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									     DEPARTMENT OF THE TAOISEACH - FINANCIAL MANAGEMENT IN A REFORMED PUBLIC SERVICE




 FINANCIAL MANAGEMENT IN A REFORMED PUBLIC SERVICE




Report of the SMI Working Group on Financial Management to the SMI
                       Implementation Group
                               Bainistíocht Airgeadais I Seirbhís
                                      Phoiblí Athchóirit he

  Turascáil ón nGrúpa Oibre TBS ar Bhainistíocht Airgeadais chuig an nGrúpa Feidhmithe TBS


                                           July 1999

     Contents

     Réamhrá

     Introduction

     Multi-Annual Budgeting and other Public Expenditure Management Issues

     Delegation of Financial Authority

     Administrative Budgets

     Property Issues

     The Generic Model

     The Way Forward

     Appendix 1- Membership of Working Group

     Appendix II - Working Group Position Papers




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1. Réamhrá
1.1
In Córas Rialtais Níos Fearr rinneadh léirmheas ar bhainistíocht agus rialuithe
airgeadais mar a bhí an trát h sin i Ranna Rialtais. I dtaca le fadhbanna go nuige seo
le bainistíocht airgeadais phoiblí, chuir an tuarascáil sin iad i leith córas
neamhdhóthanach a dtuairiscíodh ina leith go raibh siad ró -lárnaithe, go raibh siad
gearrthéarmach agus gur mhó an bhaint a bhí acu le rialú ionchur ná le soláthar
éifeachtach aschur. Ba é conclúid na tuarascála ná go raibh géarghá le hathruithe
bunúsacha ar chórais airgeadais láithreacha chun tacú le próiseas an TBS agus, go
háirithe, le go mbeadh taca ann do chur chuige torth aí-bhunaithe maidir le
bainistíocht a dhéanamh ar earnáil phoiblí a oireann do riachtanais geilleagair nua -
aimseart ha iomaíoch. Is iad na gnéithe is tábhachtaí a bheadh ann sa phróiseas
athchóirit he ná (a) creat bainistíochta meántéarma caiteachais buiséid agus
caiteachais phoiblí a thabhairt isteach; (b) tuilleadh freagrachta as caiteachas a
tharmligean chuig Ranna ar leith agus freagracht as bainistíocht airgeadais a
leathadh laistigh de Ranna; (c) córas na mBuiséad Riaracháin a at hchóiriú lena
chinntiú go mbeidh nasc níos sainráite ann idir freagracht as costais acmhainní agus
baint amach aschur, spriocanna agus torthaí; agus (d) múnla 'aicmeach' a fhorbairt le
haghaidh córais fheabhsaithe bainistíochta airgeadais ar córas é a chuimseodh ní
hamháin cuntas aíocht chun críocha tuairiscithe sheachtraigh ach freisin córais ina n-
áireofaí pleanáil éifeachtach maidir le leithroinnt acmhainní, measúnú clár agus
múnlaí le haghaidh déanamh cinnt í bainisteoireachta.

1.2
Mar chuid de na socruithe foriomlána a ceadaíodh chun na tograí maidir le
hathchóiriú atá in Córas Rialtais Níos Fearr a chur chun cinn, cheap an Rialtas Grúpa
Oibre ar Bhainistíoc ht Airgeadais chun maoirseacht a dhéanamh ar fheidhmiú an
chláir oibre le haghaidh athchóiriú bainistíochta airgeadais. Bhí ionadait he sa Ghrúpa
ó Ranna Rialtais, ó shaol an ghnó, ó ghairm na cuntasóireachta, ó leasanna foirne
agus ó Oifig an Ard-Reachtaire Cuntas agus Ciste. Tá liosta in Aguis ín I de
chomhalt aí an Ghrúpa; ghníomhaigh Ard-Rúnaí na Roinne Airgeadais mar
Chat haoirleach ar an nGrúpa. Tháinig an Grúpa le chéile 22 uair idir Meán Fómhair
1996 agus Aibreán 1998. Ba é an modus operandi a bhí aige ná a iarraidh ar an
Roinn Airgeadais plé-pháipéir a scaipeadh i dtaobh na bpríomhthéamaí le haghaidh
athchóiriú mar a sainaithníodh iad in Córas Rialtais Níos Fearr. Bhí cur síos sna
páipéir sin ar ghníomhaíochtaí athchóirithe a bhí ar siúl cheana féin agus leagadh
amach iontu tuairimí na Roinne Airgeadais faoi threo an athc hóirithe sa todhchaí.
B'ionann na páipéir agus pointe tosaigh agus bonn le breithniú an ghrúpa. Ba é
toradh an bhreithnithe ná sraith páipéar seasaimh ina leagtar amach sraith
chuimsitheach tograí chun mórathrú radacach a dhéanamh ar nósanna imeachta
airgeadais láithreacha; tá fianú déanta ag an ngrúpa ar n a tograí sin. Tá liosta in
Aguisín II de na páipéir seasaimh agus tá achoimre ar na páipéir sin sna míreanna
sin ina dhiaidh seo den Tuarascáil seo. Ó tharla gur cheap an grúpa go raibh sé
tábhacht ach a chinntiú go mbeadh tacaíocht iomlán ag an gclár athchóirithe ó gach
Roinn, agus go mbeadh gach Roinn páirteach ann, d'iarr sé ar an Roinn Airgeadais
tuairimí a lorg ó Ranna agus ó Oifigí maidir leis na páipéir sin agus déantar tagairt dó
sin ag deireadh na n-achoimrí.




