This chapter describes the role of the ministry of finance department responsible for supporting the state secretary in driving forward the application of PFM/IC,Footnote 1 the driver department. Overall responsibility and hence accountability for the operational application of the reform, within the context of policies specified by the minister of finance and by the government, should lie with the state secretary in the ministry of finance (see Chap. 5). Given the volume and often detailed nature of the work involved in the day-to-day application of the reform, the state secretary ought to be supported by a specialist department with the necessary expertise and resources. One of the main responsibilities of this department is an educational responsibility to secure a real appreciation of what the reform means and what it involves for those most directly affected by the reform. As has been explained in previous chapters, this is that the reform is not simply a financial control reform, of only interest to finance staffs, but has a significant impact upon how organisations are managed which in turn affects the budgetary and accounting arrangements. It impacts too upon the arrangements for transparency and accountability and requires that attention is paid to the quality of governance. The head of this department should recognise that the reform affects both politicians and officials and therefore that both groups need to be informed and their concerns addressed. Also, the reform should ultimately impact upon all public organisations, whether first- or second-level bodies, and therefore the application plan should take this into account. The head should use the information and arguments contained throughout this guide as a help in that educational process.

An important preliminary step prior to the formal decision to adopt PFM/IC should be a strategic analysis of the impact of the reform considering current cultural and managerial arrangements including how the reform would impact upon those arrangements. The risks with implementing the reform can be considerable and these should be explored. Merely deciding to adopt the reform without this type of strategic analysis exposes the minister of finance and the ministry state secretary to added risk in the effective implementation of the reform.

9.1 Introduction

As the PFM/IC reform is about management and the quality of financial management, this should be the central issue for the department of the ministry of finance responsible for its detailed implementation if PFM/IC is to be effectively introduced. This appreciation of the reform should be acknowledged from the outset. It is not simply a financial control reform. The quality of management determines how successful a public organisation will be in delivering its objectives and doing so efficiently and effectively.

The head of the department responsible for advising on and securing the application of PFM/IC must work closely with the state secretary (or equivalent) in the ministry of finance who has overall responsibility for the introduction of the reform on behalf of the minister of finance. The head would have the implementation responsibility to demonstrate to public organisations the benefits of introducing PFM/IC and how they can be achieved. Because the reform is likely to require quite radical changes to the management arrangements for the delivery of public services, some public officials (political and appointed) may find these changes difficult to accept and consequently the support of the state secretary will be essential to achieve the necessary changes.

This specialist department of the ministry of finance is in effect the PFM/IC ‘driver’ department supporting the state secretary. Establishing such a department would be an important statement of a substantive policy intention to introduce this reform. This department would be responsible for advising on the development of PFM/IC by individual ministries and other public organisations; on training and for systematically reviewing (annually, at least) the operational quality of public financial management and internal control throughout the public sector.

This chapter explains the main issues with which this specialist department should be involved with the introduction of PFM/IC. Because of the extensiveness of the reform PFM/IC can only be introduced effectively over time. There is no ‘quick fix’ solution but the basic managerial element of the reform should be established from the outset. Not only would this department, acting on behalf of the state secretary, be responsible for driving the reform, but to secure the quality of the reform and the maintenance of that quality over time, the department would in effect also become an oversight body.

9.2 Before a Decision Is Made to Introduce the Reform!

What is essential before the ‘driver department’ is established is that key preparatory work is undertaken. The critical feature of this reform, as has been explained earlier in this guide, is to deliver the policy objectives of the government along with the aimed for performance standards and objectives and to do so to time, within budget and efficiently and effectively having regard to the quality of corporate governance, accountability and the arrangements for transparency. This also means establishing an appreciation that the reform is not simply a financial control reform (which in this author’s experience is how it is often perceived). If simply strengthening control is what is required this  can be achieved without the need for the extensive managerial reforms that PFM/IC requires. In previous chapters the point has also been made that the achievement of objectives and performance standards to time, within budget, efficiently and effectively requires positive managerial actions, and it is to these ‘positive managerial actions’ that the PFM/IC reform should be directed. With the PFM/IC reform ‘positive managerial action’ must come from within the civil service, and in some countries, this will require civil service reform before the PFM/IC reform can be effectively introduced. But this can only come from within the civil service if there exists a government willingness to see this happen.  

Therefore the policy initiative to introduce this reform should ideally come from government itself. However, as has been pointed out previously, it frequently comes from outside, from third parties such as aid agencies or other international organisations and sometimes from commercial consultancies seeing it as a potential source of work. This immediately raises four questions which need to be addressed before those responsible for driving the reform forward can effectively operate. One question is that of ‘ownership’. For the reform to be successful, as has been pointed out, local ownership and local leadership are extremely important and are made more important because of the radical nature of this reform. The second question concerns the recognition by those advocating the reform that PFM/IC is as much a managerial reform as a technical reform. The third question to be addressed is about timing: is this an appropriate reform for the country at this time? There are many reasons why it may not be. The fourth question particularly arises where an aid agency is promoting the reform because implementing PFM/IC is a long-term reform and the question is, would long-term financial support be available? As this would be unlikely to be forthcoming this adds to the risk that the reform will not be successful unless the government itself recognises that it will be required to provide the funding at some future point.

These are questions that should be addressed by the minister of finance, supported by the ministry state secretary. And the answer may be that this is an inappropriate reform at the present time. In Chap. 4, nine tests were described which ought to be considered by the minister of finance and the state secretary before a decision is made to implement the reform. To do otherwise, as has been explained earlier in this guide, would be likely to increase costs without any corresponding benefits and could only make a weak financial and budgetary control system worse. Where there is external pressure to introduce this reform, this would require resistance to that pressure on the grounds that the reform is premature. (Section 9.2.1 below suggests how an initial report should be framed before a decision to proceed is made.)

What is also necessary is that a recognition should exist amongst senior officials (political and civil service) that reform is necessary and that the adoption of PFM/IC will make possible improvements to the utilisation of public resources, will lead to a better quality of governance and enhance democracy through greater transparency and accountability. A question then is, how is the nature of this reform to be communicated to parliament and to senior political officials beyond the minister of finance (and indeed also senior civil service officials) recognising that some at least will regard it as essentially simply a technical financial reform of benefit largely to the ministry of finance? The problem is made more complex if there is a high turnover of these officials. The introduction of PFM/IC, as has been explained in earlier chapters, has significant implications for:

  • The role of ministers, deputy ministers (mayors and deputy mayors in local government) as policy makers and strategists, and changing their role as operational managers.

  • The civil service (and local government service) officials giving them greater responsibilities for operational management decision making and consequently for how the civil service (and local government service) is organised and managed.

  • Consequently, the relationships between the political and official levels of management.

  • The quality of the budget for both income and expenditure because effective operational management depends upon certainty about the availability of funds and cash flow.

  • The reform of traditional budgeting and financial accounting arrangements to provide the information managers require if they are to deliver services efficiently and effectively.

  • Accountability arrangements including the scrutiny role of parliament and the information available to civil society through increased transparency.

These implications need to be explained and if they are not acceptable, the reform should not proceed. An important initial step therefore should be to achieve widespread key official, including parliamentary, appreciation of and support for the reform in principle at the highest political and official levels. This means that the decision to introduce PFM/IC should not be made before the main features which would affect the implementation of the reform have been considered. All this should occur prior to the establishment of the specialist ‘driver’ department in the ministry of finance. However, this preliminary exercise would provide essential training for those who would provide the nucleus of that department should a decision be made to proceed.

