Public Financial Management: A Critical Tool for Risk Management in Developing Countries

July 14th, 2014

Doug Hadden, VP Products

Risk management has become an important discipline in Public Financial Management (PFM), particularly in developing countries. For example, the World Bank, via the Coursera MOOC platform, is providing a very interest course on Managing Risk for Development. We have been seeing an increasing emphasis on public investment planning, performance audit and planning for environmental sustainability over the past few years. Here's my take on the contribution of PFM to risk management in developing nation governments:

Government Physical and Network Security – A Reputational Risk

June 27th, 2014

David Robillard, the President of Multilatin, spoke at our recent FreeBalance International Steering Committee (FISC) conference about the reputational risks of physical and network security.

 We recently asked David for insights that we could share with the broader Public Financial Management community with this abridged interview from his offices in Mexico City. 

Q: Is information security a compliance issue?

A: It absolutely is. The US was the first country to legislate about security breaches and make accountable those people in charge of gathering and safeguarding private data. Such laws allow their owners to complain if there is improper use, destruction or theft of sensitive data. Since the 2000's when the state of California legislated upon this matter, 46 more states in the US have followed suit, as well as several countries in Europe, Asia, Africa and Latin America (particularly Mexico, Colombia, Argentina and Uruguay).

Q: What is the weakest link in information security?

A: It depends on the kind of information you are administrating and the type of security systems you would need. For instance, if you keep personal information at the entrance of a building, the information would not need to be collected on the web, so a breach via hacking would not be a risk. In this case, the weakest links would be the person in charge of security, a thief or the loss of information. However, for every case you are only as strong as your weakest link, so according to your specific situation and the one from its owner, you would be able to identify the major threats to your information security. There is a school of thought that people are the weakest link in information security because people make poor decisions like writing passwords on sticky notes or failing to install security patches.

Q: How does poor information security cost governments?

A: Breaches in information security have high costs on reputation, both for governments and companies. If your country does not have a clear legislation on information security, it would be a bigger risk for companies to invest in that country because they cannot be sure what would happen if their information is not protected (i.e. industrial secrets), which affects the country itself and the government income. In addition, if the authorities cannot proceed against security breaches a possible theft or destruction of government's information, it could mean the no recovery of the information and big economic loses.

Q: Have you seen any good practices in Latin America?

A: Mexico has legislation where the Instituto Federal de Acceso a la Información y Protección de Datos (IFAI) can start an investigation in case a security breach occurs in order to determine who was responsible for it, as well as to guarantee that, if this happens, the owner of the information is notified and advised about what to do and how the person responsible will restore the damage.

Q: How has the thinking about "trust" changed in the error of government transparency?

A: Open government information is now considered as a right. Governments make decisions that directly affect citizens. Also, it is now considered that information access is one of the best ways to avoid corruption, as people are watching how the public funds are being used. In this sense, trust is something that governments have to earn through transparency. This means transparency access to information at the same time that legitimately sensitive information is kept secret.

Q: Some economists see corruption as a "second order" problem for growth. What's your view?

A: Corruption is one of the most important problems for growth, firstly because it is a misappropriation that impedes that the funds (private or public) get to its destiny, which in a lot of cases would benefit directly or indirectly a social sector with needs or that would help to impulse local or regional economy. So instead of benefiting a community, it goes to the hands of only a few people, which affects growth Secondly, because it affects the reputation of the company/government that is rumored to be corrupt, which probably make it difficult to invest on it or the investors would ask more money to carry out any project, so the risk may be worth to be taken. However, it may be even worse, as the investors could give bribes and the corruption circle will expand, affecting more and more the growth as more money is needed to carry out any project that could benefit the local/regional/national economy.

Q: Do you think that the media is too obsessed with the "demand side" of corruption rather that the "supply side"?

A: Yes. For corruption you will always need the two sides. I think that it was a good thing at first to "be obsessed" with the "demand side" because normally the "supply side" has no option but to give in if they want to do business.  However, we have now reached the point where both sides are in balance and little is done to attack the corruption on the "supply side" because all the efforts have been focused on the other side.

Q: Have governments become more sophisticated in risk management over the years?

A: It is a tricky question because governments have become more conscious about risk management and have introduced several practices in order to handle it, as happened with security protection. Nevertheless, risk management has become more and more difficult to handle, as risks have increased dramatically since computer technologies have become more sophisticated. Probably more important, information has become the main conduit for commerce, which means that information risks are much higher than years ago.

