This series examines different scenarios and the impact of Government Resource Planning (GRP) to improve governance. [Framework described in more detail.]

Information and Communications Technology (ICT) initiatives such as Government Resource Planning (GRP), sometimes known as Financial Management Information Systems (FMIS) for government, are seen as an expression of PFM reform. Diamond and Khemani suggest that “the establishment of an FMIS has consequently become an important benchmark for the country’s budget reform agenda, often regarded as a precondition for achieving effective management of the budgetary resources. Although it is not a panacea, the benefits of an FMIS could be argued to be profound.” 

IMPACT: General agreement that Public Financial Management and institutional reform is critical to improving governance

PROBLEM: The pace of PFM reforms often slows because of the inability for information systems to adapt to new needs

OTHER FACTORS: Sequencing of reformsdiffers because of differing country contexts  

SCENARIO: Continued and sustained activation of required PFM functionality based on country governance needs

Matt Andrews has pointed out the importance of regulative, normative, cultural-cognitive mechanisms to understanding the country governance context. Richard Allen suggested that there is no consensus model for sequencing.  The need for more in-depth understanding of context in government is further complicated by what Cindy Jutras describes as a lack of agility in Commercial-Off-The-Shelf (COTS) Enterprise Resource Planning (ERP) systems that are often used in government. This series demonstrates how GRP can be used to improve governance and enable governance reform.

Government Resource Planning Progressive Activation

The GRP “progressive activation” lifecycle can be described as:

1. Technical GRP Platform consisting of one of more modules is installed in a government organization after a thorough needs analysis
2. This needs analysisis used in a system configuration to meet government PFM needs
3. Governments modernize and create new PFM laws through legal reform that can include new procurement guidelines, transparency initiatives and support for international standards
4. Governments also  develop improved processes through process re-engineering
5. Governments build civil service capacity to improve fiscal discipline and efficiency
6. These changes require functional improvements that need to be configured in the GRP Platform that can include more advanced functions and new modules
7. A typical initiative is to improve citizen delivery and decision-making through decentralization that requires some devolution of responsibilities yet maintaining budget controls
8. Government Performance Managementfunctions such as audit enables governments to identify opportunities for governance improvements in areas such as anti-corruption, risk management and efficiency improvements
9. Dashboardsand other analytical methods also identify opportunities for reform
10. Progressive Activationenables sustainable PFM reform as the cycle returns to GRP Processes where the GRP system can adapt to multiple stages of reform 

Governance Toolset

The progressive activation scenario requires the ability for GRP systems to adapt to changing requirements:

• Centralized method for change across all GRP modules is preferred to complex “Master Data Management” exercises across modules from different vendors
• Reliance on software code customization (code development, call-outs to code, and complex scripting languages) adds significant costs and time at all stages of reform, especially when this code is in proprietary software languages owned by the COTS vendor
• Methodology and process is intertwined with technology otherwise governments are often faced with entry-level custom developed software that does not reduce poor practices or inappropriate “out-of-the-box” functions from COTS vendors

There are GRP governance tools operating at every stage in the PFM reform lifecycle including:

• Controls
• Chart of Accounts that aligns all government financial activity to budgets, users, purpose, organizational structure and accounting types for fiscal discipline – the COA tends to change because of government reform to introduce program budgeting, performance measures, standards support or accrual accounting
• Segregation of Duties ensures proper fiscal discipline – duties tend to change as governments decentralize, and reorganize
• Integrationensures that controls and functions operate consistently across multiple modules – integration requirements tend to increase as new modules and users are added
• Procedure Workflow articulates proper processes and controls – the workflow tends to change as governments introduce more advanced functional

Some governance tools augment specific parts of progressive activation lifecycle:

• Needs analysisis augmented by methodology tools that generate system blueprints (that often include multiple stages) following appropriate good practices
• Configuration includes changing parameters, adding fields of information, adjusting business rules and workflow as part of controls
• Legal reformand process re-engineering is enabled through change management methodology tools that ensures appropriate reforms for the country context and effective socialization of those reforms – and the linkage with policy
• Capacity building is enabled through configuration controls  including e-learning, user certification and localized help and terminology that adapts to meet increase in civil service knowledge
• Functional improvements requires controls to upgrade parameters, information fields, business rules and workflow that includes typical initiatives like movement to accrual accounting
• Decentralizationis supported through the configuration controls
• Auditing includes compliance and performance audits decision-making tools that provides information to eliminate practice deficiencies through controls  and typically uses the technique of benchmarks within government and with peer governments
• Performance management includes results systems decision-making tools that enable connecting government spending with outputs and outcomes that can improve decions and provide insight into controls changes

Institutional governance enablers that are critical to progressive activation include:

• Capacity of stakeholders including businesses, executive and civil society to create an environment for governance improvements
• Public Service capacity and incentives is important otherwise informal practices will dominate and laws will not be put into practices
• Political Will by stakeholders such as the executive and senior public servants to champion change
• Standardsused in public financials that provides better information to stakeholders
• Accounting procedures used by the government that provides appropriate fiscal discipline using good practices and integrated with controls
• Complianceprocesses and norms within the government

There are other institutional characteristics that are important during the lifecycle include:

• Legislature institutional capacity to ensure debate and passage of appropriate PFM laws
• Focus on improving the efficiency of government processes through automation and functional improvements
• Decentralizationof appropriate controls to enable devolution and improved citizen services
• The independence and enforcement options forinternal and external audit institutions and public service organizations to enable future reforms

It can be argued that appropriate institutional arrangements for PFM reform sequencing will have limited impact without an effective underlying technology system:

• Auditors will be forced to track budget, revenue and spending effectiveness through paper files or across incompatible information systems
• Public servants will not have access to data that measures efficiency or effectiveness in order to recommend changes
• Informal processes will dominate public financial management without automated controls
• Errors in financial processing will not be easily trapped except with an automated system that will show where user capacity needs improvement

Governance Signs

There are numerous signs that are used to measure the governance effectiveness of PFM in this scenario:

• Public Expenditure and Financial Accountability(PEFA) assessments are widely accepted as showing the PFM state-of-the-art in any country. PEFA provides detailed analysis of the comprehensiveness, efficiency and quality of PFM processes
• Quality of Governance Institute measure that provides an index for government corruption, bureaucratic quality and the rule of law

Governance Linkages

In this anti-corruption scenario:

• GRP systems support automated governance tools that enforce fiscal procedures
• Governance tools within the GRP help to improve efficiency and performance
• Features of the GRP optimize government capacity and methodologies ensure capacity building as part of the professionalization of the public service
• Governance tools are progressively activated to enable more advanced functions in sequence with improved capacity
• Improved efficiency and public service capacity can improve the World Governance Indicator, Government Effectiveness

PEFA Impact

Progressive action using GRP with tools and enablers will help to improve ratings for:

• PEFA B Comprehensiveness and Transparency
• PI-5 budget classification could be improved to support program budgeting, reorganization, performance indicators and accrual accounting
• PI-6 increase in the comprehensiveness in budget documents thanks to improved data classification
• PI-7 reduced amount of unreported government operations through decentralization and integration
• PI-8 improved transparency of inter-governmental fiscal relations through decentralization and integration
• PEFA C(ii) Predictability and Control in Budget Execution
• PI-16 improved predictability in the availability of funds for commitment of expenditures through improved budget classification and controls
• PI-17 automation to improve the recording and management of cash balances, debt and guarantees
• PI-20 improved effectiveness of internal controls thanks to effective automated controls
• PEFA C(iii) Accounting, Recording, Reporting
• PI-22 improved timeliness of accounts reconciliation via integration and automation including integration across GRP modules
• PI-23 improved availability of information from service delivery units through increased GRP coverage government-wide
• PI-24 improved quality and timeliness of in-year reports through integration, automation and the use of international standards and good practices in accounting procedures
• PI-25 improved quality and timeliness of in-year reports through integration, automation and the use of international standards
• PEFA C(iv) External Audit and Scrutiny
• PI-26 improved scope of external audit through independence, capacity and access to the procurement audit trail
• PI-28 improved legislative scrutiny of external audit reports because of improved information and increased legislator capacity

Governance Indicators and Outcomes

The improvement of meta governance indicators such as Government Effectives improves trust and investment in countries. Improved effectiveness improves policies, laws and regulation of those laws. These indicators are used by credit agencies and private businesses. Foreign Direct Investment (FDI) can increase.

