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1、Applications in capital markets and beyondBlockchain for public finance omfif.orgBLOCKCHAIN FOR PUBLIC FINANCE 23 omfif.org3Contents4 Improving public policy and delivery More effective and efficient policy-making can be realised by a public finance management system that places transparency and the

2、 seamless sharing of data at its heart.6 Existing challenges Building a dedicated public finance management system that overlays internal ones will help aid data capture and sharing,delivering for the public good.10Economic advantages of improvements A modern PFM system would not only save on overhe

3、ad and administrative costs,but bring benefits through fraud and waste reduction,as well as better tracking what how impactful spending is.18 Applications in capital markets Green bond issuers and investors will benefit from a modern PFM system,tracking more efficiently how proceeds are spent and re

4、gulations are adhered to.22 Towards better public finance management More effective and efficient policy-making can be realised by a public finance management system that places transparency and the seamless sharing of data at its heart.2022 OMFIF Limited.All Rights Reserved.Strictly no photocopying

5、 is permitted.It is illegal to reproduce,store in a central retrieval system or transmit,electronically or otherwise,any of the content of this publication without the prior consent of the publisher.While every care is taken to provide accurate information,the publisher cannot accept liability for a

6、ny errors or omissions.No responsibility will be accepted for any loss occurred by any individual due to acting or not acting as a result of any content in this publication.On any specific matter reference should be made to an appropriate adviser.Company Number:7032533.ISSN:2398-4236Official Monetar

7、y and Financial Institutions Forum 6-9 Snow Hill,London,EC1A 2AY T:+44(0)20 700 27898enquiriesomfif.org omfif.orgABOUT OMFIFWith a presence in London,Washington and New York,OMFIF is an independent forum for central banking,economic policy and public investment a neutral platform for best practice i

8、n worldwide public-private sector exchanges.Where the public and private sectors meet to shape the digital future of financeA community designed to meet the policy,regulatory and investment challenges posed by ESG factorsAUTHORLewis McLellan Editor,Digital Monetary Institute EDITORIALWilliam Conings

9、by-BrownProduction ManagerFergus McKeown SubeditorClive HorwoodManaging Editor and DeputyChief Executive OfficerSimon HadleyHead of ProductionSarah MaloneySubeditor ABOUT EY EY|Building a better working worldEY exists to build a better working world,helping create long-term value for clients,people

10、and society and build atrust in the capital markets.Enabled by data and technology,diverse EY teams in over 150 countries provide trust through assurance and help clients grow,transform and operate.Working across assurance,consulting,law,strategy,tax and transactions,EY teams ask better questions to

11、 find new answers for the complex issues facing our world today.EY refers to the global organization,and may refer to one or more,of the member firms of Ernst&Young Global Limited,each of which is a separate legal entity.Ernst&Young Global Limited,a UK company limited by guarantee,does not provide s

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13、6101822 omfif.org5IntroductionMore effective and efficient policy-making can be realised by a public finance management system that places transparency and the seamless sharing of data at its heart.What should a well-designed public finance management system do?At its simplest,a PFM system should en

14、sure that funds reach their intended recipients and are used for their intended purpose.And it must give the central budgetary authority accurate and regular reports of how its resources are being used,providing it with the information necessary to formulate and design fiscal policy.The advent of di

15、gitalisation promised simplification and efficiency.However,since each entity involved in the finance management and budget delivery process uses their own systems,the consequence is often a huge duplication of effort financial and nonfinancial reporting conducted anew at every level,requiring manua

16、l reconciliation.This duplication wastes time and resources.A more automated process would not only cut down on this,but also reduce the incidence of costly mistakes.A key challenge in the construction of an efficient PFM system is to address these problems.Despite the duplication of effort,most pre

17、sent PFM systems offer only a very limited view of how resources are deployed.Many budgetary authorities have little to no idea how large portions of the funds they dole out are actually used.Quite apart from the risks of fraud or waste,this hampers the budgetary authoritys ability to formulate effe

18、ctive policy.Again,achieving this kind of transparency should be a priority in the design of new PFM systems.Delivering this transparency and efficiency is,in essence,about ensuring the seamless sharing of information.Although one tends to look at a government,be it local or national,as a monolithic

19、 central authority,it is more accurate to consider it as a network a complex web of overlapping systems and hierarchies through which policy and funding must be carefully steered from conception to delivery.Sharing information throughout this network is a challenging process that requires careful de

20、sign.There is another reason why these institutions must pursue the ability to scrutinise their budgets.Public bodies are,more and more stringently,required to adhere to high environmental,social and governance standards.This is likely to be one of the key vectors of scrutiny of public finance over

21、the next 10 years.Thanks to the sustainable finance movement,capital markets have become an important tool in the incentivisation of good behaviour in both the public and private sectors.The push for enhanced visibility on the use of funds began there with investors putting pressure on the recipient

22、s of their money to uphold these ESG standards.Meeting these demands for visibility requires a greater degree of transparency and oversight over how funds are spent.The required standards of public spending scrutiny are climbing rapidly and what was once an acceptable standard of oversight will soon

23、 be outdated and inadequate.Public finance management is no longer simply a tool to keep track of budgets,but is now a means of ensuring public institutions can maintain the standards of oversight,delivery of outcomes and impact that are increasingly expected of them that are increasingly expected o

24、f them.Designing PFM systemsTypically,public finance management solutions come in two forms.These are laid out in the International Monetary Funds How to design a financial management information system paper.First,is a single comprehensive enterprise resource planning system spanning core PFM inclu

