The available diagnostic work points to the need to upgrade PFM quality in its multiple dimensions

13. 
    The available diagnostic work points to the need to upgrade PFM quality in its multiple dimensions. Changes of government present an ideal opportunity to break the widely-held perceptions of poor governance. Few measures are likely to signal the government’s commitment to strengthen accountability more clearly than concrete steps to enhance fiscal transparency and reduce inappropriate discretions in PFM. Sustainable improvements in the overall quality of PFM would take a comprehensive approach over a number of years. The reform agenda should be realistic in its initial focus and yet comprehensive in its overall reach, divided between focused short-term measures aimed to signal the government’s commitment to reform and bring about immediate improvements by “grabbing some low-hanging fruits” and medium- to long-term measures intended to upgrade the institutional and technological foundations of PFM.
    

14. 
    It will be a while before investment in institutional strengthening of PFM will begin to yield tangible benefits (e.g., more efficient budget execution and improved service delivery). In the meantime, the government could take measures to signal its commitment to PFM reforms. One possibility is to immediately beef up some of the financial reporting to the public, especially on the usage of the approved budget (i.e., budget execution reports). Although the absence of a computerized information system that captures budget execution makes this a somewhat tedious exercise, the agencies already submit Statements of Allotments and Obligations Balances (SAOBs) more or less regularly to DBM. If DBM were to consolidate these and publish them regularly – given that this exercise will have to be done manually, twice a year may be a reasonable frequency – it would signify a considerable improvement in budget transparency. Such budget execution reporting is routine in most middle-income and high-income countries and there is no reason why the Philippines should not be able to attain a similar level of transparency.
    

15. 
    Another option would be for the government to voluntarily tie its hand in the area of budget management. For example, the government may adopt a policy whereby any reallocation from so-called savings would remain within the same agency that generated the unspent balance. In the budget execution reports, the exact sources of the “savings” and the destinations of the reallocated fund should be clearly specified in terms of program/activity/project and expense class. If there is a need to reallocate a fund across agencies, the government could report its intent to Congress ex ante, at least for informational purposes. Eventually, there should be a clearer and tighter regulation of what constitutes savings and when and how the government is authorized to reallocate them for other purposes. Such an action would be a part of a reform of the PFM legal framework which is proposed as a medium-term measure below. The new president could also support institutionalization of responsible planning and budgetary prioritization by refraining from announcing “pet projects” that have not been duly considered in the government’s formal planning and project screening processes.
    

16. 
    Immediate measures of the types suggested above should be complemented with a commitment (and a concrete plan) to address other fundamental reform requirements with a comprehensive approach. One option would be to announce formation of an independent commission to deliberate on the reform agenda with a mandate to prepare a more detailed action plan over a certain time period (e.g., six months).
    

17. 
    Once a comprehensive long-term vision is developed, it is important to devise a realistic implementation strategy. Reform measures should be sequenced on the basis of priorities (e.g., urgent need to establish fiscal control) as well as feasibility (e.g., “low-hanging fruits”) while making sure to introduce basic building blocks or foundations for more sophisticated elements first and leaving more sophisticated elements to a later stage. Cambodia’s platform approach (Box 2) offers an example of a well-considered strategic approach to sequencing PFM reforms, although neat conceptual design does not guarantee effective implementation. The Philippines would be well-advised to adopt the principle of strategic sequencing but opt to simplify actual steps so as to minimize the risk of implementation failure.
    

18. 
    Although PFM is largely a technical matter alien to the general citizenry, the government would be well-advised to articulate its importance for strengthening governance (transparency, accountability, and efficiency in government operations), a topic the general public can more easily relate to. The preparation of a reform agenda should ideally gather views of the country’s PFM experts and follow broad discussions among stakeholders both inside and outside the government. A group of senior technical staff from several agencies are working together to craft a PFM reform road map, which could serve as a valuable input.
    

