The Practical Steps for Initiating a Successful PFM/IC Reform

Abstract

Given the nature of the PFM/IC reform and the radical managerial changes that it requires, before embarking on the reform a country ought to be clear about the implications of the reform and consequently the impacts that it will have. A primary objective of PFM/IC is to facilitate the achievement of a government’s objectives and to improve the quality of public expenditure, that is enhance public value. It also has other benefits if properly implemented, including enhancing transparency and accountability. Change though has to occur and that change will be quite fundamental. All change has repercussions which may be unacceptable to some and therefore may be resisted. PFM/IC, if implemented properly, changes power structures and such changes can be an important source of resistance. Therefore an important first step before embarking upon the reform should be to carry out a series of tests to assess whether the reform is appropriate at this time, and whether the reform is possible given the scope of the changes that will be required. This chapter sets out those tests. Those advocating the reform should also recognise that this is not a ‘quick fix’ type of reform and that is the reason why wide support is essential.

This chapter looks at the practicalities of introducing PFM/IC. It sets out a series of tests that should be applied before adopting and applying the reform. It also suggests that an initial study is carried out to assess whether a government is really willing and able to undertake the scale of the reform necessary to apply PFM/IC. The chapter builds upon the discussions in previous chapters but focuses on the practicalities of successfully achieving change and the consequences when this is only partially realised.

4.1 This Is a Management Reform!

4.1.1 The Managerial Impact

Government is about hard policy choices and those choices are bound to attract criticism from those who are adversely affected. Given the increasing significance of public expenditure and the impact upon individual lives improving the quality of the management and delivery of public services, that is improving public value, is essential. PFM/IC is an important contributor to achieving that objective. Simply regarding PFM/IC as a technical financial reform focussing on the arrangements for financial and budgetary control will not deliver that contribution. In the previous chapters the argument has been that not adequately considering the substantive management reforms that must accompany the technical financial reforms which are part of the PFM/IC reform will prevent the achievement of the benefits of the reform and will probably add to costs. The overall purpose of the PFM/IC reform is to deliver better quality public services, to make better use of public money and assets and to ensure that income generating policies achieve their objectives. This reform also aims to ensure that both expenditure and income are efficiently and effectively managed. The reform can be summarised as aiming to achieve six purposes:

• 1. To facilitate the delivery of the government’s policy and the associated objectives (and the equivalent for local government).

• 2. To ensure that public organisations deliver the relevant policies and objectives in a manner that is both efficient and effective.

• 3. To ensure that public funds and assets are used only for public purposes.

• 4. To secure the long-run financial resilience of public organisations.

• 5. To improve the quality of public governance.

• 6. To improve accountability of public organisations both internally to higher levels of management and externally to third parties and not least to parliament.

Achievement of these six purposes provides the basis for judging whether the reform has been successful. Quality management, including leadership, is central to this. Leadership means that the top and senior political and appointed officials are committed to and actively support the reform. Local ownership is also very important.

Introducing PFM/IC is a major reform. As has been pointed out in the previous chapters, PFM/IC can impact radically on the roles of elected and appointed officials. The extent of the change depends upon the present organisational arrangements. It may also lead to questions about the shape of the government organisation. Elected official’s area of responsibility should be to concentrate on the development of policy and the strategy for the implementation of policy. Appointed officials, the civil and local government service responsibility, is that of operational management, that is, ‘delivery’. To achieve effective policy development though, cooperation is required between operational and political management. A role of the operational management is to assist the politician turn political ideas into deliverable public services and activities.

Decisions about policy determine the objectives the political head of an organisation (a ministry or a local government) wishes to achieve. This will affect the management structure of an organisation and the range of staffing skills required. Clarifying objectives therefore may well raise questions about the appropriateness of the present organisational structure. The head of operational management should be responsible for determining the most appropriate structure to deliver the objectives. This though may be in consultation with the political head of the organisation.

Many of the most difficult problems that governments have to address cannot be solved by a single ministry or within a single year and decisions made by one ministry can have impacts upon other ministries and public organisations. They require cooperation between ministries and between different types of organisations, such as central ministries and local governments and sometimes private organisations. For example, homelessness cannot be solved simply by making more accommodation available and therefore be a sole responsibility of a ministry responsible for housing. Or again, solving a drugs problem is not simply a function of the justice system. Consequently, a focus on objectives will require a capacity for politicians and the officials responsible for operational management to cooperate across organisations to provide solutions, and this in turn requires a flexibility of approach to budgeting and to financial and performance reporting arrangements. Effective cooperation may require budget sharing and as has been shown earlier this can be very difficult to achieve without a determined ‘whole of government’ approach. The complex nature of many problems that the public sector is required to address does mean that thought should be given to the longer term financial consequences in managing these problems. Very few problems can be addressed within a single budgetary year or even over a medium-term budgetary cycle. As has been explained in the previous chapter this means much more than simply thinking about the current and medium-term budgets.

Devolution of operational management to the civil or local government service is a feature of PFM/IC but coupled with managerial accountability. In reality as this guide shows, it will not be feasible for operational management to be retained by the political level and at the same time implement PFM/IC. This is because of all the managerial features of PFM/IC. It requires the development of competent professional managers and, where appropriate, managers with specialist knowledge and experience. The search for efficiency and effectiveness requires the creation of opportunities for the exercise of managerial discretion. That discretion is necessary to enable managers to experiment with alternative solutions to problems, but they can only do that if financial analytical information is available coupled with performance information. In some circumstances the approval of the political management may be required to alternative operational solutions, but there will be many circumstances where operational managers should use their own initiative to achieve greater efficiency and effectiveness in the delivery of objectives and in the day-to-day management of public services.

To achieve these benefits the civil or local government service must be well organised. That means, as is shown in Chap. 14, that the organisational arrangements essentially follow the principles of bureaucracy specified by Max Weber¹ and then are adapted to a managerial style of public organisation.

The characteristics of an appropriate modern civil service organisation should include the following:

• (i) Defined objectives and performance standards and performance objectives.

• (ii) A strong managerially trained leadership with the authority to drive the organisation to meet its objectives, performance standards and performance objectives expressing core values based upon the needs of the client/customer.

• (iii) Effective governance arrangements.

• (iv) A powerful financial leadership (finance director type role), focussed upon achieving objectives efficiently and effectively with an aim of improving productivity and ensuring that all public resources are either properly utilised or disposed of and that regard is had to the long run financial resilience of the organisation.

• (v) The management being responsible for internal control and the application of those external controls that would with PFA/IC have been directly implemented by external organisations, such as the ministry of finance.

• (vi) A budgetary system which provides to managers the information they require as well as the information that the ministry of finance requires.

• (vii) A stable budget for the organisation, including also stable funding of that budget during the year with the actual cash funding to an agreed timetable, so that managers can plan with certainty recognising that this may not always be possible in all circumstances.

• (viii) A financial and management accounting system which provides managers with the financial control information and the financial analytical information managers require, such as cost centre and cost driver information.

• (ix) A financially aware management.

• (x) A management trained in managerial concepts.

• (xi) Managers having the discretion to make decisions about how to achieve their objectives and therefore how to utilise the resources available to them, or in some instances to dispose of those resources such as redundant assets.

• (xii) Individual managers being accountable for their achievements in terms of objectives and performance standards.

• (xiii) An external organisational control focus upon accountability for the achievement of the organisation’s objectives and performance standards, efficiently and effectively and within the relevant laws and regulations.

Each of these characteristics is addressed in the chapters of this guide.

As these characteristics indicate, operational managers should be accountable for their actions and for the performance that has been achieved. Accountability will be from lower to more senior levels of operational management and ultimately to the political levels of management and from them to parliament and the consumer/user of public services.

In some countries, as has been mentioned previously, extensive use is made by first-level organisations such as ministries and local governments, of second-level organisations whose objectives are intended to deal with specific problems. The first-level organisation must remain in effective control of a second-level organisation and should determine its objectives, performance standards and governance arrangements. This is essential, otherwise a second-level organisation will develop its own objectives and policies and make coordination between the first- and second-level organisation difficult. The introduction of PFM/IC should generate a discussion about the need for and the role and management of second-level organisations (see Chap. 12).

The need for coordination may also generate a challenge to other public financial management reforms such as programme budgeting where very often programmes are built around individual ministries and are designed to deliver the specific objectives of individual ministries, rather than around the problems that governments, as a whole, are aiming to address.

4.1.2 The Benefits of the PFM/IC Reform

The politician and the senior civil and local government officials should be aware of and seek to make use of the benefits that the policy of applying PFM/IC at all levels of government make possible. These benefits can be summarised as follows:

• The potential for an improved quality of policy making. This is because of the additional information that becomes available to operational management and hence the quality of the advice that operational management can provide to the political level of management.

