Public financial management and accountability

PFM, poverty and aid effectiveness

PFM systems are a key component of effective states and an important means of increasing the transparency and accountability of national governments. The use of aid instruments such as general or sector budget support has emphasised the importance of effective PFM in order to track donor funds.

In post conflict situations PFM can play a key role in strengthening state legitimacy and accountability. Some research suggests that there are links between strengthening citizenship and accountability and mitigating conflict, particularly in resource rich countries.

Page contents

Where is a good place to start?

OECD-DAC Secretariat and World Bank, 2005, ‘Baselines and suggested targets for the 12 Indicators of Progress. Paris Declaration on Aid Effectiveness’  OECD-DAC, Paris
This paper outlines the twelve indicators of progress on aid effectiveness as agreed by the group of donor and partner countries party to the Paris Declaration of 2 March 2005. It specifies the assessment criteria and targets used to monitor various indicators including partner countries’ public financial management (PFM) and procurement systems as well as several aspects of donor countries’ aid implementation. The targets are designed to track and encourage improved accountability among partner countries, and increased collaboration between donor and partner countries in the provision of aid.
Access full text: available online

Financial management and poverty reduction

PFM systems are, in theory, 'poverty-neutral', as they do not deliver poverty reduction outcomes by themselves. However, good PFM systems are a vital tool for effectively implementing government spending priorities, including those relating to targeting poverty and social spending.

Existing systems of Public Financial Management are unlikely to reflect the interests of the poor or other excluded groups. Re-orienting the planning and budgeting process to take account of the poor requires political will, and an appreciation of how informal institutions and vested interests influence the formal process.

Fozzard, A., Holmes, M., Klugman, J. and Withers, K., 2000, 'Public Spending for Poverty Reduction,' Chapter 1.6 in PRSP Sourcebook Volume 1, World Bank, Washington D.C.
This document begins with an overview of the budget system, considering the influence of institutional arrangements on public spending outcomes at the national, sector and local levels. It sets out a framework for assessing spending options and presents a guide on how to get started on this process. 
Access full text: available online

Brobäck, U. and Sjölander, S., 2001, Programme Support and Public Finance Management. A New Role for Bilateral Donors in Poverty Strategy Work, SIDA, Stockholm.
What should bilateral donors in developing countries be doing in the areas of programme support and public finance management? This question is the focus of a paper undertaken for the Swedish International Development Cooperation Agency (Sida). This report analyses the key issues at the heart of programme support and public finance management and discuses the problems, details and method used with this form of support. It concentrates on the development of poverty-focused assistance to African countries.
Access full text: available online

Foster, M., Fozzard, A., Naschold, F. and Conway, T. 2002, 'How, When and Why Does Poverty Get Budget Priority? Expenditure in Five African Countries', Working Paper 168, Overseas Development Institute, London.
It has become a part of the conventional wisdom of development policy that poverty reduction is one of the main development objectives. What are the key factors influencing the struggle to re-orient public expenditure towards the interests of the poor? This working paper from the Overseas Development Institute synthesises the key findings from case studies in five countries (Ghana, Malawi, Mozambique, Tanzania and Uganda), each of which examined how public expenditure management has been linked to poverty reduction policy goals.
Access full text: available online

Accountability and the use of aid

There is an increasing emphasis within many aid agencies on building strong and effective states by promoting country ownership of aid budgets. This has been marked by an increasing trend away from project level support towards general and sector budget support. A key aspect of country ownership involves building the accountability and capability of the state. As such, strong PFMA mechanisms are vital components of effective states and a necessary means of increasing the transparency and accountability of national governments. Decisions about the appropriateness of budget support in certain country contexts necessarily include a consideration of whether a government has sufficient capacity to absorb donor aid directly into their national budget. This, of course, includes whether they have adequate financial management and accountability mechanisms in place in order to offset fiduciary risk.

The flow of aid has a direct impact on the ability of partner governments to plan and allocate expenditure. In order to enable governments to plan their spending, particularly over the medium term, aid needs to be long term, predictable and reliable.

