First of all, thank you for the opportunity to present to the committee today on the Public Governance, Performance and Accountability Act and related topics. We refer to the act as the “PGPA Act”, and I'll do that for ease of reference throughout.
The PGPA Act came into effect on July 1, 2014, but it represents the third significant wave of reform in our framework since the 1980s. I can elaborate more on that a bit later. The unique part of this wave is that the PGPA Act consolidates in a single piece of legislation all of the governance, performance, and accountability requirements that apply to the key areas of government activity, and it sets out a regulatory framework for national government and for the entities which comprise it.
In terms of the budget process, the PGPA Act requires “accountable authorities”—and accountable authorities are either boards or individuals, the chief executives—to prepare budget estimates in accordance with any direction issued by the finance secretary, who is the non-parliamentary head of the finance department. It doesn't, however, address specific requirements for the budget process or the parliamentary estimates process in any given year. These sorts of issues are covered in separate legislation by the Standing Orders of our Parliament, particularly of our Senate.
In the case of legislation, there's another piece of legislation that is important here, the Charter of Budget Honesty Act 1998, which in many ways is part of the second wave of broad reforms that I talked about earlier. Then, annually, we supplement that with budget process operational rules, which cabinet approves each year and which govern the operation of the budget in any given year.
The PGPA Act drew on earlier reform attempts, including two separate pieces of legislation that covered, on the one hand, departments of state and similar activities, and on the other hand, companies and other statutory bodies. It brought all those things together into a common framework.
We also took the opportunity—and government took the opportunity—to introduce new elements and requirements, not just to replicate what was already there. In particular, the act creates positive duties on all officials. An official in our context is now defined as anyone from the head of a department to an army reservist and they are covered by this framework, so there are positive duties on all officials and the heads of all public sector organizations in terms of how resources are managed.
The act has provisions that strengthen the focus on risk, on co-operation, and on performance and accountability. It's an act that goes to the questions of budgeting and resource management, but it goes to those things in the context of governance more broadly.
There are five key principles of the act. I'll briefly refer to those.
The first is that government should act and operate as a coherent whole. The second is that a uniform and consistent set of duties should apply to all resources handled by any Commonwealth entity. The third is that public sector performance goes beyond the financial to the non-financial. The fourth is that to improve performance you need to engage constructively with risk. The fifth is that the financial framework for which we are responsible, including the rules and supporting policy, should support the requirements of the government and the Parliament to discharge their responsibilities.
A key element we've been working on lately is the performance aspect of this framework. We introduced two new elements through that set of reforms: corporate plans, which are forward-looking documents for entities, and annual performance statements, which are intended to strengthen the focus on performance that entities provide. Together, they are meant to be read as the start point, and subsequently, in reporting against the annual performance statements, the end point of a full cycle.
A key element in our thinking is to see the management of the public sector as a cycle, from planning and resourcing to implementation and evaluation. Historically, we've been good at some of those things, but not at others. We're trying to use these reforms to get good at all of them.
We've also been working on a range of other things that are still to be worked through in terms of this third wave of reform. I'll briefly describe those.
We're working on our appropriations basis and how we provide resources to entities. We think we have a very complex appropriations framework, and we think there's, at the very least, a job to do to simplify and streamline appropriations. We're working on cash management—how cash is treated in our system—and in particular on ensuring that the legitimate interests of government in a whole-of-government approach to cash management are given force.
We're working on joining up, which is really about how entities and organizations in the public sector connect with each other. We find that there are no problems or issues in our policy areas these days that can reasonably and effectively be best managed within a silo. In fact, all of them require cross-entity, cross-program, and cross-jurisdiction co-operation, and our systems really haven't been designed to facilitate that.
We call our approach “differential regulation”, which is to say that if risk is fundamental to how we should think about government and how it works, then risk needs to be differentiated. Some aspects of public management are riskier than others. Some organizations have a different risk profile than others. Our regulations need to recognize that.
Very importantly, on the performance framework, as I've mentioned, given that we are a national government and have organizations spread across the country, we need to get better at providing information and guidance in a way that people can take advantage of, because we recognize that the success of any reform program is dependent on people's ability to work within the context that is provided.
I might leave it at that as the opening statement. I'm happy to go to questions.
The Charter of Budget Honesty Act is a piece of legislation passed in the 1990s that sets out the expectations that Parliament has about what documents will be provided, who will produce them and on what basis they will be provided.
