Course Title: Graduate Course on Health Financing

Instructors Manual

Lecture 6 – PFM and Health

Topic: PFM basics and its Goals & Functions

Total time 180 min (Lecture time 120 min, 40 min discussion, 20 min break)

Chapter Theme

This chapter introduces the concept of Public Financial Management (PFM), covering budget
formulation, approval, execution, and evaluation. We'll delve into the strategic process of
translating policy goals into financial targets, budget preparation, and the crucial role of
accountability through external audit. At the end of this lecture students must be able to
explain the basic concept of Financial Management.

Lecture outline

PFM Basics (80 minutes)

Definition and Overview of PFM (10 minutes– Cumulative Total 10 min)

 Define PFM and its significance.
 Describe the broader context and influence of PFM systems.
 Discuss how PFM is embedded in national policy processes.

Topic to stimulate class discussion (see topic 1 below -10 min Cumulative Total 10 min)

Strategic Budgeting and Budget Preparation (15 minutes– Cumulative Total 25 min)
 Explore the strategic budgeting phase.
 The budget preparation process.
 Describe the Ministry of Finance's role.
 Discuss the budget circular, negotiation, and classification of budget items.

Topic to stimulate class discussion (see topic 2 below -10 min Cumulative Total 20 min)

Budget Approval and Execution (20 minutes– Cumulative Total 45 min)

 Explain the budget approval process.
 Discuss examination, potential amendments, and accountability.
 Describe the budget execution phase.
 Discuss internal control, audits, and accounting mechanisms.
External Audit and Accountability (15 minutes– Cumulative Total 60 min)
 Explore the role of Supreme Audit Institutions (SAIs).
 Discuss compliance with budget laws and value for money audits.
 Highlight the use of SAI reports by legislative bodies and civil society.

PFM Goals and Functions (80 minutes)

Four Key Dimensions of Functional PFM (20 minutes– Cumulative Total 80 min)
 Introduce the four dimensions: Prudent fiscal decisions, credible budgets, reliable
resource flows, and institutionalized accountability.
 Explain how each dimension contributes to a functional PFM system.
 Emphasize the impact of PFM on decision-making, solvency, and accountability.

Topic to stimulate class discussion (see topic 3 below -10 min Cumulative Total 30 min)

Prudent Fiscal Decisions (10 minutes– Cumulative Total 90 min)

 Explore the dimension of prudent fiscal decisions.
 Discuss the affordability of spending decisions and management of public debt.
 Importance of maintaining fiscal health.

Credible Budgets (10 minutes– Cumulative Total 100 min)

 Explain the dimension of credible budgets.
 Discuss the formulation of comprehensive and regular budgets.
 Emphasize the role of accurate revenue policies and spending reflection.

Reliable Resource Flows and Transactions (10 minutes– Cumulative Total 110 min)
 Explore the dimension of reliable resource flows and transactions.
 Discuss the timely provision of cash, salary payments, procurement, and contract
management.
 Significance of minimizing corruption and nonperformance losses.

Institutionalized Accountability (10 minutes– Cumulative Total 120 min)

 Explain the dimension of institutionalized accountability.
 Discuss tracking fund flows, financial reporting, and independent assurance through
audits.

Topic to stimulate class discussion (see topic 4 below -10 min Cumulative Total 40 min)
Topics to Stimulate Class Discussion

QUESTIONS

1. Discuss the comprehensive definition of PFM and its key components as mentioned in
the text. Why is it important for governments to manage public resources effectively?

2. Discuss the mechanics of the budget preparation phase, including the role of the
Ministry of Finance and the negotiation process with spending entities. How does the
budget circular guide this phase, and what are the challenges in reaching a
comprehensive budget proposal?

3. Debate the main goals and functions of a PFM system, as outlined in the text. How do
these functionalities influence decision-making, fiscal health, credibility, and
accountability in the public sector?

4. Explore the role of Supreme Audit Institutions (SAIs) in ensuring accountability in

public financial management. How do SAIs contribute to transparency, and what are
the implications of their findings?

ANSWERS

Public Financial Management (PFM) is a comprehensive concept that encompasses how

governments manage public resources. It involves a range of activities and processes,
including budget preparation, approval, execution, and evaluation. PFM ensures that public
funds are collected, allocated, and spent efficiently and effectively to meet the government's
objectives and serve the needs of its citizens. It also includes the management of revenues as
well as expenditures.

