Annual conference of the European Group of Public Administration Ljubljana, Slovenia 1-4 September 2004
Study Group n. 4 Public Finance and Management Chairs: Prof. Mihaly Hogye and Dr. Wouter Van Reeth
Accountability in local governments: trends, initiatives and effects of the implementation of result-oriented accounting
Federica Farneti Faculty of Economics – University of Bologna Piazzale della Vittoria, 15 47100 – Forlì (Italy) Tel. +39.349.7723277 Fax. +39(0)541.55296
[email protected] and Ton Bestebreur Erasmus University - Rotterdam The Netherlands Tel. +31.621.522411
[email protected]
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Contents Accountability in local governments: trends, initiatives and effects of the implementation of resultoriented accounting ...................................................................................................................... 3 1 The impact of New Public Management principles in public administration................................... 3 1.1 Introduction ..................................................................................................................... 3 1.2 New Public Management.................................................................................................. 4 1.3 Structure and method of the paper .................................................................................... 5 2 The principle of accountability within local governments ............................................................. 6 2.1 The meaning of the accountability principle ........................................................................ 6 2.2 Why a formal accountability behavior has developed in Italy ................................................ 9 2.3 Individual responsibility behaviour for an accountable management ................................... 10 2.4 The BSC for local governments....................................................................................... 11 3 A result-oriented budgeting.................................................................................................... 15 3.1 Dutch initiatives in result-oriented budgeting in local government ....................................... 15 3.2 A critical appraisal of Dutch NPM-initiatives related to public budgeting .............................. 18 3.3 Case 1 - BBSC in local government: the case of the city of The Hague in the Netherlands - . 18 3.4 Case 2 - Does NPM give rise to the dominance of financial directorates? -.......................... 20 4 Conclusion ........................................................................................................................... 21 Figure index Figure 1: Design of the meaning of the accountability principle. See Farneti, F., (2004 a), Il progressivo affermarsi del principio di accountability negli enti locali. Le implicazioni di tipo manageriale, FrancoAngeli, Milano, p. 88. .............................................................................. 8 Figure 2 The BSC model in local governments. The writers version derived from Kaplan, R.S., (1998 A). ........................................................................................................................... 12 Figure 3 BSC framework designed for Italian local governments with a strategic theme which is concerned with day-to-day activities in a specific application. See Farneti, F., (2004 a), Il progressivo affermarsi del principio di accountability negli enti locali. Le implicazioni di tipo manageriale, FrancoAngeli, Milano, p. 237. .......................................................................... 13 Figure 4 Tables show a selection of the goals indicated as strategic critical success factors, effect-indicators and output indicators in all four areas of interest bases on the annual report 2003 of the BBSC. .................................................................................................... 19 Figure 5 Potential unintended effects of NPM-based accounting in local government ....................... 21
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Accountability in local governments: trends, initiatives and effects of the implementation of result-oriented accounting 1
1 The impact of New Public Management principles in public administration 1.1 Introduction This paper aims at deepening insight in management accounting in Italian and Dutch local governments to illustrate a situation in transition. There are changes within local governments in both countries. Therefore we analyze the importance of the accountability principle, the objectives of resultoriented accounting and the techniques that can be exploited to facilitate the transition. From the end of the seventies to the present, public administration has been characterized by profound changes which have influenced the management procedure of public administration. In the international context, what necessarily follows is a concerted effort both in minimizing waste and lessening the fiscal pressure. This concept was identified as New Public Management (NPM) and which was emphasised categorising certain major changes, well delineated by Hood (1995; 95-98): the unbundling of units of public organization, for better management with the end in view of containing wastes by introducing the practice of delegation and autonomy; the introduction of greater competition within public organization and between public and private, in order to decrease costs; the raising of public organization management to the private level; adapting a frugal behaviour in managing resources; managing with a greater accountability towards a clear definition of responsibilities which means departing from the traditional bureaucratic system of administration; focusing on the realization of objectives, thus the capability to measure performances (output) and/or to benchmark those with standards; finally and consequently, the possibility of controlling output and weighing results 2. One of these changes concerns the accountability through which is possible to favourite the realization of objectives by public managers, particularly because they have to explain how they have 1
Paragraphs number 1.1; 2.1; 2.2; 2.3; 2.4 are attributable to Federica Farneti, Faculty of Economics of Forlì – University of Bologna, while paragraphs 1.2; 3.1; 3.2 to Ton Bestebreur Erasmsu University - Rotterdam, paragraphs 1.3 and 4 are coauthored by them. 2 Lapsley and Pallot later on specified in a very synthetic way the essential theory of NPM that comes from ideas of private sector. They affirm that NPM is characterized by “a highly rationalist perspective on management actions in which: choices flow from objective analyses an the evaluation of alternatives; the management of the organization is in command of the resources (material, human) at its disposal; controls exit to induce individuals to work in the interest of the organization; and objectives are key dimensions of the need to measure the performance of individuals, sub-units and the overall organization”, see Lapsley, I., Pallot, J., (2000), Accounting, management and organizational change: A comparative study of local government, Management Accounting Research, n. 11, p. 216.
