Posts Tagged ‘GFS’

The Difficulties and Rewards of so-called “technical” PFM Reforms

Monday, April 8th, 2013

Doug Hadden, VP Products

It’s the era of PFM myth building and myth busting.

Of clichés and fashion. Cynicism and risk aversion.

But, ultimately, it’s the era of increased insight into what works in public financial management reform.

2 Dimensional Debate

Current discussions about PFM effectiveness seem to centre about the relative merits of applied technology versus applied practice. There seems to be a view among many that proven practices can be automated via technology and so-called technical initiatives such as Governmental Financial Statistics (GFS) or International Public Sector Accounting Standards (IPSAS) will yield positive outcomes. There is an opposing view that the country context is critical: institutional capacity, macroeconomic situation and cultural norms should drive reform.

Both points of view are valid. The truth falls in a fuzzy place in-between. Where there are elements of both.

Best Practices vs. Country Context myth

”Best practices” has become a pervasive meme in the public and private sectors. Many suspect that this a code phrase to sell software (built-in “best practices”) or consulting. Matt Andrews of the Harvard Kennedy School has described the weaknesses of adapting so-called best practices , especially migrating a reform that seemed to work in one country to another . My sense is that the ‘best practice’ myth is unfortunately alive and well in public financial management. (‘Best practices’ remains a justification for donor funding for governance initiatives.) It’s going to take a few more years for this myth to die.

The opposing myth is that PFM reform success is more of an art than a science. If not the fine art of budgeting, spending, and managing public monies . In this view, PFM reform is the craft of understanding the country context. Richard Allen has stated that complexities of the reform process are not amenable to modeling; nor are the enabling conditions, political and administrative, that are critical for success and vary so widely from country to country. This myth is particularly strong in the PFM community. The result of which seems to be contradictory advice given PFM experts to the same government. It’s staggering the number of times that government officials are told to speed up or slow down reforms. To focus on budget planning or focus on budget execution first. To create an anti-corruption commission or undergo public service reform first.

PFM reform success cannot be divined through some kind of black magic?

That’s why we look at the set of practices that have been known to work. These are good practices that enable PFM success under certain circumstances. Some practices are better based on the country context. The point here is that “county context” is not half the mystery it’s made out to be. We’ve got open data, PFM, governance and transparency assessments and macroeconomic country data. The information isn’t perfect – but enough to:

  • Benchmark the country condition relative to other countries
  • Evaluate what has and hasn’t worked in similar contexts
  • Narrow down the good practices that can work
  • And, the technology enablers of these practices

Technical reforms are effective or not effective?

There is evidence that initiating technical reforms without other conditions tends to have limited results. Matt Andrews found that governments could improve Public Expenditure and Financial Accountability (PEFA) scores in legal reform without necessarily putting those reforms into formal practice. And, as Jack Diamond, has has argued implementing technology such as Government Resource Planning (GRP) aka Integrated Financial Management Information Systems is no “panacea”.

Yet, technical reforms are significant themes for donors. And, GRP systems are considered to be a tool to enable PFM reform.

The notion that reform is 5% technology, or possibly no more than 1% technology was part of a recent discussion at http://www.freebalance.com/blog/?p=3969 . I was tweeting during the event and was asked what my view was. My view remains that these so-called technical reforms impact governance through changes in behaviour . As we have described in our FreeBalance Governance Framework :

  1. GRP technology used to automate financial functions in government
  2. provides a set of tools: controls, front-office, decision making
  3. that are leveraged by institutions whose capabilities can improve or reduce effectiveness
  4. that has positive or negative effects that are exposed in measures like credit ratings or corruption perception
  5. that are used for important composite indicators like World Governance Indicators
  6. that, with other indicators, show governance outcomes such as economic growth or educational improvements

Technical reforms are easy or not?

Some observers suggest that implementing technical reforms including the implementation of a financial management system is somewhat easy and less political. Philip Krause has suggested that these technical reforms are not of magnitude to, say, proper parliamentary accountability – which involves party systems, electoral systems, media freedom. There’s a difference between accountants tinkering with the chart of accounts and societal transformation . My comment at the time was: “I find this notion that there is a distinction between technical and political reforms to be artificial. Technical reforms represent a sub-set of political reforms.”

