2020 The Year that Public Financial Management Came in from the (Covid) Cold

Posted on December 21, 2020 in PFM

Covid-19 Pandemic Exposed Government Need for the Reallocation, Tracking, and Transparency of Public Finances!

First post of 3 in a series, PFM takeaways from 2020

1. 2020 The Year that PFM Came in from the Cold
2. Overwhelming motivation for PFM reform in 2021/2022
3. PFM and the Volatile, Uncertain, Complex & Ambiguous World

With the recent passing of John le Carré, whose first novel was The Spy Who Came in From the Cold, it seems appropriate to consider how Public Financial Management (PFM) has “come in from the cold”. PFM systems often operate behind the scenes and act as impenetrable and secret “black boxes”. PFM has come to the rescue in many countries to improve the pandemic response.

How did it happen? It’s beyond health governance. The crisis exposed the best and the worst in Public Financial Management (PFM):

• Effectiveness of fiscal responses
• Equity of emergency reallocation
• Ease of tracking health spending
• Efficiency of health procurement

“Public financial management (PFM) systems, through which government’s fiscal and health policies are implemented, play a key role in how well countries manage the impact of the pandemic. There is increased emphasis on making larger and more timely investments into the health sector, as well as ensuring that resources flow smoothly to service delivery units and are spent efficiently. This places greater pressure on PFM systems.”

Flashback : did we learn anything from previous pandemics? A pragmatic approach to balancing spending agility with anti-corruption measures. 

PFM lessons learned in 2020:

1. Coordinate debt and cash management to provide fiscal space for health spending
2. Allocate health spending more effectively to achieve better health value for money
3. Optimize revenue collection to provide more funds for health spending
4. Integrate treasury, revenue, and procurements to improve decisions
5. Empower civil society and development partners through fiscal transparency

1. Coordinate debt and cash management to provide fiscal space for health spending

“Campaigners say the pandemic will put unsustainable pressure on governments with public finances already under stress and with health systems ill-prepared for the crisis.”

Governments were under significant fiscal constraints prior to the pandemic, limiting fiscal space for emergency spending. That debt will only increase to above crisis levels with rich nations expected to be $17T in debt, while poor countries are expected to incur debt at 30% of revenues this year. 

 “Cash flow is critical”. Governments with effective cash planning and treasury operations benefit from improved liquidity, especially when integrated with debt and revenue systems.

2. Allocate health spending more effectively to achieve better health value for money

Good PFM systems enable governments to reallocate budgets while temporarily adjusting, loosening, or tightening controls within reason. This enables accelerating priority pandemic spending. Important PFM spending practices include:

• Clear policy for priority spending and reallocations
• Reoriented rather than diluted controls
• Efficient procurement and payment management
• Expenditure tracking across the budget cycle, including special coding
• Returning to stricter controls post-pandemic

3. Optimize revenue collection to provide more funds for health spending

“Revenues will be hit in all countries as a result of reduced economic activity.”

Many countries have inequitable tax systems. Taxes collected in many countries fail to achieve the 15% of GDP thought to be the minimum necessary to sustain governments. Unlike spending reallocation, legal reform is likely necessary to improve revenue mobilization. “Governments could make use of the opportunities this shock provides to make changes to tax systems now that might be politically difficult later.”

4. Integrate treasury, revenue, and procurements to improve decisions

Finance ministries need to communicate and coordinate across budget, revenue, treasury, and procurement for an effective response. Government Financial Management Information Systems (FMIS) are central to improving decisions. These systems enable “line ministries that deliver key public services to spend their allocated budget in an expedited manner whilst ensuring that budget rules are complied with.” Many governments suffer from multiple versions of the truth because of a lack of interoperability among financial systems. Different metadata and conflicting controls makes it impossible to give policymakers timely and accurate information.

5. Empower civil society and development partners through fiscal transparency

The danger of temporarily loosening spending controls includes poor and corrupt decisions. Governments can leverage the power of oversight by:

• Maintaining an audit trail for all Covid spending for post-emergency audit reports
• Providing frequent budget reports showing reallocations, commitments, obligations, and actual expenditures
• Leveraging open and transparency e-procurement systems

An alternative view expressed by Canadian Prime Minister Justin Trudeau is that “being too forthcoming can hinder the government’s ability to wrestle with tough decisions.” Black box decision-making can result in very poor value for money as recently experienced in the United Kingdom.

“The New York Times analyzed a large segment of it, the roughly 1,200 central government contracts that have been made public, together worth nearly $22 billion. Of that, about $11 billion went to companies either run by friends and associates of politicians in the Conservative Party, or with no prior experience or a history of controversy. Meanwhile, smaller firms without political clout got nowhere.”

Public Finance Accounting Enables Governments

Public finance, accounting, and audit are often seen as very dry subjects. Especially compared to glamorous public investment projects. “At this stage in the pandemic, improving government accounting may not seem a high priority, but it could truly be a lifesaver.”

Most importantly, we’ve learned that PFM should no longer be in the “cold”, should be interoperable and transparent.