Sustainable Public Financial Management

by Doug Hadden VP Products

Ray Wang of the Altimeter Group, “the software insider“, can be counted on to provide interesting food for thought. Last week, it was about changes to the Master Data Management (MDM) market: “Focus on Outcomes Drives Push for Value.” According to Wikipedia, MDM includes the “set of processes and tools that consistently defines and manages the non-transactional data entities of an organization (also called reference data).”

Rationalizing data definitions across large organizations has been a difficult problem for many years. An expanding problem thanks to more and more data. Hence the need for more effective methods to manage meta data – the description and logic behind the data being used. MDM is needed to ensure that everyone is reporting on the same concepts.

The core government financial ”master data” in Government Resource Planning (GRP) is located in the Chart of Accounts (COA). The COA holds information about the organization, budget codes, accounting codes, programs, projects, activities, objectives and statistics. MDM in government becomes more challenging with procurement (vendors), revenue (customers), taxation (taxpayers) and civil service (employee) information. The advent of performance management highlights the need to rationalize data across multiple systems: governments need consistent data definitions for reports and dashboards.

I had just returned from a meetup at the International Semantic Web Conference when I read Ray’s piece on MDM. Semantic web is sometimes referred to as “Web 3.0.” (I won’t get into the debate about how “semantic” semantic web is – or whether this is “Web 3.0″.) Semantic technology has moved from the academic to the business world. It can be used to classify both structured and unstructured data. (And, integrate with the “deep web” through databases.)  It occurred to me that this technology represents the future of MDM. 

Photo:

Sir Tim Berners-Lee inspires the crowd about semantic web at the ISWC “meetup of meetups”.

 To expand on my comments on Ray’s blog:

1. Vertical: Semantic technology is ideal in building vertical taxonomies. Machine learning has been most effective when applied to single domains. (This is changing as the technology improves to handle multiple domains.)
2. Structured and Unstructured: designed to leverage both structured and unstructured content. Semantic technologies can pull concepts and identifiers directly from unstructured data. It can also show unexpected patterns with structured data because it is not limited to the explicitly relational database structure.
3. Data in the cloud: Can use web and “linked data” from external systems. Current search technology indexes web pages. Semantic web technologies can pull data from databases. And, there does not need to be a single source of data – this is the advantage of “linked data” that enables multiple servers to expose information.
4. Styles: Semantic technology tends to focus on business concepts rather than the physical layer. (At the same time, supports data rationalization at the physical layer.)  Users need to have information presented as concepts to discover important facts. Otherwise, users need to be database experts.
5. Governance: It might be possible to leverage semantic web technologies for governance – trap improper uses of classifications, identity facts that could change classifications. And, it can reduce the burden to ensure that data is classified in a particular fashion.
6. Social networks: Semantic technology is being used today to analyze customer reaction on social network sites to gauge opinions. Semantic technologies can help determine whether a blog post or series of Tweets refers directly to your organization or not.
7. All data types: Semantic technology extends well into all text-related content. There is also some work in integrating with all media. This technology is helping to break free of the arbitrary containers for data (documents, videos, databases etc.)

There are excellent sources for reading material on PFM and GRP coming from donor organizations.  We’d like to highlight some of the best material from DFID, USAID, the World Bank and the International Monetary Fund.

Integrated Financial Management Information Systems A Practical Guide http://pdf.usaid.gov/pdf_docs/PNADK595.pdf

Review of Public Financial Management http://www.dfid.gov.uk/Documents/publications/evaluation/review-pub-finan-mgmt-reform-lit.pdf

World Bank Public Sector and Accountability Series:

