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Format of the portfolio budget statements
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Senator GEORGE CAMPBELL
Format of the portfolio budget statements
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Finance and Public Administration References Committee
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Senator GEORGE CAMPBELL
Content WindowFinance and Public Administration References Committee - 17/06/99 - Format of the portfolio budget statements
CHAIR —I declare open this round table public hearing of the Senate Finance and Public Administration Legislation Committee and welcome you all to our deliberations. As you would be aware, the matter of the format of the portfolio budget statements was referred to this committee by the Senate on 21 November 1996 following dissatisfaction with the documentation expressed by legislation committees in their estimates reports. The committee reported in October 1997, indicating that it considered it inappropriate to advocate wholesale changes to the PBS at that time, given the imminent introduction of accrual budgeting and the outcomes-outputs reporting framework. We indicated, however, that we would continue discussions with the Department of Finance and Administration over the PBS guidelines in the interim and that we would report again following the first accrual budget.
The time has now arrived, and to assist us in our deliberations the committee has invited all portfolio ministers both to make a submission to the inquiry by 16 July and to send representatives to this round table. I am delighted to see that so many of you have been prepared to revisit the scene and the subject matter of your recent estimates hearings. The committee welcomes your input today. Together we may be able to ascertain if there are ways in which we can modify the PBS to better suit all our requirements.
Today's proceedings are, of course, protected by parliamentary privilege. They will be recorded by Hansard, and the transcript will be circulated to you all when it becomes available. I thank the Department of Finance and Administration for its preliminary submission, which has been circulated and which will form the basis for some of our discussion today. The committee proposes to conduct the hearing today as follows. I shall call on the speakers listed in your program for each item and then, following their presentation, call on questions from senators and then from any other participant.
I now call on Dr Boxall to set the scene for today's round table with an outline of the federal move to accrual budgeting and the outcomes-outputs reporting, although we will not be questioning the rationale for the move today, merely aspects of its implementation. We have had to discourage him from using the usual highly professional Finance Power Point presentation, as it would be too hard for everyone to read in this round table situation. But I am sure he can be sufficiently eloquent without it.
Dr BOXALL —Thank you very much, Senator Gibson. It is a pleasure to come along to this round table. The introduction of the outputs-outcomes accrual budget framework is a major change for the Commonwealth; indeed, it is a major change for any government. We consulted widely in the lead-up to that with senators, members of parliament and departments—all departments were represented on various steering committees—and we put out the portfolio budget statement guidelines. We welcome very much any contributions to improve the PBS in the light of our experience in the first accrual budget. I will not talk for long; I will pass it over to Stephen Bartos, the General Manager of Budget Group.
Mr BARTOS —I should reiterate that we very much support this inquiry. We see it as a key part of the effective implementation of accrual budgeting that we review the experience of the first year and see what avenues there are to improve the portfolio budget statements.
The portfolio budget statement is one of the central budget documents that enables effective public scrutiny of Commonwealth expenditures. As such, it needs to be in a format that is tailored to the information needs of senators and members to ensure that it is able to be used as a document that can enhance accountability and ensure disclosure.
It also has a role in an agency's own management and it is good that a number of agencies have chosen to come to this round table to indicate how they themselves might use the portfolio budget statement as part of their own budgeting and planning.
One of the things that we hope we will see as a result of the introduction of the new outcomes and outputs reporting framework is that the formal accountability documents and the documents that agencies themselves need to produce for their own planning and budgeting will become one and the same and that we will not have separate documents used for purposes within departments and for accountability purposes simply because the formats are so different.
The introduction of the accrual budget has been widely seen as a successful initiative, but as with any major change process there are ups and downs and there are things that we need to look at to see whether they can be done better.
In this inquiry, obviously the focus is on the portfolio budget statements and that is what I want to address in particular. Although people have seen the submission that we have circulated, I might just touch on some of the key points in that before opening it up to any questions.
In accordance with this committee's recommendations of October 1997, the Department of Finance and Administration did consult very widely with the parliament and with all agencies in developing the new portfolio budget statement format. Having said that, as with any major change, with the consultation on what we planned to do and then people's experience when it comes to the actual estimates hearings that we have just gone through and the actual experience of the budget, it is worth reflecting on the earlier consultation and what needs to be changed in the light of the practical experience.
We did consult very widely and tried to get it as right as possible, but we fully accept that when you try it out in practice and when you are looking at a document that is very, very different and a set of budget numbers that are very, very different, the practical experience has to be borne in mind as well. We are very open to suggestions for changes that might enhance the portfolio budget statements.
The changes that were made for the 1999-2000 budget are actually worth noting. Some of them are considerable improvements from previous years. One of the ones is timeliness. Portfolio budget statements in the past were available, at best, a few days after the budget, and at worst they were available up to a week or two after the budget. This year, for the very first time, portfolio budget statements were available on budget night, both in hard copy and on the Internet. So that information was available at the same time as the budget came out. That was a first for this budget and something that reflects the efforts that people in agencies, many of them around this table, put in to ensure that they could get their portfolio budget statements done in time.
The integration with other budget documentation is also worth mentioning. The appropriation bills are now organised along the same lines as the portfolio budget statements, and annual reports, when they come out, will again be structured along the same outcomes and outputs lines. For the first time, senators and members of the public will be able to see what performance is promised in the portfolio budget statement and then what performance is actually reported on when the annual report comes out. In that way the accountability will be greatly enhanced because what is promised and then what is delivered will both be reported in a consistent format.
The PBSs that were produced contain more information than has previously been the case. Those of you who have compared the size of PBSs between last year and this year will appreciate that there is a greater wealth of information, in particular, for the first time. This is a consequence of the change to the Commonwealth's accounting. We see full disclosure of the full set of financial statements for Commonwealth agencies—that is, their operating result, their balance sheet and their cash flow statement, together with the forward estimates against each of those financial statements through all of the forward years. Again, that is a first. That is the first time that the books of Commonwealth agencies have been opened for scrutiny in this way.
We have, of course, picked up during the course of the Senate estimates hearings that have been under way post-budget the fact that there is demand for different types of information also to be included within the portfolio budget statements, to the extent that, as a result of the discussions today with those around this table, this committee might want to recommend further information. As I said before, we are well and truly open to that sort of suggestion.
Some of the issues that were raised by senators on the portfolio budget statements are actually transitional as a consequence of the change to the new accrual framework. So, for example, there are some tables in the portfolio budget statements that are needed to explain the transition that are not necessarily going to be an ongoing feature of portfolio budget statements. I think it is important to distinguish the transitional issues from those that are actually longer term, and in our submission we have tried to identify which issues are transitional and which issues that are raised should be considered in terms of the future format.
Some of the enhancements that we think could well be worth considering are consolidating information that is currently held in other budget documents into the portfolio budget statements so they are more of a stand-alone document. The reason that was not done, of course, was that there was a concern about volume and duplication of information—if information is in one budget document why should it also be in the PBS? That reflected consultations that were held in the development of the PBS guidelines. Nonetheless, it became apparent during the consideration by the various Senate committees that more consolidated information would have been useful in terms of that consideration. So that is probably something that is worth talking about and thinking through.
Finally, one thing that is probably, as much as anything, a reflection of looking at other jurisdictions' budget documentation is that clearer presentation in terms of graphics and design may well be useful for senators. For example, charts and graphs showing trends and
distributions may make the documents easier to comprehend and more useful for accountability purposes. On that summary note I will close my remarks.
CHAIR —Are there any general questions from senators? If not, are there any general questions from any participant this morning? If not, let us move on with the program. The next segment is to look at the experience of other jurisdictions. To start off this morning is Ms Megan Smithies, Director Budget Management, ACT Chief Minister's Department. I might add that we have got a Victorian participant whose plane is late into Canberra, but he will hopefully be here in the near future.
Ms SMITHIES —I will just talk briefly about the ACT framework and then go through some of the experiences that we had over the last couple of years. The ACT has been doing an accrual based budget for four budgets. We presented our first accrual budget in 1996-97.
The essence of our framework obviously is an output based budget with full accrual statements. We budget for the delivery of outputs, not outcomes, and we provide performance measures against each of the outputs which the government is actually contracting to buy. The outcomes themselves are determined by the government. In the first three years of our reforms, there was quite a comprehensive outcomes statement which branched across all portfolios in the ACT government.
Last budget, the government decided to change that approach ever so slightly but still present an outcome statement. The outcome statement encapsulated the government's plan of a caring capital and basically tried to include the outcomes that the government wanted in terms of a healthy, safe, diverse community, accessible cost-effective services and a dynamic sustainable economy. From the point of view of the government, the main reason for the move from the more detailed outcome statement to a more summary and strategic outcome statement was the difficulty of actually being able to measure its achievement towards its outcomes.
What we see now is essentially a government plan for the term of the government which encapsulates the government's visions and outcomes. It also presents, at the highest level, the ACT government's measures of success in terms of its impact on the community in the ACT and how it is going to be measured in unemployment rate, education levels, achievement against greenhouse gas targets, et cetera. Behind that sits the government's key result areas, which are essentially a set of around 12 areas that the government wants to achieve by the end of its term, the first one of those being the elimination of the operating loss by 2004-2005.
For the ACT budgets, as I said, at output level, we have a piece of legislation which dictates exactly how we should budget and the level to which we should budget. That piece of legislation also dictates our reporting requirements, firstly in terms of financial reporting on a monthly basis and annual reporting. It also dictates the fact that our output statements need to be audited.
Having the system in place for the last four years, our experience has been that the first two years of budgets were very tough and quite difficult in terms of community perception and the perception of our assembly. In scrutinising our budget documentation, our own
estimates committee, certainly for the first year, had a large task in front of them to get over the detail that was before them. We managed to do two budgets before we had our outcome audited and the result of that audit is quite interesting in itself. Our Auditor-General had said that the level of detail that we were budgeting was far too low and there was a great deal of difficulty within our own departments in terms of measuring the activities that they were being audited on and the lack of systems that were in place.
We had problems concerning the comparability of an output based accrual framework from year to year. Even now the fourth accrual budget is the first budget that we have brought down in the ACT where there has not been a certain level of concern in our assembly committees as to the comparability of the documents. Four years down the track we are no longer fielding questions such as `What does this mean and how is it comparable?' but it has literally taken us four years.
The Auditor-General had a number of concerns not only on our performance measures and the measurability of our performance measures but also on the comparability between the way that we were budgeting in an accrual framework and what was being reported in the financial statements at the end of the year. Obviously, across time, some of the accounting definitions and the framework were still being refined, so there were a number of significant variations between the year end and the original framework.
It is interesting to note that the first report that the Auditor-General did in the ACT said that he himself lacked a precedent against which he could audit the outcome statements. As a result, there are a number of matters of emphasis that he declared on almost all of our financial statements—which is not to say that they were qualified, just that basically he had no way of auditing. They were nonetheless a concern.
The Territory moved after that to basically reducing the level of detail that we put in the budget papers, reducing the level of outputs and also reducing the number of performance measures. Nonetheless, administrative order rearrangements within the government have, until now, made comparability very difficult. Again, they did not make the task of our assembly committees in their scrutiny of the budget easy.
The last budget just presented probably represents almost as good a product as we can get. Again, we addressed a number of concerns from last year's estimates committee relating to the reconciliation of the movements between financial years to show the policy impacts on the financial statements as a result of government decision making processes as opposed to the impacts on the financial statements relating to accounting changes, program changes or transfers between departments. Those are quite detailed reconciliations that have been published in our budget papers. I would suggest—again, from the experience of our estimates committee—the total lack of questioning and the lack of comment on the lack of comparability is probably a testament to the fact that we have almost got it right in our own committee.
Another point that came out of our experience, certainly in the early years, is that there is very much a lack of appropriately qualified staff in the areas preparing accrual financial statements, particularly in the government service, and particularly a lack of understanding of output based budgeting. In the goals of government in terms of financial policy and how that
translates into a purchaser-provider output based model which we adopted in the ACT, there remain a number of unresolved issues for us in our financial model. Those issues we are still taking up with our own Auditor-General and the Accounting Research Foundation.
That provides a really broad outline of what we have done in the Territory. I think it is really important to stress that the issues of comparability in our early years or our first two budgets were really difficult issues on which to get our government and our assembly across the line. Nonetheless, the system does actually settle itself down. I guess hindsight is great in these sorts of issues, but it certainly was a teething process for us.
CHAIR —Thank you very much, Ms Smithies. I think a lot of people here have a lot of sympathy for some of the comments you made, particularly about the early years, and I am sure I am speaking on behalf of the senators who are finding it difficult to learn the new system. We will have a short question time, if you do not mind.
Mr BUTT —When you have an administrative service arrangement change in the ACT government and a structure or organisation with its associated activities moves from one department to another, do you move the performance measures with it as they were before to try and ensure some comparability across measuring cross-years?
Ms SMITHIES —Yes, we do. Obviously, if the function is going to transfer, the performance measures will transfer. There is an opportunity, again within our financial legislation within our framework, for those performance measures to be reassessed during the course of a financial year and assessed in terms of whether they continue to be relevant in the new framework. But, since our budget is an output level, if you move the output or the production of an output from one department to the other, unless the output ceases to be produced, the performance measures on the whole remain relatively useful.
I think that, in the end, the issue becomes who ultimately is responsible for the delivery of those outputs—which chief executive should be signing off for the delivery of those outputs and the performance of those outputs over the course of the financial year. We have basically set up a framework which allows a midyear sign-off. It creates a bit of confusion at audit time. What we do not do, though—or we try hard not to do—is back cast the performance for the full financial year so that it always looks as though it stayed with the area to which it was moved. We keep it with the old area. I guess, in terms of scrutinising the performance for the financial year, it does cause a bit of a hiccup because, again, you lack the comparability from year to year to year. In past budgets what we have tended to do in those cases is to put an appendix in which provides a reconciliation.
Mr FASSINA —With the performance benchmarks, you said that you have been accrual accounting, I think, for two or three years now. That certainly has been an issue in this estimates round, both for Labor senators and Labor staff, whom I represent here today. How do you determine the performance benchmark criteria in both quantitative and qualitative measures?
Ms SMITHIES —Originally, we took the approach that we should obviously identify the output which the government wanted to buy from the department. So, basically, it was what the department delivered that identified the output. We had a committee set up, which
spanned the government and all of our senior finance officers and chief executives, to identify each of the outputs. From there, in the first two years, it was for each of the departments to determine, for the output or for the service, what was, firstly, the most meaningful performance measure. Secondly, it had to be tempered not only with what was just meaningful but also with what was measurable, what the systems could actually capture and at what point the actual capturing of that data became relevant and useful in a management sense.
The truth of it is that performance measurement is not new to output based budgeting. In terms of identifying key result areas and key performance, it had been done for probably the last 10 years to some degree. So it was an issue of dusting those off, finding which of the measures was the most relevant to the particular activity and, I guess, in the first year, giving it a whirl and seeing how it actually went.
As we said, we actually got the mix wrong. In the first year, we decided that we would go right down and actually capture everything that literally moved. And we did that. We had a hell of a time documenting and presenting it and then getting it audited and verified, which is why we lifted the whole thing up one level. We cut down to about 25 per cent the level of information we provided. Then it was parked through the audit process involving the Auditor-General and having consultation with the Treasury and each of the agencies as to whether the initial performance measures they had identified were useful in terms of, again, a government management sense.
Over the last two budgets, we have tended to use those performance measures and those outputs in the actual budget negotiation phase. So what we are saying to our agencies is: you say that you are going to produce this; you say that you are going to produce it to this level; and it costs this. But the government no longer wants to do that. What impact does that have? Or we say: the government wants you to increase that. What impact does that have?
It is through that process that a lot of our agencies have ensured that those performance measures really do capture the essence of what the agency does. It becomes very close to home when you are being allocated a budget based on the way that you have been able to set up your outputs and your performance measures. It is not a perfect system, but it is pretty good.
CHAIR —I am just wondering, given your comments about the relationship between the government and the Audit Office, whether our Audit Office has any comment about future plans or perhaps across portfolio in following through this work.
Mr WELSH —I am not involved on the actual audit side of the operations. I am on the corporate side and was involved in the development of the portfolio budget statements. So I really could not comment portfolio-wide for the Australian National Audit Office. We will have a representative here in the afternoon who should be able to do that for you.
CHAIR —Thank you. Are there any other comments?
Mr COCHRANE —You mentioned that it took about four years before the accrual accounting and the changes settled down. How would you describe the changes that
happened during that period? What I am getting it is: was it basically refinements to the framework or did you have to make significant changes in these three intervening periods?
Ms SMITHIES —There were some fairly substantial changes to our framework in the sense that in our first budget we still did not have some of the framework in place that we wanted to put in place. The capital user charge was one issue. That in itself caused problems in terms of comparability. But, while it was a major change and a major plank to the framework, it probably did not add significantly to the problems that our committee was actually having in terms of scrutinising the budget.
I guess the issue for the ACT was that, while our first budget was pretty awful, our second budget was worse. I actually mean `awful' from the sense of taking a look at it and reading through it and understanding it. What we found was that, while you could put in a budget in the very first year, since you had totally changed the framework, people were grappling with what the framework was and asking for a number of reconciliations, so there had to be some degree of acceptance on both sides—in terms of the government and the assembly—that, if you wanted to do this and if you wanted to move to a financial framework that obviously had so many benefits, there was going to be a downside to doing that. That downside in the first year was that lack of comparability and the difficulty of understanding the systems, et cetera.
The second year, for us, I would say was worse because people began to understand the framework and began to actually expect to see certain reconciliations that we were still unable to provide. They started to ask some of the more critical questions in terms of performance management and financial management—horror, somebody asking a question about a change on a balance sheet. It had never been done before. It was not done in the first budget; it was done in the second budget. All of a sudden, we realised that our government and our assembly were actually going to start getting down into the details of investment balances, et cetera.
Our first two budgets were done 10 months apart. That time just did not allow the system, in terms of the bureaucracy, enough time to cool down and put more grey matter behind the budget. So it was actually worse, and the pressures for delivery on the second budget and the expectation were much greater.
CHAIR —Mr Gurr from Victoria still has not arrived, so we will look at the international experience. Mr Suur, from the Department of Finance and Administration.
Mr SUUR —I want to give a brief overview of how some other countries are dealing with the reporting of planned performance in a budget context; in other words, how they report the performance information that the Commonwealth government reports in its portfolio budget statements. I have also been asked to provide a brief overview of the international interests in accrual budgeting, and I will start with that.
The Commonwealth budget which deals with the planned management and disbursement of an estimated $163 billion worth of revenue to be collected by the federal government in 1999-2000 is the largest accruals based government budget in the world. Australia is currently the world leader in this field and Australia's achievements in implementing accrual
budgeting have sparked significant interest overseas. By introducing accrual budgeting, Australia has entered a very small league of national governments that are conducting their fiscal policy and budgeting on an accruals basis. At the moment, only New Zealand and Iceland prepare their national budget in this way.
The move to accrual budgeting builds on the move to annual accrual whole of government financial reports for the Commonwealth which were first audited and published in 1996-97. The new accrual framework ensures a common basis for planning, budgeting and reporting in the Commonwealth general government sector. The integration of planning and reporting information is a common theme in OECD countries at the present time and the level of OECD interest in our accrual budgeting framework is in fact very high.
A number of countries have moved to or are moving towards accrual based budgeting. New Zealand introduced an accrual based outcomes and outputs framework budget in 1989 following the passage of its public finance and state sector acts. A number of other OECD countries are now moving towards introducing accrual budgeting. Of these, the United Kingdom, the Netherlands, Canada and Ireland are probably the closest to implementation, with Finland and Sweden close behind.
The United Kingdom will introduce full accrual budgeting in the year 2001-2002. The resource accounting and budgeting project, as the UK calls its accrual reforms, was commenced in 1993. Under resource accounting and budgeting, UK agencies will be required to report systematically on how the resources are allocated to their objectives and what is achieved as a result. A number of countries, including the United States, Canada, Ireland, Italy and the Netherlands, produce accrual financial reports but their progress towards accrual budgeting varies on a case-by-case basis.
Of particular interest to today's hearing, however, is the increasing trend among OECD countries towards a provision of greater levels of performance information in budget documents. This move is accompanied by a shift in focus from inputs to outputs and outcomes, and an increased acceptance of the need for fiscal transparency to support policy credibility, macroeconomic stability, an allocative efficiency and fairness in government spending.
Two weeks ago at the OECD's public management committee's annual meeting of senior budget officials, the Department of Finance and Administration distributed copies of the current portfolio budget statements to 33 participating countries and international agencies in the context of giving them an overview of recent budgeting reforms in Australia. I can report to the committee that the interest in the contents of our PBSs and in the performance management framework that the Commonwealth has put in place, including the role of annual reports, was very high. There was a general view that the quality of the performance information we were requiring from agencies was well in advance of the practice in most other OECD countries, and there was a particular interest in our attempt to integrate performance and financial management data, which a number of countries regarded as beyond their capabilities at the moment.
I will now focus on how some other countries are reporting their planned performance in a budget context. New Zealand under its framework sees ministers individually and the
cabinet collectively as responsible for defining outcomes. In order to achieve desired outcomes, ministers purchase outputs which, as in our case, are defined as goods and services produced by departments and other suppliers and they are specified in terms of quantity, quality, cost and time. Ministers buy outputs, including policy advice from a number of sources, one of which may be their own department. Appropriations are organised at this output level.
Three types of appropriation are established in New Zealand. The first is for acquisition of classes of outputs from departments, the second is for injection of capital into departments and the third is payments on behalf of the Crown, including acquisition of outputs from other public sector bodies and from the private sector, as well as transfer payments. It is a bit like our SPPs.
These three types of appropriations are essentially similar to the Australian system of departmental capital and administered appropriations. Under the New Zealand system, each department administers votes, which may include all three types of appropriations. Votes represent the annual appropriation for which each minister is responsible.
In New Zealand, the key document for defining outputs and performance information is the performance agreement between the chief executive officer of a department and the responsible minister. These performance agreements are in three parts. Part 1 specifies the key result areas requiring the personal attention of the chief executive and relates these to the government's strategic concerns. The expected results are expressed in verifiable terms and include output related tasks, management related tasks and relationships with other departments and stakeholders.
Part 2 sets out detailed information on the outputs to be purchased. Since 1993-94, this output information has taken the form of purchase agreements. Part 3 provides information on departmental compliance with statutory responsibilities and with government policies, and on the stewardship of public assets. It is intended to provide a means by which the government can better manage medium- and long-term commitments and decide on appropriate levels of investment—what we have termed, in our own budgeting framework, the ownership interest of government.
