ReFoRMs in Post-conFlict countRies participation were also targeted: the 2006/7 budget was the libeRia first to be submitted to the legislature for some decades; and the draft budget, final budget, and quarterly budget execution reports were all published on the MOF website. One element Edward Hedger of the design logic for these reform measures was the expected A. Reform context and political economy role of domestic demand-side actors in asserting pressure The progression of PFM reforms in Liberia from the on the executive to achieve and then sustain improvements Comprehensive Peace Agreement in August 2003 up until the in financial management. A more detailed and systematic middle of 2010 may be characterized broadly in three phases: sequencing plan for PFM reforms over the period 2009/10 n During the transitional Government, 2003–05, only to beyond 2011/12 was developed as part of the 2008 multi- limited reforms were achieved. Two important measures donor PEMFAR, following IMF-conducted technical assistance were the establishment of a cash-based balanced budget missions on PFM in 2006, 2008, and 2009. and formal control of budget execution through a Cash C. Reform outcomes and sustainability Management Committee. Despite these efforts, financial Major achievements include the development and passage mismanagement and corruption was widely reported. The of a new PFM Law in 2009 and the formulation of detailed significance of this period is that it revealed clearly the implementing regulations. The law provides a comprehensive underlying weaknesses in PFM and provided the premise framework for PFM and it addresses previously identified gaps and justification for development of the Governance and in internal control, internal audit, and financial reporting. Economic Management Assistance Program (GEMAP). It also establishes a mandate for government borrowing Starting in late 2005, the National Transitional following the HIPC Completion Point, and it sets a timetable n Government signed GEMAP and the incoming elected for future introduction of more ambitious reforms. The law and Government confirmed its intention to implement that regulations have provided a useful basis for the Government to program. The focus of the reform effort, strongly pushed by develop a PFM reform action plan. external donors, was on re-imposing financial discipline, Annual budget preparation, which complies with a fixed strengthening financial control, and centralizing calendar and is well ordered, was resumed quickly following responsibility for planning post-conflict reconstruction. the conflict and has been functional at a basic level. The n The gradual shift from 2009 onwards brought a more establishment of a National Budget Committee has improved concerted and coherent approach to capacity development coordination of the process by the executive. Historical and to strengthening the broader institutional arrangements weaknesses in the macro-fiscal forecasting capacity of the for effective PFM. One indicator of that shift was the start Ministry of Finance are being tackled through the formation of support for institutional reforms by the World Bank and of a Macro-Fiscal Analysis Unit. However, the IMF still plays the AfDB. From the Government’s side, the development a key role in preparing multi-year projections and efforts at of a comprehensive PFM reform strategy and action plan development of a medium-term expenditure framework are in 2009, linked to the new PFM law, marked a transition only incipient. The substantial proportion of off-budget, from short-term control measures to longer-term PFM donor-funded, investment expenditure compromises budget capacity development. The HIPC debt relief process also planning for overall government spending, despite progress provided a driver for reform. with integration of capital and recurrent budget preparation. B. Design and implementation of PFM reforms The implementation of a cash-based balanced budget has Attention to the technical sequencing of PFM measures provided a strong disciplining mechanism but has also served reveals an early focus on selected downstream aspects to comprise budget credibility as a result of the in-year of financial management, including strengthening of the spending adjustments needed in response to variance in financial control environment. Much of the PFM reform effort revenue receipts. in the period 2006 to 2009 was centered on the Ministry of The achievements in budget execution appear relatively Finance (MOF), with a strong additional focus on the Ministry strong, if also selective. Automation of the budget execution of Health through support from DFID. Greater openness and was started with the monitoring of allotments and commitments The World Bank 77 through the Liberia Expenditure Control and Accounting D. Links to wider public sector and governance issues Program (LECAP). Control over payroll has improved through Against a backdrop of very weak governance following the the shift to bank transfers for most civil servants in Monrovia. conflict and National Transitional Government era, the first Despite recent progress with development of an internal audit regular Government elected in 2006 pushed ahead with strategy and establishment of internal audit units in some governance reform measures. Key results on paper include ministries, this function remains weak. the establishment in law of an Anti-Corruption Commission The accounting and reporting function has been and appointment of the Commissioners, the development strengthened by the unification of separate divisions as a single of a Civil Service Reform Strategy, and the requirement Accounting Department under a new Comptroller General for all ministers to declare their assets. It is not clear how position. A new chart of accounts has been developed that substantive those results will prove. The most significant is compatible with budget classification of the Government measure may be the establishment of the Liberia Extractive Finance Statistics Manual 2001. Reporting has improved Industries Transparency Initiative (LEITI) Secretariat