• Greater discretion available to managers to make decisions about the utilisation of public resources to achieve objectives and performance standards and therefore provides an opportunity to build managerial capabilities. This in turn reflects in the advice available to the political level of management.

• The better use of public resources through greater efficiency and effectiveness generated by better quality management who in turn should have available to them a wider range of information to enable them to make decisions.

• A better quality of governance, which is very important not only to ensure that decisions are properly made but also to ensure that all factors are fully taken into account in decision making.

• A public service that is more immediately responsive to public service user needs not least though a continuing search for effectiveness, that is essentially what the service user requires.

• A greater chance of achieving the governments and organisation’s objectives and performance standards because a key management focus has to be on objectives and performance standards.

• More effective political control of the public administration because elected representatives have the opportunity to focus upon policy and strategy, the setting of objectives (and performance standards and objectives) and operational management performance without becoming engaged in the detail of operational management.

• More effective parliamentary control because parliament should have available to it more detailed information linking budgets and objectives with the opportunity to challenge the exercise of discretion by line ministry and other public organisation managers through financial scrutiny processes.

• Greater transparency being achieved through improved accountability arrangements not only to parliament but also to civil society.

These benefits are discussed in more detail in Chap. 10.

4.1.3 Control

Where the focus is simply upon budgetary and financial control maintaining that control, as required with PFA/IC, can be a relatively simple exercise. It does not require a sophisticated management, but with PFM/IC delivering a service and achieving an objective efficiently and effectively, does. Therefore, politicians and senior civil and local government officials in considering this reform need to question the quality of the managerial arrangements with honesty and openness. Success with the reform depends heavily upon the quality of management and whether the present managerial arrangements are fit for purpose or not? To answer this question politicians and civil and local government officials should consider not only the role of other civil and local government officials, but their own roles as well. Answering this question challenges how elected officials perform their responsibilities as well as appointed officials.

Financial and budgetary control, which is the focus of pre-PFM/IC policies, is not management. Certainly, financial and budgetary control are an essential precondition, a building block, in the process of establishing efficiency and effectiveness in the achievement of objectives. If, though, a ministry of finance or an organisation responsible for personnel controls tries to maintain exactly the same form of control with PFM/IC as it traditionally has, what it is likely to do is to actually prevent the development of PFM/IC. The approach to financial and budgetary control must change to reflect the managerial environment then applying in line ministries and other public organisations.

PFM/IC will also require the deployment of new skills, both financial and managerial skills. This will mean that considerable effort will need to be devoted to training and the practical development of both sets of skills in ‘real life’ situations. The training that is required is not simply technical training but very importantly should include the development of managerial skills which are essential to the development of a quality civil and local government service. How the operational management is appointed depends upon the arrangements in a particular country, but the underlying theme should be that such officials should be appointed on merit. A statement about the appointment of civil servants setting out 14 principles has been issued by the OECD² and SIGMA has published a set of ‘Principles of Public Administration’ which are discussed in detail in Chap. 14. These provide guidance to countries introducing PFM/IC on the professionalisation of public service management, but they also demonstrate how important is the integration of PFM/IC reform with public administration/civil service reform.

4.1.4 The Timetable for the Reform and the Role of Parliament

The full requirements of the reform cannot be accomplished quickly or even comprehensively across the public sector, except possibly in the smallest of countries. Where a country is decentralised with powers devolved to regions and local governments the time taken to undertake a comprehensive reform is likely to be even longer. This is not simply a matter of introducing new laws and regulations, although this is likely to be part of the process, and then assuming that because such laws and regulations exist, they will be obeyed. (In the experience of this author this is how officials in some countries have reacted to the introduction of PFM/IC, largely because they have seen it simply as a technical reform.)

Treating the reform as a technical reform or even as a managerial reform does not necessarily consider the development of external accountability and in particular to parliament. In no policy papers seen by this author has the impact upon parliamentary accountability been discussed. Yet parliament through the development of PFM/IC should have a greater ability to review how decisions have been made and the factors that have been taken into account. In particular an issue that should be considered is the extent to which the budget should incorporate information about performance indicators and other managerial objectives (see Chap. 3).

As has been explained previously in Chap. 2, parliament ought also to be involved with the reform from the outset. It should be asked to approve the policy and its purpose. It should approve the timetable and proposals for the staging of the reform. It should also hold ministers, and in particular the minister of finance, to account for the achievement of the timetable and the objectives of the reform, including the benefits. In this sense parliament should act as a driver of the reform.

Countries are often under pressure from external organisations to introduce this reform, but such organisations seem to focus only on the technical aspects of the reform overlooking the managerial context. Yet whether this is an appropriate reform for a country depends upon the political, cultural and operational circumstances prevailing in a country and its willingness to undertake the scale of the reforms needed. To assist a country in making this decision a series of tests have been developed (set out below) which should be applied by those seeking to apply the reform.

Countries also tend to want to undertake this type of reform when there is a crisis. But that is often the worst time to do so because there are immediate pressures for results and yet as has been shown a PFM/IC reform is a long-term reform and managerial change often takes several years to become embedded. A much better approach would be to plan for and apply the reform in a more normal situation.

4.1.5 The Tests That Can Be Applied to Assess the Feasibility of the Reform

Based upon the experience of this author, those governments contemplating the introduction of PFM/IC ought to apply the following tests to establish whether this is a feasible reform given the circumstances of the country. This would be a novel approach, but if the requirements identified in these tests cannot be met, the likelihood is that the reform will not be successful. Most of these tests cannot be met immediately. The aim should be to ensure that over time they can be.

Success should be measured by the extent of the achievement of the benefits of the reform. Success should not be judged by the existence of the bureaucracy associated with the reform: that is no test, although, in the experience of this author, that is the judgement that is often made.

The tests, and there are nine, reflect the political and senior official ‘will’ that is required to achieve the substantive change process that results in success and for the benefits to be fully achieved. They are separate from the structural systems and processes that provide the platform upon which PFM/IC can be built. Each test is individually important but a failure to meet one or more of the tests would not necessarily be fatal, apart from tests 1 and 2, but it would make the achievement of the benefits of the reform much more difficult. However, the experience of this author is that some form of these tests is rarely, if ever, applied. The assumption appears to be made that because PFM/IC represents ‘international best practice’ almost by definition, if the bureaucracy associated with PFM/IC is introduced, it will result in the removal of deficiencies that presently exist. It will not!

Test 1

Is the present system of public financial administration and external control robust?

This first test should be to assess the current strength of the present system of public administration and control (i.e., some form of PFA/IC). Does it suffer from those weaknesses identified in previous chapters? This is a crucial test. If this test is failed, then no further substantive progress can be made. The remedy is to ensure that this test can be met by strengthening the present system. This is because the change to PFM/IC shifts responsibility for budgetary and financial control from an external control, essentially by a ministry of finance, to an internal control by the managers of a public organisation. The risk, if this test cannot be met, is that the ministry of finance loses control of the finances of the government and this is too great a risk.

In Chap. 1 the distinction between external control (i.e., by a ministry of finance or other ministries external to the organisation concerned) and internal control (i.e., by the management of the organisation itself) was identified, and in Chap. 3, the differences between public financial administration and public financial management were described. Only when weaknesses in the present controls have been removed should the introduction of PFM/IC be commenced. Unfortunately, in many countries in the experience of this author, this test is not considered.

Test 2

Is there the recognition and acceptance by the government that PFM/IC is primarily a management reform and that its introduction will have an impact upon the allocation of responsibilities for operational management between the political and the official levels of management. Coupled with this are top operational managers (state secretaries and others) willing to accept the additional responsibilities and be prepared to fully support implementation? This also creates an opportunity to increase parliamentary accountability and is that recognised as acceptable?

This is a critical test because it asks if the government and the top opertional management is willing to accept that PFM/IC involves significant managerial changes and the enhancement of accountability to parliament. This test strikes at the heart of the custom and practice often existing within a country. The most important change that is likely to be required affecting the political level of management will be to separate most decisions about operational responsibility for the day-to-day delivery of services from responsibility for the development of policy towards the delivery of those services and the oversight of the quality of service delivery. Responsibility for operational management would become a civil or local government service responsibility and policy, strategy and oversight would be a political responsibility. (There may be some exceptions to this general rule and these are discussed in Chap. 14.) Parliament also has a greater potential opportunity to assess managerial performance in the delivery of objectives and performance standards. The analysis of the PFM/IC reform contained in this guide as indicated above shows that in practice, given the additional managerial activities that PFM/IC imposes upon a manager and the experience and training required to undertake those responsibilities, continued political management of most operational activity would be most unlikely to be successful.

