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  • 10 Marks

PSAF – May 2021 – L2 – Q3a – Public expenditure and financial accountability framework

Explain the objective of the PEFA framework, its uses, and the sources of information for PEFA assessment.

The Public Expenditure and Financial Accountability (PEFA) Framework has gained worldwide recognition due to its contribution to public financial management discussions. It is one framework that has received acceptance across the globe.

Required:
i) Explain the objective of the PEFA framework. (2 marks)
ii) Discuss FOUR (4) uses or applications of the PEFA Reports. (4 marks)
iii) Explain FOUR (4) sources of information for the PEFA assessment. (4 marks)

i) The objective of the PEFA framework:
The objective of the PEFA framework is to provide an assessment of public financial management (PFM) systems’ performance. PEFA aims to offer a snapshot of how well the PFM systems are functioning at specific points in time, using a standardized methodology that allows for comparisons over time and across different jurisdictions. This assessment helps in evaluating whether the PFM systems are delivering the desired outcomes in terms of fiscal discipline, strategic resource allocation, and efficient service delivery.

ii) Uses and applications of PEFA report:
The PEFA report serves multiple purposes for governments and other stakeholders:

  1. Snapshot of PFM Performance: Governments use the PEFA report to gain a quick and comprehensive overview of their PFM systems’ strengths and weaknesses.
  2. Benchmarking: The report provides a common basis for comparing PFM performance across different governments or over time within the same government.
  3. Informing Reforms: The findings from PEFA assessments help in identifying areas where reforms are needed and in prioritizing those reforms.
  4. Stakeholder Engagement: PEFA scores and reports are valuable for engaging with civil society, international development partners, and other stakeholders, providing them with a clear picture of a country’s PFM performance.

iii) Sources of Information for PEFA assessment:
The PEFA assessment draws on a variety of sources to ensure a comprehensive evaluation:

  1. Legislation: Relevant laws, such as the Public Financial Management Act, provide a legal framework that guides PFM practices.
  2. Government Policy Papers: These documents, including fiscal policy statements and medium-term development plans, offer insights into the government’s strategic objectives and priorities.
  3. Budget Documents: The national budget and related documentation are critical for assessing how well the government plans and executes its financial policies.
  4. Reports and Statistics: Official reports and statistical data, including those from independent audits or surveys, provide additional context and verification of the PFM system’s effectiveness.
  • 20 Marks

PSAF – Nov 2020 – L2 – Q3 – Public expenditure and financial accountability framework | Financial statements discussion and analysis

Explain the PEFA framework, compute financial ratios for two countries, and analyze their financial performance and position.

a) Public financial management is critical for the successful implementation of government policies and developmental goals. Public financial management is a linchpin that ties together available resources, delivery of services, and achievement of government policy objectives. The need to assess the extent to which public financial management systems operate led to the development of the Public Expenditure and Financial Accountability (PEFA) framework by a coalition of seven international development partners. Since 2001, the PEFA framework has received recognition across the world.

Required:

i) Explain the purpose of the PEFA framework. (3 marks)
ii) Explain the key pillars of an open and orderly public financial management system under the PEFA framework. (7 marks)

b) Country A and Country B are Sub-Saharan African Countries that attained independence around the same period. Presented below are the financial statements of the two countries:

Statement of Financial Performance for the year ended December 31, 2018

Description Country A (GH¢ million) Country B (GH¢ million)
Domestic Tax 26,450 17,000
International trade tax 18,200 21,330
Non-tax revenue 7,500 12,800
Grants 1,300 1,100
Total revenue 53,450 52,230
Compensation for employees 29,800 20,300
Use of goods and services 10,300 14,000
Consumption of fixed capital 240 280
Exchange difference 990 600
Interest 19,660 10,460
Subsidies 510 120
Other expenses 1,600 1,430
Total Expenditure 63,100 47,190
Net Operation Result (9,650) 5,040

