How Does PEFA Stimulate Better Public Financial Management?

Lewis Hawke, Head of PEFA Secretariat | October 10, 2017 |

With over a decade and a half facilitating assessments of public financial management (PFM) performance, the Public Expenditure and Financial Accountability (PEFA) program has just begun its fifth phase of operation. The program was established in 2001 by seven development partners, including the World Bank, IMF and the EU, and has since assessed PFM performance in 150 countries, resulting in more than 560 reports and over 50,000 quantitative performance indicator scores. It has become the global standard for PFM performance assessment and has been used as a template for development of several other “drill down” diagnostic tools. Here is what’s to come for PEFA in phase 5, which will continue until the end of 2021.

Breaking Down the PEFA Framework

The PEFA program provides the framework for evidence-based measurement of PFM performance at a specific point of time. The PEFA methodology can be reapplied in successive assessments to track changes over time. A PEFA assessment measures the extent to which PFM systems, processes, and institutions contribute to the achievement of the three desirable outcomes of an open and orderly PFM:

  • Aggregate fiscal discipline;
  • Strategic allocation of resources; and
  • Efficient service delivery.

The PEFA framework uses 31 indicators that are disaggregated into 94 dimensions to assess and report on the strengths and weaknesses of PFM. The performance of each indicator and dimension is measured against a four-point ordinal scale from A to D. The highest score, A, is warranted if evidence clearly demonstrated that an internationally-recognized level of good performance is achieved. The 31 indicators are grouped into seven pillars of performance focusing on essential features of an effective PFM which provide the foundation for a PEFA assessment.

The Seven PEFA Pillars of PFM Performance

 

  1. Budget reliability. The government budget is realistic and implemented as intended, measured by comparing actual revenues and expenditures with the original budget.
  2. Transparency of public finances. Information on PFM is comprehensive, consistent, and accessible to users. This is achieved through comprehensive budget classification, adequate published information on service delivery performance and ready access to fiscal and budget documentation.
  3. Management of assets and liabilities. Effective management of assets and liabilities ensures that public investments are valuable, assets are recorded and managed, fiscal risks are identified, and debts and guarantees are prudently planned, approved, and monitored.
  4. Policy-based fiscal strategy and budgeting. The fiscal strategy and the budget are prepared with due regard to government fiscal policies, strategic plans, and adequate macroeconomic and fiscal projections.
  5. Predictability and control in budget execution. The budget is implemented within a system of effective standards, processes and internal controls, ensuring that resources are obtained and used as intended.
  6. Accounting and reporting. Accurate and reliable records are maintained, and information is produced and disseminated at appropriate times to meet decision-making, management, and reporting needs.
  7. External scrutiny and audit. Public finances are independently reviewed and there is external follow-up on the implementation of recommendations for improvement by the executive.

 


PEFA's Purpose

PEFA was built on a premise that effective institutions and systems of PFM play a crucial role in the implementation of national policies concerning development and poverty reduction. Good PFM is the linchpin that ties together available resources, delivery of services, and achievement of government policy objectives.

Therefore, PEFA was established as a means to reduce the duplication and costs of multiple assessments by different organizations and instead produce a single report, built on international good practices, which would facilitate dialogue between government and other relevant stakeholders about how to improve the effectiveness of fiscal policies.

PEFA went through a major refinement process between 2014 and 2016, in which its methodology was opened up to comments and suggestions for change from all global stakeholders. Following more than 800 individual comments from international institutions, academia, governments, and development practitioners, PEFA was revised, tested, and released as a substantially enhanced product in February 2016. The upgraded version includes three new and seven substantially revised indicators. Guidance on the use of PEFA was improved and expanded, and training was provided to more than 1,000 users in 2016 and 2017.

The results of PEFA assessments have been used to guide development of PFM reform plans in countries, provinces and municipalities where it has been applied. In fact, the upgraded methodology has been used more than 50 times at national and subnational levels since its introduction. 

Measuring and Informing PFM Reform

The 2016 external evaluation of the PEFA program confirmed that governments and development partners have been using PEFA to support analysis of PFM. They have also used it to provide a baseline for reform initiatives and to inform action plans for improving performance.

The case studies undertaken during the evaluation established that it is common practice to use PEFA to underpin government-led PFM reform and that governments have been increasingly active in using PEFA findings as part of reform action plans.

PEFA scores and reports allow PEFA users—national and subnational governments, international development institutions, and civil society organizations—to gain a quick overview of the strengths and weaknesses of a country’s PFM. Users also see the implications of the overall performance results on the seven key pillars of PFM performance and achievements of the three budgetary outcomes. This analysis contributes to dialogue on the need and priorities for PFM reform.

Future Direction

As the program moves into its fifth phase, the international partners seek to build on PEFA’s successful record as an evidence-based assessment framework and a source of knowledge on PFM performance within and across countries. PEFA’s extensive data base, combined with user experiences over more than a decade, provide a rich source of information and lessons about reform progress.

The sharing of knowledge and lessons learned from analysis of the PEFA data will be a key part of PEFA’s activities in phase 5. The PEFA program has initiated several research projects on the impact and effectiveness of PEFA. This work is a starting point for deeper analysis of PFM and will also support policy dialogue on areas identified as crucially important in international development policy and practices.

Ultimately, it is expected that PEFA will contribute to improvement of PFM practices globally, and enhance their contribution to more efficient and effective service delivery and sustainable development.

  
 

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