Chains of command: Global Government Finance Summit, part 2

By on 25/09/2018
"We think that this year will be the one that properly sees the growth of blockchain technology", Mark MacDonald, EY global’s public finance management leader said at the Global Government Finance Summit 2018

Blockchain technologies are set to transform oversight of finance and performance across the public sector, EY’s Mark MacDonald told top finance officials at the Global Government Finance Summit. But his audience identified a series of challenges that must be addressed before governments can make full use of this emerging technology. Matt Ross reports

“We think that this year will be the one that properly sees the growth of blockchain technology – not just within governments, but also across the corporate and private sectors,” said Mark MacDonald, EY Global’s Public Finance Management Leader. “We’re moving past concept through proofs, pilots and so forth to the full industrialisation of blockchain applications.”

MacDonald was speaking at the Global Government Finance Summit, which was hosted this year by the German government in Berlin and supported by EY and Microsoft. And the audience of senior finance department leaders listened keenly, for blockchain has long been talked of as the next wave of digital transformation – yet some digital experts have questioned their applications in public service, and few governments have yet got to grips with the technology.

In essence, blockchains are decentralised, digital ledgers, updated in real time and held simultaneously by all participants. Because the nature and author of any changes are immediately visible to all those with access, they can provide a trusted medium for sharing data and logging transactions. And this, said MacDonald, makes them ideal for managing interfaces “across organisational or system boundaries; it’s a powerful way to deal with conditions of information asymmetry or high transaction costs in the exchange of information.”

Drawing data from the IT systems of participating bodies, he added, “blockchain layers are essentially independent of the control and the attributes of the underlying systems: the blockchain floats on top of the existing infrastructure.”

Where’s the value?

In today’s governments, MacDonald pointed out, “there are vertical operating systems and very costly information exchange, with a lot of manual manipulation and reconciliation and so forth; perhaps some absence of transparency. And it’s very, very difficult to get real-time reporting.” The result is that “decision-making is impeded, because treasuries and finance professionals lack the ability to know what’s happening out there.”

Meanwhile, many politicians and senior officials are “looking for ways to have much more effective horizontal management”: to connect data, teams and services across organisational boundaries. Blockchains can provide these connections, he argued – linking together in real time the data held by disparate arms of the public sector to provide a common view of information and activity.

The technology could also help facilitate the public sector’s external relationships, he continued. Citizens could use blockchains to, for example, verify their identity, pay taxes, collect benefits or even vote. Businesses and charities could demonstrate compliance with regulations, receive grants, or manage government contracts.

What’s more, said MacDonald, blockchain’s ability to handle complex, multi-layered relationships makes it well-suited to managing the intricacies of public service delivery and oversight. These days, most delivery systems “extend beyond the traditional, vertically-defined ministry to involve both supply chains and delivery chains with all sorts of external actors,” he noted: blockchains can bring together data across the breadth of these systems.

Finally, they can form a platform for combining and comparing data on spending with information on performance and outcomes – “connecting the financial with the non-financial, so you get properly integrated reporting in real time: almost the ‘holy grail’ of public finance management.” This, said MacDonald, will enable managers to see how money is being allocated, to track its expenditure, and to link spending to data on productivity and the results of service delivery.

A Canadian example

To illustrate how these capabilities might be applied, MacDonald set out a pilot blockchain model that EY has developed to oversee education services. Pulling data out of various IT systems via APIs, this tracks funds from their allocation by the central budget authority, through the education department or ministry – which distributes the money and attaches conditions to its use – and down through the local education providers which spend the money. So all the key players can check that money is being spent in accordance with policies and regulations, and local spending can be linked to data on productivity, service delivery standards and educational attainment.

“This means that you can not only deal with things from a reconciliation, consolidation, financial management and statutory reporting perspective, but also through a management view, looking at things like how effective school boards are,” he explained. “And because the data comes through in real time, you can make spending adjustments.” So budget holders will learn immediately if, for example, pupil numbers change – enabling them to adjust funding allocations there and then rather than waiting for a year-end reconciliation.