in 2008. progressively and regular annual fiscal out-turn reports are The Governance Commission has provided a strategic focus now supplemented by quarterly reports, all of which are for the public sector reform agenda, with PFM reform as a published on the MOF website. The Ministry of Finance has core component. PFM reforms were prioritized in part for their recently started to produce financial statements following catalytic potential with regard to the wider governance reform the implementation of the Sun Accounting System in the agenda. The budget process, for example, was presented as PFM unit. International Public Sector Accounting Standards a mechanism for bringing together the various government have been adopted on a cash basis and are being rolled out. ministries as part of a structured negotiation around Implementation of the IFMIS has been postponed repeatedly resources, services, and results. The PFM reform measures but is expected to proceed ahead now that work has been were included as part of the core “150-day deliverables� completed on the chart of accounts and the accounting following the President’s election in 2006; and, after the standards. President assumed office, the Government quickly developed Appointing an Auditor General on an externally funded a six-month budget. contract has substantially strengthened the external audit and One key assumption underlying governance reform accountability function. The General Auditing Commission in Liberia is that the collapse of the system was as much (GAC) has completed audits of several sector ministries in attributable to flawed institutions as to the corrupt behavior of line with the HIPC trigger requirements and has also audited individuals. Formal institution building, such as through the the central government accounts. Despite weak engagement PFM Act and the establishment of an independent Auditor by the legislature on audit scrutiny, the Auditor General General, has therefore been targeted as means to embed has interpreted his mandate very broadly and has been a reforms and develop a culture of stronger accountability. PFM vocal public critic of weaknesses in government financial reforms are clearly positioned in the context of wider public management. Pursuit of financial impropriety through the sector reform, with recognition of the links to civil service courts has been hampered by weaknesses in the justice reform, rationalization of ministries and agencies, development sector. However, strong engagement between the GAC and of an integrity system and codes of conduct for government media and civil society has ensured that the GAC audit officials, strengthening accountability systems, and building findings have gained high public profile. One major challenge local governance systems through decentralization. to sustainability is the decision not to renew the contract for Implementation has been less coherent with decentralization the serving Auditor General. neglected relative to other public administration issues. Rather Efforts need to be made to consolidate the reforms noted than pursuing an integrated approach to decentralization above. Moreover, some measures, which are not technically and PFM reform, work on the latter has focused on central complex, have proven too advanced for capacity levels government entities in Monrovia through the GEMAP and or too challenging to vested interests. These include the other donor-supported interventions. Fiscal decentralization is implementation of internal audit, strengthening of legislative recognized by the Governance Commission as a critical issue audit scrutiny, and integration of external aid flows with the because of its potential contribution to securing a long-term budget. state response to some of the causes of the war. 78 Public Financial ManageMent ReFoRMs in Post-conFlict countRies control; and technical assistants carried out day-to-day sieRRa leone functions. Second, between 1996 and 2002, incremental policy initiatives and the continued provision of some public services to restricted areas of the country served to strengthen Heidi Tavakoli governance structures (2002 CFAA). A. Reform context and political economy The PFM reform action plans have been heavily directed by Since independence, Sierra Leone’s development has been diagnostic assessments primarily funded by the international repeatedly undermined by a series of military coups and a community. There have been three such plans since the end protracted civil war. The devastating consequences of the of the civil war: the 2002 CFAA; the 2004 Common Action conflicts are still visible in Sierra Leone as it ranks near the Plan, which developed into the National Action Plan; and bottom of the Human Development Index. However, these the 2009 Integrated Public Financial Management Reform stark results do not capture the considerable progress Sierra Project (GoSL 2008; World Bank 2009). Each successive Leone has made in other aspects of its development, which plan has attempted to improve both the comprehensiveness have facilitated peace and state building. Such efforts are and conceptual coherence of PFM reforms; the most recent illustrated by strong macroeconomic performance and plan is based on a platform approach. considerable improvements in certain social development C. Reform outcomes and sustainability indicators. Since 2002, the Government of Sierra Leone has made International support, a fundamental component of Sierra good progress in improving its PFM framework and systems. Leone’s development, has financed and guided government By 2007 the Government had achieved scores on a PEFA policy both during and since the end of the civil war. Since the assessment equivalent to those attained by other countries end of the civil war, the substantial budget support program in the Region despite progressing from a considerably lower has ensured a considerable level of international engagement starting point (GoSL 2008; World Bank, 2009). in government activities and has become a key focal point for There has been considerable concentration on establishing a policy