Sustainable Public Financial Management

This is section 2.6 of a series of blog entries creating a Government IFMIS Technology Evaluation Guide. This includes information to assist in evaluating IFMIS options and the technology requirements for FreeBalance IFMIS implementations. These series will be combined with feedback to produce a comprehensive Technology Evaluation Guide to be published on our web site.

Integrated Financial Management Information Systems (IFMIS) can be installed in all government entities in a country. Should IFMIS software be standardized within the same level of government or across all government tiers? Many ICT experts believe that the key to effective Public Financial Management (PFM) can be accomplished with a single system with a standardized configuration. This approach can simplify the support and management of the system. Country experiences show that this approach has not often been effective.

What are the characteristics of “whole of government” requirements? 

Needs Differ

Financial management needs can differ within countries. This can differ among levels of government and within each level. A system that operates well for the Ministry of Finance for the National Government may not satisfy the needs of all government organizations.

Some considerations include:

• Specialized functions: some government organizations provide highly specialized functions that need to be accounted for. System configurations may not provide the level of information granularity required for financial discipline for some government organizations. And, standardized functions may prove to be ineffective with some government organizations.
• Materiality: the level of detail required to effectively manage day-to-day operations in a local government can be materially irrelevant to the national government.  Highly detailed information flowing across tiers of government provides visual “noise” making it difficult to leverage to improve decision-making. 
• Project accounting: some government organizations focus on the execution of important government projects and need rich program, project and activity functionality.
• Human resources: some government organizations are labour-intensive where salary planning and civil service management are critical.
• Central concerns do not translate: some critical functions are often missing when the national government IFMIS is provided to sub-national governments. For example, revenue collection in the form of property taxes may not be satisfied by the national government system.

Capacity Building Differs

Civil service capacity can differ among government organizations. For example, civil servants in the Ministry of Finance may be able to operate on accrual accounting with performance planning and a complex Chart of Accounts (COA). Local governments may not have civil servants with these skills. Sometimes, the civil servants in the capital city local government have more capacity than some line ministries at the national level. 

Some governments address this “capacity gap” by rolling out complex functionality at the national level first. These governments attempt to add more government entities through training. This often results in hitting the capacity gap at some point where the system cannot be used across all government organizations.

Some governments implement with a more simple configuration at the national level and roll out over time. This has proven to be somewhat successful in implementing a whole of government solution. There is often a “performance gap” where the tools for the civil servants with high functional knowledge do not have the tools that they can use to improve decision-making. This method can enable broad capacity building over time so that all users can move to more progressive systems.

The implementation of government financial management in developed countries was more organic. Many of these countries have different financial systems across their governments. This recognizes the needs difference among government organizations. However, they have standardized on a consolidated COA and processes.

The lesson for emerging countries is that the system configuration should match organizational capacities. For example, the national government can operate on an accrual basis of accounting while local governments operate on a cash basis. Budget allocations from transfer payments can be controlled and reporting from local governments can be on an modified cash or modified accrual basis.

Technology Limitations

Modern IFMIS software is often implemented in always-on, highly available networks with good bandwidth. This system requirements often require large servers and is designed on the notion of central management and control. Many countries do not have reliable power or available bandwidth. For example, in Canada, the Territory of Nunavut has four sites that can only connect via VSAT satellite technology.

Technology considerations for whole of government solutions include:

• Bandwidth limitations – data moving on the network may need to be at a summary level because detailed information cannot be reliably transfered. Detailed information is often not material.
• Power limitations – power issues across the network may require that local or regional centres are created to ensure that data can be captured regardless of the state of the network. This requires a hybrid centralized/de-centralized implementation.
• System costs - emerging country governments should not expected to acquire the latest computer technology to operate IFMIS software. The technology “footprint” of computers and equipment often requires more power. 

Towards an Integrated Approach

Many PFM experts say that “one size does not fit all.” This is most often said when comparing the needs among countries. This is also true when comparing needs and capacity within a country. Recognizing these needs and articulating technology limitations will result in effective requirements. In particular, this approach can determine an effective strategy to address needs and build capacity.

This is section 2 of a series of blog entries creating a Government IFMIS Technology Evaluation Guide. This includes information to assist in evaluating IFMIS options and the technology requirements for FreeBalance IFMIS implementations. These series will be combined with feedback to produce a comprehensive Technology Evaluation Guide to be published on our web site.

There is a notion that government financial and human resource management is a variation of the private sector. Many observers argue that governments want to operate more like businesses. (Notwithstanding the current financial crisis.)  The discussion about Public Financial Management (PFM) can often be dominated by terminology from the private sector: “business rules”, “business process”, and “lines of business”. 

It is true that government can leverage lessons learned from the private sector. The mission of governments differ from companies in many ways:

• Governments focus on mission effectiveness and outcome results. Companies focus on competitiveness and profit.
• Governments strive for accessibility to all citizens. Companies focus on one or more target markets.
• Government priorities are set through the legislative process. Company priorities are set by managers and shareholders.
• Governments strive for standardization across government entities. Companies strive for differentiation.

There are many similarities in financial and human resource management between the public and private sectors. For example, all modern accounting systems use ledgers and journals. Significant differences remain. These differences can be considered for any acquisition of a Government Integrated Financial Management Information Systems (IFMIS). Functional requirements can be more or less complex than the private sector.

System Set-Up

This is section 2.5 of a series of blog entries creating a Government IFMIS Technology Evaluation Guide. This includes information to assist in evaluating IFMIS options and the technology requirements for FreeBalance IFMIS implementations. These series will be combined with feedback to produce a comprehensive Technology Evaluation Guide to be published on our web site.

Governments are modernizing public financial management processes. Virtually all governments. Everywhere. 

