Chapter 3: Discussion paper on Reforming Victoria's public finance legislation

3. Possible directions for reform

The previous chapter discussed the various developments and considerations informing this review. These covered the trends and emerging developments in public sector financial management towards a greater focus on outcomes and the need to reduce complexity and ambiguity.

3.1 An outcomes framework

A more outcomes-focused approach to public finance would change planning, resource allocation and accountability aspects of the management framework.

A focus on outcomes will enhance the strategic focus of government, and facilitate joined-up government, because we now recognise that many desired outcomes can only be achieved through the collaborative effort of multiple departments and entities. It is also consistent with evolving citizens’ demands of government for efficient delivery of flexible, personalised services; bureaucratic arrangements for their delivery are of little interest to citizens.

3.1.1 Planning

Plans establish a benchmark against which actual performance can be measured and reviewed. It is appropriate for government to set short, medium and long-term goals for the overall direction of the state, with appropriate milestones for assessing intermediate performance.

The Financial Management Act includes a range of provisions relating to sound financial and budget management but it does not explicitly require the development of outcome plans or the presentation of progress against the outcomes to parliament. A key consideration for this review is to determine whether whole-of-government and departmental strategic plans should be an obligation under legislation, in addition to existing fiscal plans and budget policy statements that are presented annually.

A strengthened strategic and integrated planning framework, with stronger linkages between outputs and outcomes would be consistent with the direction of current practice, and with the perceived benefits of an outcomes-orientated approach.

Departments and entities could be required to develop strategic and operational plans that outline how their outputs will help create public value and contribute to government outcomes, and how each of these will be measured. Entities could prepare plans independently of departments, or their contribution could be included in departmental plans.

Strategic plans could include a mix of quantitative and qualitative measures, accompanied by explanatory narrative. Such plans could also cover the full range of time frames from the short term through to the inter-generational.

Given the discussion above, you may wish to respond to the following questions.

Should a requirement to develop strategic plans be embedded in legislation?

If so, should strategic plans be at the level of:
• whole-of-government
• departments
• entities?
What form should these strategic plans take?

3.1.2 Providing and allocating resources

Strategic plans should inform priorities in deciding resource allocations (the budget process). A stronger alignment between government priorities and the allocation of resources is likely to enhance efficiency and provide a better mechanism for creating and measuring public value.

With an increased focus on outcomes, a modern public finance system should ensure that clearly identified outcomes drive the budget process. The resultant decisions are then presented to parliament for approval in the form of appropriation Bills.

At present, the purpose of appropriations is for parliament to authorise the payment of funds from consolidated revenue to departments to use for particular purposes in the following year. This practice dates from well before the establishment of responsible government in Victoria. It originated when government had fewer departments, and was responsible for fewer services and activities. For several decades these practices have been augmented in Westminster jurisdictions around the world, through such means as forward estimates budgeting and global output appropriations. The review is considering whether they can be further built on, in a formal legislative arrangement, without diminishing traditional parliamentary oversight of the performance of executive government.

Appropriations could be authorised at the outcomes level in a number of ways. One option might involve parliament authorising specific dollar amounts against each desired outcome. It would then be the responsibility of the Treasurer, on behalf of the government, to purchase the outputs necessary to achieve the outcomes. Another form might involve parliament authorising the draw down of funds to the level deemed necessary for the government to achieve its desired outcomes.

Under both options, departments would continue to report output performance in the budget papers, with an additional requirement to report on their performance against strategic goals, that is, their contribution to the government’s desired outcomes. Appropriating at the outcomes level would provide greater transparency to parliament and the public about the resources allocated in the pursuit of those outcomes.

While the appropriations are currently presented to parliament on an annual basis, a move to a multi-year approach could be considered. This would be based on the existing budget and forward estimates (three years) process. Multi-year appropriations would provide a legal basis for multi-year spending or investment, especially for those items that require a longer term planning horizon. Such changes would ideally be supported by enhanced reporting on the achievement of strategic objectives.

In any new framework, an important consideration would be how much flexibility the executive government should have to adjust the application of funds to address unforeseen circumstances.

