## _wp15232

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### Taxonomy of Central Finance Functions: overview and context
- Purpose: review international experiences on functions and organizational models of finance ministries; focus on finance ministry role within a country’s “central finance agency” (CFA) group.
- Historical context:
  - Public expenditure rose from about 10 percent of GDP in the early 1900s to around 40 percent in recent years in many industrial countries.
  - Major expansion after World War II, especially after 1960, expanding budget, accounting/treasury, policy analysis, control over off-budget transactions, welfare/industrial/state enterprise roles, international finance, local government finance, commercialization and privatization.
- Sources of finance ministry power:
  - formal constitutional/finance law provisions;
  - informal powers from prime minister or president;
  - technical mastery and superior knowledge of economic and financial issues.
- Organization is shaped by political, socio-economic, legal, historical, and cultural context; substantial cross-country variation and temporal instability.

### High-level functional taxonomy
- Policy functions (examples):
  - setting fiscal policy rules or targets;
  - managing fiscal risks;
  - developing a debt strategy;
  - formulating the annual budget and the medium-term budget framework;
  - advising on alternative tax policy options.
- Regulatory functions (often by ministry or arms’-length agency):
  - enforcing legal framework for budgeting and public finance;
  - supervision of banks, stock exchanges, insurance companies, pension funds;
  - sectoral supervision (electricity, telecommunications, water) to ensure competition and consumer protection.
- Transactional (operational) functions:
  - processing budgetary payments;
  - internal control;
  - issuing government securities;
  - tax collection and other revenue collection.
  - Many transactional functions are highly automated; in most developed countries these have been outsourced or devolved.
- Hybrid functions:
  - combine policy and transactional elements (e.g., debt strategy implemented through T-bill and bond operations by debt management department, an arm’s-length agency, or central bank agent).
- Organizational implications:
  - specialization improves efficiency; separation of policy and operations requires consultation mechanisms to avoid disconnection between policy and administrative realities.
  - safeguard examples: France integrates tax policy division within directorate for tax and accounting but with direct reporting to director-general.
  - debt management commonly organized into front (execution), middle (strategy), and back (operations) offices with Chinese walls.

### Fiscal Policy: core tasks and budget management
- Fiscal policy core tasks:
  - fiscal policy analysis and formulation, fiscal rules;
  - monitoring compliance with rules, spending ceilings and performance targets;
  - macro-fiscal forecasting;
  - debt management strategy, regulation of debt markets, debt issuance and registry functions;
  - policy on taxation and other government revenues; enforcement of tax laws; collection of taxes, customs/excise duties;
  - policy on and management of fiscal risks, guarantees; monitoring implementation of risk management policies; issuance of guarantees.
- Budget management tasks:
  - formulation of the medium-term budget framework / annual budget; coordination of budget cycle; estimation of budget costings;
  - public investment strategy and planning, monitoring policy implementation, gateway reviews;
  - budget execution policies, monitoring/oversight of budget execution, cash forecasting/liquidity management/TSA; monitoring through Cash Management Committee; TSA managed by central bank under government supervision;
  - policies on public procurement and PPPs; execution of procurement contracts and PPPs.
- Accounting, reporting, internal control and audit:
  - development of accounting policies, coordination/monitoring compliance with accounting standards (IPSAS, GFS);
  - compilation of financial reports and provision of internationally comparable fiscal data and statistics;
  - standardized recording of transactions, assets, and liabilities;
  - policies on internal control and internal audit and execution thereof.

### Allocation of responsibilities: empirical comparison (sample sizes and selected percentages)
- Sample sizes:
  - OECD Countries: 34
  - Selected Developing Countries: 25 (Benin, Brazil, Cambodia, Colombia, China, Cyprus, Egypt, Ghana, Indonesia, Jordan, Kenya, Kyrgyz Republic, Malaysia, Mongolia, Moldova, Mozambique, Nicaragua, Panama, Peru, Philippines, Rwanda, South Africa, Togo, Yemen, and Zambia)
- Selected results (Table 2, percentages preserved exactly):

  A. OECD Countries (34)
  - Macroeconomic forecasting: Ministry of Finance 47; Other Ministry 38; Independent Agency 11; Shared Responsibility 4; Total 100
  - Long-term fiscal projections: Ministry of Finance 55; Other Ministry 33; Independent Agency 12; Shared Responsibility -; Total 100
  - Tax policy: Ministry of Finance 82; Other Ministry 12; Independent Agency 6; Shared Responsibility -; Total 100
  - Formulation of the budget: Ministry of Finance 91; Other Ministry 9; Independent Agency -; Shared Responsibility -; Total 100
  - Public investment planning: Ministry of Finance 50; Other Ministry 50; Independent Agency -; Shared Responsibility -; Total 100
  - Standards and policies on accounting: Ministry of Finance 47; Other Ministry -; Independent Agency 41; Shared Responsibility 12; Total 100
  - Regulation of financial institutions: Ministry of Finance 15; Other Ministry 6; Independent Agency 56; Shared Responsibility 23; Total 100

  B. Selected Developing Countries (25)
  - Macroeconomic forecasting: Ministry of Finance 60; Other Ministry 24; Independent Agency 16; Shared Responsibility -; Total 100
  - Tax policy: Ministry of Finance 48; Other Ministry 8; Independent Agency 44; Shared Responsibility -; Total 100
  - Formulation of the budget: Ministry of Finance 48; Other Ministry 8; Independent Agency -; Shared Responsibility 44; Total 100
  - Public investment planning: Ministry of Finance 24; Other Ministry 60; Independent Agency 16; Shared Responsibility -; Total 100
  - Accounting policies: Ministry of Finance 84; Other Ministry 8; Independent Agency 8; Shared Responsibility -; Total 100
  - Regulation of financial institutions: Ministry of Finance -; Other Ministry -; Independent Agency 45; Shared Responsibility 55; Total 100

- Key empirical patterns:
  - Advanced countries: finance ministry dominant in budget preparation and tax policy; less dominant in financial regulation and accounting policies; 14 OECD countries had established independent fiscal councils by 2012; 48 percent of OECD countries had a dedicated PPP unit; centralization patterns vary (examples: Finland, Australia, Canada, Brazil, U.K., U.S.A., etc.).
  - Developing countries: wide dispersion of arrangements; tax policy analysis often de facto by revenue agencies; central banks often manage oversight and supervision; ministry of planning frequently responsible for capital investment budget; overall budget formulation often shared (nearly one-half of surveyed countries); macroeconomic forecasts often prepared cooperatively by finance ministry and central bank.
  - Central bank roles: historically significant in auctions, financing, accounts, payments, registry; since 1980s trend to separate fiscal and monetary roles, limiting central bank fiscal role largely to banking services for government; exceptions noted (e.g., Burundi, Democratic Republic of Congo, Haïti, Colombia, Uruguay, Yemen).

### Trends: centralization vs devolution and fiscal councils
- Major trends over last 30 years:
  - move from centralization within finance ministry to devolution of transactional/operational functions to line ministries and agencies;
  - finance ministries shifting toward greater emphasis on policy-making.
- Consequences:
  - staffing: fewer but more specialized staff in finance ministries;
  - emphasis shift: from controlling inputs to managing systems, outputs, outcomes;
  - rise of “network” organizations exchanging timely financial information;
  - finance ministry focus on regulation of financial systems and information, and monitoring performance of service-delivery agencies.
- Devolution examples:
  - creation of agencies for macro-fiscal forecasting, debt management, revenue collection, public procurement, and delivery functions; strong trend since 1970s in Australia, Canada, New Zealand, the U.K., and Nordic region.
- Risks and counter-trends:
  - fragmentation can weaken central spending control and fiscal-data consolidation; global financial crisis prompted recentralization moves; OECD survey (33 countries) shows sharpening of central controls by finance ministries between 2007 and 2012 in areas like approval of in-year reallocations and end-year carryover of unspent appropriations.
- Fiscal councils:
  - established in many countries, especially in the EU, to promote sustainable public finances; fiscal councils review fiscal policy performance but do not replace executive branch responsibility (example: U.K. Office for Budget Responsibility).