But there are nuances to this notion of “tinkering accountants” (and tinkering economists) that was exposed with a recent twitter exchange with Matt Andrews.

Andrews suggests that the PFM tinkerers encounter political barriers. Our experience implementing in many countries is that this is true. However, the political disincentives and technical complexities differ for these practices:

  • Support for Medium Term Expenditure Frameworks (MTEF) is highly political (can transform budget priorities and threaten vested interests) and highly technical (requires high capacity to manage multiple year budgets, use program budgeting and understand the long-term recurrent costs for public investment projects.
  • Support for Accrual Accounting is highly political (shows the true value of government programs and the true government debt load that threatens patronage models of politics – also exposes arrears) and highly technical (capital asset depreciation, accounting for contingent liabilities).
  • Support for International Public Sector Accounting Standards (IPSAS) has severe political implications if following the accrual standards. The support for cash-based IPSAS can have political implications in the accounting for sub-national and State-Owned Enterprises (SOE) requirements. And, there are significant technical problems to account for this. But, cash-based IPSAS support for national government accounting has moderate political implications because the data is not necessarily open and is easy to support in financial systems. The politics of making the data open. Of independent audit. Of legislative scrutiny. Well, that’s a different political issue from supporting IPSAS.
  • Support for Government Financial Statistics (GFS) has limited political barriers because it helps justify donor funds and is of moderate technical complexity because it can be generated from financial systems when properly designed.

Conclusion: Nuance over Magic Bullet approaches

If PFM reform were well-understood, we’d be doing it better. Observers who focus primarily on a magic bullet as the critical success factor are doing us a disservice. Governance does not improve when government PFM decisions are weighted heavily to best practices, informal processes, ICT technology, human capacity, or ‘PFM as art’. Or, through tinkering accountants and economists. Or, self-congratulating donors, for that matter.

We are on the cusp of a scientific revolution in PFM reform and country development. Open data and ‘big data’ techniques are debunking strongly held myths . And, social media provides additional avenues for discussion that has only recently been available.

Let’s persist in breaking down the myths. Of opening data and discussions. And, turning PFM reform from art to science.

The FreeBalance Governance Framework, Part 2

Monday, March 11th, 2013

Doug Hadden, VP Products

This picks up from the introduction to the impact on governance of Government Resource Planning (GRP) software posted last week.

Governance Linkages

The FreeBalance Governance Framework links Government Resource Planning with institutional factors to achieve governance outcomes

  1. GRP technology used to automate financial functions in government
  2. provides a set of tools: controls, front-office, decision making
  3. that are leveraged by institutions whose capabilities can improve or reduce effectiveness
  4. that has positive or negative effects that are exposed in measures like credit ratings or corruption perception
  5. that are used for important composite indicators like World Governance Indicators
  6. that, with other indicators, show governance outcomes such as economic growth or educational improvements

The working premise for the governance framework includes:

  • Different levels of governance factors are in use when evaluated countries
  • There is no implied weighting of any governance factor at this time other than it is likely that all factors have some influence
  • There is no implied sequencing of PFM reforms in the FreeBalance Governance Framework but this analysis is used by FreeBalance as part of a Governance Valuation process that determines sequencing
  • There is no implied contribution effect for any governance factor (where some factors may need to reach a nominal level to have any material affect) and some factors (such as high capacity high autonomy in the public service could reduce governance) may have complex curves
  • It is challenging to identify where a popularly used governance indicator is placed in the FreeBalance Governance Framework
  • Virtually every governance measurement in use have flaws (methodology, comprehensiveness, ideology), but it is likely that these flaws have less effect when considered in aggregate
  • It is important to understand where exceptions can occur through exploring scenarios and real-life experience
  • Despite flaws, governance indicators are used by businesses, donors, journalists and credit agencies so there are incentives for governments to improve these indicators including the use of technology

Layer 1: Government Resource Planning (GRP)

GRP represents software that automates PFM functions. FreeBalance uses the PFM Component Map to define the categories of software provided by FreeBalance, competitors, third parties and developed in-house
by governments. FreeBalance makes no value judgement about the effectiveness of any software component from any vendor in the FreeBalance Governance Framework. The ICT characteristics that enable governance are described. It is possible that an ICT solution used for PFM by a government may not include important features that can enable good governance.