9.2.1 The Strategic Analytical and Planning Report

To prepare for the policy decision to introduce PFM/IC an initial step should be the development of a strategic analytical and planning report. This would consist of a preliminary analysis of the current public administration arrangements based upon those nine tests referred to in Chap. 4. This report should be prepared by or on behalf of the chief official within the ministry of finance and would be designed to ensure that before any decision is made to implement the reform, that PFM/IC is an appropriate reform for the country at the time and that it can be properly implemented or implemented in such a manner that the objectives can be achieved considering the cultural and political environment. This may affect how the objectives of the reform can be achieved and the timescale for achievement. The starting point in the preparation of the strategic analytical and planning report would be the undertaking or commissioning by, ideally, a person familiar with the operational environment within government and the public sector as a whole. This report should not simply be concerned with the present administrative arrangements but also with the power distribution between different groups and individuals and the processes that create and sustain those relationships over time. This is what the PFM/IC reform should address because it is likely to challenge existing traditions and the current decision making processes. The issues that such an analysis might consider and how they would change include:

  • Roles and responsibilities of institutions: Who would be the key stakeholders in the PFM/IC processes, including parliament, central ministries and line ministries?

  • Roles and responsibilities of officials: What are the formal/informal roles and mandates of different players, such as ministers, civil servants, advisers, others?

  • Power relationships between and within ministries: What are the actual power relationships between central and line ministries in the provision of public services? How are those power relationships exercised?

  • Power relationships between specific individuals, groups and public officials: To what extent is power vested in the hands of specific individuals/groups, whether within or outside the formal governing structures? Are decisions within organisations made collectively within public organisations or are they made by a single individual or a small group?

  • Ownership: What is the balance of ownership between central/line ministries/local authorities in provision of services and private organisations? How are the different ownership relations managed?

  • An assessment of current strengths and weaknesses of the current public financial management arrangements: including are they delivering the government’s objectives efficiently and effectively, within budget and in accordance with the laws and regulations. That will require identifying whether public organisations have specific objectives or more general aspirations, how the present budgetary arrangements affect managers ability to deliver public services and how assessments are made of efficiency and effectiveness, if any.

  • Financing and control: What is the balance between central ministry and line ministry control over the determining, allocation and utilisation of funds?

  • Information and costs: How well informed are decision makers in the delivery of public services about operational performance, about costs and about the longer run impact of decisions on future service delivery and the financial resilience of public organisations?

  • Service financing: How are individual public services financed (e.g., public/private partnerships, user fees, taxes, donor support) and what is the rationality for these arrangements?

  • Interest groups and their influence: How do different interest groups outside government (e.g., private sector, NGOs, consumer groups, the media) seek to influence policy and is there a policy facilitating transparency?

  • Historical legacies: What is the history of previous reform initiatives? How does this influence current stakeholder perceptions?

  • Corruption and rent-seeking: Is there significant corruption and rent-seeking in government/local government? Where is this most prevalent (e.g., at point of delivery; procurement; allocation of jobs)? Who benefits most from this? How is patronage being used?

  • Service delivery: Who are the primary beneficiaries of service delivery? Are particular social, regional or ethnic groups included/excluded? Where subsidies are provided, which groups benefit most from these?

  • Ideologies and values: What are the dominant ideologies and values which would shape views about PFM/IC? To what extent may these serve to constrain change?

  • Decision making: How are decisions made about public service delivery, that is, including objectives and performance standards? Who is party to these decision making processes?

  • Implementation issues: Once made, are decisions implemented? Where are the key bottlenecks in the system? Is failure to implement due to lack of capacity or other political reasons?

  • Potential conflict with other reforms: some may be in progress or proposed, particularly to the civil service and to financial management arrangements (such as the introduction of accrual accounting and programme budgeting) and an assessment should be made about the impact of the PFM/IC reform upon those other reforms. A risk that should be addressed is that unless this assessment occurs different reforms may be inconsistent in their impact and produce conflicting results. A second risk is ‘overload’ because too many reforms are occurring. A third risk is that technical financial reforms may not take into account the managerial implications of those reforms and that could cause conflict with the PFM/IC reform which has such a significant managerial focus.

  • Potential for reform: Who are likely to be the ‘winners’ and ‘losers’ from the PFM/IC reform? Are there any key reform champions within the sector? Who is likely to resist reforms and why? Are there ‘second best’ reforms which might overcome this opposition?Footnote 2

The author of this report should recognise that decision making around any politically driven process takes place in both formal and informal spaces and that an appreciation of both is necessary. Without that the recipient of the report will not have the right information to be able to create the reform pathway.

The strategic analytical and planning report should include an assessment of the quality of the civil and local government service and the entry qualification arrangements and therefore specific questions should be asked about the civil service arrangements. Are those entrance qualifications appropriate and the university educational arrangements appropriate? On entry are the training arrangements appropriate given the managerial responsibilities that will fall upon civil servants with the implementation of PFM/IC? What will be the extent of higher level management training that will be required? Another issue that should be addressed is an assessment of the quality of the public financial administration arrangements. Are they robust and can that robustness be maintained when authority for decision making is transferred from central ministry controls to local controls exercised by individual public organisations? A further factor that should be covered should be to ensure that the ministry of finance itself is comfortable with how the reform will impact upon its role.

Those responsible for the implementation of the reform should also ensure that there is an appreciation of the implications of the reform for the relationships between politicians and civil servants (and equivalent in local government). This will also raise the practical question about the changes to the responsibilities of the elected and the appointed official within individual organisations. If these power changes cannot be resolved, then it is more than likely that the reform will fail. Again, are the managerial structures suitable for the application of the processes that will facilitate the achievement of the reform objectives efficiently and effectively? Do organisational structures require reform? These elements of the reform affecting the managerial arrangements need to be fully coordinated with other civil service/public administration reforms. Is this feasible or are such reforms taking different reform paths? Will the personnel management arrangements require reform, especially given that with PFM/IC civil servants will be responsible for making operational management decisions? And very importantly, will the reform in reality have top level (political and appointed official) support?

The person responsible for the preparation of the strategic analytical and planning report, if a civil servant, would be ideally placed to become the state secretary’s chief adviser on PFM/IC and the head of the department responsible for advising on and securing the application of PFM/IC (i.e., driving forward the reform). That civil servant should be well informed about PFM/IC and ideally be an experienced manager.

A problem that this author has encountered is that many advisers and aid organisations responsible for supporting the application of this reform do not appreciate the political, managerial and cultural impact significance. They tend to have a ‘standard template’ approach and focus simply on the technicalities of the reform. They have not appreciated the impact upon the relations between elected and appointed officials, often on the grounds that this is either too difficult or premature or not relevant to the culture of the country. They have also not appreciated that success with improving the quality of public services, both policy and delivery, is not about techniques but about people and the skills they bring to the formulation of policy and the implementation of that policy. Neither have they appreciated the wider implications of the reform such as the effect that this reform will have upon budgeting and accounting arrangements both for the ministry of finance and within public organisations. They have also not considered whether this is an appropriate reform at this time given the current political, organisational and cultural background. The reform can be seen as ‘best international practice’ and therefore, by definition, a ‘good thing’ to adopt. The idea of initially developing a policy design approach, given the managerial implications of the reform, is not recognised and therefore a strategic analysis and planning approach (as with many other technical reforms) is not perceived as a necessary step in the reform process.

9.2.2 The Risks with Implementing This Reform

Implementing this reform is far from being risk free. The possibilities that risks may arise should be considered in the planning and implementation process. The potential risks fall into several categories and these are set out in the table below.

Possible areas of risk

(i).  Opposition to the reform from political officials and senior civil servants.

(ii).   Those arising from the likely length of time the reform is likely to take.

(iii).   The problems of integrating this reform with civil service reform.

(iv).   The possible difficulties with providing the budgetary information that managers require and the changes needed in the structure of ministry of finance control over spending.

(v). The problems associated with the need to achieve the integration of the ministry of finance financial information system with the managerial needs of ministry managers: this is potentially a major risk where a standard commercially based financial information system has been acquired and an expert assessment will be required to establish to which the system can be adapted to provide the information managers require.

