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ACCRUAL OUTPUT BASED BUDGETING SYSTEMS IN AUSTRALIA

The rtietorrc-reality gap
Tyrone M. Caiiin and James Guthrie

to reaff^ft^ In

lyrone M. Carlin and James Guthrie Macquarie Graduate School of Management Macquarie University bydney, NSVv/, 2109 Australia

Routledge

Vol. 5 issue 2 2002 145-162 Public Managsmont Review ISSN 1471-9037 print/ISSN 1471-9045 online 5 2003 Taylor &.francis Ltd bttp://wvw.tandl.cc.uk/journais nOI: 10.1080/1461567032000066372

146 Public Management Review

INTRODUCTION
The past two decades have witnessed considerable changes in the manner and mode of public sector management, and in particular, public sector financial management. This has not been a uniform global experience, with some nations or jurisdictions vnthin nations adopting public sector financial manageixient techniques radically different from traditional methodologies (Jones et al. 2001a). Australia (and the various states and territories which compiris^ the federation) is an exanjple of a country whicti has Ichosen a radical rather than conservative or traditional approach to public sector financial management (English et al. 2002). This degiree of change can be interpreted in several ways. Often, technical ot process oriented changes in management techniques are represented as neutral, perhaps eVen as agnostiCj, in thej sense that they theoretically lack decision bias towards one set of outcomes (for example maintaining the public sector as the locus of considerable economic and social activity) versus another (disperstagi tnatty of the roles and functions traditionally carried out by the public sector to private sector operatives). This neutral technico-centric view of the reforms carried otit in jurifedid;ioltis such ,k% Australia pervades official normative and descriptive literature relating to the intfodwctitm of methodologies such as accrual accounting and financial reporting, capital charging, new asset valuation methodologies and accrual output based budgeting systems. However, viewed from an alternative perspective, stich as that offered by Hines (1988), accounting is a form of communication that both, represents reality and constructs that reality through the discourse and images created. That ip, acCoilntants, in choosing what to account for and vs^hen aad how to account fbr it, shapte' ao factors (e.g. society), which in turn impact on the form pf accioiit^tiftg c;ho#n. According to this approach, although accounting doefs ii()t dorpinate in the^fe, ifpffle processes, it does influence them. Therefore, ptil^lic seirtor accounting is not socially, politically or economically neutral (Broadbeflt aftd Guthrie 1992; Gittbxie 1^94). Sipiilariy, financial reporting and budgeting reforms are more than nieittral, ifechnjcal, disinterested activities (Guthrie 1998). Rather, the adoption of accrual accotjnting VbA biidgeting techniques has been part and parcel of broad based public sectot refibrjii, whfcrleby old discourse ideals and methods of management have hew gradwlly sa,peisaded by managerialism, contracting and market based activities (tftrkep akiA Gtatkrie 1993'; Alford and O'Neill 1994; Olson et al. 1998; English et al. 2002). While the material contained in this article is written in awareness of these debates, the purpose of this article is not to attempt to add to fh%. politico-critical lit^rsfture on public sector management and reform, bkt rather to adopt an analytical approacji to the subject matter. Thus, th.e key objective of this article is to shed light on the effect, in practice of the adoption of accrtial output based budgeting (hencfeforth AQfiB) in Australia. In pursuing this objective we contrast our fjEidijags about practice with the claims made ahout expected practices it) the 'ofiicial^ literature on this subject^ that is, the descriptive normative literature produced by govefnrnent centiml finartcial Sgendes

Carlin & Guthrie: Accrual output based budgeting systems in Australia 147

from a range of jurisdictions in Australia explaining the 'necessity' and 'desirability' of such reforms.' Our analysis is informed by the discrepancies we observe between the characteristics of accrual output based budgeting systems as implemented and predictions and explanations contained in normative theories about such modes of administration and resource allocation. This article is organized into five subsequent sections. In section two we explore the nature of AOBB systenis in light of some pertinent literature on budgeting regimes. In section three, a brief review of AOBB systems adopted in a variety of Australian jurisdictions is outlined. In section fo^ur we artalyse claims, which we bave classified as rhetorical in their, nature, made in relation to the role, i'^unction and benefits of AOBB systems. Subsequently, in section five these claims are contrasted against some evidence we have collected in relation to the actual operation of AO'BB systems in Australia. Finally, we offer some conclusions and thoughts relating to possible profitable future research agendas.

