Green Cover Confidential Report No. - LAC March 14, 1994 Public Sector Human Resource Management: Experience in Latin America and the Caribbean and Strategies for Reform Gary J. Reid and Graham Scott Public Sector Management Division Technical Department Latin America and the Caribbean Region The World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

________________________________________________________________ Executive Summary A. Public sector human resource management policies and practices in many Latin American and Caribbean (LAC) countries need significant improvements. Conversations with professionals and managers within core government Ministries in many Latin American countries reveal deeply felt dissatisfaction and frustration both with the performance of public agencies and their employees and with the legal and institutional framework that appears to undermine individual efforts to manage public agencies and their employees effectively. B. Most Latin American public sectors are bedeviled with counterproductive civil service policies and practices that impede their efforts to recruit and retain highly qualified employees and motivate them to perform to the best of their abilities. Low levels of compensation, especially for positions demanding greater skills, undermine efforts to recruit and retain qualified employees. Excessively rigid procedures and practices impede the ability of public managers in LAC to significantly affect the performance of their employees. Such rigidities may be found in policies and practices governing promotions, assignment of salary upgrades, as well as the transfer, demotion or release of non-performing employees, sometimes including constitutional guarantees of job tenure except in the event of gross malfeasance. C. Finally, the institutional structure within which public sector managers must operate in LAC often is so full of red tape and overlapping responsibilities that it is extraordinarily difficult to take any significant actions, let alone effectively manage complex programs and large numbers of employees. Ex-ante audits of all expenditures prior to authorization create long delays in both managerial actions and compensation of vendors, thereby both undermining the ability of those managers to obtain services from the private sector and causing them to face prices for those services that have been increased to reflect the uncertainty regarding when and if payment will be received and the expected lags between service delivery and receipt of those payments when they are forthcoming. D. This litany of concerns about the structure and performance of civil service systems in many Latin American countries highlights the need to take significant steps to restructure and energize those systems. Accordingly, this study offers two distinct types of recommendations. First, the study offers recommendations on how these systems might be fundamentally restructured, dramatically altering their orientations from that of controlling inputs (personnel actions) to that of holding managers accountable for the performance of those inputs in the production of the agency's outputs. Since such fundamental change is likely to be difficult in the short run, the study also offers a variety of recommendations for improving human resource

management capacities within the existing legal framework found in most LAC countries. These latter recommendations address salary restructuring as well as various other core personnel policies, such as recruitment, promotions, employee performance reviews, etc. A.Fundamental Restructuring E. Civil service systems in virtually all LAC countries are designed to prevent mismanagement. The key feature of such systems is their focus on controlling input (personnel) usage. This is reflected in centralized pre-control of such things as expenditures, employment slots, hiring, firing and promotions actions, salary scales, salary adjustments, employee performance review procedures, etc. These centralized pre-controls over human resource management decisions are intended to prevent managers from making bad decisions -- to prevent managers from employing too many people, staffing their units with the wrong occupational or skill mix, hiring unqualified persons, paying unjustifiably high or unfairly low salaries, promoting persons for the wrong reasons, etc. F. A common theme among government management reform programs in a number of countries, which otherwise have important differences, is a search for more effective public sector performance through applying simple principles of modern management. These essentially boil down to four points. a. clear expression of, and agreement about, objectives b. managers who are accountable for results c.the freedom to manage resources within incentives for efficiency d.clear information about performance G. However, while these principles can guide the shaping of a management system which encourages the achievement of results, it must always be remembered that results are produced by people and the relationships between them. Questions of leadership, culture, values, vision and motivation are what energizes a management system to achieve organizational goals. Good management systems increase the probability of good performance but cannot guarantee it. Efforts to reform government management regimes, which are based on these ideas, have occurred in a growing number of countries. Australia, New Zealand and the United Kingdom have been pursuing reform programs of this type for many years now. In the United States the Government Performance and Results Act, together with the Chief Financial Officers Act, the Budget Enforcement Act and the continuing work of the Vice President's National Performance Review, share the same underlying themes. Not only English-speaking developed countries have picked up these themes. H. In Malaysia the objectives of administrative reform are, in the words of the Chief Secretary "firstly we want to create a civil service which is efficient, effective, dynamic and

innovative; secondly we need to have a civil service which is highly disciplined with the highest standards of integrity; and thirdly we require a civil service which is action oriented, people oriented and customer focused". I. In pursuing these goals the Government of Malaysia is introducing total quality management and has established client's charters as an assurance that agencies will produce outputs or services that comply with declared quality standards. There will be concrete performance indicators used to continuously upgrade the services. "Public sector managers are now held accountable for achieving the intended outcomes of their respective programs. The focus is on results, not just processes of budgetary expenditure. The reward systems of performance appraisal procedures have also been introduced as support mechanisms to ensure a higher level of motivation, discipline and delegation among public sector employers. The remuneration system introduced in 1992 will lead to flatter, less hierarchical organizations. It will also facilitate the provision of adequate recognition to excellent employees." J. Countries pursuing this approach to reform are endeavoring to focus and release the energies of public administrators by increasing their responsibilities through the removal of regulations on their discretion while strengthening their accountability for results. Various incentives and sanctions are sometimes used to reinforce accountability but the specifics depend entirely on the circumstances. K. The principles behind these approaches have some, but not all, of their philosophical roots in rationalist views about the role of the State, which seek to establish objective goals for government interventions and to meet those goals effectively but at minimum long-run cost. They seek also to expose the details of the operations of government, and its effectiveness in pursuing stated objectives, to scrutiny and comparison by the various parties with an interest in the government activity concerned and in particular by the people's elected representatives. They are broadly based on the same principles upon which effective private sector management and accountability to shareholders and other parties are based. L. In support of these changes there have been rapid developments in theories and doctrines of finance, accounting, and management and these have contributed greatly to change in the private sector. However, their potential to contribute to the evolution of the public sector is still largely untapped in many countries. Developments in institutional economics over the past 20 years have provided new theories for analyzing the behavior of government institutions and developing policies to improve their performance. Scott and Gorringe (1988) summarizes some of these theoretical influences on the reform programs in New Zealand. Some political scientists and others argue that "managerialism" is unsuited to public administration. The authors of this report disagree (Scott (1992)) and believe that the problems raised by these critics are exaggerated and can be dealt with by careful design of a management framework supported by professionalism in the practice of management. (Scott & Blakeley 1993) There are, however, pervasive requirements to modify private sector practice to take account of the special character of the public sector. M. Around the world there are still many large government agencies which consume a substantial share of the national resources of their countries and which pursue vague and often

contradictory objective, with little accountability for, or even information about, the effectiveness of management. There are many reasons why this has occurred, and it is a mistake to assume that more traditional approaches to public sector management were simply the result of a lack of enlightenment about modern management principles. Traditional bureaucratic modes of organization, with their diffused accountabilities and their propensities to avoid risk, innovation or efficiency arose all over the world and have been stable and enduring features of the public sector landscape. This would surely not be the case if they had not been well adapted to, and deeply embedded in, the political and administrative life of countries. Such organizations have been successful in playing certain necessary roles in government over the last century. (Horn (1988) elaborates these issues in depth). Efficiency, innovation, accountability and openness were not valued highly in the affairs of these traditional organizations. N. They were in fact developed as a response to a set of problems that preceded them and which they have handled by and large satisfactorily. The modern bureaucracy came about in many countries as a response to problems created by the politicization of the public service, low morale, corruption of various kinds both intellectual and financial, and low quality service. At its best the modern bureaucracy is an organism capable of mass producing standardized public services by politically neutral staff who have reasonable expectations of income and security. The modern bureaucracy in this sense has done for government services what Henry Ford did for the motor car: that is, delivering a product of uniform quality which met the expectations of the public which had been established in part by the organization itself. Asking the question whether the product's quality or suitability was as fine as it should be was not encouraged, and the absence of significant alternative suppliers of course meant that the expectations were not often challenged. O. At worst, however, these same bureaucracies can become captured by their own interests as providers, have low and declining productivity, a culture that inhibits innovation, inertia which leads to simply doing what has always been done, and indifference to the needs of the public they are there to serve. The fact that bureaucracies with indifferent reputations have been enduring features of government administration the world over suggests that they may have, however, come to be accepted - possibly just because of the absence of any preferable alternative. A more likely explanation is that they have satisfied the sources of political power which had the means to abolish or reform these institutions if they had so wished. The stability and survival of these organizations is remarkable. It is little wonder that officials from Finance Ministries and Audit Offices, and Cabinet Ministers in charge of public administration (who are often relatively junior Ministers), fail to make much impact on these organizations simply on the basis of arguments that they are not very well managed or that they don't keep proper accounting records. P. The emerging tendency towards more rational managerialist approaches to public administration today is the consequence of several forces affecting most countries in various ways. This explains why governments of differing ideological stripes have adopted these approaches in varying degrees, as a result of their compelling logic in the circumstances that currently affect so many countries.

B. Reform Within an Existing Legal Framework Q. While there are common themes in approaching common problems at a general conceptual level, there is also, on the other hand, the ultimately dominant influence of specific situations, objectives, and culture in determining what is actually done in reforming government management in any country. Careful consideration of the problems and possibilities in any situation must precede any attempt at reform. R. There are many factors in any particular situation which will have a major influence and included in these will be some of the following matters. ·the state of development in a country and the condition of its economy and finances; ·ideological philosophies or political preferences about the role of government in the

society; ·practical political considerations, such as where power lies in a government and what are

the views of the centers of influence within it about the need to change and the objectives to be pursued;

·the state of the civil service and public administration generally and, in particular, such

matters as the stock of skills, the quality of leadership, the degree of political influence, the cultural orientation towards efficiency, honesty, or otherwise;

·the degree of trust, and the consequent attitude towards delegations of authority; ·the immediate and long-term priorities of the government as they affect what demands

will be placed on public administration and the preparedness to undertake reforms which may disturb existing patterns;

·the desire or otherwise of the civil servants themselves to promote and lead change. S. A careful consideration of these and other powerful influences on what is possible in any given situation promotes a clear definition of the scope and objectives of financial reform. This should aim to solve immediate and practical problems in addition to establishing useful frameworks for the longer term. There is some experience to show that political leadership is unlikely to agree to disruptive change and systems improvements just for their own sake. Practical short-term problem solving is vital to gain their support for longer term programs. T. Programs of management system reform also require the support of people affected throughout the organization being reformed, through communications, incentives and, in certain circumstances, safety nets for those who will be adversely affected. Given the starting point of dysfunctional central control in many countries, the incentive to managers of being freed from frustrating central controls can be a powerful motivation, even though the increases in

responsibility come paired with much tighter systems of accountability and performance assessment. U. The risks of shortcomings in implementation and unexpected difficulties, together with the factors listed above, all need to be considered in designing a programme of implementation to apply a general, management framework to solving a sequence of practical problems while at the same time building up an overall integrated system as the framework becomes established. The ideal end point is a full implementation of the basic principles of a best-practice model, although views about what this is are debatable and will be evolving constantly. Whatever the specific circumstances which determine the objectives and achievements of a reform programme in any given situation, if effective service delivery is the goal then the designers should seek to reflect the basic principles of clear objectives, clear accountability, transparent reporting, incentives, delegations, effective budgetary processes etc. When working these principles into specific system features, designers should seek simplicity and cost-effectiveness and be wary of over-emphasizing particular techniques out of their appropriate context. It is, for example, possible to spend considerable resources on sophisticated accounting systems without getting much benefit if the preconditions for using the information in effective decision-making are not in place. It is the performance of the system as a whole which is the overarching objective. Accordingly, when fundamental restructuring of the human resource management framework proves infeasible in the short run, a variety of more modest devices can be found for enhancing competitive pressures in core personnel policy areas; including salary setting and salary adjustments, tenure protection, recruitment, promotions and career planning, employee performance evaluations and training. (1) Salary Structure V. Data reported in this study provide striking evidence that the salary-setting regimes that typify LAC public sectors fail to assure that public sector compensation bears a consistent relationship with the opportunity costs of working in the public sector. Those salary regimes rely upon technical rather than economic criteria for assigning base salaries. Because of this, they cannot ensure a consistent degree of competitiveness between public and private sector salaries across types of positions. This is true for the proposal by the Presidential Commission for Reform of the State (COPRE) for assigning managerial salaries in Venezuela's public sector and the newly adopted salary scale for the National System of Public Administration (SINAPA) in Argentina's public sector -- among the most sophisticated to be found in Latin America. The poor functioning of the public salary regimes is evident in the widespread dissatisfaction expressed by civil servants, political appointees, and even private sector executives aware of salient features of them. W. Public sector salaries need not equal their private sector counterparts -- because of the greater tenure protection usually afforded public sector employees in LAC than private sector employees and because of the weak fiscal position of most LAC governments. But if a simple rule is to govern the setting of public sector salaries, a reasonable recommendation would be that public sector salaries should bear a uniform relation to those available for comparable private sector positions. Such a policy would provide two important advantages. First, it would focus

the debate about the appropriate level of public sector salaries upon the single most important determinant of the competitiveness of those salaries; namely, the opportunity costs (i.e., domestic private sector wages for comparable positions) faced by public employees of working in the public sector. Second, it would provide a simple, objective, measurable basis for setting salary differentials within the public sector; namely, in proportion to differentials found in the domestic private sector. (2) Salary Supplements X. The equity and transparency of salary policies in most LAC countries is compromised by the proliferation of salary supplements. Except in Trinidad and Tobago and in Honduras, salary supplements account for a significant share of total public employee compensation--as much as 84% of total compensation in Argentina, 80% in Uruguay, 74% in Chile and 32% in Venezuela.1 Interestingly, although some of the supplements -- for instance, household supplements -- bear little or no relationship to employee productivity or job demands, many supplements are linked to these factors, even if only crudely. Y. The primary problems raised by salary supplements are not so much their proliferation as the reduced transparency of salary setting procedures and their outcomes and the lack of accountability for their impacts upon agency performance. Accordingly, the following recommendations are suggested: (a)Allow discretionary salary supplements only when managers responsible for assigning

those supplements are held accountable for the performance impacts (upon their units) of their assignment of those supplements.

(b)Strengthen personnel and financial information systems to ensure capacity to provide reliable and timely reports on the pattern and impacts of salary supplements.

(3) Salary Policy Enforcement Capacity Z. Three factors often undermine the ability of central authorities to enforce centrally mandated salary policies. The factors are the strength of the incentives for line agencies and their managers to circumvent those policies, the ease with which managers can circumvent the policies, and the risks of being detected and punished for noncompliance. AA. Incentives to circumvent salary policies are strong because of the inability of typical public sector salary scales in Latin America to assure a consistent and competitive relationship between public and private sector salaries for comparable positions. In Venezuela, El Salvador, and Uruguay, the avenues for circumvention of salary policies are ample and varied and appear 1. The above reported shares of total compensation accounted for by salary supplements in Argentina, Uruguay, and Chile reflect maximum shares either possible or observed within the existing salary structure; although the shares reported for Venezuela and Trinidad and Tobago are averages based on salary scale data and actual expenditure data reported in annual budget documents. To put this in perspective, although the maximum share of total compensation that can be accounted for by supplements in Uruguay is 80%, the average is only 20%. It is, then, not surprising that these shares are higher in the former three countries than in the latter two. Data limitations prevented reporting the same measures for all five countries.

to represent those available in many LAC countries. The methods include a multiplicity of salary supplements, the capacity to generate new job titles without effective checks by central authorities, the ability to promote employees without timely and effective review of such promotions by an independent body, and the possibility of hiring some employees outside the career civil service (for example, letting fixed term or fixed price contracts for personal services) without adequate means of holding those managers and their agencies accountable for the performance of such employees or the unit for which they work. Weak capacities for personnel and compensation monitoring, such as those found in Trinidad and Tobago, Venezuela, El Salvador, and Uruguay, appear to be typical among LAC countries, thereby significantly reducing the risks faced by line agencies and their managers who circumvent centrally imposed salary policies. (4) Other Core Personnel Policies and Practices BB. If core personnel policies are to elicit effective and efficient performance by public sector employees, they must be designed to enhance competitive pressures throughout the personnel system. By contrast, policies that create monopolies -- such as designating a single agency to provide all training or to handle recruitment -- undermine competitive pressures. Policies that restrict competition for public employment slots in other ways -- for example, prohibiting recruitment to position or restricting the recruitment pool to internal candidates -- reduce the competitive forces required to assure that the public sector has access to the best employees it can afford to hire. Guarantees of the right to career advancement and ironclad tenure guarantees dramatically undermine the competitive pressures that can be brought to bear on public employees to perform well. Employee evaluation procedures that create strong incentives for evaluators to assign virtually all employees the same, highest rating inexorably undermine efforts to reward employees on the basis of performance. Trivial investment in training sends a signal that the institution does not value skills and reduces the attractiveness of public sector employment -- makes it less competitive. Failure to hold agencies and their managers accountable for their employees' performance or their own resource allocation decisions including how well they target their training resources also undermines the system's ability to impose competitive pressures on managers. CC. These anticompetitive consequences of civil service policies and practices can be avoided. The experience of agencies such as the Superintendencia de Valores y Seguros and the Superintendencia de Bancos e Instituciones Financieras in Chile and the Banco Central de Venezuela, demonstrate that public agencies can enhance competitive pressures on the civil service. This can be done, for example, by recruiting from external as well as internal sources, eliminating de facto or de jure promotion guarantees, eliminating monopoly control over particular elements of the human resource management system, etc. DD. Tenure guarantees: To protect public employees from excessive political pressures, civil service systems in LAC typically provide strong tenure protection to career civil servants. In Argentina, Chile, El Salvador, Guyana, Trinidad and Tobago, Venezuela, and Uruguay, and undoubtedly many other LAC countries, the vast majority of public employees are career civil servants who can be removed only for severe disciplinary infractions. When Ecuador recently prepared a plan for civil service reform at the municipal level of government, the cornerstone of

the proposed reform was just such tenure guarantees. Less frequently, career civil servants can be dismissed in the event of a major restructuring of the agency within which they are employed -- for example, in Guyana and Venezuela -- although this power is rarely employed. EE. The drawback of such tenure guarantees is, of course, that employees covered by them need do no more than avoid committing severe disciplinary infractions -- such as consistently refusing to show up for work -- to retain their positions. If such guarantees are coupled with poorly or nonfunctioning procedures for linking employee rewards (e.g., assignment of tasks, responsibilities and managerial authority, annual salary increments, training opportunities, promotions, or other awards or bonuses) to performance, such employees will have little incentive to proficiently execute their assigned tasks. Only personal pride in one's work remains as a possible motivator under such circumstances, and that too is likely to be compromised when the more self-motivated workers find their efforts undermined or compromised by the indifference of their less self-motivated colleagues. FF. Tenure protection in most LAC countries is granted to those employees whose job demands are least susceptible to being distorted by political pressures -- namely, non-managerial employees -- while the positions least likely to enjoy tenure protection are precisely those most susceptible to political pressures -- namely, higher management, such as positions of "exclusive confidence." Venezuela is perhaps the clearest example. This arrangement couples all the drawbacks of tenure guarantees with few of their benefits. A wiser policy would restrict tenure guarantees to those employees whose positions require a regular exercise of judgment that could be readily compromised by political pressures -- namely, management and highly skilled professionals. Administrative and other clerical personnel, semi-skilled and unskilled labor need not be provided tenure guarantees. GG. Recruitment, promotions and career planning: Many LAC countries restrict competitive recruitment procedures and pools to entry level positions and higher level management. At the same time, promotions policies often, either de facto or de jure, are based primarily or exclusively upon seniority. Career civil service recruitment and promotions policies in Chile and Argentina provide the clearest examples. These restrictions undermine the competitive pressures that can be brought to bear upon existing public employees seeking promotion. The experience of agencies such as the Superintendencia de Bancos e Instituciones Financieras and the Superintendencia de Seguros y Valores in Chile, as well as the Banco Central de Venezuela, illustrate that opening recruitment at all levels to the competitive pressures of external candidates and preventing promotions from being based primarily or solely on seniority, can significantly improve the quality of a public agency's personnel. HH. Employee performance evaluation: Employee evaluation systems in many LAC countries fail to force managers to reliably sort their employees on the basis of performance. The typical employee performance evaluation system in LAC poses the following perverse incentives to managers charged with evaluating the performance of their employees. Because those managers can confer benefits on their employees (namely, salary increments and improved prospects of promotion) without facing any negative consequences for themselves or their agency (for instance, a loss of resources) by bestowing high performance ratings on their employees, they have strong incentives to give high ratings to all employees. Conversely, if they

give an employee a low rating, they stand to gain nothing tangible (since their own salaries, promotions and other rewards for performance do not depend upon how accurately they appraise their own employees' performance), while they run the risk that the poorly rated employee might either file a complaint (which could harm the manager's own performance review by his superior) or simply undermine the performance of his unit by slacking or even actively sabotaging the unit's activities. In short, systems such as the SINAPA system in Argentina and the system prescribed in the Nuevo Estatuto Administrativo in Chile, encourage evaluators to assign all employees the same rating, rather than to reliably sort them according to their actual performance. II. Some employee evaluation systems found in LAC do reliably sort employees according to their performance. Both the simple, subjective procedure employed by the Superintendencia de Seguros y Valores (SVS) in Chile and the elaborate, objective procedure employed by the Banco Central de Venezuela (BCV), appear to reliably evaluate employee performance. These procedures force evaluators to rank order employees, rather than to simply assign them to pre-specified performance rating categories, thereby forcing mangers to discriminate among employees. More importantly, evaluators in these agencies are in turn evaluated on the basis of the overall performance of their units, and they can influence that performance by how accurately they rank employees; two factors which strengthen their incentives to reliably evaluate and rank employees. These conditions are precisely the reverse of those found in most public sector employee evaluation systems in LAC, in which evaluators know that their safest strategy for both protecting themselves and their agency is to assign all employees the same high rating. The latter scenario exists under the SINAPA performance evaluation procedures in Argentina, those found within Venezuela's core civil service and those prescribed in the Nuevo Estatuto Administrativo in Chile. The former appears to exist in the SVS in Chile and the BCV in Venezuela. JJ. Training: Training provides an important opportunity for public sector personnel systems to both augment the attractiveness of public employment and improve the capacities and performance of their personnel. Unfortunately, human resource management practices in most LAC countries fail to take advantage of this opportunity for at least three important reasons. First, governments in LAC under-invest in training. Venezuela's central government devotes less than one-half of one percent of its personnel expenditures to training, or roughly one-third the fraction spent by that country's private sector employers. The same is true in Chile and appears to be typical in many LAC countries. KK. Second, personnel management systems fail to hold managers accountable for the results of their training resource allocation decisions. Pre- and post-training skills tests are unheard of. Nor is employee performance on the job monitored in ways that permit assessment of whether training allocations actually improve employee performance. But most tellingly, managers are neither rewarded for improving their units' performance through their use of training, nor penalized for their use of training resources that fail to yield performance improvements. LL. Finally, training rules often create a state-run or state-sanctioned monopoly for providing training to current or potential public employees, thereby undermining the competitive pressures that could be enlisted if training were contracted for on a competitive basis.

I. _________________________________________________________________ Introduction A.Some Conceptual Issues in the Design of Government Financial Management Systems A. A common theme among government management reform programs in a number of countries, which otherwise have important differences, is a search for more effective public sector performance through applying simple principles of modern management. These essentially boil down to four points. a. clear expression of, and agreement about, objectives b. managers who are accountable for results c.the freedom to manage resources within incentives for efficiency d.clear information about performance B. However, while these principles can guide the shaping of a management system which encourages the achievement of results, it must always be remembered that results are produced by people and the relationships between them. Questions of leadership, culture, values, vision and motivation are what energizes a management system to achieve organizational goals. Good management systems increase the probability of good performance but cannot guarantee it. Efforts to reform government management regimes, which are based on these ideas, have occurred in a growing number of countries. Australia, New Zealand and the United Kingdom have been pursuing reform programs of this type for many years now. In the United States the Government Performance and Results Act, together with the Chief Financial Officers Act, the Budget Enforcement Act and the continuing work of the Vice President's National Performance Review, share the same underlying themes. Not only English-speaking developed countries have picked up these themes. C. In Malaysia the objectives of administrative reform are, in the words of the Chief Secretary "firstly we want to create a civil service which is efficient, effective, dynamic and innovative; secondly we need to have a civil service which is highly disciplined with the highest standards of integrity; and thirdly we require a civil service which is action oriented, people oriented and customer focused".

D. In pursuing these goals the Government of Malaysia is introducing total quality management and has established client's charters as an assurance that agencies will produce outputs or services that comply with declared quality standards. There will be concrete performance indicators used to continuously upgrade the services. "Public sector managers are now held accountable for achieving the intended outcomes of their respective programs. The focus is on results, not just processes of budgetary expenditure. The reward systems of performance appraisal procedures have also been introduced as support mechanisms to ensure a higher level of motivation, discipline and delegation among public sector employers. The remuneration system introduced in 1992 will lead to flatter, less hierarchical organizations. It will also facilitate the provision of adequate recognition to excellent employees." E. Countries pursuing this approach to reform are endeavoring to focus and release the energies of public administrators by increasing their responsibilities through the removal of regulations on their discretion while strengthening their accountability for results. Various incentives and sanctions are sometimes used to reinforce accountability but the specifics depend entirely on the circumstances. F. The principles behind these approaches have some, but not all, of their philosophical roots in rationalist views about the role of the State, which seek to establish objective goals for government interventions and to meet those goals effectively but at minimum long-run cost. They seek also to expose the details of the operations of government, and its effectiveness in pursuing stated objectives, to scrutiny and comparison by the various parties with an interest in the government activity concerned and in particular by the people's elected representatives. They are broadly based on the same principles upon which effective private sector management and accountability to shareholders and other parties are based. G. In support of these changes there have been rapid developments in theories and doctrines of finance, accounting, and management and these have contributed greatly to change in the private sector. However, their potential to contribute to the evolution of the public sector is still largely untapped in many countries. Developments in institutional economics over the past 20 years have provided new theories for analysing the behavior of government institutions and developing policies to improve their performance. Scott and Gorringe (1988) summarizes some of these theoretical influences on the reform programs in New Zealand. Some political scientists and others argue that "managerialism" is unsuited to public administration. The authors of this report disagree (Scott (1992)) and believe that the problems raised by these critics are exaggerated and can be dealt with by careful design of a management framework supported by professionalism in the practice of management. (Scott & Blakeley 1993) There are, however, pervasive requirements to modify private sector practice to take account of the special character of the public sector. H. Around the world there are still many large government agencies which consume a substantial share of the national resources of their countries and which pursue vague and often contradictory objective, with little accountability for, or even information about, the effectiveness of management. There are many reasons why this has occurred, and it is a mistake to assume that more traditional approaches to public sector management were simply the result

Introduction

of a lack of enlightenment about modern management principles. Traditional bureaucratic modes of organization, with their diffused accountabilities and their propensities to avoid risk, innovation or efficiency arose all over the world and have been stable and enduring features of the public sector landscape. This would surely not be the case if they had not been well adapted to, and deeply embedded in, the political and administrative life of countries. Such organizations have been successful in playing certain necessary roles in government over the last century. (Horn (1988) elaborates these issues in depth). Efficiency, innovation, accountability and openness were not valued highly in the affairs of these traditional organizations. I. They were in fact developed as a response to a set of problems that preceded them and which they have handled by and large satisfactorily. The modern bureaucracy came about in many countries as a response to problems created by the politicization of the public service, low morale, corruption of various kinds both intellectual and financial, and low quality service. At its best the modern bureaucracy is an organism capable of mass producing standardized public services by politically neutral staff who have reasonable expectations of income and security. The modern bureaucracy in this sense has done for government services what Henry Ford did for the motor car: that is, delivering a product of uniform quality which met the expectations of the public which had been established in part by the organization itself. Asking the question whether the product's quality or suitability was as fine as it should be was not encouraged, and the absence of significant alternative suppliers of course meant that the expectations were not often challenged. J. At worst, however, these same bureaucracies can become captured by their own interests as providers, have low and declining productivity, a culture that inhibits innovation, inertia which leads to simply doing what has always been done, and indifference to the needs of the public they are there to serve. The fact that bureaucracies with indifferent reputations have been enduring features of government administration the world over suggests that they may have, however, come to be accepted - possibly just because of the absence of any preferable alternative. A more likely explanation is that they have satisfied the sources of political power which had the means to abolish or reform these institutions if they had so wished. The stability and survival of these organizations is remarkable. It is little wonder that officials from Finance Ministries and Audit Offices, and Cabinet Ministers in charge of public administration (who are often relatively junior Ministers), fail to make much impact on these organizations simply on the basis of arguments that they are not very well managed or that they don't keep proper accounting records. K. The emerging tendency towards more rational managerialist approaches to public administration today is the consequence of several forces affecting most countries in various ways. This explains why governments of differing ideological stripes have adopted these approaches in varying degrees, as a result of their compelling logic in the circumstances that currently affect so many countries. B.Hard & Soft Aspects of Management

L. Common solutions that advanced countries embarking on programs of government reform have considered bear resemblances to what has happened in the private sector in the same environment. There has been a tendency towards more focused business units and a rejection of slow-moving conglomerates; management structures have been flattened; rapid changes in information technology have been introduced; there has been a decentralization of authority away from head office to operating units close to customers and clients; the nature of top management has changed to emphasize leadership, communication and strategic skills rather than direction and control; and the introduction of total quality management programs featuring employee involvement and customer emphasis. M. Organizing the public sector to promote effective management requires attention to both the "hard" and "soft" elements. By "hard" is meant structures, systems, corporate planning, personnel policies, information technology and financial management. These elements are necessary to bring an organization to perform satisfactorily in delivering services and create a foundation for achieving higher levels of performance. These "hard" elements create a floor of acceptable management performance by defining and monitoring achievement against specified objectives. By "soft" management is meant the motivational factors of leadership, values, personal responsibility, empowerment of staff, teamwork and strategic thinking and assessing and shaping the external environment. It is generally believed by management experts that it is these "soft" factors which take an organization from satisfactory performance to high performance. It is not that the "soft" issues are about personnel management and the "hard" issues about finance or planning. The distinction is between systems on the one hand and empowerment and motivation of people on the other. The traditional bureaucracy runs by enforcing compliance with central requirements to achieve minimum standards. It rarely seeks to encourage individual excellence. C. Centralization versus Decentralization N. These modern management approaches may give the appearance of raising decentralization to a philosophical principle. This is not so. It is a common experience for government managers in all countries to be confronted with problems where the common sense remedies for systems failures are to reduce authorities by strengthening central controls. Typical of such problems are a loss of financial control, abuse of personnel management discretion, corruption, poor stores purchasing and investment decisions. These are serious problems. The right solution often is to tighten central controls and the political pressures to do so can be irresistible. O. It is not being argued here that decentralized solutions are always the right answer. In fact numerous case studies in both public and private sectors show that it can be a serious mistake to adhere rigidly to a view that either centralist or decentralist approaches are always appropriate. It depends on the issue and the circumstances. There is a lot of evidence that successful organizations display simultaneously characteristics that are objective, rational and

Introduction

tight alongside characteristics that are loose and uncontrolled. There is also evidence to suggest that a total reliance on central control and excessive rationalism and objectivity in management culture are a great threat to the performance and even the survival of organizations in both the public and private sectors. Successful organizations keep control at the center of those things which are major strategic issues such as its mission, its values and certain information flows. They also relinquish control of operational matters to the staff who are in charge of them. P. With regard to the information flows, large bureaucratic organizations both public and private, traditionally collected information on everything and processed it at the center to support the central control systems. In the private sector ITT, under its Chief Executive Harold Gineen, some years ago is an often quoted example. In the management practices in today's successful larger organizations the information flows are more likely to fit the following pattern: ·Information about the monitoring of critical successful factors is passed to the people

who have the authority to respond quickly in the workplace. A lot of this information is very decentralized, although information about the achievement of strategic goals goes to the center.

·Management information needed to prepare standard accounting reports, annual

accounts etc flows routinely to the center. ·Central management has an internal audit or management assurance function that

routinely checks the key operations of the organization and responds to failures. Q. The development of an organization over time also affects this balancing of control and motivation or centralization and decentralization in organizational design and culture. R. A common path for a private sector organization is to begin with a very loose system held together by one or a few key individuals. Success and growth leads to a demand for systems and controls as for example in the history of the Apple Computer Company. Other organizations, and sometimes the same ones later in the life-cycle, reach a point where an excess of systematic management systems stifles the dynamism of the organization. In recent history IBM is an example. S. It is a reasonable speculation that the path to becoming an organization with the balance of controls and freedoms set to bring rapidly improving performance, commonly involves passing through a stage of building too many controls. Practical experience then shows which ones are redundant or causing performance problems. As an organization grows it needs controls over different things. D. Control or Performance?