A departmental forecast report accompanies the budget, and it fulfils a role which is very similar to our portfolio budget statements. This document sets out the planned financial performance for agencies and the performance standards for each class of outputs, as agreed with responsible ministers. I understand that information is provided at a similar level to that contained in our PBS documents. As will be the case under our new budgeting framework, the annual report in New Zealand is a key accountability document, both for chief executives and departments.
In the United Kingdom, the key accountability documents will be public service agreements which will set out what departments will deliver in return for the spending limits agreed with the Treasury. These agreements will include the department's aims and objectives, performance targets and a statement on efficiency and progress against its departmental investment strategy.
The UK system will see departmental plans published in the northern spring. The plan will provide strategic commentary on the department's activities over the forthcoming period and will include the department's plan for the forward years on an accrual resource basis, focusing on public service agreement targets and objectives, the detailed resource estimate for the coming year and information on the department's past performance. The departmental report, which will be published in the northern autumn, will report on the department's out-turn and performance for the previous financial year.
Although Canada is in the process of deciding whether it will move to full accrual budgeting, it already produces a significant amount of performance information in the budget process. In 1995, Canada introduced an improved reporting to the parliament project to provide better departmental expenditure information to the parliament principally by augmenting financial information with performance information, which is the very thing that we are seeking to do under our new framework.
While utilising only cash financial information, Canada's specification of expected program results, development of meaningful performance indicators which demonstrate performance, and the reporting on achievements is typical of moves in some of the more advanced OECD countries towards improving information provided to parliament on the activities of government agencies.
The Canadian budget is presented in several sections. Like the Australian budget, it starts in part 1 at the whole of government level and becomes increasingly more specific. Part 2 of Canada's estimates sets out planned expenditure by department and contains the proposed wording of the conditions governing spending which the parliament will be asked to approve.
As a result of a 1997 motion of the House of Commons, part 3 of the estimates now consists of two documents for each department. The first is a report on plans and priorities, which provides additional detail on each department and its programs, including results information with a focus on outcomes. The second is a departmental performance report which provides a focus on results based accountability by reporting on accomplishments achieved against the performance expectations and results commitments set out in the spring report on plans and priorities. This departmental performance report reports against outcomes, reports against business lines, which is similar to our old program structure, and also reports against strategic goals and objectives. In a sense it reports against everything. Interestingly, it also reports the department's achievements against the expected results it advised parliament would arise from any legislative or regulatory initiative it has commended to the parliament.
The Canadian Treasury Board has issued review criteria relating to results reporting which highlight good practice in reporting accountability for results. I thought it would be appropriate if I concluded by reading to you the four specific subcriteria that they believe good results reporting should incorporate. The first is context and strategy strategies. It says:
The report should clearly describe the mission and mandate of the organisation, the objectives of its programs and services, the major strategies used to achieve these objectives and the related environmental context. There is a need to provide an overview of what the program is trying to accomplish under what operating environment and its relationship with broader organisational goals as context for interpreting the performance reported. The major strategies
being used, such as business lines, should be clearly described, along with their sub-objectives. This should include links to other stakeholders on all of the major instruments, such as loan guarantees and tax expenditures.
The second subcriterion is meaningful performance expectations. It reads:
The performance information shall contain clear and concrete key performance expectations, with a focus on outcome results. Clear performance expectations state what would have to occur for the entity, program or activity to be judged successful in the context of the mission objectives and rationale for the activities undertaken. Concrete performance expectations can be qualitatively or quantitatively measured, and hence be credibly reported on as to whether or not they have been accomplished. Key expectations reflect the major intended results, usually outcome oriented, expected from the program in relation to the interests and concerns of the users of the performance report. Key expectations also reflect the major or significant programs and elements thereof.
The third subcriterion is performance accomplishments against expectations. It says:
The performance information should report key accomplishments in relation to expectations. The reader expects the department or agency to report on key accomplishments. These allow the reader to judge the extent to which expectations have been met. Reporting of performance accomplishments needs to be selective and usable. Key performance accomplishments should be reported in relation to previously stated expectations. They should be linked to related mission statements and objectives and include the important aspects of results achieved and their costs, related financial performance, the capacity to adapt and, where performance has been weak, what adjustments will be made to reflect what has been learned.
The fourth and final subcriterion is credible performance information reports. It reads:
Performance information should be relevant, fair, understandable, attributable and consistent. Relevant information is timely key performance information reported at a level which is meaningful to the interests and concerns of the user. Reliable information can be validated. The reliability that can be placed on performance information should be indicated by presenting such information as a method of data collection and verification or whether the data are actuals or estimates. Fair information provides a balanced picture of performance, including both strengths and weaknesses. Understandable performance information allows the intended reader to readily and clearly see what results are expected and the extent to which they have been achieved. It is essential that adequate explanatory and interpretative material is included so that the reader can understand the relevance and importance of the measures provided and the context in which the performance has been accomplished or not.
CHAIR —Going back to New Zealand, the agreement between the chief executive and the minister, I assume that is a public document?
Mr SUUR —I understand that it is. Mr Cochrane is best placed to answer questions on New Zealand.
Mr COCHRANE —Yes. It is.
CHAIR —Any questions, anybody? If there are no questions, we will move on to Victoria and welcome Mr Gurr. Mr Steve Gurr is the director of budget reform for the Victorian Department of Treasury and Finance and he is here this morning to tell us about the Victorian experience.
Mr GURR —Victoria has recently, in the 1998-99 budget, introduced an accrual and output management framework for the budget process. The genesis of these reforms occurred
back in 1992 with the change of government and with that government appointing a commission of audit to have a look at the financial affairs of the state.
That commission of audit found and reported in May 1993 that the Victorian government was living well beyond its means, around $3 billion a year; there was an unclear balance sheet position; departments were accounting in cash, and therefore there was no reliable record of assets and liabilities of the state; and asset management was a low priority for the state.
Specifically, in relation to the budget process, the commission of audit found that the planning framework lacked credibility; forward estimates were not an adequate tool for expenditure control; the appropriation reporting formats were inconsistent and unclear; financial information systems were inadequate; and systems and processes focused on inputs rather than on the outputs being achieved by government.
The Commission of Audit recommended a comprehensive management reform program, including the implementation of a robust and credible forward estimates system; adoption of accrual concepts for budget management and appropriation; the building of the budget around outputs rather than inputs; separation of policy and regulatory functions from those of service delivery; and the introduction, wherever possible, of competition and contestability in service delivery.
Following that, the Victorian management reform program was framed with a number of objectives in mind. These included: to strengthen or improve the government's fiscal and strategic control through the budget process; to improve departments' efficiency and the contestability in service delivery by departments; to improve their departments' management of assets and liabilities; and to improve accountability for service provision and client focus.
A number of reforms occurred between that time and when we introduced accrual output management, including the introduction of accrual reporting, but that was reporting only—not for the budget process. For 1998-99 the budget included both outputs as the basis of the budget and accrual concepts in terms of costing those outputs.
Key elements of the system that was introduced in 1998-99 include: outputs and performance measures specified for all departmental services and agreed with government through the budget process and published in the budget papers; full accrual costing methodologies adopted for costing outputs and as the basis of appropriation; and disclosure of outputs and performance measures in the budget papers. The budget papers effectively formed the contract or agreement between government and departments on the delivery of outputs, which is a deviation from what has been undertaken in other places, such as New Zealand and the ACT, where they have separate purchase contracts or agreements separate to the budget papers.
Another feature was the move towards the management of total resources, principally through better reporting and reporting of departmental balance sheets, which bring into play explicitly the assets and liabilities, and reporting of operating statements, which brings into play accrual concepts—depreciation, capital assets charge and employee entitlements—and bring to the budget planning phase a lot of those costs that were clearly not linked before.
Closer linkages of capital investments to outputs through that process was also a significant feature.
Budget appropriation involved one of the more significant mind-set changes in the moves in 1998-99. Significantly, appropriations moved from being an authority for departments to spend to an authority for government to purchase outputs from departments. I think that was a very significant mind-set change. It is one that I am not too sure has been fully recognised yet by everyone in the system. We moved, as New Zealand and the ACT have, to three appropriation purposes. These three purposes reflect the essential nature of the transactions that are being undertaken: payment for outputs, which reflect the purchase relationship that government has with departments—the purchaser-funder relationship; additions to net assets, which reflect the capital injections that government, as owner, wishes to make in the departments; and payments on behalf of the state, which are the flowthrough payments or the postbox type payments that government administers.
The system broadly enhanced accountability through the use of standard financial reporting. Where possible, we have stuck to Australian accounting standards in the reporting that we have undertaken in both the budget papers and the annual reports, and there is regular performance reporting to government on a monthly and a quarterly basis of budget aggregates.
In this model, the budget papers really open the accountability loop for the government's budget. Three financial statements for each department are published in Budget Paper No. 3, as are output statements which detail each output that each department delivers, along with quantity, quality and timeliness measures for each of those outputs. That opens the accountability loop. The loop then progresses through the delivery stage, with monthly reporting by departments to government against the financial statements, so there is monthly reporting of financial performance. On a quarterly basis, departments are required to report to government on their performance against the delivery of outputs, as set out in Budget Paper No. 3. That quarterly reporting phase also involves certification by government of the outputs having been received, which allows departments to recognise revenue for the outputs. So it completes a quasi-commercial transaction on the outputs.
The accountability loop is closed initially before the end of the financial year, when government reports through the budget papers on estimated actual performance against all of the output targets and against all of the aggregates in the financial statements for each department. That is the first point of public accountability reporting on the budget. Departments, in their annual reports after the end of the financial year, are required, by a change to the Minister's directions that was undertaken when the reforms were being implemented, to report against measures and targets set out in the budget papers. That closes the accountability loop.
We have not yet seen any reporting in annual reports, as the first year was 1998-99. So it will be interesting to see how departments carry out that direction. There are some difficulties that we need to recognise in terms of that closure of the accountability loop, the annual reports of departments being driven by accounting standards and being very much based on entities in the accounting world. The Victorian budget is based on a portfolio aggregation of entities by each of the departments. Therefore, there will be some
manipulation required in reporting to ensure that what is being reported on in the annual reports is the same as what is opened up in the budget papers. It will be interesting to see how that is handled by departments.
That is a very brief outline of what we have done to date. I think we have got a long way to go if we are going to extract the full benefits of the reforms in Victoria. It is a five-year project which we embarked on about two years ago, so we have got some three years to run to complete the process.
Where do we need to go from here? I think we need to continue to refine the output and performance measures specifications. Anyone having a look at our budget papers, I think, will recognise that there are significant deficiencies in the specifications and particularly in the performance measures in order to meet the tests of the purchaser and the deliverer to demonstrate delivery. But we are working on that and it will steadily improve. I think we need to sharpen the rewards and sanctions that are implicit in the system so that departments have greater incentive for engaging fully in the reform process and extracting the benefits of those reforms. We need to create closer linkages in strategic planning, budgeting, managing the budget and reporting of the budget. There is not yet an adequate flow-through from start to finish in that management cycle.
We definitely need to drive the framework more deeply into the departments. At this stage, I characterise what we have put in place as the super structure. We have the relationship between government and departments in place but, in terms of the substructure at the departmental level, there is not a lot of cascading down. I think we need to have decisions aligned from the base of the pyramid all the way up to the top before we get the most benefits out of the reforms. That is where the focus of our work will be in the next couple of years—to drive it deeper into departments.
In terms of external review of the process and the system, the Public Accounts and Estimates Committee in Victoria in their report on the budget estimates for 1998-99 made some observations about the process. I think they were generally supportive in their observations about the process and the documentation produced for that budget. However, I think they concluded, as we did, that there was significant further work required on output and performance measures. There is no argument on that. They were also particularly concerned about the flow-through relationship and the linkage between strategic plans or government outcomes; through to departmental, corporate and strategic plans; through to the budget; through to the performance monitoring regime; and then through to the eventual reporting through departmental annual reports. They saw that as one of the weaker links from a parliamentary scrutiny perspective, and I cannot but agree.
I guess that is it. We are two years down the track of a five-year program. We think that, after five years, we will start to see some of the real benefits of this flowing through in greater efficiency, greater effectiveness and enhanced accountability.
CHAIR —Thank you very much. While you were running around in the fog, Ms Smithies was telling us that the first of the four budgets in the ACT was bad because of a lack of understanding of the framework, but the second one was worse. With the fourth one,
there has been pretty good understanding between the assembly and the bureaucracy about the process. Any comments from Victoria?
Mr GURR —We shared the ACT's experience in the first budget and we have had only two. It was a bit of a nightmare all round. It was a very difficult period because of a lack of understanding, or different understandings at times, between the various players. I think a lot of that was ironed out in the course of the last year. In the 1999-2000 budget process, it ran a lot more smoothly and my perception is that there was a very good understanding of the process by all of the key players, from ministers through to the central agencies to the line agencies. It did not go perfectly, but it was a quantum leap in terms of a better understanding and smoother process on the first round. I think we have achieved significant improvement. I would expect that to improve more as time goes on.
CHAIR —Including members of parliament?
Mr GURR —Including members of parliament. I think their understanding of the budget papers, of what is contained in the budget papers, is steadily improving. I think their understanding is very good currently and the Parliamentary Accounts and Estimates Committee, in particular, has taken a leading role in making sure that there is appropriate awareness raising for members of parliament. I think they have done a particularly good job.
CHAIR —Is the government going to accept the recommendations of that committee in its recent report?
Mr GURR —The government has responded to the report on the 1998[hyphen]99 estimates and I think it has accepted most of the recommendations, but not all.
CHAIR —I should own up to you that when you made reference to your commission of audit I thought it was such a good job that I grabbed Bob Officer and recommended him to the government for our commission of audit here in 1996. The work from there actually flowed on here.
Senator GEORGE CAMPBELL —You said this is the second budget that you have put together in accrual form. Have you or members of parliament experienced any difficulties in making comparative judgments between year on year in outputs or outcomes? What difficulties have arisen in that area? What can we expect in 12 months time?
Mr GURR —My perception was that there were difficulties experienced in comparability, but they were not perceived by anyone in particular to be too serious. We put in a lot of effort with the first budget to explain it in the budget papers and to reconcile the cash budgets that had preceded with the accrual budget being presented in that year. We must have done a reasonably satisfactory job on that because most people seemed to be satisfied with it. The greater difficulty seems to be—and, certainly, it is the issue raised by the Public Accounts and Estimates Committee in their report—having available a series of daty in relation to output performance and performance against the output performance measures. There has not been a long history of that. There is, and there is likely to continue to be, significant movement as departments refine their output structure, change outputs—substitute one for another—and change the output performance measures. As we work with these
things we find that they are often not adequate for the task, so we need to change them. Every time you change them, you obviously lose comparability with prior years. I know that is something of concern to parliamentarians.
Senator GEORGE CAMPBELL —I notice that Ms Smithies is shaking her head. Is that in agreement? Have there been similar problems in the ACT?
Ms SMITHIES —Yes, there have.
Senator GEORGE CAMPBELL —So this has to do really with the departments changing?
Mr GURR —It is a necessary part of the implementation and move to output management that you refine your output structure and particularly your performance measures. We were really babes in the wood, I guess, when we first set up the outputs and performance measures. We had not actually had any experience in working hard with those performance measures, in particular, to make a budget work—to monitor it through the year. As we go, we are finding out where the difficulties are and reviewing those. I think that will go on for a couple of years yet.
Senator HOGG —My question follows on from that of Senator Campbell—and I heard you talk about changing within the outputs. Is there consistency between the outputs from one year to the next? You have had only two budgets and they may have been a little bit too difficult to judge at this stage. If they have changed, have there been significant changes—which make judgment of comparability very difficult—or have they been changes at the margin? The other issue that I am interested in is: have the outputs—and you have been talking about finding them—become more narrow based and therefore less open to scrutiny and accountability or have you refined them but increased the number to allow more detailed scrutiny on a number of outputs?
Mr GURR —Tackling the last part of the question first, our outputs are fairly highly aggregated bundles of services. There is a school of thought that says that we ought to be taking them to a much lower level to make them more understandable, more readily identified as discreet goods and services that you can pick up off the shelf and buy. We have avoided that because, to take it to that next level, we would need to perhaps have 1,500 to 2,000 outputs, which might be more confusing or, at least, more voluminous in the budget papers and less useful.
The changes to the outputs have not been particularly voluminous and they have been pretty much at the margin where they have occurred—where departments have looked at what they are doing and say, `No, now that we have worked with the first stab at this output that we had in the 1998-99 budget it does not really work for us so we're going to make some changes at the margins.' Sometimes it is taking some activities out of an output, moving them into another output and therefore adjusting some of the performance measures to the output. On other occasions it is getting rid of one output—perhaps rebadging it—or reaggregating some and making change. I do not believe the changes have been so significant as to reduce the effectiveness of the overall output framework for scrutiny from year to year.
CHAIR —Do you have any examples of some of the changes?
Mr GURR —No, not off the top of my head. I am sorry.
Senator HOGG —Could you give us some? I think that would be interesting.
Mr GURR —I could certainly provide them to the committee.
Senator HOGG —The issue of refining the outputs: has that led to a narrowing of the focus such that it may, in some way, impair accountability and scrutiny?
Mr GURR —No, I would not say it has led to a narrowing of the focus of the outputs. It is generally just related to a change in the focus or just describing the services differently in many of the cases or, in some cases, describing a different bundle of services. I would be quite happy to look out some of the changes and provide those to the committee as well.
Senator HOGG —Has that changed any benchmarking?
Mr GURR —At this early stage benchmarking is not a strong feature of the process. We are not employing benchmarks as much as we intend to be employing them in two or three years time. That is part of that issue about having the superstructure in place but not the substructure.
Senator HOGG —I can see a smile behind you which obviously indicates a willingness to participate.
Ms SMITHIES —In the territory we introduced a concept in the 1998-99 budget called `comparative pricing' which we have carried forward into the 1999-2000 budget and which essentially aims to benchmark a number of the services provided in the territory with other jurisdictions or municipal councils, et cetera. We draw heavily on the Grants Commission information in the service provision reports on government and we do our own research with other municipal areas. The whole idea of comparative pricing for us is to be able to identify where the government is delivering a standard level of services at an average price so that we can then identify, as part of service delivery, what is an inefficient cost of delivery. As I said, we did it at the last budget.
In this particular budget we are actually seeing it bite with our TAFE system obviously being well above benchmarks in terms of the cost of service delivery here in the ACT when we compare it to other jurisdictions. Certainly Victoria pulls the average down in terms of the cost of delivery. The issue for us is that not only do we have a high cost TAFE service, we have got a TAFE service that employers in the ACT are not particularly happy with in terms of its performance and satisfaction. I guess these are some of the benefits of an output budget when you are doing performance measurement on it and when we compare it to other areas doing exactly the same thing with high cost-low satisfaction. We have actually seen significant budgetary cuts in the TAFE sector in the ACT in this particular budget as a direct result of benchmarking.
It is a fairly brave move for the government because you could hardly say that it is particularly glamorous coming out in your budget papers and saying, `We're above average cost in service delivery in areas (a), (b), (c), (d), (e) and (f), but we do well in this area.' It is a brave move but it is necessary. The territory has an operating loss and the only way to resolve an operating loss is to start reducing expenditure in areas where we are high cost so that we can move resources elsewhere. So, yes, we have gone well down that path but there is a lack of benchmark data and a lack of benchmark partners as well.
Mr BUTT —I guess DOFA would have a good feel for this. But while the three representatives of the state governments are here, I actually heard some senators say in our estimates hearings that they were a little concerned about the concept of `one size fits all': because of the guidelines put out by DOFA everybody could follow them. Does anybody know what the volume of our budget documentation is like compared to other countries or other states?
Ms SMITHIES —This is the volume of the ACT budget papers?
Mr BUTT —I am sorry, I am referring to the PBS in particular.
Ms SMITHIES —You are talking about the budget statements? If we had tried to get it down from the Internet it would have taken us all day. It is well beyond anything that any other jurisdiction does; I cannot speak about internationally. It would certainly be well beyond your staff.
Mr GURR —The Victoria budget papers are about the same in volume as the ACT.
Ms SMITHIES —Yes, we have a set of purchase agreements which go with this, but that would double the size of this. No other jurisdiction actually goes anywhere near that.
Mr COCHRANE —Fortunately, as far as the New Zealand example is concerned, it is much the same but they are not contained in one document; there are several documents to meet the different purposes that they are meant to achieve.
Mr BARTOS —In terms of the Commonwealth's budget documents per se—what is produced on budget night and circulated—they compare very favourably with other international comparisons in the extent of disclosure and it is regarded internationally as good practice. The comparisons get more tricky when they start talking about all of the other ancillary material that is produced at the same time as the budget. Practices vary widely across different jurisdictions. Canada prepares a large number of performance reports that are circulated by individual agencies. The New Zealand formal budget papers are, I suppose, slightly slimmer than ours, but there is a great deal of other material produced at the same time as the budget.
By and large—and I base this on discussions with officials in the OECD and the World Bank—as far as quality and volume is concerned, Australia's budget documentation is regarded as being amongst the leaders in the world. But to try and actually get a rating between the different leading countries is, because the styles are so different between them, a bit tricky. Certainly, we are up there.
Ms SMITHIES —Again, to follow on and put that in perspective, certainly in the case of the territory our health and education sector takes up two-thirds of our budget, and yet it is, in proportion, vastly under represented if you are going to go through and do a page count on a budget paper. Some of our smaller areas are doing a lot more detailed information as part of budget and their purchase reporting. So those sorts of comparisons are a little bit tricky.
Mr BUTT —One of the reasons I asked that question is that the Victorian government—and also it is the international OECD experience—refers to corporate plans, operational plans and annual reports. Austrade obviously prepares those and they are all stand-alone documents which overall would contribute to a greater understanding of what Austrade does, but I would not like to start duplicating them all into the portfolio budget statements. There is also a timing issue with their preparation: they may not be through our board by the time the budget is introduced, so they might not be available.
Mr O'KEEFFE —It is an issue which might be of interest to participants later on in the day and is a question addressed to you, Mr Gurr. To what extent have Victorian government departments attempted to alter their organisational structure—what we would call, in federal departments, their program structure—to align with their output structure?
Mr GURR —That is an interesting issue. The realignment of organisational structure to align with outputs is not great at this stage. It has occurred in some departments. For instance, in the justice department, within the corrections area, there has been significant organisational alignment with outputs and particularly in relation to the private prison contract management functions. They have separated the policy/purchaser role from the provider role very well in a structural sense.
When I refer to the pressing need in Victoria to drive the reform framework deeper into departments, that is very much part of what I am talking about: working with departments to encourage them to better reflect the output structure in their organisational structure, so that you can then align management decision making along those output lines. You can have that through-pull of accountability from the bottom of the organisation up to the top. The experience is not much at this stage. I would hope that we would gradually get greater alignment.
CHAIR —Is there one last question?
