Sequencing PFM Reform Good Practices
And Government Resource Planning (GRP)
Doug Hadden, VP Products
There has been some recent questioning of the wisdom of reform sequencing. Yet this approach is considered a good practice, if not best practice, by most in the PFM community.
- Research has shown a statistically relevant link between good governance indicators and development. For example, countries whose governments achieve higher good governance indicators tend to have higher GDP per capita and longer average life expectancy.
- The quality of public financial management (PFM) systems is a key determinant of government effectiveness. The capacity to direct, manage and track public spending allows governments to pursue their national objectives and account for the use of public resources and donor funds.
- There is some consensus that basics matter more than best practice in PFM. Reforms should be sequenced based on the country context because of the complexity of implementing too much change at once. There is a virtue to sequencing. Yet, there remains some concern of the platform approach for sequencing, the notion of leapfrogging and an over-emphasis on technical PFM.
- Although often thought as consultant-speak, the approach of “small wins” rather than the “big bang” approach is considered a good practice in the PFM community.
- PFM diagnostic tools like Public Expenditure and Financial Accountability (PEFA) provide good insight but are not prescriptive and do not answer the much more difficult question of how to sequence PFM reforms. These assessments tend to be technology neutral.
- It often appears that “country context,” sequencing methods and PFM reform momentum is more of art form than a science.
The “platform” approach to PFM sequencing is designed to suit unique country conditions.
What is the implication of PFM sequencing to GRP?
- Financial Management Information Systems (FMIS) or Government Resource Planning (GRP) are recognized as technology tools to assist in PFM reform. The establishment of an FMIS has consequently become an important benchmark for the country’s budget reform agenda, often regarded as a precondition for achieving effective management of the budgetary resources. Although it is not a panacea, the benefits of an FMIS could be argued to be profound.
- GRP and e-government technology enables PFM, where the real benefit of e-government lies not in the use of technology per se, but in its application to processes of transformation.
- The challenge for GRP technology is to adapt to meet country conditions such as human capacity while enabling future modernization and reform because many reforms have taken up to two centuries to evolve from where many developing countries find themselves today, to where the developed countries are today.
Countries with higher HDI tend to have higher PEFA scores. PFM reform progress results in improved government effectiveness. Capacity building is considered a pre-requisite for PFM reform.
How can sequencing be more of a science?
- The information necessary to understand the country context is more readily available thanks to open data and analysis from International Financial Institutions. And, there has been some work to identify high-level PFM reform sequencing such as the need to implement core functions first such as adopting the Treasury Single Account and focus on budget execution prior to budget preparation.
- Third party ratings from Revenue Watch, Open Budget Partnership, Transparency International, Freedom House and other organizations provide insight into the country context. It has become easier to identify priorities for reform such as revenue transparency and support for the Extractive Industries Transparency Initiative (EITI) in resource-dependent countries or the need for aid transparency and support for the International Aid Transparency Initiative (IATI) in countries with a high percentage of Official Development Assistance (ODA) relative to the government budget.
FreeBalance government customers that have undergone PEFA assessment enjoy better scores than countries with higher HDI who do not use FreeBalance software. FreeBalance customers have been recognized for achievements of substantial reform.
How does technology enable modernization?
- Technology is seen as an enabler for transformation in government. Technology should use a gradual and flexible process.
- There have been numerous technology failures in developed and developing countries where implementations failed to achieve results, were delivered late, were provided over-budget or were unable to adapt to reform.
- Many implementations of software for GRP needs have not been financially sustainable by governments.
- Enterprise Resource Planning (ERP) software that was designed for the private sector across many inhibits reform initiatives. Large-scale public sector ERP implementations additional time is required during the analysis and design phase to focus on the gap between the commercial process and the required process
- ERP and custom-developed GRP solutions can make reform difficult. ERP and custom-developed software requires significant software complex code customization (BPM scripts, call-outs & software development) to meet government requirements that reduces time to results. The ratio of services to software cost in the public sector is estimated to be three time that in the private sector or up to 15 times the cost of software.
Is technology leapfrog possible?
- GRP technology leapfrog is possible in many country contexts particularly in the ability to publish open data.
- Developing countries often do not have entrenched legacy technologies and can bypass stages in development. Although more developed countries took centuries to reform, developing countries can benefit from proven good practices. This gives developing countries the “latecomer” advantage.
- Developing countries are leveraging the convergence of Internet and mobile technology to overcome the “digital divide”. The technology is adapted to the local context – typically at lower costs than legacy technology.
- Nevertheless, a pure technological solution does create reform because technology can maintain or reinforce an accountability gap.
Increasing mobile global penetration is changing the accountability gap dynamic in developing countries.
What are the incentives for government reform?
- Governance reform is highly political and disrupts the traditional power structures in countries. This dynamic reduces reform momentum. And, there are emerging lessons learned about reform incentives.
- Improved access to technology has created organic protest phenomenon like the Arab Spring that assisted in the overthrow of governments. Social media and mobile technology have enabled rapid citizen organization. Governments can “crowdsource” or be “crowdsourced.”
- Globalization has created an open and competitive environment among countries. Businesses are more prepared to invest in countries with effective governance, which manifests itself in legal predictability, low corruption, and ease of doing business.
- International Finance Institutions use governance scorecards for funding decisions. This strategy can better align leadership with citizen incentives.
- The relative success in global poverty reduction demonstrates that many government leaders are concerned about good governance and improving development results.
What are the incentives for implementing GRP?
- GRP has a great potential for increasing predictability, participation, transparency, and government accountability.
- GRP technology can improve business and citizen confidence through transparency and government effectiveness. This can lead to increased investment.
- GRP technology increases government efficiency and revenue. This can result in reducing deficits and providing governments with more fiscal space including reduced cost of borrowing.
- GRP technology aligned with e-government initiatives enables citizen efficacy to improve country stability.
How does the technology supply chain impact reform?
- The traditional approach to GRP implementation through 3rd party systems integration firms with little or no involvement of the software manufacturer increases risk in developing countries.
- Some systems integration firms find incentives to increase costs and reduce financial sustainability. Some software manufacturers form part of “devil’s triangle”
- Standard project management techniques have not overcome difficulties in implementing software in developing or developed countries. GRP implementations require more concentration on capacity, communications and change management.
- GRP solutions that rely on code customization add complexity and cost. This complexity reduces momentum to the point where technology inhibits rather than enables government transformation.
- Software manufacturers who hope to achieve success in GRP must have appropriate governance mechanisms whereby governments drive product enhancements.
- Holistic methods can provide reform roadmaps based on the country context. Lessons learned can be used to improve GRP products.
What are good practices for PFM and GRP sequencing?
- There is growing evidence that PFM sequencing is becoming more of a science than an art form. Open data and governance assessments provide material for sequencing roadmaps.
- Government human capacity determines reform momentum and reform sustainability.
- The modernization rate is much faster in developing countries than experienced in developed countries. This means that the technology approach and implementation practices need to be aligned to PFM needs to ensure effectiveness.