(vi).  The difficulties with developing the performance information and systems that managers require enabling them to manage effectively the delivery of objectives to the appropriate performance standards.

(vii).  Creating a financially aware management.

(viii). Developing the appropriate management training arrangements and achieving the changes to personnel management that will be required.

(ix).   Recruiting appropriately skilled staff and retaining them within the public sector and in particular skilled finance staff able to provide the management accounting information managers require.

As the reform will be a long-term reform, clear milestones should be identified and a risk that should be recognised is that of ‘reform fatigue’. Those milestones should be identified as achievements with which politicians and the civil service can identify.

The main risks will be to those elements of the reform that result in changes to the distribution of power between political and appointed officials and between central and line ministries. The underlying pressure will be to return to the status quo ante at least over time. This emphasises why it will be important to have wide support for the reform from parliament, the prime minister or president, the cabinet of ministers and very importantly from the most senior civil servants. That means that their concerns should be explored from the outset. Other risks are mainly of a technical nature and over time should be capable of solution.

9.3 Implementing the Reform

9.3.1 Learning from Others

This guide demonstrates what a considerable change will be required. What matters most is the people not the procedures, although this author’s experience is that with PFM/IC reform the focus is always upon the procedures. And the reform must start at the very top of the organisation, considering both the political and civil service roles. At the civil service level, a mistake (which again in this author’s experience occurs too frequently) is to start lower down the organisation with the head of finance.

A practical problem with implementing the reform is that of finding a role model to learn from. This is very difficult. There are many models existing of developing and transition economy countries that have regarded the reform as just a financial and budgetary control reform treating the COSO standards as simply procedural technical standards. The result has added to bureaucracy, and cost, but with no benefit gain. Countries rarely discuss failures although it is from failures that the most important experiences can be gained. “There is not enough attention in the PFM community to failure. Failure is a better teacher than success! If I could see one change in the PFM community, I’d like to see a more open and forthright conversation regarding success and failure in PFM innovation.”Footnote 3

The best models come from developed economy countries but this illustrates a major difficulty with implementing PFM/IC reform. That problem is building a modern sophisticated reform onto a traditional system of public administration without also recognising that that system too also requires reform if the PFM/IC reform to be successfully implemented. To move from an administrative culture to a managerial culture is not at all easy. Apart from the reform requiring changes in the distribution of power between different groups, the willingness of civil service (and local government) managers to take risks and to develop new analytical skills can be problematic. The reform is likely to generate resistance, sometimes overt and sometimes covert especially as it may mean making personnel changes and that may require redundancies, promotion of some staff and the transfer of some existing staff to alternative employments.

Success depends on persuading individuals to change the way they work and that requires altering the mind-sets of civil servants and politicians. This is no easy task and the requirements generated by PFM/IC cannot be separated from a more general reform to civil service culture. A publication by the consultants McKinsey on the psychology of change management included these remarks which although directed at private sector organisations are relevant to the civil service: “But what if the only way a business can reach its higher performance goals is to change the way its people behave across the board? Suppose that it can become more competitive only by changing its culture fundamentally—from being reactive to proactive, hierarchical to collegial, or introspective to externally focused, for instance. Since the collective culture of an organization, strictly speaking, is an aggregate of what is common to all its group and individual mind-sets, such a transformation entails changing the minds of hundreds or thousands of people.”Footnote 4

McKinsey went on to identify four conditions that were regarded as important:

  • Employees will alter their mind-sets only if they see the point of the change and agree with it—at least enough to give it a try;

  • The surrounding structures (reward and recognition systems, for example) must be in tune with the new behaviour;

  • Employees must have the skills to do what it requires (this emphasises the significance of in-service training);

  • [Employees] must see people they respect modelling it actively.

What this emphasises is that the strategic analytical and planning report ought to make clear that the PFM/IC reform must be integrated with civil service reform more generally. To treat it as simply a reform of limited interest to the ministry of finance, albeit with a managerial context is not sufficient. An important component of the reform therefore, is how it fits with civil service reform more widely. It also means that those responsible for the development and application of the reform should have regard to the psychology of reform. To do that should mean consultation with experts in organisational change and in particular the psychology of organisational change. Once the strategic analytical and planning report is agreed, then this creates the policy framework to move to the next stage. The head of the specialist ‘driver’ department should recognise the importance of this point about the psychology of reform.

9.3.2 The Preparation of an Operational Implementation Policy Paper

Once the policy decision has been made to proceed with the reform, a detailed operational implementation policy paper should be prepared. This would be prepared in the name of the ministry of finance state secretary but the head of the specialist PFM/IC ‘driver’ department normally should prepare this policy paper on behalf of the state secretary. This paper should form the basis for the operational implementation of the reform and it would be based upon the strategic planning and analytical report. It should address the practicalities of the reform, that is:

  • Explain how the reform would affect the current administrative/managerial arrangements and how delegation would impact upon the role of political officials separating policy and strategy setting from detailed operational management. The latter would be a civil service responsibility unless there were specific reasons for ministers not to delegate (see next point).

  • Central to the success of PFM/IC is the development of delegation and managerial accountability. Delegation tends to be treated as a broad policy requirement but in fact what should be delegated and what not often requires sophisticated judgements and the policy paper should explain the principles that should lie behind the arrangements for delegation and accountability. (This is referred to in Chap. 14.) To ensure there are no misunderstandings, the head of PFM/IC department needs to work closely, as was pointed out in Chap. 5 and above, with those officials responsible for civil service/public administration reform. (Note: The PFM/IC reform cannot drive the civil service/public administration reform but a failure of the civil service/PFM reform to match the requirements of the PFM/IC reform can prevent that reform being effective.)

  • Demonstrate the impact that the reform would have upon civil service organisation and responsibilities (e.g., that each ministry should appoint a senior official to be responsible for the overall management of the ministry, that is a state secretary, with the relevant responsibilities and authority) and not least for the development of managerial structures and responsibilities throughout the organisation including those of the head of finance.

  • Consider the practicalities of coordinating this reform with civil service/public administration reform and the requirement for the civil service personnel policies to be compatible with the personnel policies necessary to implement PFM/IC.

  • Because the focus of PFM/IC is upon improving the managerial quality of the civil and local government service, it should include a commentary upon the changes that might be required to the day-to-day personnel (HR) management arrangements (see Chap. 14).

  • Consider whether reform is required to the present civil service reward, disciplinary and sanction arrangements.

  • Explain the need for each organisation to develop operational objectives and performance standards and performance objectives based upon government policy also recognising that for some services and activities this could be extremely difficult.

  • Explain that management responsibility for internal controls would extend to the delivery of objectives and performance standards and objectives and that managers would be accountable for the delivery of outputs as well as inputs and would be required to do so efficiently and effectively.

  • Point out the need to develop performance information systems linked to the objectives of the organisation and to ensure that managers could not manipulate such systems to show a better performance than is actually being achieved.

  • Emphasise the need for training and especially managerial training for civil servants and financial management training for heads of finance and finance staffs.

  • Explain how the reform would affect the budgetary and financial accounting arrangements including the linking of budgets with objectives and performance standards, ensuring stability in cash flows during the year, as well as providing the information managers could need whilst at the same time meeting the needs of the ministry of finance: this would include:

    • Ensuring that budgetary and cash flow forecasts were more stable, especially forecasts of income flows because of the need to avoid significant changes to resource availability for managers during the year;

    • The changes to the budgetary and financial information available to individual managers and how this may impact upon existing financial information systems;Footnote 5

    • The impacts upon the role of the head of finance in ministries;

    • The need for the development of managerial and cost accounting in addition to financial accounting.

  • Explain how the reform would affect governance, transparency and accountability arrangements including the consequences for parliamentary and civil society scrutiny.

