Public spending makes up almost a third of global gross domestic product, having jumped seven percentage points in 2020 as the Covid-19 pandemic hit. How that money is spent is one of the single biggest factors in determining socio-economic outcomes for a country and its citizenry. There is a clear moral imperative to ensure that this money is spent as efficiently and effectively as possible. This requires transparency and accountability in public finance management systems.
Over the last year, OMFIF, in collaboration with EY, has highlighted the ways traditional PFM systems are deficient and the benefits that can accrue from modernisation.
The fundamental quality missing from traditional systems is the ability to form a robust connection between the purpose of a disbursement of public money, how it is spent and what impact this spending has. This is particularly true as public funds flow through several layers of government, and increasingly through private or third-sector service providers, before reaching their beneficiaries. Part of the challenge here is moving from simple line-item budgeting to programme budgeting, which delivers a higher standard of accountability and creates a clear link between the budget allocated and the spending activities.
This is not a simple task. Many of the information management systems are disparate and unconnected. Payroll, accounting systems and impact assessment systems are all separate, as are the systems used at different levels of government, from central budgeting authorities to local government level to those used by service providers. This makes any effort to track and reconcile spending across these systems a costly and time-consuming exercise.
The goal should be to create a system to pull together this information and allow budget stipulations to flow seamlessly from central budgetary authorities to delivery agents in near-real time and for spending and impact reporting to follow the same path in return.
There are several beneficial outcomes of implementing a system like this. First, operational efficiency savings can free up resources for more beneficial uses. Second, improved transparency on how money is used reduces waste and improves allocative efficiency. Third, better, more timely information on the impact of spending should improve policy formulation and execution.
The fourth benefit forms the core of a new report by OMFIF and EY. Improving transparency and efficiency does not just increase the quantity of funding available or improve the quality of public expenditure on existing projects; it opens up new, previously inaccessible avenues of finance and expenditure.
Sustainable finance is increasingly predicated on delivering transparency to the end investor. Whether funding comes directly from an investor with a green or social mandate, or via a development bank (ultimately funded by similar investors), transparency is key. Year on year, more and more money flows into funds with a mandate to pursue exclusively ethical opportunities.
The limiting factor for many projects is the ability of the borrower to provide the high standard of transparency these investors require. Similarly, there is a class of project that is simply too administratively burdensome to pursue without the support of the latest and most efficient information management systems.
The technology to support this kind of transparent and impact-based finance management has only become available and cost-effective in the last 10 years, so it is not surprising that its implementation remains patchy. But governments have a fiduciary obligation to spend taxpayers’ money in the most efficient and effective fashion possible, and they have a duty to leave no stone unturned in their efforts to do so.
Delivering this requires two things. The first is an overhaul of the operational systems of PFM. This ensures that policy-makers have the requisite information to make spending decisions. Second, we must re-examine how effective spending is defined and ensure there is a robust, comprehensive framework against which we can assess the impact of public expenditure. The first point is the subject of this year’s report. The latter point will form the basis of the next phase of our research in collaboration with EY.