In the public eye

How financial management reform will transform Public Sector

Grant Thornton’s 2016 Innovation in Public Financial Management survey indicates substantial convergence in thinking around the importance, nature, and to a more limited extent, key priorities of PFM reforms. To begin with, efforts at Public Financial Management reform are now the standard rather than the exception.

In the survey, 68% of respondents say their countries have a formal PFM reform programme in place. A further 21% report that they either are developing, or intend to develop, such a programme.

It shows that there is also a growing consensus around the expanding scope of reform and how it differs from the more restricted territory of the past. As one respondent advised, ministers and senior managers “should know that, at some point, everything will depend on finance. So, it is essential to really understand the impact their decisions have on policy making and on the people.”

In practice, the survey found that reform frequently involves adopting international standards rather than re-inventing the wheel. To enhance transparency for example – a key part of the PFM reform agenda – 93% report the adoption of some international standards. However, the standards seeing the most widespread acceptance – the International Public Sector Accounting Standards and International Auditing Standards, followed by 48% and 42% respectively – are still not adopted by a majority of countries.

Variations in the scope of reforms

Although PFM is moving towards widespread international convergence, the pace of change varies. Terms such as ‘financial management’ and ‘reform’ are also broad and can mean different things to different people.

The study authors noted that “wide gaps between debates on the issue, not only within countries, but between them”.  So while the survey indicates that PFM reform is on the agenda, and that the scope of its definition is growing, countries are still working out the details and moving at different speeds. In South Africa it largely refers to the adoption of the Public Finance Management Act; the Municipal Finance Management Act and of course the various Treasury regulations and standards.

However, while South Africa has a solid legal framework to work from the country continues to struggle with effective implementation of the rules and regulations.

And we are not alone.

Grant Thornton’s survey indicates some basic gaps in the ability to deliver PFM reforms. When asked about what resources they needed to succeed, the area most frequently cited was technical assistance (named by 38% of respondents), followed by employee training (33%), and new legal frameworks that support or allow PFM (33%).

Digging deeper, the nature of technical assistance needed also points to a lack of some fundamental capacities: 78% of respondents say that their governments, when looking for such support, prioritise help on implementation of integrated financial management systems, while 60% prioritise accounting and financial reporting – the two most common responses.

The capabilities and available capacity for PFM reform differ significantly between countries, but both developed and developing countries have limitations that slow progress.

Many developing countries face intense demands for development and services – from both internal and external stakeholders – with limited capacity to respond. As one of the authors noted in the survey: These nations “are just trying to do what they need to do today and it is hard in that situation to keep big issues of reform foremost in your mind.”

But it’s important to note that developed countries are not immune to the fundamental barriers to PFM reform. Even in the United States “there’s no guarantee that staff empowered to accomplish PFM reform have the skillset needed to develop a modern, integrated, digital, financial management programme,” said the study.

Citizen engagement and political commitment prove vital

Capacity can be built up over time. A more worrying finding for long-term PFM reform is that the main drivers appear to be internal rather than external to government. The most commonly cited is a generic desire to improve operational transparency (49%), followed by enhancing accountability to internal government and business stakeholders (37%) and improving the effectiveness of budget expenditure (33%).

All of these are good aims, but none indicate strong public pressure for change. Instead, just 21% of respondents say that increased involvement or awareness of citizens is an important driver of PFM reform, even though 47% believe that citizens, not governments, are the main beneficiaries of increased transparency. In a striking, and no doubt related finding, only 22% of respondents think that the public even understand the value of PFM reform, suggesting a widespread lack of popular engagement with it.

The danger of such disengagement is its impact on the number one challenge for PFM reform: the political will to push change forward. If the population in general is apathetic, such political will is unlikely to have staying power. The issue is essential for progress no matter what the level of economic development. As a respondent from New Zealand noted, the most important critical resources for PFM reform are “political commitment and clarity of purpose. Next to these external resources are of secondary importance.”

In some countries the first step towards better public engagement over PFM is to build up the basic financial skills of citizens. For example, in August 2014, the Indian Government launched the Pradhan Mantri Jan Dhan Yojana (PMJDY), described as the world’s biggest financial inclusion initiative.

The goal of the PMJDY is to provide access to banking facilities to every household in the country - a monumental task across India’s vast population and geography. The scheme created 180 million new bank accounts in its first year and is expected to improve, not only personal finance practices, but also the efficiency of public subsidy and welfare programmes, and ultimately PFM engagement.

In conclusion

Should we learn from international best practice and remain committed to effective and bold financial management transformation, South Africa could make dramatic improvements to its service delivery mandate. The related improvement in financial controls will ensure that government extracts greater value from the money it spends and also help to better serve its public agenda in an age of uncertainty in the global economy.