Chapter 2: Discussion paper on Reforming Victoria's public finance legislation

2. The case for change

The previous chapter described the evolution of the current framework and key participants in Victoria’s public finance system. This chapter considers the case for reform.

Expectations and demands on government are increasing. With improvements in technology people expect more streamlined and simpler interactions with government, and information on performance that is clear and accessible. People want more flexible and adaptable services, and they expect these services to be delivered seamlessly, regardless of the diversity of entities that may be involved. The public also expects government to respond to increasingly complex policy issues and deliver optimum outcomes. Finally, the public wants to know what outcomes the government plans to achieve and how it plans to achieve them.

Worldwide trends show that governments are evolving in a number of different ways to meet these demands. The case for change in Victoria now is substantially informed by those trends in thinking and practice.

An important part of modernising Victoria’s public administration is to simplify the public finance system. All participants should clearly understand their functions, what they are accountable for and to whom they are accountable.

2.1 Emerging thinking and trends

Outcomes

There are many benefits to focusing on outcomes. First, it provides a more strategic focus for government to ensure that its policies and programs are directly connected to things that matter to citizens: it shifts the focus of government away from inputs and outputs, towards benefits and results. Further, it is more likely to ensure that funds are allocated where they are most likely to maximise the achievement of outcomes. It also provides a potential framework for joined-up government where more than one department or entity is expected to make a contribution to a government outcome. (B Perrin, ‘Moving from outputs to outcomes: practical advice from governments around the world’, Managing for Performance and Results Series, January 2006, p. 6.)

Victoria is in a strong position to formally add an outcomes focus to the management framework. As a leader in the adoption of output-based management in Australia, Victoria has developed a solid foundation in output planning, budgeting, delivery and reporting. Already, the Victorian public sector has been aligning plans and performance measures with desired government outcomes. It has put in place outcomes-focused reporting arrangements such as the Growing Victoria Together Progress Report, sustainability reporting and triple bottom line reporting. These have evolved beyond traditional reporting on financial performance to incorporate environmental and social objectives.

With this strong foundation in place, Victoria has an opportunity to be a leader in the design of the next generation of outcomes-orientated systems. This could involve embedding the use of outputs and outcomes performance information more deeply in the strategic allocation of government resources.

A focus on outcomes can make an important contribution to improving government transparency and accountability. A heightened focus on outcomes is a prominent worldwide trend in public finance. This approach emphasises how outputs contribute to desired outcomes and provides more meaningful information for parliament and the general public on government outcome performance. Jurisdictions that have adopted an outcomes-focused approach include New Zealand, the United Kingdom, Canada (British Columbia and Alberta), the Netherlands, Sweden, and Scotland.

Under an outcomes-focused management system, the achievement of outcomes, together with the delivery of outputs becomes the key indicator of government performance for which government is accountable. It enables citizens to assess whether government has achieved its objectives, rather than how much money has been allocated and spent on a particular good or service. Parliament and the general public can hold the government accountable for delivering the mix of services that makes the greatest contribution to the achievement of desired outcomes.

In practice, an outcomes approach demands clearer connections between inputs and outputs, and in turn, outcomes (see Diagram 1). Creating these links requires financial and non-financial information to show how goods and services are contributing to broader government outcomes. To implement an outcomes-based management approach the public finance system needs to integrate outputs and outcomes including government planning, resource allocation, performance measurement and reporting functions.

Diagram 1: Linkage between inputs, outputs and outcomes

Source: Victorian Department of Treasury and Finance (adapted from Z Noman, ‘Performance Budgeting in the United Kingdom’, OECD Journal on Budgeting, vol. 8, no. 1, 2008, p. 78).

To further strengthen accountability, some jurisdictions have adopted formal mechanisms for their outcomes planning, performance measurement and reporting. For example, in the United Kingdom, public service agreements set out the priority outcomes the government wants to achieve over the next spending period, including aims, objectives and outcome targets. The departments report annual progress against these public service agreements and departmental objectives.

It is important to recognise that a focus on outcomes is not without its challenges, particularly in the area of performance measurement. Ensuring timely, reliable and valid information is a key challenge for all jurisdictions, along with the development of good data systems, clear objectives and accurate performance measures. (Organisation for Economic Co-operation and Development, Modernising government: the way forward, OECD Publishing, Paris, 2005, p. 76.) A strengthened focus on non-financial reporting may also require a re-balancing of financial and non-financial reporting requirements to minimise the reporting burden on government.

Outcomes may also require a longer term outlook when compared with outputs. Such a longer term approach has also been implemented by some jurisdictions in the area of expenditure and appropriation reforms. These reforms have included the introduction of multi-year appropriations or appropriations of unlimited duration. Certain expenditures, such as investment projects that require long-term planning horizons, are approved on a multi-year basis. In some jurisdictions, including the United Kingdom, Sweden, and Finland, multi-year expenditure planning and budgeting has led to the setting of firm expenditure ceilings. In some instances, these ceilings cover a large proportion of central government spending and are reviewed periodically.