19. 
    No matter what the specific content of the PFM reform agenda mentioned above, there is no doubt that the government will need a functional government financial management information system (GFMIS), which is a backbone of good financial management in modern times. It minimizes human errors in financial transactions and makes record keeping more speedy and reliable. Countries ranging from Brazil to Turkey have developed a system that processes key financial transactions such as control of obligations and cash payments and allows real-time reporting on these financial operations on a real-time basis. In some countries, these systems include a web-based public interface which gives the general public access to some of the reporting functions. Within the East Asia Region, Indonesia and Vietnam, among others, have been implementing ambitious GFMIS projects of their own.
    

The platform approach developed in Cambodia is an example of a sequenced approach to PFM reform (Figure 2). In Cambodia, the focus of the first phase (Platform 1) was to make the budget a credible instrument for guiding the government’s strategic and operational management. The critical attribute of a credible budget is predictability of funding, which in turn requires improving the budget’s comprehensiveness and realism, and among other, streamlining the spending process. In the second phase, the government aimed to improve financial accountability by strengthening internal control, accounting, reporting and auditing. In the platforms 3 and 4, the intention was to develop capacities to link policy priorities to budget and service delivery targets, and introduce performance management.

20. 
    Even under the best of circumstances, full implementation of a GFMIS project will take several years and cost millions of pesos. Often these projects are implemented over several phases spanning a decade or longer, with each phase extending the system’s functional scope and institutionally coverage, and updating its technical elements. It is advisable to take the time necessary to design a sound project, in line with the overall PFM reform strategy. A wrong choice at the beginning could compromise the integrity of the project and cause costly reversals or modifications later on. An excessively ambitious design – a common pitfall – is especially prone to implementation failures.
    

21. 
    A smart approach would be to first develop a clear conceptual design that determines the functional scope (treasury functions and financial reporting, budgeting, procurement, etc.) and institutional coverage (oversight agencies, line departments, LGUs), taking into account the PFM framework, the overall reform objectives, the plan/need to reengineer some business processes and user requirements. It is better to start with a core treasury system for accounting (general ledger), management of payments, revenues, cash, expenditure commitments and financial reporting. Other systems, such as budget preparation and procurement, can be developed and integrated to the core treasury system later on.
    

22. 
    There are other design and operational details that need to be considered in designing and implementing a GFMIS project. Policy-makers’ role would be to establish clear objectives and expectations of a GFMIS, take the challenges of project implementation seriously and provide adequate resources, both financial and human, as well as time to maximize the success of the project. If the project is launched at the beginning of the administration, it should be possible to have a fully functioning system, perhaps without some of the non-core modules, by the end of the six-year presidential term.
    

23. 
    Over the medium term, a relatively doable and yet substantively meaningful reform would be to improve the presentation of the budget documentation. Currently the national government’s budget documentation consists of the General Appropriations Act (GAA), the National Expenditure Program (NEP) which is the Executive’s budget proposal submitted for review and approval by Congress and which also contains some “actual” data, the Budget of Expenditures and Sources of Financing (BESF) which compiles a large volume of fiscal/budgetary data, the Organizational Performance Indicator Framework (OPIF) which is a collection of national government agencies’ performance indicators and the program logframes. Although this set of documents provide some reasonable amount of budgetary data, including a large amount of details, overall the presentation of the data in these documents is quite unwieldy and is not particularly user-friendly. Besides, none of these documents includes straightforward reporting on budget out-turns (approved vs. executed), nor do they include any narrative to explain the government’s budgetary priorities and policy intent or its program performance.
    

24. 
    Redesigning the format and content of these budget documents requires a fair amount of technical work. However, from the point of view of user-friendliness (and thus transparency in a practical sense), it would be worthwhile investing some effort in improving public accessibility of these documents. Eventually the government may consider codifying a series of reporting and transparency requirements in the form of a fiscal/budget transparency law.
    