### Treasury systems across the EU (Box 1): models, drivers, and efficiency trade-offs
- Treasury core functions include bookkeeping, setting accounting standards, internal controls and payments processing, cash forecasting and management, preparation of annual financial statements, oversight of government bank accounts, management of public assets/liabilities/guarantees.
- Diversity of models; determinants: function range, control framework, degree of centralization, organizational form (directorate vs arms’-length agency).
- Observed trend over past “twenty-thirty years”: decentralize most operational functions; establish autonomous agencies for remaining centralized functions.
- Sub-regional variations:
  - British/Irish/Scandinavian: payment/control functions decentralized; central policy/oversight in finance ministry or arms’-length agency (example: NTMA in Ireland).
  - Francophone: historically centralized payments/control in finance ministry; modernizing LOLF transferred many processing functions to line ministries.
  - Belgian: central bank plays important payments role.
  - Spanish/Portuguese: similar to Francophone model but less centralized; Spain: autonomous treasury agency manages payments and TSA.
  - Former Yugoslav: powerful centralized Treasury agency largely independent of finance ministry, with decentralized variants (example: Bulgaria).
- Four levels of decentralization:
  - centralized, deconcentrated, decentralized, hybrid.
- Efficiency trade-offs:
  - centralized/deconcentrated models: effective for overall financial control and fiscal consolidation but deconcentrated model heavy on staff;
  - decentralized models: promote efficient processes and spending-agency accountability but may weaken finance ministry control and increase fiscal risk exposure.

### Traditional vs Emerging models and development hypothesis (Section II)
- Box 3 contrasting characteristics (verbatim phrases preserved): “Traditional Model” vs “Emerging Model” (examples include Segmentalist culture → Integrative culture; Hierarchical, organizational silos → Horizontal coordination mechanisms; Closed, introspective (budget secrecy) → Open, communicative and consultative; Centralized control environment → Decentralized control environment; Process oriented → Policy oriented; Multiple and non-integrated financial information systems → Integrated financial information system (IFMIS)).
- Developmental pattern hypothesis:
  - finance ministries may follow an inverted-U path as countries develop: small → expand in middle-income status → contract as development advances (Allen and Grigoli, 2011; World Bank, 2013).
  - movement to advanced status accompanied by PFM reforms, broader distribution of functions, greater autonomy, and computerization enabling transfer of transactional functions.
- Comparative evidence (Table 6) for selected countries (Finland, France, Spain, South Africa, Turkey, U.K., U.S.A.):
  - Open Budget Index scores preserved exactly where cited:
    - France (Score: 83, ranking: 5)
    - Spain (score: 63, ranking: 19)
    - South Africa (score: 90, ranking: 2)
    - Turkey (score: 50, ranking: 45)
    - U.K. (88, ranking: 3)
    - U.S.A. (score: 79, ranking: 7)
  - Use of integrated ICT systems: High for Finland, France, Spain, South Africa, Turkey; Low for U.K. and U.S.A. (as reported).
  - Devolution of transactional functions: High in Finland, U.K.; Medium/Low varies across others as tabulated in source.

### Reorganizing ministries of finance: approaches, principles, and practical challenges
- Reorganization approaches:
  - fine tuning; incremental adjustment; modular transformation; corporate transformation.
  - countries typically follow a mixture of approaches.
- Principles for reorganizing (Box 5):
  - Principle 1: Unitary finance ministry — single ministry responsible for central finance functions; where split is necessary, ensure effective coordination.
  - Principle 2: Flexible bureaucracy — efficient decision-making, timely vertical/horizontal communications internally and externally.
  - Principle 3: Agencies for specialized functions — devolve revenue collection and debt management to arms’-length agencies with close monitoring and robust controls.
  - Principle 4: Devolution of transactional functions to line ministries — progressively delegate payment processing, internal control and procurement when capacity exists; monitor performance and control appointments initially.
  - Principle 5: Focus on core policy and regulatory functions — build capability in policy areas central to mandate; reinforce communications between policy and operational staff.
  - Principle 6: Strong role in agenda setting — build cross-sectoral analytical capacity to advise cabinet on costs and allocations.
  - Principle 7: Consolidate new functions within existing departments — avoid creating separate structures for emerging issues; maximize synergies.
- Challenges and risks:
  - political and institutional constraints in developing countries (patronage, rent-seeking, resistance to FMIS or TSA);
  - organizational segmentation from ad hoc creation of units increases complexity and inefficiency; solution: integrate new functions into existing departments and establish cross-cutting teams.
  - sequencing and change management: risk of destabilizing core functions if reforms are too rapid; reorganization should be coordinated with business-process and ICT reforms.
  - capability vs capacity: distinction between inputs (capacity) and ability to transform inputs into policy decisions (capability); recommendation to develop quantitative indicators of capacity and capability.
- Tools for reorganization:
  - functional reviews; external stakeholder analysis; business process reengineering (BPR); staffing and skills review; medium-term HR plans; use of external consultants where needed.

### Trends in advanced-country restructuring of core finance functions (Box 6): highlights
- Budget preparation and execution: strengthening/separating budget overview units; parallel units for shadowing line ministries.
- Debt management: recommendation for consolidated debt office organized into front-, middle-, back-office; many countries established integrated debt management offices within finance ministry or as arm’s-length agencies.
- Revenue policy and administration: increasing separation of policy (finance ministry) from administration (revenue agency or segregated function).
- Government statistics: strong case for independent statistical agencies; EU mandates independence by legislation.
- Fiscal risk analysis and PPP risk management: emphasis in IMF papers and revised Fiscal Transparency Code; units for PPP risks established in many advanced countries and some emerging markets.
- SOE oversight: many governments centralize SOE oversight in a single specialized entity (department or autonomous agency) to protect shareholder value.
- Coordination weaknesses:
  - finance ministries powerful but coordination mechanisms vary; center-of-government bodies (president/prime minister/cabinet office) can play key mediating roles;
  - weak coordination in developing/middle-income countries can impede control over tax exemptions and fiscal implications of sector legislation.
- Human resources and common services gaps:
  - many developing-country finance ministries have inadequate HR systems, poor staff mobility, rigid salary structures, insufficient training.
  - proposals: strengthen HR management, progressive devolution of recruitment, flexible salary structures to attract scarce skills, policies to strengthen staff mobility.
- Managerial recommendations:
  - establish senior management board or secretary general to facilitate cross-cutting decisions; devolve responsibilities to line managers; improve IT and internal communications.
- Final synthesis (five main conclusions):
  - 1) Many advanced-country finance ministries have evolved from “traditional” to “emerging” models with greater openness, flexibility and strategic focus.
  - 2) As countries develop, transactional functions are transferred to line ministries and arm’s-length agencies while finance ministries strengthen oversight and policymaking capability.
  - 3) Organizational restructuring should be grounded in functional analysis before structural change.
  - 4) Structures evolve incrementally; radical reforms require strong political leadership or crises; gradual reforms may be preferable in fragmented or rent-seeking environments.
  - 5) Local context and institutions are crucial; reforms should prioritize incentive and behavioral changes over wholesale transplantation of advanced-country models.

*Source: _wp15232 - IMF Fiscal Affairs Department working paper content as supplied.*

### 1. Taxonomy of Central Finance Functions ...............................................................................