Modernization and reform is not limited to emerging countries. G7 countries are in the process of modernization. Some recent initiatives include:

• Full accrual accounting
• Performance planning
• Standardized reporting, including XML data
• Citizen-centric reporting
• Audit to improve results
• Transparency reporting on procurement, public servant expenses
• Exposing data for mashing up
• Improved budget oversight
• Accountability frameworks
• Shared services and standardized processes
• Program outcome assessment
• Multi-year budgeting
• Single face of government for life events
• Open government initiatives led by sponsor at the Cabinet level
• E-Procurement and E-Recruitment
• Participatory budgeting

Government objectives change. This spurs the need for reform. Public Financial Management (PFM) plays a critical role in reform. The Integrated Financial Management Information System (IFMIS) is software that assists civil servants to execute the PFM reform. Technology consisting of computers, networks, printers, databases and web browsers enable the IFMIS.

Modernization and the Private Sector

The private sector has best practices. Government has good practices. Improving practices.

Large private sector companies combine Enterprise Resource Planning (ERP) software with Business Process Re-engineering (BPR). These companies analyze the demand and supply sides of their business. They develop just-in-time inventory methods. Logistics and manufacturing are automated. When done properly, the ERP implementation improves efficiency, reduces costs, and increases revenue. This benefit comes from combining the process analysis and building competitive differentiation and best practices into the ERP software.

Then the company “tweaks” the software. Minor improvements or leveraging new features.

The Journey of Government Reform

Government reform means that the  IFMIS is never a destination. It is a journey.

Public Financial Management (PFM) needs to progressively adapt to support government policy changes. Country macro-economic situations change. International standards are updated. Decision-making is decentralized.

The government IFMIS must be able to adapt to three main dimensions of modernization:

• Modules: governments extend automated functionality from core expenditure control and taxation systems to procurement, civil service capacity building, transparency portals and other functions.
• Modernization: governments extend the capabilities of existing modules such as advancing to accrual accounting or developing talent management plans.
• De-centralization: governments de-centralize functionality and decision-making to line ministries and sub-national government.

Country Context Paths

There is not set roadmap for reform. Reform is delivered in phases. The most important guideline is that reform should follow what is important in the country context. There are some general sequencing principles and typical phases. There are few, if any, acknowledged “best practices”.

Government modernization and reform can significantly affect the configuration of existing financial systems. For example,  the chart of accounts, that forms the core of any financial system can undergo comprehensive changes:

• Budget management reform like MTEF often requires adding a performance segment
• Program budgeting to enable focusing on priorities often requires adding a program or project segment 
• Accrual accounting requires adding many new accounts including contingent assets and liabilities
• Automated budget execution requires a single classification for budget and accounting
• International standards, like the IMF Government Financial Statistics, often requires introducing economic classifications
• Activity-based costing requires detailed activity codes
• Civil service transparency requires ensuring that the structure includes responsibility centres and that certain expense types from the Civil Service Management system are passed to the General Ledger in details

Technology is Not Modernization

Innovation in technology can assist governments to modernize. But, the most modern technology may not meet government needs. Many software vendors advocate the potential of software technology. This potential – what the software could do, at some point in the future – is marketed as modernization. It can become very difficult to connect this potential with the actual need for modernization in government. 

This is part 9 of the 9 part series on PFM knowledge sharing.

FreeBalance provides a Commercial Off-the-Shelf (COTS) IFMIS suite that is used in many countries around the world. We hope that the following is sufficiently objective to be of value to you.

Updated: June 2009

Transparency and accountability have become important themes in Public Financial Management (PFM). In fact, this is one of the major themes from the new American president. 

Government transparency and accountability improves citizen and business confidence. Developing nations can increase donor funding and achieve direct budgetary support.

Integrating transparency with PFM reform is considered an excellent approach by practitioners. Budget transparency is often described as the first step. Information about budget objectives and spending programs can be presented to the public. Budget execution or “actuals” can also be presented. 

Improved service delivery through “seamless government” is the next stage of transparency. Governments who focus on transparency such as showing procurement results tend to be improving service delivery. Service delivery metrics can also be provided to citizens and act as government objectives.

Notes

Need for Transparency

• Legislatures need to effectively monitor the government to improve accountability. The legislative systems differ among countries. Strong public accounts, audit and budget committees are needed to improve public financial management. (Beasley)
• Lack of transparency encourages wasteful and corrupt spending , effective governments depend on empowered citizens (Mafabi)
• Must go beyond the machinery of government to the private sector, citizens and the press to ensure good governance and transparency. (Tarallo)
• In Latin America, the 2 main triggers – not enough information + re-democratization and need to be more transparent. (Pessoa)
• Donor aid does not necessarily reduce transparency. (Ramkumar 2)
• Research has shown that majority of government deny citizens basic information on how public funds are spent. (Mafabi)

A survey at the ICGFM Winter Conference found that “transparency and accountability” is clearly the more important benefit of PFM reform. The survey result from the group of public financial management experts was:

• Consensus on reforms to be undertaken: 2%
• A multi-year focus: 5%
• Articulation of Government and service priorities: 20%
• Improved coordination of reforms within the government: 7%
• Improved public accountability and transparency: 55%
• Improved coordination with and amongst international donor organizations: 0%
• Increased likelihood that reforms will continue in times of economic and political change: 5%
• Improved macro economic and financial forecasting: 5%

Delegates to the 23rd Annual ICGFM Conference believe that governments can do more to inform citizens about public spending.

Budget Transparency (Hawkesworth)

Budget transparency and IT: IT is a tool, not an end in itself. Obstacles include: 

• Vested interests (information is power)
• Difficult to communicate (generally very technical)
• Individual citizens don’t see how budget impact them personally
• Parliaments are not active enough in scrutinizing information.
• Budget reports should include non-financial performance information. Year-end report is the key accountability document from the document. Should be audited within 6 months. Policies and responsibilities should be clear. Tax – tend to reduce taxes rather than subsidies.

