TOPIC 4

PEFA FRAMEWORK

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What is PEFA?
• Public Expenditure and Financial Accountability
(PEFA) is a framework developed for assessing the
status of public financial management at central
and local government levels of government.
• A PEFA assessment provides a thorough, consistent
and evidence-based analysis of PFM performance at
a specific point in time.
• The PEFA methodology can be reapplied in
successive assessments to track changes over time.

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Development of PEFA
• The development of PEFA is predicated on the
international recognition of the critical role of PFM
in public service delivery.
• PEFA program was initiated in 2001 by seven
international development partners:
• The European Commission,
• International Monetary Fund,
• World Bank, and
• France,
• Norway,
• Switzerland, and
• United Kingdom
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Development of PEFA
• The 2001 framework has undergone update in 2005 and
2011 respectively.
• The 2011 version was substantially upgraded in 2016, which
is the current version in use.
• Features of the 2016 version include
• Considers changing landscape of PFM reforms and the evolution
of good practices over the last decade;
• An addition of four new indicators to assess public investment
and asset management, macro fiscal forecasting and fiscal
strategy.
•  the expansion and refinement of existing indicators;
•  A recalibration of baseline standards for good performance in
many areas;
• focus on the elements of internal financial control
• Clearer guidelines

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PEFA Reports
• It provides an evidence-based assessment of PFM
performance based on the indicator analysis and other
crucial information in a concise and standardized
manner.
• The PEFA assessment takes several matters into account:
• the controls used by governments to ensure that resources
are obtained and used as intended.
•  transparency and accountability in terms of access to
information, reporting and audit, and dialogue on PFM
policies and actions.
•  the institutions, laws, regulations, and standards used by
governments in the PFM process.
• the results arising from the operation of PFM in key areas
such as budget outturns, effectiveness of controls, and
timeliness of reporting and audit.
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PEFA Reports
• Benefits/uses of PEFA Reports
• Governments use PEFA to obtain a snapshot of their own PFM
performance.
• PEFA offers a common basis for examining PFM performance across
national and subnational governments.
•  PEFA scores and reports allow both governments and others users
of the information to gain a quick overview of the strengths and
weaknesses of a country’s PFM system.
•  PEFA assist users to appreciate the implications of the overall
performance results for the key goals of fiscal discipline, strategic
resource allocation, and efficient service delivery.
•  The PEFA analysis contributes to dialogue on the need and
priorities for PFM reform.
•   PEFA program provides support, monitoring, and analysis of PEFA
assessments

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PEFA Report
• Structure of the report
• An executive summary
• An introduction
• An overview of relevant country-related
information
• An assessment of performance in terms of the
seven pillars of the PFM system.
• Conclusions of the crosscutting analysis

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Scope of PEFA
• PEFA’s scope is aligned to three outcomes of an open and
orderly PFM system:
• Aggregate fiscal discipline
The objective of public financial management is to ensure effective
control of the total budget and management of fiscal risks. The
outcome is that government must be fiscally discipline
• Strategic allocation of resources
The objective of a public financial management system is to ensure
resources are strategically allocated to priority areas of government
policy and plans. This involves planning and executing the budget in
line with government priorities aimed at achieving policy
objectives.
• Efficient service delivery
The objective of public financial management it to collect revenues
and direct these revenues to the provision of public services in an
efficient and effective manner. It requires using budgeted revenues
to achieve the best levels of public services within available
resources
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Scope of PEFA
• PEFA is built on Seven Pillars
• Budget reliability.
• Transparency of public finances.
• Management of assets and liabilities.
• Policy-based fiscal strategy and budgeting.
• Predictability and control in budget execution.
• Accounting and reporting.
• External scrutiny and audit.

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Seven Pillars
• Budget reliability.
• The government budget is realistic and is implemented as
intended. This is measured by comparing actual revenues
and expenditures (the immediate results of the PFM
system) with the original approved budget.
• Transparency of public finances.
• Information on PFM is comprehensive, consistent, and
accessible to users. This is achieved through
comprehensive budget classification, transparency of all
government revenue and expenditure including
intergovernmental transfers, published information on
service delivery performance and ready access to fiscal
and budget documentation.
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Seven Pillars

• Management of assets and liabilities.

Effective management of assets and liabilities ensures that
public investments provide value for money, assets are
recorded and managed, fiscal risks are identified, and
debts and guarantees are prudently planned, approved,
and monitored.
•  Policy-based fiscal strategy and budgeting.
The fiscal strategy and the budget are prepared with due
regard to government fiscal policies, strategic plans, and
adequate macroeconomic and fiscal projections.
• Predictability and control in budget execution.
The budget is implemented within a system of effective
standards, processes, and internal controls, ensuring that
resources are obtained and used as intended.
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Seven Pillars
• Accounting and reporting.
• Accurate and reliable records are maintained, and
information is produced and disseminated at
appropriate times to meet decision-making,
management, and reporting needs.
• External scrutiny and audit.
• Public finances are independently reviewed and there is
external follow-up on the implementation of
recommendations for improvement by the executive.