T. An evolution from controls to management freedom cannot, however, be seen as a justification for the extraordinary web of controls that once entangled the public administration of those countries that have reformed their government management in recent years, or that persist in most countries. Manuals running into thousands of pages covering personnel, finance, purchasing and other matters can be found around the world. In the United States the Federal Government has a personnel manual of 12,000 pages. New Zealand's regulations became so detailed that they included instructions on how motor cars were to be parked on hills. U. Such systems are full of contradictions and widely ignored, but create a culture in which the motivations of staff are to keep out of trouble by complying with rules and not achieving results. If the overriding objective of a management system is control and detailed management of public administrators by politicians, it must be accepted that this will cost heavily in terms of efficiency, effectiveness, performance and innovation. Even if that is not the objective the effect is the same, as for example, when layers of control come about simply through the accumulation of minor interventions in management discretion over a long period of time. Some observers argue that government management systems have this inherent tendency to accumulate controls. V. From such a starting point experiences in the countries that have reformed show that many, and perhaps most, of the controls can be removed without much effect either on control or performance. A point is reached, however, where the quest for improved performance does force a tradeoff with respect to control in the sense of micro control over daily management decision-making. The potential for people who are directly in touch with clients and production processes to use their detailed information to make quick and effective decisions is not compatible with forcing compliance with controls. It is ultimately impossible to design a system for compliance with central controls and for motivating staff to produce results and innovate for the future. W. In view of this, it is necessary to ask in any country what kind of government management regime is most conducive to the country's development and other goals. If high-performing, innovative public administration is necessary for the achievement of these goals over the longer term, then a system that motivates people to produce results is required. Whatever the evolutionary path may be through various phases of control and de-control, the system as a whole will not reach the necessary end-point unless there is a clear strategic goal to achieve this in due course. E.Country Specific Determinants of Systems for Government Management X. While there are common themes in approaching common problems at a general conceptual level, there is also, on the other hand, the ultimately dominant influence of specific situations, objectives, and culture in determining what is actually done in reforming government management in any country. Careful consideration of the problems and possibilities in any situation must precede any attempt at reform.

Introduction

Y. There are many factors in any particular situation which will have a major influence and included in these will be some of the following matters. ·the state of development in a country and the condition of its economy and finances; ·ideological philosophies or political preferences about the role of government in the

society; ·practical political considerations, such as where power lies in a government and what are

the views of the centers of influence within it about the need to change and the objectives to be pursued;

·the state of the civil service and public administration generally and, in particular, such

matters as the stock of skills, the quality of leadership, the degree of political influence, the cultural orientation towards efficiency, honesty, or otherwise;

·the degree of trust, and the consequent attitude towards delegations of authority; ·the immediate and long-term priorities of the government as they affect what demands

will be placed on public administration and the preparedness to undertake reforms which may disturb existing patterns;

·the desire or otherwise of the civil servants themselves to promote and lead change. Z. A careful consideration of these and other powerful influences on what is possible in any given situation promotes a clear definition of the scope and objectives of financial reform. This should aim to solve immediate and practical problems in addition to establishing useful frameworks for the longer term. There is some experience to show that political leadership is unlikely to agree to disruptive change and systems improvements just for their own sake. Practical short-term problem solving is vital to gain their support for longer term programs. AA. Programs of management system reform also require the support of people affected throughout the organization being reformed, through communications, incentives and, in certain circumstances, safety nets for those who will be adversely affected. Given the starting point of dysfunctional central control in many countries, the incentive to managers of being freed from frustrating central controls can be a powerful motivation, even though the increases in responsibility come paired with much tighter systems of accountability and performance assessment. BB. The risks of shortcomings in implementation and unexpected difficulties, together with the factors listed above, all need to be considered in designing a programme of implementation to apply a general, management framework to solving a sequence of practical problems while at the same time building up an overall integrated system as the framework becomes established. The ideal end point is a full implementation of the basic principles of a best-practice model,

although views about what this is are debatable and will be evolving constantly. Whatever the specific circumstances which determine the objectives and achievements of a reform programme in any given situation, if effective service delivery is the goal then the designers should seek to reflect the basic principles of clear objectives, clear accountability, transparent reporting, incentives, delegations, effective budgetary processes etc. When working these principles into specific system features, designers should seek simplicity and cost-effectiveness and be wary of over-emphasizing particular techniques out of their appropriate context. It is, for example, possible to spend considerable resources on sophisticated accounting systems without getting much benefit if the preconditions for using the information in effective decision-making are not in place. It is the performance of the system as a whole which is the overarching objective. CC. Given these considerations, the remainder of this report undertakes two distinct tasks. First, it spells out a best practice model, along the lines described above, for fundamental public management reform required to create the preconditions for effective and efficient human resource management within the public sector, and highlights issues and constraints that must be addressed whenever such fundamental restructuring is being considered in a particular country. This analysis is based primarily on the experience of New Zealand, the country in the world that has moved the farthest in this direction in reforming its public sector financial and personnel management framework. Second, the report examines in detail the features of human resource management frameworks and practices found in many Latin American and Caribbean countries in order to identify not only the ways in which they often fall short of this ideal, but also to identify examples that approximate this best practice model, and to suggest feasible steps that could be taken within Latin American and Caribbean countries to move their public management framework -- and in particular, their human resources management practices -- closer to such a best practice model.

I. _________________________________________________________________ Fundamental Restructuring: The Strategic Context The Influence of National Development Goals, Constitutional Frameworks, Politics and National Culture on the Design of Government Management Systems A.Government Reform is an Instrument of National Development Strategy A. Comprehensive government management reform is rarely undertaken because it is a good idea in its own right. There are examples around the world of Ministers and officials who have failed to persuade their Cabinets that action should be taken to improve the effectiveness of management when evidence of the need is quite clear. There are many reasons for this. In the United States, Italy and a number of other countries widespread public dissatisfaction with the performance of the public sector provoked reform. In New Zealand, although the public were not agitated about poor services, they did not support those who resisted reform at least until reform of health services was attempted. While the case for reform to improve the effectiveness of government management seems to be advanced where countries are having such difficulties there are countries without these problems. Singapore for example, where attention to effective management arose from a concern to ensure continued avoidance of problems. B. Government management affects the delivery of all public policies and hence the translation of development strategy into real benefits for citizens. Broad strategic goals are translated into specific policy actions which must in turn be implemented and administered by units of public sector management to produce the outputs which the Government's policies intended. The effects of these outputs on the economy and society are the outcomes which the Government's broad strategy initially sought. There are feedback loops at each point so that the strategies, policies and outputs are constantly being refined in the pursuit of improved outcomes. Public sector administrators are required to administer laws, collect taxes, monitor the Government's investments in business enterprises, administer income transfers to people in need, provide goods and services to the Government itself and to the wider public, including advice and information. The management of these core government activities can be complex and require very high levels of professionalism in management.

C. The impulse to reform government organizations which has spread through a number of countries has drawn political power from other sources. Public sector management reform has become instrumental in pursuing vital national development goals. It has become commonplace to observe that in an integrated world market where economic competitiveness is the key to rising standards of living, an important contribution to success comes from effective management of the government itself, so that non-economic goals may be achieved with minimum distortion to internationally competitive private sector activities. D. More and more countries have found themselves with concerns about the relative decline in economic performance linked to difficulties in containing government spending and deficits; concerns about the competitiveness of private sector industry internationally; severe political and economic constraints on raising taxes; inefficient government-owned businesses; and rising demands for State spending on social policy, driven by demographic and other factors. Analysis of these sorts of problems, from most ideological and political perspectives, leads to the conclusion that the improvement of management efficiency in the public sector is central to meeting a country's development goals. For this reason, powerful political forces in some countries have elevated the subject to become a primary priority for action. Other countries have seen the necessity for change but have taken an incremental approach; some have done very little to change. E. In very general terms a large number of countries are seeking to raise living standards through long-term development programs which emphasize the importance of the key contributors to economic development, as summarized in numerous World Bank reports. These key contributors are: stable and consistent macro-economic policy; an outward orientation to international trade, investment, technology and finance; frameworks of government interventions which promote innovation and enterprise in the development of the business sectors, especially those involved in foreign trade; and a heavy emphasis on the development of human resources. Success in implementing policies around these strategies can have a major effect on the overall competitiveness of nations in the world economy. F. For most countries, however, these strategies prove difficult and expensive and have commonly not been followed consistently in the past. For these, and other reasons, many countries find themselves trying to implement these strategies in the presence of large burdens of foreign debt, inflationary problems, balance of payments problems, high unemployment, inadequate investor confidence, and government involvement in, and regulation of, the private sector - which is associated with poor competitiveness and low productivity growth. G. For most developed countries at least there is a strong pressure from both demography and entrenched public expectations that government funding of transfers in social services will continue to grow in spite of weak economic performance. In the presence of some, or all, of these problems it follows naturally that programs of substantial, even radical, government reform take a high priority. An agenda involves the following elements, all of which have been attempted in the United Kingdom, New Zealand, Australia, Mexico, Chile and Argentina for example:

Fundamental Restructuring: Strategic Context

·improvement in the efficiency of government commercial activities through management reform, corporatization and privatization;

·tax reform to expand the revenue base, while seeking to keep the rates of taxation on

business and personal income in line with international norms; heavy cuts in government expenditure in low priority areas, and the abolition of some programs;

·monetary policy reform aimed at lowering inflation while maintaining competitive and

stable exchange rates, hence cutting back the government's borrowing requirements;

·capping the growth of, or cutting back, income transfer programs that were previously

established as open entitlements; ·targeting social assistance on those in genuine need, at the expense of universalism, and

therefore lower effective marginal tax rates; ·comprehensive reform of the management regimes for central government

administration, through structured reorganization for increased focus and contestability, civil service reform, cutting staff numbers, and strengthening institutional capacity for better performance through more flexible systems aimed at performance and innovation rather than control.

H. The situation in the world economy and the enormous pressures for innovation and productivity improvement in the private sector have inevitably forced governments around the world to reflect on the efficiency and effectiveness of their own activities. This was, for example, an important point in the evolution of New Zealand's programme of government reform where 12% of gross domestic product and 20% of national investment was generated by activities owned or controlled by the government. Even in countries where this proportion is not so high, the effectiveness of government activities is an important contributor to the effectiveness of the economy as a whole. I. In the large number of countries around the world where there has been a need for rapid economic adjustment, there has been relentless pressure for governments to do more and better with less, while responding more rapidly to changing situations, and adopt new practices and technologies. Commonly there have been increased pressures for accountability at all levels of government. Further, many countries have been affected by changes in culture, as younger people particularly have been less willing to conform to traditional behavior patterns necessary to work in old-style government bureaucracies. There have been pressures for decentralized authority and participation, better management, leadership, employee involvement etc, parallel to similar pressures for change in the culture of private sector workforces.

J. The link between the country's national development goals, its culture and society, and what contribution might be made by the reform of central government administration, requires some careful analysis of the problems the country faces in progressing its strategy and setting some objectives for moving forwards. Policy instruments from a whole range of government interventions must then be assigned to those objectives on the conventional basis of comparative advantage in the design of economic policy, allowing for the practical problems of political feasibility in giving priority government action to the most pressing problems. From these considerations emerge descriptions of the problems which reform of government administration is best suited to solve, and the relative importance of such reform within the wider scheme of things. This approach to setting the wider context for government reform in order to ensure it makes an effective contribution to national development goals can be represented pictorially in the following exhibit. B.The Influences of International Trends in Management K. An important influence which has affected thinking about government management for many years now has been the rapid evolution of management practices and styles in the private sector, where bureaucratic regimes that were almost identical to government frameworks have proven to be disastrous in an integrated competitive world economy. Popular management gurus, as for example Drucker, have emphasized this message; although management thinkers generally seem agreed that the processes of reform in private sector management, dramatic as they have been, have a long way to go yet before any stable pattern emerges. Reform in the United States is particularly influenced by these thinkers. Vice-President Gore's summit conference on improving the performance of the US Federal Government placed much more emphasis on the best-practice and visionary models of management in the private sector than on structures and systems to encourage improved effectiveness in the public sector. Modern management thinking has also been a powerful influence in other countries. L. It is clear that there are concepts and frameworks of management reform which transcend national boundaries. In the private sector top managers from around the world are trained in the same business schools. Academic work in public administration is similarly internationalized. Public sector management practice has, however, been slower to develop into a similarly uniform international pattern. The World Bank and the International Monetary Fund have only recently begun to give a major emphasis to the field, and amongst country governments there are still very widespread differences of practice and philosophy. While Australia, the United Kingdom and New Zealand have pursued reform programs with common underlying concepts and objectives, Canada appears to have stalled after launching a major initiative Public Sector 2000 some years ago. The United States National Performance Review observes but pays much less emphasis to some elements of the national framework which are considered essential in some other countries. M. In a great many countries the traditional relationships between Ministers and bureaucrats have not really been disturbed as, for example, in continental Europe and Asia and much of Latin America. Reforms in the former communist countries reflect profoundly changing political

Fundamental Restructuring: Strategic Context

relationships which is not the case elsewhere and lie beyond the frameworks explored in this report. N. While consensus has yet to emerge internationally about frameworks for effective government management it will always be the case that the circumstances of each country and its culture, traditions and other factors will have a major influence in the way things are done. C.New Zealand : A Case Study in Applying Government Reform to National Development

Objectives O. The New Zealand case study gives some insight into how a Government reform programme was conducted in one country which faced major problems in its economic strategy. In the following chapter there is a more detailed focus on the place within this strategy of reform of structures and processes across the whole spectrum of activities which are managed by the Government. The Longer-term Perspective of the Reasons for New Zealand's Poor Economic Performance P. New Zealand's leading economists had been concerned about the growth performance of the economy since at least the early 1960s. Their concern had become widespread through the 1970s and was seen by the Government and its advisors as a critical problem to address through reforms to economic management. Q. By comparison with other OECD economies New Zealand had experienced growth that made it one of the worst performers within that group of countries. The gross national product per capita in New Zealand declined from fifth in the world rankings down to twentieth from the 1950s to the 1980s. Had New Zealand grown at the average OECD rate from 1960 to 1985 its income per capita would have been about 50% higher at the end of that period. Allowance should be made, however, for the fact that higher growth rates may be more difficult to achieve from a high absolute standard of living than from a lower base. Also New Zealand's population grew more rapidly than the OECD on average over the period. Even so, the relative decline in GDP per capita was a long-standing cause for concern. R. Underlying this relative decline was evidence that the productivity of capital and labor was growing more slowly than OECD benchmarks and for some sectors or periods may even have been negative, although there are some difficulties with interpreting sectoral productivity measures. Total factor productivity growth as a whole over twenty years was half the OECD rate and one-fifth of Japan's. S. Growth had been slow and unsteady through the 60s and early 70s, but virtually stopped after the first oil shock in 1973. As other countries moved beyond the oil shock, particularly

some of those in the Asian region close to New Zealand, it caused even more concern about New Zealand's apparent inability to make adjustments to changes in its external circumstances. T. Growth between the first oil shock in 1974 and 1984 totalled only 14.6% and the difficulties were not only in relation to growth. U. Registered unemployment moved from being negligible in the 1960s to 5% in the late 1970s and reached 7% by 1983. V. Inflation averaged 12% between 1970 and 1984 and the little growth there was was sustained by a large foreign borrowing programme. From 1974 to 1984 the government deficit rose from 4.2% to 8.2% of GDP causing mounting concern. In the minds of the Government's advisors and the Ministers responsible for economic policy the reasons behind this long period of poor performance, culminating in severe macro-economic imbalance were as follows. W. Generally it was thought that Government policies had undermined the allocation of the country's resources to activities which would lead to higher rates of growth. Through regulations, subsidies and taxes the whole price system in New Zealand had been distorted away from reflecting the value of its goods, services, labor, capital and other resources in the international markets. The development of the tradeable goods sector had been suppressed by loss of competitiveness as a result of these price distortions and poor macro-economic policy. X. The price distortions had caused the private rates of return on investment in most activities to depart from their social rates of return and consequently led to a pattern of poor resource use, low productivity and low growth. New Zealand's share of investment to GNP was about the same as the OECD, but its growth rate did not reflect the same response. There was particular concern for the dynamic effects of this resource misallocation. Innovation was stifled and mis-directed with a consequence that New Zealand seemed destined to continue to drift further and further behind the most advanced economies. Y. Very high levels of tariffs and quantitative controls over imports provided high and widely varying levels of assistance to domestic industry with the consequent effects of raising the cost structures of export industries. Extensive regulation of domestic industry and monopolization of many infrastructure activities compounded the problems. Capital markets were heavily distorted through controls on the financial sector which were aimed to channel savings into politically preferred activities. In addition, the entrenched inflation attracted resources into real estate and other activities that provided a hedge against inflation and took advantage of the absence of a capital gains tax. Z. Extensive labor market regulation and laws promoted wage fixing arrangements which were not related to enterprise productivity but were primarily directed at issues of income distribution. The Government's incomes policy over the years had led to real wages being higher than those that could be sustained by productivity improvement. AA. The tax system relied heavily on income taxes and the effective rates varied widely and contrary to generally accepted principles of efficiency and equity in tax design. The marginal tax

Fundamental Restructuring: Strategic Context

rate for individuals was 66% which produced widespread avoidance in large part through investments in business proposals that would not otherwise have made sense. The indirect tax system was narrowly based and the tax rates were highly variable. The tax system thus contributed in a major way to the overall picture of a badly distorted price system that was channelling investments away from the highest value uses of resources. BB. The Government directly controlled a large portion of the economy through its ownership of enterprises in many sectors of the economy and in some cases monopolizing them. The Government through these enterprises, was a major presence in electricity, coal, gas, oil, the postal service, telecommunications, radio, television, road transport, buses, railways, shipping, airlines, banking, insurance, agriculture, forestry, real estate, health, education, science, housing, construction, computer services, engineering and others. CC. Throughout all these industries there were problems of poor management, low productivity, poor service and poor investment decision-making. Well-run businesses were the exception to the rule. All these sectors were imposing unnecessary costs on the exposed sectors of the economy because of their inefficiency, their fiscal effects and their protection from competition by regulation. These government businesses accounted for 12% of total economic activity and had a major negative effect on the country's overall competitiveness. DD. Besides these long-standing government enterprises, the Government in the early 1980s had a policy of direct involvement in major new investments in energy and energy-related industry and also subsidized various industries. This led to contingent liabilities to the taxpayers when many of these activities failed commercially. EE. As regards macro-economic policy, discretionary stabilization policy had been badly applied on numerous occasions with the effect of amplifying, rather than dampening, the business cycle. Fiscal expansions had not been followed by compensating fiscal contractions, and monetary policy had been neutralized by interest rate controls. Macro policy lost its effectiveness in stabilization of activity and contributed to the deeper problems of the low growth by adding instability and risk to markets while also distorting important price signals. FF. An integrated approach to micro-economic reform and macro policy was required in order to raise the country's potential growth rate through more effective resource allocation and improved international competitiveness while meeting other national goals of social policy, security and the environment through means which were more in harmony with growth policy. Successive governments since have endeavored to achieve these objectives although, as a Westminster-style parliamentary democracy New Zealand does not engage in detailed government economic planning. The broad goals and approaches of the country's development strategy are, however, reasonably clear. A comprehensive strategy document was published with the 1992 Budget which emphasized the importance of: a. Stable macro economic policy.

b. Human development. c. Openness to the world in trade, finance, technology and cultural exchange. d. Enterprise and innovation in business and government. D.Re-thinking the Role of the Public and Private Sectors in Attempting to Integrate Macro

and Micro Policies GG. The scale of the macro-economic imbalances in New Zealand, together with the objective of raising the growth rate, presented policy-makers with a difficult dilemma. To make progress on both these objectives simultaneously presented problems of co-ordination of macro and micro reform. The problems of integrating stabilization policy and liberalization policy was the subject of practical experience in a number of countries and there was also substantial literature on the topic. In particular, experiences in Latin America before and around the time of New Zealand's reforms created a precedent which had not gone unnoticed. The World Bank, in particular, had taken an interest in the issue and Anne Kruger who headed the World Bank's research division at the time visited New Zealand for discussions. HH. The problem, put simply, is that policies to correct major fiscal and monetary imbalances will dampen the economy and possibly cause a recession while at the same time dis-investment and unemployment is being caused by the removal of subsidies and regulatory protection from industry. There are a number of channels by which this can occur. A common one is a transitional loss of international competitiveness caused by a transitory rise in the exchange rate as a result of tighter monetary policy, especially if fiscal policy lacks credibility. II. While aware of the potential problem the Government did not want to postpone its programme of micro-economic reform while bringing the macro-economy back into balance. The scale of the fiscal policy problem in particular did not allow for this alternative as the fiscal deficit was thought likely to take several years to correct. As events turned out it took six years to gain fiscal credibility and the deficit, on current plans, will not be completely eliminated until 1995. JJ. Because two-thirds or more of the fiscal deficit of 9% of gross domestic product was structural, large increases in taxes and expenditure cuts were required to eliminate the deficit. The effects of this on economic performance and on the volume of public services would have been very large and negative if stabilization had been pursued in isolation. The Government also was impatient to progress its agenda of reform given the short 3 year electoral term. As a consequence the Government set out to advance all its economic objectives simultaneously and in the hope that the liberalization of the business sectors and reform of commercial and social activities would boost business confidence sufficiently to offset the short-term depressing effects of rapid fiscal consolidation and tightening monetary policy.

Fundamental Restructuring: Strategic Context

KK. A major complication for integrating these policies was that the charges for government services had been frozen in order to support the incomes policy regulations with the result that heavy subsidies were being provided for many government activities in order to cover the costs. Further the need for more revenue was seen to require the introduction of comprehensive indirect taxes. Fiscal consolidation was, therefore, going to inject a price shock into the economy and further complicate economic management. LL. There were some underlying themes in policy design which emerged throughout the whole programme and concerned a redefinition of the role of the government in the economy and society. MM. The Government set out to withdraw from direct commercial activity and also to shed commercial risk that it had previously adopted indirectly on behalf of the private sector in a variety of ways. The private sector would be expected to look after itself in a market-place that would be more open to competition. Over time this would make the New Zealand economy more internationally competitive. NN. In addition to the Government withdrawing from those activities that it does not have a comparative advantage in, particularly managing businesses, there would be a total reform of the systems of government management. Commercial activities were corporatized and many were privatized. Government departments were to provide rising levels of service on shrinking budgets, through increased productivity and more effectively targeting the services on those in the community who were least able to care for themselves. There was concern that the bureaucracy was inefficient and motivated by incentives to grow larger and accumulate influence rather than delivering services cost-effectively to the people. OO. The theme of the reform of New Zealand's extensive systems of social service delivery as part of its comprehensive welfare state was to abandon universal provision of services to all citizens regardless of need, in favor of targeting social services on those in need. Also in some areas the Government monopoly of the provision of social services was relaxed and funding increased for private sector provision of those services.

E.Major Policies and Institutional Changes PP. Space doesn't allow a full discussion of all the policies that were instituted in the years since 1984, but this section provides a catalogue of the major policies and some brief comments. 1.Monetary Policy and Financial Market Reform QQ. The foreign currency crisis at the time of the election in 1984 was resolved by a 20% devaluation. This was quickly followed by the removal of foreign exchange controls to integrate New Zealand's financial markets with the rest of the world and facilitate real investment flows as part of the restructuring and internationalization of New Zealand industry which had formerly been isolated from world markets. RR. Volatility in the financial markets continued for a few months and the Government finally chose a freely floating exchange rate over the fixed system which New Zealand had always had. SS. All controls on prices and wages and incomes were removed, including controls on interest rates, lending and reserve asset ratios for banks which permitted the beginning of a process to restore the credibility of monetary policy and the central bank which had been lost as a result of the crisis. TT. As with all other countries, New Zealand had difficulty interpreting its monetary aggregates and in the face of a burst of inflation to 16% which followed the removal of all the controls, interest rates rose to very high levels. In an effort to control inflation for a period business interest rates were well in excess of 20% and house mortgage interest rates were 18-20%. UU. The micro management of the monetary policy by the politicians, and the fact that large sums of money were lost in central bank interventions in the currency markets in the mid 1980s, led the Government to search for ways of rapidly building the credibility of the central bank. This took into account the prevailing view around the world of the importance of institutional credibility in monetary policy in order to minimize the output losses from disinflation. In 1989 legislation was passed establishing a totally independent central bank which has been the subject of much attention internationally as a possible model for other countries. The Governor of the Bank is required to meet an inflation target between 0 and 2% and left free to manipulate short-term interest rates in order to achieve this objective. Other functions which the central bank previously had were removed. The full responsibility for managing the Government's debt portfolio was established in The Treasury.

Fundamental Restructuring: Strategic Context

VV. Controls on foreign investment were largely eliminated except for certain sensitive areas such as rural and coastal land. 2. Industry Assistance Reform WW. All subsidies were removed from agriculture and industry, quantitative controls on imports were removed and a programme for cutting down tariffs over time was instituted. XX. The levels of assistance to industry were as a result cut savagely where quantitative controls had been used. This applied to most manufacturing activity. A timetable for a free trade agreement with Australia that had been negotiated by the previous Government was accelerated to establish full free trade. YY. A very wide range of regulations and protections on the non-tradeable sectors were removed. Some examples are telecommunications, road transport, taxis, buses, railways, airlines, ports, electricity and other energy and some professional services. Corporate law and securities law were reformed to promote market efficiencies. ZZ. Protections for government commercial activities which occurred throughout the economy were removed to put government business on the same competitive basis as the private sector. 3.Tax Reform AAA. A value-added tax known as Goods and Services Tax was introduced to replace the previous partial wholesale sales tax system. The tax applies at 12╜% to all consumer goods with no exemptions whatsoever. This policy is unique and has been the subject of study by many countries around the world. BBB. A steeply progressive personal tax regime was replaced with a flatter structure with a top rate of 33%. A programme that amounts to a negative income tax for families was introduced. CCC. A huge work programme on reform of the business tax system was begun in the mid 80s and is still being refined today in some elements. Almost all concessions were removed and a complex international tax regime developed with the objective of neutrality between forms of income and location of earner. DDD. Throughout the whole period of reform of the tax system the basic principles that were applied to each area of taxation, with varying degrees of administrative and political pragmatism, were that the fundamental objectives for equity and efficiency in tax design are best served by tax regimes which employ broad bases and low rates. This reflects the belief by respected international tax theorists that such an approach minimizes the losses to economic welfare from distorting the behavior of consumers and producers and meeting the criteria for vertical and horizontal equity. These principles explain, for example, the introduction of an extensive tax on

fringe benefits paid to employees. The same principles would support the introduction of a capital gains tax which, although proposed by the Minister of Finance and worked out in some detail, was rejected for political reasons in the run-up to the 1990 election. EEE. The tax reform led to an increase in the ratio of taxation receipts to gross domestic product of almost 6% between 1984 and 1990, although this ratio subsequently dipped sharply, because of the huge accumulated losses in the corporate sector following the crash of the stock market, real estate market and other asset values in the wake of the 1987 world stock market crash. Also as New Zealand went into recession in 1991 automatic stabilizers worked to reduce tax revenues and enlarge the deficit. 4.Expenditure Policies FFF. Endeavors to control government expenditure and shift priorities within it lay at the heart of the strategies of the two political parties, four Prime Ministers and three Ministers of Finance who drove the New Zealand reforms. Several different policies and philosophies were adopted. GGG. In the early years of the reform the emphasis was on the elimination of subsidies to industry, reforming government businesses so that they did not draw on public expenditures, targeting the very expensive national pension scheme through a tax surcharge on people with high incomes, and undertaking a detailed line by line study of all government expenditures in a search for low priority activities. HHH. At the same time there were substantial increases in expenditure on some items, particularly in the areas of social policy. III. Included in the line by line review was the elimination of subsidies to various classes of taxpayer delivered through the tax system as a "tax expenditure". Some of the larger items, for example, were special investment allowances, export assistance schemes and tax deductions for investments in private savings for retirement. The schemes eliminated amounted to over 1% of gross domestic product. JJJ. User charges were introduced on many government services based on the principle of covering costs plus a normal return on the capital employed. Many of the government departments that initiated these changes were subsequently corporatised to achieve greater efficiency. Examples are meteorological services, scientific research and airports. KKK. The experiences of line by line consideration of expenditure programs in the areas of services delivered by core government administration led Ministers to be concerned about the lack of information that was useful in order for them to make sound decisions about priorities and costs. The budgetary system was based on traditional planning, programming and budgeting frameworks and recorded expenses on the basis of input categories within programs. LLL. When they were able to make decisions they were frustrated by the lack of freedom for managers to manage more effectively because of extensive central controls of government administration, particularly in relation to personnel management and financial management.

Fundamental Restructuring: Strategic Context

MMM. It was also apparent that enormous waste had been uncovered through the corporatisation of government commercial activities which created a presumption that similar waste might exist in the administrative areas. Reforms were introduced by the Labor Government and continued by the National Government after the 1990 election and are discussed in more detail below. 5.Labor Reform NNN. While the Labor Government made major reforms of the laws regarding employment of public servants, comprehensive private sector labor market reform did not occur until the National Government were returned in 1990. Monopoly rights for trade unions to represent workers was removed as was compulsory unionism for workers. Government machinery for resolving disputes was dismantled. A specialized Labor Court was established and minimum wages remain in place. The underlying philosophy is to base labor market agreements on enterprise and individual contracts. The law was titled the "Employment Contracts Act". 6.Public Sector Reform OOO. In the pursuit of the wider strategic objective the Government undertook extensive reform of the public sector through programs for: ·corporatisation of commercial activities; ·privatization of almost all the State's business activities; ·results-based management in government administration; ·structural reorganization to enhance performance through focus and competition. PPP. Common themes underlie all these reforms. Their purpose is to address problems of low productivity growth rates by making managers of organizations, both public and private, more accountable to their customers and owners for increasing returns on the resources under their control. Also managers are subject to more competition where possible from competing providers of goods and services. QQQ. The pressures for improved public sector performance were influenced by the fact that the Government had put exactly the same pressures on the private sector. This influence was both in terms of ideas, but more importantly in political terms as the public sector could not be excluded from the pressures for adjustment and reform bearing on the whole economy. Similarly the evidence of performance improvements through corporatisation suggested the potential gains from core government reform. RRR. Several Ministers of Finances' considerable role in the leadership of these reforms also reflects their place as a component of the Government's economic development strategy for

which they were primarily responsible. It also partly explains the very active role of the Ministry of Finance (known in New Zealand as "The Treasury"). SSS. For ten years the Auditor-General and other senior officials had called for management reform and some marginal changes were made. This was a helpful background, but it was the wider events in New Zealand's political economy which created the opportunity for rapid change. F.The Results of Reform TTT. The proper benchmark against which to make a judgement regarding the results of these reforms is what would have happened had the New Zealand economy been subjected to an alternative policy strategy. We cannot know this counterfactual. The variety of exogenous factors affecting both New Zealand's economy and the quality of publicly provided services is large enough to preclude probative econometric modeling of the impacts of these reforms over the relatively short period since these reforms were implemented -- beginning with the State-Owned Enterprises Act of 1986, the State Sector Act of 1988 and finally the Public Finance Act of 1989. It can be said with some confidence, however, that a continuation of the previous strategy would have led to great financial instability, continuing low growth and rising unemployment. G.The Macro-economy UUU. After eight years there are reasons for optimism that New Zealand's growth potential has been raised through more credible financial policies, internationalization of the economy, and more efficient resource allocation. VVV. New Zealand is in some ways an unlikely location for a very advanced economy and society, although it has natural environmental advantages. Success depends crucially on enhancing its competitiveness as a location for advanced economic activities servicing world markets. It is too small to generate growth from its internal market. WWW. The Swiss-based Economic Forum has moved New Zealand rapidly up through the ranks of countries in terms of international competitiveness in recent years. From 22nd New Zealand is now 13th. The same study declares the New Zealand Government to be the best in the world in terms of its contribution to national competitiveness. XXX. Interest rates, which were controlled at 11% in 1984 and went into the middle 20s in the late 1980s, have dropped since 1991 more rapidly than any other country and had settled around 6%. These rates are a very positive indicator as they summarize international market views about inflation, future exchange rates, fiscal and monetary policy, debt management and the credit rating.

Fundamental Restructuring: Strategic Context

YYY. The inflation rate is steady between 1% and 2% and among the very lowest in the world. ZZZ. Experiencing a long, reasonably steady recovery since September 1991, the economy is growing at about 3% and perhaps more for the first time in many years and with no sign that it will stall due to inflation or balance of payments problems. It is a long time since New Zealand had a higher growth rate than Japan and a lower inflation rate than Germany. AAAA. Indicators of investment intentions and business confidence are at, or near, record levels in spite of a weak world economy, although New Zealand does benefit somewhat more than average from the growth of its Asian neighbors. BBBB. At the macro-economic level there remains the problems of an uncomfortable, but manageable, debt burden, which restricts flexibility in economic management. CCCC. The worst problem by far is the unemployment rate of 9% within which is a major problem for unskilled youth and New Zealand's indigenous Maori people. While not unfamiliar on the international scene, this level of unemployment is a horror for New Zealanders who remember near zero unemployment in the 1960s. DDDD. This unemployment had been growing very rapidly since 1977 and is due to forces in New Zealand's and the international economy too complex for discussion here. Plainly the reforms are responsible for some of it, particularly the problems in political-economic management that led to tensions between monetary and fiscal and labor market policy. EEEE. Throughout the period direct interventions to train and place the unemployed were developed and expanded. The problem is, however, more deeply rooted in the structures and performance of the economy as a whole.

