The financing needs of local authorities will be particularly considerable in the coming years in view of the galloping urbanization and increasing empowerment of local governments to meet the needs of their populations. Since 2005, public finance management has become a priority for OECD member countries. The PEFA (Public Expenditure and Financial Accountability) methodology has specifically been created to provide it with a framework for precise, objective and ambitious measurements. Interview with Jérémie Daussin Charpantier, an expert in decentralization and local finances at AFD gives you the answers!
What interest does a local authority have in engaging in a PEFA diagnostic?
The PEFA assessment is a tool that allows the local authority to:
- Strengthen its credibility via an internationally recognized tool, which makes it easier to obtain State transfers, and loans from donors or private or public financial institutions;
- Develop a program to improve its management on the basis of objectifying the weak points and strong points of the local authority;
- Feed into and update the dialogue between the city, central authorities and financial partners in terms of public finance management.The PEFA diagnostic is based on the rating of some thirty indicators, which provide a relevant summary of the performance of public finance management. Each criterion is rated on a scale ranging from A (performance corresponding to the highest international standards) to D. Six essential aspects are studied:1. The credibility of the budget: Is the budget realistic and is it implemented as planned?
2. Completeness and transparency: Are the budget and supervision of budgetary risks exhaustive and is the financial and budgetary information accessible to the public?
3. Budgeting based on priorities: Has the budget been prepared taking due account of public policies?
4. The predictability and control of budget execution: Is the budget executed in a predictable manner and are there control and supervision mechanisms for the collection and use of public funds?
5. Accounting, the recording of information and financial reports: Is there a production, storage and dissemination of appropriate data and information to meet needs in terms of decision-making, control, management and the preparation of reports?
6. Supervision and external verification: Are there provisions for the analysis of public finances and for supervision measures by the managers?This rating conducted by specialized external consultants is completed with a more qualitative report, which explains the strong points of the local authority and sheds light on its areas of weakness.One of the main interests of launching this type of diagnostic lies in its requirements, which allow a local authority to situate itself in terms of the highest international standards for public management. Indeed, the method is universal and the references to rate each criterion are the same for everyone (for both developed and developing countries). For example, for the first indicator, which measures the total level of expenditure made with regard to the initially approved budget, in order to obtain the highest score, the local authority needs to manage to demonstrate that over 95% of the estimates have been implemented for at least two of the three past years. Reaching this level requires a high degree of budget control (I do not know of many French local authorities that would achieve it!) and targeting it makes it possible to set an ambitious horizon.Since 2005 and the introduction of the method, some 400 diagnostics have been conducted, including over 125 carried out on subnational authorities all over the world. While the PEFA framework had initially been designed to assess States, this demonstrates both the increasing importance of decentralization and the commitment of local authorities to work towards a greater efficiency in their management.
Since 2008, AFD has supported 5 cities in Sub-Saharan Africa for the implementation of PEFA diagnostics: Dakar (2008); Ouagadougou (2010); Cotonou (2011); Nouakchott (2012); Douala (2012). These assessments, which were proposed on the initiative of AFD, took place in a context of an in-depth dialogue with these cities. In the case of Dakar and Ouagadougou, for example, it involved an additional action to the direct loans allocated by AFD to these cities to finance public infrastructure and facilities. In the case of Cotonou, following the PEFA, a loan was allocated to the Government of Benin then reallocated to the City.
Even if the diagnostics have generally shown that these local authorities have significant financial management difficulties, they have also allowed a sort of “map of the major challenges” to de drawn up for decision-makers in order to improve the effectiveness of the budgetary engineering. In Dakar and Ouagadougou, municipal finance supervision committees were set up following the PEFA in order to attempt to initiate reforms. Although these approaches have not always led to spectacular results, they contribute to raising the awareness of a new generation of locally elected officials in terms of the fact that access to financial resources, which are necessary in order to align the development of cities with urban growth, requires demonstrating a rigorous management and a commitment to permanent progress.
In 1960, Africa had 2 cities with a million inhabitants, there were 25 of them in 2000 and their number has more than doubled since. In practical terms, this means that a large proportion of Africa’s development over the coming decades will depend on the actual capacity of several dozen cities to successfully implement public policies that make it possible to receive hundreds of millions of new city dwellers in sustainable and inclusive conditions (ecologically, socially, economically and financially). For all these cities, my analysis is that a tool like PEFA is part of the set of tools required to rise to the challenges, reassure both public and private investors, and attract the financing they can implement.
What lessons have you learned from these experiences?
ABased on the support to these five local authorities, I have been able to outline some lessons, which aim to strengthen the impact of this approach.
