MIDDLE EAST AND NORTH AFRICA OCTOBER, 2008 GOVERNANCE NEWS & NOTES VOLUME 2, ISSUE 4 A NOTE FROM THE PUBLISHER IN THIS ISSUE: WHY PUBLIC FINANCIAL MANAGEMENT MATTERS: PART II A Note from the Publisher……….…….….... 1 he most recent issue of Governance News & Notes (September 2008) introduced the topic of public financial management (PFM) and Governance Newsmaker discussed a number of problems with budget formulation that are Interview with H.E SALAM common throughout the MENA region. First and foremost is the FAYYAD…………………...2 challenge of ensuring credibility and making the budget the primary tool for fiscal management. Other areas for reform include expanding the PFM Reforms in Palestine scope and comprehensiveness of the budget; improving the link between ……………………………...4 recurrent and investment budgeting; trying to introduce elements of a multi-year framework and improved performance orientation; Budget Execution in strengthening budget classification; and enhancing greater transparency MENA……………………..7 and parliamentary scrutiny in budget formulation. Our September issue also featured a discussion of Lebanon’s PFM reforms, including a Case Study: PFM Reform in governance newsmaker interview with Lebanon’s recent Minister of West Bank & Gaza……….7 Finance, Jihad Azour. You can access it at the following webpage: http://go.worldbank.org/UO6IVFTVB0. Upcoming Events and Activities………………........9 In this issue, we change both sub-topics and countries while remaining focused upon the broader PFM theme. Our substantive emphasis shifts Notewo rthy from front-end problems of budget formulation to back-end problems of Links……..............................9 budget implementation, where a number of MENA countries are pursuing a variety of important reforms. They include reducing ex-ante controls on expenditure, in which multiple clearances can often lead to unnecessary delays and dilute rather than enhance authority, while at the same time doing a better job in tracking commitments. They also include improved virement (basically, empowering line departments to shift resources between budget heads within certain specified limits); improved treasury operations and cash management; the development of computerized financial management information systems; strengthening internal audit; and improving external audit, including more independent and transparent reporting relationships. Mark Ahern, our Senior Public Sector Specialist in West Bank & Gaza, will discuss common issues and problems with regard to budget implementation in MENA. We are fortunate to include an interview with the Palestinian Prime Minister, Salam Fayyad, in this issue as well. During his first tenure as Minister of Finance for the Palestinian Authority (PA), Salam Fayyad presided over some of the most far-reaching and successful PFM reforms in the Arab world. GOVERNANCE NEWS & NOTES Page 2 VOL. 2, ISSUE 4 Major PA reform initiatives include: substance and content of these reforms in greater detail. · The payment of all PA revenues into a central treasury account, Finally, allow me to share a brief concluding word which eliminated previous about the World Bank and public financial discretionary and non-transparent management. PFM issues remain at the core of the World Bank’s work on governance and public spending of these funds. management throughout the MENA region. We have provided lending support for PFM reforms in · Enhanced transparency in financial management, including the regular Morocco, Algeria, Tunisia, Iraq and Yemen and posting of budget data on the Ministry grants to support PFM reform in the West Bank and of Finance (MoF) website and Gaza. We are currently active in providing analytic expanding the formal budget document work and technical assistance in more than ten to include more detailed information countries in the region. This experience provides a on topics ranging from balance of pay- rich comparative basis for assisting the efforts of our ments to public service employment; clients to improve the quality of public spending for development and ensure that maximum value is extracted from every pound, dinar, rial and dirham · Improved control over the civil service payroll through the MoF assuming spent. responsibility for staff numbers from the General Personnel Council (GPC); Robert P. Beschel Jr. and paying salaries of all civil servants Lead Public Sector Specialist and security personnel through MENA Vice Presidency, World Bank personal bank accounts rather than in cash; and GOVERNANCE NEWSMAKER · The establishment of the Palestine INTERVIEW: H.E SALAM FAYYAD Investment Fund (PIF), which has PRIME MINISTER OF PALESTINE brought all PA equity holdings under MoF overview and provides BY RAMI G. KHOURI for a centralized and commercially based management. Fiscal trans- Salam Fayyad: “People do parency has also been enhanced by not eat or drink reform. the publication of a valuation of all They have to feel the PIF investments, and by the benefits .” publication of the PIF’s audited financial statements. WASHINGTON: The rapid overhaul and institution- It is particularly noteworthy that these reforms, alization of the previously which the IMF once characterized as “highly free-for-all Palestinian significant in improving both transparency and public finance sector under accountability,” were implemented against the Finance Minister-turned- background of occupation and strong domestic Prime Minister Salam Fayyad is one of the more resistance. In his interview with noted Palestinian striking and well known success stories in the journalist Rami Khouri, Dr. Fayyad provides a MENA region. Less appreciated, but important for fascinating assessment of how these reforms were other would-be reformers who might learn from the implemented in the face of stiff opposition. A Palestinian experience, is the combination of companion piece by Nithya Nagarajan discusses the political, psychological and communications tools GOVERNANCE NEWS & NOTES Page 3 VOL. 2, ISSUE 4 that Fayyad and his colleagues used to achieve their A single directive from the finance ministry and goals. central monetary authority did the job. “People do not eat or drink reform,” he said in an “I had a circular issued to the commercial banks interview with MENA GN&N during a visit to asking them to transfer any and all funds that come Washington in mid-October, “and especially people in as revenues for the Palestinian Authority (PA) to living in difficult political and national an account that was set up with one of the banks, circumstances, as the Palestinians were in 2002. what we called a central treasury account. People need to quickly feel the tangible benefits of any reform process if they are to protect it.” Virtually immediately, all the money started to come in, which also immediately enhanced the standing of Reviewing the ups and downs of the 2002-2006 the ministry of finance in the system. period, he recalled, making changes that mattered to people and Everybody seeing such knew that if reforms they wanted persist something required they had to several simul- come to the taneous ministry of dynamics at finance -- the technical that was and political really levels. basic,” he recalled. The technical level included Parallel consolidating with this, all public the ministry revenues into took control a single of the many account with commercial the finance operations ministry, that were drawing up a owned by unified state the public budget that was presented to parliament and sector and dominated by influential individuals who published on the internet, and consolidating all profited from largely unregulated and unaudited public commercial investments and monopolistic monopolistic operations in fields such as cement, and operations (like oil and cement imports and sales) oil. into a state-owned holding company managed by a credible board of directors headed by the finance “Two months into the task, we consolidated all of minister. these operations by establishing a public holdin g company, the Palestine Investment Fund (PIF), “The starting point was the structural need to ensure which acts as an umbrella for all of them and is that all revenues came into a central treasury 100% owned by the Palestinian Authority.” account. Corruption and other such issues would be tackled, but first of all we had to stop the leakage and Finding out exactly what assets the government make sure the system functions well,” he said. owned and taking control of them was a logistical GOVERNANCE NEWS & NOTES Page 4 VOL. 2, ISSUE 4 challenge that was resolved often by swooping down All the while, officials were creating a public on a company’s office by stealth, seizing the books, constituency for this, “making it clear that an and freezing all bank accounts before consolidating efficient, non-corrupt public finance system was a them all into the PIF. sign of a modern government. Things that we did along the way gave the reform program a good name The third major technical move was in the petroleum and generated public support. One was to work products sector, where monopolistic control by a towards goals that were pre-announced, and not to single state importer buying from a sole Israeli talk too much, particularly in an environment where supplier led to several negative trends: inflated skepticism, if not cynicism, reign supreme.” consumer prices, a flourishing black market, and reduced state revenues due to corruption. Officials implementing the reforms were conscious of the difficult political environment