Capacity Development in Public Finance Reforms: The Approach of GTZ

1. Capacity Development in Public Finance Reforms: The Approach of GTZ Presentation at the XVIII Seminario Regional de Política Fiscal Santiago de Chile, January 23-26, 2006 Philipp Krause

2. Overview • Good Financial Governance • A Systemic Perspective on Public Finance • Capacity Development in Public Finance Reforms

3. The Overarching Objective: Good Financial Governance • Good Governance means a conducive political framework for social, economic and environmental development, as well as the state‘s responsible use of political power and public resources. • Responsible and transparent management of public resources depends on proper policies for revenue collection, resource allocation and their control by audit courts and parliaments. • Functioning systems of public finance are a prerequisite of a country‘s successful development and poverty reduction. • Good Financial Governance matters both as a means towards better public sector performance, but also as and end, being a central element of good governance overall.

4. Core Principles of Good Financial Governance (1) • Legitimacy and voice: The totality of decisions, rules and regulations of the state must be legitimized by democratic rules. Particularly relevant for • revenue collection, where legitimacy depends on equitable tax policy while successful revenue collection depends on legitimacy of the state, and • the budget, where oversight and control of elected representatives is crucial, as is a fiscal policy that provides public goods and services for all citizens.

5. Core Principles of Good Financial Governance (2) • Accountability: Holding individuals and organizations accountable for their performance. • First of all requires transparency of public finances. • Needs various mechanisms and organs of control, including audit institutions, legislatures, civil society and media. • Centers on the budget as the comprehensive expression of a government‘s priorities. The more activities are run off-budget, the weaker is transparency, the higher is the potential for corruption and the lesser is the scope for control.

6. Core Principles of Good Financial Governance (3) • Rule of Law: Requires all actions by the state to be embedded in a fair and impartial legal framework. • Rule of law secures trust and predictability in public finances as all activities of public finance policy and management have to be based on democratic laws. • Development orientation of the government: To turn reform advances into benefits for the population. • Underscores the importance of a fair tax system. • Depends on a sound macroeconomic framework. • Puts public management for development results at center stage.

7. Core Principles of Good Financial Governance (4) • Performance: Public sector institutions deliver public goods that meet the needs of the population while making the best use of resources. • Increased performance of institutions depends on advances in three areas: decision making, implementation and control. • Raising performance cannot be achieved by implementing adequate technical procedures and information systems alone. • Has to be seen within a systemic process of capacity development.

8. A Systemic Perspective: • Sees Public Finance as a complex system, which is: • a central part of any country‘s public sector, • divided into several interrelated subsystems, • linked in various ways to its environment. • Focuses on processes and linkages between actors, not on individual instruments or actors.

9. The System of Public Finance and its Subsystems

10. Core Subsystems of Public Finance Reform: • Revenue Policy and Administration: • Comprises of tax policy, tax administration and customs administration. • Seeks to boost countries own revenues as a prerequisite of sustainable reforms. • Budgetary Policy and Expenditure Management: • Reforming budgetary policy aims at reorienting budget priorities towards most important government priorities. • Reforming expenditure management seeks to strengthen the capacity of the administration to implement government policies. • Oversight and External Control: • Parliamentary oversight and capable decision-making are key for responsible, efficient and effective public spending. • Strong external auditing serves to detect irregularities and identifies related weaknesses in management controls.

11. Examples for Reforms Linking Subsystems of Public Finance: • The distribution of responsibilities between the treasury department and the budget department should be clarified. • Debt management departments should be unified. • Co-ordination between tax administration and departments responsible for preparing tax forecasts should be reinforced. • Inter-ministerial cooperation needs strengthening at the political and operational level, e.g. Ministry of Finance – Ministry of Economy – National Statistics Office. • Parallel reforms at the central and sector level are required, e.g. improving investment budgeting depends on the effectiveness of procedures to screen and select projects within the line ministries. • Attention should be given to the linkage between the central and sub-national layers. Source: OECD (2001) Managing Public Expenditures

12. Examples for Linkages to the Environment: • Independent Judiciary: Assures individual rights, legality of government actions. • Party system and political groups: precede formal debate in the legislature. • Civil Society: Participates, controls, channels individual interests. • Media: Informs, translates complex data for wider citizenry. • Informal networks of rules and norms of behavior: affect autonomy and embeddedness of the state. • General Population: Taxpayer, Beneficiary, Citizen.

13. Capacity Development in Public Finance Reforms • Capacity development has been a core task of GTZ since its foundation. • Is the process of strengthening the abilities of individuals, organizations and institutions to achieve their own goals on a sustainable basis. • GTZ‘s work of capacity development in public finance reforms employs a systemic perspective and strives towards good financial governance.

14. Increased Importance of Capacity Development in Public Finance Reforms: • Traditionally important as the strengthening of a central function of the modern state, but sometimes neglected in favor of more immediate development objectives. • New emphasis in the international dialogue for more aid effectiveness: With the Paris Declaration, countries committed to an ambitious agenda of using efficient and effective country systems of public finance. • Millennium development goals and poverty reduction strategies create a constructive pressure for governments to perform.

15. Systemic Capacity Development for Good Financial Governance: Necessary Good Practices • Facilitation of country ownership and leadership of reform processes • Integration of political reforms, institutional changes, and managerial and technical aspects • Adaptation strategies to country context

16. Facilitation of Country Ownership and Leadership of Reform Processes • Take a long-term view and develop a common language for dialogue. • Use joint country-donor diagnostics to facilitate ownership. • Build upon external incentives for reform. • Step back to create space for government to lead: Capacity development can only be facilitated, not lead by donors. • Build upon the leadership of the ministry of finance. • Strengthen Supreme Audit Institutions and parliamentary oversight as agents of change. • Build awareness and ownership in line ministries.

17. Integration of Political Reforms, Institutional Changes, and Managerial and Technical Aspects • Integrate organizational strengthening into institutional context. • Use training strategically to support institutional and organizational changes. • Structure project management roles realistically. • Balance local and international expertise in the implementation. • Make use of practitioners to build bridges between administrations in different countries.

18. Adaptation of strategies to country context • Be responsive to government’s most pressing needs. • Support government in setting clear objectives and advancing incrementally. • Focus on specific public finance outcomes, rather than a department or function. • Reform fundamental procedures and structures first. • Extract key concepts in lieu of replicating whole systems.

19. For further Discussion: Four Challenges for Future Work • How to balance a long-term capacity development agenda with short-term pressures to show results. • How to understand and manage the politics of public finance reforms. • How to introduce results-based management techniques without overtaxing country capacities. • How to facilitate momentum for a „results-culture“ in the public finance system.

20. Forthcoming Publications: • „Capacity Development in Public Finance Reforms“ • „Good Financial Governance“ • „Towards Good Financial Governance in Vietnam“, first in a series of country information papers

21. Thank you for your attention!