Improving public financial management

The collection, allocation and spending of public money is a core task of any government. This is known as public financial management (PFM). In developing countries, PFM is often weak. Yet it plays a vital role in determining whether the country will achieve the Millennium Development Goals and sustained economic growth.

Australia helps the governments of developing countries to monitor and improve their PFM performance. The goals are to:

Design good economic and social policies

Good policies maintain fiscal discipline and ensure debt is not too high. They ensure that revenue is prudently reinvested to build a broad economic base for the future. This is essential in resource-rich countries. They share the benefits of growth with the poor and disadvantaged, through taxation and redistribution. They pursue open trade in a responsible, phased manner. They build infrastructure critical for economic growth and poverty reduction, such as schools, hospitals, roads, bridges and ports.

Assign enough resources, through a credible budget process, to implement the policies

Good policies are not enough. If they are not properly costed or fully funded they are not likely to succeed. When preparing the budget, there will be many policy proposals competing for funding. It is essential that the politicians are able to identify which are the most important and allocate resources accordingly. It is also important that they understand the implications of their decisions for future budgets. For example, a decision to build new infrastructure should also recognise ongoing maintenance and operating costs.

Implement the policies in an efficient manner

There are many institutional factors, both formal and informal, that will support or undermine efficiency. Staff knowledge, the attitude with which they approach their work, and the processes they use for financial management and reporting, are all critical. External scrutiny, which depends upon transparency, is another key factor. 

To do this, we use a range of methods, including:

• assign consultants or AusAID staff with the right expertise to act as ‘change agents’. The goal is to help partner governments identify PFM weaknesses and then implement appropriate solutions. It is important that the reforms are all driven by the partner government and not by the change agent. These people are usually based in the country
• place officials from Australian agencies, such as the Department of Finance and Deregulation, to work with officials in the matching agency in the country
• fund multilateral organisations that provide PFM assistance, such as the IMF, the World Bank and the ADB
• transfer funds to partner governments to spend on certain activities; on the condition they introduce reforms in order to meet certain performance targets. This is one type of performance-linked aid
• use partner government PFM systems. Providing funding directly to partner governments is one of many ways to do this, subject to a satisfactory risk-return analysis. Another way is to report development assistance to the Finance Ministry and have this shown in the partner government’s official budget.