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performed, giving an account of what has been done in a transparent manner, referring both to what they have done in the past, what they are responsible for in the present and what they are going to do in the future. From this point of view, therefore, the citizen is not just a service user, but he appears as a central figure and considered 3 as shareholder of the organization who provide the service. Moreover, management according to accountability principle means following the guidelines that stress the importance of the realization of objectives and not to processes. Thus a general reform process started in the international environment (we may say mainly in a OECD countries) concerning public administrations, indicated as New Public Management (NPM) and succeeded in affirming a few basic principles which relate to the management of these organizations. Among them there is accountability. It was made clear and important to recognize the accountability behaviour in managing public resources (Olson, Humphrey, Guthrie; 2001: 505-522) in order to achieve particular objectives. These changes were, however, applied in different ways in different countries. This paper refers mainly to Italy as well as the Netherlands, to illustrate what has happened in these public administrations and how these countries are following the accountability principle. Furthermore, it aims at illustrating the benefits which can be achieved by Italian and Dutch local governments, from a theoretical perspective if the accountability principle is observed and how the result-oriented focus can be useful as a management instrument. The NPM trend on result-oriented government has caused a wide variety of initiatives to come to a more result-oriented budgeting, accounting and accountability. 1.2 New Public Management New Public Management is a widespread movement within western governments, where politicians and civil servants are inspired by management concepts from the private sector. As government would do well to leave tasks to the private sector, they themselves should operate more like a business; hence, core task discussions, privatization, but also internal self governance are being suggested. Internal self governance means that public services are managed by managers who have the same discretion as their counterparts in the private sector. It is necessary that politics determine what an agency has to do, which services it must provide, while the managers determine how that will happen, with what means and analogous to contracting-out. This is what Osborne and Gaebler’s (1993) metaphor of ‘government should be steering not rowing’ refers to.
See Cassese, S., (1995), Presentazione, in Osborne, D., Gaebler, T., Dirigere e governare. Una proposta per reinventare la pubblica amministrazione, p. 15. 3
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NPM involves a different way of budgeting. Authorization no longer regards the input, the amounts spent for certain government tasks and the means with which these are achieved, but the output, the product delivered and the price paid for out of collective means. Thus, in Netherlands, a performance budget is created. In this manner, allocation and management are separated. The unique character of government as an income-spending organization is expressed in political decision making about the production, but the agencies function as companies that provide services ordered by a client and thus behave as an income-forming organization. Therefore we see that in the income-management of municipalities, aimed at allocating collective means to collective tasks, a self-governance of capital management aimed at achieving optimal results in financial terms with certain means (Mol, 2000). Characteristic for a management approach of working is that the agency is rewarded for the actual performance. When the agency can perform with less means than expected, there is a profit that can be added to the profit reserve. If performance is less than what was agreed upon, it will be paid less and that will cost the profit reserve. That is to be seen as reckoning or settlement. In this manner all aspects of NPM converge: 1. Steering for output where politics determine what and how much will have to be produced. 2. A performance budget where the amount of money available is indicated per product. 3. Performance indicators in the form of prices per product that can be calculated from the performance budget - in so far as they are not already part of the performance budget. 4. A “dual” model with a clear separation of responsibilities between politicians and management of agencies. 5. Internal self-governance or self-management as consequence of (4). 6. Integral management that gives managers the choice of which production means will be used in order to achieve the greatest efficiency possible. 7. Business style of operation enabled through internal self-governance and integral management. 8. Reckoning between concern and agencies on the basis of performance. 1.3 Structure and method of the paper The paper is made out of four main parts: an introduction contextualising he topic of the paper and explaining accountability and result-oriented method in public administrations. The second part is mainly related to Italy, aimed at clarifying the meaning and the importance of the accountability principle, as well as identifying the best tool to express accountability in BSC.
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The third is mainly related to the Netherlands and its objective is to give reason for result-oriented accounting. Finally, the conclusion section refers to general observations concerning the importance to apply a substantial managerial culture within public administration and suggestions e.g. the specific application of the BSC local governments framework. The research methodology is based on the literature review as well as the normative one, concerning Italy and the Netherlands. This is an essential qualitative study; thus, descriptive. It also refers to a change of BSC model, proposed for Italian local governments in a previous study mentioned in paragraph 2.4. The research developed is targeted at local government managers (who should respect these principles) and politicians, and it can help to contribute in the development of accountable practices in public administration. The aims of the paper are threefold: The first refers to underline benefits which can be achieved by Italian local governments, from a theoretical perspective if the accountability principle is observed. The second refers to a more result-oriented focus, which in part derives from realizing the accountability principle. It is not only limited to report to superior institutions (Parliament, National Audit Office …) or citizens, but also an instrument for management. Lastly, it aims at showing the effects of result-oriented budgeting, accounting and accountability on management, based on research in Dutch local governments where unforeseen cultural effects will be explored.