Depending on the extent of change pursued for appropriations, consequential changes to the Administrative Arrangements Act are likely to be required.

Given the discussion above, you may wish to respond to the following questions.

Does the current Victorian parliamentary appropriation system serve any continuing purpose?

Should appropriations authorise:

• payments from the consolidated fund at the departmental / output level
• payments from the consolidated fund against each outcome
• drawing down of the consolidated fund to the level deemed necessary to achieve the government’s desired outcomes?

Should appropriations be annual or multi-year, or a mix of both?

3.1.3 Accountability

A stronger strategic planning framework, particularly one that includes outcomes, provides an opportunity to strengthen accountability mechanisms, particularly those that link outputs and outcomes. Clear plans with clearly defined goals and measures would allow parliament and the public to more meaningfully assess executive government performance.

In recent times, parliament has granted additional flexibility to the executive government in return for greater reporting. It is expected that this trade-off will continue. If a more flexible approach to resource allocation is adopted (through appropriations to outcomes or multi-year appropriations), an increase in accountability would be required.

Improving performance (non-financial) reporting

Parliament has an important role in ensuring that government uses public resources effectively and efficiently. Meaningful performance information should tell parliament and the public what government is planning to do and what it has achieved.

It is important that a performance management framework be based on robust performance measures and monitoring processes, and clear accountability, whether at the input, output or outcome level. The new legislation should define the level and type of performance information that is required, and should ensure that performance information remains relevant over time and open to scrutiny.

The current government produces progress reports on its outcomes plan (Growing Victoria Together) in addition to the budget papers. However, this outcomes-focused reporting is not mandated by legislation. An option would be to legislatively mandate government outcome performance measurement and reporting. This would ensure that all future governments take a similar approach.

It will also be important to ensure strong links between outputs and outcomes at the departmental and entity level, and associated accountability. Existing mechanisms such as annual reports and budget papers could be used to convey the performance information to parliament. Any new mechanisms would need to complement these existing requirements.

A common criticism of government performance reporting is the difficulty in assessing progress from year to year when targets are regularly revised. As outcomes are generally achieved over a longer time frame, they are less likely to change from year to year compared with outputs.

A comprehensive reporting framework should balance financial and non-financial, and prospective and retrospective information across inputs, outputs and outcomes. The framework should recognise the trade-off between the benefits derived from reporting and the costs associated with producing these reports.

A further benefit of an enhanced planning and accountability framework is that it will enable a more systematic evaluation of programs and services across government.

Given the discussion above, you may wish to respond to the following questions.

Should a requirement to report progress against strategic plans be legislated?

Question: If so, should reporting of progress against strategic plans be at the level of:

• whole-of-government
• departments
• entities?

What accountability arrangements should be established for performance at input, output and outcome levels?

In terms of reporting, what do you consider to be the appropriate balance between:

• financial and non-financial information
• prospective and retrospective information?

3.2 Modernisation and simplification

3.2.1 Entities

Victoria has a large number of entities that range in size and complexity from small committees of management through to large public financial corporations. The government’s ability to manage and monitor the operations of such a large number of entities is hampered by legislative inconsistency. The definition of public entities varies across Victorian Acts as do the different requirements prescribed under these Acts.

Currently, the level of government involvement in an entity (which is managed largely through departments) varies greatly and is determined by a number of factors. These encompass considerations such as whether the entity is established under statute, whether the government plays a role in appointing board members, or the entity’s size and complexity.

At times, these entities transact with the private sector for the delivery of goods and services. However, the public sector’s interest in these instances is limited to contractual arrangements with the private sector, which are reflected in the accounts of the public sector entities.

The definition of public entities for the purpose of public financial management should be clear and where appropriate, consistent with definitions used for other government purposes. Given the thorough and systematic approach used by the Public Administration Act, a strong case could be argued for the new legislation to align with the definitions in the Public Administration Act (reproduced in Appendix A of this paper).

