Regardless of a country’s stage of economic development, their governments make payments to, and collect payments from individuals and businesses. Financial resources are also transferred between government agencies. These flows cover a wide range of economic sectors and activities, and in most cases, the overall amount of such flows is significant – normally ranging between 15% to about 45% of the GDP.
However, only 25% of low-income countries worldwide process cash transfers and social benefits electronically and this percentage is only slightly higher for public sector salaries and pensions—and this has considerable cost implications. By going electronic, governments can save up to 75% on costs, a significant amount in an era of stretched resources.
And there are more potential benefits. Improving government payment programs so that they are more efficient, safe and transparent can also significantly impact the economy, and aid in the pursuit of other public policy objectives, such as the modernization of the national payments system or the promotion of financial inclusion for certain population segments. This is why the Bank has released guidelines to assist governments and other stakeholders in developing and operating safe and efficient government payment programs.
A better way to pay: why does it matter?
First, the scale of government payments in most countries means that improvements in the way government payments are processed (e.g. posted, disbursed/collected, and registered) can reduce transaction costs and increase efficiency. One outstanding example is the case of “Bolsa Familia” in Brazil: by switching to electronic benefit cards, the program helped lower administrative costs from 14.7 percent to 2.6 percent of the value of the grants disbursed.
Also, massive government-to-person (G2P) payment programs such as pensions and/or other social benefits are often a gateway to modern payment instruments as well as other financial services for the un-banked and under-banked. As an example, approximately 36% of the recipients of social transfers made by the South African Social Security Agency (SASSA) were banked in 2005. A few years later, this percentage had risen to 60% and continues to increase, due in large part to SASSA’s reinforced strategy to use electronic payments.
Finally, government payment programs reforms can trigger the development of a robust payments infrastructure, which in turn will support the safe and efficient processing of government payments. To activate this virtuous circle, a holistic approach to reforming government payment programs is necessary, one that takes into consideration the entire process, tools and arrangements supporting their operation.
Getting to the Virtuous Circle
So it’s clear that improved government payment programs can benefit governments and beneficiaries alike. But how do they get there? The new guidelines offer recommendations for developing safe, efficient and transparent government payment programs and cover the critical aspects associated with the day-to-day program operations. Here are some highlights:
• Operators of government payment programs around the world are concerned that payments made by and to the government are done safely, and that government money is managed transparently and efficiently. Many safety, efficiency and transparency issues, are, to a reasonable degree, under the direct control of program operators, which are generally the national treasuries. Countries should look into governance arrangements and risk management practices, and the usage of electronic payments to improve cost-effectiveness, as well as to enhance the potential developmental impact of government payment programs.
• An appropriate legal and regulatory environment to underpin government payment programs is important. Establishing associated laws, regulations and norms to provide clarity and certainty to all parties involved is crucial. It is also essential that laws and regulations support the soundness of payment instruments and systems, competition in the marketplace and consumer protection issues.
• A modern, comprehensive and robust national payments system is important for government payment programs. A suitable payments infrastructure can help realize the full potential of electronic payments for enhanced safety and efficiency. However, such an infrastructure should not only be available, it should also be used extensively so that many payment service providers, taxpayers and recipients of government payments can benefit from it.
• Government payment programs have many potential positive externalities, and authorities can and should leverage them to address broader developmental goals. The guidelines explore the experiences of many countries such as Brazil, India, and the Philippines-to name a few-where the modernization of government payment programs became an opportunity to reform the national payments system. Finally, given their scale and the fact that some programs specifically target population segments that lack access to most, if not all, modern financial services, government payment programs can be leveraged to promote financial inclusion.
Visit www.worldbank.org/paymentsystems for more information.