It is true that exogenous factors and informal processes can reduce the PFM reform pace. Appropriate GRP technology can enable “small wins” and incremental improvements that enhance institutional efforts and capacity building.

Case Study: Kosovo

PFM reform in Kosovo began with the United Nations Mission in Kosovo (UNMIK) in 1999.UNMIK created an administrative structure creating the “Central Fiscal Authority (CFA), later renamed the Ministry of Finance and Economy. The FreeBalance Accountability Suite was selected and implemented in 26 days to support a new Chart of Accounts, support budget controls and issue payments.

The GRP system in Kosovo adapted to new reforms by the UNMIK and the Government of Kosovo after independence was declared in fiscal management, public procurement, human resources, budget, decentralization, corruption, cash and debt management.  PEFA assessments also improved with use of GRP functionality cited as partly responsible. Today, Kosovo has rolled out GRP software to all budget organizations are all government tiers. Budget transfer and purchasing responsibilities have been decentralized to improve decision-making and service delivery while maintaining compliance with fiscal controls.

Conclusions

The pace of PFM reform needs to be sustainable to have lasting governance improvements. The information systems must enable rather than prevent reform. There have been numerous failures when inappropriate software is used for government financial management. GRP software can enable reform through:

• Progressive activation of business rules and workflow to support modernization
• Integration of additional software modules that increases automation across government
• Decentralization of processes and responsibilities in concert with capacity improvements
• Government-specific methodologies for needs analysis and change management that includes tackling incentives and informal practices

These tools and techniques are best leveraged by governments with political will, good civil service, legislative and civil society capacity with audit organizations with sufficient capacity, independence and enforcement.

Governance Enablers

Institutions and institutional characteristics such as capacity and political will are necessary to effectively leverage the governance capabilities of GRP. 

Doug Hadden, VP Products

I had a few interesting exchanges on twitter yesterday, the first concerning the improvement from 21% to 59% made by the Government of Afghanistan on the Open Budgets Survey . (See below for the “storiefied” version)

The International Budget Partnership provided links to news stories about this achievement.

• “Open Budget Survey Ranks Afghanistan as Second Greatest Improver,” Asia Foundation, 23 January 2013
• “Afghanistan achieved progress in Open Budget Index,” Wakht News Agency, 23 January 2013
• “Global report ranks Afghanistan as one of the fastest improving countries in enabling its citizens to understand and influence budget decisions that affect their lives,” http://pro-act.org, 26 January 2013

My sense is that many are incredulous that Afghanistan has a rating just below Italy.

The point is that Afghanistan makes 6 of the 8 documents that should be public by the OBI public. The other 2 are used internally. Public engagement was rating weak and there is room for improvement. Publishing the additional 2 document and increasing public engagement will improve the rating.

The Government of Afghanistan uses the FreeBalance Accountability Suite. This enables the government to publish budget information if there is political will to do so. The Government of Timor-Leste publishes information directly from our software in a Transparency Portal and the Government of Liberia has announced an electronic billboard project to show government expenditures. I suspect that Liberia will also be using FreeBalance back-office software to support this initiative.

The governance news from Afghanistan is usually grim, as I have said in the past. The truth is that there have been achievements in Afghanistan including a good Public Expenditure and Financial Accountability (PEFA) assessment in 2008, rating of achieving substantial PFM progress and evidence of how software reduced corruption in Afghanistan.

To be clear, I am not saying that our software is a magic anti-corruption/good governance pill. I’m saying that the tool, when there is political will and commitment can be used for transparency and accountability. And, the governments of Afghanistan, Honduras and Liberia should be acknowledged for their governance achievements.

Open Budgets Controversy?

Interesting exchanges from the launch of the "increasing the Pace of Budget Transparency" event at the World Bank (http://live.worldbank.org/increasing-pace-budget-transparency) yesterday.

Storified by · Wed, Feb 06 2013 06:10:12

Part 2: PI-15 to PI-28

Doug Hadden, VP Products

I suggested in my previous post, What Canada can learn from Developing Countries on Public Financial Management sustainability, [Part 5], that we could learn more about holistic public financial management. In particular, the PEFA assessment methodology. This is Part 2. [Part 1 covers PI-1 to PI-14]

PI-15. Effectiveness in collection of tax payments

Factors:

(i) Collection ratio for gross tax arrears, being the percentage of tax arrears at the beginning of a fiscal year, which was collected during that fiscal year (average of the last two fiscal years).

(ii) Effectiveness of transfer of tax collections to the Treasury by the revenue administration.

(iii) Frequency of complete accounts reconciliation between tax assessments, collections, arrears records and receipts by the Treasury.

A 2006 report from the Auditor General of Canada about the Canada Revenue Agency found  that as of “31 March 2005, the total amount in undisputed tax debt stood at $18 billion, of which the Agency expects to collect only about $13.3 billion—it considers the rest to be doubtful accounts and not collectible. The Agency also writes off a certain amount in uncollectible unpaid taxes every year—in 2004–05 the amount was $2.7 billion.”

It is likely that the Canada Revenue Agency has improved the following deficiencies from 2006 that related to the factors:

• Unsophisticated risk approach
• Untimely collection
• Tax debt growing faster than the rate in which taxes are paid

PI-16. Predictability in the availability of funds for commitment of expenditures

Factors:

(i) Extent to which cash flows are forecast and monitored.

(ii) Reliability and horizon of periodic in-year information to MDAs on ceilings for expenditure commitment

(iii) Frequency and transparency of adjustments to budget allocations, which are decided above the level of management of MDAs.

My sense is that the federal government should be rated relatively high on these requirements. Cash is centrally managed. I expect that cash flow is well managed and that treasury functions like investments and bonds are also well managed.

Allocations are predictable except when there is an unusual circumstance like the financial crisis. Commitment information is provided from all MDAs (Ministries, Departments, Agencies). There are six month reviews.

FreeBalance developed the initial generation of products to manage budget, allotment and commitment control. Manual and computerized accounting systems did not track whether MDAs were over or under spending. Or forecasting the year-end position. The Government of Canada term to calculate the amount left to spend is the “free balance.” [budget – commitments – obligations – actuals = free balance]

PI-17. Recording and management of cash balances, debt and guarantees

Factors:

(i) Quality of debt data recording and reporting

(ii) Extent of consolidation of the government’s cash balances

(iii) Systems for contracting loans and issuance of guarantees

Debt information is found budget documents. The cash position is consolidated centrally. My sense is that this is handled quite well in Canada.

PI-18. Effectiveness of payroll controls

(i) Degree of integration and reconciliation between personnel records and payroll data.

