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Scenario in Automating Good Governance: Government Resource Planning (GRP) for Budget Credibility

 

May 19, 2013

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: Profitability is the key concept in the private sector. Budget is the key concept in government. In business the budget is only an internal document. In governments and not-for-profits, the budget is the key fiscal document.

PROBLEM: Many government budgets are created with little regard for spending realities or budgets are changed in execution without the spirit of the original plan.

OTHER FACTORS: Credible budgets require effective economic understanding and linkage with policy.

SCENARIO:Use of GRP systems for improved budget planning and budget execution. 

 

Matt Andrews suggests that considerable effort has been made to help developing countries improve budget planning but these bettter budgets did not result in better spending. Stephen Symansky has pointed out that governments should focus on budget execution priorities first despite the orthodoxy that budget preparation should come first.   Credible budgets requires a combination of effective planning and execution. According to Simson, Sharma and Aziz, an effective budget pursues three (partially competing) objectives: maintaining fiscal discipline, allocating resources in accordance with policy priorities and efficiently delivering services, or ‘value for money’. Budgets should be comprehensive, transparent and realistic. This series demonstrates how GRP can be used to improve governance including improving budget credibility.

 

Government Resource Planning Approach for Credible Budgets

Managing the civil service is enabled through GRP systems:

  1. Government Performanceincludes historical analysis decision-making tools of examining past spending, budget variances and revenue trends
  2. What-if and scenario planning decision-making tools  are used to model the effects of economic changes, policy and unit pricing
  3. Logic mapping decision-makingtools  are used to align government goals (budget inputs, outturns, outputs and outcomes) with capital, operating and salary spending  where alignment and objectives change over time
  4. The Budget Preparation element of Government Performance management includes the budget circular, a control tool, that sets the acceptable parameters for budgets from government Ministries, Departments and Agencies (MDAs)
  5. The budget calendar control tool sets out the process of multiple budget versions, compliance with information detail and schedule
  6. The GRP leverages an enterprise-grade ICT Platform as foundation that integrates data from multiple system including core accounting, expense, payroll and revenue systems as a decision-making tool
  7. The resulting budget law that can include a budget book becomes a control tool within Core Financials that needs to be integrated with all financial management systems
  8. Commitment Accountingis a control tool inherent in all GRP systems, rather than an add-on to private sector software, that supports multiple  aggregate controls to prevent over-spending budgets or spending on unauthorized items
  9. Analyticsdecision-making tools that are part of Government Performance management enables tracking and forecasting budget variances
  10. Budget transfersmay be required based on revenue variance or a reaction to economic shocks where transfers are a control tool to ensure proper authorization for these changes

Governance Toolset

The budget credibility management scenario requires the ability for GRP systems to support the progressive activation of good practices in public service reform:

  • Support for analyzing information from budget execution to develop effective estimates
  • Automating budget formulation and execution controls to ensure that budgets are not overspent
  • Support for changes to budget classifications and the introduction of techniques of Medium Term Expenditure Frameworks (MTEF) such as macro-fiscal frameworks, performance management, multiple year viewpoints and sectoral strategies when appropriate based on government capacity

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
  • Policy that articulates government priorities is critical at all stages of budget formulation and execution
  • Reporting and Analytics is important at all stages of the budget lifecycle for proper planning and adjustments
  • Budget Transparency can also be important to engage civil society on prioritization and effective spending

Some governance tools augment specific parts of progressive activation lifecycle:

  • Historical analysis includes decision-making tools used for general  that supports benchmarking and other comparisons
  • Scenario planning includes decision-making tools for ‘what-if’ analysis that include different economic, revenue and spending assumptions
  • Logic mappingincludes analytical tools that support program management, outputs and outcomes, and Key Performance Indicators (KPIs) to better align public servant performance with government objectives
  • Budget circular  and Budget calendar leverage control tools of workflow and approvals for compliant and timely budget formulation
  • Integration controls  including data integrity and reconciliation ensures that the data used for decision-making is accurate and up-to-date
  • Budget law generates budget controls that sets multiple aggregate and line-item budget ceilings across multiple periods with tolerance levels
  • Commitment Accountingis a commitment control tool that ensures that the requirements of the budget law are respecting during budget execution
  • Analytics decision-making tools including alerts & dashboards re-forecasts variances and provide early warning to management
  • Budget transfer controls tools ensures that all virements and changes to aggregate levels follow legal approval requirements

Governance Enablers

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

Institutional governance enablers that are critical to budget credibility include:

  • Efficiency in budget formulation and execution through automation to ensure timely intervention
  • Standards and guidelines used across the budget lifecycle including support for Government Financial Statistics (GFS), International Public Sector Accounting Standards (IPSAS) and national standards
  • Compliance processes that ensures that standards are followed
  • Legitimacy of the budget process within the public service, with politicians and civil society that creates an environment to support budget credibility

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

  • Capacity of public servants  to support the progressive activation of performance management, decision-making tools and new standards
  • Institutional arrangements aligned to controls to add incentive for credible budgets
  • Accounting procedures that follow appropriate good practices so that information is reliable

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

  • Informal processes will dominate budget processes without the imposition of automated controls where the executed budget does not reflect policy or the budget law
  • Budget estimates will be inaccurate without a computerized model based on the government establishment
  • No early-warning systems for potential budget variances will be observded

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 budget credibility
  • Quality of Governance Institute measure that provides an index for government corruption, bureaucratic quality and the rule of law
  • Open Budget Indexdescribes the compliance with good budget transparency practices

Governance Linkages

In this anti-corruption scenario:

  • GRP systems support automated governance tools that enforce fiscal procedures
  • Features of the GRP ensure broad budget coverage
  • Governance controls and decision-making tools enables budget coverage
  • Improved budget credibility improves development outcomes and the World Governance Indicator, Government Effectiveness 

PEFA Impact

Progressive action using GRP with tools and enablers will help to improve ratings for numerous scores, especially PEFA A:

  • PEFA A Credibility of the Budget
  • PI-1 aggregate expenditure out-turn compared to original approved budget can be achieved through controls on budget execution
  • PI-2 composition of expenditure out-turn compared to original approved budget can be achieved through aggregate budget controls and budget transfer controls
  • PI-3 aggregate revenue out-turn compared to original approved budget is improved through historical information, macro-economic and scenario planning
  • PI-4 stock and monitoring of expenditure payment arrears is managed within the financial management system with links throughout the budget cycle including commitments, obligations and good receipt
  • PEFA B
  • PI-5 classification of the budget tends to improve when linking policy with programs and performance
  • PI-6 comprehensiveness of information in budget documentation improves through comprehensive budget preparation and execution systems that can easily generate budget books and financial statements
  • PI-10 public access to key fiscal information is more easily supported out of comprehensive budget systems
  •  PEFA C(i) Comprehensiveness and Transparency
  • PI-11 orderliness in the annual budget process will be enhanced through planning and budget models that will provide more accurate estimates
  • PI-12 multi-year perspective will be enhanced through budget tools

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. Many countries attempt employment interventions through tax credits, training programs and investments. Credible budget planning can align with these policies. Analytical tools can be used to identify the most effective interventions.

There are numerous budget management software applications available but, according to Hove and Wynne, in practice the World Bank and aid agencies have funded the introduction of private sector financial systems, which do not include core budgeting functionalities.  Many government organization use spreadsheet applications for budget planning that fail to support controls, version management, management approval while referencing multiple years of historical information.

Case Study: Antigua and Barbuda

The Government of Antigua and Barbuda utilized numerous procedures for budget formulation. The government had good budget office capacity. Budget execution did not often follow the plan. And, there were numerous supplemental budgets over the years. The use of supplemental budgets is a sign that the original budgets were not credible.

The Ministry of Finance at the Government of Antigua and Barbuda decided to reform the budget process to include:

  • Multiple-year budget planning using FreeBalance Performance Budgeting
  • Broader coverage of the Core Financials and Payroll functionality of the FreeBalance Accountability Suite across Ministries, Departments and Agencies (MDAs) to provide additional controls
  • Capacity building of accounting and payroll officers in MDAs
  • Support for accounting standards that better reflect program and objectives
  • Performance measures used in budget proposals
  • Improved budgeting of the long-term recurrent expenditures from public investment projects
  • Quarterly budget meetings to ensure socialization of budget discipline and share lessons learned across MDAs chaired by the Financial Secretary and the Minister of Finance
  • Develop of Dashboards using the FreeBalance Accountability Suite to provide actionable information to the Accountant General

Significant improvements in the PEFA measures for budget credibility have been achieved at the government improves budget management.

Conclusions

Many studies show that budgeting in the public sector is fundamentally different from budgeting in the private sector. It can be argued that budget credibility cannot be achieved without GRP systems that provide:

  • Controls and automation of the entire budget lifecycle
  • Integration of all expenditure and revenue systems
  • Decision-making tools to develop better budgets and for early warning on budget variance problems

Government institutional characteristics can improve budget credibility further

 

 

 

 

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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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