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1.3
Ní mór tograí an Ghrúpa Oibre ar Bhainistíocht Airgeadais a thuiscint I gcomhthéacs
fhorbairt fhoriomlán an TBS. Is iad príomhchuspóirí an TBS ná

        - Ráitis Straitéise a fhorbairt ag Ranna ar leithligh;

        - bainistíocht ghníomhaíoch laistigh de Ranna ar bhonn pleananna
        gnó ag leibhéal Rannáin/Rannóige ar pleananna iad a leanann as na
        Ráitis Straitéise Roinne faoi seach;

        - tarmligean gaolmhar feidhmeanna chuig daoine aonair agus chuig
        foirne faoin Acht um Bainistíoc ht na Seirbhíse Poiblí, 1997, agus cur i
        bhfeidhm próisis leanúnaigh maidir le tort haí oibre a bhainistiú ag
        gach leibhéal - agus sin a dhéanamh trí róil daoine a bheith níos
        soiléire, trí chuspóirí agus spriocanna gaolmhara torthaí oibre a
        leagan amach do dhaoine aonair agus d'fhoirne agus trí maoirseacht
        a dhéanamh ar dhul chun cinn.

Cé gur tograí suntasacha iontu féin iad tograí an Ghrúpa, ceapadh iad go príomha
chun a chumasú príomhghnéithe an TBS a chur i bhfeidhm agus chun taca a
thabhairt dóibh.
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1. Introduction
1.1. Delivering Better Government presented a critique of existing financial
management and controls in Government Departments. It attributed the problems
until now in the management of the public finances to inadequate systems which it
characterised as over-cent ralised, short-term in orientation and more concerned with
control of inputs than with efficient and effective delivery of outputs. It concluded that
fundamental changes in existing financial systems were urgently required to support
the SMI process and, in particular, to underpin a results -driven approach to managing
a public sector appropriate to the needs of a modern, competitive economy. The key
elements in the reform process were to be (a) the int roduction of a medium -term
budgetary and public expenditure management framework; (b) greater delegation of
responsibility for ex penditure management to line Departments and the cascading of
responsibility for financial management within Departments; (c) reforming the system
of Administrative Budgets to ensure a more explicit linkage between responsibility for
resource costs and achieving outputs, targets and results; and (d) the development of
a "generic" model for an enhanced financial management system which would
comprehend not only accounting for external reporting purposes but also systems to
facilitate effective resource allocation planning, programme evaluation and
managerial decision - making models.

1.2. As part of the overall arrangements approved for driving the reform proposals in
Delivering Better Government, the Government appointed a Working Group on
Financial Management to overs ee implement ation of the financial management
reform agenda. The Group comprised representatives from Government
Departments, the business world, the accountancy profession, staff interests and the
Office of the Comptroller and Auditor General. Appendix I lists the membership of the
Group which was chaired by the Secretary General of the Department of Finance. It
met on 22 occasions between September 1996 and April 1998. Its modus operandi
was to invite the Department of Finance to circulate discussion papers on the main
reform themes identified in Delivering Better Government. These papers described
reform activity already under way and set out Department of Finance thinking on the
direction of future reforms. The papers served as a starting point and basis for the
deliberations of the Group. The outcome is a series of position papers mapping out a
comprehensive set of proposals for radically overhauling existing financial proc edures
which have been validated by the Group. Appendix II lists the position papers which
are summarised in the following paragraphs of this Report. Because of the
importance which the Group attached to ensuring that the reform programme should
have the strong support and participation of all Departments, it requested the
Department of Finance to invite comments from Departments and Offic es on these
papers which are referred to briefly at the end of the summaries.

1.3. The proposals of the Financial Management Working Group have to be seen in
the context of the overall development of SMI. At the heart of SMI are:

                the development of Strategy Statements by individual
                 Departments;

                proactive management within Departments on the basis of
                 business plans at Division/Section level which flow from the
                 respective Department al Strategy Statements;




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                associated delegation of functions to individuals and teams
                 under the Public Servic e Management Act 1997 and the
                 putting in place of an ongoing process of managing
                 performance at all levels - through greater role clarity,
                 through setting objectives and related performance targets
                 for both individuals and teams through monitoring progress
                 on their achievement.


The Group's proposals, while significant in their own right, are designed primarily t o
enable and to underpin these central elements of SMI.

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2. Multi-Annual Budgeting (MAB) and
Other Public Expenditure Management Issues
2.1. The paper sets out the background to the new MAB system. It describes its main
aims, progress to date with its introduction and plans for its future development. The
central aim is to put in place a budgetary framework and decision-making proc ess
within which bot h Government and Depa rtments can consider overall budgetary,
taxation and expenditure priorities over a three -year period in place of the one-year
perspective which previously applied and which did not capture fully the longer-term
cost implications of Government decisions on tax and expenditure.

2.2. The development of MAB is viewed as congruent with wider managerial
changes, including those arising under the Public Service Management Act, whereby
Heads of Department now have formal responsibility for the preparation of
Departmental strategy statements and for day-to-day management of their
Departments. The medium-term focus of MAB and the emphasis on outputs and
results will be important to the success of the reform programme. It will enhance the
capacity of managers to optimise the use of resources. Three-year resource
allocation should encourage line Departments to prioritise spending, focus on
outcomes and outputs, free up resources for service developments and in general to
exercise primary responsibility for managing within approved resources. The
particular policy constraints which membership of Economic and Monetary Union
(EMU) and the expected reduction in the availability of Structural Funds post -1999
make the adoption of the discipline implicit in MAB essential.

Existing Level of Service Framework
2.3. This is the fundamental baseline analysis by reference to which the financial
envelopes for individual Departments for the 3 -year MAB period will be determined by
Government. It presents costs and revenues associated with the implementation of
existing taxation plans and the existing level of services under expenditure
programmes explicitly approved by Government. It excludes the cost of incremental
service development unless this has been approved by specific Government
decision. The key concept of "existing service levels" is used because in most cases
it is clear and allows for relatively easy agreement between all parties involved,
thereby providing a clear basis for quantification. It takes account of specific agreed
policy decisions and recognises specific difficulties in costing initiatives already
underway in particular sectors. Specifically, Finance accepts that, for agreed



developments, provision should be made for the first year and the full year cost of
implementation. Where a specific time frame and costs have not been agreed by


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Government, only the full cost of parts of programmes already begun will be included.
A Government decision will be required for second or subsequent years
developments.