DFID, 2002, ‘Managing Fiduciary Risk When Providing Direct Budget Support’, DFID, London
This draft policy paper by the UK Department for International Development (DFID) provides guidelines to assess and monitor fiduciary risk in the case of budget support. DFID has little control over funds that are directly channelled through central governments or sector ministries. Instead, DFID will need to provide reasonable assurance that direct budget support represents an effective use of aid. This will entail making an ex-ante assessment of the fiduciary risk inherent in the recipient government's accounting and procurement system; deciding whether the level of risk is acceptable and taking appropriate measures to mitigate and monitor the risks.
Access full text: available online

DFID, 2005, ‘Managing Fiduciary Risk When Providing Poverty Reduction Budget Support’, Department for International Development, London
Do the potential developmental benefits of providing Poverty Reduction Budget Support (PRBS) justify the risks involved? DFID is accountable to Parliament for the use of taxpayers’ funds. Making sure that aid resources are utilised for the intended purposes, properly accounted for and that they deliver value for money is therefore part of DFID’s main responsibilities. This document by DFID provides operational guidance on how to assess fiduciary risk in relation to PRBS.
Access full text: available online

Sector wide approaches (SWAps) are mechanisms by which development agencies collaborate to support sector reform programmes that are based on a country’s long-term vision for its development. They have evolved as a means of improving development cooperation and aim to strengthen government ownership and coordination of projects.

Interest in SWAps has grown in recent years. The World Bank is committed to advance proposals to allow for fuller participation in SWAps in a drive to modernise its lending instruments and to support new approaches to donor coordination. This paper looks at ways in which the Bank can adapt its procedures to support sector programmes. It proposes the introduction of special procedures for applying the Bank’s financial management procurement and disbursement policies, which would mean that the Bank would be able to pool funds with governments and other donors participating in SWAps. SWAps are characterised by country/government ownership, direction and coordination of programmes, donors and other stakeholders involved, and are targeted at the development of a particular sector. Donors and governments typically pool funds for disbursement from a common account. SWAps also aim to foster country capacity building and the more efficient use of resources, and are usually found in social sectors and in countries where many donors are active.

World Bank, 2002, ‘Fiduciary Arrangements for Sector-Wide Approaches (SWAps)’, World Bank, Washington DC
Sector wide approaches (SWAps) are mechanisms by which development agencies collaborate to support sector reform programmes that are based on a country’s long-term vision for its development. They have evolved as a means of improving development cooperation and aim to strengthen government ownership and coordination of projects. 
Access full text: available online

Conflict reduction and post conflict financial management

In conflict or post-conflict situations, traditional approaches to PFMA may not be realistic, largely due to a severe lack of necessary resources and capacity. However, developing effective PFM systems can be a key means of strengthening state legitimacy and accountability in post conflict situations. Furthermore, there appear to be important links between strengthening accountability and mitigating conflict – particularly in resource rich countries.

O’Donnell, M., 2004, ‘Literature Review: Post Conflict Public Finance’, Programme on Post Conflict State Building, Center on International Cooperation, New York
Access full text: available online

Gupta, S., et al., 2004, ‘Rebuilding fiscal institutions in post-conflict countries’, Fiscal Affairs Department, International Monetary Fund
What macroeconomic and fiscal challenges do post-conflict societies face? What economic and political reforms should governments undertake to reconstruct their tax and budgetary systems following conflict? This paper from the IMF Fiscal Affairs Department reviews advice given to post-conflict governments by the IMF to identify general strategies for re-establishing fiscal operations. It argues that post-conflict governments should introduce legal frameworks, a fiscal authority, simple tax policies and a transparent expenditure administration to strengthen fiscal institutions and promote economic recovery.
Access full text: available online

Addison, T. and Murshed, M., 2001, The Fiscal Dimensions of Post-Conflict Reconstruction UNU/WIDER, United Nations University, Discussion Paper No. 2001/49
What are the fiscal dimensions of conflict? What are their implications for reconstruction? This paper by the United Nations University World Institute for Development Economics Research examines these questions using research on African conflicts.
Access full text: available online

Additional information resources

The Centre on International Cooperation in New York is a good source of further research on conflict reducation and post conflict financial management.

New additions