Noel Hepworth on What Makes Public Sector Management Successful
Noel Hepworth is the former Chief Executive of the Chartered Institute of Public Finance and Accountancy (CIPFA). Since retiring, he has been supporting reform processes and advising on the development of financial management and control (FMC) in many countries across South East Europe (SEE). After realizing that FMC reforms often have limited impact, he concluded that this is because of the lack of appreciation of what FMC reforms should be really about. To fill this gap, he started writing a book on public financial management and internal control. We talked to Mr. Hepworth to find out more about what public sector reforms should be really about.
Please describe the main ideas of the book.
My main point is that if a country is to adopt FMC, it should recognize that it really is an advanced technique and that for it to work successfully important management changes will be required compared with traditional systems. FMC is not simply about budgetary and financial control; it is about delivering objectives and performance standards efficiently and effectively. This requires good management and that means well-trained and experienced management willing to make operational management decisions and being prepared to take risks.
Consequently, personal policies, including recruitment and training, also require reforming. There is no value in politicians thinking that they can do better and feeling that they must make all operational decisions, sign invoices, approve holiday rotas, or appoint their own friends and political associates to run services. That will not work; good policies are developed from discussions about alternatives and what will and will not work and successful policy delivery depends upon experience, managerial discretion with clarity of objectives, and performance standards.
When we talk about FMC, we talk about delivering results. So why is it so much reform activity related to auditing?
This is because the initial focus of the FMC reform was on auditing, particularly on internal auditing. This carried over into thinking about FMC where the focus was on control but a limited form of control, concerned with financial and budgetary controls. The controls necessary to achieve objectives and performance standards and manage the related risks were not considered. Indeed, why should they have been, as objectives and performance standards did not exist and neither were the managers expected to deliver them. The discipline on managers was about ensuring that budgets were adhered to and that financial regulations were obeyed. Internal auditing was a useful way to check that this occurred.
We talk a lot about the importance of leadership and management when implementing the reforms but rarely in connection – are these two connected, and how? How to achieve institutional changes?
Effective management embodies leadership. The need for leadership extends to all levels in the civil service. At the highest level, the state secretary or secretary general (or whatever the title of the most senior civil servant in a ministry is) and other senior officials not only have a responsibility for managing their organization but also for working with the political level of the organization to define and develop policies. They are also responsible for ensuring that the organization can deliver these policies.
Leaders at all levels must be inspiring, confident in their approach to their responsibilities, and prepared to give to their colleagues the space and authority to undertake the tasks for which they are responsible. All this requires clarity about what is to be achieved (objectives and performance standards), delegation, and effective accountability arrangements. Managers must be prepared to take decisions within their area of competence.
Successful public sector management means higher-quality public services and more efficient and effective delivery of those services. That is what FMC is about. In some countries, there is no single civil servant responsible for all the activities of the civil service in a ministry. Instead, individual senior civil servants, sometimes called directors, are appointed to report directly to ministers or deputy ministers on particular topics. With FMC, this arrangement needs to be rethought because effectively it means that there is no single person responsible for the management of the ministry as a whole. Yet efficiency and effectiveness apply throughout the whole ministry as does finance. And where the functions of a ministry are divided over different directors and there is no single head, the opportunities for coordination and common approaches to problems are small or non-existent, and what develops is a 'silo mentality.
Few public sector problems can be fully addressed by a narrowly focused approach. The result is a lack of sharing information, objectives, ideas, priorities, and processes. Given that there is a single source of finance, the taxpayer, this is highly inefficient with no opportunity for savings in one area of activity to be used to support other areas within the same ministry.
In summary, the roles of the minister and the head of the civil service within a ministry are not that dissimilar from those of a company chairman and chief executive, with the minister having the equivalent of the chairman role and the most senior civil servant having the chief executive responsibility for the day-to-day management of the organization and putting into effect the decisions and policies of the minister. For the minister (and deputy ministers) to be engaged in routine operational activities is a waste of their time and it is not what they were elected for.