• Local Public Financial Management http://siteresources.worldbank.org/PSGLP/Resources/LocalPublicFinancialManagement.pdf 
• Budgeting and Budgetary Institutions http://siteresources.worldbank.org/PSGLP/Resources/BudgetingandBudgetaryInstitutions.pdf
• Performance Accountability and Combating Corruption http://siteresources.worldbank.org/PSGLP/Resources/PerformanceAccountabilityandCombatingCorruption.pdf
• Macro Federalism and Local Finance http://siteresources.worldbank.org/PSGLP/Resources/MacroFederalismandLocalFinance.pdf
• Local Budgeting http://siteresources.worldbank.org/PSGLP/Resources/LocalBudgeting.pdf
• Participatory Budgeting http://siteresources.worldbank.org/PSGLP/Resources/ParticipatoryBudgeting.pdf
• Intergovernmental Fiscal Transfers: Principles and Practice http://siteresources.worldbank.org/PSGLP/Resources/IntergovernmentalFiscalTransfers.pdf
• Public Expenditure Analysis http://siteresources.worldbank.org/PSGLP/Resources/PublicExpenditureAnalysis.pdf
• Local Governance in Industrial Countries http://siteresources.worldbank.org/PSGLP/Resources/LocalGovernanceinIndustrial.pdf
• Local Governance in Developing Countries http://siteresources.worldbank.org/PSGLP/Resources/LocalGovernanceinDeveloping.pdf
• Fiscal Management http://siteresources.worldbank.org/PSGLP/Resources/FiscalManagement.pdf
• Public Services Delivery http://siteresources.worldbank.org/PSGLP/Resources/PublicServiceDelivery.pdf

IMF Fiscal Affairs Department Technical Notes

• Modernizing Cash Management https://imf.org:443/external/pubs/ft/tnm/2009/tnm0903.pdf
• Commitment Controls https://imf.org:443/external/pubs/ft/tnm/2009/tnm0904.pdf
• A Basic Model of Performance-Based Budgeting https://imf.org:443/external/pubs/ft/tnm/2009/tnm0901.pdf
• Transition to Accrual Accounting https://imf.org:443/external/pubs/ft/tnm/2009/tnm0902.pdf

The FreeBalance Accountability Suite is designed for managing government fiscal processes from the ground up. The FreeBalance IFMIS is implemented by activating functionality options through software configuration rather than bespoke programming and software source code customization.

Governments worldwide select required functionality that reflects the unique country circumstances and can activate additional features and functionality as the political process evolves. The FreeBalance IFMIS is initially scaled down for fast implementation of a simple system, which can be extended over time to reflect evolving government needs and budget frameworks.

• Localization. All translations, including terminology changes are easily accessible by the customer through simplified methods for uploading translation files. All software modules support multiple languages and multiple currencies of up to 14 digits and 2 decimal places.
• Configuration. The software configuration includes selecting and setting the Chart of Accounts (COA), accounting methods (cash, modified cash, accrual, modified accrual accounting), the government purchasing processes, fiscal periods, approval methods, valid code combinations, business rules, workflow, reporting entities and authorizations.
• Progressive activation (sequential activation of additional functionality) though allowing ongoing changes to the accounting methods, budgetary controls and initial country-specific configuration to support evolving political processes and capacity building.
• Adaptable connectors to 3^rd party software, such as Customs and Taxation systems, secure cheque printing and electronic funds transfer systems.
• Multi-tiered Government Synchronization (MTGS). MTGS enables stand-alone systems located at nodes such as the Ministry of Finance (MOF), line ministries or regional offices to be connected by a wide area network (WAN), usually through VSAT satellite communications. This deployment enables synchronization of data between the nodes and different levels of government.

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 section 2.2 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.

Note: this has been updated to add comments about IPSAS and the COA

It starts with the Chart of Accounts. Fiscal discipline, controls, reporting and performance are enabled through the proper creation and modernization of a government Chart of Accounts (COA). The COA describes government objectives. It can provide effective decision-making. 

Technologists understand the the COA represents the metadata of government financial management. The COA provides a logical hierarchy of fiscal management. The government COA tends to be more complex than in the private sector because it can include all government entities and a broader set of considerations.