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Institutional coverage
• PEFA has increasingly been used in the assessment
PFM performance in:
• Central governments
• Subnational government (state governments and local
governments)
• Extrabudgetary units (activities of central government
implemented outside the budget)
• Public corporations

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Scope Limitation of PEFA
• PEFA focus on the operational performance of key
elements of the PFM system rather than on all the
various inputs and capabilities that may enable the
PFM system to reach a certain level of performance
• PEFA also does not involve fiscal or expenditure
policy analysis that would determine whether fiscal
policy is sustainable
• PEFA does not provide recommendations for reforms
or make assumptions about the potential impact of
ongoing reforms on PFM performance
• PEFA assessment elements of the defense, public
order and safety function may not be included if
information is not available
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PEFA Methodology
• PEFA has a well thought through and robust
methodology in terms
• framework of assessment of public financial
performance,
• scoring procedures,
• source of information and
• conclusion of analysis of PEFA.

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Analytical Framework of PEFA

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 Measurement of Performance indicators
• Procedure for measuring indicators
• The Pillars of the PFM is reflective of some indicators
or elements of PFM. Thus, the Pillars are measured
based on the indicators of each of the Pillars.
•  The Indicators of each Pillar are scored based on
certain dimensions.
• The dimensions of each indicator are assessed based
on a scoring criterion ranking from A to D. There are
2-dimensional dimensions, 3-dimensional indicators
and 4-dimensional indicators.
• The dimensions and indicators are respectively
aggregated based on a conversion table of scores to
arrive at the score for an indicator
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Scoring of Dimensional indicators
• A clear scoring criterion is designed to guide the
process. For example:
Table 3: Scoring of Dimension of an Indicator
P1-1: Aggregate expenditure outturn
Score Minimum requirements for scores
Aggregate expenditure outturn was between 95% and 105% of the
A approved aggregate budgeted expenditure in at least two of the last three
years.
B Aggregate expenditure outturn was between 90% and 110% of the
approved aggregate budgeted expenditure in at least two of the last three
years.
C Aggregate expenditure outturn was between 85% and 115% of the
approved aggregate budgeted expenditure in at least two of the last three
years
D Performance is less than required for a C score.
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Scoring (cont)
• Most indicators have a number of separate dimensions,
each of which must be assessed separately.
• Each dimension is scored separately on a four-point
ordinal scale: A, B, C, or D, according to precise criteria
established for each dimension.
• The overall score for an indicator is based on the scores
for the individual dimensions.
• The scores for multiple dimensions are combined into
the overall score for the indicator using either
• the Weakest Link (WL) method or
• the Averaging (AV) method. Each indicator specifies the
method to be used

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Scoring methods
• Weakest Link Method: M1 (WL).
• This method is used for multidimensional indicators where
poor performance in one dimension is likely to undermine the
impact of good performance on other dimensions of the
same indicator. In other words, this method is applied where
there is a “weakest link” in the connected dimensions of the
indicator.
• The steps in determining the aggregate indicator score
are as follows:
• Each dimension is initially assessed separately and given a
score on the four-point calibration scale.
•  The aggregate score for the indicator is the lowest score
given for any dimension.
•  Where any of the other dimensions score higher, a “+” is
added to the indicator score. Note: It is NOT acceptable to
choose the score for one of the higher-scoring dimensions
and add a “-” for any lower
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Krah @2019 dimensions.
Scoring methods
• Averaging method: M2 (AV).
• The aggregate indicator score awarded using this
method is based on an approximate average of the
scores for the individual dimensions of an indicator, as
specified in a conversion table (discussed next).
• This method is prescribed for selected multidimensional
indicators where a low score on one dimension of the
indicator does not necessarily undermine the impact of a
high score on another dimension of the same indicator.
• Though all dimensions of an indicator fall within the
same area of the PFM system, in certain areas progress
on some individual dimensions can be independent of
the others.
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Scoring Method
• Average method (M2) cont
•  The steps in determining the aggregate indicator
score are as follows:
• Each dimension is initially assessed separately and given
a score on the four-point calibration scale.
•  Refer to the conversion table for indicator scores using
the averaging method and find the appropriate section
of the table—that is, whether there are two, three, or
four dimensions for the indicator.
•  Identify the row in the table that matches the scores for
each dimension of the indicator; the ordering of the
dimension scores does not matter.
•  Enter the corresponding overall score for the indicator.

