CIMA knowledge fast forward
View(s):CIMA knowledge fast forward is a knowledge sharing initiative which strives to improve the conceptual clarity of the business community with regard to a core management/financial accounting or business related knowledge area, describing the concept, and explaining how it applies in practice.
Performance management: the public sector perspective
Public sector performance has been the subject of debate and dissension throughout the world, and stereotypes of lazy public sector workers, a running joke. This does not, however, take into account the complexity and diverse requirements of the public sector, compared to that of the private sector into account. In an effort to understand and combat the problems the public sector faces, in line with its mission to help people and businesses in the public and private sectors succeed, CIMA has commissioned research into the performance management problems of public sectors around the world.
Some of the factors contributing to the difficulty in managing performance in the public sector are the lack of a predominant profit motive to simplify resource allocation; politics, which affect almost everything from the very nature of the public sector to governance arrangements and the frequency and philosophy behind reform efforts; complicated delivery chains and multiple stakeholders which make it more difficult to manage activities; unclear cause and effect relationships – as the effect of changing any single factor cannot be easily isolated; delayed impacts which may not be observable for many years or even decades; and attitudes towards accountability and transparency. (CIMA, 2011)
‘Financial performance of state owned enterprises in emerging economies’, a 2012 report which examines the financial performance of state owned enterprises (SOEs) in emerging economies, with specific reference to Pakistan Rail (PR), and highlights the factors that have contributed to its poor financial performance, is one such initiative. The research findings are timely and can be applied to many public sector enterprises engaged in a battle for better performance.
The Pakistan Rail case
Analysis showed that between 2001 and 2011, there was a nominal increase of 56% in the gross earnings but a 174% increase in total working expenditure, as railways management failed to bridge the gap between revenues and expenses.
This was found to be attributable to several aspects:
Management Information System: The lack of a formal IT-based management information system at PR. All tiers of decision making were based on information gathered on an ad hoc basis. There are no formal analyses or exception reports produced to assist the top management on a day-to-day basis, making it impossible to determine whether assets and resources were being used effectively. As complexity of operations and volume of work increase, manual systems fail to deliver unless they are replaced with innovative, IT-based information systems.
Financial Reporting System: The financial accounting and reporting system of PR was introduced formally in 1940. It was a cash-based model with different sets of rules found in scattered documents and office circulars, leaving sufficient room for wrong and inconsistent application of accounting policies in different departments and between different accounting periods. This makes it very difficult to measure the financial performance of PR objectively. Finally, the study of financial statements shows that the format and contents of financial reports are not compatible with the requirements of International Financial Reporting Standards (IFRS).
Management Accounting and Financial Management Systems: To enable effective decision making, management accounting and financial management systems in an organisation should be evolved and integrated to provide timely, accurate and comprehensive information for all tiers of management. This was not the case at PR.
Inventory and Procurement Management System: There was no formal inventory classification system in place for effective control and monitoring. A large number of items were purchased without establishing their actual need. Consequently, substantial amounts of money are blocked in redundant items of stock which could be used elsewhere. This also results in non-availability of essential inventory items due to consumption of limited funds on redundant items. Study of past audit reports also revealed that, in many instances, procurements have been made at inflated prices by corrupt officials. All these practices led to rising losses in PR.
Asset Management System: No proper system existed to monitor and evaluate the maintenance and replacement schedule of various items of assets. For example, locomotives and carriages were allowed to wear out due to poor maintenance up to a point where they cannot remain operational. The result is a substantial decline in the earnings of PR on a gradual basis.
Risk Management System: Risk management has become a critical issue in all businesses. At PR, the responsibility of risk assessment and strategy formulation lay with the railway board comprising civil servants with limited knowledge of railway operations. Besides, these civil servants may be transferred too frequently on political and administrative grounds. The result is that risk management and strategy formulation is always done on an ad hoc basis with no tangible and consistent policy options.
Human Resource Management: Employees of an organisation are its most important assets because they help transform organisational goals into real achievements. A study conducted by consultants, Riaz and Co, highlighted flawed recruitment procedures at Pakistan Railways.
Internal Control Systems: PR inherited an elaborate system of internal controls as designed during the British rule of India. However, over time: the complexity of business operations; increase in volume of transactions; and non-adherence to these controls; led to the controls gradually losing their utility and efficacy. The result is substantial increase in annual financial losses at PR. Study of past audit reports corroborates these research findings.
Cultural Impact: PR is a huge, bureaucratic organisation with traditional long tiers of management and slow decision-making processes. There is also political interference in all key decisions. This situation results in two outcomes. First, slow response to the dynamics of the changing business environment. A classic example is the time consumed by official meetings. Second, some decisions may be politically motivated with serious financial consequences for PR.
Recommendations
The authors of the report made several recommendations for the improvement of PR’s performance including the development of an IT-based management information system, which is fully integrated with the costing and financial management system of this entity. This is borne out by the findings of the 2011 report on global public sector performance:
A caveat, however – according to a World Bank report in 2006, only 6% of the financial management information systems which it funded in developing countries were sustainable, the problem with most of the remainder being that they were overspecified. (CIMA, 2011)
Adoption of modern management accounting techniques was also recommended to strengthen its management accounting function. In the realm of financial management, cash budgets and cash management models may be introduced to synchronise cash receipts and expenses to overcome liquidity problems. Discounted Cash Flow Analysis (DCF) techniques, based on reliable forecasts, can improve project management issues significantly. Similarly pension costs may be rationalised by conducting an actuarial study and introducing a pension fund scheme.
The 2011 report, ‘Public sector performance: a global perspective’ invokes the need for strategic performance management, highlighting that performance management is a process, not an event. The report goes on to say, ‘It operates as a continuous cycle, needing continuous development of people, processes and services. It needs to influence behaviour by way of mechanisms such as performance budgeting, performance-related pay, benchmarking and results oriented management in general, to achieve real performance improvement.’
As CIMA President Gulzari Lal Babber stressed during his recent visit to Sri Lanka, this need for management accounting processes creates an opportunity for professionals in the field to truly add value.
The full recommendations and reports are available for download on the CIMA website at www.cimaglobal.com/Thought-leadership/.
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