  • Explain how the reform would affect the arrangements for the control of second-level organisations (whether non-market or market-based organisations) and that the first-level organisation must retain a capability to ensure that second-level organisations establish policies that are consistent with those of the first-level organisation and that they operate efficiently and effectively.

  • Provide a requirement that strong governance requirements were applied to state-owned enterprises to ensure that such organisations were effectively managed and that their resources were not misused.

  • Provide an overview of the benefits and costs (see Chap. 10) including an assessment of the time period over which those benefits and costs may accrue or be incurred.

  • Explain the changes that would be required to existing legislation, including the budget law and regulatory arrangements along with those disciplinary and regulatory arrangements which could adversely affect managerial willingness to make decisions and hence the establishment of a managerial culture.

  • Follow research advice on the most appropriate ways of introducing the reform, such as using pilot organisations or phasing in over different types of organisations.

  • Indicate whether the reform should be introduced in stages or not and whatever the arrangements identify the key milestones that should be achieved to demonstrate progress with the reform. An example of the possible stages is set out below:

Stage

Comment

I.   Clarify the separate roles of ministers and deputy ministers and operational managers

This should be addressed first. The boundary between the responsibilities of political appointees and civil servants will vary over time and may differ between individual ministries. In general, operational responsibilities should be allocated to civil servants with overall responsibility for the quality of operational management lying with the top official within the ministry. He/she would be responsible to the political head of the organisation. However, delegation is a complex issue and the issues to be considered are addressed in Chap. 14.

II.Require that ministries adopting PFM/IC should define the managerial structures under the chief official to deliver services efficiently and effectively. Regard should be had to the appropriateness of the corporate governance arrangements.

How these management structures should be developed will depend upon types of services being provided. These structures should not be regarded as fixed but capable of change as circumstances change. Particular regard should be had to the role of head of finance.

III.Arrange with the ministry of finance, and if investment is managed separately with the ministry responsible for investment, the provision to individual managers of the budgetary and accounting information they require to enable them to deliver services efficiently and effectively.

Such detailed information does not have to be available to every level of manager but it should be up to senior management within individual ministries to decide. Again, the allocation of this information may change over time.

IV.Ensure that individual ministries adopting PFM/IC have developed objectives and performance standards and objectives for individual managers and the arrangements to monitor performance. These objectives and performance standards should be linked to budgetary availability. They should also be accompanied by reporting arrangements.

This could be very difficult to develop for some ministries and managers may require considerable support to achieve this. It will also require clarification of the budgetary arrangements. This process is one that is likely to be refined over time.

V.Ensure that financial and performance information is available to individual managers to complement the efficient and effective delivery of objectives and performance standards.

This stage will also take time to develop as individual managers and heads of finance gain experience. The extent to which financial and performance information is available affects the extent to which delegation from political to civil service officials can occur.

VI.Introduce the ‘managerial disciplines’ that follow from the COSO report.

To try to introduce these disciplines earlier in effect demeans the significance of these disciplines. They can only be of effect in a managed organisation with individual managers taking responsibility for their effective implementation under the authority of the head of operational management of the organisation.

VII.Develop reporting arrangements about the performance of the ministry and the quality of the internal control arrangements. If possible, also identifying the benefits from the implementation of the policy.

This will include reports to different parties including to the ministry of finance, parliament, taxpayers, civil society and users of the public services. This is an essential element in the development of transparency.

VIII. Reviewing the successes and failures of the policy to establish how the quality can be improved.

This process of systematic review is important to consider lessons learned and to explore emerging ideas from other countries.

  • Clarify the timescales for the reform implementation and given the length of time that will be needed when the key assessment stages (milestones) are expected to occur where progress can be judged.

  • Explain the reporting arrangements that will be implemented to the cabinet of ministers.

  • Explain the proposed parliamentary reporting processes.

In preparing this policy paper the head of the ‘driver’ department should:

  1. 1.

    Undertake an assessment, after consultation with state secretaries and other relevant officials including the state auditor, of the strength of the current internal financial and budgetary control arrangements.

  2. 2.

    Assess after consultation with state secretaries and other relevant officials, the appropriateness of managerial structures that presently exist and their adaptability to the managerial requirements of PFM/IC. Establish the current extent of delegation of operational management to the civil service (if any) and the arrangements where delegation exists for accountability to the political level of management.

  3. 3.

    Discuss with the ministry of finance department responsible for budgeting and financial accounting arrangements the changes that will be needed to provide managers with the information they require and establish if there will be any difficulties in providing that information. An element of these discussions should be to ensure that the arrangements to link budgets with objectives and performance standards are effective. These arrangements will determine whether such objectives and performance standards and objectives are defined in such a manner that they have the capability of being translated into actual operational objectives. (These difficulties may be of a technical nature, such as the inability of the financial information system to provide the additional information or they arise from other concerns about the potential loss of ministry of finance control. Whatever the difficulties these must be resolved.)

  4. 4.

    Establish what performance information systems exist and the extent to which they will need to be developed.

  5. 5.

    Assess the capabilities of the heads of finance to provide the management and cost accounting information that managers will require.

This operational implementation policy paper should be agreed ideally by the state secretary in the ministry of finance with the most senior civil servant in each ministry before submission to the minister of finance and the government. This is because of the impact that the policy will have upon the organisation and operational management of each ministry. As with the strategic planning and analytical report an aim with the operational implementation policy paper should be to obtain the widest political support (as well as wide civil service support), including the support of politicians who are not presently part of the government. The operational implementation policy paper, or a version of it, should be submitted to parliament. As has been explained above, wide political support is highly desirable because application of the reform is likely to take much longer than the period of office of any one government, and consistency in the policy of application is essential.

Because management and financial training will be a key component of the reform, the policy paper could also explore with academic institutions how this might be developed, and if there is to be an in-service training institution (or one may already exist) how this could contribute to the training needed.

An important feature of the policy paper should be an explanation of how transparency and external accountability will be affected and not least how parliament should be informed about the details of the reform and be able to make comments.

As a result of the discussions that should occur during the preparation of this policy paper, variations from the proposals and information contained in the strategic planning and analytical report may occur. Such variations should be discussed with the key political and senior civil servants before publication.

9.3.3 Actions of the Head of the PFM/IC Department Following the Approval of the Operational Implementation Policy Paper

Once this policy paper has been approved practical implementation will commence. The head of the PFM/IC department should focus initially on the managerial consequences of the reform. Whilst budgetary and financial control remains important, the key to success lies in strengthening or introducing those managerial arrangements, including managerial controls, that facilitate the delivery of the objectives of the government and the aimed for performance standards and objectives, to time, within budget and efficiently and effectively.

Control will no longer simply be about ‘inputs’, important though that will remain but will also be about the delivery of ‘outputs’. Failing to emphasise how important the managerial context along with the consequences for the political and top and senior civil service and local government officials and other levels of management of public organisations, would lessen he emphasis upon achieving objectives and performance standards and objectives efficiently and effectively.

The introduction of a managerially oriented approach to public service delivery with its focus upon outputs and the delivery of those outputs efficiently and effectively will require that a set of managerial disciplines is employed to facilitate the development of a quality management approach. These managerial disciplines which are discussed in detail in Chap. 11 are usually described as international standards of internal control or the COSO standards.Footnote 6 However, for the purposes of this reform those responsible for implementing the reform would be better to regard them as ‘managerial disciplines’ because they inform managers of the features that should exist if an organisation is to be well managed. These managerial disciplines cover five main areas, that is, the control environment, information and communications, control activities, risk management and monitoring. However, these managerial disciplines will be of little value if a number of preconditions applying to those five areas do not exist. These are referred to in Chap. 11 but include clarity about objectives and performance standards, a managerial structure designed to deliver those objectives and performance standards, the consistency of budgetary allocations with the objectives and performance standards and the linkage of budgetary and accounting information with managerial needs as well as those of the ministry of finance.

