Sustainable Public Financial Management

Doug Hadden

Is foreign aid effective? Is money better spent domestically?

There is probably no public debate so much dependent on bad information and confirmation bias than foreign aid. Polls consistently show that public perception of aid spending is orders of magnitude larger than it is. And, press reporting about aid focuses far more on the bad news than the good. As the video from Save the Children UK shows.

This video from Development Initiatives shows the need for transparent information to advance development and improve governance.

That’s not to say that foreign aid can’t be improved. And, there has been significant work to find evidence of what works and what doesn’t. And, for transparency thanks to the International Aid Transparency Initiative (IATI). We are on the cusp of leveraging “big data” analytics to improve aid effectiveness and development. It’s time for the aid debate to move from “narrative” to “visualization”. To leverage data for insight. To test our preconceptions.

How to Make the Most of Big Data infographic

What about the other 99.3% to 99.9% of government spending?

The rest of government can take a page from the aid community to leverage open data to improve performance. Let’s compare spending effectiveness on aid versus other government programs.

Differences between public and private sector

Doug Hadden, VP Products

Large companies seek to improve spend management: the process of reducing costs through economies of scale. Aggregate multiple purchase requests for similar products to single tenders = lower prices. Performance management in the public sector has additional important characteristics. Why? Public sector procurement is more complex than the private sector. And, budget driven.

Budget-Performance Linkage

Government expenditures are controlled based on the budget. Budgets are the legal embodiment of government objectives and policy. The approved budget is often called the organic budget law or the budget vote. Government budgets should be credible. The planning – assumptions and expectations should be rational. And, expenditures should be controlled through commitment accounting methods to eliminate over and under spending.

Governments create programs to execute on objectives. One program consists of multiple procurement cycles. Therefore, procurement plans are aligned to the budget plan.

Budget preparation is a serious business in government. The assumptions about how many kilometers of roads or numbers of hospitals that can be built for a certain amount of money are critical. Government budgets, when fully spent for the purpose envisioned by the legislature and executive of a government, are expected to result in positive outcomes: Improved economic growth because of new roads. Improved health because of new hospitals. The expenditure is output based: X Kilometers of road connected with the input (budget). Outcomes are unlikely to be achieved if the outputs are based on incorrect assumptions. Poor assumptions means the government fails to build the length of roads envisioned in the budget.  Or, poor control and performance management means that roads are not built because the budget was not fully executed.

Outcomes and outputs are the basis for government performance management.

Modern government budget preparation look at budget assumptions as cost drivers. A cost driver is an expected cost for a unit of something. A litre of petrol. A laptop computer. One hour of labour in road construction. These cost drivers can be packaged together to form an assumption for things like the cost of a training session (travel, lodging, per diem, course) or the creation of 1 KM of highway. Managers can see the predicted output of budgets. This improves decisions and makes the budget credible.

Procurement and Outputs

Cost drivers and packaging cost drivers are relatively easy in budget preparation. The difficulty comes in aligning outputs in expenditures. A cost driver or cost driver package may require multiple purchased items. A single procurement may include multiple output units and more than one package, especially if spend management is used.

It is critical to align the cost driver assumptions with reality. That way the budget spend and the outputs can be re-forecast during the year – rather than the surprise of finding that only ½ of the bridge was completed at the end of the project!

It’s difficult to align the “bill of materials” from multiple procurement cycles with the cost drivers. Not impossible. [Yet another advantage of the FreeBalance Accountability Suite.]

Government Performance Management during execution

Characteristics in which performance management in the public sector differs from the private sector include:

• Value for Money: Governments use value criteria to determine the cost per unit of outcome improvement. As John Glenn remarked: “As I hurtled through space, one thought kept crossing my mind: Every part of this capsule was supplied by the lowest bidder.” The lowest “compliant” price may not be the best value.
• Spend Management: The primary focus of government spend management is to create purchasing vehicles like standing offers with pre-negotiated bulk prices to facilitate the purchasing of commodity goods and to use e-procurement systems to get more competitive bids
• Output Progress: The progress for spending against the budget and the progress against project milestones need to be tracked.
• Transparency: Governments provide transparent public information throughout the budget and procurement processes.

