FMIS for Fiscal Discipline
Title: Using Financial Management Information Systems (FMIS) for Fiscal Control: Applying a Risk-Based Approach for Early Results in the Reform Process1. Moritz Piatti, Ali Hashim and Clay Wescott Abstract FMIS are a set of automation solutions that allow government finance and accounting staff to carry out their day-to-day operational tasks. This enables government finance managers to plan, prepare and approve budgets, approve and verify commitments, issue payment orders and payments, monitor and report on financial resources collected, and develop appropriate resource allocation and borrowing strategies. Budgetary controls are an essential function of FMIS in that they provide control that execution happens against appropriations, meaning that at the aggregate expenditure targets should be met, providing more realism into deficit targets. The potential of such systems to improve effective service delivery, and increase participation, transparency, and accountability to citizens, their elected representatives, and creditors is widely recognized by the literature and practitioners alike. As such considerable resources have been invested into FMIS around the world, however at times with mixed results. This study finds suggestive evidence that FMIS coverage is associated with better budget performance and fiscal deficits conditioning on there being a functioning budget execution system in place. An important implication of this findings is that a roll-out strategy of initially capturing high-value transactions with FMIS could be pursued. Such a riskbased approach would be an important innovation in achieving early results in improved budget management, fiscal control and accountability, prior to scaling up to the full range of many more, smaller transactions.
Introduction A government’s capacity to manage its public finances is central to its ability to deliver services. Financial management information systems (FMIS) are among the basics that facilitate this as they “support management of public sector budgetary, accounting, treasury, and public debt management processes as well as generate corresponding reporting documents” (Uña and Pimenta 2015, p.282). There are multiple definitions of FMISs varying in scope in the literature (see Dorotinsky and Watkins (2013) for a review), which have been summarized by as “computerized systems that track government 1
Paper presented at the IPMN 2017 Conference on Reform, Innovation and Governance: Improving Performance and Accountability in the Changing Times, School of International and Public Affairs, the China Institute of Urban Governance, and the Center for Reform, Innovation and Governance (CRIG) of Shanghai Jiao Tong University from Aug 17th-18th, 2017 in Shanghai, China. Corresponding author: Moritz Piatti
[email protected]; Ali Hashim
[email protected]; Clay Wescott
[email protected]. This paper has not undergone the review accorded to official World Bank publications. The findings, interpretations, and conclusions expressed herein are those of the author(s) and do not necessarily reflect the views of the International Bank for Reconstruction and Development / The World Bank and its affiliated organizations, or those of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries.
FMIS for Fiscal Discipline expenditures and payment processing, and report accordingly” (Schiavo-Campo 2017, p.187). As such FMISs broadly consist of computer programs, databases, and associated processes, procedures, and technology platforms that enable government finance and accounting staff to conduct their day-to-day operational tasks. The information collected in the system databases as the transactions process enables government finance managers to plan, prepare, and approve budgets, approve payments, monitor and report on financial resources collected, and develop appropriate resource allocation and borrowing strategies. Government auditors can access this transactional data to audit operations. The potential of FMISs to contribute significantly to budget management outcomes has been documented widely by the literature (see for example Dorotinsky and Matsuda 2001; Diamond and Khemani 2005; Hove and Wynne 2010, Dener et al 2011, Dorotinsky and Watkins 2013; Dener and Min 2013; Hashim 2014; and Una and Pimenta 2015) and practitioners alike. Among the arguments that are put forward are that improved recording and processing of government financial transactions allows ready access to reliable financial data. This supports transparency and accountability of the executive to parliament and the general public. Further, an FMIS strengthens financial controls, potentially facilitating a comprehensive and current picture of commitments and expenditure on a continuous basis. Once a commitment is made, the system would be able to trace all the stages of the transaction processing from budget releases, commitment, purchase, payment request, reconciliation of bank statements, and accounting of expenditure. This then allows a comprehensive picture of budget execution. Finally, it provides the information to ensure improved efficiency and effectiveness of government financial management. Generally, increased availability of comprehensive financial information on current and past performance assists budgetary control and improved economic forecasting, planning, and budgeting (Diamond and Khemani 2005). There are many avenues through which FMIS can potentially contribute to improved budget and fiscal management. Schick (1998), classifies PFM objectives into (1) fiscal discipline, (2) allocative efficiency, and (3) operational efficiency. The pathways through which FMIS can contribute to these is outlined in table 1 below. Table 1. Contribution of FMIS to Public Finance Objectives
•
Macro-fiscal stability
• •
By providing comprehensive data across government, a clear picture of the state of the budget is possible, enabling financial management. By providing more “real time” data during the fiscal year, opportunities for corrective intervention within year exist. Emerging budget threats can be identified and corrected. By providing data in greater detail, managing total spending is possible in a more flexible way. The sources of overspending can be more clearly identified, and specifically redressed.