I. ________________________________________________________________ Fundamental Restructuring: Financial Management in Core State Sector

Activities and Government Departments A Best Practice Model A. Introduction A. Typically, financial management reform in government is a response to concern over loss of control over the bureaucracy, escalating costs, and low value for money in the services provided. The focus of a reform programme is to: ·direct resources quickly to shifting priorities and get control of total spending; ·measure the true costs of services; ·provide information on the effectiveness of agencies; ·report the true financial position of the Government; ·facilitate decentralized management for results. B. A key theme from the preceding chapters is that the objective, scope and implementation of a financial management reform programme in any country is likely to be determined by specific issues in any given situation. There are, however, basic principles of sound financial management which should underpin the specifics of reform in any situation. C. Preceding chapters have argued that financial management is one element of the hard side of government management. The principles which underlie the approach described here have much in common with principles that drive corporatisation and the effective management of large private sector organizations. D. Core State sector activities and government departments work in areas where corporations and the private sector firms cannot but, as for those organizations, effective management in core government activities is enhanced by: ·clear specification of required results

·incentives and structural pressures for performance ·clear information on service delivery ·freedom to manage ·superior managers E. This chapter provides details of the main components of a financial management system which observes these principles and is based very largely on experience in New Zealand, without necessarily implying that all elements of a best-practice model are in place there. B.Managing for Results F. The fulcrum of the whole financial management system described here is the definition of the deliverables which public administrators are to provide to their political masters, to other government entities, the private sector or to the public at large. G. The importation of modern management techniques into traditional public administration practice calls for the removal of webs of controls over the discretion public sector managers are allowed to exercise. While in most countries the accumulation of regulations and controls has at some point reached a degree where the elimination of many of them results in no significant diminution of control, the essence of this system is to cut much deeper than that. The fact that they very seldom exercise these freedoms unwisely, in examples where freedoms have been granted to this extent, is a reflection of culture, professionalism and ethics and, in a best-practice situation, powerful incentives and sanctions. In the particular system being described here, the degree of control is in an important sense increased as a result of the removal of control over inputs because there is a substitute in much more effective control over outputs. H. By being clear and precise about what it is they want from the departmental suppliers of goods and services, politicians are able to throw the responsibility back on managers to find ways to deliver these: within specified budgets and under strong incentives to exercise their managerial freedom to minimize the resource use over time. The more clear are the definitions of what outputs are to be produced, the stronger are the incentives created to economize and be effective. I. From the politicians' point of view, clearly defined outputs change the whole nature of the traditional budgetary process because they are no longer being asked to fund programs comprising bundles of undefined services, but are being given the opportunity to judge on the basis of superior information just how much they value what it is proposed that they purchase. J. Every government agency represents what it is producing in the form of an agreement between the Government and the head of the agency which lists all the distinctively different

Fundamental Restructuring: Core Financial Management

deliverables that it is funded to produce. The basic definition of an output is something which can be contracted for between a provider and a purchaser. Applying this simple concept is, however, no small task. Government agencies traditionally count the costs of the activities which they are engaged in, such as data processing, or of inputs, such as labor. While translating this into definitions of what services are actually being provided is easy in some instances, it can be extraordinarily difficult, although still very valuable, in others.

K. It is not difficult to convert the budget for a small policy advisory group that has previously been provided funds for data processing, labor, accommodation etc. into a budget for the delivery of policy advice on certain topics. It is, however, much more difficult to convert a budget for the Armed Forces which has been expressed in terms of the respective costs of the Army, Navy and the Airforce to a budget which breaks those costs out in an accurate way into the delivery of various defence objectives. The merits of doing so are, however, considerable in terms of enhancing the management of information available to the Chiefs of Staff and the ability of politicians to see what it is they are getting for the expenditure and to re-prioritize it if they wish. L. In New Zealand the information presented to Parliament for its scrutiny of the Defence Forces increased from six pages of summarized costs of the three Services to 60 pages of information about capabilities and objectives and their associated costs. Political control and scrutiny was enhanced and, at the same time, the Chiefs of Staff became enthusiastic about the vastly improved management information they had available to them which permitted large cuts in total funding without affecting the capabilities of the Armed Forces. M. The centrality of the output concept in budgeting itself forces the clarification of the respective roles of the parties responsible for delivering outputs and those responsible for demanding them. In government accounting literature, for example (Ramanathan 1982), the distinction between outputs and outcomes is drawn. In some cases the connections are simple.

Outcomesbenefits sought by the Government (Strategy and Operations) Outputsgoods and services produced by departments Inputsresources used to produce outputs

The output of policing highways contributes to the outcome of controlling road deaths. The Police Force is responsible for the former while the Minister of Police or the Minister of Transport may be responsible for the latter. The policy analysis which makes the link between changes in policing and changes in the death rate is not hard to imagine. N. In many areas of public policy, however, the connections between outputs and outcomes are complex, uncertain, or even unknown. The link between any given output and the ultimate outcome may be swamped by other factors that have been at work. O. The effect of trade promotion activities on exports, for example, would be swamped by changes in the exchange rate, or protection policies in destination markets. Even in our simple example above, oil shortages or unexpected weather could produce changes in road deaths which are large in relation to the effects of changes in policing practices. P. For these and other practical reasons the model described here, and employed in New Zealand, holds public administrators to account for outputs. The concept of outcome budgeting is arguably theoretically superior only where those being held accountable can in reality exert major control over the outcome. The concept is being used in the United Kingdom and discussed in the "Reinventing Government" discussions in the United States. In the latter case, the widespread use of political appointees in management and administration makes the distinction between outputs and outcomes less useful in designing a management framework. Also the definition of output used in the United States Government Performance and Results Act is closer to an input than an output in New Zealand's use of the terms. Q. Giving public health administrators budgets with which to achieve certain objective standards of public health, rather than paying them to co-ordinate the delivery of health services, has obvious attractions in terms of incentives for effectiveness and innovation and for the delivery of the ultimate outcomes for which the public holds their elected representatives to account. Given the uncontrollable influences affecting outcomes, the search for outcome budgeting is likely to come at the cost of vague definitions of outputs and weaker incentives for managing for performance within the output delivery agencies. Over time, and with further experience of these different approaches, it could be expected that this trade-off would be less severe. It is likely always to be the case, however, that outcomes are inherently more vague and more difficult to express than outputs, thus weakening one of the incentives on managers to perform. On the other hand, there is no point in driving managers to deliver outputs unless there is good reason to believe that will enhance performance on an outcome. R. The practical reality in both New Zealand and the United Kingdom, where these issues have been pursued furthest, is that a pragmatic blending of considerations of both outputs and outcomes is necessary in seeking to avoid innocuous outcome statements on the one hand, and on the other, outputs which, while precise, are ineffective in their impacts on the ultimate objectives of government. It is likely that some mixture of output and outcome budgeting is optimal and the conditions for each will emerge through practice over time. The term "results" has arisen both in New Zealand and the United States to cover both outputs and outcomes.

Fundamental Restructuring: Core Financial Management

S. As a practical matter it is more important to think about where to begin the movement away from a system of input controls than to make a prior commitment to the end-point of this evolutionary process. The model described here and used in the New Zealand case seeks the early benefits of forcing government departments in the first instance to re-arrange their information so as to be open about what it is they are actually delivering at present. This change alone has been seen to influence decision-making by both managers and politicians as they realize for the first time that some of what they are doing is costly, ineffective or both. T. The outputs have different formal significance at different levels in the government hierarchy and in different constitutional forums. The purchase agreement is quite a detailed document which forms the major part of the performance agreement between the head of a government agency and the political principals. The level of detail reflects what both parties regard as a useful expression of their understandings about what is going to be done. U. For example, the New Zealand Treasury has roughly 150 outputs, which range from expenditures on a large but homogenous service which the Minister does not take a day-to-day interest in such as the operational aspects of the New Zealand Debt Management Office to particular policy advisory services on topics of interest to the Minister even though they are small in terms of resource use. The Minister does, however, want to ensure that the advice is pertinent, timely and of good quality and hence it is contracted for specifically. V. An aggregation of these outputs is then presented by the Minister of Finance to the Cabinet sub-committee which reviews government expenditure within the Budget Cycle; that committee could demand any further detail it wanted. The outputs are aggregated further to 9 output classes which appear in the Estimates document presented to Parliament to support the Appropriation Act while providing the Government with approval to spend money on the specified output class. W. Once the Act is passed, the Government is not free to shift resources between these output classes, beyond a tolerance of 5%, without going back to Parliament for approval. In this way the output budgeting system provides Parliament with far greater information with which to review the Government, and with the right to be consulted about significant changes in the Government's financial plans. C.Establishing Accountability for Outputs X. The agreement about outputs contains fairly detailed descriptions of the services to be delivered by departmental managers. This becomes a personal responsibility of the chief executive of the department and the features of the incentive environment which are a part of the motivation of managers.

Y. The central principle is that managers' accountability should not extend to results that they have little or no ability to influence. The financial management framework, therefore, holds them accountable for those flows of revenue and expense, assets and liabilities that they can make management decisions about. Z. All countries have flows of payments and receipts that are determined by government legislation and over which departmental managers have no control. Welfare payments and tax receipts are obvious examples. Although improved administration can have an impact on these flows they are fundamentally determined by rights and obligations established in law. The relevant government department is handling these flows on behalf of the government (or the Crown in the constitutional monarchies). The department administrators are accountable only for their performance as managers of these flows and not for the flows themselves. These flows therefore do not pass through the accounts for which the managers are held responsible. AA. Similarly, there is a distinction between some liabilities which departmental managers have the authority to acquire and replace, or dispose of, and assets and liabilities which are incurred by the government and for which the department only has a responsibility to administer. In New Zealand, for example, the national parks do not appear on the balance sheet of the Department of Conservation, but on the Consolidated Balance Sheet of the Crown. The Government's portfolio of financial liabilities similarly does not appear on the balance sheet of the Treasury, but in the Government's consolidated balance sheet. With these conventions in place it becomes feasible to hold the chief executive personally responsible for the management of the income and expense flows and the assets and liabilities recorded on the departmental accounts. In New Zealand the law states that the chief executive is responsible for financial management of the department.

Fundamental Restructuring: Core Financial Management

D. Framework for Senior Human Resource Management BB. The system being described aims to produce more efficient and effective public service delivery through information and incentives to promote better management. This system will fail unless there are arrangements to ensure that the top management team available to the government is fully capable of providing this better management. The fact that it can be safely assumed that some improvements in management will occur spontaneously once the new objectives, incentives and freedoms are in place should not distract from the vital need to take a positive and very active approach to the creation and continuing development of a team of top public service managers. CC. A human resource management regime must be developed which balances the objective and subjective aspects of human resource management. On the one hand there are appointment, tenure, remuneration, procedures for severance, constraints, if any, on rights of entry into the civil service and so on. On the other hand there are dimensions of personal development, professional training, leadership, values, culture and ethics which determine whether people rise above the floor levels of performance established by the objective elements of the personnel management system. DD. Countries differ with respect to the capabilities of existing top managers, and in the objectives and constraints placed by the government and the wider national culture on their freedoms to develop a strategic human resource management system which meets the goals of rapid and constant improvement in the capabilities of the senior managers. EE. In the New Zealand experience the regime described below was put in place, and is still evolving. Top executive appointments are made by a central personnel agency called the State Services Commission which is headed by a Commissioner who is appointed by the Government on a five-year term under an Act of Parliament called the State Sector Act. This also lays down the basic framework of personnel management in the civil service. FF. The procedure for appointing chief executives requires the Commissioner to consult with the Government and particularly with the Minister to whom the appointee will be accountable. The Minister also has influence on the appointment panel, which is assembled for each appointment, and advises the Commissioner on the best candidate. Typically the panels will have on them prominent individuals in the community who are knowledgeable about the business of the department in question, and/or members of groups in the society significantly affected by the department's activities. The Commissioner does, however, have the major say in who among the candidates is best suited for the job. GG. The Commissioner makes a recommendation to the Government, which normally accepts the recommendation but is free to substitute another appointee if it chooses. There have been dozens of appointments since this regime was introduced in 1988 and this substitution procedure has not been used once. On one occasion a recommendation was rejected without a substitute

being appointed by the Government. The system does, however, permit a clear expression of the views of Ministers to be provided to the Chief Commissioner, although it is not common for Ministers to express strong views about candidates. All jobs are open to applicants without any barriers to entry either the private sector or from candidates who are not New Zealand citizens. The Director-General of Health, for example, is a Canadian. There are no rights of appeal against appointments although the Labor Court in New Zealand, which oversees industrial relations law, could in principle hear a case on an appointment where the procedures of the appointment had violated principles of administrative or labor laws. HH. Tenure is for a five year term with no automatic right of renewal, although chief executives who have performed satisfactorily are typically offered an extension for a further three years or encouraged to apply for a position as the head of another government department. The contract provides for dismissal for an unsatisfactory performance or for fundamental incompatibility between the chief executive and the relevant Minister. The exercise of these provisions would also be subject to appeal to the Labor Court, on grounds of either the procedure or violation of the terms of contract. The procedure for performance assessment is described in the section on incentives below. II. Remuneration is determined provisionally by comparison with the salaries of similar jobs in the private sector, as assessed by standard international systems of job sizing and pay research. These systems typically analyse a job in terms of skill levels, responsibilities, and the amount of risk being carried. In this way it is possible to get comparability between jobs that are not necessarily similar in terms of the business the manager is employed in but are similar in terms of the factors which determine remuneration levels within private sector corporate structures. JJ. In New Zealand's case salaries were struck at these levels as senior civil servants moved from permanent tenure to five year terms. This involved substantial pay increases for those in jobs with heavy responsibilities. People in smaller departments without heavy responsibilities did not receive much extra, and they expressed their dissatisfaction with the methodology that was used. The point at issue was whether people in control of small, but influential, policy departments carry positions of greater significance than standard pay methodologies allow for. KK. It is critical to develop as wide a recruitment pool for senior civil servants as possible in order to promote innovation and fresh thinking about issues and policy, service delivery and management; also in bringing a wider set of perspectives from the community as a whole. This may not may occur if all the appointments are of people who have spent all, or most, of their careers working their way up the hierarchy. However, Even with market-based remuneration, it is not easy to recruit people from outside the government who are offered better prospects than the internal candidates. Surveys showed that managers in the private sector often regarded working for the public service with disfavor; they saw the service as not providing a supportive climate for getting things done, and disliked the 'fishbowl' environment in which executives - especially those in high-profile departments - had to work. LL. Because New Zealand was going through a period of difficult economic adjustment the salary levels of the chief executives drifted steadily away from the private sector benchmarks to end up as much as 30% below them. Good private sector candidates need to be sought out by

Fundamental Restructuring: Core Financial Management

skilled executive search firms who keep in touch with the careers of competent managers in the public and private sectors. MM. Private sector culture typically provides for an appointment process which is more certain and rapid than in the public sector, where the procedure described above can take quite a along time and may also involve a person's candidacy becoming known. Private sector managers seeking top jobs also typically expect a greater degree of authority over their actions than the public sector can offer. The systems of parliamentary accountability, the rights of Ministers to direct, and of Parliament to publicly scrutinise activities, are usually negative features of the jobs from a private sector person's viewpoint. NN. There remains a significance difference in culture between the public and private sectors, although the regime of the kind being described here can close that gap substantially and in desirable ways. Appointments from the private sector into the senior civil service in New Zealand even with this regime have been few and far between. A retired chief executive of a major New Zealand company did, however, serve as head of the Ministry of Defence. While a certain proportion of outside appointments is a healthy sign, it should generally be expected that top quality internal appointees are also presenting themselves as candidates for top jobs. OO. The obligation to prepare people for senior jobs lies with the chief executives themselves, but for a number of reasons it is desirable to establish a public service-wide initiative for senior management development that does not, however, cut across this basic obligation of a chief executive. PP. The basic requirements for a chief executive in the public sector are a mixture of special attributes specific to the public service, but are in other respects the same as those of a chief executive in the private sector. The task includes managing the external environment of the organization; strategic planning, with a longer-term focus than the line managers; managing external relations with key people whose interests intersect with those of the department and the Ministers it serves; and managing relationships with the Minister and the government more widely. A chief executive must develop, represent, and constantly reinforce the values and culture of the organization which underlie all its systems, objectives and day-to-day activities. QQ. Finally there is a requirement for all-round leadership closely resembling that which private sector is encouraging in its thinking about the leadership role of chief executives. Out of the large number of managers in any civil service, only a handful will have the capability, motivation and ability to learn to be the leaders which high performance in these demanding jobs requires. The pressure for change in most countries today is far greater than in former times, and this is reflected in far greater demands on senior civil servants insofar as their management and leadership skills and their technical abilities are concerned. This pool of talent won't happen naturally and needs to be nurtured and developed. RR. One model which is being tried in New Zealand is to have a center for strategic human resource management which is controlled by the group of chief executives themselves in

partnership with the State Services Commission, using techniques adapted from the advanced private sector practice. Studies are being done to identify the competencies which characterize the top performing chief executives. Some of these are generic to all senior managers and others are specific to the kinds of operation a manager is in charge of. SS. From this information individual training and development programs can be assembled for every individual in the pool of potential senior management talent, after assessing their competencies against the demonstrated standards. These development programs will entail some standard management training courses, but will emphasize heavily on-the-job training to gain day-to-day experience in areas where competence is to be enhanced. Arranging experience in different departments and in the private sector, or in other countries, is likely to be a part of this. TT. To ensure that these individual development programs actually happen they must be entered into the personal employment agreement between the employee and his or her chief executive and then monitored by the State Services Commission. UU. All these issues in senior management recruitment, motivation, and development may seem side issues, but experience shows that they are absolutely critical to the success of a financial management regime. The system must be run by top quality people who are motivated to get results, are recognized in whatever way is deemed appropriate for their success, and may be dismissed for persistent poor performance. When this is achieved it send clear signals throughout the civil service: signals that efficiency, effectiveness, innovation and flexibility are valued, not just in words but in deeds. VV. Much of the discussion of civil service reform in international circles centers on technical and procedural aspects of employing and remunerating civil servants. However, if rapid improvement in performance is the objective, then a framework for using these instruments must be developed which is in harmony with a wider management philosophy and regime to enhance government performance. The New Zealand experience shows that unless equal attention is paid to the 'soft' variables - culture, leadership, competence-based performance management, and systems coherent with the development and reward of these variables - paying attention to the technical and procedural aspects alone leaves the whole reform vulnerable. E.Industrial Relations WW. Every country has its own industrial relations laws, customs, personalities and workers' organizations which play a variety of roles in the economy and in politics. XX. As labor is the major input cost into so many public services, the conditions for contracting labor are a critical influence on top management's ability to introduce management regimes which focus on innovation, quality improvement, and declining costs. The ability to implement employment regimes which, for example, link remuneration to performance, or permit open entry into the civil service at all levels, will be constrained by the views of employee organizations seeking to advance the interests of the membership as a whole.

Fundamental Restructuring: Core Financial Management

YY. From this perspective public sector unions are likely to bargain hard over proposals to accord management more discretion over the conditions of work, setting pay rates and, in particular, provisions for redundancies which are likely to arise as a greater push for efficiency in public service management comes about. ZZ. From the viewpoint of the politicians, granting discretion to public service managers to set wages and conditions for civil servants may cut across their interests in the substance or appearances of public sector wages relative to other norms in society. Also there are large, highly organized groups of public service workers in many countries whose muscle in pay negotiations can be exercised through the withdrawal of labor or services in a way that raises issues of political concern. In these circumstances politicians will inevitably involve themselves in industrial relations issues. AAA. From a manager's point of view increased control over the cost and deployment of the major input is an element that is so important that they might find themselves unable to meet their specified performance goals without a substantial measure of discretion about these issues. This is not, however, a one-way street from the employee's point of view. Increased effectiveness and efficiency is not going to come about from a government department whose staff are disgruntled and demotivated through arbitrary management decisions. They still have rights to negotiate collectively, belong to unions and ultimately vote with their feet. BBB. The best-managed private sector firms emphasize that their people are labor is their most important resource, and many firms see the effectiveness of their human resource management practices as a major competitive advantage. High performing public agencies can often be expected to come to the same conclusion. Modern practices of total quality management, for example, emphasizes employee involvement, continual upgrading of skills etc. CCC. From the point of view of individual workers, their responses to the greater flexibility that managers may achieve in the deployment and management of labor depends on the individual circumstances. While for some their jobs will be threatened, others will be offered greater prospect of fair reward for effort, through both remuneration and promotion, plus opportunities for personal development, and pride in working for an organization whose management is improving and delivering better services. DDD. The introduction of more decentralized systems of human resource management is therefore likely to meet mixed receptions depending on the circumstances. As a consequence the reaction of State unions is likely to be mixed, although naturally centered on the interests of the majority of members whatever their circumstances may be. It could be expected that they would seek a substantial say in the design and implementation of a more decentralized regime and seek compensation for those who are adversely affected. EEE. The sequence of events in New Zealand was that the Government was dissatisfied with the performance of the civil service and was looking for change which it sought to negotiate with

the State unions over an extended period. After some time, however, the Government came to the conclusion that the changes that could be negotiated were insufficient for the achievement of the reform goals they had in mind and went ahead with the reform, which was resisted in some regards by the State unions. FFF. In this reform the law governing the employment of civil servants was changed so that the chief executives were made the legal employing authorities of workers in their departments, whereas previously the State Services Commission had been the legal employer of all civil servants. The law required, however, that in exercising their rights as employers, chief executives were to be "good employers" which in practical terms meant establishing personnel management systems which emphasized principles of equal opportunity, observance of the rights of New Zealand's indigenous Maori people, and processes which emphasized transparency, merit and various rights of appeal or review of decisions. GGG. What actually transpired in each department was left to the interplay of management and employee interests against the background of introducing performance requirements for the chief executives and tight, usually shrinking, budgets. The objective of the New Zealand reforms was flexibility, unlike many other countries which have sought government-wide policies on particular industrial relations issues, as for example, performance pay. HHH. As a consequence of the changes, the system of occupational classes with detailed pay ladders, through which staff progressed on the basis of seniority, was replaced with a system of "ranges of rates" which could apply to a job; the particular rate was set by management on the basis of qualification and performance. It was, however, entirely over to the departmental managers whether they sought to introduce performance pay systems and, in fact, many did not. III. Transitional issues proved to be very important. The previous system had established expectations of automatic progression up the remuneration ladder over time. The "range of rates" approach established pay through benchmarking with pay research with margins around that of up to 20% for performance. There was not a lot of resistance to the introduction to the "range of rates" approach, even though it put an end to entrenched expectations about annual wage increases. Large numbers of civil servants have had little or no increases as a result. A variety of pay systems have arisen as thought appropriate by departmental managers. Some departments have paid targeted performance bonuses and given little or no general increases. Except for the bottom one or two rates within the range, progression to higher levels is only on the basis of performance. Typically performance is reviewed annually, but there is nothing automatic about pay increments. JJJ. Under the previous system there were a large number of occupational groups for which pay scales were struck in separate negotiations. As a result of the changes there were amalgamations into a much smaller number of groups with a range of rates established for each. KKK. While the specifics of remuneration in each department has been decentralized, there are periodical discussions between all the departments which are coordinated by the State Services Commission, seeking a consensus view about conditions in the labor market immediately before the negotiations with unions begin. The Government may, from time to time, direct a limit to

Fundamental Restructuring: Core Financial Management

any overall general pay increase that is to be granted and has over the past three years instructed that there will be no compensation in the budget round for general movements in pay. LLL. The State sector unions have paid relatively less attention to the individual department negotiations than seemed apparent under the previous regime and have instead focused attention more on discussions with the Government about general pay movements. So far this has been relatively unsuccessful given the general climate of restraint on government spending. MMM. Union coverage of State sector employees has generally been withdrawn from middle management, although this varies from department to department according to the negotiated outcomes. The people reporting to chief executives have their pay and conditions determined by individual negotiations with the chief executives, within the basic framework of a five-year contract, and some oversight of the remuneration levels by the State Services Commission. Chief executives are, however, free to negotiate individual contracts with people at senior levels outside this framework, but generally do so only where particularly specialized skills are needed. NNN. These institutional details from the New Zealand case illustrate the extent and complexity of industrial relations issues that can arise in the implementation of a decentralized management regime. The approach is more decentralized and flexible than any other national regime of which the author is aware, but the case does show that there nonetheless remain some measures of overall co-ordination and administrative guidance to departmental management in the exercise of their considerable discretion. There is a strong consensus amongst these chief executives that their ability to improve the performance of their departments was critically dependent on these freedoms, and they are vigorous in resisting any central encroachments on them. F. Financial Delegations OOO. The legal basis of the freedoms to manage the finances stems from legislation which covers the rights of the Government to spend public money and to delegate this right to others. The Appropriation Act authorizes the Executive to expend resources on the specified output classes with limited freedom to shift resources between classes. PPP. During the fiscal year a Supplementary Appropriation Act may be passed to appropriate further resources, or it may shrink the resource availability where output requirements have been reduced or unexpected cost savings made. Ministers in charge of each portfolio are "voted" by Parliament the right to spend the money. They in turn delegate this right to the chief executive who under the law is responsible for the financial management of the department. The department is responsible for administering the vote. The right to borrow must be severely constrained. QQQ. In the New Zealand case only the Minister of Finance has the power to borrow on behalf of the Government. The Minister of Finance should have the power to issue guidelines about

prudent financial management and instructions about high-risk financial transactions such as the investment of trust funds. Good practice guidelines should be issued for all major areas of financial management. In certain areas policies must be negotiated between the Ministry of Finance and the department, covering areas of significant risk or technical complexity; policies on insurance and the management of foreign exchange risk are examples of these. RRR. Departments should be free to operate their own bank accounts, but the Government's interest in optimizing its management of financial assets and liabilities leads to restraints on banking activities. The section below on debt and cash management explains this. G.Information on Financial Performance and Service Delivery SSS. It is fundamental to the system being described to distinguish between the two interests which the Government has in a government department. Firstly, it is concerned to obtain the outputs that it has contracted with the chief executive to deliver. This agreement about outputs is known in New Zealand as a "Purchase Agreement" to emphasis the focus on delivering what has been agreed and the possibility of non-purchase or purchase from an alternative source. Secondly, the Government is concerned with the efficiency of resource use in the production of those outputs. This reflects its interests as the owner of the agency and it will strike agreements with managers about financial and other aspects of its efficiency and its investments for the future. TTT. Ultimately the only reason the Government owns a government department is to obtain services from it for itself and for third parties. If it thought the services could be obtained cheaper and better from the private sector then there would be no rational basis for having the department. UUU. As the owner of the assets and liabilities of a department, the Government is concerned to have available a form of financial reporting which exposes the assets and liabilities which are under the control of the managers. This enables a judgement to be made about the effectiveness of resource management. A standard accounting balance sheet, broadly similar to that which is presented to the shareholders by the managers of a private sector company, is the appropriate reporting format. VVV. In addition to this, the Government is interested in information about the flow of costs incurred by the department in the production of the required services. The appropriate format for this is a standard income statement similar to what is found in the private sector. Besides expenses incurred in the consumption of resources in the current year, the Government is interested in the consumption of assets which have been purchased in prior years. This is done in the same way that standard accounting practice requires through the depreciation of assets over their lifetime. The money coming from the Government to fund the purchase of resources is entered in the income statement as if it were revenue from sales in a private company.

Fundamental Restructuring: Core Financial Management

WWW. By using these standard accounting documents in an environment of considerable management freedom, the Government can assess the effectiveness of management in minimizing the resources required to do the job. The balance sheet information, over time, enables management to be assessed on how well it has released resources for productive purposes: resources that were locked up by the consequences of decisions in past years to acquire assets that are now no longer needed, or are obsolete, and should be cashed up. XXX. The concepts of accounting behind the revenue statement permit a full accounting for the resources actually being used. To ensure that standard accounting conventions are used throughout the government, and to enable valid comparisons between government departments and equivalent private sector activities in order to assess performance, it is important to insist in law that the generally accepted accounting principles used in the country by professional accountants are employed in the government. In all developed countries the accounting profession, usually with statutory backing, issues statements to its members about proper accounting practice. The national professional bodies are also linked in various ways to international conventions that are constantly evolving. Typically the general accepted principles in any country allow conventions from other countries which are seen to be relevant to be adopted where there is no national standard. YYY. Public sector accounting standards are generally not as highly developed as private sector standards, and there is also considerable variation from country to country. Many of the conventions used internationally have been developed in the United States, Canada and other countries. An important issue for early consideration by designers of national financial management systems in the public sector to consider is whether to head in the direction of specialized public sector standards or to aim at uniform accounting standards to be applied in both the public and private sectors. Whereas some countries have decided on specialized public sector standards, the approach that is being adopted in New Zealand is to aim for similar conventions in both sectors except where specialized issues arise. Valuation of publicly-owned assets is an example. ZZZ. Generally the accounting professions in countries are dominated by private sector accountants who have not put much attention into public sector accounting standards. It is, however, common for the accounting profession to have a public sector body within it which should become much more active if a system like the one described here is implemented. AAAA. In the New Zealand case the senior public sector financial accountants became prominent in the Society of Accountants and, in particular, the public sector group within it. Their work in generating accounting standards reached a point where they were breaking new ground on issues which were relevant for the private sector also. As a result the accounting profession has agreed that a single set of standards will be developed. A spin-off benefit of this in countries where private sector accounting standards may be regarded as inadequate is that the public sector can lead the development of high standards of accounting practice in a country.

BBBB. Good accounting practice emphasizes materiality and relevance, and derives from underlying principles of good stewardship. It is for professional financial managers to make these judgements and not to adopt mechanical mechanistic formulations. Where, for example, a business is sufficiently simple that a cash accounting system is an adequate representation of its affairs, then there is little point to going to more complex systems. For any significant activity in the public sector, however, it is appropriate to use full accrual accounting methodologies to provide timely and accurate reporting. CCCC. The objective of accrual accounting is to ensure that the accounts for any one period of time accurately represent the total resource flows in the period. They should not be distorted by differences from year to year in the outstanding debtors, creditors, unusual payments and receipts from asset acquisition and disposal which distort the picture cash accounts give of the underlying resource usage. DDDD. Accrual accounting also captures information faster than cash accounting by taking account of commitments for the future that have been entered into but for which no payment has occurred. The application of generally accepted accounting principles, therefore, leads to the adoption of full accrual accounting; this follows in turn from the requirement for information about the ownership interest the Government has in a department. EEEE. In addition to these accounting documents there is a requirement for reporting on the delivery of the outputs covered by under the purchase agreement. The resources consumed in producing these outputs must also be recorded and reported; this requires government departments to employ cost accounting techniques which allocate costs to the outputs delivered. There are many complex technical issues which arise in cost accounting and must be dealt with skillfully. FFFF. Most of the problems are not, however, different from cost accounting in the private sector and therefore methodologies can be easily obtained. There are, however, many traps to be wary of in allocating costs. A common problem is the distinction between average and marginal cost. It is a temptation to adopt average costing procedures because of their simplicity and in most cases they are suitable. They can, however, lead to misleading reporting in circumstances where marginal costs are very different from average costs. GGGG. An example which arose in New Zealand's experience was the costing of police services in responding to different kinds of incidents. Average costing approach would allocate costs to each category or incident on the basis of how much police time and other resources were allocated to it. A marginal costing approach would allocate more of the cost to the urgent and high priority incidents whose volume has more effect on the total resource requirement which must be available for policing than do the incidents of a minor nature which are only responded to when there is a lull in high priority activity. If decision-makers were to use average cost information they might be tempted to cut back on the expenses of responding to low priority incidents, whereas that would lead to a cutting back of resources which need to be on standby to respond to high priority incidents.

