Public Financial Management: The long road to reform as seen in the Philippines

by Lewis Hawke, Lead Public Sector Specialist, East Asia and Pacific, World Bank

These days it is a no-brainer that governments will not be able to achieve their policy objectives if public sector institutions are weak or fundamentally flawed. It follows logically that any responsible government should act quickly to ensure their institutions are in good shape before embarking on ambitious or expensive policy initiatives, right? Well, that’s not always possible. The reasons are often not straightforward, direct or obvious. 
  

For one thing, good policy takes time. Consider, for example, the experience of the Philippines, where I’m working. There is no doubting successive governments’ commitment to effective public financial management (PFM), including the current administration, which has initiated an ambitious reform program. They have been seeking improved revenue and expenditure policies and practices as well as building on previous achievements in fiscal transparency, tax administration, results-based management and medium-term budgeting.

A key element of the program has been to propose a significant change in the way budgets are approved and controlled. Legislation currently before Congress seeks to introduce annual cash-based appropriations. If agreed, government agencies will change the way they plan, manage and report from expenditure obligations to the cash paid each year. Enforcing more robust planning, costing and management on agencies will also improve the quality and reliability of financial reporting and cash management.

The annual cash appropriation policy is not a new concept, having been developed and refined over a long period of time. It has been informed by a series of independent diagnostic assessments, using internationally-respected tools, including public expenditure and financial accountability, public expenditure review, fiscal transparency evaluation, and public investment management assessment. The administration has also undertaken its own assessments and stakeholder consultations. This kind of detailed, evidence-based, consultative approach takes time, so it should not be surprising that it has taken several years for the broad ideas to be fashioned into detailed legislation and procedures. 

Deciding when a policy should be implemented requires careful planning, consideration of the risks and support for the initiative. There are usually winners and losers in policy change and that needs to be managed. Timing is not so difficult at times of crisis or overwhelming evidence of failure. Significant policy change can also follow a change of government with the new government ready with new policy, but this is not necessarily the case. The previous Aquino government in the Philippines was committed to PFM reform but its term expired and many initiatives were left incomplete. The new Duterte administration’s Secretary for the Department of Management and Budget, Benjamin Diokno, came into office with his own ideas for a reform agenda. His experience as minister in previous administrations also gave him a head start on navigating the political and institutional framework. This is not always the case for new ministers, who often need extra time to settle into the job. 

As shown in the Philippines, even where there is a plan and a determination to implement policy reform, the process takes time, requires extensive analysis and consultation before it can move forward. And then there is the challenge of implementation and change management. You can read more on these challenges in the World Banks’ interesting recent analysis of several South East Asian countries highlights elements of PFM reform success. It is provided here.