The Difficulties and Rewards of so-called "technical" PFM Reforms

Doug Hadden, VP Products

It’s the era of PFM myth building and myth busting.

Of clichés and fashion. Cynicism and risk aversion.

But, ultimately, it’s the era of increased insight into what works in public financial management reform.

2 Dimensional Debate

Current discussions about PFM effectiveness seem to centre about the relative merits of applied technology versus applied practice. There seems to be a view among many that proven practices can be automated via technology and so-called technical initiatives such as Governmental Financial Statistics (GFS) or International Public Sector Accounting Standards (IPSAS) will yield positive outcomes. There is an opposing view that the country context is critical: institutional capacity, macroeconomic situation and cultural norms should drive reform.

Both points of view are valid. The truth falls in a fuzzy place in-between. Where there are elements of both.

Best Practices vs. Country Context myth

”Best practices” has become a pervasive meme in the public and private sectors. Many suspect that this a code phrase to sell software (built-in “best practices”) or consulting. Matt Andrews of the Harvard Kennedy School has described the weaknesses of adapting so-called best practices , especially migrating a reform that seemed to work in one country to another . My sense is that the ‘best practice’ myth is unfortunately alive and well in public financial management. (‘Best practices’ remains a justification for donor funding for governance initiatives.) It’s going to take a few more years for this myth to die.

The opposing myth is that PFM reform success is more of an art than a science. If not the fine art of budgeting, spending, and managing public monies . In this view, PFM reform is the craft of understanding the country context. Richard Allen has stated that complexities of the reform process are not amenable to modeling; nor are the enabling conditions, political and administrative, that are critical for success and vary so widely from country to country. This myth is particularly strong in the PFM community. The result of which seems to be contradictory advice given PFM experts to the same government. It’s staggering the number of times that government officials are told to speed up or slow down reforms. To focus on budget planning or focus on budget execution first. To create an anti-corruption commission or undergo public service reform first.

PFM reform success cannot be divined through some kind of black magic?

That’s why we look at the set of practices that have been known to work. These are good practices that enable PFM success under certain circumstances. Some practices are better based on the country context. The point here is that “county context” is not half the mystery it’s made out to be. We’ve got open data, PFM, governance and transparency assessments and macroeconomic country data. The information isn’t perfect – but enough to:

  • Benchmark the country condition relative to other countries
  • Evaluate what has and hasn’t worked in similar contexts
  • Narrow down the good practices that can work
  • And, the technology enablers of these practices

Technical reforms are effective or not effective?

There is evidence that initiating technical reforms without other conditions tends to have limited results. Matt Andrews found that governments could improve Public Expenditure and Financial Accountability (PEFA) scores in legal reform without necessarily putting those reforms into formal practice. And, as Jack Diamond, has has argued implementing technology such as Government Resource Planning (GRP) aka Integrated Financial Management Information Systems is no “panacea”.

Yet, technical reforms are significant themes for donors. And, GRP systems are considered to be a tool to enable PFM reform.

The notion that reform is 5% technology, or possibly no more than 1% technology was part of a recent discussion at . I was tweeting during the event and was asked what my view was. My view remains that these so-called technical reforms impact governance through changes in behaviour . As we have described in our FreeBalance Governance Framework :

  1. GRP technology used to automate financial functions in government
  2. provides a set of tools: controls, front-office, decision making
  3. that are leveraged by institutions whose capabilities can improve or reduce effectiveness
  4. that has positive or negative effects that are exposed in measures like credit ratings or corruption perception
  5. that are used for important composite indicators like World Governance Indicators
  6. that, with other indicators, show governance outcomes such as economic growth or educational improvements

Technical reforms are easy or not?

Some observers suggest that implementing technical reforms including the implementation of a financial management system is somewhat easy and less political. Philip Krause has suggested that these technical reforms are not of magnitude to, say, proper parliamentary accountability – which involves party systems, electoral systems, media freedom. There’s a difference between accountants tinkering with the chart of accounts and societal transformation . My comment at the time was: “I find this notion that there is a distinction between technical and political reforms to be artificial. Technical reforms represent a sub-set of political reforms.”

But there are nuances to this notion of “tinkering accountants” (and tinkering economists) that was exposed with a recent twitter exchange with Matt Andrews.

Andrews suggests that the PFM tinkerers encounter political barriers. Our experience implementing in many countries is that this is true. However, the political disincentives and technical complexities differ for these practices:

  • Support for Medium Term Expenditure Frameworks (MTEF) is highly political (can transform budget priorities and threaten vested interests) and highly technical (requires high capacity to manage multiple year budgets, use program budgeting and understand the long-term recurrent costs for public investment projects.
  • Support for Accrual Accounting is highly political (shows the true value of government programs and the true government debt load that threatens patronage models of politics – also exposes arrears) and highly technical (capital asset depreciation, accounting for contingent liabilities).
  • Support for International Public Sector Accounting Standards (IPSAS) has severe political implications if following the accrual standards. The support for cash-based IPSAS can have political implications in the accounting for sub-national and State-Owned Enterprises (SOE) requirements. And, there are significant technical problems to account for this. But, cash-based IPSAS support for national government accounting has moderate political implications because the data is not necessarily open and is easy to support in financial systems. The politics of making the data open. Of independent audit. Of legislative scrutiny. Well, that’s a different political issue from supporting IPSAS.
  • Support for Government Financial Statistics (GFS) has limited political barriers because it helps justify donor funds and is of moderate technical complexity because it can be generated from financial systems when properly designed.

Conclusion: Nuance over Magic Bullet approaches

If PFM reform were well-understood, we’d be doing it better. Observers who focus primarily on a magic bullet as the critical success factor are doing us a disservice. Governance does not improve when government PFM decisions are weighted heavily to best practices, informal processes, ICT technology, human capacity, or ‘PFM as art’. Or, through tinkering accountants and economists. Or, self-congratulating donors, for that matter.

We are on the cusp of a scientific revolution in PFM reform and country development. Open data and ‘big data’ techniques are debunking strongly held myths . And, social media provides additional avenues for discussion that has only recently been available.

Let’s persist in breaking down the myths. Of opening data and discussions. And, turning PFM reform from art to science.