Fundamental Restructuring: Core Financial Management

HHHH. While analyzing such matters is difficult, it has the great benefit of providing very valuable management information not previously available. H. Performance Incentives IIII. The management system described here focuses on systems of financial control and monitoring. However, the government's ultimate objectives place the effective delivery of public services within the broader context of national development. Accounting systems in the core government are only a tool to assist in achieving these objectives. It is people who produce the desired results, not accounting systems. JJJJ. This system is designed, however, to assist governments to create an environment in which the creativity and motivations of public service managers are aligned with objectives for improved public service delivery. The weaknesses of traditional systems, which this system attempts to overcome, include their incentives for budget maximization, preservation of the status quo, avoidance of risk etc. KKKK. The question of incentives is a huge and complex issue and a large amount of management literature shows that the motivations of workers and managers cannot simply be appealed to through performance-based remuneration. Inadequate remuneration can, however, cause very serious problems in organizational performance. LLLL. Public servants, in particular senior professionals and managers, typically have complex motivations for undertaking their work and for seeking to improve it. The fine texture of any regime for incentives and sanctions for performance should take this into account. These issues of psychological motivation open up a large subject which includes organizational climate, values, culture, individual development, together with issues which will be unique to each country and each government department. They are an essential component of the system being described, but very detailed. At the general level there is a macro framework of information, sanctions and incentives. MMMM. The framework has its theoretical roots in agency theory, which analyses techniques to minimize the costs of striking effective contracts between principals and their agents and to monitor performance within a contract. Public sector reform can be seen as having the objective of lowering these agency costs and getting civil servants to produce more effective public services at lower cost. Scott and Gorringe (1988) elaborates this point. I. The Management Framework Surrounding the Head of a Department

NNNN. Once objectives have been set, decision-making authorities have been delegate, and performance information systems put in place, the features of the financial management system which signal success or failure in achieving greater efficiency and effectiveness should be devised. Some of the specific implications for individual managers from good or bad performance were discussed above. Regardless of what motivates any particular chief executive personally, he or she will find herself within an environment with the following influences on their managerial discretion:

a. The output commitments in the performance agreement. b.A fixed amount of resources available to meet those commitments with sanctions

against asking for more later in the year. If your department sells services to third parties then your constraint is the fixed net resource input from the appropriation measured on an accruals basis. You are free to spend without limit provided this is recovered from third party revenues with a surplus to pay the associated charge for the capital tied up.

c.A budgetary process which is better informed about what you are doing with the money

than the traditional system and is therefore likely to be more probing and demand a contraction of your low priority activities.

d.If you are producing services for which there are readily available alternatives from

other government providers or the private sector there will be competitive pressure on you to enhance quality and cut cost and your costs will have to be accounted for in the same way as your competitors'.

Chief Executives' Performance Agreements ·Key Results: Chief Executive's personal commitments to strategic

objectives and essential outputs ·Output requirements or purchase agreements ·Management requirements or ownership agreements

Fundamental Restructuring: Core Financial Management

e.You will be required to pay to the Finance Ministry a charge for the capital you are employing in your department in a manner that is analogous to a dividend payment in the private sector. The rate which is applied to your net assets in calculating this capital charge is based on a comparison with the cost of capital in similar activities to yours in the private sector, with a default rate; where that has not been decided it is the government's overall cost of finance. You can reduce your obligations under this payment by reducing the stock of assets employed in producing the required services.

f.Interest rewards and penalties are paid on variations in cash balances throughout the

year away from an agreed profile of balances which is set at the beginning of the year. An interest penalty is paid for a shortfall while interest is received on balances up to the agreed target at a market rate, with a below market rate for surpluses in excess of that amount. The net effect of this regime is to drive the management of cash to conform to the planned time profile.

This regime, which is in place in New Zealand, was decided after a lengthy debate about whether

it would be preferable to have incentives for the accumulation of cash surpluses above what was planned. Such surpluses would be a reflection of unanticipated success in lowering costs. The question was also debated as to whether such surpluses should remain with the department or be returned as a dividend to the central Treasury. The approach taken reflected a concern to ensure that surpluses were not generated by cutting back on the volume or quality of service delivered. Output definitions, measures of service delivered and quality dimensions would have to be very advanced to be completely sure that a perverse incentive was not created.

The view was taken that as a matter of principle surpluses belong to the government as a

whole, not to departments. There are instances, however, of discretionary decisions by the Government to allow surpluses to be retained and directed to agreed activities as they arise. Also, for reasons of macro-economic management, involving a desire for increased transparency together with and stability about the Government's cash requirements and their effects on financial markets, the objective of having departments stay close to their forecast cash profiles was seen as desirable in its own right.

g.There is the possibility of receiving performance bonuses for performance above

expectations or of being criticized or dismissed for performance below expectations.

Countries around the world have considered policies for performance bonuses for civil

servants such as "gain sharing" schemes in the United States. The approach suggested here is to strike a policy for the chief executives which might, for example, put 20% of total pay at risk in relation to performance.

In the New Zealand model, each year the central personnel agency conducts a

performance assessment of the chief executive. This, in addition to its own views of management performance, gives considerable weight to the views of the Ministers who contracted for the outputs initially, and wider views in the government and amongst other stakeholders and peers. Persistent poor performance leads to severance, whereas bonuses are paid for outstanding performance.

It is not practicable to use quantitative or purely objective measures of performance for

many areas of government administration. Performance assessment amounts to a judgement on the basis of a lot of information, within a transparent and stable process, in order to avoid dysfunctional incentives such as excessive avoidance of risk or compromising the independence of advisors.

The Ministry of Finance or Treasury provides advice to Ministers within the Budget

Cycle about the strategic positioning of the department in relation to the Government's goals and the country's longer term outlook, the quality of its business plans and their track record in effective use of resources. At the end of the year the Ministry also reports to the central personnel agency specifically on the quality of financial management.

h.There is also the freedom to pay performance bonuses to your own managers. Whether,

and what kind of, performance bonuses should be applied in any particular circumstance is at your discretion. The literature on motivation it suggests that any performance-based remuneration policies should be carefully designed to suit the features of the government department, such as the nature of the service it produces, the most efficient ways of producing those services, the culture of the organization and its values etc. A badly designed performance remuneration regime can do a lot of damage or at least be ineffectual. Where, for example, integrated team-work is necessary to raise the quality of service, any bonuses should reward team behavior as well as, or instead of, individual behavior.

i.Where departments provide all, or some, of their services to parties other than the

government itself, the financial management system should permit funding through parliamentary appropriation on a net basis to cover those services which are provided to government. Beyond this the revenues earned from sales of services to third parties can be ploughed back into the expansion of those services, provided that proper costing conventions and systems ensure that its business is not covertly subsidized by funds which were intended for providing services to the government.

j.External reviews of the performance of a department are done by a number of sources.

The Auditor-General is responsible to Parliament to review the running of the department as assessed by its standards of financial management, the delivery of

Fundamental Restructuring: Core Financial Management

the outputs through an audit of the "Statement of Service Performance" and also through discretionary value for money audits.

k.There is general management discretion to allocate the resources as the chief executive

sees fit to meet agreed goals and innovate for greater future effectiveness. These freedoms and the restraints on them are described elsewhere in this chapter.

J.Budget and Appropriation Processes OOOO. Typically the control by Parliament over the Executive, in relation to its powers to spend public money, takes the form of an Appropriation Act which authorizes the Executive to spend certain quantities of cash for specified objectives with some system of supply bills being used during the year to release cash to the Government on a gross basis pending the passage of an Appropriation Act. In bicameral systems, such as Australia, it is possible for a Government with a majority in one House to be blocked in its access to supply by the Upper House, in which case the Government is forced to resign. Control of supply is an important feature of some parliamentary systems of government and is traditionally expressed in cash terms. PPPP. As the financial management system being described rests heavily on these latter concepts, and in particular on the use of accrual accounting, it is a practical necessity to devise a system in which the Legislature's control of the aggregate flow of cash going to the Government is retained while, at the same time, the Appropriation Act is expressed in terms of total resource use. This can be done by having the documentation underlying the Appropriation Act expressed in terms of the total resources costs of providing the outputs which have been contracted for by each Minister. QQQQ. Shifting to an accrual-based system undermines the significance of cash control, which can be abandoned or modified to suit. In New Zealand's case it was thought that a control of cash was still needed as a residual sanction. The Auditor-General still signs the checks which provide funds for the Government on a daily basis. RRRR. The Appropriation and Imprest Supply Acts are in two parts. The payments on behalf of the Crown are still appropriated in cash terms, but the Government's operations are in accrual terms. The Auditor-General monitors the flow of accrual financial data from departments, but would advise that the cash supply be turned off if the expenditure were not in accordance with Parliament's authorizations. SSSS. If there is to be such a control it is necessary to be on a cash basis as Parliament, on the Auditor-General's advice, could not turn off the flow of accrual-based costs. The assets would go on depreciating regardless. The concept of supply is on a gross basis covering all government expenditure regardless of offsetting revenue flows. TTTT. This financial management system has implications for the structure of Appropriation Acts. Whereas it was traditionally common to vote resources to a department which may service several Ministers, this creates internal conflicts over resource use and these should be avoided by identifying the resources for each performance agreement between a Minister and a department with one Minister. These so-called "votes" of resources for each Minister can, therefore, end up being grouped with several votes for one department if there are several Ministers. By the same token, where one Minister has several portfolios allocated, then he or she would be responsible for several votes which may not necessarily all be administered by the same department.

Fundamental Restructuring: Core Financial Management

UUUU. The accrual accounting concepts also changed the way in which appropriations are made for long-term investments. Recalling the Government's interest as an owner of a government department, it has an interest in encouraging managers to provide the contracted outputs efficiently which means with as small an asset base, as represented in the balance sheet, as possible. VVVV. Managers have the freedom to optimize their asset base which includes using funds generated by depreciation for the purchase of replacement assets. For most departments this will involve a rolling replacement programme in which new assets are purchased with the cash being set aside by the application of the depreciation formula in setting the costs of outputs for which funds are provided by the Legislature. Where a department is to expand its asset base, then the cost of new assets will exceed the funds being generated by depreciation and a cash injection will be required that fills the gap between the total cost of investment in any year and the funds generated by depreciation. The documentation underlying the Appropriation Act, therefore, provides for these "capital injections". WWWW. The payments being made by departments under legal entitlement programs and at the direction of Government are not part of the income and expense statement of a government department because managers are not accountable for them. They must be appropriated for separately from appropriations for outputs. XXXX. Where departments are receiving money from parties other than the Government for the services they are providing, then the concept of a net appropriation is needed to link together the statement of the resources coming from the Government and the services it is purchasing with the departments' underlying business plan, which will show that it is using resources and gaining revenues from trading with third parties. YYYY. While appropriations are conventionally on an annual basis and entirely at the discretion of the Legislature which can reverse its decisions at any time, considerable improvements in management effectiveness can be achieved in some areas through appropriations that make commitments over longer periods of time. While subsequent decisions can overturn the plans, and are more likely to when there has been a change in Government, there are considerable benefits from making longer-term commitments in areas where the time lags in investment are long and the lifetime of the assets is long. Defence purchasing is an obvious example. The investment lags for major equipment such as ships, for example, can mean planning horizons extend over many years. ZZZZ. Multi-year appropriations can also have a place where activities are relatively small in size and regarded as being satisfactorily managed so that it makes sense for the Parliamentary Budget Cycle not to reconsider these items every year. AAAAA. The processes by which the Executive prepares the Appropriation Act for submission to the Legislature, that is the budget, has a major impact on the success or otherwise of the financial management system.

BBBBB. The Budget debate within any Government is the forum for resolving a contest of wills, policies and ideologies that, unless carefully managed, can easily produce decisions which swamp the benefits of an improved financial management system. It is naive to suggest that the budgetary battles of nations will be shoe-horned into tidy, stable, well-informed and rational budgetary processes. CCCCC. Experience shows, nonetheless, that a Government commitment to an orderly budget process can have a major impact on the quality of the outcome, if only from avoiding simple, but serious, errors. The design of an appropriate budget process in any particular country would be entirely governed by its structure, politics, personalities and the issues being faced, but there are a number of points which would seem to have some general applicability. DDDDD. Countries vary a great deal in the extent to which their national development is led by a government strategy covering economic, financial, social and other issues integrated to be consistent with each other. Countries are not companies and cannot be driven by the equivalent of corporate strategies. Democratic political processes are usually adept at striking compromises between competing views about how the nation should develop than they are at designing and delivering comprehensive national strategies. EEEEE. The financial management system described here can function effectively in either a planned or unplanned economy. The more a Government seeks to draw its policies and administration together around some integrated objectives, the more the outputs that are specified will reflect priorities and outcomes consistent with those objectives. The budget is an arena where tough detailed choices about the direction the Government wants to take are hammered out. Whether in a planned or unplanned environment, there is a tendency for the consideration of the details of a budget to overwhelm general agreements at the strategic level about the direction of fiscal policy. FFFFF. A major objective in the design of a budgetary process should, therefore, be to strengthen the influence of broad fiscal policy objectives and set an envelope over the detailed expenditure and revenue decisions which emerge. The annual Budget Cycle should begin with some expression of the general parameters within which budgetary decisions will be made. In a country with a comprehensive strategy this could take the form of a major speech by the head of Government about the Government's directions and priorities, its view of economic developments, taxation and other revenue policies and priorities for expenditure. This can be translated into technical details about the constraints within which departmental budgets will be prepared and might, for example, foreshadow an expected productivity improvement, or comment about the expectations for general wage movements and price level changes. Departmental performance agreements would be developed with Ministers, with these budgetary constraints in mind. Then it would be subject to detailed scrutiny by the Finance Ministry, and other central agencies, to test for consistency with the broad directions of Government policy. It will also look to impose much more detailed pressure on specific elements, taking account of views of the effectiveness of activities and the efficiency of management. This information should be submitted to a group of senior Ministers who generate the recommendations that go to

Fundamental Restructuring: Core Financial Management

the Government as a whole for final decisions about what to recommend to the Legislature in the Appropriation Act. GGGGG. Given the time that all of this is likely to take there will be revisions to the general economic and fiscal outlook and modifications to budget plans. It is important, however, that the basic process is maintained and that the hard work of prioritising and forcing efficiencies is not overwhelmed, as is so often the case, by large expenditure items that come on to the table by other routes at the end of the process. The Minister of Finance should have very considerable authority to control and manage this process which requires that Minister to have the unequivocal backing of the head of Government. HHHHH. Rights of appeal to the head of Government around the committee of senior Ministers have to be strictly limited if that committee is to do its work effectively. IIIII. The information generated for budgetary purposes should assist in the development of decisions about trade-offs and priorities and the output-based budgeting system is particularly strong in this regard. Budget decision-making will also be enhanced if the budget process is stable and repeated from year to year with incremental improvements on the basis of experience. JJJJJ. Experience shows that small misunderstandings about information protocols and timetables can produce serious problems in the development of a budget and in the fiscal outcomes. This is particularly true with the development of expenditure and revenue forecasts. The departments themselves must take full responsibility for forecasting their income and expenses and also the receipts and payments on behalf of the Government which they are administering. KKKKK. Forecasting models can be very complex and require considerable exercise of well-informed professional judgement. In traditional systems it is not uncommon for departments to take this responsibility rather lightly and expect that the Finance Ministry will take responsibility for the forecast. LLLLL. Familiarity with information is very important, as is the elimination of conflicting and contradictory sources of information. While no country has yet done this, there should be a full integration between the accrual-based financial management information in the departmental reporting systems and the information in the budgetary processes themselves. This means that the business plans for government departments would include projected income and revenue statements and balance sheets. K.Debt and Cash Management

MMMMM. The financial management system leads to change in the concept of cash management by government departments. Under a simple version of the traditional cash accounting system the central Treasury keeps a bank account with the Central Bank and draws on that account for payment to third parties on receipt of authorizations for payment from the spending departments. NNNNN. As described in other sections, the accrual-based accounting and control system results in cash not being controlled except at the level of aggregate supply. The negotiation of cash profiles for each department and the interest rate incentives to stay close to those profiles were also explained above. OOOOO. Further, it was noted that for departments with investments which exceed their depreciation flow, there will be cash injections for capital. Also the lumpiness of investments can lead to accumulations of cash. It is a matter of Government decision whether the build-up of cash in these circumstances is invested somewhere waiting a draw-down to finance an investment, or whether the Government chooses to finance the investment from taxation or borrowing when payment is due and then make the cash injection at that time. PPPPP. In this system departments are entitled to have their own bank accounts with a commercial bank and manage their own banking relations, which can yield considerable improvements over forcing the system to take whatever banking services are offered by the Central Bank. The system enables decentralized commercial banking services to be available to departments while at the same time keeping the advantages of scale and risk management through centralized management of the Crown's cash position. The system used in New Zealand is structured as follows. QQQQQ. A branch within the Treasury was established which was named the New Zealand Debt Management Office and given the responsibility for managing both the Crown's cash position and its portfolio of domestic and foreign debt. It is organized in both structure and function in a way that is very similar to a typical corporate treasury in a large corporation with many subsidiaries. There is a research group, a portfolio strategy function, a small dealer team, a back office settlements team and a cash management group. RRRRR. As a result of competitive contracting processes of all the major commercial banks, a contract was let to the Westpac Banking Corporation to provide commercial banking services to all the government departments. This contract comes up for renewal periodically and covers the conditions under which banking services will be provided and charged for. Departmental requirements differ substantially in this regard. At this stage of the technological development of New Zealand financial markets it is not practicable to allow government departments to chose any commercial bank they wish, while still satisfying the objective of central management of cash. At some point in the future it is likely to be possible. SSSSS. Each year at the time of the budget the Debt Management Office prepares for the Minister of Finance's approval a borrowing programme with the details of how the Government proposes to fund the net cash deficit for the year. Note that this cash deficit is not the fiscal deficit measure which is at the center of economic policy and debate; this is an accrual-based

Fundamental Restructuring: Core Financial Management

concept which is an accrual-based concept. This borrowing programme matches the profile of cash draw-downs into departments, the forecast receipts from taxation and other sources, forecast of other government expenditure and the servicing of existing debt. TTTTT. The Debt Management Office's objective is to minimize the net cost of servicing the Government's debt obligations over time, within the constraints of a portfolio management objective, which is to minimize risk from variability of interest and exchange rates and liquidity and credit risk. UUUUU. Besides administering the incentive system for departmental cash management, it sweeps their bank accounts each evening and invests surplus cash in the overnight money market. This innovation generated savings by comparison with departments' previously idle balances of about $30m per year. VVVVV. The development of a consolidated Government balance sheet, mentioned earlier, has permitted the Debt Management Office to add to its portfolio management objectives the matching of its financial liabilities with the characteristics of the assets on the other side of the balance sheet in much the same way as a private sector company does. L.External Reporting and Scrutiny WWWWW. The financial management system provides an extensive suite of financial documents which are available for scrutiny by the various external parties. These statements are listed below and samples are contained in the Appendix. a. Statement of financial position b. Operating statement (revenue and expenses) c. Statement of cash flows d. Statement of objectives e. Statement of service performance f. Statement of commitments g. Statement of contingent liabilities h. Statement of unappropriated expenditure i. Statement of accounting policies j. Other statements as necessary k. Comparative actual figures for previous year for (A-H) XXXXX. Scrutiny of these accounts by the Legislature should be in three phases. YYYYY. First, scrutiny of the Government's intentions for the current fiscal year as represented in the Estimates documentation supporting the Appropriation Act. This involves detailed cross-examination of departmental management, by a relevant sub-committee of the Legislature,

of the purchase agreement and management plans for the year in question. There is also an examination of the broad economic and fiscal policy plans that encompass all the departmental objectives. ZZZZZ. Second, at the end of the year there is a further round of scrutiny of department's actual performance on the basis of annual reports and financial statements summarizing the events of the year. AAAAAA. Third, there is examination of the performance of State-owned enterprises and Crown-owned entities. The latter are discussed in a later chapter. BBBBBB. Depending on a country's laws regarding the access by the public to official information, there will also be constant pressure by various elements in the community for information bearing on the department's objectives and its performance. CCCCCC. At the macro-economic level there will be continual scrutiny by financial market analysts and economic commentators. This will also take place formally and periodically when reviews are conducted by international organizations, particularly the International Monetary Fund. DDDDDD. The development of this financial management system offers a rapid improvement in the quality of information about the Government sector within the country's national economic statistics. A full reconciliation of the information in the financial accounts with the international formats and conventions of the United Nations and the International Monetary Fund can be achieved. Detailed and accurate information from the accounts can also eliminate the need for proxies and rough estimates to fulfil international statistical conventions. Information about capital consumption is an example. EEEEEE. The most significant innovation which followed from the implementation of the suite of accounts was the production of a government-wide accrual-based income statement and balance sheet. The conventions of the generally accepted accounting principles provide the procedures for consolidating the accounts of government departments, Crown-owned entities, State-owned enterprises and the Government's own assets and liabilities. FFFFFF. While there are complex conceptual issues in interpreting a full set of Government accounts they are a very useful addition to the information available for assessing the impact and performance of the Government on the economy. In 1992 New Zealand produced the first set of such accounts in the world, and because of the novelty of the information it undertook an extensive communications exercise to ensure that the information in the accounts was correctly interpreted. GGGGGG. Although the accounts have the same appearance as the annual report of a public company, it is a mistake in some respects to interpret the information about the Government in the same way as would be appropriate in the private sector. The bottom-line concept of changes in net worth, in particular, cannot be seen as a profit or loss, although it does contain very useful information about the overall effects of Government's financial performance.

Fundamental Restructuring: Core Financial Management

M. Quality Assurance and Audit HHHHHH. Because the Finance Ministry has given away detailed control over the financial management of departments, it is necessary to institute a quality assurance function. This is not an audit function, which is the proper responsibility of Parliament's Auditor-General, but is intended to provide assurance to the Minister of Finance that the departmental financial management is up to a standard which entitles that Minister to sign the annual accounts submitted to the Legislature secure in the knowledge that they are materially accurate. It is desirable also to have the head of the Finance Ministry countersign the accounts to add to their credibility. IIIIII. To provide this quality assurance, the Finance Ministry can conduct reviews of accounting systems or spot checks in areas where there are problems. It can be effective to rely on the internal audit capability of the department itself. In this activity it is important that the Minister of Finance does not cut across the fundamental legal responsibility of the head of the department to manage the finances. JJJJJJ. If an internal audit function is demonstrably professionally competent then Parliament's audit might also rest on it to some degree. The function is, however, commonly not done well in government departments. KKKKKK. Internal audit is an invaluable management tool which can keep the chief executive in touch with how effective operations are down the line. When fully developed, it can become a total system of management assurance which periodically reviews and checks all the management systems in a department to assure that they are constantly improving and that their costs are being held down. It is good practice to use people from outside the organization working alongside the internal audit staff to ensure there is a high degree of objectivity. LLLLLL. The development of tighter lines of accountability and clearer performance information within the incentive environment described here, also can change the philosophy of value-for-money and effectiveness reviews. Whereas some countries have controllers and auditors who institute rolling programs of reviews of departmental activities, this system tends to put more onus on management to undertake those reviews themselves through processes which are open to scrutiny from outside. This can have the advantage of targeting costly review processes on areas of priority as seen by the people most involved, rather than imposing an automatic programme of reviews. It can also help reduce a problem for departmental heads everywhere which is managing multiple reviews by outsiders that usually arise in an uncoordinated way and divert valuable internal resources from getting on with the business. MMMMMM. The introduction of this system fundamentally changes some aspects of the audit function. It clarifies the accountabilities and establishes the central Audit Office as the agent of

the Legislature reporting on the performance of Executive Government. NNNNNN. The shift to greater management freedom in the use of the generally accepted accounting principles brings the practice of auditing in the public sector closer to that in the private sector. Compliance auditing techniques are used across the range of financial accounts. OOOOOO. The central Auditor also audits the Statement of Service Performance which is prepared by the department in discussion with the Minister at the end of the year to report on whether the outputs were delivered as planned. N.Functions of Central Government Agencies PPPPPP. It will be apparent from preceding sections that there is a requirement in this system for four central functions. These are an Audit Office, already discussed, a Finance Ministry or Treasury, a central personnel agency and policy coordinating and strategy group of some kind. QQQQQQ. A Finance Ministry or Treasury must administer the Budget Cycle and bring together all the flows of information about the economy and government regarding expenditure, revenue and management performance. This is necessary for Ministers to make decisions about what outputs they want to provide funding for, and what sized balance sheets are appropriate to the organization's providing these outputs. RRRRRR. This agency develops policies on improvements in government financial management, leads any system-wide changes that are undertaken and provides the Government with assurance that the delegations it has made to departmental managers in the financial area are being prudently exercised and that the information coming to Government is of good quality. The debt and cash management operations also belong here. SSSSSS. As the focus shifts from monitoring controls to assessing performance; the character of investigatory work by the Finance Ministry also changes to become analogous in some ways to the kind of assessments that investment analysts and management consultants do in the private sector. TTTTTT. A central personnel agency is also needed to ensure the recruitment, retention, performance assessment, dismissal and career development of the top management team and also works with the top managers to ensure the development of top managers for the future. UUUUUU. In a Westminster-type system, this agency is responsible for maintaining the constitutional line between professional civil servants and politicians. In a country where political appointments are used extensively this role would be modified or eliminated. A central personnel agency also has some oversight of any service-wide policies in areas such as equal opportunity employment, remuneration and personnel management practices. VVVVVV. Depending on the circumstances in a particular country, a central agency which

Fundamental Restructuring: Core Financial Management

has some responsibilities for the Government's total policy programme, its communication strategies, and the co-ordination of the government machinery to achieve these, may be desirable. Typically there is some unit associated with the head of the Government which is responsible for assisting him or her to integrate the development of the Government's overall policy strategy and solve day-to-day problems. The relative weight that goes on each of these functions varies, but there is an inevitable tendency for advisors to the head of Government to have these dominated by the priorities of the moment. WWWWWW. Some countries, particularly in Asia, have large planning organizations which are distant from the day-to-day issues concerning the head of Government while still nominally attached to that person as with the Economic Planning Agency in Japan. The Economic Planning Board in Korea, however, is attached to a Deputy Prime Minister. The Departments of the Prime Minister and Cabinet in Australia and New Zealand, the Cabinet Office in Britain, and the Privy Council in Canada, all undertake some functions of co-ordination of Government policy of a much less comprehensive kind. XXXXXX. The variations are endless, but so far as the financial management system described here is concerned there is a need for the involvement of advisors who have a broad responsibility to the head of Government to be involved in establishing the priorities and parameters for fiscal policy and the budget, and to be party to the advice going to senior Ministers about major priorities of Government expenditure. YYYYYY. Coherent fiscal policy which exploits the techniques of this system requires, ideally, the head of Government to ensure that a medium-term strategy for development is established, and that its implications for fiscal policy in the circumstances of any particular year are spelled out in clear enough terms early in the annual Budget Cycle so that they drive important priorities through the system. In the circumstances that commonly prevail this is a counsel of perfection. Experience, however, suggests that if the head of Government and the Minister of Finance and other senior Ministers can agree on a set of such priorities, then this financial system can drive those priorities through the organs of government administration and provide feedback on whether what was intended to happen is happening. ZZZZZZ. While the system can function to increase efficiency and financial control in an environment of complex politics and conflicting priorities, it can also be an instrument for delivering Government strategy through fiscal policy if that is what is asked of it. O.Evolution Over Time AAAAAAA. This chapter has described an integrated system of government management with particular emphasis on financial management that, at the time of writing, the author believes to be a best-practice model in circumstances where the underlying assumptions which are necessary for it to function as intended are valid. Quite different systems of financial management will be

more appropriate in particular countries at particular times. BBBBBBB. This system is not, however, a rigid blueprint, although this chapter has sketched a lot of the detail of implementation that was required to make it work in the New Zealand setting. Most of that detail would, however, be subject to evolution and change in any particular circumstances. CCCCCCC. The designers of the particular application in New Zealand intended that it deal with the problems and issues that arose in New Zealand over the past five to ten years. It could develop in a number of directions according to the issues and problems that arise that it is called on to solve. The emphasis on future evolution may be towards even greater decentralization, greater contracting in of public services, and shrinking of central government administration. It may develop towards implementing broad strategies and development goals or new systems of delivering of social services, depending on the priorities of future governments. DDDDDDD. The system is capable of evolution in any of these directions. What would, however, be very adverse in terms of improving levels of efficiency and creative management and leadership would be a return to central control and direction of decisions about the detailed used of resources in meeting Government's goals.

I. ________________________________________________________________ Fundamental Restructuring: Some Practical Issues in the Implementation

of Financial Management Reform A. Introduction A. The rapid implementation of a comprehensive financial management system of the kind described in the previous chapter would involve making major root and branch changes in public sector management in most countries. The bigger those changes, the greater the risk, and the more attention would be needed to carefully plan change management strategies to handle those risks. B. Chapters One and Two argued that the specifics of any reform programme will be determined by a host of detailed matters concerning the country, its current and historical circumstances, development goals etc. These are factors external to the management systems of core government administration. There are also internal parameters to do with the existing systems, the people working within them and the results expected of them. C. There are, no doubt, many countries where the system described in the last chapter is not appropriate to their circumstances. The author would assert, however, that movement towards financial management systems which are more results driven, open, and create powerful incentives for more effective management, are desirable in the public interest in almost any country. D. Whether a country whose systems are far removed from these ideals is better advised to plan a giant leap forward or to set out on a path of reform that may take 10 years or more is a question without a general answer. It has been demonstrated that radical change in a short-time period is possible, which poses the question as to what are the conditions under which this approach is likely to be successful. E. This chapter touches on a few issues in implementation of a comprehensive programme of reform. It does not repeat the many points about implementation of aspects of the system that were covered in the previous chapter. F. What you can do depends on how big a Problem you have and where you start from:

G. While every government in the world is dissatisfied with the effectiveness of public administration in some regard, very few governments undertake fundamental rapid reform that is intended to rectify this situation. For reform to occur there needs to be acceptance that there is a problem, agreement about the solution to it and preparedness to commit to a process of implementation which will possibly have to overcome a lot of difficult obstacles perhaps before producing much in the way of results. These conditions are understandably rare. H. To illustrate the point in relation to New Zealand's implementation of this system, there were a number of important factors that promoted the change and which are elaborated in Scott, Bushnell and Sallee (1990). The country was in a very difficult financial situation. Its fiscal deficit had been around 9% of gross national product, tax reform and increases in all government charges and introductions of new charging systems had boosted government revenue to the point of arousing considerable political resistance. I. Government expenditure on support for industry had been removed. Government businesses had been converted to State-owned enterprises and were paying dividends and taxes out of profits for the first time and were not having their investment programs funded by the government. Government administration was being squeezed and welfare support for citizens was being withdrawn from the middle classes and targeted to those in need. All this did not, however, eliminate the problem with the fiscal deficit. J. Furthermore, there was dissatisfaction on the part of some Ministers about the regimes for setting public sector wages, which put politicians in the position of having to take direct responsibility for detailed industrial relations issues in a highly politicized atmosphere. There had been huge wage increases as a result which had contributed to a very damaging wage explosion in the economy as a whole. Some Ministers were also very dissatisfied with the lack of freedom that their departmental heads had to make sensible choices about inputs. K. Over the whole of the period in New Zealand there was a general move to undertake reform of institutions which had been largely unchanged for a very long time. Deregulation, removal of protections via import barriers, and the removal of subsidies in the private sector, taken together with measures to expand the corporate tax base, and very high interest rates from both deregulation of financial markets and firm monetary policy, meant that the private sector was being very heavily squeezed in a general period of restructuring and retrenchment. The pressures for restructuring in the private sector and the exposure of incredible inefficiencies in the parts of the public sector that had been corporatised all added to an environment in which proposals for reform would fall on fertile soil. L. Key Ministers and the leadership of the bureaucracy were enthusiastic to change and for one or two years advisors had been preparing proposals, when the political opportunity arose to launch a reform programme following an election. The basic outlines of the system were established in meetings between senior Ministers and key advisors in a matter of a few hours following which a programme for implementation was put in place over the next two years that changed the way in which every government agency was managed. The introduction of the new financial management systems took 18 months and came in 6 months ahead of schedule. This pace of change was only possible because of the general recognition of the need for change in

