Public finance and development: top things to read in January

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Welcome to 2021! While it has been great to see the back of 2020, the first few months already feel like they are set to be the same story on repeat. The United Kingdom and many other European countries are back into lockdown as Covid-19 cases surge on the back of a new, more infectious variant. A second new variant was also detected in South Africa. The roll-out of coronavirus vaccines gives hope of a return to normal, but there are major concerns about the global equity of the distribution of the vaccines and their availability in many low and middle-income countries (LMICs). Vaccine equity will be the defining challenge of 2021.

It’s difficult to focus on anything but the Covid-19 crisis, but this month we bring you recent research on accounting and auditing – the importance of which was highlighted in our December round-up. We also explore debates around the centralisation of financial management in the health sector and the latest work on digitalisation in public financial management (PFM).

Accounting and accountability

Improvements in accounting practices are frequently recommended as one way to reduce corruption. But simple correlations between improved accounting practices and lower corruption cannot tell us about causation. Does accounting reform lower corruption, or are the least corrupt governments the most likely to introduce accounting reform?

An important new study looks at the adoption of accrual accounting in Indonesian local governments. It finds that accounting reform is associated with lower corruption, but once the reasons why local governments might introduce accounting reform are controlled for, it finds no effect. It claims to be the first paper to show the causal effect of accounting reforms and more generally, it highlights the potential for exploiting variation in PFM reforms across sub-national units to help us understand their impact.

A report (and blog) from the International Budget Partnership and the International Organization of Supreme Audit Institutions Development Initiative assesses the strength of national audit and oversight systems in 117 countries using Open Budget Survey data.

It finds generally weak performance overall with an average score of 37 out of 100. Oversight systems in the Arab (average score of 14) and Francophone African regions (average score of 15) were particularly weak. Higher-income countries also tended to have higher scores. There was also wide variation within different components of audit systems. The institutional framework scored highest, with an average of 76 out of 100, but this effectively measures de jure independence of auditors which may be undermined in practice. The weakest components were opportunities for public engagement in audits (16 out of 100) and executive responses to audit findings (13 out of 100).

Together, this suggests that governments are under little pressure to respond to and implement audit recommendations. To remedy this, the report advises governments to:

  1. strengthen the independence of audit institutions
  2. enhance public engagement in the audit and oversight processes
  3. improve the review and follow-up of audit reports by the executive so that audit recommendations lead to reforms to improve the quality of public spending.

Little in this agenda is new, so the challenge for reformers will be to implement these changes, especially at a time of shrinking democratic space.

On the theme of public participation, a new study looks at the implementation of participatory budgeting in sub-national Kenyan governments. It emphasises that participatory budgeting is a learning process, with citizen understanding of the process, and how to effectively engage with it, growing over time. This is consistent with evidence from Brazil where the effects of participatory budgeting became stronger the longer it was implemented. Institutional change is a complex and long-term process, raising questions around the correct time horizon for evaluating the impacts of such reforms.

Brian Levy praises a recent World Bank report on corruption for eschewing quick fixes and technocratic best practices, and instead pushing for a deliberative, coalition-building and norm-strengthening approach. The unstated unifying thread he observes across the case studies in 13 areas – varying from combating corruption in procurement to collaboration with tax administrations – is that reform opportunities emerge through creative interactions between sector initiatives, stakeholder engagement and “govtech”.

Public financial management in the health sector

Two new pieces of research look at the contrasting arguments for centralising the management of resources in the health sector.

Financial control in South Africa

First, we look at the experience of the centralisation of financial control in South Africa between a provincial Department of Health and district health offices. It is often argued that decentralising financial control to managers responsible for service delivery should improve service delivery. South Africa’s PFM system is designed to let managers focus on the outputs of public spending. But this study finds that in practice, a history of poor audit outcomes and the need to cut expenditure during a period of austerity led provincial finance managers to centralise financial control. Clinical managers felt that this reform – together with an authoritarian management style focused on ensuring financial compliance – negatively affected planning and decision-making. This impairs organisational functioning.