High Level Consultation with Heads of Departments at critical
stages
2.4. The Group recognises the importance of achieving a shared perspective on the
broad budgetary and economic context in which expenditure decisions must
ultimately be taken by the Government. Accordingly, it endorses the proposition that
there should be regular consult ation between the Department of Finance and line
Departments on the operation and development of MAB.

Critical success factors
2.5. Successful implementation of the MAB process will require:

       Change to be led by a joint commitment at Head of Department level for the
        full three year period, involving priority allocation of time, agreed consultation
        arrangements and a mechanism to signal difficulties;

       Fairness and transparency in the system, with maximum clarity in relation to
        the definition of key concepts and acknowledgement of exceptional
        circumstances;

       A comprehensive methodology to address varied circumstances across the
        whole Civil Service.



Programme Evaluations
2.6. The Group welc omes the decision of the Government taken last year to initiate
systematic reviews of all expenditure programmes. This should assist the
development of appropriate performance parameters, including a focus on output s
and outcomes rather than inputs. The review process should als o link spending to
relevant strategic results under the broader SMI review process.



Savings
2.7. The Group attaches particular import ance to the creation of mechanisms under
MAB which will incentivise spending programme managers to achieve the maximum
possible savings within programmes. It recommends that discussions should take
place - possibly in the context of expenditure reviews - between the Department of
Finance and line Departments to establish a framework within which efficiency
savings achieved by a Department in the operation of a particular programme may as
a norm be freed up for use elsewhere by that Department, while recognising the
Government's entitlement to use savings to meet unanticipated requirements or
priority policy developments in other sectors in certain circumstanc es.

Gross v Net Spending
2.8. Departmental managers are responsible and accountable for gross expenditure
and measurement of outputs and outcomes can realistically be made only on this
basis. Where an expenditure proposal would give rise to the generation of revenue to
the State, however, it could be unduly restrictive to look solely at the gross cost in



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assessing proposals. There will be need for flexibility in these cases. Effective
measurement of outputs and outcomes can only be undertaken having regard for
both expendit ure outflows and corresponding revenues. Maximising income and
revenue should be encouraged and, where relevant, consideration should focus on
the net cost to the State. Where the gross expenditure basis gives rise to particular
difficulty due to significant EU co-financing, Finance will explore the issues arising
bilaterally with line Departments to assess the scope for a more flexible approach.

2.9. The first steps towards the int roduction of the new system were taken in the 1997
Budget, with which was published a multi-annual present ation of the major revenue
and expenditure aggregates. The expenditure dat a was in aggregate form, without a
breakdown by vote Groups. The multi-annual budgeting approach was furt her
developed in the 1998 budget with the publication of projections showing expenditure
by individual Ministerial Vote Groups for the period 1998 -2000. These projections
reflect an "existing level of service" assessment for 1999 and 2000 of the final 1998
expenditure allocations decided by the Government. The Minister said in his Budget
speech that in the context of his preparations for the 1999 budget, he would be
considering the final phase of the move to multi-annual budgeting as envisaged in
Delivering Better Government viz the det ermination of medium -term financial
envelopes by Departments. The Group understands that the Government have now
decided to proceed on this basis.



Reaction to proposals from Heads of Departments/Offices
2.10. There was concern expressed that there should be a very clear understanding
of what is meant by "existing levels of service". Some Departments expressed a
preference for the conc ept of "existing policies" and argued that the exclusion of
second and subsequent year policy development costs could undermine the rationale
of MAB.

2.11. The flexibility proposals in relation to redistribution of savings should be
operated under clear rules. It was felt that they would work only if there was major
flexibility. In general, it was felt that the proposed financial envelope system requires
some refining. The development of p erformance indic ators will be necessary to
achieve value for money, but these will be difficult to develop and over emphasis on
them may not produce worthwhile benefits.

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3. Delegation of Financial Authority
3.1. The existing statutory basis for expenditure authorisation is set out in the
Ministers and Secretaries' Act 1924, which provides that the expenditure of each
Department must be sanctioned by the Minister for Finance. Finance sanction may be
either specific, related to a once -off propos al, or a general sanction to a Department
to deal with certain programme expenditures without furt her recourse to the
Department of Finance.

Broad approach to delegation
3.2. The Department of Finance, for some time, has been pursuing an active policy of
maximum delegation of control over programme spending to line Departments, in
circumstances where the broad parameters for spending on these programmes have
been established. Programme expenditures are in very large measure already
delegated. This is in line with the recommendations in Delivering Better Government,
and is based on the Department's strategic commitment to redefine its role in
managing expenditure so that responsibility and accountability for expenditure
management is exercised effectively by line Departments within the res ources
allocated to them.


3.3. Approaches to delegation differ with the category of expendit ure under
consideration. In the case of capital expenditure, where once-off capital projects give
rise to substantial ongoing operational costs, Finance often ret ains the right to
authorise spending on a project-by-project basis. Where, however, the broad criteria
for capital programmes (eg roads) have been agreed, spending authority for
individual projects is generally delegated to line Departments within approved overall
budget allocations and subject to project appraisal guidelines. Delivering Better
Government states in relation to capital ex penditure that the "contractual
commitments for year two and three of the cycle will be restricted to 75 per cent (the
present limit is 65 per cent) and 50 per cent (there is no limit at present), respectively,
of the year one alloc ations". Percentage limits on forward commitments of capital
spending are normally specified in the formal Government decision on Estimates
each year and it is the intention to reflect the limits proposed in future decisions
approving estimates allocations.

3.4. Administrative spending is managed within the framework of three year
Administrative Budget Agreements.

The future evaluation of delegated spending authority
3.5. Remaining expenditure areas will be delegated by Finance to line Departments
to the maximum extent possible, with the intention of linking the conferred delegat ed
authority to specific undertakings in relation to programme review and delivery of
agreed outputs and outcomes. The public expenditure review process is an integral
element of this new approach.

3.6. Finance will require assurance that an expenditure management system based
on extended delegation of spending authority to line Departments will deliver control
of public expenditure, including the effective internal structures to support
accountable management by line managers required under the Public Service
Management Act.

