Financial Management Reforms in Public Sector
Introduction
In the business world the provision of information allows the managers to be more efficient and effective while performing management accounting duties. With the widespread need for business accounting to manage the finances efficiently, public financial management is driven. The spread of accountable management throughout the world has redirected the management attention from inputs to outputs and outcomes has provided management accounting with the opportunity to infuse the public sector with the tools that are required to manage public needs efficiently. As change has swept across the public sector, a huge range of accounting and financial management challenges are created.
This report is constructed to address the government reforms that the government institutions have undertaken in Saudi Arabia as compared to Australia. The paper is dissected in four sections as follows:
Section A: This will be based on broad and deep discussion of public financial management and the need for its development. Key issues, benefits and costs related to public financial management will also be discussed in this section and how to implement it.
Section B: Financial management reforms for past decade in Saudi Arabia will be presented in this section along with key challenges and benefits being driven by Saudi Arabian government. The steps taken by Saudi Arabian government will also be discussed in this part.
Section C: The public financial management structure in Australian economy will be presented along with initiatives taken by Australian government.
Section D: The financial management reforms in public sector of Saudi Arab and Australia are compared in this section. After comparative analysis the key lessons that Saudi Arab can learn from Australian public sector will be presented.
Section A Public Financial Management
1.1 Public Financial Management
Public Financial Management (PFM) is concerned with the effective management of collection and spending of funds by the government. With the evolving hike in societal needs greater than the available resources to government, there is a strong need to manage all public resources efficiently and effectively (Bietenhader & Bergmann, 2010). In order to minimize funds wastage and optimum spending, efficient public financial management becomes the central and vital approach opted by governments to create a relationship with its citizens based on mutual trust and consensus (Bietenhader & Bergmann, 2010).
The reforms of the ineffective public financial management system helps the government and institutions to secure long term economic success while maximizing the efficient use of limited public resources.
1.2 Approaches for Public Financial Management
Following approaches aid in development of economy of the countries around the globe:
- For the dealing and setting of PFM reforms, the Public Financial Management work should encourage and support country’s initiatives.
- The analytical work should be done in an incorporated and facilitated way, drawing upon the particular capabilities, with the timing and scope that should be set up in view of country’s needs.
- PFM framework helps in the implementation of PFM reforms and can add up value in the government’s policies like their budget and processes.
- Their work should be time framed in the perspective of many years’ horizon and should be organized in sequence.
- They should have continuously monitored the gains in the performance of the PFM systems (World Bank, 2014).
1.3 Key Issues
There are the following key issues that are faced by the government:
- An economic factor represents the differences in the quality of PFM systems. But the country’s economic instability can have strong negative impact on the quality of this system(Wynne, 2005).
- Poor technical assistances related to PFM would lead to poor PFM systems and the association will be weak(Bowerman, 2002).
- In the countries where the economy depends on the donor efforts would affect the quality of the PFM systems(Bowerman, 2002).
- The poor political support and leadership would lead to poor PFM reforms.
- The lack of effective implementation and poor efficiency would lead to poor PFM reforms.
- Indirect investment by the government is the main key issue; the investment should be made directly(Bowerman, 2002).
- Lack of financial funds is also an issue regarding implementation of PFM reforms.
- If the reforms are not country owned, the result will be a poor PFM system (Lawson, 2012).
1.4 Benefits
Following are the benefits due to proper implementation of PFM systems:
- It helps in improving the budget cycle of the country by the effective budgeting plans.
- It helps in achieving the development of economy.
- It helps in improving the government’s standard and auditing systems.
- It helps in developing management information systems which helps in the usage of better technical assistances.
- It will also help in strengthening the skills of the managers and the accountants by the implementation of the effective plans.
- It helps in improving the financial management system of the country.
- It helps in controlling the external and internal issues of the country.
- Everyone should be clear about the purpose and know the strategies of the country’s policies regarding PFM (World Bank, 2014).
1.5 Cost Incurred in PFM Reforms
While improving the PFM reforms, following costs will be incurred:
- The Government would have hired the Public Financial Management systems, who charged them for making the effective plans in order to achieve the development of economy(Mulgan, 2002).
- Different technical assistances would be utilized like managing information systems and different databases would be bought by the government.
- Arranging meetings at good level while asking donors for their investments will require funds(Mulgan, 2002).
- Cost would incur while hiring the competent accountants and auditors (Mulgan, 2002).
This is a brief introduction about Public Financial Management that how it works as well as its importance for the development of country through economical perspective as economy is the main root of country’s health.