Forms of Accountability (O’Brien)

• Accountability can be difficult for practitioners to define
• Answerability and enforcement represent the two stages of accountability regardless of the modality of accountability.
• Traditional horizontal accountability has executive accountable to legislature and oversight institutions and civil service accountable to the executive
• Traditional vertical accountability has Legislature and Executive accountable to citizens. New forms of accountability include oversight institutions and civil service accountable to citizens

Day 1 (1700) Theme 3b O Brian Presentation

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Service Transformation (Cochrane)

• How to build confidence in government? Transparency, accountability, service delivery
• Key enablers are service transformation and public service renewal
• Has been on a journey since 1998 on service transformation.
• Focused externally on Canadians through government on-line and service initiatives (increase client satisfaction by 10%). Internally was on the back office to make more efficient.
• Goal of GOL: seamless government
• GoC has focused too much on external customers and less so on internal.

Each department and agency, transparency disclosure, all contracts >10K, grants and contributions >25K, travel costs by senior people posted monthly + hospitality costs, financial statements and reports on plans and priorities, departmental performance reports. Robust access to information law and commissioner. (Libby)

Elements of Good Governance and Transparency

(Sitton)

• Independence
• Clear and define roles and responsibilities
• Compliance with laws, policies and regulation
• Fair, competitive and transparent procurement system
• Effective operational and financial management
• Regular audit based on international standards
• Widely published and access to accurate and comprehensive information

(Velloso)

• Risk and disclosure should be managed.
• Disclosure is often driven by accounting, reporting and transparency standards like IPSAS and GFS
• Is more incentive in government to hide risk. Yet there are many important benefits to disclose this rik.
•  This can increase confidence and reduce uncertainty for investors and taxpayers.

(Pilapitiya)

• Accountable and transparent accounting at decentralized level
• Independence of Judiciary

(Habibullah)

• Disclosure strategy and law required including timetable for disclosure
• Includes right to information
• Penalties for failure to disclose

(Van Daniker)

• Do government financial statements help citizens make decisions?
• Current government reporting is too cumbersome for the average citizen. In an AGA/Harris poll in 2008, the majority of Americans polled said that they did not get adequate information about government financials. The majority claimed that understanding the financial situation would affect their voting behaviour.
• The AGA has created a citizen-centric report located at: http://www.agacgfm.org/citizen/default.aspx.
• Some government organizations using this format and that this approach is starting to gain momentum. The U.S. Department of Defense is expected to be the first American federal government organization to use this approach.

(Saboia)

• Need for audit – Why does Brazil have a poor rating from Transparency International? Denmark has 100 auditors for each group of 100,000 people. Brazil has 8. This means that Brazil is not well-audited. Hiring auditors is unrealistic given the financial crisis.
• Solution – enable civil sociate. The Government is training journalists and engaging civil society. This distance learning course is being taken by 35,000 people.

Challenges to Legislative Oversight

(Page) Challenges for parliamentary budget oversight including limited resources. The executive tends to have more information than the legislature. Lessons learned in Canada because of the crisis include:

• Need for improved transparency and financial reporting. This includes culture change.
• Opportunity for increased scrutiny and accessibility to economic analysis
• Manage for long-term results and effects like the aging population and the affects of climate change

International Benchmarks: Lessons Learned

PEFA – Public Expenditure and Financial Accountability

• PEFA assessments do not identify root causes of poor assessments nor does it evaluate policy. Mr Ronsholt says the trend to self assessment is a good sign, but that 3rd party scrutiny is very helpful.
• Assessment information should not be used simplistically. (Ronsholt and Bessette)
  PEFA idea for high level PFM performance overview and identifying PFM weaknesses. It does not cover investigating underlying causes, selecting and implementing PFM reform. (Ronsholt and Bessette )
• PEFA enables tracking improvements in Public Financial Management (Brajshori)

OBI – Open Budget Index (Ramkumar 1)

There is a lack of will for governments to create open and transparent budgets. The three key finding for the most recent open budget survey were:

• The public is shut out of the budget process in the majority of countries. 41 of the 85 countries provide only minimal, scant, or no information.
• The lack of transparency is compounded by weak oversight institutions in audit and parliament. Donor aid may negatively affect transparency. Low scoring countries often share similar characteristics, including regional locations, dependence on oil and gas exports and foreign aid, and weakness of democratic institutions.
• Budget Transparency can be improved quickly and at little cost

 Governments with more transparent budgets are more likely to receive donor funds.

OECD/DAC Procurement Benchmark

Tools are based on broadly accepted international tool. It was attended to achieve good practices in many countries across a spectrum of capacity (Bigart)

The OECD/DAC benchmarking tool is not a perfect methodology, but it has a common vocabulary (Claro).