There are potentially significant cultural implications that may make this test difficult to address. It can also raise the question of ‘trust’. The tradition in many countries is that an election gives to the elected officials authority to make all decisions and, as is pointed out elsewhere in this guide, that for some, unless elected officials have that power to make all decisions they do not feel in full control. That power to make all decisions, no matter how trivial, creates an illusion of control. An important activity in the establishment of PFM/IC is to encourage elected officials to recognise that PFM/IC is about the development of managerial professionalism. Elections give the elected official an implicit mandate to put into effect the policies that they have been elected to pursue. The emphasis is upon policies not upon detailed operational matters. A key question therefore is, is there the political will to accept the delegation of operational management to the civil and local government service? Is there also a corresponding willingness of the top operational management, not just in the ministry of finance but throughout the central and local government sector, to accept and support the reform? Involved in this decision is this question of ‘trust’. Do the politicians trust the civil service and do the civil service trust the politicians?

A consequence of this separation will be that the civil and local government service organisational arrangements may need to be restructured to accommodate its additional responsibilities for operational management. For example, state secretaries, or equivalent, may need to be appointed with substantive executive authority over operational service delivery matters. Exactly where any boundary exists between decision making about operational matters and policy will be largely a matter for local decision based upon local circumstances. The precise boundary between policy and strategy and operational management will also vary over time, with personalities and operational circumstances. However, effective policy development depends upon an appreciation of the issues that will need to be addressed by operational management (emphasising the importance of cooperation between operational managers and those responsible for policy development), and not least the financial issues.

Another objection to the reform may be that enhanced accountability to parliament thus allowing parliament to question in more detail the quality of management would be inappropriate. But then transparency and accountability are essential to democratic control of government activity and can serve to support government in improving the quality of the management and hence delivery of the objectives efficiently and effectively.

This test will indicate whether the government and top appointed management accepts that this is a managerial reform or sees it simply as a technical financial control reform. If the latter, either the government needs to be persuaded otherwise or it should be made clear that the benefits of the reform will not be achieved. There is no point in spending public resources on introducing the appearance of a reform that will have no substantive benefits and will add to costs. The possibility also exists that pressure will develop to modify the cosmetics of the reform when there is a recognition that the benefits are not being achieved, and return to the status quo ante.

Test 3

Is the budget designed to facilitate the development of managerial objectives and if not, can it be?

Because PFM/IC should be regarded as a management reform as well as a technical reform, the budget should be designed to make it possible for management to deliver its objectives (i.e., outputs) as well as to secure the control of inputs. Most budgets focus on inputs although the accompanying budget statements very often describe the broad objectives to be achieved. Budget structures generally are designed to largely meet the needs of the ministry of finance, rather than those of the operational manager. For PFM/IC to be effective an important budgetary reform should be to develop linkages between budgetary inputs and the outputs expected from those inputs. These linkages can only be developed over time, and the reorganisation of the budget structures to meet the needs of the manager should depend upon individual managerial requirements. To meet this test initially the ministry of finance should first acknowledge that budgetary reform is required and that it needs to occur as PFM/IC is developed. It should then cooperate with those responsible for the PFM/IC reform to ensure that the two reforms are compatible. Budgetary reform should also make possible the development of parliamentary scrutiny. However, the main concern with budgetary reform should be to ensure that these three concerns are addressed:

• (i) For what purpose, or need, is the money to be allocated?

• (ii) How and where is it being spent?

• (iii) What is expected to be achieved?

This may mean for some expenses, for example, such as personnel or property costs, that instead of such budget lines being consolidated, they are analysed over individual services or activities. This would have also the advantage of facilitating parliamentary scrutiny.

A feature of management in some developing and transition economy countries is that a main activity of managers/administrators within line ministries is to manage the delivery of public services within a context of unstable budgets or budgetary uncertainty with budgetary allocation shortfalls, often represented by a shortage of cash. Introducing PFM/IC in such circumstances is inappropriate. PFM/IC will do nothing to remove such problems. A key requirement of PFM/IC is the existence of a budget to which objectives and performance standards and performance objectives can be linked. This will facilitate effective management, and therefore, such budgetary and cash management deficiencies need to be addressed before attempting to implement PFM/IC.

Unfortunately, in the experience of this author, in no country has any consideration been given to the impact of the PFM/IC reform upon budgetary or cash management arrangements to meet either the needs of the manager or to facilitate improved parliamentary scrutiny. (See also tests 4 and 5.)

Test 4

Is there a willingness by the ministry of finance to accept that changes to the traditional budgetary and accounting arrangements will be required to allow for the development of managerial control by individual managers and for the development of management accounting , thereby allowing managers to deliver improvements in efficiency and effectiveness?

The first change that will be required for effective management is that budgets will need to take into account not only the financial limitations but also the policy objectives, performance objectives and performance standards the government wishes to see achieved. These will also have to be cascaded down to each level of management. It is these factors which ought to determine the available budget to each manager, not simply last year’s budget plus inflation and then adjusted for the overall fiscal position. Therefore, if the financial ceiling is insufficient to facilitate the achievement of the desired policy objectives, performance objectives and performance standards one or other should be changed. The second change is that the traditional budget structure will not be analysed in a manner to meet the needs of the manager. (There is most unlikely to be any correspondence between the allocation of resources required for ministry of finance budgetary control purposes and the allocation of budgets for management purposes.) With PFM/IC a manager should know the total budget available to him/her (i.e., all budget headings) in order to achieve the objectives for which the manager is responsible for delivering. The manager should also be aware of those costs that are fixed and those that are variable and therefore those on which a manager can have an impact, sometimes short term and sometimes long term. This can be a particularly difficult analysis because some costs deemed to be fixed, although not in accounting terms, such as employee costs and some overhead costs, along with accommodation costs are, in reality, variable. To achieve efficiency a manager should be prepared to take on the challenge of questioning whether such costs are predetermined and necessary. For example, is it really necessary to occupy a particular building, or can the way in which the service is delivered be changed in order to increase efficiency or to take advantage of new technology or new ways of working using modern technology?

Meeting managerial needs can become more difficult where, as in some countries, there is a separation between current and investment budgets with the ministry of finance being responsible for the current budget and a separate ministry, such as a ministry of planning, responsible for the investment budget.

In summary, with PFM/IC the budgetary analysis (and hence also financial accounting information) needs to serve at least two purposes: the interests of the ministry of finance and the interests of the manager. It may also need to address the specific needs of the parliament for parliamentary scrutiny purposes. This will mean changes in some countries where comprehensive budgetary information is not available to the manager because some budgetary headings, as pointed out in the comments on test 3, such as personnel and overheads which can be regarded as ‘fixed’ costs, are not analysed over objectives but are held as centrally controlled budgets.

Consequently, a further test associated with the change from an administrative to a managerial culture is to recognise that budget structures required for managerial purposes, and indeed parliamentary scrutiny purposes, may require considerable reform.

A further consequence of this is that where the manager is expected to deliver objectives and performance objectives and standards within a specified budget, the manager responsible should be committed to the delivery of those objectives, to the performance standards and to the available budget because otherwise that manager cannot be held to account. This may require changes to the consultation arrangements associated with budget preparation (i.e. the budget circular) with the manager being involved in detail in budget preparation and agreeing that the available budget is sufficient to deliver the objectives and performance objectives and standards expected within a budgetary limit.

Experience shows that ministries of finance can be reluctant to see different forms of budgetary analysis and accounting information develop. This may be a particular problem where ministries of finance have adopted ‘off the shelf’ commercial software packages. This is because such commercial packages can be difficult to amend to facilitate managerial needs as well as those of the ministry of finance. Ministries of finance may also fear loss of budgetary and financial control and a potential weakening of their ability to provide internationally required statistical information. They may also be driven by a concern that they cannot trust other public organisations to properly control costs. Or as was pointed out by De Geyndt (see Chap. 1), central bodies can be unwilling to see changes which would affect their apparent authority. The result may be inappropriate budgeting and a budget which is incompatible with managerial objectives.

In general, changes to the arrangements for budgetary and financial analysis are not considered as one of the consequences of the introduction of PFM/IC. However, they are essential if managers are to deliver objectives, performance standards and objectives and efficiency and effectiveness. If a ministry of finance is unwilling to accept the need for such changes, this will make difficult, if not impossible, the achievement of the benefits of PFM/IC.

(Some argue that a ministry of finance and the manager should be concerned not with outputs but with outcomes. However, outcomes are even more difficult to define and to manage than outputs, not least because the factors affecting outcomes are often not under the control of the manager and they are likely to take many years to realise.)