Fundamental Restructuring: Implementation Issues

government administration in an environment where other large changes were occurring and there was little support for the status quo. B. Solve a Sequence of Real Problems M. There is a natural temptation for the designers of government financial management systems to seek to implement a grand design. The realities of day-to-day government are such that politicians are rarely interested in that, but do have real problems they want solved. While it is important to have an end-point in mind and principles which ensure the inconsistencies are not built into the system, the change management programme should emphasize the solution to the sequence of real problems. This can improve the design, produce early pay-offs to justify the costs and effort and gain needed political support for keeping the reform going. C. Political Commitment is Necessary at Key Points N. While it may not be necessary to have the commitment of the head of Government to a programme of reform of this kind, it cannot be done without the support of the Minister of Finance and other key Ministers involved in fiscal policy and public administration. The implementation programme does not require much input from them apart from demonstrating their support on important occasions, particularly to the top management of the civil service, and also in steering the necessary legislative proposals through the Government and the Legislature. It may be possible to introduce a reform programme without legislative change in a technical sense, but it is desirable to pass legislation which captures the purpose and intent as well as the technicalities of the changes. O. This relatively low level of top political input presumes that there is not energetic opposition from the Government's political opponents. The reform of public administration to increase effectiveness and efficiency can be expected to have a high degree of bipartisan support. In New Zealand's case the reform programme was started by one Government and completed by another who had no disagreements with each other about what was being done. This will not always be the case and it might be expected that differences between political parties could arise over some aspects of reform as, for example, the handling of issues of concern to State unions. D. Leadership from the Top of the Bureaucracy is Essential P. The chief executive of the government departments and the heads of the central agencies, particularly the Finance Ministry, must be energetic in their efforts and support for the reforms. There are a great many opportunities to frustrate the intent of the scheme and good people must

be diverted inside departments to see that the changes are made. A passive attitude by a chief executive will lead to unsatisfactory results, even though there is nominal compliance with the requirements. Q. The central agencies should take a major role in developing the output definitions at the outset. For practical purposes, the Finance Ministry and the Minister of Finance should have a near veto over these definitions. Without this there is a danger of getting stuck in a situation where input controls have been removed and output controls are ineffective. Some chief executives will try to gain excessive freedoms through vague output definitions. In one case in New Zealand a government department sought to have only one output for a huge and complex government agency. The result would have been no control whatsoever. E. There are Managers Everywhere Who Will Welcome the Change R. No matter how much push comes from the top of the system, the people who know where to find the real waste and inefficiency in government administration are further down the organization. The system is designed to empower these people to make the changes in the way they manage their people and other resources and increase their responsiveness to customer requirements. S. It is common for resistance for the change to come from people who are comfortable with the old system and in many departments it proves necessary to change key individuals in the financial management area. T. The change management programme will pass through at least three phases and probably require different skills at different times which will not always be found within the same individuals. U. First, a heavy effort is needed in conceptualization, planning and strategy. The early implementation phase involves very different skills in organizing large numbers of people, some of whom are quite unsure of themselves and unsettled by the change, but who must be motivated to push hard to get practical solutions to problems in place quickly. Inevitably things will go wrong and interventions to patch things up will be needed. The whole system of government finance will be reworked or replaced while the basic functions of the system still have to operate satisfactorily day-by-day. V. Once the system is operating initially, the emphasize moves to decentralized activities in seeking improvement through technical development, staff training, learning from errors etc. Managers at this stage begin to see all the new possibilities for improving management through using the systems instead of being preoccupied with the difficulties of installing the systems. W. Some of this continuing change requires a change in habits and attitudes that will not be shifted as rapidly as the systems themselves. Having an accrual accounting system in place will

Fundamental Restructuring: Implementation Issues

not be much use if staff are still putting invoices aside at the end of the financial year to be carried over into the next year. F. Create Incentives for Change X. Departmental heads will see the removal of controls over their inputs as a very positive change and this motivation can help to implement the reforms. Rather than impose on them a single date at which they will have to change, it is much safer operationally and assists with motivation to run a dual system for a while with only those departments going on to the new system that are checked as being ready to do so. Y. The financial managers in departments will take a pride in getting the systems up to the necessary standard in return for which the managers in their departments as a whole will be given greater freedoms to manage. No department will want to be the last one to be approved. G. Communicating the Objectives of the Changes is Essential Z. Introducing comprehensive reform is going to cause extra work for a lot of people who will be better motivated if they understand why the changes are being brought about and what benefits they will bring for the Government as a whole and for their particular operation. If New Zealand's example is typical there will be many senior managers throughout the bureaucracy who have never been particularly interested about financial management and will need to be persuaded why they should give the issue the high priority that is necessary to make the changes. Once senior Ministers have made their intentions clear, a large effort is necessary by the Finance Ministry, financial managers through the government, the professional accounting body, Audit Office, and other players to keep people abreast of the objectives and requirements at each stage and translate the general objectives for reform into specific details for each agency. Departments which are involved with public interest groups will need communications programs to explain what is going on and how the public will be affected. AA. As mentioned above, passing legislation to support the programme provides huge communication benefits as well as substantive technical advantages. H. Decentralize Technical Accounting Issues BB. Consistent with the decentralizing principles of the regime, the Parliament and Treasury should avoid directing detailed accounting practices in departments. The generally accepted accounting principles hold departments to standard conventions in making these decisions and

the lack of strict comparability which may arise in treatment across departments is a small price to pay for the efficiencies and incentives of imposing the obligations directly on the departments. The inconsistencies can be ironed out later if they appear to be material. This can occur in places where standard accounting conventions have not been developed. In the New Zealand case, for example, the definition of policy analysis varied across departments, which caused confusion when politicians queried the system as to how much was being spent on that amount in total. CC. Accept that a lot of senior management time will be spent on internal management issues before, during and after the Changes DD. In Chapter Three it was noted that the role for chief executives in the reform system is similar in many basic respects to a senior position in the private sector. The transition, however, from the role of a traditional departmental head to the new role is likely to require the individual to spend a lot of time overseeing the development of the new management systems that will eventually facilitate their changed role and become routine in terms of management responsibilities. EE. During this phase there is likely to be dissatisfaction expressed at times by both managers and Ministers about how much effort is being spent in management reform while some of the traditional functions of policy advice, representation, etc, are being de-emphasized. In the New Zealand experience this was a temporary phase. I. Manage Transitional Risks Carefully FF. Opponents of reform will seize upon any early problems associated with the new system or difficulties in implementation. There are risks in making major changes to management and financial systems. New accounting systems may not work perfectly to begin with and it is not always feasible to run the old and new systems in parallel. The early information in the new formats will have inconsistencies in definition between agencies that take time to sort out. Managers granted new freedoms will make a few mistakes that attract attention and so on. GG. Managing these risks is common sense in anticipating them, intervening quickly to limit the damage and fix the problem. The attention to them is also diminished if the programme is producing early results as noted above. J. Managing Change at the Department Level HH. This report is not the place for much to be said about managing change within a government department. It is important, however, to emphasize strongly what a critical factor this is in the implementation of comprehensive management reform.

Fundamental Restructuring: Implementation Issues

II. In the system described here the responsibility for management is shifted squarely onto the shoulders of departmental chiefs. Success or failure depends largely on their response. They become personally responsible for managing strategy, operations, personnel and finance to achieve results that are public knowledge. Traditional bureaucratic systems appoint people to top positions who are not all capable of doing this. Their success has come from policy advice, diplomacy, seniority, political popularity etc. They are better at shifting responsibility than shouldering it. JJ. Below these people are deputies and assistants who have often been promoted into management for extra status and money, but cannot manage and may not even be expected to. KK. Staff in traditional government organizations are usually psychologically resistant to change. This does not mean they will not change, but that it will require a high class of leadership, motivation, communication, and management skill from the top of the organization for them to become comfortable with change. If the people at the top cannot, or will not, provide this then others should be brought up from within the organization or from outside it who will. LL. This may only be necessary rarely because the experience of a number of countries who have reformed is that there are many senior and middle managers who have the skills and welcome the changes. Also stronger incentives to produce results and the freedom to do so will quickly change the behavior of many traditional senior civil servants. MM. Assuming competent top management is in place, the change process involves the following elements: ·A clear mission for the organization that is absorbed throughout the organization and not

just on the cafeteria wall. ·Organizational values which guide its behavior in respect of staff, clients, the public,

politicians; its commitments to the quality of what it does and how it does it. ·Strategic plans which define and prioritize what it is important to achieve in terms of

outputs and organizational development over a period of time. ·Operational plans which translate strategies into detailed agreements concerning

assignments of responsibility for results, allocate resources and specify information flows both internally and externally.

·Communication plans which ensure that all the above is known and understood and that

people affected are involved in the preparation of plans and are committed to their achievement.

·Enabling systems which allocate and develop resources, ensure quality, specify results,

monitor achievements and motivate for performance and innovation.

·Finance, management assurance, quality management, information technology, asset

management etc. ·Human resource management which aims to nurture the development of people with the

competencies needed for the organization to provide constantly improving services with increased efficiency.

I. ________________________________________________________________ Reform Within an Existing Legal Framework: Compensation A. Public employee compensation systems in LAC vary considerably in their details, yet some features are widely shared. Three key aspects of these systems are worth examining: an inconsistent relationship between skill levels and compensation relative to private sector comparators, salary assignment based largely on non-economic criteria, and weak enforcement of centrally imposed salary setting restrictions. B. The first section of this chapter shows the current symptoms, the second shows how -- and posits why -- they have developed, and the third discusses why the symptoms have been difficult to correct. A.An Inconsistent Relationship Between Skill Levels and Compensation Compared with

the Private Sector C. Those seeking to reform civil service employee compensation in Latin America face systems marked by an inconsistent relationship between public sector salaries and their private sector counterparts. Base salaries are--without apparent exception--assigned using technical criteria, rather than on the basis of the opportunity costs faced by current or potential public employees or worker productivity. The same is true, generally, for salary supplements. These inconsistencies are apparent in data from Trinidad and Tobago, Uruguay, Chile, Venezuela, and Argentina. D. Data from Trinidad and Tobago and Uruguay reveal public sectors that tend to increasingly undercompensate their employees as responsibility levels and skill requirements rise (see tables 9.1 and 9.2). For instance, while a computer operator makes roughly 125 percent as much in the public sector as in the private sector in Trinidad and Tobago, permanent secretaries receive only about 64 percent of the compensation of a chief executive officer in the private sector. In Uruguay, trades workers in the public sector earn about 94 percent of what journeymen earn in the private sector, while a division director in the public sector earns only 37.5 percent of what a manager earns in the private sector. (Salary comparisons for these two countries especially for Trinidad and Tobago are among the most meaningful in this report, because the data allowed reasonably close matching between specific public and private sector positions.)

Public Sector Human Resource Management 2

E. In Chile, top-level public sector managers earn between 63 and 70 percent of the average for chief executives and general managers in the private sector, while mid-level public sector professional and technical staff earn between 27 and 135 percent of the overall average for professional and technical workers in the private sector (table 9.3). Mid-level administrative and support personnel in the public sector earn between 17 and 61 percent of the overall average compensation for administrative positions in the private sector. The higher ratios in all these cases apply to public sector employees governed by the fiscalizador salary scales and the lower ratios reflect public employees governed by the less generous unified salary scale. (Fiscalizador positions handle finances.) These comparisons could be made more reliable if the public and private sector comparators were more specific. F. In Venezuela, the average public sector managerial salary equals about 16 to 67 percent of private sector managerial salaries, depending on the level of managerial position in the private sector (table 9.4). Average professional and technical salaries in the public sector range between about 27 and 71 percent of typical professional and technical salaries found in the private sector--depending again on the skill and responsibility level of the private sector comparator. Public sector administrative and support positions receive, on average, between about 27 and 84 percent of various private sector comparators; while semiskilled public sector labor receives between 48 and 74 percent of the wages earned by private sector comparators. These comparisons could be more accurate if the public sector figures reflected positions that could be matched to the available private sector occupational categories, rather than simply identifying averages for broad public sector career paths. G. In Argentina, top-level managers governed by the 1428/73 salary scale earned only 24 percent of the salary of a chief executive officer in the private sector--or about 74 percent of a director of budget and finance in the private sector (table 9.5). Public employees located at the modal category within the 1428/73 salary scale earned between 24 and 51 percent of plausible private sector comparators; while those at the bottom of that salary scale earned between 53 and 89 percent of private sector secretaries or receptionists, respectively. As with the Chile data, these comparisons could be made more meaningful if specific positions in the public sector--instead of the less homogeneous salary grade groupings--were used to make these comparisons. H. A recent World Bank study provides additional evidence on differences in public versus private sector salaries for a particular subset of positions--teachers (Psacharopoulos, Valenzuela, and Arends 1993). Public teacher salaries ranged between 65 and 16 percent of private sector comparators near the end of the 1980s in twelve LAC countries (see table 9.6). I. In sum, although public sector salaries often fall below those available in the private sector in these LAC countries, this phenomenon is not uniform across countries or types of positions--and is often marked by wide variation. Although more precise data could help with many of the comparisons, the variations in the relationship between salaries for comparable public and private positions likely would still hold. The negative relationship between the ratio of public-to-private salaries and levels of responsibility and skill requirements is quite noticeable in the Uruguay and the Trinidad and Tobago data, and to a less obvious extent in the Venezuela

Compensation 3

data. Senior civil servants in all those countries regularly point to low managerial salaries as a key impediment to their ability to staff higher managerial level positions with qualified persons. J. As noted earlier, the inconsistent relationship of compensation for public sector positions compared with their private sector counterparts in most LAC countries grows out of the use of technical--instead of economic--criteria for salary setting. K. An understanding of the two key processes--setting base salaries and assigning salary supplements--examined here, helps clarify the inevitability of the inconsistencies between public and private sector compensation. B.Salary Assignment Based on Non-economic Criteria (1)Setting base salaries L. Procedures in all LAC countries reviewed in this study virtually guarantee that public sector base salaries will fail to bear a consistent relationship with the opportunity costs faced by current or potential public employees. Two basic steps are used to assign base salaries to positions. First, each position is classified according to some set of criteria. Second, each classification is assigned a base salary using some additional set of criteria. Although both tasks are important, assignment of a salary is crucial, because it determines whether any systematic relationship will exist between public salaries and their domestic private sector comparators and thus how competitive public sector positions can be compared with the private sector. M. Venezuela. The Comisión Presidencial para la Reforma del Estado (COPRE) in Venezuela recently proposed a very sophisticated methodology for classifying managerial positions and assigning salaries to them (Viera 1992). Although the proposal is more elaborate and sophisticated than most, its structure captures the basic elements and design of these systems as they exist throughout most of LAC. N. The proposed Venezuelan salary assignment system has two steps: classifying positions and assigning salaries to them.

Public Sector Human Resource Management 4

Table 9.1 Trinidad and Tobago: public-versus private-sector annual salaries (dollars)

Public sector Managers Public sector Permanent secretary 25,852 4,941 30,793 Private sector Chief executive officer 32,471 16,002 48,473 63.53

Public sector Chief planning officer-(grade 68) 23,726 1,101 24,827 Private sector Administrative director 27,346 4,947 32,293 76.88

Public sector Chief technical officer-(eng. grade 68) 23,726 1,101 24,827 Private sector Top engineering executive 23,753 7,574 31,327 79.25

Public sector Director of fin. and accounts-(grade 65) 20,349 1,101 21,450 Private sector Finance manager 21,176 6,353 27,529 77.92

Professional/ technical Public sector Chief engineer -(grade 62) 17,839 1,101 18,940 Private sector Chief engineer 28,376 6,447 34,824 54.39

Public sector Admin. officer, level V-(grade 61) 17,269 1,101 18,370 Private sector Operations manager 18,353 5,224 23,576 77.92

Public sector Accounting exec. level II-(grade 58E) 14,931 1,101 16,032 Private sector Chief accountant 20,471 3,660 24,130 66.44

Public sector Cost accountant 11,384 1,101 12,485 Private sector Cost accountant 20,154 3,677 23,831 52.39

Public sector Accountant level II-(grade 35G) 11,384 1,101 12,485 Private sector Accountant 15,529 1,412 16,941 73.70

Compensation 5

Table 9.1 Trinidad and Tobago: public-versus private-sector annual salaries (dollars) (continued)

Position Base salary Allowances Total Public sector Professional Technical (cont.) Public sector Computer programmer 12,449 1,101 13,550 Private sector Computer programmer 11,118 1,117 12,235 110.75 P bli

Computer operator level III-(grade 39C) 10,478 1,101 11,579 Private sector Computer operator 8,888 359 9,247 125.22 Administrative/ support Public sector Clerk level IV - (grade 30C) 8,945 1,101 10,046 Private sector Senior accounts clerk 8,550 1,085 9,635 104.27

Public sector Clerk level I - (grade 14) 4,947 1,101 6,048 Private sector Computer data entry clerk 6,459 542 7,001 86.39

Blue collar Public sector Foreman grade I - (class 1) 7,540 1,101 8,641 Private sector Production foreman 10,296 1,859 12,155 71.09Shift supervisor 10,933 1,395 12,328 70.10

Public sector Lowest public sector wage rate (14 year

old boys and learners, skilled, & semiskilled (class 54)

n.a. 4,193

Private sector Lowest private sector wage rate

(Minimum wages order, 1991) 1,814 n.a. 1,814 231.15

n.a. Not available. Source: For Private sector except minimum wage figures, Price Waterhouse, 1992. For Public sector, Republic of Trinidad and Tobago, 1992.

Public Sector Human Resource Management 6

Table 9.2 Uruguay: public-versus private-sector annual salaries (dollars)

Total i

Public sector i

Position Base salary Allowances Managers Public sector Division director a 4,275 2,253 6,528 Private sector Manager n.a. n.a. 17,402 37.51 Professional/ technical Public sector University trained professional 5,607 612 6,219 71.37Technical - professional 3,534 613 4,148 47.59Private sector Section chief n.a. n.a. 8,715 Administrative/ support Public sector Administrative 2,994 613 3,607 89.98Specialized 2,860 613 3,474 86.66Auxiliary services 2,304 705 3,009 75.07Private sector Qualified technician n.a. n.a. 4,009 Blue Collar Public sector Trades 2,010 750 2,760 Private sector Foreman n.a. n.a. 7,139 38.66Journeyman n.a. n.a. 2,931 94.18Worker n.a. n.a. 2,202 125.35 Memorandum: National Minimum Private Sectorb 658

n.a. Not available Note: Private sector salary data are from June 1989. Public sector data are for July 1989. All figures converted to 1992 US dollars (US CPI) for comparability. a. As reported in "Uruguay; Employment and Wages," IBRD. May 1991, Table VI-20. b. Based on normal minimum wage less the workers contribution to social security. Source: "Uruguay; Employment and Wages," IBRD. May 1991.

Compensation 7

Table 9.3 Chile: public versus private sector annuals salaries (dollars)

Public sector Position Base salary Allowances Managers Public sector Top political appointee-grade A 4,415 18,236 22,651 70.36Top civil serv. director-grade 1B 4,066 16,282 20,348 63.20Civil serv., middle manager-grade 9 2,446 7,670 10,116 31.42Lowest profes. manager-grade 18 1,223 2,804 4,028 12.51Private sector Chief exec. and general managers n.a. n.a. 32,195 Professional/ technical Public sector Top-level professional-grade 4 3,478 11,692 15,170 134.91Mid-level professional-grade 13 1,798 5,215 7,013 62.37Bottom-level professional-grade 23 872 2,196 3,068 27.29Private sector Professional/ technical n.a. n.a. 11,245 Administrative/ support Public sector Top-level administrative-grade 9 2,446 2,415 4,861 61.55Administrative/support-grade 17 1,321 1,723 3,045 38.54Administrative/support-grade 25 762 1,053 1,815 22.97Bottom-level adminis.-grade 31 553 771 1,324 16.76Private sector Administrative n.a. n.a. 7,899 Blue Collar Private sector Specialized employees n.a. n.a. 6,830 Specialized laborers n.a. n.a. 4,319 Nonspecialized n.a. n.a. 3,437 Service workers n.a. n.a. 3,316

n.a. Not available Note: All salary figures are 1990 year-end figures converted to 1992 U.S. dollars (U.S. Consumer Price Index) for comparability. Source: For public sector, Escala Unica de Sueldo 1990. For private sector, Instituto Nacional de Estadísticas.

Public Sector Human Resource Management 8

Table 9.4 Venezuela: public versus private sector annual salaries (dollars)

Base salary Allowances Total Public sector Position Managers Public sector Minister/executive director 9,753 11,654 21,407 29.54Private sector President 49,694 22,780 72,474

Public sector Sectoral director general 8,201 6,635 14,836 42.38Private sector Director of finances 25,052 9,954 35,007

Public sector Unit chief 6,319 3,909 10,228 53.40Private sector Director of internal audit 12,737 6,415 19,152

Professional/ Technical Public sector Top prof./ tech., grade 32-10 9,356 2,866 12,222 105.83Private sector Chief systems analyst 8,562 2,986 11,549

Public sector Mid-level prof./ tech., grade 24-5 5,493 1,682 7,175 97.61Private sector Internal auditor 5,568 1,783 7,351

Public sector Bottom prof./ tech., grade 15-1 3,145 963 4,108 90.48Private sector Computer operator 3,448 1,093 4,541

Administrative/ support Public sector Top administrative, grade 26-10 4,726 1,448 6,173 63.41Private sector Executive secretary, bilingual 7,344 2,392 9,735

Public sector Mid administrative, grade 14-5 2,329 713 3,042 54.81Private sector Cashier 4,178 1,373 5,550

Compensation 9

Table 9.4 (continued) Public sector Public sector Bottom administrative, grade 1-1 1,120 343 1,463 Private sector Receptionist 2,382 724 3,106 47.10

Blue Collar Public sector Semi-skilled labor 1,491 995 2,485 50.55Private sector Chauffeur II 3,723 1,194 4,916

Note: All salary figures in annual U.S. dollars, converted at an exchange rate of 66.85 Bs./$US, (IFS Jan. 1993). Source: For private sector, decree 2039, 1992; Escala de Sueldos y Primas para Cargos de Alto Nivel Organismos de la Administración Pública; Oficina Central de Personal, 1993; República de Venezuela. For public sector, Encuesta de Compensación 1992; Krygier, Montilla y Asociados.

Public Sector Human Resource Management 10

Table 9.5 Argentina: public versus private sector Annual salaries (dollars)

Total Public sector Position Base salary Allowances Highest ranking positions Public sector Max.: Escal. 1428/73 (cat. 24) 10,842 39,797 50,639 Private sector Chief executive officer n.a. n.a. 210,035 24.11Director of administ.and fin. n.a. n.a. 101,603 49.84Director of budget and finance n.a. n.a. 68,803 73.60Director of personnel n.a. n.a. 50,596 100.08 Modal Positions Public sector Mod.: Escalafón 1428/73 (cat. 16) 2,591 6,236 8,828 Private sector Chief financial analyst/ planner n.a. n.a. 36,143 24.42Chief accountant n.a. n.a. 32,370 27.27Personnel manager n.a. n.a. 25,946 34.02Senior systems analyst n.a. n.a. 25,326 34.86Budget/financial analyst n.a. n.a. 17,354 50.87 Lowest Ranking Positions Public sector Min.: Escalafón 1428/73 (cat.1) 1,807 4,904 6,710 Private sector Secretary n.a. n.a. 12,648 53.05Receptionist n.a. n.a. 7,564 88.72

Note: All salary data based on September 1991 data converted (U.S. CPI) to 1992 U.S. dollars for comparability. Source: For public sector, Ministerio de Economía. For private sector, Informe de Remuneraciones, Anual; AMROP, Executives S.A.

Compensation 11

O. Position classification consists of specifying: ·Title ·Functions and purpose of the position ·Responsibilities ·Managerial responsibilities (for example, magnitudes of budget, personnel budget, value of

equipment, numbers and types of employees supervised directly, and indirectly

·Institutional responsibilities (formal relations that the holder of the position is responsible for maintaining, inside the agency and across agencies)

·Policy and program responsibilities (external public policy or service effects of the unit managed by the holder of the position)

·Skill requirements ·Complexity of demands placed on the holder of the position (types of challenges to be

faced, complexity of thought processes required, extent of autonomy, and discretion that must be exercised)

Table 9.6 Latin American countries: teachers' mean earnings as a percentage of a comparator group

Country 1979 1989

Argentina 93% 75%

Bolivia 74% 65%

Brazil 92% 88%

Peru n.a. 88%

Uruguay 109% 78%

Colombia 137% 165%

Costa Rica n.a. 133%

Chile n.a. 121%

Ecuador n.a. 124%

Honduras 131% 141%

Panama 110% 111%

Venezuela 135% 122%

Average 110% 109% n.a. Not available. Source: Psacharopoulos, Valenzuela and Arends, 1993.

Public Sector Human Resource Management 12

·Technical and managerial knowledge and capacity required for the position, including key indicators of such knowledge and capacities, such as formal education and experience.

P. While this level of detail is perhaps greater than is found in many other position classification systems in the public and private sectors, the categories are typical: title, functions, responsibilities, and skill requirements. Q. Salary assignment is accomplished by giving weights to the position responsibilities and skill requirements. The Venezuela proposal first rank orders a subset of the responsibilities and skill requirements identified in the position classification exercise and then assigns salary increments across rankings along each given dimension of 5, 20, or 25. The proposal ranks skills along two dimensions (conceptual and technical and integrative), and identifies seven ordered levels of conceptual and technical skills and five additional ordered levels of integrative capacities. In addition, the proposal ranks responsibilities along (1) managerial and (2) policy and program responsibilities. Seven levels of managerial responsibilities and four levels of policy and program responsibilities are identified. Integrative capacities rankings carry 20 percent salary increments, conceptual and technical skill rankings carry 25 percent increments, managerial responsibility rankings carry 25 percent salary increments, and policy and program responsibility rankings carry 5 percent premiums. R. Although this procedure provides a ready methodology for assigning salaries to positions once the position descriptions have been drawn up, it has two drawbacks. First, the 5, 20, and 25 percent salary premiums for each step up one of the job classification dimensions are arbitrary. The document justifies these increments by citing a neurophysiology "law of the minimum threshold of human perception" (the Weber-Freshnner law), which asserts that humans cannot distinguish changes in stimuli of less than 15 percent. Supposing both that such a claim is true and that it applies to salary increments (as opposed to changes in stimuli the measurement of which, unlike salaries, is not reported to be the subject of the experiment), it remains entirely unclear where the 5, 20, and 25 percent figures came from--none of them reflecting the 15 percent figure that was used to justify a fixed, arbitrary premium for movement up rankings along a given dimension. S. More fundamentally, however, this technical methodology for assigning salary differentials across positions provides no means of assuring that salaries so assigned will bear a consistent relationship with the opportunity costs faced by workers who might fill those positions. This methodology could only by accident yield a salary scale that rewards responsibility or skill requirement increments by the same fraction that they are rewarded in the private sector across all responsibility or skill requirement levels. To illustrate, although an increment from level 1 to level 2 of the managerial responsibility scale brings a 25 percent salary increment, as does an increment from level 2 to level 3, it is entirely possible, that an increment from level 1 to level 2 would receive a 25 percent increment in the private sector, while an increment from level 2 to level 3 could expect a 40 percent premium. If no fixed relationship holds with the private sector, this salary scale will undermine the ability of the public sector to

Compensation 13

staff those positions whose salaries happen to fall more below their private sector counterparts (level 3 in the hypothetical example) than do other public sector position salaries (level 2 in the example). T. Argentina (SINAPA). The same flaw can be seen in Argentina's recent revision of its public sector base salary assignment policies under its new Sistema Nacional de Profesión Administrativa (SINAPA). The SINAPA position classification procedure and salary assignment algorithm is very similar to the proposed Venezuelan procedures. Positions are classified based on responsibilities and skill requirements, including both task demands and level of autonomy demanded by those tasks. On the basis of thirteen responsibility categories and seventeen skill categories (eleven task demand categories and six autonomy level categories), each position is classified into one of six possible levels, labeled A through F. Each position classification has five salary grades (base through 4) (see Tables 9.8 and 9.19). Base salaries are computed by multiplying the appropriate cell index by the current period multiplier, thereby allowing ready adjustment of the salary scale to reflect factors such as inflation or a policy to increase salaries across the board. Salary increments along the horizontal axis of that salary scale are attained on the basis of the employee's history of annual personnel performance evaluations, while vertical movements (across levels) within the salary scale are achieved by meeting the position-specific responsibility and skill requirements for a higher-level position and being promoted to it. U. The index magnitudes were constructed to assure that the ratio of the salary of the highest-paid to the lowest-paid employee covered by that salary scale (the compression ratio) would achieve a prespecified magnitude--in this case, 10.5. The particular pattern of across-level and across-grade salary increments were constructed to assure 9 percent increments for each

grade step (horizontal movement in table 8), while satisfying this overall requirement of a compression ratio of 10.5. Preliminary versions of the SINAPA salary scale imposed 50 percent increments for promotions across levels F through C and 60 percent increments for promotions between levels C and A. The more recent version which was adopted under Decree 994/91,

Table 9.8 Argentina: SINAPA salary scale, June 1991

Level Base grade Grade 1 Grade 2 Grade 3 Grade 4

A 900 954 1,050 --- ---

B 606 660 720 --- ---

C 408 444 484 527 ---

D 260 296 322 351 382

E 150 164 178 194 212

F 100 109 119 130 141

Source: Sistema Nacional de Profesión Administrativa (SINAPA), Annex 1 to Decreto 994/91, Argentina.

Public Sector Human Resource Management 14

relinquished this increment simplicity to achieve the overall compression ratio of 10.5 (the overall compression ratio in a preliminary SINAPA salary scale proposal was 10.28). V. Assignment of salary increments on the SINAPA salary scale has nothing to do with differentials in the opportunity costs faced by employees holding positions at those different skill and responsibility levels. Instead, the increments have been constructed to achieve a pre-specified compression ratio. W. Other salary scales. The COPRE and SINAPA systems' lack of a consistent relationship with the opportunity costs of labor is not unique. The complexity and transparency of the procedures for establishing base salary scales vary across countries, but all countries examined in this study suffer from this shortcoming because they rely upon technical rather than opportunity cost factors to construct their salary scales: ·In addition to SINAPA, Argentina's previous and other public salary scales (the previous

salary scale covering core personnel within the central government under decree 1.428/73, as well as those still governing teachers, various public enterprises, the judiciary, etc.) are also based technical considerations, rather than opportunity costs.

·Existing central government salary scales in Chile, El Salvador, Guyana, Honduras, Trinidad and Tobago, Uruguay, and Venezuela are based strictly on technical considerations. (Throughout this chapter "central government employee" denotes people employed in central government agencies subject to the governing civil service stature. In Venezuela, this set includes seventy-one central government agencies, although some employees within those agencies are exempted from the Ley de Carrera Administrativa, for example, uniformed military personnel, teachers, and university administrators).

·Trinidad and Tobago is currently employing a consultant to revise its civil service salary scale. The approach being taken is very similar to the Venezuelan and Argentine approaches described above. Points are to be assigned to various dimensions of position descriptors and those points are to be used to rank order positions. Salary differentials are to be assigned so as to assure that the overall salary structure will exhibit a normal distribution. The assignment of points and the imposition of a particular functional form on the overall distribution of salaries are based on or reflect technical considerations rather than opportunity costs. Such a system cannot assure that salaries for all positions will bear a consistent relationship with opportunity costs.

(2)Assigning salary supplements. X. Salary supplements are a significant fraction of many public employees' compensation in the typical LAC country — as much as 84 percent of total compensation in Argentina, 80 percent in Uruguay, 74 percent in Chile, and 32 percent in Venezuela. The above reported shares of total compensation accounted for by salary supplements in Argentina, Uruguay, and Chile reflect

Compensation 15

maximum shares--possible or observed--in the existing salary structure, while the shares reported for Venezuela and Trinidad and Tobago are averages based on salary scale data and actual expenditure data reported in annual budget documents. To put this in perspective, although the maximum share of total compensation that can be accounted for by supplements in Uruguay in 80 percent, the observed average is only 20 percent. So, salary supplements as a portion of compensation appear to be higher in the former three countries than in the last two. Data limitations prevented reporting precisely the same measures for all five countries. Although such supplements sometimes better link public sector salaries to economic factors--to counteract the fundamental flaw of the technical algorithms used to assign base salaries--they also tend to reduce the transparency of salary determination and can yield arbitrary salary assignments. Y. In Uruguay, for instance, public employee wages consist of a basic wage, defined by the applicable personnel roster escalafón, plus any of more than fifty situation-specific compensations and fringe benefits. The compensations and fringe benefits attach to such things as longer work weeks (thirty-six, forty or forty-eight-hours, rather than the thirty-hour base), full-time dedication and representation expenditures, night work, unhealthy occupations, seniority, being a member of an organized household (hogar constituido), family allowance, and so on (World Bank 1991).1 Although some of these situation-specific compensations obviously are tied to the demands placed on the worker for example, the bonuses for working more than the thirty-hour base and the unhealthy-occupations premiums), many have no obvious link to job demands; they reflect, instead, equity or special interest considerations. In addition, in practice these situation-specific compensations narrow the range of compensations. The seniority premium, a fixed premium per year of service, inexorably raises the remuneration of more-senior employees, regardless of their performance or the demands of their positions. The premium for members of an organized household is inversely proportional to the wage level, thereby partially counterbalancing the wage pyramid embodied in each of the salary scales. The family allowances are fixed premiums per child. Z. The situation-specific compensations account, on average, for roughly 20 percent of central government employee compensation and can easily exceed 80 percent of an employee's total compensation.3 Given their large share of total compensation and the fact that many of these benefits bear no relation to job demands or employee performance, it is not surprising to find that actual compensation packages vary less across employment grades (levels within the salary scales) than do the base pay rates found in those salary scales. For instance, in the absence of all situation-specific compensations, the overall ratio of highest-to-lowest salaries - the compression ratio - in the central administration stood at 13.2 (table 9.8). When three of the most significant of these situation-specific compensations are included--seniority, established household, and health care--this ratio is reduced to 9.5. Within job descriptions reserved for university-trained professionals, the base pay compression ratio was 7.3, but this ratio falls to 6.4 when these three benefits are included. These data and the details of the salary-setting provisions in Uruguay's public sector reveal a public pay-setting policy that could be made more transparent and more clearly linked to the quantity and type of work being performed by eliminating or curtailing the use of many of the situation-specific compensations.

