How can the PEFA framework both help and hinder our understanding of PFM systems? This paper illustrates how PEFA can be (mis)used to guide PFM system reform. While the PEFA framework remains the most comprehensive indicator of PFM to date – over 500 formal assessments have been undertaken and verified by the Secretariat since its launch in 2005 – not all elements of the framework are universally relevant, and indicators do not always capture which systems are not working or why. It suggests that more could be done to interpret which ratings matter in each national context, and why.
The revision of the PEFA framework in 2016 is an appropriate moment to revisit how it has contributed to its stated goals: (i) to strengthen the ability of donors and recipients to assess public expenditure and fiduciary management; and (ii) to support the development and monitoring of reform programmes.
Despite guidance from its Secretariat, PEFA ratings continue to be used to determine what systems should look like, rather than as one element in the reform process. Incentives to implement reforms that change how the system looks but not how well it function have grown in tandem with the influence of the framework. PEFA has several important advantages over other diagnostic frameworks for PFM, but it also has some important limitations. While it measures overall budget reliability and benchmarks key processes against international ‘good practices, improvements in PEFA scores do not necessarily represent improvements in the functioning of the PFM system. There are three reasons why PEFA does not reveal how the overall PFM system is working or why it works that way:
- Limited coverage. Indicators tend to focus on processes and therefore miss islands of excellence and mediocre delivery.
- Form not function. PEFA largely measures how systems look but not how they are implemented.
- Missing institutions. PEFA does not capture the political economy of PFM systems, organisational capabilities nor interactions between processes.
Overreliance on PEFA also risks neglecting other analytical tools which provide different insights. For example, there has been a relative decline of public expenditure tracking surveys (PETS) which, when done well, can give better understanding of which PFM systems are a barrier to better services. PEFA should be used to provide analytical input into thinking about problems in PFM performance. Yet, in many countries it is used as a guide for what systems should look like, rather than a measure of what systems do look like. This undermines the impact and ownership of PFM reforms, neglecting country context, and potentially diverting resources away from addressing reasons for poor performance.
The tendency to design reforms that work towards OECD best practices threatens PEFA’s value as an objective measure, and runs counter to the advice of the PEFA Secretariat. Future reforms will need to be more ‘problem-driven’, but as yet there are not many answers on how this could be done. To improve how PEFA is used will involve interpreting assessment results relative to the local context and addressing negative incentives. Complementing PEFA with periodic surveys could provide useful information not captured in the framework. Revisiting donor approaches to programming PFM reform is challenging, but has greater potential impact.