25. 
    The most important objective of developing a strong PFM system is to strengthen the bureaucracy’s capacity to implement priority programs/projects efficiently and effectively. Available evidence suggests inefficiency in budget execution is caused by both the cumbersome (and often unpredictable) budget release procedures and weak institutional capacities of most of the line agencies. Both factors negatively reinforce each other and create a situation where the oversight agencies try to retain tight control of budget releases because of the mistrust of the agencies’ ability to spend and the line agencies fail to develop their capacities fully because their staff resources are devoted to meeting transactional requirements of the release procedures. The introduction of the “spend it or lose it” policy for cash releases by DBM in 2009 and the revival of selective pre-audits by COA are two recent examples of reactive measures by oversight agencies triggered by mistrust in the agencies’ ability to absorb the allocated cash and account for its use properly. The two sides of the budget execution reform – gradual relaxation of central procedural control and upgrading of line agencies’ execution capacities – need to go hand in hand in a coordinated fashion in order to break this vicious circle.
    

26. 
    DBM might consider developing a program similar to the “hurdle” approach attempted elsewhere (e.g., Thailand). This approach allows those agencies that meet certain pre-specified conditions to be granted gradually increased financial autonomy and reduced oversight of day-to-day operations. Irrespective of the specific design of the reform, key to supporting agency-level PFM improvements is to adopt a consistent strategy across the government but allow for adaptation of the strategy to fit agency-specific conditions (i.e., avoiding “cookie-cutter” reforms) in actual implementation. In general, it appears to be the case that those agencies which already have a reasonably coherent sectoral policy framework in place are better placed to invest in improving their PFM. In contrast, those which suffer from ad hoc policies - one of the most serious sources of uncertainty in budget management - are less capable of adopting consistent approaches to reforming their PFM practices. Hence one of the “hurdle” criteria could be the existence of a coherent sector policy/reform framework. Another one could be some level of basic financial accountability, evidenced in an operative internal control system and effective internal audit, and budget absorptive capacity.
    

27. 
    To upgrade the Philippines’ PFM to a world-class system, it is desirable or may even be necessary to review certain legislation, including aspects of the Constitution, which concern efficient budget management and clear lines of accountability. Some long-term questions that require resolution include the high level of discretion the Executive enjoys in managing the approved budget and the use of the special purpose funds, as highlighted in the companion note on governance reforms. Both of these obscure the relationships between the approved budget and its actual execution as they both lead to considerable levels of in-year fund reallocations. Tighter regulations (and more explicit codifications) of executive discretions and of the conditions under which SPFs can be created and managed could enhance transparency and credibility of the government budget and hence improve financial accountability.
    

28. 
    Another contentious aspect of the constitutional basis of the Philippine PFM has to do with the appropriate role of COA as the supreme audit institution (SAI) in charge of external audit as well of the overseer of government accounting policy. In the recent past, COA has also played an important role in spearheading development of a key government financial management information system (eNGAS). Experts generally agree that having the SAI take charge of government accounting is undesirable as it could lead to potential conflict of interest since the same agency is responsible for preparing the government’s financial reports and auditing them. COA maintains that the internal separation between the audit and the accounting arms minimizes such a risk. In truth, COA’s institutional focus is already heavily weighted towards the audit role, having approximately 9000 auditors, and only 150 accounting posts, of which only 70 are filled. Therefore the issue may be less about the potential conflict of interest between COA’s simultaneous roles in external audit and government accounting than about the difficulty of inter-agency coordination in financial management matters (e.g., accounting policy) that COA’s independent status often creates for the government. Such difficulty has arisen recently over coordination of efforts to develop financial management information systems.
    

29. 
    If the government chooses to adopt a legislative measure, it might also consider charging a single body with full responsibility of overseeing the government’s financial management policy including accounting and internal audit matters (i.e., the financial comptroller of the government; effectively a ‘PFM Czar’). An example of such an agency includes the US Office of Budget and Management, the Treasury Board Secretariat of Canada, and the UK Treasury. Creating such a body could minimize the problem of ineffective inter-agency coordination. The source of inter-agency discord has not been limited to DBM and COA but may also involve NEDA vs. DBM (over planning and budgeting), the Office of the President vs. DBM (over the internal audit policy), DBM vs. BTr (over cash management), and NEDA vs. DOF vs. BSB (over macroeconomic framework). Although effective inter-agency coordination has been possible at times, it has often been a challenge to overcome the structural built-in tendency for each agency to “go its own way.”⁰ A “PFM Czar” agency could help in overcoming the problem of institutional fragmentation.
    