AOBB k m THE NATURE OF BUDOETIMG SYSTEMS

Traditionally the literature on central budgeting has focused on comparisons with practices ioternationally (Knight 1970; Ca,rderi and Wildavsky 1974; Gray et al. 1993) with emphasis on similarities and differences, as well as political institutional systems explaining these variations in practice. Other authors have focused on the form of budget documents (e.p. incremental, line items and performance) with emphasis on explaining tlie legislative intent and structure of budgets (Joyce 1997). This stream, of .literature indicates that the last fifty years has witnessed a riumber of .serious attempts. at central budget transformation wth the implementation of new procedures and processes. This was th.e case with program budgeting, management and budgeting by objectives, deficit control through 'no-fault' budgeting and balanced budgets (Schick 1966; Tyer and Willand 1997). Some have agreed that these new budget fads come and go, while 'real' budgetary battles still take place over iVhd gets how much money for y/hat programmes, and where the money will be spent (Wildavsky 1988; Jones 1997: 49). An importsint stream of central budget literature is that which examines the public policy debate .about its iniain objective (fol' example executive accountability, control, oyersight)' (Tyer and WilLand 1997), or takes .an'economic approach focusing on central economic and'fiscal management concerns. Another Stream is that literature which deals with budgetary theory vwth its emphasis on the theoretical underpinning of certain budget systems. For instance, institutional economics (Smith and Bertozzi f998), entrepreneurial activities (Lynch ajnd Lynch 1997)., behavioural (Wildavsky 1969; Jones 1997) and performance management (Lu 1998). Irrespective of the analytical or explanative approach taken to describing or viewing budgets and budgeting systems, the central public budgeting problem is able to be

148 Public Management Review

viewed generally as the process by which government funds are distributed among competing interests. In most jurisdictions, complex budget systems have developed where major actors in the process have set criteria and discourse as a means to resolve choices about allocation of funds (also 'new' policy choices). The budget process and the annual budget itself are immersed in these political processes, and indeed the technical aesthetic of the budgeting process itself is deeply enmeshed in the overlayed political structure wjiich makes use of the underlying; technical budgeting system. Though comprehension of the politics of the budgetary pi*ocesses is central to understanding budgeting, it is not a focus of this article. In order to imderstand the recent transformations taking place generally in central budgeting, the following themes have been identified (Lynch aiid Lynch 1997; 161180): budget formats and procedures are important as they do influence policy outcomes; a major feature of future budgeting is the use of performance measures which focus on outputs and outcomes; and another changing feature is the use of the currency of 'accruals' to replace more traditional public sector accounting (focused on cash measures).

In the official literature, accrual budgeting is most often not highlighted as an end in itself, but rather, as a means of shifting the emphasis of the budgetary process away from cash inputs, towards outputs and outcomes, in the hope that this will result in greater management efficiencies, and hence, better outcomes for governments and the communities they service. Irrespective of these recent alterations to perspective, it is worth noting that the traditional currency focus of the governmental budgeting process has been cash. The rationale for this phenomenon is simple. Cash is the resource extracted by governments from the household and corporate sector, and cash is, despite suggestions from some quarters to the contrary, the resource governments transform into the goods and services consumed by the public (Bland 1946). For that reason, traditionally it was appropriate that the discharge of accountability exercised, via the budgetary process should have cash as its focus (Guthrie 1998). The use of cash based budgeting was questioned in various Australian jurisdictions from the late 1980s onwards, as various pundits claimed that it was aflawedsystem, due to its inability to measure the 'full cost' of government service provision (see Officer 1993; SACA 1:994). This resulted in the movement, in some jurisdictions, towards the presentation of budgetary data, in a modified 'accrual' format. This usually involved simple transforitiation cif traditional cash based budgets to reflect non-cash items such as depreciation cbargesi, movements in inventory balances, etc. For instance, in New South Wales this had the effect of driving a vvedge between disclosed cash payments and the 'cost of services' (cash disbursements adjusted for non-cash items).

Garlin & Guthrie: Accrual output baseo budgeting systems in Australia 149

Theoretically, the recog.nition of 'fulF cost ought to inspire governments and their agencies to seek greater efficiencies in their processes and resource usage. Revelations that for many agencies, the only hint of 'accrual reporting' came with the passing of a limited number of year end adjusting journal entries, have subsequently raised questions as to whetlier tlie mere presentation of numbers in a particular format has actually changed underlying incentives and behaviour, an important point to which we return later in this article. In contrast to traditional cash based input budgeting systems, AOBB represents an attempt to transform the public budgeting process into a .system within which goveriiraents puri;;hase outputs from providers, often publicly funded government departnients. In this sense, the budget mechanism, becomes much more than a simple resource allocation system, but rather, the clearing house for a range of market and quasi market based transactions between central financial management departments, acting as principal, and a range of agent providers. I.nAO.BB systems, the object on which, the foundation of the funding decision is laid is the collection of outputs produced :by agencies. Outputs are to be conceptualized as goods or services produced, by agencies as^ a result of the expenditure of their effort and resources." The resource management process witliin tbe context of AOBB should proceed, ft'om a consideration ai the; operationial plans of the agency in terms of the production qf outputs .and achievement ,of outcom.es, to a consideration of the inputs recjuirec! to finaoce the desired operaticmal ends. This allegedly differentiates management use O't AOB,B systemis versus cash systems,, thoujrh logically,there is no reason why the use of a'cash'systeni is predicated o,n,,ignc!r'an(;e of operational ends any more than the use of an AOBB' .system is necessarily hased on a .focus on this dim,ension. While it is the case that th.e measures of total cost .constructed ij^nder both systems will differ, this does not of itself suggest a diffetential focus on matters of eperational concern. The AOBBi systenis which have developed in Australia have their lineage in eai-lier contract base<| budgeting systems which evolved in New Zealand (Robinson 2000) and the lUiiiited,l<;ipgdpm. (most pa^ticulatriy the NHS internal market model introduced in the. early 1990st) (Bartktt land. Harrison 1'9'93). Knowledge of this heritage assists in explaining, the character,,, and objectiyies of ylOBB systems. Since these systems act as much in relation to resource allocation as they do in relation to tlie provision of a market clearing infrastructure, they cannot be ariialysed within framev/orks appropriate for the assessment ,ol traditional cash based ipput budgeting systems. In. particular, it needs l;o be recognized that AOBEi systems provide an explicit mechanism for the determinaticn of the cost of providing goods and services within a public consupiption framework;, a ,stimuius. then transformed into the basis for funding agencies for the quantum of; outputs they agree to produce for governments on an annual basis. This meGhani'STO acts to support extensive market testing, outsourcing, and contraqtingi activities hy central agency 'purchasers' acting on bebalf of governments (DQFA 1998:: vii).