(ii) Timeliness of changes to personnel records and the payroll

(iii) Internal controls of changes to personnel records and the payroll.

(iv) Existence of payroll audits to identify control weaknesses and/or ghost workers.

Payroll is effective in the Government of Canada. There are some difficulties with the timeliness of changes to personnel records and payroll whereby one department may be paying for an employee who has transferred to another department. This is likely to change because of a new payroll system that will be implemented.

It’s unlikely that there is a ghost worker problem in Canada. There have been payroll audit such as at CIDA, but it’s probably not a major activity thanks to the reporting of expenses by public servants.

Many MDAs in Canada have strong controls on payroll budgets. Standard payroll or human resource Commercial-off-the-Shelf (COTS) software have no budget controls and are not “budget aware”. So it is possible to over or under-spend the budget. FreeBalance developed salary management software, currently in use in many federal departments to solve this problem.

FreeBalance Performance Budgeting for Human Capital (PBHC) enables MDAs to build payroll spending scenarios based on union collective agreements, payroll rules, salary scales and assumptions around training, vacancies, seasonal employment, leave accrual etc. PBHC takes the actual payroll generated from a pay period to re-forecast potential surplus or deficit situations.

Expense reporting for senior public servants is transparent in the federal government to add a further level of control.

PI-19 Transparency, competition and complaints mechanisms in procurement

Factors:

(i) Transparency, comprehensiveness and competition in the legal and regulatory framework.

(ii) Use of competitive procurement methods.

(iii) Public access to complete, reliable and timely procurement information.

(iv) Existence of an independent administrative procurement complaints system.

The federal government does well in most of these factors based on our experience as a supplier. There is an open procurement system for tenders. There are mechanisms like supplier agreements that enable spend management. Advance Contract Award Notices are used to public sole-source contracts to add competitor feedback to non-competitive procurement.

There are numerous independent complaints systems depending on the nature of the procurement.

There has been some recent criticism about the Royal Canadian Air Force sole-source acquisition of F35 aircraft. My sense is that the F35 acquisition is an exception that proves the rule about procurement transparency. There is reasonable justification for the sole sourcing, although some question the acquisition of a single-engine fighter/interceptor in Canada. They key issue is whether the estimates were accurate – it was fairly open that the acquisition was planned. The Parliamentary Budget Officer first identified the estimation problem. Later, the Auditor General found that “Defence Department officials twisted government rules, withheld information from ministers and Parliament, and whitewashed cost overruns and delays afflicting the F-35 program.”

PI-20. Effectiveness of internal controls for non-salary expenditure

Factors:

(i) Effectiveness of expenditure commitment controls.

(ii) Comprehensiveness, relevance and understanding of other internal control rules/ procedures.

(iii) Degree of compliance with rules for processing and recording transactions.

FreeBalance provides Government Resource Planning (GRP) software to 28 Government of Canada MDAs. The control regime is advanced to include:

• Commitment and obligation control
• Segregation of duties
• Approvals based on context such as by purchasing vehicle or amounts
• Reporting

PI-21. Effectiveness of internal audit

Factors:

(i) Coverage and quality of the internal audit function.

(ii) Frequency and distribution of reports.

(iii) Extent of management response to internal audit findings.

According to Charles-Antoine St. Jean, the former Comptroller General of Canada, reform of internal audit in the Government of Canada has been slower than expected. Mr. St. Jean spoke at the FMI conference last month in Fredericton. He suggested that weaknesses in internal audit were to be improved in the last five years but has not met. In a previous presentation from 2007, he pointed out that the federal government introduced an internal audit policy on 2005 to “reorganize and bolster the internal audit function” and “strengthen public-sector accountability.” The intent was that “Internal auditors will fill an enhanced role” and that “Internal auditors and departmental audit committees will have more independence.” Audit training remains behind schedule.

PI-22. Timeliness and regularity of accounts reconciliation

Factors:

(i) Regularity of bank reconciliations

(ii) Regularity of reconciliation and clearance of suspense accounts and advances.

My sense is that the federal government does well in reconciliation.

PI-23. Availability of information on resources received by service delivery units

Factor:

Collection and processing of information to demonstrate the resources that were actually received (in cash and kind) by the most common front-line service delivery units (focus on primary schools and primary health clinics) in relation to the overall resources made available to the sector(s), irrespective of which level of government is responsible for the operation and funding of those units.

Many service delivery units at the sub-national level even though funding originates with the federal government. It is somewhat difficult based on the federal nature of government in Canada, the complexities of a developed countries and the country size to provide this information. As mentioned in Part 1, Statistics Canada attempts to overcome these constraints.

PI-24. Quality and timeliness of in-year budget reports

Factors:

(i) Scope of reports in terms of coverage and compatibility with budget estimates

(ii) Timeliness of the issue of reports

(iii) Quality of information

The federal government provides quarterly reports for all MDAs. These are produced in a timely manner.

PI-25. Quality and timeliness of annual financial statements

Factors:

(i) Completeness of the financial statements

(ii) Timeliness of submission of the financial statements

(iii) Accounting standards used

As above, the annual reports produced are comprehensive. The Canadian federal government is unique among G8 countries for the quality of financial statements and financial processes. As indicated recently:

For the 13^th consecutive year, the Government has received an unqualified audit opinion, now referred to as an unmodified audit opinion under the new Canadian auditing standards, from the Auditor General of Canada on the financial statements.

PI-26. Scope, nature and follow-up of external audit

Factors:

(i) Scope/nature of audit performed (incl. adherence to auditing standards).

(ii) Timeliness of submission of audit reports to legislature.

(iii) Evidence of follow up on audit recommendations.

The Auditor General of Canada has an international reputation for audit quality, for performance audit and for motivating changes from the audit recommendations.

PI-27. Legislative scrutiny of the annual budget law

Factors:

(i) Scope of the legislature’s scrutiny.

(ii) Extent to which the legislature‟s procedures are well-established and respected.

(iii) Adequacy of time for the legislature to provide a response to budget proposals both the detailed estimates and, where applicable, for proposals on macro-fiscal aggregates earlier in the budget preparation cycle (time allowed in practice for all stages combined).

(iv) Rules for in-year amendments to the budget without ex-ante approval by the legislature.

The Westminster system in use in Canada provides incentive for party voting. Members of the government party vote for the budget to prevent the government from falling. There had been very limited scrutiny of the budget law in Canada until after the Federal Accountability Act came into force.

The 2005 IMF study suggests that there is not sufficient time provided to Parliament to evaluate the budget and with limited oversight:

In Canada, the legislature has largely been focused on optimizing the budget process, as opposed to taking an active role in the formulation of the budget…

Parliament receives the budget relatively late, less than two months before the start of the new fiscal year. A quarter of the fiscal year has typically elapsed by the time the budget is approved. In contrast, legislatures of other countries receive the budget two to six months before the new fiscal year, and even earlier in the United States…

As in many parliamentary systems, the Canadian legislature has limited powers to change the submitted budget. Parliament can reduce, but not increase, funding for line items, but has otherwise only the choice of approving or rejecting the government’s spending proposals.

The Westminster system has a notion of ‘budget confidentiality’. Budget information leaked before tabled can provide organizations with unfair advantages. Yet, this notion of confidentiality often extends past the point at which the budget is tabled. There has been significant criticism that the methods by which departments will reach spending cut targets has remained confidential.