Complexity

Government procurement for complex projects like turnkey government financial management systems or airports tend to be more intricate that in the private sector. Consider that governments are involved in far more “lines of business” that the largest private sector multi-nationals. Many governments are involved in more government-owned businesses “lines of business” than large private sector conglomerates! Some complexity challenges in government include:

• Tender complexity: The procurement documents rendered to potential suppliers can run into the hundreds of pages. (And, the responses in thousands of pages. Military acquisitions often run into the tens or hundreds of thousands of pages.) Parts of proposals are often distributed among specialists for evaluation.
• Contract management complexity: Contract provisions and payment terms can be very complex for turnkey solutions. Milestone payments. Holdbacks. Performance contracts. And, complex contracts tend to operate for multiple years. This requires multiyear commitments in the government financial system. Missing performance criteria.
• Spend management in a cost-basis of accounting: It is relatively easy to identify arrears and the cost of these arrears when using accrual accounting. Government systems track transaction progress through commitments, obligations and goods received if running on a cash or modified cash basis of accounting.
• Macroeconomic changes: Changes in commodity prices (such as a major increase in food prices), natural disasters and other economic shocks have significant impact on revenue and expenditures. This affects costs meaning that outputs need to be re-forecast
• Vendor management: Vendor selection (qualifications, certifications, financial capabilities and past experiences), vendor performance management (timeliness, quality) and vendor blacklisting (corruption, poor performance, loss of certification) is more complex in government than the private sector.

Doug Hadden, VP Products

While contemplating the state of government shared services, I was reminded of the Elvis Costello version of the song: (What’s So Funny ‘Bout) Peace, Love and Understanding.

Which led me to remember the the Canadian and Commonwealth governance concept of Peace, Order and Good Government.

Government shared services is often presented as a magic pill to overcome myriad government challenges. Standardization is seen as the key ingredient to catalyze cost savings and performance improvement. Some go so far as to suggest that standardization will improve agility and accountability.

It’s not surprising that technology vendors that make money on shared services use a little hyperbole.

Standardization and Good Government

1. Standardization does not improve agility. The more standard the processes, the less agile the organization.
2. Standardization does not improve discretion. The more standard the processes, the less discretion public servants have to make decisions that will improve performance.
3. Standardization does not improve accountability. The more standard the processes, the less ability public servants have to demonstrate merit. Accountability requires discretion and agility.

At least standardization improves government efficiency. Or does it? Generic processes can introduce inefficiencies, can limit streamlining, can add management burden.

At least standardization improves government risk management. Or does it? Standardization can provide an atmosphere of risk adversity, reducing effectiveness and innovation.

Searchin’ for light in the darkness of insanity?

As captured by Mr. Costello’s version of the lyrics, we need to consider a shared services approach that weighs all factors. My sense is that many financial management software vendor shared services implementations lack the ability to achieve the right balance between standardization and accountability.

The ideal financial management shared services platform should adjust to the standardization – accountability balance:

• Enable thick standardization rather than thin. Thin standardization takes lowest common denominator, typically a part of a process. This often leaves orphan processes that are automated through custom development – or not automated at all. Thick standardization enables government organizations to share the processes that are appropriate.
• Respect mandate and agility. Different legal and organizational mandates mean that government organizations have many unique processes. These processes should be supported by multiple configurations. Those processes that should be standard are standardized, those that are unique remain unique. All operating in the same data centre or private cloud to achieve IT cost savings.
• Bottom-up governance. Standards must change to reflect changes in government objectives and recognition of good practices. This is enabled through governance mechanisms that adapt to real-life situations. Shared services must not be static and must not inhibit change.

Standardization, agility and accountability is serious stuff indeed.

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

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.

Global Poverty

Entertainer and activist Bono tells the Globe and Mail to forget the past mistakes in foreign aid. “The present aid is working” [video]. This is a contrast to the ‘aid is just a waste of money’ and ‘it’s better to give at home’ narratives promoted by some politicians in developed countries.

As Owen Barder has pointed out:  most people don’t need to be convinced that development is desirable; they need to be convinced that aid works. However, rising budget deficits have given rise the notion of reducing foreign aid.

Developed country governments have fallen short of past commitments and now more is threatened. This has created concern in the aid community as reflected by the Modernizing Foreign Assistance Network in the United States who pointed out:

For around 1% of the federal budget, experts from the United States Agency for International Development (USAID), the Millennium Challenge Corporation, and other agencies are empowered to work hand-in-hand with our diplomats and members of the Armed Forces to help build accountable institutions and increase stability in “frontline” states like Afghanistan, Pakistan, Iraq, Somalia, and Yemen.  These professionals are also deployed to help boost private-sector and middle-class growth and reduce poverty in developing countries, the fastest-growing markets in the world. Our development efforts in these countries are crucial to opening up export opportunities for American businesses and building stable, long-term trading partners and allies. Were we to pull back, the void left behind would surely be filled by other countries that do not share our values.

Cutting aid may reduce security in developed countries as pointed out by US Secretary of State Hillary Clinton. Much of the security and aid debate relates to military and government aid to maintain stability. But, it is clear that improving the economic conditions of any country increases stability.

