AFD and the PEFA methodology applied to local authorities by Agence Française de Développement

AFD AND THE PEFA METHODOLOGY APPLIED TO LOCAL AUTHORITIES

Yaoundé © AFD

Enhancing public financial management at local level

LOCAL AUTHORITIES: KEY ACTORS IN URBAN DEVELOPMENT POLICIES FOR AFD

Rapid urbanization in developing countries and gradual uptake of decentralization policies have prompted AFD to include support to local authorities as a strong focus in its Strategic Orientation Plan. AFD can tailor its support to local authorities’ level of maturity thanks to its extremely wide range of operational tools (Including: direct financing for local authorities, with or without a State guarantee; financing for the State reallocated to the local authority; credit lines held by commercial banks, etc.). AFD is today recognized as a leading donor in the field of local authority financing.

Nouakchott, Mauritania

Bamako, Mali

Through its financing, AFD also aims to build the capacities of partner local authorities in order to have them guarantee investments that would be effective and sustainable: firstly, by organizing training activities, designed for contracting authorities, which contribute to improving their capacity to define objectives, monitor the implementation of projects and arrange appropriate financing; secondly, by strengthening the financial health of local authorities and helping them to improve their capacity to manage and mobilize revenues.

PUBLIC FINANCIAL MANAGEMENT PERFORMANCE IN SUPPORT OF DEVELOPMENT An efficient public financial management (PFM) system is essential for the implementation of development policies. Indeed, the achievement of Millennium Development Goals, especially poverty reduction, does not only require increasing expenditure, it is also necessary to optimize the use of resources. PFM targets three main budgetary objectives: (i) budgetary discipline, (ii) strategic resource allocation and (iii) efficient public service delivery.

AFD’s growing interest in budget support and in “sub-sovereign” loans directly to local authorities has resulted in greater vigilance in terms of PFM capacities. In this respect, AFD has been a pioneer in developing tools such as the PEFA diagnostic for local authorities. The aim is to have an objective assessment of the quality of their financial management and to implement PFM reform plans.

PEFA INITIATIVE: A COMMON PUBLIC FINANCE ANALYSIS TOOL The PEFA (Public Expenditure and Financial Accountability) initiative was launched in December 2001 and is the result of a partnership between: W orld Bank;

PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY: SUB-NATIONAL TECHNICAL ASSISTANCE PROGRAM

E uropean Commission; U K Department for International Development; S wiss State Secretariat for Economic Affairs; F rench Ministry of Foreign Affairs; R oyal Ministry of Foreign Affairs of Norway; I nternational Monetary Fund. When the Paris Declaration on Aid Effectiveness was signed in 2005, governments pledged to increase the number of developing countries with a public financial management system in line with international good practices. The PEFA initiative contributes to the implementation of this commitment. It aims to allow countries and their technical and financial partners to: A ssess the performance of public financial management (PFM) systems; P romote the implementation of reforms and capacity building measures.

The Sub-National Technical Assistance (SNTA) program was launched in 2007 to help sub-national entities and public enterprises access private finance without sovereign guarantees. It is managed by a multi-donor Trust Fund: the Public-Private Infrastructure Advisory Facility (PPIAF). The objective of the SNTA program is to improve the borrowing capacity of these entities by financing (i) credit ratings, (ii) creditworthiness enhancement programs, (iii) assistance in the preparation of financing, and (iv) knowledge generation for governments in terms of private financing without sovereign guarantees. In this respect, it plays an essential role in financing and supporting PEFA diagnostics of local authorities. SNTA and AFD work together to enhance local authorities’ capacities by organizing workshops on the management of financial revenues. PPIAF website: www.ppiaf.org

PEFA SECRETARIAT A performance measurement framework for public financial management The PEFA program is managed by the PEFA initiative Steering Committee, which comprises a representative of each of the seven partners and defines its orientations and work plan. The program is implemented by the PEFA Secretariat. The Secretariat is fully funded by the program’s resources and is an independent body located in the World Bank’s offices in Washington, DC. It has the following mandate: disseminate and harmonize the PEFA framework methodology, provide technical assistance to users, supervise and guarantee the quality of PEFA assessments (document reviews), train PEFA assessors, give assistance for research on PFM.