The Government of Canada created the post of Parliamentary Budget Officer (PBO) in 2006. The post was filled in 2008. The PBO is an independent agency of the Library of Parliament lead by Kevin Page. The drivers for the creation of the PBO were:

• Unprecedented public demand for transparency and accountability across the public and private sectors
• A series of large unplanned budgetary surpluses for the Canadian government
• A number of high profile cost over-runs on major government capital projects
• New and emerging global standards and best practices to promote financial and budgetary transparency
• Successive minority governments that are changing the relationship between the government and Parliament A fundamental change has taken place in the way citizens view the government’s stewardship of taxpayer resources

Although there is asymmetrical access to information: the government through the Ministry of Finance and Treasury Board Secretariat have more information and staff, the PBO has been very effective, in my opinion,  in helping parliamentarians to consider budget ramifications. “Even in a Westminster model, Parliament has the fiduciary obligation to scrutinize the planned expenditures of the government.”

PI-28. Legislative scrutiny of external audit reports

Factors:

(i) Timeliness of examination of audit reports by the legislature (for reports received within the last three years).

(ii) Extent of hearings on key findings undertaken by the legislature.

(iii) Issuance of recommended actions by the legislature and implementation by the executive.

Parliament in Canada has a public accounts committee to review audit reports. The “sponsorship scandal” is an example of the impact of external audit to parliamentary actions.

Part 1: PI-1 to PI-14

Doug Hadden, VP Products

I suggested in my previous post, What Canada can learn from Developing Countries on Public Financial Management sustainability, [Part 5], that we could learn more about holistic public financial management. In particular, the PEFA assessment methodology.

Norway is the only developed country to have completed a PEFA assessment. This was an interesting exercise by the Norwegian development agency, NORAD. The assessment showed that Norway has stellar public financial management, yet there are 11 C’s and D’s.

Fortunately, there has been some academic work to evaluate PFM in Canada such as How Do Canadian Budget Forecasts Compare with Those of Other Industrial Countries from Martin Mühleisen, Stephan Danninger, David Hauner, Kornélia Krajnyák, and Bennett Sutton from an IMF paper in 2005. It would be helpful if Canada was evaluated as part of the Open Budget Index and Revenue Watch Index.

As has Marco Cangiano of the IMF noted in a recent ICGFM presentation, not all developed countries operate with PFM “best practices”.

[Part 2: PI-15 - PI-28]

PEFA scores seem to be somewhat aligned to Human Development Index and World Governance Indicators for Government Effectiveness. Norway has the highest average PEFA score with the highest HDI and government effectiveness rating. The graphs show that many countries have PFM systems that are operating far better than expected from the country condition.

My sense is that the federal government would achieve a good PEFA assessment similar to Norway. I have some familiarity with PEFA. We use PEFA as part of our governance valuation process. And, I’ve attended some workshops and have a PEFA pen – but I’m not certified to complete an assessment. That doesn’t mean that I can’t offer and opinion of the 28 criteria – PI-1 to PI-28. (There are 3 donor criteria that aren’t relevant because Canada does not receive donor funds). Here are the first 14.

PI-1. Aggregate expenditure out-turn compared to original approved budget

Factor:

The difference between actual primary expenditure and the originally budgeted primary expenditure (i.e. excluding debt service charges, but also excluding externally financed project expenditure).

The federal government produces conservative estimates. The current Conservative government and the previous Liberal government revealed better than estimated results. This was often accomplished by expending less than planned. It’s good politics, but it’s not clear whether the government could achieve an A.

According to the 2005 IMF study:

fiscal forecasting in Canada is governed by one of the strongest institutional frameworks relative to benchmark countries. Although Canada has no formal fiscal rule, the policy of “balance or better” has evolved into a de facto fiscal target. In support of this objective, Canada has adopted a conservative approach to budgeting, with explicit prudence and contingency factors

This “prudent” nature for budget estimates from 2005 continues in 2012 as “analysts said Ottawa could easily close the budget gap one year earlier due to a better-than-expected fiscal performance this year, an improved economic outlook and a contingency cushion built into the numbers.” The 2005 IMF study that benchmarked Canada with other developed countries concluded: “even when scaled by the size of GDP, Canadian fiscal forecasts appear unusually conservative.”

PI-2 Composition of expenditure out-turn compared to original approved budget

Factors:

(i) Extent of the variance in expenditure composition during the last three years, excluding contingency items

(ii) The average amount of expenditure actually charged to the contingency vote over the last three years.

There has rarely been significant contingency spending by the federal government with the exception of the stimulus problem. As described above, there is “a contingency cushion built into the numbers.” The 2005 IMF study found that “deviations on the expenditure side appear partly driven by smaller than expected debt servicing costs.”

PI-3 Aggregate revenue out-turn compared to original approved budget

Factor:

Actual domestic revenue compared to domestic revenue in the originally approved budget.

As Ian Lienert pointed out in 2009:

“With regard to revenue forecasting, Canada stands out as the country with the most consistent and largest underestimation of budget revenues. Canada’s GDP forecasts were deliberately conservative during 1995-2003: actual economic growth was on average ½ percentage point higher than that assumed in budget projections. Inflation (the GDP deflator) was also underestimated, by 0.2 percentage points. All tax and nontax revenue components were underestimated (the forecasting records of four different taxes were analyzed).”

The 2005 IMF study found that “economic growth in Canada has on average been ½ percentage point higher than budget projections in recent years” and “forecasters also underestimated GDP inflation by 0.2 percentage points on average.” The study also found  that “on the revenue side, projections of personal income tax and GST/MST revenue have contributed most to the overall forecast error.”

PI-4. Stock and monitoring of expenditure payment arrears

Factors:

(i) Stock of expenditure payment arrears (as a percentage of actual total expenditure for the corresponding fiscal year) and any recent change in the stock.

(ii) Availability of data for monitoring the stock of expenditure payment arrears.

The federal government operates on a modified accrual basis. Therefore, arrears are visible to financial managers. There is significant attention to handling arrears when closing the year.

PI-5. Classification of the budget

Factor:

The classification system used for formulation, execution and reporting of the central government‟s budget.

Financial management is decentralized in the federal government. There is a consolidated chart of accounts. Departments and agencies have custom elements. Many experts believe that the budget classification should be more standardized. PI-5 requires the support of Government Financial Statistics (GFS) and Common Functions of Government (COFOG). This is not currently supported, but there is a plan, according to Statistics Canada:

statistical system underlying government finance statistics must also change. Statistics Canada has decided to move towards reporting government finance statistics on a Government Finance Statistics 2001 basis. The GFS 2001 is an international accepted accrual accounting framework for government finance statistics. The GFS 2001 is also fully integrated with the United Nation’s System of National Accounts framework.

While it will take a number of years to be able to derive detailed GFS-based statistics directly from government financial information (Statistics Canada will begin publishing public sector statistics based on the GFS 2001 manual in calendar year 2014), Statistics Canada has decided to release quarterly GFS data using Canadian System of National Accounts (CSNA) government sector data and a bridging model that maps these data to the GFS framework. The CSNA (consistent with the United Nations’ System) already compiles some government data on an accrual basis and therefore offers the foundation to produce preliminary estimates of government data on a GFS basis.

This is good news because the GFS standard is ideal for comparing the economic purpose of programs over time and for comparing with other governments. For example, many government agencies can be involved in educational programs or environmental protection. These standards can provide the type of clarity that policy makers need. However, it appears that, unlike in developing countries, GFS will not be baked into the budget classifications. Rather, some kind of meta survey of financial information will be accomplished to re-create GFS information. As we have found in developing countries, GFS is easy to support within the financial chart of accounts in a Government Resource Planning (GRP) system.