Public Sector Human Resource Management 16

AA. Like Uruguay, many LAC countries — such as Argentina, Chile, and Venezuela — allow a wide variety of salary supplements. Trinidad and Tobago, on the other hand, relies little on salary supplements.

Table 9.9 Uruguay: potential weekly pay compensation comparisons in the central administration, July 1989 (dollars)

Classifications Base pay Pay including three special benefits

Minimum

Maximum

Ratio max/min

Minimum

Maximum

Ratio max/min

University-trained professional

157

1143

7.3

190

1211

6.4

Technical- professional

134

858

6.4

170

926

5.5

Administrative 88 651 7.4 128 719 5.6

Specialized 88 205 10.2 128 964 7.5

Trades 86 144 7.4 127 706 5.6

Auxiliary Services

94

165

4.0

135

450

3.3

Overall 86 1143 13.2 127 1211 9.5 Note: Minimum compensation including benefits assumes no seniority, while maximum compensation including benefits assumes 30 years of seniority. The three benefits are seniority, established household, and child care. All figures reflect potential compensation packages rather than actual remunerations received and assume a 40-hour work week and 4.29 weeks per month. Figures are monthly compensations expressed in U.S. dollars based on the July 1989 exchange rate of 611.2. Source: These comparisons are taken from "Uruguay: Employment and Wages," tables VI-12 and VI-14, pp. 84-85.

Table 9.10 Venezuela: central government personnel budget, 1992

Personnel expenditure category

Amount (Bolívares)

Percentage of total (less collective contracts)

Total personnel expenditures 105,889,578,318

Total personnel expends. less collective contracts

88,868,463,107 100.0

Base salary 60,528,484,459 68.1

Base salary - permanent employees 58,687,912,457 66.0

Base salary - temporary employees 1,840,572,002 2.1

salaried employees 691,163,816 0.8

wage employees 1,149,408,186 1.3

Premiums 8,006,264,882 9.0

Premiums for seniority, performance, education 3,329,094,597

3.7

Other premiums 4,677,170,285 5.3

Overtime and related compensations 9,799,789,702 11.0

Annual bonuses 5,501,338,410 6.2

Aid contributions to personal savings and retirement Plans

5,032,585,654

5.7

Collective contracts expenditure categories

Amount (Bolívares)

Percentage of collective contract

expenditures

Collective contracts 17,021,115,211 100.0

Total wages 10,208,712,133 60.0

Bonuses and other compensations 6,812,403,078 40.0

Compensation 17

BB. Venezuela. In Venezuela, salary supplements represent almost 32 percent of budgeted personnel expenditures on public employees not covered by collective contracts in the 1993 budget, and 40 percent for those covered by collective contracts (see table 9.10). Moreover, a significant fraction of those salary supplements are not clearly linked to the quantity or quality of work supplied by an employee. Only 3.7 percent of personnel expenditures were explicitly allocated as "premiums for service," despite the fact that such "premiums" are allowed to augment base salaries by up to 80 percent for professional staff and up to 60 percent for technical staff. Up to almost 39 percent of allowable service premiums could simply reflect seniority, while the maximum salary supplement resulting from an employee's performance evaluation cannot exceed 21 percent of base salary — or roughly 26 percent of allowable premiums for service. Although overtime accounts for another 11 percent of budgeted personnel expenditures in Venezuela, non-performance-linked salary supplements appear to account for approximately 11.9 to 20.4 percent of total personnel expenditures in Venezuela in 1993, exclusive of employees covered by collective contracts. Performance-linked salary supplements appear to account for between 11.5 and 20 percent of such expenditures.2 CC. Argentina. Argentina's salary supplements are also typical of LAC countries. Although each salary scale that governs personnel compensation in the central government carries its own set of salary supplements, two examples illustrate the significance of such supplements in determining total compensation--the military salary structure and the D.L.1,428 salary structure, which covered the lion's share of central government employees until replaced recently by the SINAPA salary structure (discussed above). DD. Military salaries consist of a base plus four categories of supplements--allowances, seniority, residency, and a special premiums. Combined, these supplements dwarf the base salary. Base pay accounts for, on average, roughly 16 to 23 percent of total compensation (see table 9.11); while allowances account for 24 to 34 percent, seniority accounts for 2 to 32 percent, residency accounts for 24 to 20 percent, and special premiums are roughly 15 to 21 percent.3

Public Sector Human Resource Management 18

EE. A similar yet more complex picture emerges when the salary scales covering many other central government employees are examined. As of 1988, for instance, while escalafón 1,428 had been designed to cover most central government employees, at least 17 other wage regimes covered employees in various central government agencies and more than sixty types of salary supplements existed. This plethora of salary scales and supplements contributed to increased

Table 9.11 Argentina: Military salary components as percentage of gross salary, October 1991

Position

Base wage

Allowances

Seniority premium

Residency premium

Special premiums

Lieutenant general 15.9 23.8 31.7 13.9 14.7

Major general 16.0 24.0 31.2 14.0 14.8

Brigadier general 16.3 24.4 30.1 14.2 15.0

Colonel 16.8 25.2 27.7 14.7 15.5

Lieutenant colonel 17.7 26.5 23.9 15.5 16.4

Major 18.7 28.0 19.7 16.3 17.3

Captain 19.8 29.7 14.9 17.3 18.3

First lieutenant 1 20.6 30.9 11.4 18.0 19.1

First lieutenant 2 21.3 31.9 8.6 18.6 19.7

Second lieutenant 21.9 33.0 5.5 19.3 20.3

Sergeant major 17.1 25.6 26.5 15.0 15.8

Sergeant principal 17.9 26.8 23.2 15.6 16.5

Sergeant adjunct 18.7 28.0 19.7 16.4 17.3

Sergeant 1 19.4 29.1 16.5 17.0 18.0

Sergeant 20.6 31.0 11.3 18.0 19.1

Corporal 1 21.5 32.3 7.6 18.8 19.8

Corporal 22.2 33.4 4.4 19.4 20.6

Volunteer 1 22.7 34.1 2.3 19.8 21.1

Gendarme 22.2 33.3 4.5 19.4 20.5

Source: "Argentina: Public Finance Review: From Insolvency to Growth." 1993 Report No. 10827-AR (World Bank, Feb. 11) table A7.3

Compensation 19

variations across agencies in total compensation accorded identical positions and compressed the salary structure. To eliminate these wage distortions, the government issued decrees 2,192 and 2,193 in 1986. These provided salary enhancements on technical grounds designed to counteract the salary compression introduced by the existing salary supplements. To illustrate, in March 1991, salary enhancements based on decree 2,192 in the Instituto Nacional de Tecnología Agricultural Agropecuaria (National Institute of Agriculture Technology) were 342 percent of base salary (including dedicación funcional) for employees at the top of the INTA salary scale, 126 percent for those near the middle of the scale; and only 61 percent for those at the bottom (Republic of Argentina, Ministry of Economy). These enhancements accounted for 21.1 percent of total reported compensation for a prototype top-level employee in INTA, 23.2 percent for a prototype mid-level employee, but only 13.9 percent for a prototype employee at the bottom of the salary scale (see table 9.12). Total enhanced base salary, including all position-linked salary enhancements as of April 1991, accounted for 27.2, 41.6 and 36.8 percent, respectively, of total reported compensation for these three prototype employees. Salary supplements other than these position-specific enhancements accounted for 72.8 percent of total reported compensation for the prototype top-level employee, 58.4 percent for the middle-level employee, and 63.2 percent for the prototype employee at the bottom of the salary scale. Salary supplements reflecting level of responsibility and job demands - for example, whether the position-holder held a university title, level in the hierarchy, and whether the position - was a scientific, technical or supervisory position) accounted for almost 30 percent of total compensation for the highest position, but only about 12 percent for lower positions. Supplements reflecting government program priorities - including program priority, exclusive dedication, investment dedication, and regional adjustments - accounted for 10.2 to 19.6 percent of total compensation. Seniority factors (time in position and seniority), in turn, accounted for between 1.4 percent and almost 4.0 percent of total compensation. A productivity factor could account for around 7.7 to 9.2 percent of total compensation for these positions. Other supplements accounted for another 20.9 percent of total compensation, on average, including 18.7 percent dedicated to providing meals to employees. In short, salary supplements account for a sizable fraction of total compensation under both of these typical salary regimes in Argentina. While a sizable fraction of those supplements appear to be linked to levels of responsibility and skill requirements, a large portion would appears to have little to do with such factors, the 18.7 percent of salaries attributable to meals.

Public Sector Human Resource Management 20

FF. Chile. Chile's set of salary supplements is perhaps as extensive as that found in Argentina. Salary supplements exist for, among other factors, handling cash, having to visit clients as part of one's job, overtime, change of residence, travel expenses, seniority, possession of a professional degree, (asignación familiar y maternal), and D.L. 3.551 (Chile 1980b), which

provides additional compensation on the basis of professional qualifications and responsibilities. GG. These salary supplements can be divided into three categories based on personal characteristics of the employee or his or her personal situation that have nothing to do with the

Table 12. Argentina: Salary Components in Instituto Nacional de Tecnología Agropecuaria, April 1991 (percent)

Compensation component

Highest-ranking position

(grade A-1-15)

Modal position (grade E-1-10)

Lowest ranking position (grade

C-2-4)

Enhanced salary base 27.2 41.6 36.8

Base salary 2.5 7.3 9.2

Functional dedication 3.7

Special benefit 11.0 13.8

Art. 4, D.2192/86 21.1 23.2 13.9

Salary supplements 72.8 58.4 63.2

Responsibility/job demandsa 29.6 12.5 12.1

Government program priorityb 10.2 15.7 19.6

Productivity 8.0 7.7 9.2

Seniority Factorsc 4.0 1.7 1.4

Other Supplements 20.9 20.9 20.9

Meals 18.7 18.7 18.7

Household/domestic benefit 1.0 1.0 1.0

Miscellaneousd 1.1 1.1 1.1

Total compensation 100.0 100.0 100.0 Note: Supplements for Law 20340/73, meals, and miscellaneous are imputed at agency averages, and hence are estimated as constant average percentages across position prototypes. All other figures reflect position prototype compensation levels. a Position and function, university title, hierarchy compensation, and supplemental Law 20340/73, which provides salary enhancements to stimulate scientific, technical, and supervisory functions. b Priority program, exclusive dedication, investment dedication, regional adjustment. c Time in position, seniority. d Undesirable assignments, eradication, Función SCD, cash shortages.

Compensation 21

quantity or quality of work performed or skills required for the position; based on job demands, the responsibilities or skill requirements of the position; and related to performance, reflecting the quantity or quality of work performed. Those reflecting personal characteristics appear to be fairly limited in magnitude. These include change of residence and asignación familiar y maternal. Change of residence compensation is restricted to one month's salary, while asignación familiar y maternal is part of the basic social security system. Similarly, performance-related supplements appear to be insignificant. Overtime in each and every program is limited by the budget law each year. Aside from this, performance-related salary supplements do not appear to play any important role in Chile's central government. HH. Salary supplements reflecting job demands, on the other hand, are sizable. The largest of these are supplements resulting from D.L. 3,551, which account for 9.4 to 45.5 percent of total compensation in non-fiscalizador positions. Salary enhancement based on whether a position is a fiscalizador position are also significant, accounting for between 8.5 and 67.7 percent of total compensation. Total job-demand-related salary supplements range from 32.7 to 68.2 percent of total compensation for non-fiscalizador positions and between 38.4 and 73.9 percent for positions responsible for financial transactions (see table 13). (Chile 1989b).

Public Sector Human Resource Management 22

II. Trinidad and Tobago. Trinidad and Tobago is an exception to this pattern. The only allowance available to central government employees--and, indeed, only to a subset who hold posts classified as "traveling"--apart from health and the National Insurance Scheme, is a transport allowance of approximately $1,101 per annum.5 Aside from overtime, salary

supplements in, for example, the Office of the President, the Office of the Prime Minister and the Ministry of Finance and Economy accounted for less than 2.5 percent of total personnel expenditures in 1989 (see table 9.14). Of these, roughly four-fifths (about 2 percent) reflect contributions to the National Insurance Scheme, leaving less than 0.5 percent of personnel expenditures as variable salary supplements.

Table 9.13 Chile: unified annual salary scale components, December 1989

Grade

Career group

Base

salary

Adjustments

Supplements

Total remuneration

(U.S.$)

F/G Fiscalizadores 16.0 10.1 73.9 68,993

A Autoridades de gobierno 19.5 13.1 67.4 58,136

1B Fiscalizadores 18.9 12.9 68.2 54,825

1C Jefes superiores de servicio 19.9 13.8 66.3 51,380

1C Dir.sup.profesionales 21.2 14.7 64.1 48,311

1C Dir.sup. no profesionales 33.2 19.5 47.4 30,862

8 Fiscalizadores 22.6 19.9 57.6 37,371

8 Directivos profesionales 23.6 20.9 55.6 28,783

8 Profesionales 24.2 20.8 55.0 28,018

8 No profesionales 50.7 16.6 32.7 13,379

14 Fiscalizadores 29.3 19.9 50.8 19,922

14 Jefaturas 34.7 18.2 47.1 12,308

14 Profesionales 25.6 20.4 54.0 16,685

14 No profesionales 46.0 16.1 37.8 9,279

23 Fiscalizadores 47.4 14.8 37.8 4,129

23 Profesionales 28.4 18.5 53.1 7,875

23 No profesionales 41.7 16.1 42.2 5,365

25 Fiscalizadores 47.7 13.9 38.4 2,975

31 No profesionales 41.8 15.2 43.0 3,397

Source: Republic of Chile, Ministry of Finance, 1989 "Escala Unica de Sueldos." December.

Compensation 23

JJ. Honduras. Honduras is also an exception to the pattern of heavy reliance on salary supplements. The central government salary scale in Honduras includes 39 grades and 22 steps in each grade--858 cells in total. Salary increments across steps and grades are, as noted above, fixed by simple technical criteria, which, of course, results in salaries bearing no consistent

relation with opportunity costs posed by private sector labor markets and faced by current or potential public employees.6 Despite this weakness, the Honduran salary structure includes only a single salary supplement option; namely, eligibility for below-market mortgage loans--an arrangement which undoubtedly favors workers nearer the top of the salary structure, who are more likely to be in a position to purchase rather than rent their housing.

Table 9.14 Trinidad and Tobago: personnel expenditure composition, 1989

Office

Base salary, wages, and

COLA

Overtime

Allowances

National insurance

scheme

Misc

Office of the President 94.5 0.0 3.8 1.5 0.2

Office of the Prime Minister 91.6 6.2 0.1 2.0 0.0

Minister of Finance and Economy Comptroller of Accounts Inland Revenue Customs & Excise Division

97.5 97.1 70.4

0.2 0.3

19.1

0.2 0.1 1.7

2.1 2.2 1.4

0.0 0.2 7.4

Overall Average Percentage 86.8 8.2 0.7 1.9 2.5

Average Percentage Net of Customs & Excise Division

94.7 3.0 0.2 2.1 0.1

Source: Republic of Trinidad and Tobago, Auditor General. 1989.

Public Sector Human Resource Management 24

(3)Assessment of salary scales and supplements KK. The information reported above illustrates two important aspects of salary setting practices in most LAC countries. First, both base salaries and total compensation fail to bear a consistent degree of competitiveness with domestic private sector comparators. Second, the plethora of salary supplements, which could be employed to correct distorted base salaries, do not appear to do so. Instead, coupled with weak accountability for performance, those salary supplements make salary setting practices less transparent and less subject to competitive tests of their efficacy. LL. These patterns raise at least three important questions whose answers can help to identify practical steps for improving both base salary setting practices and the use of salary supplements. The three important questions are: ·Why do LAC governments generally employ technically based base salary setting algorithms

despite the fact that these algorithms cannot readily ensure equally competitive salaries across different types of positions?

·Why do salary supplements proliferate in LAC civil services, yet still fail to correct the disparities in competitiveness of public salaries across types of positions?

·Why do salary supplements undermine transparency and accountability? MM. Base salary setting. The inconsistent relationship between public and private sector base salaries is an artifact of the technical basis typically employed to assign base salary differentials across positions (see above). These technical criteria are employed to calibrate salary scales for two basic types of reasons: horizontal and vertical equity, and to prevent personal or political patronage or favoritism from undermining either of these types of equity. NN. When top-level public managers in LAC countries are asked to suggest how base salary policies might be improved, they almost without exception advocate not only that base salaries be raised, but - equally important - that those base salary structures be updated so as to ensure that positions with comparable responsibilities and skill requirements receive comparable levels of pay and that compensation rises with responsibilities and skill requirements. Salary scales that assign salary increments based on pre-specified assessments of differences in responsibilities and skill requirements address precisely this concern, regardless of whether the increment assignments are based on technical or economic criteria. Moreover, use of such an objective algorithm for assigning base salaries ensures that personal or political patronage or favoritism will not undermine either horizontal or vertical equity. OO. Why then do top government officials throughout LAC routinely accuse the salary setting policies based such salary scales of failing to assure equal pay for equal work? The answer to this question turns out to also account for the proliferation of salary supplements. PP. Salary supplements. Under a salary scale such as Chile's Escala Unica, created in 1974 (Chile 1989b), Argentina's D.L. 1.428/73 salary scale (Argentina 1973) or Argentina's recent

Compensation 25

SINAPA salary scale, the salary differentials between levels or grades are based on technical criteria that do not necessarily reflect skill- or responsibility-specific salary differentials observable in domestic labor markets. As a consequence, public managers find that some of their available positions are relatively more difficult to staff than are others. If for instance, the technical criteria for assigning salary increments for job responsibility fall below increments for those same responsibility differentials in the domestic private sector, pressures are likely to increase within the bureaucracy to augment the salaries of such positions. A complete revision of the salary scale could prove costly, time-consuming, and potentially risky with regard to its uniformity (its claim to fairness) and its fiscal sustainability. Consequently, a politically more feasible response is likely to be to create a special "responsibility" enhancement or supplement. QQ. An extreme version of such a response to a salary scale that fails to reflect the opportunity costs of particular types of positions is to proliferate salary scales, as occurred in Argentina between 1973, when the D.L. 1.428/73 salary scale was created, and 1991, when the SINAPA salary scale was imposed. For instance, among six of Argentina's salary scales in 1991, salaries for the highest-ranking positions varied by a factor of more than 2.2, while these varied by a factor of 2.9 among modal positions and 2.1 among entry-level positions.7 Tellingly, the core salary scale, escalafón 1.428/73, provides, with few exceptions,8 the lowest salaries among Argentina's salary scales. This is consistent with the suggestion that a primary motivation in the creation of Argentina's plethora of salary scales has been the desire of the governmental units to provide more competitive salary levels than were allowed under the 1.428/73 core. Chilean officials responsible for administering the central government's Unified Salary Scale (Escala Unica de Sueldos) also noted, when interviewed, that they regularly face significant pressures to convert individual agencies to the fiscalizador salary scale, which allows more competitive salaries than does the Escala Unica (see table 9. 13). RR. A scenario such as this is consistent with the data cited earlier on salary supplements. It also matches the casual empirical observation that the longer a salary scale has been in place, the wider is the variety of such salary supplements and the greater is the level of audible discontent within civil service ranks about the fairness of salary setting. This scenario provides a plausible explanation for why discontent with the "unfairness" of salary setting policies under such technical-based salary scales is so widespread, why targeted salary supplements proliferate under such salary scales, and why discontent mounts as the variety of salary supplements increases. SS. Base salary recommendations. Supposing this assessment correctly identifies the dynamic by which these salary scales, have failed to achieve the end for which they were designed - equal pay for equal work - how can the problem be corrected? TT. To avoid corruption of salary setting, salaries offered for all public sector positions must bear the same relationship to their private sector counterparts--regardless of whether that is 40, 80 or 120 percent. But how can this be accomplished? It cannot be accomplished on a priori grounds, as the failure of the strictly technical approaches demonstrates. Instead, empirical evidence on salaries offered in the domestic private sector is essential. Fortunately, such data are

Public Sector Human Resource Management 26

often readily available (see above). Once such data are obtained, two obvious options exist for using them to guide public sector salary setting: ·Alternative 1. Match public and private sector position descriptions and require that salaries for

all such matches bear the same relationship — each public sector position must offer a salary that is the same fixed fraction of its matched private sector counterpart.

·Alternative 2. Apply the same responsibility and skill requirements position descriptors to private sector positions and public sector positions. Then estimate hedonic price equations on the private sector sample in which these descriptors are the right-hand-side variables and observed total compensation is the left-hand-side variable. The estimated descriptor coefficients can be employed as imputed weights for assigning salaries to each public sector position on the basis of its position descriptors.

UU. These two methodologies are not novel in other applications. Alternative 1 is known as the "comparables" methodology when it is employed to assess housing values for such applications as identifying the taxable base for real estate taxes or deciding how much to bid on a piece of real estate. Alternative 2 is simply an econometrically sophisticated version of the "comparables" methodology in which market "prices" are imputed for each of the key dimensions of the product being studied (for example, housing, labor services). A large body of experience and literature exists on the use of both methodologies. VV. Alternative 1, the "comparables" approach, is the simpler one to apply, because it does not require econometric work. Its weakness that it is sometimes difficult to identify sufficiently comparable positions. But even given this limitation, the approach can readily be used to set average or base compensation levels for broadly defined positions for which reasonable comparators can be identified in the private sector. Finer salary discriminations across positions can be achieved using, for example, technical criteria, annual personnel evaluations, or managerial discretion (managerial discretion can be used only if managers are adequately held accountable for the performance of their units [see below]). WW. Alternative 2, the hedonic regressions approach, assures that any public sector position that can be described along the same dimensions (responsibilities and skill requirements) deemed important by those designing the salary scale can be reliably assigned a salary that reflects the wage those responsibilities and skills could, on average, command in the domestic private sector. Its drawback is that it requires considerably more sophisticated resources to implement. XX. Both methodologies require regular updating with reasonably current information on private sector labor market compensation levels. Fortunately, such data appear to be readily available in many LAC countries. For instance, such data were readily obtained from private sector firms who monitor private sector salaries in Argentina, Trinidad and Tobago and Venezuela. Alternatively, the government can itself gather such data. Comparisons reported above between public and private sector salaries in Chile and Uruguay are based, in part, on

Compensation 27

government survey data on private sector salaries. The data currently being reported by those government surveys do not always provide as fine a set of private sector position classifications as would be desirable, but it is obviously feasible to enhance such surveys to assure that they do provide an adequate level of occupational detail. YY. If either of these two empirically based methodologies were used to set salary scales — and the scales were updated regularly — the plethora of salary supplements in countries such as Argentina, Chile, and Venezuela could be significantly reduced. More important, the pressures to create new salary supplements would be significantly diminished. This should increase the transparency and fairness of public salary setting. ZZ. Salary supplements recommendations. The primary problems raised by salary supplements are not so much their proliferation as the reduced transparency of salary setting procedures and their outcomes and the lack of accountability for their impacts upon agency performance. Accordingly, the following recommendations are suggested: ·Allow discretionary salary supplements only when managers responsible for assigning those

supplements are held accountable for the performance impacts (upon their units) of their assignment of those supplements.

·Strengthen personnel and financial information systems to ensure capacity to provide reliable and timely reports on the pattern and impacts of salary supplements.

C.Weak Enforcement of Centrally Imposed Salary Setting Restrictions AAA. Salary setting policies are, of course, never fully effective. The extent to which individual line agencies and their managers will circumvent centrally mandated salary policies will depend upon (1) incentives to circumvent those policies; (2) means of doing so; and (3) risks of being detected and punished for failing to adhere to centrally mandated salary policies. Incentives to circumvent centrally mandated salary policies BBB. The previous analysis of the inconsistencies and non-competitiveness of typical public sector salary regimes in LAC suggests that most line agencies and their managers have strong incentives to circumvent the salary regimes. Means of circumventing salary policies CCC. There are many ways to circumvent such salary setting policies--for instance, by resorting to contracts for personal services, instead of hiring into the career civil service; generating new position descriptions and filling them with temporary appointments more rapidly than the central personnel agency can review and appropriately classify those new positions;

Public Sector Human Resource Management 28

maintaining unreliable and difficult-to-decipher personnel, payroll, and expenditure accounts; and using grounds other than performance to advance employees up the salary grades or steps. Risks. DDD. At issue are the risks of being detected and punished for failing to adhere to centrally mandated salary policies. Central authorities can influence the odds of being detected through the quality and reliability of key financial and personnel information monitoring systems. The expected penalty depends on the enforcement capacity of key central administrative enforcement agencies--such as the controller general, the treasurer, the budget office, and any administrative courts. EEE. Industrial countries rely on sophisticated, computerized information monitoring systems in budgeting, accounting, personnel, financial transactions, asset, facilities, and materials management. Among developing countries attempting to set the stage for serious reform, World Bank Experience confirms the importance of this capacity for integrated financial and resource management systems. (Nunberg 1990, 1991; Nunberg and Nellis 1990; de Merode 1991). Lending operations in Argentina, Bolivia, Brazil, Chile, Ecuador, Guyana, Jamaica, and Venezuela have all supported strengthening of information systems in order to provide such capacity (see table 9.15).

Compensation 29

FFF. Although these capacities are the backbone of any system that effectively monitors and enforces such things as staffing levels and composition, compensation packages, and overall resource usage by line agencies, these capacities are often dangerously weak in the public sectors of many LAC countries.

Table 9.15 Selected developing countries: civil service reform elements

Improve information system

Undertake diagnostic work

Reduce employment

Restructure employee incentives

Restructure management incentives

Latin America

Argentina Bolivia Brazil Chile Ecuador Guyana Jamaica Venezuela

Argentina Bolivia Costa Rica Haiti Jamaica Peru Uruguay

Argentina Bolivia Chile* Costa Rica Guatemala Guyana Haiti Uruguay*

Argentina Bolivia Chile* Costa Rica Dominica Haiti Jamaica Peru Uruguay

Argentina Chile* Jamaica Peru

Other developing countries

Bangladesh Cent. African Rep. Ghana Mali Mauritania Senegal

Bangladesh Cent. African Rep. Congo Gambia Ghana Guinea Guinea-Bissau Mauritania Niger Senegal Sri Lanka Thailand Togo Uganda

Benin Cameroon Cent. African Rep. Congo Gabon Gambia Ghana Guinea Guinea-Bissau Laos Mali Mauritania Nepal Niger Sao Tome & Principe Senegal Turkey Uganda

Bangladesh Benin Cameroon Cent. African Rep. Congo Gabon Gambia Ghana Guinea Mauritania Niger Sao Tome & Principe Senegal Sierra Leone Thailand Togo Tunisia Uganda Zaire

Bangladesh Cent. African Rep. Gambia Ghana Mali Mauritania Senegal Togo Turkey Uganda

Note: Entries reflect World Bank-sponsored reforms during 1981-91, except those followed by an asterisk (*), which were done independently of the Bank.

Public Sector Human Resource Management 30

GGG. Trinidad and Tobago. The managerial capacity of the central government of Trinidad and Tobago suffers from problems that are widely recognized by its managers. Perhaps the two most important are, first, an inability to reliably monitor key indicators of the government's resource usage, the activities undertaken with those resources, and key outcomes of those activities and, second a salary structure in which highly skilled public employees earn only 50 to 70 percent of what they could command in the private sector, while very low-skilled public employees may earn substantially more than they could obtain the private sector (see above). Weak information monitoring capabilities undermine the government's capacity to enforce any expenditure or employment constraints it might try to impose. The salary structure further undermines this weak enforcement capacity and creates strong incentives in the line agencies to circumvent any constraints the government might try to impose on staffing decisions. HHH. The most fundamental weakness of the public management capacity of the central government is its inability to reliably track the minimal information required to ascertain just what government agencies are doing, the quantity of resources they are using, and what they are accomplishing. The little expenditure information that is monitored is widely reputed to be unreliable and requires inexcusably long periods before it is made available to those who could use it. This indictment applies with most force to the government's expenditure monitoring, including its payroll system. It is widely believed by public managers in line ministries and in ministries charged with maintaining the institutional framework for managing human resources — including the Ministry of Finance and the Ministry of the Public Service — that the payroll system is unable to reliably and in a timely manner enforce agency-specific employment and payroll constraints or employee-specific employment constraints, such as limits on sick leave and annual leave. III. This incapacity to monitor resource use and outcomes is illustrated by the recent Voluntary Termination of Employment Program. That program, which began in 1989, and was followed by a freeze on all new hires beginning in 1991, resulted in 1,053 voluntary terminations, at a cost of $9.3 million, or approximately $9,000 per separation. Despite this, the government continues to budget for large numbers of vacant positions in each agency. Furthermore, line agencies are widely suspected of filling many officially "frozen" vacancies by having underqualified existing employees serve as "acting" holders of those positions. This maneuver sidesteps the normal hiring or promotion process conducted by the relevant Public Service Commission. These actions are also completely unmonitored — the government has no systematic information on the number of vacancies the fraction of those filled by "acting" appointments or how long such "acting" appointments endure. In short, the total absence of timely and reliable information on vacancies and "acting" appointments prevents any arm of the government from exercising effective control over this practice. JJJ. Uruguay. The Government of Uruguay's capacity to enforce salary setting rules is weakened by a proliferation of salary supplements and job titles coupled with a weak capacity to monitor the use of those supplements and promotions to those job titles. (The proliferation of salary supplements has already been documented above). Regarding job titles, no fewer than 755

Compensation 31

existed in the central government ministries, exclusive of the military, teachers, police, judiciary, and foreign service as of 1991 (see table 9.16). Job titles are most numerous among the university-trained professional, administrative, and specialized ranks, but are most concentrated in the technical professional and "others" ranks, which have roughly one job title for every nine employees. Job titles are least concentrated in the administrative and auxiliary services ranks, which have only one position title for every 36 to 37 employees. KKK. It is an open question whether reducing the number of job titles in the name of increasing transparency would enhance, compromise, or leave unaffected the performance of the employees filling those positions. The proliferation of job titles could easily result from managers seeking to tailor pay and screening requirements to the markets in which they must search for personnel. In short, the plethora of job titles may be a consequence of a rigid set of salary scales, coupled with the more than 50 possible devices (situation-specific salary supplements) that can be used to augment the base salaries, by carefully penning a job title and its attendant job description. Although some may decry the Byzantine picture that emerges from this process, it does not necessarily follow that the public employees hired in this context perform their tasks less efficiently than would those hired under a simpler and less readily circumvented civil service pay structure. LLL. Promotions and quarterly inflation adjustments have contributed to a worsening public sector wage structure. Promotions have reflected seniority. With a fixed set of salary grades and a stable set of employees, this has led to a gradual compression of employees in a progressively higher but narrower band of salary grades (see table 9.17 and Figure 9.1). Although the median

in the distribution of employees across pay grades in 1985 held a position in pay category 3, that median moved up to pay category 4 by 1988 and to pay category 5 by 1990. It is readily apparent that central government employment has become steadily less represented among the lower pay categories and more concentrated in the higher pay categories. In 1985, for instance, 67 percent

Table 9.16. Uruguay: position titles

Classification

Number of titles

Number of positions

Positions per title

University-trained professional Technical professional Administrative Specialized Trades Auxiliary services Others

169 93

157 151 97 74 14

2,795 881

6,020 3,644 1,391 2,775 128

16.5 9.5

38.3 24.1 14.3 37.5 9.1

Total 755 17,634 23.3 Source: "Uruguay: Employment and Wages," tables VI-15, p. 86.

Public Sector Human Resource Management 32

of central government employees were in the three lowest pay categories, while by 1988 only 32.5 percent were in the three lowest pay categories — and by the end of 1990 only 5.3 percent could be found in those pay categories. Although the two highest salary categories accounted for 0.7 percent of central government employment in 1985, their share increased to 1.7 percent by 1988 and to 4.6 percent by the end of 1990--more than a 6.5-fold increase over the five years. MMM. This compression of public employees within the higher grades suggests that public managers in Uruguay are employing grade and step increases to circumvent the salary constraints imposed by a salary scale that is not competitive with wages within the domestic private sector. The unwarranted promotions are possible because of a weak capacity of the central personnel office to enforce promotions standards.

NNN. Venezuela. Evidence from interviews with government officials in Venezuela points to important weaknesses in the government's ability to reliably monitor and report on the level and composition of its workforce and the full costs of the government payroll. Such ability is, of course, essential. In addition, reliable, timely, publicly available information on public employment levels and their costs is essential if citizens are to effectively hold their government accountable for its activities and spending.