An important activity of the head of the department driving the PFM/IC reform, once the decision has been made to implement this reform is to ensure that these standards (managerial disciplines!) are applied. This is not a simple training exercise, not least because these standards impact upon each other and cannot be introduced completely in a single reform process. The quality of application will evolve over time. Whether or not they have been properly applied can only largely be demonstrated by the quality of the outputs of the public organisation. That is, has the organisation achieved delivery of its objectives and performance standards and objectives efficiently and effectively, to time and within budget. Success cannot be judged by whether the bureaucracy associated with those managerial disciplines exists although this is often how application is in practice judged. An important statement which should be required of management annually from which success can be judged is the statement of internal control (see Chap. 13).

9.4 The Ministry of Finance State Secretary Relations with Individual Ministries

Whilst the state secretary of the ministry of finance should have overall responsibility for the application of the reform, each ministry state secretary should also be intimately involved as the reform. This applies equally to spending ministries and income raising ministries such as those responsible for the different forms of taxation. There ought to be regular meetings of these officials chaired by the ministry of finance state secretary. This process will require managing and this will usually occur through secretariat arrangements. The head of the PFM/IC driver department should act as that secretary. The agenda for such meetings should include:

  • A review of the implementation arrangements within the affected ministries;

  • Overall progress against ‘milestones’;

  • The effectiveness of the coordination arrangements with the organisation responsible for civil service reform and with other reforms which may impact upon the PFM/IC reform;

  • Reactions of ministers and other political appointees to the delegation and managerial accountability arrangements;

  • Reactions of the civil service to their added decision making responsibilities;

  • Emerging difficulties and how they are being addressed and not least in the development of objectives, performance measures and performance standards;

  • Arrangements for the development of performance information systems;

  • Comments on the availability of budgetary and financial management information for managers;

  • Developments in training in managerial disciplines, how this training is proposed to be undertaken and the impact of the reform on personnel management and development arrangements.

  • Observations on the enhanced role of the head of finance and the significance of finance in establishing efficiency and effectiveness: is that role being effectively undertaken and if not, what is required for improvement;

  • An update on the benefits and costs of the reform.

As part of the practical application arrangements, it would be desirable for the head of the PFM/IC department to also establish two subordinate coordinating groups. One would be with those officials involved with public administration and/or civil service reform and a second with those involved with the practicalities of this PFM/IC reform within individual ministries, particularly those concerned directly with the financial management arrangements. Both groups should have a particular responsibility to identify problems and develop solutions. These groups should in turn ‘feed into’ the state secretary group chaired by the ministry of finance state secretary.

A main source of information about emerging problems should be through the work of the ‘driver’ department supporting the state secretary because it should be in regular contact with each ministry implementing the reform. Potential emerging problems could include difficulties in developing objectives and performance standards and in developing the necessary financial and performance information systems required by managers to enable them to be confident about delivering objectives efficiently and effectively. Another problem area could be in securing the appropriate training for managers. A further problem could arise over the development of personnel policies that are consistent with a managerial approach to public administration (see Chap. 14). One of the most sensitive changes that should result from the introduction of PFM/IC will be the delegation of operational management for the implementation of policy and strategy from the responsibility for the development of policy and strategy. In some countries this will have a major impact upon the role of political appointees, including ministers and mayors and on the role of top and senior civil servants. This separation is fundamental to the reform but is not intended to weaken political control but rather to strengthen it by causing control to be focussed on key issues with those key issues being defined by the political management. This is to change from a political management trying to make all decisions, no matter how trivial, on both policy and operational matters.

A further problem with implementing the reform is that the delegation element can be misunderstood leading to resistance and this may be an especial problem where the civil service is not well trained or is politicised (which anyway should raise questions about the appropriateness of this reform). The result can be ‘tokenism’ in the development of delegation. Similarly, the requirement for each ministry (and other public organisations) to prepare annually a statement of internal control may be a cause of difficulty because this statement involves disclosure of internal control problems that have emerged during the year and the actions taken to correct them.

An important function in the development of relations between the ministry of finance state secretary and other state secretaries is to identify and address these areas of potential problem.

9.5 The Experience, Skills and Attributes Required to Build a Successful PFM/IC Application Team Supporting the State Secretary

The PFM/IC ‘driver’ department should be staffed with, or have available to it, the following range of skills:

  1. (i).

    Staff experienced in organisational management, including the setting of objectives, performance standards and performance measures and indicators or that advice on these topics is available (which may include academic advice); and

  2. (ii).

    Persons who are experienced in all aspects of financial management, including budgeting, that is, economists, financial accountants, experts in cost and management accounting and experts in interpreting the trends revealed by financial and performance information.

Such staff may be seconded from other ministry departments or from outside the civil service such as staff linked to university management schools and similar institutions which have an interest in promoting improvements in public sector management practices. (Some of these experts would not be full-time appointments but should be available as required and could be experts specially hired for the purpose, such as experts in the management of taxation.)

Because support may be required in the development of budgeting, financial and cost and management accounting, and these are often in short supply in the public sector, this may involve recruiting or ‘borrowing’ staff from the private sector. The support that should be looked for should have the capability to assist public organisations in the development of objectives, performance standards, performance measures and indicators, in developing strategic financial planning, in suggesting cost centre analysis and in routine performance analysis. They may also need to assist managers in ministries in developing business and strategic plans. In addition, such staff should be familiar with pricing where public organisations earn income from charges so that organisations can be helped to identify whether charges properly reflect the costs of providing services and activities and where costs are not to be fully recovered, the extent of any subsidies and who benefits from those subsidies. The budget available to the ‘driver’ department should reflect the wide diversity of skills that are required to apply the reform.

In those countries where PFM/IC has been interpreted as primarily an enhanced form of financial control, the initial focus in the introduction of this reform has been upon the development of internal audit. This is very unfortunate and ignores the key managerial perspective of the reform. It is in effect ‘putting the cart before the horse’. First, it confirms preconceptions that PFM/IC is simply a finance orientated and basically financial control activity. Secondly, it tends to encourage politicians (who may be wholly unfamiliar with the requirements of management) that this is simply a financial reform and that it does not have the wider impacts upon managerial structures, budgetary and accounting and performance information arrangements, if the benefits are to be achieved. Thirdly, this in turn affects attitudes towards what is the necessary staffing structure and organisation of the department within a ministry of finance responsible for supporting the state secretary. Of course, improvements to internal audit should always be looked for but they are not a precursor to the development of PFM/IC. Internal audit will be affected by the development of PFM/IC, but then so will many other aspects of public financial management, as this guide shows.

In summary, the successful application of PFM/IC requires a broad managerial approach to the reform; it requires reforms to budgeting and accounting arrangements and the availability of a wide range of skills within public organisations. The ‘driver’ department will require a corresponding range of skills. Not all will be required immediately and not all will be a full-time requirement so the staffing arrangements for this department should be flexible. A responsibility of the head of the ‘driver’ department should be to ensure that the relevant skills are available when needed and of the right experience and calibre. That is likely to require a flexible approach to staffing and quite different from traditional arrangements. The head basically requires the same flexibility in the delivery of the objectives of the department as the department will be trying to encourage to exist in other managements.

9.6 Achieving Local Ownership of the Reform

Ensuring local ‘ownership’ at each ministry level is an important factor in the successful application of the reform. Although this reform will be promoted by the minister of finance, the potential benefits to individual ministers in helping them to achieve their objectives are substantial. The reform also provides opportunities for the civil service to develop its skills, responsibilities and initiative in achieving the relevant minister’s objectives.

