Has New Public Financial Management had its Day?

This article is published in association with IMF.

Julie Cooper, Tim Youngberry

New Public Financial Management (NPFM) emerged in the 1980s as a transformative approach to public sector governance, aimed at enhancing efficiency, accountability, and responsiveness. Rooted in principles drawn from private sector management, NPFM promotes results-oriented practices such as performance-based budgeting, measurable outcomes, and decentralized management. Its objectives align closely with those of traditional PFM: ensuring fiscal discipline, strategically allocating resources, and delivering services efficiently and effectively.

However, while NPFM’s objectives are commendable and have often led to positive outcomes, its achievements are debatable, especially in developing countries. This is because the implementation process can be burdensome, particularly in environments where administrative capacity is still developing. Even in countries that are considered relatively well-developed, the sophistication of some of the concepts in NPFM can be lost on officials in line ministries who need to work within NPFM frameworks.  So, what might be sensible to technically proficient staff in the finance ministry can be difficult to understand for officials who are not ‘financially literate’ in line ministries. 

What is good about NPFM?

NPFM adopts a more holistic approach to public finance reform, harnessing the capability and capacities across a broad range of areas including governance, performance management and workforce assessment and capability.  NPFM has delivered notable successes in various countries:

• New Zealand: New Zealand achieved remarkable fiscal discipline and efficiency, with its government debt-to-GDP ratio falling from 52% in the 1980s to 32% by the late 1990s. Decentralized accountability and performance-based evaluations have supported sustainable results.
• Sweden: Introduced multi-year budgeting and spending caps during the 1990s, reducing public debt from over 70% to around 40% of GDP by 2010. High-quality services in healthcare and education showcase the effectiveness of balancing fiscal discipline with service delivery.
• Australia: Devolution of authority and accrual accounting in the 1980s and 1990s helped reduce public debt to near zero by the mid-2000s, while shifting to outcome-based performance assessment assisted in fostering innovation in service delivery.

But NPFM can be challenging …

Despite these successes, NPFM faces significant challenges, in particular:

1. Administrative Burden: Rigid procedures and concepts that are unfamiliar to public officials can overwhelm public sector institutions, particularly in countries with limited capacity. For example, performance-based budgeting demands robust data systems and trained personnel, which are oftentimes not readily available
2. Short-Term Focus: The desire to show ‘quick wins’ in NPFM reform can sometimes lead to less-than-optimal fiscal outcomes in the long-run. For example, the United Kingdom’s Private Finance Initiative reforms prioritized immediate cost-efficiency, but resulted in long-term financial commitments and fiscal inflexibility.
3. Capacity vs. Efficiency: Excessive emphasis on cost-cutting can undermine public sector capability as workforce numbers are reduced.  This affects the capacity of the workforce to implement NPFM as well as the quality of public services.  For example, in Greece austerity-driven reforms weakened public sector capacity and diminished essential services.
4. Stakeholder Resistance: Reforms perceived as top-down or overly focused on ‘technical’ matters often meet resistance from public officials who do not have the technical expertise to understand or implement the reforms.

How should the challenges be addressed?

The challenges associated with NPFM often stem from the technical nature of the reforms and overly complicated reform processes that fail to account for local contexts:

• Maturity of Institutions: NPFM reforms require strong institutional frameworks, reliable data, and skilled personnel. In less mature systems, NPFM frameworks may have been overly ambitious and did not account for the capacity of the affected public institutions.
• Procedural Complexity: Reforms emphasizing detailed compliance over clear, actionable outcomes can stifle innovation and responsiveness.
• Capacity Constraints: A skilled workforce is key to NPFM. However, many ministries lack the resources to effectively manage complex reforms, leading to delays and diminished results.

A Path Forward: Simplifying NPFM for Better Outcomes

To ensure NPFM achieves its intended objectives, reforms should be grounded in simplicity, flexibility, and context-appropriate strategies:

1. Phased Implementation: Introduce reforms gradually, allowing institutions to build capacity and adapt. Focus on foundational elements like budgeting discipline and basic performance tracking before advancing to complex systems.
2. Context appropriate strategies: Adapt reforms to a country’s administrative maturity, ensuring that systems, policies and procedures – including IT software – are realistic and implementable.
3. Capacity Building: Invest in training, data systems, and institutional development to support the effective implementation of NPFM principles.
4. Stakeholder Engagement: Involve public employees, unions, and civil society in designing and monitoring reforms to foster buy-in and address local needs.
5. Balancing Goals: Ensure that NPFM objectives are balanced to ensure that one area, such as cost-efficiency, does not dominate. Have clear and simple metrics to track progress.
6. Do not replicate the private sector: NPFM draws lessons from the private sector in efficiency and effectiveness. But the private sector is different and should only be used as an example. Private sector practices should generally not be copied directly into the public sector. 

Conclusion

NPFM represents a valuable framework for achieving transparency, accountability, and efficiency in the delivery of public sector goods and services. While its objectives remain valid, success depends on implementation strategies that avoid unnecessary complexity and account for local conditions. By focusing on simplicity, capacity building, and stakeholder engagement, governments can unlock the full potential of NPFM to deliver sustainable improvements in fiscal discipline, resource allocation, and public service delivery.