February 16, 2011Doug Hadden
Doug Hadden, VP Products
(white paper draft)
The Integration of Donor and Recipient Government Financial Systems
The International Aid Transparency Initiative (IATI) “aims to make information about aid spending easier to access, use and understand.” IATI seeks to improve aid effectiveness through transparency. Transparency can improve aid harmonization and reduce aid transaction costs throughout the entire aid lifecycle from donor funding through to result.
The IATI Technical Advisory Group (TAG) has been studying methods for aid data integration among all aid participants. The integration of data between donor systems and recipient government budget systems is critical to IATI success. This integration can reduce administrative transaction cost. It can improve the coordination of donors and governments to achieve results. And, it can lead to direct budgetary support that ensures that aid better meets recipient government objectives. It’s all about improving aid effectiveness.
The TAG has encountered technical issues with donor and recipient government integration. Stakeholders from donors, civil society, governments and NGOs have differing aid effectiveness improvement objectives. Some stakeholders are concerned about the quality historical statistical information, while others seek a better understanding of transactions. Aid sector categories differ among stakeholders. There are differing needs for the level information granularity. Current standards in use by International Financial Institutions (IFIs) and governments operate at cross purposes, satisfying few stakeholders.
These difficulties are seen as technical metadata integration problems – data structures from operational systems used among donors and recipient governments cannot be rationalized.
The technical problem of project, transactional and statistical information integration among donor and recipient government budget systems is thought to be too complex and too expensive to contemplate. Nothing should be further from the truth. At its core, the IATI technical integration challenge is integrating donor budget with recipient government budget systems. Project data and statistical data are hierarchical constructs of budget and financial transactions. Additional data elements, including documents, project and statistical information can be linked directly to this transactional data.
What’s the Technical Problem?
Timely, effective, and automated integration among financial and project systems across the aid lifecycle requires the adoption of good practices in financial management systems – the use of program classifications. Herein lies the problem.
Developing nation governments, particularly FreeBalance customers, use program classifications. (And, the software enables progressively activating program classifications.) Many donors are not using this established good practices and have financial software systems that are too rigid to quickly and inexpensively adopt this good practice. (Financial software designed for the private sector often provides rigid classifications because these change infrequently. Government COAs change frequently to reflect modernization, reform, government restructuring, adoption of performance management, support of standards – including new standards like IATI.) Some donors pull project information from documents and have to manually reconcile with transactions.
Towards Donor to Government Integration: Automating the Financial Aid Lifecycle
The integration of donor systems with recipient government budget systems for on-budget aid projects includes the following elements:
- Donor budget preparation systems where donors determine upcoming project budgets. These systems could integrate directly with recipient government budget preparation systems that include anticipated on-budget aid resulting in legally mandated budget
- Alternatively, and perhaps preferably, the donor budget preparation and system could integrate with aid management systems. Aid Management systems enable donors and recipient governments to collaborate in the definition, funding and management of aid projects. Also recipient government budget preparation systems could integrate with aid management systems to enable budget planning and to harmonize the government and aid budgets.
- The resulting budget prepared in the donor budget preparation system is formalized in the donor financial management system for disbursements during the fiscal year.
- Disbursement information from the donor financial system could integrate with the recipient government financial system. The recipient government receives the funds against the budget item and provides authority to spend through appropriations or warrants.
- Alternatively, and perhaps preferably, the donor financial management provides disbursement information to the aid management system that also integrates with the recipient government financial management system. This provides disbursement information to all stakeholders to improve aid harmonization.
- Outcome and project reports are generated from the Aid Management System.
- Outcome and project reports from the donor financial management and recipient government financial systems can also provide output, project and outcome information.
- Recipient government financial systems typically output statistical data using the IMF GFS standard.
- Output, project, outcome and statistical data can be compared to support historical analysis.
All public sector organizations operate using commitment accounting techniques for financial management. Budgets are developed that become the legal embodiment of government policy in recipient governments. Bi-lateral donors are government entities and operate based on the legal budget. Multi-lateral donors also manage financials based on commitment accounting to satisfy funders.
The budget preparation cycle is similar among public sector organizations whether special budget preparation software or spreadsheets are used.
Recipient Government Perspective: Aid intentions from donors, regardless of the certainty of that aid, are critical to forming budgets. Recipient governments require harmonizing with donor budgets to achieve government objectives. The fact that a donor might commit to funding is important because the recipient government can identify this likelihood and be prepared should these funds be disbursed later.
- Numerous factors are analyzed during the budget preparation process. This includes organizational objects, or the general policy of the organization, macroeconomic analysis and historical information to determine budget assumption for the upcoming year, typically in the form of a budget circular. This budget circular is scheduled during the current fiscal year for planning for a subsequent fiscal year. Many government organizations plan ahead on a medium term; therefore, the historical information includes preliminary information about the upcoming fiscal year and multiple year projects and commitments.
