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What Canada can learn from Developing Countries on Public Financial Management sustainability, [Part 5]


June 13, 2012

Part 5: Holistic approaches

Spending and administrative reviews often takes focus away from what’s important

Doug Hadden, VP Products

This is Part 5 of 6 parts detailing the content in my Financial Management Institute of Canada lunch presentation What can we learn about Sustainability from Developing Nation Governments?

If there is anything I learned at FMI, it’s the disruption to government programs of stimulus spending on one hand and spending reviews and deficit cutting on the other hand. Shot-term initiatives might make sense politically. These initiatives break continuity. As I described in the previous post, the multiple year view in budget planning and execution is required to track the effects of government programs.

A stop-gap measure is not a reform.

An incremental improvement is not a reform.

Effective public financial management, in my opinion, means that multiple-year budget plans are tied to outcome measurements. And, changes to the macroeconomic situation are easily modeled – many have already been modeled through scenarios. There should not be the need for government departments to go through an exercise to justify expenditures or attempting to discover program effectiveness. This should already be understood. Governments should already know which programs are more effective and which programs are more critical to achieving government objectives.

Holistic Public Financial Management reform

Developing nation governments understand reform from a holistic perspective. They understand the linkages from improved education and health to economic development. Government intervention in education and health may not always be effective, but it’s this holistic view of many causes, effects and relationships that dominate the Public Financial Management (PFM) reform in developing countries.

Holistic PFM reform = finding what’s important

Many developing country and emerging economy governments can benchmark PFM with peer countries using Public Expenditure and Financial Accountability (PEFA) assessments. PEFA was developed a “multi-donor partnership between seven donor agencies and international financial institutions to assess the condition of country public expenditure, procurement and financial accountability systems and develop a practical sequence for reform and capacity-building actions.” The PEFA framework provides a holistic view of government financial management.

PEFA was designed for developing countries. There have been over 200 PEFA assessments, many of which are public. PEFA has been used at national and sub-national levels. Many governments have completed more than 1 PEFA in order to track progress.

What if Canada had a PEFA?

Norway is the only developed country to have completed a PEFA assessment. This was an interesting exercise by the Norwegian development agency, NORAD. The assessment showed that Norway has stellar public financial management, yet there are 11 C’s and D’s.

Fortunately, there has been some academic work to evaluate PFM in Canada such as How Do Canadian Budget Forecasts Compare with Those of Other Industrial Countries from Martin Mühleisen, Stephan Danninger, David Hauner, Kornélia Krajnyák, and Bennett Sutton from an IMF paper in 2005. As has Marco Cangiano of the IMF noted in a recent ICGFM presentation, not all developed countries operate with PFM “best practices”. My sense is that the federal government would achieve a good PEFA assessment similar to Norway.

I’m in the process of a quick survey to see how I think the Canadian federal government will rate in PEFA and will post as soon as completed. Part 1: PI-1 to PI-14. Part 2: PI-15 to PI-28

Focus on what is important: Sequencing

PEFA helps governments to focus on the reform sequence: what is important and in the most effective order for reforms. Governments often develop a Public Financial Reform Action Plan based on the assessment. The support for International Public Sector Accounting Standards (IPSAS) is often part of reform. The Government of Canada is starting to support some of the IFRS reporting standards that are aligned IPSAS. There does not appear to be any developed nation government fully compliant with IPSAS accrual standards.

Countries like Afghanistan and Kosovo have experienced significant reform achievements thanks to sequencing. The “platform” approach is considered a good practice for sequencing. This enables governments to complete reform goals before moving to the next platform although planning on one platform can start during execution of the previous. The important thing here is to set milestones and objectives for multiple year outcomes rather than introduce new incremental or disruptive processes.

Focus on what is important: Project Management

Chris Kanaracus of IDG News reported on April 2nd:

“Public-sector ERP (enterprise resource planning) software projects historically have experienced some of the industry’s most dramatic cost overruns and delays”.

I’ve addressed this issue in previous blog posts. I believe that some solutions are riskier than others and that business case of using ERP for government financials is weak. There is added risk in government compared to the private sector. And, more risk in developing countries than in developed countries.

Project management and project governance is more critical in developing countries. We can learn something from these processes. For one thing, vendors can’t blame victims for government financial implementation failures because these are turnkey.

It can’t be the government’s fault if the key does not turn.

Some factors are more important for success in public financial management. Project Management 101 is not enough to explain why some implementations are successful and some not.

Some of the governance lessons that can be leveraged in Canada include:

  • Software manufacturers should be part of the governance structure, not at arm’s length from the government implementation
  • Governance structure that commits the software manufacturer to augment products to meet Government of Canada needs rather than forcing customization
  • Methodology that ensures that software manufacturers continue to augment products as Government of Canada standards change
  • Focus on change management that includes communications to government departments and socializing upcoming changes
  • Project governance in which Chief Financial Officers set objectives and Information Technology professionals follow. Public financial management reform is not an IT project, it’s process reform first.
  • Mentoring and knowledge transfers as a condition of doing business with the Government of Canada so that IT and PFM capacity is built and government organizations become self-sufficient

Why FreeBalance created a unique methodology

We’ve adapted our Integrated, Iterative, Implementation and Quality Methodology (i3+qM) to reduce risk. This ISO-9001/2008 certified methodology has helped FreeBalance to have unusually high implementation success rates relative to competitors. The methodology leverages PEFA and other good practices in something we call a “governance valuation”. My view is that the techniques that we use in the governance valuation would be particularly helpful to any government, at any level, in Canada.

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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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