Start with the management first... why?
Successful public service delivery – that includes efficiency and effectiveness – depends on the quality of policy development and the quality of operational management service delivery. Clarity about policies means that the operational management, in turn, can be clear about what it is to achieve. Take risk management as an example, which is an important feature of FMC. Risks should have been thought about during policy development and risk management must be a feature of operational management. For instance, as the manager, I have an objective, so I must think what could stop me from achieving that objective.
Risk management is about much more than system risks, which is where the audit focus has tended to be. The political level wants high-quality service delivery, identifying and anticipating risks is an important element of that, and the manager has to consider this at all times. Without effective management, this will not happen. The same applies to other features of FMC, such as efficiency and effectiveness. Without effective management, efficiency and effectiveness will not be achieved. So you cannot have FMC without effective management, and if it does not exist, FMC cannot be developed.
How to persuade countries that management is important?
This is a very difficult question. In large measure, the problem is accentuated by third parties, such as aid agencies and, indeed, by the EU in SEE countries. Their focus has tended to be only on technical issues, like the quality of accounting and auditing, and economic management. The advice can readily be given about how to achieve technical improvements, although the impact of that advice will be limited if it stays with the technical officials and does not impact upon managerial and policy decisions. And these technical improvements can be very important in, for example, achieving better economic management.
Achieving managerial reform strikes at the very essence of how countries are run. Management reform affects the responsibilities of politicians, the opportunities for patronage, the distribution of power, and the opportunities for achieving benefits from inappropriate practices. Management reform does mean strengthening the role of the civil service; an important factor in achieving this is building trust between the political level and the civil service. Management reform is a long-term process, which takes at least 10 years, with the risk that boredom with the process occurs. Therefore, interim targets should be an essential feature of the reform.
A further problem is that aid agency and EU funding is generally short-term (2 to 3 years and may be stopped even within that short period). Therefore, countries ought to finance the reform largely from their own resources, relying on foreign aid for special elements of the reform. An associated problem in achieving managerial reform can be the shortage of skilled people, the low esteem in which the public sector is held, low pay, and poor career opportunities plus the politicization of the civil service. All these aspects need to be addressed.
It is important to build capacity building into technical development proposals and bear in mind that capacity building means much more than technical training. In the SEE countries, where PIFC is being implemented, the training element included in projects has been limited to technical training.
Success with many technical reforms, such as FMC, program budgeting, and accrual accounting, requires local politicians and the civil service to recognize that a managerial reform is also needed for such reforms to be effective. If such recognition does not exist, then it is questionable whether that reform is worthwhile. Before making any decisions to implement such reforms, the willingness to undertake the appropriate managerial reforms and (in the case of FMC) reforms to the budgetary and accounting arrangements should be assessed. This is to make sure that managers have access to the financial and performance information that they will require. If that willingness does not exist, then the benefits of the reform cannot be achieved.
Achieving accountability is another cornerstone of public sector reforms. What is accountability in your opinion, and how to achieve it?
There are different types of accountability. Accountability starts with the leader. In the public sector, the leader can be a political person or a civil servant. The political leader will be accountable to the cabinet of ministers and the prime minister or president, and also to the parliament and the electorate. Furthermore, the political leader may be accountable to the beneficiaries of public services. The senior civil servant may be accountable to the politician responsible for a particular service, and also to the head of the civil service for how the ministry civil service is managed (this could be too, for example, the head of a special civil service department or a head of the most senior ministry such as the head of the prime minister’s or president’s civil service department). That senior civil servant in a ministry may also be accountable to the parliament for how public services are delivered, including their quality, and how well public funds have been used – that is efficiency and effectiveness.
Transparency and high-quality governance are critical to the development of accountability. This means developing openness about how decisions are made and by whom, arrangements for consultation, provision of relevant information, and disclosure of the reasons behind decisions. Where decisions affect individuals, appropriate arrangements for an independent appeal process should exist. Accountability for policy decisions should be part of the parliamentary process. This requires clarity of information and explanations, bearing in mind that policy decisions involve political debates, which may affect the development of policies.