25、ding budget execution,accounting,treasury and cash management as well as the more auxiliary functions development planning,budget formulation,procurement,payroll,debt management and asset management.Although such a system can certainly be efficient once implemented,creating one system for every part

26、icipant and stakeholder to use requires a high level of technical capacity.It is also important to note that finance management processes are run by people with skills,experience and preferences.Uprooting and replacing the status quo entirely requires a long and complex change management process acr

27、oss many stakeholders.It is more feasible to implement incremental changes,allowing people to continue to use the systems in which they have expertise,while removing the most onerous,time-consuming and least valuable elements.The second method keeps only the core PFM processes budget execution,treas

28、ury and cash management,and accounting on a single platform and manages the auxiliary PFM systems with separate IT systems.The risk here is that the more disparate IT systems required for the PFM process,the more potential there is for duplicated effort in the reporting process.Information could als

29、o become siloed,limiting how effectively it can be shared between the layers of management and delivery.The key to avoiding the wasted effort that characterises many PFM systems is to connect existing systems effectively,leading to easily shared information and enabling new,inter-institutional funct

30、ions.Cutting down on duplicated effort frees up resources to be more effectively employed elsewhere.This delivers the information-sharing benefits of a single comprehensive system with a far less complex transition process.ArchitectureWhile the precise architecture of such a system falls outside the

31、 scope of the report,it is worth considering the question of whether it should be based on blockchain or if the same or better results could be achieved with centralised infrastructure.Some experts argue that the requirements of a PFM system do not fall within the specific confines of a system that

32、could only be created via blockchain.Typically,blockchain systems are necessary in a specific context where there is a need for distributed consensus between distrusting parties and there is no trusted central party to oversee and maintain the network.Government agencies could be seen as trusted par

33、ties,so it could be argued that a system involving public institutions could simply rely on the funding authority managing the record of transactions centrally.However,it is worth acknowledging that most public sector programmes involve complex ecosystems with many counterparties,both from within an

34、d outside the public sector,each with specific agendas and reporting requirements,as well as distinct management information systems.Blockchain systems can provide this ecosystem with a single source of truth and a streamlined approach to sharing information,rather than relying on disparate systems.

35、Providing an efficient means of logging payments,accounting for uses and controlling these with smart contracts might most easily be done with blockchain,although it is not impossible that such a system could be developed with centralised architecture.PFM systems have existed in one form or another

36、for a long time but,in many cases,have failed to develop the sort of streamlined inter-institutional functionality now needed.There are various ways to achieve this,as highlighted above,but the question facing public institutions is how they can deliver this with the minimum of expenditure and disru

37、ption of services.This is likely to rule out a root-and-branch rebuilding of the system,because of the necessity for high investment and extensive retraining of staff.Instead,a solution like blockchain,which can be layered on top of and connect existing systems,allowing every party to benefit from t

38、he single source of truth,could deliver many of the same results with a far easier implementation process.Complex systems with large numbers of counterparties that need to share certain information with each other,overlaid across a variety of enterprise resource management systems,deploying instruct

39、ions implemented by smart contracts can work effectively with blockchain,even if there is no explicit need for trustless consensus-building.Public finance management systems have existed in one form or another for a long time but,in many cases,have failed to develop the sort of streamlined inter-ins

40、titutional functionality now needed.IMPROVING PUBLIC POLICY AND DELIVERYBLOCKCHAIN FOR PUBLIC FINANCE 4 omfif.org71.EXISTING CHALLENGESBuilding a dedicated public finance management system that overlays internal ones will help aid data capture and sharing,delivering for the public good.The process o

41、f managing public finances is riddled with problems of inefficiency and failures of transparency.The IMF paper breaks down the failures into four categories:functionality,data sharing and interoperability,inadequate institutional coverage,and connectivity and IT platform issues.The first two relate

42、to failures of design and are explored below,while the latter two relate to broader questions of infrastructure and governance that fall outside the scope of this report.The IMF highlights that some systems do not have sufficiently effective financial reporting capabilities undermining the tools abi

43、lity to support PFM processes and transparent dissemination of fiscal information.Other systems are unable to track cashflows effectively.This should be achieved by efficient sharing of information between government accounting systems and bank accounts and payments services.Reconciling any discrepa

44、ncies between accounts and bank statements is a costly process,often requiring manual intervention.Other systems struggle to capture all the relevant data required to effectively control payments,like commitment ceilings to limit expenditure.Finally,effective financial management requires accurate f

45、orecasts of cash positions.Some PFM systems fail to do this effectively because of a failure to electronically log payments and receipts or in capturing information on accounts payable.Information sharing capabilities and interoperabilityAs mentioned,many of the different functions involved in the P

46、FM process are performed by different people using different IT systems.An effective PFM system must have a facility to ensure that information entered in one platform can automatically be read by another without manual re-entry of the relevant information.BLOCKCHAIN FOR PUBLIC FINANCE 6 omfif.orgBL

47、OCKCHAIN FOR PUBLIC FINANCE 89An effective PFM system must have a facility to ensure that information entered in one platform can automatically be read by another without manual re-entry of the relevant information,which is resource intensive and introduces the possibility of human error.The PFM jou

48、rneyTo illustrate some of the problems with present systems,we will trace the path of budgetary funds through a notional PFM system.The public finance management process begins with a central budgetary authority.Consider the national treasury;it decides the budget for a given department for example

49、the UKs Department of Health and Social Care and attaches various policy aims for what the money should achieve,perhaps to reduce waiting times for urgent care.The department receives the money and policy aims,adding additional details based on how these goals can best be reached perhaps by a recrui