Mr JOHNSTON —The Parliamentary Library is the smallest department and the smallest portfolio by far in the Commonwealth. Our information research people use PBSs so that when we look at preparing our own PBS—whilst we are concerned that the figures we have are totally non-material in a Commonwealth sense, and also we have a very large amount of work for a small agency—we are concerned that there be consistency in the PBS for use by senators and members. I say to my own staff that a senator has to be able to pick up the PBS and know that table 2.3 has this data. Equally our own staff as other users, going beyond senators and members, need, in analysis, to find the information as well in consistent areas. We see a tremendous overhead for ourselves on the corporate side but also a tremendous advantage for everyone using PBS to have a standard format as far as is
practicable. I would endorse the Finance approach on that, notwithstanding the overheads we ourselves incur.
CHAIR —With that pat on the back, it is time for morning tea. We will break for fifteen minutes.
Proceedings suspended from 10.32 a.m. to 10.54 a.m.
CHAIR —In this next session until lunchtime, we are to go through the various stakeholders in this process. We will start off with the Department of Finance and Administration.
Mr COCHRANE —I will just dwell on two things. Firstly, I will give some of our experiences in producing the PBS this year. Secondly, I will build on some of the issues that Ms Smithies and Mr Gurr commented on earlier and give a little bit of the New Zealand experience which I was involved in for 10 or so years.
In compiling the PBS for our department, we felt that there were a number of positives, particularly that the guidelines were issued in plenty of time and briefings were made in advance. We had a fair idea of what was expected. Like everything with change—just talking to a few people during the break—what you have is that a whole lot of changes tend to fall in one area. In our case, the finance area had things like devolved banking and Y2K compliance issues. Basically, there was a lot of work on.
What we found was that the budget officers in the budget group were always available to us, particularly the account managers and various specialists were in place to give us help in interpreting the guidelines. Through the process, they particularly checked the aggregate numbers for us, given that this was all new and that it was quite important—because there are a lot of numbers in the document. Particularly with changes and reiterations, it was quite important to have a quality check in place. Looking to the future, with any possible modifications to any formats, the guidelines can get issued in plenty of time, say at the end of the year or early next year, to enable us to put our planning in place and just see what needs to be required.
Stephen mentioned earlier—or it could have been Lembit—that most of the issues are transitional as we move into the new environment. There is always room for improvement, but my people preparing this this year told me that, in 1980 when there was a change to program budgeting, the same thing happened. Hearing about the ACT government and Victorian government experience, three or four years tends to be a settling down period before you can really get the strong comparatives and the education of members of parliament, senators and so on, so that they can get a real understanding of the information contained in the new documents.
We had some irritations. There were minor changes to the guidelines, and as we had set them in process it meant that we had to go back and basically restart on a couple of occasions. But they will not recur because they will be reincorporated in any new processes for next year. We will not incur these problems again. I believe it will be easier in the future. We have the base in place, so the information processes are there. Any changes that we do have to make will fall back to business groups a lot more easily. The feedback from
them is, `Yes, it was a lot of work, but the information produced and the content at the end of it is much more useable in the business context within the department as a whole.'
The issue for the first year is going to be comparative. Cash accounting information, even converted into accruals to compare to accrual concepts based on outcomes and outputs, is very difficult to do, because information did not relate to outcomes and outputs in previous years. The real first year of comparison will be next year, when the results for each output and outcome can be measured against what was put in the PBS at the start.
To move on to my second comments, in New Zealand this was done in 1989-1990. There were major changes in the first few years to the documentation and formats, ending up with a purchase agreement but, basically, in the last five or six years, it was fairly stable. When I look back at it, I went through exactly the same processes as we have done this year. There are some huge benefits of the financial management reform process as a whole. One area that is greatly improved is financial reporting, with the focus on the balance sheet, income statement and the cash flows. Each of the three means that each department has to look at their asset base and how things generate income and have that measured in the effectiveness indicators.
One good example of that is the assets. The federal government has an enormous amount of assets on its balance sheet. As Lembit said, it is one of the biggest jurisdictions to put in accrual accounting and therefore would be one of the biggest balance sheets in the world as such. For example, going way back in my experience under cash accounting, with things like debtors and fixed assets, you generally get the cash reinvested. Under accrual accounting, you have to pay creditors and you have to receive money from debtors. People tend to treat the Commonwealth or the government as a last resort debtor. You get the money last. At the same time, our creditors expect us to get an invoice and pay it the next day.
This greatly improves the government's cash flow over a period of time. Departments will institute debtors collection periods—which is normal commercial practice, and similarly with payments. That will reverberate through into the commercial sector. It is basically bringing commercial reforms into place. It also results in greatly improved management reporting. Internally, management have to focus a lot on what generates the outcomes and outputs, and these things are called performance indicators. Each department will have to measure them. For us, that is a real challenge in the sense of having systems in place. The value produced in the outputs—the price of the outputs—is related to the performance of the department. Over a period of time, greater transparency in the price of the outputs happens. That is a tremendous plus for the system.
Accountability has become very clear, and much clearer over the Tasman in the sense that the purchase agreement made it clear that the government was responsible for determining outcomes and the departments, through their secretaries, determining the outputs. The ministers could not cross over. That made it a lot easier for the departments to produce without a level of political interference. From an accounting aspect, two major things happened. One was a large increase in the number of qualified accountants required in the public sector. When I started this, I was one of the first people in New Zealand to be employed on an individual employment contract and came from the private sector. I was one of about three accountants in the department—in the ministry, I should say. When I left,
there were about 25 accountants spread throughout the ministry in one form or another. I see the same happening here. To get good analysis and interpretation of financial information, you need the expertise, and that can only come from the accounting sphere. This was recognised in the MAB report of a year or so ago.
The other good accounting thing was that, in moving into the accrual accounting and financial management reforms, you had very little difference between the public and private sectors. The accounting statements were very similar to what you will see in companies' financial reports. It took a few years to develop the same sophistication, but the end result was that the standards merged between the public and private sectors. You had one standard applying for each area; you did not need different standards. One big difference was income tax, and that will always be there. But fringe benefits tax, GST and everything else still applied to the government sector. That is further need for having more accounting resources.
CHAIR —Thank you. We will have questions at the end of each group presentation.
Senator WATSON —In developing this accrual budgeting in the way they have, the introduction of accrual based budgeting with outcomes and outputs based on appropriations, I think the smooth transition is testimony to your workshops and your forward planning. But if we listen to the words of Ms Smithies, if you think all your hard work has been achieved, I can assure you that a lot remains.
Despite the pre-eminence of the House of Representatives in financial matters and money matters, as outlined in the Constitution, it is essentially the Senate that has taken that role, particularly since 1996, in the development of what we have today. I have to pay tribute to all those people, senators and also members of the secretariat, working in conjunction with the Department of Finance and Administration, for what really has been achieved.
If we are looking for just two words to describe the benefits of what we have before us at the moment, those two words are, essentially, integration and linkage. That, I think, best describes the format which really provides us parliamentarians with what I believe will certainly be an improved form of accountability with the focus on outputs and outcomes. Since the PBS concept was first introduced way back in 1970, I think it was, the first reform was in the introduction of explanatory material. Subsequently, we had progress with standardisation and program budgeting. There were a few gaps in that process, until today when we have an accrual budget documentation with clear linkages between appropriation bills right through to reports and others. So for the first time, in 1999, we have full accrual accounting.
I must again pay tribute to the pre-eminence of the Commonwealth in terms of the global role in which we stand as a pre-eminent player, being the first. We had a similar role in superannuation, when other nations were tending to come to Australia to look at the methodology and how it had all been achieved. It is good to see Australia being a leader and, in fact, one of the territories also being so far ahead. I pay tribute to the Capital Territory.
The road to accrual accounting has certainly not been an easy one over the years. In fact, I recall chairing a subcommittee of the Joint Committee of Public Accounts in 1992 on the
form and standard of financial statements that applied to Commonwealth undertakings. It produced a discussion paper: report 199. In that paper, the committee acknowledged the need for a portrayal of relevant economic facts as an indicator of success in achieving particular outcomes. That report also noted the deficiencies or undesirability of linking policy and theory to produce an `acceptable' policy result with an inability to clearly articulate the benefits and the quantum of the outcomes.
There is always the difficulty, of course, of making a comparison with private sector performance, which is obviously pretty standardised. In those days it was believed that perhaps it was best to follow a prescription of developing a set of public sector standards that were essentially different from the private sector—after all, the public sector always had that tendency to change names of departments, functions and programs and to move parts of one into others and vice versa, to consolidate, to de-consolidate. Consequently, the issue of a trend analysis, which is so important in the private sector, was not available in the public sector.
So the success of accrual accounting and what we have today is dependent on a degree of stability of government policy. It is also dependent on a degree of stability in terms of the structures through which the programs are delivered. If you continue to move bits and pieces from department to department, office to office, it is going to be very difficult in an accounting sense to get some consistency to compare performance from period to period. There are going to be challenges there. If radical governments get elected and change the whole nature of things, this whole concept of accrual accounting is going to be very difficult for the accountants. If we think we have got problems today in understanding the new concepts, down the track it is going to be a lot harder. I throw that out as a challenge to the bureaucracy as well as to the parliamentarians.
The pressure from the bureaucracy in those times—in 1982—was just so strong against the concept of accrual accounting and what was envisaged as being desirable that I must say, with hindsight, that even the JCPA—which, as I said, I was a member of and I chaired—really wimped in terms of our real responsibility in that we tended to favour the concept of the full development of public sector standards to overcome the intricacies and the so-called difficulties of the public sector environment. But, at the same time, we were pretty strong on the need for the development of public sector standards that were sound and that provided a complete basis for the construction of public sector financial reporting standards.
The whole question then of the adoption of private sector standards to the public sector really revolved around the relevance of accrual accounting. While the old guard played particularly hard ball in this area, I must pay tribute to a number of enlightened public servants. Two doctors whose names come readily to mind were Dr Shand and Dr Keating, both now in other areas, who really grasped this opportunity and ran with the need to develop performance standards et cetera which have led this year to the PBS accrual format.
The other big landmark happened in 1984 with the Hawke government appointment of a former South African, a Mr Block, who certainly hastened this process. I must say that, working in these areas at the time, it was really quite exciting to be part of the evolution that started and then quickened apace because we became trendsetters in program budgeting, goal setting, goal standards and all this sort of thing. It is interesting in a seminar such as this that
we do remember the road to where we have arrived at, because it does help to give us some direction for where we have to go in the future.
Coming back to the public servants in those days who played such hard ball, what were some of the reasons that they provided? It is interesting to note that governments, they believed, historically had operated on an annual cash basis because that was deemed to be fundamental to democratic, constitutional safeguards, stewardship and all that sort of thing—after all, that had taken a long time to evolve historically, that evolution had taken place since the days of King Charles I in England and therefore it was better to develop that evolutionary process than to embark on something as radical as accrual accounting. Tradition sometimes dies hard; and when you have a history dating back to Charles I, it is not easy to change.
Questions in those days were raised about what were referred to as the arbitrary and subjective asset valuations. They are still going to be with us. In the second and third year, more questions are going to be asked about those when senators come to grips with what outcomes are all about and how you arrive at the measurable items.
We certainly did not dismiss the arbitrary and subjective asset evaluations in those earlier days—how to value a warship, et cetera; lines under the ground used by Telecom when you have new technologies taking over. Perhaps one of the most difficult and most controversial in the future will certainly be what we refer to as cost allocations, when you allocate particular costs to particular programs to achieve a full accrual method.
All these sorts of things that we refer to as subjective or arbitrary judgments were seen to be a violation of the concept which was pre-eminent then of absolute certainty. After all, if you spent a certain amount on travel in a particular period, that was it. It could be substantiated, it could be documented, and no opinion came into it.
Having taken the big step with the new method of presenting the PBS in accrual form, together with cross-referencing to the appropriate departments and other documents, I still believe there is some fine tuning to be done. That has actually been recognised by the minister and by Mr Bartos's department. Some of those measures are under active examination, and I will highlight those in a couple of minutes.
While the new format required a very consistent linkage between the appropriation bills to the PBSs and the annual reports with the emphasis on outcomes and outputs, I still believe there are a few services around, particularly those which did not attend the seminars and the other presentations by offices from the Department of Finance and Administration, who have really been at a loss in certain situations where their particular interest focus in the past suddenly was no longer there, was reduced in terms of what they were looking for to, in some cases, a non-event, a non-reference or a one-line item with no linkage and no reconciliation. I think that is a valid criticism.
Certainly, gone are the days when senators could grill bureaucrats on the movement from year to year in cash items such as travel, staff training and stationery. I think many a bureaucrat's future hung in jeopardy on the challenges thrown out by a few senators on those
particular items. In the future those challenges will take on a new direction and a new focus—an improved direction, I think.
What do I see as the challenges ahead? Firstly, if we are not careful I think we are going to have a preoccupation with short-term programs, where the results are easily measurable compared with those programs which go on for a period of years and where you necessarily have cost allocations, certain arbitrary assumptions, judgments and so on. There will be a preoccupation with short-term programs vis-a-vis the long-term programs because the long-term programs will be much more difficult to measure and to identify in terms of outcomes and successes.
Secondly, I think a degree of stability is required regarding the agency structures. As soon as you start changing those, the whole question of reallocating costs from former departments and agencies, et cetera, is not going to be easy. Also I think there is a challenge in what is at least a six-month gap between the PBS and the annual report. This really could raise the question of whether the budget material, more of that sort of information, should actually be included in the annual reports.
If we did that, what are going to be the consequences for the secretaries and the managers and also the Senate scrutiny process? If this happens, I would see that there should be a greater focus coming away from the Senate estimates, as it were, on the program structure, to what has been achieved and how it has been achieved. After all, the PBS is produced in a very tight time frame whereas there is more time for reflection, examination and review with the annual report.
I see some big challenges in this question of whether we have summary or detail in the PBS. If you go for detail, I think, Mr Bartos, you and all your officers and departmental heads are going to have difficulty in meeting the time frames for having their documentation ready for the annual budget. What is really important is for a senator to be able not only to look at where we are going in the future but also to look at the success of the programs. I would like to see much more focus, much more information and much more detail going into the annual report rather than going into the PBS. But, of course, that is completely in the hands of senators.
Despite all the dedicated efforts of Department of Finance and Administration staff, one has to ask at this early stage how consistent are the so-called stages. I think there is some evidence—and I think this is just a teething problem—about consistency across different portfolio areas. From the scuttlebutt which has followed some of the first round of the Senate estimates, I think there is certainly room for improvement there. Is there room for an auditor-general to be involved in ensuring there is standardisation across the spectrum in terms of what is projected as opposed to what is achieved? Perhaps this is a new role for the Australian National Audit Office to look at in the future.
The explanation in some cases about the written material, some senators believe, was just too brief. In annual reports we will have to link through the cash flow statement the relationship of surplus to cash movements. Subjective judgments in the area of asset valuation and cost allocation still need clearer explanations.
Since the PBS format for 1999-2000 represents a transitional year, some of these transitional problems are not unexpected. For example, some inconsistency across portfolios and the sort of jargon or the acronyms associated with the description of outcomes and outputs are two areas that I know the department of finance is working on. Certainly some new tables and, indeed, explanations within the tables do appear to be desirable. The mapping of programs and subprograms to outcomes and outputs is also a need. Where that focus should be in the future—whether it should be in the PBS or more in the annual report—is really a question for the Senate to resolve. I think it is a pretty important issue that we look at that in the not too distant future.
There was also the issue of carryover. But given this may be only a transitional issue, perhaps it should not preoccupy our minds too much in that we really should be looking for the long term. It is important to remember that the departmental price of output and capital appropriation from 1999-2000 onwards will not lapse at the end of the financial year and, of course, that is an important feature of the concept of accrual accounting. In a nutshell, from now on agencies will be funded for the price of their outputs based on their budgeted accrued expenses from that year so departmental equity injections will allow agencies to access their running cost carryover in the 1999-2000 year.
I am confident that the DOFA officers have already noted all the comments and that has gone through to the minister. There will be change and they will use this seminar today to further improve the situation. But, of course, we have to remember that any change must be viewed in the light of the very tight time frame required for presenting the PBS to the parliament.
What are the real issues? Government and DOFA have certainly heeded the comments that have already occurred in terms of improving the format such as the explanation of key issues in the explanatory notes, the grouping of information, the improving of comparisons between agencies in the same portfolio and allowing information to be located in one chapter rather than being spread across the PBS. Also DOFA is already examining the PBS in terms of the level of detail, particularly in the phraseology and outcomes.
In summary, the PBS really informs the public and people on the full allocation of resources for a government. They expand on the appropriation bills in providing both financial and non-financial information to help MPs and senators understand proposed activities of the agencies. In short, it is an important mechanism to ensure the executive is fully accountable to the parliament.
The financial complexity of the presentation of most private sector reports has led many shareholders to actually ask for the short-term report, because they are bewildered by the technical nature of the information that is in that report. I think we have to be very, very careful that we do not go down that path of providing just so much technical information that the ordinary people and the ordinary senators are so bewildered by all of what is involved that they opt for the shorter form report. We have to be careful as too much information can obscure the wood from the trees. The Senate committee system is designed to scrutinise, and I think in future it will be looking to the annual report. That is the challenge that I leave with you.
Senator HOGG —My comments will probably pertain mostly to the Defence portfolio. If one wants to read a good resume of my comments on this area, I think it is on pages 1 to 21 of the Hansard . There are a number of criteria that I laid down on the current PBS when I first went to the estimates. I said, firstly, there needed to be readability, and readability included understandability because there was no way the PBS should be shrouded in mystery. Secondly, I said there needed to be transparency, which included transparency in terms of both the money trail and the paper trail. Thirdly, at the end, I said there needed to be accountability and that accountability would be achieved through the annual report. Having laid down those criteria for myself, I then called for the plain English version of the PBS, which no-one was able to provide, because I think my difficulty in coming to grips with what was in the PBS was being experienced by my colleagues. I also asked for a `guide to the galaxy' so that we could find the links within the PBS. I think those, again, are genuine concerns raised by some of my colleagues.
The thing that I focused on, though, was the fact that there is a difference in the presentation of the PBS, given that we are in the public sector as opposed to the private sector. Readability and understandability are issues that are really important as far as I am concerned, as is transparency. The private sector, of course, deals with private sector companies which have shareholders, and the private sector accounts are of interest to shareholders, investment analysts, accountants, lawyers and—dare I say it—economists and the like. However, our audience is a different one, and I think that is something we should not lose sight of. Our audience has a different interest base. Politicians have been clearly identified as having a real interest in the form, the structure and the readability of the PBS. They are not all accountants; they are not all investment analysts or lawyers; they are not all economists. But they are definitely stakeholders in the whole process.
The other people with a great interest in the whole process are the public. In other words, if a PBS is not readable and understandable to the public in some way, then it is a document that is shrouded in mystery. This breeds cynicism and breeds contempt. And as one of course knows, there is a large deal of contempt for the political processes in this country and in many parts of the world today. The other people, of course, who have a stake in PBSs are the insomniacs, who try to work out what is in there, and also some accountants. But by far and away the most important groups are the politicians and the public. We should not lose sight of this, because it is a public process. It must, therefore, be transparent and it must, therefore, end up being accountable in real terms.
So that leads me to the actual estimates process itself. I think the estimates process, which arises out of the tabling of the PBS, needs to be a source of detailed information. Whilst taking on board Senator Watson's comments about providing too much material, I think it is the balance that is very important. It needs to be a source of detailed information from both ministers and officers of the departments appearing, because this is the chance, this is the opportunity, for the public scrutiny of the expenditure of this parliament, which to me is paramount and needs to be done with the greatest degree of intensity that is available to the politicians at the estimates process.
In terms of the outputs, they provide the opportunity to scrutinise what the government and the bureaucracy are doing. I am a bit concerned that we might end up with outputs that are far too narrow and, thereby, the claim would be made that this limits the scrutiny that
can be placed upon the officers of the parliament and, also an important part of the process, the ministers who are at the table. Government policy as well as the minutiae which is in the PBS are subject to the estimate scrutiny process, and I think there should be no attempt through outputs to limit the amount of scrutiny that takes place. I have already expressed a concern that this may well see a limitation on the narrowing of the output definitions, whereas the outputs should facilitate scrutiny rather than inhibit scrutiny.
I have also expressed, in a comment to Mr Gurr earlier, my concerns about the changing nature of the outputs. That was also expressed by a number of colleagues—that we will not see consistency from one year to the next. The shift to outputs should allow for no less scrutiny than has previously taken place, and I think this is one of the things we need to guard against in the future, otherwise we will lose the confidence of the public at large, to whom we are all responsible.
One of the other things that caused me concern was that some people believed that the senators had not got away from a concentration on inputs and moved to outputs. There was a bit of a transition period for senators where there was a blurring between inputs and outputs, and I do not think there is any denial of that. The nature of the outputs becomes so important in this whole process. In the three areas that I dealt with—Defence, Veterans' Affairs and Foreign Affairs—there was no consistency in the way outputs were described across the areas. I heard this comment coming consistently from colleagues who had crossover responsibilities in other portfolio areas—that there was no consistency.
This is not a criticism of any of those individual portfolios, because I actually think in some ways some of them have done it reasonably well, but there is no consistency. One of the things that senators do is move across portfolios; they are not locked into just one portfolio. As an example, Defence had key objectives and, at the front, they had goals 1, 2, 3, 4, 5 and 6, which was very good. That was an overview and they are going to report against that; that is fine. Then they came to the outputs, where they had preparedness, capability enhancement initiatives and performance targets, and I will come to those in a moment.
Veterans' Affairs had effectiveness, overall achievement of the outcome, performance information for administered items and performance information for departmental outputs based on quantity, price, timeliness and quality where appropriate. Foreign Affairs—and I do not know if Trade did, and I might stand corrected—had general effectiveness indicators and milestones, which they euphemistically called millstones—that was said by Foreign Affairs not by me, by the way—for suboutputs. So they tried to break it down on a suboutput basis. They also had performance information for departmental outputs. Nowhere across those three areas was there a real consistency. That is why I refer to the issue of readability and understandability. So something needs to be done there.
In terms of outputs, and whilst we were told to think more in terms of outputs rather than inputs, we go to some classics, for example, which you will find probably only in Defence. Again, it is recorded in those pages 1 to 21, where you will notice output 13. Output 13 was in respect of the capability for air strike reconnaissance. It referred to endorsed operational viability periods, endorsed sustainability periods and endorsed deployment lead times. They might not mean a lot to a lot of the agencies around here. We
find out that against each of those preparedness objectives performance targets, which we are to measure in 15 months time, the targets are fully achieved and that is it. It is abstruse for one good reason: one finds that because of the nature of the portfolio of Defence, they cannot be any more definitive. One finds that you are dependent upon the Chief of the Defence Force's preparedness directive. The Chief of the Defence Force's preparedness directive is classified. So here are we undertaking public scrutiny, but we cannot undertake the public scrutiny in the end, because it is classified. Even though it is classified, there is a notation down at the bottom of that particular table that says, `Valid only for CPD 98. Judgment for CPD 99 yet to be made.' In other words, the preparedness directive for 1998 was the basis on which the 1999-2000 budget was made, without the preparedness directive for 1999 being available. Even if it were available, we could not measure it.