For example, they specify—and this is relevant to the fact that we're now in a “caretaker” period here—that 10 days after the issuing of the writs for an election, the secretaries of the Department of Treasury and the Department of Finance will produce an economic statement and a fiscal statement, and they specify how budgets will be produced, in a very high-level sense, and ex-post reporting. For example, it is specified that we will have an annual consolidated financial statement for the whole of government and also monthly financial statements. It's a piece of legislation that does not have any punitive measures to it, but it is a statement, in many ways, of Parliament's expectations in this area.
It was introduced as part of the same wave of reform that introduced accruals to our budgeting system. Around that time—I call that the second wave—we also revised the financial legislation. The financial legislation was changed, the Charter of Budget Honesty Act was put in place, and the accruals framework was put into place.
We have an accruals framework. We sometimes hear that we've moved from an accruals framework, and we struggle to recognize ourselves in that. We produce a full set of accrual financial statements for every document we produce. We have an operating statement, a balance sheet, and a cash flow statement. We have the notes that go with that, all produced on an accrual basis.
What people are sometimes talking about is the relationship between that accrual information and the appropriation framework. We did include, in the late 1990s, reforms in terms of appropriations on a full accrual basis to agencies. That's just the departmental funding, if you like; that's the bit that helps government to run. That's not programs. That included, for example, funding for depreciation, which is an accrual concept.
As we've gone through, our experience is that some of these elements haven't really met their full intent. The inclusion of depreciation in agency financing was a key area. We've decided to centralize that, effectively, and to manage it through a normal allocation process of government. That means people only get appropriated each year for the cash they require in order to meet their capital needs.
We still retain accrual appropriations as far as they relate to, for example, leave liabilities, which is also an accrual concept, but depreciation is not included in our system anymore. I think that is the main departure from the accrual appropriation framework.
I would still say that we run accrual appropriations.
Yes. We do not fund depreciation on an accrual basis. We do fund the cash requirements in any given year through the appropriations system.
When you talk about “alignment”, I would use the language “integrated”. Our appropriations and our estimates are fully integrated, that is, we produce one set of documents, all of which get released at budget time, which for us is traditionally the start of May. We release a set of documents that covers the full forward estimates period—the four-year period—and the treasurer, in our case, introduces the annual appropriation bills, which cover the coming financial year.
The numbers in the appropriation bills are fully derived from the accrual statements and fully derived from the forward estimates system, so I would say that we are integrated, rather than aligned. Thirty years ago that wasn't the case, but it has been for some time here.
I would say that there are always issues to do with understanding complex financial statements. There are people who are very comfortable with seeing a set of financial statements, seeing notes to them, and working their way through them. There are others who come with a background that makes them perhaps more familiar with a cash flow statement, but not so familiar with a balance sheet, for example.
We always have those issues, but it was a very big transition to go from a full cash-based approach with no balance sheet in the 1997-98 budget to a full set of financial statements with a proper balance sheet in the 1999-2000 budget. The extent of the change—system, people, understanding—can't be underestimated or otherwise neglected.
We find that on the whole tend ministers to be more comfortable talking about cash, because in one sense it's an easier concept to use in a quick reference mode. It's harder to talk about debt, for example, and net debt, or assets and liabilities, or to talk about revenue versus expenses. It's harder to talk about those things, so much of the public debate, if you like, is still focused on the cash version of our numbers, which are produced as part of our statements, but the analysis often goes down into the accrual numbers.
If I may, I'll make a comment on that. I think our experience is that the value of accruals and accrual concepts is in the depth it gives to financial statements and the possibilities it opens up for financial analysis.
If I can take one very stark example, prior to going to an accrual basis, we would not have had a clear understanding of the liability attached to our public sector superannuation arrangements, which back in those days were in a fully defined benefit scheme. We now measure and value those things. Two things have happened on the back of that information, which could not have happened, I think, without that information.
The first is that we've moved systematically to close our defined benefit scheme, to manage the liability by effectively putting a lid on it. The second is that, back in the middle of the last decade, the government of the day put in place a future fund, which is effectively an accumulation of surpluses put into a special fund in order to fund the liability. It's sometimes characterized as a sovereign wealth fund, but it's actually more limited than that. Now, would government have taken such big steps on such big issues if they hadn't had some confidence that they understood what the numbers were, and if they hadn't had confidence that they were really tackling the right issue in the right way? My suspicion is no.
