Peterson, Stephen. "Automating Public Financial Management in Developing Countries." KSG Faculty Research Working Paper Series RWP06-043, October 2006.

Abstract

The principal recommendation to developing countries for automating their financial systems is to adopt off-the-shelf integrated financial information systems (IFMISs). The recommendation to adopt an IFMIS goes beyond a strategy of automation. IFMISs are often viewed as the driver of financial reform in developing countries. Experience shows that these systems usually fail or under perform yet research to date has not adequately explained their poor performance. This paper presents two frameworks and a case study from Ethiopia which illustrates an approach to automating financial systems that has worked. The first framework distinguishes between business process innovation (reengineering) and process change. Process innovation is a comprehensive change of procedures and organization driven by information technology. Process change is an incremental strategy driven by procedural reform and supported by information technology. Process change is far less risky than process innovation and is a more appropriate approach because the financial systems in most developing countries are relatively sound and thus provide a basis for improvement. The conventional off–the–shelf IFMIS reform is principally process innovation which exceeds the capacity of most public bureaucracies in developing countries. The second framework concerns the three factors of risk to an automation project: scope, schedule and budget. The availability of concessionary aid to many developing countries means there is not a hard budget constraint to automation projects and there is little discipline with schedule and scope. The virtual absence of a financial and social cost–benefit analysis of these large and questionable investments is a serious failing in the use of development assistance and loans. The custom IFMIS developed to support the Ethiopian reform is presented as an example of a successful low risk strategy of automation in a difficult environment. The case illustrates the two frameworks as the reform focused on process change and the automation component was delivered on budget, ahead of schedule and beyond specification. The Ethiopian case demonstrates several lessons about automation in developing countries: the virtue of process change, the role of automation to support not drive financial reform, the virtue of ‘optimal obscurity’ of automation projects given that high level commitment can not be assumed, and the value of an incremental development strategy of frequent operational upgrades of information systems.