Country personnel focused on the grading. Donors tell them not to worry about the grading, yet they worry about the grading (Claro)

Lessons learned from the use of the OECD/DAC benchmarking tool includes (Bigart):

• The tool is useful and relatively easy to use
• Standardization through the tool creates need to use flexibly in a given country – may require some customization and interpretation
• Some indicators will require adjustment after experience from over 40 countries
• Use of the tool is an input to a process so scoring is not as important as the information learned
• Results of any benchmarking exercise needs to be more clearly linked to other tools like PEFA
• Reform strategy must be integrated and prioritized on the basis of overall public sector management and public financial management strategy
   

References

• Beasley: Ivor Beasley. World Bank
• Bigart: Pamela Bigart, World Bank
• Brajshori: Behxhet Brajshori from the Government of Kosovo
• Claro: Jorge Claro, President of the International Procurement Institute  
• Cochrane: Ken Cochrane, CIO Government of Canada
• Habibullah: Wajahjat Habibullah, the Chief Information Office of India
• Hawkesworth: Ian Hawkesworth Administrator, Budgeting and Public Expenditures Division, Governance Directorate OECD
• Libbey: Jim Libbey, Executive Director, Financial Systems Authority, Office of the Controller General, Treasury Board of Canada
• Mafabi: Nandala Mafabi Nathan, Chairman, Public Accounts Committee, of the Parliament of Uganda 
• O’Brien: Mitchell O’Brien,World Bank
• Page: Kevin Page, Kevin Page, Parliamentary Budget Officer, Canada
• Pessoa: Mario Pessoa, Fiscal Affairs Department IMF
• Pilapitiya: Husitha D. Pilapitiya of Casals & Associates 
• Ramkumar: Vivek Ramkumar, Open Budget Initiative
• Ronsholt and Bessette: Frans Ronsholt and Franck Bessette PEFA Secretariat
• Sitton: John Sitton of Emerging Markets Group
• Tarallo: Roberto Tarallo,  World Bank
• Van Daniker: Relmond Van Daniker, Executive Director of the Association of Government Accountants
• Velloso: Ricardo Velloso, IMF

This is section 2.3 of a series of blog entries creating a Government IFMIS Technology Evaluation Guide. This includes information to assist in evaluating IFMIS options and the technology requirements for FreeBalance IFMIS implementations. These series will be combined with feedback to produce a comprehensive Technology Evaluation Guide to be published on our web site.

Government financial management is different from the private sector, particularly for budgets and commitments. This is often called ‘Commitment’ or ‘Encumbrance’ accounting. Financial Accounting relates to transactions that affect the General Ledger such as revenue, payroll and purchasing.

Private sector accounting focuses on the ability of companies to manage for the “bottom line”: profit. Governments do not manage for profit. The government “bottom line” is budget. The budget represents the legal embodiment of government policy. Commitment Accounting precedes the traditional accounting cycle and typically contains the following elements:

• Draft budget plan – consists of budget estimates that have yet to be approved.
• Budget – consists of budget at the line item level.
• Appropriations, allotments or warrants – consist of budgetary information that authorizes spending. These can be combinations of short and long term allotments. 
• Commitments – represent the start of a spending process through the generation of a Purchase Requisition. A commitment sets aside an estimate amount from the budget. This prevents other commitments that could exceed the budget.
• Obligations – represents a legal obligation with a supplier through the generation of a Purchase Order. The obligation can be at a different amount that the estimate. The original commitment is de-committed. The commitment is replaced by the obligation. (The government may elect not to enter into a contract. The entire amount is de-committed and made available in the budget.)
• Payments – actual payments made. The payment de-obligates and replaces the obligated amount with the actual amount that could be different.
• Budget transfers and virements that change the budget amounts to reflect changes in need or government financial position. For example, the government may recognize that there will be revenue shortfalls and adjusts the expenditure budget. Or new priorities require transferring budget to different programs.

Commitment accounting requires many steps prior to affecting the General Ledger. Government financial management systems must track the status of all of these steps to ensure that the budget will not be overspent. The available budget for spending is often referred to as the “free balance” where:

free balance = budget – (commitments + obligations + actuals)

The status of budgets, commitments and obligations provide government decision-makers with trend information that can predict budget variances. 

There are variations in Commitment accounting among governments including:

• Terminology: commitments are often termed “soft commitments” or “pre-encumbrances”. Obligations are often termed “hard commitments” or “encumbrances”
• 1 or 2 Commitment stages: some governments do not track the “soft” commitment as affecting the budget. This is often the case when the government is modernizing and has lower human capacity so processes should be streamlined. It is also the case when the government organization is of a modest size where there is limited value to having soft commitments.
• 1 or more allotments: some governments leverage more than one appropriation. For example, governments often have an annual appropriation that is used for predicting budget variance for the year, and a monthly warrant or authority to spend.
• Cash or Accrual Accounting: some governments use modified or full accrual accounting that hits the General Ledger when the goods or services, and invoice, have been received.
• Multi-year Commitments: governments often have different rules for commitments that can span more than one year. Some types of goods or services may need to be delivered in the fiscal year otherwise the contract is cancelled.

There are many benefits to the use of Commitment Accounting in government including:

• Ensuring sufficient funds are available to meet contractual needs
• Guaranteeing that budgets will not be overspent
• Helping in planning for future costs
• Assisting in determining flexibility in adjusting budget transfers
• Predicting budget variances to speed up or slow down spending to meet government objectives
• Balancing the budget cycle with the General Ledger to ensure information integrity

This is part 8 of the 9 part series on PFM knowledge sharing.

FreeBalance provides a Commercial Off-the-Shelf (COTS) IFMIS suite that is used in many countries around the world. We hope that the following is sufficiently objective to be of value to you.

Updated: June 2009

Procurement, budget planning, government performance management and public private partnerships (PPP) are four subjects discussed by many Public Financial Management (PFM) practitioners at conferences. All four subjects present an opportunity for improved fiscal management and government results. PPPs have become more visible recently.

There was little guidance from experts on when procurement, budget planning or performance initiatives should be implemented. This depends on the country context. These subjects are somewhat linked. Procurement reform requires performance metrics showing improved spend management. Performance management can be integral to budget planning. PPPs remain controversial.

Procurement

Government procurement can represent a significant portion of the country Gross National Product (GNP). Reducing government costs through more competition and effective management of commitments can have a significant fiscal impact. A country could achieve up to a 4% improvement in GDP through improved procurement processes.

