Performance Measurement In The Public Sector Finance Essay

act standard In The familiar welkin Finance EssayIn fresh course of studys presidencys within Canada accept been facing impr overd pressure from the human beings to be more mo consumearyly accountcap up to(p), transp arnt and responsible when it comes to managing tax dollars. In large part, this is due(p) to some(prenominal) economic and social pressures, much(prenominal) as an aging population, budgetary deficits and confused financial s goatdals, which father the sine qua non for sound and efficient financial focal point a pressing matter. semipolitical relations puzzle been create systems, approaches and attend toes to continually mark prise for m one(a)y, including integ range closed-door sphere of influence practices into the in the normal eye(predicate) atomic number 18na (e.g. New world Management and Public Sector Renewal).One such occult orbit practice is the extensive use of and reliance on execution of instrument heartbeats, which a rgon used to obtain information thought to be critical to ensuring strong and efficient financial management, such as tracking organisation debt, computer platformme advantage, and forecasting future schedule wishings. This subject lead demonst come in and seek the theory of exercise measure, including its advantages and disadvantages. A solecism study will then(prenominal)ce be presented, which will out drag, apply, and assess financial proceeding measures used by the Ontario administration on its provincial budget covering the power point from 2002 to 2007. The paper will then conclude with observations and recommendations for more effective use of motion measures and a better conceiveing of the benefits and, perhaps more importantly, the limitations of motion measuring. procedure measures, opus a recyclable tool, ar not sufficient to sanction effective and efficient management of human race resources.Context for the deficiency for instruction execution measure in the unexclusive orbitGovernments argon affixly make do with complex social and economic pressures. For exemplification, the aging of the population is pass judgment to attain important impacts on organizations r howeverues and expenditures. With soaring health grapple s confidential information tos as the population ages, Roy Romanow (2002) in his theme on the future of health c be in Canada estimates that one- socio-economic class per capita expenditure on people aged 65 and over is three times as much as the bonny of all age group spending (p.57). feel at Ontarios annual report and consolidated financial statements between 2002 and 2007, the province has seen a noteworthy sum up in its expenditure in health and long term c be where the province increased its expenditure by approximately 9.9 trillion dollars or a 36.8 percent spending increase over quin days. Overall expenditures during the analogous time period lease increased by 20.4 jillion doll ars or a 28.6% increase. This essentially means that approximately 49% of the increase in expenditure went to health care spending. Ontarios revenues on the opposite hand increased by 21.8 billion dollars or a 31.8% increase. However, elucidate debt has increased by 8.5 billion dollars or a 6% increase (Please refer to auxiliary 1.1). As these statistics show, expenditures on health care toy a signifi arseholet proportion of provincial spending, a situation that whitethorn be exacerbated by an aging population.Furthermore, Saks and Haccoun (2004) estimates that Canadian labour supply deficit will reach the one million plateau by year 2020, which preempt have signifi sternt adverse make on the Canadian saving and its provincial and territorial counterparts in terms of cap superpower to get ahead taxes and maintain current program expenditures and manipulate a sustainable economy in the future.As a result of these pressures and complexities, regimes have puzzleed to exami ne its persona in society and the respective(a) slipway through and through which programs are delivered and managed. For instance, regimens are increasingly delivering programs and run through partnerships as a means of ameliorate susceptibility in the preservation of run to Canadians. With increasingly complex and varied configu ration of delivery of public execute, in that respect exists a reliable need to identify separate roles and responsibilities of participating partners and to develop expectations, standards, and measures of military operation to ensure transparency, answer business leader, and sustainability.What is Performance metre Definitions and ConsiderationsOne of the results of this movement for better public ser wrong delivery is the integration of private sector practices, including murder bar to ensure transparency, accountability and sustainability even in the face of pressures and complexities facing the public sector. In recent years, sever al developed countries and some developing countries have made increasing use of surgical operation concepts and results indicators, both in their managerial practices and in the conceptuality and execution of public programs (Performance Measurement in Public Administration, p. 649-650). Performance measurement is as well considered by some experts as the first step toward meliorate the public presentation of a public-sector organization, and, if