50、tment campaign to hire more nurses and more specific instructions about how the money can be used advertising positions,outreach and so on.A portion of the budget is spent on wages,administrative costs and other overheads at this level.The remaining budget and the more detailed instructions move dow

51、n another layer,perhaps to a local health authority where the money can be spent in various approved ways such as on salaries,procurements,investments and fees.In practice,there may well be other layers before the actual delivery agent,made up of,in this example,individual hospitals,departments with

52、in each institution,contractors and more.Hospitals and local administrators log that they have received the funding and deliver financial reports of their accounting processes back up the chain.Reporting on the outputs and outcomes achieved is typically reported separately and is not linked to the s

53、pecific funding sources.That is how it should work in theory,but this abstracts much of the complexity of the real experiences of those working in these systems.At each layer,money must be tracked and reported on,entered into new enterprise resource management software and acknowledged to the upper

54、layers.The financial reporting process and the reconciliation of payments across multiple systems is,at present,often manual and resource intensive.Fulfilling the financial reporting obligations each layer owes the previous layer is a costly and time-consuming exercise that is necessary to fulfil le

55、gal obligations but otherwise contributes little to the effective operation of government.In addition to the resources required to keep this system operating,the existence of human error also has substantial costs,which are detailed belowLimitationsIt is also important to note that,while hospitals a

56、nd local administrators deliver financial reports,there is very little transparency on how the money is actually used.This means there is no link between funds spent and outputs or outcomes achieved,no transparency on prices across a system and that the aggregated data is not available at the budget

57、 decision-making level for policy formation.This is discussed in more detail in a section on the benefits of effective PFM systems below.How to improveThe key problem that needs to be solved is that every entity involved in the spending of government funds has their own internal systems,and financia

58、l reporting and auditing obligations.What is needed is a system that can overlay not replace the enterprise resource planning systems of each institution and automate the process of generating financial reporting data.Such a system,if properly designed,could also give upper layers the ability to app

59、end conditions to the budget funding they pass on,restricting and guiding its use.One might imagine some budget,digitally earmarked for wages,funnelled automatically to the control of the payroll team.Other funds might be allotted for use by a particular project,channelled to the team in charge of i

60、t and restricted such that they can only be spent on contractors on an approved list.In some cases,these conditions already exist but are only communicated via strategy and policy documents.These must then be manually disseminated among those responsible for spending the budget and delivering the pr

61、ojects.A system wherein these conditions were effectively attached to the budget payments would improve managers awareness of and ability to adhere to these conditions.Information also flows the other way.As delivery agents spend the funds,they enter in their own systems the outcomes that the spendi

62、ng achieves.A sophisticated resource management system should be able to integrate with these internal systems and feed this information up to higher managerial levels,giving them both granular and aggregated visibility in near real time of how the budget is spent and what it achieves.FIGURE 1.1:PFM

63、 SYSTEMS MUST BE ABLE TO TRACK PAYMENTS THROUGHOUT THE PROCESSTraceability scenarios across actors beyond the project implementation unitSource:World BankThe key problem that needs to be solved is that every entity involved in the spending of government funds has their own internal systems,and finan

64、cial reporting and auditing obligations.A sophisticated resource management system should be able to integrate with these internal systems and feed this information up to higher managerial levels.Payment scenarioWorld Bank PIU of MoF Intermediary 1Intermediary 2SupplierCitizenWorld Bank to PIUPIU to

65、 intermediaryPIU to supplierPIU to citizenIntermediary to intermediaryIntermediary to supplierIntermediary to citizenPIUs internal operating expensesSupplier provides goods or services to citizenWorld Bank to supplierKEYUnconventional contracts:subgrant agreements or agency agreementsConventional co

66、mmercial contracts Citizen directly receives paymentPIUs internal operating expensesDirect paymentsGoods or services11144223332 omfif.org112.ECONOMIC ADVANTAGES OF IMPROVEMENTSA modern PFM system would not only save on overhead and administrative costs,but bring benefits through fraud and waste redu

67、ction,as well as better tracking what how impactful spending is.A report,commissioned by EY and conducted by Prysm Group,specialists in the economics of emerging technologies,evaluated the potential savings that could be achieved from the implementation of an improved public finance management syste

68、m of the type described.The first category of savings they identified was improper payments,defined by the US Office of Management and Budget as a payment made by a federal agency that is made in an incorrect amount or to the wrong recipient.The OMBs dataset on payment accuracy reported improper pay

69、ments of$277bn in 2021,of which$255bn were overpayments.Around 40%of this was recovered.It is worth noting that 2021 appears to have been anomalously high,as a result of economic stimulus payments.Prysm Groups medium scenario,where a digital public finance management architecture prevents 50%of impr

70、oper payments caused by a failure to access data and 20%of improper payments where data was inaccessible or missing,suggests that some$695bn of losses would be prevented over a decade.Even if this figure would come down with a lower base year than 2021,the scale of the cost of improper payments and

71、the savings from preventing them are likely to be in the hundreds of billions of dollars.$277bn The OMBs dataset on payment accuracy reported improper payments of$277bn in 2021,of which$255bn were overpayments.BLOCKCHAIN FOR PUBLIC FINANCE 10 omfif.orgBLOCKCHAIN FOR PUBLIC FINANCE 1213Many of the be

72、nefits can be achieved without changing payments rails,simply by improving the PFM architecture.Governments would also be more effective at efficiently managing their cash and forecasting their future cash position.Knowing when payments will be made or received reduces the need for the institution t