In terms of reporting at the entity level, a one-size-fits-most approach is currently applied regardless of the size, risk or importance of the entity with most entities reporting on the same basis. This may not be appropriate. A more suitable approach could see entities producing reports with different amounts and levels of detail according to principles-based criteria outlined in the Bill. These principles would require some entities to report to parliament, but would allow other entities to report directly to their portfolio minister instead. Such a differential reporting framework could be based on various factors such as materiality, financial position, historical issues, public interest, control, administrative burden, and class of entity. This approach would be similar to the Australian Accounting Standards Board’s distinction between general purpose reporting and special purpose reporting.

Given the discussion above, you may wish to respond to the following questions.

To which entities should the Public Finance Bill apply?

Should all elements of the Bill apply equally to all entities (for example, financial management, governance, reporting, procurement, compliance frameworks)?

If a differential framework were to be adopted, what form would it take and what criteria would it take into account (for example, financial position, materiality, public interest)?

3.2.2 Accrual-based appropriations and flexibility

Victoria has an accrual-based budgeting and appropriation framework. Within that framework, there are some residual cash elements, such as the warrant process (set out in section 1) and the cash-based nature of special appropriations. Given the adequacy of controls in the state’s accrual accounting environment, it is now questionable whether these cash-based features remain appropriate.

There are also some highly detailed and prescriptive legislative provisions which should be reviewed. These provisions impose constraints on executive government while delivering very little additional information or control of executive government to parliament. Examples of these provisions include restrictions on shifting or augmenting appropriations.

Given the discussion above, you may wish to respond to the following questions.

What features of the cash-based system need to be retained?

What other technical provisions are no longer required?

3.2.3 Reporting

Public financial reporting provides important information to both executive government, which makes decisions about resource allocation, and parliament, which holds the executive accountable for those decisions. Under the current framework, the government provides numerous and frequent reports to parliament, both retrospectively and prospectively. The current framework focuses more on retrospective reporting. Examples of retrospective reporting include quarterly financial reports, the Mid-year Financial Report and Annual Financial Report, while the prospective reporting includes the Budget and Budget Update.

Frequency of financial reporting

There is questionable value in producing so many retrospective reports. For example, the quarterly financial reports do not substantially add to parliament’s knowledge about the state’s finances. One option for consideration would be to discontinue the publication of full financial reports for the September and March quarters. In their place, relevant information regarding performance in those quarters could be explicitly reflected in the latest estimates for the end-of-year outcome. The effects of the September quarter information could be explicitly stated in the Budget Update and the effects of the March quarter could be explicitly stated in the state Budget.

Longer term reporting

Another option for consideration is the production of longer term reports. This would be consistent with an outcomes-focused approach as outcomes are generally achieved over a longer time frame.

Prospective reporting in Victoria currently involves the publication of financial estimates over a four-year period while performance information is only provided for one year. These time frames could be aligned by matching the performance information reporting period to the financial estimates four-year period. This would provide greater transparency and accountability in performance management.

Historical trend data would enable government, citizens and parliament to better assess output delivery and outcomes performance.

In its 2008–09 Budget, the Commonwealth Government included fiscal projections for the underlying cash balance going forward twenty years as part of its medium-term fiscal outlook. It did this to allow the public to understand more clearly its fiscal policy and overall financial performance.

The United Kingdom, United States of America and New Zealand also prepare similar long-term reports on public finances. The time horizon covered in some of these reports extends up to seventy-five years.

Further, the International Public Sector Accounting Standards Board has recently commenced a project to produce a framework for the reporting and disclosure of information related to the long-term fiscal sustainability of government programs.

A financial management framework that includes long-term strategic plans and long-term fiscal reports would enable parliament and the public to assess the fiscal environment in which the government’s longer-term objectives are set.

Timeliness of departmental and entity annual reports

A further issue for consideration is the timeliness of annual reports produced by departments and entities. In Victoria, the legislation requires annual reports to be tabled in the Parliament four months after the year end, which is longer than in some other jurisdictions and in standard business practice. Currently, the Australian Securities and Investments Commission requires disclosing entities to report within three months of the end of a financial year. In Western Australia, reporting entities are required to report within ninety days of the end of the financial year, or sooner, as prescribed.