### 1. Taxonomy of Central Finance Functions

### Introduction and purpose
- The paper reviews international experiences related to the various functions and organizational models of finance ministries and aims to formulate guiding principles.
- Focus: mainly on the role and organization of the finance ministry as the most important entity within a country’s “central finance agency” (CFA) group.
- The paper draws on IMF Fiscal Affairs Department experience and country examples including Australia, Canada, Finland, France, New Zealand, South Africa, Sweden, Turkey, the United Kingdom, and the United States.
- Organization of the paper (as described):
  - Section II: role and functions of a finance ministry; concept and characteristics of its organization and staffing.
  - Section III: traditional and emerging approaches to the role and culture of a finance ministry.
  - Section IV: guiding principles of good organizational design, challenges for developing countries and emerging markets, and approaches to reform.
  - Section V: conclusions.

### Context: expansion of the finance ministry’s role
- Public expenditure as a share of national income grew from about 10 percent of GDP in the early 1900s to around 40 percent in recent years in many industrial countries.
- Major expansion occurred after World War II, and especially after 1960.
- Growth in state activity increased the scale and breadth of finance ministry functions, including:
  - budget and accounting/treasury offices,
  - policy analysis techniques,
  - control over off-budget transactions (e.g., social security funds),
  - involvement in welfare policies, industrial policies, state enterprises, international finance, local government finance, commercialization and privatization.

### Sources of the finance ministry’s power and variation across countries
- Power may derive from:
  - formal provisions of the constitution or finance laws,
  - informal powers assigned by the prime minister or president,
  - technical mastery and superior knowledge of economic and financial issues.
- Role and responsibilities are strongly influenced by institutional factors (formal and informal), economic and political influences, and historical/institutional context.
- Variations in powers and structures are substantial and not necessarily stable over time.

### Taxonomy: Policy, Regulatory, and Transactional functions
- High-level classification of central finance functions (examples indicated in source):
  - Policy functions:
    - setting fiscal policy rules or targets,
    - managing fiscal risks,
    - developing a debt strategy,
    - formulating the annual budget and the medium-term budget framework,
    - providing advice on alternative tax policy options.
    - These occupy a substantial part of the time of senior officials and ministers.
  - Regulatory functions (often by the finance ministry or an arms’-length agency):
    - ensuring legal framework for budgeting and public finance is respected and enforced by line ministries and agencies;
    - supervision of banks and other financial institutions (e.g., banking regulation and supervision agencies, the stock exchange, insurance companies and pension funds);
    - supervision of specific economic sectors (e.g., electricity, telecommunications, water) to ensure effective competition, prevent cartels, and protect consumers.
    - These functions are often shared with or carried out by the central bank or independent regulatory bodies.
  - Transactional (operational) functions:
    - processing of budgetary payments,
    - exercise of internal control,
    - issuing of government securities,
    - collection of taxes and other government revenues.
    - Many transactional functions are highly automated; in most developed countries these have been outsourced or devolved to line ministries or arm’s-length agencies.
  - Hybrid functions:
    - functions that combine policy and transactional elements (e.g., government debt strategy implemented via T-bill and bond market operations by a debt management department, an arm’s-length agency, or the central bank acting as agent).

### Organizational implications: specialization, separation, and coordination
- Rationale:
  - Specialization tends to improve efficiency and effectiveness; public managers prefer focusing on policy and delegating operational work (Dunleavy 1992).
- Risks and coordination needs:
  - Separation of policy and operational responsibilities can disconnect policy-making from administrative realities (example: U.K. tax policy concentrated in the Treasury while collection was merged into an independent agency after the O’Donnell review).
  - Policymakers must be able to consult staff in revenue-collecting agencies or operational units about implementation implications.
- Safeguards and organizational design:
  - Arrangements to prevent conflicts of interest are important where policy and transactional functions coexist.
  - Example: in France the division responsible for tax policy is integrated in the directorate for tax and accounting but reports directly to the director-general of the finance ministry.
  - Debt management commonly organized into front, middle, and back offices with Chinese walls separating each office:
    - front office — design and execution of debt transactions;
    - middle office — design of the public debt strategy;
    - back office — operational and administrative functions, such as payments, accounting and reporting.

### Key conceptual points and implications for reform
- “Organization” encompasses formal structures (departments, processes, rules) and broader social constructs shaped by political, socio-economic, legal, historical, and cultural context.
- Understanding finance ministry behavior requires analyzing political economy, behavioral economics, and public choice dimensions—including the interactions among politicians, senior officials, bureaucrats, voters/taxpayers, civil society, and financial institutions.
- Reform prescriptions focusing on legal frameworks and business processes need to be complemented by attention to political and cultural drivers to gain traction for technical reforms.

*Source: _wp15232 - 1. Taxonomy of Central Finance Functions*

### 1. Fiscal Policy

### 1. Fiscal Policy

### Fiscal policy
- Fiscal policy analysis and formulation, fiscal rules
- Monitoring compliance with rules, spending ceilings and performance targets
- Macro-fiscal forecasting
- Debt management strategy
- Regulation of debt markets
- Debt issuance and registry functions
- Policy on taxation and other government revenues
- Enforcement of tax laws
- Collection of taxes, customs / excise duties, and other revenues
- Policy on and management of fiscal risks, guarantees, etc.
- Monitoring implementation of risk management policies
- Issuance of guarantees

### Budget management
- Formulation of the medium-term budget framework / annual budget
- Coordination of budget cycle
- Estimation of budget costings
- Public investment strategy and planning, policies and guidelines
- Monitoring policy implementation, gateway reviews
- Execution of policies and guidelines, including investment appraisal
- Budget execution – policies, guidelines, instructions
- Monitoring/oversight of budget execution, compliance with regulations
- Execution of budget by spending agencies
- Cash forecasting/liquidity management /TSA
- Monitoring through Cash Management Committee
- TSA managed by central bank under government supervision
- Policies on public procurement and PPPs
- Monitoring of policy implementation, gateway reviews
- Execution of procurement contracts and PPPs

### Accounting, reporting, internal control and audit
- Development of accounting policies, rules and guidelines
- Coordination/monitoring compliance with accounting standards
- Compilation of financial reports
- Application of international standards (IPSAS, GFS)
- Provision of internationally comparable fiscal data and statistics
- Standardized recording of transactions, assets, and liabilities of public sector
- Policies on internal control and internal audit
- Monitoring compliance with standards
- Execution of internal controls and internal audit

*Source: _wp15232 - 1. Fiscal Policy*

### 4. Other Central Finance Functions

### 4. Other Central Finance Functions

### Allocation of responsibilities for selected finance functions (empirical comparison)
- Sample sizes:
  - OECD Countries: 34
  - Selected Developing Countries: 25 (Benin, Brazil, Cambodia, Colombia, China, Cyprus, Egypt, Ghana, Indonesia, Jordan, Kenya, Kyrgyz Republic, Malaysia, Mongolia, Moldova, Mozambique, Nicaragua, Panama, Peru, Philippines, Rwanda, South Africa, Togo, Yemen, and Zambia)
- Table 2: Allocation of Responsibilities for Selected Finance Functions (percent)

  A. OECD Countries (34)
  - Macroeconomic forecasting: Ministry of Finance 47; Other Ministry 38; Independent Agency 11; Shared Responsibility 4; Total 100
  - Long-term fiscal projections: Ministry of Finance 55; Other Ministry 33; Independent Agency 12; Shared Responsibility -; Total 100
  - Tax policy: Ministry of Finance 82; Other Ministry 12; Independent Agency 6; Shared Responsibility -; Total 100
  - Formulation of the budget: Ministry of Finance 91; Other Ministry 9; Independent Agency -; Shared Responsibility -; Total 100
  - Public investment planning: Ministry of Finance 50; Other Ministry 50; Independent Agency -; Shared Responsibility -; Total 100
  - Standards and policies on accounting: Ministry of Finance 47; Other Ministry -; Independent Agency 41; Shared Responsibility 12; Total 100
  - Regulation of financial institutions: Ministry of Finance 15; Other Ministry 6; Independent Agency 56; Shared Responsibility 23; Total 100