2 The principle of accountability within local governments 2.1 The meaning of the accountability principle The importance of the accountability principle for local governments, what it consists of and where is derived from have been briefly discussed in the introduction. In the past two decades, public sector and particularly local governments, have experienced a notable transformation which was characterized by a displacement from the traditional public administration system to one more dynamic, flexible, responsible and open - the New Public Management 4. The continuing reform process of public sector in It is important to underline that the shift from a traditional administration system to a managerial one was inevitable, given the complexity of the context in this sector. The complexity is well described by Lapsley: “…the heterogeneity of the
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local government towards managerial techniques and practices, is still on-going to realize the management changes outlined. Among OECD countries, the different levels of implementation of NPM changes are recognizable5. To understand how accountability is applied by the two countries, it is worthwhile to explain its meaning. Then the major techniques adapted in local governments to act in an accountable and result-oriented way will be described. The development of the significance of accountability principle has undergone changes through the years within the international context. Accountability, in the eighties, referred to a mere general reporting, but later on it assumed different connotations. Accountability relates to the ability to explain how resources are assigned and utilized (Roberts, Scapens, 1985; Sinclair, 1995; Willmott, 1996;). It wants to find out, through objectives and standards, the measure of the performance realized, in order to identify the connected responsibilities (Hood, 1991; Patton, 1992). Then accountability concerned itself to the social, moral and ethical dimensions (Roberts; 1991) and to the necessity to explain to different stakeholders, not just to superior referents (Buritt, Welch; 1997). It was further characterized by the dimension of the cooperation between two different components that help to express the effective meaning of this principle: accountability which means to account for something in the past and in the future, with a responsibility for actions that someone is doing in the present (Hoskin, 1996; Olson, Humphrey, Guthrie, 2001). The meaning of accountability is thus expresses by the following figure 1 (Farneti, 2004 a). Figure 1 underlines the dualism of the sphere of being accountable and the sphere of being responsible for something. These two parts complement each other. They show a responsible behaviour to follow in performing actions and the capacity to communicate to stakeholders what has been done in a transparent way. Thus the figure explains the essence of the principle which is here analyzed. In other words it means an individual responsibility6 behaviour in appropriate management and operations. organisations comprising this sector of the economy (from commercial and quasi-commercial organisations to non-profit organizations); the scale of their operations; and the diversity of the accounting practices. (…) Such differences apply to all aspects of the accounting function: the rising of finance; the decisions to spend (on revenue capital expenditure); the basis of recording transactions and related economic events, and the assessment of the financial performance of such organizations and the means by which responsible persons are held accountable for the resources of their disposal”, Lapsley, I., (1988), Research in Public Sector Accounting: An Appraisal, Accounting, Auditing & Accountability Journal, Vol. 1, n. 1, p. 21. 5 To effect changes it requires “a wide breadth of reform including new institutions, new frameworks of accountability, new management systems and processes, and new accounting practices and procedures” see Lapsley, I., Jackson, A., (2003), The diffusion of accounting practices in the new “managerial” public sector, International Journal of Public Sector Management, Vol. 16, n. 5, p. 360. 6 Concerning the difference between formal accountability and responsibility, Olson et al. specify that: “…what is meant by ‘accountability’ in this context, particularly as it relates to the term ‘responsibility’. (…) We would argue that the difference between the two concepts exists and is important – particularly because ‘accountability’, in public sector context, appears to be increasingly dominating matters of ‘responsibility’. (…) In formal accounting contexts there is a strict distinction (often reinforced by legal provisions) between the giving of accounts about past action via ex-post accounts (e.g., an annual report)
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Figure 1: Design of the meaning of the accountability principle. See Farneti, F., (2004 a), Il progressivo affermarsi del principio di accountability negli enti locali. Le implicazioni di tipo manageriale, FrancoAngeli, Milano, p. 88.
The problem is that in the public sector context, such expected principle is hardly ever taken into consideration. In most cases, it is just a formal accountability behaviour performed. In some countries, like Italy and the Netherlands, this has led to the implementation of formal accountability framework, which focuses more on observing normative prescriptions and respecting them, rather than assuming the individual responsibility (Farneti; 2004 a). It is necessary to recognize the importance of accountability behaviour on the part of those in responsible position, in order to account to stakeholders who, from the other end, require financial and non-financial, quantitative and qualitative, political and
and the giving of accounts future action via reference to ex-ante accounts (e.g., a budget).…”. A real responsibility aspect of accountability is, as said before, a main topic of NPM: “…NPFM reforms represent a move from system essentially based on the discretionary responsibility of service providers to ones with more constrained public service responsibilities and requirements for performance to be measured and compared against targeted volumes, costs of units produced and service/product quality”, see Olson, O., Humphrey, C., Guthrie, J., (2001), cit., pp. 507-508 and p. 510.
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social information, to ensure control in a transparent way (Pezzani; 2003). It is possible, in this way, to describe the realization of the planned objectives in terms of results or, at least, explain why it has not been possible to achieve them. The difference between formal accountability and individual responsibility consists in the willingness to explain (which means a substantial accountability). It is therefore very important that the management culture inside local governments has to be applied in every level of the organization. 2.2 Why a formal accountability behavior has developed in Italy While the Common Low System, in Anglo-Saxon countries, is respected by citizens, Italy is characterized by complex normative provisions system, making it all the more difficult for its citizens to observe uncodified rules. Consequently, as seen, accountability has contributed to the development of NPM in Anglo-Saxon countries, while in Italian local governments the accountability principle is derived from the application of the law. The reform process in the Italian local governments started in the 1990’s, produced a public sector closely resembling to that of the private sector. The reform process, law after law, delineated principles as “economicità”7, techniques as “PEG”8, process (planning, programming and control) that led to become local government practices similar to those of private organizations. It was particularly recognizable how an accountability behaviour necessarily followed. Formal accountability9 was applied in local governments, but the accountability principle described in the previous figure began to be put into practice in a few local governments. Why? Because there was a need to explain to different stakeholders how public resources are being utilized and whether there has been a realization of objectives. Result-oriented managers came into existence. Given this, managers in local governments, have observed strictly normative prescriptions, performing a formal accountability management, as formal observation of law, described in the previous chapter, while in these last years they have tried to change and recognize individual responsibility. Managers themselves benefit from the practice. They would be able to explain to the different stakeholders how the resources are spent. So with politicians, who would be in a position to explain the 7
It refers to efficiency and effectiveness contemporary. According to Italian theory of Economia Aziendale, particularly referred to public administration, see Farneti, G., (2004 a), Ragioneria pubblica. Il “nuovo” sistema informativo delle aziende pubbliche, FrancoAngeli. 8 PEG stands for “an executive management plan (EMP) that concerns the operative aspect realized by every single operator”. it is based on performance measurements and contains mainly cash data, but derived from accrual data. It is a programming tool that local governments have to develop. See Farneti, F., (2003), Public Financial Management Technologies in Italian Local Governments: a review of theories and practices developed during the last decade, paper presented to EGPA conference in Oeiras September 2003, p. 11. 9 Formal accountability behaviour was recognisable even in the Netherlands since a few years ago.
