Commonwealth Financial Accountability Review (CFAR) Paper Is Less More?

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1 Commonwealth Financial Accountability Review (CFAR) Paper Is Less More? Thank you for your correspondence on the CFAR paper Is Less More and for the opportunity to comment on the proposals contained therein. The proposals for the reform of the financial framework are extremely wide ranging and thought provoking and have led to extensive review and discussion within Customs and Border Protection. Our CFO Steven Groves has provided a high level response directly to Mr George Sotiropoulos and has requested that we provide more detailed comments on the range of objectives and propositions contained in the paper. As a result, we have set out below a number of points which we believe are worthy of additional consideration and which may impact on the successful implementation of these proposals. Overview As a general comment the paper does not appear to address the issue that one of the most significant barriers to effective governance arrangements lies within the individual legislation governing the operations of agencies rather than the FMA framework itself. It should be noted that, similar to other agencies, whilst most of the routine administrative operations of Customs and Border Protection are governed by the Financial Management and Accountability Act 1997 (FMA Act), its operational activities are impacted by the application of the Customs Act 1901 (Customs Act) and a series of related Customs Acts, together with a wide range of other elements of legislation including the Passenger Movement Charge Acts, legislation relating to Import Processing Charges, Trade Marks, Copyright, and the Taxation Administration Act 1953 and related Acts concerning indirect taxes. These combine with a variety of other legislation which it administers on behalf of other agencies including the Department of Agriculture, Fisheries and Forestry, Department of Immigration and Citizenship, the Australian Quarantine Inspection Service, the Australian Taxation Office and the Australian Maritime Safety Authority. The non-fma legislation administered by Customs and Border Protection contains a wide range of specific operational requirements that impact on Customs and Border Projection s financial management, often resulting in conflicting requirements. We believe that a key element in improving governance arrangements is to consider how to better enable FMA legislation to work more effectively alongside other agency-specific legislation. An example of a situation where individual legislation creates a barrier to effective governance arrangements is the successful joint operation between Customs and Border Protection and the Australian Taxation Office (ATO) relating to the collection of customs duty, goods and services tax, luxury car tax and wine equalisation tax on imported goods. Complications arise under this arrangement, however, when amounts owing for customs duty and other indirect taxes (which have been issued on a single invoice) are not paid by the due date. Because the Customs Act does not contain any provisions relating to the imposition of interest on overdue debts we are bound by the provisions of FMA legislation and the Finance Minister s Delegation. In contrast, the ATO has specific provisions within their legislation regarding when interest can be charged and the rate of interest that can be applied. The substantial differences in the rate of interest and the point of time Page 1

2 when interest can be applied between these legislative requirements add to the complexity of debt collection and inevitably contribute to a loss of revenue to the Commonwealth. Scope of Proposed Reforms The paper contains a wide range of proposals which will demand a significant investment of resources and capabilities. They include the restructuring of the budget and appropriation processes, the development and maintenance of training materials for Parliamentarians and officials, the provision of guidance materials surrounding principles based legislation, and the development of a risk management framework and key performance indicators. We believe that the scale of change involved in these proposals would impose a significant additional burden on resources and capabilities both on Finance and agencies in general. As a result, we are of the opinion that a more narrowly focused, and staged agenda would be more likely to achieve the desired outcomes. Detailed Analysis This section of commentary on the CFAR paper is based on the seven key objectives for reform in the paper and set out a number of points which we believe are worthy of additional consideration and may impact on the successful implementation of these proposals. OBJECTIVE #1 Enhancing Transparency and Accountability Proposal: Appropriation by program Clearer definitions are required in relation to the proposal of appropriating by program particularly in relation to programs and, more specifically, departmental programs. Based on current definitions, there are a large number of programs that exist across the Commonwealth. Whilst appropriating by program would increase transparency it would come at a greater cost due to the increased administrative burden required to monitor, manage and report on each of those appropriations. Discussions are currently under way between Customs and Border Protection and Finance in relation to how best to address the issues arising from a move to appropriating by program for those agencies with departmental programs, of which Customs and Border Protection is one. Based on current definitions, the move to appropriating by program will reduce the amount of flexibility currently available to agencies. Since the implementation of Operation Sunlight, agencies have received their appropriation by outcome but have been required to attribute the appropriation provided at the outcome level to the programs within that outcome. This approach has given agencies the flexibility to reallocate funding within the outcome to those areas that are of the highest strategic importance to the government. In addition to the additional administrative costs due to the requirement to monitor, manage and report on each program, appropriating by program is likely to create additional administration if there is a need to transfer funding between program related appropriations to meet changing priorities. Page 2