dialogue between the Government of Sierra Leone and suitable legal and regulatory framework and consequently good budget support donors—AfDB, DFID, European Commission, progress has been made in this area. However, various studies and the World Bank. have commented on the challenge of full implementation of B. Design and implementation of PFM reforms many of the new acts, procedures, processes, and systems During the civil war, state capacity was severely depleted with (Lawson 2007; IMF 2008). According to the recent Public the extensive destruction of social and physical infrastructure. Expenditure Review, “Interviews with the authorities have In terms of PFM, not only was there the loss of skilled personnel identified politically sensitive decisions as the root causes of but in 1997 the building that housed the Ministry of Finance some of these deviations from the legal framework� (World was destroyed. However, the Country Financial Accountability Bank, 2010). In addition, weak knowledge and understanding Assessment (CFAA), published less than three months after of the acts and procedures—particularly the Government the civil war was declared officially over in January 2002, Budgeting and Accountability Act and Financial Management states that “given the acute period of civil collapse from which Regulations in ministries, departments, and agencies—have the Republic of Sierra Leone only recently emerged, financial resulted in their poor implementation. management in the country functions surprisingly well.� In addition to developing the legal and regulatory framework, According to the 2002 CFAA report, although internal and initial reform efforts post-2002 were heavily weighted external controls were weak, budget preparation, execution, toward strengthening budget formation and parts of budget accounting, and reporting were performing moderately well. execution. Key achievements include strengthening internal There were two key reasons for this relatively positive PFM capacity, establishing new entities and hiring qualified staff performance. First, during the civil war a legal and regulatory for key positions, rolling out an IFMIS, establishing internal framework for PFM was upheld and a highly centralized audit units, strengthening the MTEF (despite remaining system of management maintained a degree of expenditure challenges), integrating regular financial reporting systems, The World Bank 79 and improving the Accountant General’s function and output. in a particularly well-funded public administration in Sierra Strengthening external audit and oversight was initiated at Leone. However, the effectiveness of the administration later stages of the reform effort. is less straightforward to assess. As with other countries The PFM performance of deconcentrated entities is among the case studies in this report (e.g., Afghanistan) in weaker than that of the Ministry of Finance, reflecting the an attempt to improve service delivery in an environment concentration of reform effort. Despite this, the establishment of weak civil service capacity, a parallel public sector has of budgeting, accountability, and procurement for both central developed in Sierra Leone (Ingram 2009; World Bank 2010). and local government is considered to be among the main This has addressed reform bottlenecks in the short term, but achievements of PFM reform since the end of the civil war. has created significant sustainability concerns over the longer period, particularly related to sustainability and civil service D. Links to wider public sector and governance issues pay reform. The establishment of a significant cadre of local Public sector development has been a longstanding priority technical advisors and off-civil service officials in the Ministry in Sierra Leone for Government and donors alike. In the early of Finance and Economic Development falls into this category. stages of his tenure, President Kabbah and his government Local technical advisors have driven the implementation of prioritized civil service reform, in tandem with reducing PFM reforms led by strong political support and incentivized corruption, and it formed a key part of the 1999 Governance by budget support operations. Reform Secretariat’s mandate. Overtime, it has also been the recipient of considerable donor support. This has resulted 80 Public Financial ManageMent ReFoRMs in Post-conFlict countRies a limited impact on the strategy, policy, and regulation of tajikistan service delivery. Donors have become increasingly involved in the country since the war ended, with the European Commission and Samuel Moon World Bank providing significant investment in PFM reform A. Reform context and political economy and the Asian Development Bank joining them as a third major Tajikistan is a small mountainous country in Central Asia with provider of budget support. China has become the largest an economy dominated domestically by aluminum and cotton single donor in recent years with approximately US$1 billion in production. Another important driver of growth in the economy investment commitments in public infrastructure since 2005. has been remittances from migrant workers in Russia. The B. Design and implementation of PFM reform country gained independence in 1991 during the breakup of The PFM reform efforts have been largely donor driven and the Soviet Union, but the political vacuum soon led to brutal began to a limited extent in the late 1990s, with significant civil war as rival pro-Russia and Islamic-based factions fought bilateral and multilateral donor engagement in the reform over political and economic resources and the geopolitical agenda since 2005. Early efforts at reform led by the World role of the new country. With Russian and Uzbek support, Bank in the Institution Building Technical Assistance (IBTA) Emomali Rahmonov secured victory in 1997 and continues project focused on gaining macro-economic stability. A more to lead the country to present day. Violence continued to flare ambitious second phase, IBTA–2, covered a far broader range up regularly until the early 2000s, and in recent years there of