Statement of Financial Position as at 31 December 2018

Description Country A (GH¢ million) Country B (GH¢ million)
Non-Current Assets
Property, plant and equipment 2,450 22,400
Equity investment 8,000 5,500
Total Non-Current Assets 10,450 27,900
Current Assets
Receivables 6,700 8,400
Cash and cash equivalent 4,700 18,000
Total Current Assets 11,400 26,400
Total Assets 21,850 54,300
Description Country A (GH¢ million) Country B (GH¢ million)
Funds and Liabilities
Accumulated Fund (80,200) 4,800
Current Liabilities
Payables 6,200 4,100
Trust monies 1,400 900
Domestic debt 16,000 4,500
Total Current Liabilities 23,600 9,500
Non-current Liabilities
Domestic debt 36,000 18,000
External debt 42,450 22,000
Total Non-current Liabilities 78,450 40,000
Total Funds and Liabilities 21,850 54,300

Required:

a) From the information provided, compute for the two countries respectively:
i) Grant to Revenue ratio
ii) Wage Bill to Tax Revenue ratio
iii) Interest to Revenue ratio
iv) Capital Assets ratio
v) Debt to GDP ratio
vi) Capital expenditure per Capita
(4 marks)

b) Based on the result in question (a), write a report discussing and analyzing the financial performance and financial position of the two countries. Include in your report the limitations of the analysis of the two countries. (6 marks)

a) Purpose of the PEFA Framework:

i) The Public Expenditure and Financial Accountability (PEFA) framework provides a structure for assessing and reporting on the strengths and weaknesses of public financial management (PFM) using quantitative indicators to measure performance. PEFA is designed to provide a snapshot of PFM performance at specific points in time using a methodology that can be replicated in successive assessments, giving a summary of changes over time.

PEFA is useful in the following ways:

  • It helps governments achieve sustainable improvements in PFM practices by providing a means to measure and monitor performance across important public financial management institutions, systems, and processes.
  • PEFA provides a framework for assessing transparency and accountability in public financial management.
  • It offers a common basis for examining PFM performance across national and subnational governments.
  • PEFA scores and reports provide a quick overview of the strengths and weaknesses of a country’s PFM system.

(3 marks)

ii) Key Pillars of an Open and Orderly Public Financial Management System under the PEFA Framework:

  1. Budget reliability: The government budget is realistic and implemented as intended, measured by comparing actual revenues and expenditures with the original budget.
  2. Transparency of public finances: Information on public financial management is comprehensive, consistent, and accessible, including budget classification and transparency of all government revenue and expenditure.
  3. Management of assets and liabilities: Effective management ensures public investments provide value for money, assets are recorded and managed, and fiscal risks are identified.
  4. Policy-based fiscal strategy and budgeting: The fiscal strategy and the budget are prepared with due regard to government policies and strategic plans.
  5. Predictability and control in budget execution: The budget is implemented within a system of effective standards, processes, and internal controls.
  6. Accounting and reporting: Accurate and reliable records are maintained, and information is disseminated at appropriate times for decision-making.
  7. External scrutiny and audit: Public finances are independently reviewed, with external follow-up on the implementation of recommendations.

(7 marks)

b) Computation of Ratios:

Ratio Country A Country B
i) Grants to Revenue ratio (%) 2.43 2.11
ii) Wage Bill to Tax Revenue ratio (%) 66.74 52.96
iii) Interest to Revenue ratio (%) 36.78 20.03
iv) Capital Assets ratio 47.83% 51.32%
v) Debt to GDP ratio (%) 65.13 404.55
vi) Capital expenditure per Capita 0.524 1.864

(4 marks)

d) Report on Financial Performance and Position:

Introduction:
This report provides an analysis of the financial performance and position of Country A and Country B based on the computed ratios.

Discussion and Analysis:

  • Grants to Revenue ratio: Both countries receive less than 3% of their revenue from grants, indicating a minimal reliance on external aid.
  • Wage Bill to Tax Revenue ratio: Country B manages its wage bill better than Country A, as indicated by a lower ratio (53% compared to 67%). This suggests that Country B allocates a smaller proportion of its tax revenue to employee compensation, potentially leaving more resources available for other expenditures.
  • Interest to Revenue ratio: Country B also spends a smaller proportion of its revenue on interest payments (20% compared to 37% in Country A), indicating better management of debt servicing costs.
  • Capital Assets ratio: Both countries show relatively high ratios, with Country B slightly higher, reflecting significant investments in long-term assets.
  • Debt to GDP ratio: Country A has a much lower debt to GDP ratio (65%) compared to Country B (404%), indicating a more sustainable debt level for Country A. Country B’s high ratio suggests a potential debt crisis.
  • Capital expenditure per Capita: Country B spends more per capita on capital expenditures compared to Country A, which could imply more investment in infrastructure or other long-term projects.