I think that in areas such as Defence, there needs to be a detailed look at how this will be handled because there are obviously difficult areas in terms of security considerations. Let me say that, if one reads the transcript of what I have said, I have acknowledged that that is a real concern for Defence. You cannot handle it at the estimates process. You cannot find the benchmark at estimates because estimates is a completely open process. You can test it out at the annual report hearing. And the reason that you can do that is because you can have an in-camera session. We have this dilemma of, in the estimates process, not being able to have an in-camera session. Yet when you are judging the annual report you can. How do we say to the public that the outputs—and there are a number of outputs in Defence where that occurs—can be fully and properly tested and that the public are assured that they are getting value for money? If we looked at that particular output—and I may stand corrected—I think it is accounting for something like $660 million expenditure, which is not to be sneezed at.
On that issue alone, there is another expenditure in output 11, where it is $3.78 billion and again to find any disaggregation of that $3.78 billion is impossible indeed. There are teething problems undoubtedly. There are issues that need to be addressed there. The outputs need to be well defined but they do not need to be such that they limit the ability of the Senate to scrutinise not only specifically the output but also matters related to the output so that there is a confidence in the minds of both the Senate and the public that the public are getting value for money because, at the end of the day, we are spending public money.
On the budgeted financial statements that are presented within the three areas that I looked at, I would have a general comment that there needs to be an interconnection process. There need to be better explanatory notes. One needs to be able to follow the trail of money and that was not always possible in those particular budgeted financial statements.
The other comment that I have noted down here about outputs is the dispersal of costs across a number of outputs. It becomes difficult to track how that dispersal will come out in the annual report because it is very difficult now to even identify it as being part of an individual output.
The other problem that arose was that, in a particular output, one would find reference to an item being spread over a number of years, but the output for that specific year, that is 1999-2000, was not specified. One needs to be able to get the break up into the outyears for no other reason other than one has some idea of the rate at which the program is progressing
and one can then ask the appropriate questions on the accountability of what that department is doing. In the interests of time, I have just made a few comments there about the process as I saw it and as has been related to me by a few colleagues. Thank you.
Senator MURRAY —Thank you, Mr Chairman. I speak to you as deputy of this committee, the Senate Standing Committee on Finance and Public Administration, as a member of the Joint Committee of Public Accounts and as the Democrat responsible for the Finance and Administration portfolio. The remarks I am going to put to you are going to be more general than specific, because I think all of you are very conscious of what the executive have required from you. You have probably not been given the opportunity as a group before today to hear from the constituent parts of the parliament what the parliament wants from you, and those are two entirely different perspectives. It is best to hear from the component members of the parliament as you have heard already.
In the estimates process, government senators and government members are unfortunately often in the situation of being relatively quiet, because of the conflict that they have between sitting opposite the executive and themselves being part of their ruling party. The role of estimates falls very heavily on the official opposition who carry that task, in my opinion, very well and I am sure the previous official opposition did just that. They carry the principal burden.
Nevertheless, I think it is your duty to understand the perspective that the parliament will expect you to put on the progression of this issue over the coming years. I think the remarks by Ms Smithies from the ACT were particularly pertinent. In my view, these are very much early days. This process will take a number of years to get up to speed and to get up to scratch. All of us have to be tolerant but forgiving on the way to getting it up to speed.
We also need to understand what our long-term objectives are. To me and to my party, one of the greatest values attached to this process is, in fact, to introduce a long-term perspective on the way in which you and the parliament will approach the issue of the government's and the bureaucracy's financial responsibility. In our view, the government has already made very useful strides in that process with the introduction of the Charter of Budget Honesty, apart from the fact—which we regret—that it is not justiciable. But that and the long-term economic statements that have been introduced are extremely healthy developments for our overall approach to government and the financing of government.
The second general remark that I want to make is that it is in the interests of Australia for there to be consistency, conformity and comparability in the way in which accounting and financial matters are dealt with by the various sectors of our society. Almost forever the non-profit sector and the profit sector—the business sector—have had largely one set of accounting and financial management standards. They have been largely been on an accrual basis, whereas governments—federal, state and local—have not. I think that they all need to move into a situation where the national accounts of this country can truly become national accounts and not merely the accounts which reflect the public sector.
Attached to that is also, of course, the question of international comparability. It is fashionable to talk about globalisation—far too much in my view because much of it does not apply, but some of it does. But the fact is that international comparability or
benchmarking—if you want to use a catchword—is very much the modern material by which we measure our performance at all sorts of levels: at social levels as well as economic levels.
The fact that Australia—and New Zealand before us—is at the forefront of moving into a new area of government accounts is very valuable; others are following. We will be able to use the time that we have in front to actually improve our procedures, while they are still learning. That international comparability matters a great deal to parliamentarians. Those of you who follow debates will know of this constant reference to treaties, conventions, figures and statistics of other countries, and so it should be with the states.
The component parts of accrual budgeting can be put into four or five areas. They include management accounts, cash flow statements, capital expenditure statements and, of course, balance sheets. And to the theory, you would probably add ratios and trends. The JCPAA, at my instigation, is getting the Auditor-General and the Department of Finance and Administration to start looking at what ratios and trends are appropriate for proper measurement. As you know, ratios and trends are a long-term measure of analysis, not a short-term measure.
If I start by going through some of those elements, I think the consequence of introducing accrual accounting will drastically improve our short-term ability to report, or your short-term ability to report, to the executive and to ourselves, as well as long-term, because all of you will be forced into a management accounting system which will be a monthly reporting basis, which simply means that interim estimates, or particular committees, will be able to inquire where a program is at any point in time, rather than having to wait until the financial statements at year end. Although there might be some resistance to that from some ministers and some departments early on, I forecast that the parliament will become quite demanding in regard to knowing where you are in terms of particular programs, and that sort of thing.
Attached to the whole management accounts approach which, as you know, is different to the financial statements view of things, are the questions of budget statements. I think the calendar process by which we arrive at our cycle should pretty well be the plan, the budget and then the financial statements. The presence of management accounts enables, in fact, budgets to be presented with a kind of 10 month—at least eight or nine month—up-to-date view by the time the Treasurer has to speak.
Cash flows are critical. Parliaments have traditionally paid attention to quantum but not flow. An understanding of the flow of cash is, I think, going to be considerably improved by this process. As you know, most of you have had the responsibility for cash flow management devolved into your own departments. It means that you are very much conscious of how much money you have access to and when. As you know in the corporate world and, indeed, the non-profit world, it is often said, `Cash is king.' I think for many of you that has never been a consideration. You might become far more conscious of it, and desirably so.
The next area I want to comment on briefly is capital expenditure. In the Democrats we think, in particular, this is an area which benefits very appreciably from the accrual
accounting system because governments, like companies, are subject to very lumpy expenditure periods on the capital basis. You can think particularly of infrastructural expenditure, ports, railways or roads. You can think particularly of defence expenditure, which is probably the most obvious alternative.
To date, parliamentarians have tended to think of the surplus as either something you use to pay off debt or something you use to give back to the constituents in income tax cuts, greater benefits or services. It is my hope that governments will start to conceive of the necessity to generate some surpluses within departments, in fact, to put aside as companies would for capital reserves. That, to us, is an important consideration. Otherwise, in any 15-year cycle, which is probably a reasonable long-term cycle, you find, when you eventually are hit by the need to provide frigates, submarines, air force requirements or the Darwin to Adelaide rail, that you are faced with raising capital on the money market because you do not want to raise your taxes. It might not be the most appropriate thing to do at that time. I am hoping that the government and the departments will start to think about whether there is a necessity to generate capital reserves and how those should be recorded and kept, not in the general sense in which they have always had reserves in the Reserve Bank, but in the specific sense of being set aside for a purpose. I think the introduction of a better approach to long-term capital perspectives, and the reporting of them to the parliament, is hopefully a trend and development that we will see later on.
Now I want to come to what is probably the most important part of accrual accounting for us and that is, in fact, the provision of balance sheets. So far in this process, I think parliamentarians have focused primarily on budget statements, on what is going to be spent, on what services are going to be delivered, and that short-term view is obviously vital and critical to the program the government operates on. But the balance sheet perspective leads to a more independent and more objective viewpoint of the health of our country and of a particular status that we have at any one time.
This leads us into difficulty because, as a federation, you have to ask yourself whether the Commonwealth government, in a balance sheet sense, is actually the consolidated group balance sheet, or merely an isolated item separate from the states that, in turn, might be separate from local government. My view is that Australia is one country, frankly, not broken up into six. If my view were to prevail it would require the states and the Commonwealth to make sure that their systems and their approach were absolutely consistent and conformist.
My view is that since the Commonwealth holds the purse strings they can pretty well dictate that, and should dictate that, because it is, after all, a question of accounting standards or financial and management standards that you are trying to lay down. That is no different from, in the private sector world, the Accounting Standards Board laying down a common standard for all companies to perform in even though they have different individual operations.
The attraction of the balance sheet for the Democrats is that you are able to now show assets and liabilities, both of a short-term, current nature and a long-term nature, and that is absolutely critical. Governments in Australia have always been pretty good at the short-term exposition of their affairs; long-term, it has been very poor. It is only in the last decade, I
think, that proper evaluation of superannuation liabilities, for instance, has started to appear and, as we all know, those are very long-term commitments.
It is only in the last decade, I think, that a proper perspective on our long-term commitments on the social security and the health side have emerged. Those are very long-term and very serious and have very serious consequences for the future state of government revenues and concerns. If defence, for instance, needed a major expenditure in the year 2010 and by then we were a much more aged and sick Australia, you would have these competing demands, which is why it is necessary to lay out.
We think the expression of long-term and current assets and liabilities of a tangible kind is absolutely critical, and there you do arrive at Senator Watson's very clear understanding of the needs for very practical valuation processes. In the private sector world, valuers have much to answer for. In the 1980s, they should have been put in the dock along with lawyers and accountants, frankly, because the evaluation practices were absolute abhorrent.
It is an area where you are all going to have to be far more aggressively critical—and I do not mean that in the unkind sense but in the focus sense—when offered evaluation. In this parliament we have recently had the Australian Valuers Office give some advice as to how you should treat the valuations of the press offices in the press wing. Frankly, they were way out in terms of their understanding because they took one set of understandings from a commercial world and tried to apply it to a parliamentary building which just did not work out. It may well be that in this new area of properly valuing government assets and liabilities that they will make many mistakes and assumptions which need to be challenged. It is far better that they are challenged by you first before they ever get to us and we have to challenge them and discover that they are wrong. That is an area of importance.
The intangible area now is an area I want to focus on. This is another reason the Democrats are very attracted to the whole area of accrual accounting and the introduction of balance sheet responsibilities. Australia's assets are probably mostly intangible. New Zealand, for instance, has started to value its forests, its coast, seas, natural resources and parks, and it is a difficult task. The result of that valuation is to put a value to those things which Australians and the world value. The cutdown value of a tree to a wood chipper may be such a value but the actual value for us long term, if you value it in tourism or in other terms, may be much greater. As you know we have an environmental commitment. We think that the true valuation of our assets is very important to an understanding of where we sit. As Commonwealth departments and DOFA, you have got to steer the whole thing. You then have the problem of whom it belongs to. Do the seas belong to Australia but the forests belong to Western Australia? And so you go. This brings me back to my need for consistency between Commonwealth, states and local government methods of dealing with these things and the problem of how these things are to be resolved.
Most of you would know that in Coca-Cola's balance sheet the single biggest item is the brand name. It is an intangible. Probably the single biggest item in Australia's balance sheet would be the intangibles. But there are other areas like the intellectual property which is our people. How do you value the educational resource? We, as a country, are one per cent of the world's GDP. We produce two per cent of the world's scientific papers. If our future is in the smartness of our people do you and those departments that are concerned with this
area value it or do you not? I am not going to answer these questions now but they are questions that you have to pose.
In summary, whilst you are attending to the very narrow, practical and important things of what you are going to produce by line item, and what an output or outcome means, and how it can be properly measured, and next year when you report on it whether you are going to be roasted because your reporting is generalised and obtuse, I want you to have a perspective and the long-term objective in mind. There is a wonderful saying that when you are up to your arse in crocodiles it is hard to remember that your objective is to drain the swamp, but I want you to remember your objective even when you are having the crocodiles snapping away at your backside. That is the Democrats perspective for you.
Mr O'KEEFFE —Can I begin, firstly, by thanking the committee for the opportunity to contribute to the seminar. What I will offer to participants here is a perspective from someone in the parliamentary environment who had to both plan and manage the preparation of a PBS for the Department of the Senate and someone with some familiarity with the history and culture of the Senate as a political assembly as a scrutineer of government power and expenditure and as a house of review, as we call it.
Firstly, as a compiler of a PBS, I can say that the Department of the Senate simply cannot afford to fudge or obscure its accountability to the Senate, not only because they know what we do by virtue of their proximity to us and because our role is exclusively to serve them, but also because we, as a department, are imbued with a culture and philosophy of accountability to parliament. I believe that that is not as widely shared by other departments as it should be and, in my opinion, that very culture of accountability is, by its very nature, less a constraint and a gag for professionals in parliament and in the parliamentary service than some professional servants of government might think it is.
Can I begin by saying that, even at this stage, I think there is uncertainty about the purpose of a PBS and we have even heard some of that today. The DOFA submission states:
The purpose of the PBS is to inform Senators and Members of the proposed allocation of resources by Government agencies within each portfolio.
Others think and say that the PBS is the department's document to the minister to help him or her understand the department's budget and expenditure plans in the first instance and is then unused as an accountability document for parliament. Others still think that the PBS is the department's document to itself to help it plan its financial year projects and activities. I know that in the Department of the Senate, for example, attempts are made, successfully or otherwise, to make our PBS serve these three different roles. Whether that is a good thing or a bad thing is really a matter for this committee to decide.
To this extent, I think the PBS is a hybrid document, and that hybrid nature has constantly and consistently been the source of disputation and dissatisfaction for senators, particularly when accountancy methodologies and formats change. That arises from the hybrid nature of the document. But that hybrid character in itself is a function, I think, of the hybrid nature of estimates hearing processes and procedures. The theory is that the estimates committees examine the government's proposed estimates for a particular financial year. But,
by tradition and practice, the questioning of estimates committees has always gone well beyond that surface though still constrained at its outer limits by a concept of relevance that is really a very wide concept of relevance. The concept of relevance for estimates committees is any money being appropriated for any aspect of the government's activity or policy about which the senator is asking a question at estimates. That wide nature of the estimates process has to be understood. It is a very wide field of fire, as those of us who have appeared before estimates committees will know.
Notwithstanding changes to budgeting and accounting methodologies, the estimates process remains in my view inherently and first and foremost a forum of political exploration of government and a forum of political accountability of government albeit against the absolutely enormous backdrop of the major tool of government—the major tool of power—which is its possession of $165 billion worth of taxpayers' money and rising. No PBS, old or new, is capable of satisfactorily coping with the range, scope and varying degrees of such a mandate as the estimates committee process enjoys. Again, you see that reflected in confusion and disputation about the nature of the PBS itself. That is not meant as a counsel of despair to anyone, but really as a reminder of the facts and of the forum into which some departments sometimes naively drop a fairly naive PBS. I can think of one premier and elite department which did that this year.
I never cease to be amazed that, when I watch estimates committee hearings—as we get an opportunity to do here in Parliament House—senators sometimes engage in an extremely frustrating process at estimates committees to obtain details of highly predictable and regularly recurring things: entertainment expenditures, consultancy expenditures, ministerial travel expenditures, political appointments to high office, details of multimillion dollar contracts involving taxpayers' money, administrative processes that impact on the parliament or on the Senate itself, legal advice and the legality of government operations and activities and, finally, matters that are claimed to be secret.
These are not the outcome/output issues which DOFA wants senators to focus on, but questions of this kind are asked in every round of estimates. In every single round of estimates since 1970 they have been asked—regardless of the format of the PBS. Why is that? The reason, I think, is very simple. These are the matters which represent any federal government's greatest exposure to corruption and abuse of power or office. Why, then, is there such surprise when these questions come to be asked at estimates committees and such consternation from officials when the answers are not there? More importantly, why, occasionally, the pained resistance to accountability that does nothing but confirm that possibly indefensible motivations and decisions may well lie behind such resistance to accountability?
I see the estimates process as being at the very heart of making government accountable for those things which I listed because of their very dangerous nature. The estimates process is the premiere form in which to explore them and should remain so. If I had my druthers I would have a separate section of every department's PBS detailing such matters up-front, at the beginning, straightaway, rather than this caution and fear of them. I think it is a fear of the potential for abuse of power.
I will give you a few specific suggestions in relation to the PBS. Firstly, the PBS format should obviously be consistent across all departments, not merely in relation to the sequential unfolding of the document from greater to lesser order matters—I think there has been some confusion about that in some PBSs that I have read—but also in simple matters like presentation, like printing, like spacing. Some of the departments' financial statements and tables that I read were in ridiculously small print for those of us who are arriving at the senatorial age group. I do not know how senators coped. I would invite all of us to compare the quality of writing, the quality of wordsmithing, which goes into PBSs to the quality of writing and wordsmithing which was in the cabinet submissions. There is no contest. Why should one be more important than the other?
Secondly, some attempt should, I think, be made to narrate or describe the year's budget plan, figures and highlights in words at the beginning of a document and at the beginning of each output. Senators are, like all politicians, wordmerchants as well as wordsmiths. They are not primarily number-crunchers. I think, again, that is one of the problems: there is not a sufficiently precise, snappy, cabinet-submission quality narration of a department's budget plans for the year.
Thirdly, I think that every variation in expenditure from one year to the next should be explained. Every variation of, say, 10 or 15 per cent should be explicitly explained in text with very average words. I think if that were done and were done honestly it would curtail an enormous amount of fairly frustrating questions that occur at estimates hearings.
Fourthly, I would like to congratulate DOFA and other departments on their pre-estimates briefings for senators and for senators' staff. I would encourage the continuance of that for a few years to come, if not permanently. It provides a tremendous icebreaker. Notwithstanding that sometimes only small numbers of senators find the time to appear, I think the educative process there is an accumulative and an iterative one. I think also, if I could say it, that perhaps some of those officers appearing at those briefings could do so with a bit more frankness and a bit less fear in that environment. It is not an environment where public servants should be as apprehensive as they might be before the actual hearing.
Fifthly, the estimates hearings could perhaps be held a week or so later than happened this year. I realise timing is a major headache for everyone—for DOFA, as well as us—in preparing our PBSs. But the PBS was released on budget night, which was 11 May. The hearings were three weeks later. Two of those three weeks were full-on sitting weeks in the Senate. It really does not give much time to cull through, analyse and understand documents as complex as PBSs. Either we have a little bit more time for senators and their staff to absorb the contents of a PBS or perhaps the budget should be planned to be a week earlier. I think an extra week might have made a significant difference in this year's round.
Two last points: at the risk of losing my head, I would also suggest that senators have a responsibility to learn and not merely a right to be taught by people like us. Accrual budgeting is a difficult learning challenge for anyone coming new to it, and most politicians are coming new to it. Learning requires a desire to learn in the first instance, and its effects are maximised when serious knowledge and expertise about the activities, personnel and responsibilities of departments of state develop.
I wonder if that political urge or need to understand, as a specialist, what some portfolios and departments are doing has not become somewhat diluted over recent years to some extent because of time pressures and complexity on the Senate side and also because of some less openness and professional detachment on the side of the witnesses.
Finally—and I choose my words fairly carefully here, partly as a consequence of what I have just said on that last point—I think there has been a loss of expertise and senatorial specialisation. That problem, that trend may be compounded by the beginning of a breakdown in the extent and depth of high level mutual respect and regard between some senators and officers attending hearings. If that is happening—and I think I can detect a bit of it in the past couple of years—it is a function of a complex of issues and pressures on both sides of the hearing table. Perhaps it is not the responsibility of this committee, but I think it is worthy of examination and some remedy.
Mr FASSINA —Chair, I would firstly like to thank you and the committee for the invitation to attend. Very rarely do staff at this level get input into such a forum. At the end of the day, it is the staff who are behind a lot of the work and a lot of the questions that many officials here today get.
Firstly, I would say that the move towards accrual accounting is certainly a plus. I do not think there is any doubt about that. The use of the revenue and expense statements, the cash flow statements, balance sheets and capital budgeting is definitely an improvement. One of the things that I looked at, though, about the information presented, was how relevant it is in terms of ascertaining what was happening within departments and agencies. That is where I, and colleagues I spoke to at a staff level, came across a stumbling block.
It is good to have the information before you, but one has to also elicit from it meaningful information that can allow you to probe the statements and go into what departments are doing. I say that in the light of the issues of accountability and transparency, but the information has to be relevant and meaningful to those who are reading it. In effect, the PBSs represent accounting information to non-accountants. That in itself raises a problem. We have experts such as Senator Watson, of course. Luckily I come from an accounting background so I have a bit of a better understanding than some people. But I would ask you to bear that in mind. All the people round here, no doubt, have been subject to accrual accounting for a number of years, as I believe it has been used internally for three or four years. Just remember who the information is going to. Most of them are non-accountants. That raises the issues of their being able to understand what is presented to them. I think that was raised by Senator Hogg.
Now to some specific points that have been raised. They may be a bit disjointed but they are perceptions both of mine and of people I have spoken to. There seemed to be a large discrepancy between departments as to performance indicators and benchmark indicators. I must admit that the DOFA PBS stands up as a bit of a model. Pages 33 to 34 provide a very good breakdown in terms of an attempt at performance measurement as opposed to, for example, page 20 of the Treasury PBS. I focus on that because it is one I have looked at as Senator Cook represents the shadow treasurer in the Senate. Thus it is my responsibility to go through it.
I have chosen output 1.1.3—debt management—because it strikes me as a relatively easy performance benchmark to establish. But what do we get? It cites achievement of the Commonwealth's financing task in a cost-effective manner. One would assume that is taken as given. What about some sort of measurement of the average cost of capital over the year? What about a measurement for previous years in costs of capital? Taking into account the fact that interest rates and inflation do move, what is the real cost of capital as a performance benchmark? Thus people could see how well the Commonwealth has managed its debt from a perspective of being a major creditor in the timely reproduction of reports and debt management activities. There is no need to go on. I would have thought those would be taken as given and are not as much performance benchmarks as statements of what we intend to do.
