PART II CASE STUDIES ON THE DEVELOPMENT OF PERFORMANCE MANAGEMENT
SECTION 2. A NALYSIS OF THE PERFORMANCE MANAGEMENT FRAMEWORK IN THE U NITED K INGDOM
representatives from the third sector, trade unions, interest groups, the research community, and representatives from related organizations. The need for service delivery partners to come together to negotiate and then deliver these agreements have begun to transform the nature and strength of these partnerships. This strategy will seek to improve the choice and control that they have over the required service delivery and to prevent a one-sided approach to addressing citizens’ needs. This strategy helps to remove some of the current barriers to service delivery for citizens.
The lead department for each PSA will drive performance by regularly monitoring progress, holding service delivery partners accountable, and resolving inter-entity disputes where they arise. The responsible officer within the government for the PSA will chair a delivery board, comprising all lead and supporting departments. The board will also monitor progress, review delivery regularly and report to the relevant cabinet committees. They will use the views and experiences of service beneficiaries, gathered through interviews, focus groups and observations of delivery, to inform future policy making and to enhance service delivery.
Section 2. Analysis of the performance management framework in the United Kingdom
Table 5.2 Performance measurement system in the United Kingdom’s central government
Performance target
Performance measure Linking expenditure with Evaluation reports
Benchmarking Performance
target*
Performance goals/
objective Output Outcome
O O O 41-50% No O -
Source: OECD (GOV), 2007 Budget Practices and Procedures Database.
*Percentage of expenditures specifically linked to performance targets.
Spending review assesses the governmental aims and objectives of each spending program to find the best way to deliver government objectives. Although the link between expenditures and government aims and objectives is considered during spending reviews, the expenditures are not specifically linked to performance targets/goals/objectives in the budget. Central government departments prepare PSAs separately from the budget.
2.2. Strategic perspective of the performance management framework
Performance management system in the United Kingdom utilizes a well-developed system of performance measurement and evaluation to strengthen the link between planning, budgeting, accounting and auditing toward performance. Performance measurement and evaluation have always been important elements in performance management system. As shown in Figure 5.2., a performance management system refers to the planning, managing, and controlling of public expenditures based on performance and accounting techniques and information. It highlights the expectations regarding performance management systems to improve decision making (e.g.
resource allocation and expenditure prioritization) at both the government-wide and the departmental levels by providing them with objective performance information as well as incentives to manage resources more effectively. Under the performance management regime, input-oriented budgets are turned into performance and accrual budgets, cash based accounting are turned into accrual and performance reporting systems (including a cost accounting system), and compliance and financial audits are complemented by performance audits and evaluations.
Table 5.3 Multi-year estimates and budget flexibility
Multi-year Separate capital and operating budgets
Flexibility at the ministry level Lump sump appropriation for agencies
Estimate Target Operational Investment
Yes (ministry level)
Yes (ministry level)
Yes Yes Yes Yes (operating and capital expenditure) Government authority to increase
spending
Government authority to cut/spending
Reallocation fund between line items in LM
Carry over of unused appropriation
Mandatory Discretionary Operating
expenditure
Investment Transfers/
subsidies Yes
(subsequent approval of legislative)
Yes (prior approval of CBA and subsequent approval
of legislative)
Yes Yes (with restriction)
Yes (approval of
Finance Minister)
Yes (approval of Finance
Minister)
No
Source: OECD (GOV), 2007 Budget Practices and Procedures Database.
The United Kingdom’s performance management system is developed under the strategic
perspective. The United Kingdom’s central government prepares multi-year estimates for three years at the ministry level. The budgetary system in the United Kingdom is relatively flexible13 compared to other OECD countries, as it provides flexibility at the ministry level. This enables the government to increase and cut spending, to reallocate funds between line items, and to carry over unused appropriation.
2.3. The development of the accrual (cost) concept under the reconciliation between cash and accrual-based information under the strategic perspective
One of the main features of Resource Accounting and Budgeting (RAB) is linking inputs (resources) to outputs and outcomes (PSA) through a framework for analyzing expenditures (cost) by departmental aims and objectives. It confirms the need to align performance indicators with cost information to provide a comprehensive measure of an entity. As cost recognition is important to adequately assess “value for money”, attention has turned to introducing the accrual concept in a more integrated financial and performance management system that more effectively supports the alignment of the basis of budgetary measurements with financial reporting standards.
