In the first paper in this series – entitled Digital public financial management: An emerging paradigm – we make the case that a paradigm shift is needed in how governments and development partners approach digital PFM. We outline an ‘emerging paradigm’ based on the latest thinking in PFM, digital change in government and digital technology.

Building on this emerging paradigm, this paper discusses how digital PFM as a discipline can help make public finance digital and, more broadly, usher in a new era of public finance reform in government. In this way, digital PFM brings together different specialisms from PFM, digital government and service delivery into a more holistic focus.

This paper outlines six main challenges to the emerging digital PFM paradigm:

1. A bias towards commercial off-the-shelf (COTS) solutions, because digitalisation is equated to introducing a financial management information system (FMIS), and the market for FMIS is dominated by a small number of vendors. The focus on technology solutions also makes it harder to take a problem-driven approach.
2. An incomplete understanding of user needs and incentives, resulting from a lack of meaningful user research in most digital PFM initiatives. The needs of certain users are deprioritised, which in turn impedes digital transformation. Because most users are internal, there is not the same pressure to improve usability that exists for predominantly citizen-facing services.
3. An inherent aversion to iterative, incremental ways of working given the ritualised nature of PFM, institutionalised risk aversion and inflexible, hierarchical cultures.
4. Critical skills gaps in finance ministries, especially in digital specialisms such as product management and design. Digital specialists tend to be treated as inferior to economists and policy advisors, and truly multidisciplinary digital teams in finance ministries are vanishingly rare.
5. Outdated funding models for digital initiatives in both government and development partners reinforce the prevailing bias towards COTS, and ‘big-bang’ implementation. Finance ministries are in a unique position to help reform these models.
6. Legacy technology and sunk cost fallacy will pose a particular problem in the PFM field, given the extensive investment in FMIS and other PFM systems over the past 30 years.

The paper concludes that, although these six challenges are significant, they are not insurmountable. To be overcome, finance ministries will need to adapt their ways of working, and funders will need to adjust their expectations and funding models. Significant supply-side investment will be needed at the national and global levels to create a more vibrant, competitive ecosystem of technology firms and technical assistance partners working on digitalisation and PFM reform, to bring public finance into the digital era.

The paper concludes by outlining a series of topics for future exploration, including the potential for digital public goods (DPGs) and digital public infrastructure to help governments move to an open architecture for PFM; painting a fuller picture of an alternative to an FMIS; and the potential presented by digital to more radically accelerate change in PFM processes.