PFM functions; but, spread too thin, the IBTA–2 project have been some indications of new clashes. The consolidation enjoyed little success of reaching its goals of reforming core of power around the president and effective elimination of PFM systems, including budget management and internal visible discontent provides some stability in the short to and external financial control. However, during this period medium term, especially without any viable opposition; but it the Government independently implemented a successful is likely to provoke instability in the longer term. computerization of the Treasury. The experience exposed The country suffered dramatic economic and capacity an indifference to the donor approach to PFM reform and losses during the 1990s. The loss of the Soviet Union single demonstrated that the Government’s priorities for reform were market and the effects of the civil war caused a contraction of limited to specific control and management functions rather GDP averaging 11.75 percent annually during the mid 1990s. than a broader agenda. Nevertheless, the donor projects were The annual inflation peaked at 2,200 percent in 1993, staying able to transfer some knowledge of public sector management in triple digits for most of the decade and falling to single and PFM reforms to government officials, and also establish digits by the early 2000s. Additionally, the civil war prompted the need for a clear strategic approach to PFM reform. an exodus of skilled workers. Governance, corruption, and By 2007 a large amount of diagnostic work had been security issues remain considerable with the country scoring completed by the World Bank and other donors, including a a low 3.2 out of 6 on the World Bank’s Country Policy and programmatic Public Expenditure Review and the country’s first Institutional Assessment with little improvement over time. PEFA assessment. Work began in 2008 on the development Terrorism and sporadic sparks of Islamic fundamentalism are of a PFM Strategy, which was approved later that year. The relatively common, and weak control along the Afghanistan Strategy included an action plan to implement the reforms over border has encouraged a large shadow economy exploiting a three-year period. From its early stages, the PFM Strategy the porous border with largely drug related trafficking. did not enjoy universal support: concerns were expressed Tajikistan’s public sector management is highly centralized about the ambition and breadth of the planned activities and although it uses relatively weak subnational administrative the focus on PEFA scores for monitoring. Implementation units to undertake a significant amount of tax collection and has been relatively slow, but some key reforms undertaken the majority of service delivery. The Soviet legacy has left an include the introduction of a revised budget classification and institutional capacity for central planning and control, but chart of accounts, a new treasury software system and budget the fiscal relationship between local governments and the planning systems, and the roll out of internal audit units in Ministry of Finance means that central ministries have only central and local government. The World Bank 81 C. Reform outcomes and sustainability commitment to public sector or PFM reform. The civil service Since the early 2000s when PFM reform efforts began, lacks the skill base and motivation to provide strong technical donors have been the main driver. Early efforts to establish leadership on reforms within PFM, although the engagement macro-economic and macro–fiscal stability have achieved with reform projects and capacity development efforts has relatively positive results with inflation figures and deficit led to a growing understanding of PFM reform concepts. levels improved. However, capacity to monitor and manage Incentives and management of the civil service have been economic shocks is still weak, and Sierra Leone is highly poor and civil service reform efforts have stagnated. Financing exposed to external remittances and commodities market and management of local governments is particularly opaque; fluctuations. The Government’s analytical capacity and project and while there are several reform projects in specific areas of economic development also remain weak. The development intergovernmental relations, there is little transparency and no of a comprehensive legislative framework for PFM functions clear formula for financing local governments. On the positive was an important step: the Law on Treasury was adopted in side, there has been some progress in management and 2001 and the Law on State Finances was adopted in 2002. financing of the education sector, with per capita financing However, implementation of planned reforms lags behind in introduced in the past years. most areas and, until recently, the reform efforts have been Strong concentration of economic power with political ties largely limited to the central agencies. While the PFM Strategy and very limited domestic or international challenge for greater has introduced a common approach to reform, political accountability or expansion and diversification of economic leadership of the reform process remains weak agents has been a constant underlying issue that limits the potential for reform. External assessments of corruption are D. Links to wider public sector and governance issues high and have not declined. Civil society and parliamentary The Government’s focus on political consolidation and tight agents are weak and neither affects any real influence on the control of the private sector leaves little space for serious reform agenda. 