3 Proposal: Appropriation at portfolio level Appropriating at a portfolio level would appear to build in added administrative burdens and bureaucratic layers with no clear corresponding operational or administrative benefit. Adopting this approach would add additional layers of administration at both the line agency level and the portfolio agency level in terms of reporting, reconciliation of appropriation bills, management of drawdown processes etc. It is highly likely that the increased level of administration required at the portfolio level would more than offset any limited decrease in administration at the agency level. Proposal: Cash appropriations The paper proposes moving back to cash appropriations based on the current net cash arrangements. Any greater move to a cash based framework, while maintaining the current accrual based reporting framework would simply increase agencies workloads. Agencies internal forecasting and reporting mechanisms and systems are currently geared towards accrual based reporting. The provision of advice back to the centre on a cash basis will simply add additional work and complexity. The cash flow statements and ACM reconciliations provided monthly and annually through CBMS provide sufficient information regarding the appropriations used by agencies. As a result, it is not clear how appropriating on a cash basis would create increased transparency, since it is relatively easy to manipulate results on a cash basis by simply bringing forward or delaying payments. If a move to cash appropriations is being considered, together with the other reforms proposed in the CFAR paper, it may be an appropriate time to consider whether the current accrual accounting framework is actually still appropriate for the Commonwealth. OBJECTIVE #2 More Effective Governance Arrangements Proposal: Single bank account This section of the paper includes a proposal to operate all Commonwealth entities from a single bank account. Further clarification of this proposal is required as, since the introduction of as needed drawdowns for FMA Agencies, all undrawn appropriations - with the exception of working cash - have been held in the Consolidated Revenue Fund. This proposal raises two major questions: 1. Does Finance intend to reduce the level of working cash held by agencies? 2. Does Finance intend to change the arrangements that agencies can currently make in accordance with the Agency Banking Framework? If the answer to either of these questions is in the affirmative, it will have a significant impact on Customs and Border Protection. Working cash is required to ensure that bank accounts do not become overdrawn as a result of expenses that occur before funds can be drawn down. An example of this type of payment is the amount paid monthly to our credit card supplier. Page 3

4 If the proposition involves changing the arrangements that Customs and Border Protection can make in accordance with the Agency Banking Framework there would be a significant impact on Customs and Border Protection, because we currently utilise a large variety of banking services in a wide range of geographical locations across Australia. Access to diverse banking arrangements is essential due to the nature and location of our operations. Proposal: Legislate role of Departmental Secretary The paper includes a proposal to legislate the role of the Departmental Secretary but does not contain any explanation or evidence that such an approach is required. In the absence of issues regarding the provision of information to Departmental Secretaries this proposal appears overly prescriptive. Proposal: Consolidation of functions at portfolio level The discussion paper suggests that improved control by government can be achieved by consolidation of functions at a portfolio level. The proposal to consolidate functions such as payroll, accounts payable, accounts receivable and internal audit has merit when applied to smaller agencies with similar workforces and functions. Whilst economies of scale may be achieved when functions are consolidated for smaller agencies, it is unlikely that cost savings will be achieved by consolidating such functions across larger agencies or portfolios with fundamentally different functions and workforces. We believe that a better model - which would not be impacted by changes in future administrative arrangements - may well be a move to a single shared services agency to support all small agencies across the Commonwealth. Within operational agencies such as Customs and Border Protection, functions related to payroll and accounts payable and receivable vary significantly from normal administrative departments. Accounts payable and receivable, for example, are significantly focussed on applications related to the Customs Acts including the Integrated Cargo System (ICS) which is accessed directly by brokers and importers in relation to customs declarations, and thus unique to the agency. A similar situation applies to a substantial portion of Customs and Border Protection employees who are employed under conditions not applicable to other members of the public service and which include maritime, aviation and other related border protection services. The consolidation of these functions at a portfolio level would clearly not be a cost effective option. Care should be taken when considering the centralisation of Audit Committees at a portfolio level. When a portfolio consists of both material and small agencies it would be a difficult balancing act to ensure that an appropriate focus can still be applied to the smaller agencies. Proposal: Pooled funding arrangements The paper contains a proposal to allow for pooled funding arrangements. In some respects this already occurs for specific measures funded by government. A recent example is the funding decisions made in respect of the Government s hosting of the G20 meetings when relevant agencies Page 4