Table 5.4 Cost information in the central government
Separate capital and operating budgets
Internal charge for capital assets
Internal charge for goods and services
Reporting basis
Budget Financial statements Yes Yes, a general capital
charge is used
Yes, it is used to a great extent
Accrual Accrual Source: OECD (GOV), 2007 Budget Practices and Procedures Database.
The case study of performance management system of United Kingdom provides evidence that the key to the transformation to the accrual measurement is the ability to align of resource (accrual) information with cash information under the strategic perspective, which is elaborated on the practice of reconciliation between resources and cash requirements, and the categorization of current (operational) and capital spending.
2.2.1. Reconciliation between resources and cash requirements
Under resource budgeting, resource accounts replace appropriation accounts and become the main form of accountability to parliament. The resource budget is measured and approved by the parliament on dual cash (associated cash requirements to finance the expenditure) and accrual terms. Each budget estimate includes the following:
(1) Request for resources that represent accrual basis expenses, including non-cash expenses such as depreciation and a 6% charge on net assets employed and
(2) A single cash requirement, developed from the resource requests and representing an
13 It ranks first in the executive budget flexibility index prepared by the OECD (Government at a Glance, 2009).
absolute limit on the withdrawals from the Consolidated Fund.
Figure 5.4 Reconciliation between requests for resources and the cash requirements Department’s Resource Budget
+ New capital spending + Borrowing permissions
- Capital charges (including depreciation) -/+ changes in working capital
= Department’s financing requirement (Broadly equal to net cash requirement)
Source: General Accounting Office (2000), Accrual Budgeting: Experiences of other Nations and Implications for the United States, Report to the Honorable Benjamin L. Cardin, House of Representative, United States.
RAB highlight this idea by requiring departments to prepare the summary of revenue outturn, which offers a reconciliation between requests for resources and the consequential cash requirement, that are voted on by parliament. Considering users’ (actors and stakeholders) familiarity with the incumbent system, the move to an accrual system should consider and integrate the incumbent cash measurement system to gain support and participation from users.
2.2.2. Categorization of current (operational) and capital spending
For cost calculation purposes, distinguishing between current and capital spending will help to overcome differences in the measurement basis, as the difference between cash and accrual numbers lies mainly in capital-related expenditures. The categorization ensures that the full costs of government activities are measured properly by reconciling capital spending with the cost of capital and spreading the cost of capital over its useful life.
Figure 5.5 Reconciliation between the cash and accrual basis Multi year estimate (cash outlay)
Program A 2001 2002 2003 Current expenditure
Capital expenditure Performance target
Multi year estimate (cost)
Program A 2001 2002 2003 Direct cost
Indirect cost Performance target
The argument could go further into arguing that the accrual concept would have the greatest implications for capital-intensive departments and would likely have significantly less impact on other departments. This is confirmed by the experience with accrual budgeting in Australia where there is relatively little material difference between cash-basis and accrual-basis numbers in the majority of the budget due to the absent of interest expenditures, the fully funded civil service pension plan and low capital investments. Most other capital-intensive services, including infrastructure, are developed and operated by lower levels of government (Blöndal, Bergvall, Hawkesworth and Deighton-Smith, 2008).
The strategic perspective – under the multi-year estimates/targets and a flexible budget – encourages and sometimes forces the government to lengthen the time frame for budgetary decisions. The preparation of multi-year estimates and their implementation on a flexible budget provide the framework to reconcile cash-based expenditures and accrual-based expenses, and operating and capital expenditures, as the differences between the cash and accrual basis, are reconciled in longer periods of time. As a result, it is easier to reconcile the full cost of programs with the cash outlays in the longer term under the strategic perspective.
2.4. Distributed governance: The quasi-contractual relation and stakeholder management/involvement in the United Kingdom
2.4.1. The quasi-contractual relationship: Integration of performance budgeting and accrual budgeting
The United Kingdom’s performance management system is regulated by contractual rules under the link between performance and cost information. The contractual relation is not only limited to the relation between the central government and service delivery partners, but also within the central government (between the Treasury and government departments). Any resource must be justified by performance. Each department has the discretion to translate and implement the PSA objectives and targets. Departments are in charge of achieving performance targets and evaluating the results.