73、o keep excess liquidity on hand,allowing it to be used elsewhere more productively.Outlay tracking and allocation efficiencyPerhaps most importantly,the outcome of government spending programmes would be easier to track and identify.Financial reporting and nonfinancial reporting typically occur in c

74、ompletely different systems.They are only rarely used together to design policy.The NHS National Health Service distributes a fixed budget and not much information flows back to the centre,so its difficult to get control of what is spent across the whole system.Tracking where the budget goes is an a

75、rea of great complexity,said Noel Gordon,chair and non-executive director of NHS Digital.Many resources are expended on people trying to track where money is spent.Questions of how to most efficiently procure high volume,low ticket price consumables are particularly difficult to assess.One of the co

76、nsequences of this is that there is little in the way of price transparency.The Carter review in 2015 highlighted unwarranted variations in procurement costs,noting for example that the average price for a hip prosthesis varied from 788-1,590 and that the NHS trusts purchasing the most were not doin

77、g so at the lowest price.For some consumables,prices are negotiated centrally.However,this means the health service faces the challenge of distributing the materials to hospitals all over the country.With budgets distributed around the country and delivery occurring at various levels of decentralisa

78、tion(nationally,regionally or institutionally),the pricing strategies suppliers are using for different institutions is not at all clear to the central budgeting authority,meaning that it cannot be confident that it is getting good value for money.On logistical matters,there is even more variation a

79、nd even less clarity on its causes.The Carter review revealed that cost of running facilities varied between 105-970 per square metre,with little clarity on reasons for the variation.Without improved transparency on how resources are used,it is difficult to smooth out variations like these.The data

80、are generally available at the level of budget delivery,but the architecture for feeding it back up to central budgetary authorities to inform policy decisions is lacking.As Gordon put it,Its clear to policy-makers that there are savings to be made,but its difficult to know how to get at them.Reduce

81、d overheadsThe administrative burden of the financial reporting that could be alleviated by an efficient public finance management system is difficult to calculate.Prysm Group identified$4.8bn in annual salary expenditure in 2021 in US government agencies that could be targeted across three relevant

82、 job categories:accounting&budget;financial analyst;grant management.They then used a 2020 survey that suggested federal employees spend roughly 13%of their full-time hours on tasks they consider low value and that could potentially be reduced via automation.However,this proportion could be consider

83、ably more among employees in accounting and financial management roles for example,the National Science Foundation estimates that grant managers spend 40%of their time on compliance related tasks that could be reduced via automation.Making assumptions about the effectiveness of a solution in reducin

84、g these low-value tasks,Prysm Group estimated the administrative savings would be between$1.6bn-$4.8bn over 10 years.This does not include any benefits that might accrue from freeing up peoples time to complete more valuable work.It is important to note that the less effectively automated a process

85、is,the more likely it is for mistakes to be introduced.As well as causing improper payments,checking for,identifying and rectifying these mistakes is a major requirement of time and resources in this area.It is also not obvious that financial reporting,since it is mandated by law,would necessarily b

86、e considered low value activity by survey respondents.Indirect benefits of blockchain for PFMOutlay tracking:Fraud and waste preventionWith the outlay tracking system mentioned above,governments and other public institutions would have greater visibility of how their budgets are deployed.Waste shoul

87、d become more obvious and easier to avoid.Corruption should become easier to identity and prevent.The enhanced transparency and traceability of payments should make it much easier to identify the recipient of funds.This should make embezzlement of funds more apparent and easier to prevent.There has

88、been a substantial rise in fraud globally,causing costs to businesses.Regulators want to better protect consumers and businesses from more advanced forms of fraud,including ransomware and cybersecurity attacks intercepting payments or stealing from accounts.The pandemic caused a noticeable change on

89、 the type of scams that transpired in 2020.Unsolicited calls,robocalls and phishing emails saw dramatic increases during the period in question due to lockdown.According to the Federal Trade Commission,overall identity fraud incidents increased around 45%in 2020,incurring financial losses for many.B

90、usinesses face increasing losses from business e-mail compromise and invoice fraud(which costs businesses 92.7m per year,according to a UK Finance survey).Invoice fraud,where invoice letters or emails are intercepted for the purpose of rerouting a payment by changing an account number,has become mor

91、e common.The advent of a blockchain public finance management network would reduce the opportunity for invoice fraud,since recipients payment details could be stored within the network.Paying an invoice would simply involve the click of a button to initiate a payment to the recipient,rather than sen

92、ding payment details on paper or digitally,which a payer would have to enter without being able to verify the recipient.The possibility of errors(either accidental or as the result of malicious interceptions)would be mitigated by this kind of system.If a central bank provides a digital currency,it c

93、ould work with a new public financial management system.With a master wallet for the government and various sub-wallets for different departments,perhaps giving permissioned visibility to certain parties,the governments financial position could be made clear.However,while a digital currency would me

94、sh well with this kind of system,it is certainly not a necessity.Waste should become more obvious and easier to avoid.Corruption should become easier to identity and prevent.FIGURE 2.1:MONETARY LOSS PREVENTION FROM EFFECTIVE PFM SYSTEMSReturns from PFM improvements grow year on year,$mFIGURE 2.2:ADM

95、INISTRATIVE SAVINGS FROM EFFECTIVE PFMSubstantial opportunities to cut overheads,$mSource:Prysm GroupSource:Prysm Group-20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,0002022202320242025202620272028202920302031LowMediumHighHigh+0100200300400500600202220232024202520262027202820292030