In a similar vein, the shadow finance minister gave a speech in this same area regarding the Department of Transport and Regional Services and the evaluation of the national highways of national importance programs. He said their performance standard was as follows:
Quality : To Minister's Satisfaction
Cash flow managed to ensure best value for Commonwealth funds
Timeliness : Advice to Minister to allow time for consideration
Process payments for approved projects within seven working days or receipt of a claim . . .
I need not go on. One would assume things regarding, say, a road program and the use of funds: is it measurable in terms of, say, black spots; was the road built; did it lead to a decrease in accidents in that stretch of road? That may be a bit beyond measurability but, in terms of information and meaningfulness, I think we need to go a bit further. As I say, I make that point in the context of consistency across agencies and departments.
I raise that, too, because I assume that there would have been a common set of guidelines to all departments. It is hard to determine whether the information given on something like this is a minimum standard, as opposed to some other departments such as DOFA which may have just gone further over the minimum standard. In terms of having what is a base level of performance benchmarking, for instance, it is hard to tell from that perspective.
The other major criticism—and it has certainly been talked about—is the absence of the forward estimates. Certainly from an opposition perspective and from the perspective of staff advising opposition members, it was a cause for considerable concern. Previous years provided a reasonably detailed subprogram breakdown of forward estimates. That was lacking in this year's PBSs and budget statements in general. For instance, we have in Budget Paper No. 1—I know it is not the PBS but the PBS flows from it—family and community services. We have the Department of Family and Community Services administrative expenses for 1999-2000 as $48 billion and for 2000-2001, $53 billion, and that is it. It is a lot of money, but there is no breakdown as to what it is actually going on. Plus, we have in effect a 10 per cent increase, which I think is a material item—which I know Mr O'Keeffe has raised.
I think materiality in the accounts is also something that needs to be looked at in terms of the information that is given to the stakeholders. That $5 billion, for all I know, could be as a result of the government's commitment to increase pensions by four per cent as a result of the GST, which I will get to in a moment, too. We do not know, basically. While that can certainly be elicited at the estimates round, one would say that, if it is provided there up-front, it is certainly going to save time for officials and time for Senate estimates committee which are always under pressure, basically, to get program examination out of the way. I do not think there is anything more to say on that, other than to be aware that that is certainly a big issue.
The capital use charge, which was the one that was raised for me by a colleague, needs to be more fully explained. As I understand, I do not think it is 12 per cent, six per cent being for the risk free bond rate plus six per cent risk premium. Mainly in the light of the same thing, people who are looking at this are non-accountants. They do not know what it means. From explanations, I think it is equal to a return on shareholders' funds, that is, government investment in departments, et cetera, via equity.
The other comment that was made to me is that the output structure of the statements is very opaque and that a large amount of information has been eliminated. Given that accrual accounting, as I understood it and as it has been explained to me, was to increase transparency and accountability of government, there is a perception that there has actually been information eliminated under the guise of then claiming transparency and accountability. Basically that relates, as I said before, to the absence of subprogram functions and details. But there is a perception—and, as I said, this has obviously come from colleagues but I am sure it is also a concern amongst senators; I see Senator Hogg nodding his head—that the opaqueness of the statements is a concern to us in terms of accountability and transparency regarding what departments and agencies are doing.
Regarding the materiality of some of the items that appear in the financial statements—and this relates in part to what I said about social security—I will give some examples. On page 89, the Treasury PBS has a write-down of assets—it is an administered item—of $1.1 billion in 1999-2000—and I think it is about $1 billion the following year—with no explanation. A $1 billion write-down of assets is certainly significant. One would have thought that it would deserve some sort of comment or explanation as to what that is about.
Another example is the balance sheet for the ATO. Table 3.2 shows 1999-2000 total liabilities and equity of $5.9 billion, which is exclusively represented by $5.5 billion in receivables. The next year that goes up to $10 billion. You have a 100 per cent increase in your receivables which represents about 95 per cent of your equity base—no explanation. And it is in the ATO.
I can come to two conclusions: (a) for 1999 the increase is a result, say, of the GST and collections in terms of the timing; or (b) is the ATO just slack in collecting money? You have a blow-out from $5 billion to $10 billion. I do not know, but it is a question worth asking. Also in that time and in that context, too, of receivables, I could honestly say it would be very helpful, if possible, to have an ageing scale—as I think they prepare in the private sector—of debt as a receivable, so we know how efficient the ATO is at collecting revenue. That is just another practical example.
Also in that context I raise the issue of the GST—and this, probably, is not related so much to departmental matters as, I suppose, it is political. We have a fundamental policy change about to come into being—subject to the Senate, of course, next week—where the GST will become a significant revenue item to the Commonwealth—about $25 billion to $26 billion a year under the proposed change, which is just under 20 per cent of total receipts. We have had intensive public debate, as we know, yet there is a nice little statement in the Treasury PBS which basically says in regard to the GST—if I could just find it; sorry, I will not waste any time—that the Commonwealth is not classifying the GST as Commonwealth revenue. Consequently, I cannot find any revenue estimates in Budget Paper No. 1 or the PBS of what the proposed GST revenue will be.
The only source, obviously, is the ANTS document, which is now out of date—in terms of what is out there in the public sphere—as to what the GST revenue is going to be. So we have a budget item worth just under 20 per cent of total Commonwealth revenue which is written off in two paragraphs as being classified as not being Commonwealth revenue because all the money is going to the states. It is raised under a Commonwealth statute; it is raised under a head of power contained in the Constitution. Yet, as I say, it may be a political judgment to ignore it. So I raise that in this context too: if, for example, social security pensions go up $5 billion as a result of the GST, we are happy to include the increase in the pensions and show any pension increase; yet we do not want to actually tell the public how much we are raising from them via this tax. That strikes me as slightly ludicrous.
Also in that context, I raise it in this way as well: back to the debtors. Looking at the ATO example and the $5 billion: if there is an increase as a result of the GST from five to 10, how is that going to be treated? If it is a receivable at 30 June 2001, where is the credit side? Is it a liability in terms of money owing to the states or is it revenue? I will be very interested to see how the Audit Office, when they go about doing this, actually report on it. One would assume as a revenue item it is a flow item; it is not a stock item. But, once again, we do not know. Also, if it is for the purposes of the tax office a receivable, that is going to obviously affect the net equity position if you treat it as liability, as money owing to the states, and hence a return to shareholders in terms of the user charge. So I think there are some issues there—on which I could go further, but I am sure Senator Gibson is keen for me to stop—that need to be looked at from that perspective and the whole issue of how the GST is accounted for via the tax office and throughout departments. I think I should probably leave it there.
CHAIR —Thank you. We are running out of time. We are supposed to be breaking for lunch, but we have still got one more speaker to go. So thank you for that.
Ms Jenny Morison is an accountant who runs her own business and has been a consultant to several Commonwealth agencies through all this change process, going back quite some years. Ms Morison has offered to come along today and give her comments on the process.
Ms MORISON —Thank you very much. I really do not want to talk too much about whether accrual output based budgeting is going in the right direction, because it is. I think everyone here would accept that it is. I think some of Mr Fassina's comments about a billion
dollar write-down are testimony to the fact that accrual budgeting gave him the ability to ask those questions.
I would like to limit my comments, though, to the format of the PBS. I do have some comments about the Commonwealth's interpretation of the output based model from New Zealand and the ACT, which I can probably present at some other venue, so I will stick to the PBS. The reason I need to do that is because, in my role in assisting agencies, I was in essence a conduit between the guidelines and the interpretation of the guidelines by many of the agencies.
I would like to bring a perspective to this committee about the resource intensive nature of accrual budgeting and, in fact, the impact that the guidelines can have within agencies. I think we cannot sit on one side continually asking for lots of information without understanding what that actually does at the departmental level because accrual budgeting has been resource intensive to implement for a number reasons.
Let us not forget that we have not been using accrual accounting concepts in departments for four years. We may have been reporting at year end, but that was only a pocket of people in agencies who were pulling those numbers together. There is a very low level of understanding across accrual accounting. In a lot of departments, there has been quite a separation of the accrual accounting reporting pockets from the budget function, anyway. They tend to be very separate, so the people who were involved in interpreting the guidelines probably had very few accrual accounting skills within their area.
The other thing I think we need to make sure we understand from an implementation perspective is that we tend to focus on the implementation of integrated accounting systems as another major change that is happening within agencies. But within some of the larger departments, we have also had to implement quite sophisticated budgeting tools and models. A couple of the models which I have been involved in implementing are the largest I have ever seen in my career over 20 years. One of the complexities of those models is that they not only have to satisfy the balance sheet operating statement and traditional accounting perspectives; they also have to be able to take information and produce outputs. They also have to provide a lot of information for Budget Papers Nos 1 and 2, the reconciliations in some of those tables, and they are often cuts of information which are not traditionally able to be achieved through off-the-shelf budgeting models. I would like to put on the table that there has been significant development in the models.
During the preparation of the last PBS, there was an evolutionary nature of the build up of the budget requirements, right up until the presentation of the budget. I think that was going to happen; there are always these sorts of things in bedding down a new system. I recognise that it is transitional. I think, though, that when you are dealing with the large budgeting models that are necessary to supply accurate information under this model, it is difficult to provide some information very late in the piece because you need to build it in at the building stage of the model. That simply means that, in late requests, some of the quality of the information would have probably been dubious, knowing that there were not proper systems being able to be put in place to collect it. I think we should make sure we remember that in setting the guidelines.
I think 1999-2000 was a great start in departments pulling together their PBS. I think a lot of the criticisms are again related to resource implications. There was a lot of work to be done. There was a lot of work to be done not only in the PBS, the submissions and the four cuts of the budget which went into the DOFA budget system for the various updates. Behind that, there has been devolved banking. There have been major implementations of new systems. Throw that all together into large organisations which also have to continue to run, and I think everyone should be well proud that we actually produced the statements. But we should recognise that we need to go further.
I think a lot of the criticisms about the outputs are really a reflection of resourcing. In trying to do absolutely everything, some of the output information, particularly the non-costing performance indicators, suffered in that process. I would really like to put a statement forward that that is where we really should be focusing. The PBS should be focusing on the outputs because the output information is so critical. That is what this whole thing is about. It is about the government acting as a purchaser. What do you need to know when you go to the shop? You need to know what you are buying, how many and what colour. I am sure some of the frustrations that people have in interpreting are perhaps that some departments felt that outputs were simply about trying to explain their existence in terms of performance. No, it should go further than that. It should provide a shopping list, as far as I am concerned, of what the government should buy. Why did we get rid of running costs and 1[half ] per cent cuts across running costs? It is because we felt that there was a better way to make decisions about what the government could and could not do. The purchaser information that should be provided in the outputs needs to be improved. People will find the readability of the PBS much enhanced because of it.
I totally agree that more detail is not better, and particularly where we require that detail to enable links for people who perhaps say, `I need that table because I want to understand these PBSs. I need that table because it might help me to understand that a bit.' At the end of the day—and I think it has been mentioned before—I think it is incumbent on everybody to embrace the new environment; not only the departments in putting in sufficient training for people within their agencies to understand it but also the users of the financial statements because it is such a major change. The PBS is not often in a format to provide more and more detail to try and bridge that gap. It should go back to more fundamental training and understanding. I was disappointed that two of my clients—one very large department and one very small—did not have one question asked about their finances. That was disappointing but was, I guess, to be expected. It probably mirrors some of the earlier days in the ACT government, from my experiences there.
I think when we are trying to decide whether we need to add more detail to the PBS we should take a cost-benefit focus on that. I must be an accountant to recommend that! What I mean is that there are large budget models out there. There are large resource costs in agencies complying with a lot of the requirements so we need to recognise that as well: are we providing good quality information? Is it focused? Is it giving the senators what the senators want and certainly what the other users of the financial statements want? We do not need to think that we simply need to add more and more detail because people do not understand. We need to be focused on that.
I have a comment about requiring output information further out. I think agencies will be able to deliver that, but I think you also must be aware that the further out you go with business rules for attribution of outputs the less reliable the actual result will be.
I think that the actual financial statements of the PBS—the balance sheet operating statement and cash flow—should not be at the back, which traditionally is where they have always been in annual reports as well. I think the balance sheet, as some other members have said here today, is so important because it provides a long-term position. It enables you to make questions about tax as receivables. The long-term liabilities are visible. If you focus only on outputs and only on operating statements, you miss a major advancement that we have had in the PBSs, which is the balance sheet information.
In terms of a better explanatory guide, I would like to recommend people to the ACT government's budget papers which have, I think, a very readable and very user-friendly guide. They place one in the front of every budget paper. That might be worth considering. One of the problems I noticed in going through some of the PBSs is that some of the guides to understanding were at the back and some were at the front—they were all over the place. If they were at the front it would enable people to know where they can quickly go and see the terms. But, of course, we have to make sure they are correct, and the ones that were in the PBS this year were not always correct.
We need to have more note information about the financial statements. The actual PBS guidelines said to put in what was material to you—explanations. I think we need to move to a fuller set of notes: what is in the receivables? What is in the liabilities? I noticed that a lot of the questions that came, certainly out to the departments where I was at, were just about understanding what is behind, say, a $5 billion item on the balance sheet. We give it in annual reports—the precedents are out there to do that—so I think that would be an improvement in the PBS.
I would just like to sum up by saying that I think we have made a great start, but I do think we need to be mindful that detail has a cost. We have to make sure that that detail is not there through the inability of people to understand the data and that we stay focused, and focused about outputs. That is where we need to insist on more detail.
CHAIR —Thank you very much, Jenny. We will break for lunch now. I urge you to gather your questions over lunch and we will have a question session as soon as we resume.
Proceedings suspended from 12.40 p.m. to 1.23 p.m.
CHAIR —Following the last session this morning, where we had the perspective of the PBSs and also comments about the whole accrual accounting process—but remember that we are here to discuss the PBSs—from various stakeholders, we ran out of time for questions. So we will have a question time now that is really a flow-on from what the stakeholders said this morning. Firstly, do senators have any questions? If not, do any other participants wish to make a comment or ask a question?
Mr DAVIS —I am from the Corporate Governance Division of the Department of Immigration and Multicultural Affairs. I was interested in the comment by Senator Hogg and his use of the term `too narrow'. Could he explain a bit more about what he means by the
outputs being too narrow? It was certainly a challenge for us in the departments to get the outputs at a sufficiently detailed level to provide meaningful information without going into so much detail that you got lost. His perspective on what his term `too narrow' means would be useful.
Senator HOGG —My concern is that some of the outputs will become too narrow, thereby trying to restrict the questioning available for senators at the estimates process, and that officers of the department or the minister at the table will sink back on the fact that we are supposed to be discussing output 21, which is specifically only that item—wherein lies my problem. It is good to have clearly defined outputs rather than just one big output where we are trying to fathom our way through the whole myriad suboutputs. If we can get a number of suboutputs, that is equally helpful—as were supplied in some of the PBSs. Foreign Affairs did that reasonably well, from my recollection.
It is my hope that the departments and the government do not try to narrow any of the outputs, such that they say that that is all that can be discussed at the estimates process, because that, to me, is not what the estimates are about. That is part of the estimates process because, out of every output, there will be other parts of government policy that flow, and I do not want to get into definitional arguments at estimates. That is precisely what I was on about, and that was said by Mr O'Keeffe, as well.
Senator WATSON —Mr Chairman, a number of representatives from the department have suggested that perhaps it would be helpful if DOFA could get their guidelines out a little earlier than January. Is that possible, in future?
Mr BARTOS —Absolutely, Senator. During the lunch break, a couple of comments were made to me that a timetable of November would be better than January, and we would be quite amenable to that. The thing to remember is, of course, that the guidelines for portfolio budget statements are as stable as the demands that are placed on us by, amongst other people, Senate committees from time to time. To the extent that, for example, suggested changes to portfolio budget statements might come out of a round of estimates hearings that would occur in November-December of next year, departments will have to be flexible about that. But I can see no problem with getting the guidelines out by around November, and we will keep them as stable as external forces permit.
CHAIR —Are there any other comments on this particular item?
Mr WALSH —I am from Corporate Development in the Department of the Parliamentary Reporting Staff. I think that all of us agree about openness, transparency and accountability and, from what has been said this morning, everybody is in agreement about the thrust of these reforms.
I was interested to hear this morning from DOFA that one of the experiences that they had with the preparation of their own portfolio budget statements was that the Budget Group officers were always readily available to provide expert advice. That was not our experience—and I guess there have been lessons for all of us with this—and I would like to think that it was not because we were a small agency nor because we were a parliamentary department. We found that there was a constant turnover of personnel in the Budget Group
in DOFA, and it was a source of great frustration that we were getting different views when we sought advice and that there were times when advice was not forthcoming.
The other general point that I would like to make—and, again, it was touched on this morning—is that the preparation of the portfolio budget statement was but a part of the way we are going with the move to accruals. For people in corporate areas, particularly, where we are now just an overhead, it has been a huge exercise and very resource-intensive. I am sure that Steve would be disappointed if I did not remind him that none of us were supplemented for any of this and also that, indeed, the move to accruals was just one of a range of reforms undertaken. This morning, devolved banking was briefly mentioned, and the new superannuation arrangements: there have been a raft of things, and there have been some occasions where I am not sure that the people we were dealing with in DOFA were really very aware of what the changes were meaning to us in terms of the impact on our resources. I hope we have all learned from these lessons and that, with a bit of luck, it will easier next time, but I am cautious about that, having heard of the ACT experience.
CHAIR —Thank you, Mr Walsh. It is amazing what people can do when the high bar is lifted in front of them and they are given a bit of encouragement to have a jump.
Ms MORISON —I agree with the guidelines.
CHAIR —Are there any other comments or queries?
Mr BUTT —I would be remiss as well if I did not make a remark at this hearing. There are two points that I would like to make, one of which is: who are the PBSs actually aimed at? To my mind, it is the parliament, and Senate in particular, but also the public and interest groups. This should obviously have a bearing on the format and content. When you look at the public and interest groups, you do not see them running down to the government bookshop to buy them. Basically, it is through journalistic analysis. Most of the journalists in this place are political journalists and not accountants, so I do not agree with the comment that the financial statements should be up-front, for example. Obviously, they should be there, but it seems to me that there should be a lot more weight on text and explanation in a clear and comparable form across years.
I am surprised that nobody here today has mentioned the tables again, which is a particular bugbear of mine. I find that the tables in this document are totally misleading. In Austrade's case, if you read the balance sheet, you will find, for example, that we are repaying to the budget some $39-odd million, but that is not reflected in the tables or the price of outputs. The outputs in the tables as per the guidelines are overstated by the price. We really need to have a look at the way the guidelines for some of these tables are put together and try to make them more readable and presentable.
The other point I would make is that the PBSs do not really serve much purpose. In my mind, it is a stand-alone document. I am sure everybody here today realises that. But, again, the general public might not. In our case, for example, it flows on from the minister's trade outcomes and objectives statement that comes out in February, on which we build our corporate plan, which flows through to our operational plan, then our business plans and even our performance agreements and, obviously, through to the annual report. So it is
almost as though, in our case, you have to read the PBS in conjunction with at least four other documents. There is a bit of a timing issue there in the fact that our corporate plan has not been approved by the minister at the time of the budget, and our operational plan, which flows from the corporate plan, has not been approved by the board at the time of the budget. So they could only be in draft form to look at that stage anyway. In some way, there needs to be a better linkage in the planning process. I think we have got the planning process right. What is available to the Senate and the estimates committees on the night really does not fit in—or it can only be in draft format with the actual budget that is in front of them.
Senator WATSON —Do you think some of the information should be better contained in terms of detailing the annual report?
Mr BUTT —I agree that the PBS should not get overwhelmed in detail. The trick is getting a hand on the background or the other planning data. As I say, it is a stand-alone separate document.
Senator WATSON —Do you think this format can allow an outcome to be more easily contrived?
Mr BUTT —I would have to say yes. The problem here is that I suspect everybody sitting at this table has got a different business cycle, apart from the fact that we are all tied by the financial year and budget. But the Defence planning cycle certainly would not be the same as that of Austrade and I doubt that it would be the same for Social Security, Immigration, et cetera. What the PBS, and in particular accrual budgeting, is all about is recognising the nature of the business that you are in.
This observation may be grossly unfair, and I apologise to our colleagues in DOFA if it is, but I suspect we have got the ivory tower principle here a little bit. It would be good for DOFA to go out and work with some agencies actually putting together some of this stuff before they write the guidelines on how to do it—get some practice with the theory.
Senator WATSON —You have 80 per cent of costs which are allocatable. Doesn't that lead to a situation of opinion and a degree of arbitrariness? You can doctor your result to suit a particular outcome.
Mr BUTT —In our case, Senator, we put ours together from a bottom-up approach. We actually went to all our sharp-end areas and asked them to allocate their time, and thus their costs. We built it up from an activity sheet right through to an operational plan, which we then convert into the PBSs. So, in our case, that did not happen. But that could happen where you came from a top-down approach. I have to admit that we have to measure ours as the year goes on to see how exact it comes out on that approach.
Senator HOGG —Following on from Mr Butt's statement, I think the PBS is terribly important in setting the benchmarks from which one will then pursue the annual report some 15 months after that PBS has been examined. Therefore, it is necessary to examine at the PBS estimates—if I can call it that—in the widest terms, the issues that one may feel will need to be tested in the annual report, because one cannot anticipate what necessarily will be
contained in that annual report and what benchmarks one will need to test against. So that is part of the difficulty that exists from the questioner's point of view in the estimates process.
Mr BUTT —Can I just make the point also, as it has not been mentioned—and I do not know how others plan to do this—that our annual report for the year past will still be in the old format. It will not align with outcomes. So for this first year you will not be able to make that link easily.
Senator HOGG —I do understand that there is one innovative department that is going to seek an exemption to put this year's annual report in accrual terms to overcome the problem that you have just raised. Maybe that is something that other departments need to look to do, given that to report on a cash basis may be more confusing this year than is otherwise necessary.
Mr BARTOS —Certainly, the Department of Finance and Administration is looking to report its annual report against the new outcomes and outputs framework. In fact, in terms of the performance measures that we intend to report on in our annual report, even though, technically, we could report on our former structures and performance measures, we are going to take the step of reporting as if the new structure and framework had been in place.
The accounts in annual reports have been on an accruals basis in any case in the past. So the formal accounts in annual reports will continue to be on a full accruals basis. I think the issue on annual reports is the one about the structure against which people report. Just as in this year's portfolio budget statements there was a translation that showed how the former program structure translated into the new outcomes and outputs structure, that would be a perfectly reasonable option for agencies to adopt in terms of their annual reporting and it is one that is available to agencies.