PEFA Secretariat website: www.pefa.org Contact: services@pefa.org

The achievement of the objectives of the PEFA initiative is based on a common methodology to assess PFM performance, which was defined in 2005. The PFM measurement framework – called the “PEFA framework” – uses 31 indicators to measure six essential aspects of a transparent and organized PFM system: 1) budget credibility, 2) comprehensiveness and transparency, 3) policy-based budgeting, 4) predictability and control in budget execution, 5) accounting, recording and reporting, and finally 6) external scrutiny and audit.

Public financial management performance report Resulting from the analysis of the indicators, this report gives a snapshot of PFM performance at a given moment, and serves as a basis for the identification of an action plan to improve PFM.

REFERENCE WORKING PAPER Working Paper 124 entitled “PEFA Metho dology and Sub-National Governments: What Lessons for AFD?” (AFD publication, Frédéric Audras and Jean-François Almanza, 2012) provides an analysis of the application of the PEFA methodological framework to sub-national entities by examining 56 assessment reports and the practical experience of AFD’s project teams.

ADAPTING THE METHODOLOGY FOR LOCAL AUTHORITIES The PEFA methodology was initially developed to assess the PFM performance of central governments. AFD wished to promote its use for local authorities and contributed to adapting the PEFA tool, initially for the cities of Dakar in 2008 and Ouagadougou in 2010. The operational lessons learned from these two experiences were published in a Working Paper in 2012. AFD has since supported the municipalities of Cotonou (2011), Nouakchott (2012) and Douala (2012) during their PEFA assessment processes, thus underscoring the relevance of this methodology for local authorities. In 2013, the PEFA Secretariat published a new version of the Guidelines for the Application of the PEFA Framework to Sub-National Governments. It specifies how to apply all the indicators to the local context and proposes amendments to the content of the performance report.

REVIEW OF PEFA ASSESSMENTS (APRIL 2013) Between 2005 and April 2013, 218 PEFA assessments were launched at national level in 138 countries. 75% of these assessments were financed by the World Bank and European Commission. Repeat assessments are now mainly conducted and enable to determine the specific changes that have occurred in a system’s performance three to five years after the first assessment. Since 2007, 117 assessments have been conducted at subnational level in 24 countries. Half of these countries have conducted assessments in more than one entity.

PEFA assessments 2005-2013

300 250

200

Dakar, Senegal

PILOT TEST IN DAKAR IN 2008 The PEFA assessment of the City of Dakar was the first pilot operation in Africa to use the methodology for a municipality. The exercise was financed by PPIAF and was jointly managed by the City of Dakar, AFD and World Bank. This assessment demonstrated the value of all 31 PEFA indicators for the decentralized level. However, it also highlighted the extent to which the interpretation of the results is sensitive to the specific position of a municipality with regard to the authority of the central government. The City of Dakar and AFD used this tool when AFD allocated a direct loan to the city without a State guarantee. The assessment also contributes to feeding into discussions on city management.

150

8 19

100 138

0 At national level

First assessments

At sub-national level

Repeat assessments

Planned assessments

PEFA assessments by region at sub-national level 1 1 Sub-Saharan Africa

Latin America and Caribbean

Europe and Central Asia

East Asia and Pacific Middle East and North Africa

MOVING TOWARDS AN INTEGRATED “ASSESSMENT/REFORMS” APPROACH INCLUDING THE DEFINITION AND IMPLEMENTATION OF A REFORM STRATEGY The experience of Douala

AFD-PPIAF partnership

The PEFA assessment report for the Urban Community of Douala (CUD) was published in November 2012, thanks to financing from the French Embassy’s Cooperation and Cultural Action Department. The CUD defined a reform strategy for its public financial management (PFM) for 2014-2016 on this basis, with financial support from AFD and with the participation of all the relevant stakeholders.