Many countries do not have an effective portfolio of procurement vehicles like leasing, framework contracts, international sourcing or spend management. Local vendors are often unaware of how to leverage these vehicle to provide improved value to governments.

Budget Planning

There appears to be a sequence in budget planning maturity as countries adopt Medium Term Expenditure Frameworks (MTEF). A government budget represents the legal embodiment of government policy.

Many governments begin with line-item budgeting with incremental changes from one year to the next. This does not improve government results. Nor does this approach provide a credible budget because outcomes often take more than one year until fruition.

Multi-year program budgeting is the next step. This enables governments to identify programs and projects across multiple years. Performance management is the next step.

Government Performance Management

Performance management is more difficult in government than the private sector. Companies in the private sector have a “bottom-line” of profit or loss. Performance Management requires planning for objectives during budget planning. The audit function in many governments have transitioned from compliance to regulations to analysis of value for money.

Public Private Partnerships

Public Private Partnerships enable governments to fund and implement projects using the private sector. The structure of these projects differ. Many experts believe that PPPs represent another way to spend “off budget”. Other experts believe that the private sector can provide improved efficiency and value for money.  A conference poll at the 23rd Annual ICGFM Conference found that “sources of finance” was the msot often used justification for PPPs.

Notes

Procurement

• In a high risk environment: how to ensure that partners and competitors are ethical? How to change culture of doing business? How to get competitors and stakeholders on board? Strengthen corruption commitments, provide incentives for stakeholders and companies. Collection action can be successful. (Petkovski)
• Corruption affects delivery of public services (Ayoung)
• No system is corruption proof (Ayoung)
• No one thinks of investments in procurement as investments. They look at it in terms of expenses, even though the investment can have good results (Claro 2).
• Public procurement represents 10% to 15% of GDP in many countries. Procurement can range as high as 70% of government budgets. Governments are trying to invest more in infrastructure and to stretch budgets to do more with the current financial crisis. Making procurement more efficient translates to obtaining more value for money. (Bigart 2)
• Most public procurement systems focus on rule  compliance. She noted that the purpose of procurement is to achieve a net  service delivery. Procurement officers are often viewed as clerical staff who insist on running to the rules. This can often result in delays to important and critical services. Emergency situations mean that organizations like the World Bank  needs to lend more quickly and be much more flexible in rules in order to achieve service results (Bigart 2).

Lessons learned from public procurement reform include: (Bigart 2)

• Procurement is linked as part of Public Financial Management reform
• Procurement reform costs money and takes time
• Some reforms can deliver results in the short term
• Reform cannot be effective if isolated from broader public sector management

and financial management reform
Reforms require long term commitment to achieve sustainable results

Trends in Procurement (Claro)

• Reform of the State is one of the most important components of the International fight against corruption but this has not resulted in the best approach from a technical viewpoint.
• Procurement needs to be integrated with other Public Financial Management initiatives as part of an overall strategy.
• International studies indicate Public Sector Procurement accounts for approximately 15% to 20% of GNP in many countries Procurement has traditionally been poorly managed with inefficiencies adding anywhere between 15% to 20% to the cost of the works, goods and services being procured   Corrupt practices add an additional 15% to 20% to the cost of those works, goods or services In other words, inefficiency and corruption combined could account for 2.25% to 4% of GNP in most countries, thus negating growth – yet there seems to be little concern about this loss of GNP in most countries.
• Most of the data from countries about procurement is inaccurate. This is particularly important because of the rise of different procurement methods. Framework Contracts, Lease Agreements, Reverse Auctions and Public-Private Partnerships are described in the presentation.
• There has been no profession of “government procurement”. Capacity building for civil servants and vendors is required.
• Need for: legislative and regulatory framework, institution framework and management capacity, procurement operations and market capacity, integrity and transparency of the system, committed government, donor harmonization
• Vendors need to be trained as much as the government
• Reform of the State is one of the most important components of the International fight against corruption but this has not resulted in the best approach from a technical viewpoint.
• Procurement needs to be integrated with other Public Financial Management initiatives as part of an overall strategy.

Budget Planning

• There have been some challenges in moving to performance planning because there remains a tendency to favour effectiveness measurements. (Alvarez)
• Mr. Alvarez emphasized the importance of the multi-year approach to planning and project planning. This reform has been difficult to implement. The Government of Costa Rica develops many multi-year scenarios. (Alvarez)
• The budget needs to be used as a macro fiscal tool and that fiscal strategy needs to be closely coordinated with monetary policies. She noted that there are trade-offs between fiscal controls and strategic allocation of resources. Tight financial controls are generally needed at the beginning of any reform, but these controls needed to be loosened. This forms part of a gradual approach to achieving all three goals. (Angelovska-Bezoska)
• Budget reform is also challenging. Budget preparation needs to focus on results (Angelovska-Bezoska)
• The Government of Macedonia introduced more flexibility than line-item budgeting by introducing aggregate appropriation controls. Line-item budgeting requires too much administration of budget transfers and provides few benefits. (Angelovska-Bezoska)

Performance Management in Government

• Government performance management requires audit to ensure that the government has achieved the best value for money. There has been a switch from compliance “with every single rule” to performance in South Africa. Corruption can be reduced through information availability, variance analysis, corporate performance culture, limited computer fraud, audits, GAAP disclosure requirements and better means of investigation. This provides a “paper trail” for accountability. Criminal sanctions in South Africa address financial malfeasance. (Woods)
• The American government experience provides very good insight to any government considering improving outcomes through performance management. The performance review of government projects by the Bush administration has resulted in significant budget changes. Nevertheless, there has been resistance from Congress who are more concerned about outputs than outcomes. Performance management has achieved a high momentum in the US federal government so “performance is here to stay” regardless of who becomes President in 2009 (Joyce)

Linkage of budget and performance. (Joyce)

• Desired state is “clarity of task and purpose” yet, legislative bodies create ambiguity. Additional problems are created by legislative involvement in budget execution. Results in multiple and conflicting goals for ministries.
• Often uniformed budget decisions.
• Legislative oversight tends to be episodic rather than comprehensive. Little attentiveness to performance signals that overall results don’t matter.
• US Congress appropriations committees have been uninterested in the Program Assessment Rating Tool.
• Performance information remains little used. It is difficult to change the status quo.
• Easier to use in production
• Measuring costs as hard as measuring results
• Requires leadership and incentives
• Performance data important to transparency.

