We attended a 2-day conference at the Inter-American Development Bank, Innovation in Government Week: Strengthening the Institutional Capacity of the State to Deliver. The conference was focused on lessons learned in Latin America but has wider applicability.
There are some very interesting trends in Latin American governance discussed:
Latin American governments are leveraging citizen engagement and transparency to show significant improvement in outcomes
Some of the most effective and innovative reforms are occurring at the sub-national level of government
High use of social media in Latin America has created more demanding citizens
Latin American governments seem to be on the forefront of changing political and public servant incentives
Our busy conference week began Tuesday at the IBM Government Analytics Conference in Washington. The conference was very US focused, but I think that there are some critical takeaways about big data and analytics for all government organizations:
Transparency and open data initiatives are helping to drive the need for analytics in government
Governments are leveraging analytics to address complex “horizontal” problems despite being organized in a “vertical” fashion
There remains cultural barriers to adoption including the view that analytics can’t help experts and that analytics exposes errors in government = political problems
Analytical results needs to change process and policy
Budget and performance management needs to be core to financial management systems, not something that is handled in some external data warehouse
Timeliness of data is often more important than quality of data
It was a privilege earlier today to engage in a graduate class at the Harvard Kennedy School of Government. One of our mandates at FreeBalance, as a for profit social enterprise, is to build and share good practices in Public Financial Management (PFM). This is a unique labor of love for us – to share our experiences to help countries grow. We do not restrict this knowledge to only our government customers.
The FreeBalance team has been building up our methodology on reform sequencing for the past few years based on our experiences in 20 countries and the engagement with the greater PFM community. This was our first opportunity to present an new and comprehensive framework for technology-enabled governance.
The second released document, embedded below, describes good practices in budget formulation. Governments are budget driven and use commitment accounting. Profit is the key concept in private sector accounting. Budget is the key concept in government.
That’s why budget formulation is so critical in government.
Budget is linked with policy and government objectives. It’s the formal and legal expression of government policy. That’s why many countries call a budget “the vote” or the “organic budget law”.
I’ve seen governments fall in Canada by losing the budget debate.
There are many budget formulation applications designed for the private sector. These software programs focus on fulfillment planning: logistics, manufacturing, assembly. Sure, financial planning is part of that. But the result of the planning is rarely multiple aggregate controls across different periods into the financial system. And, rarely handles supplemental budgets, virements, transfers, continuing resolutions and adjustments to tolerances.
And, let’s face it: budgets in the private sector are guidelines.
Credibility of the budget – The budget is realistic and is implemented as intended
Comprehensiveness and transparency – The budget and the fiscal risk oversight are comprehensive and fiscal and budget information is accessible to the public.
Policy-based budgeting – The budget is prepared with due regard to government policy.
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.
What is the budget formulation process?
Budget formulation differs among countries and levels of government. The budget formulation process typically starts economic analysis and prediction for government revenue. The process follows sets of budget rules during a budget calendar that includes a broad set of financial information.
How does budget planning fit into PFM processes?
Government budget planning begins during the fiscal year and leverages historical and current revenue and expenditure information. Budget planning processes align, in theWorld Bank Treasury Reference Model, with economic forecasting, debt management and treasury systems. Liquidity and cash management is critical to understanding the expected revenue and expenditure variations in government.
What budget categories are used by governments?
Budget planning categories differ among countries. The processes used can be different depending on the categories. Typical categories include:
How do budget classifications enable budget formulation across categories?
Government budget formulation software can adapt to the planning workflow and categories used by governments through budget classifications. Government budget classifications, often called Charts of Accounts (COAs), represent the underlying meta data for Public Financial Management (PFM).
The COA structure can be used within the budget formulation software to map:
Users and roles to elements in the COA to ensure that planners are only able to see the correct sub-section of data
Workflow processes and that the budget formulation process follows government standards for different budget preparation categories
Revenue sources such as donors (aid), debt and government revenue can be shown in “fund” source segment or included in the accounting codes
Capital, recurrent and salary categories are typically modeled in the accounting (or object) codes
Program segment and can be combined with object codes can be used to model public investment projects
Organization or location segment can be used to control decentralized budgets across line ministries, government owned enterprises and sub-national governments
What are the major trends in government budget preparation?