Elements of a COA

Example of COA Elements

The Chart of Accounts can include many important elements such as:

• Object, Accounting or  Transaction Code that corresponds to standard accounting practice including codes for assets, liabilities, revenue and expenses.
• Organization Code that describes the organization hierarchy including ministries, agencies and divisions.
• Responsibility Centre that describes approval responsibilities. Sometimes the approval structure differs from the organizational hierarchy.
• Location Code that describes the physical location of the organizational unit.
• Tier that describes the organizational tier in unitary governments such as provinces or municipality.
• Fund Code that describes the source types of revenue. Many emerging countries have fund codes for donors. Most countries keep track of different revenue sources and treat expenditures differently based on revenue types.
• Economic Code that describes the purpose of any expenditure or program. For example, other ministries, other than the Ministry of Education, expend money for educational purposes.
• Programs that describes government programs that could be shared across multiple ministries. Programs often last more than one year and represents an important commitment on behalf of the government.
• Projects that describe important government projects.
• Activities that describe the functions being performed for any expenditure.
• Objectives that describes the objective of any expenditure.
• Performance that describes the measurement for any initiative.
• Support of International reporting standards such as Government Financial Statistics (GFS).

A Most Beautiful Chart of Accounts

The Accountant General of Sierra Leone,  Cyprian Kamaray, describes his COA as ‘beautiful’. There are a number of ways to design an elegant chart of accounts. Good practices include:

• Identifying shared information in the COA to reduce the number of characters. For example, the “project” element could be part of the “program” element. The COA in Sierra Leone uses 27 characters yet provides full GFS reporting.
• Simple is always better. Government should err on making the COA as small and simple as possible. This reduces data entry errors.
• Inferring important reporting information. Users should not be expected to understand Government Financial Statistics. GFS can be inferred from normal accounting codes.
• Valid coding combinations. Programs and projects often fall under one or two ministries. The COA should be designed to prevent incorrect data entry in these situations.
• Adapt over time. The COA should be designed for current conditions. Adding complexity to the COA can result in errors. It is best to match updating the COA with capacity building.
• Simplify double-entry bookkeeping. Many data entry personnel are not fully familiar with debits and credits. The context of the data entry can define the debits and credits for users. 

Example of a simplified COA hierarchy

Performance Management Linkage

Government Performance Management is a critical subject in Public Financial Management. Governments want to improve development results. Sometimes these improvements are tied to international objectives like the Millennium Challenge. Performance characteristics need to be integrated within the Chart of Accounts to facilitate performance reporting and analysis.

The beautiful Sierra Leone Program segment is an excellent example of organizing objectives with other critical elements. The characteristics of the segment include:

• Objectives managed through pillars, and objectives linked to project components.
• Themes, priorities and Millennium Development Goals linked to objectives reducing the data entry complexity.
• Project hierarchy built on a number of tiers down to the activity level.
• GFS inferred from the project elements.

Other COA Considerations

Government organizations update the COA to meet new objectives. This may include adding of an additional segment or revising the economic codes. Governments are constantly modernizing the financial management system. 

A multi-year Chart of Accounts

Details within the COA that are important to a government entity may not be material to the Ministry of Finance. For example, details coming from local governments may not be important. Country-wide COAs where every government entity shares the same complex coding structure can add complexity. Summarizing unimportant details and inferring parts of the COA can simplify the consolidation of financial information.

Simplifying the roll-up to a consolidated Chart of Accounts

Implication of IPSAS

The Institute for International Public Sector Accounting Standards (IPSAS) published 26 standards. . This has many implications for public financial management in general. IPSAS provides guidance on COA objectives, reporting needs and supporting accrual accounting including creating classifications for:

• Calculating financial position and cash flow to enable the creation of financial statements
• Organization units or segments that can relate to geographic or service entity to enable comprehensive reporting for any organizational unit
• Depreciation and amortization 
• Revenue and expense types to classify revenue streams and expense types
• Salary and benefits recognition
• Finance and borrowing costs
• Any long term contractual agreement like leases
• Contingent liabilities and assets
• Statistical reporting
• Inventories including costs and changing in value including write-downs
• Foreign exchange including accounting for realized and unrealized foreign exchange gains and losses

Summary

The Sierra Leone COA is attractive. There is no perfect COA for every government. It depends on the country context – particularly government objectives and human capacity. 

There is important internal political capital that can be generated from an effective design of the Chart of Accounts. One Latin American civil servant complained that the President of his country could not tell people how much money had been spent on education in a province. That is because there was no element that covered the “economic purpose” of expenditures.