Outcomes in the Australian context

An Australian example of focusing on outcomes is the new Commonwealth-state financial framework being negotiated by the Council of Australian Governments (COAG).

This reform seeks to increase the flexibility of states in their use of Commonwealth tied grants, while increasing the accountability of all governments to their citizens for achieving planned outcomes.

This approach recognises the benefit of a partnership between Commonwealth and state governments in delivering shared objectives and outcomes. It also recognises that both levels of government are first and foremost accountable to their electorates for their performance, rather than to other levels of government.

Key changes which have been agreed by COAG include:

• greater focus on outputs and outcomes to replace prescriptive controls on the use of Commonwealth or state resources to achieve agreed outcomes
• rationalisation of a number of existing specific purpose payments (SPPs) into a smaller number of broad, flexible funding agreements focused on shared objectives and aspirational outcomes
• provision of national partnership agreements to support the delivery of specified projects or to drive reforms of national importance
• new performance reporting framework, focusing on providing meaningful, publicly available information on the progress of all governments towards stated objectives
• central payments to each state treasury, which will then distribute the funding within its jurisdiction according to its resource allocation processes.

Most of the new arrangements are due to commence in the first half of 2009.

‘Joined-up’ government

Improved collaboration and integration across government is a priority for jurisdictions across the globe. Traditionally, governments have been organised with vertical, confined structures, aligned to the delivery of particular services such as hospitals or schools. This structure can provide efficiency, clear lines of accountability and concentration of specialist knowledge. However, vertical structures are not always well equipped to deal with many contemporary public policy issues, such as climate change or social disadvantage, which require action across many portfolios.

The move to horizontal, joined-up arrangements (also known as ‘networked government’) recognises that no one organisation has sufficient knowledge or resources to effectively address commonly encountered public issues on its own.

Victoria is already well down the path of operating joined-up government. For example, the approaches to reducing family violence and improving road safety are jointly administered by several departments and entities, with clear particular and common responsibilities. However, Victorian Government systems and processes could be improved to further encourage and enhance this approach to service delivery. This will affect all elements of the framework: planning, resource allocation, service delivery and accountability.

Engaging citizens

Another new focus of public administration is the relationship between the citizen and the state, and the growing desire for strengthened community and individual engagement with government.

Many governments worldwide have identified a trend of citizens expecting and demanding improved service from government. Specifically, they expect:

• higher levels of transparency and accountability for results
• services that are more flexible and adaptable, more holistic and tailored to their needs, and delivered in a way that best meets their needs
• cohesive policy responses from all levels of government that address the growing complexity of cultural, social, environmental and economic issues.

For Victoria, there is an opportunity to continue to strengthen citizen engagement, in areas such as planning and reporting. This approach would build on recent developments such as the Annual Statement of Government Intentions, which aims to engage the public in the legislative program, increase government accountability and build trust. It would better equip the public and parliament to assess government progress against its objectives and would likely involve increased web-based and short-form reporting.

A related recent development is a body of work concerning ‘public value’. MH Moore, Creating public value: strategic management in government, Harvard University Press, Cambridge, Massachusetts, 1995. While there are different approaches to the subject, the consensus is that public value is determined by the value that citizens place on services, or infrastructure, or general government efficiency. The quality of services (outputs), as well as the broader outcomes achieved and the trust generated, are all central to public value. Although the concept is still developing and there is some debate as to its applicability in some jurisdictions, it is increasingly being used in management frameworks or service delivery objectives. (For the debate, see J Alford, ‘The limits to traditional public administration, or rescuing public value from misrepresentation’, The Australian Journal of Public Administration, vol. 67, no. 3, 2008, pp. 357-366.)

2.2 Modernisation and simplification

Since its introduction in 1994, the Financial Management Act has been amended on a number of occasions to deal with issues as they arise. This has led to inconsistencies in the language and application of the Act, and inconsistencies with other legislation. Various requirements set out in different but related legislation give rise to even more complexity.

Further, more sophisticated and flexible approaches to appropriation and procurement have developed since the Act’s inception and should arguably be incorporated into Victoria’s public financial management legislation.

2.2.1 Entities

A key example of the Financial Management Act’s complexity is its lack of clarity about which entities are a ‘public body’ for the purpose of public finance legislation. Public sector entities are defined and categorised under several state Acts, and different aspects of the governance of entities are regulated by different pieces of legislation. These include, for example, the Financial Management Act, the Public Administration Act, Victorian Managed Insurance Authority Act 1996 and various establishing legislation. This has led to a degree of ambiguity and inconsistency in applying the terms defined across the various Acts and the corresponding requirements of entities. There is a need to provide a clear and consistent definition for public entities, and to establish a consistent reporting and governance framework for them.