Towards a Rational Aid Debate

Aid targeting the sources of poverty and instability could be orders of magnitude more effective than securing borders and building intelligence and military capacity. Fixing the symptom is typically less expensive that mitigating the problem.

Foreign aid may also have more impact than local aid – especially with so many people living in poverty.

There is no question that aid effectiveness could improve. This is one of the benefits of the International Aid Transparency Initiative. The international community is improving results and leveraging transparency. There is a growing recognition of the power of harmonizing aid with government priorities and the need to untie aid.

But what about the other 99% of government budgets? Is there the same scrutiny to improve outcomes for national investment? It seems as if politicians are willing to promote spending based on inputs (the money provided for projects) rather than outcomes, with techniques such as “earmarks“.

Don’t get me wrong, there remain opportunities to improve aid effectiveness. Transparency data with visualization techniques holds much promise. It might be time for governments in developed countries to improve outcomes for internal national programs too.

Matthew Olivier, FreeBalance Director of Global Marketing and Alliances, welcomed delegates and speakers to the 5^th Annual FreeBalance International Steering Committee conference in Madeira, Portugal. He described how FreeBalance is  live tweeting and blogging to provide knowledge transfer to the Public Financial Management (PFM) community. The twitter hash tag is #fisc2011.

FISC Agenda

It is another rich agenda for FISC attendees focused on key trends of PFM reform and aligning FreeBalance products to these trends.

Monday, January 17

• Opening Remarks,  Matthew Olivier, Director Global Marketing & Alliances
• PFM Reform and Donor Funding in Post-Conflict Countries: Recommendations Derived from Personal Observations, Steven Symansky
• FreeBalance 2010 Company Update, Manuel Pietra, President and CEO
• Customer Case Studies and Survey Results, Doug Hadden, VP Products
• FreeBalance Reporting, Aldo Segastume, Director New Product Development

Tuesday, January 18

• Opening Remarks,  Manuel Pietra, President and CEO
• Detailed Product Roadmap, Doug Hadden, VP Products
• FreeBalance software for Capacity Building and Knowledge Management, Aldo Segastume, Director New Product Development
• FreeBalance Technology update, José Saldanha, Vice President, Research & Development
• FreeBalance Workflow, Pedro Jorge, Senior Software Development Specialist
• Migrating to Version 7, Matthew Olivier, Director Global Marketing & Alliances
• Solutions for Government Performance and Transparency, Aldo Segastume, Director New Product Development

Wednesday, January 19

• Opening Remarks,  Matthew Olivier, Director Global Marketing & Alliances
• FreeBalance Customer Presentations (Lessons Learned) from Timor-Leste, Antigua and Barbuda, Sierra Leone
• Budget and Performance Management Panel
• Accelerating E-Government Development, Doug Hadden, VP Products
• FreeBalance Customer Presentations (Lessons Learned) from Kosovo, Afghanistan, Mongolia
• Capacity Building Panel
• FreeBalance Customer Presentations (Lessons Learned) from Liberia, Uganda, Kyrgyzstan
•  Civil Service Reform Panel
• Roadmap Discussions and Voting, Doug Hadden, VP Products
• Closing Remarks, Manuel Pietra, President and CEO
• Closing Ceremony

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).

Doug Hadden, VP Products

FMI PD Week ends today. As always, interesting. And, a signpost for change in the Canadian Federal Governments. Here are some observations:

• The theme of risk and control generated many interesting discussions. The increase in financial control was sited by many speakers as limiting innovation and improvements in productivity.
• FMI did not tweet this year because of the lack of uptake last year. That didn’t stop us from tweeting and creating a hash tag #fmipd10.
• Government 2.0 was not a major topic of conversation. (Perhaps this explains the lack of interest in Twitter.) Nevertheless, my presentation: The Emperor has no Clothes: Risk and Results in an Increasingly Transparent Government 2.0 World was well-attended. (The presentation uploaded to Slideshare was a daily favourite and had some retweets).
• The development of a performance culture in government and the use of performance management techniques was very evident this year. Many public servants found lessons learned to be valuable. Although, based on my presentation last year, there does not seem to be a recogntion that Government 2.0 is critical for Government Performance Management.
• There were many excellent keynote speakers. Senator Jacques Demers, a former hockey coach, had attendees spellbound with his lessons on leadership, constant learning, growth and team building. Robert Blain of Cirque du Soleil had compelling thoughts of how Corporate Social Responsibility and strong values can lead to growth and profitability.

Doug Hadden, VP Products

The Government Accountability Office in the United States has published a statement of the use of Web 2.0 by Federal Agencies.  The statement by Gregory C. Wilshusen, Director Information Security Issues, focuses on – well – information security issues. There has been an undercurrent of risk avoidance and general fear of Web 2.0 technologies in government. This statement is fair and balanced (really fair and balanced, not the tag line) with a good assessment of the privacy, access to information and records management limitations of the Government 2.0 state-of-the-art. And, Mr. Wilshusen describes some of the work taken to overcome these concerns.

