Executive Summary

In conflict-affected or fragile states there is often a significant gap between what the state is able to deliver and what the citizens of that state, as well as international partners, expect the state to deliver. This problem stems in part from international partners focusing heavily on what should be delivered and not enough on how best to deliver it in that particular context. To examine this idea further, the g7+ Foundation has commissioned two initial case studies to try and bridge the gap in understanding and to enable governments to see what has and has not worked in comparable countries. These case studies are intended to give governments and their international partners a clearer understanding of how best to achieve meaningful reform in such countries.

This paper, using the two case studies of Timor-Leste and Afghanistan, looks at the experience of state building in the area of public financial management (PFM). The case studies demonstrate how the evolution of the Ministry of Finance (MoF) in both countries has led ministers to similar conclusions about the real challenges they face and about what works in building sustainable and robust national systems of accountability. The experience over the last decade or more is that state building as an explicit goal has largely been side-lined in practice by both governments and donors. The goal of using the national budget as the primary tool of development policy has fallen out of favor in many development circles.

Establishing systems for PFM in con?ict-a?ected or post-con?ict fragile states is challenging, to say the very least. There might be on-going conflict, but even if not, the shadows of conflict mistrust, trauma, and chaos are almost certainly present. The result of bypassing country systems and the annual budget process is usually large scale fragmentation.

Both a “projectization” of the national development e?ort and an unintentional undermining of state legitimacy in the eyes of the citizenry occur. Ignoring the importance of building legitimacy of the state means that newly elected governments are often saddled with a fragmented budget that is already locked into the donor project cycle and priorities, which are often not responsive to the government’s national priorities.

T I M O R - L E S T E
The Timor-Leste case study follows the development of the MoF through three distinct periods after the restoration of independence in 2002. First, was a period of initial work to put in place systems to manage the national budget. Second, a longer period of reform work responded to a sharp increase in the size and scope of the national budget due to oil and gas revenues. Third, the period under the current government focuses on the capacity of the national sta? to manage the challenges of the future.

The case study shows that Timor-Leste has made consistent progress in difficult circumstances.

By 2014, just seven years after a period of unrest and widespread violence in 2007, the MoF had dramatically scaled up the budget, showed steady progress against international indicators on reform and development of its systems, restructured its organization twice, developed a 20-year strategic plan, and adopted a program of team-based rolling plans to implement a long-term strategic plan under a performance management system. It had moved from being aid dependent to being largely self-reliant with a direct budget support arrangement with its two key donors.

As a result of reforms, by 2016 the MoF had managed to reduce its reliance on external advisers from over 180 to only 35, with all critical functions performed by local sta? or local contractors. During this same period the economy showed strong growth of more than 10% for many years and experienced a rapid reduction in poverty one of the fastest in the world.2 3 Most critically, this has been the longest period of peace in the country’s history and there has been no repeat of the earlier episodes of violence. The country saw the withdrawal of international troops and police and successful presidential and parliamentary elections in 2012.4 In fact, the legacy of the last ten years has been that Timor-Leste, through its leadership roles in the g7+ and the New Deal for Engagement with Fragile States, has been able to export its experience in post-conflict stabilization and development by being a key interlocutor in other parts of the world.


A F G H A N I S T A N

The Afghanistan case study similarly follows the Afghan MoF through the initial transitional period from 2002 to 2004, and from 2004 up to the election of the current government in 2014. This case study shows a similar pattern to that of Timor-Leste. Despite the government’s initial work in laying the foundations of the budget, extensive fragmentation due to the large number of donor-driven development projects caused a myriad of problems. The first budget of the transitional administration was able to start discussions between the political leaders about how much would be allocated to development objectives and
each administrative agency based on policy priorities. Given the circumstances, establishing the national budget as a policy tool and not just a means to distribute rents to warring parties was a substantive achievement requiring innovation and pragmatism in equal measure.

The period from 2005 to 2014 saw some improvements in the development of core public finance systems, but also highlighted the difficulties in shifting some practices once they become entrenched. Afghanistan’s budget systems improved over time – quickly at first, but then at a slower pace. While international benchmarks like the World Bank’s Public Expenditure and Financial Accountability (PEFA) framework tended to overestimate progress in a number of key areas, progress once achieved did not reverse despite significant security challenges.

A new government was elected in August 2014 and a former Minister for Finance, Dr. Ashraf Ghani, became President. One of his first policy decisions was to commission an assessment of the public finance and national accountability systems. It was the first time the Afghan government had commissioned an assessment by the government and for the government. The President wanted advice on how to make the budget an e?ective tool to support the new government’s national priorities, while making the government and donors more accountable to the public for managing public finances. Using this assessment as a baseline for the challenges ahead, the government established a program of 5-year rolling plans meant to address the challenges raised in the assessment. These plans would be team-based and subject to a performance management system. The system ranks team performance against a set of criteria aimed at measuring each team’s progress against their goals.

The first annual assessment of progress against the Rolling 5-Year Fiscal Improvement Plan was conducted between November and December 2016. This follows the completion of the first mid-year assessment of performance that was presented by the Minister of Finance at the International Conference on Afghanistan in Brussels in October this year. The annual assessment shows signs that the reform trajectory is beginning to rise again, with significant steps taken on the policy front by the Afghan government, such as the establishment of the High Economic Council, which is supported by the Directorate General of Macro-Fiscal Policy and Performance.

Further signs of progress include: a synthesized and streamlined set of National Priority Programs being designed, with some already well advanced; the first steps taken to establish forward estimates and reduce the problem of endemic over budgeting (however, reform of the budget process remains the biggest risk to the reform program); a big investment to upgrade the Afghanistan Financial Management Information System (AFMIS), as well as investments in the backbone of the MoF HR, IT, and accounting; and The National Procurement Authority’s outstanding progress in cleaning up procurement and setting new world class standards that will be gradually rolled back out to line ministries based on performance. Finally, despite continuing aid dependency, the government is engaging donors to support national priorities and use country systems, and has encountered some progress on this front. For instance, budget support programs are now in place with the US and EU.