PFM 101

The Government of the Philippines is implementing major reforms to strengthen its Public Financial Management (PFM) systems.  The reform agenda is laid out in the Philippine Public Financial Management Reform Roadmap: Towards Improved Accountability and Transparency 2011-2015.  PFM is an essential part of the government’s plans to improve transparency, accountability, public institutions and participatory governance in pursuit of more inclusive growth and poverty alleviation.   

So what is PFM all about?

PFM deals with all aspects of resource mobilization and expenditure management in government.  It is about the way government raises its income (in the form of taxes, customs duties and other revenues) and manages its expenditures to deliver essential services to its citizens, i.e., education, health care and other social programs, roads and infrastructure, the rule of law and security, and those areas which generally make the lives of citizens better off.

PFM in practice refers to the means by which government is addressing the performance of its systems in budget preparation, budget execution and financial controls (including procurement), accounting and treasury management, fiscal reporting, internal and external audit, debt management, and other aspects related to the budgetary process.  Increasingly, PFM is seen as a set of inter-related systems and processes, including organisational and political cultures, rather than as a stand-alone activity.  Civil society has also become an important contributor to sound and robust PFM systems.

Why is PFM so important to the Philippines?

The application of sound PFM systems is crucial to reducing poverty and improving the lives of all people in the Philippines.  Just as the management of finances is a vital function of any organization, indeed even in the family home, similarly PFM is an essential part of every government, the governance process, and the development of a vibrant, inclusive economy with opportunities for all.  

Greater expectations and rising aspirations of Filipinos are placing more demands on limited public resources.  At the same time, the emphasis of the people of the Philippines is on transparency and accountability, and greater value for money, thus making effective, efficient and economic use of public resources increasingly vital.  Sound PFM systems help reduce the opportunity for misuse of funds and help government decision-makers perform their functions and do their jobs.  It helps them to channel funds to where they are intended and will do the greatest good.  And importantly, it helps to inform citizens where public funds are actually being spent.

Each year the President of the Philippines submits the proposed National Budget to the Congress of the Philippines.  Following congressional scrutiny, the proposed Budget is signed into a law, otherwise known as General Appropriations Act.  The GAA serves as the legal basis for government spending in a given year.  The President’s Budget Message, National Budget documents and the GAA can be accessed at the website of the Department of Budget and Management, www.dbm.gov.ph.  

Meanwhile, the Commission on Audit (CoA) audits and maintains the government accounts, and produces an annual report covering the financial condition and operations of the entire government.  The Commission’s public accounts and audit reports can be accessed at its website, www.coa.gov.ph

Who are the main partners in PFM reform in the Philippines?

As is expected, the leading actors in PFM reform in the Philippines are the central government agencies with responsibility for the economy and its financial aspects.  This includes the Department of Budget and Management, the Department of Finance and its Bureaus (Treasury, Internal Revenue and Customs), and the Commission on Audit, with engagement of the National Economic and Development Authority and Office of the President, for whom PFM reform is a key policy objective.  

Beyond these central agencies, PFM is the responsibility of all public bodies and public officials at all levels of government, whether it is the largest department in the country, the Department of Education, an elected member of the Congress, or the smallest of Barangays.  Each has a role to play in improving PFM in the Philippines.

International development partners are assisting the government in its PFM reform efforts.  Australia, currently the largest bilateral donor to the Philippines, is working with the Philippines Government through the PFMP to implement the Philippines PFM Reform Roadmap.  Other development partners include the Asian Development Bank, International Monetary Fund, the World Bank, and the European Union. 

Civil society plays a role in PFM by holding government to account.  The 1987 Constitution of the Philippines explicitly recognizes the right of people and their organizations (non-governmental, community based, sectoral organizations, and independent people’s organizations) to reasonably participate at all levels of social, political and economic decision-making. 

How do we measure PFM performance in the Philippines?

One of the most common tools for measuring PFM performance is the Public Expenditure and Financial Accountability assessment, or PEFA.  The PFM Performance Measurement Framework (or PEFA Framework) was developed as a contribution to the collective efforts of many international stakeholders to assess and develop essential PFM systems.  By providing comparability across nations, a common pool of information for measuring and monitoring PFM performance, and a common platform for dialogue, the PEFA Framework aims to contribute to the development of effective country-owned PFM systems.

The PEFA Framework incorporates a PFM performance report, and a set of 31 indicators, providing an overview of the performance of a country’s PFM system.  The critical dimensions of performance of an open and orderly PFM system are as follows:

1. Credibility of the budget - the budget is realistic and is implemented as intended
2. Comprehensiveness and transparency - the budget and the fiscal risk oversight are comprehensive and fiscal and budget information is accessible to the public
3. Policy-based budgeting - the budget is prepared with due regard to government policy
4. Predictability and control in budget execution - the budget is implemented in an orderly and predictable manner and there are arrangements for the exercise of control and stewardship in the use of public funds
5. Accounting, recording and reporting - adequate records and information are produced, maintained and disseminated to meet decision-making control, management and reporting purposes
6. External scrutiny and audit - arrangements for scrutiny of public finances and follow up by executive are operating.

 The first PEFA assessment for the Philippines was published in 2010 and can be accessed at the PEFA website, www.pefa.org