Mark MacDonald says blockchain’s ability to handle complex, multi-layered relationships makes it well-suited to managing the intricacies of public service delivery and oversight.

Practical questions

MacDonald’s presentation prompted a welter of questions from the delegates – from pragmatic queries around delivery, to concerns around public perceptions.

“What is the real value-add that we would get out of creating another layer; one that we can’t already get through the systems that we have?” asked Rosemary Huxtable, the Secretary of Australia’s Department of Finance. “If you move to a new system, there’s potentially a very significant change to how existing relationships work: what then would you get at the end out of that? I’d really like to see Blockchain in action, operating at scale, to see the potential.”

But there’s no need to disrupt existing Enterprise Resource Planning (ERP) systems, MacDonald responded: blockchains would be used to link them together and build connections to other actors. “I’m sure there’s a series of important external agents whose performance you’d be interested in knowing in real time, both from a financial and a non-financial perspective,” he added. “Perhaps that’s the first application.”

How can blockchain users know that the data fed into the system is accurate, asked Bill Matthews, Canada’s Senior Associate Deputy Minister for Defence: “Public sectors collect a lot of data, but much of it is inaccurate and more is irrelevant.”

And Matthews pointed out another key challenge: “Our political masters are rightly nervous about new IT projects,” he said. “They’ll like the message around integrated reporting, but I’m not sure you can yet show that this is truly low-cost, low-risk.” Torsten Arnswald, Head of the Fiscal Policy Division in Germany’s Federal Ministry of Finance, agreed: “One would need to convince political leaders that that risks can be controlled and that the new technology is secure in order to fully tap into its innovative potential.”

Rosemary Huxtable, secretary of Australia’s Department of Finance wanted to know the potential benefit of switching to blockchain and upheaving the existing systems.

Privacy concerns

Allied to this mistrust of government IT projects, public sector leaders would also have to address internal concerns around data sharing between departments, pointed out Global Government Forum Director Kevin Sorkin. And Martti Hetemäki, Permanent Secretary of Finland’s Ministry of Finance, highlighted the public’s concerns about privacy and government’s use of personal data: “Especially if there are risks around data security, anything to do with privacy is toxic,” he said. “It would lose political support right away if there were major problems in this respect.”

In Singapore, said Ow Fook Chuen – Accountant General in that country’s Ministry of Finance – the public generally trust the public administration’s use of data, but nonetheless “there is scepticism that anything in the cyber world is totally secure. The challenge with adopting blockchain is that we do not know enough to be really comfortable about transferring that reliance and trust in good administration to the technology.”

Harry Tsavdaris, a Digital Architect for knowledge partner Microsoft, added another question around privacy. The new EU GDPR data protection rules give people the “right to be forgotten”, he said; but blockchains cannot be easily amended and hold data in perpetuity – so it’s important that all blockchain projects are properly defined and architected.

And Tsavdaris also had questions around the technology. The biggest blockchain currency, Bitcoin, can manage seven transactions per second, he said; but using blockchain on the scale suggested by MacDonald would demand transaction rates thousands of times greater than this. MacDonald was reassuring: “In the private sector, there are blockchain applications that manage millions of transactions a day,” he said. “And the technology’s development is moving at an unimaginable pace; these issues will be dealt with.”

So are we trying to run before we can walk, asked Tsavdaris. The worldwide web has been widely available since the early ‘90s, but it took ten years for new digital businesses to become so established and popular that they began to seriously disrupt existing industries. “New business models will evolve for blockchain, but it will take some time,” he said. “We should be laying out the ground for innovative start-ups to take blockchain forward.”

Harry Tsavdaris, digital architect for knowledge partner Microsoft, suggested we should be laying out the ground for innovative start-ups to take blockchain forward.