1.6 Principles for Implementation of PFM reforms
PFM reforms need to follow a specific sequence in order to achieve the desired level of development. Reforms must be implemented as an integral part of an overall strategy. The financial reforms needs to start with the sound policy formation at a macroeconomic level that includes the framework of government and macro-economic policy (Barret, 2004). The reforms must also be backed up by political commitment at the highest level and must be continued with unwavering support for reaping long term benefits (Barret, 2004). Moreover the key institutions needs to be empowered for operating the autonomously from government. These institutions will provide transparent mandates, sufficient financial resources and human capital to operate efficiently.
Section B Saudi Arabian Public Sector Reforms
Saudi Arabia is a developed country with robust economic performance coupled with strong growth in public spending. Saudi Arabia is known as one of the best performing G-20 economies countries with strong economic growth through its stabilizing role in the global oil market. From the past few decades Saudi Arabia has performed many financial reforms for the development of their economy.
2.1 Financial Management Reforms in Saudi Arabia
Due to its economic size in spending, consumption and investment and for being an owner of the most valuable economic resource i.e. oil, the fiscal policy implemented by Saudi Arabia affects the economic well-being of the country. One of the main economic policy tool used by Saudi Arabian government (Hélis & Sánchez, 2010). The financial management reforms that are performed by Saudi Arabia in the past few decades in order to maximize the development of the country are outlined below:
- Saudi Arabia is known as the main oil producer in the world. In the past few decades, Saudi Arabia has increased the oil prices which facilitated the greater public spending(Barret, 2004).
- The revenue generated by oil exports increased from US $3 billion in 1970 to US $100 billion in 1980. Saudi Arabia spent huge amount of oil revenue on infrastructure projects as well as some welfare programs. It also followed a liberalized trade policy(Koeda & Kramarenko, 2008).
- With the public investment, Saudi Arabia was able to improve the infrastructure quality for diversifying the economy of the country. The table below shows the growth of expenditure in oil producing countries. The table highlights the public expenditure prior to oil price boom and after the oil price boom. Clearly, the government of Saudi Arabia increased the budget expenditure during the oil boom followed by a reduction in expenditure after the boom.
Table 1: Average Annual Growth of Budget Expenditure
Source: (Al-Darwish, et al., 2015)
- Saudi Arabian government ensured to practice balanced approach which is (in accounting terms) explained as balancing the revenues and expenditures. The concept didn’t work well in reality but in starting years the balancing approach worked well due to large reserves built up(Al-Darwish, et al., 2015).
- The transition of Saudi Arabian public sector moved the economy from being a capital-surplus mineral economy to rentier economy. The boom in oil output and revenue during 1974-1981 permitted Saudi Arab government to accumulate the financial reserves for lengthening the structural adjustment of the economy(Al-Darwish, et al., 2015).
- During the second oil boom in 2002-2008 period, financial capital was accumulated by Saudi Arabian government leading to structural adjustments. This also helped the government to emphasize on education and competitiveness of the Saudi economy.
- With hype in foreign direct investment, country was able to come up with the best financial management reforms and implemented the domestic reforms with focus towards education and health sectors(Al-Darwish, et al., 2015).
- From 2006 onwards, the Saudi Arabian government’s planned expenditure intentions were clearer with more focus on education and health. However, due to adoption of public finance, the government had been able to control the unnecessary government recurrent expenditures(Cangiano, et al., 2013).
- Due to increase in oil revenue the government expenditure increased causing an increase in demand for goods as well as increase in imports. The ripple effect led to increase in investment opportunities while reduction in government customs and duties. Increased income and increased savings coupled with double consumption rates followed the multiplier effect(Cangiano, et al., 2013). This is shown in the oil revenue volatility model below.
2.2 Key Challenges
Following are the key challenges in the financial management reform of Saudi Arabia:
- Due to significant decline in oil revenues and high population growth, Saudi Arabia has to face both financial as well as budgetary restraints.
- Lack of qualified accountants posed a big threat for the government. The government strived to hire the best and competent accountants for managing the budgeting policies.
- Most of the companies depend on the big 4 accounting firms which create major issues related to audit fees(World Bank, 2014).
- Lesser academic research exposure and low inclination towards implementing a coherent and integrated financial system in public sector hindered the economy’s growth (Nurunnabi, 2015).
- The most significant issue faced by economists and financial sectors in Saudi Arabia are the inability to calculate the scale and pace of reform needed to build the true wealth because of different estimating trends for the Saudi Economy.
- Saudi Ministry of Finance has always tended to be reactive rather than proactive i.e. cutting the capital expenditure after the fall in oil price and increasing the current and capital expenditure in rising oil prices(Mallakh, 2015).