Test 5

Is there the recognition by the ministry of finance that traditional budgetary, cash flow and personnel controls exercised by central ministries may need to change as may the virement control arrangements to accommodate the responsibility of managers to deliver improvements in efficiency and effectiveness?

A key feature of a managerial culture is that managers have the freedom to develop initiatives to ensure that they can deliver objectives and performance standards along with improvements in efficiency and effectiveness. In practice this means that managers need the discretion to make changes to the allocation of resources.

Consequently, a managerial culture does mean that the traditional detailed control exercised by ministries of finance and by the ministry or department responsible for personnel management will require reform. Unless these ministries accept that discretion is needed line ministry management will not be able to take advantage of the managerial opportunities that the adoption of PFM/IC generates. Consequently, the controls exercised by the ministry of finance should also be reformed taking into account not only the control of expenditure (i.e., inputs) to a control based upon the achievement of objectives (i.e., outputs). A managerial capacity to develop initiatives may affect the timing of expenditure as well as the detail of expenditure, and this could also mean that cash flow control may also require review. Similar points apply to the central organisation responsible for personnel controls. Improvements in efficiency and effectiveness are not achieved simply by exercising financial and budgetary control or even by requiring that the lowest tender is always the one to be accepted, although this is sometimes how improvements in efficiency are defined. A consequence of the reform, therefore, is likely to be that line ministries will require considerable freedom about how they organise, direct and manage the resources put at their disposal through the budget process. Without that if a ministry of finance or the organisation responsible for personnel control seeks to continue to exercise control through detailed regulation requiring it to approve all changes, in effect that shifts responsibility from the line organisation manager to those central organisations who effectively become the decision makers. This is not to argue that such controls should be totally removed but it does mean that the way in which they are exercised may need to be changed. In other words, the introduction of PFM/IC should cause countries to review the way in which such central controls are applied. If a ministry of finance (and any other central organisation) is not willing to change their approach, the benefits of PFM/IC are unlikely to materialise, or at least fully materialise.

A ministry of finance or the organisation responsible for personnel controls therefore should change their approach to control from detail to focus on developing policy guidance about the types of transactions or personnel policies which they feel they ought to be consulted about, that is, a shift to a strategic form of control allowing the development of a managerial capacity.

Test 6

Is a reform of the civil and local government service responsibilities and organisational structures (public administration reform) also being undertaken and is this review compatible with the requirements of the PFM/IC reform?

Following on from test 5, whilst the PFM/IC reform has significant management characteristics, that reform on its own cannot drive public administration reform. That drive needs to come through an overall review of how the civil and local government service operates, that is, its responsibilities, management structures, leadership arrangements and the relationships with the political level of management. Public administration reform will also need to prepare the civil and local government service to take on the leadership, operational management and other responsibilities that the PFM/IC reform will require the civil and local government service to absorb. There is no feasible option for those involved in the PFM/IC reform but to ensure that a comprehensive management reform is compatible with the managerial reform requirements of PFM/IC. Success in improving the quality of public services depends very heavily upon the quality of management.

An essential feature of the reform therefore will be that the PFM/IC and public administration reform programmes are fully coordinated and are developed in parallel. The initial focus of the public administration reform should be to facilitate the separation of operational management from policy and strategy development responsibilities and to facilitate the development of management structures (see also test 7). What should not happen is a public administration reform that seeks to specify in detail how each ministry and other organisation should be structured and the different categories of official that should be employed. The person who is the head of operational management should have sufficient authority to determine the actual management structure within the organisation for which he/she is responsible.

Coordination of the PFM/IC and public administration reform programmes is not an activity that usually occurs. Both reform programmes are usually considered separately, and this is because the PFM/IC programme is simply regarded as a technical reform. But without that coordination, which has the practical effect of bringing finance into the management processes, the benefits of the PFM/IC reform will not be achieved. Therefore, can this test be met?

Associated with this test will be the need to establish an effective managerial control over second-level organisations. Not only will that mean the preparation of agreements setting out the objectives and performance criteria for such organisations and that such agreements are regularly reviewed, but also the first-level organisation having a capability to determine and systematically monitor the policies and performance of the second-level organisations it is responsible for.

Test 7

Are the arrangements for the management and motivation of civil and local government officials consistent with the need for them to take on the responsibilities of management including taking initiatives and making judgements?

Central to the successful application of PFM/IC are ‘people’ and their motivation. The reform is not simply about systems and technical ‘fixes’. Systems and technical ‘fixes’ must be applied by people, that is, by the civil and local government service officials. With delegation and managerial accountability, an important consideration should be the motivation of civil and local government service officials to make judgements and to take decisions, that is, their engagement in the business of the organisation. This is not just a matter of training in the techniques and technical ‘fixes’, important though these may be, but it is also about culture and management: how to develop and direct organisations to achieve whatever it is they are expected to achieve and to do so in a manner that has regard to the public interest. This requires rather more than training but an investment in the development of civil and local government officials as managers and leaders. This involves the linking of theoretical training with problem solving as well as developing those skills that a manager requires. Such development training would include, for example, the transition from administration into management; an appreciation of the different management styles; communication and interpersonal skills; building teams and focussing on organisational goals; developing leadership skills, building relationships with ministers and mayors; effective policy making; as well as establishing an understanding of the tools, techniques and concepts of good financial management. This also emphasises the significance of the role of the head of the civil or local government service in an organisation and how that person exercises his/her leadership role.

The development of an effective management starts with the head of the civil or local government service in an organisation and then throughout the organisation. Management training is important because it involves planning and goal setting and creating a vision for the organisation. It requires the interpretation of the political objectives and putting them into a form that will be operationally practicable, along with motivation of staff to execute the operational plans. Staff management and motivation are also especially important (see test 8). Effective management creates a direction for the organisation and communicates the vision internally and externally to the different stakeholders.

To achieve this, though, requires the recognition by elected officials of the need for the motivation of the civil or local government service officials. With PFM/IC the role of the civil and local government service is enhanced. No matter how good the management and technical training, if officials feel frustrated or if they feel they have no effective authority, this will adversely affect their performance. “Effective government agencies have high levels of motivation among their members, including high levels of public service motivation, mission motivation, and task motivation.”³ Many of the reforms implemented in the public sector such as PFM/IC are likely to affect the incentives that influence motivation and thus affect individual and organisational performance. “Employees are an important ingredient in determining the quality, effectiveness and responsiveness of public services, especially when financial resources are scarce or there are novel challenges to face. How they think and feel about their jobs and working conditions inevitably affects the way they carry out their tasks (Rainey & Steinbauer, 1999).”⁴ Much depends upon local circumstances but in introducing PFM/IC regard should be had to such factors because the introduction of a managerial work ethic is a significant reform and therefore regard should be had to those factors that inhibit performance. Motivation is not necessarily simply a function of pay and other financial rewards, although especially for specialist skills competitive pay should be offered. Motivation can be a function of a wide range of factors including the nature of the work, the effectiveness of the activity, the opportunities for preferment.⁵

The question that then arises is who is to be responsible for civil service and local government staff management and motivation within organisations? Given that delegation of operational management should occur, responsibility ought to lie with the head of the operational staff of an organisation such as the state secretary or the equivalent in local government. This is a question that ought to be addressed with the introduction of PFM/IC, but no evidence has been seen that it actually has been considered in countries introducing PFM/IC or in the relevant literature. Yet quality staff management and motivation is highly desirable, indeed essential, for successful management. (A reality that will need to be considered is that career development in many civil services is not affected by success or failure in meeting objectives but the development of a managerial performance-oriented culture, ought over time, at least, to challenge this reality even if it means allowing preferment to those with new ideas and able to develop and deliver new initiatives.)

Test 8

Is there a willingness to rethink the penalties and sanctions and the arrangements for the discipline of civil and local government officials?