A move to shorter reporting time frames in Victoria would result in more timely and up-to-date disclosure of information. This will enhance citizen engagement and the transparency and accountability of the reporting process.

Consolidated reporting

Another option to consider is to replace individual entity reporting with reporting at a higher level and in a more consolidated manner. This could be similar in manner to how private companies provide a consolidated report of their subsidiaries. In considering such an option, it is important to assess the value of individual entity reports and whether they provide parliament with meaningful information that would not be provided in a more consolidated report.

Any move to consolidated reporting would have to take into account accountability requirements, such as those associated with Commonwealth funding grants.

Improving accessibility

Many of the reports produced by government are quite technical in nature. Often this is because they must meet technical requirements such as accounting standards, but it means that they require a degree of specialist knowledge to be fully understood. A number of other jurisdictions (e.g. Canada and the United States of America) produce concise and targeted reports to reach specific audiences, including citizens’ reports which act as a guide to the technical reports. (See examples: Popular Report 2005, District of North Vancouver, viewed 16 October 2008, http://www.dnv.org/popular_report/2006/main.html; The Federal Government’s financial health: A citizen’s guide to the 2007 financial report of the United States government, United States Government, viewed on 16 October 2008, http://www.whitehouse.gov/omb/financial/reports/citizens_guide.pdf.

One approach to improved performance reporting is to have a high level report card that includes a set of holistic key performance indicators that make clear what the government considers will create public value.

The private sector is increasingly utilising modern communication methods to engage stakeholders and the general public, and to improve access to reports. Examples include emails and the internet and short-form annual reports, which provide high-level summary information. This approach could be adopted for reporting at the whole-of-government, and department and entity level.

Given the discussion above, you may wish to respond to the following question.

What options for modernising and simplifying reporting should be considered?

3.2.4 Other public finance legislation

This review provides an opportunity to consolidate related Acts into one overarching framework for all government financial legislation. This would supplement the foundation Constitution Act. The following proposals could be considered:

• transfer the Borrowing and Investment Powers Act 1987 and Monetary Units Act 2004 into the new Public Finance Bill
• repeal the Public Authorities (Dividends) Act 1983
• transfer existing property and land functions to another Act.

More detail about these proposals is set out below.

As already mentioned, the new Bill may also require consequential changes to the Administrative Arrangements Act 1983.

Borrowing and Investment Powers Act 1987

The Borrowing and Investment Powers Act 1987 was introduced shortly after the financial deregulation of the 1980s. It provides certain entities with access to financial instruments for the effective management of their exposure to financial risk, and centralises financial expertise for the state. Specifically, it provides powers to certain entities to borrow and invest state funds and sets out the processes and accountability mechanisms.

Generally, other Australian jurisdictions do not have separate legislation for borrowing and investment powers. These powers are usually part of the public financial management legislation or legislation governing entities. However, in Victoria the Borrowing and Investment Powers Act preceded the enactment of the Financial Management Act and the separation of these two Acts has continued.

One possible course of action is to repeal the Borrowing and Investment Powers Act and the borrowing and investment powers from all other legislation. The underlying principles of these Acts could be incorporated into the Public Finance Bill. This would create a more consistent and comprehensive financial management framework for Victoria.

The government is considering options to improve its monitoring and control over a wider range of entities than those currently included in the Borrowing and Investment Powers Act. This may require entities to invest centrally, enabling greater efficiencies and more effective monitoring and reporting of exposures. Entities would still retain autonomy to adopt the strategy appropriate to their business situation. The Public Finance Bill provides the opportunity to develop the legislative framework to support greater centralisation.

Monetary Units Act 2004

The Monetary Units Act 2004 was enacted to enable certain government fees and penalties (listed under Schedule 1 of the Act) to be indexed more consistently. The Act dictates the conversion of these fees and penalties from monetary amounts to fee and penalty units. These units are indexed annually by the annual rate set down by the Treasurer. The annual rate has been relatively consistent with the consumer price index since 2004.

As the legislation is concerned only with one aspect of public finance, it could be included in the new public finance legislation. This would not reduce the level of transparency applied to the current policy and process.