40% of respondents to a survey at the Winter ICGFM Conference said that performance reporting is the most needed affect of public financial management transparency. The voting was:

• Strategic priorities: 17%
• Budget priorities: 9%
• Financial reporting: 34%
• Performance reporting: 40%

Public Private Partnerships

•  PPPs seem like magic like free money. Yet, companies have made significant profits. The magic is that the debt is hidden where the government has the obligation to repay the debt to the private sector. (Wynne 1)
• Is PPP a gimmick or a value-for-money proposition? Value-for-money requires real risk transfer from the public sector to the private sector. Without such real risk transfer, then PPPs are simply a mechanism to move projects and related financing off-budget. (Hawkesworth)
• PPPs appear to reduce the level of borrowing. Andy believes that PPP sounds more cuddly and friendly than privatization (Wynne 2)
• Establishing effective procedures for the budgetary treatment of PPPs is a work in progress in OECD countries with noted failures in the United Kingdom. (Hawkesworth)
• In 2002 2002 – 57% of public sector accountants in UK did not think PPPs provided value for money (Wynne 2)
• PPP economics are only temporarily jeopardized by the financial crises. PPP is not solution in time of financial crises, and should not be leveraged to stimulate the economy (Drapak)
• PPP risk is never fully transferred to the private sector, and the risk is transfered to the government that assumes the liability. Allowing the private sector to charge for public services as part of PPPs is not sustainable. (Wynne 2)
• If you wanted to design a system to maximize the opportunity for corruption, you would create something like PPPs,  ”You have all the ingredients to maximize corruption.” (Wynne 1)

Lesson Learned

•  Many countries do not have an appropriate legal structure to handle PPPs. (Bigart 2)
• PPP economics have changed. In particular,  emerging countries are seeing a lack of funding on both the equity and debt side.  There is a general lack of interest of investors and operators in PPP for infrastructure projects. (Drapak)
• The UK experience is that IT projects should not be PPP. (Hawkesworth)
• Public Private Partnerships (PPPs) can enable  building private sector capacity. (Bigart 2)
• PPPs should not be used for infrastructure projects (Wynne 2)

References

• Acosta: Manuel Acosta, Director General de Presupuesto Paraguay
• Allen: Richard Allen, Fiscal Affairs Department, IMF
• Alvarez: Fabian QuirosAlvarez, the General Sub-Director of the National Budget 
• Angelovska-Bezoska: Anita Angelovska-Bezoska, Chief Economist, Central Bank of Macedonia
• Ayoung: Asha Ayoung, Lead Procurement Specialist, World Bank
• Bigart: Pamela Bigart, Lead Procurement Specialist, World Bank and (2)
• Claro: Jorge Claro, Claro and Associates and (2) case study presentation
• Drapak: Filip Drapak of the World Bank
• Hawksworth: Ian Hawkesworth Administrator, Budgeting and Public Expenditures Division OECD
• Joyce: Philip Joyce, Professor of Public Policy and Public Administration, The George Washington University
• Petkovksi: Djordjija Petkoski, World Bank
• Woods: Gavin Woods, Member of Parliament, National Assembly of South Africa.
• Wynne: Andy Wynne, Editor of the International Journal on Governmental Financial Management and (2)

This is section 3.1.1 of a series of blog entries creating a Government IFMIS Technology Evaluation Guide. This includes information to assist in evaluating IFMIS options and the technology requirements for FreeBalance IFMIS implementations. These series will be combined with feedback to produce a comprehensive Technology Evaluation Guide to be published on our web site.

It is easy to be lost in buzzwords: Service-Oriented Architecture (SOA), Web-Oriented Architecture (WOA), Web Services, Composite Applications…

Software vendors are quick to claim compliance with these standards. White papers are written full of diagrams. Experts warn about security. Before you know it, there is an industry trying to govern the implementation of the standard. Experts argue about who has implemented the standard best.

It becomes difficult to understand the benefits of SOA to a government. Technical nuances do not appear to be relevant. All vendors seem to claim compliance with SOA or the intent of SOA.

History of SOA

Perspective is needed. Traditionally, software was designed for a purpose in mind and developed on a technology platform such as Java, .Net or a 4^th Generation Language. These applications were designed to be self-contained , with some ability to integrate with other applications. This integration was often limited to applications using the same technology platform. Technology limited government modernization.

Large technology vendors were able to provide a portfolio of software products that provided intra-suite integration. Governments were faced, with the option of using best-of-breed applications with limited integration or a portfolio of tightly integrated applications from a single vendor that did not meet all needs.Governments could not achieve objectives with the technology choices.

There were two major initiatives in the late 1990’s that were designed to support better integration among applications. There were temporary solutions like RPC, RMI and CORBA. The development of Java enabled the “write once, run anywhere” approach. The creation of Web Services (SOAP, WSDL, UDDI) and specific XML-based industry standards enabled better integration among applications. Government found that integrating processes meant acquiring a portfolio of expensive applications, often called “monolithic” applications. Governments could not afford needed technology.

Web Services enables applications to integrate regardless of technology platform.