- Previously, government of Saudi Arabs didn’t anticipate the oil price cycles for steering the economy accordingly(Mallakh, 2015). This problem occurred because the real power of managing finances and budgets lie in the hands of Saudi Ministry of Petroleum instead of Ministry of Finance.
2.3 Benefits
There are the following benefits Saudi Arabia achieved while implementing financial reforms:
- Foreign direct investments increased with the attraction of oil exports(Al-Darwish, et al., 2015).
- Saudi Arabia focused on the domestic reforms in order to attain the benefits.
- Ongoing public financial management reforms helped in increasing the technical capacity to achieve their goals(Mallakh, 2015).
- It helped in accomplishment of the transparency, accountability and better financial structure in public dimension (Nurunnabi, 2015).
- Economic development was achieved by implementation of financial reforms in public sector in Saudi Arabia through proper management of revenues and expenditures.
Section C Australian Public Sector Reforms
Australia is also a developed country. Since 1983, Australia is struggling to manage their budget and management systems. The Australian government has gained almost $30 million with the help of the Philippines program of public financial management in the five years for the improvement of transparency and accountability. (Anon., 2015)
3.1 Public Financial Management Reforms
Following financial management reforms have been taken into the account with the help PFMP in Australia:
- PFMP is assisting the department of health of stakeholders, which helps in organizing and systemizing the public expenditure.
- The department of Budget and management helps in obtaining and implementing the fiscal tools which helps in improving the financial reforms(Barret, 2004).
- PFM certificate program organized for improving and adding the technical skills and competences of the financial workforce (Anon., 2015).
- Adaption of IFRSs gave the Australian public sector a strategic direction for reporting periods after January 2005. Several benefits were reaped including better oversight and comparability of public sectors with others around the world(Barret, 2004).
3.2 Outcomes and Outputs Framework
The Australian government agencies utilize the outcomes and outputs framework through the government tends to deliver benefits or services to the Australian community through proper administration of items and goods and services that are delivered against these specific performance benchmarks or targets. The framework is based on following features (Barret, 2004):
- The government sets the outcomes via outcome statements for achieving goals in given areas
- These outcomes are then specified in terms of the impact which government aims to target with aspect of society e.g. defense.
- The parliament then appropriate the funds on accrual basis that allows the government to achieve these outcomes through administered items and departmental outputs.
- Items like grants, benefit payments and transfers are administered on behalf of agencies for maximizing the contribution to specified outcomes.
- The agencies then specify the nature and full accrual price of outputs and manage them for maximizing the contribution to the achievement of Government’s desired outcomes.
- Performance indicators are then developed for scrutiny.
- Agencies discuss the performance against indicators in the annual reports.
Section D Lessons Learnt
In order to review public financial sectors of both countries, we get to know that apart from similarities in financial practices, Australia is still leading the way with more developed and advanced financial system in public sector. However, both countries are trying really hard for adopting different public financial management reforms so that economy can be run effectively and efficiently.
4.1 Key Lessons Learnt by Saudi Arabia from Australia
Australia is more competent than Saudi Arabia while facilitating a better public financial system. Saudi Arabia can follow the footsteps of Australia by setting up accruals and output-outcome based budgeting systems. By following the accrual accounting system, Saudi Arabia can experience a shift from input to output based budgets and outcomes reporting system. It will also drive the initiative to turn to market benchmarking and outsourcing of the delivery of government securities (Barret, 2004). Moreover balanced score card approach will also aid in the evolution of performance measurement and management. Accrual based public accounting will also help Saudi Arabian government to recognize the importance of ownership and management while prepare the government for development of its financial statements. Secondly Adoption of international financial reporting standards can bring the light in public sector management of Saudi Arabia (Barret, 2004). This will allow the Saudi Arabian government to facilitate more meaningful comparisons of the financial performance and financial position of Saudi and foreign public sector reporting entities.
The swift shift from cash based to accrual accounting in Saudi Arab will not only trigger significant development in accounting and financial systems but also will aid in the way the resources are managed and accounted for. Moreover by adapting the accrual based accounting, transparency and accountability can be enhanced in public sector of Saudi Arab (Barret, 2004).
Conclusion
As we see in the above scenario and by analyzing the Public Financial Management reforms in Australia and Saudi Arab, we can conclude that the adoption of PFM reforms is compulsory and very important for the development of the economy of countries. It can only be achieved when we would implement the PFM reforms effectively and efficiently with the help of best accountants and auditors. The analysis has also concluded that Saudi Arabia can learn key strategies for implementing a much effective financial reform in public sector like Australia.
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