Delegations should be appropriate to each Department's needs




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3.7. Delivering Better Government envisages dialogue between the Department of
Finance and line Departments to ensure that the widely varying nat ure, cost,
economic and social importanc e, longer-t erm implications, and the legal basis of the
various expendit ure programmes are taken fully into account when delegated
sanctions are being extended or revised.

3.8. In preparing their financial/ operating plans for implementation of Departmental
Strategy Statements, Heads of Departments must specify the extent to which
delegated authority will apply both within the Department and with agencies under its
aegis. The objective is to push the decision making process as close as possible to
the point of delivery of service, subject to the terms and conditions of relevant
sanctions.

Reaction to proposals from Heads of Departments
3.9. Departments generally welcomed the proposals for greater delegation,
particularly those Departments which have not yet been granted full delegated
spending authority in respect of their programme expenditures. The proposals are
seen as complementary to significant upgrading of organisational and management
systems to meet the needs of SMI. In some cases, the proposed extent of delegation
was seen to be in conflict with restrictions relating to Administrative Budgets. Possible
confusion between the operation of programme and administrative expenditure was
also noted. Reservations were expressed regarding the adequacy of the carry -over
limits on contractual commitments for large multi-annual capital programmes.

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4. Administrative Budgets

Background
4.1. Administrative Budgets (ABs) comprise the administrative (or running) costs of
civil service Departments/Offices. They include salaries and overtime, travel costs,
office premises expenses, office equipment, consultancy etc. They do not include the
cost of programme expenditure. Pay is by far the largest single element of ABs,
accounting for over 70% of total AB expenditure. Tot al AB expenditure of the 24
participating Departments/Offic es is about £700m a year, which is equivalent to about
5% of Non-Capital Supply Services (NCSS) expenditure.

Objectives and Main Features of AB System
4.2. The main objective of the AB system is to ensure that the level of running costs is
kept to the essential minimum. It achieves this through a new strategic approach
based on two main elements:

(i) it gives each Department a "fixed" basic annual allocation or "envelope" of funding
within which it is expected to manage its activities;

(ii) greater freedom is accorded to Departments in the way in which administrative
resources can be us ed so that they can use such flexibility to operate more efficiently.
This flexibility includes the right to switch up to 25% of a subhead to another, the right
to carry over end-year savings into the following year and the right to appoint staff up
to a certain grade without reference to Finance.

The AB system sets base financial allocations for administrative expenditure for each
participating Department/Office for year 1 of each 3 -year AB cycle, thus giving
Departments a reas onable degree of cert ainty as to the availability of resources
(subject to overall budgetary constraints) and, thereby, f acilitating a more rational,
medium-term planning approach.

User Disappointment
4.3. In the view of the Group, it is essential that the operation of the agreements,
while necessarily influenced by resource constraints and adjusted to policies set by
Government, should involve a clear and continuing recognition by those concerned
that the proc ess involved is one of partnership between the contracting parties. While
an administrative budget system does enhance the capacity of management to make
choices, it cannot insulate Departments from overall resource constraints nor prevent
overall budgetary adjustments impinging on their expectations. There is some
evidence that in the diffusion through Departments of information about the
administrative budget system, the prospect of such external factors impacting on its
operation may not have been highlight ed and a degree of disappointment
engendered when local expectations were not met in full. The Group can appreciat e
such reactions but recognises that, while adminis trative budgets once fixed should be
adhered to in all but the most pressing circumstances, any system of resource
allocation must operate against the background of changing Government policies.




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Future Operation of AB system
4.4. It is intended in the future that a more open two-way process of dialogue will take
place throughout the year in relation to management issues arising in Departments
with a view to securing a more collaborative approach to the settlement of
Administrative Budgets at the appropriate time. This dialogue will, of course, take
place within the parameters of current Government policy on Government spending
and civil service numbers. This collaborative or part ners hip process will also have the
aim of monitoring and developing the scope for even greater empowerment of civil
service managers by formal delegation of more authority and
responsibility/accountability for AB expenditure and associated outputs. The precise
form this should take will vary from Department to Department depending on local
circumstances and will in time be developed as part of the new performanc e
management system.

Proposed Modifications to the AB Initiative
4.5. Although it is generally accepted that the AB system has been operating with
reasonable success for the last six years or so, it is clear that certain modifications to
the system would improve its effectiveness and make it more attractive to the
Departments operating under the system. These improvements are necessary, on the
one part to ensure that civil service costs are maintained at a level which is consistent
with the Government 's overall spending targets and on the ot her hand to increase the
empowerment of civil service managers in certain areas. A number of the proposals
were rec ommended either by the Co-ordinating Group of Secretaries or in the VFM
Report. Others were proposed in informal discussions with some Departments
participating in the system.

        (a) any overrun on an Administrative Budget alloc ation for which an
        explanation has not been agreed will be regarded as a drawdown (or
        advance) from the following year's alloc ation, whic h should be
        adjusted accordingly. Provision should be made for adjustment of the
        base at the commencement of a new cycle;

        (b) there should be no departure from agreed AB alloc ations unless a
        major ex pansion of services is involved or where some limited
        flexibility might be deemed necessary to deal with major unfores een
        circumstances and where it has been demonstrated that any extra
        demands cannot be met by redeployment of existing resources;

        (c) new procedural arrangements will be made in situations where it
        is not possible to reach agreement on an overall AB allocation, by
        introducing arrangements for advice to Ministers on the issues in
        dispute by a group of Secretaries General;

        (d) improved arrangements should be int roduced to take account of
        recoupable expendit ure - the possibility of a " Trading Fund" model to
        be examined;

        (e) an efficiency dividend of 2% should be restored in the next round
        of Agreements subject to the proviso that Departments be allowed to
        retain that saving, in whole or in part, in circumstances where it can
        be demonstrated that the cost of new programmes or
        expanded/improved services had been met by the realloc ation of a
        Department's existing resources;

        (f) the virement limit on Administrative Budget subheads should be
        abolished in the case of non-staff subheads. As regards staff
        subheads, the Group believes that there should be an openness to
        selective proposals for virement from within the Administrative