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Dimensional score conversion
Table
• It is used to aggregated to a single score scores for
each dimension that made up an indicator.
• The conversion table applies to indicators using
M2 (AV) scoring methodology only. Using it for
indicators designated for M1 (WL) will result in an
incorrect score.
• Three types of conversion tables:
• 2-Dimensional
• 3-Dimensional
• 4-Dimensional

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2-Dimensional Table
Dimensional scores Overall score
D D D
D C D+
D B C
D A C+
C C C
C B C+
C A B
B B B
B A B+
A A A

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3-Dimensional Table
Dimensional scores Overall score
D D D D
D D C D+
D D B D+
D D A C
D C C D+
D C B C
D C A C+
D B C C+
D B B B
D B A B
C C C C
C C B C+
C C A B
C B C B
C B B B
C B A B+
C A A B
B B B B+
B B A B
B A A A
A A A A
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4-Dimensional Table
Dimensional Score Overall
D D D D D
D D D C D
D D D B D+
D D D A D+
D D C C D+
D D C B D+
D D C A C
D D B B C
D D B A C+
D D A A C+
D C C C D+
D C C B C
D C C A C+
D C B B C+
D C B A C+
D C A A B
D B B B C+
D B B A B
D B A A B
D A A A B+
C C C C C
C C C B C+
C C C A C+
C C B B C+
C C B A B
C C A A B
C B B B B
C B B A B
C B A A B+
C A A A B+
B B B B B
B B B A B+
B B A A B+
B A A A A
A A A A A
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Sources of Information
• Information for PEFA assessment was sourced from
various official document such as
• legislation,
• government policy papers,
• budget documents,
• reports and statistics,
• recent surveys
• analytical work at national, regional or international
levels

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Conclusion of Analysis of PEFA
• PEFA does not provide a ranking or global result.
• It draws conclusion based on general assessment of
all matters in relation to:
• Internal control effective
• Government reforms action
• Strengths and weaknesses of the PFM

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Internal control
• Objective of internal control in PFM are:
• operations are executed in an orderly, ethical,
economical, efficient, and effective manner;
• accountability obligations are fulfilled;
•  applicable laws and regulations are complied
with; and
•  resources are safeguarded against loss, misuse
and damage.

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Internal control analysis
• PEFA adopted the COSO framework of internal
control in its analysis
• The Framework has five interrelated components

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Control environment
• The control environment describes a set of standards,
processes, and structures that provide the basis for
carrying out internal control across the organization

• Key areas on interest to PEFA are:

• The personal and professional integrity and ethical values of
management and staff, including a supportive attitude toward
internal control constantly throughout the organisation
• Commitment to competence
• The “tone at the top” (i.e. management’s philosophy and
operating style)
• Organisational structure
• Human resource policies and practice
•  

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Risk Assessment
• The risk assessment forms the basis for determining
how risks will be managed. A risk is defined as the
possibility that an event will occur and adversely
affect the achievement of organizational objectives.
• Key areas:
• Risk identification
• Risk assessment (significance and likelihood)
• Risk evaluation
• Risk appetite assessment
• Responses to risk (transfer, tolerance, treatment or
termination

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Control activities
• Control activities are actions (generally described in policies,
procedures, and standards) that help management mitigate
risks in order to ensure the achievement of objectives.
Control activities may be preventive or detective in nature
and may be performed at all levels of the organization
• Key areas
• Authorization and approval procedures.
• Segregation of duties (authorizing, processing, recording, reviewing)
• Controls over access to resources and records
• Verifications
• Reconciliations
• Reviews of operating performance
• Reviews of operations, processes and activities
• Supervision (assigning, reviewing and approving, guidance and
training)

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Information and communication
• Information is obtained or generated by management
from both internal and external sources in order to
support internal control components.
• Communication based on internal and external sources
is used to disseminate important information
throughout and outside of the organization, as needed
to respond to and support meeting requirements and
expectations.
• The internal communication of information throughout
an organization also allows senior management to
demonstrate to employees that control activities
should be taken seriously
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Monitoring
• Monitoring activities are periodic or ongoing
evaluations to verify that each of the five
components of internal control, including the
controls that affect the principles within each
component, are present and functioning. around
their products.
•  Key areas:
• Monitoring PFM under PEFA’s assessment deals with the
following:
• Ongoing monitoring
• Evaluations
• Management responses
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Consideration of Govt Reform
process
• The following identifies several factors that are
likely to be relevant in supporting an effective
reform process in many country contexts
• Government leadership and ownership
• Coordination across government
• A sustainable reform process
• Transparency of the PFM program

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