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ADOPTION OF AOBB SYSTEMS IN AUSTRALIA

Various governments in Australia have introduced AOBB reforms. For instance, Australian Capital Territory (ACT 1995a, 199Sb; Wearing 1997), Victoria (Victoria Treasury 1996), Western Australia (WA Treasury 1996), South Australia (SA Treasury 1997), Tasmania (Tastaania 1994), Queensland (Queendand Treasury 1997a, 1997b, 1997c) and the federal goyernment (Khan 1997; Solnyay 1997; DOFA 1998). Victorian budgets, like those of other jurisdictions with parliamentary processes modelled on the Westminster example, have traditionally been presented, managed and reported on a cash basis. Small adaptations to this traditional input based, cash calculated and line item driven approach to budgeting and reporting began to manifest themselves in the early 199Gs. For example, Victor'ia included in the 1 9 9 3 ^ Budget Paper no. 4 a series of output meastires for each department. Actua! data for 199'23 and'estimated data for 1 9 9 3 ^ were presented. This relatively rhinor step was the precursor to a more material change which occurred in 19967 in Victoria with the introduction of budget documentation containing improved dfeHnitiohs of outputs and extensive sets of performance measures in the reporting of outputs.^ A comprehensive output budgeting reporting regime was implemented from the 19989 budget period onwards. Victoi-ia's 19989 budget, and those subsequently coilstructed have been on an accrual basis includihg all parliamentary appropriations.* This accrual basis complements an output based view taken by the budgeting, ptocess of the Victorian public sector environment.^ The ACT' prepared an accrual based output budget for 19967 and 19978 with improvement in output definition and quality of perfo]*wiance measures over that period (ACTTreasqry 199Sa, l99Sb). That jurisdiction has continued with this line of i-feporting subsequently. The Commonwealth engaged in a series of trials during 19989, in which a hmited numher of agencies implemented and reported on the basis of a full accrual framework, including an accrual budget and quarterly accrual reports from 199920G0 (DOFA 1999): The ti"ial having been judged successful, the Commonwealth has now adopted a full accs'ual based management and reporting system for all agencies, tod has, like Victoria, included a capital charging reginde as an integrated element of its new budgeting and reporting model. NSIf presents accrual hudget andfinancialstatements for agencies in budget estimates (it has yet to decide on whether it will shift to an accrual appropriation). It published output measures for forty-one agencies and outcome measures for tv.'^elve agencies in 1996-7 (NSW Treasury 1996). However, since that initial flirtation, the State of New South Wales has backed away from further changes to budgetary processes or documentation, earning a reputation as a somewhat recalcitrant jurisdiction. QueemiflriJ puhlished output related data as appendices to individual agency based programme statements in the 19989 budget year, though the budget ihanagement process and overall reporting framework in that period retained an input focused flavour.

Garlin & Gtithrie: Accrual output based budgeting systems in Australia 151

Subsequently, full accrual budgeting was introduced in 19992000 (Queensland Treasury 1999). South Australia began pilot trials of output based budgeting during 19989, and moved to a full accrual output based budgeting model in 1999-^2000 (SA Treasury 1999). Ihsmaaia implemented output based accrual budget in 19992000. Western Australia's experience with output budgeting began with all new funding for tlie 1997-8financialyear .and extended to all funding in 19989. In addition, all agencies bave been expected to produce moiithlv accrual financial reports from 31 July 1998 onwards, within seven days of the end of die month. A full accrual based budget was iraplemented for 19989. Agencies are expected to provide estimated operating statements, statements of financiai .position .and cash fiow statements for 19989 to 2000-0.1 inclusive (WATreasury 1999).TheAVestern Australian AOBB model, like those of Victoria and the Commonwealth, includes a capital charging system. Though there has been, a general tlirust towards the adoption of AOBB systems in Australia (with the notable exception of the oldest and most populous jurisdiction. New South. Wales), .tliere is no sense in which a if^niforrn btidgetary management or reporting framework has been adopted Jtcx-oss Austretlia, or indeed within individual jurisdictions across, time (since the adoption of AOBB Sdeals).. R.ecentlY, it appears:that the federal government has quietly abaildo-ned its cDTOmitment to accrual budgeting. Withotit comment or remarking, the 2002 federal bydget moved away from accrualfiscalmetrics, instead reporting a cash bfisedi budget surplus of SA2.1 billion, when the acCTual based figure was a surplus of $ A200 million (Harris 20'02).

