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More Than Ever Before, Financial Capability is a Core Skill for Public Sector Managers

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Kevin P Riley
June 4, 2020

Proper use of public resources

Public sector finance legislation typically requires project, policy and program managers to ensure their decisions demonstrate the proper use of public resources. In the Commonwealth of Australia, proper use of public resources requires managers to demonstrate:

  • Efficiency – proposed commitments of public resources are efficient when they represent the achievement of the best value-for-money. This will include quality, timeliness, risk and determining the most suitable means of obtaining the intended objectives, results and outcomes.
  • Effectiveness – proposed commitments of public resources are effective when they achieve the intended objectives, results and outcomes.
  • Economy – proposed commitments of public resources are economical when they avoid waste and represent the most appropriate use of resources and costs for delivering the intended objectives, results and outcomes.
  • Ethics – proposed commitments of public resources are ethical when they demonstrate honesty, integrity, probity, diligence, fairness and consistency. Ethics will also consider whether the proposed commitment includes perceived or actual conflicts of interests or the improper use of information or an individual’s position.

Historically, the proper use of resources has focused on decisions about incurring expenses and expenditures, often referred to as direct funding.

Impact of alternative financial arrangements

A recent Australian Government Parliamentary Budget Office (PBO) report, Alternative Financing of Government Policies: Understanding the fiscal costs and risks of loans, equity injections and guarantees, Report 01/2020, highlights the increasing use of alternative, often more complex financial arrangements, for policies and programs and the flow-on implications for public sector managers.

The PBO has identified that public policy decisions are increasingly using:

  • Equity injections – the government invests in a business and then owns all or part of that business. Examples include injections of equity in government companies building transport, high-speed broadband, energy or other infrastructure.
  • Loan arrangements – a loan issued by the government, which is often offered at conditions more favorable than would be offered commercially and repayments may be contingent on income or some other factors. Examples include income contingent loans for higher education or vocational studies, agricultural and primary producers for drought or flood relief.
  • Guarantees – the government agrees to assume the debt or performance obligations of another party in the instance of default. Examples include home loan guarantees, bank deposit guarantees or aged-care accommodation guarantees.

These alternative financing arrangements have featured in many government’s responses to the economic impacts of the coronavirus (COVID-19).

A major implication of these more complex, alternative financial arrangements is that managers need to demonstrate a higher level of financial literacy when assessing and recommending these policy responses, particularly when these responses also need to represent a proper use of public resources, and typically, because of their nature, have a longer timeframe for implementation.

The implications of more complex, alternative financial arrangements will require more advanced financial capability than a general understanding of expenses and expenditures. To provide comprehensive and accurate advice to government, managers will need to:

  • Possess the financial capability to identify and manage balance sheet asset and liability transactions.
  • Be alert to the budget impacts of valuation assumptions and methodologies.
  • Recognize off-balance sheet items and their associated financial risks.

The PBO report identifies that, in the Australian government context, these complex, alternative financing arrangements are having an increasing impact on the Budget bottom line.

As an example, diagram 1 below shows that in infrastructure project funding, alternative financing arrangements between 2007–08 and 2016–17, averaged around 5% total annual infrastructure investment. From 2017–18 to the end of the 2019–20 budget forward estimates period in 2022–23, the proportion is set to average 20% of total annual infrastructure investment.

Diagram 1: Proportion of infrastructure investment from direct funding and alternative financing arrangements

There are sound policy reasons for using alternative financing arrangements to fund government policies:

  • Income-contingent student loans, for example, recognize that there are both individual and community benefits to higher and vocational education.
  • Infrastructure projects may be too large or risky for private sector investors, or are required to enhance competition or are for broader social or public benefits.

When we do use these complex, alternative financing arrangements, we also need to ensure public sector managers can analyze, assess and make recommendations on the proper use of public resources that involve these complex, alternative financing arrangements. This requires an investment in financial knowledge and skill – capability.

Managers will need the financial capability to demonstrate:

  • Awareness of complex, alternative financing arrangements within project, policy, and program design.
  • Knowledge and skills to read and act on balance sheet and off-balance sheet financial information, including transactions and revaluations.
  • Appreciation of movements in discount rates on asset and liability valuations.
  • Ability to budget and forecast future financial scenarios that may involve asset or liability revaluations and the flow-on effect to Budget bottom-lines.

A commitment to enhancing levels of public sector financial capability is a direct requirement of increasingly utilizing complex, alternative financial arrangements for public policy design and delivery. By making this commitment the legislative requirement for the proper use and management of public resources will be enhanced and government will be better advised.

Author: Kevin P Riley is the Managing Partner of GPA Partners, a Canberra based firm advising on governance, performance and accountability matters. Kevin was born in Warwick, R.I. and continues to follow U.S. governance arrangements closely. Kevin is a Fellow with both CAANZ and CPA Australia and is a Qualified Accountant with the UK based CIPFA. Kevin is a National Councillor of the Institute of Public Administration Australia Inc. Kevin can be contacted by email at [email protected]

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The American Society for Public Administration is the largest and most prominent professional association for public administration. It is dedicated to advancing the art, science, teaching and practice of public and non-profit administration.

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