The 2005 IMF study found some issues with budget classifications: “expenditure subcategories appears particularly difficult. For example, the distinction between discretionary and mandatory spending components”

My sense is that not all federal government organizations use best practices in program classifications. These departments and agencies place programs as part of the organizational structure. (My information might be out-of-date.)

PI-6. Comprehensiveness of information included in budget documentation

Factors:

1. Macro-economic assumptions, including at least estimates of aggregate growth, inflation and exchange rate.

2. Fiscal deficit, defined according to GFS or other internationally recognized standard.

3. Deficit financing, describing anticipated composition.

4. Debt stock, including details at least for the beginning of the current year.

5. Financial Assets, including details at least for the beginning of the current year.

6. Prior year’s budget outturn, presented in the same format as the budget proposal.

7. Current year’s budget (either the revised budget or the estimated outturn), presented in the same format as the budget proposal.

8. Summarized budget data for both revenue and expenditure according to the main heads of the classifications used (ref. PI-5), including data for the current and previous year.

9. Explanation of budget implications of new policy initiatives, with estimates of the budgetary impact of all major revenue policy changes and/or some major changes to expenditure programs.

Budget plans and speeches from the Throne make for interesting reading, but may not satisfy all the PEFA criteria. The 2012 budget plan is a compelling political document and covers some of the criteria for PI-6. My sense is that more factors are covered during budget preparation but are not presented in the budget plan. For example, the 2012 Budget: Canada’s Economic Action Plan shows the fiscal output, describes deficit and debt. GDP is forecasted. But, the rationale for macroeconomic conclusions such as industrial indicators is not shown. The potential effects of material changes to cost drivers like oil prices on government revenue and expenditures are not described. Only the revenue and expenditure impact of GDP changes are described. Examples of meeting good practices in budgeting from the 2012 budget plan include the following images:

The 2005 IMF study suggested that “Canada could enhance the understanding of budgetary forecasts by providing more information on the assumptions and methods underlying the translation of the macroeconomic outlook into fiscal projections.”

It’s not clear whether government department are using multiple year planning to enable “bottom-up” forecasting for future years or whether the rolling budget estimates provided in the document are “top-down” forecasts.

Major revenue and expenditure initiatives are costed at an aggregate level, so it’s not clear how the estimates were developed.

The government financial position and risk are well described. The new policy initiatives by the government are detailed such as Supporting Entrepreneurs, Innovators and World-Class Research and Expanding Trade and Opening New Markets for Canadian Businesses. Expected tax revenue is projected as are the effects of some entitlement programs.

PI-7. Extent of unreported government operations

Factors:

(i) The level of extra-budgetary expenditure (other than donor funded projects) which is unreported i.e. not included in fiscal reports.

(ii) Income/expenditure information on donor-funded projects which is included in fiscal reports.

My sense is that the federal government does not have any material unreported government operations.

PI-8. Transparency of Inter-Governmental Fiscal Relations

(i) Transparent and rules based systems in the horizontal allocation among SN governments of unconditional and conditional transfers from central government (both budgeted and actual allocations)

(ii) Timeliness of reliable information to SN governments on their allocations from central government for the coming year

(iii) Extent to which consolidated fiscal data (at least on revenue and expenditure) is collected and reported for general government according to sectoral categories.

Canada does well with federal – provincial transparency in fiscal relations (SN= ‘sub-national’). Although, the 2005 IMF study claimed that “data on transfers to other levels of government are not provided on a consistent basis.” The formula for transfer payments is well documented. The budget document shows transfer payments for:

• Canada Health Transfer Canada Social Transfer
• Other health and social transfers
• Fiscal arrangements
• Canada’s cities and communities
• Other transfers
• Alternative Payments for Standing programs

The federal nature of government in Canada means that provincial governments have no obligation to report to the federal government. (Territories have that obligation.) However, Canadian Provinces provide financial information to citizens so some of factor iii can be achieved.

PI-9. Oversight of aggregate fiscal risk from other public sector entities

(i) Extent of central government monitoring of AGAs and PEs.

(ii) Extent of central government monitoring of SN governments‟ fiscal position.

(SN – subnational, AGA – autonomous government agencies, PE – public enterprises)

Canada is a federal state. Sub-national fiscal risk is not rolled up to give a notion of fiscal risk for governments across the country. There are constitutional issues that are not easily overcome for Canada to achieve more than a D.

PI-10. Public Access to key fiscal information

Factors:

(i) Annual budget documentation: A complete set of documents can be obtained by the public through appropriate means when it is submitted to the legislature.

(ii) In-year budget execution reports: The reports are routinely made available to the public through appropriate means within one month of their completion.

(iii) Year-end financial statements: The statements are made available to the public through appropriate means within six months of completed audit.

(iv) External audit reports: All reports on central government consolidated operations are made available to the public through appropriate means within six months of completed audit.

(v) Contract awards: Award of all contracts with value above approx. USD 100,000 equiv. are published at least quarterly through appropriate means. Resources available to primary service units:

(vi) Information is publicized through appropriate means at least annually, or available upon request, for primary service units with national coverage in at least two sectors (such as elementary schools or primary health clinics).

The federal government will rate well on fiscal information on 4 or 5 of the factors. According to the 2005 IMF study: “The Canadian public has relatively broad access to budgetary information…However, the closed nature of the budget compilation process implies that forecast risks may not be widely understood, limiting public debate on this aspect.” The study suggests:

Canada could benefit from further improving the transparency of its budgetary forecasts. Given the importance of restoring public confidence in government finances in the mid- 1990s, the consequences of running into deficit were considerably higher than those of achieving a surplus. As Canada’s fiscal situation has improved, it is unclear to what extent the relative costs of missing budget targets have changed. However, Canada could benefit from opening up the forecasting process, e.g., by involving private forecasters in producing revenue estimates. Equally important, providing more information about critical parts of the forecasting process—in particular the assumptions and methods used for transforming macroeconomic forecasts into fiscal projections—would invite greater outside scrutiny, helping to improve forecast quality and bolster public confidence in budget projections.

PI-11. Orderliness and participation in the annual budget process

Factors:

(i) Existence of and adherence to a fixed budget calendar;

(ii) Clarity/comprehensiveness of and political involvement in the guidance on the preparation of budget submissions (budget circular or equivalent);

(iii) Timely budget approval by the legislature or similarly mandated body (within the last three years)

The federal government may have some difficulty with the third criteria. The 2005 IMF study suggests that there is not sufficient time provided to Parliament to evaluate the budget:

In Canada, the legislature has largely been focused on optimizing the budget process, as opposed to taking an active role in the formulation of the budget…

Parliament receives the budget relatively late, less than two months before the start of the new fiscal year. A quarter of the fiscal year has typically elapsed by the time the budget is approved. In contrast, legislatures of other countries receive the budget two to six months before the new fiscal year, and even earlier in the United States…

As in many parliamentary systems, the Canadian legislature has limited powers to change the submitted budget. Parliament can reduce, but not increase, funding for line items, but has otherwise only the choice of approving or rejecting the government’s spending proposals.

The previous budget bill was defeated rapidly. As I described in a previous post comparing Canada and the United States:

Yet here we are, with budget theatre in two G7 countries: Canada and the United States. In Canada, the opposition parties announced, within minutes of budget release, that they could not support the budget. No debate. The government fell three days later on a confidence motion. Perhaps the budget was designed by the governing party to generate an election: an election budget.

