PUBLIC SECTOR ACCOUNTING

AND FINANCE
AC403 – LECTURE 7
PUBLIC SECTOR PERFORMANCE MEASUREMENT

University of Zimbabwe - Department of Accountancy - AC403 October 2017 1

 PUBLIC SECTOR PERFORMANCE MEASUREMENT

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 PUBLIC SECTOR PERFORMANCE MEASUREMENT
Topics to be covered
 What is performance measurement
 Performance measurement challenges in the public sector
 How to measure performance in the public sector

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 PUBLIC SECTOR PERFORMANCE MEASUREMENT

What is performance measurement?

 Performance measurement is generally defined as regular measurement of
outcomes and results, which generates reliable data on the effectiveness and
efficiency of programs.

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 PUBLIC SECTOR PERFORMANCE MEASUREMENT
Performance measurement -
-quotes specific to public sector?
I do believe
that there is a systematic,
pervasive, though possibly not
deliberate, ignorance of the Measuring performance
critical value and importance of has long been recognised
good accounting to governments
as necessary for improving
(IFAC CEO, 2010)
the effectiveness and
efficiency of the public
Sector. (OECD 2011)
Governments, like
companies, need timely
and accurate financial
information to monitor
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and manage their
performance (IFAC,2009)
 PUBLIC SECTOR PERFORMANCE MEASUREMENT
PURPOSE?
 Measuring and reporting on performance demonstrates accountability for public
spending and links government activities and services with results for citizens.
 It also serves as an important source of information for decision-making useful to
legislative assemblies, citizen groups, senior managers, central agencies, clients,
partners, and program managers and staff
 Spending should be evaluated regularly to ensure that there is reliable,
evidenced-based information to assess if government programs are achieving
their intended results
 In addition, financial pressures and cost cutting measures have put increased
scrutiny on the use of public funds and often mean that government is expected
to do more with less.
 In this context, rigorous performance measurement and evaluation become an
integral tool for public sector managers.
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 PUBLIC SECTOR PERFORMANCE MEASUREMENT
Key Elements?
 Reporting frameworks
 supporting frameworks to guide the ongoing collection, monitoring, analysis
and reporting of performance data
 Appropriate key performance indicators to support the frameworks by
collecting relevant information for decision-making and analysis.
 Systems, processes and procedures
 Underlying all performance measurement are systems, processes and
procedures.
 These are essential for ensuring that data is collected to support KPIs and
then used for accountability and decision-making.
 Presentation and reporting performance information
 The true value of performance measurement and evaluation results comes from
its use in decision-making and accountability reporting
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 PUBLIC SECTOR PERFORMANCE MEASUREMENT
WHY IT MATTERS Better Data
generates
better
information

Better Improved
decision Accountabi
making -lity
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IFAC recommendations to G20, 2009

What makes performance measurement in the public sector complicated?
 Lack of a predominant profit motive and competition
 Private sector organisations can relatively easily determine where to invest effort &
resources to maximise overall results (profitability) whilst the predominant
objective of public sector is to deliver services to achieve certain outcomes
 Politics – affect governance structures, state regulation thus affects performance – How?
 Govt regulation either enhances or constraints performance e.g state vs pvt hospitals
 State colleges subsidised whilst pvt sector colleges are not – measurement difficult!
 Given the role of government in public sector, long-term organisational objectives
are sometimes sacrificed for short-term political gains
 Conflict between political agenda and service delivery agenda
 Complicated delivery chains and multiple stakeholders – cascading
information/activities/decisions from exec level – national level – provincial level to local
level
 The public may have higher expectations of public sector vs commercial organisations.
 A decision to close a local hospital in an effort to save costs, for example,
University of Zimbabwe - Department of Accountancy - AC403 October 2017
is likely
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to
be less acceptable to the public than the closure of a factory for the same reason
What makes performance measurement in the public sector complicated (cont)?
 Unclear cause and effect relationships –
 objectives affected by different issues cutting across diff programmes & ministries
 effect of changing any single factor cannot be easily isolated
 Delayed impacts – progress and achievement of objectives usually takes years
 Attitudes towards accountability and transparency –
 corruption, nepotism, poor governance or a lack of openness
 resist scrutiny of politically motivated, rather than evidence-based decisions
 Public sector has little control over their income
 Funds influenced by public opinion, government aspirations, skill of leaders, the
current state of the public finances overall and the economic climate
 Different stakeholders hold different expectations of public sector organisations.
 For example, parents, employers, the community at large and central government
might require different things from the education sector , even differences within
subgroups of parents, priorities may change over time
 Financial constraints
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 borrowing power in pvt sector generally limited by managerial prudence,
 but a local authority's ability to raise finance - subject to strict control by central govt
 PUBLIC SECTOR PERFORMANCE MEASUREMENT
Measuring outputs
 Outputs can seldom be measured in a way that is generally agreed to be
meaningful, for example:
 Are good exam results alone an adequate measure of the quality of teaching?
 Unreported crimes are not included in data used to measure the performance
of a police force.
 It is difficult to assign a monetary value to many public sector entity outputs.
 For example, in a state hospital, what is the monetary value of a hip
replacement?
 Is a hip replacement on an old aged pensioner worth more than a knee
operation on a 35 year old?
 Many public sector organisations provide services for which it is difficult to define a
cost unit for example:
 what is the cost/unit for a local fire service? This problem does exist for
commercial
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- Department of Accountancy - AC403providers but problems of performance measurement
October 2017 are11
made simple because profit can be used.
 PUBLIC SECTOR PERFORMANCE MEASUREMENT
Assessing performance
 Since most public sector organisations cannot be judged by their success against
competition nor by profitability, other methods of assessing performance have to
be used.
 Given the problems just discussed of valuing outputs in public sector entities, this led
to the creation of the 3E approach.
 Economy, efficiency and effectiveness are relevant considerations for all types of
organisations but they are particularly useful when judging the performance of
public sector
 It is important to balance all three factors (Es)

