Rethinking Public Financial Management

Managing Public Finances: Country Perspectives in a Changing Landscape

I attended an interesting symposium on “Managing Public Finances: Country Perspectives in a Changing Landscape” public finances hosted at the New York University Wagner Graduate School of Public Service held in Washington on May 9th.  We’re seeing many changes in thinking in governance and the PFM domain that were reflected at the symposium. Here are my top ten observations about rethinking PFM.

1. Increasing recognition of PFM complexity

Many PFM interventions are thought to be of a “technical” nature. Technology is acquired, legal frameworks changed, capacity built and all sorts of positive outcome ensue. Diagnostics tools like Public Expenditure and Financial Accountability (PEFA) demonstrate success. That’s complicated but the reality is that PFM is transformational. Complex. Simple solutions for revenue mobilization, fiscal transparency, or debt management are anything but.  Diagnostic tools can be used to “game the system.”
Lesson: PFM reform works when in concert with social and economic incentives where sustainable solutions are often those that experts would never recommend.

2. Modern finance ministry key to reform outcomes

The role of finance ministries outside core functions was discussed. The emerging model of finance ministries centrally managing planning and forecasting the impact of spending and revenue collection changes was discussed. There remains some controversy around this idea of finance ministries as policy arbiters.
Lesson: Governments need finance ministries to model policy to help make better decisions. Modern finance ministries integrate national objectives directly in budget formulation and executions systems. I believe that finance ministries are at a strategic inflection point.

3. Silos are the PFM villain

There was much discussion about the impact of government and donor silos in PFM reform. Donor technical assistance is often in silo specialization. Government PFM functions are often in silos. There is often poor communication among divisions within finance ministries. And, poor communications with SOEs, central banks and sub-national governments. The lack of integration among information systems also limits decision-making effectiveness.
Lesson: Finance ministries can be at the integration centre for decision-makers. And, the emerging smart and unified model of enterprise software design enables effective analytics with metadata and controls integration.

4. Agility needed for PFM success

PFM has been thought of as large multiple year interventions. “Best practices” are used to predict outcomes of PFM reform projects. Yet, many such project fail, especially in the implementation of Government financial systems. More agile approaches have emerged, such as Problem-Driven Iterative Adaption (PDIA) from the Harvard Kennedy School of Government. The key PDIA is that mimicking reform that worked elsewhere often results in failure because of differences in the country context.
Lessons: Country reform experimentation leveraging PDIA and lean techniques enable learning what works and scaling what works is emerging to improve reform success. Legacy thinking and legacy “waterfall” techniques need to be avoided.

5. Service delivery outcomes

PFM reform has shown good success in improving government fiscal discipline. But there is far less evidence that PFM improves service delivery. The symposium examine health delivery improvements through budget integration. These case studies from Princeton University point to a way forward, as did many of the takeaways from the recent World Bank and International Monetary Fund Spring meetings.
Lessons: Finance ministries can provide the missing link for measuring service delivery outcomes. This requires use of program budgeting techniques, and building outcome measurements. (Which is complex, see number 6.)

6. Government Performance Management is hard

The difficulty of tracking outcomes in government, particularly service delivery (point 5), was discussed in detail. Governments in the case studies had more success tracking outputs. The inhibitors to tracking outcomes include lack of structures where ministries and agencies share programs. And, outcome metrics can’t be validated against an objective bottom line – like profit in the private sector. Government performance management is much more difficult than corporate performance management.
Lesson: Performance can be tracked in government when national objectives are aligned with budgets, and outputs and outcomes tracked to the point where the cost per unit of outcome is discovered – in other words, the ability to tie the performance dots together is technically complicated, where validating outcome measurements is far more complex

7. Towards country-led development reform

It’s a sea change in development thinking: from foreign experts and donor-led to country-led development. As presented in Prosperity Paradox: How Innovation Can Lift Nations Out Of Poverty, and many other works. Countries that take control of the reform process have had better success. Many donors have seen the light. There is an increased suspicion of best practices and solutions out of context.
Lesson: Although many experts understand that context is critical, there remains an attraction to “proven solutions”, where approaches like PDIA seem extreme – what’s important to understand is that the approach enables teams to experiment with solution sets

8. Less is more

What’s a government to do among so many PFM experts and so many reform opportunities? Professor Matt Andrews, at the Harvard Kennedy School, likens reform to a Christmas tree with many small ornaments. It’s better to have fewer but larger ornaments.
Lesson: Reform should be focused by addressing what’s important in countries – the country context, and respecting constraints in the form of governance gaps

9. Innovation only when the basics addressed

Process and technical innovation has great promise. Consider the global PFM reform opportunity shown below. Many governments have had limited reform success to date. It’s unlikely that governments that have poor reform implementation records can succeed by levering Blockchain, the Internet of Things or Chatbots.
Lesson: Many countries have technology leapfrog potential, but innovation builds on basic building blocks

10. Are IT systems part of the solution?

There was much discussion of the impact of financial systems in case studies. The existence of Integrated Financial Management Information Systems (IFMIS) – what we call Government Resource Planning (GRP), was described as a success factor in achieving service delivery outcomes. However, the coverage of GRP systems differed among health case studies where some countries did not have GRP integration.
Lessons: Few in the PFM community are technology experts. This can often lead to misleading conclusions. That’s because IFMIS is not a generic thing. Better conclusions can be reached about the impact of GRP to service delivery and PFM reform when we look at:

  • Integrated coverage of financial systems, especially whether silos have been overcome
  • Ability for systems to adapt to changing reform, what we call “progressive activation”
  • Use of program budgeting and government performance measures in systems (as in point 6 above)
  • Ability to extend beyond systems of record to new technology generations to support open government and more effective data collection for decision-making

Summary

Perspective is everything in complex subjects like PFM reform. And, the incentives among stakeholders often reduce the potential of any reform. Donors get funds from contributing countries while loaning to others. PFM experts build careers through specialization. Vendors sell things. Government stakeholders often have political agendas.
Perverse incentives.
This symposium was another example of asking tough reform questions recognizing constraints. PFM reform is not all “gloom and doom”, there are many cases of reform success. I’m optimistic of even better success in the future.

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