96、2031LowHighBLOCKCHAIN FOR PUBLIC FINANCE 14Utility of public fundsPrysm Group also goes into some detail on the analysis of how the money saved via the introduction of a digital PFM solution might be better spent.The reallocation of money lost through inadequate PFM system would benefit gross domest

97、ic product growth and the broader economy.They estimate that the intended recipients of improper payments have a higher marginal propensity to consume and that if the payments were directed appropriately,US economic output will climb by$260bn over the course of 10 years.As well as boosting raw outpu

98、t figures,properly directed government spending should cause an increase in general welfare.Assessing the benefits of government spending across all departments is immensely complex.Prysm Group borrows a unified framework from 2020 research by Hendren et al,which employs the marginal value of public

99、 funds metric to capture the utility benefit of public spending to the recipient.With better outlay tracking,it is reasonable to expect that money saved by the introduction of a PFM system could be reallocated to programmes with a higher MVPF.Prysm Groups assumptions yield a marginal increase in soc

100、ial welfare of$165bn over the next 10 years,solely by redirecting improper payments.But this might just be scratching the surface of the benefits achievable through this kind of analysis.If we accept the assumption that a more effective PFM system improves the ability to assess the impact of governm

101、ent spending,why would this technique only be used on the funds saved by the prevention of improper payments?It could also be used to redirect funds from underperforming programs to programs with a higher impact in terms of outcomes.Hospitals and administrators must gather data on how effective the

102、policy was.For example,did the additional money spent on a recruitment campaign lead to an increase in staff and reduced wait times?Without a channel to feed this information back up to central budgetary authorities,the information cannot be used to inform policy decisions.At present,governments do

103、receive data on how their funds are spent,but,typically,this is delivered annually,biannually or,at best,quarterly.Much of the valuable data is stored in siloes belonging to a particular institution or department that is not smoothly communicated to collaborators.With an effective means of digitally

104、 tracking outlay of funds and programme outcomes,public sector institutions will have a better idea of the effect of their spending.There are regulatory directives coming into play in some jurisdictions that will make this additional transparency a necessity.This is discussed in more detail below.Wi

105、th this improvement of the oversight of the performance of government spending programmes,public institutions will be better informed about how their funds are used and what programmes achieve their intended purpose.The richer data offered by this improvement in oversight means that governments can

106、begin a more effective process of evaluating their spending.The Hendren MVPF framework offers one possible framework for the evaluation of public spending,but the discipline of welfare economics offers other tools for this assessment.Governments might also consider analysis of the efficacy of their

107、spending based on the cost benefit ratio or the net social benefits criterion.Hendren et al assess the relative merits of these frameworks as tools for the evaluation of public spending,but the decision on how to quantify the impact of government spending is a political one and falls outside the sco

108、pe of this report.However,all forms of welfare economics analysis are easier with the richer sources of data generated by an effective PFM system.Imagine you could rewrite the rules of public finances.Imagine not having to cut social services nor raise taxes to close that damaging hole in a budget.I

109、magine building more schools and training more doctors without having to borrow money,raise taxes or cut other budgets.Imagine being the generation of public service leaders that creates high quality,well-funded government services without leaving tomorrows taxpayers to pick up the tab.Or imagine yo

110、u could rewrite the rules of public sector lending.Imagine if organisations that spend donor or investor money on public projects could accurately,and in near real time,track how that money was spent and generate data to demonstrate the impact it made.Imagine how much more confident donors or invest

111、ors would be that their money was being spent effectively and efficiently and the impact this confidence could have on our collective capacity to do good around the world.Is this too good to be true?Not anymore.Managing within long-held constraintsEffective public financial management is always a to

112、p priority for governments.But in recent years as demographic change and crises,including the Covid-19 pandemic,have driven public spending and investment,while low growth has emerged as a feature of the modern global economy renewed fiscal pressures have increased the urgency for advances in the wa

113、y public finances are managed.For decades,governments and public sector agencies have been spending taxpayers,donors and investors money as effectively as they could.But the system hasnt been perfect.It costs money to move funds through the government value chain,as they make their way from the cent

114、ral treasury or finance ministry through programme departments to delivery agencies and their partners,and to the ultimate payment or service recipient.Its the same for a development agency,as money is allocated to a programme and then makes its way through the chain of funding and delivery agencies

115、 toward the ultimate beneficiary.A$5bn investment in a key public programme may have shrunk to$4bn by the time it gets spent on actually delivering it.A great deal of administrative time,effort and cost are involved in managing the allocation and disbursement of public funds.Considerable staff time

116、is consumed with relatively low value,manual tasks associated with,for example:managing controls and compliance;reconciling payments;processing cash transfers;and collecting,auditing and reporting financial and nonfinancial results.Until now,public sector leaders have had no way to understand in any

117、thing like real time what spending this money actually achieves,hampering their ability to make effective decisions and allocate more of the funds to what actually works.The complexity of public service ecosystems,data siloes and a lack of integration between the various actors financial and nonfina

118、ncial reporting systems has made it almost impossible to gain a consolidated view of the flow of funds and the outputs and outcomes associated with them.Reporting and auditing often long after the fact limits the ability of leaders to make timely and informed decisions about the most effective alloc

119、ation of funds,and to prevent waste,fraud and abuse within the system.None of this is the fault of public servants.They are taking care of public money within the constraints of the systems and tools currently at their disposal.Throwing off the shacklesBut all this is about to change.New digital tec