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 PUBLIC SECTOR PERFORMANCE MEASUREMENT
Assessing performance - The 3E approach.
 Economy, efficiency and effectiveness are relevant considerations for all types of
organisation but they are particularly useful when judging the performance of public
sector
 Economy - takes into consideration the overall costs and revenue e.g the
acquisition of resources of appropriate quantity and quality at minimum cost.
- takes into account the way a change in one cost or benefit can have effects on
others e.g less headcount – lower staff costs – high work pressure – high turnover
 Effectiveness - utilisation of resources such that the output of the activity achieves
the desired result
- There are usually several ways to achieve objectives, some more costly than
others.
 Efficiency - the ‘achievement of either maximum useful output from the resources
devoted to an activity or attaining desired output from the minimum resource
input.
University of Zimbabwe It therefore
- Department combines effectiveness with economy.
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Assessing performance - The 3E approach.
 The assessment of economy, efficiency and effectiveness should be a part of the
normal management process of any organisation, public or private
 Management should carry out performance reviews as a regular feature of their
control responsibilities.
 Independent assessments of performance measurement can be carried out by
'outsiders', perhaps an internal audit department, as value for money audits (VFM
audits).
 Economy, efficiency and effectiveness can be studied and measured with reference
to the following:

Inputs Process Outputs

(Economy) (Efficiency) (Effectiveness)
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 PUBLIC SECTOR PERFORMANCE MEASUREMENT
Assessing performance - The 3E approach.

Inputs Process Outputs

(Economy) (Efficiency) (Effectiveness)

Inputs: Process: Systems that process Outputs: results of an activity,

 Money the inputs measurable as the services
 Resources – For example actually produced and the
 Labour – man or  State run hospital – could be quality of the services
machine hours, the cost per successful heart For example
 Material and their cost operation.  State run hospital – the
For example  This is usually some ratio of percentage of patients
 State run hospital – price for economy and effectiveness recovering from heart
drugs in comparison with measures – relationship surgery October 2017
open market prices
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between inputs and outputs
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 PUBLIC SECTOR PERFORMANCE MEASUREMENT
Assessing performance - The 3E approach.
 Value for money is the ‘performance of an activity in such a way as to
simultaneously achieve economy, efficiency and effectiveness
 It is important to ensure that the entity is not too focussed on any one of these three
measures to the exclusion of the others
 For example Public Sector organisations have obsessed about targets with little
thought about cost or efficiency.
 When all the relevant statistics have been collected, look at them in the light of all
the three E’s so as to get an all-round picture of performance,
 but in the end, the priority or emphasis of each E over the others is a matter that
one has to decide on and hopefully the bureaucracy in the public sector system
does not clog the process

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 PUBLIC SECTOR PERFORMANCE MEASUREMENT
Assessing performance - The 3E approach.

Financial indicators to measure efficiency (process)

(i) Cost per unit of activity (eg cost per arrest/bed-night in a hospital/pupil)
(ii) Variance analysis
(iii) Comparisons with benchmark information
(iv) Cost component as a proportion of total costs (eg administration costs as a
proportion of total costs)
(v) Costs recovered as a proportion of costs incurred (eg payment received from
householders requesting collection of bulky/unusual items of refuse

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 PUBLIC SECTOR PERFORMANCE MEASUREMENT
Assessing performance - The 3E approach.