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realization of policies given at the beginning of the mandate. Stakeholders also are at an advantage because they understand how the local government is managed. The benefits are thus achieved by Italian local governments from a theoretical perspective, if the accountability principle is observed. It would be logically very useful for politicians, managers and stakeholders. The relevance of this principle is carried out from a recent accounting provision. In Italy a new accounting standards for local governments was designed that suggests to observe this principle with effect from January 2004. It is worthwhile mentioning that since January 2004 the National Observatory for Local Governments Accounting and Finance, a body that belongs to the Ministry of Home Affairs, which aims at identifying accounting standards for local governments, suggested the application of the accountability principle in its annual reporting (rendiconto), at the fourth publication10. The local government accountability framework in Italy, in the sense of the direction suggested by the National Observatory, explains the shift in focus, from formal to substantial accountability, where public organizations are treated in the "economia aziendale" context. The proposed Italian accounting standards for local governments assume a wider meaning than the international accounting standards (e.g. a focus just on financial aspects), since they include social and political accountabilities, planningprogramming activities and tools needed to measure efficiency, effectiveness and outcome11. Although this provision is not a law, it is a highly recommended behaviour to be observed in the law framework. There is a greater awareness on the part of local government managers to operate in an accountable way. This is linked to planning-programming and control processes. The current Italian situation about accountability is related to the management process (planning-programming and control) showing the benefits to be achieved by observing the principle (a transparent explanation of how resources are utilized; a clear explanation of a responsible realization of objectives defined in the planning…). So it is no longer possible to get away from accountability principle. 2.3 Individual responsibility behaviour for an accountable management The second aim of the paper is to underline a more result-oriented focus, which is not only limited to reporting to superior institutions (Parliament, National Audit Office …) or citizens, but also as an instrument for management. Operating in an accountable way facilitates the realization of planned
10 See: Principio contabile n. 3 “Il rendiconto degli enti locali” 15/01/2004. Osservatorio per la finanza e la contabilità degli enti locali, Ministero dell’Interno, Dipartimento per gli affari interni e territoriali, Direzione centrale della finanza locale, (2004), I principi contabili per gli enti locali. This principle is strictly connected to the framework (the first publication of the National Observatory for Local Governments Accounting and Finance, see the English version at http://www.dea.unibo.it/italiano/webdocenti/farneti/italiano/wmisc/) 11 Farneti, G., (2004 b), Il rendiconto secondo i principi contabili: l’accountability, Azienditalia, n. 5, maggio.
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objectives, thus result-oriented focus is required. An increasing and notable tendency, in applying NPM concepts within the international context, is the major use of accounting based-techniques where a high rational sensibility in management is required and where objectives have a key dimensions. One of the best tool recognized as useful in operating following the accountability principle is the balanced scorecard (BSC). The BSC can be applied to support management in local governments providing accountability to the various stakeholders in the economic, social, political decision making environment (Farneti; 2004 a) and in realizing strategies. The BSC framework can realize an accountable management, in order to supply not only the accountability principle, but even a strategic management for local governments. Thus the technique of BSC can be helpful in switching to an individual responsibility behavior realizing an accountable management, because it permits to identify strategic objectives and to realize them through the mandate years, giving responsibilities to managers and taking into account the result that has to be reached. Moreover, there is a strong linkage between resultoriented budgeting, performance measurement12 and strategic management. Local governments have lost at times the long-term sensibility in operating, so even for this reason it is important to monitor if managers are performing in a responsible way. Thus it is required to focus on results and on the accountability principle. Within local governments there are some important examples of the BSC implementation like that of the City of Charlotte in North Carolina13 which experienced the mentioned technique. Then there have been other experiences. The aim is to give reasons for the importance in applying the BSC in Italy, too, according with a model apposite studied for Italian experience, explained in the next paragraph. It is in this sense that the framework of BSC for local governments will be illustrated as well as suggested. 2.4 The BSC for local governments An accountable management can be performed helping itself in assuming a specific accounting technique. This technique serves as guide in the realization of general strategic objectives and then of operative objectives. It is through the control and the explanation of the realization of objectives (resultoriented management) and through the giving account of how they were performed, that stakeholders
“Performance measurement in government is related to accountability and inadequate performance measurement system do not help in understanding what services are provided and to whom.” See Kloot, L., Martin, J., (2000), Strategic performance management: A balanced approach to performance management issues in local government, Management Accounting Research, n. 11, p. 233. 13 Particularly see Kaplan, R.S., (1998), City of Charlotte (A), Harvard Business School, 9-199-036, Boston and Kaplan, R.S., (1998), City of Charlotte (B), Harvard Business School, 9-199-043, Boston. 12
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are able to understand if politicians as well as mangers direct and manage in an effective way. The best technique in analyzing these aspects is applying the BSC, as suggested by Kaplan and Norton. The BSC is characterized by the individualization of the mission and the vision of an organization. On the basis of these aspects will be designed strategies that are then organized into four dimensions that work from the bottom to the top. The four perspectives, underlined by Kaplan for public administrations are firstly, the customers perspective, that might rather be indicated as citizens perspective, then follows the financial and then the internal process and lastly, the growth and learning perspective. The reason for this change is due to public organization acts for the entire community. So profit (expressed by the financial perspective in private organizations) is not the final purpose, but adequate services and the capacity to provide these services are the final output in public organizations. For this reason BSC indicates as first perspective the citizens (figure 2).