Budget preparation is a meticulous process where detailed expenditure plans are developed,
often involving collaboration between the Ministry of Finance and spending entities. A
budget circular provides guidance on submitting spending requests and indicates spending
limits for each entity to maintain fiscal discipline. Negotiations between the Ministry of
Finance and spending entities result in a comprehensive formal budget proposal that reflects
revenue and expenditure plans.

The main goals of PFM are to promote prudent fiscal decisions, credible budgets, reliable and
efficient resource flows, and institutionalized accountability. These functions are fundamental
to effective public resource management and contribute to the overall fiscal health and
stability of a government.
External audit institutions, such as Supreme Audit Institutions (SAIs), play a critical role in
ensuring accountability in PFM. They independently examine government financial activities
to ensure compliance with budget laws and regulations. SAIs report findings, which are used
by legislative bodies and civil society to hold the government accountable for resource
management and value for money.

POINT/COUNTER-POINT:

Is it reasonable to argue that macroeconomic stability and operational efficiency are

primarily dependent on effective public financial management (PFM) systems, and
countries with deficiencies in PFM cannot achieve sustained economic stability and
efficiency?

Point For Yes:

Absolutely, PFM systems are pivotal for macroeconomic stability and operational efficiency.
They ensure prudent fiscal decisions, resource allocation, and transparency. Without them,
avoiding wastage and inefficiency is challenging. PFM also plays a vital role in managing
public debt, maintaining credibility, and attracting investments, contributing to economic
growth and stability.
Without robust PFM systems, governments may struggle to control deficits, manage debt, or
allocate resources optimally, potentially leading to economic instability. These systems
facilitate accountability and help direct resources to essential services. In summary, PFM
systems are indispensable for promoting sound fiscal policies, reliable resource allocation,
and informed decision-making, all of which contribute to macroeconomic stability and
operational efficiency

Point For No:

While PFM systems are important, macroeconomic stability isn't solely dependent on them.
External factors, political stability, diversified revenue sources, and short-term measures can
influence stability. Global economic conditions, trade dynamics, and commodity prices
matter too. Countries with stable political environments or alternative revenue sources may
maintain stability despite PFM deficiencies. In some cases, unsustainable measures may offer
short-term stability but pose long-term risks. PFM is crucial but not the sole determinant of
macroeconomic stability.
Conversely, nations with robust PFM systems may still face instability due to non-fiscal
factors like civil unrest or external crises. Therefore, while PFM systems significantly
contribute to stability, they are not the sole drivers. A holistic approach that considers broader
economic and political dynamics is essential for achieving and sustaining macroeconomic
stability and operational efficiency.
WHO IS CORRECT?

The argument "Point for Yes" is correct because it emphasizes the critical role of PFM
systems in promoting fiscal responsibility, transparency, and efficient resource allocation.
While external factors and political stability also influence macroeconomic stability, PFM
systems are fundamental in ensuring prudent fiscal decisions and accountability, which are
key contributors to long-term economic stability and operational efficiency.

In the context of Pakistan,

Point for Yes is generally more correct. Pakistan, like many countries, relies on effective
Public Financial Management (PFM) systems to ensure fiscal discipline, efficient resource
allocation, and transparency. Strong PFM systems are crucial for addressing Pakistan's fiscal
challenges and promoting economic stability. However, PFM's impact can be influenced by
other factors, but it remains a fundamental pillar of fiscal management in the country.

CASE STUDY

Case Study 1:
Rwanda's PFM Transformation by Lewis Kabayiza Murara

Rwanda has undergone a remarkable transformation in its PFM system over the past two
decades. Following the devastating genocide in 1994, the Rwandan government embarked on
a comprehensive reform program aimed at rebuilding the country's institutions, including its
PFM system. The reforms focused on improving fiscal discipline, enhancing transparency
and accountability, and promoting efficient resource allocation. Key initiatives included the
introduction of a medium-term expenditure framework (MTEF) to link policy priorities with
budget allocation, the automation of financial management processes, and the strengthening
of internal audit and oversight mechanisms. As a result of these efforts, Rwanda has achieved
significant improvements in budget execution, revenue collection, and public financial
reporting.