CLAIMS AB.OIJT A0B8 SYSTEMS

The key rhetorical device used in an attempt to legitimize the introduction of AOBB systems is the resort to claims that under previous budgeting regimes that the procurement of goods and services within the public sector was subject to a high degree of inefficiency, brought about by chronic market failure. This ploy is somewhat unfair, given the not uoreasDnable expectation that the objectives of a purely market driven system of resource planning and allocation roight differ extensively from th.e non-market system which existed historically. Furthermore, the cost of supporting a pure market architecture would be expected to differ from the cost of supporting a non-market system with greater accomitability a.nd transparency demands. Related .closely to the arguments set out above, a subject of ongoing interest in public sector management research in Australia (and elsewhere internationally) has been the question as to the relative efficiency or inefficiency of the public sector when compared to the private sector. Cole (1988) notes that the weight of evidence suggests that as a rule, the private sector is more 'effi'cient' tlian the public sector.^ Whether that is the case as a question of fact is immaterial fc'r the purposes of this argument. The more important question for the purposes of this article is to consider Cole's analysis of the

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reason for this phenomenon. Cole suggests that it is because the public service is not designed to be efficient (in an economic or financial sense), but rather, fair, open, objective and accountable. AUars (1997) reviews some of the legislative requirements operative on the public sector, and in particular the general government or budget dependent sector, which differentiate the public frona the private sphere. Two of the most important of these are the Administrative Decisions (Judicial Review) Act 1977 (Cth) and the Freedom of Information Act 1982 (Cth). The impact of these Commonwealth statutes (as vvell as similar state based provisions) is to impose a far,greater degree of scrutiny on decision making by public sector bodies than would be countenanced by the private sector, which has the benefit of makipg 'commercial confidentiality' arguments to protect its position in a way that public sectonagencies (andiin particular' budget dependent or largely budget dependent general goyertiment sectoi" agencies) do not.' The strong legislative pro\dsions which exist in a variety of Australian jurisdictions to permit andfenforcejadicial revieWi of admiijistrative decisions as well as pei'mit access to a wide range.of dqcum.etits generated by the public sector, mean that the prevailiiig institutional Glim.ate places a heavy emphasis op openness, fairness objectivity and accountability, an emphasis which may very well override efficiency considerations. The''desire''for'efBciency in'the.'piiblic sector on'the one hamd^ constrained by a legislatisd duty for openfeess.and fair ness, on the other bring into relief a considerable conflict at'a stratefic'leveliwithin'tfie Au'stralian public sector. How can the public service transform its efficiency to achieve 'private sector levels of efficiency', while at the.'same time maintaining the fairness and openness required of it by legislation? The reconciliation of these goals becomes exceptionally difficult beyond a certain point, the demands of the administrative review and openness process: afetjii'g: as,at kast:a;partial counterweight to efforts for efficiency enhancement (Walsh 1989). Assuming that it is not acceptable to drop efther the 'efficiency' or the 'fairiless and accountability' goal, an internally unnavigable impasse lis reached. However, there is another alternatiYe the removal, or at least the credible threat of removal, oflarge chunks'of activity,,frorti witliin the public sector sphere to the, private sphere, via competitive teridering, outscfurcing, contracting out and other related piechanisms. This solution howeverj requires, at a minimum, a set of fully or nominally functioning markets frora which to dtaw price signals from competing resource providers, including traditionalbudget funded incumbents. These markets, or more accurately,,quasi markets, would require a comprelnensive set of cost or price inputs, yet information produced by public sector agencies had t;raditionally not-given rise to detailed data relating to the cost of'produciBg iqdividijiat'gpcids er 'services. The adaption of oucjut based budgeting can be interpreted as a solution to this 'missing irtformation' problem, since budgets produced along these lines contain estimates of the quantity of 'outputs' (goods or services) to be produced by a g,oernmentj togetjier',ivith the aggregate cost of production, meaning'that unit costs ought tO' be abk to bb calculated (Cairlln'and Guthrie 200fa). Using:,the accrual