1st lesson: As PEFA is a high-level measurement framework, the political sponsoring of the approach is indispensable at local level and the involvement of the central Government is essential. Each PEFA exercise must be based on a political commitment to transparency, as the local authority undertakes to make the result public. Furthermore, undergoing this type of analysis only makes sense if an action plan is subsequently implemented to improve the quality of its management. The local authorities that have accepted to undergo the diagnostic without following up with a reform process would appear to be those where the political ownership has been insufficient and where PEFA, perceived as a technical tool, has remained an issue confined to the sphere of only administrative and financial directors. In addition, the participation of members of the central Government throughout the process would appear to be a prerequisite in order to lead to improvements in the long term, as the institutional framework and architecture of financial decentralization count a lot in the performance of a number of indicators measured by the PEFA framework.
2nd lesson: PEFA is a useful and unique tool to directly assess management quality and indirectly examine the financial credibility of a local authority. Although PEFA is not intended to assess the risks of a debt issuer as a rating agency would do, in addition to traditional financial analysis instruments, the method gives an idea of the sincerity of the accounts presented, the completeness of the information collected, the level of risk surveillance and, ultimately, provides an accurate picture of the quality of the local authority’s management system. In other words, a local authority that would show a significant improvement in its PEFA diagnostic at a 3-year interval could use it as an argument to find financing sources from a bank or financial markets.
3rd lesson: PEFA is a relatively costly and cumbersome tool to implement. It would be worth completing it with a “rapid assessment” tool. A PEFA diagnostic requires mobilizing international consultants for a period of between 3 and 6 months and consequently today has a cost (USD 100,000 to USD 200,000) which may prove to be prohibitive for a local authority. This therefore limits its use, in its current form, to a small number of municipalities which are large and well-equipped enough in terms of human resources. Consequently, although the added value of the PEFA methodology is based on its integrity, it may be worthwhile thinking about a simplified assessment tool. This assessment would not be intended to lead to a label from the PEFA Secretariat, but could be a more accessible gateway to the process. In a world where the resources that can be mobilized to conduct this type of action to strengthen management are limited, it would make it possible to convince a larger and more varied number of local authorities to enter into the PEFA rationale of permanently improving financial management.
4th lesson: PEFA is not a decision-making tool in itself. It should be adapted and subject to pedagogical feedback in order to help the Executive use it to initiate reforms. The PEFA report issues a standardized diagnostic, but is not necessarily a tool that elected officials can directly take ownership of to launch an in-depth reform of their local authority. Consequently, it is important to promote a more integrated approach which, in addition to the rather austere framework of presenting the results, can summarize the diagnostic and make it operational by prioritizing thematic areas and outlining a reform path via an action plan.
5th lesson: In order to go beyond the initial diagnostic and achieve a final improvement in management, it is necessary to devise “PEFA 2.0”, including the definition of an action plan and, when required, support for its implementation. It can be seen that to date, few PEFA diagnostics conducted on African local authorities have led to ambitious reform processes implemented over the long term. This is due to an insufficient strategic ownership of the process by local authorities and a continuing structural difficulty in African local authorities to conduct administrative reforms involving an improvement in processes and change management.
But there is nothing inevitable in this respect and the case of Douala, which has managed to take full advantage of the diagnostic, has led us to think about a new way of addressing this approach in order to maximize its effects. This success is indeed based on a few key principles:
- For reasons of continuity, the same team of experts has been mobilized for the PEFA assessment and the preparation of the reform strategy;
- The reform strategy has provided a framework, which previously did not exist and allows the planning, execution and supervision of the implementation of reforms;
- The methodology has focused on the internalization of the diagnostic process and action plan via a steering committee including all the institutions concerned and project managers appointed in all the entities involved in public finance management;
- The anticipated programming of a new PEFA diagnostic in 2016 to gauge the progress achieved makes it possible to set a tangible time horizon and mobilize energies.
On the basis of this example, AFD has, with the trust fund PPIAF (Public Private Infrastructure Advisory Facility), launched a joint initiative to change the way of approaching this tool:
- By selecting five African cities (Sfax, Agadir, Pointe Noire, Beira, Antananarivo), which demonstrate a strong political ambition to launch management reforms;
- By proposing to support them for a PEFA diagnostic going as far as the preparation of an action plan in an initial phase;
- By offering them, in a second phase, the possibility of benefiting from support in order to help them to implement priority actions for their financial management in relation to the weak points identified.
We hope that this more integrated PEFA approach, combining a diagnostic and reforms, will in a few years lead to a significant improvement in the budgetary management of these cities, contribute to strengthening their financial credibility, and ultimately allow them to find more varied sources of income to address the challenges they face.
What are your recommendations for local authotities wishing to engage in this exercise?
I will reply in a light-hearted and figurative manner. My ten key recommendations are:
- The actual motivation of your elected officials to undertake reforms, you shall sound out;
- External financing for the diagnostic study, you shall seek;
- From the outset, the organization up to the change management, you shall devise;
- A steering committee and an internal supervision committee, you shall create;
- National authorities, you shall involve them;
- An action plan following the diagnostic, you shall prepare;
- The projects for the action plan, you shall prioritize;
- Support for the implementation of the action plan, you shall seek;
- A final objective for external financing, you shall define;
- Three to four years after the start of the process, you shall measure your progress.