In many transition and developing country economies, the disciplinary penalty and sanction arrangements, whether imposed upon civil and local government officials through the budget law or in other specific laws, are often designed to reflect the legalistic and authoritarian nature of the public administration regime that exists or has existed in the recent past. The aim is to achieve strict adherence to the laws, rules and regulations with little or no scope for the exercise of judgement. These disciplinary and sanction arrangements are often reinforced by specific inspection arrangements. They tend to impact more heavily upon lower level officials than upon either elected officials or senior appointed officials. A primary aim of such sanctions and disciplinary arrangements is often to reduce the risk of decisions being made that might cause budgetary constraints to be ignored or avoided or to minimise the risk of fraudulent or corrupt activity. Introducing PFM/IC places more responsibility upon officials to make decisions, and making decisions involves risk. Delegation of operational management will not be effective if those officials remain concerned about how the system of sanctions and discipline may adversely affect them. In some countries the legal code affecting the way in which civil and local government officials undertake their responsibilities has provisions for sanctioning them for what may be vague offences such as, in an example from one country, ‘exceeding competences’ and ‘criminal indifference’. In practice such provisions may be only rarely applied but the fact that they exist creates a perception that they can be used and this can cause officials to rigidly limit their activities and to avoid taking any risks by referring all decisions upwards. This discourages even senior officials as well as middle and lower level managers from taking risks or rethinking how public services should be delivered. Yet PFM/IC is about how public officials make decisions about the utilisation of resources to deliver public services efficiently and effectively and at the same time achieve their objectives within what can be a changing and challenging operational environment. With the delegation of operational management, operational managers (who ought to be the civil and local government officials) need to exercise judgements: that is what making decisions is all about. As any judgement involves risk and particularly where public services have a direct impact upon individuals who may object, officials, who have been traditionally risk averse, may have difficulty in accepting the responsibilities associated with a PFM/IC regime.

What this means is that where such a traditional legal and disciplinary framework exists, the introduction of PFM/IC will require change to avoid inhibiting management action by the operational managers. Without a reform which recognises the significance and consequences of devolving operational management responsibilities, the operational environment will discourage operational managers from taking those actions which will deliver more efficient and effective public services as well as those actions which will secure the delivery of objectives and performance standards.

A feature of introducing the PFM/IC reform, therefore, should be a review of the penalties and sanctions regime which can have a critical bearing on organisational performance. Is there a willingness to undertake such a review and if not the managerial reforms which PFM/IC envisages will be difficult to introduce?

Test 9

Does the ministry of finance recognise that to secure success in the establishment of a managerial culture both it and the ministry responsible for civil or public service reform will require that they are able to provide a high quality of advice and support to line ministries that will complement the development of PFM/IC? This will mean that the role of a ministry of finance will need to change to become much more supportive than simply acting as a ‘controller’.

The main gains from this change will be a management focus upon the achievement of objectives, standards of performance and efficiency and effectiveness, that is, outputs as well as inputs. In other words, a better use of public resources. Consequently, there will be a much greater emphasis upon developing financial awareness, an awareness that goes well beyond knowledge of budgetary limits and financial control processes. That gain will only occur with the active and ongoing encouragement and support from the ministry of finance. With PFM/IC former administrators will be operating in a managerial environment, and this does mean changing the whole culture of the organisation including at the lower levels of staffing. This will require a radical change of approach in how the civil or local government service operates. The focus upon achieving outputs and doing so efficiently and effectively represents a very different approach from a traditional administrative approach dominated by concerns about budgetary and financial control.

The ministry of finance should provide advice and guidance on technical issues such as the development and interpretation of costing information, on fiscal risks, on the financial controls that should be applied to second-level organisation including state and local government-owned companies as well as on long-term financial planning. This advice should be available to both managers and to specialist officials concerned with financial management. Managers also will require advice, including training, on how to improve efficiency and effectiveness (e.g., on such issues as how to identify, manage and allocate costs against cost drivers, how to identify, manage and allocate costs against cost centres and how to develop the performance information that should accompany such analyses), how to identify risks and the management of those risks. Heads of finance and their staff may also require training in the development of analytical techniques such as cost accounting and managerial information systems such as new ministry or local government coding structures including how to link these with ministry of finance coding structures. This adds significantly to the role of the ministry of finance as well as changing the traditional role. Is there a willingness on the part of a ministry of finance to take on this ‘educational’ type role which will change its traditional relationships with line ministries and other public organisations?

4.2 How Is the PFM/IC Reform to BeUndertaken?

4.2.1 Who Should Be Responsible for the Development of the PFM/IC Reform Policy, Its Application and Local Ownership of the Reform

Because this is a major reform, political and top operational management support for it is essential. Also, because the reform involves long-term change, that support ideally should have cross party political support. In addition, the prime minister and minister of finance (and their successors) should be committed to the reform and their responsibility is to secure commitment from other ministers and where the reform extends to local government, from mayors and other local government leaders.

Very often the reform will be initiated by an external organisation such as an aid organisation or, for countries seeking to join the European Union or to benefit from its funding as neighbourhood countries, the European Commission. Financial support in these circumstances will usually accompany such an initiative. However, the timing and advice about the development of the reform policy and its application as well as the period of the funding in such circumstances will be determined by the provider of the funds. The driver in these circumstances will be external to the country and the motivation to introduce the reform may be wider than simply the PFM/IC reform itself. The fact that the driver is external to the country can affect how political support is mobilised and the continuation of that support, especially if there are differences of view about the wider objectives.

Because this reform has such an impact upon the roles and responsibilities of civil and local government officials, their commitment, through the support of the senior civil and local government service, is also essential. Once the principles of the reform have been established and parliamentary support obtained, the ministry of finance would normally be responsible for its application. Support for the actual application of the reform as it affected political officials should be the responsibility of the prime minister and the minister of finance. So far as the overall operational application of the reform is concerned, the responsibility for securing its application should lie with the state secretary (or equivalent) of the ministry of finance. That person should have the authority to require his/her equivalent in other ministries to apply the PFM/IC application policy and their commitment to and support for the reform is essential. Therefore, within each ministry or local government, subject to the overall guidance of the state secretary (or equivalent) of the ministry of finance, the application responsibility should be that of the head of the civil or local government service (i.e., the state secretary or equivalent) reporting as appropriate to the political head of the organisation. The head of the civil or local government service in each public organisation should have the authority to continue with the reform even when political personalities change, unless there is a central government political policy change affecting the acceptability of this reform. Without that delegation to the head of the civil or local government service, a risk could be that a ‘stop/start’ process occurs caused by changes of ministers (or mayors) which will be disruptive to the application process. Achieving that civil and local government service authority to proceed with the application of the reform is an essential practical requirement. The role of the state secretary in the ministry of finance is discussed in detail in Chap. 5.

However, there is a potential problem where politicians feel that they must be involved in all decisions, which could be the situation in some developing and transition economy countries (as well as in some developed economy countries). This potential problem is that as political post holders change, they may feel that even though the policy in principle remains they may wish to impose their opinions on the application processes. The result can become an erratic application which will be disruptive. A consistent approach is highly desirable, and it will avoid delay.

Whoever has responsibility for the development and application of the reform, a critical first step should be an assessment of the results of the tests described above. Unless the response is positive to these tests, even though the reforms needed cannot be implemented speedily, the benefits of applying the reform will not be achieved and that will raise questions as to whether the reform is worthwhile at this particular point in time. The attitudes of the ministry of finance and the department or ministry responsible for personnel management demonstrated in the response to these tests will affect:

• The timetable for the development of the policy and the application of the reform;

• How the reform should be applied (see next sections of this chapter) and

• It will also identify the complementary reforms that may be required.

As has been pointed out earlier, introducing PFM/IC is a major reform there is no ‘quick fix’ such as introducing a law specifying what is to be done coupled with the introduction of a series of additional bureaucratic procedures. The introduction of PFM/IC will take a considerable period to implement across a public sector, maybe 10 to 15 years⁶ or more. Not only within this period will the techniques associated with PFM/IC need to be introduced, including the extended financial and performance information systems but also fundamentally the managerial changes that will be required, and it is with these managerial changes that the reform process should start. Unfortunately, this rarely, if ever, occurs and the reality is that reform usually starts with the introduction of the bureaucracy associated with the reform and with that associated with the introduction of international best practice, that is, the COSO requirements.

4.2.2 Achieving Local Ownership

Achieving ‘local ownership’ of the reform, even at an individual organisation level, is an essential step and it will be demonstrated by the strength of the commitment of the key political and senior officials. Ownership is important for these reasons:

• First, the effective management of public money is central to the achievement of the policy objectives of the government. How it manages that money should be its decision and the systems that it chooses to adopt should be those that it is comfortable with. Where systems have been imposed externally, the likelihood is that, in reality, they will only be implemented in a manner which suits the interest of the promoter of the reform and which justifies that organisation’s support. The most obvious result in such circumstances is that the reform becomes a cosmetic reform. This is because a substantive reform would have a fundamental impact upon traditional customs and procedures. This is a real risk with the PFM/IC reform.

• Secondly, because government problems cannot easily be compartmentalised by making their solutions the responsibility of a single ministry, the budgetary and financial systems must have government-wide ownership. This is even though the reform may be implemented in stages, which means that some ministries and other public organisations may be implementing the reform much later than others.