  B. Selected Developing Countries (25)
  - Macroeconomic forecasting: Ministry of Finance 60; Other Ministry 24; Independent Agency 16; Shared Responsibility -; Total 100
  - Tax policy: Ministry of Finance 48; Other Ministry 8; Independent Agency 44; Shared Responsibility -; Total 100
  - Formulation of the budget: Ministry of Finance 48; Other Ministry 8; Independent Agency -; Shared Responsibility 44; Total 100
  - Public investment planning: Ministry of Finance 24; Other Ministry 60; Independent Agency 16; Shared Responsibility -; Total 100
  - Accounting policies: Ministry of Finance 84; Other Ministry 8; Independent Agency 8; Shared Responsibility -; Total 100
  - Regulation of financial institutions: Ministry of Finance -; Other Ministry -; Independent Agency 45; Shared Responsibility 55; Total 100

### Key empirical conclusions and institutional patterns
- Advanced countries:
  - Finance ministry dominant in budget preparation and tax policy.
  - Finance ministry much less dominant in regulation of financial institutions and accounting policies; many advanced countries use independent standard-setting bodies.
  - Independent fiscal councils have reduced or diluted finance ministry roles in macroeconomic and fiscal forecasting and long-term fiscal projections in some countries; 14 OECD countries had established such a council by 2012.
  - 48 percent of OECD countries had established a dedicated public-private partnership (PPP) unit; in nearly half of these, the unit is located in a ministry other than the finance ministry.
  - No exact correspondence between core finance functions and the organizational structure of the finance ministry; examples of central finance functions divided among two or three ministries include Australia, Brazil, Canada, Ireland, France, the Philippines, Turkey, and the United States.
  - Counterexamples: Finland — Minister of Finance also Deputy Prime Minister with “super-minister” status; finance ministry also responsible for civil service personnel management and local government administration in Finland.
  - National statistics collection sometimes under finance ministry authority, though international trend is for independent statistical agencies (e.g., EU Regulation 223/2009).

- Developing countries:
  - Wide dispersion of organizational arrangements; some functions remain rudimentary.
  - Shortage of capacity: tax policy analysis often de facto carried out by revenue collection agencies.
  - Financial sector under-development: oversight and supervision often managed largely through the central bank.
  - Ministry of planning frequently responsible for capital investment budget; overall budget formulation responsibility often shared with finance ministry (nearly one-half of surveyed countries).
  - Macroeconomic forecasts often prepared by both finance ministry and central bank, often cooperatively.

- Differences by legal/administrative tradition:
  - Distinct organizational patterns between Anglophone and Francophone countries and other governance models; differences may be lessening over time.
  - In many Francophone countries, budget process elements, accounting, cash management, tax policy, and revenue administration are centralized in the finance ministry (heritage of French colonial state), though France has devolved certain powers since the 2001 Loi organique relative aux lois de finances (LOLF).

- Central bank roles:
  - Historically important fiscal role: running bond/treasury bill auctions, influencing government financing policy, directly financing government cash requirements, managing government bank accounts, processing payments, supplying registry/records for public debt.
  - Since the 1980s, good practice calls for stricter separation of fiscal and monetary policies, limiting central bank fiscal role mostly to providing banking services to the government.
  - Exceptions: central bank cashier functions in former Belgium colonies (Burundi, Democratic Republic of Congo); control and collection of tax revenue and budget payments in Haïti; important role in debt management in Colombia and Uruguay; most treasury functions provided by the Central Bank of Yemen.
  - Central banks sometimes perform quasi-fiscal activities (e.g., interest rate subsidies to state enterprises and the private sector).

### Trends: centralization vs devolution of functions
- Two major trends over the last 30 years:
  - Progressive move from centralization within the finance ministry to devolution of transactional/operational functions to line ministries and agencies.
  - Shift of finance ministries toward greater emphasis on policy-making functions.
- Consequences:
  - Staffing: fewer but more specialized staff in finance ministries.
  - Emphasis shift: from controlling inputs to managing systems, outputs, and outcomes.
  - Growing reliance on “network” organizations that exchange reliable and timely financial information among budget stakeholders.
  - Finance ministry role becomes focused on regulating financial systems and information, and monitoring performance of service-delivery agencies.
- Autonomous or semi-autonomous agencies:
  - Devolution trend includes creation of agencies for macro-fiscal forecasting, debt management, revenue collection, public procurement, and delivery functions (e.g., payment of social welfare benefits).
  - Strong trend since the 1970s in Australia, Canada, New Zealand, the U.K., and the Nordic region; examples include U.K. executive (“Next Steps”) agencies and Canada’s special operating agencies (SOAs).
  - Devolution of regulatory responsibilities to independent agencies for financial markets, energy, telecommunications, public transport; EU post-crisis creation of national supervisory bodies under the European System of Financial Supervision (ESFS).
- Risks and counter-trends:
  - Fragmentation from agency creation can weaken central control of spending and consolidation of fiscal data; dangerous where fiscal risks need central oversight.
  - Global financial crisis prompted some recentralization moves to strengthen finance ministry control (partial reversal of earlier devolution).
  - OECD survey (33 countries) indicates sharpening of central controls by finance ministries between 2007 and 2012 in areas such as approval of in-year reallocations and end-year carryover of unspent appropriations.
- Fiscal councils:
  - Many countries, especially in the EU, established independent fiscal councils to promote sustainable public finances through public assessments of fiscal plans/performance and evaluation/production of macroeconomic and budgetary forecasts.
  - Fiscal councils generally review fiscal policy performance but do not replace executive branch responsibility for setting and executing fiscal policy. Example: U.K.’s Office for Budget Responsibility (OBR) projects macroeconomic and fiscal indicators while H.M. Treasury retains its own macro-fiscal unit.

### Case study note: devolution of treasury functions (EU)
- Member states in the EU balance finance ministry control of core policy functions with line ministries’ management control and accountability for resources.
- Application varies widely across countries and sub-regions; national treasuries’ staff numbers range from less than 20 in some small countries to many thousands in others.

### Synthesis
- Finance ministry functions and organization are dynamic and evolve with economic, financial, and political changes and as the characteristics of finance functions change.
- No single pattern fits all countries; local context determines the allocation of roles and responsibilities for core fiscal functions.
- Trade-offs exist between decentralization (efficiency, responsiveness) and centralization (consolidation of fiscal data, control of fiscal risks).

*Source: Adapted from Allen and Krause (2013).*

### Box 1. A Comparison of Treasury Systems across the EU

### Box 1. A Comparison of Treasury Systems across the EU

### Treasury: core functions
- The Treasury comprises an important sub-set of public finance functions that includes:
  - the preparation of accounts (“book-keeping”),
  - the setting of accounting standards and policies,
  - the application of internal controls and the processing of payments on behalf of the government,
  - the forecasting and management of the government’s cash requirement,
  - the preparation of annual financial statements,
  - oversight of the government’s bank accounts,
  - the management of public assets, liabilities and guarantees.

### Diversity of treasury models and drivers of design
- There is no single model of “the Treasury” that applies universally across the EU; rather a wide diversity of practices and organizational structures exists.
- Design determinants cited:
  - the range of functions carried out,
  - the control framework,
  - the degree of centralization and decentralization,
  - whether organized as a directorate or department of the finance ministry or as an arms’-length agency with operational independence but oversight by the finance ministry.
- Observed trend over the past “twenty-thirty years”:
  - (i) to decentralize most operational functions of the Treasury (e.g., internal control and payment processing);
  - (ii) to establish autonomous agencies to manage the remaining centralized functions.