Blockchain in action

Nonetheless, Tsavdaris could see useful applications for blockchain: it could, he suggested, be used to manage hypothecated taxes – linking revenues directly to spending, and thus boosting public trust in and support for new forms of taxation.

And Dmitri Jegorov, the Deputy Secretary General for Tax and Customs Policy in Estonia’s Ministry of Finance, could point to real examples of blockchain being developed by his own government – which is famously well advanced on digital technologies. Estonian laws are enacted without print publication, he explained: instead, they’re captured in blockchain – whose distributed nature ensures that “in case of an IT disruption, you can still verify that it’s precisely the text that parliamentarians voted on.”

The country is also using blockchains to capture individuals’ medical records, said Jegorov: the technology is suitable because records must be available to a range of medical practitioners whilst remaining “absolutely secure; and you need to log every interaction and note – it must be absolutely precise,” he commented.

Looking ahead, Jegorov suggested using blockchains to track the movement of goods across borders – providing “traceability of the whole value chain and all the transactions along the way.” The issue is particularly important at the moment because the European Commission has put forward proposals to impose full VAT on all cross-border transactions, in a bid to crack down on VAT evasion scams. These scams typically involve corrupt businesses amending their records, he explained, “but with blockchain you can’t go back into your transactions and undo them without leaving a trace, so it could eliminate the potential for fraud there.”

The Commission’s current proposals, he added, would “make everyone pay, including honest businesses, in order to stop the small share of dishonest businesses. We have to look at the promise of blockchain technology instead.” Ludger Schuknecht, Chief Economist at the German Ministry of Finance, argued for a “balanced approach” to blockchain – one that keeps risks in check whilst enabling innovations. Do not “create enormous bureaucratic monsters, when there may be other solutions,” he commented.

And MacDonald pointed out that blockchain can indeed be used in this way: in some US states, major manufacturers are developing ways to add tax collection agencies “as nodes in their private blockchains, which cover all their transactions – so the reconciliation and payment of all their indirect taxes can be made automatically. It’s just a matter of time before this is up and running.”

Dmitri Jegorov, the deputy secretary general for Tax and Customs Policy in Estonia’s Ministry of Finance, pointed to real examples of blockchain being developed by his own government.

Last link in the blockchain

These applications all play to blockchain’s strengths as a single point of truth, its authority guaranteed by transparency and its distributed nature. And these characteristics, argued MacDonald, will help it overcome public concerns: “It’s software and an associated business solution that enables you to demonstrate greater degrees of trust, greater control, greater customer interaction,” he said.

As to issues such as its scalability and security – these, MacDonald held, will be addressed by the technology’s incredibly rapid development. Compared to traditional ERP systems, he added, blockchains are already extremely quick to create: “Some of the largest of the existing business applications have been built and gone live in a matter of months, rather than years; and with a hugely diminished level of investment required,” he said. “The difference is incredible.”

So some applications of blockchain have already been proved; and the technology’s development has barely begun. “This is a quiet time; the beginning of the curve,” MacDonald concluded. “There will be an immense amount of movement in a very short period of time that addresses each of these questions, from a conceptual perspective all the way down to a technical one.”

“The industrialisation of blockchain is about to take place,” he said. “By 2020 we’ll be having a totally different conversation.”

This is the second instalment of our report on the 2018 Global Government Finance Summit. The first instalment introduced the event and covered the Compact for Africa; The third instalment covers Finland’s radical reforms of health and social care. Part four explores how digital technology can give governments the power to provide convenient user-focused services. Part five will be published soon; and part five detailed Singapore’s innovation in digital public services and efficiency.

About Matt Ross

Matt is a journalist and editor specialising in public services, policymaking, government and management. He was the editor of trade title Civil Service World from 2008 to 2014, serving an audience of senior UK officials; and the features editor of weekly news magazine Regeneration & Renewal between 2002 and 2008, covering urban regeneration, economic growth and community development. He has also been a motoring and travel journalist, and now combines his role as editorial director of Global Government Forum with writing for other publications including The Guardian and Planning magazine.

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