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        Budget where the programme evaluation exercises now being
        initiated reveal benefits in doing so without incurring long -term costs;

        (g) the Group reported that it was proposed to include the estimated
        costs of implementing all increases in pay and conditions allowable
        under Partnership 2000, including the local bargaining element due
        to commence in 1999, in Departmental allocations under the multi-
        annual budgeting framework. Any necessary changes to
        administrative budget procedures and cont racts (which are not
        confined exclusively to pay costs) would be worked out with
        Departments. The aim was to secure maximum delegation to
        Departments - consistent with normal negotiating procedures - of
        responsibility and accountability for the expenditure concerned and
        for securing full implementation of the Agreement, including delivery
        of the public service modernisation programme;

        (h) the Group recommended that the level of expenditure which can
        be devot ed to pay in respect of exceptional performance under the
        new cycle of AB agreements is to be increased from 0.1% to 0.2% of
        Subhead A.1;

        (i) the Department of Finance is to consider the possibility of further
        devolution to Departments in the area of cons ultancy in the context of
        the next round of AB agreements;

        (j) finally, the AB system should be extended to those parts of the
        civil service where it is not applied at present.


Recent Developments

4.6. Since the FMG Administrative Budget paper was agreed, a Memorandum was
submitted to Government covering the next round o f AB Agreements (1998-2000).
Most of the views of the FMG were taken into account along with those expressed by
the Co-ordinating Group of Secret aries and by the C&A G in his VFM Report on
administrative Budgets. A positive decision was received from Government and new
agreements are currently being drafted. Departments who currently operat e under the
administrative budget initiative must conclude agreements by 30 April, 1998 while
others must conclude agreements by 30 June, 1998.




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Departments views on the FMG Administrative Budget paper

4.7. Departments generally supported the views contained in the paper and the
proposed modifications to the existing system. Most Departments did, however,
object to the re-introduction of the efficiency dividend of 2%. The arguments being put
forward by Departments are that pay costs amount to approx. 70% of the AB
allocation and there is little flexibility for efficiencies in that area. Some Departments
argue that those Departments who surrendered dividends in previous years are not
now in a position to have their AB base eroded any further. Others have drawn
attention to the apparent conflict between the requirement for efficiency savings and
situations where services are continually expanding.




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http://www.irlgov.ie/taoiseach/publication/smi/ - Contents
5. Property Issues
5.1. The Group's deliberations on issues involved in the development of the
administrative budget system prompted a det ailed ex amination of the manner in
which the property management function is managed in Government Departments. In
this regard Delivering Better Government recommended that responsibility for
maintenance, fitting out and refurbishment expenses, which had been delegated to
Departments in the past, should be restored subject to adherence to any necessary
guidelines/criteria which should be drawn up as soon as possible. Departments
should have more control over, and be more account able for, their accommodation
costs. An in-depth study of the issues involved was carried out by a sub-Committee
set up by the Group.

Background

5.2. The main responsibility and manpower relevant to property functions in the Irish
Civil Service has traditionally been held centrally in the Office of Public Works (OPW),
which manages the civil service office accommodation port folio. This has provided
benefits in terms of organisational focus, expertise and market power. However,
centralisation also led, on the maintenance side, to funding arrangements,
procedures and work practices which were seen as unresponsive to the interests of
Departments. In relation to property procurement and management, the centralised
approach also led at times to Departments pressing for additional accommodation
without regard to the costs, which fell on the OPW Vote.

5.3. The civil service occupies about 6 million square feet of office space, of which
about 70% is state owned. The capital value of the estate is of the order of £1 billion.
Accommodation is allocated by OPW to Departments from this stock. OPW is
accountable in the first instance for the efficiency of space use and holds the funds
for payment of rental on leased space.

Rationale for present system

5.4. When property acquisition and the management of the £1bn civil service "estate"
are handled centrally, it brings into play the specialist knowledge and expertise of an
organisation whose primary organizational focus and high -level management skills
and time are concentrat ed on property matters. Departments acting individually could
not hope to achieve such levels of expertise and bargaining power in the market.
OPW also provides the Government with an informed overall view of property matters
as they affect the civil service and the whole public sector. As against this, however, a
Department seeking additional space may be obliged to accept accommodation
which, while it maximises the cost-effective use of space by OPW, may be
inconvenient and costly in terms of the Department's/Office's operations.




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Main Recommendations:

Property Acquisition

5.5. The sub-committee found difficulty in devising a system to meet all eventualities
and was satisfied that the existing system is not wasteful and produces little or no
unused space. The sub-committee felt that there was some pot ential for further
economies from more efficient use of space and from us e of less costly locations.
        - Central procurement, with OPW holding funds, should continue to
        be the model for property acquisition, by rental, purchase or
        construction, in the Civil Service.

        - OPW should retain power to alloc ate space to Departments and to
        re-organise Departments between buildings.

        - The existing system of rental norms imposed by OPW should be
        retained.

        - Departments which ec onomis e on their accommodation costs
        should receive some financial recognitio n, in the Administrative
        Budget context or otherwise. This should be negotiable rather than
        automatic and should only arise when actual rent al savings have
        been realised or additional costs avoided.

        - The work already done on accounts should be further de veloped to
        include capit al costs such as fit-outs and refurbishment.

        - Comparison by OPW of its costs with the privat e sector through
        benchmarking should be further developed.

        - There should be no dividend from shedding expensive space in
        Dublin because of involuntary decentralisation.

        - Consideration should be given to making the allocation for
        construction genuinely multi-annual, since the present system can
        encourage the funding of lower priority projects at year end.

        - Investments in system furniture, leading to significant rent savings,
        should be carried on the OPW Vote.

        - OPW should produce a plan for consideration by Government to
        optimise the balance between owners hip and leasing of property.
The sub-group considered alternative arrangements whereby OPW would charge
individual Departments for occupied office space but concluded that they would not
serve a useful purpose bec ause of the practical issues involved. The sub -committee
concluded that charging rents to Departments was not a viable option at the present
time. However, the working group, while acknowledging the problems outlined by the
sub-committee, remains attracted in principle to a system on these lines and
recommends that further work be undertaken to develop a practical system based on
charging Departments for their accommodation.