Senator HOGG —Is there any special approval needed to do that?
Mr BARTOS —The annual report guidelines are administered by the Prime Minister's department under advice from the Joint Committee of Public Accounts and Audit.
Senator HOGG —Yes, I thought it was the PM&C.
Mr BARTOS —Unfortunately, I honestly do not know the answer to that in a formal sense.
Senator HOGG —I think there is a formal requirement to get approval from PM&C. Unless the various departments and agencies are aware of that, I think they would need to attend to that.
Mr BARTOS —I think the important thing with the annual report is to also bear in mind that it is one of the key accountability documents, along with the PBSs. And, in the same way as with the portfolio budget statements, to the extent that any presentation improves accountability and the ability of readers to understand what is going on, I think that is something, by its very nature, that people should be thinking about when putting together their annual reports.
While we are talking about annual reports, I have a quick comment on this morning's presentations and what seemed to me to be a real issue in what I thought was raised by Mr O'Keeffe in relation to expenditures on consultants and senior appointments and so on. I agree that that has always been raised in the estimates hearings. The question that occurred to me is whether we should be looking to marry those comments from Mr O'Keeffe with those from Senator Watson about what is appropriate to be in the annual report, because the thing that did strike me very strongly about that is that it is actually quite difficult, in the budget and in the portfolio budget statement hearings straight after the budget, to talk about what appointments a minister or a department is planning to make in the future. You know there will be some, but you do not know who you are going to appoint—what consultants you are actually going to appoint. You know there will be some, but you do not know who they are going to be.
In fact, while I agree absolutely entirely that those questions do get asked and are quite appropriate to get asked—they should be asked—it is a question of whether the right time for that is when the information is actually available through the annual report, as opposed to trying to guess prospectively through the PBS.
Senator WATSON —Don't you think it would be desirable that, as you have responsibility for issuing the guidelines for the portfolio budget statements, you should also be responsible in terms of the annual report guidelines which are administered by another department?
Mr BARTOS —I would be more than happy to take that up with both the Prime Minister's department and the Joint Committee of Public Accounts and Audit.
Senator WATSON —I think that is going to be necessary.
CHAIR —To follow on from that, from the fact that it would appear that some agencies are planning to do as your department is and report to the new framework, it is obvious that some clarity is required in guidelines back to all agencies about the options on that. One other thing: what about the use of the web sites by the agencies to post where they are at and their results?
Mr BARTOS —The use of the web site is something that the Department of Finance and Administration takes an overall coordinating responsibility for. In the AusInfo organisation, we administer the federal government web site—fed.gov.au—and that provides links through to the budget papers as a whole and then provides further links to individual agency budget papers.
We required all agencies to advise us in advance of their web page address, so that those links could be made. We do not, however, have a role in administering individual agency web pages. Our role is to require that they do post their budget material to a web site, and we do maintain that central web site, so that those readers who are interested in seeing what every agency does can have a simple set of links that they can follow through.
Senator HOGG —Just on Mr O'Keeffe's point in respect of those consultancies and so on, I think you have got to see it in its correct perspective and that is that, whilst it is not
necessarily possible to predict in advance who are going to be the actual consultants, or the other things that might be done under that PBS, there will be no doubt, though, an historical link with what might have transpired in the forerunner in the previous year. So questioning on that as to allocation of resources—or potential allocation of resources—will be quite important in trying to get some feel, some understanding, as to how that particular output or set of outputs will unfold through the year. I understand your comment in isolation but, as part of a continuum, I think it takes on a different perspective.
Mr BARTOS —I absolutely agree, Senator, and I think that scrutiny of those is important. Really, my comment was to agree with Mr O'Keeffe and suggest when it might happen.
Senator HOGG —You cannot do it just in the annual report, though. It really needs to be built into that continuum.
Ms MORISON —I want to follow on from Mr Butt's very timely comment about DOFA officers coming out and being placed in departments. I notice there are some former colleagues from the ACT government here, and that was certainly one of the things that was done in the ACT government. It would be excellent if people within DOFA could understand the business as much as the budget implications. I will cite an example of issue with one of my larger clients. Probably not very far out from the budget being finalised, an officer from DOFA asked if we could send across our journals. I said, `Do you realise that is on 40 disks?' That surprised me to the extent that the model was so large and I felt it would have been good if people had come in and gained understanding of the business.
I know that is probably contrary, though, to the devolution of budget development that you are trying to achieve in this environment. But it is important to understand the business as much as the mechanics of the budget. If you are trying to get comparability across budget statements, if you are trying to do some of those things and the centre is the only place that can actually see the things that are not compatible, it gives that opportunity for people to understand why the numbers look like they do.
Mr CORCORAN —I would like to pick up on the scrutiny of annual reports. I will assume for the moment that we are going to continue to have AEs. It has been our experience in the past that AEs and annual report scrutiny occurs at the same time. I will be generous here and give a percentage: in the past the amount of scrutiny on annual reports, against AEs, has been in the region of about 15 or 20 per cent, and I think that is being generous. Perhaps the committee could give some consideration to looking at having discrete hearings into the AEs and the annual reports, perhaps dropping the supplementaries for the AEs and having one hearing on the AEs and one hearing on the annual reports. We do not believe the annual reports are given enough scrutiny.
CHAIR —Thank you for that suggestion. The committee will certainly look at that. We can do so; that is possible now.
Mr BUTT —Mr Chair, just before we get too far down the track, the focus I was trying to get to before in relation to the annual report for the current financial year—about to finish in a couple of weeks—is that it will not be reporting separate outputs in accrual form. I
think it is a good move to try to link it to accrual somewhere along the line, given the way of next year's budget, but it will not have the same output measures. That is going to be the bit that is missing because people will not have the mechanisms to put that in place for the year just passed, as opposed to the one coming up.
Mr DAVIS —I support Mr Butt there. I have that concern about not only the output measures; the financial structures of our current financial management systems are also in program structures, and providing even the financial information in output terms would be a major exercise. It is not a matter of just pressing a button and getting the 1998-99 year in output terms. There is actually a fair degree of work.
Could I just add one other small point. Mr Butt mentioned earlier the use of the PBS, and an intention of Immigration is to use the PBS widely internally as an overview planning tool. For me the PBS, as we have drafted it, has three of the four essential elements to a business plan: the key objectives, or outputs and outcomes; the performance measures; and the resources. What is missing is the strategy to link the performance to the objectives and the outcomes. I see the PBS as a critical internal document that Immigration is planning to use widely.
Mr JOHNSTON —I would like to put a small point in front of the committee. For the sake of consistency it would be appropriate if materiality figures were agreed and circulated as part of the next guidelines for the PBS and that they also take into account the normal accounting materiality figures which ANAO will certainly hold us by and which we will be reporting on.
In relation to the Austrade and DIMA comments, I would like to add that I have to have our financial statements signed, as they always are, by the end of July. If we have to have ANAO come in and do a review in detail of the cost allocation model we use for our PBS, that will be a major resource exercise for ANAO. I know there is no way that ANAO would have the resources, having been once in ANAO, to do this for all of us and to meet the requirements for annual reports generally. I do believe that for this year we have been addressing the issue of transition, but it will have to be a transitional annual report, not a comprehensive audited set of statements based on both the old and new structures.
CHAIR —I think all of us on the committee understand that. We all recognise we are in transition and have to go through some difficulties to come out the other end. That is fine.
Senator HOGG —In respect of this, I think people should not lose sight of the fact that we, as senators inquiring on the PBS, are not a group of accountants or auditors. There is a real political agenda there. First and foremost, we are politicians looking for the accountability of the government and the bureaucracy. I think I said that in my opening statement. One should not start to try to squeeze us into a corner where we are seen as giving some sort of legitimacy to the accuracy of the figures or otherwise. It does not matter who is in government and who is in opposition; their role is very much a political one in pursuit of the PBS. It is a political process. It just so happens that it is the basis around which the political judgments are made by the government or the opposition.
CHAIR —Thank you, Senator. Time is moving on. I think we will move on to the next segment and that is issues relating to the financial statements.
Mr DOLAN —I want to talk about some of the issues that we, as a department, faced in putting together the portfolio budget statement. The key message is that we were able to deliver a high quality portfolio budget statement in difficult circumstances—namely, the transition to accrual accounting; transition to a more devolved estimates process, and transition to a new departmental structure as a result of the administrative orders late last year. We are learning key lessons from the processes that led to the development of the last PBS. We will be acting to improve those to make sure we have a better process for next year.
The creation of this year's portfolio budget statement involved a transition to accrual accounting and accrual budgeting principles, which involved a variety of changes to our statements. There was a move away from program based reporting towards outcome based reporting. There was a greater focus on reporting performance in order to assess the level of achievement in our departmental outcomes, which required the creation of performance indicators and the various outcomes under the portfolio. Finally, there was a presentation of our accounts in balance sheet and operating statement format.
These processes required considerable resources to be devoted by the department to achieve these desired changes. We had anticipated the move to accrual budgeting and that it would bring with it considerable changes. Work had commenced last year on developing a trial set of accounts, which we felt set us up well to cope with the demands of preparing the PBS in accrual format. Nevertheless, preparations of the statements were fairly resource intensive and added to the usually high work demands associated with the budget process.
We raise a number of factors, all of which we feel can be characterised as one-off transitional factors. There was a question of the devolution of outcome reporting to individual agencies. We feel this will lead to a greater accountability and responsibility among agencies, such as FACS, for the preparation of our budget statements. In the transition period, it created some additional workloads, as we had to create the necessary systems to allow that reporting to be made.
There was a question earlier today concerning the level of detail on the reporting of our outcomes. In the portfolio budget statements we were careful to ensure we did have quite a disaggregated level of information on the output and the suboutput classes performed by the portfolio. In a sense, we saw the portfolio budget statements as augmenting other budget material. So by looking at the portfolio budget statements a fairly clear picture can be obtained as to the expectations for expenditures on the output classes that we deliver on.
The creation of FACS as a new department last year brought significant changes to the development of the portfolio budget statements. It brought, for example, a whole new range of agencies and programs into the portfolio which brought additional workloads to integrate them into the budget process, as well as requiring us to devote considerable effort to building an outcome-output structure that reflected the department's new broader goals. It required links to be formed between staff in the new organisation which added to the challenges we faced in putting the portfolio budget statements together. Finally, there were
the inevitable processes in making sure you had the detail right on the accrual treatment of the individual items to be shown in the portfolio budget statements.
Overall, reflecting those sorts of factors, the portfolio budget statement process was fairly resource intensive. But, basically because of the efforts of the staff involved, the statements were produced on time and, indeed, to a greater standard of documentation than actually required. For example, we included estimated expenses for detailed appropriations for 1999-2000. At the same time we sought to retain features of the previous portfolio budget statements on which the committee had previously commented favourably, in particular a separate section on budget and non-budget measures which was designed to improve the readability of the document.
In terms of the lessons for future years, generally speaking, the department considers that the format of the portfolio budget statements worked reasonably well. However, we accept that there is a need to ensure there is a reasonable degree of consistency between the approaches used by different agencies. Obviously, some refinement to the guidelines for the PBS may be necessary, particularly in respect to some of the estimates tables—that is an inevitable process of a transition period. For example, it may be appropriate to show estimates for each outcome class for the full forward estimates period, rather than just for the upcoming year, which has been the practice to date. As I said, while we consider that we did well in producing the estimates, given the pressing circumstances, we are drawing lessons from the exercise. We are reviewing our budget process at the moment, which we feel will improve the future processes in that regard, and to achieve that we will of course be consulting with DOFA and other agencies in a similar position.
I understand there was an issue about how we track the portfolio changes within the portfolio budget statement. As you know, the amalgamation of the department brought together a whole range of programs, from the Child Support Agency, the old Department of Social Security, elements of Health and Family Services and from Attorney-General's. Basically, we had to put together programs from this range of agencies into outcome classes in the new structure. In the portfolio budget statements we have done that. Page 31, for example, cross-references the programs run by the new department into the new output and suboutput structures, so there is a sense of being able to track through what has happened with those programs to allow us to follow the transition to the new system.
How did we get to those results? Clearly, there was an effort required to move from the program structure to the outcome structure, but that was necessary anyway. The creation of the outcome classes in the portfolio budget statements was more like a residual of that process because in order to identify the strategic goals of the new department we had to basically define what we wanted to achieve, and the output and suboutput classes associated with that, which basically required us to group together elements of the former agencies into a cohesive whole. The outcome of that was reflected in the portfolio budget statements. In summary, it was a transitional task. We have learnt a number of lessons to improve on that, but we feel we have put together a good product within some difficult transitional circumstances for us. Thank you.
Mr KHAN —Mr Chairman, I would like to share with you and the audience today two very specific practical issues that we faced in the Department of Finance and Administration
when putting together the first accrual budget. The first issue was that when we were trying to develop a model which we hoped would apply throughout the organisation we realised that there was so much diversity within the department that application of any one model was very difficult.
I will give you a flavour of the types of diversity we had in DOFA's activities. We had the Budget Group, which is predominantly a policy advice and budget production organisation unit, mainly funded by appropriations. Then we had the Property and Contract Management Group, which had a property portfolio of about $3 billion and an insurance business which had premium income of around $70 million. The whole area was run primarily on commercial lines and it was not predominantly dependent on appropriations. The third group, the RMF Group, which oversights the Commonwealth's superannuation arrangements, managed an annual accrual based expense of some $2.5 billion and a liability of some $4 billion to $6 billion.
Each of these areas had very specific accounting policy types of issues, and applying any model to all of them required a great deal of flexibility in interpretation and understanding. One specific example, which was fortunately resolved through the framework, was the application of capital user charge to DOFA uniformly for internal consistency. Immediately we struck a problem. The whole idea of capital user charge was that it was designed to promote understanding and awareness of the value of capital which had in the past been treated as if it was a free resource. But when we came to our property group, which already had a targeted rate of return, to apply a capital user charge again was obviously going to be counterproductive. So, through the framework arrangements, we actually exempted the capital user charge requirements from the property group.
The second issue I would like to talk about is probably one of the very good things that came out of the whole process. DOFA, like most other organisations in the public sector, never really considered corporate overheads as a key issue for business line managers. As part of the budget preparation exercise, when we were doing cost allocation, it was becoming very clear that managers started to think about corporate overheads, and obviously every manager thought that the allocation was wrong because it was too much. But the most beneficial thing to come out of this, we think, is that the managers are starting to think about the business processes which give rise to corporate overheads and whether there are better ways of doing the business which would result in reduction of the full cost. I think that was probably a very good point to come out of the whole process. Thank you, Mr Chairman.
CHAIR —Thank you, Mr Khan. Are there any other comments or queries about financial statements?
Senator WATSON —Do you think that in the public sector you will be able to make the sort of evaluation the private sector can make in terms of interfirm comparisons on effectiveness and costs? For example, you can go into the woollen trade, get all the various manufacturers there, put all their figures into a common figure and come out with a position on a quartile. It was suggested that perhaps this applied in the ACT with TAFE. Do you think that, for every state and territory, the Commonwealth would be able to come out and effectively do an interfirm type of comparison in relation to the discharge of their obligations to TAFE? This has got to be the ultimate expression of efficiency, hasn't it?
Mr BARTOS —We are looking, I think, nationally to get into a situation where that will apply. A body on which DOFA is represented, and which some of the departments here are also involved with, is an exercise administered through the Productivity Commission on Commonwealth-state service provision. A range of services are compared in terms of both the quality and the quantity of the outputs and comparisons between different states. Where there are common activities, for example in relation to courts, between the Commonwealth and the states, all jurisdictions are compared. One of the bugbears on that comparison exercise in the past has been that the ways in which the different jurisdictions measured the costs of their activities were all different.
The move to accrual budgeting now at the Commonwealth level and in several states—and all of the Australian states are moving to the introduction of full accrual budgeting—will actually allow valid comparisons to be made, through that committee, between like activities. For example, one of the concerns of the Commonwealth-state review of service provision has been in relation to capital intensive activities: how do we value and attribute capital to different sorts of activities? The introduction of accrual budgeting means that we would apply accounting standards in a common way to that, which then means that realistic comparisons can be made for the first time. That is one of the big avenues for further improvement in the operations of not just the Commonwealth but all governments in Australia.
CHAIR —Thank you, Mr Bartos. Are there any other queries or comments about the financial statements?
Mr FASSINA —Just out of curiosity, on the comment that one model does not fit all, which is obviously true, how much did you draw on private sector financial reporting in the development of accrual accounting and a model per se and also in terms of information to be included in the statements that are presented?
Mr KHAN —The content of the statements was very much following what happens in financial statements and therefore was following accounting standards. In the majority of cases, private sector and public sector are similar; there are some differences. In that sense we were very much comparable to private sector, though we may not have been identical. Then we went into specific items—this is within DOFA and in the context of budget preparation—and said the model should be five different models. We adopted one model—it just happened to be made up of five different parts which applied to different parts of the organisation.
Mr NANKERVIS —I have a question for Mr Abdul Khan. Could you explain why the CUC has been presented in the way it has, rather than simply letting us determine the amount of fees or taxes that we are to do at the end of each annual year without actually carrying a couple of million dollars into our budget and then out of our expenses? Was there any particular reason why you could not come up with the same figure using less appropriation?
Mr KHAN —To answer the last part of the question, the appropriation amount is in fact unchanged because of CUC in net terms, because while it is appropriated it is also charged at the end of the year. There are some particular situations where the two amounts may be
marginally different. As to why we did it in this particular way, I suppose the answer is really tied to the primary purpose of why we wanted to do capital user charge at all, which was to make clear, to make very transparent, the fact that, as agencies build up their balance sheet in terms of net assets, it does cost the government very real financial cost as well as an opportunity cost. While there could be many other means of communicating that message, we thought that this probably was the most transparent means. It is also a means which has an effect on people's behaviour, in that when they are looking at, for instance, business decisions about outsourcing, et cetera, they look at the full cost implication of what they are producing and what they have.
Mr O'KEEFFE —Why did you not simply take it as 12 per cent of the operating result? Why was it grossed up in order to produce a net levy, with money in, money out and all the accountancy overheads associated with that?
Mr KHAN —What we did was 12 per cent of net assets. The reason that we thought we could not do it on operating result was that the operating result of one year has no particular relevance to the capital that that organisation is using. As you can imagine, two organisations using the same capital can come up with very different operating results, and we were trying to make the message clear about what this charge is about. That is why it was on net assets. I am not 100 per cent sure that doing it on operating result or net assets would necessarily have significantly different overhead costs associated with it.
Mr O'KEEFFE —We have all probably experienced this. The Senate, for example, received supplementation of $2.6 million, and on our best outcome we expect to be paying back $2.77 million. The interest that we will earn from that money, which will sit in our devolved bank account in the Reserve Bank of Australia, will go into our balance sheet because you have already taken it out of our appropriation at the beginning of the year in any case. It makes our budget look inflated, and I think it was a matter which confused a lot of senators, wondering why the Senate got another $2[half ] million or why any department got another so many million in capital use charge supplementation. The same effect could have been achieved through an educative process without the need for the charge to be grossed up as money in, money out in terms of millions of dollars.
Mr BARTOS —We do not wish to get into a debate about the structure of the accruals framework. This is an inquiry about the PBS. In terms of the PBS, the effect of the application of the capital use charge is to show a true price of the output that is being delivered in the PBS. If that were not there, the price of that output would actually not take account of the capital associated with delivery of that output and so the price would be artificially lower. So the purpose of showing the capital use charge is to take account of all of the resources involved in delivery of agency outputs, including the capital that the government has invested in that organisation. That is the reason for that presentation and that is why it comes out that way in the PBS.
Ms MORISON —If we can go back to the PBS, I think one of the confusing things for people interpreting the PBS was that it was explained as being part of the cost of doing business and yet it was shown in the PBS as a return back to the government below the line, below the operating result. I think that is conceptually quite confusing, to understand why it needs to be in price and why it behaves like an expense but we show it to you like a below
the line return to government. I understand there were accounting standard implications for that, but that is difficult, isn't it?
Mr BARTOS —The point is: can the presentation of that in the PBS be made a little clearer? I think that is a useful point to take on board arising out of this discussion.
CHAIR —Whilst we are on the PBS structure, on finances, there was a query from this committee during its estimates hearing just recently about the addition of both equity and liabilities together as a single-line item in some departmental balance sheets. The question was why there has not been a requirement for them to separate liabilities and equity.
Mr KHAN —As far as I am aware, there is a requirement for every balance sheet to show the liabilities separately and equity separately and then add the two together as a line item. There is a definite requirement, as far as I am aware.
CHAIR —It sounds like there is some confusion about that.
Ms MORISON —The real issue about it, though, is that if you go to a public set of financial statements you will see assets minus liabilities to give you equity. In these we have liabilities plus equity, and I think that it does not help to actually talk about net assets being the increase between the operating statement—which goes back to your point. I think that is an area we could look at.
CHAIR —I would agree with that, yes. The wider audience basically understands the commercial accounting rather than what we have actually adopted here.
Mr KHAN —I can try to answer that. I have to say first of all that I personally believe that net assets is what we should be doing. The reason that this presentation was adopted was that there was a fear that the net assets private sector presentation might focus too much attention, and attention which was probably misplaced, on whether an organisation has net assets or deficiency of net assets. While that particular indicator is very forceful for a private sector organisation, because it has obvious implications for liquidity and solvency, it was felt that in a public sector organisation to focus too much attention on that item as a balance sheet bottom-line measure probably was not desirable. That was the logic behind it. I quite understand that.
CHAIR —In the reality of the estimates in the last two weeks it hardly rated a mention.
Ms MORISON —The readability is not there.
CHAIR —If it had been a clearer presentation perhaps it might have got a bit more mention. Certainly, no-one was going overboard about it.
Mr BARTOS —This falls into the category of things that were introduced for good reason which in the light of actual practice are well worth reviewing.
Mr JOHNSTON —Given that the PBS are and are going to be used as extrinsic aids to interpretation of the appropriation acts, why was it not a more direct reference in the
appropriation acts themselves or in other material so that for court, audit and other purposes they have a clearer legal identity?
Mr SUUR —I am not quite sure that I understand that questioning in all of its dimensions.
Mr JOHNSTON —Under the Acts Interpretation Act, when you interpret any act, extrinsic aids may be utilised, for example, the second reading speech or explanatory memorandum. These are clearly extrinsic aids to interpretation and have been considered and discussed as such by Finance. The proposals to make them more clearly legally identifiable as such do not appear to have been followed through. To me, that would appear to create potentially some later complications. For example, in a fraud situation or just day to day in an audit situation where the appropriation act refers purely to the outcome, for the detail of where the requirement of whether the expenditure has been within appropriation for section 83 of the Constitution, et cetera, you need to go to the PBS in many cases.
