Methodological changes to the PEFA Manual 2011 – 2016 | Public Finance Reforms in Mozambique

By: Katherine Culross & Evildo França

Objective

The dual objectives of this article are to summarize the main changes to the PEFA manual 2016 and to discuss the implementation of the new manual in Mozambique.

The article will discuss the role of MB Consulting in supporting public finance reforms within the PEFA 2016 guidelines. The implications for Mozambique if they do not undertake the suggested public finance reforms will also be highlighted. 

Introduction

In February 2016 the PEFA partners conducted a comprehensive upgrade to the PEFA assessment framework. The 2011 framework was refined and rewritten to reflect the changing landscape of Public Financial Management (PFM) in 2016.

The new framework allows for a more comprehensive assessment of modern public financial systems through an expanded and updated selection of indicators and dimensions.

These changes to the PEFA manual provide an opportunity for public finance reform globally. Engaging in these reforms is very important for Mozambique to maintain a transparent and efficient Public Finance system.

Such a system will result in more strategic allocation of resources, efficient service delivery and a better global reputation for public financial management.

MB consulting will play a crucial role in encouraging the uptake of financial management reforms in Mozambique. It is our aim to support and advise the government throughout the process in the hope that issues of poor public financial management can be avoided in the future.

Summary of changes

The 2016 update of the PEFA manual took 3 years to complete and was based on a combination of partner and user feedback, global consultation and testing.

500 PEFA assessment reports from around the world were analyzed to identify the areas that would benefit from revision. This analysis was combined with a global consultation period in 2014 and testing in 2015 to inform the changes made by the PEFA partners.

The primary purpose of the PEFA revision of 2016 was to ensure that the framework measures the most important aspects of a well functioning public financial system.

PFM understanding has evolved since the initial design of the PEFA manual and it is important that the assessment framework is updated to reflect this. The changes were also intended to allow easier discussion and design of PFM reforms.

In terms of technical changes to the PEFA assessment design, the most significant update is the addition of a new group of indicators called Management of Assets and Liabilities.

The previous version of PEFA already included some aspects of this pillar but it was incorporated within a number of other indicators and not explicitly labeled.

The PEFA 2016 framework contains 4 completely new indicators (2 of which are included in the new pillar) and 14 new dimensions. Each of these new additions illustrates how the PEFA 2016 framework has evolved to reflect the changing global attitudes and understandings in PFM.

Many existing indicators and dimensions have been expanded and/or recalibrated to better reflect best practices in PFM. The most changes occurred in the areas of internal financial control, public access to information, macro-fiscal forecasting and medium-term planning and strategy.

Another major change to the PEFA framework is the complete incorporation of the Donor Practices indicators (D-1, 2 & 3) into the other pillars. Existing indicators (such as budget out-turn indicators) have been expanded to incorporate the important concepts of the original Donor Practices indicators.

For example, PI-3 ‘Revenue Out-turn’ now includes not only domestic sources of income, but also externally donated funds. Alterations have also occurred in indicators relating to the ‘Transparency of Financial Data’ and ‘Financial Reporting’.

The scoring methodology of the PEFA assessment was also subject to some changes in the recent upgrade. It was simplified and made uniform across the indicators.

The individual scoring matrices for many indicators were reformulated to reflect changing international benchmarks for good performance in these areas. Such changes can be attributed to the evolving global understanding of Public Finance Systems and this is part of the reason why the PEFA framework needed to be updated.

All the changes to the PEFA assessment system in 2016 have resulted in some concern among global practitioners regarding the comparability of pre and post 2016 assessments.

One of the primary benefits of the PEFA system has always been its ability to monitor changes within a country over time and also, to a certain extent, to allow comparisons between different countries. The largely unchanged PEFA system of the last decade has allowed for this long term comparability. The recent upgrade of the PEFA framework, however, has seen too many changes to allow such comparisons to take place into the future.

The PEFA partners have provided a document¹ to assist with the comparison between 2011/2005 and 2016 PEFA assessments. Throughout the upgrading process, care was also taken to maximize the amount of dimensions that could be directly or indirectly compared to 2011 assessments.

However, in the final version of PEFA 2016, only 40% of dimensions could be compared (directly or indirectly) to earlier versions. The remainder of dimensions are either completely new or the methods for determining the score are sufficiently different so as not to allow comparisons.

The 2016 update ensures that the PEFA framework will continue to provide an up-to-date analysis of PFM systems around the world, supporting them to meet sustainable development objectives.

An updated report format will result in more logical reporting of assessments and clear guidelines will ensure that comparisons remain possible.

The 2016 PEFA framework is already being implemented around the world and is expected to enjoy a high level of success in the coming years.

Implications if reforms are not undertaken

The many changes made to the PEFA manual provide an important opportunity for Mozambique to improve its public finance system through a series of reforms.

MB Consulting is perfectly positioned to assist the government of Mozambique to identify these reforms and support their achievement. If Mozambique chooses not to engage in the reforms suggested by MB Consulting in line with the PEFA manual, there are a number of economic and development implications that will arise.