Table 5.5 Political regime and the role of actors
Political regime
Highest official whose primary responsibility is
budget
The function of central budget
authority
Achieving performance
target
Performance against target available to public Public Legislature Westminster
/Parliament
Bureaucrat HM Treasury Line Ministry Yes (LM, part, Internet)
Yes (LM/B) Source: OECD (GOV), 2007 Budget Practices and Procedures Database.
Table 5.6 Performance target setting, implementation and evaluation
Setting performance targets
Achieving performance
target (execution)
Performance evaluations Review of
ongoing programs
Ex post review of
program
Review of new initiatives of
programs
Sectoral reviews
Efficiency &/
Cost Effectiveness
reviews Formal In
Practice C PM,
MoF
LM CBA/MoF/
LM/SAI
LM/SAI CBA/MoF/
LM
LM/SAI CBA/MoF/
LM/SAI Source: OECD (GOV), 2007 Budget Practices and Procedures Database.
Note: The function of Ministry of Finance (MoF) and CBA are in the HM Treasury.
The OECD survey confirmed the existence of performance measurement and accrual accounting systems in the majority of OECD countries. The implementation of accrual basis in budgeting and accounting, and the separated operational and capital budgets facilitate the calculation of full cost information. However, the link between cost and performance
information requires the integration of performance measurement and accrual accounting systems into the planning and budgeting system.
The central government of the United Kingdom has implemented a well developed performance management system that is basically built on the integration between accrual budgeting and performance budgeting, which sets accounting principles as decision rules and links resources to performance. It further developed the quasi-contractual relation under the link between expenditures (cost) to government aims/objectives both within the central government, and between the central government, service delivery partners and stakeholders.
It is possible to argue the implementation of the quasi-contractual relation within the central government, and between the central government and service delivery partners because each department and agency receives a lump sum appropriation covering both operating and capital expenditures, with a sub-limit on wages, under the framework of Public Service Agreements (PSA) and cost information, as confirmed by the OECD survey. Furthermore, the OECD survey also confirmed the implementation and utilization to a great extent of internal charges for capital assets and for goods and services provided by one government organization to another.
2.4.2 Stakeholder management
The United Kingdom receives the highest overall budget transparency score among the countries surveyed in 2008, which indicates that it employs the best practice in stakeholder management and involvement in the performance management system.
Table 5.7 Budget Transparency Scores
Transparency index Score
Budget formulation
Pre-budget statement 89
Executive’s Budget proposal 95
Budget approval
Enacted budget 67
Citizens budget 100
Budget execution
In-year reports 100
Mid-year review 92
Year-end report 77
Budget evaluation and audit
Audit report 92
Stakeholder involvement
Can citizen obtain disaggregated program financial information 67 Can citizens obtain disaggregated non financial information 67 Public hearing on macro economic and fiscal framework 67 Public hearings on individual budgets of central government administrative units 67
When is the audit report released 67
Overall score 88
Source: Open Budget Initiative, 2008.
The United Kingdom’s central government manages stakeholders by making each PDCA cycle as transparent and accountable as possible. The survey confirmed that performance indicators
performance indicators are well designed so that one can assess whether there has been progress toward meeting policy goals. Performance indicators are utilized in conjunction with performance targets presented in the executive’s budget. The executive makes available to the public a summary that describes the budget and its proposals. In practice, highly disaggregated information is available to the public for programs representing at least two-thirds of, but not all, expenditures.
The United Kingdom’s central government promotes citizen engagement through public hearings for budget proposals. Public hearings about the macro economic and fiscal framework presented in the budget are held by legislative committees. During these hearings, testimony is heard from the executive and some constituencies, while the testimony for public hearings on the individual budgets of central government administrative units – i.e., departments and agencies – is only heard from the key administrative unit from the executive branch, thus, there is no testimony from constituencies, but the report of the hearings is released to the public.
2.5. Utilization of performance and accrual (cost) information in decision making
The multiple regression analysis on OECD data in Chapter 4 demonstrated that the utilization of performance information in resource allocation is positively influenced by the quasi-contractual relation, stakeholder management and involvement, and the strategic perspective (and performance evaluation). Among the factors, stakeholder involvement has the lowest influence upon the utilization of performance information in resource allocation.