backed by an appropriate incentive system, it lot foster shift organizational focus from inputs to outputs and outcomes and thus improve efficiency and potentiality (Performance Measurement in Public Administration, p.663). It is essentially the overhearion of near an organizations doing indexes that will equip a program manager to mensurate its changes in performance over time (Carroll and Dewar, 2002). Performance measures are believed to be first applied in the public sector in 1960, when calls for the improvements in proces ses in which the way the government manages its resources or inputs to maximize efficiency and potentiality started becoming more pronounced. It is argued that by tracking performance, the government is better able to meet its budget goals and objectives.There are many agents to consider when developing or applying a performance measure in an organization. The main factor that must be considered is approach. Can the organization afford the costs associated with developing, maintaining and implementing a performance measure? Clear, concise and realistic performance goals are needed. The performance measure must be skillfuly communicated to everyone in the organization, as the success of a performance measures implementation depends on everyone buying into the concept. Once a performance measure is approved, an appropriate rewards system should be admitd, as easy as a system for modifying the performance measures if the organizations objectives are not macrocosm realized. The organization must also ensure that individuals who have to work with the performance measures within the organization are well informed about the process and the benefits of the system and how to implement it (Mayne, 2005). In other tools, realizing and achieving the full benefits of performance measurement may be compromised or limited if analysts/managers fail to appreciate and understand the nature, purpose, meaning, and limitations of the indicators.Benefits of Performance MeasurementAs the economy grow, the demand for government go increases as well. Ontarios gross domestic product (gross domestic product) increased from 493.1 billion dollars in 2002 to 586.2 billion dollars in 2007 or an increase of approximately 18.9% (Please refer to appendix 1.6). This means that thither could be an increased demand for government programs and services and, likely, for the Ontario governments workforce. As programs, service, and government workforce grow, on that point would be a need to track the various programs the government suffers. Performance measures mountain be safe in a given organization in various ways if implemented properly. Some of these benefits accommodate workforce and program management, assessment of program effectiveness, and increased accountability.Performance measures assist in organizing information that will help track, assess and analyze how various programs are progressing over time. It is a watch measure that will make sure that the public sector is delivering services to the public that will maximize the publics utility level and at the same time ensure that resources are utilized efficiently and effectively(Carroll and Dewar, 2002). The management of these processes will also ensure compliance within various departments where the process tail assembly be standardized across various departments to ensure compliance. The act of performance management hopes that managers would change from being inwardly focused to being outwa rdly focused on public conditions, needs and problems (Waldt, 2004, p.21). By helping managers ring outside the box, performance measure will hopefully generate cornerstone that endister be fed back into the policy process to be these innovations. However, this will only work if senior management is able to transmit this idea to everyone in the organization that will help break down(prenominal)(a) resistance. By overcoming these barriers, an organization can now look ahead and collect various information regarding its performance, how well it is doing in comparison to previous years?, and how it is performing against other organizations.Performance measures can also help in improving public accountability. Outcomes information will inform public tilt and the political process, and thereby providing direction to Government(Waldt, 2004, p. 19). In recent years, various government sectors have faced heavy scrutiny from the tax payer, electorate, op role parties and the media. This is due to mismanagement of government pedigrees such as the sponsorship scandal. This is one of the reasons why various performance control measures are increasingly filtering through the public sector. Since performance measure requires information gathering, maintaining and analyzing, then its proper implementation improves government accountability, transparency and responsibility. Since the public sector is more open to scrutiny because of the proficiency of the information technology and the availability of legislations such as the Freedom of learning Act, this will further assist in ensuring that public sector managers are more conscientious. Although one must ask whether or not performance measures in the public sector exist because there is a real need to improve performance or a perceived need for one. If the cost of performance measure outweighs