The categorisation of entities is further complicated by the different functions they undertake, and the way in which they are held accountable.

Some of the requirements of the Financial Management Act are also ‘one-size-fits-all’ in nature; they fail to tailor requirements or needs to match the varying size, complexity and function of entities.

2.2.2 Accrual-based appropriations and flexibility

In 1998-99, the Victorian Government adopted an accrual-based budgeting and appropriation framework. Despite these changes, there are some elements of Victoria’s appropriation mechanism that date back to a time when it focused solely on cash. At the time of these reforms, it was thought that a strong focus on accrual reporting might detract from the management of cash flows. Administrative tools and the utilisation of accounting formats such as cash-flow statements continue to recognise the essential nature of cash, both in the context of government’s operations and in explaining a more complex and integrated financial picture. However, some residual elements of the cash system, such as warrants and special appropriations, could be reassessed, given that the adequacy of controls in the accrual environment has now been established.

There are also some highly detailed and prescriptive legislative provisions in the Financial Management Act which constrain executive government’s management flexibility while delivering very little additional information or control of executive government to parliament. Examples of these provisions include restrictions on shifting or augmenting appropriations.

2.2.3 Reporting

The Financial Management Act requires the tabling in parliament of:

• the Annual Financial Report
• the Mid-year Financial Report
• quarterly financial reports
• the estimated financial statements as part of the annual Budget
• the estimated financial statements as part of the Budget Update.

Victorian Government financial reports are presented in a format that complies with both prescribed Australian Accounting Standards Board and Uniform Presentation Framework standards.

Increasingly, public sector reporting standards have become more closely aligned with those in the private sector.

The current level and type of financial reporting in Victoria should be evaluated to ensure it is achieving the appropriate balance between transparency and reporting burden.

2.2.4 Other public finance legislation

Consistent with the Victorian Government’s election commitment to modernise all legislation and reduce the number of Acts, this review provides an opportunity to do this for public finance legislation. The Acts and provisions being considered are:

• Borrowing and Investment Powers Act 1987
• Monetary Units Act 2004
• Public Authorities (Dividends) Act 1983
• existing property and land functions currently contained in the Financial Management Act.

The above Acts all deal with elements of public finance. To this end, consolidating the Acts would provide a more consistent and comprehensive financial management framework for Victoria. Further, since the introduction of several of the Acts, there have been changes to the number of entities to which these Acts apply, particularly the Borrowing and Investment Powers Act 1987 and the Public Authorities (Dividends) Act 1983. This raises the question as to whether a more appropriate structure could administer the relevant provisions in these Acts, rather than maintaining separate Acts.

2.2.5 Procurement

An effective governance framework for procurement is an important element of public financial administration. In the mid 1990s, in order to achieve greater value for money in government purchases, the centralised purchasing body, the State Tender Board, was replaced with accredited purchasing units within individual departments. At the same time, the Victorian Government Purchasing Board (VGPB) was established under the Financial Management Act to:

• develop, implement and review policies and practices pertaining to the supply of goods and services to departments and the management and disposal of goods by departments, and to provide advice, staff training and consultancy services
• monitor departmental compliance with supply policies and ministerial directions, and to report irregularities to the Minister for Finance and the relevant portfolio minister
• foster improvements in the use and application of purchasing systems and electronic trading
• establish and maintain a comprehensive database of purchasing data of departments and supply markets for access by departments.

Over the past decade, a rigorous process has been developed to ensure a high level of probity and accountability in Victorian Government procurement. The elements include probity advisors, probity auditors, requirements for probity plans, the contract publishing system and a requirement to report policy breaches. The Whistleblowers Protection Act 2001 was introduced to encourage and facilitate disclosures of improper conduct by public officers and public bodies. More broadly, scrutinising bodies such as the State Services Authority, the Auditor-General and the Ombudsman now play a greater role in ensuring probity and accountability.

Beyond the probity aspects, some of the key activities ascribed to the VGPB have been transferred to specialist teams in government departments. At the same time, functions such as policy development and implementation, and the focus on improvements and adoption of purchasing systems have been undertaken centrally.

Given these developments, it is worth considering how these procurement issues should be addressed in the development of a modern public finance system.

View other sections of this Discussion Paper:

Foreword
Introduction
1. Victoria’s current public finance system
2. The case for change
3. Possible directions for reform
4. Next steps
Appendix A: Extract from Public Administration Act 2004, Part 1, s. 5
Appendix B: Extract from Public Administration Act 2004, Part 5, s. 81
List of shortened forms
Glossary of terms