Table 9.17 Uruguay: central government employees by salary category

Salary category 12/31/90

Employment structure percent

4/29/85 2/29/88

1 2 3 4 5 6 7 8 9 10 11

3.2 28.0 35.8 15.3 5.6 4.9 2.6 2.0 0.4 0.9 0.7

0.6 2.9

29.0 25.1 21.8 10.4 3.7 2.0 1.7 1.1 1.7

0.8 1.0 3.5

10.4 50.3 11.4 9.6 4.5 2.4 1.5 4.6

Total 100.0 100.0 100.0 Note: The lowest salary category (1) ranged as high as US$ 91 as of 4/29/85, but only as high as US$ 69 by 12/31/90. The highest salary category (11) began at US$731 as of 4/19/85, but its minimum had dropped to US$412 by 12/31/90. All salary figures are real monthly US$ equivalents at the 12/90 exchange rate of 1551.4. Source: "Uruguay: Employment and Wages," tables VI-7, p. 77.

Compensation 33

OOO. It appears that wage rates that can be offered for highly skilled positions in the public sector in Venezuela are considerably below their private sector counterparts. In addition, the central government has attempted to trim the public sector by placing restrictions on filling vacant slots within career civil service positions (planta). So, a high-level public manager who wants to hire a high-level professional or manager, will be tempted to fill such a position by contracting someone on a short-term contract. This arrangement bypasses the normal review processes and takes a while to show up in the government's accounting records. Furthermore, poor information monitoring by the central government appears to permit repeated contracting of a given person, thereby making such "short-term" contracts virtual long term contracts. Although such contracts do not provide the non-salary benefits available to career civil servants, a manager can set a salary high enough to compensate for this omission and be competitive with private sector remuneration for comparable positions. PPP. Although such a scenario suggests that such contractors (contratados) can provide an effective and sustainable means of circumventing central government constraints in order to improve agency performance, it is equally easy to imagine that such circumventions might reduce agency performance by providing politically useful sinecures or patronage--often referred

Figure 9.1: Uruguay: central government employees by salary category, 1985-90

Public Sector Human Resource Management 34

to in Venezuela as "clientelist" benefits. Because of these risks, it is important to design constraints, reporting requirements, grants of authority, assignment of responsibilities, and managerial incentives that encourage the performance-enhancing types of managerial maneuvers reflected in the first scenario, while discouraging the performance-compromising types of managerial behavior reflected in the second scenario. In Venezuela, whether one or the other scenario occurs appears to depend almost exclusively on the morals and objectives of managers, rather than on existing government policies or practices. QQQ. El Salvador. In El Salvador, the central government is unable to monitor and control the number and composition of authorized positions, to control expenditures on employee compensation, and to assure compliance with constraints on public employee hiring decisions--for instance, quality constraints as well as restrictions on rehiring people who have enrolled in the public employment retirement incentive program created by Decreto 111. RRR. Personnel records are created by each operational unit (ministries and autonomous institutions) and by the Directorate of Personnel Administration in the Ministry of Finance. Operational units typically devise their own unique employee identification codes. No common code identifying an employee exists across all agencies. Consequently, it is difficult, if not impossible, to link personnel records from one agency with those from another agency. This weakness poses a number of problems for the government. First, it is impossible to control multiple-position holding or greater-than-full-time employment in the public sector by a single employee. Second, it is impossible to enforce the five-year ban on holding a public sector position after accepting a voluntary retirement package under the decree 111 voluntary retirement program. Third, it is impossible to construct a personnel information system capable of tracking employment histories for purposes of facilitating human resource management efforts. At a minimum, the government needs a reliable means of linking information on any given public employee with information from any other sources on that same employee, regardless of whether the employee positions or operational units, or whether the public sector work history is continuous. SSS. Chile. Chile is unique among LAC countries in its capacity for management and reform. At the time that sustained public administration restructuring efforts began in Chile, that country already possessed two of the three key aspects of such capacity: information and tools. Chile's capacity to reliably monitor public employment and resource use in its various ministries and to enforce centrally determined policies was — and still is — unrivalled in LAC. TTT. Chile's effective monitoring and enforcement capacity allowed the government to impose enforceable binding personnel constraints, while the lack of typical civil service job protections in Chilean law throughout most of the retrenchment period assured that ministries had adequate authority to make mandated cuts. Other countries contemplating programs to achieve reductions in force for maintained central government functions must, then, first establish a solid monitoring and enforcement capacity.

Compensation 35

D.Summary UUU. These illustrative assessments of the weak capacity of many central governments in LAC to enforce centrally imposed salary setting restrictions highlight important lessons. In particular, they illustrate the importance of three factors: the strength of the incentives (potential benefits) line agencies and their managers face to circumvent those policies, the means available to them to circumvent those policies, and the risks they face of being detected and punished for noncompliance. VVV. Because of the inability of typical public sector salary scales in LAC to assure a consistent and competitive relationship between public and private sector salaries for comparable positions, most line agencies and their managers in LAC face significant incentives to circumvent those salary policies. The avenues for circumvention in El Salvador, Venezuela, and Uruguay, are ample and varied and appear to represent those available in many LAC countries--including a multiplicity of salary supplements, the capacity to generate new job titles without effective checks by central authorities, the ability to promote employees without timely and effective review of such promotions by an independent body, and the possibility of hiring some employees outside the career civil service (for example, letting fixed-term or fixed-price contracts for personal services) without adequate means of holding those managers and their agencies accountable for the performance of those employees or their unit. Last, weak personnel and compensation monitoring capacities, such as those found in Trinidad and Tobago, Venezuela, El Salvador, and Uruguay, appear to be not atypical among LAC countries, thereby significantly reducing the risks faced by line agencies and their managers of undertaking to circumvent centrally imposed salary policies.

Public Sector Human Resource Management 36

N O T E S 1 The information in this section on Uruguay's public sector compensation practices comes largely from World Bank 1991. 2 The lower estimate attributes all overtime and 12.5% of actual service premiums to "performance-linked" salary supplements. This assumes that the average performance rating achieved by public employees was "very good" on a option scale, with "very good" the second-from-the-top rating. The upper estimate attributes 75% of service premiums, all overtime, and all annual bonuses to performance-linked salary supplements. The 75% attribution assumes that all training and prior education are performance-linked, but that 25% of service premiums are attributable to seniority (between twelve and thirteen years of service), which is assumed to not be performance-linked. In both cases, "other" service premiums and contributions to personal savings plans are assumed to be non-performance-linked. 3 See World Bank (1191) p. 83, wherein it is noted that "[t]he combined effect of the established household and health care benefits represents 43 percent of a minimum wage without seniority in the auxiliary services job group; with seniority of 30 years, the combined social benefits can exceed 80 percent of that minimum compensation." 4 "Escala Unica de Sueldos," as of December 1989, (Chile 1989b). 5 All dollar accounts are U.S. dollars. 6 Step within grade level receive fixed salary increments of roughly 4% per step. These are assigned at fixed amounts within each usually five-grade range, and these increments become progressively larger across those five-grade ranges. For instance, within-grade-level increments in the first five grades are 15 lempiras per month (approximately US$33 per annum) or approximately 4.0% of the median grade-and-step salary in these five grades; grade-level increases in the second five-grade range are 25 lempiras; etc. At the top of the salary scale, step increments have reached 125 lempiras per month (approximately US$277 per annum), which is still very near 4% of the median salary step in the grade 39 category. Inter-grade salary increments are assigned according to a similar algorithm. These rise from 10-lempira increments (per month, or approximately US$22 per annum) across the lowest five grades to a 180 lempira increment (per month) between the penultimate and top grades (approximately US$400 per annum). On a percentage basis, these increments rise from just shy of 4.9% at the lowest grade to 9.9% for the rise to the highest grade. 7 The salary scales being compared include 1428/73, Docente, Docente Universitario, Judicial, INTA, and Militar. 8 Only certain scientific and technical agencies consistently pay lower salaries than those provided by Escalafón 1428/73.

I. ________________________________________________________________ Reform Within an Existing Legal Framework: Core Personnel Policies --

Hiring, Firing, Promotions, Annual Salary Review and Adjustment, Assignment of Responsibilities and Training

A. Hiring, firing, promotions, annual salary review and adjustment decisions and the assignment of responsibilities and training are core tools for personnel management. Although the base salary scale, including all the non discretionary salary supplements, set important limits on the ability of line agencies and their managers to offer competitive compensation packages to their personnel, the policies governing hiring, promotions, and other rewards to employees within those constraints are pivotal determinants of the capacity of management to effectively harness the human resources at its disposal. Judging from the nearly universal condemnation that is heaped upon the civil service in most LAC countries, it would appear prudent to begin with the working hypothesis that these core personnel policies and practices are generally not well designed. B. In line with this, this chapter first summarizes the typical pattern of such core personnel policies and practices found in the countries examined for this study, with an eye to identifying features likely to account for the low esteem in which the civil service is held. Then, the chapter focuses on a few public agencies with widely recognized reputations for effective management of their human resources -- with an eye to identifying why and how these agencies have managed to differentiate themselves from the others. C. The hypothesis that sets apart inefficient from efficient civil services is competitive pressures. LAC civil service systems with reputations for inefficiency and ineffectiveness have policies that undermine competitive pressures in the public sector labor force. The few examples of public sector agencies or personnel systems with reputations for efficiency and effectiveness, on the other hand, include a wider variety of personnel policies and practices that increase the competitive pressures faced by managers and the employees they manage. Examples of personnel policies and practices that reduce competitive pressures are: ·Procedures that guarantee job tenure ·Restrictions on recruiting to position from outside the civil service ·Recruitment procedures that ensure monopolistic control over recruitment and employee

selection ·Promotions procedures that in effect make seniority the major determinant of promotions

Public Sector Human Resource Management 2

·Employee performance evaluation systems that discourage — or threaten retaliation to -- evaluators who assign low performance ratings to employees who perform poorly -- employee performance evaluation systems driven by competition among budgetary units for salary enhancements rather than creating competition within individual program units for personnel resources;

·Employee performance evaluation systems that are not used, for whatever reason -- e.g., they are too rigid, too elaborate, too complicated, or have no means to induce the designated evaluators to reliably execute their mandate

·Rules that create a state-run or state-sanctioned monopoly for providing training to current or potential public employees

·Rules that fail to hold managers accountable for the results of their training resource allocation decisions

·Allocations of training resources that are not competitive with those available from private sector employers

·Compensation levels that fail to link compensation to the opportunity costs faced by current or potential public employees

·Periodic (e.g., annual) salary adjustments determined by factors other than performance factors, such as seniority

·A lack of systems that provide information on personnel decisions, usage, and performance and enable administrators to summarize and evaluate those decisions and their consequences

·A lack of systems that provide information on program-specific costs, thus making it difficult or impossible to evaluate the cost-effectiveness of programs and personnel uses.

A.Typical patterns of core personnel policies and practices (1)Chile. D. Although Chile's public sector made impressive strides of downsizing, privatizing, and decentralizing between 1974 and 1990, it has not made similar progress with its core personnel policies. Core personnel policies, procedures, and practices in Chile's central government ministries, intendencies (intendencias), and governors (gobernaciones), including the centralized and decentralized public services established under each of these three authorities, are governed by the New Administrative Statute (Chile 1989c). Those core personnel policies include a multitude of provisions that significantly undermine competitive pressures in the civil service. E. Recruitment. Hiring from outside the civil service is allowed to entry-level positions only. (New Administrative Statute, Title II, Para. 1, Art. 15). Lateral entry is permitted only when people meeting minimum skill requirements are not available in the civil service (Ibid). So, it is virtually impossible to hire to position and thus competition for available positions is minimal. On average, staff quality likely is compromised by this restraint of trade.

Core Personnel Policies 3

F. Promotion. Competition for vacant positions is restrained further by the policies governing promotions. A promotion is, by law, granted to the agency employee -- among those who meet minimum skill requirements for a vacancy -- whose employment rank (salary grade and step) most nearly equals without exceeding that of the available slot (New Administrative Statute, title II, para. 4, art. 48-54). Because the evaluation system that determines employment rank fails to sort personnel by performance (see below), promotions are, in effect, based on seniority. G. Personnel evaluation system. The New Administrative Statute (Chile 1989c: Title II, para. 3, arts. 27-47) prescribes a personnel evaluation system for all civil servants, but it is so elaborate, rigid, and reflective of military criteria that officials from several ministries claim that virtually no agency uses it. The little evidence available on the system's use reveals that virtually all employees received the top rating. Both outcomes should come as no surprise once one is familiar with the rules governing the system. Perhaps the most significant rule governs the grounds on which an employee may be dismissed on the basis of poor performance evaluations. The statue provides four overall performance rating categories: distinction, normal, conditional and deficient. An elaborate system of assigning points for each of five dimensions (loyalty, tact, ability to get other employees to perform effectively, training and efficiency and dedication) virtually guarantees that every employee who at least shows up at work regularly and does not actively sabotage the agency's activities will be awarded a rating of normal or distinction, because all employees begin with enough points to place them in the normal ranks and can fall below that rating only by incurring "demerits." That these valuative dimensions reflect criteria more obviously applicable to military personnel than to many other civil service positions is, perhaps, not terribly surprising, because the military drafted these guidelines. This undoubtedly contributes to the reluctance of many agencies to apply them. H. Managers, who are assigned the task of evaluating employees, know that should their evaluations place an employee in the conditional category more than once in five years, the employee will face a significant risk of being dismissed (see below). A rating of deficient is cause for dismissal. Furthermore, managers face no penalties for giving high ratings, but do face the risk of creating ill-will and possibly outrage among their employees if they give low ratings, because of the risk of dismissal. More specifically, because line managers face no negative consequences for themselves or their agency (such as using up limited salary funding) by bestowing high performance ratings on their employees, they have strong incentives to give high ratings to all employees. Conversely, if managers give employees low ratings they stand to gain nothing tangible (because their own salaries, promotions, and other rewards for performance do not depend upon how accurately they appraise their employees' performance). They do, however, run the risk that a poorly rated employee might file a complaint (which could harm the manager's own performance review) or undermine the performance of the unit by further slacking or actively sabotaging the unit's activities. I. Thus, it is extremely unlikely that any employee will be rated lower than normal. A performance evaluation system that fails, as this system does, to sort employees on the basis of

Public Sector Human Resource Management 4

their performance undermines the ability of the personnel management system to target rewards to high-performing employees. As a consequence, annual salary adjustments largely reflect time in position. J. Training. Resources for training are extremely limited. To illustrate, in 1992 the central government allocated less than 0.5 percent of its personnel expenditures — roughly $28 per employee — to training activities within the Secretariat of the Presidency and the Ministries of Economy, Finance, and Education (see table 18). Although no data on training expenditures by private sector firms in Chile were available, comparable data in Venezuela reveal that private sector firms spent 1.33% of personnel expenditures on training in 1989 — or almost three times the fraction that these four key ministries in Chile spent (Instituto de Estudios Superiores de Administración (IESA) 1990). K. By law, training resources are allocated for three purposes in Chile: to prepare workers for promotions, to correct skill deficiencies, and to reward high-performing employees. Training for promotion is assigned, by law, according to position on the salary scale. Given the existing personnel evaluation system, training for promotion is allocated according to seniority rather than performance or potential. Training to correct skill deficiencies for an employee's current position is to be assigned by concurso -- for example by examination. Regrettably, no data are available on how well targeted such training is or whether or to what extent it reduces skill deficiencies. Voluntary training is to be assigned by top-level managers based on evaluations of the merits of the candidates. Once again, an absence of information on the targeting and outcomes of such "voluntary" training precludes the government or any independent body from reliably assessing the efficiency with which these resources are allocated. The government does not finance basic education and degree programs as training — except limited funding for graduate training in specialized fields.

Table 18: Chile: Training Expenditures, 1992

Ministry

Training expenditures per employee (US$)

Training expenditures as a percentage of

personnel expenditures

Training expenditures as a percentage of total

expenditures

Secretariat of the Presidency 11.72 0.23 0.074

Ministry of Economy 34.78 0.39 0.033

Ministry of Finance 48.00 0.72 0.315

Ministry of Education 13.81 0.27 0.013

Weighted Average 28.31 0.45 0.038 Source: Ley de Presupuestos del Sector Público, Año 1992 (Law _ 19.103), República de Chile, Ministerio de Hacienda, Dirección de Presupuestos.

Core Personnel Policies 5

L. Tenure protection. Members of the permanent civil service have secure tenure. They can be dismissed only under one of three conditions: the agency within which the employee works is restructured (e.g., because of budgetary constraints) and the restructuring eliminates the position; the employee receives a rating of deficient (4 on a scale of 1 to 4), or a rating of conditional (3 on the same 4-point scale) three times during any five-year period or twice in a row; or the employee is sanctioned with a destitución disciplinary action. Such a disciplinary sanction can be imposed only if the employee (a) fails to report to work for three consecutive work days without justification; participates in labor strikes against a public agency, commits acts of destruction against the public sector, or incites to destroy or disrupt the activities of public agencies; or is condemned for a criminal offense. A destitución sanction is surely extremely rare and certainly not a tool for maintaining competitive pressures to perform. Given that the few agencies that perform annual employee performance evaluations uniformly rate all employees as distinction (1 on the 4-point scale), the use of poor ratings to dismiss employees is nonoperative. Last, eliminating an employee's position through agency restructuring requires payment of one month's salary for each year of service, up to a six months. (New Administrative Statute, Art. 148). Although this restructuring justification was surely heavily used during the 1974-88 retrenchment, it is probably no longer widely used. M. Tenured civil servants constitute about 94% of the authorized civil service positions (planta) in Chile's central government, exclusive of health care positions.1 The balance of the civil service positions, 6.4% of total central government employment are positions of "exclusive confidence" (cargos de exclusiva confianza) -- political appointments. Holders of these positions serve at the pleasure of the president or his representative; they enjoy no tenure protection nor are their working conditions governed by the civil service statute. These positions of exclusive confidence include division chiefs and department chiefs or their equivalents in the ministries or the regional ministerial secretariats, and also superior chiefs, sub-directors, regional directors, and department chiefs or their equivalents within the public services (art.7, law 18.834 (Chile 1989c)). The planta also does not include people hired under personal service contracts. These are limited by law to 20% of authorized civil service positions in each agency or program.2 N. Chile's relatively heavy reliance on nontenured positions to fill many of its higher ranks raises the important issue of the trade-offs that attend tenure guarantees. As noted elsewhere in this study, tenure guarantees provide one means of assuring a stable public workforce. They also provide one weapon for protecting public employees from arbitrary dismissal for reasons other

1. This figure is calculated from 1989 data found in law 18.827 (1989a), which respecified the planta for every central government agency in order to endow a large number of non-tenured appointments made during the Pinochet regime with tenured career civil service status. Health care positions were excluded from the calculations because of the difficulty of transforming part-time positions to full-time equivalents.

2. All personal service contracts are required by law to expire December 31 of each year. The annual budget law sets explicit limits by program on the number of persons and total expenditures allowed through such personal service contracts.

Public Sector Human Resource Management 6

than poor performance; e.g., for "political" reasons. At the same time, tenure guarantees dramatically reduce competitive pressures for existing public employees to perform effectively and efficiently. An integrally related issue in Chile, as in most LAC countries, is that non tenured appointments through arrangements such as the cargos de exclusiva confianza circumvent the normal salary scale constraints. In so doing, they provide a means by which the government can offer compensation packages more nearly competitive with those available in the domestic private sector. Because of this, the option of hiring a significant portion of the government's managerial ranks under such non tenured terms can provide the government with an important source of competitive pressures for recruiting highly qualified employees and motivating them to perform well. For such a device to achieve this end, however, other means besides tenure guarantees must be found to assure the continuity of such appointments and to protect the process by which such appointments are made from being corrupted by patronage. O. Chile's experience in this regard is instructive. Despite the central government's fairly heavy reliance on political appointees, higher-level managers express few concerns about their quality and reliability. This is striking, because in other countries, such as Venezuela, which rely considerably less on such nontenured appointments to fill the higher managerial ranks, the instability of those ranks is routinely decried as a major cause of the poor performance of public agencies. (See, for instance, COPRE 1989.) Although the explanation for Chile's apparently successful use of nontenured appointments in the higher managerial ranks is surely complex, perhaps an important element of that explanation is the stability of the minister-level appointments, who, in turn, shoulder the responsibility for making the lion's share of the remaining non tenured appointments. Because ministers tend to hold their appointments for a long time in Chile, even under the post-Pinochet democratic government, so do their appointees. If this hypothesis is valid, it suggests that any advice about how deep nontenured appointments ought to run within the public sector must be couched as conditional upon the stability of the highest-level political appointments. Where cabinet-level appointments tend to endure, extending nontenured appointments to cover up to 5 or 10% of the public sector workforce may still yield positive net benefits; whereas in countries in which cabinet-level appointees have expected half-lives measured in months, it may be necessary to restrict nontenured appointments to the top 0.1% or less of the civil service in order to attain positive net benefits from those appointments. P. A second risk faced by an increased reliance on appointments outside the normal civil service recruitment guidelines, is that such appointments will be made on grounds of patronage instead of performance qualifications. Two means of mitigating this risk are: (i) to subject such appointments to the same rigorous review process required for tenured appointments; and (ii) to make such appointments (or a subset of such appointments) for fairly lengthy fixed terms, while shielding them from removal from office except under the same sorts of extreme conditions as apply to Chile's civil servants. Chile summary. Pressures for employees to perform within Chile's central government are reduced by aspects of the central government's core personnel policies. Recruitment policies eliminate competition for career civil service positions from private sector labor markets, except

Core Personnel Policies 7

at entry level. Employee performance review policies and practices, coupled with the statutory requirement that vacancies be filled by the next highest-ranking career civil servant in the office where the vacancy exists as long as that employee meets minimum qualifications result in promotions based almost solely on seniority. Employee performance evaluation policies that create strong incentives for line managers to not evaluate their employees or to give them all the highest permitted rating rob the evaluation process of its ability to sort employees according to performance. This, in turn, yields annual salary adjustment practices that award increases according to seniority, rather than performance. Training resource allocation policies fail to force managers to compete for scarce training resources on the basis of the resources' ability to produce desirable outcomes. Tenure guarantees for the vast majority of civil servants, further undermine the ability of the civil service system to bring competitive forces to bear on its career bureaucrats. Q. The one feature of Chile's civil service system that appears to provide some beneficial effects of competitive forces is its relatively heavy reliance on nontenured political appointments to many higher-level managerial positions. Given the relative stability of the government's highest-level political appointees -- ministers -- and an apparently relatively trustworthy recruitment and selection process for these appointments, this corps of appointees appears to enhance the functioning of Chile's public bureaucracy. (2)Argentina. R. Argentina's civil service system appears to have many of the same problems as Chile's. S. Recruitment. Argentina has undergone a number of changes in its recruitment processes over the years. As early as 1943, decree 16.672/43 established minimum recruitment and screening guidelines, including minimum qualifications standards. These guidelines and standards were apparently largely circumvented during the 1946-55 Peronista period. The Civil Service Statute of 1957 (decree 3.577/57) reestablished the 1943 guidelines and standards, while decree 10.115/59 ratified these standards, set forth a system of open public competition (concursos) for new positions, and created a unit (Instituto Superior de la Administración Pública) for monitoring recruitment activities and their results. Apparently, these competitive recruitment and screening procedures operated for roughly a decade. In the 1970s and much of the 1980s little attention was apparently given to competitive recruitment and screening procedures. Reforms initially introduced in 1984 and ultimately enacted in 1987 aimed at re-imposing competitive recruitment and screening procedures. But by 1989 these reforms still covered only data processing personnel and the Cuerpo de Administradores Gubernamentales, the latter of which is reviewed below. T. In 1991, the Sistema Nacional de la Profesión Administrativa (SINAPA) was created (Argentina 1991). By March of 1992 (Argentina 1992) the regulatory framework developed for SINAPA included a detailed set of competitive recruitment and screening procedures. Key features of the procedures are as follows:

Public Sector Human Resource Management 8

·Each jurisdiction (for example, ministry or autonomous institute) establishes a selection organ, consisting of three members -- human resource specialist, technical specialist with expertise in the area for which recruitment is required, and a manager of rank national or general director or the equivalent -- plus an observer from any relevant labor union.

·This selection organ specifies job skill requirements, selection criteria and their weights, and screening procedures and identifies and recruits professional and technical personnel required to conduct the recruitment and screening.

·Recruitment pools: ° Levels C through E (middle to lower-middle ranks) are subject only to searches in the

jurisdiction -- ministry or Office of the Presidency -- that has a vacancy. °Levels A and B (upper ranks) are subject to a "general" search covering all civil servants

(SINAPA). °Executives (appointees at the level of national or general director or their equivalent) and level

F positions (entry-level positions) are subject to an "open" search -- i.e., encompassing external as well as internal candidates.

U. This SINAPA recruitment regime has the advantage of building safeguards against monopolistic control of the recruitment process by a single party, such as line managers -- requiring instead that a selection organ be staffed by three interested parties. It has the disadvantage, found also in Chile and Venezuela, of restricting the pool from which recruits can be drawn. Only top-level political appointees and entry-level positions may be recruited from a pool that includes qualified personnel available in private sector labor markets. This looks very much like the Chile model. Because the SINAPA system is new, the problematic effects of this restriction on the recruitment pool have not yet become apparent. There can be little doubt, however, that in the long run this restriction will lead to the same reductions in the ability of the public sector to attract qualified personnel as has occurred in other countries that have imposed similar restrictions -- including Chile and Venezuela. It will also, as in those countries, spawn efforts by ministers and other people responsible for the effective functioning of public agencies to circumvent these recruitment restrictions. Such efforts can, in turn, undermine the moral fabric of the civil service system. V. Promotions. Procedures for advancement under the SINAPA regime assure objectivity -- protection from patronage -- at the expense of competitive pressures. Promotions are, by law, granted strictly on the basis of performance evaluations and the type and quantity of training received in the previous twelve months (see table 19). Each promotion requires two to four consecutive "outstanding" performance evaluations or three to six consecutive "good" performance evaluations, plus specific amounts and types of training. Although such a set of objective criteria might appear reasonable, the result of these criteria and the employee performance review procedures is very likely to be a promotions regime that in fact assigns promotions on the basis of seniority rather than performance. This is because article 42, title IV, annex I of decree 993/91, establishing the SINAPA system, requires that every civil servant obtain a rating of "good" or better in each year's performance evaluation process in order to remain in the permanent civil service. Because the penalty for failing to attain a "good" rating is

Core Personnel Policies 9

severe -- the loss of one's job -- the agents who conduct those performance evaluations assign ratings lower than "good" only under extraordinary circumstances.3 In other words, virtually all civil servants can be expected to receive at least a "good" rating every year. When this is coupled with the promotion criteria, (table 19) it follows immediately that promotions will be based on seniority. W. Personnel evaluation system. SINAPA requires annual evaluations by an evaluation committee, whose membership is to be determined by the Secretaría de la Función Pública de la Presidencia de la Nación, which must include a member of the Civil Service Union (UPCN) as an observer. The staffing of these Committees by people other than an employee's immediate superior provides an important check on the tendency of employee performance evaluations to gravitate toward the upper ratings, but the statutory requirement that a rating of "good" or better be attained in order to retain one's status as a permanent civil servant severely compromises the ability of this procedure to sort employees according to their performance.

3. This hypothesis could be readily corroborated by examining data on the distribution of annual performance evaluations. Unfortunately, Argentine authorities were unable to provide such data.

Public Sector Human Resource Management 10

Table 19. Argentina: SINAPA Promotion Requirements Level

Grade

Number of consecutive evaluations

Minimum rating in each

evaluation

Credits for training

A 1 3 5

Outstanding Good

INAP public management course

A 2 4 6

Outstanding Good

Yes

B 1 3 5

Outstanding Good

INAP public management course

B 2 4 6

Outstanding Good

Yes

C 1 2 4

Outstanding Good

Management course

C 2 3 5

Outstanding Good

Yes

C 3 4 6

Outstanding Good

Yes

D 1 2 3

Outstanding Good

Yes

D 2 2 4

Outstanding Good

Yes

D 3 3 5

Outstanding Good

Yes

D 4 3 5

Outstanding Good

Yes

E 1 2 3

Outstanding Good

Yes

E 2 2 4

Outstanding Good

Yes

E 3 3 5

Outstanding Good

Yes

E 4 3 5

Outstanding Good

Yes

F 1 2 3

Outstanding Good

No

F 2 2 4

Outstanding Good

No

Table 19. Argentina: SINAPA Promotion Requirements (continued) Level

Grade

Number of consecutive evaluations

Minimum rating in each

evaluation

Credits for training

F

3

3 5

Outstanding Good

No

F

4

3 5

Outstanding Good

No

Source: Decree 993/91, annex 1.

Core Personnel Policies 11

X. Salary adjustments. One element of the salary adjustment policies forces employee performance evaluators to sort personnel according to performance. Besides level and grade changes based on an employee's history of performance evaluations, training received (see above and table 19), and the various supplements (see chapter 3), employees may receive a bonus equal to one month's base salary plus any applicable supplement for executive or specific function of the position for receiving an "outstanding" performance rating. But this bonus may not be given to more than 10% of the employees evaluated. (decree 993/91, article 66, title VI, annex I) Y. Use of personal service contracts to circumvent hiring and salary setting restrictions may be significant, but no data on the incidence of such arrangements is available. Weak monitoring capacities make many officials concerned about this issue. Z. Training. The National Institute of Public Administration (INAP) was created by law 10.173/73, and given responsibility for providing all training for public employees, including the course on upper-level management skills (curso de Alta Gerencia Pública), which is required for promotion to levels A or B. Once again, the government has created a monopoly - in this case for the provision of training services - that undermines competitive pressures. Although such a monopoly may prove cost-effective because of increased control over the production function, no such monitoring and evaluation of the national institute's cost-effectiveness has yet been undertaken. AA. Tenure protection. As in virtually all LAC countries, job security protections have always been greater in Argentina's public sector than in its private sector. Even the most basic regime (Régimen Jurídico Básico, decree 1428/73, now being phased out by the SINAPA regime) includes protection amounting to an almost lifetime job guarantee, the detailed regulations making dismissals for non performance all but impossible. To illustrate the strength of these protections, an average of roughly 10 employees per year were dismissed for non performance between 1984 and 1989, out of an average base of roughly 300,000 per year -- or roughly 0.003% per year. If the 38 employees who were dismissed in 1984 for alleged civil rights offenses in the previous military government, rather than for non performance, are omitted, these figures are reduced to 21 dismissals, or roughly 3.5 employees per year -- of roughly 0.001%. BB. Argentina summary. Recruitment policies protect public employees from having to compete with their private sector counterparts for openings in all but the highest and lowest ranks. On top of this, promotions to such vacancies, while nominally based on performance, in effect are virtually guaranteed to reflect little more than seniority. The personnel evaluation system poses overwhelming incentives for evaluators to assign only the top two ratings, because to do otherwise is tantamount to dismissal. Data on allocations of resources to training activities were unavailable, so it is not possible to assess the government's commitment to investing in its employees. The one training program that has received the most attention recently -- the training program of the National Institute of Public Administration for members of the government's elite managerial cadre, the administradores gubernamentales -- is a government-mandated monopoly

Public Sector Human Resource Management 12

subject to no apparent regular review of its cost-effectiveness. Tenure protection covers most government employees and mirror those found throughout LAC. In short, Argentina's core civil service policies — even after the recent reforms — suffer from the same pattern of anti competitive protections typical of many other LAC public sectors. (3)Venezuela. CC. Although Venezuela's system differs from those of Chile and Argentina in some details, the outcomes of the systems are similar. DD. Recruitment. Hiring policies in Venezuela incorporate more competitive pressures than in Chile, but fall short of assuring that civil servants compete on equal terms with the private sector labor market for vacancies in the civil service. Article 19 of the Ley de Carrera Administrativa requires that candidates for career civil service positions be screened in three prioritized groups: current eligible candidates in the agency in which the vacancy exists, current eligible candidates anywhere in the civil service, and eligible candidates from outside the civil service. Only if no qualified candidates exist in the first two groups can an external candidate be considered, because Article 19 also guarantees the right to promotions to all tenured civil servants. So, although competitive pressures in the recruitment process should be somewhat greater in Venezuela than in Chile, they could be enhanced significantly by drawing no formal distinctions between internal and external candidates in the selection process. EE. The recruitment procedures do include conventional assignment of responsibilities designed to insulate recruitment from the exercise of monopolistic control over the outcome, which could harm the fairness and effectiveness in identifying the most competitive candidate. In particular, although line agency personnel offices are responsible for advertising and for screening and identifying a registry of eligible candidates, they must forward that list to the Central Personnel Office (OCP), which is responsible for maintaining an overall registry of eligible candidates for the National Public Administration. Guidelines for these procedures are laid down by OCP. These registries include all candidates who passed the screening process, ranked by their scores and sorted into three lists: career civil servants (seeking promotions), former career civil servants (seeking reentry), and potential new entrants. Responsibility for selection of the final candidate rests with the president, cabinet, ministers, and the highest managerial authorities of the autonomous agencies of the National Public Administration. This process, then, counteracts the potential exercise of monopoly power in the recruitment process by assigning elements of the recruitment and selection process to other actors (line agency personnel offices, central personnel office, and line agency heads). FF. Interestingly, a few avenues do exist by which line agencies might circumvent these carefully designed procedures and thereby wield monopoly power in hiring decisions. Should no candidate meet minimum qualifications under the screening procedure (concurso), a non qualified person may be appointed on an interim basis, not to exceed six months. During this six-month period, the personnel office is obligated to administer the appropriate screening test. If no screening test is administered, the provisional incumbent is automatically granted career

Core Personnel Policies 13

status. This provides a potentially important back door into the civil service. Similarly, each new appointee is subject to a six-month probationary period, during which his or her direct superior is required to evaluate him or her. Should the superior fail to provide an evaluation during those six months, the appointee is automatically granted career status. Although the supervisor is subject to an unspecified sanction, this scenario does provide an avenue by which underperforming new hires can attain tenure. GG. Thus, promotions in Venezuela are subject to somewhat more competitive pressures than in Chile, but less than they could be. Civil servants are promised the right to promotions on the basis of their ranking on personnel performance evaluations and training received. (Ley de Carrera Administrativa, Art. 19; Reglamento General de la Ley de Carrera Administrativa, decree 1.378 [1982], Arts. 146-7). Unfortunately, because compliance with the personnel performance evaluation requirements appears to be weak (see below) and resource allocations for training are small, it is probably true that promotions are governed largely by seniority, especially because seniority is specified as the tiebreaker criterion when merit and training differences do not exist. HH. The personnel evaluation system is elaborate, but appears to be rarely used to inform promotion and annual salary adjustment decisions. OCP is responsible for creating a personnel evaluation system, which line agency personnel offices are responsible for administering. OCP officials report that thirty-four of the seventy-one agencies subject to their authority currently use the personnel evaluation scheme designed by OCP. Conversations with personnel outside OCP, however, suggest that the OCP personnel evaluation procedure is not widely used and is viewed as unwieldy. II. The OCP employee evaluation system began in 1986 and was modified in 1989 and 1992. It began with fifteen valuative categories from which each agency was allowed to select categories it deemed appropriate. Under the current arrangement, OCP fixes twelve categories (with input from management in each government agency), from which each agency must employ three specified by OCP and is free to choose five others from the remaining nine. Employees must be evaluated at least twice per year, although some agencies do so as many as ten times per year. Along each dimension (category), four ratings (levels of assessed performance) are possible. Weights for each dimension are assigned by the person making the evaluation and can range between 1 and 8. These weighted rankings are summed to obtain an overall evaluation, which is used to rank employees. Given the separate explicit specification of weights and ratings, it is clearly feasible to alter weights to reflect management or policy priorities. JJ. The results of these rankings are used as follows: ·Employees are assigned to one of six ranges of evaluation (three considered good and

three considered poor) ·Employees are rank ordered. Then each unit decides how much bono (one-time bonus)

to distribute to each employee on the basis of this rank order.