The PFM Component Map includes:

  • Government Performance Management (GPM) includes reporting, analytics, dashboards, Chart of Accounts design, risk management and multiple year budget formulation
  • Budget and Commitment Management (BCM) includes budget and commitment controls and commitment tracking with budget adjustments
  • Public Financials Management (PFM) includes accounting and associated functionality such as asset management and inventory control
  • Government Treasury Management (GTM) includes cash, aid, debt and investment management functionality with bank integration and reconciliation
  • Public Expenditure Management (PEM) includes government purchasing, procurement, grant, contract and payment management
  • Government Receipts Management (GRM) includes all tax and non-tax revenue sources
  • Civil Service Management (CSM) includes the human resources lifecycle with financial functionality including payroll, time and attendance, travel and subsistence and pensions
  • Transparency and Accountability) includes front-office functions designed to increase government accountability such as transparency portals or corruption reporting
  • Service Delivery ) includes government financial services designed to improve service delivery such as e-procurement and on-line licensing

Layer 2: Governance Tools

ICT Governance Tools


GRP systems include functionality designed to reduce ICT vulnerabilities. Governments augment this functionality through the use of ICT tools and leverage good practices to reduce ICT threats.

Although manual paper-based systems are fraught with corruption opportunities, governments should reduce the risk of ICT manipulation by internal government or external sources.

ICT vulnerabilities include:

  • Databases where individuals could change transactional information with the database that results in improper payments, manipulates transactional information or hides transactions
  • Network where individuals can identify transactions in progress
  • User Identity where individuals can steal user names and passwords to manipulate transactions
  • Interfaces where individuals can change information between systems
  • Reports where individuals can change the content of financial reports
  • Intrusion where individuals can connect into government networks externally

ICT solutions and good practices can significantly reduce the likelihood of ICT-enabled corruption:

  • Data integrity within GRP systems identifies when a piece of data has been manipulated or will not allow the data to be changed in the database or via scripts
  • Obfuscation is a software technique used in GRP to prevent individuals from understanding the logic of the underlying code, which is further strengthened when individuals do not have access to GRP source code
  • Encryption of data makes it difficult to access important data
  • Biometrics makes it difficult to steal user identity to manipulate databases or reports
  • Virtual Private Networks (VPN) restricts access to the GRP system and tracks usage
  • Security policies such as password rules, password reset and timing out reduces the opportunity for data manipulation
  • Security audits track every change in the ICT system including the database, operating system and middleware to identify manipulation attempts
  • Audit trail ensures that every transaction in the system can be stored and compared with the results from the system
  • Transaction audits enable auditors to trace all transactions to identify manipulate of information and to recommend improved processes such as segregation of duties and security policy changes
  • Database abstraction reduces the ability to manipulate information at the database level
  • Sniffing is used to identify suspicious network or user activity
  • Integration techniques are used to eliminate manual interface intervention
  • External transparency through portals enables civil society to identify data manipulation acting as citizen auditors
  • Intrusion detection systems identify attempts to hack into government networks

Governance Controls

GRP systems include internal back-office control functionality that ensures fiscal discipline and reduces corruption opportunities. These operate across GRP functions and some or significant controls.