Figure 2 The BSC model in local governments. The writers version derived from Kaplan, R.S., (1998 A).
In analyzing the possibility to apply the BSC to local governments, another aspect becomes relevant. In local governments there are a number of strategic focus areas, as indicated in the five-year
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mandate in Italy. Beside the strategic focus areas, there is also the ordinary one, which has to be realized on a day to day basis. Since it is not secondary to the strategic one (in importance), it would be equally relevant to perform the day to day activities of public administrations and to apply the same mechanism to follow the realization of ordinary objectives. This would allow to put under control the achievement of these objectives (result-oriented), to demonstrate the ordinary activities accountability and to raise the value of these activities in local governments 14. Figure 3 is an attempt to identify the BSC framework that would be adapted by Italian local governments.
Figure 3 BSC framework designed for Italian local governments with a strategic theme which is concerned with dayto-day activities in a specific application. See Farneti, F., (2004 a), Il progressivo affermarsi del principio di accountability negli enti locali. Le implicazioni di tipo manageriale, FrancoAngeli, Milano, p. 237.
“Initially, however, the city could not link the five strategic focus areas to day-to-day activities of its business units. The MBO process continued to generate local, operational measures but these were too voluminous and were not focused on contributing to advancing performance in focus areas”. Then they suggested that through the four perspectives even the dayto-day activities would be taken into account. See Kaplan, R.S., (1998 A), cit, p. 3. However, in our view, in the Italian context it is necessary to give a proper evidence to ordinary activities, because they are very relevant.
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Figure 3 shows the impact of ordinary activities, if identified as relevant to strategic theme. Thus the theme has to be developed by unbundling this into the four perspectives of BSC. For this particular theme it is suggested to start from the financial perspective to develop it, in order to verify the financial availability to perform ordinary activities. It is therefore suggested to find new resources for the financial perspective, within the stability pact and despite the resources coming from higher levels of administrations, in terms of: 1. fiscal and tax policy; 2. services policy; 3. outsourcing policy; 4. efficiency policy; 5. additional public revenue (e.g. sponsorship); 6. instrumental investment. The objectives of the other three perspectives should then be pointed out. The new strategic theme and its perspectives should be correlated with the other strategic themes and their respective perspectives in order to accomplish the general mission of the local governments. Lastly it is necessary to express two final considerations. The first concerns the linkage between BSC and PEG. The second one regards what is called “processi decisionali inclusivi”15. The BSC is a strategic management technology which allows to guide people in realising strategic objectives and to evaluate performance. In Italy, (and similarly in Dutch context indicated as performance-based budget), there is the PEG16 which concerns the management objectives and which allows to realize operative objectives. But, both of them aim to supervise and to monitor objectives (strategic and operative), to control performance, to exercise control over the accountability not only by managers but also by other people concerned. Moreover, both BSC and PEG are based on accrual measurements and are able to offer, at different levels, a detailed explanation of local government performance as well as an orientation to the result. Thus these tools can be coordinated, if both applied. The second consideration concerns what in Italy is identified as “processi decisionali inclusivi”, which means, taking into account the stakeholders and their needs when a decision process has to be developed. The matter of inclusive decision-making processes particularly states that it would be better to start to involve stakeholders possibly right at the beginning of that process in order to avoid arguments later on. It would be worthwhile to consider the decision-making processes jointly with the BSC process and the accountability one. 15
See Bobbio, L., a cura di, (2004), Amministrazioni pubbliche, imprese, associazioni e cittadini nei processi decisionali inclusive, Cantieri, Edizioni Scientifiche Italiane. 16 See note n. 8.
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The whole process starting from the planning stage to the control is a systemic one. Thus to take into consideration stakeholders’ needs from the beginning of the process would facilitate the achievement of objectives and the rise of an accountable behaviour. The suggestion is to activate inclusive decision-making processes from the planning stage, in the BSC, to be able to perform an accountable management. These processes show something more than a citizen-result-oriented behaviour, because citizens are directly involved as early as from the planning stage and would allow to implement accountability process in a more analytic and accurate way and well delineated through the BSC.