Limitations:

  • The analysis does not consider differences in the accounting bases used by the two countries.
  • The stage of economic development and governance systems may differ, impacting financial performance and position.
  • The analysis does not account for external economic factors that could influence financial results.

Conclusion:
Country B shows better performance in managing its wage bill and interest payments, but faces a significant debt challenge. Country A, while managing debt better, could improve its expenditure management, particularly concerning employee compensation and interest payments.

  • 10 Marks

PSAF – Mar 2023 – L2 – Q3a – Public expenditure and financial accountability framework

Describes the scope and goals of the Public Expenditure and Financial Accountability (PEFA) framework.

The Public Expenditure and Financial Accountability (PEFA) program was initiated in 2001 by seven international development partners: The European Commission, International Monetary Fund, World Bank, and the governments of France, Norway, Switzerland, and the United Kingdom. PEFA began as a means to harmonize the assessment of PFM across the partner organizations. It subsequently established a standard methodology for PFM diagnostic assessments, the PEFA framework. Since 2001, PEFA has become the acknowledged standard for PFM assessments.

Required:
Describe the scope and goals of the PEFA framework.

Scope of the PEFA Framework:

The PEFA framework is a methodology for assessing and reporting on the strengths and weaknesses of public financial management (PFM) performance. It identifies 94 characteristics (dimensions) across 31 key components of PFM (indicators) in 7 broad areas of activity (pillars).

The outcome of the performance assessment, the PEFA report, provides the basis for dialogue on PFM reform strategies and priorities. The methodology can be replicated in successive assessments, giving a summary of changes over time as well as providing a pool of information that contributes more broadly to research and analysis of PFM.

Goals of the PEFA Framework:

  1. Strengthen Capacities: To strengthen capacities to assess the status of country PFM systems and develop a practical sequence of reform and capacity development actions.
  2. Encourage Country Ownership: To encourage country ownership of the PFM reform process.
  3. Reduce Transaction Costs: To reduce transaction costs to countries by harmonizing the assessment process.
  4. Enhance Donor Harmonization: To enhance donor harmonization around a common understanding of PFM performance.
  5. Monitor Progress: To allow monitoring of progress in country PFM performance over time.
  6. Address Developmental and Fiduciary Concerns: To better address developmental and fiduciary concerns in the PFM reform process.
  7. Improve Reform Impact: To lead to improved impact of PFM reforms by providing a comprehensive diagnostic tool.
  • 10 Marks

PSAF – Nov 2021 – L2 – Q3a – Public expenditure and financial accountability framework

Distinguish between the Weakest Link Method and the Average Method in scoring PEFA indicators and compute and interpret the results for three indicators.

One important pillar in Public Financial Management is accounting and financial reporting, according to the Public Expenditure and Financial Accountability (PEFA) Framework of 2016. The pillar has three indicators with ten dimensions scored using the Weakest Link Method (M1) and Average Method (M2).

The information below relates to the scoring of the accounting and reporting pillar for Ghana in the 2019-2020 PEFA Report:

Pillar (P1-07) Accounting and Financial Reporting Score
Indicator 1 (P1-07.1) Financial data integrity To be determined
Dimensions (M2) Bank account reconciliation D
Suspense accounts D
Advance accounts A
Financial data integrity process C
Indicator 2 In-year budget reports To be determined
Dimensions (M1) Coverage and comparability of reports B
Timing of in-year budget reports C
Accuracy of in-budget reports B
Indicator 3 Annual financial reports To be determined
Dimensions (M1) Completeness of annual financial report C
Submission of reports for external audit B
Accounting standards D

Required:

i) Distinguish between the weakest link method and the average method of scoring the performance indicators.
(3 marks)

ii) Compute the score for each of the three indicators using the appropriate method of scoring and interpret your result.
(5 marks)

iii) Suggest TWO (2) ways the government can improve its performance in indicator 3: Annual financial reports.
(2 marks)

i) Distinguish between the Weakest Link Method and the Average Method:

  • Weakest Link Method (M1): In this method, the overall score for an indicator is determined by the lowest score received by any of its dimensions. This means that if one dimension is rated poorly, the entire indicator score reflects that weakest link, regardless of the scores of the other dimensions.
  • Average Method (M2): In this method, the overall score for an indicator is the average of the scores of its dimensions. This method balances out the different scores of the dimensions, providing an overall rating that reflects the general performance across all dimensions.

ii) Compute the Score for Each Indicator:

  1. Indicator 1 (Financial data integrity):
    • Dimensions: D, D, A, C
    • Method: Average Method (M2)
    • Score: (D, D, A, C) -> Average of scores: (1+1+4+3)/4 = 9/4 = 2.25 ≈ C
    • Interpretation: The overall score for financial data integrity is C, indicating moderate performance with significant room for improvement in specific areas.
  2. Indicator 2 (In-year budget reports):
    • Dimensions: B, C, B
    • Method: Weakest Link Method (M1)
    • Score: The lowest score among the dimensions is C, so the overall score for this indicator is C.
    • Interpretation: This score reflects that the weakest dimension (timing of in-year budget reports) is dragging down the overall performance.
  3. Indicator 3 (Annual financial reports):
    • Dimensions: C, B, D
    • Method: Weakest Link Method (M1)
    • Score: The lowest score among the dimensions is D, so the overall score for this indicator is D.
    • Interpretation: The poor score in accounting standards significantly affects the overall performance of this indicator.

iii) Ways to Improve Performance in Indicator 3 (Annual financial reports):

  1. Adopt and Implement IPSAS: The government can improve the accounting standards dimension by adopting and fully implementing International Public Sector Accounting Standards (IPSAS). This will enhance the quality and comparability of financial reports.
  2. Timely Submission of Reports: Ensure that annual financial reports are completed and submitted within the prescribed timeframes. Strengthening internal processes and automating reporting systems can help achieve this.
  • 10 Marks

PSAF – May 2020 – L1 – Q3a – Public expenditure and financial accountability framework

Explain control objectives in public financial management relevant to the PEFA framework and discuss internal control components.

The Public Expenditure and Financial Accountability (PEFA) framework recognizes the importance of internal control systems in achieving the desired fiscal and budgetary outcomes. Internal control systems play a vital role across every pillar of public financial management. It addresses risk and provides assurance that operations meet the control objectives of the PEFA framework. Therefore, it assesses how effectively the internal control systems operate in the country by making reference to the internal control components developed by other international organizations, specifically the Committee of Sponsoring Organizations (COSO) of the USA.

Required:
i) Explain THREE (3) control objectives in public financial management relevant to the PEFA framework of assessment.
(3 marks)

ii) Discuss FIVE (5) components of internal control in relation to the PEFA Framework.
(5 marks)

iii) Explain TWO (2) limitations of the PEFA Framework for assessing public financial management.
(2 marks)

i) Control objectives in public financial management relevant to the PEFA framework

  1. Orderly, ethical, economical, efficient, and effective operations: Ensuring that operations are executed in a manner that is ethical, efficient, and effective.
  2. Accountability obligations: Ensuring that public officers and institutions fulfill their accountability obligations.
  3. Compliance with laws and regulations: Ensuring that applicable laws and regulations are complied with.
  4. Safeguarding resources: Ensuring that resources are safeguarded against loss, misuse, and damage.

ii) Components of internal control in relation to the PEFA Framework

  1. Control environment: The values and culture of the organization, setting the tone for control at the top by which the entire organization is directed and controlled.
  2. Risk assessment: Identifying and mapping risks within the organization to ensure they are effectively managed.
  3. Control activities: Policies, procedures, and rules that ensure resources are safeguarded, such as accounting controls.
  4. Information and communication: Ensuring the right information is received by the right person at the right time.
  5. Monitoring: Reviewing and monitoring procedures to ensure deficiencies in systems and policies are corrected.

iii) Limitations of the PEFA Framework for assessing public financial management

  1. Focus on operational performance: PEFA focuses on the operational performance of key PFM system elements rather than all the various inputs and capabilities that may enable the PFM system to reach a certain level of performance.
  2. Lack of fiscal policy analysis: PEFA does not involve fiscal or expenditure policy analysis that would determine whether fiscal policy is sustainable.

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