5 learnings from studying digital approaches to PFM

Public financial management (PFM) encompasses the systems, mechanisms and processes by which public resources are collected, allocated, spent, and accounted for. Central to this is the exchange of data and transfer of funds between a finance ministry and line ministries.

PFM underpins all government activity and is integral to a government’s ability to deliver effective and reliable public services to its citizens. But in many lower and middle-income countries (LMICs), PFM systems are archaic: paper-based, labour-intensive, slow, and subject to human error – or exploitation. Even in higher-income countries, there is often a lack of flexibility and transparency.

A digital approach to PFM, underpinned by new technologies as well as updated standards, governance structures, and ways of working, has the potential to improve the ability of finance and line ministries to exchange funds and information. This enhances the quality, accountability, and transparency of public service delivery, also carrying the potential to increase financial inclusion, reduce corruption, and link public funding to achieving outcomes.

Despite this, there has so far been limited progress in achieving service delivery through digital PFM.

For the last few months, Public Digital has examined the reasons behind this limited progress, and explored ways in which the foundation could support LMICs to improve their public service delivery through digital PFM.

This complements the work Public Digital are doing with Overseas Development Institute (ODI) as part of the Digital Public Finance Hub, and reflected in the papers we published together in March (Digital public financial management: An emerging paradigm and Making public finance digital: Challenges to the emerging digital public financial management paradigm).

We conducted detailed research to identify case studies that demonstrate what has and hasn’t worked in digital public finance reform. We supplemented this by interviewing over 60 people from nearly 30 countries, including Finance Ministers and other members of government, development professionals from the World Bank and the International Monetary Fund, and subject matter experts and academics.

Here, we share our five main learnings about why digital PFM reforms have so far failed to deliver improved public services, and what might be done to change that.

Many countries attempt to deliver PFM reforms by meeting international best practice standards. This offers ministries of finance some credibility in their engagements with international organisations like the IMF. But it’s not clear that these efforts to reform policy actually have a measurable impact on the quality of public services offered to citizens.

In some instances, this policy-focused approach could even be counterproductive, such as in cases where ministries of finance prioritise the allocation of resources to line ministries above having a comprehensive, detailed view of total expenditure.

One former Minister of Finance from a Latin American country described how, despite meeting all IMF standards for PFM, some basic services were so chronically neglected that schools were in danger of being cut off by the electricity provider for unpaid debts. The former Minister described having to create an Excel spreadsheet of schools and the total debt they owed to the electricity company in order to pay it off.

Whilst procedures appeared effective and compliant from a standards perspective, there were still urgent problems impacting citizens.

Although support from leadership is crucial for achieving effective and sustainable change, several interviewees signalled the challenges in achieving that support.

In spite of its function as a critical enabler of good public services, PFM is too often seen as a technocratic question about the mechanics of government. From this perspective, the investment of time, money, and political capital required to reform PFM is not justified by the gains – whether political or actual – that these reforms offer.

As a Senior Economist at the IMF commented, ‘It’s hard to include issues related to public finance at the top of the public agenda. We need to convey clear messages about the actual benefits governments can get from these initiatives.’

Occasionally, too, there may be a more nefarious resistance to PFM reform: That establishing an effective and transparent PFM system may expose corruption, and thus establish more acute political problems than existed before.

Even within the same government, there are often significant discrepancies between ministries’ digital capabilities. Several interviewees pointed to issues with ministries’ digital skills, capacity, and data management processes.

A PFM expert observed the lack of API use connecting line ministries to the centre. While financial management systems might sit in the Treasury, processes largely remain manual.

Ministries of finance have a broad, cross-governmental perspective and unique levers of influence with which to coordinate and guide reforms.

But driven in part by this widespread discrepancy between digital capabilities, they can find it challenging to implement successful digital reforms, both within the finance ministry as well as across government. As one subnational Treasury leader asked: ‘Non-agile processes slow the whole transformation down. The finance ministry works with twenty line ministries – can they all become agile at the same time?’

The rapid pace of digital change, the commoditisation of technology and the widespread use of cloud infrastructure has made it easier, cheaper, and faster to develop digital solutions. This has partly been driven by an ability to rapidly experiment, test, and iterate products, scaling those that succeed and adapting or abandoning those that don’t. One result is that expectations around user experience in digital services are now much higher than they previously have been.

The conventional government approach to project delivery is risk-averse, with plans, budgets and timelines established far in advance. This limits flexibility to respond and adapt to changing priorities or lessons learnt during development. This approach is well suited to delivering large infrastructure projects, but poorly suited to delivering successful digital initiatives.

Such projects require a more flexible approach to planning and funding. In the fast-moving and uncertain environment of digital delivery, it is crucial to be able to start small, iterate, and scale. This approach is culturally alien to many governments.

A more agile approach also promotes cross-governmental collaboration. Generally, digital needs are shared by several ministries and public bodies, whether capabilities for processing payments, sending notifications, or exchanging information. Rather than planning and developing a bespoke product each time, there is a substantial opportunity for governments bodies to invest in and co-develop shared infrastructure, creating interoperable services that quickly meet users’ needs.

As well as greater cross-governmental coordination, this requires a shift to prioritise development teams and products above individual organisational requirements.

Digital public infrastructure, or DPI, is an emerging approach to delivering public digital services. Building on existing concepts such as government as a platform (GaaP) which have been impactful in countries like the UK and Estonia, DPIs are ‘society-wide, digital capabilities that are essential to participation in society and markets as a citizen, entrepreneur, and consumer in a digital era’.

DPI can offer revolutionary benefits in the same way that non-digital public infrastructure such as roads and electricity grids do. The impacts of DPI have already started to be seen in India and Bangladesh. But partly due to its novelty, DPI can be hard to define.

The potential value of establishing effective DPI is enormous, but this infrastructure is an inherently long-term commitment in which the benefits are often quite removed from the initial cost of development.

This creates unique design challenges, such as measuring that changes have the intended impact, as well as issues around governance and funding. In some cases, changes to governance structures are necessary to build trust and collaboration across a complex range of private and public sector stakeholders.

The benefits of DPI are becoming increasingly well-known, largely driven by India’s success with the India Stack. The key challenges remain identifying the best way to help governments identify the right points of entry, generating momentum for DPI initiatives and creating the right institutions to take the appropriate local approach.

Digital public finance has the potential to radically improve public services. Unlocking this potential, though, will require a sustained effort to promote its value, as well as the establishment of new data standards, digital capabilities, governance structures, and the adoption of human-centred design practices.

DPI could further revolutionise service delivery, but the immediate challenge remains generating sufficient enthusiasm among leaders and governments to make the investment.