Public Authorities (Dividends) Act 1983

The Public Authorities (Dividends) Act 1983 was introduced to authorise the government to obtain annual dividends from certain entities and to subject them to the same expectations and discipline as private sector entities. Dividends from entities make a notable contribution to the consolidated fund (estimated to be $421 million in 2008–09).

The Public Authorities (Dividends) Act has limited application today. Since its introduction, many of the entities to which it applied have ceased to exist. Contemporary practice is to insert dividend clauses into establishing legislation and industry Acts. The Public Authorities (Dividends) Act now only applies to three corporations, of which two already have dividend provisions in other Acts. Further, the formula for calculating dividends prescribed in this Act is no longer in use and has been superseded by the benchmarks set out in financial reporting direction 3A.

Consequently an option to consider is the repeal of the current Public Authorities (Dividends) Act and all dividend clauses in other legislation. These could be replaced with a high-level provision in the new Public Finance Bill enabling the Treasurer to impose a dividends policy framework. This option would not reduce the level of transparency applied to the current dividends policy and process.

The Financial Management Act empowers the Minister for Finance to acquire land, lease land or premises for the purposes of other ministers or departments, and license and lease surplus Crown land and buildings. It also authorises the minister, on behalf of the Crown, to distribute any unclaimed property, whether real (i.e. land) or personal (i.e. chattels or legal rights), where the Crown is entitled to such property.

However, at present, a number of other ministers are empowered by Acts other than the Financial Management Act to make some specified decisions in relation to Crown land and premises. Where those powers are not specified, these other ministers rely on the Minister for Finance to acquire land, and lease land and premises on their behalf.

The land and premises provisions of the Financial Management Act were originally set out in the Public Lands and Works Act 1964 and administered by the then Minister for Works and Services. The departments of public works and property services were abolished and the Act was repealed, in 1994. Powers over land and premises were not at that time perceived to be an integral part of a financial management framework, and so were not fully consolidated either into the Minister for Finance’s responsibility or the Financial Management Act. Consequently, provisions relating to land and premises are still set out in a number of other Acts, including the Land Act 1958, the Transfer of Land Act 1958 and the Property Law Act 1958. Victoria is the only state that has land and premises powers set out in public finance legislation. Due to the dispersal of these powers in several different Acts, it is also the only state with land and premises powers administered by several ministers. In light of the government’s desire to consolidate and simplify current Victorian legislation, these powers could be considered in a comprehensive review of land and premises-related law. The government has recently announced it will review the Transfer of Land Act and the Property Law Act.

Consideration will need to be given to how to treat the existing Financial Management Act provisions while the comprehensive review is undertaken.

Given the discussion above, you may wish to respond to the following question.

Are the proposals for related legislation appropriate?

3.2.5 Procurement

The past decade has seen significant changes for procurement in Victoria. In developing a modern public finance system, it is necessary to consider:

• whether procurement principles should be included in the new legislation
• which key players should perform each of the functions
• to which entities should procurement policy apply.

Procurement principles

If principles-based legislation is adopted for the Public Finance Bill, the Bill could enshrine the procurement principles from the current ministerial directions:

• value for money
• open and fair competition
• accountability
• risk management
• probity and transparency.

Procurement governance framework

A new framework for government financial management would provide the opportunity to establish clear lines of accountability and responsibility for procurement. This could be done by having the legislation clearly reflect the current roles and responsibilities of the Minister for Finance, the Department of Treasury and Finance and the VGPB.

The policy-making function of the VGPB could be undertaken by a minister or by the Governor in Council. There are already precedents in the area of procurement. For example, policies and procedures specifically addressing capital expenditure and travel are set out in ministerial directions. In practice, the procurement function would become self-regulating. In other words, rather than investing in monitoring compliance, compliance should become clear through the operation of the system, that is, through the audit function and avenues for pursuing complaints.

For the policy breach handling function, complaints could be registered with the Minister for Finance and a panel of on-call, independent, qualified review officers, who would convene to review complaints when required.