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Maintenance Arrangements

5.6.
        - Responsibility and funds for maintenance, fit-out and refurbishment
        work up to £100,000 per project, (£250,000 per project for
        Departments with particular needs), to lie with Departments and
        above those limits to remain with OPW.

        - Each Department to establish a standing committee with OPW to
        consider all maintenanc e, fit-out and refurbishment projects costing
        over £50,000. Work costing between £100,000-250,000 should be
        procured by Departments through OPW so as to protect OPW's
        position as owner or head lease holder of State property.

        -   OPW to begin work on condition reports and maintenance
        schedules for the portfolio with a view to the introduction of a planned
        maintenance system. This may indicat e the need for a substantial
        level of expenditure in the shorter term, but better value ultimately.

        - Dilapidation charges arising from failure to maintain rented buildings
        should continue to fall on the tenants.

        - The accounts and billing practices of the OPW Building
        Maintenance Servic e should be further developed so that all costs,
        including costs of capital employed, are fully reflected in charges.

        - OPW should prepare handbooks for Accommodation Officers,
        model contracts and lists of approved contractors. They should also
        prepare and deliver training courses for Accommodation Officers.


A system along thes e lines would give Departments/Offices additional freedom and
responsibility in this area, but would provide for profess ional advice and review by the
OPW.

http://www.irlgov.ie/taoiseach/publication/smi/ - Contents




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6. The Generic Model
6.1. A major project in the work programme of the Group was to develop the concept
of the generic model as described in Delivering Better Government. The Group views
the generic model as a conceptual framework for the enhanc ed financial
management system which will be needed in Departments to support the SMI
process. It provides a coherent and consistent mechanism withi n which the various
elements of the financial system may function in a coordinated way as an integral
element in overall strategic management. In addition to the standard functions of a
financial system, it will facilitate the use of financial and non-financial performance
indicators. In this way, the model will support the results driven SMI process, in
particular the assessment of performance against the Statement of Strategy, in the
context of increased levels of delegated responsibility and accountabili ty.

6.2. A generic model, of its nature, may require some modification to cater for the
specific needs of individual Departments. However, in order to achieve the necessary
financial support framework for SMI, the essential principles and features on whic h
the model is based should apply across central government.


Essential Features:
6.3. The generic model should provide for:

Accounting Framework : A common framework based on a number of
integrated standard accounting modules. The model will capture data on an accruals
basis and will facilitate accruals and cash based reporting. It will be capable of
capturing all the direct costs of a Department, distinguishing bet ween current and
capital costs, and identifying accrued expendit ure and inc ome. It will also be capable
of recording indirect costs - actual costs borne on other Votes and notional costs,
such as rental of State-owned buildings. (The accounting framework of the generic
model relates to departmental accounts (both financial and management) and does
not relat e to the whole of government accounting e.g. the Finance Accounts, the
National Accounts).

6.4.
Management Accounting: Within the generic model, there is a focus on the
development of management accounting (periodic reports during the year for all
levels of management). Accrual accounting will be the norm across Departments and
Offices. The fundamental reasons for introducing systems of accrual accounting are
to underpin and strengt hen performance management and focus on results. Accrual
accounting has a number of features which have the potential to give ris e to benefits
in the area of costing, planning and budgeting. There may be exceptional
circumstances where the benefits of an accruals system are limited (e. g. the detailed
accrual of "direct" programme expenditure on certain non -discretionary demand-led
schemes ) and do not justify the costs involved; in such circumstances, there can be
local variations from the norm but only after Department al management have
accessed professional accountancy advice.




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6.5.
Financial Reporting: (financial reports for external users). The Appropriation
Accounts have undergone a three -year period of reform culminating with the 1996
Appropriation Accounts. As a result the range of information in the Accounts ass umes
many, but not all, of the key elements of a full accruals system, although the
presentation is not the conventional one. It is recommended that the new Accounts
are subject to review by the year 2000, which will involve a critical assessment of the
value-added provided by:

        (a) the accruals information produc ed with the Appropriation Accounts, and

        (b) the financial statements produced by the Department of Public Enterprise
        pilot project based on the U.K. Res ource Accounting Model. (It should be
        noted that the entire DPE Project needs to be evaluat ed when completed, i.e.
        the budgeting, management information and financial statement aspects).

6.6.
Cost Allocation System: The generic model should facilitate cost allocation on
a programme, project or individual cost centre basis. The allocation of costs to
programmes is part of a wider process starting with the Strategy Statement and
culminating in performance review -including value for money.

The general approach to cost allocation in the generic model is as follows:

        - a standard approach to cost allocation across Departments,
        facilitating the possibility of cost and performance measurement
        comparis ons

        - costs of compiling the information should not outweigh the benefits.

        - cost centres, organised as necessary, on an individual, programme
        or project basis to continue as the basis for cost allocation.
        (Programme costs could be allocated to a cost centre or a number of
        cost centres).
The process will require management/cost accounting skills and will involve cultural
and procedural change.

6.7.
Performance Indicators: One of the primary objectives of a comprehensive
adjustment to existing financial systems is the need to relate expenditure not only to
inputs but to outputs and outcomes. This is a prerequisite for any meaningful form of
programme evaluation, performance assessment or VFM study. Consequently, the
model must incorporate non-financial data, as appropriate, for each accounting period
and for each budget-holder's area of responsibility. Much of th e non-financial dat a will
be in the form of achievements measured against specified performance indicators.
Systems to collate non-financial performance data may vary considerably between
Departments and will depend to a great extent on the nature of each Department 's
business. Policy areas will enc ount er greater difficulty than non -policy areas, as the
latter lend themselves more easily to measurement. While useful meas ures of
outputs and outcomes should be specified from the outset to the maximum extent
possible, the cycle of Programme E valuations should be helpful in the future
development and refinement of such meas ures over time.