- The budget circular typically provides guidance on budget assumption in the form of budget ceilings to organizational units.
- Government organizations follow an iterative process of numerous internal budget proposal or versions with project and cost justifications. These versions are rolled-up to budget organizations and analyzed. Scenarios are examined.
- The budget organization completes a detailed budget document or budget book for approval.
- The budget is adapted by legislative processes through a vote.
- The result of the budget vote is a budget law in government.
- The budget law provides the allotment or appropriation information for budget execution in the government financial system.
- Donors prepare budgets based on donor objectives
- Donor objectives are harmonized with government objectives to determine areas of mutual interest
- Projects that meet objectives are proposed
- That include a set of risk factors and performance measurements for expected outputs and outcomes
- Projects that are approved for funding are shown in donor and recipient Budget Preparation systems
- Budget information is shown in the Budget Execution module of donor and recipient government Financial Management systems
- Funds are disbursed by donors to the recipient governments and progress shown in a Monitoring and Evaluation module
- Funds received by donors are executed by the recipient governments, with progress shown in a Monitoring and Evaluation module
- Results from the projects can be tracked against risk factors and performance measures in a Monitoring and Evaluation module
Budget execution includes the financial management of all revenues and expenditures controlled by the budget. The budget can be adjusted throughout the fiscal year based on cash availability, macro-economic changes and availability of new revenue sources.
Recipient Government Perspective: Budget execution is difficult for many developing countries to effectively manage. These governments tend to experience cash shortfalls. Some governments are not able to spend the entire budget, hence reducing the effectiveness of many initiatives. Many donors examine recipient government disbursements as an indicator of progress. Yet, budget execution processes can expose in-progress spending through commitments and obligations to give a better indication of the recipient government project budgets.
- The budget law developed during formulation creates the annual budget. The budget typically includes annual spending limits that are aggregated by organizational unit, fund source, project and type of expenditure such as capital or recurrent. The budget law also includes detailed line-item budget estimates that are used for advisement in most governments. Some government organizations use full line-item budgeting. The appropriations including authority to spend typically include the aggregate annual budget, some elements of the line item information and period budgetary controls. Many governments operate with monthly or quarterly controls that are more detailed than the annual appropriation to enable more effective fiscal control.
- Expenditures in government financial management systems leverage commitment accounting functions. Funds are set aside during expenditure cycles to ensure that budgets are overspent. Many governments support two phases of commitments where money is set aside during the requisition stage as a soft commitment or pre-encumbrance. Good practices in government financial management ensure that contractual obligations set aside funds when purchase orders are created.
- Goods and services are received by the government are paid for through disbursements.
- Government revenue may be higher or lower than expected based on macroeconomic changes. There may be cash and liquidity issues. These situations often change expenditure budgets and appropriations.
- Governments often receive supplemental budgets. Recipient government receive project funds when fiscal years are not aligned with donors and there is no budget preparation integration. Special supplemental budgets are often created because of macroeconomic shocks, such as stimulus packages or because of natural disasters.
- The spending status against the budget can be analyzed. Budget deficits and surpluses can be predicted. It is considered a poor practice to under-spend because this will reduce outputs and outcomes. Appropriations can be loosened to encourage spending or tightened to reduce spending.
- Budget reports showing outputs and variances are produced.
Commitment Accounting Transactions
Commitment Accounting is sometimes considered as part of the Budget Execution cycle. PFM transactions combine the traditional accounting transactions used in the private sector with budget controls.
Recipient Government Perspective: The status of commitments and obligations provides a better indicator of project progress than disbursements. It should also be noted that there can be delays in payment cycles after expenses have been approved. Therefore, the goods received and expense voucher stages in expenditures can also provide insight to project progress because these indicate goods and services completed but not yet paid.
The commitment accounting transaction structure includes the following:
- Budget law provides one or more appropriations that act as expenditure controls
- Internal purchase requisitions are checked for budget availability in some countries. The estimated amount of the expenditure is committed or set aside.
- Purchase Orders are checked against budget availability. Differences with requisitions are adjusted. The purchase order represents a contractual obligation or hard commitment. The obligation is set aside.
- Goods and services are received and returned via Goods Receipt and Goods Returned Notes are accrued if the government is using modified accrual or accrual accounting.
- Goods and services that are accepted are approved for expenditures through Expense Vouchers that are shown in the Accounts Payable sub-ledger. PFM systems tend to post Accounts Payable transactions to the General Ledger immediately in order to show the true cash and budget situation.
- Cash Receipts, revenue from taxation and other sources of government income are provided to Bank accounts and shown in the Accounts Receivable sub-ledger, posted in real time to the General Ledger.
- Payments are posted to the Accounts Payable sub-ledger and honoured by the Bank.