Cariin & Guthrie: Accrual output based budgeting systems in Australia 153

accounting methodology to support tlie preparation of budgetary aggregates in theory means that 'full' costs of production are taken into account, with the result that the cost data produced by such a system should be broadly comparable to cost data prepared by potential private sector or other public sector competitive contractors. Internal markets such as those supported by the adoption of the purchaser-provider model referred to above, ultimately draw their inspiration from the operation of pure, competitive markets. In such markets., transactions are contractual phenomena, in which suppliers agree to provide known quantities of .goods or services of a pre-specified quality to buyers, in exchange for a kaovs-n p>rice. A key objective of tJie implementation of the accrual output based budgeting system is that a.ll exchanges within the public sector would operate according to a simitar methodology, the suggestion being that this would improve transparency, drive down costs and ultimately result in more efficient and effective outcomes. It should be noted that the market price borne by the purchaser of goods or services and the cost of producMg the go.ods and .services on the part of the producer wall often diverge in the case of a market exchange situation. This is especially so where 'cost' does not.refer to aii im.plicit cost of capital associated with the production of any particular gO'od or service. Theoretically, it is possible,, through a process of benchmarking, to derive an 'efficient price' for a good or service, which may be lower than tlic cost of production faced by the incumbent producer. Whether in such a. set of circumstances the incumbent producer would be faced with the idecision as to whether to sell services or goods at a 'loss' or alternatively lose the frajicliise to produce has not yet been tested, though the omnipresent threat of outsourcing certainly .suggfests .that dicbotomiz.ation ot price and cost may be a powerful stimulant to. the reduction of public sector'agency cost bases over time, all otlber things being, ec{uaL Arguably th.erefore, it is the existence of this credible threat of replacement mechaaism., more tijan anything else, which lies at the heart of the expectation, on the part of AO.BB iprotagoriists, that its adoption will result in cost savings, efficiency increases and generally improved resource planning and allocation processes. Tui?ning,.froiTi tbe^maciro to the micro, it is wo^rth e.xami!ning the description O'f AOBB and its benefits offered :by y\ustralian jurisdictions'in central "agency official literature. A rep.resetatati".^e definitioja. and description is conveniently drawn from ^ the state of Queeoslan;d..The definition' of accrual output based budgeting, adopted in that jurisdictiati'is: 'fcpirocess. through 'wdiich ageacies are funded and monitored on the basis of deliyery (peirforiTiiarice.') of oiitpaits .which h^ve iieen costed on a full accrual basis' (Qucen'slfiind Treasury' 1997b: 17). It is claiiTied thit some of the benefits to Bo'w from such a system are: " " * increasetj customer focus; concentriatio.n on the supply of services/products; a theoretical and practical separ.ation of purchaser and owner; reflection.'of'full' costs as measured on an accrual basis;

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provision of clear and informed choices to buyers of goods and services; provision of a conceptually sound basis for internal and external resource allocation; focus on the production of outputs and the achievement of outcomes, leading to better management and value for money.

Thus benefits are contrasted with the outcomes offered under traditional cash based budgets which focus on inputs and processes (Guthrie 1993), in which compliance, not effective management of resources is suggested to be the key goal. Thus, the shift in budgetary focus has meant a concentration on 'outputs', 'outcomes' 'prices', 'agreements', 'flexibility in suppliers' and 'performance benchmarking', rather than the traditional focus on expenditure aggregates.

ANTICIPATED DIFFICULTIES AND SOME CONTRARY EVIDENCE

We posit that notwithstanding arguments put forward by central agency protagonists in favour of AOBB and setting out anticipated benefits to arise from the adoption of such a system, there are several key preconditions to success in practice. First, appropriate definitions of outputs and outcomes need to be agreed upon, and useful, stable performance measures and indicators must be identified and implemented to support an effective feedback mechanism. Examination of outputs, outcomes and performance indicators in actual implementations gives cause to question the degree of success with which this goal is being met, and reveals instead, a great degree of confusion about the basic mechanisms underpinning the accrual budgeting methodology. In relation to the use of performance indicators, we have reported elsewhere the immense variability in the adoption and maintenance of these in Australian AOBB implementations, and the poor quality of many indicators adopted over time by public sector agencies (Carlin and Guthrie 200fb). In relation to output and outcome specification and definition, we have also previously published data which calls into question the capacity of AOBB systems as we have observed them in implementation to deliver the types of managerial benefits discussed above. Some brief examples of the types of difficulties we have encountered include a consistent blurring of the lines between measurable outcome dfefinitions and broad brush 'vision' statements, the adoption of'definitions for 'outputs' which are actually outcomes or the faijureto specify and attenipt to measure outcomes at alL Given that it is critical that outputs and outcomes be accurately and appropriately defined and measured, this type of phenomenon is troubling indeed. Our continued review of this phenomenon suggests that no material improvements have been made over the past year. (For detailed case studies of these types of difficulties, see Cai-lin ajid Guthrie 2(S)01a.) In this article we put forward,newly collected evidence about the high state of flux in which the AOBB system implemented in Victoria (an early adopter in Australia and often