120、hnology gives them the opportunity to free themselves from these shackles to vastly reduce the cost of spending public money,to improve control over that spend and to see,in close to real time,the outcomes it achieves.This gives governments the opportunity to use REWRITING THE RULES ON MANAGING PUBL

121、IC MONEYDigital technology can improve the management of public finances and funds,and unlock significant value for governments,citizens and communities,writes Mark MacDonald,global public finance management leader at EY.PARTNERS COMMENT omfif.org15For decades,governments and public sector agencies

122、have been spending taxpayers,donors and investors money as effectively as they could.But the system hasnt been perfect.Knowing when payments will be made or received reduces the need for the institution to keep excess liquidity on hand,allowing it to be used elsewhere more productively.money more ef

123、fectively in ways that improve public services,boost economies,benefit communities and change lives.It provides accountable outcomes for citizens and investors.Public sector leaders who have the vision to adopt the new technology now can gain an unprecedented level of visibility,predictability and c

124、ontrol over the use of public money,without disrupting or replacing existing systems and controls.They can realise a long-held ambition of more efficient and effective management of public money.Size of the prizeThe Prysm Group,specialists in the economics of emerging technologies,has carried out re

125、search for EY.Prysm studied the US federal government to explore the potential impact of using a digital technology-based approach to better manage public money.For example,it looked at the well-documented levels of monetary losses due to improper payments,such as payments made to ineligible recipie

126、nts or incorrect amounts paid to eligible recipients.Making conservative assumptions,Prysms research found that using a system that would enable better data sharing,tracking and reporting throughout the value chain,US federal agencies could prevent losses of$695bn due to improper payments over a 10-

127、year period.It also found that using the same technology to reallocate these funds to eligible and intended recipients could lead to an uplift in US gross domestic product of around$260bn over 10 years,given that these recipients would have a higher marginal propensity to consume.Redirecting these f

128、unds from programmes with relatively low social value to those with even a medium social value could boost social welfare by$165bn over the decade.Prysm estimated that by automating data exchange and reducing the time federal employees spend on the routine manual tasks involved in disbursing,trackin

129、g,reporting and auditing the flow of funds could bring a further administrative saving of over$1.5bn over the 10-year period.These numbers are significant.But they are just the tip of the iceberg.Imagine using this technology across the whole public sector budget from national through to local gover

130、nment not just omfif.orgBLOCKCHAIN FOR PUBLIC FINANCE 1617to prevent improper payments but to see,in real time,where properly allocated money is having a tangible impact and where it is not.Imagine the savings that could be made and reinvested into services and programmes that make a real difference

131、 to peoples lives.And imagine being able to prove it to your stakeholders.Can blockchain provide part of the answer?Public expenditures and services are managed through a complex ecosystem of government departments,agencies and delivery partners.Up to now,no one organisation has centralised authorit

132、y over,or visibility of,how every dollar is spent.Thats why EY has developed an approach called blockchain for public finance.This approach integrates financial and nonfinancial reporting in government,reconciles and consolidates information within and across government and its external partners,and

133、 produces near real time spend and performance reporting and advanced analytics.This enables a government organisation to see exactly where money is being spent and what is being achieved across the entire ecosystem,down to the level of individual assets purchased or recipients paid.This approach ca

134、n be used by central budget authorities,government ministries or departments,delivery agents and international development donor agencies and their partners.It can streamline multi-government entity funding agreements and provide visibility and transparency across the entire ecosystem.And it synchro

135、nises with each participants existing enterprise resource planning and financial management systems it does not replace them.It even enables delivery partners and recipients,who may not have digitalised management systems,to input data directly into the system via a simple mobile interface.Blockchai

136、n for public finance can reduce the administrative effort associated with financial reconciliations,tracking and reporting.Business terms or eligibility and compliance rules can be embedded into the system to automate transaction controls via smart contracts.Automated tracking and reporting can sign

137、ificantly reduce the cost for partners of interacting with government.Access to view or amend data in the system can be strictly controlled through user permissions.And the fact that the approach uses distributed ledger technology means that it provides an immutable,shared and verifiable record of e

138、very transaction,thus reducing the scope for fraud and abuse,and improving trust between partners in the ecosystem.EY has demonstrated the potential for blockchain for public finance to improve efficiency and effectiveness.For example,EY teams used the approach to help a global city in North America

139、 improve how it tracked and managed contract spend through its shared services model.EY teams worked with the city to reduce reconciliations and reporting from over 30 days to near real time,while significantly reducing manual inputs and errors.It streamlined the citys ability to track and demonstra

140、te asset utilisation,status and condition to drive increased business value,and tie contracted spend directly to assets.Multilateral organisations finance large capital development projects around the world through an intricate network of borrowing countries,implementing agencies,contractors and sup

141、pliers.As is typical in these large ecosystems,they lose visibility into the downstream distribution of funds and the outcomes they generate.EY teams have worked with multilateral organisations on a blockchain approach that was able to provide broad disbursement and traceability of funds across the

142、global ecosystem.The approach provided enhanced end-to-end transaction analysis capabilities to monitor flow of funds and associated metrics,and included a mobile application for remote connectivity and end-user reporting.A generational opportunityThis is a moment to be seized.There are so many dema

143、nds on government resources:building better health and social services;investing in skills and economies;and creating more secure,cohesive societies all while ensuring that people keep hold of enough of their own money to maintain and improve their living standards in a time of unpredictable and ris

144、ing costs.This moment demands vision and a boldness of purpose.Technology such as blockchain presents todays generation of public sector leaders with a priceless opportunity to make public money go further and deliver more than before.Now is the time to take it for the taxpayers who fund the service