Mr SUUR —There is a direct reference to the PBSs in each of the three appropriation bills. Unfortunately, I do not have a copy of Budget Paper No. 4 with me. There is a reference in each bill that says that the outcomes against which the appropriation are made are to be read in the context of, or interpreted by reference to, the appropriate portfolio budget statement.
Mr JOHNSTON —I understand that there is the reference.
Mr BARTOS —The reason why we are having a little difficulty with your comment is that we thought we had done exactly what you were suggesting. If you look at part 2, section 7, subsection 3 of Appropriation Bill (No. 1), there is a specific reference to portfolio budget statements. It says:
If the Portfolio Budget Statements indicate that activities of a particular kind were intended to be treated as activities in respect of a particular outcome, then expenditure for the purposes of carrying out these activities is taken to be expenditure for the purpose of contributing to achieving the outcome.
Our apologies for the legalese in that but that was drafted by people who draft so that it is legally enforceable, so we do have that reference. It is in the beginning of the appropriation bills.
Mr JOHNSTON —I understand the reference.
CHAIR —He enforces the point made earlier today about easy to read language in these documents.
Mr BARTOS —Fortunately, that language was not in any of the PBSs.
CHAIR —I know that. On the format of the financial statements, could we go around each agency and see any particular issues that you had problems with or concerns about before we move on, particularly out of the estimates process? The Department of the Senate?
Mr O'KEEFFE —I do not believe we had any significant difficulties in compiling our financial statements. Our experience was the same as the experience of many other departments. Senators did not really focus on those tables; senators did not focus on financial information of that kind. Perhaps one charitable reason may be that for the first year of this process to know what employee expenses, suppliers, liabilities, assets and cash assets were for this year, last year and the outyears was not really all that relevant.
Perhaps it may become of greater significance further down the track when comparisons become a bit more important and trends are important to identify. But once you get into that area you are right smack back into the concern that Senator Watson was expressing earlier on about administrative arrangements, departmental restructures and reallocation of responsibilities, which completely disrupts the interpretation of such trends and thereby renders those sorts of financial statements ineffective. But in terms of their preparation there are no significant problems.
Mr CORCORAN —I am not the appropriate person to talk about this but we will certainly raise any concerns in our submission.
Ms O'BRIEN —I was not actually involved in the preparation of our own financial statements being from the audit arm of the office. However, I have observed a number of our audit clients preparing their own statements. The biggest issue we have been dealing with, with our clients, is the need to ensure consistency in the accounting policies and treatments adopted in the budget financial statements with those which will be in the audited annual financial statements. That has been an issue for a number of agencies.
Mr WATSON —We did not have any particular issues in relation to the financial statements although I would echo some comments which were made earlier in relation to the amount of perceived expertise within agencies to construct statements of this type. We certainly do have—and have had for a couple of years—expertise within the agency to do the annual financial statements of the department but, in terms of preparing budgeted financial statements which are prepared on a different basis, the sort of expertise that we and other agencies have is a bit thin on the ground at this stage. That is something we need to build up over a period of time.
In terms of constructing the estimates, we are able to do that, although timing is always going to be an issue because of the way that the budget process runs and the timing of the final production of the PBS. There is not a lot of time between the decisions of government and the actual tabling of the PBS.
Mr DAVIS —I have three issues I will mention briefly. One is consistency of the financial statements required here in the PBS and the annual report and those financial statements. Early on we did have some concerns there with the lack of consistency on an issue such as free resources that were not required to be identified here but were in the others. We worked through those issues with DOFA and came to a situation of greater consistency than where we started. I think we learnt through that process. The attribution of corporate overheads has been mentioned. It is a major challenge to get that right. Certainly we are intending to improve that over time. What we have here is the best we could do in the time available.
The third issue, which probably has not been mentioned, is that Immigration actually did a full review of all its previous program items to reassess whether they were departmental or administered items and we ended up, as part of that process and in agreement with the Australian National Audit Office, moving some of our previously separate program items into departmental because of an assessment under accrual budgeting of the control test. That affected our financial statements in terms of moving items from one area of our statements into the other area of our statements.
Mr BRITT —Certainly the level of expertise in the AFP was an issue at the beginning of the creation of the accrual budget statements. We did seek outside help from a consultancy to do that.
Another general issue is the number of outcomes that the AFP has, compared to other agencies of a similar make-up and complexity. I think we have five outcomes where other agencies got away with one or two outcomes. It is something that we will be taking up with DOFA and with our minister over the next 12 months.
Mr BUCKPITT —The only issue that we grappled with was some of the guidance in relation to the presentation of various tables. In tables 1.1 and 2.2 we found there were variations being made right up until the end. That was quite difficult for us. The tables were revised until quite late in the piece and that was quite difficult for a number of agencies.
Mr HINE —We did not have within the department too much difficulty in varying the statements. We did have a major issue in terms of trying to coordinate the other agencies so that we could put together the portfolio statements. We were in the process of printing the portfolio budget statement at 10 to six on the Friday night and one agency rang and said, `We've just negotiated some changes with the department of finance.' There are those sort of coordination issues which were a major issue.
As some of the other departments said, sometimes there was a lack of consistency in terms of the messages coming back from the department of finance and that created some difficulty as well, even across the portfolio. Those issues will be worked through as part of the transition arrangements.
We also had some difficulty when changes were made at the last minute. With 59 outputs and adopting a similar process to Mr Butt from the bottom up, a number of our outputs cut across different outcomes. That made difficulty then in trying to attribute those costs accurately and efficiently so that at the end of the day, the figures all balanced. We were able to do that but it was a major exercise for us. Like everybody else, we would be looking for some stability in the process. If it cannot be stable, then we need some additional lead times to enable us to be as professional again this year as we were.
Ms HAZELL —In Foreign Affairs and Trade we had some very similar issues to those we have heard around the table. The department has a level of expertise to prepare accrual statements, but there is a difference between preparing financial statements for audit purposes and accrual budgets. Some of that leap of faith, if you like, fell down the hole a little bit.
Needless to say, though, the department did get there, but that is a resource issue, I think, that we all have to address for coming years in making the links between budgeting and statements and then educating our departments. It is one thing for the people in the finance area to understand it, but all the managers of all the different outcomes and outputs have to understand how they link into it as well. That I think will be an education process for all of us, not just for DFAT.
Cost allocation models are a big exercise, so last minute changes, as Geoff mentioned, can be an absolute nightmare. At the end of the day, trying to get it in and get it printed, some of it may not be as accurate as we may wish it to be.
The other issue is actually having a year of operation and seeing how accurate some of those models are anyway. There is an issue, I think, in terms of having issues with consistency of message again, but we have heard that around the table. I think there are also issues about understanding that this is an evolving process. This is only year one. We all learnt a lot this year, we will learn a lot more again next year and it will take—I think the ACT government experience is probably about right—about four years to refine it and get everything stable and consistent. Otherwise, the information that appears here every year is going to be so different that it will not be very meaningful.
In terms of the actual statements in the PBS, it is probably worth while just mentioning that we spent quite considerable time briefing our senators before Senate estimates. Then, based on their interest in the statements, we prepared quite extensive explanatory notes for senators on the financial statements, which I am assuming by the lack of subsequent questions on the subject means that it answered a lot of the questions that senators may have had. We certainly found that there is a level of interest in the statements which we maybe were not expecting. We were expecting more interest in the outputs and the outcomes.
CHAIR —We would be interested in seeing copies of your notes, actually.
Ms HAZELL —The defence, foreign affairs and trade committee has them, but we can provide them again.
CHAIR —Thank you.
Ms HAZELL —It is basically a summary of what is in various items which we have talked about a bit this morning.
Mr BUTT —The actual statements themselves were not a real problem, leaving aside access to the DOFA system, which was a teething problem, I guess. However, I would endorse entirely everything Anne just said because it was similar with us. In fact, our apportionment of what we call enabling services overheads, like HR, finance and what have you, was all based on the bottom up approach. If anybody from out the sharp end changed any of their figures late in the piece, we had to go back and reapportion it all. That made the exercise a bit hard. The difficulty that I have, and I mentioned before, is that there are some things in our financial statements—for example, the state of revenues and expenses—which are below the line. The capital use charge is one of them. They are reflected in our output prices in a table. Our output prices in a table, I am saying again, are highly overstated—in
administered items, for example, by about $39 million. It makes it a bit disheartening for us to put together, go to an estimates committee and show that our output prices are high when in fact it is a below the line repayment that reduces that. You get back to the old concept of outlays as opposed to expenses. The cost to the budget, I think, was a little bit overstated in the table, even though it is right in the financial statements. That is a presentation issue.
Mr MARTIN —I will restrict my comments to the financial statements themselves. I guess, in a lot of ways, the financial statements were actually the easiest part of the whole exercise, given that we have all been reporting that way for some time, we are all accountants and we know that the fundamentals are all the same. Based on a number of comments that have been made today, we certainly also support moving to a net asset presentation of the balance sheet rather than a liabilities and equity format.
We felt that, in the guidelines given, there probably was not enough separation of administered items in the departmental statements. I think that comes out in a lot of the outputs versus administered items debate as well. We did pay a lot of attention to the notes and variances in our financial statements, including linking those to the outputs and other activities that vary during the year. We also have a bit of a problem with their comparability to the end of year financial statements, particularly the projections. Currently, the projections are required to assume that we had full year responsibility for certain issues when we do not. Accounting standards will not require that at end of year, so there will be no comparability between the projections in the budget paper for the current year and the final ones that are audited. We also obviously had extensive costing issues that we have to come to grips with this year as well.
Mr McKINLAY —One of the problems that we had was the lateness of advice on the format of some of the tables. That just made it difficult, I guess, but it was unavoidable, considering where the source of that guidance was to come from. There were some transitional issues, which of course will not occur again, in comparing cash and accrual for 1998-99, for converting 1998-99 into an accrual year and general understanding in the client areas which put together the source documents for the portfolio budget statements for us. It was a matter of guidance from the Department of Finance and Administration, which were very helpful all the way through, but it struck us raw halfway through the process that beginners were dealing with beginners. The fact that we need to regear our processes to what is relatively a major production exercise over what the previous PBSs were also struck departments hard, I suspect. In the putting together of our unit prices, I think, again, we had a beginner's experience that we look forward to improving.
CHAIR —While we are on the PBS finances, there were a couple of other issues which were raised in this committee's estimates hearings. The first one was the treatment of long-term contracts in departmental financial statements, and I understood the department was going to look at that. The second issue was the depreciation expenditure. Are you aware of those, Mr Bartos?
Mr BARTOS —Certainly. The issue of treatment of long-term contracts was raised during the course of one of the estimates hearings with this committee, and the answer we gave then was that how those are treated is actually not amenable to a simple rule because it depends on the nature of the contract in each case and what is being delivered. We
undertook guidance on that and we will honour the undertaking to get back—as per one of our questions on notice—to that committee.
CHAIR —In normal commercial private enterprise accounts, there would be a note to the account about such issues. Should there be a lot more notes to the accounts in order to explain the balance sheet items?
Mr BARTOS —I actually agree with the position that notes to the accounts, as Ms Hazell indicated, were very helpful for the consideration of the DFAT accounts. More extensive notes to the accounts can be useful. One of the things in the budget papers per se that senators will have noticed was that the notes to the accounts were really quite extensive, and we had a series of notes in the budget papers against the financial statements that explained individual lines in some depth. That is a good way of going about handling these issues. On the depreciation issue, I would actually appreciate some greater clarity on what the committee is looking for, and I am sure we can provide advice on it.
CHAIR —There was concern raised by several senators about the magnitude of the depreciation charge. That is basically what it was about; we just needed further information about the detail and the process.
Mr BARTOS —In consultation with the secretariat, we should provide you with some more depth on that particular issue, and we are more than happy to do that in the course of this inquiry.
Senator HOGG —In the first instance: how was the depreciation charge even raised and how did you place the value on that item in the first place? I cannot give you the specific, but I think it may well have been in Veterans' Affairs that Senator Schacht raised that issue.
Mr BARTOS —I recall that particular instance, because Senator Schacht raised the issue of valuation of the Australian War Memorial, that is: why is an asset like the Australian War Memorial treated as a departmental rather than an administered asset? The answer that we gave then, and it is worth repeating for people's information, was that it would have reflected the discussions that the Department of Veterans' Affairs had with the Audit Office in relation to all their financial statements as to what was within their control and what was not. Similar issues arise in relation to—
Senator HOGG —Before you proceed, is there depreciation on that asset?
Mr BARTOS —There is. There is depreciation on the War Memorial.
Senator HOGG —The issue was: how did you determine the value of the War Memorial to start off with and how can you therefore determine what the depreciation on that asset is, given that, really, it is an asset that has immeasurable value?
Mr BARTOS —The issue there of how to apply the accounting standards is a legitimate one. In fact, the War Memorial does have a value in the accounts, and it has been shown as having a value in the whole of government accounts in the past, as I understand it. The valuation of it is done according to accounting standards against the value of the land it is
on, alternative uses and so on. However, it was a very legitimate point raised by Senator Schacht: should it be treated in that way? Our answer to that was to draw a contrast with this building. Parliament House is not treated in that way; it is treated as an administered asset against exactly that same logic. It is of immeasurable value and no-one is ever going to sell it.
One of the things I think we need to do as part of bedding down accruals is actually to be a little more sophisticated in how we treat agencies that have large assets. In the case of the War Memorial, for instance, I think it is pretty clearly the case that there are some parts of the War Memorial that would never be sold. There are other things that they do sell; similarly with the collecting institutions such as the National Library or the National Gallery. There are some things that you would say are never going to be sold, but there are other things that they do from time to time.
Senator HOGG —What about the National Archives?
Mr BARTOS —It is similar with Archives. There are disposals of assets within agencies, but there are some things that should be treated as though they are not. This is actually more an accounting policy issue to be dealt with in the course of bedding down accruals, but it is a very legitimate accounting policy issue that we have to deal with with all of those institutions.
CHAIR —I think we should move on. The next set of issues to be looked at is issues relating to the outcome/output framework or performance measurements.
Mr HARPER —In this committee's hearings in 1997, we indicated that we were strongly supportive of a move to budgeting, managing and reporting on an accruals basis and also supportive of a move to a focus on what is delivered, rather than the hitherto prevailing focus largely on what is being consumed. Your committee reported in October of 1997. In December of 1997, the Management Advisory Board produced a report to which Mr Cochrane referred earlier in the day, called Beyond bean counting: effective financial management in the APS 1998 and beyond . Against that backdrop, the then Department of Transport and Regional Development produced a portfolio budget statement for its minister in 1998-99, which was on both an outputs and an accruals basis. It included projected performance information on output delivery and performance information relating to financial impacts of the year's activity, and indicated to which outcomes the department's outputs contributed.
Through that year it was not particularly easy for the department to manage on that basis. In my first sentence, I think, I indicated the importance of budgeting, managing and reporting on an accruals and outputs basis, because the whole of government framework continued to be on a program and cash basis, appropriations being on a reimbursement on a cash needs basis. Of course, that should be much less of an issue in 1999-2000, as the whole of government framework moves to the outcome, output and accruals basis.
In terms of our annual report for the year 1998-99 soon to be completed, and hearing the messages, particularly from Senator Watson, about the importance of a clear read through from budget documentation to annual reports, we are drafting our 1998-99 annual report
having regard to the output information in our 1998-99 portfolio budget statement. For 1999-2000, the Minister for Transport and Regional Services has produced a portfolio budget statement on an outcome/output/administered items/accruals basis in accordance with the whole of government requirements promulgated by DOFA.
Mr O'Keeffe and others have stressed the importance of recognising the interests and backgrounds of users, and, recognising that, we included a reasonably comprehensive user guide to the documentation, trying to explain some of the jargon and approaches that had been taken. It included a verbal description of what the portfolio was about and what it was seeking to deliver through the year. It included some graphical information to assist those who might be less excited by numbers and it offered a briefing to the estimates committee that looks after our portfolio, and such a briefing was undertaken.
To assist comprehension of the 1999-2000 figures, the comparative figures for 1998-99 in the PBS are based on estimates at the time that that PBS was prepared and not necessarily those that persisted at the time of the previous budget. Those estimates reflect pressures and opportunities which had arisen during, and up to, the time of preparation of the PBS or were foreseen for the remainder of the 1998-99 year. They also included an estimated full[hyphen]year effect of the 1998 Administrative Arrangements Orders changes for the purposes of comparison in the budget context. Notwithstanding that, in our financial statements at the end of the year, they will reflect only the amounts for which the department was responsible at particular times through the year.
There has been some commentary about the numbers of outcomes raised by colleagues earlier in the hearing. In the case of our portfolio, the government recognises that, in addition to services specifically aimed at communities in regional, rural and remote Australia, transport facilities and options play an integral part in fostering the social and economic capacity of regional Australia and in maintaining its links to the rest of the country. In recognising these priorities of the government, all agencies in the Transport and Regional Services portfolio deliver services to assist the ministers in pursuing a single outcome for the community, which is described as `linking Australia through transport and regional services'. Of course, those bodies deliver different outputs in contributing to the ministers' outcome.
As I indicated earlier, we had a portfolio budget statement on an outputs basis last year in respect of this year. The department's 1999-2000 PBS includes a different grouping of outputs from the previous year, and I will come back to that shortly. It also includes administered item groups which we had not included in the 1998-99 PBS. In addition, in 1999-2000, there is output information for the `material' general government sector portfolio authorities as well, which was not there in the previous year.
To come back to the change in our output specification, in 1998-99, the then minister's PBS for what was then the Department of Transport and Regional Development had nine output classes which were organisationally based. There was some commentary, earlier in the day, about the extent to which organisations had reshaped themselves to accord with the outputs which they were to deliver. Last year, we may have shaped the outputs which we were to deliver to the organisation which then existed.
For this year, our PBS includes five output groups representing the broad functions of DOTRS. I will read them out: policy advice and ministerial services, regulatory investigative and safety services, services to communities, services for industry and government, and revenue administration. There are two administered items groups, each of which aligns with one of the output groups. The two administered items groups are: services to communities administered on behalf of the Commonwealth and services to industry administered on behalf of the Commonwealth.
Earlier on, Mr Fassina made an observation on some aspects of the DOTRS PBS referring to the Road Safety Black Spot Program and the National Highway and Roads of National Importance programs. I thought it might be instructive to elaborate a little there. Mr Fassina referred to an extract from one of the outputs which is associated with the output of administering the administered payment. Relevant to the programs that were mentioned, we have at page 64 of our PBS output 3.2, one of the activities of which is to administer the black spot program, and there are indicators associated with that.
At page 75 of the DOTRS PBS, output 4.4 includes the activity of administering the National Highway and Roads of National Importance programs. In addition to that, on page 79 of the minister's PBS under the administered items groups, we have administered item 1.2, which includes the payment of $37.8 million to the states and territories for the black spot program. Similarly, administered item 2.2 on page 83 of the DOTRS PBS includes information relevant to the payment of $769.3 million to the National Highway and Roads of National Importance programs for the states, and it indicates which roads will be commenced in 1999-2000.
Having given that as some indication of the depth of information, there is considerable performance information in respect of outputs and administered items. In our case, pages 46 to 84 of the portfolio budget statement address quite detailed performance information in respect of outputs and administered items. The general metrics that we used were quantity, quality, timeliness and location measures, particularly as we are the Department of Transport and Regional Services and our ministers have a focus on where services are provided. In many instances, there is an indication of where outputs will be delivered or have their impact. In addition, there is pricing and cost information for each output and the cost of each administered item. As well as that, there is projected financial performance information.
As we understand it, a key element of the reforms is to align the performance in delivering outputs and administered items with financial performance. As Mr Martin indicated earlier, the financial statements include notes which refer back to the impact of particular outputs on the financial performance of the department.
That is where we are at. I have a couple of observations for the future, if I may. We have heard today from some other jurisdictions where the primary focus for budget decisions is the standard of agency outputs and administered items and how they contribute to the whole of government outcomes desired for the community. This year, the Commonwealth budget has focused on agency[hyphen]specific outcomes. As I indicated earlier, our minister elected to have an outcome for his entire portfolio, recognising the common objectives that he expects the agencies within the portfolio to pursue on his behalf and also reflecting six whole of government priorities—which are reflected in the portfolio budget statement—to
allow a more strategic approach to determining which outputs and administered items should be delivered by the department.
One would imagine that in future the Commonwealth, in seeking to improve the service delivery of its agencies and the impacts that it has on the community, will also focus more on the standard of outputs and administered items of its agencies. That may in turn require a review of the outcome structure for government and how it relates to agency service delivery. As I indicated earlier, our portfolio has adjusted slightly by administrative arrangements and changes and has recast some of its output structure already. That having been said, there is extensive performance detail available of the order of 40 pages in respect of the department and additional material in respect of material general government sector agencies, which should assist with accountability to parliament and others.
We see the challenge for the department as taking the presentation of this year's budget, using it and playing our role in the responsibility and accountability framework, which provides a sensible base for decision making—both inside and outside the department—and which promotes real internal reform in the management of service delivery and resources. As I indicated earlier, we see the PBS as being an integral part of a framework, aligning service delivery and resource management, and promoting day-to-day management of the two.
Mr KEMISH —I am the Director of the Corporate Planning Section in the Department of Foreign Affairs and Trade. It was that section which developed the performance information framework in DFAT's PBS. You have all just received two handouts for DFAT. The thinnest of those two handouts shows DFAT's outputs-outcomes framework. The second is the performance information framework in toto taken out of our PBS. That is all in our PBS. We are simply offering that to you for ease of reference for this discussion.
We are not here to report any particular coordination difficulties with DOFA in assembling our performance information framework. My plan is simply to highlight some of the challenges we faced in tailoring the accrual based requirements to our particular circumstances and to tell you a little bit about the approaches that we adopted to meet those challenges.
What I would like to say at the outset is that, while we are confident enough that the performance indicators in our framework provide a solid enough platform for meaningful reporting in the 1999-2000 annual report, we know full well this is an evolving thing, and we will be looking to improve the framework as time goes on. Indeed, feedback from Senate committees will be an important factor in applying the principle of continuous improvement to our framework.
I will begin by speaking about our outcomes and outputs which, as I said, is in the thinner of those two handouts. The outcomes—which appear in the left-hand column of that first page—are intended to capture the impact of DFAT's work on the Australian community, as is the case, I know, with other agencies. The nature of our department's work and the uncertainties of the international foreign and trade policy environment in which we operate have led us to define outcomes that are necessarily long term. I will return to that issue later on.