• Thirdly, governments must retain ownership of their financial systems because weakness in public finances is often the result of poor execution, not of inadequate systems or procedures. Desirable reforms “will only be successful if they are accompanied by measures that enhance the accountability of those who operate the systems including enforcing the rules embodied in existing or reformed regulatory frameworks”.⁷ Accountability requires ownership.

• Fourthly, any reform is undertaken at a particular point in time. However, operational circumstances are changing constantly and therefore systems must be adapted to reflect such changes. Governments must own a reform to ensure that it is sustained and remains relevant in different operational circumstances.

The reform will involve the development and/or employment of skilled managers and, as indicated, a refocusing of elected official interests away from day-to-day administrative and operational arrangements towards the development of policy and strategy together with an oversight responsibility for operational management activity. This emphasises the importance of local ownership. None of these elements of the reform will be easy or short term.

4.2.3 The Role of Parliament

In many countries if this reform is to be driven forward, as has been explained in previous chapters, there is an important role for the parliament. Parliament should not be concerned with the detailed application of PFM/IC within individual public organisations except in the context of external audit reports about those organisations. However, parliament should be concerned firstly about the appropriateness of the proposed policy and that will mean that parliament has a clear appreciation from the outset of what the reform involves including its costs and benefits and then secondly about the progress with the reform as it is applied. This means that parliament ought to approve a timetable for the application of the reform and that the minister of finance should be accountable to the parliament for progress. Should the minister of finance wish to make changes to the timetable for application, then parliamentary approval should be sought. Through this process accountability pressure would be exerted on the minister of finance and that in turn would be reflected on the officials responsible for the operational application of the reform, not least on the ministry of finance state secretary.

In effect through this accountability process, parliament becomes an effective driver of the reform requiring explanations where the timetable is not being met or the managerial changes required are not being made. If there is no such accountability process, the reform remains wholly an internal organisational reform to be pursued at a time of choosing by the minister or ministry of finance which in turn means that the timetable will be affected by the current priorities of that ministry.

The main adviser to the parliament would in most countries be the state auditor but exactly how a parliament would exercise this responsibility would depend upon its traditions. For example, it could do so through a specialist committee, such as a committee established to consider external audit reports.

4.2.4 The Basic Elements of This Reform Recognising That This Is an Ongoing Reform

As developing PFM/IC will take several years as experience is gained, new ideas will emerge and circumstances will change. This means that there should be a flexibility of approach. However, what is important in the implementation of PFM/IC is first to put in place the basic elements of this reform, that is:

• Ensuring that a robust and effective financial administration (test 1) exists at each of the organisations expected to implement the reform. (If this does not exist, then this should affect the timing of the ‘roll-out’ of the reform across the public sector because this must be established first.)

• Ensuring that the promoters of the reform have a clear appreciation of what the reform is essentially about with its managerial implications, including top management support, and that they in turn promulgate widely that appreciation both at senior political and at senior official levels across the public sector (test 2).

• Following on from the previous point that the ministry of finance budgeting and accounting departments are willing to allow information to be provided that meets individual managerial needs as well as their own and the available software has the capability to provide both sets of information, or if not that a capability and willingness exists to allow individual public organisations to develop their own budgetary and financial analytical systems provided they can also provide the information that the ministry of finance requires (tests 3, 4 and 5).

• Given that the state secretary, or equivalent, in the ministry of finance should be responsible for the management of the reform he/she will need support. This should be by the establishment of a department with responsibility for supporting the ministry of finance state secretary with the detailed implementation of PFM/IC across the public sector. The selection of the head of that department will be important because he/she should have a wide operational experience and recognise the managerial significance of the reform. (A summary of the responsibilities of this department are set out in Chap. 9.) The state secretary should, of course, be expected to report regularly on progress to the minister of finance (tests 6, 7, 8 and 9).

• Ensuring that a clear and supportive political and official leadership exists within each public organisation committed to the delivery of the reform. This is important because it enables ‘local ownership’ to be achieved at each public organisation level. This means that before the reform is formally announced there has been wide discussion at both the political and appointed official levels about the reform, how it will impact upon different groups of officials and how it will affect the future management of organisations. This is essential because it will be important to avoid too great a shock to the present administrative system which would only create an adverse reaction (tests 6, 7, 8 and 9).

• There is a willingness to coordinate public administration/civil service reform with the PFM/IC reform. There is little point in proceeding with the PFM/IC reform if proposals for the public administration/civil service reform are not compatible with the managerial requirements for the PFM/IC reform (tests 6, 7, 8 and 9).

• Personnel policies can be established which facilitate the development and application of managerial skills and that a civil service organisation exists which has the structures which can be developed to provide a managerial approach to the delivery of public services. This should include that a review is undertaken of the sanctions and disciplinary arrangements affecting civil and local government officials to ensure that they are compatible with the development of a managerial culture (tests 6, 7, 8 and 9).

Given that these initial elements have been established, then for each ministry implementing the reform the following steps should be taken (with the equivalent steps applying where local government is involved):

• (i) The state secretary of the ministry of finance agreeing with the most senior appointed official in each ministry (state secretary or equivalent) undergoing the reform about how and when the reform will be implemented in practice including the acceptance within that ministry (or local government) of the delegation of operational management responsibilities to the civil (or local government) service. (See Chap. 14 for a detailed discussion of the limitations of the delegation of operational management.)

• (ii) Each state secretary in the relevant implementing ministry to establish, in conjunction with the political leadership as necessary, service delivery objectives, performance objectives and performance standards to be achieved by operational managers and which are derived from the political objectives and strategy for the ministry.

• (iii) Each state secretary to establish a managerial structure to deliver the operational objectives: this may require the agreement of the political leader of the ministry in some countries. These managerial structures should be accompanied by delegation and managerial accountability arrangements. This will also include arrangements for reporting to the political leadership.

• (iv) A programme for developing financial awareness amongst managers is established with budgetary and financial accounting arrangements being developed so that they not only provide the information and budgetary control that the ministry of finance requires but also provide the managerial information the managers need to enable them to deliver their objectives efficiently and effectively, to standard, to time and within budget.

• (v) A financial planning and analytical capacity and a long-term financial forecasting capability is developed and that the head of finance also has a capability and status to act as an adviser to management including to support and advise on the development of business and strategic plans.

• (vi) Steps are taken to ensure that policy makers and managers have the performance data they require to accompany financial data for the purpose of setting objectives and performance standards.

• (vii) Performance information systems are developed to provide the performance information managers require as they deliver their objectives and performance standards. (Such systems should operate independently of the manager to prevent managerial manipulation of the information.)

• (viii) Arrangements are made to determine the governance arrangements, objectives and activities of second-level organisations (including both agencies and enterprises) and to monitor their activities to ensure that second-level organisations operate to the same standards as those expected of first-level organisations and that their objectives are compatible with those of the first level owning organisation.

• (ix) A review of the human resource (HR) arrangements is undertaken to ensure that they facilitate the establishment of a managerial culture including a review of the penalty and inspection arrangements.

As has been pointed out earlier, what PFM/IC is not about is simply introducing a series of bureaucratic practices such as those relating to risk management or information and communication or the control environment, that is, the COSO bureaucratic requirements. Yet this has been the focus of much reform activity, especially in countries joining or aiming to join the European Union. These bureaucratic requirements are important, but they are only facilitators for management to use and what matters is the quality of leadership and management and how management utilises the information becoming available from those requirements. Those responsible for the reform ought to recognise from the outset that the long-term nature of the reform will require a consistent application policy. This again points to a need to ensure that the policy is ‘politically neutral’ in its application and therefore ideally that operational implementation is a function of appointed, rather than political officials.

Countries should also recognise that introducing PFM/IC is a continuing process as experience is gained and circumstances change. There is effectively no ‘end date’. Whether or not external financial support is available (and such support is likely only to be available for the initial stages of implementation), the argument in this guide is that this reform is so important, with its managerial implications, and that it is desirable in any event. However, there is such a thing as ‘reform fatigue’ and therefore how the reform is implemented is important. There ought to be clear steps in the reform process when assessments of the success (i.e., benefits) can be made. The most important initial stage is to put in place the basic elements of the reform, that is, the managerial elements of the reform, the enhancement of the financial management capabilities and the reform to the budgetary and accounting processes. These should be supported through the enhancement of the parliamentary scrutiny processes. Beyond these basic elements of the reform the main driver will be ‘practical experience’ as managements, both political and civil service, become more confident about how they can improve quality in the utilisation of public expenditure.

To emphasise a point made previously, countries considering adopting the policy of PFM/IC will already have in place a more or less satisfactory version of PFA/IC. These PFA/IC arrangements may need to be considerably modified in some circumstances if:

• That system does not result in the effective control of public resources.

• Significant losses have occurred through inappropriate practices or system weaknesses.