Scope of the procurement framework

The scope of the VGPB and its policies only relates to the purchase of goods and services in departments and administrative offices. The board’s area of responsibility does not extend to purchasing activities that relate to capital projects, which represents a significant portion of whole-of-government expenditure. Neither is the board responsible for oversight of purchasing undertaken by other entities (mainly public non-financial corporations and public financial corporations). At present, these other entities are advised, but not required, to use the VGPB guidance as best practice.

Given the discussion above, you may wish to respond to the following questions.

Should procurement principles be incorporated into the new Public Finance Bill?

What functions associated with procurement need to remain entrusted to a statutory body or be independent of government?

Is the scope and nature of procurement controls sufficient?

3.2.6 Principles-based legislation

The new legislation should be modern, easy to read and comprehensive in scope. This section considers a principles-based approach as a means of improving and modernising the current legislative framework.

Public finance legislation has two dimensions. In some matters it contains the compact between parliament and government about the relationship of the two institutions. In other matters it gives legal effect to the rules required for the governance of the public sector. In fact, the changes made by the Financial Management (Miscellaneous Amendments) Act 2006 have already given the Minister for Finance considerable additional powers to set rules relating to public sector financial governance.

Principles-based legislation states in primary legislation the fundamental principles of the law, leaving other processes and detailed rules to subordinate legislation. Principles-based legislation focuses on assuring desired outcomes more than on procedural details or technicalities. Its purpose is to create a legal requirement (or opportunity) that something be done, not to establish how it is to be done. For example, a board may be required to have a policy about probity in receiving gifts, but remain free to tailor the policy to its own circumstances.

There are two important reasons to consider principles-based legislation in a context of public finance legislation. First, by focusing on the desired outcome (for example, promptness and adequacy of services) the legislation demands compliance with the outcome rather than the set of procedural rules needed to achieve it. Second, legislation that establishes clear principles, rather than prescribing detailed practices for giving effect to those principles, remains relevant in the face of operational evolution. This is especially so in relation to rules internal to the public sector, which is why the Financial Management Act (section 8) gives direction-making powers to the Minister for Finance.

As already noted, the powers of the Minister for Finance are to a considerable degree already principles-based. This is due to the interaction of the regulation-making power in section 59, and the direction-setting power in section 8. Beyond that, it is generally true that the objective of legislation often outlasts the particular mechanism enacted to achieve that objective.

The Public Administration Act also provides examples of principles-based legislation in Victoria. The Act established a framework for good governance in the Victorian public sector and in public administration generally in Victoria. A particular example is section 81 of the Act (reproduced in Appendix B of this paper), which sets out governance arrangements for public entities. (Note that this section of the Act only applies to public entities established on or after the commencement of Part 5, unless applied by Order in Council to existing entities. The Act also allows for exemption (s. 75 of the Public Administration Act 2004).)

Victoria’s Financial Management Act is highly detailed, prescriptive and complex. Legislation in the area of public finance lends itself to a principles-based approach because it is essentially internal to the business of government. In only the rarest of instances does it affect the rights or obligations of individuals or invite consideration by the courts.

There has been a shift in recent times towards principles-based public finance legislation in other jurisdictions. Overseas examples include Sweden’s State Budget Act 1996. In Australia, the Western Australian Government has recently introduced revised financial management legislation, which includes more streamlined provisions and devolved operational provisions. Queensland and Tasmania are currently reviewing their respective financial legislation and have indicated that they intend to develop principles-based legislation.

Principles-based legislation does not compromise or diminish the accountabilities and responsibilities set by a financial management framework. In addition, parliamentary scrutiny of the particular means by which the principles are carried into practice, and of the practices themselves, remains intact. However, an expansion of the principles-based approach could initially present difficulties for some key participants. Policy authors, for example, have previously relied on the legislation to mandate specific and detailed policies and compliance activities.

If a principles-based approach is adopted, the legislative framework in its entirety (including, for example, the financial reporting directions) should be readily available to the public, to ensure an appropriate level of transparency is maintained.

Given the discussion above, you may wish to respond to the following question.

Should the Public Finance Bill be drafted as principles-based legislation?

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