In your book, you claim that “without a thorough appreciation of the linkage with management, these reforms will at best fail to meet their intended objectives and at worst could add to administrative bureaucracy and hence costs”. What reforms are you talking about?
In the book, I am specifically talking about the FMC reform. This reform also impacts upon other reforms such as how internal auditors should undertake their role and to whom they should report. In the first instance, they should report to the chief official in a ministry, such as a state secretary. Such a change in the audit reporting process comes about because although a minister may remain nominally responsible for the administration, in practice the person with day-to-day responsibility should be the state secretary or equivalent. The state secretary in turn needs advice and support from the internal auditor, who should focus on the main business of a ministry, including not just financial issues but also information about performance. The auditor should be concerned with the achievement of the objectives and the efficiency and effectiveness of the organization, which includes the proper utilization of assets. The auditor should also retain the right to report to the minister where appropriate.
What is said in this book applies equally to other financially based reforms, such as program budgeting and accrual accounting. These too have serious managerial implications if they are to be properly implemented.
As far as budgetary reform is concerned, budget departments should be willing to recognize that whilst overall budgetary constraints must be adhered to and the manager has a responsibility to do that, if efficiency and effectiveness are to be achieved, for operational management the manager requires different information apart from that needed simply for budgetary control. As far as possible, this different information should be linked to performance and the achievement of objectives. Thus, the manager requires a form of analysis different from that needed by the ministry of finance. This is perfectly feasible with modern sophisticated computer systems.
Let's now turn to another challenging question. Who is the manager in public sector organizations? Why is it so difficult to identify managers?
There are a number of problems identifying who the real manager in a civil service organization actually is. These include:
- Defining their responsibilities: Where a management structure does exist within civil service, individual managers cannot be effective unless their responsibilities are defined in specific terms with the objectives to be achieved, accompanied by performance measures as far as possible linked to budgets.
- Knowing the total resources available to them: Managers must know the total budgets for their responsibility areas. Unfortunately, managers rarely, if ever, know that. They may, for example, only know the available budget for items that they are specifically allowed to procure.
- Being able to decide on and appoint their own staff: Managers may have no say in appointing their staff or deciding the total number of staff.
- Management decisions are subject to review: Very often management decisions are subject to approval by a third party, such as the ministry of finance, who may have no specific knowledge of the issue that a manager is trying to address or who are concerned about non-relevant matters, like creating a precedent. That third party in effect becomes the decision-maker even when the original manager is following all the appropriate rules.
In summary, managerial accountability will only work properly if the manager has a clear responsibility for the decisions within their area of competence.
So who should be responsible in a ministry that FMC is properly implemented?
Ensuring that FMC is properly implemented is the responsibility of the most senior official in the ministry, the state secretary or equivalent. That official has the ultimate responsibility for ensuring that objectives are achieved, performance standards are maintained, the actions of officials comply with the law, and budgets are adhered to. That official must also ensure that risks are identified and properly addressed. This means that the state secretary must regularly review both activity and financial performance, taking appropriate corrective actions where necessary. If there is no such head, and in some countries, the person with the title 'state secretary' has only limited responsibilities for administrative logistics and personnel management, there is no opportunity for ensuring that the FMC reform is properly implemented across the whole ministry.
The role of the head of finance also changes considerably with the introduction of FMC. The roles of financial controller and bookkeeper remain the same but the head of finance needs to raise the financial awareness of managers and provide them with the financial information that they require to achieve efficiency and effectiveness. This will include developing cost and management accounting. The head of finance should advise managers when objectives and performance standards are not achieved within budgetary forecasts, assess the long-term financial viability of the organization, support budget drafting, and advise on the financial implications of policy proposals. The head of finance should be a key adviser to the state secretary.
A full explanation of the impact of FMC on the roles of the state secretary and the head of finance is set out in the book.