5 were asked to bid for funding. The funding agreed by the government for the G20 has been appropriated to a single agency, with funds being distributed in line with Cabinet s agreement and subject to the conditions set out in a Memorandum of Understanding. However, to avoid disputes that will adversely affect the delivery of the program it would be necessary to decide up front: Who will be the lead agency and who will maintain the pool of funding? How can the funding be quarantined so that the responsible agency does not utilise it for other purposes. How decisions would be made in relation to the distribution of funds, and whether those decisions should be made by Cabinet or a Minister. Who will have ultimate responsibility and accountability for how the funds are utilised? Who will take carriage of policy issues, particularly in relation to implementation and monitoring? What financial reporting mechanisms will be in place for these arrangements? Proposal: Centralisation The discussion paper advocates moving to a more centralised model when stating that: Although the centre should step back from micro-managing policy and delivery, it should be able to keep control of the overall public finances and ensure compliance with the policies and strategic direction of the government. This could include more direct access to financial information of entities. It is hard to determine the benefit of real time access to the financial information of entities. Most agencies have a range of end of month processes and accessing raw data at other times in the month is likely to be misleading. Agencies already provide a significant amount of data by way of the Portfolio Budget Statements, provision of monthly and annual actuals and the audited financial statements included within the Annual Report. In addition the Minister for Finance can seek financial information from an agency at any time. Better access to the internal analyses undertaken by agencies on their financial position may be of more value. This would best be obtained through internal financial reports and commentary rather than access to agency financial management information systems. We believe that this goal would be best achieved by building stronger relationships between officers of agencies and the Agency Advice Unit/Budget Group. This would assist Finance in establishing context and accurately interpreting the information currently supplied. OBJECTIVE #3 Improving Performance Proposal: Legislate responsibilities of chief executives in relation to estimates The paper includes a proposal to legislate the responsibilities of Chief Executives but does not contain any explanation or evidence that this approach is required. In the absence of issues regarding the provision of estimates, this approach appears overly-prescriptive. Current FMA Page 5

6 legislation clearly prescribes the requirement for agency heads to be responsible for the efficient, effective, economic and ethical operation of their agency. Proposal: Incorporate performance management in the financial framework We believe that there is value in considering the American model where performance management has stand-alone legislation as an alternative to incorporating performance management within the financial framework. Incorporating performance management requirements and guidance solely in the financial framework legislation devalues its contribution. (This problem is further exacerbated by the issue raised earlier in relation to agencies legislation external to FMA legislation.) Further separate legislation would assist in addressing the pervasive culture where performance management has been viewed as an externally imposed requirement rather than as part of a strategic management system designed to manage and enhance performance. Proposal - Develop indicators that allow for performance to be measured and compared across the public service There is value in comparing similar activities across Commonwealth agencies and developing associated benchmarks of performance. It should be noted, however, that a substantial number of key indicators reported in Portfolio Budget Statements are non-financial in nature. Additionally, it should also be acknowledged that a number of agencies including Customs and Border Protection - are required to perform in specialised operational environments. As a result, it is considered that it would have been more appropriate for the paper to also include performance comparisons with similar agencies in foreign jurisdictions similar to Australia facilitating a more complete perspective on this proposition. Under current arrangements performance measures, utilising both quantitative and qualitative indicators, are developed by agencies and agreed by Ministers. A requirement to agree performance measures across the public service would require agencies to agree these measures and report against them. For example, under this arrangement there may be a requirement to develop performance measures for national security and for those to be agreed across not only a number of agencies but also a number of portfolios. Obtaining such agreement would require identification of comparable priorities and measures that would allow performance measurement of government s key strategic priorities. That would require agencies to identify activities that can be compared across agencies, the ability to collect the data required to be able to report the required information, particularly as some security agencies have restricted statutory reporting requirements. OBJECTIVE #4 Engaging With Risk Proposal: Develop an overarching risk management framework Care should be taken when developing a risk management framework to ensure that it covers both financial and non-financial risks. A substantial volume of the risks facing Customs and Border Protection, for example, are related not to financial issues but to strategic, operational and tactical risk management. Our officers are daily faced with unique risks that can have a serious impact on their welfare, the agency, and our obligations to the government. As a result, risk management within Customs and Border Protection is aligned to business processes, planning and priority setting, through a risk based approach to strategic planning. That approach ensures that risk management Page 6