3 A result-oriented budgeting 3.1 Dutch initiatives in result-oriented budgeting in local government The first initiative to develop a more result-oriented policy and budgeting system on the local level in the Netherlands dates from 1987. The ambition of the project was to create an administrative and management concept to facilitate the transition towards an output or outcome oriented system (BBI). The policy of the transition process was a step by step procedure, consisting 7 phases (Aardema, 2002): Translate political requirements and wishes into concrete plans. Move from policy plans and multi-year budgets via departmental plans and sector plans to a budget. Adapt the organization to allow effective implementation of policy and improvement of information management. Develop interim management reports and control reports. Develop an annual report and financial statements as policy instruments. Develop operational standards and administrative ratios. Develop a set of instruments for measuring the effects in society. The initiative for the BBI project was taken by the Ministry of the Interior, later in 1989 a corporation was set up, de Stichting BBI. A wide range of instruments was set in to promote the ideas of the project: congresses, regional meetings, training courses and publications. Aardema evaluated the BBI-project on the aspect to what extend municipalities were informed about the existence of BBI and the willingness to accept the ideas of the project. He found out that more than 90% of the municipal stakeholders were familiar with the intentions of the project. It was also stated by a vast majority a 15
willingness to accept. The stated preferences were however not confirmed in the revealed preferences as far as the internalization/ implementation of the different phases were concerned. The first phase, translate political requirements and wishes into concrete plans, was commonly adopted. Linking policy plans to concrete departmental and sector plans (including the budgetary component) is not very recognizable. Other intentions of the BBI project (adapt an organization to allow effective implementation of policy and improvement of information management, interim management reports and control reports, annual report and financial statements as policy instruments), were traceable, but not as an effect of the BBI project. With respect to the most related phases to the ideas of NPM, development of operational standards, administrative ratios and instruments for measuring the effects in society, Aardema concludes very little progress. In fact ratios were developed, but they do not play an important role in planning and control. There is a great similarity in the outcome of the study of Aardema and a study performed by Bordewijk and Klaassen (2000). They initiated an investigation into the experiences of nine municipalities with (performance) indicators. This research sought to gain insight into the potentials and limitations of using (performance) indicators. From the budget and accounting data of the nine municipalities, it appeared that none had a performance budget in the form described above. In each of these municipalities, they claim a performance budget, but nowhere is the amount available per product indicated so that a price per product can be calculated. As a result, it is not possible to trace the development of a price within one municipality and thus conclude performance gain. And it is certainly not possible to compare different municipalities. It is remarkable that in the nine Dutch municipalities, most agency budgets do not have the characteristics of an operating budget of a private organization, where the benefit side displays compensation on the part of the agency for the produced delivered. Instead, one generally sees that agency budgets show a large deficit that is supplemented by the municipality. This is at odds with the idea that municipalities should start working like a business. Also, in none of the nine municipalities there is an indication of reckoning on the basis of performance. Products also do not play a role in the allocation. It is clear that the performance budget does not function as an allocation instrument but as some kind of a ritual17. The performance budget does not help the allocation, but competes with it.
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The same aspect is recognizable in Italy too, where budget didn’t play the function of allocating resources but, most of the time, has been just a ritual.
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The performance data in the performance budget only have an illustrative nature. Performance indicators are included in the budget and annual report for each product group. These concern ratio data (amount per citizen) and cost-coverage percentages. Next, output data per product group are presented. This concerns output data such as the number of enrolments, the number of polder installations, the number of acres of water mains, the number of community centres, the number of neighbourhood centres, etc. Performance indicators and output data included are not functional and do not serve as touchstones for management. Since performance indicators and output data for the various product functions are indicated for a number of years, it is possible to get an idea of the increase or decrease (of the amounts per citizen), or an image of volume growth (e.g. the number of artists), but they are not systematically related to one another. The overall conclusion of the study is that the budgets of the nine Dutch municipalities do contain many performance indicators in absolute terms in order to characterize the projected performance, but none had performance budgets. The budgets are not constructed on the basis of products, while the allocated amounts usually concern a higher aggregation level than that of the homogeneous products. Across the board and systematic use of the idea that agencies are paid by the municipality on the basis of actual performance could be found nowhere while internal self-governance is used to varying degrees. The idea of result-oriented budgeting has not truly been achieved anywhere. The cause for this gap between the norm and the actual situation can be found in shortcomings of the municipalities, but also in the ideas that form the foundations of NPM. Especially since it is more than a decade that this movement emerged, the question can be raised whether the assumptions of the ideal of performance budget are correct. In this respect our view differs from that of other investigators who observed the same gap between theory and practice. In our view the following circumstances resist a system of result oriented budgeting and certainly resist its application across the full range of municipal activities: 1. Result-oriented budgeting assumes homogeneous products (services), which is only relevant for a part of the municipal activities; 2. Result-oriented budgeting assumes that the municipality itself determines how many services will be provided in a certain area, disconnected from the individual choices of citizens or societal developments; 3. The notion of internal self-governance, as linked to result-oriented budgeting, is at odds with legal principles and with the logic of political government.
