Monday, 14 May 2012

Plateaus not Summits: Reforming Public Financial Management in Africa

What Africa needs in public financial management are plateaus, not summits. For the most part, however, nations on the continent don't gain these plateaus.

Public financial management (PFM) in Africa has been much about seeking out summits of advanced techniques of financial management borrowed largely from the private sector (accrual accounting, performance budgeting, enterprise resource planning information systems) and not building stable plateaus of the basic techniques unique to the public sector (the traditional line item budget). PFM and its reform in Africa have lost its way. Getting the basics right has been given much lip service but little practice.
The virtues of getting the basics right by building a plateau of financial management in a developing country is elaborated in greater detail by my recent publication. The argument for plateaus is illustrated by the 12-year PFM reform in Ethiopia where I directed the technical assistance project that supported this government reform.

Four pathways to reform public financial management: Recognize, improve, change and sustain.

Why are summits sought in PFM rather than first establishing solid plateaus (the basics) of PFM? One reason is the approach to public sector reform and its subset PFM reform as principally being about change.

A reform has potentially four activities — recognize, improve, change and sustain. Most reform is viewed principally as the activity of change, which in the developing world environment with relatively weak organizations and institutions, more often than not exceeds the capability of governments to absorb reforms based on change.

In contrast and as demonstrated in Ethiopia, a reform strategy that first recognizes what exists and improves it, is faster, cheaper, less risky and most importantly promotes government ownership and management from the start. By fully involving the user (the government) all along the way, the recognize / improve strategy of reform promotes the fourth reform activity: sustain.

One can argue that the principal problem with public sector reform in general and PFM reform in Africa in particular is defining reform as change, often perpetual, and ignoring the other tasks of reform. 
  • Reform as Recognize. Recognizing meaning understanding and respecting what exists, is the first and often most neglected step in reform. All too often, governments in developing countries do not understand the strengths of their systems and are too quick to change them, often on the advice of outsiders. The recognition task of reform is significant for it focuses one on the definition of the problem rather than the leap to the solution. Unfortunately, PFM reform is much about technique and sequence and little about hard questions—why change and how does it improve outcomes (sustainability and quality of expenditure)?
  • Reform as Improve. Improving fits with the reality found in most African governments of systems being robust but not adequately executed. Toning up what exists and focusing on strengthening execution (i.e. in-service training, schemes of service, organization of finance functions) can have significant payoffs at modest cost. Reforms that focus on improving rather than changing, are faster, cheaper, less risky, and are less disruptive of daily operations. Most important, reform as improvement ensures that government remains in the driver’s seat of management and operation of PFM. 
  • Reform as Change. Change should be done judiciously and justified in terms of improving the quality of PFM outputs (e.g. sectoral allocation, composition of expenditure). As with mountaineering, the significantly higher risk of changing rather than improving PFM requires clear rules to manage risk and avoid failure. While recognizing the risk of changing financial systems, two striking lessons emerge from the Ethiopian reform. 
First, if proper preparations are made for the introduction of a new system, capacity is not as serious a constraint as expected. Capacity building often becomes blue sky — some is good, more is better, and even more is even better. Blaming the lack of capacity is often a far too easy explanation for failure and excuse for not doing the due diligence of understanding what exists and working with it. 

A second lesson from the reform was that change worked if driven by a clear not derived need (e.g. the need to have an equitable intra-regional transfer formula with the advent of second stage decentralization to districts).

  • Reform as Sustain. Sustaining is the orphan of reform it lacks constituencies. Sustaining a reform, however, is the key to effective execution of systems, and that is the weak link in PFM reform in Africa. Sustaining is the ‘operating and maintenance (o&m)’ of reform. Governments the world over underfunds o&m and gives priority to new expenditure (capital) rather than the required expenditure (recurrent wage and recurrent statutory). O&M is discretionary.

Again, PFM as applied to African governments has largely lost its way and indeed has neglected some of the key findings of the field. Perhaps the key finding of PFM, the durability of the traditional line item budget as elaborated by Aaron Wildavsky speaks directly to the virtue of a plateau rather than summits of performance and program budgeting.

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