82 Public Financial ManageMent ReFoRMs in Post-conFlict countRies and clearances had stopped and normal budgetary operations west bank and gaza ceased as a result of the cash shortage. The knowledge about these systems did not disappear however, and many control functions remained intact, where applicable. For instance, Philipp Krause the financial controllers in line ministries continued to check A. Reform context and political economy invoices. Since most officials remained in place during this The West Bank and Gaza have had a turbulent political history period, the status quo ante was restored within about six over the past two decades. At the outset of the 1990s, the months after the end of the Hamas period. territories were administered by Israel. The PFM reform Since 2007, there has been a renewed effort to implement trajectory can be divided into four phases, which also coincide reforms and a gradual improvement of governance in many with and were largely driven by the major high and low tides of areas. From a reform perspective, the three years until 2010 political change in West Bank and Gaza. had been a period of stability where the focus of attention In 2002 West Bank and Gaza found itself with a has gradually moved from how best to respond to a multi- fragmented, personalized, and informally organized public dimensional emergency to how best to ensure sustainable sector in general and PFM system in particular. Its inability to stability and more gradual improvements. Since 2008, deliver either an internationally credible proto-state or a stable reforms have been broadened and deepened to the point operation of public finances (and consequent service delivery) where all the basic elements of a soundly operating PFM had become apparent to most domestic and international system seem to be in place on the budget execution side, stakeholders. There was a long-drawn build-up of domestic with substantial progress in other areas. Reviews have found pressure over the Palestinian National Authority’s perceived substantial improvements to the credibility of the budget, corruption and inability to deliver as well as concurrent comprehensiveness and transparency, predictability and international pressure over its non-credible source of stable control, as well as accounting, recording, and reporting. and reliable government and governance for West Bank and Improvements to policy-based budgeting and external scrutiny Gaza. These pressures were brought to a head by the crisis audit were rather more modest (Ahern 2010). Over the entire that resulted from the Second Intifada. These factors created period between 2006 and 2010, no significant deteriorations the political space for a technical, reformist finance minister could be found, although of course some areas saw quite (with an IMF background) to take office. significant but temporary setback for certain periods of time. Between 2002 and the end of 2005, there was a first West Bank and Gaza is not a sovereign state and the wave of reforms. The finance minister was supported by operations of the Palestinian National Authority are very the international community and at least tolerated by the vulnerable to disruptions of its revenues, the two largest most important domestic veto players. Up until late 2005 sources of which (clearance revenues and external aid) can be determined reforms to budget execution began to change disrupted by means almost completely beyond the Authority’s the way the public sector operated. These reforms did not control. The engagement of external actors is enormously however prove sufficient to sway a disenchanted electorate, important for the operation of politics and government in West which voted Hamas into power in January 2006. Hamas won Bank and Gaza. The donor community is heavily engaged in a strong majority in the Palestinian Legislative Council and supporting the Palestinian National Authority. In 2006, the gained the right to form the next Government. Authority received about 40 percent of its revenues from From early 2006 until mid-2007, the Hamas-led external sources. Due to West Bank and Gaza’s particular Government and the subsequent separation of Gaza and the political status, aid modalities are fairly complex. Support West Bank dominated the agenda. Many reforms that had been from the World Bank is given in the form of grants, through implemented during the preceding years quickly fell apart or, a trust fund arrangement. Other donors use a variety of more often, became dormant. The single treasury account fell mechanisms, from project aid to budget support. out of use because ordinary revenues from external donors The World Bank 83 B. Design and implementation of PFM reforms the Government. By 2010, many substantial reforms were Progress was made in fits and starts. The broader political carried out successfully. These reforms profoundly changed environment determined the degree to which reforms could the practice, as well as the formal setting, of public financial advance and, notably in 2006/7, caused much progress to management. It is much more difficult, unfortunately, to be reversed if only temporarily. The Government deliberately properly assess the success of these reforms in a comparative emphasized reforms that would strengthen credibility and reliable way. Expert reviews carried out over the last two and control of budget execution. These reforms were for years emphasize strongly that reforms have proceeded in the most part constrained by political conditions, not by many fields, although obviously many challenges still remain. capacity or financial constraints. Where resources or capacity Over the entire reform period, only one PEFA assessment were lacking, the Government possessed enough central has been carried out (in 2006), which only partially captures management capability to direct external assistance toward even the first wave of reforms. Since it took place at a time of areas of priority. As a consequence of this strategy, not all PFM acute political and fiscal crisis, it is difficult to extrapolate, or fields that were considered crucial by international experts reconstruct, how scores might have looked like before or after were given a similar degree of attention, which occasionally this one snapshot view. At the time, the PFM system did not caused friction between donors and the Government. On the tally very well, with only 4 “B� and 12 “D� scores (out of a whole, however, the international community supported the total of 28 performance indicators in the PEFA framework). broad reform agenda of