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Add the practical problems that when all municipal activities would meet these conditions, the usefulness of a performance budget as a steering instrument is still doubtful, given the large number of products and the difference between integral and marginal costs. Thus, a number of products have an illustrative value in budgets, but that actual steering occurs by more intensive spending or budget cuts in comparison to the former budget. In practice, it then appears that the improvement of the performance budget is more quickly viewed as competing with budget cuts rather than as supporting them. What occurs behind the facade of the performance budget is balancesteering: the first demand imposed upon agency directors is that they should not exceed the balance between revenue and expenditure. Realizing the production as mentioned within the budget is subordinate to that. 3.2 A critical appraisal of Dutch NPM-initiatives related to public budgeting Efforts to promote result-oriented budgeting should take into account that the result of the policy making process is seldom determined by government alone but the result of societal developments. Almost entirely lacking in the ambition to introduce result-oriented budgeting is the significance c.q. influence of the culture of organizations. Organizational culture, defined as the process and product of collective interpretation developing in and around the living environment of organizations, is essential; on the one hand, for the determination of crucial values and orientations in the organization and thus for the description, selection and implementation of adequate performance indicators; on the other hand, because organizational culture is a decisive factor in the receptiveness of an organization to new plans, ideas, working methods and also, therefore, to alternative management techniques and mechanisms (Hakvoort and Klaassen, 2003). Result oriented budgeting should take into account that a critical, constructive attitude (itself also a result of the existing culture) with regard to the internalization of such (new) concepts in the organization, is needed for a successful introduction in the organization. If such an attitude is lacking, the introduction of steering mechanisms, management techniques and accounting mechanisms may even be detrimental to the functioning of the organization. Two cases will be explored to explain the effects of NPM related efforts to come to a more resultoriented accounting style in the Netherlands. 3.3 Case 1 - BBSC in local government: the case of the city of The Hague in the Netherlands The Hague, residence of the Dutch Cabinet and major international (legal) organizations, aims to be transparent to the general public by producing a state of the art annual report. In 2003 the city of the 18
Hague won the Dutch Kordes-trophee for the high level of transparency of its annual report of 2002 to the local town council. Especially the consequent effort to link success factors, effect-indicators and output-indicators divides in 4 focus groups was regarded as a ambitious effort. Most relevant for the BBSC-idea (balanced business scorecard) is the effort of the city to be transparent in 4 ways: 1. For citizens as residents; 2. For citizens as customer; 3. For entrepreneurs; 4. For its own employees. The next table outlines a selection of the goals called strategic critical success factors, effectindicators and output indicators in all four areas of interest bases on the annual report 2003. citizens as residents strategic critical success factors Public safety
effect-indicators % citizens feeling unsafe
Cultural attractiveness
Citizens opinion on cultural supply No. visitors of events
Traffic safety
Injured and mortality related to traffic
citizens as customers strategic critical success factors Service level
output indicators • controlled coffee shops • controlled hash houses • % houses controlled on safety (fireinspections) • No. new cultural projects No. booked hotel nights during cultural festivals • •
No 30 km zones No. reduced black spots
effect-indicators • Citizens opinion on service delivered • % citizens with access to the internet
output indicators • % services on internet
entrepreneurs strategic critical success factors Employment
effect-indicators Total workforce
Access to city
Average speed public transport
Service
No. starting businesses
output indicators • m2 new office space • volume reconstructed industrial area • % optimized traffic lights • no. Truck movements • no starters with support of the citystarter-desk
employees strategic critical success factors Quality efficiency Financial position
effect-indicators % sick leave
output indicators • % immigrants
Reserved capital / citizen
Figure 4 Tables show a selection of the goals indicated as strategic critical success factors, effect-indicators and output indicators in all four areas of interest bases on the annual report 2003 of the BBSC.
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Some critical remarks of the Kordes-trophee jury were that: The level of detail of performance-information tends to be too low; information overload might eventually limit the transparency. The actual spending is compared to the estimated totals but a link to the effect on the performance is still missing. Much can be added to this. This scorecard is covering only a small portion of the total services of local government. Because of the level of aggregation its is also doubtful whether is has any relevance to the general management of the city. If the opinion on service level drops, who can be blamed for it since all parts of the city render services. The definition of performance-indicators is also vague. Putting services on the Internet is great, but old-fashioned technologies are more irritating than joyful to citizens. Most fundamental however, is the missing link between the unit responsible for designing his scorecard (the financial directorate) and the rest of the organization. Thanks to the creativity of the financial directorate, the city could produce this scorecard, not because of a organization-wide policy on becoming more result-oriented18. Secondly, the scorecard idea was not used as a planning, programming reporting tool but as an isolated reporting tool only. The idea tot report with a BBSC came up after the fiscal year 2002, not before. The effect till now therefore, is the lack of proof that the organization is really steering on these indicators. Positively however, the acceptance of the BBSC idea might fundament further growth of the idea in upcoming years. The BBSC should then be used not only for reporting but also for planning and programming and should not be an instrument for the financial directorate only, but for the entire organization. Nevertheless, while there’s much reasons for further growth, the effort as shown by the city of The Hague might be an interesting effort to come to a more full accountability in local governments. 3.4 Case 2 - Does NPM give rise to the dominance of financial directorates? NPM and the sharper focus on result-oriented accounting has, at least in the Netherlands and in Italy, strengthened the position of financial directorates. They have become more central in organizational decision making, have influenced the ‘language/discourse’ by introducing there systemoriented approach and thinking style. In most organizations, instruments of the financial directorates have been introduced in other areas like HRM (human resources management), IT (Information Technology), but also in general policy units. They all seem to be busy today with monthly and quarterly
18
Iinterview with financial director of the city, December 2003
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management reports, risk analysis, performance information and have accepted the idea of incentives, calculate risks, and efficiency gains. Much has been written on the negative effects of an-over-the top- performance approach. Perverse effects of performance management have been well documented. Less has been written so far on the effects within organizations. Aardema has produces a list of potential unintended effects of NPM-bases reporting and accounting in local government, based on his empirical research. 1
Increased power of scorekeepers
controllers become dominant
2
Instrumentalism
Rules instead of results
3
Financialism
Financial goals dominate
4
Focus on ‘the books’
No extern focus
5
Misuse of power
Too much delegation of power
6
Overemphasized entrepreneurship
Negative effects on core tasks
7
compartmentalization
Unit-thinking
8
Performance paradox
Decreasing affectivity
9
Tunnelvison
Focus on what’s measurable
10
Ossification
Less innovation
11
Window dressing
Fake results
12
Myopia
Real insight gets lost in the numbers
13
Creaming off
Unit performance in stead of public performance
14
McDonaldization
Copying concepts
Figure 5 Potential unintended effects of NPM-based accounting in local government
Though his list of 14 potential effects needs to be elaborated and the relative influence of each effect is not clear, additional research might be useful to evaluate these effects. If true, these should be taken into consideration at the moment of introducing NPM-based instruments in organizations.