- The Bank information is reconciled with the General Ledger.
- The recipient government manages Cash and liquidity based on Bank information, expected payments from Accounts Payable and the commitment cycle, revenue expected from Accounts Receivable, forecasts based on Appropriations, investments and debt.
The Classification of Aid Information
Classifying data is a typical information management problem. Information systems need to catalogue and classify data to support process workflow, analysis, decision-making and reporting. Information systems classify data based on needs. This data classification is known as “metadata.” Organizations often require using “master data management” tools to harmonize data across multiple information systems. These systems reclassify and transform data to create common information. These systems also rationalize differing levels of detail required in information systems.
International data exchange standards like IATI provide a standard data target to facilitate integration. Organizations use MDM tools to import and export data.
The aid lifecycle includes project, budget and financial information. This metadata associated with aid information tends to be multidimensional and hierarchical. For example, budget classifications often include multiple data segments. Each segment includes a hierarchy of details.
There are numerous COA practices including:
- Budget classification structures tend to change over time as donors and recipient governments change objectives, accounting methods (i.e. accrual accounting) and items to measure
- Organizations tend to modernize from a simple structure including fund, organization, object/economic item to add programme and output segments.
- Mid developed countries are often less likely to support international standards and multiple segments. Lower developed countries are most likely to follow international standards. High developed countries have mature national standards that are often at a par with international standards.
- International and some national standards are supported via side tables or side concepts. These items roll-up transactional data in alternative methods through mapping ranges of data to a different structure. Budget and accounting users should not be exposed to most statistical, project, and performance objects.
The Government of Sierra Leone utilizes the program segment of 8 characters with 5 levels of hierarchy. Users enter budgets and accounting transactions where:
- Character 1 = Project Type
- Characters 2 & 3 = Project
- Character 4 = Component
- Characters 5 & 6 = Sub Component
- Characters 7 & 8 = Activity
COA rules are able to take the 8 characters to infer 3 levels of Government Financial Statistics support, 2 additional levels of project reporting, 4 additional levels of output or performance information and 1 level of Millennium Development Goals.
The use of Side Concepts, supported by financial management systems used in almost all donors and most developing countries is conceived to be the method to support IATI reporting and integration.
Aid Management Classifications
Aid management systems track information and transactional information related to projects. This can vary from government to government, but the data structure for any project typically includes:
- Project identification including title , description , objective , purpose , agreement number and agreement date
- Planning information including project start and end dates , extension dates if any and project status
- Project implementation information which includes whether it is implemented at national/sub national level and the sector.
- Alignment of project to national priorities or MDGs
- Project implementing and beneficiary partners
- Government and donor focal point contact information
Integrating Structure across Systems
Integrating donor and recipient government systems is enabled because these systems hold more detailed information than is needed by the IATI standard. The structure of the budget data is different among stakeholders. However, there is sufficient commonality to infer or roll-up to the aggregate project and statistical information required by the IATI standard. The process is conceptually no different than donors supporting CRS or recipient governments supporting GFS.
- The donor budget system includes Chart of Accounts that describes objective, project, sector, recipient and object code. This information could be in as few as 2 segments structured hierarchically. The objective, project, sector and recipient government information can integrate with an aid management system through a mapping process. Mapping data structures is well understood in information technology using Extract, Transform, Load (ETL), Enterprise Application Integration (EAI) or Business Process Management (BPM) tools.
- The same information provided to the aid management system can integrate with the recipient government Chart of Accounts. The conditions of the donor can be integrated through the fund and object segment and controlled through valid code combinations to prevent improper spending.
- Documents and other material such as assessments, reviews and proposals can be linked directly to elements of the budget and aid classifications.
- The highly detailed transactional information can be exported from donor budget systems through side table COA structures or via mapping tools.
- The less detailed transactional information can be exported from aid management systems through reports or via mapping tools.
- The highly detailed transactional information can be exported from recipient government budget systems through side table COA structures or via mapping tools.
- Common elements from DAC/CRS produced by some donors and GFS could be used to enhance the IATI data set or simplify the process of reporting. Of course, the IATI data structure can align with data elements found in documents. Navigating and drilling through IATI data could include document discovery.
- Aid information including transactions (and transaction stages), project information (including documents) can be integrated because charts of accounts provide the linking metatdata
- Differences among charts of accounts can be facilitated through the use of side tables or side concepts
- Members of the aid ecosystem need to adopt program budgeting to enable integration – this cost will enable timely aid reporting including monthly
- Manual methods of integration compromises data quality and timeliness resulting is less coordination and less effective aid
- Integration can be accomplished with aid management, budget preparation and budget execution systems
- Tracking disbursements from donors and payment by recipient governments does not show progress so aid transparency and effectiveness can be improved by following the commitment cycle
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