Governance Linkages
The FreeBalance Governance Framework links Government Resource Planning (GRP) with institutional factors to achieve governance outcomes.
GRP solutions such as the FreeBalance Accountability Suite™ are used to automate financial functions in government and provide a set of tools that are used by civil servants whose capabilities either improve or reduce government effectiveness. This has positive or negative effects that are exposed in measures like credit ratings, the Corruption Perception Index and other important composite indicators like World Governance Indicators.
Good governance is important as economic, social and environmental prosperity are directly linked.
Layer 1: Government Resource Planning (GRP)
GRP represents software that automates Public Financial Management (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
- Transparency and Accountability includes front-office functions designed to increase government accountability such as transparency portals or corruption reporting
- Public Financials Management (PFM) includes accounting and associated functionality such as asset management and inventory control
- Budget and Commitment Management includes budget and commitment controls and commitment tracking with budget adjustments
- Public Expenditure Management (PEM) includes government purchasing, procurement, grant, contract and payment management
- Service Delivery includes government financial services designed to improve service delivery such as e-procurement and online licensing
- Government Treasury Management (GTM) includes cash, aid, debt and investment management functionality with bank integration and reconciliation
- Government Receipts Management (GRM) includes all tax and non-tax revenue sources
- Revenue Management provides interoperable budgeting, accounting, expenditure and revenue management to drive effective decision-making across government budget cycles.
- Civil Service Management (CSM) includes the human resources lifecycle with financial functionality including payroll, time and attendance, travel and subsistence and pensions
Layer 2: Governance Tools
Governance Controls
GRP solutions 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
- Reconciliation capabilities 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
ICT Governance Tools
Manual, paper-based systems are fraught with corruption opportunities. GRP solutions include functionality designed to reduce ICT vulnerabilities.
- 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
Decision-Making
GRP solutions 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.
- Alerts from the workflow that notifies interested parties such as internal audit or the Minister of Finance about milestones in the tendering process providing more oversight
- Dashboards that provides exception reporting to managers about the process
Transparency Portals
Accountability portals provide transparency across the budget cycle. Transparency changes behaviour and enables civil society oversight.
International Standards
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.
Recent reports show that FreeBalance customers outperform on many of these metrics.
Governance Enablers
Institutions and institutional characteristics such as capacity and political will are necessary to effectively leverage the governance capabilities of GRP. However, there is evidence that GRP systems, by themselves, reduce corruption:
- Controls prevent many corruption opportunity points
- Transparency through front-office systems changes behaviour because of the embarrassment factor
- Knowledge that all transactions are tracked changes behaviour because of the threat of being caught
Institutional governance enablers that are critical across the procurement lifecycle include:
- Capacity of stakeholders including businesses, civil society, legislature, anti-corruption organizations and the civil service for management and oversight
- Political Will by stakeholders such as the executive to support anti-corruption activities
- Standards used in public financials that provides better information to stakeholders
- Compliance processes and norms within the government
There are other institutional characteristics that are important during the lifecycle include:
- Accounting procedures used by the government that provides appropriate fiscal discipline using good practices and integrated with controls
- Access to transparency technology and maturity of civil society institutions during and after public investment procurement which can extend back to budget preparation to hold the government to account
- The independence and enforcement options for internal and external audit institutions to trap corrupt practices
It can be argued that appropriate institutional arrangements for anti-corruption will have limited impact without an effective underlying technology system:
- Auditors will be forced to track spending and compliance violations through paper files or across incompatible information systems
- Transparency mechanisms could result in publishing only the information that procurement officers wish to be published
- Manipulation of procurement processes will be difficult to uncover without an audit trail “smoking gun”
- Disconnection with the original budget process could result in the purchase of goods and services that have little to do with the intention to build a hospital
- Cash payment will reduce the ability for auditors to “follow the money”
Layer 4: Governance Signs
Governance Signs
There are numerous signs that are used to measure the governance effectiveness of PFM:
- Transparency International Corruption Perception Index that uses surveys to determine the perception of corruption in a country
- Actual incidents of procurement corruption and prosecuted procurement corruption that becomes well-known in the country
- 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 the comprehensiveness, efficiency and quality of PFM processes
GRP functionality enables achieving improved PEFA assessments which typically drive PFM reform programs.
PEFA Impact
Although PEFA assessments lack some detail on procurement processes, a GRP with tools and enablers will help to improve ratings for:
PEFA B Comprehensiveness and Transparency
- PI-5 budget classification could be improved to show objectives and sector programs within the government books
- PI-6 increase in the comprehensiveness in budget documents thanks to improved planning and accessibility of procurement details
- PI-10 increase in the availability of financial information to the public via the e-procurement portal and through improved reporting
PEFA C(ii) Predictability and Control in Budget Execution
- PI-19 improved value for money through increased competition and improved commitment and procurement controls
- PI-20 effectiveness of controls for non-salary expenditures through budget, commitment and process controls integrated across accounting and procurement systems
- PI-21 effectiveness of internal audit through improved capacity, independence and access to audit trails
PEFA C(iii) Accounting, Recording, Reporting
- PI-22 improved timeliness of accounts reconciliation via integration and automation including bank reconciliation from payments made to the vendor providing the hospital
- PI-24 improved quality and timeliness of in-year reports through integration, automation and the use of international standards and good practices in accounting procedures that shows potential gaps between the proposed budget and actuals
- PI-25 improved quality and timeliness of in-year reports through integration, automation and the use of international standards that shows the impact of public investment projects like the hospital to the government books
PEFA C(iv) External Audit and Scrutiny
- PI-26 improved scope of external audit through independence, capacity and access to the procurement audit trail
Layer 5: Governance Outcomes
GRP systems are leveraged to reduce procurement corruption and to trap incidences of procurement corruption through:
- ICT security techniques to reduce manipulation
- User management integrated with GRP controls
- Audit trails and alerts to track manipulation of GRP systems
- Integration among systems to prevent corruption at interface points
- Transparency through e-procurement to enable civil society and competitors to monitor procurement
- Workflow that ensures that government procedures are used
These tools and techniques are best leveraged by governments with anti-corruption political will, good civil service and civil society capacity and audit organizations with sufficient capacity, independence and enforcement.
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.
For more information on how the FreeBalance Accountability Suite™ can help address corruption, please get in touch.
Background
The working premise for the governance framework includes:
- Different levels of governance factors are in use when evaluated different 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 evaluation 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 has 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