  • Chart of Accounts or budget classifications is the metadata structure for all government transactions and is integrated into user and group security to ensure that individuals can only handle functions for which they are authorized
  • Budgets and Commitments provide transaction controls to ensure that budgets are not overspent including salary budgets and integration with revenue and treasury systems
  • Segregation of duties ensures that individuals do not have access to multiple steps in transactions
  • Secure Payment provides secure cheque printing and electronic funds transfer to prevent manipulation while improvement efficiency of government payments
  • Integration capabilities within GRP applications through web services support and the use of Service-Oriented Architectures (SOA) facilitate integration within the GRP suite and to GRP subsystems to reduce errors, improve efficiency and eliminate manipulation of data among systems
  • Reconciliationcapabilities within the GRP traps errors from external systems and ensures that transactions have been completed
  • Workflow and Procedures enables setting business rules and workflow that follows government fiscal practices to improve efficiency and reduce the impact of dangerous informal practices
  • Approvals ensures that all transaction stages have been approved by the proper authority
  • Accrual accounting provides better visibility than the cash-basis of accounting on the true state of government financials to improve planning and decision-making while reducing the effects of government arrears
  • Asset Management provides better information on the state of government assets, replacement needs, recurrent costs and responsibility for those assets to improve decision-making while reducing corruption on the use and disposal of assets

Decision-Making

GRP systems provide decision-making tools to governments. This includes standard “Business Intelligence” functionality such as reports, analytics and dashboards. It also includes budget planning and macroeconomic analysis as part of Government Performance Management. Embedded decision-making functionality in GRP systems enable creating more credible budgets, anticipating the effects of macroeconomic changes and making better day-to-day decisions.

Front Office

Front office systems provide transparency across the budget cycle. Transparency changes behaviour and enables civil society oversight. International public sector standards improve the quality and understanding of government data:

  • International Public Sector Accounting Standards (IPSAS) enables comparing information across governments for cash and accrual basis of accounting
  • Government Financial Statistics (GFS) tracks the spending purpose
  • Construction Sector Transparency Initiative (CoST) tracks construction cost for public investment infrastructure
  • Open Contracting is an emerging group intending to standardize e-procurement information
  • Extractive Industries Transparency Initiative (EITI) providing transparency on tax revenue received through extractive industries
  • International Aid Transparency Initiative (IATI) providing transparency on aid including donors, NGOs and governments

Layer 3: Institutions

Numerous internal government and external institutions interact to enable improved governance. The effectiveness of these institutions is dependent on numerous characteristics such as capacity and political will. Some characteristics are more critical for some institutions.

The efficacies of institutional characteristics are measured by civil society organizations. Some of these measurements have significant political impact in many countries. And, many of the more detailed measurements are used as part of meta indicators such as the World Governance Indicators.

Layer 4: Governance Signs

GRP functionality enables achieving improved PEFA assessments. PEFA assessments typically drive PFM reform programs.

Layer 5: World Governance Indicators

World Governance Indicators include: Government Effectiveness, Rule of Law, Control of Corruption, Regulatory Quality, Voice and Accountability, Political Stability and Absence of Violence. All of these indicators are used by the Millennium Challenge Corporation (MCC) when considering country investment.

Layer 6: Governance Outcomes

There are many positive outcomes from good governance in economic growth and addressing social issues like health and education. The scope of these indicators has been reduced in the FreeBalance Governance Framework to those that have impact on donor funding decisions such as the World Bank Doing Business indicator. There are other measures such as Foreign Direct Investment (FDI) and macroeconomic country growth that are relevant.

Budget 2.0 Roadmap Framework

Wednesday, September 14th, 2011

Doug Hadden, VP Products

As described in a post yesterday, I’ve been working on a paper for the Association of Budgeting and Financial Management (ABFM) conference in October. I’ll be on a panel discussion on October 15th on Online Expenditure & Performance Reporting.

The premise of the paper is that government budget management is modernizing to “Budget 2.0″ that leverages Web 2.0 technology and social media. The roadmap to Budget 2.0 includes:

  • Budget Preparation including the process for creating and approving budgets
  • Oversight including internal government and external stakeholders
  • Citizen Engagement includes methods of communicating to external stakeholders
  • Transparency Mechanisms leveraged by governments
  • Budget Comprehensiveness including all government tiers, parastatal organizations and coverage of all revenue and expenditures
  • Accounting Methods from cash through accrual accounting
  • International Standards Support for public sector and transparency standards
  • Policy Formulation including the process of building policy and aligning policy to budgets
  • Budget execution including how execution is controlled to meet budget objectives
  • Government Communications Medium from published documents through to open data
  • Timeliness on information provided to parliaments and citizens

The following shows the work in progress.