4 Conclusion NPM is a widespread movement influencing accounting, budgeting and accountability practices in many countries, in many areas. We decided to develop a paper together, because we found some similarities in our countries, concerning the consideration of NPM principles (which remains at the beginning formal) and its new techniques (that are several times not considered). However, there is also a variety in the progress of the level and speed of implementation of NPM-ideas. Whereas we see e.g. 21
that Dutch municipalities adapted a more result-oriented approach in the early nineties, Italy seems to start later but is fast catching up by enacting NPM-principles in its legislation. The Dutch began with a long period of experimenting and tried to gain confidence in the idea, whereas in Italy a more top-down approach seems to be adapted. We are convinced that efforts have to be taken, in both the Netherlands and Italy, in order to spread a managerial culture in public administrations characterized by a substantial result-oriented accounting as well as a substantial application of the accountability principle, utilising, when possible managerial tool as the BSC. However, lessons drawn from the Netherlands can be useful in the way and speed of implementation of new accountability practices in Italian local government. Three lessons drawn from the Dutch experiences. 1. Since NPM concepts need to be matched with existing local governance principles, a period of experimenting and enough local discretion can be useful for a more successful adaptation of the principles. Stimulating the exchange of practices between local governments, facilitate serious research and support training initiatives could be beneficent to the adaptation and implementation of accountability-practices. The BBI-initiative in the Netherlands can be regarded as an example of this supportive style of implementing new budgeting and accounting concepts. 2. Though formal concepts of budgeting accountability lay at the heart of the implementation, it should be taken into account that a critical, constructive attitude (itself also a result of the existing culture) with regard to the internalization of such (new) concepts in the organization, is needed for a successful introduction in the organization. This can not be reached by a legislation programme alone and therefore needs a longer lasting program a full support of national government, political and administrative decision makers. 3. The potential dominance of financial directorates should be addressed as a serious issue and critical to the full adaptation of new budgeting and accountability standards. It might be necessary to support the financial directorates as (temporary) change agents in an more NPMproof style of working, but serious discussion should take place whether this could eventually limit a real internalisation of accountability-concepts in the rest of the organization; give rise to a shift in focus to measurable practices rather than effective procedures alone.
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Four considerations can be gleaned from the Italian approach: 1. In the Italian context it is very relevant to raise the level of accountability within local governments. The best thing would be to start this activity from the planning stage, to the programming and then through the control. The National Observatory for Local Governments Accounting and Finance particularly suggested the application of the accountability principle in the annual reporting. Moreover, the accountable management is linked to the result-oriented management. Thus by the accountability analysis, it is understandable how a result has been realized or why it was not possible and where the related responsibilities are. With this aim, the useful management technique as seen in the BSC, it follows that the accountability process begins from the planning stage and has a result-oriented sense (from strategic objectives to results). Hence, since the accountability concept is a codifying behaviour19 indicated by a body which interprets, in technical terms, laws and which connects local government behaviours to those laws, it is necessary to ensure it. The suggestion is to recommend it through the BSC tool. 2. The BSC has several utilities according in the international context. It can realize a strategic management; it can be used in performance evaluations; but it can also be used to point out accountability. To use the BSC in local governments, as underlined by Kaplan (1998), the first perspective is the client. Respecting the BSC framework there are two adjustments. The perspective mentioned here is indicated as citizens perspective. The second adjustment which is more relevant consists in adopting, among the strategies, one that is related to the current activity, in order to consider not just the new strategies, but even the day-to-day activities performed in local governments. 3. The BSC has a perspective to the client who, as underlined in the paper, is seen as a citizen. So it is even a result-oriented view, because in realizing its objectives it becomes effective in the perspective of the needs of the citizens. To render this perspective a reality and to facilitate the accountability process, a greater involvement of the stakeholders, who are the final beneficiaries of services, would be recommended. This can be seen as something more than a client perspective, because there is greater participation of people to the “res publica”. The citizens orientation can be more profoundly expressed by taking into account the stakeholders’ considerations from the planning stage, through the inclusive decision-making processes. 19
Accountability practices were introduced in Italy at the beginning of the last century and then again emphasised in the Constitution, art. 97.
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4. The last consideration is related to the possibility of connecting the BSC to the PEG (in Italy) and to the performance-based budget (in Netherlands), to arrive at a higher level of accountability from the planning stage.
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