At the political level achieving local ownership will be primarily a responsibility of the minister of finance. At the operational civil service level this will be a responsibility of the ministry of finance state secretary working in partnership with other state secretaries (or their equivalents). These officials will generally provide the continuity of ‘ownership’ that political officials cannot provide. The head of the ‘driver’ department has a duty to make clear, either directly or through the ministry of finance state secretary, that responsibility for applying the reform within each public organisation and for ensuring that the quality is maintained should lie with the most senior appointed official in the organisation, that is, the state secretary (or equivalent in local government). Therefore, a considerable effort will be required in presentations to and discussions with these officials. In this author’s experience a frequent mistake is that too much focus is given to informing and training more junior officials such as heads of finance in line ministries and then only in the bureaucracy of the reform processes rather than in informing and generating an understanding of the purpose of the reform at the highest levels of the administration. This does not achieve local ownership.

The role of the minister of finance is very important in the actual application of PFM/IC because that minister will need to act to ensure that political colleagues accept and in turn also fully appreciate what the reform means for them. The ministry of finance state secretary with the support of head of the ‘driver’ department consequently has an important role in providing a full brief to the minister of finance on the implications of introducing this reform, for supporting the minister in the promotion of the reform, and for informing the minister on progress with implementation. The head of the ‘driver’ department may do this directly or through the ministry of finance state secretary.

9.7 The Practical Issues the Head of the PFM/IC ‘Driver’ Department Should Address

Set out below are the practical issues the head of the PFM/IC ‘driver’ department should consider in supporting the ministry of finance state secretary in the application of PFM/IC. Essentially the aim is to create a modern management style of organisation. Therefore, coordination with civil service reform is so essential and the civil service personnel policies should be compatible with those needed for the application of PFM/IC. These issues are all covered elsewhere in this guide, but are brought together here as a form of ‘checklist’ for the convenience of the head of this ‘driver’ department to ensure that his/her advice to the state secretary covers all the issues. The order of the items is also important. For example, there is no point in seeking to introduce the bureaucracy of the procedures associated with the reform until other elements of the reform process, and not least the managerial elements, have been introduced. The procedures should be designed to facilitate the development of quality management. They are not ends in themselves. Therefore, for example, the introduction of the COSO standards (managerial disciplines) should come later in the process rather than as almost the first steps to be taken following the approval of the policy paper. To regard them as ‘first steps’ indicates that the COSO standards are not seen as managerial disciplines but as the equivalent of other technical standards such as internal audit standards. Yet these managerial disciplines, as the name implies depend upon the existence of an effective management and that management is also responsible for maintaining their quality of application. This is a primary responsibility of the head of operational management in each public organisation.

As this is a long-term reform some of the activities will only mature over a long period of time such as raising financial awareness or improving the efficiency and effectiveness in the delivery of public services. However, what is important is that the structures are put in place to facilitate this. An example would be making it possible for managers to have available the type of budgetary and management accounting information that they may require. Also, some of the issues that need to be addressed are complex, and whilst the principles can be stated the actual practice can require careful consideration. This applies to one of the central features of PFM/IC which is delegation and managerial accountability. In Chap. 14 the issues about the appropriateness of the arrangements for delegation and the development of managerial accountability are discussed in some detail. There is not necessarily a simple solution.

The references in the schedule of activities set out below are to ministries and civil servants, but as local governments and other public organisations should also, at least over time, apply the reform these requirements should be adapted to cover local governments and other public organisations and to their officials.

The practical issues that the head of the PFM/IC ‘driver’ department should be responsible for include:

  1. 1.

    The preparation of an operational implementation policy paper, action plan and timetable on behalf of the state secretary. (The possible contents of this paper have been set out above.)

  2. 2.

    Once the operational implementation policy paper has been approved the head should prepare with the appropriate legal authorities any new laws and regulations to facilitate the processes of application envisaged in the paper. Those new laws and regulations, if required, should cover, inter alia:

    • Codes of practice governing the actions and behaviour of politicians and senior civil servants;

    • Managerial accountability arrangements including rules about the delegation of authority for decision making and reporting arrangements;

    • Contracting and procurement (which should be regarded as integral to the development of effective PFM/IC);

    • The rules about approvals for investment decision making;

    • The rules about who can accept responsibility for what types and values of financial transactions and other aspects of financial activity (see also Chap. 5 and the annex to that chapter on the purpose and content of the financial regulations);

    • The arrangements for risk management, including both systems risks and managerial risks; and

    • Corporate governance and financial reporting arrangements.

  3. 3.

    The head should ensure that the arrangements for internal audit reflect the change in the style of public administration to one of management and that managers in making decisions involve them in accepting some degree of risk. Internal auditors should be aware of the impact that the reform will have upon the current reporting arrangements and the issues they should be concerned about, not least how managers not only exercise their responsibilities for financial and budgetary control but also for improving efficiency and effectiveness.

  4. 4.

    The head should arrange on behalf of the ministry of finance state secretary the coordination arrangements with all other state secretaries creating the secretariat arrangements for that coordinating body (see earlier in this chapter).

  5. 5.

    The head should discuss with individual ministry state secretaries and other chief officials, as necessary, the arrangements for the development of operational objectives and performance standards based upon ministerial determined objectives and performance standards and objectives; the need for performance information; the linkage with the arrangements for organising managerial structures to deliver those objectives and performance standards and objectives. This may require the employment of specialist experts, for example, on education and social welfare policy, on policing or on the management of prisoners. Exactly what may be required will depend upon the objectives of the relevant minister. It may also require that the head of the department responsible for implementing PFM/IC may need to give advice on what is required and where the ‘delegation boundary’ should be drawn permitting civil service officials to make operational decisions.

  6. 6.

    Because of the impact upon the budgeting and accounting arrangements, the head should discuss with the ministry of finance budget department and the financial accounting department as well as with state secretaries how to achieve budgetary and cash flow stability and the information that managers will require if they are to deliver the objectives and performance standards required of them efficiently and effectively. The latter is likely to require a radical change to the current arrangements for budgeting and financial accounting. (See Chaps. 5 and 8.)

  7. 7.

    The head should also discuss with the relevant ministry of finance departments the revised arrangements for the exercise of budgetary controls to ensure that the authority of managers to deliver objectives efficiently and effectively is not inhibited by too detailed an external control process.

  8. 8.

    A critical activity for the head would be to continuously ensure that there is compatibility of the civil service/public administration reform policies with those for PFM/IC, including the timing of the two reforms.

  9. 9.

    As success in the application of PFM/IC depends upon people the head should ensure that a relevant and effective HR policy exists to support managers. (See also Chap. 14. This may be for individual organisations or collectively and it may require change to existing arrangements.) Therefore, the head should discuss with the ministry of finance state secretary the personnel management implications of the reform with the aim of ensuring that the organisation responsible for civil service personnel management arrangements and individual state secretaries accept the need for personnel management arrangements which are compatible with those necessary to recruit, train and manage the managerial and financial staffs who will be required to secure an effective reform. This should also include that state secretaries should ensure that appropriate channels exist to allow staffing concerns to be identified and addressed. This may require the development of staffing review, whistle-blowing and similar arrangements.

  10. 10.

    This review of the personnel arrangements should also include a review of the staff reward, disciplinary and sanctions arrangements. As has been explained earlier in this guide, PFM/IC requires that civil servants make operational decisions and all decision making involves risk. An inappropriate disciplinary and sanctions process can inhibit the willingness of civil servants to take risks and hence in turn inhibit the development of delegation.

  11. 11.

    The head should advise the ministry of finance state secretary who in turn should advise the minister of finance about:

    • The consequences of the development of external accountability and transparency (see Chap. 8 and the role of the head of finance) including the information parliament and civil society is likely to require once the reform is introduced (which probably will be more extensive than that traditionally made available);

    • The arrangements for reporting to parliament on the proposed reform and then on the progress of the reform;

    • The impact on the role of the state auditor and parliamentary scrutiny processes.