Budget 2.0 Roadmap Interaction

 

Budget Preparation Modernization

Towards participatory budgeting

Oversight and Engagement Modernization

Towards citizen oversight

Transparency Mechanisms Modernization

Towards open data

Budget Comprehensiveness Modernization

Towards treating whole of government as an enterprise

Budget Execution and Accounting Method Modernization

Towards true value of government and government performance


International Public Sector and Technical Standards

Towards true financial comparison between governments


Timeliness

Towards timely data to enable timely decisions

Policy Management

Towards participatory policy


 

 

 

Transparency Leapfrog in Timor-Leste

Sunday, May 1st, 2011

Doug Hadden, VP Products

Over 200 people gathered at the Transparency Camp managed by the Sunlight Foundation yesterday to talk about trends and lessons learned in government transparency (twitter hashtag #tcamp11). I was lucky enough to present a case study about Timor-Leste that generated some interesting discussions.

2011-04-29 Government Financial Transparency in Timor-Leste

Governments in developing countries like Timor-Leste (aka East Timor) recognize the power of transparency to build stability and improve government performance. This appetite for transparency comes at a time where countries like the United States are cutting back on transparency funding.

When we in the developing world face these types of crisis, which we do on a more regular basis than our colleagues in more economically advanced nations — then we are repeatedly told to increase our openness to the global economy, to trust in the market but to regulate them well. To be honest this approach has worked
Minister of Finance Emilia Pires

Timor-Leste is using technology to rapid achieve transparency as part of a public financial management strategy to improve governance and enable civil society. This includes:

  1. Adoption of international standards
  2. Use of decision dashboards for manager
  3. Document management systems for correspondence and freedom of information
  4. E-procurement portal (to go live in August)
  5. Budget transparency portal at www.transparency.gov.tl

These initiatives put Timor-Leste on track to leapfrog the United States on transparency.

Timor-Leste will be the country that goes down in history as the nation to put a stop to falling victim to large companies and the resource curse.

Prime Minister Xanana Gusmão

This video from the Sunlight Foundation gives a flavour for the event.

 

Lessons Learned from FreeBalance Customers

Monday, January 24th, 2011

Customer Presentations and Panel

FreeBalance government customers presented information about country Government Resource Planning (GRP) implementations, Public Financial Management (PFM) reform and lessons learned at the FreeBalance International Steering Committee (FISC) conference in Madeira Portugal.

PFM Challenges

Public management and reform challenges described by governments at FISC included:

  • Financial Control: Liquidity and fiscal deficits
  • Inefficiencies: Structural inefficiencies requiring streamlining

PFM Accomplishments

Accomplishments made by FreeBalance government customers, some leveraging the FreeBalance Accountability Suite:

  • General Financial Management: improved PEFA assessments, reform plans based on PEFA assessments, clearance of backlog in annual reports, timely production of budget and statutory reports, better budget execution
  • Standards: support for IPSAS, GFS, COFOG standards
  • Treasury: automated cheque printing, electronic signatures, electronic funds transfer, automated bank reconciliation, better cash and liquidity forecasting
  • Performance: management reporting including OLAP and dashboards with Key Performance Indicators (KPIs) and analytics, automated budget planning and budget book creation, program budgeting and performance management in the Chart of Accounts
  • Civil Service: reduction in ghost employees, more rapid generation of payroll
  • Receipts and Revenue: faster recognition of cash receipts
  • Audit: improved audits, unqualified audits, better audit trails and fraud reduction
  • Procurement: improved purchasing and payment efficiency
  • Decentralization:  decentralization of accounting, purchasing and budget functionality to line ministries and sub-national governments

PFM Lessons Learned

FreeBalance international customers completed the FISC Survey prior the conference. FISC members rated “government ownership” over PFM reform as the most important lesson learned in implementing Government Resource Planning (GRP) systems.

FISC member agreed that Project Management and a project steering committee are essential to GRP implementation success. They disagreed that Information Technology personnel should manage the project.