Carlin & Guthrie: Accrual output based budgeting systems in Australia

155

held up as a role model for other jurisctions) has existed over the past four years. The Victorian budget funded public sector is arranged into eight main government departments. Each of these departments has its budgetary arrangements set out and managed on an AOBB basis. In each case, annual budget docum.entation discloses the output groups used by each department as the basis for their internal budgetary management raodels. Each output group is a placeholder, within the management and budgetary framework, for a ranige of individraal outputs produced by agencies on an ongoing basis. We argue that the degree of changeability in this top level placeholder is a meaxiingful indicator of the nature of a jurisdiction's AOBB system in practice. Table 1 includes data for output group survival rates for each VictO'riati government department from 1998/9 through to 2001/2.* In. interpreting the data contained within the Table., note that the base year in which observations were taken was the 1998/9 budget year.This explains why survival rates for that year are set at 100 per cent for eacli department. Each successive year's data refer to the survival rate of observed output groups when compared against the portfolio of output groups used by each department in the base year. The Victorian public sector provides a useful forum for study of this issue because, unlike many other Australiati jurisdictions, the collection of agencies for wMch budget data is individuallyTeported has remained essentially unchanged, since tJie implementation of AOBB systems in 1998.'This means that oui" data observations are not obfuscated by material departmental portfolio shifts. Notwithtstaniding this, sotue' degree of variation in output groups would be expected over time. For example, the Department of Infrastructure exhibits a 0 per cent survival raite from base yeir plus twO' onwards. This can be largely explained by the fact that most of that department's output groups were centred on'project based work, much of vvhich matured earlv in .the data' capture period replaced with tiiew projects undertaken, .by lie. department. However, this, organizational setting is no't the norm, m..ost departments (e.g. erfecatioti, health) carrying out relatively constant operational missions over time.
TatiJe 1 : .Siirviu^i.fates in output.iroups - Victorian liEidget funded public sector 1998/9-2001/2

1998/9

1999/2000

2000/1

2001/2

Education Human services infrastructure Justice Natural resources & environment Pr^imier & cabinet State development Treaaury & finance

100 100 100 100 100 100 100 100

66 82 100 70 100 81 100 100

66 63 0 70 58 54 33 100

33 63 0 0 33 18 33 100

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In order to develop a more acute appreciation of the degree to which the AOBB framework across the Victorian budget funded public sector has experienced flux and volatility, it is possible to drill down into the data to examine the rate of change in reported individual underlying outputs. Due to space constraints and the very large amount data"^ we have gathered while conducting this highly detailed analysis, we are unable to report our fmdin,gs in detail in this.article. Hovrever, it is possible to report that the level and rate of ch^tige of individual underlying outputs has been higher, over the observation pei-iod, than the headline rates of change reported iii'Table 1. Again,.we acknowledge that some degree of change would'be expected, perhaps even necessary, as a new budgetary system is put into operation. What we find inexplicable however, is the degree of change we have observed in the underlying data, and more partictilarly, 'the i-atc df change, which has increased as we haveroLOVedfujfther away from the initial implementationj point. If change is to: be explained as the: artefact of a 'bedding down' process, we posit that tbe rate of change should have slpwed as time from initial implementation lengthened. Instead, we havei.observed the rate of ickange Increasing. All of this leads us to (question the degree to wbieh the'AOBB isystetft, at least as implemented in Victoria, can: i have been expected to have 'meaningfully" contributed, to enhanced public sector rnanagement. Second, in order fOr the micro (management) level improvements to be realized, internal I'operating-str'Uctares .must reflect an external, open orientation, implyipg that the adoption of an accrual/output/outcome budgetary stance .needs to be more than an act of externa^l 'symbolism'. Rather, the notions of accruals/outputs and outcoiiies will need to pervade management culture in the same way that the focus on availahle cash resources has been a. critical element of management'technique in previous budgetary regimes. Where :an internal management shift does not take place, there is no reteon to expect, simply because'the format and content of external buc^geti documents .changes, measurably improved orj^anizational economy^ efficiency or effectiveness. Yet some evidence which has recently come to light in Australia suggests a groi^ng concern that managers and financial document users have difficulty in even understanding; AOBB systems, let'alone.using:them to better''op'eratioual.effect (Awty 3Q03).,.Poiiqetn with budget papers is not confined to the ACT. The Commonwealth Joint Committee of Public Accounts and Afidiit recently, announced a public hearing as part of its review of tbe effectiveness of the current budget docuixientation and options for enhancing its format and content. Further evidence of interest in these issues by various jurisdictions can be found in the report of the 2001 conference of the Australasian Council of Public Accounts Committees held in Canberra (AiCPAC 2001). Third, if improved transparency and accountability is to be a result of tbe adoption of accrual based budgeting, then explicit accounting guidelines will need to be adopted and disclosed. In the case of the implementation of accrual based btidgeting in Victoria, it was argued that one result would be a greater proximity between public sector and 'conventional' accountttig procedures.'' Yet it is becoming increasingly clear that tbis alleged prox.imity is a..chimera. Face value comparability bleeds away to a profound

