Sustainable Public Financial Management

Recent financial shocks have led to accelerated adoption of Government Resource Planning (GRP) and Public Financial Management (PFM) reform in emerging countries. What about more developed countries? There has been some examples of fiscal reforms in countries like Korea, and changes in regulations for the financial sector in OECD countries. Yet, governments in Iceland, Greece and Ireland are experiencing significant fiscal shortfalls.

How can GRP help governments to adapt more effectively to unexpected financial crisis? Freezing spending and public sector wages is a typical approach. How can emerging country governments expect to better manage budget shortfalls if the budget management software in use in developing countries appears so ineffective?

Financial Stress and the  ’Budget Problem‘

Government financial management is budget driven, unlike the private sector. Government budgets are complex. And, constrained:

• Capital expenditures often span multiple years and generate multi-year commitments. Slowing in-progress capital expenditures can result in half completed bridges, buildings, internet infrastructures.
• Recurrent expenditures often have minimum costs that provide little room for reduced spending. Hospitals need electricity and medical supplies.
• Public Private Partnerships (PPP) bring expenses off the government balance sheet. However, governments are often liable to pick up on these projects when the private sector partner encounters financial difficulty.
• Legal constraints often mandate expenditures, such as the results of  ’propositions’ in the the American State of California. These expenditures cannot be reduced. Many governments are unable to reduce the size of the public service even when jobs are identified as redundant, as in the case of India.
• Donor projects executed by the government or outside organizations often require a legal commitment for the government. Governments may need to contribute funds to projects or provide specific deliverables. Cutting back on the government expenditure can cancel donor funded programs.
• Wages often represent a significant portion of government expenditures. Governments are often the largest employer in countries.  This is why salaries are often reduced or frozen when governments encounter budget deficits. Yet, this method often demoralizes public servants and reduces the quality of government services.
• Government objectives and priorities are difficult to manage during financial crisis. New priorities such as stimulus packages are introduced. Medium and long-term objectives often take a “back seat”.

Effective Budget Management for Governments Under Financial Stress

Many budget preparation software applications used by governments are ineffective in handling financial crisis.  Applications developed for the private sector do not have necessary features for modeling multi-year budgets. Custom applications typically manage the ceremony of budget proposals. Spreadsheet applications are not able to handle whole-of-government budget analysis.  These solutions are often unable to forecast budget surpluses or deficits during the fiscal year.

Governments can use effective budget preparation and budget execution software components of GRP to more effectively deal with financial crisis. These applications, like the FreeBalance Accountability Suite, can support the following:

• Scenario planning and what-if analysis during budget preparation and execution. Financial crisis can be modeled in budget preparation software. Governments can leverage these models should a crisis occur. Governments can also update these scenarios with actual figures to enable more effective reaction to problems.
• Forecasting provides early warning on revenue shortfalls. Governments can react quicker and more effectively.
• Wage forecasting is particularly important when managing deficit situations. Wages include salaries, benefits, training, travel, bonuses and other civil services expenses. So, wages can vary significantly from plans. Human Resources applications rarely have budget visibility. Wage forecasting and variance is critical. Elements of salary costs other than wages could be reduced.
• Multiple year visibility to budgets, budget types and budget constraints to enable decision-makers to find more effective methods of expenditure management.
• Objectives management for budgets enable governments to link expenditures with objectives and priorities.  Every expenditure is linked with one or more objectives. Priorities change during a financial crisis. Objectives management enables governments to recast budget plans during the fiscal year to focus on priorities.

Public Financial Management Reform Needed for Economic Recovery

The current financial crisis is global. The consequences could be dire. The theme of the 23^rd Annual ICGFM Conference in Miami, May 18 to 23, was “Country Perspective on Public Financial Management during Global Economic Uncertainty. “ There was certainty by the end of the conference: a common solution for all countries is renewed public financial management reform.

The opening keynote speech by former U.S. Government Comptroller General, David M. Walker, set the stage. Mr. Walker described the systemic financial governance problems in the American government. The Wednesday keynote presentation by Kevin Page, the Parliament Budget Officer in Canada, described the challenges in legislative budget oversight. Speakers from developed countries were frank about oversight, accountability and transparency problems in their countries. This was not an event where emerging country representatives were patronized or lectured by experts.

By the time the conference was over, the theme appeared to be “The Financial Crisis, we are all in it together and good governance can pull us out.” Speaker after speaker concluded that the current economic crisis has revealed government governance gaps. This realization emphasizes the need for robust public financial management reform in all countries. The case study on procurement reform in Chile by Jorge Claro, President and CEO of the International Procurement Institute, highlighted the many political challenges for PFM reform.

The conference was not without controversy. A debate was sparked by Andy Wynne, editor of the International Journal on Governmental Financial Management, and Filip Drapak of the World Bank, about the utility of Public Private Partnerships (PPP). Mr. Drapak believes that the financial crisis has changed the PPP market. Mr. Wynne believes that PPPs do not provide value for money.

Representatives from the Government of Honduras objected to their classification by the Open Budget Index. This atmosphere created open discussions and sharing of good practices. The Public Expenditure Financial Accountability (PEFA) workshop was described as having high value by ICGFM participants.