About FISC

The annual FreeBalance International Steering Committee (FISC) conference runs from January 16 – 19, 2011 in Madeira, Portugal. FISC provides an interactive forum to exchange Public Financial Management (PFM) good practices among international customers and PFM thought leaders. FISC drives the FreeBalance Accountability Suite product vision to direct FreeBalance GRP solutions. Previous FISC events were held in Mt. Tremblant, Canada (2010); Prague, Czech Republic (2009); Cascais, Portugal (2008); and London, United Kingdom (2007).

The FreeBalance Customer Survey

The FreeBalance Customer Survey helps achieve a very important company mission: public financial management knowledge transfer, as a For Profit Social Enterprise (FOPSE). It also helps us improve customer-centric processes by gauging satisfaction and measuring trends.

More results of the FreeBalance Customer Survey will be presented on this blog during the FreeBalance International Steering Committee conference in Madeira Portugal. Many of the items on the agenda are built from the survey, so discussions here in Madeira will add more context to the survey results.

Practical Approaches to the Aid Effectiveness Agenda published

Wednesday, July 14th, 2010

SamMoonDoug Hadden, VP Products

The Overseas Development Institute,  International Budget Partnership and Publish What You Fund has published a study that shows how aid information can be aligned and integrated with recipient country budgets.
The report authored by Samuel Mooon (pictured on the left at the recent IATI Technical Advisory Group meeting)  with the assistance of Zachary Mills takes a practical approach.

Why Use Country Systems?

The Accra Agenda for Action mandates the use of country systems by development partners.  According to the authors, “the Paris Declaration and the Accra Agenda for Action emphasise and formalise the importance of aligning aid with recipient government priorities and delivering aid through government systems. Yet, a significant amount of aid, in some countries the vast majority, is not delivered through the national budget. Indeed, many recipient governments are not even aware of large amounts of the aid directed to their countries. Generic donor ‘sector’ categorisations of aid are often applied at country level, even though these do not relate meaningfully to recipient governments’ sectoral or administrative budget classifications.” The use of country Integrated Financial Management Information Systems (IFMIS) can reduce transaction costs, improve transparency and harmonize aid to improve results.

The authors also point out that “the ability of citizens to hold their government to account for the services it delivers may be weakened by the provision of aid.”  Governments become more accountable to development partners rather than citizens.  The use of country systems to integrate development partner and government budgets changes the transparency dynamic to focus on citizens. And, citizens participate when taxes are linked to policy and outcomes.

It is difficult to argue with the statement that ”a solution at the country level is imperative to effectively align aid with government planning and implementing cycles and to address country-specific concerns.” Integrating the aid lifecycle from donor through to outcome is the focus of the International Aid Transparency Initiative. IATI also promises to make donors accountable.

Can Aid and Government Information Integrate?

 Many stakeholders seem to view the notion of aid and country integration as a theoretic exercise fraught with technical difficulties. The authors point out that “no AIMS has successfully and reliably brought aid information together in a way that interfaces with the national budget.”  The study examined whether current international classification standards can be leveraged including:

There has been much effort in countries to leverage good practices in budget and accounting classifications. The study found that there is complexity associated with linking sectoral requirements and  international classifications against multi-dimension Charts of Accounts (CoA). Yet, the study shows remarkable similarities in budget classifications across 14 governments. And, the study recommends how international standards can be extended to meet integration and harmonization needs. Government CoAs can accommodate standards support through inferred or side concepts that require little or no change to budget operations. Budget preparation and budget execution can operate independent of these classifications so as not to add any complexity. This is currently supported by many governments who are able to support GFS, COFOG and MDG classifications without affecting daily data entry.

The study recommends that donors should provide budget and funding information to facilitate usage by country system rather than the other way around.  ”Those countries most dependent on foreign aid and countries with lower capacity will lose out if donors do not publish aid information that is easy to link with recipient government budget systems,” the study asserts.  The study points out that donors have adjusted to national currencies and fiscal years. So the technical exercise can extend to supporting government budget and auditing calendars.

There remains some semantic issues in classifications that need to be overcome. There is no technical reason why development partner, aid information and country systems cannot integrate.

How is FreeBalance Helping with Aid Transparency?