the Government in 2003–05 and Since the 2006 PEFA assessment, qualitative reviews since 2007. have found substantial improvements to the (a) credibility The type of PFM reforms and their sequence is notably of the budget, (b) comprehensiveness and transparency, (c) different from what has been observed in many low-income predictability and control, as well as (d) accounting, recording countries. There was a marked and deliberate emphasis on and reporting. Improvements to (e) policy-based budgeting budget execution, to the exclusion at least at first, of efforts and (f) external scrutiny audit were rather more modest (Ahern to strengthen budget preparation. At least during the second 2010). Over the entire period between 2006 and 2010, no phase of reforms, efforts were not limited to the concentrated significant deteriorations could be found, although some entities at the core executive but also extended to spending areas saw quite significant but temporary setback for certain ministries. The reforms could draw on a fairly broad and periods of time. Without being able to quantify it, the PFM deep cadre (by the standards of a small and fragile state) reform record can be called broad and substantial. of competent officials, who enjoyed a modestly meritocratic The sustainability of the current state of PFM remains an open question. Many core elements of the current system, career path within the Ministry of Finance and associated such as the treasury single account (TSA), have now been agencies after 2002. The reforms also benefitted from a core practiced throughout multiple budget cycles and are therefore capacity within the core executive to set priorities and steer probably accepted as standard practice among staff. Yet the a complex reform process according to the domestic political Hamas period has shown that in West Bank and Gaza there priorities of the day, even if the capacity to implement all is a real risk that a political reversal brings about a situation aspects of these reforms clearly depended on support where, whether by intentional design of the Government or not, from donors and external technical experts. This reform progress on PFM reforms is threatened and reversed. While management capacity is very often lacking in low-income in the past these periods have been massively disruptive to countries and is perhaps the clearest expression that West the operations of the Palestinian National Authority, they also Bank and Gaza is not a typical fragile state. turned out to be reversible. However, over the last decade, C. Reform outcomes and sustainability much of the achievements have been associated closely with It seems clear that serious reforms began in 2002 from a the person of the current Prime Minister (who is also a former relatively low starting point in most PFM areas. The fiscal IMF staff member). The next time a change in the highest crisis at the time, combined with the underdeveloped systems offices of the executive takes place, a lot will depend on the and procedures across all phases of the budget cycle, precise circumstances of the changing political balance to created a sense of urgent emergency among donors and determine if the support for PFM reforms holds firm. 84 Public Financial ManageMent ReFoRMs in Post-conFlict countRies D. Links to wider public sector and governance issues to the Palestinian National Authority’s viability as a proto- There is a direct connection between PFM reform and state state for the Palestinian people is an explicit motivation for building in West Bank and Gaza, and the key political actors virtually every official interviewed, starting with the Prime are keenly aware of it. A functioning, modern budget process Minister himself. It sometimes seems that it is more important that provides a stable framework to the formulation of policy, for senior officials to have a strong and credible PFM system its public deliberation, reliable execution and external control as a core element of any modern state rather than to expect is clearly understood to be a defining feature of a sovereign the PFM system to deliver better outcomes however defined. state. Conversely, the inability of the Palestinian National This emphasis on PFM reform as an exercise in state building Authority to function as a capable government in 2002 was might to some extent explain the relative emphasis chosen by seen as a main motivation to carry out reforms, not necessarily the Government over the years. for their own sake but because not tackling these issues This progress is limited however by the unresolved macro- would be a permanent obstacle toward these much larger political situation. The Government in the West Bank is not political goals. The focus on the downstream side of the able to extend its reach into Gaza, which has effectively split budget process, reaching deep into the cash management of off from West Bank and Gaza after the Hamas takeover in spending ministries, has had a substantial impact on the way 2007. At the same time, the Palestinian Legislative Council the public sector operates. It has managed to remove a lot of is not operational because the majority of delegates (from scope for informal, discretionary action away from the center Hamas) no longer attend. Gaza and the West Bank are of government. governed under emergency rules. Both legislative (2006–10) There is much anecdotal evidence that the PFM reforms and executive (2005–09) terms have technically come to an of the past years have contributed to the Palestinian National end. In 2010 the situation is one of sustained progress, but Authority’s (and international) state-building agenda for West with an uncertain future. Bank and Gaza. That a stronger PFM system would contribute The World Bank 85 ReFeRences Ghani, A., C. Lockhart, and M. Carnahan. 2005. Closing the Sovereignty Gap: an Approach to State-Building. ODI Working Paper 253. London: Overseas Development Institute. Global Integrity Report. Integrity Indicators Scorecard. www.globalintegrity.org ———. 2007. Tajikistan: Integrity Indicators Scorecard. 