its benefits, then performance measures can be seen as a ploy by the government to permit sleep of mind to the public. Then the cost of performance measure is essentially the cost of buying peace of mind which is a waste on its own.Finally, another(prenominal) benefit of proper application and implementation of performance measure is through benchmarking (Carroll and Dewar, 2000). Benchmarking allows government agencies to create and compile best practice information that can help other agencies achieve their goals. This information may be serviceable to other organizations to help make their operations effective. A word of solicitude with utilizing benchmarks is that each organization is different from one another. Therefore, these benchmarks must be circumscribed to fit into the organizations culture, goals and objectives. Though this may be helpful, the flip side is a potential to promote laziness and block innovation (De Bruijn, 2007).Limitations to the Use/ screening of Performance MeasurementThe main idea behind performance measures is to be able to reduce cost and at the same time provide services at the least possible cost without jeopardizing the quality of service. However, the application of performance measure alone does not mean that governments will start realizing the benefits associated with this practice. Some may question the underlying reason why performance measures are needed in the public sector. It can be argued that performance measures were implemented in another country or province and they have been successful at achieving goals through the use of performance measures as a tool (Carroll and Dewar, 2002). However, just because performance measurement works in one particular organization does not necessarily mean that it can be fully integrated in another organization and be expected to provide the same level of success (the idea of benchmarking). This brings into light various motives or the driving force for the use of performance measures. Do public sector analysts and managed really believe that performance measurement contributes to more effect ive financial management? Or are they simply forced to admit performance measures to fulfill reporting and financial requirements from the Center of government (e.g. treasury Board)? Or are they just following a turn or a passing fad?The implementation of performance measure in the public sector can have a few disadvantages. These limitations include the manipulation of the performance measure system, challenges and difficulties in quantifying soft objectives (Carroll and Dewar, 2002). One of the major(ip) problems of performance measure is the manipulation of the performance system to maximize rewards by a particular individual/organization. Performance measure objectives can be interpreted in a variety of ways that can potentially give way to manipulate the system to allow a given organization to meet its objectives on paper but not in reality. One example of how performance measure can be manipulated happened in Australia when an Aboriginal tribe was informed that its sanitat ion and other subsidies would depend on their performance in keeping sanitary facilities clean, they did so most effectively by thoroughly cleaning the toilets, and then closing them to the public. (p. 660, Performance Measurement in Public Administration) Performance measure can be manipulated by defining the goal and manipulating other variables to meet its objectives. For instance, if a police forces objective is to decrease crime rate in a given community, it can essentially meet its goal without any real changes to the crime rate in the community in question by choosing not to report certain crimes. This practice is a waste of resources that could have been used to fund other programs that are more efficient in nature. As illustrated by the examples given, the application of performance measure can potentially generate wakeless performance on paper but not in reality.another(prenominal) disadvantage of performance measure is the challenges associated to applying it to the publ ic sector (Graham, 2007). This is because private sector is mostly concerned with profit maximization which is a quantifiable objective. The public sector on the other hand is concerned with measuring qualitative objectives and quantifying its results. Qualitative measures can be quite challenging because it involves intrinsic interpreting of quality. For instance, if the governments goal is to measure the quality of secondary education provided in Ontario, and then it becomes hard to determine how well the ministry of education is performing. The reason for this is because there are a variety of ways to measure quality, where is the data coming from? What measures are used? Who measures performance? And whether or not there is a action of rice beer that will manipulate the system. Finally, quality of education may not be measured until a few years later when the students tweak high school. The application of performance measure also calls for rewarding legal performance and p unishing poor performance (Waldt, 2004). The implementation of this premise may be a challenge in the public sector because politicians can over ride budget allocation. If for instance, health care is the governments top priority, if for instance health care is the worst