Meanwhile, south of the border, after a full year of deliberations and almost 200 days of continuing resolutions, the American government avoided a shut down by minutes.

The current budget bill, C-38, has been presented as an omnibus bill. It appears that the opposition parties are attempting to delay passage.

PI-12. Multi-year perspective in fiscal planning, expenditure policy and budgeting

Factors:

(i) Preparation of multi -year fiscal forecasts and functional allocations;

(ii) Scope and frequency of debt sustainability analysis

(iii) Existence of sector strategies with multi-year costing of recurrent & investment expenditure;

(iv) Linkages between investment budgets and forward expenditure estimates.

It does not appear that federal government follows “medium term expenditure frameworks” or uses a process similar to Australia for forward estimates. The federal budget shows expected revenue and expenditures but with only a linkage to GDP, not a full macroeconomic and financial framework aligned to programs. The future year budget implications become less credible based on the 2005 IMF study that found that “Canadian budgets generally adopted a conservative view of macroeconomic developments over the past 10 years” and that “Canada has experienced greater macroeconomic volatility than many other countries.”

PI-13. Transparency of Taxpayer Obligations and Liabilities

Factors:

(i) Clarity and comprehensiveness of tax liabilities

(ii) Taxpayer access to information on tax liabilities and administrative procedures.

(iii) Existence and functioning of a tax appeals mechanism.

My sense is that these three factors are handled well in the federal government.

PI-14. Effectiveness of measures for taxpayer registration and tax assessment

Factors:

(i) Controls in the taxpayer registration system.

(ii) Effectiveness of penalties for non-compliance with registration and declaration obligations

(iii) Planning and monitoring of tax audit and fraud investigation programs.

A 2004 OECD study showed that the tax regime in Canada is at a par with other developed countries. Research by Sylvain Fleury and Mark Mahabir conclude that “various factors in Canada’s tax system contribute to making avoidance and evasion easier.”

Part 5: Holistic approaches

Spending and administrative reviews often takes focus away from what’s important

Doug Hadden, VP Products

This is Part 5 of 6 parts detailing the content in my Financial Management Institute of Canada lunch presentation What can we learn about Sustainability from Developing Nation Governments?

If there is anything I learned at FMI, it’s the disruption to government programs of stimulus spending on one hand and spending reviews and deficit cutting on the other hand. Shot-term initiatives might make sense politically. These initiatives break continuity. As I described in the previous post, the multiple year view in budget planning and execution is required to track the effects of government programs.

A stop-gap measure is not a reform.

An incremental improvement is not a reform.

Effective public financial management, in my opinion, means that multiple-year budget plans are tied to outcome measurements. And, changes to the macroeconomic situation are easily modeled – many have already been modeled through scenarios. There should not be the need for government departments to go through an exercise to justify expenditures or attempting to discover program effectiveness. This should already be understood. Governments should already know which programs are more effective and which programs are more critical to achieving government objectives.

Holistic Public Financial Management reform

Developing nation governments understand reform from a holistic perspective. They understand the linkages from improved education and health to economic development. Government intervention in education and health may not always be effective, but it’s this holistic view of many causes, effects and relationships that dominate the Public Financial Management (PFM) reform in developing countries.

Holistic PFM reform = finding what’s important

Many developing country and emerging economy governments can benchmark PFM with peer countries using Public Expenditure and Financial Accountability (PEFA) assessments. PEFA was developed a “multi-donor partnership between seven donor agencies and international financial institutions to assess the condition of country public expenditure, procurement and financial accountability systems and develop a practical sequence for reform and capacity-building actions.” The PEFA framework provides a holistic view of government financial management.

PEFA was designed for developing countries. There have been over 200 PEFA assessments, many of which are public. PEFA has been used at national and sub-national levels. Many governments have completed more than 1 PEFA in order to track progress.

What if Canada had a PEFA?

Norway is the only developed country to have completed a PEFA assessment. This was an interesting exercise by the Norwegian development agency, NORAD. The assessment showed that Norway has stellar public financial management, yet there are 11 C’s and D’s.

Fortunately, there has been some academic work to evaluate PFM in Canada such as How Do Canadian Budget Forecasts Compare with Those of Other Industrial Countries from Martin Mühleisen, Stephan Danninger, David Hauner, Kornélia Krajnyák, and Bennett Sutton from an IMF paper in 2005. As has Marco Cangiano of the IMF noted in a recent ICGFM presentation, not all developed countries operate with PFM “best practices”. My sense is that the federal government would achieve a good PEFA assessment similar to Norway.

I’m in the process of a quick survey to see how I think the Canadian federal government will rate in PEFA and will post as soon as completed. Part 1: PI-1 to PI-14. Part 2: PI-15 to PI-28

Focus on what is important: Sequencing

PEFA helps governments to focus on the reform sequence: what is important and in the most effective order for reforms. Governments often develop a Public Financial Reform Action Plan based on the assessment. The support for International Public Sector Accounting Standards (IPSAS) is often part of reform. The Government of Canada is starting to support some of the IFRS reporting standards that are aligned IPSAS. There does not appear to be any developed nation government fully compliant with IPSAS accrual standards.

Countries like Afghanistan and Kosovo have experienced significant reform achievements thanks to sequencing. The “platform” approach is considered a good practice for sequencing. This enables governments to complete reform goals before moving to the next platform although planning on one platform can start during execution of the previous. The important thing here is to set milestones and objectives for multiple year outcomes rather than introduce new incremental or disruptive processes.

Focus on what is important: Project Management

Chris Kanaracus of IDG News reported on April 2nd:

“Public-sector ERP (enterprise resource planning) software projects historically have experienced some of the industry’s most dramatic cost overruns and delays”.

I’ve addressed this issue in previous blog posts. I believe that some solutions are riskier than others and that business case of using ERP for government financials is weak. There is added risk in government compared to the private sector. And, more risk in developing countries than in developed countries.

Project management and project governance is more critical in developing countries. We can learn something from these processes. For one thing, vendors can’t blame victims for government financial implementation failures because these are turnkey.

It can’t be the government’s fault if the key does not turn.

Some factors are more important for success in public financial management. Project Management 101 is not enough to explain why some implementations are successful and some not.

Some of the governance lessons that can be leveraged in Canada include:

• Software manufacturers should be part of the governance structure, not at arm’s length from the government implementation
• Governance structure that commits the software manufacturer to augment products to meet Government of Canada needs rather than forcing customization
• Methodology that ensures that software manufacturers continue to augment products as Government of Canada standards change
• Focus on change management that includes communications to government departments and socializing upcoming changes
• Project governance in which Chief Financial Officers set objectives and Information Technology professionals follow. Public financial management reform is not an IT project, it’s process reform first.
• Mentoring and knowledge transfers as a condition of doing business with the Government of Canada so that IT and PFM capacity is built and government organizations become self-sufficient

Why FreeBalance created a unique methodology

We’ve adapted our Integrated, Iterative, Implementation and Quality Methodology (i3+qM) to reduce risk. This ISO-9001/2008 certified methodology has helped FreeBalance to have unusually high implementation success rates relative to competitors. The methodology leverages PEFA and other good practices in something we call a “governance valuation”. My view is that the techniques that we use in the governance valuation would be particularly helpful to any government, at any level, in Canada.

Doug Hadden, VP Products

FreeBalance was the Platinum sponsor this year at the International Consortium on Governmental Financial Management (ICGFM) conference on 21st Century Public Financial Management (PFM). FreeBalance participates in PFM events around the world. Yes, helps publicize our strong and exclusive focus on government and Government Resource Planning (GRP). More important than the sales and marketing opportunity is learning: important trends,lessons learned, good practices. You’d think that I’ve heard it all by now. (Someone asked me that yesterday – “isn’t this getting boring”.)