2007 Assessment. Ahern, M. 2010. Public Financial Management Reform in the Middle East http://report.globalintegrity.org/Tajikistan/2007/scorecard/55 and North Africa: An Overview of Regional Experience. World Bank Report ———. 2008. Cambodia: Integrity Indicators Scorecard. 2008 Assessment. No. 5506, Middle East and North Africa Vice Presidency. World Bank. http://report.globalintegrity.org/Cambodia/2008/scorecard/54 Washington, D.C. ———. 2009a. Kosovo: Integrity Indicators Scorecard. 2009 Assessment. Allen, R. 2009. The Challenge of Reforming Budgetary Institutions in http://report.globalintegrity.org/Kosovo/2009/scorecard/54 Developing Countries. IMF Working Paper 09/96. ———. 2009b. Liberia: Integrity Indicators Scorecard. 2009 Assessment. Andrews, M. 2007. “What Would an Ideal Public Finance Management http://report.globalintegrity.org/Liberia/2009/scorecard/54 System Look Like?� In Anwar Shah, editor, Budgeting and Budgetary Institutions. Washington, DC: World Bank. http://siteresources.worldbank.org/ ———. 2009c. Sierra Leone: Integrity Indicators Scorecard. 2009 Assess- PSGLP/Resources/BudgetingandBudgetaryInstitutions.pdf. ment. http://report.globalintegrity.org/Sierra%20Leone/2009/scorecard/54 ———. 2010. PFM in Africa: Where Are We, How Did We Get Here, Government of Sierra Leone. 2008. Republic of Sierra Leone: PFM Where Should We Go? Lessons from recent PEFA data and World Bank Performance Assessment Report. Final draft, June 18, 2007, published Public Financial Management Performance Reports. Research report May 2008. sponsored by the Brookings Institution and the World Bank. Hedger, E., G. Baudienville, and P. Krause. 2009. Public Financial ARTF (Afghanistan Reconstruction Trust Fund) Performance Assessment Management in Fragile States: Review of International Knowledge and Matrix (PAM)—SY1388. Concepts and Three Case Studies on Experience with PFM Re-building and Reforms. Summary Report. ODI, London (for PRMPS/World Bank). Brooke, P. 2003. Study of Measures Used to Address Weaknesses in Public Financial Management Systems in the Context of Policy-Based Support. International Budget Partnership. 2010. Open Budget Survey 2010. Available PEFA. Available at: http://siteresources.worldbank.org/PEFA/Resources/ at: http://internationalbudget.org/what-we-do/open-budget-survey/. Brookes-PFMReformPlatformapproach.pdf IMF (International Monetary Fund). 2004. Rebuilding Fiscal Institutions in Boyce, J., and M. O’Donnell. 2007. Peace and the Public Purse: Economic Post-conflict Countries. Fiscal Affairs Department. Washington DC: IMF. Policies for Postwar Statebuilding. Boulder CO: Lynne Rienner. Available at: http://www.imf.org/external/np/fad/2005/022505.pdf. Collier, P. 2007. The Bottom Billion: Why the Poorest Countries are Failing ———. 2008, Sierra Leone: Implementing PFM Reforms. IMF Fiscal Affairs and What Can Be Done About It. Oxford: Oxford University Press. Department. Search for information on PRM at http://blog-pfm.imf.org/ pfmblog ———. 2009. “Rethinking the Provision of Public Services in Post-Conflict States.� In Contracting Out Government Functions and Services. OECD ———. 2009. Budget Classification. Fiscal Affairs Department Technical and AfDB: OECD Publishing. Available at: http://www.oecd.org/dataoecd/ Notes and Manuals. Washington, DC: IMF. 32/41/43915615.pdf ———. 2011. Chart of Accounts: A Critical Element of the Public Financial Dener, C., J. A. Watkins, and W. L. Dorotinsky. 2011. Financial Management Management Framework. Fiscal Affairs Department Technical Notes and Information Systems: 25 Years of World Bank Experience on What Works and Manuals. Washington, DC: IMF. What Doesn’t. Washington, DC: World Bank. Ingram, S. 2009. State-Building—Key Concepts and Operational Implications De Renzio, P. 2010. “Can Donors ‘Buy’ Better Governance? The Political in Two Fragile States: A Case of Sierra Leone and Liberia. A Joint Initiative Economy of Budget Reforms in Mozambique.� Cadernos IESE No. 9. by the World Bank’s Fragile and Conflict-affected States Group (OPCFC) and Maputo: Instituto de Estudos Sociais e Económicos (IESE). United Nations Development Programme’s Bureau for Crisis Prevention and Recovery (BCPR). World Bank, Washington, DC and UNDP, New York, NY and De Renzio, P., Z. Mills, and M. Andrews. 2010. Evaluation of Donor Support Geneva, Switzerland. to Public Financial Management (PFM) Reform in Developing Countries. London: Overseas Development Institute. Available at: http://www.afdb.org/ Kaufmann, D., A. Kraay, and M. Mastruzzi. 2010. The Worldwide Governance fileadmin/uploads/afdb/Documents/Evaluation-Reports/EvaluationDonor Indicators: Methodology and Analytical Issues. www.govindicaors.org. SupportPFMReformDevelopingCountries.pdf. Kuteesa, F. 2010. Budget Reforms in Uganda: From Vision to Reality— DFID (Department for International Development). 2005. A Platform A Personal Account. IMF PFM blog, September 1, 2010. Approach to Improving Public Financial Management. DfID Briefing. Lawson, A. 2007. DFID Budget Support to Sierra Leone, 2004–2007: London: Department for International Development. Achievements and Lessons for the Future. Review Report prepared for Easterly, B. 2001. “Think Again: Debt Relief.� Foreign Policy Magazine. Multi-Donor Budget Support to Sierra Leone. DFID, London, UK. November–December 2001 Lawson, A., and P. de Renzio. 2009. Approach and Methodology for the FRIDOM (Functional Review and Institutional Design of Ministries). 2008a. Evaluation of Donor Support to Public Finance Management (PFM) Reform in Functional Review of Public Expenditure Management Systems. FRIDOM is Developing Countries. Report to the Evaluation Management Group. Oxford: a DFID-funded project implemented by HELM Corporation, Consulting and Fiscus. Public Management Group, Governance Institute Slovakia and Altair Asesores. Leftwich, A. 2000. States of Development: On the Primacy of Politics in http://map.rks-gov.net/userfiles/file/FRIDOM/Fridom_en/Horizontal_Reviews/ Development. Cambridge: Polity Press. Functional_Review_Systems_206e.pdf Kabayiza Murara, L. 2011. Rwanda: A Decade of Difficult but Sus- ———. 