7 considerations are central to all of our operational work. The application of risk analysis to all of these areas requires the identification and prioritisation of areas where risk likelihood is the greatest to enable the efficient allocation of resources to where they will be of greatest value. National and international risk management standards need to be incorporated into agencies programs and as a result risk management should not be viewed as a stand alone function simply within the financial framework. Proposal: Report to government on management of risk As Customs and Border Protection s primary role is Border Protection we recognise that the external reporting of some material risks may compromise certain operational matters, and therefore needs to be addressed judiciously. OBJECTIVE #5 Building Capability and Culture Proposal: Clearly articulate qualifications, experience and minimum responsibilities for Chief Finance Officers When articulating the qualifications, experience and minimum responsibilities for Chief Finance Officers (CFOs), Finance should take into account the major differences in the role between material and small agencies. Within material agencies Chief Finance Office has a high level, strategic view of the operations of the agency. Day to day management activities are delegated to other officials. Within smaller agencies the CFO is much more likely to be more directly involved in the day to day operations of the agency. OBJECTIVE #6 Simplifying Requirements Proposal: Restructure the financial framework so that primary legislation is more clearly principlesbased and focussed on areas of high risk, with clearer and more detailed guidance to support entity performance. The adoption of more principles based legislation supported by clearer and more detailed guidance is unlikely to achieve the goal of providing flexibility to entities to tailor arrangements to suit their operations and support decision making unless fundamental changes are made to the types of guidance material developed and implemented. The procurement of goods and services, as an example, contains the most detailed and complex requirements in the current financial framework. Whilst the core requirements for spending public money are straightforward, the vast array of supporting guidance material severely curtails the ability of agencies to tailor arrangements to suit the requirements of their businesses. Proposal: Annual appropriations lapse after an appropriate time frame The paper contains a proposal to allow annual appropriations to lapse after an appropriate time frame. Since the introduction of as needed drawdowns, unspent current and prior year Page 7

8 appropriations (cash reserves) are held centrally on the Consolidated Revenue Fund (CRF). There are only three ways that an agency can utilise the unspent prior year appropriation held in the CRF: 1. Agencies may run at an operating loss which might require the drawdown of cash reserves. Under the current framework the Minister of Finance must approve this option. 2. Agencies may spend more on capital expenditure than their Departmental Capital Budget. Under the current framework the Minister of Finance must approve this option. 3. Agencies can draw down cash reserves to fund liabilities such as accounts payable and employee provisions. Two of the options require Ministerial approval before cash reserves are accessed whilst the third involves the use of reserves to fund legitimate liabilities on the agency s balance sheet. The automatic lapsing of annual appropriations could result in agencies being unable to pay their liabilities, rendering them insolvent. The reintroduction of this approach is likely to encourage the behaviour seen in the past where agencies increased their spending towards the end of a financial year, essentially to use up their appropriations. This proposition appears inconsistent with the notion of encouraging strong financial management and financial accountability within and across agencies. OBJECTIVE #7 Clarifying Obligations Proposal: Embed concepts found in other legislation into the financial framework We have concerns about embedding concepts found in other, existing legislation into the financial framework as a result of our current experience relating to difficulties with conflicting legislation. The inclusion of such material in the financial framework is simply likely to create further issues in future unless there is a watertight process to ensure that any changes to one bloc of legislation are automatically reflected in the other. Page 8