6.8.
Systems Interface: The model provides for the interface of any new systems
with existing systems (both administrative a nd IT). There should be linkages with the
budgeting (estimates) process, which should be expanded to include output targets,
and with a system for tracking performance in delivering out puts against targets.


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The generic model concept also brings into focus a number of other key issues which
are outlined in the following paragraphs:

6.9.
Delegated Powers: An extended financial management system is a prerequisite
of any devolution of financial authority. Devolution of budgetary authority and
accountability, within an agreed overall framework, will require an appropriate
framework for budget and programmes controls and incentives for both the
organisation and individual managers. Line managers, in order to make decisions in
relation to the responsibility and tasks assigned to them, should have real budgetary
responsibility appropriate to their level. The financial management system will cater
for the agreed level of delegation. An essential element of the generic model is a
robust management information system with common basic features across all
Departments. Departments should identify their own management information needs
and implement a system to meet these needs. Key non -financial performance
indicators must be seen to be an integral part of the strategic plan and must form a
central part of management reports.

6.10.
Cultural Change: The generic model and the required cultural and procedural
changes must be driven by top management. In the management of this change, it is
essential that systems of control are not undermined, but are developed as
necessary. The Internal Audit function and the establishment or continued operation
of an Audit Committee will play an important role in this regard. Departments should
carry out an Organisation and Process Impact Study of the proposed changes.
Relevant staff must be skilled to utilise new systems, particularly in the area of
financial and management accounting and procedures. Particular consideration must
be given to the staffing and skills level of Accounts Branch es and Finance Units.

6.11.
Information Technology: A strategic approach must be taken to developing
the appropriate IT support for the generic model. Departments should be encouraged
to consider the benefits of a standard package. (While a number of Departments
have PROSE FMS, it would be difficult to re-engineer this package back to its
commercial basis). The Information Technology Working Group reported that
Departments will require secure funding to undertake new projects essential to
support legislative changes and SMI objectives and that there is a need to address
funding and budgetary procedures for projects involving more than one organisation.
The IT Group als o recommended that IT project proposals should identify and cost
the training requirements for IT and us er staff and that in assessing these proposals,
Department of Finance must adopt a coordinated approach.




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6.12.
Cost factors in the upgrading of systems and procedures will vary bet ween
Departments. Costs will arise in the area of: staff, IT, consultancy, on-going running
costs etc. It is not possible to provide a represent ative cost figure, as costs will vary
across Departments, depending on existing systems and the scale and complexity of
activities.

6.13.
Timeframe: If the impetus of the change programme initiat ed under SMI is to be
maintained, the required upgrading of systems and procedures should be
implemented pragmatically as soon as possible, with the objective of completing this
process over a period of not more than 5 years. Cert ain factors may inhibit progress -
the conversion effort required to deal with the year 2000 and the adjustments to
follow from the introduction of the Euro, to name but two - in terms of demands
already being made on IT staff. This will vary bet ween Depart ments depending on the
scale of activity and the degree of sophistication of the existing financial management
system. This situation is a very signific ant one and will have to be assessed by each
Department.

6.14.
Roll-Out: The roll-out of the generic model, which compris es
(i) budgets and targets, with a multi-annual dimension;
(ii) management accounts;
(iii) financial reporting; and
(iv) performance measurement against organisational objectives and target will
require a commitment to change on the part of individual Departments and strong
pro-active leadership by the Department of Finance:
        - A Consultative Committee of Departmental project managers (both
        IT, financial and general management) to be established to facilitate
        the sharing of expertise and development of guidelines e.g. the
        formats for management accounts, guidelines for cost allocation.

        - The Department of Financ e (CMOD) should outline the common
        platform for systems to be developed in Departments.

        - Departmental Management teams should ensure that expert
        accountancy advice is available at all stages and is directly involved
        in designing, implementing and maint aining the financial
        management system.
The Group recognises that these recommendations have implications for staffing and
resource levels, both in the Department of Finance and in Departments generally.
The resourc e area will be a particular area of difficulty in smaller Departments and
Offices. It recommends that these issues should be addressed urgently and positively
by all concerned.

6.15.
Response of Departments to the proposed generic model: There
was general concern at the cost and resources implications. There was also concern
that a reasonable timeframe would be specified for the roll-out, taking account of the
individual situations of departments. A view was expressed that the changes
envis aged under the generic model could not be contemplated until other SMI
changes e.g. the Customer Service Initiative, Performance Management and FOI
were firmly embedded.




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http://www.irlgov.ie/taoiseach/publication/smi/ - Contents 7. The   Way Forward

7.1. The Group is reasonably satisfied with progress to date in implementing the
reform agenda and with the plans of the Authorities for maintaining the impetus of
change. In particular, it welcomes the significant steps which have already been
taken to give management of the public financ es a medium -term orientation and to
delegate financial responsibility for programme spending from the Department of
Finance to line Departments. Less progress has been made to date in the matters to
be addressed under the generic model. However, there now exists an agreed
framework for reforming the instruments of financial management to support
improved managerial performance by the civil service and to deliver effective cont rol
over the public finances.

7.2. Improved financial techniques and procedures are important constituents of
reform but the Group believes that enduring transformation will not occur unless they
are accompanied by a fundam ental change in the mind-set of the main actors. In any
process of change - particularly one as far-reaching in its implications as SMI - the
various participants involved are likely to have diverging expectations which must be
managed if change is to be successful.

Thus, in moving from the traditional adversarial relationship between the Department
of Finance and line Departments to a system which places greater emphasis on
devolved financial management, it is important to recall that the total system obj ective
has not changed. The authors of Delivering Better Government argued for reform
because of the failure of the existing system to deliver effective management and
prioritisation of the public finances. The litmus test for a reformed system of financial
management will be improved budgetary performance in bot h these res pects. The
Department of Finance has indicat ed a preparedness to relax any unnecessary
control over Departmental spending, including further delegation of programme
spending to the maximum extent possible. Increased delegation is also being
reflected in the implementation of the multi-annual budgeting and administrative
budget proposals, allied with the improvement of programme efficiency envisaged
under the ex penditure review process. The challenge will now be to spending
Departments to demonstrate that there will be no loss of commitment to budgetary
discipline or to achieving maximum cost-effectiveness under a more devolved regime.