• Serious shortcomings have occurred such as a major fraud or losses caused by corrupt practice or waste and which have resulted in a withdrawal of aid support.⁸

To emphasise a point made previously, before any attempt is made to introduce PFM/IC the PFA/IC system should be reformed to ensure that the PFA/IC is effective and that also means understanding why the PFA/IC control system has not been effective, if that is the situation. If the present control system is weak, the remedy is not to change the system by trying to introduce PFM/IC but to improve or remedy the deficiencies of the present system not least because the likelihood is that whatever the deficiencies of the present system they will creep into any new system. What should also be borne in mind is that if the objective is to make it more possible to achieve the objectives of the government, this will not happen without complementary reforms to management. This may mean that the PFM/IC reform ought to be delayed and sometimes for a considerable period. Against this though can be the political imperative that ‘something has to be done’. The responsibility of the civil service in such circumstances should be to accommodate the staging of the reform in such a manner that the major deficiencies of the present PFA/IC system are addressed first. This is likely to mean that the discretion available to managers with PFM/IC is moderated recognising that this will defer the achievement of the potential benefits of the reform.

If, though, the reason is that the government wishes simply to adopt PFM/IC as international best practice, will such a reform for this reason be successful? Public financial reforms are not ‘freestanding’: they must fit into a context and the context is a country’s history, culture, economic, political and bureaucratic arrangements. Financial reforms do not always succeed, and a real risk is that the formalities of a reform (i.e., the bureaucracy associated with it) may be established but not the substance. So, whilst the appearance of reform exists in practice, the benefits cannot be achieved. The result is more bureaucracy and higher administrative costs and ultimately disillusionment. International best practice has no regard for local contexts. It also carries with it certain assumptions (see Chap. 11 which discusses the COSO reform requirements) and the implications of these assumptions must be addressed. With PFM/IC those assumptions are about the existence of objectives, the existence of an effective management, the delegation of responsibilities and managerial accountability arrangements. A principal and possibly key reason that financial reforms have not been successful or at best have only resulted in more bureaucracy in developing and transition economy countries has been the attempt to insert best international practice into an inappropriate local context. This applies particularly to PFM/IC if the aim is to introduce it into a country that has a traditional system of public administration with no or a limited concept of management and a strong centralised control. If there is no indication that the government is willing either to recognise the need for managerial change or to actually undertake such change and to accept that decentralisation of control will have to occur or if there is no support for the reform amongst senior officials (both political and appointed) then the reform will fail. Aid organisations in particular ought to recognise these potential risks.

Change therefore may be the inappropriate answer, especially where change involves the introduction of sophisticated public financial management systems like PFM/IC when the real answer lies in making the existing system of PFA/IC work more effectively. Changing rather than improving entails significantly higher risk and cost. Changing to PFM/IC is both expensive and risky because it is a fundamental reform and is not a simple technical financial change. To emphasise, the change from PFA/IC to PFM/IC is to a major and very advanced reform.

An expert adviser on financial reform in developing and transition economy countries, Professor Stephen Peterson, has summarised the key factors that need to be addressed in reform using this acronym: COPS,⁹ that is:

Context::

Historical, cultural, economic, political and bureaucratic.

Ownership::

Government, foreign aid, contractor.

Purpose::

Financial administration or financial management.

Strategy::

Recognise, improve, change, sustain.

The reform strategy which the state secretary in the ministry of finance, supported by the department responsible for the implementation of the reform, should consider is that it should have four elements: ‘recognise’ what exists; ‘improve’ what exists; ‘change’ [where necessary] what exists; ‘sustain’ the improvements and changes that have been introduced.¹⁰ It is not simply therefore just about change. Frequently the reform focus is on ‘recognise’, ‘improve’ and ‘change’. The missing element is ‘sustain’. This is one of the most important aspects of reform. Because the PFM/IC reform is not simply about technical systems but is about management and the distribution of powers within and between public organisations (and not least between elected and appointed officials and between the ministry of finance and line ministries), pressure is likely to exist over sustaining the reform. Because of the impact upon the distribution of ‘power’, pressures are always likely to exist to return to the status quo ante and therefore a positive sustain policy is necessary. The De Geyndt study is evidence of this.¹¹ Another factor affecting sustainability is ‘cost’. The drive to sustain the reform should be led and resourced by a government itself because it is most unlikely that third parties, such as aid agencies, would be willing to finance such an ongoing activity over a long period of time. A further factor affecting sustainability is that those who will be expected to share resources to solve cross-boundary problems, which a focus on outputs will generate, will be reluctant to do so. Overall, therefore, the risk is that at least over time the internal pressures will be to return to a form of PFA/IC, that is, the status quo ante.

4.3 Will Delegation of Operational Management to the Civil or Local Government Service Cause Politicians to Lose Control?

See also Chap. 14.

This question is not about ‘internal control’, rather it is about ‘political control’, and one that will be very important in some countries and can be central to addressing local culture. Those responsible for the implementation of PFM/IC will have to consider it. In some countries where PFM/IC has been, or is proposed to be, introduced, concern has been expressed by political officials that if they do not make all decisions (i.e., that there should be no delegation to appointed civil or local government officials), they will lose control of the organisation. This has been a cause of objection to PFM/IC reform in some countries. Even if the reform proceeds, this concern may limit the extent to which delegation and managerial accountability develop.

Associated with this concern about a potential loss of political control, other concerns about delegation may exist including about the ability of civil or local government officials to undertake the delegated responsibilities or a lack of political trust in the civil or local government service officials and vice versa. The problem of inexperienced civil or local government service officials is not solved by appointing inexperienced political officials but has to do with the overall quality of the civil or local government service. This in turn raises questions about recruitment and training processes for such officials, but it also is affected by the atmosphere or ‘tone’ of the relationships between political and appointed officials. If that is threatening, the risk to officials is increased, and where there are few alternative job opportunities, officials will be unlikely to accept delegated responsibilities that involve a higher degree of risk. As has been pointed out previously, making decisions involves making judgements and, by definition, making judgements involves risk. ‘Trust’ is much more difficult to address and can involve many factors. Without the civil or local government service having a tradition of demonstrable independence, irrespective of the political control, political trust in the public administration can be difficult to establish. Control is not addressed by politicising the civil or local government service through appointing ‘political friends’ of the government to civil or local government service positions. Alternative solutions are required. The answer lies in civil service or public administration reform, including the training and entry requirements. Without a quality civil service, the introduction of the PFM/IC reform is much more problematic. This emphasises the importance of establishing a ‘Weberian’ style of civil service (see Chap. 14).

However, apart from these questions about competence and trust, the main points to be made in any debate about this question of potential loss of control by politicians include:

• The political head of a public organisation, a minister or mayor and their political deputies are frequently chronically overburdened given their responsibilities for the development of policy, the strategy for implementing that policy and the political considerations of government as well as detailed responsibility for operational management (where that is the situation). This adversely affects these officials’ ability to focus on their most difficult task which is the development of policy and strategy and the management of their political relationships. Good quality policy is central to efficient and effective policy execution.

• When dealing with straightforward operational management tasks, the political leadership has, at best, only a limited time available for the many operational managerial tasks that exist. These include the exercise of organisational leadership, supervision and control of operational management activity including the setting of detailed operational and staff objectives, setting performance standards and performance objectives, maintaining quality, the supervision of second-level bodies and communication with the staff as well as ensuring that public resources are efficiently and effectively utilised. In practice most of this does not actually occur where there is no delegation of operational management to the civil service.

• Political leaders are not usually appointed for their specialist skills in a particular service or activity (although this is sometimes essential). Therefore, if they are to undertake responsibility for operational activities, they need to familiarise themselves with not only the policy objectives for the organisation for which they are responsible but also with operational matters and at the same time have the knowledge experience and capacity to manage a usually large and complex organisation (larger and more complex than most private companies). However, the reality is that given the complexity of most modern public services, nobody within a public organisation can be familiar with every detail of a subject matter. The result is that many decisions, taken in a strictly centralised and hierarchical process, do inevitably suffer from a lack of competence. Consequently, the quality of managerial decision making can be less than is desirable. (Even where a politician has top management experience in a commercial organisation, transferring that experience to a public sector context is not easy not least because of the complexities of public service management and the competing pressures upon leaders.)

• Operational decisions, as a general rule, should be made on the basis of operational related issues with political considerations being mostly of limited relevance, but if the decision maker is a politician rather than an appointed official, the separation of political considerations from operational or managerial considerations is very difficult.