145、s that governments provide,the donors and investors whose money agencies spend around the world,and the citizens who depend on public services and programmes.Lets turn these long-held dreams of better public finance management,and better government,into reality.Public sector leaders who have the vis

146、ion to adopt the new technology now can gain an unprecedented level of visibility,predictability and control over the use of public money.$695bn Potential savings from preventing improper payments by US federal agencies over a decade.omfif.org193.APPLICATIONS IN CAPITAL MARKETSGreen bond issuers and

147、 investors will benefit from a modern PFM system,tracking more efficiently how proceeds are spent and regulations are adhered to.In the past,equity investors stood out in the capital markets because they had a say in the governance of the companies to which they provided capital.Over the past 10 yea

148、rs or so,tools have emerged to allow creditors in the fixed income market to have a degree of oversight and the power to incentivise positive behaviour from debtors.Green bonds have raised almost$2tn,according to the Climate Bonds Initiative,some$509bn of which was raised in 2021 alone.More and more

149、 institutions,both public and private,are turning to the green bond market.Motivations vary.Some issue green bonds to obtain a cheaper cost of funds.Others to obtain access to a broader range of investors,since all investors will buy green bonds while some investors will not buy conventional bonds.B

150、ut perhaps the most important reason is that issuing a green bond has become an important symbol of commitment to a broader environmental,social and governance agenda.The concept is simple.The language around the use of proceeds for conventional bonds is that the funds are to be used for general bud

151、getary purposes.For green bonds,this is replaced by an in-depth framework detailing the types of projects eligible for funding.The bonds proceeds must be spent in accordance with this framework and investors are entitled to receive impact reports detailing how the money has been used and what has be

152、en achieved by the funded projects.There are different sets of principles and rules governing what should be eligible for green bond funding.The most significant of these is the European Unions green taxonomy,which aims to classify economic activities to determine their alignment with the blocs goal

153、 to achieve net zero carbon BLOCKCHAIN FOR PUBLIC FINANCE 18$2tn Green bonds have raised almost$2tn,according to the Climate Bonds Initiative,some$509bn of which was raised in 2021 alone.omfif.orgBLOCKCHAIN FOR PUBLIC FINANCE 2021A greenium is a feature of a healthy and effective green bond market.T

154、he larger the greenium,the more powerful the incentive for issuers to engage in environmentally friendly activities.It is worth noting that investors are not blind to distinctions of quality and rigor between green bonds.Those issuers with the most effective investments and the most transparent over

155、sight frameworks are preferred by ESG investors,particularly those with the resources to do their own ESG-specific research.A well-designed PFM system that can deliver enhanced transparency over the use of funds could conceivably boost the greenium an issuer is able to achieve in the marketplace.Rep

156、orting requirement challengingIssuing a green bond is not a simple process.Developing the framework and gathering the impact reporting data required by investors are challenges.The technical capacity to gather and deliver data requires substantial investment.For many in the green bond market,these c

157、osts eat up any funding advantage conferred by the greenium.This is particularly the case for set-up costs.Over time,the cost of continuing to deliver these reports is likely to go down but investing in developing the capacity initially remains a stumbling block for potential issuers.An effective PF

158、M system for sharing data between budgetary authorities and budget delivery agents is likely to lessen this burden,potentially lowering the barrier for entry.Indeed,if this greater level of transparency is available across an institutions budget,it might reveal areas of eligible expenditure that can

159、 be funded via green or sustainable bonds.A regulatory imperativeSpurred by the climate crisis and the advent of sustainable finance,a slew of regulations is in train requiring businesses and financial market participants to report more thoroughly on their activities.The nonfinancial reporting direc

160、tive(NFDR)is intended to improve the business transparency and accountability on social and environmental issues.Similarly,the International Sustainability Standards Board,with the backing of the International Financial Reporting Standards Foundation,is working on two sets of draft requirements:gene

161、ral sustainability-related and climate-related disclosures.These proposals are being developed in response to requests from G20 leaders and the International Organisation of Securities Commissions.Delivering these requires improvement in the availability of data and the disclosure of nonfinancial in

162、formation.This certainly requires enhanced finance management capacities in the private sector.Much of the public sector is out of the immediate scope of this regulation.However,credit institutions are not.Kommuninvest is a funding aggregator for Swedish local authorities.Since their individual fund

163、ing needs are too small to access wholesale capital markets in liquid size,they pool their needs via Kommuninvest,which issues on their behalf,onlending the proceeds to the local authorities.This is a common model in many countries,especially in Scandinavia.While the local authorities are public ins

164、titutions and therefore not in scope for NFDR regulation,Kommuninvest although entirely publicly owned is a credit institution and therefore is in scope.Bjorn Bergstrand,head of sustainability at Kommuninvest,said,We are all coming under increased scrutiny.We need greater insight into how our client

165、s deploy the money they borrow from us so that we can assess the degree to which it is in alignment with the EU taxonomy.Unavoidably,this requires a greater amount of data transferred by clients to us.This might increase the volume of green bonds issued since a much higher proportion of the clients

166、budgets will be subjected to scrutiny on taxonomy alignment.Theyll have to map their investment activities versus the taxonomy,disclosing their green asset ratio in their lending portfolio and then mirror that disclosure requirement to us,said Bergstrand.At present,13%of Kommuninvests borrowing is f

167、or green projects.emissions by 2050.Bonds adhering to the EUs green bond standard must finance only projects that follow the taxonomys criteria.As well as prescribing what investments are eligible,the green bond standard outlines the requirements for issuers to report on the impact of the proceeds t

