Digital Innovation in Public Financial Management (PFM): Opportunities and implications for low-income countries July, 2018 1 Contents Foreword 3 Executive Summary 7 1 The challenges of low-income countries in public financial management 22 2 Technologies with the potential to transform PFM 34 3 Making it happen: lessons learnt on capturing PFM opportunities 45 3.1 Geographic Information System (GIS) 48 3.2 E-procurement systems 61 3.3 Big data to detect tax fraud and evasion 74 3.4 Digitization of existing & potential G2P payments 90 3.5 Blockchain technologies 107 4 Concluding thoughts 122 Appendix 128 2 Foreword There has been a global push in recent years to help low-income countries improve the way they raise, manage and spend taxpayer money. In multilateral agreements such as the Paris Declaration (2005), the Accra Agenda for Action (2008) and the Busan Partnership for Effective Development Co-operation (2011), governments from around the world have reaffirmed their commitment to collaboratively strengthen the public resources management in developing countries. Such management of public resources – both revenue and expenditure – and its impact on an economy or society is known as ‘Public Financial Management’ (PFM).1 Well-functioning PFM systems are essential for governments to provide services and improve the lives of citizens effectively. Strong PFM institutions can also make development financing in low-income countries more impactful. Latest efforts to strengthen PFM systems in low-income countries come at a time where information and communications technology (ICT) are becoming more accessible. More and more people in low-income countries are using digital devices, which in turn opens up new opportunities for the local public sector to digitize its services offering. Greater storage capacity and computing power now enable tax authorities to collect growing amounts of taxpayer data, supporting their efforts to counter tax fraud and evasion. Geographical Information Systems (GIS), computerized databases designed to work with data referenced by spatial coordinates, have substantially increased the property tax collection in several developing countries. New digital payment systems have helped to lower administration costs and fraud, made welfare programs more targeted, and allowed beneficiaries to receive aid faster. Other emerging technologies, including blockchain, assist government efforts to minimize fraught and make services more effective by creating permanent, immutable identity records of citizens and businesses. While many of these digital technologies are not new, their application to PFM has received less focus compared to other areas of public sector concern. While some of these technologies, including electronic procurement systems and budget preparation software have often been analyzed as part of an integrated system of information technologies, there has been less focus on their individual impacts and implementation processes However, interest is clearly growing in this area. The International Monetary Fund (IMF) recently became one of the first to provide a systematic survey of the potential impacts of digitization on PFM.2 1 Matt Andrews, Marco Cangiano, Neil Cole, Paolo de Renzio, Philipp Krause, and Renaud Seligmann (July 2014). This is PFM, CID Working Paper No. 285. 2 Gupta S, Keen M, Shah A, Verdier G (2017). Digital Revolutions in Public Finance. International Monetary Fund, Washington DC. 3 Foreword This report seeks to contribute to the existing research. Based on an extensive literature review, and interviews with over 50 government officials, industry experts, and specialists in development aid and PFM-related technical assistance programs in low-income countries, this report provides: 1. A broad-based and comprehensive overview of potential technologies applicable to PFM in low-income countries; 2. A ‘deep-dive’ on technologies that have so far received less attention, particularly in the PFM area (such as blockchain and geospatial information systems); and 3. An analysis of the specific factors that make some technologies more suitable for use in some countries, and an overview of resulting policy priorities (drawing on lessons in other low-income countries). The goal of this report is to help finance ministries in low-income countries understand how various digital technologies could strengthen their public financial management. At the same time, this report is cognizant of a common pitfall of technology adoption: the risk that a government adopts solutions that may have worked elsewhere in the world but are less suitable for its own purpose. The result would be a loss in time and money.3 Against this backdrop, the approach of this research report is to first identify the most acute challenges of managing public revenues and expenses in low-income countries, namely aligning budgets with policy priorities, improving tax compliance, allocating public spending more efficiently and deliver services more effectively, reducing corruption in public procurement, and ensuring institutional accountability. After identifying potential technological solutions in a series of case studies, this report uses a ‘readiness framework’ to assess country-specific requirements for different levels of technology adoption. We are grateful for the advice and input of many experts in academia, government, not-for-profit organisations, and industry, who have provided invaluable guidance, suggestions, and advice. Our particular thanks goes to Marco Cangiano and Richard Allen. 3 A recent World Bank report remarked, “many investments in e-government fail to have any impact other than wasting scarce fiscal resources”. World Bank (2016), World Develop- ment Report 2016: Digital Dividends. 4 Key Terminology Allocative efficiency Geographical Information Systems Scenario where the distribution of goods and services A geographic information system (GIS) is a computer matches consumer preferences. system for capturing, storing, checking, and displaying data related to positions on the earth’s surface. By Big data relating seemingly unrelated data, GIS can help Big data comprises extremely large, often individuals and organizations better understand spatial heterogenous and unrelated streams of information patterns and relationships. from multiple sources. Integrated Financial Management Biometrics Information Systems The measurement and statistical analysis of person’s IFMIS refers to the computerization of PFM processes, unique physical and behavioral characteristics for from budget preparation and execution to accounting identification and access control. and reporting, with the help of an integrated system for financial management of public entities. Blockchain Blockchain is a digital ledger – a continuously growing Interoperability list of records (called blocks) linked and secured using The ability of data in different databases to be easily cryptography. Blockchains embed contracts and trans- and securely exchanged. actions in digital code that is resistant to modification, so information can be shared safely in a peer-to-peer Open source software network of computers. Software with source code that anyone can inspect, modify, and enhance. Cadastre registry Official register of the ownership and value of property Participatory budgeting in a given area, used as a basis for taxation. A democratic process in which community members directly decide how a public budget is spent. Digitization Process of converting analogue streams of information Smart contracts into digital format. Smart contracts are self-executing contracts with the Geocoding terms of the agreement between buyer and seller Geocoding is the process of converting an address or being directly written into lines of code. place name into geographic coordinates. 5 Technology opportunities in Public Financial Management THE OPPORTUNITIES Allocating public Aligning budgets with spending more Improving tax policy priorities efficiently and deliver compliance services more effectively Reducing corruption in Enhancing institutional public procurement accountability THE REQUIREMENTS Pre-readiness Basic readiness Advanced readiness Advanced and widespread Traditional approach with Some basic use of adoption of relevant no or only limited use technologies in PFM, but technology across of technology limited in scope relevant PFM functions THE LESSONS Know your starting Be clear on the Adopt a phased 1 point 2 objectives 3 rollout Focus on shifting Communicate, Champion digitization mindsets (and not communicate, 4 in the public sector 5 6 just on skills) communicate! 6 Executive Summary 7 Executive Summary Findings at a glance • The issue: Governments in low-income countries typically have five key concerns when managing public finances. They are: 1) aligning budgets with policy priorities; 2) improving tax compliance; 3) allocating public spending more efficiently and deliver services more effectively; 4) reducing corruption in public procurement; and 5) Ensuring institutional accountability. • The potential solution: This report identifies60 technology applications with the potential to transform PFM systems and help authorities in low-income countries overcome key challenges of managing expenses and revenues. These technological applications can be broadly categorized into five groups: 1) digitization of payments; 2) integrated IT hardware and software; 3) citizen and business engagement solutions; 4) identification and recording technologies; and 5) data analytical