I think the value is in that: what it adds to analysis. Pragmatically, I think, appropriations for departments are simply about what is the most sensible way by which you get resources to the right place so that people can deliver programs, in such a way that Parliament is happy that it has discharged its responsibilities of ensuring that monies are only taken from consolidated revenue against a proper appropriation.
Again, it's a document within the executive government.
Essentially, as individual ministers develop proposals that then come to a cabinet committee for consideration, the finance department takes the lead if it's a spending thing, producing a green brief, which is two things in one. It's a summary of the proposals and it's a commentary on the proposals with recommendations, which are usually agreed to, but not always, among the three central agencies—the finance and treasury departments and the prime minister—but Finance takes the running on preparing those things.
That document goes into a cabinet committee. It is used as the agenda for cabinet consideration, or for cabinet committee consideration, but it is never intended for public consumption. It is part of the deliberative process of cabinet.
That's a very good question. Thank you.
To give some sense of it, in each budget there are the four budget papers, which, if it makes any sense, would look very wide in terms of stacking them side to side, so maybe 1,000 pages across the budget papers, plus maybe 5,000 pages of portfolio budget statements. In many ways, I think, we've seen a rapid increase in the volume of information, presented in different ways, that is made available to the public and the Parliament.
I think the problem everyone has in the system now is how to really look through the volume to look to those things that really matter. I think the process we're going through at the moment in our third wave is really about trying to tighten up relevance and get a clearer connection between bits of information. In many ways we've had information, but not the ability to follow through to say that this is what government intended, this is what Parliament approved, this is what happened, and this is the impact. We haven't been able to follow that through.
Our shift now is not so much to add to the volume of material, although that continues to happen for other reasons, but to really tighten up the relationships between different types of information to make it more useful to Parliament and to the people.
Thank you very much. I appreciate the opportunity to ask our guests a couple of questions.
You mentioned that something new is performance statements as part of budgeting and reporting. Our system has that in terms of reporting on plans and priorities, and then the departmental performance reports. I think they were considered by a previous parliamentary study to be a lot of information that doesn't have a lot of high value, so I'm interested in your approach to following through to make information more usable for Parliament. What are your ways of connecting the dollars to the programs and the priorities of the ministries? Could you talk a bit about that?
Second, I want to ask about the appropriations vote structure. I guess in our system it's called “input-based”. The input is dollars for capital, which is a vote. If the input is dollars for operations, that's a vote for a ministry. There is also advice from that previous parliamentary committee to consider changing the vote structure to give parliamentarians more control over program activities, so the vote approvals, appropriations, may be by program or purpose as opposed to the broader categories of the input of the funds. I'd like to know what the Australian mechanism is for the actual votes for appropriations.
I'll make some brief comments on that, and then maybe Mr. Suur can handle the first part of the question, briefly as well.
Under annual appropriations, we run appropriations for ordinary annual services, which basically means anything that's pre-existing, that is a normal part of keeping things ticking over, such as salaries and these sorts of things, and then we run another type of annual appropriation that covers new outcomes or other kinds of one-offs and these sorts of things. We make the split that way.
In each case our appropriations are divided by portfolio, by agency, and by outcome. This means that Parliament can always see what is the purpose, expressed in terms of an outcome, to which it is appropriating.
We have recently had a lot of High Court interest in our appropriations system, and we are finding that the requirements on specificity in our appropriations and in how Parliament approves appropriations are evolving. The High Court interpretations effectively are putting a lot more weight on legislation or legislative-type authority that specifies purposes and that sits outside the appropriations but is referred to in the appropriations. We are evolving in that respect, but in essence, Parliament sees the outcome to which an appropriation is being made in all of our bills.
I might just ask Mr. Suur to talk briefly about the performance side.
Following up on what Mr. McCauley asked you, in 2008 Australia undertook “Operation Sunlight”, out of which there were 45 recommendations. Ten were implemented, 21 were rejected, and then there are others at play. We all want to ensure that when public money is being spent there is clarity, so I need to ask you a question on the reports you provide Parliament. How simple are they to read for a non-accounting person? Even accountants have fun reading those reports, and they have to go through their debits and credits and trying to mix things up....
Number two, what sort of transparency or level of disclosure do you provide in the reports? What is allowed and what is not allowed in terms of what the government may make decisions on?
Number three, as you know, we always face problems when monies lapse in a program or a budget. People like to use those monies; they really go into a spending frenzy. How do you ensure that doesn't happen?