The United Kingdom shares similar patterns with OECD countries. It has implemented quasi-contractual relations within the central government and between the central government and service delivery partners under the strategic perspective. Although its OBI score showed that the United Kingdom has thoroughly managed its stakeholders through the accountability process, it has limited stakeholder involvement (in public hearings). The functions of setting, achieving and evaluating performance are mainly conducted by the HM Treasury and by departments. The results of performance evaluations are utilized only to some extent by the HM Treasury and related departments, as they utilize high-level objectives and performance targets in spending reviews.
Table 5.8 The utilization of performance information in budgetary decision making
Utilization of performance information by actors
Performance information used in budget discussion
Justifying allocation to
program
Pushing change in
program
Setting target for next year
Managing program CBA* Department Evaluation
report
Performance against target
Sometimes Sometimes 21-40% 81-100% CBA/
department
CBA/
department
CBA/
department
department Source: OECD (GOV), 2007 Budget Practices and Procedures Database.
2.6. Development of the performance management model in the United Kingdom
In the United Kingdom, public sector reform was one of the motors behind the shift from government to governance because it created distributed and networked governance. Although the reform sought to increase the freedom to manage, it is argued that the reform – particularly agencification – sought to increase political control of the bureaucracy (Bevir and Rhodes, 2003). This poses the dilemma of steering and controlling the networks of independent organizations. As NPM reform focuses on control and management in organizations, and not between organizations, it calls for a new framework to accommodate control and management between organizations within the new governance structure.
The Spending Review (SR), Public Service Agreement (PSA) and Service Delivery Agreement (SDA) are implemented under the contractual concept (linking expenditures (cost) to performance targets/goals) in strategic planning and resource allocation. This has further developed the contractual relationships within the central government, and between the central government and service delivery partners. Stakeholder management through the publication of performance and accounting information at each phase of the PDCA cycle has encouraged stakeholder involvement to some extent.
There is moderate stakeholder involvement in public hearings, and in budgetary and accountability processes. Performance evaluations are mainly self evaluations by the central government, more specifically, the HM Treasury, departments, and the National Audit Office (NAO). Actual performance against targets and evaluation are actively used, along with information on fiscal policies and policy priorities to inform but not to determine budgets. The HM Treasury and departments utilize performance information to justify allocations to programs and to set performance target for the following fiscal year, while departments utilize performance information to manage programs.
The integration of accrual budgeting and performance budgeting has encouraged the adoption of contractual-based strategic planning and resource allocation. Furthermore, multi-year estimates, a flexible budget, and comprehensive performance evaluation have linked the PDCA process and developed the strategic perspective within the cycle. It confirms the role of performance and accrual (cost) information as rules in the new governance structure that regulates the relationship between the central government, service delivery partners and stakeholders.
The new performance framework is placed to ensure the coordination of activities and joint commissioning by the central government and service delivery partners, so they have the flexibility and capacity to deliver service efficiently and to improve outcomes, as well as ensuring that services are responsive to the needs of stakeholders. It is also placed to identify
those at risk of being marginalized and can help to increase awareness of and access to, mainstream services. Well-designed and timely services can impact on various levels of stakeholder involvement.
Greater accountability to the public will be a key feature of the new approach. Accountability is not just about the central government, but it is necessary to establish clear governance and accountability mechanisms throughout the delivery chain system to ensure services are delivered on the grounds of outcome improvement. Regular performance monitoring and engagement (e.g., survey data) with stakeholders and service delivery partners will better inform policy making and service delivery.
Figure 5.6 Performance management system in the United Kingdom
Notes: 1) Table 5.7, 2) Table 5.8 (21-40% evaluation report and 81-100% performance against target) Source: Developed by author (based on 2007 Budget Practices and Procedures Database of OECD and 2008 Open Budget Initiative).
Notes:
Process line
Relationship line
Role line
Performance evaluation Strategic planning and resource allocation (SR, PSA, SDA)
Budget execution
Performance measurement and accounting system Accountability
Stakeholders
Central government
Contractual relationship (performance and cost) 21-40%,
81-100%2
88%1 67%1
Citizen, Tax Payers, Policy Beneficiaries Service beneficiaries
Service delivery partners Stakeholder management