7.3. The Group wishes to emphasise the importance of confidence-building measures
in developing the relationship bet ween the Department of Financ e and line
Departments. In its discussion on the development of MAB, it called for regular
dialogue between the parties in order to foster greater understanding of th e issues
involved. Opport unities for dialogue which exist in fora such as the annual
Conference of Heads of Departments/Offices, the Assistant Secretary Net work and
the Finance Officers Network should be used and developed to the fullest extent.
Senior management in the Department of Finance and in line Departments need to
redefine their working relationship with each other to establish an ex plicit framework
of accountability for the exercise of devolved expenditure management within the line
Departments, setting out understandings reached on issues such as performance
parameters, improved information flows and the incentivisation of line Departments to
achieve programme savings. The expenditure review process launched last year by
the Government will also help to focus attention on strategic issues in expenditure
management such as prioritisation of programmes.




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7.4. In the discussion on the operation of Administrative Budgets, the Group noted
that the bulk of the problems experienced by Departments in this area are due to the
determination of successive Governments to maintain tight overall cont rol over
administrative spending and Civil Service numbers. The Group also noted that
differenc es about allocations were almost invariably resolved at official level and that
the new procedures recently agreed by the Government, along with the other
managerial reforms under the SMI, offered the opport unity to deal with such
differenc es in a collaborative fashion in future. It was also felt that in some instances
at least, administrative and programme spending were not always managed
consistently by the Department of Finance. The Group felt that the Department of
Finance should examine the reasons for any such inconsistency with a view to
ensuring a fully consistent approach in the context of the new multi-annual budgeting
system.

7.5. Delivering Better Government called for the development of a "generic model" for
an improved financial management system which would support management
decision-making on programme evaluation and resource allocation while continuing
to serve the existing accounting and reporting needs of Departments. Recognising
the significance of this proposal to the development of a system of devolved
accountable management, the Group adopted the project as a priority task. It set up a
sub-Committee to specify the main elements of the model and to engage in extensive
consultations with Government Departments as to its applicability. The model
developed by the sub-Committee was endorsed by the Group and its essential
features are described in Section 6 of this Report.

7.6. An enhanced role for accrual accounting in the new financial management model
is explicitly referred to n Delivering Better Government. There was general agreement
within the Group on the importance of taking immediate action to develop
management accounting and that an accruals basis should become the norm for the
preparation of int ernal management accounts. Some members of the Group would
have preferred a det ailed prescriptive approac h to the introduction of accrual
accounting, whereas others took the view that, based on the evidence before the
Group, a prescriptive approach could not be warranted.

7.7. It is crucially important that the arrangements for the roll -out of the model should
be managed pro-actively. The Group welcomes in this regard the commitment of the
Department of Finance to play a strong leadership role and to draw into the roll -out
process the expertise of a Consultative Committee of Departmental project managers
which will provide a plat form for sharing experience and developing operational
guidelines. It endorses the Delivering Better Government view that successful
implementation of the model will take several years to accomplish and will require
significant investment in systems development and training. The Group understands
that resources to support investment in change will be made available to the SMI
Implementation Group. It recommends that the Department of Finance and line
Departments should discuss the organisational, staffing, IT and financial implications
of adopting this enhanced financial management model. The central SMI
Development Fund should be used to support as necessary any investment by
Departments from their own resources over time.




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7.8. The Working Group on Financial Management see its role as that of a catalyst in
advancing the financial management change agenda rec ommended in Delivering
Better Government. It believes that through its validation of the detailed arrangements
for implementing change it has brought its involvement in the process to a
satisfactory conclusion and that the responsibility for moving to the next stage of
vigorous implementation lies with the Departments involved. It recommends in this
regard that Department of Finance should draw up and publish annual reports on the
progress of the reform programme.




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        http://www.irlgov.ie/taoiseach/publication/smi/ - Contents Appendix   I
              Financial Management Working Group
                                    Membership
Patrick H Mullarkey, Chairpers on

Mary Broughan, ex-Chairperson, Irish Pensions Board

Marian Byrne, Principal Officer, Department of Agriculture & Food

Des Coppins, SMI Team, Department of the Taoiseach, Secretary (until October
1997)

Dermot Curran, SMI Team, Department of the Taoiseac h, Secretary (Oct 1997 - A pril
1998)

Pat Casey, SMI Team, Department of the Taoiseach, Secretary (from April 1998)

Colm Desmond, Assistant Principal, Department of Finance

Sean Dorgan, former Chief Executive, Institute of Chartered Accountants of Ireland

Phil Furlong, Assistant Secretary, Department of Financ e

Colm Gallagher, Assistant Secretary, Department of Finance

Dermot Hegarty, Chairman, Griffith College

Margaret Hennessy, Assistant Secretary, Department of Foreign Affairs

Noreen Hynes, former President, Leinster Society of Chartered Accountants

John Loughrey, Secretary General, Department of Public Enterprise

Joe Meade, Director, Office of Compt roller and Auditor General

Ciaran Murphy, Assistant Principal, Department of Finance

Dermot McCarthy, Assistant Secretary, Department of the Taoiseach

Brigid McManus, Principal Officer, Department of Arts, Herit age, Gaeltacht & Islands

Niamh O'Donoghue, Principal Officer, Civil Service Commission

Jerry O'Dwyer, Secretary General, Department of Health & Children

Edmund Sullivan, Secretary General, Department of Social, Community & Family
Affairs

Michael Tutty, Second Secretary, Department of Finance

Sara White, Assistant Secretary, Department of the Marine & Natural Resources




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http://www.irlgov.ie/taoiseach/publication/smi/ - Contents

                                     Appendix II
               Financial Management Working Group

                                   Position Papers


1. Multi Annual Budgeting (MAB ) and Other Public Expenditure Management Issues

2. Delegation of Financial Authority

3. Administrative Budgets

4. The Generic Model

5. Property Issues




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