Critical Need for Public Sector Accountants in the Caribbean

June 10th, 2014

The need for public sector accountancy was one of the subjects at the 32nd Annual Institute of Chartered Accountants of the Caribbean (ICAC) conference held in Paramaribo Suriname last week. There were lessons for the private and public sectors. The Public Financial Management (PFM) lessons included:

  1. Public sector accountancy is becoming more critical in the Caribbean
  2. Large projects for Public Financial Management reform, often called “big bang” approaches, do not work
  3. PFM requires a consideration of economics, understanding agent behaviour and incentives – it’s not all about accountancy
  4. Monitoring and internal audit are critical to fiscal discipline
  5. Integrated reporting concepts are moving from the private to the public sector

10 Public Financial Management Innovation Insights from ICGFM

May 25th, 2014

Doug Hadden

Public Financial Management (PFM) is undergoing change and innovation, particularly in developing countries and emerging economies. My “top 10″ takeaways from the recent International Consortium on Governmental Financial Management (ICGFM) Conference in Miami are:

  1. PFM continues to change, adapt and expand
  2. Context of informal practices and culture is necessary for PFM reform change management
  3. International Financial Institutions (donors) are often as much of part of the problem as the solution in PFM reform
  4. Transparency has a significant impact of PFM and good governance
  5. There are significant problems in developing country governments when adopting complex financial management software
  6. Public Financial Management is a continues process of reform sequencing
  7. “Megatrends” will have a significant impact of public policy and public financial management
  8. The need for procurement transparency is becoming clearer to governments
  9. Governments need to think in the long term to better manage risk
  10. Capacity building is on the critical path to PFM reform sustainability

You are a Leader whether you think so or not

May 23rd, 2014

Doug Hadden, VP Products

We were treated to a fascinating presentation at the Richard Chambers the the Institute of Internal Audit. His 10 leadership characteristics resonated with the delegates from about 40 countries, most of whom are work for government.

Change Management Workshop on PFM Reform

May 22nd, 2014

Doug Hadden, VP Products

The change management workshop at the 28th Annual ICGFM Conference was engaging with significant participation. That’s probably not because of my involvement so much but from the insights from Richard Hudson and Jim Wright from our partners, Evans Incorporated. It was an enjoyable 3 hours as well and participants grappling with change found it very useful.

Change management has become recognized as critical for any transformation in any organization. PFM reform has significant impact on politicians, public servants and citizens. The workshop focused on three of the many change management disciplines: risk assessment, stakeholder engagement and communications. This aligns with what we’ve experienced in implementing Government Resource Planning (GRP) systems.

The notion of using the “wrong technology” is not rated in the top 5 for financial management software failures. My observation is that some technology solutions put more of a burden on those executing change. And, many software manufacturers are not involved in the governance structure putting more of a change burden on governments and systems integrators.

The insights from the workshop apply beyond the PFM domain.

Government Innovation Highlight of the Day: Organizational Change Management

May 22nd, 2014

Doug Hadden, VP Products

An American, a Canadian and an Englishmen walk into a Public Financial Management (PFM) conference and an organizational change management workshop ensues. I’m joined by Richard Hudson and Jim Wright of Evans Incorporated for this 3 hour workshop. Richard and Jim, as highly qualified consultants, are very good at putting other people to work. Perhaps, I’m participating to add some levity to the proceedings.

As I learned earlier this year from happiness is important at work. Why not happiness at a workshop?

They say that only babies enjoy change. Change is associated with loss and pain. But, there is no progress or transformation with organizational change. So, as a Government Resource Planning (GRP) software provider, we understand the critical role that change management plays in successful PFM projects. The importance of change management is proportional to transformation scope. GRP introduces new procedures, generates new reports, integrates many systems and usually represents a milestone for future reforms. GRP often means continuous change.

Many systems integration firms and large software vendors view change management as but one of many generic project management disciplines. Some see it as a check mark and do not distinguish change in emerging economy governments with that in the OECD private sector. That’s a fatal flaw. That’s why the CAARMA process from Evans is so critical to organizational transformation. It’s a continuos process of planning, training, communicating, mentoring and re-evaluation.

Follow @freebalance and #icgfm14 on Twitter for real-time updates on the conference. Check out our curated tweets on our Storify account

Open Contracting, the 1% and $95bn Cure?

May 21st, 2014

Doug Hadden, VP Products

I’m a big fan of the new open contracting initiative that promises transparency in government procurement through standards. Marcela Rozo, of the World Bank, explained yesterday at the ICGFM Conference how the initiative is conceived to cover the entire cycle from planning through contract deliverables.

Accountants to Change the World?

May 21st, 2014

Doug Hadden, VP Products

Tony Hegarty and Vickson Ncube made a compelling case for public sector accountancy to improve Public Financial Management (PFM). They emphasized, on Tuesday at the ICGFM Conference in Miami, that we don’t need another donor “diagnostic” that states that developing nation governments lack accounting and PFM capacity. It’s high time to move forward with professionalizing public sector accounting in developing countries.

Our “storify” and copies of the two presentations do not provide sufficient justice to the excellent and passionate speeches and remarks.

Global Megatrends Affecting Public Financial Management

May 21st, 2014

Doug Hadden, VP Products

As expected, the presentation by Trevor Davies of KPMG on Monday at the Spring ICGFM conference generated much food for thought. The implication of demographics & urbanization, for example, will increase infrastructure demands and may increase youth unemployment. Climate change will have significant public financial management impact.

Megatrends described were:

  1. Demographics
  2. Rise of the individual
  3. Enabling technology
  4. Economic interconnectedness
  5. Public debt
  6. Economic power shift
  7. Climate change
  8. Resource stress
  9. Urbanization