2008b, Functional Review of the Ministry of Economy and Finance. tained Public Financial Management Reforms. IMF PFM blog, August ———. 2008c. The Whole of Government Review: Preliminary Report with 1, 2011. http://blog-pfm.imf.org/pfmblog/2011/08/rwanda-a-de- 20 Recommendations to Improve the Organization of the Government of cade-of-difficult-but-sustained-public-financial-management-reforms. Kosovo and its Component Portfolios. http://map.rks-gov.net/userfiles/file/ html?cid=6a00e54ef0059588340154343a6a1a970c FRIDOM/Fridom_en/Whole_of_Government_Reviews/WoG_review_Final_ McKenzie, A. 2009. Personal communication. eng.pdf 86 Public Financial ManageMent ReFoRMs in Post-conFlict countRies Moore, M. (2004) Revenues, State Formation, and the Quality of Governance Symansky, S. 2010. Donor Funding and Public Finance Management (PFM) in Developing Countries, International Political Science Review, Vol. 25, No. Reform in Post-conflict Countries: Recommendations Derived from Personal 3, pp. 297–319. Observations. Paper prepared for the 2010 ODI CAPE conference. OECD (Organization for Economic Cooperation and Development). 2008. Tandberg, E., and M. Pavesic-Skerlep. 2009. Advanced Public Financial 2008 Survey on Monitoring the Paris Declaration. Paris: OECD. Management Reforms in South East Europe. IMF Working Paper 09/102. Washington, DC: IMF. http://www.imf.org/external/pubs/ft/wp/2009/ ———. 2011. Aid Effectiveness 2005–2010: Progress in Implementing the wp09102.pdf. Paris Declaration. Paris: OECD. http://www.oecd.org/document/44/0,3746 ,en_2649_3236398_43385196_1_1_1_1,00.html. Tommasi, D. 2009. Strengthening Public Expenditure Management in Developing Countries: Sequencing Issues. Available at: http:// Porter, D., M. Andrews, J. Turkewitz, and C. Wescott. 2010. Managing Public www.capacity4dev.eu/. Finance and Procurement in Fragile and Conflicted Settings. Background paper for 2011 World Development Report 2011. Webber, D. 2007. “Integrating Current and Development Budgets: A Four-Dimensional Process.� OECD Journal on Budgeting, Vol. 7 no. 2. Pretorius, C., and N. Pretorius. 2008. Review of Public Financial Management Reform Literature. London: DFID. Available at: http://www.dfid.gov.uk/Docu- World Bank. 1998. Public Expenditure Management Handbook. ments/publications1/evaluation/review-pub-finan-mgmt-reform-lit.pdf Washington, DC: World Bank. Schiavo-Campo, R. 1998. “Why Most Developing Countries Should Not Try ———. 2009, Project Appraisal Document on a Proposed Grant in the New Zealand Reforms.� The World Bank Research Observer, vol. 13, no. 1 Amount of SDR 2.7 million to the Republic of Sierra Leone for an Integrated (February 1998), pp. 123–31. http://www1.worldbank.org/publicsector/pe/ Public Financial Management Reform Process. Public Sector Reform and befa05/NZReforms.pdf Capacity Building Unit, Country Department of West Africa 1, Africa Region. ———. 2007. The Budget and its Coverage. In Anwar Shah, editor, ———. 2010. Public Expenditure Review. Washington DC: World Bank. Budgeting and Budgetary Institutions. Washington, DC: World Bank. ———. 2011a. Review of Experience with Medium-Term Expenditure http://siteresources.worldbank.org/PSGLP/Resources/Budgetingand Frameworks. Processed. World Bank. Washington, DC. BudgetaryInstitutions.pdf. ———. 2011b. World Development Report 2011: Conflict, Security, and Schick, A. 1998. A Contemporary Approach to Public Expenditure Development. Washington, DC: World Bank. Management. Washington, DC: World Bank. Available at: http://www.5m.com. tr/en/kaynaklar/AcontemporaryApproachtoPublicExpenditureManagement.pdf. The World Bank 87 Reforms of public financial management (PFM) systems are a key area of support that development partners and the World Bank in particular provide in many post-conflict environments. This eight-country comparative study seeks to capture experiences, successes, and challenges with PFM reforms in post-conflict contexts in systematic ways and to use such a mapping as a basis for lesson learning and recommendations for this important area of support to state- building. Country cases include Afghanistan, Cambodia, the Democratic Republic of Congo, Kosovo, Liberia, Sierra Leone, Tajikistan, and West Bank and Gaza. Key findings from the analysis are the following: (1) PFM reforms are feasible even in challenging post-conflict environments with initially very low skills and even where insecurity continues; (2) seeking international recognition and/or major debt relief have been important motivating factors for governments to pursue PFM reforms; (3) in most countries, the relatively greatest progress has been achieved on budget execution, while progress on budget planning has been more limited, especially on advanced reforms such as medium-term budget frameworks and program budgeting; (4) progress on budget accountability has been uneven across countries and appears to depend most strongly on political buy-in. There are important caveats about the sustainability of PFM reforms achieved due to (1) continuing strong donor support, including capacity substitution with technical assistants in several countries; (2) the need for continuous political support for reforms; and (3) challenges in related public sector reform areas, particularly civil service, pay, and decentralization. Looking at wider links and impacts, the study finds that most countries progressing well on PFM reforms also make gains on overall government effectiveness and accountability. In contrast, gains on service delivery are widespread but show no correlation with PFM reform progress over the time period reviewed. Finally, while donor engagement on PFM reforms on balance is a positive factor, many problems remain, with regard to fragmentation of support as well as the overall use of aid modalities in a way that effectively incentivizes and rewards reforms. The study is a joint product of the World Bank’s PREM Public Sector Governance unit and the Global Center on Conflict, Security and Development. Photo Credits: Front cover: World Bank Back cover: Comstock the World bank 1818 H Street NW Washington, DC 20433 USA www.worldbank.org/fragilityandconflict www.worldbank.org/publicsector