Public Internal Control Systems in the European Union Optimising Internal Control through Performance Management Discussion Paper No. 1 Public Internal Control An EU approach Ref. 2014-1
Optimising Internal Control through Performance Management Reforms in public administration have led to better performance, more transparency and more efficiency and effectiveness in terms of collecting and spending public money. Nevertheless, there is still a long way to go to achieve optimal performance management. Many administrations still need to strengthen managerial structures and internal monitoring at all levels. The shift that took place is normally well accepted at the top level of government and administration. To be fully effective, the reforms have to be understood by all members of the administration so that they can comply with it. The concept also needs to be understood and supported by all stakeholders, particularly the public and media. 1
TABLE OF CONTENTS 1. INTRODUCTION...3 2. ACCOUNTABILITY...4 3. DRIVERS AND PRE-CONDITIONS FOR BETTER PERFORMANCE IN THE PUBLIC SECTOR...5 3.1. The Rule of law...5 3.2. Economy...6 3.3. Efficiency...6 3.4. Effectiveness...6 3.5. Transparency...6 4. ROAD MAP TO UPGRADE TO PERFORMANCE BASED MANAGEMENT?...6 5. ADDITIONAL CONSIDERATIONS...7 6. CHALLENGES...7 2
1. INTRODUCTION This paper aims to illustrate a manner to increase effectiveness of internal control in the public sector by introducing performance management. To this end, the paper focusses on the key underlying principles and presents a practical "Roadmap" that will help administrations to guide this process of change. New or updated internal control systems in line with the EU Public Internal Control approach have been passed into law and implementation across many Member States is underway. These control systems involve fundamental changes. In essence, managers are responsible and accountable for maintaining effective internal control. Performance-based public management gives a new dimension to accountability. An optimised Internal Control System is one of the keys to guaranteeing that resources are spent in compliance with political and public priorities. A system of internal control, including financial and non-financial performance indicators, can help to provide reasonable assurance that organisations deliver the outputs expected. Internal control thus becomes part of the management processes of planning, execution and monitoring. For many administrations, the implementation process requires changes to managerial structures. It means building clear roles and relationships between key management officials, and requires training. This process will involve mainly officers who will be expected to provide managers with the information they need to ensure that the organisation s objectives are met in an effective and efficient manner, transparently and in compliance with the law. The global financial and economic crisis highlights the need for profound changes in public services. In Europe, the crisis has also drawn particular attention to the performance of financial management, reporting and governance within much of the public sector. Without adequate information, the inter-relationship and accountability between central, regional and local levels of government risks becoming unmanageable. The concepts of New Public Management (NPM) and Good Governance became the dominant models under which much managerial reform took place. They have in common a transparent and accountable management of human, natural, economic and financial resources for the purposes of equitable and sustainable development for the purposes of efficient and effective public administration. These reforms should turn public servants into managers made accountable for the performance of their organisations. However, the idea that performance management and managerial accountability may be easily implemented and that it will automatically show the intended results seems much too optimistic. There is no doubt that reforms in public administration have led to better performance, more transparency and to more efficiency and effectiveness in terms of collecting and spending public money. Nevertheless, there is still a long way to go to achieve optimal performance management. The quality of public-sector management is crucial for performance-oriented budgeting. It is a key challenge in improving the effectiveness and accountability of the public sector. The role of public managers and what they are accountable for seems to be one of the main drivers towards better performance. This is clearly understood in every modern management concept. 3
2. ACCOUNTABILITY Accountability means different things in different countries, reflecting different administrative traditions. Accountability arrangements within a single country may even vary according to the status and form of an organisation, the nature of its activities and the level of government. An entity (or individual) is accountable when their actions, practices, and policies are open to scrutiny by: those whom they affect those to whom they have obligations those who regulate them when there are clear consequences for actions, practices, or policies that are illegal, harmful, unethical, differ from what was agreed, or incompetent. Accountability refers to the various norms, practices, and institutions intended to hold public officials (and other bodies) answerable for their actions and for the outcomes of those actions. It is intended to prevent and redress abuses of power. In the literature, there are various definitions, for example, that of Bovens 1. He sees accountability as a social relationship between an actor and a forum in which the actor explains his conduct and gives information to the forum. The forum can reach a judgment or render an assessment of that conduct. If necessary, as according to Bovens, the forum can impose some form of sanction (formal or informal) on the actor. This definition provides a clear framework suitable for all concepts of accountability as it focuses on the relationship between the actor and the forum. In practice, accountability often refers to the political or judicial domain, but it is also a key component underpinning financial management and control. Although it lies at the heart of democratic governance and government, accountability is difficult to pin down as a concept. As Bovens puts it, accountability has turned into a garbage can filled with good intentions, loosely defined concepts, and vague images of good governance. Accountability gives stakeholders - those who have an interest in or are affected by the entity s operation or actions - confidence that the entity is providing correct and reliable information about its policies, operations and performance. In the concept of Public Finance Management (PFM), accountability is also understood to be a tool to guarantee that resources have been used in accordance with political priorities. PFM systems rely on transparency, as they are based on the sharing of information, without which they cannot be fully utilised. Enabling a country s citizens, civil society groups and media to understand the government s spending priorities from a transparent budget, fulfils one of the requirements for opinion forming and participation in political processes. 1 A framework for the analysis and assessment of accountability arrangements in the public domain, Mark Bovens, Professor of Public Administration Utrecht School of Governance, Utrecht University. (made for CONNEX, Research Group 2: Democracy and Accountability in the EU). 4