The output structure—outputs are reflected in the right-hand column of that first page—aims to reflect the key goods and services which ministers purchase from us, either directly or in pursuit of the department's whole of government role. These are represented as seven output groups that break down further into sub-outputs, which are over the page. I should say that those sub-outputs largely correspond to the department's organisational structure. I think they were familiar enough to the Senate Committee on Foreign Affairs, Defence and Trade, and provided a reasonable framework for the agenda for our hearings. Like our performance indicators themselves, the outcome-output structure was developed on the basis of fairly extensive and high level consultation between DFAT and DOFA and was approved by portfolio ministers.
I will now turn to the performance information framework itself, which is in the larger of the two documents. What I would say is that, in keeping with DOFA's guidelines, quality, quantity and price indicators were included to measure our performance in delivering our seven outputs and managing the administered items in our budget. You can find examples of those on page 7 of that larger document. In developing quality indicators, we focus particularly on feedback from our primary clients, our portfolio ministers, but also on other key stakeholders, including parliament, the travelling public and business. This focus on feedback has prompted us to review and, in some cases, strengthen the mechanisms we have in place in the department to collect and record feedback. We want to make sure that, when the time comes to report against this framework, we can do so in a credible way.
We face some challenges in quantifying our work. While it was relatively easy to quantify our service delivery work—for example, our passports and our consular functions—it was much less easy to quantify our policy development work and the important work undertaken by our network of overseas posts in maintaining and developing long-term relationships. In the end, what we did is focus on things like the number of units of policy advice delivered, the number of representations made abroad and the number of programs organised for parliamentary and state government representatives. Again, we are working to ensure that there are solid systems in place throughout the department to collect this information. While there were some challenges involved, we have been able to provide quality, quantity and price indicators.
Our more particular challenge, however, was in developing indicators to gauge our effectiveness in contributing to outcomes. Perhaps more than most agencies, DFAT operates in a context which is largely outside its own direct control. The international context is a fluid one, and Australia is only one of many players on the world scene. This context made it difficult for us to develop concrete, measurable effectiveness targets, particularly, for example, for our first output about the protection and advancement of Australia's interests through the diplomatic network and Australia based activity.
In the end, we developed an approach based on the concept of a so-called milestone, meant to signify steps along the way in pursuing the three broad outcomes. Where applicable, we chose to present effectiveness indicators as milestones representing the achievement of, or significant steps towards, major goals for 1999-2000. The milestones we have developed for outcome 1, which begin halfway down the first page of the larger document, might give you an idea of the sort of approach we have taken. Perhaps a better example is the last one there under the first category towards the top of the second page,
`Human rights and democracy promoted in China through regular dialogue with the Chinese Government, targeted representations and support for an effective technical assistance program.'
There are many different examples. It depends on the circumstances just what sort of approach we have taken. What I would say, though, is that the senior executive of DFAT was determined that these indicators be forward looking but realistic and achievable. A great deal of attention went into their development. In fact, I should say for complete clarity that the framework we developed provided in the end two types of effectiveness indicators. We also decided—and this is there on the first page of that larger document—that we really had to come up with more general effectiveness indicators to capture core aspects of our work that are undertaken by many different areas of the department. These would be, for example, bilateral consultations on political and security issues. This is something that is done across the department; it is not specific to one particular area. Other examples are trade representations and consultations with industry. There is a generic category of effectiveness indicators at the top there for each outcome.
I should say that, in the end, we decided to go further than required under the guidelines to develop indicators which show, in what we hope is a meaningful way, just how we plan to contribute to the three planned outcomes. We know this has made us a bit different from other agencies, but the intention was to stay within the guidelines while presenting to parliament meaningful information about our core business. In our dealings with DOFA, it was clear that we were both working on the basis that we knew our own business best and that we were therefore in the best position to tailor the requirements to our own circumstances.
Finally, we also know that the Senate has a keen interest in scrutinising DFAT's delivery of its corporate services and that, in keeping with the focus on outputs under accrual budgeting, the important work undertaken by areas of our department which produce so-called enabling services—for example, our corporate management division, our executive branch and our passports and securities division, with the emphasis on security—is not recorded in the framework. We provided to the Senate Foreign Affairs, Defence and Trade Committee a list of enabling services delivered by the department, and they appear on the very last page of this smaller handout. That was originally a list that was developed for internal purposes, but it ended up being a reasonably useful platform for questions at our Senate estimates hearings about our corporate services. The last thing I would say is that we are working to ensure that, in developing the annual report for 1999-2000, we addressed the performance information framework in our PBS while also meeting the Senate's interest in scrutinising the delivery of our corporate services.
CHAIR —We might quickly go around the agencies again in turn and see if there are comments each one has about the outcome/output framework and the performance indicators. We will start off with the Senate.
Mr O'KEEFFE —In the Department of the Senate, we did not have particular difficulty in identifying an outcome/output structure for the purposes of the PBS because we had already—as I imagine many other departments had done—gone through a similar process in the development of a corporate plan. The whole area of corporate planning dovetails, in a
conceptual sense, very neatly with an outcome based accrual budgeting structure. So our outcome/output structure in a sense arrived very naturally for us. I think it arrived very naturally for most of the parliamentary departments in a very simple structure of serving the Senate chamber, serving its committees, serving senators' ancillary needs and educating the public, all for the purpose of supporting an effective house of the Commonwealth parliament.
I am a little bit surprised, and to some extent a little bit worried, at what DFAT has done in terms of elevating the threshold for all the rest of us. Perhaps it reflects your experience with estimates committees and the Senate scrutiny of your activities but, to have such a multilayered set of performance indicators is, I find—admittedly coming from a smaller agency—fairly intimidating. To go from these sorts of milestones down to what I regard as the required performance indicators that DOFA has specified in terms of timeliness, quality, quantity and cost is fairly intimidating. I would not be surprised if senators found it just a little bit intimidating. It also does not lend itself particularly to diagrammatic analysis, which is perhaps the best way to present some of this material in the first instance for senators who are completely new to the development of performance indicators.
In the Senate's case, ours is a much smaller department with much smaller structures entirely. But when the time comes to write up an annual report in terms of these kinds of milestones and indicators, I pity your officers and your program managers and the extent to which they will be driven by this as an end in itself rather than by performance and service delivery as the end in itself. I do not mean to be too critical—because you have obviously done a lot of work; a lot of sophisticated work has gone into this—but I think in this entire process we need to be very careful that this kind of thing, and reporting on it, does not become the end in itself. It is the service delivery and the quality of that service delivery to our clients that is the end in itself.
Mr CORCORAN —I would like to raise two things. One is on the question of meaningful performance information. I note Senator Hogg's constructive criticism of some of our performance indicators and I acknowledge that Defence has quite some way to go in developing relevant and meaningful performance indicators. Secondly, in relation to the classified nature of some of that performance information, if the committee were to recommend that Senate standing orders be amended to allow in camera or closed hearings at Senate estimates—and this is an issue that came up in estimates last week—Defence stands ready to justify its performance for that year.
Ms O'BRIEN —The Audit Office experience in establishing our own outputs and outcomes would be very similar to the experience of the Department of the Senate, in that we found that they flowed fairly nicely from our earlier work on corporate planning within our office.
I will address the wider issue of outputs and outcomes within the public sector and the Audit Office's role in relation to these, which I understand was raised this morning. We are obviously aware of the work that our state counterparts have conducted in the past couple of years in relation to outputs/outcomes performance information. We are very well aware of the experiences that they have had and the difficulties in auditing information which is really at a transitional stage of development. We would obviously see we had a role in auditing that information in the future. But, as with the way we dealt with the auditing of the
Commonwealth's whole of government consolidated financial statements, we would prefer to see agencies have the opportunity to get that information up to the expected standard, so we would see that there might be some transitional time before agencies were able to provide Audit with information of a suitable quality to be audited.
Dr WHITNEY —We faced a challenge in relation to a number of our outcomes in that they depend not only on the work of the department but on a range of other players, state authorities and non-government organisations in some cases. In relation to education and training, the outcomes can also depend on a range of other factors in the economic, et cetera, environment—in some ways, perhaps, a similar sort of fluid situation to that faced by the Department of Foreign Affairs and Trade.
We therefore tried in our portfolio budget statement to give performance information that related particularly to the effectiveness in achieving outcomes and also in terms of the administered items and the departmental outputs, but we tried to indicate how the performance information provided linked to the strategic priorities of the portfolio. In that way we perhaps approximated to the Department of Foreign Affairs and Trade milestones, although we did not call them that, but tried to set out what progress could be made over a short period of time to achieve the priorities for the Commonwealth for the portfolio, even though some of the outcomes were much longer term and were to be influenced by a range of other players. Related to that is something we will be facing in the preparation of the annual report for 1999-2000: that not only will the performance depend on a range of other players but, at a more practical level, collecting some of the performance information will depend on input from a range of other players. So we will have to see how efficient we can be about that.
Another feature that we faced was that a number of the programs operate on a calendar year rather than on a financial year. So the performance information that is provided varies depending on the area. That may have caused some difficulty for senators in reading it for the first time. Overall, an issue that we faced was the level of detail that would be relevant to senators. Like others, we will be learning on the basis of experience whether the information that we have provided is at the appropriate level or whether more or, in some cases, less would have been more helpful.
Mr JOHNSTON —We went in expecting not to have the same problems of other organisations because of simplicity and size and because we have had costing models which have given us information since 1992. We had revised those last financial year. We found, in fact, when it came to the crunch of doing the final PBS with some variations in guidance over time, that even those upgraded costing models were not satisfactory. We are going to have to refine those further in the new year, which is why we appreciate the commitment from Finance to get the guidelines out earlier because whilst ours are smaller than others, they are significant in terms of scale.
We also found problems in some activities where we can see that, as a result of technological change where we are trying to improve access to senators and members to resources on a 24-hour self-help basis, they are going to change from one of our outputs to another. We were concerned that we would be seen to be distorting comparative information over time and how we were going to record that. So we tried to simplify that as much as
possible. The other thing we did, which we felt was required of us, was quote unit prices for all of our outputs. In fact, we were somewhat concerned when our researchers reported back to us, having had a look at all the PBS across the area, that the almost universal tendency had been to quote a global price for an output rather than unit prices for the components or the major components of the output.
Mr Chairman, I want to clarify a matter which I had raised earlier in terms of the extrinsic aids to interpretation, which I felt was an important issue. The comment made by Finance was factually correct: there is a reference to the PBS. Unfortunately, the reference to the PBS is purely under administered items, so it is focused on that. In our area, we are essentially departmental items. Also, of course, the extrinsic aid could be useful for special appropriations as well. So we would be suggesting that a broader reference be made in future appropriation bills.
CHAIR —Thank you, Mr Johnston.
Mr DAVIS —When we developed our outcomes-outputs framework, we tried to have a fundamental think about what the portfolio was on about and what the outputs were that we were delivering and the achievements for the community in terms of outcomes. So, having gone through a fairly lengthy process of internal consultation and thinking, we came up with two outcomes and seven outputs.
One of the issues we struggled with during the definition of outputs, in particular, was this issue of policy advice and ministerial services, where I think a whole range of portfolios have identified that as a separate output. Immigration came to the view that it did not see ministerial services and policy advice as separate outputs, because essentially policy advice and ministerial services are part and parcel of delivering visas, for example, and our output is visas. We have an output of visas. We have policy and ministerial services supporting visa processes. We would do similar things on translating and interpreting services. So we consider ministerial services and policy advice as part of our outputs. Many others have not; they have separated them. So I guess there is an issue there of consistency.
We also adopted a little of the Foreign Affairs approach—they call them `sub-outputs'; we call them `output components'—because we found that when we defined our outputs our performance information needed to go one level down in terms of defining what was the quality, quantity and timeliness associated with a visitor visa as opposed to a permanent residents visa, for example. One takes an hour or half an hour; the other takes nine months. So if you define your performance measure as a visa, it does not mean very much. So we defined our performance indicators and measures one level down from the outputs for that reason, but left our finances at the output level. So we are sort of a bit of a hybrid as well.
I have two other issues. On performance information, from my perspective, a lot of the early guidance from DOFA was focused on output measurement and performance. I think the emphasis in the PBS is on outcomes and the need for performance measurement on administered items is greater than agencies were led to believe earlier. So I think we and other agencies may need to put more effort—let me put it that way—into looking at the effectiveness measures for our administered items and our outcomes as opposed to just simply our quality, timeliness and measures on our outputs.
Finally, the other initiative that Immigration participated in in the budget process which assisted us was that we did end up negotiating a purchasing agreement for one of our outcomes with the Department of Finance and Administration. The rigour of going through a process of agreeing to output prices at a unit price level for processing visas or locating illegal immigrants in the community or removing them from the country, et cetera, puts a lot more rigour into the definition of your framework. We found, as part of doing that for one of our outcomes, that our output components, in particular, below the output level, changed in light of the rigour and the scrutiny that a purchasing agreement process and a negotiation process put on it. So I would not be in the least bit surprised to see frameworks evolving or changing over time once issues associated with benchmarking and purchasing agreements become more general in the process of that greater scrutiny on the prices and the unit prices.
Mr BRITT —The AFP has five outcomes, 19 output groups and about 40 outputs. I alluded earlier to the fact that we believe we need to reduce the number of outcomes we have. While we would not be reducing our accountability to the parliament, we will be taking that issue up over the next 12 months. In relation to performance measures, we actually have a question on notice with our estimates committee to do with the absence of targets appearing, and we are quite happy to provide the answer we give to that committee to this committee.
With regard to performance measures in general, I think we have to put this into perspective. We are looking at about a five-year project here, if we are serious about it at all, and there has to be a little patience with agencies so that they can build up their systems and we can get consistency across government about what level of information is required from different agencies.
Mr BUCKPITT —Customs anticipated going into this approach that there would be a period of some years before the output-outcome structure would really shake down, and so we deliberately set out to have a simpler rather than a more complex structure. With that in mind, we had one outcome and five outputs. We also considered what was the best way to go with performance measures. Whilst I think the approach taken by the Department of Foreign Affairs and Trade is excellent, I really do think it is a case of horses for courses, and I think that was mentioned.
In our own case, being the nature of the agency that we are, it is possibly a little easier for us than for some to emphasise quantitative measures. I think each agency needs to adopt its own approach to performance measures and, not that it is being suggested, we all want to guard against some sort of fixed approach because, given the diversity amongst agencies, that would not be a good thing, I would suggest, in terms of the quality of the information that would ultimately be provided to the parliament.
The last point I would make is that I think it has been a helpful approach to have this extra emphasis on performance information, not just in terms of the information we are providing to the Senate but already within our own organisation there is a much greater emphasis on internal management reporting. I suspect it will take a while for this to happen throughout the service, but within our own agency there is already a great change taking place in thinking about management reporting and bringing this sort of data into a monthly collection. That poses a whole series of problems for us in terms of the timeliness of data
collections and so on, and I think it will take us a couple of years before we can really get the data to internal managers at the rate at which we would like them to have it. But I think it is certainly having a very useful impact within the organisation as well as externally.
Mr HINE —Like Customs, the Attorney-General's Department see this as being an integral part of our internal reporting process, and therefore it will take some time to work through. Because of the nature of the department, we have two outcomes. Against each of those outcomes we have a number of output groups, and then under the output groups we have specific outputs at length. So we have very much a hierarchical structure similar to our colleagues in the Department of Foreign Affairs and Trade. Those were as a result of intensive internal negotiations and discussions, because they do not really align with our existing organisational structure. That, in itself, causes cultural changes within an organisation.
We have performance measures for each of the specific outputs, and those performance measures will be reviewed as a consequence of some issues raised at our appearance before the estimates hearings. Also, in terms of achieving some of those performance measures, some will be influenced by external agencies. Like our colleagues from DETYA, we will not be in total control of whether we do meet those targets. That is a critical issue as well in terms of developing information that can be used for assessing performances. In some cases you will not be in control of the outcome but you will be an integral player in achieving overall government outcomes.
That is where we are with that. We are working through the process. It will require significant structural change to the way we use our information data at the moment. As others have said, this process is coming on at the same time as we are trying to implement new accounting systems, management information systems and everything else, so we will need a little bit of breathing space. But the concepts are totally supported by our department.
CHAIR —Would you like another go at DFAT?
Mr KEMISH —Very briefly, if I may. I would just like to say that I do appreciate Mr O'Keeffe's comments and that I agree wholeheartedly with ACS that this is a matter for horses for courses. Personally, I would suggest that there probably needs to be acceptance that the approach DFAT have taken is possible for an organisation of our size and scope. Our only intention was in meeting what we understood to be parliamentary interest in scrutinising our core work. As I said, we do not regard it as perfect, and we will be adjusting it according to feedback.
I should also emphasise, though, that our department has always had this level of detail in its PBS performance indicators and has always reported at that level of detail in the annual report. So that will not be a particular shock to our officers, although I would say that there is probably some additional work involved as we move through the transition period.
Mr BUTT —Essentially, it is no great problem for Austrade because we always had a set of key performance indicators and key activity indicators and these have really just expanded upon them. We had a look at our core business and broke it down into four outcomes, one of which was administered. That was fairly easy to handle. We got audit agreement that a
very small cost of administration go in that, so that makes it much easier to look after the whole of the administered item.
In relation to outputs, basically in most places we had one output per outcome, but in one case we had four. The only tricky one we have is where we do some work on behalf of others. For example, where we are a sole representative of a post overseas we carry out some functions on behalf of DFAT and DIMA. So we have to take account of how they measure their performance in those areas as well.
One of the tricks we learnt when we were slightly expanding on our KPIs and KAIs and tying them down to outcome was that you have to be very careful with your definitions. In our case we can have six overseas regions, and one was attempting to count something entirely differently from the way somebody else was and it was just not making sense. So it is a matter of clearly defining it to your staff, and they have to feel ownership of what the measures are as well.
Indeed, we are currently involved in this. We have some systems that measure most of these performance measures, but the trick is that we do not want to get too involved in taking our people off marketing, which is why they are out there at the sharp end, and on to counting things that they actually move around on desks or whatever. We are trying to automate that as much as possible, but we think that that will give us consistency over time as well.
In some of the measures, I would just point out, some data is not available until year end. For example, we have always had this indicator called export impact which we have independently audited every year. I would be just a little concerned if somebody started asking for performance measures on a quarterly basis, et cetera, because there would be a limited amount that we could give.
Mr MARTIN —As my colleague Mr Harper said before, this is the second year the Department of Transport and Regional Services has gone down this path. Last year it was more of a simple budget process, so to speak—and I think most people in this room know what I am talking about. This year it was part of a comprehensive business planning process leading up to the development of the budget.
I think there are some fundamental issues in the framework in relation to the distinction between outputs and administered items. They do have very real differences in relation to responsibility and accountability. We have already seen an example here today where someone referred to one of our programs in the context of the departmental performance indicators rather than the administered performance indicators.
I think we have all got a long way to go with some of our performance indicators. In looking at examples in the PBSs, you can see that a lot of departments have developed performance indicators but not necessarily planned targets to justify their resourcing levels. We have come a long way since last year, but we are also looking forward to the feedback from our own Senate committee into the usefulness of those performance indicators, or those performance targets.
We believe that the focus over the development was more on outcomes than outputs. It was actually proposed that all our outputs and administered items be on one page. We have put them on about 40 pages and we think that is far more useful. Building on that, the budget development process did not really focus on any individual outputs and administered items this year, so what we have is an accountability process rather than a decision making process. As this evolves into next year, when government does base more of its decisions on individual outputs and administered items, it will become a more effective framework rather than one we fear. Being in our second year, we are now heading into the stage of doing business plans for next year which now take a top-down approach rather than a bottom-up approach. We hope to link those business plans to our PBS.
Mr McKINLAY —The main challenge that we faced was to maintain comparability across quite a range of agencies with a diverse set of responsibilities ranging from managing the Great Barrier Reef Marine Park to developing and implementing national policies, such as greenhouse policies. Another challenge was to attempt to maintain links between the output/outcome structure and the organisational structure—a quite important thing that an organisation can easily lose sight of. Once you have lost sight of it, or lost it altogether, the question of who is responsible for what becomes an issue. Finally, we had to contain the risk of proliferation of the number of outputs. If you have a proliferation of outputs, it simply dilutes the information and makes it less useful.
Mr KERR —One interesting point I note with our outcome/output structure, which probably reflects our orientation, is that ours is organised around the administered items, not around the departmental items. Being a very new department, having been completely changed in the administrative orders last October, has meant that we have been able to determine our outcome/output structure first and then organise the department around it. That has given us a fairly huge advantage. It means we are already operating on that structure, and have been for about three months.
The other point I would like to make—and it might be relevant for other agencies in future—is that, operating in a purchaser/provider environment, you do have to be very careful when setting your performance criteria that you are selecting them for the right body, that Family and Community Services is selecting performance indicators relevant to its role and not those relevant to the service provider's role, and vice versa.
Mr BARTOS —I would like to make some comments in relation to DOFA's own outcomes and outputs structure because we did put a great deal of thought into it. We have moved to three outcomes, which we also think went a long way to meeting Senator Hogg's concerns about readability. For example, we went from a 10-line description of the previous activities for which I am responsible in the Budget Group, which if I read out I am sure would put the entire room to sleep, to a simple outcome of sustainable government finances. We define what sustainable government finances mean, and give quantified indicators as to how we are going to measure that in terms of maintaining surpluses over the forward estimates period while economic growth prospects remain sound, of halving the ratio of Commonwealth general government net debt to GDP, and so on.
We then indicate how our outputs are going to contribute to the achievement of that outcome. Again, for each of the outputs we define both quantity and quality in quantitative
terms, and we will be reporting against clear numerical indicators whether or not we have met those. That applies to each of the outcomes for which we are responsible: sustainable government finances, improved and more efficient government operations, and efficiently functioning parliament.
Our organisational structure matches the output groups, that is, the budget, public sector financial management, property and contract management, government information, and ministerial and parliamentary services. That has been discussed at various occasions this morning. Certainly our experience is that making the organisational structure line up with the outputs that we are delivering enhances accountability. It means that we know clearly who is responsible for delivering what. We know that in my case, for example, I am responsible for demonstrating to this committee when we come under scrutiny that the outputs that I have delivered do meet our quantity and quality measures and have contributed to sustainable government finances. That is a strong discipline, but one that I think is important that we place ourselves under.
CHAIR —Thank you very much. One point that did arise from the committee's deliberations was for agencies, when they come to reporting, to comment on the extent to which external factors influenced the outputs and the outcomes. We would like to know that when it comes to reporting time.
It is time to wind up. I thank each and every one of you for making a contribution today. It has been a very worthwhile process for the committee. I would like to remind you that the committee looks forward to submissions from you following today. We would like submissions by the 16th of next month, so there is almost a month for them to come through to us. Thank you once again for your contributions. We look forward to the next round of inputs in this process. Thank you, Secretary, and thank you, Hansard.
Committee adjourned at 3.36 p.m.