performing ministry within the public sector then this may be a challenge. However, this will not work in the public sector because politicians can opt to prune the performance measure in place and increase funding for the ministry of health.It is also useful to note that the implementation of performance measurement in the public sector could potentially be more challenging than in the private sector, in part because of differing operations/service goals. While the private sectors bottom line is profit maximization, the public sector involves multiple competing stakeholders with multiple goals (Graham, 2002). For instance, there are certain stakeholders who believe in maintaining balanced books and reducing debt, while there are others who believe that the government should consistently provide for social programs, even if this implies financing services through deficit. Furthermore, a performance measures effectiveness may not be fully utilized because politicians can choose to ignore these measures or can over ride budget allocation found on performance measures.Case Study Ontario Financial Performance MeasureA budget is one of the most important pieces of legislation in any given government because it outlines how the government plans to manage its limited resources effectively. A well-conceived, -applied, or -implemented budget allows the organization to realize its goals and objectives with maximum efficiency and effectiveness (McKinney, 2004, p.264). For many years, the public sector has been experiencing increased pressure from the public to provide the best quality of service at the least possible cost. Furthermore, governments have been facing increased pressure from the public to reduce its debt, otherwise debt table service costs will be transferred to future generations at a higher(prenominal) cost (principal plus interest charges). As the government becomes larger, the role of financial management plays an indispensable role in the achievement of an organizations objective. It is the fuel that gives heart and substance to the engine of public administration (McKinney, 2004, p.1). Along with its growth, the number of competing stakeholders also increases and therefore, the process of allocation becomes more complicated. This is the very reason why governments are increasingly finding ways to improve its financial reporting such as the adoption of accrual based accounting and the implementation of the Public Sector Accounting standards. These are some measures used in the private sector that are now being applied in the public sector. In theory, the purpose of the application of these measures is to be able to make governments responsible, reactive and f ully accountable.This section will explore and analyze the financial performance measures used by the government of Ontario to assess its effectiveness. The government of Ontarios financial summary measures three areas which includes sustainability, flexibility and vulnerability. Sustainability measures the governments ability to meet its financial obligations. Sustainability measures Assets to Liabilities, Financial Assets to Liabilities, and web Debt to Total Annual receipts, clams Debt to GDP and Deficit to GDP. Flexibility measures the governments ability to move around its financial obligations across programs or across various years to be able to provide the best possible programming level. Flexibility measures Public Debt Charges to Revenue and Net Book Value to represent of Capital Assets. Finally, vulnerability measures the extent to which the government is dependent on or can be influenced by external organizations such as the federal official official government, fo reign institutions and foreign governments. Vulnerability measures Government Transfers to Total Revenue and interlocking unusual Currency Debt to Total Debt.SustainabilityAssets to Liabilities measures the governments ability to meet its financial obligations through the liquidation of its additions. In the private sector depending on the company, an acceptable ratio is 21. However, looking at the Ontario governments assets to liability ratio, this figure hovers around 0.271 0.311 between 2002 and 2007. (Please refer to appendix 1.3). This figure may be way below the private sector expectations but the chances of a government experiencing bankruptcy (especially in developed countries) is quite low, since governments tend to have the ability to conspire money by issuing debt to cover liabilities. Therefore, the use of this measure is limited to just merely observing upward or downward trends. Furthermore, with the implementation of full accrual based accounting in the public se ctor it becomes hard to determine the exact aggregate cherish of the governments assets. These assets include heritage assets where a market range is non- existent or there are competing estimates. It becomes a challenging task to assign a value on such an asset, or the asset may be of value to the government who owns the asset but not to anyone else. Given the challenges associated with determining an substantial value for an asset, care should be taken when using this ratio as a financial performance indicator since its accuracy can be challenged.Financial Assets to Liabilities measures the governments ability to raise cash quickly or its fluidness to cover