Based on prior 3 points, the government can better control spending and stay within planned fiscal targets. •
By supplying in-year data to line Ministries and agencies in a real-time fashion, an IFMIS can enable them to better manage their own resources and stay within budget. An IFMIS can thus help agents to operate within a hard budget constraint. Collectively, this supports better macro-fiscal discipline.
Operational Efficiency
Strategic Allocation of Resources
FMIS for Fiscal Discipline •
In budget execution, an IFMIS allows more active in-year monitoring and management of public funds. This enables the elected officials and center of government agencies to better enforce strategic choices made in the annual budget process, and ensure strategic allocations are implemented.
•
In budget formulation, IFMIS can supply data on current year spending as well as prior year, which should form the basis for the proposed subsequent years’ budget. This helps assure more realistic budgets tied to actual trends.
•
By automating data, IFMIS enables data to be analyzed in different ways more readily, supporting better information, analysis, and decision-making during budget formulation (for both the Ministry of Finance and line Ministries). The cost and implications of proposed policy changes should be better understood, and estimates more accurate.
•
By helping assure money gets to where it was intended, IMFIS can at a very basic level support operational efficiency. (Similarly, an IFMIS provides potential for better ex poste auditing, and detecting corruption or waste of funds.)
•
If collected in sufficient detail, IFMIS information can help identify and manage costdrivers for activities, and allow comparison of alternate service delivery modes.
•
If tied to a program structure, with definable outputs or outcomes, the cost of activities, modes of production, and management thereof, are enabled. It allows benchmarking of efficient practices for similar activities, another vehicle for evaluating and encouraging operational efficiency.
•
If revenues and accounts receivable are incorporated, improved cash flow forecasting, cash management, and lower debt service costs (or floating debt) are enabled.
•
An IFMIS offers opportunities for integration of personnel and payroll, procurement, investment and inventory management with financials. This enables improved information and controls, improved management and potential cost reduction.
Source: Adapted from Dorotinsky and Matsuda (2001). There is broad agreement on the potential of FMIS to contribute to larger PFM objectives and significant time and resources have been dedicated in the pursuit of these. The nature of FMIS implementation is however complex (Dener et al 2011, Hendricks 2012, and Hashim 2014) and the academic literature remarkably thin on causal effects of FMIS investments on intermediate or final outcomes. A recent FMIS literature review refers to this state of the research as a “dearth of rigorous evidence” ‘Combaz (2015, p.3). This study aims to contribute to the literature by assessing the relationship between FMIS investments and fiscal discipline and provides an innovative yet practical recommendation on how early results in the reform process may be attainable.
Data and Limitations This study draws on data from various sources for building the arguments. Firstly, FMIS functionality and coverage data was used. Functionality was important to eliminate candidate countries that do not have a sufficient budget execution system in place to facilitate budgetary control. For
FMIS for Fiscal Discipline countries that do, FMIS coverage was considered critical to assess the extent of their ability to provide this budgetary control function across government. The data source for this was Hashim and Piatti (2016) who use a survey based assessment and apply it to a selected group of 22 countries. The survey questions and scoring schematic is provided in the table below: Table 2. FMIS Coverage Scoring Schematic
Evaluation questions Q2.1. An FMIS has been established.
Q2.2.
Are debt service payments included?
Q2.3.
Are fiscal transfers or subsidies included?
Q2.4.
What is the geographical coverage?
Q2.5.
Is the recurrent budget processed through the FMIS? Are the capital budget or project advances to line ministries processed through the FMIS? Are EBFs processed through the FMIS?
Coverage of financing sources
Geographical coverage
Coverage of payments handled by the MOF
Category
Q2.6.
Q2.7. Q2.8.
Are IGFs processed through the FMIS?
Q2.9.