Governments need to develop credible budgets to ensure that long-term spending is sustainable. Credible budget planning takes into account the four dimensions of fiscal sustainability:
Off-budget: donor funding and government-owned enterprise budgets can be “off-budget” where governments are unaware of the full revenue and expenditure footprint for effective planning
Government budget formulation software must support:
Financial functionsincluding the ability to develop budgets in any combined top-down/bottom-up process. Effective budget preparation software can take previous data and adjust by formula (such as reduce by 5% all revenue categories or increase the cost of oil by 10%). The software enables linking budget justification directly with the budget classifications. The budget passed by the legislature, often called the “organic budget law” or “the vote” is automatically integrated with the budget execution/accounting system to ensure proper budget controls.
Content. Budget formulation software needs to use data from other sources including importing spreadsheet data directly to the financial budget plan, attaching narrative to budget requests and referencing documents.
Workflow: Flexible workflow functions are necessary to follow the government budget calendar and address budget categories. Multiple budget versions are required.
Performance: Governments with higher capacity can integrate output and outcome data to the COA and develop scorecards.
Component model for budget formulation automation software.
What are the inputs for government budget software?
Inputs in the budget formulation process include:
Financial transactions from previous years (and the active fiscal year) including the tracking of multi-year commitments that roll-over to subsequent years
Budget variances from previous budgets including changes that occurred to the budget during operation such as budget transfers and virements to provide trend information
MTEF year 2 and 3 budget estimates to provide a baseline for the working budget
Macroeconomic data that predicts government revenue, identifies risks, and creates baseline budget assumptions such as currency exchange rates
Cost drivers or established estimates for products and services so that budgets use credible assumptions and align with scenario planning such as analyzing the impact of changing energy costs and currency fluctuations
Documents like budget justification, policy information and reports
Integration with underlying systems and spreadsheets
What are the outputs for government budget software?
Outputs in the budget formulation process include:
Budget controls to be integrated with the treasury system components of the Government Resource Planning (GRP) software for commitment accounting including support for warrants, supplemental budgets, continuing resolutions
Scenario plans that enables government to quickly adjust budgets should risk factors come to fruition during the fiscal year
Documents generated from the system such as budget books
Why are flexible controls required?
Flexible controls in GRP software are critical for governments to match regulations and enable modernization:
Budget laws address high-level budget items in the COA. Therefore, strict control at details or “line item budgeting” is not material to the law
Capacity is critical when determining decentralization and needs to be flexible to support more discretion in spending and budget transfers to improve results
Allotments, appropriations, warrants and cash controls differ among countries based on legal frameworks, traditions and liquidity
Treasury departments provide more value to governments by managing liquidity and adjusting allotments based on surplus and deficit forecasts than approving commitments and transferring amounts among budget line items
What budget control functions are necessary in GRP software?
Multiple Controls: numerous controls can operate simultaneously such as cash warrants and annual appropriations
Periods: different controls can be active for different time periods, typically from a month to a year
Aggregate: controls can operate from detailed line item to high level and where the total of detailed line items could equal or not equal the total for the high level controls
Tolerances: discretion enabled for some controls such as the ability to overspend some monthly controls by a fixed amount or a percentage as long as aggregate controls are not overspent
Commitment Controls: where tolerances can be applied to commitments and obligations
Segregation of Duties: workflow controls to ensure proper separation of duties for spending approvals, payment approvals and budget transfer approvals that meet government fiscal regulations
Organization Configurations: support of different control schemes for different government organizations reflecting legal status and organizational capacity
Why not use spreadsheets or simple web applications for budget preparation?
Spreadsheet and simple web applications do not provide sufficient control, error management and integration for budget planning:
Version management and approval: versions of budgets and approvals for budgets require more sophisticated software that uses workflow control
Controls: budget formulation software is required to create controls, manage segregation of duties integrate with commitment accounting
Errors: validation on data input is not sophisticated in spreadsheet and simple web applications resulting in mistakes
Historical information: integrated budget preparation and budget execution software provides accurate analytical information for budget planners
What are good practices for budget formulation?
Budgets are the legal embodiment of government policy and is critical in public financial management
Budget formulation practices should match country conditions and human capacity
The Chart of Accounts is critical for effective budget processes
Budget formulation software can help to create more credible budgets that provide fiscal sustainability and internal controls
We just finished the one-day training course in London to a group of public financial management professions from Africa and Asia, held at the Crown Agents office. There was a lot of information squeezed into the course that I gave, as you can below. It had a bit of “drinking from a firehose” effect with so much information.