### Sub-regional variations of treasury systems within the EU
- British/Irish/Scandinavian system:
  - payment and control functions are decentralized to line ministries,
  - central policy and oversight functions are located either in the finance ministry or an arms’-length agency (example given: the Treasury Management Agency, NTMA, in Ireland).
- Francophone system:
  - payment and control functions were heavily centralized in the finance ministry, with controls extending into local governments and state enterprises,
  - many processing functions transferred to line ministries under the modernizing LOLF of 2001,
  - a specialized agency set up to pay public service salaries.
- Belgian system:
  - a variant of the French model in which the central bank plays an important role, especially for payments.
- Spanish/Portuguese system:
  - similar to the Francophone model but less centralized;
  - in Spain, an autonomous treasury agency is responsible for the processing of payments and managing the treasury single account (TSA).
- Former Yugoslav system:
  - retains a powerful, centralized Treasury agency largely independent of the finance ministry,
  - also includes more decentralized versions of this model (example: Bulgaria).

### Country-by-country variations and illustrative functions
- Substantial country-by-country variations exist within the broad categories above.
- Examples of specific country practices:
  - Sweden: the National Financial Management Authority (ESV), an independent agency, sets accounting policies and rules, produces the government’s annual financial statements, compiles ratings of the financial management performance of spending agencies for publication, and prepares forecasts of government spending.
  - Cyprus: the Accountant General’s Department is also responsible for policy on public procurement (an issue usually managed by the finance ministry or an arm’s-length procurement agency in other EU countries).

### Assignment and performance of core functions (policy implication)
- What is important is:
  - (i) that all core Treasury functions are assigned to some specific directorate or agency to manage on behalf of the government, and
  - (ii) that these functions are carried out efficiently and effectively.

### Degree of devolution mapped against ministry structure (summary of Table 3)
- Four levels of decentralization are defined:
  - a centralized model where all treasury functions are retained by the finance ministry;
  - a deconcentrated model in which some functions are devolved to line ministries but operated by officials of the finance ministry posted to the line ministry (example: France through the financial controllers);
  - a decentralized model in which controls are fully delegated to the line ministries;
  - a hybrid model representing a mixture of deconcentrated and decentralized characteristics.
- Various organizational arrangements for the central ministry may be combined with these models:
  - treasury functions assigned to a department or directorate within the ministry of finance,
  - treasury functions assigned to a separate ministry,
  - in highly decentralized countries, virtually all treasury functions devolved out of the central ministry, leaving only a residual monitoring role for the budget department of the finance ministry.

### Efficiency trade-offs across models
- No single model is universally most efficient; efficiency depends on policy trade-offs and country context.
- Centralized and deconcentrated models:
  - likely effective in achieving overall financial control by the ministry of finance and consolidating fiscal information;
  - the deconcentrated model tends to be heavy on staff resources.
- Decentralized models:
  - most efficient in promoting efficient business processes and accountability at the spending agency level;
  - may weaken control by the finance ministry and increase a country’s exposure to fiscal risk.

*Source: _wp15232 - Box 1. A Comparison of Treasury Systems across the EU*

### Section II are not static, and are strongly influenced by their political, socio-economic, and

### _wp15232 - Section II are not static, and are strongly influenced by their political, socio-economic, and

### A. Traditional vs. Emerging Models of Finance Ministries
- Box 3 frames two models (or states) of finance ministry organization: the “traditional” model and the “emerging” model. These represent opposite ends of a spectrum; most countries occupy intermediate positions.
- Direction of change is described as “almost invariably from left to right” (traditional → emerging); transitions are not linear and can involve policy trade-offs (example: transparency of fiscal reporting may decline while spending controls are decentralized).
- The traditional model remains present in many developing countries and some advanced economies; evolution to the emerging model can take many years.
- Literature cited on characteristics and management of change includes Dunphy and Stace, 1983; Kanter, Stein, and Jick, 1992; By, 2005; and Krause (2009) on macro and micro control of public spending.

Box 3 — characteristic contrasts (verbatim phrases preserved)
- Traditional Model
  - Segmentalist culture
  - Hierarchical, organizational silos
  - Closed, introspective (budget secrecy)
  - Low accountability and transparency
  - Inward-looking
  - Centralized control environment
  - Direct control of expenditure, rules based organization
  - Narrow strategic perspective
  - Primary focus on central government
  - Short-term perspective to policymaking
  - Process oriented
  - Centralization of functions within the finance ministry
  - Multiple and non-integrated financial information systems
  - Each function/agency has its own system, with limited interfaces
- Emerging Model
  - Integrative culture
  - Horizontal coordination mechanisms, devolution of decision making
  - Open, communicative and consultative
  - More accountability and transparency
  - Outward-looking, inter-ministerial
  - Decentralized control environment
  - Monitoring of fiscal developments and risks
  - Risk-based and performance oriented control systems
  - Broad strategic perspective
  - Holistic view of public finances
  - Medium-term perspective to policymaking
  - Policy oriented
  - Many tasks devolved to line ministries and spending agencies
  - Integrated financial information system (IFMIS)
  - Coverage of core financial functions and agencies, interfaced with other noncore IT systems (e.g., payroll management, procurement)

Key comparative findings (textual bullets from source)
- Traditional structures tend to be “segmentalist”: organizational culture characterized by segregation/compartmentalization of functions and weak horizontal and vertical coordination (Kanter, 1983).
- Segmentalist finance ministries generally have a short-term perspective, cautious/resistant managers, risk-averse behavior, described as “inertia without accountability” (Peterson, 2015).
- Integrative culture ministries encourage cooperation, flexible business processes, focus on solutions rather than strict adherence to formal rules, emphasize efficiency and effectiveness, monitoring/evaluation frameworks, and risk management.
- Traditional ministries are inward-looking, secretive, transaction-focused, narrow strategic perspective, focus mainly on central government operations, and often ignore local governments, public enterprises, off-budget spending, contingent liabilities, and quasi-fiscal activities.
- Emerging ministries are more open, smaller with policy focus, wider public sector perspective, medium- to long-term orientation, substantial delegation of financial management powers to line ministries/agencies, emphasize accountability, transparency, and analytical tools for outcome delivery.

Developmental pattern hypothesis
- As countries develop, concentration of central finance functions may follow an inverted-U shape (Allen and Grigoli, 2011; World Bank, 2013): finance ministries start small, expand in middle-income status, then contract as development advances.
- Dispersed manual systems of accounting, reporting, and budgeting tend to reinforce concentration in developing countries.
- Movement to advanced status accompanied by PFM reforms, less concentration, broader distribution of functions, greater organizational autonomy, and further computerization allowing transfer of transactional functions to line ministries/agencies.

Table 6 evidence summary (institutional and cultural characteristics across selected countries)
- Countries analyzed: Finland, France, Spain, South Africa, Turkey, U.K., U.S.A.
- Selected attributes and aggregated scoring findings (as presented in table):
  - Number of ministries: Single / Multiple / Multiple / Single / Multiple / Single / Multiple
  - Form of bureaucracy: Mixed / Mixed / Mixed / Mixed / Traditional / Flexible / Mixed
  - Open/communicative culture (source: 2012 Open Budget Index): High / High / Medium / High / Medium / High / High
  - Use of integrated ICT systems: High / High / High / High / High / Low / Low
  - Decentralize controls of budget expenditure: High / Medium / Medium / Medium / Low / High / High
  - Broad strategic perspective: High / High / Medium / Medium / Medium / High / High
  - Coverage of core policy functions: High / High / Low / High / Medium / High / Medium
  - Devolution of transactional functions: High / Medium / Low / High / Medium / High / Medium
- Open Budget Index scores cited:
  - France (Score: 83, ranking: 5)
  - Spain (score: 63, ranking: 19)
  - South Africa (score: 90, ranking: 2)
  - Turkey (score: 50, ranking: 45)
  - U.K. (88, ranking: 3)
  - U.S.A. (score: 79, ranking: 7)
- Notes on sources for ICT and other scoring are included in the table footnotes (e.g., France: Court of Accounts. Public Report on the Chorus System, 2011; Turkey: The World Bank, 2011; U.K.: National Audit Office, 2011; U.S.A.: Government Accountability Office, 14/671T, 2014).