If amounts of locally denominated donor funds are significant, are they
Response Score An FMIS has been established, 25 and government funds are routed through it. There is no FMIS in place. 0 Debt service payments are sent −2 directly to the CB and then posted ex post in the accounting system. Debt service payments are routed 0 through FMIS and subject to ex ante budget control. Fiscal transfers, subsidies, or −2 transfers to state-owned enterprises are not routed through the FMIS. The MOF directs the CB to make payments directly. Transactions may be posted ex post in the system. Transactions are routed through 0 FMIS and are subject to budgetary control. It pertains to line ministries and −4 spending units at central levels only. It pertains to the center and −2 provinces. It pertains to the whole country 0 (that is, center, provinces, and districts). No −4 Yes 0 No Yes
−5 0
No Yes No Yes No Yes
−2 0 −2 0 −4 0
FMIS for Fiscal Discipline processed through the FMIS? Max FMIS coverage score Source: Hashim and Piatti (2016).
25
Secondly, this study maps these findings against the PEFA indicator PI-1, capturing aggregate expenditure outturns compared to original approved budgets. Alphabetical values were translated into numeric terms following guidance from the PEFA secretariati. This PEFA score reflects the country’s performance one to three years prior to the assessment date. Thirdly, the study draws on fiscal deficit and planned deficit figures (or fiscal balance). Deficit figures were accessed through the IMF fiscal monitor and various article IV consultations. This was compared to the planned fiscal balance in the countries as presented in the Minister of Finance budget speech to parliament as available. The percentage point difference between these two (calculated as a share of GDP) was derived from this to assess the deviation of these figures. Lastly, government expenditure profiles for various countries were drawn on directly from their respective FMIS to provide a sample profile. There are many important limitations to this study, which should be reflected on: • •
• •
Data for FMIS scores were only available for 22 countries as per Hashim and Piatti (2016). This small sample size prevented the analysis from performing more rigorous hypothesis testing as there is insufficient statistical power. As such any correlations should be treated as indicative. The sample set of countries for which FMIS coverage scores were available was opportunistic. Countries were selected that had recent evaluations of their FMIS, or where the authors had knowledgeable contacts who were kind enough to fill out the survey. Since the sample is not random, there is a possibility of selection bias. Data on planned fiscal deficits were retrieved from various sources. The first best option was the budget speech from the respective Minister of Finance to parliament. However, when this was not available secondary sources were used as available. PEFA scores from the latest available assessment were used. These were however at times dated and thus do not always reflect perfect overlap with the assessment of FMIS coverage.
Findings Mapping all the FMIS coverage scores of the set of countries as per Hashim and Piatti (2016) shows that there is large heterogeneity across countries, with many scoring relatively poorly. This the authors find is because large expenditure items, such as wages, fiscal transfers, or domestic debt payments are posted into the general ledger only after the transaction has occurred and are thus not subject to any system embedded budgetary controls. An overview of FMIS coverage by countries is provided in figure 1 below.
FMIS for Fiscal Discipline Figure 1. Overview of FMIS Coverage Score by Country 25
FMIS Coverage Score
20
15
23 23 23 23 10
5
9 2
9
11 11 9 10
15 15 15 13 14
17
25 25 25 25
19
2
0
Source: Hashim and Piatti (2016) There appears to be a positive association with FMIS coverage score with the PEFA PI-1 score capturing aggregate expenditure outturns vis-à-vis budgeted amounts (figure 2). While there are likely many confounding factors influencing this relationship, this study stipulates that FMIS budgetary control subject to good coverage can facilitate a closer semblance of budgets to actual expenditure outturns. Figure 2 also shows that this relationship is unlikely to hold if FMIS coverage is only partial. Going a step further, figure 3 assesses the potential relationship between FMIS coverage and fiscal balance deviations. The deviation was calculated as percentage point differences of actual deficit and the planned deficit as per budget speech. Here there appears to be a negative association between the variables, which is in line with the findings from figure 2, as a more predictable budget is an important factor in deficit outturns.
FMIS for Fiscal Discipline Figure 2. FMIS and Expenditure Outturn
Figure 3. FMIS and Deviation from Planned Deficit 7
4.0
Percentage Point Deviation
6
PEFA PI-1 Score
3.0
2.0
1.0
5 4 3 2 1 0
-1 0
0.2
0.4
0.6
0.8
1
-2
0.0 0
0.2
0.4
0.6
0.8
1
-3
FMIS Coverage Score
FMIS Coverage Score
Source: Authors’ calculation
Discussion A small percentage of transactions have been found to make up a large share of the budget. Capturing such high-value transactions and subjecting them to budgetary controls may facilitate improved fiscal management early in implementation. The transaction profile tends to be skewed with few transactions making up most of the budget. It has been found that typically, a small share of expenditure transactions (by number) account for a large share of the budget (by volume). A rough estimation of this proportion is 20: 80, even though in some large countries (such as China and Vietnam) this distribution was found to be even more skewed (with 812 percent of number of transactions covering 90-95 percent of the budget). Thus, if a transaction threshold could be determined defining high value transactions which cover 90-95 percent of the budget, it would be possible to target ex-ante control to these transactions. Such an approach could yield a very high budget coverage despite focusing only on a limited number of transactions.