Service-Oriented Architecture promises the ability to assemble needed requirements from software components. These are known as composite applications. Composite applications will enable governments to combine Commercial Off-the-Shelf (COTS) and custom applications together. Governments will be able to purchase needed components from many vendors and get competitive prices. SOA provides choice and helps governments meet unique requirements better. SOA protects the government technology investment.

Service-Oriented Architecture using a component model enables the integration of small components from many sources to assemble an application.

A true Service Oriented Architecture should enable integration at many levels or layers of components and applications.

MIA or SOA?

Many software vendors provide monolithic applications. These applications are characterized by a large technology footprint. These applications often require purchasing underlying technology or “middleware”. The minimum size of an application component is large. The applications often support integration using Web Services and industry standards. But, these applications are not composite applications. Functionality from these applications cannot be purchased as an individual component for reuse by a government.

One of the main motivations for supporting industry standard integration for some software vendors is to enable interfacing applications from acquired companies. In the age of software consolidation, vendors need to interface applications together. The complexity of these interfaces are often hidden through a user interface layer.

These large applications with integration characteristics do not follow the intention of Service-Oriented Architecture. We term this: Monolithic Integration Architecture (MIA). The MIA vendors have a business model to “own the customer” by provided as much of the software footprint as possible: all business, content and reporting applications, application serving, databases, development tools, business process and business rules.

In Monolithic Integration Architecture, applications from different sources are internally integrated. The entire monolithic application provides interfaces.

Government organization looking at technology options can determine whether options are SOA or MIA by determining whether:

• Applications require the acquisition of a set of middleware components.
• Individual components can be acquired rather than a complete application.
• Open source infrastructure software can be used.
• Integration with current government software can be enabled.
• Applications were designed as components in the first place.
• Applications are a series of applications acquired by purchasing companies.

This is part 7 of the 9 part series on PFM knowledge sharing.

FreeBalance provides a Commercial Off-the-Shelf (COTS) IFMIS suite that is used in many countries around the world. We hope that the following is sufficiently objective to be of value to you.

Building human capacity to meet government needs is possibly the most important consideration in making an Integrated Financial Management Information System (IFMIS) successful and sustainable. Capacity building is required for each phase of implementation, according to Public Financial Management (PFM) practitioners.

Continuous training is considered a good practice to improving capacity. The tactics for teams and training need to be adjusted depending on the implementation phase. Creating a dedicated core team who can support each other is considered an effective tactic during initial implementation. User and technical training can be rolled out based on implementation needs. Governments with government-operated help desks tend to have smooth roll outs.

Training is one dimension of human capacity. Training that focuses on the reasons for reform and provides accounting and functional knowledge transfer is often more successful than typical “product” training.  Information Technology (IT) training is also needed.

Government organizations should expect staff turnover. Capacity building is a long-term processes. Matching capacity building with civil service reform should be considered. Effective incentives to managers and other stakeholders need to be present. Roles and responsibilities change during different phases.

Notes

• Need for socialization of the reform to build capacity. (Dorotinsky)
• Sustainability is always the problem. (Peterson)
• Human resources are the most important determinant of successful reform. (Cangiano)
• Expect to need a lot of training. (Myers)
• Need to train people and IT skills. Donors were there for a while and then withdrew – so lost commitment. (Sottie)
• Successful projects are completed in less than a year followed by training and further roll out. Need to achieve a critical mass change without a lot of political will. (Melhem)
• Training program needs to be structured to need. (Myers)
• Need to support civil service rotation. (Prasueth)
• Continuous training is required. A fundamental change to a performance oriented civil service is required. (Alvarez)
• Create an intermediate layer of power users who support all of other users. (Farooq)
• Legal skills among government staff (Pilapitiya )

Coordinating training and implementation plans (Myers)

• Focused to specific requirements of a given site
• Imparted just before site implementation
• Should have a help desk
• Should have hand-holding clinics

Capacity Development (Murphy)

 
1. Recognition and willingness to change

• develop a vision
• strategic management – Always opposing and supporting forces
• PFM perspective
• Environmental scan
• Gap analysis
• Diagnostic tools like PEFA and Open Budget Index promotes awareness of international good practices

2. Change capacity: understand change

• Strategy structures

i. Create structures for management and capacity building Staffing
i. Provide incentives
ii. Enhance salary schemes

• Leadership

i. Identify owners and champions
ii. Supplement
iii. Restructure if necessary
iv. Strengthen/train
v. Change leadership

3. Transition capacity: Manage the transition

• Specify
• Acquire
• Solution design
• Build/setup
• Train

i. Communicate the entire lifecycle because it is an integrated system
ii. End-users, application managers and ICT people have different training needs
iii. Implementation cycle has different training requirements

• Populate
• Pilot
• Implementation
• Refine

4. Capacity to sustain operation: facilitate sustainable operation of the new system.

Staffing and skills (Murphy)

Implementation Cycle requires different roles and responsibilities.