Cariin & Guthrie: Accrual output based budgeting systems in Australia 157

underlying lacuna between the substance of much of contemporary private sector financial reporting and that adopted by public sector entities. Again, we have previously published evidence to this effect (see, for example, Carlin 2000; but see also Barton 1999). One key area in which a profound underlying difference is evolving between public and private sector financial measurement and financial reporting practices is in the field of asset valuation. Aga.in,.the institutional factors at. play in .Australia at present have conspired to emphasize the use of historical cost accounting for non-current assets by private sector entities (especially since lie coining into force of Australian Accounting Standard AASB 1041 for periods ending Septeniber 2001. and later), w.hile in public sector settings, replacement cost methodologies dominate/Fhis has direct consequences for depreciation charges, capital charges, measures of organizational activity and efficiency such as turnover ratios and crude rate of return, measures. Further, these differences are articulated, through tiie .AOBB and .supporting, management mechanisms, into heightened cost estimates for public sector producers versus private sector alternative suppliers. We suggest that this is one plausible explaBation for the fact that many large scale outsourcing initiatives undertaken by Australian public sector agencies have not yielded the sawigs mooted at the point at vi/hich the^ decision to outsource was made. Put simply, the public .provision alternative was overcqsted relative tO' true cost, and the apparent saviHjfs available as a result of' niieving to a 'cheaper' private sector alternative more illusory than'real. Fo.urth, it has been suggested in some quarters that the notion of accrual based funding is iitsell'nti.eaningless, sfnce iJie :oHly true souixe of funds is cash, appropriated hy parliaineats: Can a parliament,appropriate an accrual (it would seem not), or in reality can it only appropriate cash? Even if accrual based appropriations were possible and m.earungfu.l (wliich is uncertain, since cash is the resource appropriated by governments from the. comrnuriity and cash is the resource which drives the service provision process), there are .questions as to the constitutionality of non-cash based appropriations, and ttiis is so^mething, wliich is'beiiig Carefully exa.Hiined'in'.a number of .jurisdictions at present. Although such state base.d constitutioniai problems could be changed via an act of parliarrtent and vTOuld not necessarily require a referendum, there is little consistency of opinion as. to which 'accrual allocation' systems would in fact he constitutional, given the traditional .parliamentary focus on .cash. FifA, if appropriations are. to take place on the bagis of'accruals' does th.is mean that agencies will be provided with' cash .funding for their expected (budgeted) depreciation. charges at tlie begiiirang of the budgetary cycle and be left to manage that cash as they se'e .fit? If th.is .is the. case, what is' th.e role and. pjurpose of separate capital allocation pro.grsimmeB., given tliat over time, the . cash required by agencies to replenish their operatijig capacity will have been provided, to them via cash funding for depreciation. The' idea iM highly' problematical, and is certaJBly no't in keeping with 'conventional' noti.ons oif depreciatioin. We insist for exariiple, in our current accounting framewo-rk.

158 Public Management Review

that depreciation is an allocation of the cost of using or consuming an asset's service potential, to the period when that loss or consumption occurred, subject to the errors inherent in the estimation procedures we employ. (Note that the use of the term measurement would not be appropriate in this situation.) Nowhere is it suggested that the depreciation charge is some type o f virtual' savings account itito which we deposit the necessary amounts for future investment. There is no necessary nexus between the act of cost allocation and new investment, simply because of the axiom of organizdtional flexibility -- an agency's current asset base may be inappropriate or unnecessary in future operating environments and while the recovery of full costs (by including an overhead allocation comprising of depreciation and other costs) is necessary t sustain aperating capacity in th.e long term, there is no necessary nexus betDveeii ftill product (testing and future investment decisions. It therefore seems almost incoTOpreljensible that in some models of accrual budgeting, cash is provided up front to agencies, even where they may have no present need or intent to invest. However, giveJi that this is under consideration in some jurisdictions, the implementation of accrual output based budgeting also poses significant questions in relation to asset recognition and valuation as well as the management of the cost of capital. Furthermore, qiaestJonsneed to be raisedabout the. effectiveness of nnecljanisms put in place to ensure that agendas expend ca^h balances according to the will and desire of parliament sometliing which was a feature of capital allocation systems under: cash based budgeting; but may not be a feature of accrual budgeting, systems as implemented. At the same time, questions need to be raised about the effectiveness of cash management at an agency ^and more particularly whole of government level. If cash transfers to agencies were made vrithout explicitly matching those transfers to current needs, an undesirable situation where excessive unu$ed cash balances comnionly .existed could arise, something which imposes significant cost on the budget sector! but does not result in any matching gain.

CONCLUSIONS AND RECOMMENOATiONS FOR THE FUTURE

Proponents of accrual output based budgeting have asserted that it is a management technology capable of substantially improving the efficiency and effectiveness of the public sector. It is claimed that one reason for this is the superior quality of performance information generated via the output based budgeting system. We have challenged these assertions on grounds both general to the adoption of AOBB systems, and specific to certain implementations in the Australian context. It appears that many aspects of the implementation of AOBB have not been fully debated, and that the change to AOBB as it currently stands in some jurisdictions is likely to be an act of symbolism rather: than a genuine change. As with many previous proposed (and implemented) shifts in public Sector managerial practice, there appears to be a significant gap between the esltant rhetoric and the reality.