30. 
    Another issue related to the institutional arrangement that merits attention is the fact that in the Philippine legislature there is no permanent committee responsible for scrutinizing government finances (such as a Public Accounts Committee), other than the ones in charge of reviewing the government’s budget proposal (i.e., the House Appropriations Committee and the Senate Finance Committee). Partly as a result, follow-up on COA audit findings is non-systematic. Although COA audit reports typically report on an agency’s progress in implementing the prior year’s COA recommendations, the absence of public scrutiny, such as hearings at a legislative public accounts committee, weakens the agencies’ accountability. Given the relatively higher prominence of the Senate, it may be more effective to add such a committee to the upper house’s 36 permanent committees.
    

31. 
    A sensible first step would be to identify these and other operational problems that can be attributed to aspects of the legal/constitutional framework. If the consensus emerges that these are serious enough obstacles to efficient PFM and that fundamental fixes require some legal/constitutional changes – for example, we have already encountered a situation where the government is legally constrained to upgrade its internal audit manual fully in line with internationally accepted professional standards – then a more thorough review of the legal/constitutional framework can be conducted to identify other (most likely unintended) negative consequences on PFM.⁰ There are a number of bills related to PFM in both Houses of the Legislature that could serve as basis for broad debate on a modern PFM law reform.
    

32. 
    Whatever the specific focus of the actual reform plan the government develops, its implementation will require building of institutional capacities both in the oversight agencies and line departments. However, a massive investment in training as such (especially if it is not closely linked to a “job at hand”) may not provide the best means of building those capacities if the critical issues of staff qualification and incentives are left unaddressed. In other words, to make the new ways of managing public finance deliver on its potential, it is necessary to invest in parallel efforts to further professionalize technical careers related to PFM, including possible changes in staff recruitment and performance and career management.
    

Commission on Audit (2005) “Effectiveness of the Budget Allocation System of the Government: Department of Budget and Management”, Management Services Report No. 2005-05, Special Study.

Abdul Khan and Mario Pessoa (2009) “Conceptual Design: A critical element of a successful government financial management information system project,” PFM Technical Guidance Note, Fiscal Affairs Department, IMF. http://blog-pfm.imf.org/files/gfmis-conceptual-design.pdf

Ian Lienert and Israel Fainboim (2007) “Reforming Budget System Laws,” PFM Technical Guidance Note, Fiscal Affairs Department, IMF. http://blog-pfm.imf.org/files/reforming-budget-system-laws.pdf

Rob Taliercio (2008) “Sequencing for Success: Cambodia’s Public Financial Management Reform Program – The Platform Approach”, a presentation made at the Public Financial Management Workshop: From Diagnosis to Action – Sequencing and Politics of PFM Reform, March 21, 2008, Washington, DC. http://intranet.worldbank.org/WBSITE/INTRANET/SECTORS/PUBLICSECTORANDGOVERNANCE/INTPUBLICFINANCE/0,,contentMDK:21722936~pagePK:210082~piPK:210098~theSitePK:1339414,00.html

Sanjay Vani and Bill Dorotinsky (2008) “PFM Global Landscape: What can we say about PFM systems and trends around the world?”, a presentation made at the Public Financial Management Workshop: From Diagnosis to Action – Sequencing and Politics of PFM Reform, March 21, 2008 , Washington, DC. http://intranet.worldbank.org/WBSITE/INTRANET/SECTORS/PUBLICSECTORANDGOVERNANCE/INTPUBLICFINANCE/0,,contentMDK:21722936~pagePK:210082~piPK:210098~theSitePK:1339414,00.html

World Bank (2010) Philippines, “Public Expenditure and Financial Accountability”.

Note prepared by:
Yasuhiko Matsuda

EASPR

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AusAID