Quantitative indicators to measure effectiveness

(i) Quality of service/output measures (e.g. exam results, crime rates)
(ii) Utilisation of resources (e.g. hospital bed occupancy ratios, average class sizes)
(iii) Flexibility/speed of response (e.g. hospital waiting lists)

Qualitative indicators to measure effectiveness

(i) Workplace morale
(ii) Staff attitude to dealing with the public (e.g. can they provide the correct
information in a helpful and professional manner)
(iii) Public confidence in the service being provided (e.g. will a student be well
educated, a patient properly cared for)
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 PUBLIC SECTOR PERFORMANCE MEASUREMENT
Performance Measurement in the public sector
 In public sector organisations, an increasing volume of information on performance
and 'value for money’ is produced for internal and external use. The ways in which
performance can be measured depends very much upon which organisation is
involved
Whats the starting point?
 The first question which would need to be asked is ‘What are the aims and
objectives of the organisation?' For example, the objective of the passport office is
to issue passports to citizens timely and in an efficient manner
 The next question to ask is 'How can we tell if the organisation is meeting the
objectives?’
 Quantified information – ie information in the form of numbers – will be useful,
and this will consist mainly of output and performance measures and indicators.
 For these, targets can be set. Any individual organisational unit should have no
more
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Performance measurement in the public sector
Individual targets are likely to fall under the headings:
(a) Financial performance targets
(b) Volume of output targets
(c) Quality of service targets
(d) Efficiency targets
Example of quality targets include:
Timeliness
 Time to handle applications
 (ii) Car driving tests to be reduced to XX weeks nationally (VID)
Quality of product
 Number of print orders delivered without fault (HMSO)
 95% business complaints handled within 5 days
 85% overall customer satisfaction rating
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Performance Measurement in the public sector
 Efficiency improvements may come through reducing the cost of inputs without
reducing the quality of outputs.
 Alternatively, areas of activity affecting total costs may be reduced. Targets
related to efficiency include the following.
 Percentage reduction in price paid for purchases of stationery and paper
 Reduction in the ratio of cost of support services to total cost
 8.7% efficiency increase in the use of accommodation

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Project Appraisal in Public Sector
 In the private sector, normally projects are evaluated using the NPV , IRR etc and
this is feasible where the main objective of the project is to make profit and
maximise shareholder wealth
 Public sector has unique aspects of project appraisal. How do we measure projects
in the public sector space where the main objective is service delivery?

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 PUBLIC SECTOR PERFORMANCE MEASUREMENT
Project Appraisal in Public Sector – Social cost benefit analysis
 Social Cost Benefit Analysis (SCBA) is used for determining the attractiveness of a
proposed investment in terms of the welfare of society as a whole.
 By presenting social benefits and costs in a monetary format, SCBA not only
facilitates choices between alternative investment options but also gives an idea of
the project’s worth.
 The technique is mostly used with regard to public sector investments
 SCBA differs from financial appraisal which views an investment solely from the
perspective of individual participants, focusing on private benefits and costs and
using market prices.
 SCBA adopts a much broader approach considering both monetary and non
monetary benefits and costs, and uses prices that more accurately reflect
economic, environmental and social values
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 PUBLIC SECTOR PERFORMANCE MEASUREMENT
Project Appraisal in Public Sector – Social cost benefit analysis
 The divergence between private and social costs and benefits arises for three
reasons:
 Not all costs and benefits fall on the immediate group of individual
participants; some may have wider impacts(known as externalities).
 Not all costs and benefits have market prices
 Not all market prices reflect the true costs and benefits to society
 Once social costs and benefits have been identified and valued the methodology
for conducting a SCBA follows a similar procedure to financial appraisal.
 Whilst it is often possible to express social costs and benefits in physical units, the
biggest challenge in conducting a social SCBA is placing meaningful monetary
values on them.

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 PUBLIC SECTOR PERFORMANCE MEASUREMENT
Project Appraisal in Public Sector – Social cost benefit analysis
 Many social costs and benefits do not have a market price. However unless they
have a monetary value, it is not possible to include them in the SCBA along with
any financial benefits and costs
 For tangible social costs and benefits, it is possible to derive approximate prices.
 One method is to identify the opportunity cost of using a resource or service. The
represents the value of the next best alternative or opportunity forgone in order
to use a resource for a particular purpose.
 For example the shadow wage rate of family labour working at home (stay at
home mum) would be the wages that could have been earned working outside the
home.
 The benefits would be offset by various social costs such as additional workloads
in worker’s homes and disruption to marriage, family, kids.
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 PUBLIC SECTOR PERFORMANCE MEASUREMENT
Project Appraisal in Public Sector – Social cost benefit analysis
 For intangible social costs and benefits it is not possible to estimate monetary
values.
 Nevertheless for projects with substantial amount of intangible benefits, comparisons
can be made between the cost effectiveness of different proposals to achieve
similar outcomes.
 The technique of cost effectiveness analysis is widely used in health sector
appraisal.

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QUESTIONS?

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