March 11, 2013Doug Hadden
Doug Hadden, VP Products
This picks up from the introduction to the impact on governance of Government Resource Planning (GRP) software posted last week.
The FreeBalance Governance Framework links Government Resource Planning with institutional factors to achieve governance outcomes
- GRP technology used to automate financial functions in government
- provides a set of tools: controls, front-office, decision making
- that are leveraged by institutions whose capabilities can improve or reduce effectiveness
- that has positive or negative effects that are exposed in measures like credit ratings or corruption perception
- that are used for important composite indicators like World Governance Indicators
- that, with other indicators, show governance outcomes such as economic growth or educational improvements
The working premise for the governance framework includes:
- Different levels of governance factors are in use when evaluated countries
- There is no implied weighting of any governance factor at this time other than it is likely that all factors have some influence
- There is no implied sequencing of PFM reforms in the FreeBalance Governance Framework but this analysis is used by FreeBalance as part of a Governance Valuation process that determines sequencing
- There is no implied contribution effect for any governance factor (where some factors may need to reach a nominal level to have any material affect) and some factors (such as high capacity high autonomy in the public service could reduce governance) may have complex curves
- It is challenging to identify where a popularly used governance indicator is placed in the FreeBalance Governance Framework
- Virtually every governance measurement in use have flaws (methodology, comprehensiveness, ideology), but it is likely that these flaws have less effect when considered in aggregate
- It is important to understand where exceptions can occur through exploring scenarios and real-life experience
- Despite flaws, governance indicators are used by businesses, donors, journalists and credit agencies so there are incentives for governments to improve these indicators including the use of technology
Layer 1: Government Resource Planning (GRP)
GRP represents software that automates PFM functions. FreeBalance uses the PFM Component Map to define the categories of software provided by FreeBalance, competitors, third parties and developed in-house
by governments. FreeBalance makes no value judgement about the effectiveness of any software component from any vendor in the FreeBalance Governance Framework. The ICT characteristics that enable governance are described. It is possible that an ICT solution used for PFM by a government may not include important features that can enable good governance.
The PFM Component Map includes:
- Government Performance Management (GPM) includes reporting, analytics, dashboards, Chart of Accounts design, risk management and multiple year budget formulation
- Budget and Commitment Management (BCM) includes budget and commitment controls and commitment tracking with budget adjustments
- Public Financials Management (PFM) includes accounting and associated functionality such as asset management and inventory control
- Government Treasury Management (GTM) includes cash, aid, debt and investment management functionality with bank integration and reconciliation
- Public Expenditure Management (PEM) includes government purchasing, procurement, grant, contract and payment management
- Government Receipts Management (GRM) includes all tax and non-tax revenue sources
- Civil Service Management (CSM) includes the human resources lifecycle with financial functionality including payroll, time and attendance, travel and subsistence and pensions
- Transparency and Accountability) includes front-office functions designed to increase government accountability such as transparency portals or corruption reporting
- Service Delivery ) includes government financial services designed to improve service delivery such as e-procurement and on-line licensing
Layer 2: Governance Tools
ICT Governance Tools
GRP systems include functionality designed to reduce ICT vulnerabilities. Governments augment this functionality through the use of ICT tools and leverage good practices to reduce ICT threats.
Although manual paper-based systems are fraught with corruption opportunities, governments should reduce the risk of ICT manipulation by internal government or external sources.
ICT vulnerabilities include:
- Databases where individuals could change transactional information with the database that results in improper payments, manipulates transactional information or hides transactions
- Network where individuals can identify transactions in progress
- User Identity where individuals can steal user names and passwords to manipulate transactions
- Interfaces where individuals can change information between systems
- Reports where individuals can change the content of financial reports
- Intrusion where individuals can connect into government networks externally
ICT solutions and good practices can significantly reduce the likelihood of ICT-enabled corruption:
- Data integrity within GRP systems identifies when a piece of data has been manipulated or will not allow the data to be changed in the database or via scripts
- Obfuscation is a software technique used in GRP to prevent individuals from understanding the logic of the underlying code, which is further strengthened when individuals do not have access to GRP source code
- Encryption of data makes it difficult to access important data
- Biometrics makes it difficult to steal user identity to manipulate databases or reports
- Virtual Private Networks (VPN) restricts access to the GRP system and tracks usage
- Security policies such as password rules, password reset and timing out reduces the opportunity for data manipulation
- Security audits track every change in the ICT system including the database, operating system and middleware to identify manipulation attempts
- Audit trail ensures that every transaction in the system can be stored and compared with the results from the system
- Transaction audits enable auditors to trace all transactions to identify manipulate of information and to recommend improved processes such as segregation of duties and security policy changes
- Database abstraction reduces the ability to manipulate information at the database level
- Sniffing is used to identify suspicious network or user activity
- Integration techniques are used to eliminate manual interface intervention
- External transparency through portals enables civil society to identify data manipulation acting as citizen auditors
- Intrusion detection systems identify attempts to hack into government networks
GRP systems include internal back-office control functionality that ensures fiscal discipline and reduces corruption opportunities. These operate across GRP functions and some or significant controls.