Here’s some of the interesting lessons learned:

• Civil Service reform tends to fall behind general PFM reform (Wescott).
• Reform managed by a single organization work better than when multiple organizations are involved (Wescott).
• It takes about 10 years to achieve full IPSAS Part 1 compliance (Hughes)
• ERP problems in developing governments are dramatically under-reported. Yes, I already knew that - but I hear about one or two new countries with ERP problems every conference. ERP projects tend to be late and have a high TCO. Just another reason to consider software designed for government like FreeBalance. Of course, I could confront representatives from these large vendors – if they were here…
• There is a general inability for ERP or custom-developed FMIS software to adapt to reform. Public Expenditure and Financial Accountability (PEFA) assessments were a major topic at the conference. The FMIS software in use by countries presenting case studies – all of these showed need to change the financial management system. Yet, no FreeBalance customer has needed to use a different FMIS/GRP to enable reform. Some of our customers have had 2 PEFA assessments! Change processes – yes. Add modules – yes. Reconfigure business rules – yes. Change the software because it can’t progressively activate – no.
• The best idea that I heard was that educational expenditures should be capitalized as a country asset (Wynne).
• Liberia is a fast reformer. The most recent PEFA assessment is well out of date – there has been a lot of progress. For one thing, Liberia has gone live with FreeBalance financial and human resource management software.
• Best quote about PFM: “the blood you inject into the government body” (Dahal).

FreeBalance to present about effects of social media, open data, big data, consumerization of information technology (CoIT), crowdsourcing and gamification on the future of Public Financial Management

ICGFM

Ottawa, Canada (April 26, 2012) –FreeBalance, a leading vendor of Government Resource Planning (GRP) software, will be showcasing the latest Government Resource Planning (GRP) solutions for public sector performance and transparency at the 26^thAnnual International Consortium on Government Financial Management (ICGFM)conference next week focused on Public Financial Management (PFM) in the 21^st century.FreeBalance will be showcasing government performance management and open data software and implementation methodology proven to improve government results and value for money at interactive sessions.

FreeBalance is the sole Platinum sponsor for the ICGFM conference and workshop sessions that take place from April 29th to May 4^th in Miami Florida. “ICGFM is dedicated to enhancing public financial management so that governments can better serve their citizens,” said Manuel Pietra, President & CEO of FreeBalance. “FreeBalance is committed to sharing experiences and good practices that support accountability, transparency, and good governance.” The event will provide participants with a unique opportunity share experiences with PFM systems, institutions and modern tools and technology to support country growth.

The conference program includes PFM expert speakers from around the globe including Namibia, Cambodia, India, Canada, Austria, and Nepal.  A conference highlight will be the first “Open Forum on PEFA” presented by the PEFA Secretariat. Public Expenditure and Financial Accountability (PEFA) assessments are used to evaluate PFM processes and government transparency. The PEFA Secretariat will present a new tool for PEFA assessments, describe trends in PFM performance, and introduce Phase 4 of the PEFA Program.

Doug Hadden, Vice President of Products at FreeBalance, is also a speaker at the event. His presentation will provide a roadmap for the 21^stcentury focused on aligning PFM reform and social Media. “The [Social] Future of Public Financial Management” presentation will explain the effects of social media, transparency, mobile, gamification and the “Consumerization of IT” in government. The FreeBalance presentation takes place on April 30th at 11:00 a.m.

FreeBalance is a sustaining member of the ICGFM and plays an active role in supporting the goals and objectives of the Consortium.  Manuel Pietra, FreeBalance President & CEO, is a member of the Board of Directors at ICGFM.  Other board members include the World Bank, International Monetary Fund, USAID, Inter-American Development Bank, Association of Government Accountants (USA), Development Gateway Foundation, and others.

About FreeBalance
FreeBalance helps governments around the world leverage robust Government Resource Planning (GRP) technology to accelerate country growth. FreeBalance is a recognized leader in fast, adaptable and successful GRP implementations. FreeBalance software manages a global civil service workforce of 1,500,000, and a quarter trillion ($US) annual budgets worldwide. FreeBalance provides software solutions for public financial and human resource management, and supports reform and modernization to improve governance, transparency and accountability. Good governance is required to improve development results. For more information, visit www.freebalance.com.

About ICGFM
Working globally with governments, organizations, and individuals, the International Consortium on Governmental Financial Management (ICGFM) is dedicated to improving financial management by providing opportunities for professional development and information exchange. The ICGFM was established over two decades ago to serve as an international forum for public sector financial managers. More at www.icgfm.org.

###

Media Contact:

Matthew Olivier
FreeBalance Inc.

(613) 301-9653

molivier@freebalance.com

www.freebalance.com

Doug Hadden, VP Products

Government Performance Management is considerably more difficult than Corporate Performance Management.  Does this mean that instituting performance management tools effectively is more difficult in developed or developing countries?

Technology Leapfrog

The notion of technology leapfrog is that developing countries can skip the incremental steps taken for developed countries to modernize.  Open systems and open standards can be used.  Client/server and wired internet stages can be avoided. The classic example of technology leapfrog is Estonia where the Internet “now tightly entwined with Estonia’s identity.”

The Government of Thailand demonstrates “technology leapfrog” in e-government with a roadmap that includes c-Government (Connected Government), m-Government (Mobile and Multichannel Government) and u-Government (Ubiquitous Government).

Yet, isn’t “government performance management” too complex for developing countries?  Not  necessarily – as we have seen in Timor-Leste where performance dashboards are used and government results provided to the public.

Advantages in Developing Countries

There may not be sufficient capacity in some governments to fully leverage budget-centric performance management tools.  But there are advantages:

• Centralized information: Developing countries tend to have fewer information systems with more centralized systems. Data from sub-national entities is more accessible. And, governments in developing countries are more likely to support public sector and information technology standards to facilitate data collection
• Holistic understanding: Managers in developing countries look at performance and the nature of government in a more holistic way that those in the “West”. Performance Management tools differ from traditional Business Intelligence through a holistic view of performance. In particular, Ministers and senior managers are attuned to macroeconomic effects like commodity prices.
• Development effects: The impact of improved performance is more significant in developing country. Government performance improvements positively affects development results, business confidence, investor Investment, aid effectiveness and remittances.
• Competitive differentiation Improving government performance has a more significant impact for developing countries in the global economy. Governments are more motivated to improve “doing business“, “revenue watch” or “open budget” indexes to create a better business and development environment.

Transparency is Aligned to Performance

The key first step to government performance management is transparency. Transparency is one of the measurements used in international government performance assessments like Public Expenditure and Financial Accountability (PEFA):

B. KEY CROSS-CUTTING ISSUES: Comprehensiveness and Transparency
PI-5 Classification of the budget
PI-6 Comprehensiveness of information included in budget documentation
PI-7 Extent of unreported government operations
PI-8 Transparency of inter-governmental fiscal relations
PI-9 Oversight of aggregate fiscal risk from other public sector entities.
PI-10 Public access to key fiscal information

Transparency is more than a superficial step to government performance, as these videos from the Open Government and  International Budget Partnerships describe. Transparency motivates accountability which improves performance.

Doug Hadden, VP Products

Make sure you calculate the Return on Investment of open data projects. Experts warn us: the open data business case is often lacking. Traditional ROI calculations are too narrow.