  12. 12.

    Even though there may be acceptance at the government level of the implications of the reform, at the individual organisation level different ministers and the senior civil service officials may in practice have reservations and differing views about how far this distinction between the responsibilities of ministers and operational managers is acceptable to them. This is even though the political heads of organisations may have volunteered to be pilot organisations, but they may have done so without realising the practical consequences. The result is that this is likely to involve the head of the ‘driver’ department in extensive negotiations. Very often the issue is about personalities, confidence and hence trust. Trust is especially needed since many governments have experienced previous reform failures leading them to ask—will this work? Establishing confidence in the reform at the most senior levels, particularly at the most senior civil service levels, is essential because it is they who will communicate confidence (or lack of it) to other more junior officials.

  13. 13.

    The head should introduce to state secretaries the managerial disciplines associated with PFM/IC, that is, the five COSO standards. The preferable order of introduction should be that set out in Chap. 11, that is, the control environment standard; the information and communications standard; the control activities standard; the risk management standard; the monitoring standard. The responsibility for securing the application of these standards is that of each state secretary, who should also ensure that the same standards are also applied in the controlled second-level organisations. As these standards are about management, there may be a need to involve academic management trainers in providing support, on the understanding that those trainers have an appreciation of the public sector operational environment. Over time the most effective alternative may be for a country to develop its own in-service management training organisation. This training should include the setting of operational objectives and performance standards, the development of managerial structures and arrangements for delegation and managerial accountability. It should also include training in leadership and in the management of people.

  14. 14.

    Ensure that the head of finance (who would almost certainly be involved in the training envisaged in point 16 below) is familiar with those requirements of PFM/IC that will impose on him/her additional responsibilities. These arise because of the change to a managerial approach to the delivery of public services coupled with the need to improve efficiency and effectiveness. The head of the PFM/IC ‘driver’ department should initiate the development of training programmes to improve the quality of management. These training programmes should also cover cost and management accounting and longer term financial planning. The capabilities of the head of finance and those of the finance staff should be particularly addressed. This is because with PFM/IC the responsibilities of the head of finance and the staff of a finance department go well beyond budgetary and financial control. Training should also be provided to managers in the utilisation of cost and management accounting. (Training requirements for the head of finance and finance staffs were discussed in Chap. 8.)

  15. 15.

    The head should also ensure that state secretaries recognise that because of the introduction of the PFM/IC reform there will be a greater emphasis upon strategic planning and strategic financial planning and where appropriate business planning (see Chap. 8). This longer term approach to management is essential in improving the efficiency and effectiveness of public expenditure as well as ensuring the long-term financial resilience of the organisation. The head of the ‘driver’ department should ensure that these longer term financial planning processes are a feature of individual ministry financial management arrangements and therefore that that department has a capability to support management in this development.

  16. 16.

    The head may also need to support the state secretary in individual ministries, as necessary, in developing the delegation and managerial accountability arrangements to be applied within the operational management structure for the ministry (see Chap. 14).

  17. 17.

    A feature of management with the introduction of PFM/IC is that ‘financial awareness’ needs to be developed throughout the organisation. The head of the ‘driver’ department should ensure that this is a feature of the development of operational management. Consequently, managers at all (or most) levels will become primarily responsible for the effectiveness of the budgetary and financial controls as well as the controls necessary to deliver objectives. This latter group of controls should be designed to deliver the objectives of a ministry to time, to standard, within budget and efficiently and effectively. The head should ensure not only that the state secretary and other senior civil service officials appreciate the significance of this change but also managers at all levels are properly trained and have an appreciation of the need for financial awareness.

  18. 18.

    Following on from the previous point, for budgetary control and financial management purposes, the financial information that an operational manager needs to have available, given the requirement to deliver efficiency and effectiveness, should be designed to meet the operational manager’s needs and not just the needs of the ministry of finance for budgetary control purposes. Where this need will be entirely new (as it is likely to be in the majority of circumstances) specialist advice should be available to managers either provided directly by the staff of the ‘driver’ department or obtained by that department from third parties such as academics and/or private organisations delivering services and actively aiming to control costs. Some of the factors that should be considered were referred to in Chap. 8 but include:

    • Managerial financial and performance analytical needs which will include, for example, analysis of costs over objectives, cost centres, cost drivers and any other form of analysis that a manager deems helpful. Budgetary and accounting coding structures should be sufficiently flexible and elaborate to permit this and this may mean, as has been shown in earlier chapters, that each ministry should be able to agree with the ministry of finance the development of the national chart of accounts coding structures (a top-down responsibility of the ministry of finance) so that managers have available to them the information they require (a bottom-up responsibility of individual ministries). This would enable the need of both the ministry of finance and that of individual ministry for management accounting information to be met.

    • Managers should be able to determine the values that should be included in the budget relative to the objectives and performance standards they are expected to deliver, if they are to accept it. In some countries the extent of the discretion available to managers in the formulation of the budget is extremely limited by the ministry of finance and this will need to change. The position should be that if the manager considers that the available budget is inadequate to meet the objectives and performance standards and performance objectives these latter should be adjusted as part of the budget negotiations so that budget, objectives and performance standards and objectives are compatible.

    • Again, change may also be required to the arrangements for contracts for the procurement of goods, services and assets where they are incompatible with the development of managerial accountability. This can occur, for example, where the administrative or other rules may require that only lowest price tenders are acceptable, irrespective of the quality of the proposal or indeed the reputation of the contractor. Also, a manager may have no ability to change from an original procurement plan where a change of specification occurs or even a change of price. All these restrictions inhibit the ability of a manager to exercise discretion, achieve efficiency and effectiveness and hence impact on the manager’s accountability.

    • Managers can have relatively little discretion in some countries to change agreed budgets even when circumstances change. Whilst it may be appropriate for a manager to seek authority for change where that manager regards change as necessary (after all a budget is only a plan), limitations can reduce the discretion available to the manager and hence his/her accountability. The introduction of PFM/IC should cause the head of the department responsible for the reform to encourage a review of the scope for discretion over budgetary changes, that is, to encourage the adoption of virement rules which are relevant to the managerial context that applies with PFM/IC.

  19. 19.

    State secretaries should be responsible for the ongoing quality of financial management and internal control. This should culminate in the annual publication of a statement of internal control (see Chap. 13). The head of the ‘driver’ department should specify on behalf of the ministry of finance the content coverage of this statement. In preparing that statement the state secretary will require the cooperation of the head of finance and of internal audit. This statement, which will focus on the achievements and non-achievements in terms of meeting objectives and performance standards as well as on the strengths and weaknesses of the financial and budgetary controls, will provide the main indicator of the effectiveness of the reform. In monitoring whether these guidelines have been successfully applied, the evidence trail should start from whether agreed objectives and performance standards and objectives have been delivered within budget and to time, and if not, then the question is why not? These statements ideally should be published and should be regarded as a key source of evidence by the ‘driver’ department of the effective application of PFM/IC by a ministry.

  20. 20.

    An important feature of public sector management in many countries is the existence of second-level organisations. A discussion about these organisations is included in Chap. 12. The head of the ‘driver’ department should ensure that service level agreements (or equivalent) exist, that state secretaries have the necessary support in developing such agreements and that they are regularly reviewed (as should the need for the continuation of the existence of the second-level organisation). The head should also ensure that the controlling ministry exercises effective supervision of such organisations. Effective supervision means that the controlling organisation:

    • Always approves the budget of the second-level organisation;

    • Requires that the second-level organisation budget is incorporated into its own budgetary requirements and is not, as in some countries, submitted separately to the ministry of finance;

    • Ensures that the budgetary requirements are linked to the expected objectives and performance standards;

    • That those objectives and performance standards are met, or if not, that the reasons for failure are adequately explained;

    • That the financial returns expected of state-owned or local government trading organisations should be subject to the approval of the controlling ministry and that such organisations should not operate in a manner which could prevent the development of the private sector market; that the controlling first-level organisation has a detailed concern about the financial returns being achieved, investment requirements, the corporate governance and accountability arrangements and certain types of payments such as for entertainment, travel and senior official remuneration.