- Chart of Accounts or budget classifications is the metadata structure for all government transactions and is integrated into user and group security to ensure that individuals can only handle functions for which they are authorized
- Budgets and Commitments provide transaction controls to ensure that budgets are not overspent including salary budgets and integration with revenue and treasury systems
- Segregation of duties ensures that individuals do not have access to multiple steps in transactions
- Secure Payment provides secure cheque printing and electronic funds transfer to prevent manipulation while improvement efficiency of government payments
- Integration capabilities within GRP applications through web services support and the use of Service-Oriented Architectures (SOA) facilitate integration within the GRP suite and to GRP subsystems to reduce errors, improve efficiency and eliminate manipulation of data among systems
- Reconciliationcapabilities within the GRP traps errors from external systems and ensures that transactions have been completed
- Workflow and Procedures enables setting business rules and workflow that follows government fiscal practices to improve efficiency and reduce the impact of dangerous informal practices
- Approvals ensures that all transaction stages have been approved by the proper authority
- Accrual accounting provides better visibility than the cash-basis of accounting on the true state of government financials to improve planning and decision-making while reducing the effects of government arrears
- Asset Management provides better information on the state of government assets, replacement needs, recurrent costs and responsibility for those assets to improve decision-making while reducing corruption on the use and disposal of assets
GRP systems provide decision-making tools to governments. This includes standard “Business Intelligence” functionality such as reports, analytics and dashboards. It also includes budget planning and macroeconomic analysis as part of Government Performance Management. Embedded decision-making functionality in GRP systems enable creating more credible budgets, anticipating the effects of macroeconomic changes and making better day-to-day decisions.
Front office systems provide transparency across the budget cycle. Transparency changes behaviour and enables civil society oversight. International public sector standards improve the quality and understanding of government data:
- International Public Sector Accounting Standards (IPSAS) enables comparing information across governments for cash and accrual basis of accounting
- Government Financial Statistics (GFS) tracks the spending purpose
- Construction Sector Transparency Initiative (CoST) tracks construction cost for public investment infrastructure
- Open Contracting is an emerging group intending to standardize e-procurement information
- Extractive Industries Transparency Initiative (EITI) providing transparency on tax revenue received through extractive industries
- International Aid Transparency Initiative (IATI) providing transparency on aid including donors, NGOs and governments
Layer 3: Institutions
Numerous internal government and external institutions interact to enable improved governance. The effectiveness of these institutions is dependent on numerous characteristics such as capacity and political will. Some characteristics are more critical for some institutions.
The efficacies of institutional characteristics are measured by civil society organizations. Some of these measurements have significant political impact in many countries. And, many of the more detailed measurements are used as part of meta indicators such as the World Governance Indicators.
Layer 4: Governance Signs
GRP functionality enables achieving improved PEFA assessments. PEFA assessments typically drive PFM reform programs.
Layer 5: World Governance Indicators
World Governance Indicators include: Government Effectiveness, Rule of Law, Control of Corruption, Regulatory Quality, Voice and Accountability, Political Stability and Absence of Violence. All of these indicators are used by the Millennium Challenge Corporation (MCC) when considering country investment.
Layer 6: Governance Outcomes
There are many positive outcomes from good governance in economic growth and addressing social issues like health and education. The scope of these indicators has been reduced in the FreeBalance Governance Framework to those that have impact on donor funding decisions such as the World Bank Doing Business indicator. There are other measures such as Foreign Direct Investment (FDI) and macroeconomic country growth that are relevant.