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Financial Management- Diagnostics to Capacity Development

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					          Financial Management:
    Diagnostics to Capacity Development




Tony Hegarty                Tanzania, November 2004
                    Overview

•   Flow of Funds from Donors
•   FM Harmonization
•   Compliance to Capacity Development
•   Country Systems, Country Diagnostics - CFAAs
•   Country PFM Agenda: Achievements, Challenges
•   Way Forward and Summing Up



                                               2
               Flow of Funds from Donors

                   Project     Sector      Country-level



Assessment



Rules on use
of funds



Reporting




Auditing

                                                           3
               Flow of Funds from Donors

                      Project         Sector   Country-level



Assessment         Capacity of
               implementing agency



Rules on use     Bank rules for
of funds        most transactions

                 Periodic Financial
Reporting       Monitoring Reports
                (FMRs) and annual
                      accounts


Auditing         Audit of annual
                 project accounts
                                                               4
               Flow of Funds from Donors

                     Project                 Sector           Country-level



Assessment         Capacity of            Capacity of
               implementing agency     sector institutions

                                     Country rules for most
Rules on use     Bank rules for       transactions; Bank
of funds        most transactions     rules for high-value
                                          transactions
                Periodic Financial
                                     Common financial and
Reporting      Monitoring Reports
                                         other reports
               (FMRs) and annual
                                     on sector performance
                     accounts


Auditing         Audit of annual       Common sector
                 project accounts    auditing arrangements
                                                                              5
               Flow of Funds from Donors

                     Project                 Sector                 Country-level


                                                                      Country
Assessment         Capacity of            Capacity of
                                                              financial accountability
               implementing agency     sector institutions
                                                                   arrangements

                                     Country rules for most
                                                               Country rules apply,
Rules on use     Bank rules for       transactions; Bank
                                                                 with few Bank
of funds        most transactions     rules for high-value
                                                                   restrictions
                                          transactions
                Periodic Financial                              Country’s normal
                                     Common financial and
Reporting      Monitoring Reports                                   reporting
                                         other reports
               (FMRs) and annual                                arrangements on
                                     on sector performance
                     accounts                                    public finances
                                                                Country’s normal
Auditing         Audit of annual       Common sector                 auditing
                 project accounts    auditing arrangements      arrangements on
                                                                 public finances
                                                                                    6
          FM Harmonization: Objectives

• Provide assurance to developing countries and external partners
  that development cooperation resources are used as intended

• Build country leadership of the development process and
  capacity in the management of all public finances

• Reduce the transaction costs of development cooperation to
  both developing countries and their external partners




                                                                    7
Traditional FM Function: Policy Compliance




                                        8
Follow the Dollar!!




Major changes since 1997
                           9
          FM – How is it Changing?
• Growing concern about the limits of ring-fencing, including
  costs/sustainable capacity
• Resource transfer patterns shifted: more development policy
  lending, sector programs, debt relief etc
• Alignment of fiduciary and development objectives
• Simplify, modernize and harmonize procedures to lower
  costs and better support country capacity development
• Country systems
• Staff (30 to 140): 85% of sector staff less than 5 years in
  Bank; 7 of 9 sector board managers about 5 years in Bank;
  75% of FMSs in COs


                                                                10
                Paul Bermingham,
                Past Chairman,
                Financial Management Sector Board



“We aim to simplify without weakening
standards, simplify in a way that better
contributes to meeting development goals,
and enhance our fiduciary assurance that
funds are used for their intended
purposes”.
  Re-aligning Financial Management

• New Audit Policy, July 1, 2003
• Financial Monitoring Reports, Nov 2001
• SWAps, Board May, Staff Guidelines Nov
  2002
• CDD Guidelines, May 2002
• CFAA Guidelines, May 2003
• Eligibility of Expenditure, 2003
• Strategy Paper to Support SAIs, 2004

                                           12
International Harmonization Initiatives
– Harmonization (OECD-DAC, MDBs)
– Working with IFAC/IASB/INTOSAI in accounting
  and auditing in public/private sectors
– Through DGF, the Bank is the main financier of
  international public sector accounting standards
  program
– Accounting standard for development assistance
  (with OECD-DAC, MDBs and borrowing country
  representatives)