The primary focus of the training was on lessons-learned in implementing Government Resource Planning (GRP) systems in emerging economies. Participants in the course were from the national and regional levels of government and from donors. There was some interesting discussions about vendor governance, donor assistance and PFM sequencing that is almost universal and mostly vendor-neutral.
You can see the topics covered in the embedded document.
General view from the PFM professionals was that the 3 most important PFM reform objectives are improved budget planning, procurement, debt and cash management
No one could guess how fast the fastest FreeBalance implementation was. Closest guess was 6 months which is slightly more that 6 times the fastest time.
Proper sequencing of reforms and the underlying technology remains a challenge in developing countries. Many participants expressed the view that donor representatives often have personal preferences.
Most participant agreed that it is difficult to make most commercial software solutions self-sufficient in governments.
It was agreed that major enterprise software vendors rarely participate in Public Financial Management events. (And, when they do, show little interest in learning from conference sessions.)
One customer of one of the ERP vendors is pleased because there is direct manufacturer support. That happens infrequently (except for FreeBalance, of course.) Maybe that vendor is reading this blog and learning something
There are many decentralization models. All of these models can be enhanced with ICT technology like Government Resource Planning (GRP) to improve governance and transparency. Capacity building in line with Public Financial Management (PFM) reform is necessary for sustained governance reform. That means that GRP tools need to adapt to the changing conditions.
Developing countries are adopting processes and technology designed to increase citizen trust while leveraging citizen and civil society cognitive surplus to improve public policy. If the Arab Spring, Tea Party and the Occupy movement has taught governments anything it’s crowdsource to improve public policy – or be crowdsourced.
Transparent and open government data enables developing nations to harness the power of citizens for audit. As I described recently in citizen audit use cases for Public Financial Management (PFM), there are compliance, fraud and performance citizen audit dimensions. Citizen audit is enabled through open data (proactive disclosure of public financial management information on the Internet) and social media collaboration (Internet enabled feedback and discussion.) I further suggested that it is the duty of citizens to leverage open government.
Auditing is expensive. Very expensive in developing countries. That’s why citizens, civil society and businesses are encouraged to help governments. For example, there is nothing better to uncover procurement fraud or poor procurement decisions than competitors.
We have world class external audit in Canada and improving internal audit, as I described in a previous post. David M. Walker, the former U.S. Comptroller General has pointed out that the US Government Accountability Office has a proven return on investment though trapping fraud, improving controls, proposing performance improvements etc. Yet, even audit agencies with proven returns are being cut back.
The Performance Problem
As I’ve pointed out before, performance management in the public sector is more complex than in the private sector. Private sector organizations have a bottom line: profit. There are established measurements like market share, and return on assets. Output measurements like the number of customer complaints handled, and outcome measurements like customer satisfaction survey ratings are factors that influence financials – profitability. If all the KPIs are green and the company is not making a profit, than the indicators are likely incorrect.
There is no bottom line in government. Outputs and outcomes are the results. Financial – in this case, budgets, is the input. This makes it very difficult to determine whether the KPIs are correct. There could be false positives and false negatives.
Social media in government, or Government 2.0, can engage citizens and civil society to report on outputs or outcomes. For example, the Ushahidi platform is used to monitor elections, disaster response and corruption.
The next stage in citizen engagement is crowdsourcing through expert groups or the public. This shows promise when managed correctly. For example, an effort at the White House generated some unexpected ideas. The principle of using citizens to propose and vet solutions reduces the burden on governments and may generate ideas to solve important problems.
Participatory Budgeting to go virtual?
Participatory budgeting is a process originally developed in Brazil to engage citizens to improve budgets. Adoption of participatory budgeting has grown particularly at local government. My sense is that the immediacy of service delivery in local government can create a critical mass of participation. The use of neighbourhood and civil society meetings and government outreach may not be sustainable in large regional governments and many national governments.
My view is that participatory budgeting will become virtual in the future. We can learn from the lessons in participatory budgeting to improve outcomes.
There is some sensitivity in governments to crowdsource policy because policy is considered the purview of political wonks. There is a notion of budget confidentiality in Canada that may restrict the kind of openness enjoyed in developing countries.