External influences and constitutional adaptation
- Institutional and cultural characteristics are not static and are strongly influenced by political, socio-economic, and technical environments, as well as by developments in other countries regarded as benchmarks.
- Examples of constitutional/legal adaptation to the U.S. model affecting PFM and finance ministry design: Korea, Liberia, Nigeria, the Philippines.
- Kenya’s recently adopted Constitution (2011) adopts aspects of the American system of financial governance by creating a parliamentary budget office, a National Treasury, and ministries headed by Cabinet Secretaries appointed by the President.

### B. Reorganizing Ministries of Finance
- Organizational restructuring approaches (Dunphy and Stace, 1993; Kanter, Stein, and Jack, 1992):
  - Fine tuning: continuing process; fine tuning of “fit” between functions and structure, staffing and business processes; typically at department/division/unit level.
  - Incremental adjustment: progressive adjustments of limited scope to align strategies, structures, and management processes to new procedures, technologies, or external political/economic changes.
  - Modular transformation: major realignment of one or more departments/divisions.
  - Corporate transformation: organization-wide change; substantial shifts in business strategy; major adjustments to structure, decision-making, senior management alignment, human resource practices, and IT systems.
- In practice, countries typically follow a mixture of these approaches (Box 4 referenced for illustration).

*Italic source attribution: _wp15232 - Section II are not static, and are strongly influenced by their political, socio-economic, and technical environment (source PDF content)._*

### Box 4. Changes in the Organization of the CFA in U.K., France, and Turkey

### Box 4. Changes in the Organization of the CFA in U.K., France, and Turkey

### Changes in France, Turkey, and the U.K.
- In France:
  - Fine-tuning―at all times.
  - Incremental adjustment—creation of a legal department (1988), an arm’s length agency for debt management (2001), a budget reform directorate (2001–05), and an agency to oversee state-owned enterprises (2004)
  - Modular transformation—creation of a Secretary General in charge of cross-cutting and support functions; merger of economic, financial, international relations and treasury administration (2004), merger of accounting and tax administrations (2008)
- In Turkey:
  - Fine-tuning―at all times.
  - Incremental adjustment—establishment of regulatory authorities to strengthen the market economy, after economic crises of 1980, 1994, and 2001; establishment of risk management office in the Treasury; separation of tax policy and tax administration functions (2005)
  - Modular transformation—separation of Undersecretariats of Treasury and Foreign Trade (1994); reorganization of the Undersecretariat of Foreign Trade as Ministry of Economy and the Undersecretariat of State Planning as the Ministry of Development (2011)
  - Corporate transformation—creation of an Undersecretariat responsible for capital budgeting (1960), separation of the Treasury from the MoF and establishment of the Undersecretariat of Treasury and Foreign Trade (1983)
- In the U.K:
  - Fine-tuning―at all times
  - Incremental adjustment—multi-year budgeting (199-2000s), resource accounting and budgeting (1990s-2000s)
  - Modular transformation—reorganization and strengthening of single departments in the 1980s (local government finance, privatization), PPPs (1990s), accrual accounting (1990s) and financial regulation (following 2008 crisis)
  - Corporate transformation—Bank of England independence and establishment of Financial Stability Authority (1997), establishment of Office for Budget Responsibility (2010)

*Source. FAD staff*

### Political and constitutional drivers of organizational change
- Election of a new government or emergence of a powerful political leader can drive organizational change; example: Margaret Thatcher’s premiership in the U.K. and the Financial Management Initiative and Next Steps Initiative.
- Next Steps Initiative features: new semi-autonomous executive agencies operating at arm’s-length to parent ministries, own governance arrangements, flexibility to manage resources, performance targets set by the British Treasury, accountability to parliament.
- Treasury initially resisted executive agencies due to risks to control of public spending, but accepted them conditional on rigorous financial controls and reporting (Allen, 2013).
- U.S. example: Clinton-Gore National Partnership for Reinventing Government (NPR) of 1993 with objectives to “create a clear sense of mission; delegate authority and responsibility; replace regulations with incentives; develop budget-based outcomes; and measure [our] success by customer satisfaction.” Many elements remain but overall benefits continue to be debated (Halligan, 2013).
- Turkey example: 1980s Ozal governments viewed finance ministry as obstacle to market-oriented reform; separation of the Treasury from the ministry and reorganization reporting to the prime minister; subsequent reforms fragmented central finance functions by creating a separate ministry of economy.
- Extreme constitutional changes can prompt reorganization: South Africa’s 1997 constitution led to a National Treasury with broad mandate; Kenya’s new Constitution led to reduction in number of ministries by two-thirds, creation of a new National Treasury, and complete local government sector reform.

### Impact of economic and financial crises
- Economic and financial stress often spurs adoption of business-like management techniques and organizational reform in finance ministries (Hood, 1995).
- New Zealand 1970s crisis: public sector reforms included organization of the Treasury, accrual-based financial accounting and reporting, devolved budget management, performance agreements, establishment of an independent central bank. Reforms aimed to improve responsiveness and accountability of public servants (Halligan, 2013); criticisms exist that objectives were not fully met (Schick, 2001b).
- Turkey 2001 crisis: led to PFM, financial sector oversight and debt management reforms; establishment of Banking Regulation and Supervision Agency; risk management department in the Treasury; separation of government revenue collection from revenue policy in the Ministry of Finance.
- Global financial crisis of 2008: required emergency actions by finance ministries and central banks; the first pillar of good financial management—achievement of overall fiscal discipline through high-level fiscal targets and rules—assumed more importance (IMF, 2014). Resulted in shift from financial compliance and control toward macro-fiscal analysis and policymaking to achieve fiscal sustainability; substantial organizational changes in finance ministries, central banks, and financial regulatory agencies; increase in staff and skills for financial supervision in affected countries (U.K. example referenced, Allen, 2013).
- Regional economic union processes can spur reform: EU Fiscal Compact (Treaty on Stability, Coordination and Governance in the Economic and Monetary Union of 2012), the “six-pack”, and proposed “two-pack” strengthen fiscal governance; establishment of fiscal councils and directives/regulations on internal control, public procurement, and financial supervision. Similar pressures in WAEMU and EAC member countries.

### Pressures to increase accountability and transparency
- Pressure from IFIs, rating agencies, parliaments, and civil society can lead finance ministries to review accounting, fiscal reporting, macroeconomic forecasting, and macro-fiscal analysis.
- EU example: outsourcing macro-fiscal functions to independent fiscal councils; the U.K. Office for Budget Responsibility (2010) led to the Treasury being stripped of producing official macroeconomic and fiscal forecasts (Allen, 2013).
- Trend toward independent government statistics offices separated from the executive branch.

### Changes in institutions and business processes
- Modernization of PFM laws and processes can drive organizational change:
  - Sweden: 1990s fiscal reforms affected balance of power, strengthened bodies responsible for economic and fiscal policy, and led to changes in finance ministry organization (Molander and Holmquist, 2013).
  - Finland: introduction of program budgeting and results-based management since late 1980s (Tiihonen, 2012).