The audit function in government has transformed in the past few years from compliance – making sure that rules are followed – to performance. Analyzing programs for effectiveness in meeting mandate and achieving value for money. That’s what we need here. Government decision-makers need to understand the benefits – not just the risks. Otherwise, government transformation opportunities slow.

The difficulty with most analysis of Government 2.0 is that there is little distinction made between purely internal collaboration efforts and external public-facing. There’s no question that both types of activities share some elements of benefit and risk. But, as I’ve pointed out in the past, internal Government 2.0 represents a significant opportunity for mission achievement. And, lessons from internal efforts can be used to reduce the risks associated with external Government 2.0 initiatives.

This is section 3.1.6 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

This entry summarizes a number of previous posts about Government 2.0 including:

• Proposed Framework for Understanding Government 2.0
• How to Implement Government 2.0
• Government 2.0 Panel Discussion
• Governments Can Be Hip 2.0
• Will Government 2.0 achieve the promise of E-Government?
• Financial Software Must Provide Social Networking Functionality
• How will Government 2.0 transform government?

From E-Government to Government 2.0

E-government was the future. E-Gov was going to transform government. Improve citizen services. Integrate with “life events”. There have been many successful e-government initiatives. Yet government has not yet “transformed”.

Phase 1: Broadcast.  Citizens and businesses have access to information in a more efficient and effective manner than traditional mechanisms. Most governments provide information via the web.

Phase 2: Interact. In the second phase of e-government, businesses and citizens are able to interact with the government. They are able to start a transaction or.  This second phase improves efficiency because businesses and citizens are able to start transactions such as filling out government forms on-line.  Most governments provide interaction capabilities.

Phase 3: Transact. The third phase of e-government supports complete transactions. Citizens and businesses are able to fill out forms, request and pay for services. These “front-office” transactions integrate with “back-office” systems in governments to improve citizen and business services. Some governments support comprehensive transactions.

Phase 4: Transform. The fourth phase of e-government assumed that government services would be magically transformed. The nature of government would change. The relationship between governments and citizens would achieve a new level. But, this did not happen. There was no miracle. There has been some change in government, but not fulfilling the promise of e-government.

Government 2.0 is the logical extension of e-government. Government 2.0 can fulfill the promise of e-government. Many e-government initiatives exposed technology problems. Many governments were unable to integrate the front and back offices.

Phase 4: Single Point. Many experts foresaw the problem of the “single point of contact”. Any life event such as the birth of a child or the creation of a business can require interacting with many government entities across multiple levels. The need to support interaction for these life events is a critical stage. We believe that is the “missing link” to enable government transformation

Phase 5: Internal Collaboration. It is very difficult to transform government to interact and collaborate with citizens and businesses if the government does not collaborate internally. Governments need to collaborate across organizational boundaries. Traditional collaboration tools have not been as successful as Web 2.0 collaboration. We believe that governments need to leverage social networking tools for internal collaboration. This is a relatively low risk. Improving internal collaboration enables governments to move to the next phase.

Phase 6: Transform. Government organizations leveraging social networking for internal collaboration are able to extend externally. Government leaders will understand the power of collaboration and the benefits of exposing data based on the experience of internal collaboration.

Understanding Government 2.0 Effects

Our view is that Government 2.0 represents the technology continuum of e-government. We also see the linkage between Government 2.0 and government back-office technology.

We see government application categories as:

• Internal: internal by governments
• External: external to government with government involvement
• Structural: follow government structure and mandate
• Social: enable collaboration

This framework identifies three classes of applications:

• Back-office: operational budget, financial and civil service management-transaction management
• E-Government: exposing government information and transactions
• Government 2.0: social networking whether exclusively internal or collaborating externally

Relevant Government Trends

There are numerous trends in government that have technology implications. These implications can be mapped against the Government 2.0 framework:

• Collaboration: Use of Web 2.0 tools and metaphors is improving internal government efficiency and moving to external collaboration
• Transparency: Exposing more government information to citizens and businesses is moving from the structural to the social domain
• Accountability: More information from back-office systems is being presented to citizens. That information is being mashed up and analyzed and providing a feedback loop to government
• Performance: Internal social networking and feedback from citizens, businesses and civil society are improving government performance

FreeBalance and Government 2.0

The FreeBalance Accountability Suite was designed with Government 2.0 as core. The underlying architecture is designed to integrate transactions with content and collaboration – to extend the internal structural back-office to enable internal and external social networking. And, the rich application user interface has been designed for simplicity.