Improving public administration performance means seeking better standards of efficiency and effectiveness within the rule of law. This requires delegation of responsibilities to the various layers of management, accompanied by appropriate monitoring and feedback mechanisms. It is thus very important to appoint high quality public managers vested with these public powers. As national policy-making becomes increasingly complex, public managers need to see the bigger picture and have the ability to coordinate their work with both national and international institutions. Accountability within the public sector raises questions such as: Did the organisation follow the rules? Did the organisation achieve its objectives? Did the organisation meet expectations? Did the organisation provide information on its activities and achievements? Did the organisation/management face consequences for its actions? Overall, accountability refers to the obligation of a decentralised unit to answer to a hierarchically super-ordinate body of government for its activities (encompassing legal, organisational and managerial accountability), but also to the necessity to answer to the citizens and the public. Accountability and responsibility are often conflated. Accountability is essentially about answerability, being held to account, whereas responsibility relates to duty and the requirements of a role. However, accountability without responsibility is an empty shell, as is responsibility without accountability. To complement the picture, empowerment is also a vital component of the accountability framework. 3. DRIVERS AND PRE-CONDITIONS FOR BETTER PERFORMANCE IN THE PUBLIC SECTOR Most administrations now share a common understanding of performance management and accountability, but still need to strengthen corresponding managerial structures and internal control. To achieve that, the underlying drivers and pre-conditions for better performance in the public sector would include the following: 3.1. The Rule of law The focus on performance management is without prejudice to a key requirement in public management that is acting within the rule of law. Trusting the government and the administration is a foundation for democratic societies and essential for economic development. Trust can be earned if society is sure that government and administration act in compliance with existing laws and regulations. To illustrate the concept of the rule of law, the UN 2 refers to this concept as "a principle of governance in which all persons, 2 Extract from the Report of the UN Secretary-General on the Rule of Law and Transitional Justice in Conflict and Post-Conflict Societies 5
institutions and entities, public and private, including the State itself, are accountable to laws that are publicly promulgated, equally enforced and independently adjudicated, and which are consistent with international human rights norms and standards. It requires, as well, measures to ensure adherence to the principles of supremacy of law, equality before the law, accountability to the law, fairness in the application of the law, separation of powers, participation in decision-making, legal certainty, avoidance of arbitrariness and procedural and legal transparency." 3.2. Economy A typical input indicator, economy, is about the organisation's capacity to procure the necessary resources, at the best possible conditions, whilst respecting the desired quality levels. 3.3. Efficiency One specific dimension of accountability relates to efficiency in the performance of public administration. The recognition of efficiency as an important process indicator for public administration and civil service is relatively recent. Today, because of budgetary constraints, it has become increasingly important for public administrations to deliver public services efficiently. Efficiency is characteristically a managerial value, a value for money indicator demonstrating the ratio between resources deployed and results attained. 3.4. Effectiveness Effectiveness measures the output and outcome set off against the organisation's objectives and is another way to demonstrate value for money. In other words, is the public administration successful in achieving its goals. Measuring effectiveness involves analysing and evaluating the public policies in place, and assessing the results of operations. 3.5. Transparency The public sector as a whole should be open and accessible to stakeholders including the public at large. Transparency within an organisation strengthens the commitment of staff to its strategies and objectives. Public administrations should communicate with their stakeholders, using channels including web-based information and social media. Transparency helps to protect the organisation from the perception that it has something to hide. Transparency is also essential in the fight against corruption and fraud. 4. ROAD MAP TO UPGRADE TO PERFORMANCE BASED MANAGEMENT? (1) Defining outcomes: The process begins by defining what the organisation, and government in general, wants a programme to do and what outcomes it seeks. (2) Defining outputs: Effective performance systems must also identify the intermediate steps in achieving outcomes. (3) Developing effective measurement mechanisms: If performance measurement is to move beyond rhetoric about what government does and how well it does it, mechanisms for effective measurement must be developed. It is difficult to develop good measurement tools, and they can be politically contentious. They may also be difficult to interpret, especially for outcomes. 6
(4) Defining responsibility: The move from traditional forms of accountability to performance-based systems has shifted the emphasis from blame to some extent. Still, learning about performance provides a means for learning about individual performance. (5) Linking programmes to outputs and outcomes: The actions of government have to be linked to measures of outputs and outcomes. (6) Defining adequate standards: What do measures of performance mean? How good is good enough? What is adequate performance? (7) Defining adequate improvement: How much improvement does it take to show that a programme and its management are performing adequately? How much improvement over what time period should be considered adequate? (8) Linking inputs to outputs: In the past, the budget process has been associated only with allocating inputs. The development of performance management systems provides an opportunity to develop understanding about how those inputs are turned into programmes and to make decisions accordingly. 5. ADDITIONAL CONSIDERATIONS Whilst many Member States have taken initiatives on performance management there is however little information about the impact of changes on the budget process and internal control. The shift that took place due to many administrative reforms is normally well accepted at the top level of government and administration. To be fully effective, it has to be understood by all members of the entity. The concept also needs to be understood and supported by all stakeholders, particularly the public and media. It may be the case that some stakeholders have been neglected while reforms took place. Over the years, we have developed increasingly sophisticated models and strategies, sometimes creating additional administrative burdens without gaining acceptance as far as public opinion is concerned. Public Internal Control (PIC) plays a decisive role in ensuring better performance and accountability. Now we must offer some simplified strategies to meet ambitious expectations. 6. CHALLENGES In addition to the steps foreseen in the roadmap to optimise internal control through performance management, changes may be required on the regulatory and organisational front. What are possible other requirements? What needs to be done to ensure that there is an effective and reliable performance measurement system? How can performance indicators be improved to allow management to have the full picture of organisational operations? As Bovens puts it, accountability has turned into a garbage can filled with good intentions, loosely defined concepts, and vague images of good governance. How can we take accountability out of this garbage can? 7