### Principles for reorganizing a finance ministry (Box 5)
- Principle 1: Unitary finance ministry
  - There should be a single finance ministry that is responsible for performing central finance functions. Where for political or institutional reasons it is necessary to divide such functions among two or more ministries or agencies, arrangements should be put in place to ensure effective coordination and cooperation among the ministries concerned.
- Principle 2: Flexible bureaucracy
  - Finance ministries should develop a flexible bureaucratic structure that permits: (i) efficient decision-making cascading through different levels of the organization; (ii) effective and timely communications and coordination both vertically and horizontally within the organization; (iii) effective and timely communications and coordination with other parts of the government, and external stakeholders.
- Principle 3: Agencies to manage specialized finance functions
  - Specialized finance functions such as revenue collection and debt management should be devolved to arms’-length agencies, whose operations and performance are monitored closely by the finance ministry. A precondition for establishing these agencies is that appropriate controls be in place to ensure that the financial management and performance of such agencies (internal controls, accounting and reporting, procurement, audit) are robust. Senior management of the finance ministry should have access to regular reports that monitor the agencies’ operations and performance, enabling them to respond immediately to any issues that require the ministry’s attention.
- Principle 4: Devolution of transactional functions to line ministries
  - Finance ministries should progressively delegate responsibility for routine transactional functions such as payment processing, internal control and procurement to line ministries. As such devolution occurs, the finance ministry’s role should switch to monitoring the line ministries’ operations and performance, and taking action where necessary to deal with unforeseen developments. Finance ministries should not devolve functions to line ministries until they are satisfied that the ministries concerned have sufficient capacity to undertake such tasks. Initially the finance ministry may also want to exercise control over the appointment of financial managers and accountants to positions in the line ministries.
- Principle 5: Focus on core policy and regulatory functions
  - The corollary of Principles 3 and 4 is that finance ministries should build capability in the policy areas that are central to their mandate. Policy functions that are not related to public finance should generally be dealt with by other ministries. Communications and coordination between the finance ministry and specialized agencies should be reinforced to ensure that staff engaged in operational tasks can inform the policy decision-making process, and vice versa.
- Principle 6: Exercise a strong role in agenda setting and shaping policy across the government
  - The finance ministry should build knowledge and skills to analyze cross-cutting policy issues relating to all sectors of the economy, e.g., agriculture, education, energy, environment, health, etc. This is essential if the ministry is to provide well-informed advice to the cabinet on the cost of new policy proposals, and the allocation of budget resources to the respective ministries. More generally, the ministry should play a key role in agenda setting and shaping policy across the government.
- Principle 7: Consolidate new functions with existing departments
  - The finance ministry should refrain from creating specific structures outside existing departments to manage emerging issues (e.g., MTBFs, the management of PPPs, macro-fiscal forecasting, fiscal risks monitoring). New policy functions should be consolidated in existing departments to maximize synergies and communication within the organization.

### Challenges and risks of reorganizing finance functions
- Political and institutional constraints
  - Issue: In many developing countries opportunities for reorganizing the finance ministry may be heavily constrained by the political environment. Political, ethnic and other dominant groups may prevail, and the finance minister may have an insufficiently strong power base to drive through desired changes in his ministry. The president may seek to balance power among his ministers, ethnic leaders and other elites, even when budgetary outcomes and the capability of the finance ministry are weakened. State treasury organizations may operate in practice as centers of patronage, rent-seeking, and money laundering. As a result, even seemingly technical reforms such as the introduction of a computerized financial management information system (FMIS) or a TSA may meet strong resistance at the political level, a situation that is commonly observed in many developing countries.
  - Proposal: Embarking on a reorganization of the finance ministry in a developing country can be problematic, as modular and corporate transformation solutions (discussed earlier) are risky and politically sensitive. Hence, a more effective solution may be for reform to proceed in an incremental, piecemeal way, focusing on specific functions or units of the finance ministry rather than the whole organizational structure.
- Organizational segmentation
  - Issue: A common feature in developing countries, particularly as specialization increases, is the tendency to disperse and fragment functions across the finance ministry rather than retaining or consolidating them within a limited number of departments. An example would be the creation of new units responsible for providing advice on specialized topics such as macro-fiscal forecasting, fiscal risk analysis, debt strategy, policy related to taxes and other government revenues, local government finance, the management of state enterprises, or public-private partnerships. This type of incremental change in the organization of a finance ministry has commonly developed more by historical accident than design. Ministries of finance become characterized by a multiplicity of structures and administrative layers, resulting from the progressive addition of new functions, without consideration being given to the need for prior reorganization. These structures usually enjoy some autonomy from existing core departments and units of the ministry, and often report directly to top management, thus increasing their relative political influence. Such organizational segmentation makes it more difficult to integrate functions and balance interests. It also tends to lengthen and complicate business processes, and increase inefficiencies and staffing costs.
  - Proposal: Possible solutions to reduce segmentation include the integration of new functions and units into existing departments of the finance ministry, and the establishment of cross-cutting teams with representatives from departments/units such as macro-fiscal analysis, the budget office, and debt management.

*Source. FAD staff*

### Box 6. Trends in Advanced Country Restructuring of Core Finance Functions

### Box 6. Trends in Advanced Country Restructuring of Core Finance Functions

### Trends by core finance function
- Budget preparation and execution
  - Reorganization examples (e.g., France, U.K.) include strengthening and separating budget overview units and sector-by-sector units.
  - Budget overview units: responsible for preparing medium-term fiscal forecasts, formulating the government’s overall fiscal strategy and annual budget targets, and coordinating the budget preparation process.
  - Parallel units for “shadowing” the budgets of line ministries and the entities supervised by or attached to them, for both budget preparation and execution.
- Debt management
  - International good practices call for a consolidated approach to the government’s overall portfolio of debts and liabilities, with a debt office in charge of managing all debts.
  - Organization of the debt office into a front-, middle-, and back-office is recommended.
  - During the 1990s and 2000s, many countries established an integrated debt management office either within the finance ministry, or through an arm-length agency (e.g., Netherlands, Sweden, the U.K. and the U.S.A.).
- Revenue policy and administration
  - Separation of revenue policy and revenue administration functions is becoming common.
  - Designing a tax system, formulating policy, drafting tax legislation and estimating its impact is a core function of the finance ministry.
  - Administration of taxes requires different skills and can be segregated from tax policy, while maintaining the ability for the revenue agency to provide technical advice.
  - Separation can take the form of an autonomous revenue agency (many Anglophone countries) or functional segregation within the finance ministry (France).
- Government statistics
  - Strong case for a government statistical agency independent of day-to-day government business and free of political influence.
  - Countries use a variety of approaches; in the EU independence of the government statistics office is mandated by legislation.
- Fiscal risk analysis and management
  - Emphasized in recent IMF board papers and the IMF’s extensively revised Fiscal Transparency Code.
  - Main sources of fiscal risk include macroeconomic developments and PPPs.
  - Units for managing PPP risks have been established in many advanced countries and some emerging markets.
- SOEs oversight and monitoring
  - Many governments centralize SOEs’ oversight in a single specialized entity to manage state assets and protect government shareholder value, segregated from policy-making and regulatory functions.
  - This function can take the form of a department or unit within the finance ministry (France and South Africa), another ministry (U.K.), or an autonomous agency (China, Chile).