                                                     13
  From Compliance to Capacity Development
• Best assurance we can have that funds are used for
  the intended purposes is when borrower institutions
  function well
• This points to an alignment of fiduciary and
  development objectives:
  – Fiduciary, that donor funds used for intended purposes
  – Development, that all public funds are managed appropriately
• The FM Strategy therefore becomes:
  – the development of country capacity in financial management
  – improved compliance against a fast-changing policy
    framework
• Capacity agenda embedded in broader work in:
  – governance and public sector (for PFM)
  – investment climate (for private sector accounting and auditing)
                                                                  14
 Public Financial Management and MDGs


Improved PFM capacity
lies at the heart of
achieving the MDGs –
ensuring that public and
donor resources are used
economically, efficiently
and effectively for the
intended purposes.

                                        15
               Flow of Funds from Donors

                     Project                 Sector                 Country-level


                                                                      Country
Assessment         Capacity of            Capacity of
                                                              financial accountability
               implementing agency     sector institutions
                                                                   arrangements

                                     Country rules for most
                                                               Country rules apply,
Rules on use     Bank rules for       transactions; Bank
                                                                 with few Bank
of funds        most transactions     rules for high-value
                                                                   restrictions
                                          transactions
                Periodic Financial                              Country’s normal
                                     Common financial and
Reporting      Monitoring Reports                                   reporting
                                         other reports
               (FMRs) and annual                                arrangements on
                                     on sector performance
                     accounts                                    public finances
                                                                Country’s normal
Auditing         Audit of annual       Common sector                 auditing
                 project accounts    auditing arrangements      arrangements on
                                                                 public finances
                                                                                 16
            WHAT IS A CFAA?



A CFAA a diagnostic tool to enhance the knowledge of
PFM in client countries.

It supports fiduciary responsibilities by identifying the
 strengths/weaknesses of PFM so that potential risks to
 funds can be assessed/managed.

It supports development objectives that leads to the
design and implementation of capacity building programs
(Action Plan) to improve a country’s PFM

                                                            17
CFAA: Collaboration/Partnership/Harmonization




              Government
                Donors
              World Bank
      CFAAs: Salient Observations

• Undertaken collaboratively with Governments
  and Development Partners
• Burkina Faso and Malawi were prepared as part
  of an SPA pilot
• In Tanzania the process was led by DFID
• Costs of CFAAs significantly reduced by DP
  involvement e.g. AfDB, DFID, SIDA, EU, IMF
  and many other bilaterals

                                              19
CFAA: Agree Development Action Plan




                     Priority Measures
                   Medium-term Measures
                    Long-term Measures
                How do we get there?




From diagnostics...

                ...to capacity development




                                       21
Country PFM Agenda: The Journey So Far




                                     22
 Country PFM Agenda: The Journey So Far

• At the beginning of the millennium, critical gaps in
  donors’ knowledge of country PFM systems and risks
• Substantial progress made in the last 4 years:
   – Increased knowledge of country PFM systems and risks (27
     CFAAs, 27 CPARs and 40 PERs)
   – Improved collaboration among donors
   – Increased level of lending to support PFM reforms
   – PFM has become integral element of development policy
     lending


                                                                23
Country Financial Accountability Assessments
                   (CFAAs)

 Angola         Gambia         Mozambique
 Benin          Ghana          Niger
 Burkina Faso   Guinea         Nigeria
 Burundi        Kenya          Senegal
 Cameroon       Madagascar     Sierra Leone
 Cape Verde     Malawi         Tanzania
 Chad           Mali           Uganda
 Ethiopia       Mauritania     Zambia
                                               24
   CFAAs: Examples of Collaboration

• Ethiopia: Government, DFID, NORAD, Ireland
  Aid, SIDA, EU, Netherlands and WB.
• Senegal: Government, AfDB, EU, Netherlands,
  French Aid, UNDP and WB.
• Burkina Faso: Government, EU, AfDB, French
  Aid, CIDA, Netherlands, Swiss, Denmark and WB.
• Madagascar: Government, EU, IMF, French Aid,
  AfDB and WB.
• Malawi: Government, NORAD, CIDA, KFW,
  DANIDA, DfID, JICA, AfDB and WB.