1. Preparation and Acquisition

• FMIS
• Transition structures
• Specifications
• Procurement/Evaluation
• Preparatory Training

2. Design, Testing and Setup

• Core training
• BPR (Business Process Reengineering) 
• Solution Design
• Setup
• Data collection/migration
• ICT architecture setup
• User training
• Production testing/Parallel runs
• Production acceptance

3. Pilot Implementation

• Application support
• ICT support
• Problem resolution
• Evaluation

4. Rollout

• Expansion/deepening
• Application Support
• ICT Support

References

• Alvarez: Fabian QuirosAlvarez, the General Sub-Director of the National Budget 
• Cangiano: Marco Cangiano, Division Chief, International Monetary Fund
• Dorotinksy: Bill Dorotinsky – World Bank, formerly with the IMF (1) & (2)
• Farooq: Khuram Farooq, Director PIFRA
• Melhem: Samia Melhem, Chair, e-Development Thematic Group Global ICT, The World Bank Group
• Murphy: Peter Murphy, World Bank
• Myers: Ron Myers, Public Sector and Institutional Reform Europe and Central Asia Region, World Bank
• Peterson: Stephen Peterson, Harvard University
• Pilapitiya: Husitha D. Pilapitiya of Casals & Associates 
• Prasueth: Sanya Prasueth, Deputy Chief of Cabinet, Ministry of Finance, Lao P.D.R.
• Sottie: Christian Sottie, Controller and Accountant General, Ghana

This is section 2.4 of a series of blog entries creating a Government IFMIS Technology Evaluation Guide. This includes information to assist in evaluating IFMIS options and the technology requirements for FreeBalance IFMIS implementations. These series will be combined with feedback to produce a comprehensive Technology Evaluation Guide to be published on our web site.

Compliance. Rule, regulations and oversight. There is a view that an engineered regimen expressed in IFMIS software will ensure that civil servants comply with the rules. These rules should be detailed and coded. This view is based on the assumption that expected results will follow only if rules are followed. Control becomes “command and control”. Without this level of control many believe that the government budget plan cannot be properly executed. There are many situations where government budgets were not executed to plan. Command and control is not always the answer.

Governments have learned that improving development results requires improving decision-making and providing sufficient discretion to civil servants to make better decisions within the budget envelop.

Government Budgets are not Detailed

A budget is the legal embodiment of government intentions.  Most government budgets that are signed into law are not highly detailed. The legal document provides details about government intentions, programs, initiatives and spending by organizational unit. Some expenditures are earmarked. The government fiscal framework provides details on how revenues and expenditures are to be handled. This guidance is rarely provided at the detailed level in the Chart of Accounts. Therefore, the individual detailed budget item is a guideline or a working assumption. The budget law provides ceilings for aggregations of these detailed budget items.

Aggregate Controls in Government

The IFMIS must prevent potential expenditures from exceeding the aggregate budget. There are numerous techniques for providing the appropriate mix of control and discretion for civil servants. The budget and appropriations can be configured to support hard controls (cannot exceed amount without budget transfer). Controls can be flexible for detailed budgets and appropriations (can exceed with warning, can exceed by amount, can exceed by percentage) for a fiscal period (month, quarter) as long as an aggregate control is not exceeded. There could be more than one aggregate control in place.

Approvals within the Budget Cycles

Automated controls prevent requisitions for goods or services if the budget is exceeded. A civil servant cannot attempt to begin a procurement cycle if the total of current commitments, obligations and expenses exceeds the budget. In the case of aggregate budgetary controls, this means that the requisition would exceed an aggregate of numerous budget items.

These automated controls are one technique. The amounts and type of expenditures can range. These require different levels of approval throughout the entire budget cycle – budget plans, purchase requisitions, purchase orders, expense approvals, and budget transfers. The amount or type of transaction may require different levels of approval within the civil service. The process of seeking and receiving approval should be automated.

Discretion in Budget Execution

Governments with high civil service capacity provide more discretion for budget execution decisions. Civil servants have become accountable for results rather than for rule compliance in these countries. Many governments implement a new IFMIS using the detailed budgetary control approach. This provides a detailed visibility into every step of the budget cycle. These governments witness civil service capacity improvements. More discretion is provided to civil servants who are experts in their fields. This improves development results within the envelope of the budget law and fiscal discipline.

Segregation of Duties

Budget execution discretion has the risk of encouraging poor fiscal decisions. This is particularly the case when individuals are able to handle many steps in the purchasing cycle. Many governments realize that duties within the cycle need to be segregated. For example, the person who requested the purchase should not be able to approve it, select the vendor or indicate that the goods were received.

The segregation of duties with approval methods and budgetary controls can reduce fraud.

Budget Transfers

Changes to the government financial position during the fiscal year results in the need to adjust budgets. An emergency situation may require funded at the expense of other government programs. A budget transfer is created. Some types of budget transfers require legislative approvals. Some require new or supplementary budgets. Some types of budget transfers are not permitted in some countries. For example, some countries do not allow transferring funds from capital to recurrent budgets.

Some budget transfers are accomplished without the need for significant oversight because they are at levels less detailed than the budget law. Many government organizations have experienced the burden of managing detailed budgetary controls. This has required frequent daily budgetary transfers. For example, an office may have exceeded its computer supplies budget for the month but have available office supplies budget. There is very little distinction about buying toner cartridges for photocopiers or printers. Nevertheless, a budget transfer is required when there are detailed budgetary controls. The burden to request, approve and execute so many budget transfers that are not material to fiscal discipline or the budget, can be significant. Focusing civil servants on the process of compliance reduces the opportunity for good decision-making.

The control regimen for a government IFMIS should support:

1. Multiple controls
2. Adjustable levels, depending on the control
3. Adjustable period, depending on the control
4. Adjustable tolerance levels, depending on the control
5. Segregation of duties across the commitment cycle, including approvals
6. Rules related to each step of the commitment cycles
7. Differences in configurations across the government

Role of Audit

Auditors ensure compliance with government regulations. Auditors ensure that the rules have been followed and find examples of waste and fraud. The role of auditors is changing from a focus on compliance to improving results. This is especially the case when civil servants are provided with budget execution discretion.

The IFMIS software must track all the steps in the budget cycle to enable audit. Auditors need good reporting tools to identify those items that warrant more investigation. There are specialized tools for computer-aided audit that can assist in identifying trends and fraud.

Auditors can leverage audit information to assist governments to improve controls and improve results. As will all elements of government financial management, the audit role modernizes as capacity increases and governments undergo reform.