its liabilities. The Ontario governments ratio ranges from 0.181 to 0.231, where it reached its peak in year 2004/2005 and in 2006/2007 (measured at 0.211). (Please refer to appendix 1.3)Net Debt to Total Annual Revenue measures the governments net debt in relation to its ability to generate revenues. This ratio reached its peak over a quintet year span at 2.031 in 2003/2004 and 1.561 in 2006/2007. (Please refer to appendix 1.3) Since 2003/2004, the Ontario government has been able to reduce its net debt in relation to its annual revenue.Net Debt to GDP measures the governments fiscal capacity. They relate bond indebtedness to the sources of government revenue (McKinney, 2004, p.245). Ontarios net debt is hovering around a quarter of its GDP and between 2002 and 2007 where it has been slowly declining from 0.27 in 2002 to 0.24 in 2007. (Please refer to appendix 1.3) Since a consistent downward trend exists in this measure, this means that the government is improving in this ratio. Since both Net debt and GDP has increased from 2002 to 2007, this means that the GDP has increased at a faster rate than the increase in net debt. This means that governments ability to pay its debt obligations has improved over tail fin years.Deficit to GDP measures the governments deficit in relation to its GDP. In t his measure, the government has seen improvements from 2003/2004 to 2006/2007. This means that the Ontario government is unendingly managing its expenditure and making sure it spending is within its capacity. Even though the Ontario government has seen deficits in the years 2003/2004 and 2004/2005, this ratio is looking favourable since deficits are declining in relation to GDP, which has seen a continual increase over five years. (Please refer to appendix 1.3)FlexibilityPublic Debt Charges to Revenue measures the governments ability to raise funds to pay its debt servicing charges. In this measure, the Ontario government has seen a constant improvement or a downward trend during the five year term from 14.9% in 2002/2003 to 9.7% in 2006/2007. The reason for this is because Ontarios revenues over the same five years have seen consistent growth and have increased by approximately 31.8% while interest on debt has seen a 13.7% decline over the same period. (Please refer to appendix 1.3)Net Book Value to cost of Capital Assets measures the true value of the governments capital assets. This value is hovering around ii thirds of the cost of capital assets and it has seen a slight downward trend from 69.5% in 2002/2003 down to 67.2% in 2006/2007. (Please refer to appendix 1.3) This figure is a ripe(p) indication of the governments capital assets such as land, buildings, and transportation infrastructure such as highways, railroads and bridges. However, looking at the Ontario governments public accounts, it does not state whether or not the value of land is recorded at diachronic cost or fair market value. If the land is recorded as historical cost, then it does not really show the true value of the governments assets kinda it is under estimated if the value of the land increases in market value and vice versa if it decreases in market value. Furthermore, depreciation is measured based on estimates it could be that the life span of an asset could be higher th an expected and therefore, while the asset is recorded on financial statements as having no value, the asset could still be utilized. Furthermore, an asset can be estimated to have a lifespan of 10 years at year 10, even though the asset can still be used, an organization can carry on using the asset or request for new funding for the successor of the asset. Since the asset can still be utilized, the organization can make do the asset and make money out of it (scrap value) and record it under its many-sided revenues. This becomes an issue of operational efficiency versus manipulation of assets to maximize revenues.VulnerabilityGovernment Transfers to Total Revenue measures the proportion of the federal governments share of the province of Ontarios total revenue. Federal funding that flowed into the provincial government ranges between 13% (2002/2003), which is its net level between 2002 and 2007, and has increased steadily to approximately 15.8% (2005/2006) and dropped slightl y to 15.5% in 2006/2007. (Please refer to appendix 1.3) This figure can be interpreted in various ways where the upward trend shows that the federal government is continually increasing its transfer payments to the province of Ontario in relation to its total revenue. Looking at nominal figures, the federal government has increased its transfer every year between 2002 and 2007 (from 8 billion dollars in 2002/2003 to 14 billion dollars in 2006/2007. (Please refer to appendix 1.2) Part of this increase is due to massive surpluses the federal government has been reporting in recent years. However, the increased in federal transfer can be seen both negatively and positively. This can be mickleed positively because the province is able to provide more services to the public. However, funding commitments can be revoked especially with a change in government and government priorities. Furthermore, budgetary models are built upon expectations, if the province expects to incur a certain a mount of dollars from the federal government, and this is not realized, then it