Carlin & Guthrie: Accrual output based budgeting systems in Australia 159

Moves towards AOBB have been chai-acterized by a willingness to embrace change, often based on the assumption tliat pre-existing systems of accountability are in many respects inadequate. Often, there is little evidence that this is tJie case. Ironically, in the case of calls for the abandonment of traditional input based budgeting, there may be a degree of justiiication. While cash based (input) budgeting systems have been argued to be a useful tool for the dischai'ge of parliamentary accountability (which may explain the length of their survival despite other obvious shortcomings), iiey are unable to capture informati.oo relating to the entire budgeting process, including, importantly, outcomes. Outcomes may be quantitative, but in many circumstances will be qualitative (i.e. quality of healthcai'e, etc.), and hence, exceedingly difficult tO' measure w.ith tools wliidb concentrate so'lely on tb.e movements of cash. It lierefore seems strange that the next Vreat leap forward' travels no further down the route of allowing governpients and stakeholders to assess the effectiveness and efficiency of government than the tool w.hich it is destined (in the schedules of some central agencies) to replace.

This article was presented at ttse Seventh International Synaposium on Public Managem.ent, in Hong Kciiig in April 2003, where it was awarded the prize for the best refereed paper.

NOTES
1 We have labelled these mtluentlal agencies 'evangelists' in some of our earlier work, as a result of their faith based approach to the impiementation and description of reforms such as AOBB (see Carliji and Guthrie 2001a). It is of course possible to contemplate situations where outputs are produced jointly by two or more agencies. This type oi situation presents diffic:ulties lor those who argue that the implementation of AOBB systems will yield clear insights into the full cost of production, since in joint produiCtion situations^ costs measured at ari individual agency level are by definition partial, and any attempt to ^gg'^^'g^te across agencies is accomplished only through some process of cost allocation/This will require a series of assumptions about source of cost, overhead burdens and so (;n, and may not result in an economically accurate estimate being produced. As reported in sonnie of our pre'^ious published work however, the extent to which these periormance measures were actually useful, either \y\' internal operatives or IOT public cLCcountability purposes, was and remains questionable. See Carlin and Guthrie (2001b). See DepartToent of Treasury and Finance (DTF) (1$98) A Guide to tbe Budget Papers, DTF, State of Victoria, ?4elboiirne. Other complementary and radical changes to the budgeting framework adopted alongside the Introduction of the AOBB syvStem in Victoria was the implementation of a capital charging regime, a mechaillsn:! by which an implicit cost of capitai was expressly included in government cost aggregates qis reported in annual budget paper series (Carlin 2002). This suggestion has of course been contested. However, oijce government agencies begin extensive contracting with private sector organizations, they often claim the cloak of commerda.1 confidentiality to shield themselves from the types of transparency costs discussed in this article. On this point see Barton (2002).

4 5

6 7

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10 11

12

Demonstrated for example by the NSW Commissjon of Audit (1988), Victorian Commission of Audit (1993), Victorian Management Improvement Initiative (1993), South Australian Commission of Audit (1994), National Commission of Audit (1996), which are discussed in English et al (2000). All tlie data used to construct Table 1 were Arsvfn from the Victorian budget papers for each period in question. An output group was coded as surviving from one period to the next if it continued to appear in each successive set of budget doctanentation. This coding task was largely devoid of any requirement for active or subjective judgement as' to whfether survival or tjon-^sur-rival appropriately described astate of affairs. However, oi) a small .ftumber of occasions, certain descriptiojis of output grQtipS' were replaced in otie iperiod with output :group$ described in siiBiletr, but not the same language in later periods. Vi/l^ere mipor descriptive changes occurred, these were interpreted as falling within the defiriition of 'survival', otlierwise, cbanges were coded as non-stirvival. We.currently have these data arranged into seventy-two separate tables, see Carlitu (forthcoming). In tile Victorian experience, exactly what those 'conventional' procedures incltide is not clear. Does this goal mean adoptiqti of relevant Austi'alian accounting! staiidards, or perhaps the IAS framework, or even tlie much tao-fe: amorphous concept ofGAAP (and If so, whose CAAP)? For reasons of lack of space, these data are not reported here. However; Cirliii (forthcoming) includes a detailed examination of the extent to which budget sector entities, though adopting 'accrual' accounting according to a largely similar set of accotmting tiorms as those which inform and guide private sector practice, create sets of accounts based on fbndata'eiitiaJly Afferelit valuation norms than tliose foitnd in the private sector. Briefly, this yfork dernonsjfates that while,private sector organizations tend strongly towards the almost exclusive use of historical cost rnethodologies for asset valuation, pttblic sector organizations have almost exclusively adopted replacement cost values. This causes material differences in both the balance sheets and profit and loss statements of private versus public sector organizations, and renders extremely difficult any direct financial comparisons, not to mention indirect compariscms, for example relative output costs.

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