Rwanda's Journey Toward a Robust PFM System

Just a decade ago, Rwanda lacked a well-defined public financial management (PFM) system
and faced a shortage of qualified personnel, particularly in the field of public accounting.
Since then, the Rwandan government has made significant strides in establishing the
foundational elements for a sound PFM system. Although some challenges persist, Rwanda's
commitment to creating a modern, efficient, transparent, and accountable PFM system is
evident.
Strategic Framework for PFM

Over the past decade, Rwanda has laid the groundwork for sound PFM through key policy
and strategic frameworks. These include a 2020 Vision Statement, an Economic
Development and Poverty Reduction Strategy, and a Medium-Term Expenditure Framework
(MTEF). These documents provide a comprehensive and well-articulated set of objectives
and priorities that guide the budgeting process.

Legal Framework and Budget Management

Rwanda has established a robust legal framework for budget management, including the
Organic Budget Law and accompanying financial regulations passed in 2006. This law
clearly delineates the roles and responsibilities of various stakeholders in public expenditure
management, ensuring transparency and separation of powers. The budget preparation
process is transparent and based on international standards. However, challenges remain in
harmonizing the budget and the planning process.

Remaining Weaknesses

While Rwanda has made substantial progress, certain areas of PFM still face challenges.
Management of public assets is a notable weak point, with issues of waste and theft. Efforts
are underway to address this through the development of an integrated financial management
information system.

Revenue Management and Tax Administration

The Rwanda Revenue Authority (RRA) has achieved remarkable success in increasing tax
revenues, thanks to strong political support, capacity building, and donor assistance.
However, challenges remain in clarifying the separation of powers between tax policy and
administration and broadening the tax base.

Financial Reporting, External Audit, and Parliamentary Scrutiny

Rwanda has made significant strides in external audit and parliamentary scrutiny, with the
establishment of the Office of the Auditor-General and the Public Accounts Committee.
Audit coverage is improving, but resource constraints hamper scrutiny.

Public Procurement

Procurement reforms have been initiated, including a new Public Procurement Law and the
establishment of a Public Procurement Authority. Although progress has been made, there is
room for improvement in transparency and competitiveness.

Conclusion

Rwanda's commitment to establishing a sound PFM system is commendable. Despite

challenges, the country has made impressive progress in less than a decade, with a strong
legal framework and ongoing reforms. However, the shortage of qualified personnel remains
a significant hurdle. Overall, Rwanda's PFM journey has been remarkable, given its resource
constraints and downsized government structures.

QUESTIONS:

1. What key policy and strategic frameworks has Rwanda established to guide its public
financial management (PFM) system?

2. How has Rwanda strengthened its legal framework for budget management, and what
are the key features of the Organic Budget Law?

3. What progress has Rwanda made in revenue management and tax administration, and
what challenges persist in this area?

4. What efforts are underway to address weaknesses in the management of public assets,
and how is Rwanda improving its external audit and parliamentary scrutiny
processes?

5. What reforms have been initiated in public procurement in Rwanda, and what areas
require further improvement?

ANSWERS
1. Key policy and strategic frameworks: Rwanda has established crucial policy and
strategic frameworks to guide its public financial management (PFM) system. These
include a "2020 Vision Statement" outlining long-term goals, an "Economic
Development and Poverty Reduction Strategy" with a five-year horizon, and a
"Medium-Term Expenditure Framework (MTEF)" that sets expenditure priorities.
These frameworks provide a comprehensive roadmap for the budgeting process.

2. Strengthened legal framework for budget management: Rwanda's legal framework for
budget management has been significantly bolstered. The "Organic Budget Law,"
passed in 2006, clearly defines the roles and responsibilities of various stakeholders in
public expenditure management. It ensures transparency and separation of powers
between the legislature and the executive. The law also mandates transparent budget
preparation procedures based on international standards.

3. Progress in revenue management and tax administration: Rwanda has witnessed

substantial progress in revenue management and tax administration. The Rwanda
Revenue Authority (RRA) achieved a remarkable increase in tax revenues, rising
from around USD 100 million in 1998 to approximately USD 600 million by 2008.
Strong political support, capacity building, and substantial donor assistance have
contributed to this success. Challenges include the need to clearly separate tax policy
and tax administration, as well as broadening the tax base.
 4. Efforts to address weaknesses in asset management and audit scrutiny: Rwanda is
actively addressing weaknesses in the management of public assets. Initiatives are
underway to develop an integrated financial management information system that
includes a public assets management module. External audit and parliamentary
scrutiny processes have improved with the establishment of the Office of the Auditor-
General and the Public Accounts Committee. However, limited resources remain a
challenge for comprehensive audit coverage and follow-up on audit
recommendations.