168、o investors.Adherence to the standard is voluntary,but many investors see it as an assurance of quality and will not invest in assets that do not meet it.Even where funds raised by green bonds could have been raised in the conventional market,the commitment to transparency that issuing under a green

169、 bond framework implies is a powerful statement of intent for issuers.Achieving this transparency necessitates a far higher degree of oversight on the use of proceeds than is typical for conventional bonds.Bond issuers must know with a high degree of detail how the money is used.This requires a PFM

170、system of the sort described above,capable of giving budgetary authorities the tools to oversee how resources are used.Smart contracts restricting how funds are used would have a natural application in this asset class.An issuer can design their green bond framework governing the use of proceeds but

171、 is at the mercy of budget delivery agents to adhere to this.With smart contracts imposing spending restrictions and limits,this could be much more rigidly enforced.Given the complex nature of the green bond taxonomy,it will be a cumbersome task to verify alignment,unless there are efficient digital

172、 mechanisms in place to support this activity,said a sustainability official at a green bond issuer.GreeniumThere is a commercial incentive at play here.Young people care much more about the impact of the money they invest than previous generations.Accordingly,fund managers with strong mandates to i

173、nvest in ESG products are more likely to attract funds.According to a CNBC poll,one-third of millennials and 19%of Gen Z reported taking ESG factors into consideration in their investment decisions,while 16%of Gen X and only 2%of baby boomers said the same.Its not just young investors though.The pri

174、orities across capital markets are changing.A survey conducted by Funds Europe found that over half of respondents said that an ESG platform was a critical feature for asset managers success this decade,easily beating an alternatives platform,at 33%,an exchange traded funds platform,at 11%,and a cry

175、pto/digital assets platform,at 5%.Fulfilling these mandates requires investors to preferentially seek out assets where the impact of the proceeds will be reported.The growth of these ESG-themed funds has far outstripped the supply of green bonds,leading to a supply and demand imbalance,which general

176、ly causes green bonds to trade at higher prices than equivalent conventional bonds,meaning that issuers can raise money at lower interest rates.This saving for issuers is known as the greenium and it is an important part of the value proposition for issuers.Germanys green bond programme provides an

177、excellent demonstration of this.To ensure liquidity,Germany issues its green bonds twinned with conventional bonds with the same coupon and maturity.At any point,a holder of the green bond can swap it for the equivalent conventional bond at the Finanzagentur.The green Bunds typically trade with a yi

178、eld of around 3 basis points below that of their conventional twins.The dynamics underpinning the precise value of this greenium are complex and vary over time and between types of issuers.A note from economists at ING discussed this variance in detail.Even where funds raised by green bonds could ha

179、ve been raised in the conventional market,the commitment to transparency that issuing under a green bond framework implies is a powerful statement of intent for issuers.FIGURE 3.1:GREEN BOND MARKET GROWING RAPIDLYPublic sector dominating the marketplace,$bnSource:Climate Bonds Initiative010020030040

180、0500600700201420152016201720182019202020212022 H1ABSDevelopment BankFinancial CorporateGovernment-Backed EntityLocal GovernmentNon-Financial CorporateLoanSovereignTOWARDS BETTER PUBLIC FINANCE MANAGEMENTTransparency and oversight will be needed by any government that wants to tackle the climate cris

181、is,for which a well-designed public finance management system is key.The research from Prysm Group provides compelling evidence that investing in digital improvements to public finance management systems will not only be rapidly recouped but will generate impressive returns,both in increased gross d

182、omestic product and social outcomes.There are inefficiencies in the present system and benefits to eliminating them.A well-designed system would do a great deal to prevent erroneous payments and reduce administrative costs.Even beyond these substantial benefits,however,an emergent property of enhanc

183、ed oversight on the use of funds is that it can reveal opportunities for savings that are not obvious in the absence of transparency.Effective oversight will provide new insights for the formulation of policy and spending strategies.Beyond this though,it is rapidly becoming clear that the present le

184、vel of oversight of public sector budgets will not be acceptable for much longer.The climate crisis is intensifying and to even begin to think of hitting targets like carbon neutrality by 2050,governments must have a means of assessing what portions of their budget are in alignment with these goals.

185、The incentives built into the sustainable finance market are an important tool in encouraging borrowers to uphold high environmental,social and governance standards,but policy-makers are rapidly coming to the conclusion that carrots are not enough and that sticks will be required.Over the next few y

186、ears,public finances will come under sharper scrutiny than ever to ensure that those in charge of budgeting decisions are doing everything in their power to avert climate catastrophe.Both the carrot and the stick require the ability to see how funds are used to a far more granular level than most PF

187、M systems presently allow.It will be imperative for governments and public institutions to develop a means of providing this level of granularity in their assessments of their budgets alignment with ESG goals.It will soon become required of any country that wants its commitment to combatting climate

188、 change and driving broader social and governance objectives to be taken seriously.A blockchain-based system provides a way to improve the efficiency of public finance management and delivers the transparency required to meet increasingly stringent ESG reporting requirements without a costly develop

189、ment and implementation process.The climate crisis is intensifying and to even begin to think of hitting targets like carbon neutrality by 2050,governments must have a means of assessing what portions of their budget are in alignment with these goals.A blockchain-based system provides a way to improve the efficiency of public finance management and delivers the transparency required to meet increasingly stringent ESG reporting requirements.BLOCKCHAIN FOR PUBLIC FINANCE 22Conclusion omfif.org23OMFIF.ORGEY.COM