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.

What is PFM all about?

PFM deals with all aspects of resource mobilization and expenditure management in government. It is about the way the 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 such as education, healthcare and other social programs, roads and infrastructure, rule of law and security, and other areas that improve the lives of the citizens.

In practice, PFM refers to the means by which government addresses the performance of its systems in budget preparation and execution, 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 greater expectations and rising aspirations of Filipinos are now placing more demands on the country's limited public resources. At the same time, many Filipinos are becoming cognizant of how the government uses its resources, and ultimately, demanding for greater transparency and accountability. These factors, therefore, make effective, efficient and economic use of public resources increasingly important.

Just at the management of finances is vital in any organization, PFM is similarly an essential function of every government and governance process, and the development of a vibrant and inclusive economy that provides opportunities for all.

A sound PFM system helps reduce the opportunity for misuse of funds. It also aids decision-makers in the government to perform their functions and decide where to allocate funds that will do the greatest good. More importantly, it helps inform the citizen where and how the public funds are actually being spent.

One of the results of a sound PFM system is a more transparent, efficient and accountable government which enables for a better delivery of services to the citizens. Additionally, the application of sound PFM systems does not only help improve the delivery of public services, but also influences and helps in the reduction of poverty in the country.

The PFM Cycle

Many PFM processes are structured around the budget cycle that usually refers to a particular fiscal year. The budget cycle starts well in advance of the relevant fiscal year, in which the budget is prepared and approved in advance of the fiscal year in question. It is further executed during the same fiscal year and reported following the completion of the fiscal year. Year on year, it is a revolving process as these annual cycles overlap on a continuous basis, constantly evolving with the current priorities of the present government.

Within each budget, there are time-bound programs and/or projects. One of the complications within these cycles is that, because many of these programs and/or projects can take more than one year to deliver, plans must be laid over a longer period. This requires multi-annual budgets, and can be a complex process.

In the Philippines, the President submits the proposed National Budget to the Congress each year. Following deliberations in the Congress, the proposed budget is approved and signed into a law, otherwise known as the General Appropriations Act (GAA), which serves as the legal basis for the 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.)

Once the budget is approved, it is then executed by the implementing agencies. Budget execution starts on the first day of the year, and theoretically, ends on the last day of the year. Accounting and reporting are done throughout the year. The final accounts are prepared early in the following year, with supreme auditing institutions preparing the audit reports. In the Philippines, it is the Commision on Audit (COA) that audits and maintains the government accounts, and produces an annual report covering the financial condition and operations of the entire government. (The public accounts and audit reports can be accessed at the website of the Commission on Audit.)

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

As expected, the central government agencies responsible for the country's economic growth and financial aspects are the lead actors in PFM reform in the Philippines. These agencies are the Department of Budget and Management (DBM), the Department of Finance (DOF) and its Bureaus, particularly the Bureau of Treasury (BTr), Bureau of Internal Revenue (BIR) and Bureau of Customs (BOC), and the Commission on Audit (COA), with engagement of the National Economic and Development Authority (NEDA) and Office of the President, for which 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 of the government, an elected member of the Congress, or the smallest of Barangays. Each has a role to play on improving PFM in the Philippines.

In the same way, the international development partners are assisting the government in its PFM reform efforts. Australia, one of the largest bilateral donors to the Philippines, is working with the Philippine Government through the Philippines-Australia Public Financial Management Program (PFMP) to implement the Philippines PFM Reform Roadmap.

Other development partners include the Asian Development Bank (ADB), International Monetary Fund (IMF), the World Bank, and the European Union.

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 (PEFA) assessment. 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.

For the PFM performance of the Philippines, this was measured using the PEFA framework. The first PEFA assessment for the Philippines, conducted by World Bank, was published in 2010. This can be accessed at the PEFA website.


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