                                               25
             ETHIOPIA
  Country Financial Accountability Assessment




World Bank




                   Royal
                   Netherlands
                   Embassy



                                                26
           Main Messages/Findings
• National and sub-national PFM systems are weak
• Capacity development is the main challenge
• Cross-cutting areas identified
• CFAA analysis complemented and supplemented
  by other analytical work
• In terms of implementation, the train has left the
  station, but…… quite some way to go – realism
  of time frames

                                                   27
Cross-cutting Issues (Expanded)


–   Budget Systems
–   Accounting Systems
–   Legal framework
–   IFMIS
–   External and Internal Audit
–   Dissemination of PFM information


    Mostly due to weak capacity
                                       28
        Examples of PFM Progress

• Institutional Development Funds (IDFs)

• Projects/Programs: Capacity Development Components

• PRSCs: PFM Related Policy Actions

• PFM W’shops



                                                       29
   Institutional Development Funds
        - FM grants being implemented

Gambia: Accountancy Profession
Malawi: Accountancy Profession
Nigeria: FM Platform for External Loans
Mauritania: Accountancy Profession
DRC: Accountancy Profession
Senegal: Supreme Audit Institution
Mali: Prepare Government’s Action Plan
Regional - SADC: Accountancy Profession
                                           30
    Institutional Development Funds
           - FM grants under preparation

Senegal: Accountancy Profession
Burkina Faso: Public Sector Control Institutions
Cape Verde: Supreme Audit Institution
Burundi: Chamber of Commerce
Uganda: Internal Audit
Malawi: Internal Audit
Regional - ESAAG: Public Sector Accounting


                                                    31
 NUMBER OF PROJECTS/PROGRAMS HAVING PFM
CAPACITY DEVELOPMENT COMPONENTS (FY97 - 05)

                   PE, FM and PR Theme
                         FY97- 05


140


120


100


 80

                                                no. projects
 60


 40


 20


 0
      MNA   EAP   SAR     LCR      ECA   AFR




Africa Region has the largest number projects with PFM
         Capacity Development Components                       32
Development Policy Lending: PRSCs

• Burkina Faso   • Mauritania
• Benin          • Mozambique
• Cape Verde     • Rwanda
• Ethiopia       • Senegal
• Ghana          • Tanzania
• Madagascar     • Uganda

                                    33
PFM Related Policy Actions in 21 PRSCs (FY01 – 04)


80

70
60

50
                                                            Total
40
                                                            Africa
30
20

10
0
        Budget       Budget      Accounting     Audit and
      Preparation   Execution   and Reporting   Oversight



     Total 177 Policy Actions (118 in the Africa Region)
                                                                     34
Using PFM W’shops to Stimulate
  Reform in Africa - Examples
Capacity Development: Substantial Challenges Remain




  Uneven Runway,
  full of road blocks
  and mine fields




                                                      36
        Way Forward: Implementation

• Country led reform strategy: realistic time-frame
• Coordinated program of work by donors to support
  PFM institutional reform
• Scale-up current support for implementation, i.e.
  IDFs, IDA Credits/IBRD Loans, Donor Programs
  and Capacity Building Workshops
• A Performance Measurement Framework (PFM
  indicators and performance report) for tracking
  progress and measuring results
                                                      37
                     Summing-Up
• FM has never been more central to business in Africa:
   – traditional compliance-based fiduciary model is evolving to
     support key governance and investment climate themes
• For the next few years:
   – Strategic realignment will continue
   – Increased focus on implementation for results, partnerships and
     harmonization
   – Scaling-up of capacity development activities
   – Adaptation of products, processes and skills
   – Greater focus on improving quality
• A challenging agenda …nevertheless, working together,
  we can deliver!!
                                                                   38

				
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