Traditional ROI Calculation and “Government as Platform”

A traditional calculation compares open data costs and lost revenue from selling the data relative to additional tax revenue achieved. Tim O’Reilly  coined the notion of “government as platform” where open data (such as GPS) generates significant economic development. Some, like Andrea di Maio, disagree that governments should be acting as platforms.  Yet, this is what governments do: build economic platforms such as highways and bridges.

The problem with:

$TaxRevenue > $OpenDataCost + $DataSales

is that the government organization that provides data and benefits directly from selling the data to the private sector does not directly receive the additional taxes nor can these taxes be easily directly attributed to open data.

1. Economic Development and “Government as Platform”

Open data as policy can be compared to stimulus programs. Stimulus programs can improve employment and reduce bankruptcies. This reduces social services costs:

$TaxRevenue + $SocialServicesCostAvoidance > $OpenDataCost + $DataSales

2. Freedom of Information Costs

David Eaves has pointed out that open data can reduce the costs of Freedom of Information:

So in a world without an open data portal the hypothetical cost of fulfilling these “Canadian” downloads as formal access to information requests would have been $967,184.46 in January alone. Even if I’m off by 50%, then the cost – again, just for January – would still sit at $483,592.23. Assuming this is a safe monthly average, then over the course of a year the cost savings could be around $11,606,213.52 or $5,803,106.76 – depending on how conservative you’d want to be about the assumptions.

Open data portals can eliminate the need for many Freedom of Information requests – a high cost to governments.

$TaxRevenue + $SocialServicesCostAvoidance + $FOIAvoidance 
> $OpenDataCost + $DataSales

3. Productivity

Open data shines light on the public service. Although transparency does not necessarily mean accountability in the sense of enforcement, it has the power to change behaviour. Government organizations become aware that the public is watching. Civil service behaviour changes.

$TaxRevenue + $SocialServicesCostAvoidance + $FOIAvoidance + $ImprovedProductivity 
> $OpenDataCost + $DataSales

4. Corruption

Procurement expert Jorge Claro estimates that procurement corruption costs up to 20% for governments in developing nations. That’s why countries like Timor-Leste open budget and procurement data: to improve oversight by vendors and civil society to reduce corruption. (This also reduces the cost for auditors when the press is examining all large government purchases.)

$TaxRevenue + $SocialServicesCostAvoidance + $FOIAvoidance + $ImprovedProductivity + $ReducedCorruption

> $OpenDataCost + $DataSales

5. Trust

There remains a distrust of government in many countries. Not just in developing countries: distrust of government is a powerful narrative in American politics. The distrust in government can boil over to protest (Tea Party, Arab Spring, Occupy Wall Street etc.) This costs governments – although the release of data might give cause for protest in some cases!

$TaxRevenue + $SocialServicesCostAvoidance + $FOIAvoidance + $ImprovedProductivity + $ReducedCorruption +$ReducedProtests

> $OpenDataCost + $DataSales + $IncreasedProtests

6. Tax Compliance

Developed and developing nations alike struggle with tax avoidance. This is especially rampant when citizens believe that governments are wasting tax money. This is often made acute because of the lack of open data. There are frequent studies that show a significant delta between how governments spend and what citizens think governments are spending. In particular: foreign aid and crime. One can make the argument that Scandinavians are less concerned about high tax rates than Americans because they see value.

$TaxRevenue + $ReducedTaxAvoidance $SocialServicesCostAvoidance + $FOIAvoidance + $ImprovedProductivity + $ReducedCorruption +$ReducedProtests

> $OpenDataCost + $DataSales + $IncreasedProtests

7. Reduced Perceived Business and Donor Risk

Transparency is fundamental in many governance valuations used by the World Bank World Governance indicators (WGI) and the Millennium Challenge Corporation (MCC). Transparency indicators used to demonstrate reduced business risk and help generate donor funds in developing countries include Open Budget Index for open budgets and Revenue Watch Index for revenue transparency from extractive industries. International transparency standards include the Extractive Industries Transparency Initiative (EITI) and the International Aid Transparency Initiative (IATI). Public Expenditure and Financial Accountability (PEFA) assessments are gaining widespread use by donors in making funding decisions. Transparency is a key element for 6 measurements in the PEFA Performance Measurement Framework:

Transparency can reduce perceived business and donor investment risk in developing countries. This increases taxes, improves outcomes and ultimately improves credit ratings.

8. It’s a Network

ROI in the physical world is a diminishing returns calculation. Each new market for toothpaste increases costs. The virtual world is one of increasing returns. Each new chunk of open data adds value to previous chunks of open data. And the costs to collect and maintain open data goes down because the infrastructure scales. (That’s why Amazon can provide such value for the Elastic Cloud.)

∑($TaxRevenue + $ReducedTaxAvoidance $SocialServicesCostAvoidance + $FOIAvoidance + $ImprovedProductivity + $ReducedCorruption +$ReducedProtests)↑increasingreturns

> ($OpenDataCost + $DataSales + $IncreasedProtests)↓reducing costs

Conclusions

The ROI calculation is a bit mangled here. Yet, there is a compelling value proposition for government organizations to take the open data journey. The calculus depends on the country situation – in some cases open data can pay for itself thanks to reduced corruption or protest.

Doug Hadden, VP Products

Publish What You Fund has completed a 2011 Aid Transparency Index. Their conclusion? “Some donors do well, all donors can do better.” Perhaps that’s a euphemism for meager improvements.

As a participant in the International Aid Transparency Initiative (IATI) Technical Advisory Group, I have heard that fully supporting IATI is technically difficult. My sense is that the problem isn’t transparency: it’s traceability.

[Technically, the majority of IATI can be supported through any decent financial management system, assuming that donors follow good practices that are imposed on developing nation governments. See: Public Expenditure and Financial Accountability (PEFA) requirements around program budgeting and budget classifications.]

The Smoking Gun

As Richard Allen pointed out in the IMF PFM blog, using “country systems” is a “courageous policy.” The same goes with full aid transparency.

• Aid transparency could reduce inefficiencies by an order of magnitude by revealing administrative costs and reducing the transaction costs for donor reporting
• Aid transparency could reduce corruption by an order of magnitude by revealing transaction and by reducing the use of cash
• Aid transparency could improve effectiveness by an order of magnitude by analyzing “apples to apples” across aid programs and through improved coordination

We know that foreign aid programs are less efficient and effective that could be. We also know that there is a lot of corruption opportunities. Therefore, IATI seems to be a no-brainer.

Here’s the deal: today we know the problems. We just can’t easily trace it to the donor. There is deniability. So, we could be almost certain that 20%, 40% or 60% of a program budget is wasted. With IATI, we know for sure. And, it traces back to the donor.

Let’s not shoot the Messenger

Please, let’s all agree that we won’t criticize donors for corruption, inefficiencies and ineffectiveness if there is a commitment to improve. “Accountability” should not mean front-page stories about money gone astray – it should mean analyzing what donors are doing about it.

My sense is that some of the backtracking on transparency at the Busan High Level Forum is about getting shot in the press. (And blogs.)

Some Odd Moments

In the course of discussions around IATI, I have had some odd points made:

• IATI is pointless because aid if fungible [that's what IATI plans to solve]
• Bi-lateral donors proud of transparency leadership [that score under 30%]
• Program budgeting is a bad practice [no, it's a good practice]
• IATI support is technically difficult [yet small organizations are able to support it]
• Certain financial software applications are difficult to adapt to support new standards [tell you software vendor to smarten up]