This study raises important questions for many countries grappling with how to balance constrained resources with the need to expand and improve health services. It suggests there may be tensions between different ways of trying to improve the efficiency of public spending. Reforms to decentralise funds to the lowest levels of service delivery may conflict with attempts to ensure accountability for the use of these funds through audits.

Procurement of medical supplies

Second, centralising the procurement of medical supplies could help low and middle-income countries (LMICs) to make substantial savings. The Center for Global Development estimate that centralising public sector procurement at the national level, switching to unbranded generics and benchmarking prices to reduce cost variability of generic health products could save between $10 to $26 billion. This is equivalent to 16-41% of the $63 billion spent in total by government, donors and the private sectors across 50 LMICs. Around 60-70% of savings are estimated to come from switching to unbranded generics.

The authors caution that these estimates are illustrative given how much of the data is outdated or incomplete. But even if only roughly right, the magnitude of these estimates means that countries – and the donors supporting them – should invest in improving their administrative data and procurement systems. This is especially true given the tight fiscal situation in many countries due to Covid-19. Greater efficiency in spending, rather than increases in resources, will be needed for improved health outcomes.

The cost of vaccine logistics in Tanzania

Many health ministries will be examining the costs of rolling out vaccines. A study in Tanzania found that shifting responsibility for the storage and distribution of vaccines from the Medical Store Department (a semi-autonomous public agency) to the Expanded Program on Immunization (a programme under the Ministry of Health) cut programme costs by over 70%. Given that different government agencies in the same country carrying out the same function can have wildly differing performance, health managers should carefully consider which agency or department to assign major new programmes to. They should also not assume that autonomous agencies will be more efficient than government departments; this should be demonstrated with evidence.

Health spending

The World Health Organization (WHO) released its 2020 annual report on health spending data from 2000 to 2018 for 190 countries in December. The report analyses long-standing trends of growing global health expenditures and stubbornly high out-of-pocket expenditures in LICs and LMICs. It presents new estimates for expenditure on primary health care for 106 countries, and expenditure by disease category for 48 countries.

It also looks ahead to the short- and medium-term impacts of Covid-19 on health spending. While the crisis sets out the risks of lower public spending resulting from reduced revenues and increased debt services in many countries, it could also provide the opportunity for a reset of policies where weaknesses have been revealed. If you don’t have time to read the full 100-page report, there is a brilliant summary of the key messages on Twitter by Agnes Soucat, WHO Director of Health Systems, Governance, Financing.

Tweet

This civil society response from Save the Children also highlights many of the same accountability issues noted above. In particular, the need for transparency on budget information and the need to engage civil society and communities in monitoring how budgets are used.

PFM and digitalisation

Almost everyone in the public sector is thinking about how to reap the digital dividends we have seen in the private sector. And with its widespread use of financial management information systems and ancillary systems to manage public expenditure, PFM is already relatively digitalised compared to many areas of government. As a result, there is no shortage of enthusiasm on how new technologies, like blockchain and machine learning, can be applied to PFM issues such as controlling corruption, as we covered in our November round-up.

There is a profusion of conceptual frameworks on how PFM can be digitalised. Last month, Moritz Piatti and Ali Hashim proposed a stacked layer model approach. This adds to proposals for a modular approach, a platform approach (PDF), and a unified system of microservices. For governments hoping to improve PFM through digitalisation, these frameworks are useful devices for understanding the links between different PFM functions, technological innovations, and ‘analog components’ like the legal framework. This will allow governments to compare how their own PFM system works to other models from a digitalisation perspective.

But a lot of public spending takes place at the local level where digital capabilities are scarcer. A recent OECD paper looks at the digitalisation challenges and opportunities for subnational governments. Meanwhile, the WHO has just published a digital investment implementation guide for integrating digital interventions into health programmes. Over the next few years, it will be interesting to observe whether and how these digitalisation initiatives come together within a country’s wider digital strategy.

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