FMIS for Fiscal Discipline Figure 4. Sample Transaction Profile by Number of Transactions and Volume of Budget
100 93.2
Cummulative Share (percentage)
90
96.1
99.5
99.9
100.0
82.0
80 70 65.3 60
52.7
50
47.4
40
36.3 31.6
30 20 10
0
18.4 11.4 6.7 0.0
0.0
0.1
0.4
1.0
15.7
3.5
Volume in LCU Number of Transactions Volume of Budget
Source: Author’s estimate. This information could be used to formulate systems deployment and control strategies that focus on these high-value transactions. Such a strategy would yield useful results early in an FMIS rollout phase, and address some of the cost-benefit issues raised by Glenday (2015). This could be done by recommending that transactions above this amount be routed through the treasury system. In practice, the spending units that generate these large transactions are few, and capturing transactions from these units would result in the same high coverage. Thus, the treasury could exert control by focusing on spending units that generate high-value transactions. This approach is akin to focusing on large taxpayers on the revenue side, which is also a risk-based approach. Identifying these spending units can enable the treasury to focus control on them and transactions above this threshold instead of wasting effort across the network. This could also be useful for determining future cash requirements and developing borrowing strategies because they determine the bulk of the cash requirements. If a spending unit that is not part of this list generates a high-value transaction, the rules could specify that the transaction must be routed through the central system. The remaining transactions could be paid through the banking network in which branches of commercial banks act as fiscal agents for the central bank and operate zero-balance accounts. These banks would need to be instructed to not honor payments above the calculated transaction threshold. After agreeing to such a selective control principle, then the following three steps could be taken in practice:
FMIS for Fiscal Discipline 1. Make it mandatory to route all transactions generated at the central ministry of finance (such as fiscal transfers, subsidies, and debt service payments) through the central system. 2. Route all payroll and civil service pension payments calculated by a central system through the central system (these are typically about 30-40 percent or more of the total budget). If the payroll is not automated, route the corresponding bill or payment request through the central system after the line ministry or spending unit calculates the employee payroll 3. Route all payments above the transaction threshold from a line ministry or spending unit through the central system. Such a strategy could be a useful first step in implementing a reasonable budget execution system in countries that do not have one. For example, in the Philippines, the large number of spending units and the lack of a network of treasury offices charged with ex ante transaction control (which line ministries resist for all transactions) hindered all previous efforts at implementing such a system. In this environment, line ministries and spending units can open bank accounts in designated commercial banks. The government transfers their allocations to these accounts periodically, and the ministries and spending units make payments through these banks. The treasury single account at the central bank controls the budgetary resources, and the commercial banks operate zero-balance accounts. However, ex ante budget control is not practiced on these transactions, which leads to the problems described earlier. Therefore, if transactions above a transaction threshold are required to be paid through a central treasury payment system (which currently regulates only budget transfers to spending unit bank accounts), then an effective budget execution system could be established quickly without deploying the treasury system to all spending unit sites (which can number in the thousands). The banking network would still handle transactions below the threshold (and during the transition period), as is currently proposed for the Philippines. This strategy could also be useful for countries where state of the art systems has been put in place, but the budget coverage remains low.