Open Government Costs
Many argue that open government, social media, crowdsourcing etc. just costs money. I’ve summarized the business case for open government in a previous entry. A recent Transparency Camp Brainstorm identified the following benefit categories for open government:
Revenue, primarily in the form of increased tax collection through increased economic activity
Efficiency, effectiveness and productivity through reduced cost per unit of work including cost avoidance
Outcome improvements such as achieving higher levels of service delivery or improved health statistics
The resistance to social media and open data in developed nation governments contrasts to the attitudes from many developing countries. I find a greater acceptance of the value proposition of open government in countries like Timor-Leste, whose transparency portal is an amazing achievement, than in G8 countries. The commitments for the Open Government Partnership show that these countries are innovating beyond expectations. This could result in a more engaged population with a deeper form of democracy than we enjoy in Canada today.
As I’ve written before, social media will be transformational for Public Financial Management. The key driver in developing countries is the need to sustain reform. This doesn’t mean sustaining the PFM “status quo”. Or, tweaking processes. This means continuous modernization and reform. Catching up to developed countries. Leapfrogging developed countries. This effort requires citizen engagement.
Let’s hope that governments at all levels in Canada do not hold back and get leapfrogged.
We often accuse the American government of having an incomprehensible list of acronyms. An “alphabet soup”. We’re falling behind in the acronym arms race in the Government of Canada. Consider the following set of planning and regulatory concepts:
The state-of-the-art of budget planning in the Federal Government includes strategic tools like MAF, MRRS and PAA that attempt to connect objectives with programs and performance. There is standard bottom-up budgeting to maintain existing programs. And, there are different review methods to cut expenditures: reviews looking for efficiencies, reviews to reconsider strategic priorities, reviews to cut costs. It’s difficult to “connect the dots” among these frameworks, structures, architectures and reviews. Even more difficult to connect government objectives with policy, budgets and outcomes across these frameworks, structures, architectures and reviews.
Sustainable planning in developing countries
“Medium term” planning is considered the best practice in developing countries. This is typically a rolling 3 year budget plan. This might sound a bit like the return to the 5 year plans used for central planning, primarily in Communist countries. Medium term planning uses rolling plans rather than separate 5 year discrete plans that operate in series.
The outcomes from government programs often take more than a fiscal year to accrue. Single year budget planning is too short a horizon to affect change. Results can be evaluated and programs adjusted to meet objectives. Medium term planning also takes into account multiple year commitments such as capital expenditures and subsequent recurrent costs. This introduces financial sustainability calculations into budget plans. Developing nations may receive grants for capital expenditures but may not have the operating budget to sustain those capital assets. Long-term financial implications become better understood to policy-makers.
Medium Term Expenditure Frameworks (MTEF) aligns economic realities with revenue and expenditures.
Political realities often encourage short-term thinking. The focus on inputs: the amount spent in a particular riding or Province rather than long-term performance thinking. This short-term thinking can also result in creating financially unsustainable programs.
The emergence of a crisis such as the recent financial market melt-down can also introduce short-term cuts that cannot be sustained. For example, cuts to some programs may result in not meeting legal minimum levels of citizen services. So, spending increases in subsequent years. Cuts to other programs may result in high initial costs to dispose of property or for civil service severance.
Long-term financial sustainability is better achieved when fiscal sustainability is built into the process.
“Medium term” alphabet soup
There is no lack of acronyms for medium planning. Medium Term Expenditure Frameworks (MTEF) can consist of MTMF, MTFF, MTBF, MTSS and MTPF. Governments apply some of these methods. The methods used typically depend on the government context, for example, countries with lower capacity will typically not use MTPFs. The methods are adapted for the country context – these are frameworks.
Frameworks link the economic realities (MTMF) to revenue and expenditure realities (MTFF) to budget planning (MTBF) to achieve objectives in multiple programs and sectors (MTSS) in the most effective ways (MTPF).
The advantages of this approach in a developed country like Canada include:
Improved long-term planning
Aligning government objectives and sector strategies across departments and agencies
Exposing the impact of economic impact to revenue and results during the fiscal year and during planning
Performance feedback loops that also show impact of economic changes on results
Integration of economic factors in planning and performance factors directly into the Chart of Accounts
The big advantage of the MTEF approach is to integrate strategy and review into day-to-day management and periodic planning. The alignment of performance to economics will enable the Government of Canada to model the effects of any major economic change to performance results. To service delivery. The decision of where to cut expenditures with the least negative impact and optimizing positive impact becomes less of a mystery. And, less of a complex management exercise. That is easier to communicate to citizens.