### Weak coordination within government
- Issue
  - Finance ministries usually exert substantial power as they formulate fiscal policies and largely control budget allocations.
  - Finance ministries often influence other areas of economic policy because most new policy proposals have fiscal and financial implications.
  - Line ministries (environment, social welfare, national defense, local government finance, management of state enterprises) typically lead policy dialogue and may be powerful.
  - Coordinating mechanisms developed in most advanced countries to ensure financial costs and benefits are appraised and approved by the finance ministry.
  - The office of the president or prime minister (or the cabinet office in the U.K.) can play a key role in coordinating and mediating.
- Examples
  - Turkey established the Economic Coordination Council in 2009 to strengthen coordination among ministries; the Treasury acts as the secretariat.
  - In Ireland, the breaking up of the finance ministry in 2012 led to the creation of a high-level council, chaired by the prime minister (Taoiseach), to coordinate the work of the two departments on overall management of the economy, tax policy, and the budget.
- Problem in developing and middle-income countries
  - Coordination mechanisms tend to be much weaker; the role of the cabinet and coordinating role of the president or prime minister are underdeveloped.
  - Involvement of the ministry of finance in the legislative process may be constrained by the absence of a central structure for managing law and regulation preparation and approval.
  - Example consequence: finance ministries can have difficulties preventing and limiting tax exemptions created by sector-specific legislation (mining, electricity, investment incentives).
- Proposal
  - Strengthen the role of the center of government by establishing a small-size specialized body for managing ministerial discussions where the ministry of finance has insufficient traction in dialogue on policy initiatives with significant fiscal implications.

### Lack of capability to deliver common services
- Issue
  - Many developing-country finance ministries devote limited resources to common services (facilities management, mail services, effective IT systems).
  - Severe weaknesses: inadequate staff records, poor recruitment and retention systems, ineffective performance management (World Bank, 2013).
  - Training to upgrade staff expertise, especially for analytical policy functions, may be insufficient.
  - Human resource systems may not be robust or flexible enough to support major reorganization or increase staff mobility.
  - Salary rigidities: in French and Spanish speaking countries, relatively high salaries are paid to professional staff in finance ministries compared with line ministries, limiting mobility. Central banks, external audit offices, and other autonomous agencies commonly have higher salary scales than finance ministries.
  - Internal rigidities: some departments offer higher salaries and benefits to certain categories of staff (tax collectors, debt managers).
- Proposal
  - Focus on improving human resource management and training capabilities.
  - In countries with centralized HR and payroll systems, consider progressive devolution of recruitment while maintaining centralized control of the government’s overall payroll.
  - Develop policies to strengthen staff mobility across government, create more flexible salary structures to attract specialized or scarce skills (accountants, economists, financial managers, lawyers, IT specialists), and develop “soft” skills in management and human resource development.

### Coordination and managerial responsibilities within the finance ministry
- Issue
  - Internal operations often characterized by compartmentalized departments and inadequate mechanisms to transfer information.
  - Departments function as silos; horizontal and vertical communications are weak.
  - Example: budget and accounting departments largely disconnected; IT systems not fully integrated, disrupting budget execution information flow and hindering reliable financial reporting.
  - Blurred roles between political and technical levels; in some countries virtually all decisions require the finance minister’s personal approval, overwhelming top management with technical decisions and stripping departments of decision-making responsibilities.
  - Genuine coordination requires changes in individual responsibilities and incentives, not just organizational redesign.
- Proposal
  - Establish a senior management board or a secretary general function to facilitate sharing of information and decision-making on cross-cutting issues where appropriate.
  - Devolve responsibilities to line managers to empower departments and allow top management to focus on strategic decisions.
  - Improve internal communications, including IT and email systems.

### Managing risks and sequencing reforms
- Issue
  - Finance ministries are backbone of public management; restructuring risks destabilizing key government functions (budget allocations, revenue collection).
  - Ministries produce critical outputs (economic and fiscal forecasts, budget analysis and projections, financial statements) based on large quantities of data from multiple sources.
  - Organizational arrangements are not the sole source of poor performance; business processes, staffing levels, qualifications and skills matter.
  - Reorganizing departments may be counterproductive if root weaknesses are inadequate processes or weak capabilities.
  - Restructuring can make organizations more inward-looking, delaying other structural reforms and expected outputs.
  - Overwhelming pace of reform risks: finance ministry may be overwhelmed and changes may take place too quickly; spending ministries’ capacity to absorb change must be considered.
  - Reorganization should be coordinated with other reforms and introduction of new ICT systems; sequencing of change is critical.
- Proposal
  - Implement a change management strategy to manage risks associated with restructuring.
  - Identify challenges and risks alongside mitigation measures prior to reform.
  - Reorganization should proceed in parallel with reforms in business processes and ICT systems and be appropriately sequenced.

### Strengthening organizational "capabilities"
- Issue
  - Objective of reorganizing a finance ministry is to increase its ability to perform functions efficiently and effectively.
  - Distinction between capacity (volume of inputs such as human resources and IT systems) and capability (transformation of inputs into operational decisions and policies affecting economic and fiscal performance) as discussed by Allen, 2013; Allen and Krause, 2013; Whiteman, 2013.
  - Measurement difficulties: high-quality policy advice may be disregarded by ministers for political reasons; confidential nature of advice complicates objective assessment of relevance, timeliness and analytical quality.
  - Some governments have attempted quantitative frameworks for measuring capability which may serve as models for others.
- Proposal
  - Develop quantitative indicators of capacity and capability when reorganizing a finance ministry.

### Approaches and tools for reorganizing a finance ministry
- Functional reviews
  - Assess whether the finance ministry conducts all relevant finance functions and whether any functions are non-essential and can be transferred or outsourced.
  - Prepare a functional chart and engage departments and units participating in functions.
  - Consider grouping functions to maximize synergies and communication and prepare a new organizational chart.
  - Ensure key supporting functions (human resource management, the finance ministry’s own budget, IT systems, legal advice, communications strategy) are defined and adequately resourced.
- External stakeholder analysis
  - Assess views of internal and external stakeholders to determine ownership, commitment, reform champions and opponents.
  - Use analysis to assess whether there is sufficient support for comprehensive reorganization or whether a limited set of changes is preferable.
- Business process reengineering (BPR)
  - Undertake detailed review of business processes and redesign them, focusing on information consolidation across sectors for budget planning, allocation and fiscal reporting.
  - BPR helps identify bottlenecks and constraints and manage change by associating departments and business units; may include line ministries where budget execution and accounting is decentralized.
- Review of staffing and skills
  - Use business-process review outputs to redefine job descriptions and staffing requirements.
  - Match new job requirements against an audit of existing skills and staffing.
  - Consider streamlining grades and salary structures as part of reorganization.
  - Prepare a medium-term plan for human resource development and assess need for external consultants/experts to support change management and assist displaced staff.

### Conclusions (five main conclusions)
- First, the role and culture of finance ministries in many advanced countries has evolved over years from the “traditional” model to the “emerging” model, characterized by greater openness, more flexible management practices, broader strategic focus; evolution accompanied by fewer organizational silos, stronger linkages with external stakeholders, and better communications.
- Second, as countries develop, finance ministries transfer responsibility for many transactional and operational functions to line ministries and establish arms’-length agencies for specialized public finance areas; finance ministries increase capability to oversee and monitor these agencies and strengthen/expand their policymaking role.
- Third, organizational restructuring should be considered to improve capability in key policy functions and strengthen fiscal performance; analysis of functions should come first, followed by organizational structure considerations.
- Fourth, organizational structures evolve continuously over time (incremental change); more radical reforms (corporate transformation) are more feasible with strong political leadership or during economic and financial crises; institutional fragmentation and rent-seeking in many developing countries may favor gradual reform initiatives.
- Finally, local context and institutions are crucial: factors such as political leadership strength, cultural resistance to external norms, power of civil service unions, limits on public service flexibility and job mobility, dominance of informal organization, and decision-making cultures that favor political over economic analysis should inform reform choices; focus on changes that improve incentives and behavior rather than mirroring advanced-country models with limited local tractability.

*Source: Box 6, "Trends in Advanced Country Restructuring of Core Finance Functions," from the supplied IMF working paper content.*

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