Conclusion There is limited evidence of the effectiveness of FMIS on budget management and fiscal discipline (Combaz 2015, Hashim and Piatti 2016), and good reason for caution in adopting FMIS in settings where information technology infrastructure and skills are limited (Andrews 2013; Dorotinsky and Watkins 2013). This paper addresses these issues by drawing on FMIS functionality and coverage data, PEFA scores on aggregate expenditure outturns compared to original approved budgets, fiscal balance data, and government expenditure profiles. This study finds that there is suggestive evidence that FMIS coverage is associated with better budget performance and fiscal deficits conditioning on there being a functioning budget execution system in place. This has important implications on the design and roll out strategies of FMIS reform. Rather than attempting full coverage with high number of transactions – as has traditionally been the case in many settings - the strategy may instead focus on subjecting highlevel transactions (covering 80-90 per cent of spending depending on the country) to ex-ante budgetary control first, and thereby achieve important results early in the reform process. The inclusion of the full range of other transactions could be gradually phased in as and when the system and staff capacities had evolved sufficiently to handle them. This short paper raises many other questions that deserve follow up going forward. What are the main reasons for the low scores? Could the narrow scope of achievement be partly because the systems were mainly designed by accountants, who saw the benefit in preparing their reporting and financial statements, but lacked broader ownership from the Budget Director and other key stakeholders in the Ministry of Finance? Were there political economy factors that resisted a change in the relative power of
FMIS for Fiscal Discipline the Ministry of Finance that would come about with a well-functioning system? To what extent were these issues picked up by project monitoring and evaluation systems and raised in dialog between donors and governments? For those of the above issues that turn out to be serious constraints, how can they be best addressed going forward?
References Andrews, Matt. 2013. The Limits of Institutional Reform in Development: Changing Rules for Realistic Solutions. Cambridge, UK: Cambridge University Press. Combaz, Emilie. 2015. Implementing Integrated Financial Management Information Systems. GSDRC (Governance and Social Development Resource Centre) Helpdesk Research Report 1229. Birmingham, UK: GSDRC, University of Birmingham. Dener, Cem, Joanna Watkins, and William Leslie Dorotinsky. 2011. Financial Management Information Systems: 25 Years of World Bank Experience on What Works and What Doesn’t. A World Bank Study. Washington, DC: World Bank. Dener, Cem, and Saw Young Min. 2013. Financial Management Information Systems and Open Budget Data: Do Governments Report on Where the Money Goes? A World Bank Study. Washington, DC: World Bank. Diamond, Jack and Pokar Khemani. 2005. Introducing Financial Management Information Systems in Developing Countries. IMF Working Paper. WP/05/196 Dorotinsky, William. And Yasuhiko Matsuda. 2002. Financial Management Reform in Latin America: An Institutional Perspective. Revista del CLAD Reforma y Democrácia, 23, 1-15. Dorotinsky, William, and Joanna Watkins. 2013. “Government Financial Management Information Systems.” In The International Handbook of Public Financial Management, edited by Richard Allen, Richard Hemming, and Barry H. Potter, 797–816. New York: Palgrave Macmillan. Glenday, Graham. 2015. Economic Analysis Guidance for Governance and Public Sector Management Operations in Select Areas of Public Financial Management. Duke Center for International Development. Hashim, Ali. 2014. A Handbook on Financial Management Information Systems for Government: A Practitioners Guide for Setting Reform Priorities, Systems Design, and Implementation. Africa Operations Services Series. Washington, DC: World Bank. Hashim, Ali, and Moritz Piatti. 2016. “A Diagnostic Framework to Assess the Capacity of a Financial Management Information System as a Budget Management Tool”. IEG Working Paper 2016/1. World Bank, Washington, DC. https://openknowledge.worldbank.org/bitstream/handle/10986/25267/10818-WPPUBLIC.pdf?sequence=1&isAllowed=y Hendriks, Christoffel. 2013. “Integrated Financial Management Information Systems: Guidelines for Effective Implementation by the Public Sector of South Africa”. South African Journal of Information Management 15(1), 1-9. Hove, M. R., and Wynne, A. 2010. The Experience of Medium Term Expenditure Framework and Integrated Financial Management Information System Reforms in Sub-Saharan Africa: What Is the Balance Sheet? Occasional Paper No. 9. African Capacity Building Foundation. Schiavo-Campo, Salvatore. 2017. Government Budgeting and Expenditure Management: Principles and International Practice. Taylor & Francis. Schick, Allan. 1998. “A Contemporary Approach to Public Expenditure Management.” World Bank Institute. Working Paper 35116. Uña, Gerado and Carlos Pimenta. 2015. “Integrated Financial Management Information Systems in Latin America: Strategic Aspects and Challenges in Public Financial Management” In Latin America. The Key to Efficiency and Transparency, edited by Carlos Pementa and Mario Pessoa, 281-323. Inter American Development Bank. Washington DC.
FMIS for Fiscal Discipline
Notes i
See FAQ on ‘how to convert the PEFA alphabetic scores into numerical values’ available at https://pefa.org/userguidance
