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Public Financial Management is at core of smart government


August 31, 2016

There’s much excitement about smart government. The use of new technologies to enable sustainable and inclusive development. Growth, participation and quality of life.

Missing among most of the smart government infographics is the role of Public Financial Management (PFM). It’s more often the systems that support PFM that are in diagrams and white papers than the discipline. An exception to the rule is a PwC whitepaper from 2013 that observed: “Better accounting leads to better reporting and decision-making, which in turn leads to better use of public resources. Public bodies and their stakeholders need to understand the full, long term economic impact of their decisions with respect to their financial performance, financial position and cash flows.”

PFM and Government Resource Planning (GRP) systems are not on the periphery of smart government. PFM is the core:

  1. Policy and Budgets: Smart government needs to be planned and monitored. Governments operate using commitment accounting for controls.
  2. Pubic Investment Planning: Smart government initiatives have multiple year horizons like many other public investment plans. Effective PFM is needed for multiple year funding.
  3. Capital Assets: Smart grids, smart infrastructure and smart buildings are government capital assets. These assets need maintenance, upgrades and replacement over time. This is accomplished via GRP systems.
  4. Revenue and Expenditures: Expenditures required for smart government initiatives and the resulting revenue changes needed to be tracked. This is accomplished through the metadata of budget classifications.
  5. Performance Management: Performance management differs in the public sector because of the need to tie outputs and outcomes to financials. This requires PFM as core.

Smart government progression is tied to PFM reform:

  1. Accruals: The cash-basis of accounting used by many governments is ineffective for smart government. Accrual accounting provides the tools to calculate the multiple year financial benefits for major public investments. The cash-basis of accounting creates perverse incentives for short programs. The PFM reform of accrual accounting enables improved smart government spending.
  2. Climate Finance: The consideration of climate costs, climate-focused expenditures and carbon taxes in PFM reform provides the financial justification for smart government initiatives.
  3. Governance and Decision-Making: PFM is all about providing government leaders with effective decision-making information. Smart government can augment the technology to aggregate data from multiple sources used in GRP to improve governance. Dashboard and alert systems provide early warning and improve government resilience.
  4. Systems of Record and Systems of Engagement: Social media has shown the power of engagement. Governments can leverage citizen and business insight through social technologies. This notion of “open government” is driven through transparency, or “open data”. And, open data is driven through systems of record – GRP.

Public Financial Management is at the core of smart government. And, PFM reform is required in order to enable smart government.

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Doug Hadden

Doug Hadden

Executive Vice President, Innovation at FreeBalance
Doug is responsible for identifying new global markets, new technologies and trends, and new and enhanced internal processes. Doug leads a cross-functional international team that is responsible for developing product prototypes and innovative go-to-market strategies.

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