Mozambique is in the precarious position whereby a large proportion of budget revenue is external. Internal revenue alone is not adequate to sustain the country’s budget so they must rely on international support.

The support and generosity of both Foreign Direct Investment and Donors relies heavily on their confidence in the public finance system of Mozambique. It is important that Mozambique continues to improve its public finance system in line with PEFA. This will project a positive image to donors and international investors ensuring that the money they invest will be efficiently used for a productive purpose.

Providing clear and transparent information to donors and investors about how donated funds are being used can dramatically improve confidence within this community.

The implication, therefore, of not applying public finance reforms may be a reduction in external revenue as a result of dropping investor confidence. The repercussions of which would be a reduced capacity to meet policy objectives and deliver essential services.

The effective allocation of government funds and the provision of key services are the primary focuses of the PEFA manual. A large number of the indicators have been designed to assess the many influencing factors which surround these core goals.

For example, the Medium Term Perspective in Expenditure Budgeting indicator assesses whether budget estimates are aligned with strategic goals. Delivery of key services such as health care and education is dependent on a well-functioning public finance system.

Without effective budgeting and fiscal forecasting processes the government will not be able to deliver services effectively.

The new PEFA manual will provide many opportunities to improve the processes surrounding healthcare and education provision. Without these improvements it is possible that service provision would not improve, preventing the meeting of national development objectives.

Worsening budget problems, deficit and debt are all possible outcomes for Mozambique if the public finance system isn’t reformed according to the PEFA guidelines.

These problems all directly influence the inability of governments to provide effective services such as education and health care to their citizens due to poorly managed funds.

Engaging in reforms to improve public accountability and government liability will reduce the risk of these negative outcomes occurring.

Transparent and honest budget processes are also essential for the effective delivery of public services. Corruption and the use of public money for purposes other than those outlined in the budget is another implication which could arise if reforms are not undertaken in line with PEFA 2016.

When budgeted money is not used in the best interests of the Mozambican public there may be public dissatisfaction and international disapproval.

This disapproval may compound into a situation whereby international donors are not willing to provide funds for fear they will be misused.

Reforms in the ‘Transparency of Public Finances’ pillar are integral to avoiding the misuse of public finances.

MB Consulting is prepared to assist all levels of the government of Mozambique to undertake public finance reforms and avoid the negative consequences of allowing the current system to remain.

MB Consulting support for Mozambique public finance reforms

MB consulting is supportive of the Mozambique government reforming their public financial management system in line with the new PEFA manual 2016. As previously mentioned, there are a number of negative consequences associated with neglecting such reforms.

MB consulting is willing to assist the government to avoid these consequences. We will play a critical role in helping the government of Mozambique to identify the areas of its public finance system which require improving.

A team of experienced professionals will perform a PEFA analysis at both National and Sub-national levels of government and then offer advice based on this analysis regarding changes and reforms which would improve performance.

Each indicator assessed would include an analysis of the current situation and recommendations for improvements. We will provide ongoing support and monitoring as the government undertakes the recommended reforms to ensure their successful completion.

MB Consulting, in addition to providing consulting services, also operates the Academy of Public Finances. This is a training institute offering high quality courses in a variety of different topics relating to public financial management.

Open to professionals from any sector, this is an important asset which MB Consulting uses to build and spread knowledge among its clients. As the government of Mozambique embarks on financial reforms, this may be an important capacity building tool.

Conclusions & Recommendations

The new PEFA manual contains a number of important updates which reflect the changes in global understanding of PFM. These changes are distributed throughout the manual and affect all pillars to the extent that direct comparisons may not occur between the new manual and past manuals.

These updates, however, provide an opportunity for governments to reform their public finance systems in line with the best manifestation of current global PFM knowledge.

It is the desire of MB Consulting to encourage and support the government of Mozambique to participate in these reforms. There are a number of repercussions associated with maintaining the current public finance systems and processes in Mozambique.

A reduction in international financial support, worsening debt problems and limited delivery of essential public services are just some of these consequences.

MB Consulting is committed to supporting Mozambique through the reform of its public finance system in the hope that these negative consequences can be avoided.

With a strong history of PFM reform support, the team of experienced consultants at MB Consulting is ready to guide Mozambique through this critical reform phase.

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References

  • Guidance on reporting performance changes in PEFA 2016 from previous assessments that applied PEFA 2005 or PEFA 2011, 2016, PEFA Secretariat, Washington
  • Guidance on Tracking Performance Across Time: Comparing PEFA 2016 Against PEFA 2011 and 2005, 2016, PEFA Secretariat, Washington
  • PEFA Assessment of Public Finance Management, 2015 Mozambique Final Report – Volume One (2011 methodology), 2015, AECOM International Development Europe and CESO Development Consultants, Washington
  • PEFA Framework for assessing public financial management, 2016, PEFA Secretariat, Washington