AFD and PPIAF have decided to strengthen their partnership in order to generalize this integrated approach, which comprises a PEFA assessment and support for the definition of a PFM reform plan, as well as capacity building activities. PPIAF could thus be able to jointly finance the PEFA assessment and the strategy and/ or the action plans of an initial group of five municipalities. This would ultimately help these municipalities gain access to AFD’s sub-sovereign loans.

In order to measure the progress achieved over time, the impact indicators selected for this strategy are the indicators from the PEFA framework. Douala’s approach is currently the most developed in terms of a PFM reform strategy following a PEFA assessment.

TRAINING IN PEFA METHODOLOGY: AFD/CEFEB ACTIVITIES WITH THE PEFA SECRETARIAT

Since 2009, AFD – assisted by its training center (CEFEB) – has been organizing training sessions in PEFA methodology with the PEFA Secretariat. Since 2012, these training sessions have more specifically targeted the public of local authorities.

PEFA SEMINAR FOR OFFICIALS FROM FINANCIAL ADMINISTRATIONS AND LOCAL AUTHORITIES IN WEST AND CENTRAL AFRICA

The objective is to contribute to strengthening knowledge of the PEFA methodology for officials from local authorities in AFD’s partner countries. This gives them the skills to manage assessments and use the results to define action plans for local public financial management.

DAKAR – 30 MAY TO 1 JUNE 2012

This discussion seminar was combined with training in PEFA methodology applied to local authorities and was organized by AFD in partnership with the PEFA Secretariat. The aim was to consolidate the PEFA assessment process, enhance the quality of reports, and help use them in the context of reforms of PFM systems.

CEFEB training course for local authorities, Marseille

It gathered a mixed public in Dakar for three days, comprising officials from local authorities, future PEFA auditors and partner donors. The training program was based on theoretical presentations, practical exercises and feedback from local authorities that have already conducted a PEFA assessment.

Agence Française de Développement (French Agency for Development - AFD) is a public development finance institution that has been working to fight poverty and foster economic growth in developing countries and the French Overseas Provinces for seventy years. It executes the policy defined by the French Government. AFD is present on four continents where it has an international network of seventy agencies and representation offices, including nine in the French Overseas Provinces and one in Brussels. It finances and supports projects that improve people’s living conditions, promote economic growth and protect the planet, such as schooling for children, maternal health, support for farmers and small businesses, water supply, tropical forest preservation, and the fight against climate change. In 2012, AFD approved €7 billion to finance activities in developing countries and the France’s overseas provinces. The funds will help get 10 million children into primary school and 3 million into secondary school; they will also improve drinking water supply for 1.79 million people. Energy efficiency projects financed by AFD in 2012 will save nearly 3.6 million tons of carbon dioxide emissions annually.

AGENCE FRANÇAISE DE DÉVELOPPEMENT (AFD) 5 rue Roland Barthes 75598 Paris Cedex 12 – France Tel: +33 1 53 44 31 31 Fax: +33 1 44 87 99 39 www.afd.fr CEFEB Les Docks - Atrium 10.3 10 Place de la Joliette 13002 Marseille Tel: 04 91 13 17 50 Fax: 04 91 13 17 78 www.cefeb.org LOCAL AUTHORITIES AND URBAN DEVELOPMENT DIVISION (CLD)

www.cefeb.org

Creation: Planet 7 – March 2014

The CEFEB is the AFD’s corporate University that supports its partner countries and its own personnel. Every year, the CEFEB organizes a professional Masters and about 60 seminars, of short and medium duration, on the themes of development.

This publication was printed in an environmentally responsible manner using vegetable-based ink and PEFC™ paper, chain of custody n° 10-31-1482 (sustainable forest management).