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How to Bring Public Financial Management into the Digital Era

By Guest Writer on November 2, 2023

digital government

In our new paper and recent conference, we are critical of the prevailing paradigm for how we think about digital within public financial management (PFM). In short, we feel it fails to live up to the promise of a digital revolution in public finance, and is not keeping pace with wider developments in digital government.

For PFM to be digital, we think three big shifts in mindset are needed: a shift in how we approach PFM reform, a shift in how we think about the technology architecture for PFM, and a shift in how we fund digital transformation.

Why are we critical of the prevailing paradigm? Our paper points to three problems:

1. PFM is rigid and losing its policy relevance

Over the last two decades the PFM community has become increasingly confused between PFM’s role as a means to an end, and PFM reforms as ends in and of themselves, prioritizing form over function.

This has happened for very understandable reasons. Successful reforms in a small number of  countries became ‘best practices’, which in turn fed a proliferation of diagnostic tools and conventions for other countries to comply with and pursue as part of their PFM reform agendas.

As a result we have seen a plethora of IT-driven planning, budgeting, procurement, accounting, auditing, and other PFM reforms that are often unmoored from the policies a government is trying to deliver and the problems they are trying to solve.

2. A closed and siloed technology architecture

IT solutions for different PFM functions are often siloed from each other, as well as from other government IT systems.

While governments have become much better at producing financial information, they are still not very good at understanding whether their fiscal policies are having their intended impact.  A big reason for this is that IT solutions are siloed in different government functions and departments, often using unharmonized data structures.

For example, inconsistencies between the chart of accounts for budgeting and accounting make it difficult to understand if spending is in line with plans. And, siloed sector management information systems make it arduous (and in some cases impossible) to bring together data on inputs, outputs, and outcomes in ways that are useful for policy-making.

3. An unsuitable funding and delivery model

The way governments fund digital transformation incentivizes a solution-driven approach to PFM reform.

Too often governments try to deliver digital infrastructure in the same way they deliver physical infrastructure. They attempt to specify all of their requirements up front in a business case, contract suppliers to deliver the IT system, and budget only for the up-front capital cost.

Figure 1: What to make of the role of user needs? (Source from authors)

This process can take so long (an average of 8 years for a financial management information system (FMIS)) that the requirements have changed by the time the system is eventually implemented. More often, the project encounters change management issues, because those specifying the requirements have not consulted well enough with the actual users of the system.

PFM changes in the digital era

For all these reasons, we recommend three big shifts in thinking. In isolation none of these are new recommendations, but together they constitute an emerging paradigm – digital PFM. A finance ministry adopting these shifts in mindset could generate important spillovers for the kind of whole of government approach to digital transformation that many governments are now aspiring towards.

1. A funding and delivery model for sustainability

Funding and delivering digital infrastructure is different from funding and delivering physical infrastructure.

Modern approaches to developing and deploying software emphasize: starting with user needs; scaling up incrementally based on user testing; and continuous iterative improvement even after the system goes live.

This implies a shift in thinking, from capital budgets for IT projects, to recurrent budgets for in-house digital skills like user research, product management, and agile procurement.

Figure 2: Agile Delivery according to the UK Government Digital Service (Source)

2. PFM ecosystem of data, platforms, and services

The capability to effectively exchange data and information across and between layers of government requires a silo-busting mentality.

New models for thinking about the role of government in the digital era emphasize a reorganization of government around data, platforms, and services. This means shifting to a much more open architecture based on standardized open application programming interfaces (APIs).

More generally, PFM professionals must start thinking about (and testing) interoperability ex-ante rather than lamenting its absence ex-post. That may ultimately mean abandoning pre-conceived notions of what constitutes an integrated financial management information system (IFMIS), and recognition that such things need to continuously evolve in line with user needs.

Figure 3: Making ‘government-as-a-platform’ real (Source)

For an example of what a PFM ‘stack’ might mean in terms of this wider ecosystem, see Figure 3 below.

3. A flexible and responsive PFM system

Like the IT systems that underpin them, PFM processes require ongoing iterative redesign to provide a system that is flexible to the ever-evolving needs of users and responsive to the problems policy makers are trying to solve.

The pandemic tested PFM systems. Some governments were able to leverage their digital capabilities to respond to the crisis in certain areas. The UK furlough scheme and Togo’s Novizzi cash transfer scheme stand out among examples. In other cases so called best practices were abandoned for the sake of expediency and at the cost of transparency and accountability.

Capabilities to solve problems will be necessary to deliver on policy promises like universal health coverage, and respond to emerging crises around climate change and inequality. This means recognizing PFM and digital as means to an end and bringing them together in a problem-driven approach to PFM reform.

A summary of the recent papers “Digital public financial management: An emerging paradigm” and “Making public finance digital: Challenges to the emerging digital public financial management paradigm” by Cathal Long at ODI and Nicholas Gates at Public Digital.

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One Comment to “How to Bring Public Financial Management into the Digital Era”

  1. Hi Cathal and Nicholas,

    Thanks for the useful summary of your paper. It’s great to see your thinking on how ‘government as a platform’ applies to the area of PFM.

    I’m working at the moment with one government entity around integration with their PFM (which lacks even an API). I think two areas that would help are (i) a short write-up of the gov as platform model that can be used to seed ideas (around the evolution of IFMIS for example) and (ii) a more detailed PFM stack to provide a roadmap. The example you provide is helpful, but is very generic.

    You have no doubt followed the work that DCI is doing to articulate what this stack might look like for the social protection sector. Something like that would be extremely helpful for the PFM sector.