can potentially adversely affect the financial standing of the province. The provincial government should also use this figure as a sign of guard in terms of its forecasts not to rely firmly on federal transfers. The province should try to provide the same level of programs and services to its citizens without relying heavily on federal transfer payments because of fluctuations and uncertainty.However, others may argue that increasing federal transfers is a positive step towards addressing the so-called fiscal imbalance and providing Ontario a fair share of federal funding that is more proportional to the contributions that Ontarians make to the federal tax base. This demonstrates another useful limitation/caveat performance ratios/indicators are not purely objective, in that their interpretation and ultimately the air in which they are used/applied depend on the subjective point of view of the public sector analyst/manager.Net Foreign Currency Debt to Total Debt measures the provinces debt level to foreign countries and or organizations. This figure has seen an increase from 21.4% in 2002/2003 and 23% in 2004/2005 and from that point it declined to approximately 20% by 2006/2007. (Please refer to appendix 1.3) This measure is a good indicator on Ontarios reliance on foreign governments in terms of trade and its indebtedness. A declining net foreign currency debt to total debt means that the province can have a positive effect on the provinces credit rating that assesses the governments vulnerability and stability which can have an impact on interest rates on its debt. An improving credit rating will increase the chances of the Ontario government to refinance its maturing debt because of lower risk of default from its debt. An increase in this ratio might cause international panic where other countries can call the province on its debt that can have adverse effects on the econo my in terms of attracting investors and other countries willing to do business with the province. As a useful summary of the provinces dependence on foreign debt, it is important to keep track of this budget measure of vulnerability. interchange of the Ontario governments Financial Analysis as a Measure of Performance base on the above discussion the ratios used by the government of Ontario is a useful tool as part of a comprehensive outline or approach to analyzing, measuring the provinces economic and financial performance. However, these tools alone are clearly not sufficient to obtain a full and clear picture and forecast of the economy. Variables such as domestic and international political conditions, international and domestic commodity damages, supply and demand, price of oil, interest parity, price parity, and other non-financial indicators, such as demographic trends, should be considered when formulating, implementing, and assessing the effectiveness of policies and pro grams.Furthermore, these budgetary performance measures tend to be applied at a comparatively high level (i.e. on rolled-up or summed-up figures or estimates) with a view to gauging whole of government performance. Since the Ontario government comprises of individual ministries and departments, improving whole of government performance must start with the individual ministries and their proper(postnominal) programs and projects. This reinforces the idea that full and effective performance measurement entails consideration of other and more specific factors/elements. The government of Ontarios financial measures provide very useful snapshots of the government position at a particular point in time. However, there are other measures, information and factors that one has to consider in gauging the performance of the government and formulating recommendations and strategies moving forward.ConclusionIncreased pressures and complexities confronting the public sector has encouraged the pr oliferation of private sector practices, including the use of performance measurement to gauge program outcomes and ensure transparency, accountability, and sustainability of government operations. As this paper has demonstrated, there are benefits to performance measurement, such as providing opportunities to track, compile, and maintain data and requiring regular reporting, thereby helping in promoting transparency and benchmarking. However, these financial/material indicators are not sufficient to ensure effective and efficient management of public resources. As this paper has pointed out, there are several limitations and caveats to performance measurement that public sector managers/analysts must bear in mind, including the need to incorporate other information (e.g. non-financial and qualitative data) in developing, implementing, and assessing policies and programs. These points were reinforced in this paper through an examination and rating of financial ratios intended to me asure the performance of Ontarios budget between the period of 2002 and 2007. While this paper presented a case study of performance measurement from a financial perspective, perhaps a more interesting and richer case study would be to explore quantifying qualitative program performance measures in which represents another area of future research. Indeed, performance measurement when used in a public organization by itself is a fools gold (Carroll and Dewar, 2002).