There is interesting observation that I don’t fully agree with: “the ease of mapping aid onto budgets may have an inverse relationship with institutional capacity levels, and lower capacity countries are likely to start at a disadvantage in the attempt to use aid information and build functioning integral AIMS.” Our anecdotal experience is that countries with lower institutional capacity level may be more receptive to supporting the standards that enables aid management integration. They are more willing to use these standards to accelerate capacity building. We see that some of these countries will often roll-out full compliance with standards in a second phase.

As a For Profit Social Enterprise (FOPSE) with numerous country Government Resource Planning (GRP) systems in emerging nations, FreeBalance has been assisting in improving aid transparency. We are active in IATI and have provided technical advice on country systems. We have integrated the FreeBalance Accountability Suite with the Development Gateway Aid Management Program (AMP). We are producing a Transparency Portal product for our customers.  And, we are working with our for-profit and non-profit partners to develop an integrated aid and budget Ministerial Decision Support System.

We see multiple integration points between aid and country systems. In particular, aid management systems should be integrated with the budget preparation process. This provides full transparency on how the government and development partners expect to achieve joint goals. It should also be integrated to track expenditures throughout the lifecycle. And, it should integrate commitments so that development partners are aware of in-progress activities.

Tracking Stimulus Money: Fad, Fashion or Trend?

Thursday, June 4th, 2009

Doug Hadden, VP Products

“Follow the money.” Great advice from the movie, All the President’s Men.  And, this has become all the rage with the American stimulus package.  Conferences, blogs, tweets, CNN – all a-buzz.  Software vendors are announcing products to track the stimulus.

Is this an important trend?

The reaction by software vendors is reminiscent of the “compliance” industry. Topical. Possibly lucrative for vendors. Essentially recasting existing software products to do new things.  Business intelligence and grant management software repositioned as stimulus tracking. Magic? No.

Accountability in government is much more than stimulus tracking. Governments around the world will be spending unprecedented amounts to stimulate economic development. Yet, these expenditures are far less than government procurement and human resources. Transparent and accountable government is the trend. Stimulus transparency is the fad.

There are ideological discussions about the size of government in the United States and elsewhere. Most citizens can support the notion that governments should be more effective.  More effective every day of the year. Not just for the stimulus package. And, citizens are interested in results, not just how much money was spent in a particular region.

Much of the discussion about tracking the stimulus program relates to where the money is going rather than whether it will have positive economic benefits. This is where the developed world can learn from emerging countries. Emerging country governments report project expenditures and provide monitoring and evaluation data to donors.

What is the technical problem that needs to be overcome to enable stimulus tracking?

Certainly not reporting. There are established commercial and open source reporting, analysis and dashboard software. And, grant management software is also available. The problem is classification. More than the traditional classification problem in data warehousing. Why? Data warehousing taxonomy is oriented for internal purposes.  For people who understand the business or government domain. Not for the public.

Transparent government means accessible government. Citizens are not familiar with the complexities of government charts of accounts. Performance classification codes can differ among government organizations.  Stimulus fund classifications may be different among federal departments. Funds transfered from a federal to State department can change classification.

Emerging country governments leverage international standards for statistical tracking (IMF Government Financial Statistics), government functions (UN Common Functions of Government) and performance objectives (typically following Millennium Development Goals).  And, the American Federal Government developed a performance classification in the previous administration known as the President’s Management Agenda.  Governments need to track the economic purpose and objective for each stimulus expenditure.  Consistently.

Classification is the first step. Explanation is the second. Transparent government requires clarity. Classifications must be explained and accessible.

Where is this leading?

Transparent and accountable government is a worldwide trend. Citizens want to participate in making government work. This is particularly evident in Latin America where participatory budgeting has been widely adopted.

Many observers believe that the stimulus money will not be spent quickly enough or executed by recipients for the purpose intended. So they should. This is more than compliance. (Or Compliance 2.0). This is about Government 2.0. About citizens participating to improve government results. Imagine how effective the American stimulus package will be if it is accessible and leverages the social network energy used in the most recent election.

Government Technology Implications: The Chart of Accounts

Monday, March 9th, 2009

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

segments

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. 

samplecoa

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.

slcoa3objectives

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. 

coamap

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.

coasimplification

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.