• Even if staff are involved in the internal decision making process where the operational manager is a politician, they are unlikely to be either authorised to take the final decision or appear as the responsible person through their name and signature. This is de-motivating and a waste of, very often qualified and well-educated, personnel resources resulting in a lack of accountability of civil (or local government) officials.

• Challenge to political leaders by civil servants and local government officials in traditionally organised hierarchical public administrations can be difficult in practice, and where this difficulty extends to operational management, the quality of governance inevitably suffers. (A responsibility of a civil service official is to set out the facts and relevant issues even where they make uncomfortable reading for the political officials, and they should not be adversely affected by doing so.)

• Many of the operational decisions that political leaders are involved with in traditionally organised public administrations are of a trivial nature, such as the signing of invoices or payment orders or job descriptions and leave arrangements, and have no political consequences. Requiring political officials to be involved in such activities is a misuse of their time.

• A requirement for political leaders to be involved in operational management decisions, because of the limited time that they have available, can lead to delay in the making of those decisions: this adversely affects the efficient and effective delivery of public services.

• Implementing PFM/IC adds to the responsibilities of the operational manager. If the political leader is to act as the operational manager, this adds to the demands upon that leader. In practice, either those added responsibilities would be ignored or addressed in only a superficial manner. An example would be improvements to efficiency and effectiveness, and another would be managerial risk management.

Trying to make every decision does not put the minister or mayor in control: the result is an illusion of control.

With PFM/IC in place and with the consequential establishment of delegation and managerial accountability, the head of the organisation is in more effective control of an organisation than by trying to take every decision. This enables those top and senior politically appointed officials to focus upon developing the policy and strategy for implementing that policy by the organisation and to supervise through the managerial accountability processes what is happening operationally within the organisation. It enables top and senior managers, both political and appointed, to just focus on the key issues and avoid involvement in items of lesser importance. Introducing PFM/IC adds to the responsibilities of the manager because it envisages a higher quality (i.e., professionalisation) of management than do traditional systems of public financial administration. This alone makes the task of the operational manager much more substantial. Overall, the likelihood is that without delegation the additional responsibilities arising from the adoption of PFM/IC would not be effectively undertaken and therefore the benefits would be lost.

There is a further aspect to the question of the allocation of responsibilities between political and appointed officials and that is how will parliament react to this element of the reform? As has been indicated earlier, parliament ought to be consulted about and kept informed of the reform progress and it can be kept informed regularly through the work of the state auditor. Parliament ought to have a view about the arrangements that are being made not least because of the accountability of the political leadership to parliament and the overriding concern that parliament should have for the utilisation of public resources. Parliament may wish not only to challenge political officials about policy and the delivery of the objectives of that policy, but it may also wish to question officials (political and appointed) on their utilisation of public resources in the delivery of policy objectives. Parliament may also be concerned about securing transparency and accountability in the utilisation of public resources. Properly implemented, PFM/IC provides greater opportunities for parliament to do all of this.

4.4 How Should the Reform Be Applied Across the Public Sector?

A decision needs to be taken about the practical arrangements for applying the PFM/IC reform throughout the public sector. This should be a government decision taken with the advice of the minister of finance who should in turn consult with other ministers and parliament should be informed of this decision. The questions are:

• Should all public organisations be expected to adopt the reform at the same time, or should it be phased over different types of public organisation (e.g., over initially central government ministries and then local governments or vice versa)? Or alternatively:

• Should a pilot process be established which would allow for an experimental approach and the identification of difficulties with the lessons to be learned?

• Should the reform be applied in stages, even within pilot organisations?

• Given the length of time the reform will take to implement, can the reform be staged in such a manner as to reduce the risks arising from ‘reform fatigue’?

Operational managers at each stage would require extensive training support.

If the decision were to apply the reform in stages, the possible stages are set out in Chart 4.1. No specific reference is made in these stages to the application of international best practice (i.e., such as the COSO standards). However, as operational implementation of those standards would be the responsibility of the operational management within each public organisation that management would require extensive management training. The expectation therefore should be that the application of such standards would be during stages 2 and 3, that is, not at stage 1.

Chart 4.1

Stages in the application of PFM/IC

The decision about how and when to proceed will depend partly upon the availability of resources to develop the detailed advice and support operational managers will require as well as the financial advisory functions and systems. Not the least of these will be the training needs of managers and heads of finance. If this advisory and training resource is limited, then this would inevitably point to the use of a pilot and staged application process. However, the most important factor determining the application arrangements will be the current administrative arrangements, the willingness of politically appointed officials and senior civil and local government officials to accept and adapt to the implications of the reform as it affects what they see as their authority, their responsibilities, their potential liabilities and their accountability. This very often revolves around the question of ‘trust’, which has been referred to earlier and an important issue should be how to build ‘trust’. That question applies not only to political/appointed official relationships but also to relations between central and line ministries.

The strength of opposition to the implementation of the reform is likely to be a determining factor in the arrangements for its introduction. And that will only be established through extensive pre-reform consultation. (This is not something that usually occurs.)

4.5 Establishing a ‘Driving Force for Change’ Within a Ministry of Finance

For this reform to be successful there must be a ‘driving force for change’ within the ministry of finance. Although this guide suggests that this should be the most senior civil servant in a ministry of finance, this person will need to ensure that a detailed and practical day-to-day support is available to public organisations and to act as an adviser and supporter to themselves. The European Commission in its advocacy of the PFM/IC type reform for countries seeking to join the Union and for neighbourhood countries benefiting from European Union funds has recognised this and required that such countries establish a special unit or department specifically designed to promote, introduce and supervise the implementation of the reform and to maintain its continuing quality.¹² Its role is defined as:

A policy unit attached and directly reporting to the Minister of Finance on the status of internal control in the entire public sector, responsible for redesigning, updating and maintaining the quality of the internal control systems, for harmonising and co-ordinating definitions, standards and methodologies, for networking between all actors (managers, financial officers, internal auditors), for the establishment and co-ordination of sustainable training facilities, including the setting of criteria for the certification of public internal auditors and for all other actions to improve public internal control systems.

Note: Given the focus described in this guide the head of this unit’s reporting line should be to the chief ministry of finance official, not directly to the minister.

The head of that department should be knowledgeable about PFM/IC and its managerial implications and provide detailed implementation advice and support, as necessary. The department should have the status of other ministry of finance departments, and it may well be required to challenge existing ministry of finance departments and their policies. That department should be staffed with the different skills needed in the application of PFM/IC including accounting, financial analytical and forecasting skills and, importantly, managerial experience. Unfortunately, where such departments have been established, because the broad managerial and financial implications of the reform have not been recognised neither have the broad staffing requirements. In European countries the initial focus has been on internal audit which can result in an inappropriate approach to the PFM/IC reform. This has focussed the reform simply on financial and budgetary control. (Chap. 9 explains how this department should be organised and what should be its agenda of activity.)

The idea of establishing a formal ‘driving force’ to support the chief official in the ministry of finance is important but if not properly directed and supported such a ministry of finance department will find it very difficult to achieve its objectives. That direction and support must come initially from the chief appointed official in the ministry of finance who in turn should be reporting on progress to the minister of finance. The minister of finance should report to the prime minister and ultimately parliament. Without this chain there is a risk that other events will intervene to divert attention away from ensuring that the PFM/IC reform is effectively implemented and to time.

4.6 Summary

In implementing this reform, politicians should be clear about the five objectives involved in the management of public money and the nine tests that should be applied to determine whether the reform is practically possible and appropriate. The use of these tests will also help countries assess how long the reform is likely to take and what it involves. Once the policy has been determined and agreed with the parliament, responsibility for actual application should lie with the minister of finance under the authority of the prime minister with managerial implementation being the responsibility of the most senior official in the ministry of finance. That official should be supported by a specialist ‘driver’ department which should be appropriately staffed and have the status of other ministry of finance departments. That department would have the practical responsibility of driving the reform forward under the authority of the chief civil service official within the ministry of finance.

The chain of responsibility back to parliament is very important to ensure that reform progress occurs.

The reform is fundamentally about the professionalisation of the management of the delivery of public services and as a result imposes considerable additional requirements upon civil (and local government) officials. These additional requirements make it difficult to see how politicians in countries where they have maintained responsibility for operational management can continue to undertake such responsibilities. Consequently, a feature of the reform will be the delegation of operational management responsibility from the political level of management. This also means that public administration or civil service reform should be coordinated with the PFM/IC reform.

Because the reform is complex and has wide-ranging consequences, countries do need to consider how they will implement the reform. Should it cover all public organisations at the same time, or be phased? Should the reform be staged to allow lessons to be learnt as each stage is implemented? In driving the reform forward regard to the risk of ‘reform fatigue’ and to allow the benefits of the reform at different stages to be demonstrated.