      The head of the department responsible for the application of PFM/IC should also ensure that the controlling ministry has a policy and technical capacity to fully monitor the activities of second-level organisations.

  21. 21.

    Corporate governance along with transparency and hence external accountability (not least to parliament and civil society) are features of PFM/IC. Advice and support are likely to be required by ministries to establish each of these features, particularly over the publication of financial and operational information. The COSO framework specifically refers to reliability, timeliness and transparency in external reporting but the framework recognises that other factors may be relevant as well depending upon local requirements. Not the least of these will be parliamentary requirements. The likelihood is that each public organisation should be expected to produce an annual report explaining the utilisation of financial resources and what it has achieved or not achieved compared with its objectives. A further example of transparency will be the need to prepare statements of internal control (see point 22 above) including, or as a separate statement, information about how the organisation addresses risk along with its risk appetite. This transparency requirement could well be a cause of difficulty because the identification of deficiencies which may have occurred and been included in the statement of internal control, or of the extent to which an organisation is prepared to accept risk, may cause public controversy. However, transparency is a key element in the accountability process and attempts to suppress transparency should be resisted by the head of the ‘driver’. (The external auditor is also likely to have a specific interest in the external reporting arrangements and in the extent to which transparency has been achieved.)

  22. 22.

    Increased transparency and accountability have two practical consequences that the minister of finance should consider (and hence that the head of the ‘driver’ department and the state secretary should be aware of). These are first, that members of parliament should receive training to enable them to appreciate the managerial change that PFM/IC will bring about and therefore how their enquiries should be focussed to secure effective parliamentary scrutiny. Secondly, both senior official managers and politicians should also receive training in how to respond to external, particularly parliamentary, scrutiny.

  23. 23.

    An important activity of the head of the ‘driver’ department will be to ensure that internal audit has a full appreciation of the managerial implications of this reform and that it sees its role as a support to management and that control is about much more than traditional financial and budgetary controls. This developed role will include advising management on:

    • The quality of budgeting when related to envisaged objectives and standards of performance and performance objectives;

    • The relevance of the financial and performance information available to managers to assess and improve the level of efficiency and effectiveness;

    • The quality of the widened scope of the internal control arrangements;

    • The accuracy and appropriateness of the annual statement of internal control;

    • The relevance, accuracy and timeliness of the financial information being made available to managers and on the arrangements for transparency and corporate governance.

      The key internal audit reporting line, as was pointed out in Chap. 7 should be to the head of the civil service in the organisation and an audit committee where one exists, with the right to report to the appropriate political official where the auditor deems that appropriate. A training programme should therefore be developed for internal auditors.

  24. 24.

    The managerial context of the PFM/IC reform ought to set the context for other reforms. The head of the ‘driver’ department should recognise that other public financial management reforms cannot be effective without the development of a managerial context. Managers must make decisions based upon the tools and information available to them. If there is no managerial context such other reforms are unlikely to be successful. Examples are the introduction of programme/performance budgeting and accrual accounting. These reforms impact upon the PFM/IC reform, and for them to be successful the managerial framework of the PFM/IC reform should exist. These different reforms need to be integrated because they all require a focus on management, the setting of objectives and operational standards and objectives and on the availability of information. A responsibility of the head is to ensure that this integration occurs. This of course also means that the head of the ‘driver’ department should be familiar with the operational implications of these other reforms. The head should seek to ensure that the timing of those reforms is linked to the development of PFM/IC. (It cannot be to the complete development of PFM/IC because of the long-term nature of that reform but the essential managerial framework with the acceptance of the ideas of objectives, performance standards and objectives, delegation and accountability including the reforms to budgeting and accounting should already be in place.)

  25. 25.

    At least annually and probably more frequently in the early development stages of the reform, the head should prepare for the state secretary in the ministry of finance a formal report on progress with the reform, i.e. a monitoring report, identifying any problems, with possible solutions and changes that may be required or new developments that might be proposed. This report should be discussed at the envisaged meeting of state secretaries (see above) and in turn should be submitted to the minister of finance. The minister in turn should be accountable to parliament, perhaps six monthly as well as annually, for the progress being made. This is a report that the state auditor ought also to see.

  26. 26.

    Supporting the state secretary by acting as the secretary to the group of state secretaries in the practicalities of applying PFM/IC. (See Chaps. 5 and 7.)

9.8 Summary

The head of the PFM/IC ‘driver’ department has a very important role in ensuring that there is a full appreciation of what this reform means for the management of public services including those organisations responsible for the collection of taxation and other forms of public income. The key challenge is the creation of a modern managerial style of organisation. The ministry of finance state secretary, under the authority of the minister of finance, should have overall responsibility for the application of the reform throughout the public sector. The head should support the ministry of finance state secretary in promoting the reform to other senior civil and local government appointed officials responsible for the operational management of public organisations. Promotion of the reform to public organisations should start with these senior officials and not with lower level officials. The aim should be to secure local ownership of the reform and to make the officials aware of the benefits that can be achieved. This is particularly important where foreign aid agencies are involved who may have a limited appreciation of the country cultural and managerial context. Where support with the reform is being provided by foreign aid organisations, the head of the ‘driver’ department should ensure that their recommendations are relevant to the needs of the country and are not just a ‘standard package’ of reform proposals. An important responsibility of the head of the ‘driver’ department is to maintain control over the direction of the reform and to do that the head must have a thorough appreciation of what the PFM/IC reform is really about.

Not the least is the recognition that coordination of this reform with civil service or public administration reform is essential.

The introduction of PFM/IC will cause radical changes to the way in which public organisations are managed and this could well generate opposition. There is every possibility that senior officials (political and appointed) may object to the reform and this reaction should be anticipated and policy options prepared. Failure to address this potential problem is likely to result in, at least, the gradual re-establishment of the former administrative arrangements.

An essential feature of the reform process should be a strategic analysis of the strengths and weaknesses of the present arrangements, including the budgetary processes and the problems and risks that implementation will generate. This analysis may result in the conclusion that this reform is inappropriate at the present time and that a different reform would be more appropriate. The fundamental point is that this reform requires a complete change in the style of the management of public services, including how its finances are managed. The emphasis adds to the traditional financial input controls the control of outputs, although such a shift can only be justified if input controls are strong and remain strong. A consequence of the reform is that the responsibilities of the most senior civil service or local government administrator in a public organisation change considerably and become much more extensive compared with those of a traditionally organised public administration, not least because of the focus upon improving efficiency and effectiveness. This means that an important emphasis should be on developing policies to respond to the potential opposition from senior officials who have an entrenched view about traditional approaches to the administration of public services and this may require that they be replaced. Another important emphasis should be placed on management training, rather than simply on the bureaucracy associated with the reform, which is what very often happens. Because finance becomes a central feature of decision making with PFM/IC, the development of the role and skills of the head of finance is very necessary. The responsibility of the head of the ‘driver’ department is to design and facilitate both these areas of training, not to undertake them.

The responsibilities falling upon the head of the PFM/IC ‘driver’ department as well as upon the ministry of finance state secretary are considerable. Together they should ensure that the ‘driver’ department is properly staffed with a range of expertise to support the reform. To support the application of the reform the state secretary with the support of the head of the ‘driver’ department should aim to achieve coordination of the reform through regular meetings with other state secretaries and officials to discuss application issues and solutions to problems that may be emerging.