5. Reforms in public procurement: Public procurement reforms in Rwanda have been

initiated, including the enactment of a new "Public Procurement Law" in 2007 and the
establishment of a "Public Procurement Authority" in 2008. These reforms have
gradually decentralized procurement to operational units while maintaining oversight
at the authority level. While progress has been made in reducing opportunities for
corruption, there is a need for further improvements in transparency, competitiveness,
and adherence to procurement procedures.

Case Study 2:
Public Financial Management Reform in Afghanistan

In the face of daunting challenges, Afghanistan has made remarkable strides in its Public
Financial Management (PFM) reform. This post-conflict nation, once governed by the
Taliban, has managed to stabilize its political climate, enhance governance, and align itself
with international PFM standards.

Prioritizing Governance

Governance holds a central position in Afghanistan's National Development Strategy (ANDS

2008). Since its inaugural Public Expenditure and Financial Accountability (PEFA)
assessment in 2005, Afghanistan has made substantial progress in enhancing governance and
transparency. These efforts have led to improved fiscal discipline, greater transparency, and
increased macroeconomic stability, factors that contribute to sustained external support.

The Role of IFMIS

The implementation of an Integrated Financial Management Information System (IFMIS) has

played a pivotal role in Afghanistan's transformation. IFMIS facilitates efficient access to
reliable financial data, strengthens government financial controls, enhances service delivery,
and elevates budget transparency and accountability.

Progress and Challenges

While Afghanistan has achieved significant progress, its PEFA scores remain relatively low,
leaving room for further development. Initiatives to enhance communication among
government bodies, engage civil society organizations, allocate more resources to internal
and external audits, and increase the use of financial reporting through AFMIS have all
contributed to this progress.

Sequencing PFM Reform

Sequencing PFM reform, tailored to a country's unique public finance system, is considered a
best practice. In Afghanistan, this approach involves the phased implementation of IFMIS,
starting in Kabul and gradually expanding to line ministries and Mustofiats. This aligns with
capacity-building efforts and ensures the establishment of a solid foundation.

Sustaining Progress

Sustaining PFM reform remains challenging due to ongoing security concerns, which can
affect governance scores. However, substantial assistance in program budgeting, expenditure
management, internal auditing, and procurement systems has significantly improved central
government operations. Capacity-building efforts, particularly at the sub-national level,
transparent accounting of public funds, and mechanisms for accountability to citizens, are all
essential for long-term success.

In Conclusion

Afghanistan's journey in PFM reform represents a story of significant progress. It underscores

the pivotal role of good governance in promoting economic stability, attracting investment,
and ensuring accessible services for citizens. While challenges persist, continued efforts and
capacity-building initiatives are essential for sustaining this momentum.

Questions:

1. Why is PFM reform considered crucial for countries like Afghanistan, especially in
terms of governance and development?

2. How has the implementation of an Integrated Financial Management Information

System (IFMIS) benefited Afghanistan's PFM reform efforts?

3. What legal reforms have been enacted in Afghanistan to support PFM, and how have
they contributed to the reform process?

4. Despite progress, what challenges does Afghanistan face in sustaining PFM reform,
and how can they be addressed?
Answers:

1. PFM reform is vital because it improves governance, transparency, and

accountability, which are linked to economic development and stability. It enhances
good governance indicators, GDP per capita, and citizen well-being.

2. The IFMIS in Afghanistan has enabled efficient access to financial data, strengthened
financial controls, and enhanced transparency and accountability. It has reduced
corruption opportunities and streamlined financial processes.

3. Afghanistan has introduced key legal reforms, including the Public Finance and
Expenditure Management (PFEM) Law, Procurement Law, and Income Tax Law,
which provide a solid legal foundation for PFM. These laws define financial
management processes, procurement rules, and taxation.

4. Afghanistan faces challenges in procurement controls, bureaucracy streamlining, and

capacity building. The precarious security situation also threatens the sustainability of
PFM reform efforts. Addressing these challenges requires continued capacity building
and efforts to ensure transparent accounting of public funds.

References:

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