Public Sector Human Resource Management 14

·Compensaciones de paso de escala (i.e., salary increments to be added to the employee's base salary) are determined by these rank orderings.

·Finally, primas (salary supplements based on the annual performance evaluation, whether the employee possesses a university degree, whether the employee possesses a post graduate degree, years of experience, and training received over the previous twelve months) are determined, in part, by these rankings as well. Employees rated excellent receive a prima equal to 21% of their base salary, while those rated very good receive a prima of 10% of base salary.

·In addition, promotions (ascensos) are conditioned on these rankings (see above). KK. Annual salary adjustments, then, include additions to the base salary and non recurrent bonuses. Each ministry or other administrative unit receives a fixed sum in its budget each year for the bonos. Base salary increments and primas, on the other hand, are financed not by these discretionary funds but by budget growth. Consequently, just as in Chile, managers have strong incentives to assign high performance evaluation scores to their employees, in order to assure them access to the bonos, the compensaciones de paso de escala, and the portion of the primas based on those performance reviews. In addition, because promotions depend upon those performance evaluations and because managers face no extra costs if they inflate their staff's personnel evaluations but do run the risk of upsetting their employees if they assign them low ratings, those managers have strong incentives to give all employees very high evaluations. In short, the incentives facing evaluators when assigning performance ratings to their employees match those in Argentina and Chile. As a consequence, it would be surprising to find much variation in employee performance evaluations. This, in turn, means that annual salary adjustments, as well as promotions, will tend to reflect non performance criteria -- especially seniority. LL. Training. Expenditures for training averaged 0.45% — with a median of 0.18% — of total personnel expenditures among the central government's ministries in the 1992 budget. (Central Personnel Office 1992). In 1992, the spending ranged from a low of 0.0013% in education to a high of 2.69% in the Ministry of Development (Fomento). These figures compare unfavorably with the private sector, which devoted 1.33% of personnel expenditures to training in 1989. The figures also compare unfavorably with expenditures devoted to training in Venezuela's public enterprises, which averaged 2.85% in 1989 according to a survey conducted by IESA (1990). MM. Although training is supposed to be assigned on the basis of, first, employee performance and promise for promotion and, second, employee skill deficiencies in their current positions, there is no available evidence as to whether the limited training resources are targeted according to these criteria. The little evidence available on the targeting of training expenditures shows that in 1991 they were concentrated in narrowly defined skill areas (30.2% of all training expenditures) and in professional and technical areas (51.4%), and in 1992 they were concentrated in training activities of short duration (roughly 55% in sessions of 8 to 20 hours and about 35% in training activities of twenty-one to forty hours). Whether these concentrations are

Core Personnel Policies 15

optimal is not clear. No systematic procedures appear to exist for evaluating the targeting or outcomes of training activities. NN. Tenure protection. Roughly 51% of Venezuela's 417,000 public employees in the seventy-one agencies subject to the Ley de Carrera Administrativa in 1991 are provided tenure protection (see table 20). Another 47% of those employees are wage laborers hired daily; although union contracts covering the vast majority of these wage laborers apparently make them virtually de facto tenured employees. OO. Only 2.2% of the central government employees did not enjoy substantial tenure protection. Of those, roughly 4,000 were higher-level management employees (0.9%), while about 5,000 (1.2%) were hired under individually negotiated short-term contracts. PP. Although nontenured appointments in the higher managerial ranks in Venezuela are less than half as numerous, as a fraction of total employment, as in Chile, tenured and non tenured officials in the public bureaucracy and officials of multilateral aid agencies who regularly work with the government uniformly lament the disruptive effects of constant turnover among high-level managers in the public sector. As in Chile, the nontenured appointments provide a vehicle for introducing greater competitive pressures into the staffing process -- by opening the recruitment pool to include people outside the civil service -- and by circumventing the uncompetitive salary structure imposed by the civil service salary scale. In Venezuela, however, it is not clear that these enhanced competitive pressures improve employee quality and performance enough to counteract the disruptive effects of rapid turnover, brought on by the frequent turnover of the highest-level political appointees and their immediate subordinates -- ministers and vice ministers. QQ. Venezuela's civil service system encompasses at least four types of tenure according to the type of contract under which a worker is hired (Ley de Carrera Administrativa, title 1, articles 2-5):4 ·Career civil servants ·Political appointees (Funcionarios de libre nombramiento y remoción), including: °Ministers, secretary general of the presidency, chief of the Central Office of

Coordination and Planning (CORDIPLAN), and the remaining

4. In addition, Title I, article 5, of the Ley de Carrera Administrativa (Venezuela 1975) explicitly omits from its coverage six categories of public employees, each of which is subject to a different set of labor laws. These include: ·Employees of the national legislature ·Employees of the foreign service, which are covered by their own body of labor law ·Employees of the judicial branch, the public ministry and the supreme elections council ·Members of the national armed forces ·National universities directors, academics, teachers, or researchers ·Day laborers contracted within the national public administration, who are covered by the Labor Law

Public Sector Human Resource Management 16

functionaries of similar rank designated by the President and the governors of the federal territories

°Highest-ranking directors and administrators of the autonomous organisms of the National Public Administration, the directors general, directors, judicial consultants, and other similar functionaries of the same rank in the service of the president, the ministries, the autonomous organisms or the governors of the federal territories

°High-level posts, primarily supervisory and managerial positions (extending down to division chiefs or their equivalent), but also all administrators and inspectors in the Customs Agency

°Positions of confidence -- a broadly defined category that includes employees at all levels of responsibility and skill whose functions include activities such as auditing and inspection; valuation; processing of patents, trademarks, licenses, and exonerations; administration or custody of currency accounts or documents through which the National Treasury (Fisco Nacional) confers privileges on taxpayers; and border control and the armed forces. This category also includes chiefs or equivalent positions responsible for procurement or disbursement; handling of cash; treasury functions; regulation and control of payments; public relations and information; cryptography, information systems, and reproduction; handling of confidential documents and materials; and labor procurement. Last, all positions within the Office of the Presidency are positions of confidence (cargos de confianza).

·Contractors ·Day laborers. RR. Although career civil servants enjoy life tenure, political appointees serve at the pleasure of the president or his designated representative, consultants (contratados) serve under fixed-term contracts with individual government agencies, and day laborers (jornalados) work only on daily contracts with individual government agencies.

Core Personnel Policies 17

SS. It is not difficult to justify these four types of job tenure provisions that reflect differing demands on the employees. Political appointees are the highest-level political appointees who serve to link the agencies and the career civil service to the agenda of the current government. The career civil service provides the permanent body of civil servants protected from the winds of political patronage. Their loyalty should rest with either the overall career civil service or the agencies within which their current and future careers lie. The consultants provide an avenue through which agencies can hire persons with unique skills for projects of fixed duration -- skills which it would be economically unsound to hire on a permanent basis, since they are not required with enough frequency to warrant such an employment arrangement. Finally, day laborers provide a similar flexibility for staffing activities needing temporary infusions of large quantities of readily available unskilled or semi-skilled labor. In short, on its face, Venezuela's set of employment tenure arrangements answers well to the need for such tenure options to reflect the variety of demands placed on the public sector labor force. TT. But when one speaks with managers or line employees within Venezuela's central government ministries, one does not hear praise for the ability of this employment system to match job tenure arrangements to labor market conditions and work requirements. Instead, one consistently hears concerns reflecting, among other things, their failure to tailor tenure protection to task demands:

Table 20. Venezuela: Public Employment Tenure Composition, 1991 Employment status Number of employees Percentage

Tenured 211,574 50.8

Administrators 134,747 32.4

Professionals 67,327 16.2

Unclassified 9,500 2.3

Nontenured 8,998 2.2

Higher management 3,919 0.9

Contracted 5,079 1.2

Wage labor 195,873 47.0

Total 416,445 100.0 Note: Tenure composition based on 71 agencies subject to the Ley de Carrera Administrativa. Source: Informe Estadístico: Distribución de Cargos y Costo de la Administración Pública Nacional, Año 1991, II Cuadro _ 16 (p. 47) (Oficina Central de Personal, República de Venezuela); and information provided by OCP officials indicating that published measures of contract employment appear to understate true levels by approximately 25%.

Public Sector Human Resource Management 18

·Extreme instability among the ranks of the political appointees is severely undermining

the ability of some ministries to manage their operations, especially agencies in the Office of the Presidency, such as CORDIPLAN.

·The inability of many ministries to purge themselves of redundant employees among the career civil service ranks has tied the hands of management, greatly diminishing their ability to manage their agencies.

·The practice of hiring persons into unclassified but tenured positions is suspected of sometimes providing a backdoor entry into permanent public employment status for insufficiently skilled or credentialed people.

·Contractor arrangements are widely suspected of being regularly abused; for example, rather than serving as a means of obtaining specialized skills for specific, time-limited tasks, frequent renewal of such contracts is suspected of providing a way to hire line personnel outside the tenure and salary constraints of the career civil service.

·Day laborer hiring is also widely suspected of providing political patronage and de facto job tenure, at least for the duration of a given administration.

·Job protection guarantees negotiated into many collective contracts have made it as difficult to adjust the levels of wage labor -- (47% of central government employment) -- to changing needs for such labor as it is to adjust the levels of administrative and professional staff.

UU. Whether these concerns are based in fact has not been adequately addressed. But the widespread suspicions suggest, among other problems, that the variety of tenure protection available in Venezuela's civil service is not appropriately targeted. Managerial and many other ranks appear to be inadequately protected from the ever-changing winds of political agendas, thereby undermining the continuity and commitment to agency missions necessary for effective management; permanent tenure appears to be too widespread in many nonmanagerial ranks, compromising administrative efficiency; short-term contracting appears to be used to circumvent personnel policy constraints rather than to avoid over-investing in transferrable human capital skills that cannot be fully employed within the public sector; and spot market hiring of day laborers appears to have relinquished its major advantage -- day-to-day flexibility regarding unskilled staffing levels. VV. Venezuela Summary. As in Chile, many aspects of the core personnel policies and practices undermine rather than enhance competitive pressures needed to improve performance in the civil service. Recruitment policies do not limit the pool from which recruits can be drawn as dramatically as in Chile, but the policy of ranking all existing civil servants who meet minimum skill requirements above any external candidates restrains the competitiveness of recruitment. Furthermore, the reluctance of many line agencies to regularly undertake the employee performance reviews mandated by OCP means that, in many agencies, seniority is the main factor in employee rankings that play a pivotal role in decisions on the filling of vacancies. In addition, managers who do conduct annual employee performance evaluations have incentives to consistently give the highest ratings, thereby undercutting the ability of that process

Core Personnel Policies 19

to reliably sort employees according to their performance and foster competitive pressures. Rules for allocating and monitoring the results of training activities also do not appear to provide strong incentives to allocate those limited resources efficiently. WW. Tenure protection -- de jure and de facto -- also appears to undermine competitive pressures upon existing employees to work effectively and efficiently. The existence of some 4,000 nontenured higher-level management positions, exempt from the recruitment pool restrictions that apply to career civil service positions and from the noncompetitive salary scale governing the career civil service, does enhance competitive pressures within those nontenured ranks. But the extreme instability at the government's highest levels -- ministers and vice ministers -- seriously compromises the advantages of the additional competitive pressures among nontenured higher-level management by dramatically increasing turnover. Contract positions provide another avenue around the anticompetitive restrictions affecting the career civil service, but monitoring and accountability mechanisms are so weak that it is impossible to know whether the use of contract labor for staffing the professional and managerial ranks enhances efficiency or is simply another form of patronage. B.Examples of Successful Public Sector Human Resource Management XX. Examples of successful public sector human resource management policies and practices in LAC are not numerous, but they do exist. The Superintendencia de Valores y Seguros (SVS) and the Superintendencia de Bancos e Instituciones Financieras (SBIF) in Chile and the Banco Central de Venezuela (BCV) and the Contraloría in Venezuela have reputations for effective and efficient personnel management policies and practices. An analysis of a few of these examples of effective human resource management within the public sector can serve to highlight how these units manage to harness competitive pressures to enhance the performance of both their agencies and their employees.

Public Sector Human Resource Management 20

(1)Superintendencia de Valores y Seguros. YY. The Superintendencia de Valores y Seguros (SVS) is highly regarded among high-level civil servants in Chile for its effective human resource management policies and practices. Every aspect of their human resource management policies and practices introduces greater competitive pressures than can be found in the civil service systems reviewed above. ZZ. The precursor of SVS was created in May 1931 and was named something like Superintendencia de Sociedades Anónimos, Bolsas, Compañías de Seguros. In 1980 this entity was transformed into SVS, in part to reflect the more general role being played by the agency in regulating securities and exchange markets -- essentially the same role as the Securities and Exchange Commission in the United States. SVS used to have 151 functionaries, but had 162 by 1992. Its total number of permitted positions is fixed by law, just as is the case with all other agencies of the central government.5 This is where the similarities end, however. AAA. Recruitment. Two key elements of recruitment in SVS contribute to its success in hiring highly qualified workers. BBB. First, their recruitment pool is always the entire domestic labor force. SVS advertises positions in newspapers, at universities, etc. They also seek applicants through informal channels. Applicants submit resumes, which are screened by the immediate superior and other members of a hiring committee. The top three candidates are selected for interviews. After interviews, the top choice is forwarded to the General Secretary, who reviews the files and decides. CCC. Second, SVS can recruit at any grade, unlike the central government agencies governed by the New Administrative Statute. Furthermore, while anyone hired for a particular position is required to meet the minimum credential requirements, just as in agencies governed by the New Administrative Statute, the Superintendent is allowed to exempt candidates from particular qualifications standards whenever he can make case that they are qualified for the position. DDD. Personnel evaluation system. SVS evaluates employees informally, basing promotion decisions on informal processes. This arrangement appears to be well-suited to their situation -- a small number of employees (162 positions), relatively clear employee performance standards, and a highly mobile cadre of workers (see tables 21 and 22).

5. Decreto Ley 3.538 (Chile 1980a) is their Ley Orgánica. D.F.L. Nº 411 (Chile 1981) is their administrative law.

Core Personnel Policies 21

EEE. Compensation. All employees' salaries are governed by a salary scale for positions with financial transactions responsibilities (fiscalizador), which means that SVS employees command salaries higher than for many of Chile's public employees, but not fully competitive with the

private sector. (table 23). SVS partially compensates for these below-market salaries through its training policies and through the skills development employees gain there. Rapid accumulation of human capital skills as an SVS employee appears to make SVS positions attractive enough to land bright, young workers, who remain within SVS, for relatively short times. Turnover rates ranged between 8.6 and 13.0% in 1987-92 for SVS, while the average number of years of tenure at the date of departure averaged 1.3 years for the lower-ranking employees. Stability of SVS tenure is greater among the higher-ranking employees. Employees at grade 7 or higher, average 8 years of tenure at departure.

Table 21. Superintendencia de Valores y Seguros: Employee Turnover Rates Year

Dotación

Number of departures

Turnover rate (percent)

1987 158 18 11.4

1988 162 15 9.3

1989 162 21 13.0

1990 162 18 11.1

1991 162 16 9.9

1992 162 14 8.6

Average 161.3 16.8 10.5 Source:República de Chile, Superintendencia de Valores y Seguros.

Public Sector Human Resource Management 22

FFF. SVS is trying to obtain one privilege — held only by the Superintendencia de Bancos e Instituciones Financieras (SBIF) — that would enable it to supplement the salaries it pays. SBIF by law is granted a fixed percentage of fees (rentas) it levies on the banks and financial institutions it serves (law 18.091, art. 17). SVS has drafted a report that identifies the costs of providing each service -- in order to justify a fee structure and convince the government to allow it to impose such fees and keep a percentage of the revenues. GGG. Training. Expenditures on training are set in the annual budget law. Approximately 70% of SVS's training budget is dedicated to highly technical training outside the country -- such as with the U.S. Securities and Exchange Commission. By law, training funds cannot be used to finance work toward an advanced degree. The heavy concentration of training expenditures on external training reflects the need in that discipline to keep abreast of new developments through international seminars.

Table 22. Superintendencia de Valores y Seguros: Tenure of Employees at Departure Employee group

Years of tenure at date of departure

Average Maximum Minimum

Managers, grades 2-5 8.0 11.2 3.3

Professionals, grades 6-7 7.9 10.6 5.7

Prof'l/Fiscaliz., grades 9-13 1.3 2.8 0.1

Overall, Grades 2-13 4.2 11.2 0.1 Source: República de Chile, SVS. Simple regression of months of tenure on grade at date of departure reveals that tenure rises by 11.24 months per grade (standard error of 1.745; t-statistic of 6.44; R2 = .69).

Core Personnel Policies 23

HHH. The remaining 30% of the SVS training budget is spent for external training in Chile, typically provided by Chilean universities. None is spent in-house. By relying on external providers for training services, SVS can shop around for the best training programs, rather than being stuck with the services of a single, monopolistic training services provider.

III. In addition, if employees arrange to pursue a degree outside the country, SVS will provide a percentage of the employee's salary while they are enrolled, in order to encourage such investments by their employees, in exchange for an enforceable pledge (in writing) that the employee will return to SVS for an equivalent number of years of work after completing the degree program. SVS claims that it has had no trouble enforcing this requirement. They estimate that about three to four employees per year have such leave-of-absence or partial-salary-compensation arrangements. The funds for these arrangements come from SVS's salary budget. The percentage of salary provided is determined by management on the basis of factors such as the costs to the employee of pursuing the degree, including travel, tuition and living costs; availability of other funds; and an assessment of the potential performance improvements to SVS if that employee receives the proposed training. Training funds are allocated by the

Table 23. Chile: SVS Salary Comparisons, December 1990 Grade

Gross SVS annual

salary (US$)

Percentage of private sector comparator

Percentage of

UUS fiscalizador salary a

Percentage of EUS non-fiscalizador

salary

Top rank (1/1/1B)

27,410 85.1 98.1 124.9

26th percentile (6/7/8)

16,922 77.9 101.3 143.7

48th percentile (12/12/15)

10,381 92.3 96.4 159.7

78th percentile (18/20/25)

4,181 43.7 145.6 213.6

Bottom rank (23/25/31)

1,703 21.6 136.2 119.3

Source: República de Chile, Superintendencia de Seguros y Valores; Escala Unica de Sueldos; Instituto Nacional de Estadísticas (for private sector comparators). Note: Grades are matched by percentile in the distribution of grades within each salary scale. Numbers in parentheses indicate the grade selected from the SVS, EUS fiscalizador, and EUS nonfiscalizador scales, respectively. Private sector comparators are managers (top rank), simple average of manager and professional and technical (26 percent), professional and technical (48 percent), simple average of professional and technical and administrators (78 percent), and administrators (Bottom rank). a. EUS is Escala Unica de Sueldos.

Public Sector Human Resource Management 24

Secretary General based on recommendations from supervisors. In addition, the superintendent allocates some funds directly. JJJ. Tenure protection. All employees are employees of exclusive confidence (empleados de exclusiva confianza), which means that none have guaranteed tenure, thereby dramatically enhancing the competitive pressures on SVS employees to perform. The pressures are reinforced by the recruitment and promotions procedures, which, as noted above, force existing employees to compete with external candidates for promotions. KKK. SVS summary. SVS core personnel policies create considerably greater competitive pressures than exist in the regular civil service. Recruitment is more competitive in SVS, because all recruitment efforts canvass as large a candidate population as possible and because hiring to position is permitted at all levels. Promotions are more competitive because of these recruitment policies and practices and because guaranteed job tenure is not provided. Compensation packages are more competitive — compared with the private sector — than in the regular civil service. But this greater competitiveness comes not so much from the higher base salaries -- because those are constrained by the fiscalizador salary scale the SVS must use -- but because of the heavy investments SVS makes in human capital acquisition among its employees. Furthermore, because on-the-job experience at SVS confers marketable skills, it is easier for SVS to attract competitive employees. Greater ability to match salaries to those in the private sector could further improve the competitiveness of the SVS in the recruitment market, as it does for the Superintendencia de Bancos e Instituciones Financieras; SBIF is allowed to supplement its base salaries with funds accumulated from some of its user charges. This is, of course, facilitated by the insulation of the SVS from the political pressures that often buffet line ministries in the central government. (2)Central Bank of Venezuela. LLL. Like SVS, the Central Bank of Venezuela (BCV) enjoys a reputation for effective human resource policies and practices. As with SVS, the key to the success of BCV's personnel policies and practices appears to be that they enhance competitive pressures in all aspects of the personnel system. MMM. Recruitment. Like SVS, BCV is free to recruit to position.6 Because of this, although BCV has an elaborate procedure for screening internal candidates for promotion to vacancies, those internal candidates must also compete against external candidates. Despite the gap between BCV salaries and those found in the private sector, top officials in BCV report that they are able compete effectively for top candidates. BCV salaries are more competitive than in government agencies governed by the Ley de Carrera Administrativa, but below those available in the private sector. BCV officials attribute this competitiveness largely to the attractive human capital acquisition prospects available to recruits. As with SVS in Chile, these attractive skills 6. BCV personnel policies are governed by the Organic Labor Law (Venezuela 1991), rather than by the Ley de Carrera Administrativa (Venezuela 1975).

Core Personnel Policies 25

enhancement prospects result from an active and serious training program and from on-the-job skills acquisition. NNN. Promotions. BCV has an elaborate employee evaluation system (see below) that feeds into its promotions review process. They maintain a registry of eligible candidates based on the permanent employee evaluation files, which ranks all employees on the basis of their annual performance evaluations. Employees are considered for promotion on the basis of this ranking -- the top three ranked employees are considered when an opening exists. OOO. Personnel evaluation system. The BCV has an extremely complex employee performance review process. Annual performance evaluations are a weighted average of monthly evaluations of performance and quarterly evaluations of potential. Those evaluations are based on the following dimensions: ·Results (productivity) (measured by six factors) ·Duties (compliance) (measured by six factors) ·Potential (measured by eight factors) Each of these three dimensions is evaluated on a short-term, medium-term, and long-term basis. Then, the factors within each dimension are combined into weighted sums, which are recorded in a computerized recordkeeping system, and these are combined into an overall performance evaluation and an overall potential evaluation each year. PPP. Interestingly, despite the extraordinary complexity of this system, and the substantial amount of time that must be spent by managers complying with the requirements for monthly and quarterly evaluations of all employees, the system does appear to function -- i.e., these evaluations do appear to be regularly completed and employed in salary review and promotions screening decisions. This contrasts sharply with the personnel evaluation practices found in the SVS in Chile, which were quite informal but apparently equally successful at ranking employees by performance. The fact that two such different systems appear to be roughly equally effective suggests an important insight: the success of an employee performance review system may be more dependent upon the institutional culture within which it is embedded than upon the technical characteristics of that system. QQQ. This is not to deny that technical features of an employee performance review system are important. Rather, while certain technical features can undermine the effectiveness of any performance review system, it is also probably true that there is not a single design of such systems that must always be employed to assure success, as is attested by the differences between the apparently equally effective practices in Chile's SVS and Venezuela's BCV. RRR. An example will help to illustrate the point that some technical features can fundamentally flaw personnel evaluation procedures. Personnel performance evaluation systems that do not force evaluators to rank order employees cannot function well because they fail to accomplish the key purpose of such a system, which is precisely to rank order employees

Public Sector Human Resource Management 26

according to their performance. Consequently, systems such as the SINAPA system in Argentina and the system prescribed in the New Administrative Statute in Chile, which encourage evaluators to assign all employees the same rating, are useless precisely because they fail to separate the better performing employees from the rest of the pack. One device to force evaluators to discriminate between employees is to require evaluations to rank order employees, rather than to simply assign ratings; i.e., require that no two employees receive the same overall rating. In addition, it is important to provide evaluators with incentives to accurately and reliably rank employees by performance. Evaluators with a stake in the overall performance of the agency and the ability to affect that performance by how accurately they rank employees will have stronger incentives to reliably evaluate and rank employees than will evaluators who know that their safest strategy for both protecting themselves and their agency is to assign all employees the same high rating. The latter scenario exists under the SINAPA performance evaluation procedures in Argentina and the New Administrative Statute regime in Chile. The former appears to exist in the SVS in Chile and the BCV in Venezuela. SSS. Compensation. BCV regularly obtains data on salaries for comparable private sector positions as input into its own salary-setting policies. Because the personnel evaluation system sorts employees according to their performance, managers in BCV report that annual salary increments reflect quality of employee work, instead of simply seniority. In short, BCV policies and practices on compensation — monetary and nonmonetary — assure that the bank is reasonably competitive with the private sector for qualified employees and create detectable competitive pressures for employees to perform well. TTT. Training. BCV invests heavily in training, according to BCV sources. Unfortunately, it was not possible to obtain data on precisely how large an investment the bank makes in human capital annually. UUU. Tenure protection. BCV employees were covered by the private sector labor law, rather than by the civil service statute until 1991, when BCV was made subject to the civil service law. The key difference appears to be in regard to firing of employees. Under the old regime, BCV could fire at will, although such firings could be contested. Because the difference between firing with cause and firing without cause doubles the legally required severance payments, BCV prefers to fire with cause. The New organic labor law clarified this distinction. Now BCV has a Manual on the Application of the Disciplinary Regime, prepared by its Human Resources Management Division (Central Bank of Venezuela 1992), of about fifty pages. This document tells how to prepare a case for firing an employee with cause. VVV. When pressed on whether the new labor law changed the incidence of firings at the BCV or the fraction of firings that are contested, BCV officials couldn't provide data, but maintained that few employees have been fired — before or after the change. Tenure protection at the BCV, which equalled that available in the domestic private sector, now equal tenure protection afforded other public sector employees. The official said the revised law, may have made it easier to fire employees, by clarifying conditions under which an employee can be fired with

Core Personnel Policies 27

cause. Any long-term effects of this change on the competitiveness of BCV's personnel system remain to be seen. WWW. BCV summary. BCV, like SVS in Chile, has personnel policies that provide substantially greater competitive pressures on all agents in its sphere than can be found within the more conventional civil service policies imposed by, for instance, the New Administrative Statute in Chile, the civil service law in Venezuela, or the SINAPA regime in Argentina. Recruitment is open for all positions, not simply entry level and top management. Promotions are competitive as well, not an automatic right conferred by seniority. The top three internal candidates are considered, but must compete against external candidates. Screening procedures appear to require input from numerous actors, reducing the risk of monopoly control of recruitment. The personnel evaluation system is complex, but appears to assure that employees are sorted by performance. Furthermore, rank orderings from these evaluations are a key input into promotions reviews, annual salary reviews, and assignment of training opportunities. Compensation is not on a par with the private sector. This differential is partly mitigated by substantial training opportunities in BCV and the opportunity to significantly enhance one's skills on the job. Finally, tenure protection was, until 1991, identical to that in the private sector. Recent changes in the organic labor law have driven a wedge between BCV and private sector tenure protection; and it remains to be seen how deleterious this change will be over the long run.

I. ________________________________________________________________ Conclusions and Recommendations A. Public sector human resource management policies and practices in many Latin American countries need significant improvements. Conversations with professionals and managers within core government Ministries in many LAC countries reveal deeply felt dissatisfaction and frustration both with the performance of public agencies and their employees and with the legal and institutional framework that appears to undermine individual efforts to manage public agencies and their employees effectively. ·Levels of public employment are widely believed to be excessive among all but the

managerial ranks. ·Tenure protection afforded career public employees is blamed both for undermining

employee performance incentives and for disabling efforts to downsize public agencies even as tightening resource constraints reduce the capacity of LAC governments to support so many employees.

·The absence of such tenure protection for most top managerial employees is often

believed to be crippling the managerial capacity of many public agencies. ·Powerful public sector labor unions are blamed for posing significant obstacles both to

downsizing efforts and to creating more flexible and effective incentives for employee performance.

·Low public sector salaries are uniformly viewed as a principal deterrent to the

recruitment and retention of highly qualified and motivated employees, especially among the professional and managerial ranks.

·Rigid salary-setting rules and procedures, coupled with extremely weak capacity to

monitor and enforce those rules, are widely suspected both of further undermining the public sector's capacity to compete with the private sector for highly qualified employees, and of causing public sector managers to find innumerable creative means of circumventing those constraints.

·Other important civil service policies -- e.g., the requirement of competitive hiring procedures (concursos) -- also appear to be widely disregarded -- a practice that both reflects the inability of those civil service systems to function as intended and undermines confidence in those systems.

·Such widespread circumventions of salary-setting and hiring rules and procedures,

including the practice of employing consultants to circumvent hiring and salary constraints, are also credited with undermining confidence in both the machinery of government and the civil service itself.

·Requirements that all organizational units within the public sector undertake annual

performance reviews of each of their employees also often appear to be either generally disregarded or executed in a way that fails to discriminate between high-performing and low-performing employees, thereby undermining any ability to link either training to identified skill deficiencies or promotions to performance.

·The inability of governments to provide timely, reliable, consistent, transparent and

complete information identifying actual employment and remuneration levels covering all types of public employees and all forms of remuneration also appears to be undermining the credibility of both those governments and their civil service systems, as well as their ability to manage those systems.

B. Finally, the institutional structure within which public sector managers must operate in LAC often is so full of red tape and overlapping responsibilities that it is extraordinarily difficult to take any significant actions, let alone effectively manage complex programs and large numbers of employees. Ex-ante audits of all expenditures prior to authorization create long delays in both managerial actions and compensation of vendors, thereby both undermining the ability of those managers to obtain services from the private sector and causing them to face prices for those services that have been increased to reflect the uncertainty regarding when and if payment will be received and the expected lags between service delivery and receipt of those payments when they are forthcoming. C. This litany of concerns about the structure and performance of civil service systems in many Latin American countries highlights the need to take significant steps to restructure and energize those systems. Accordingly, this study offers two distinct types of recommendations. First, the study offers recommendations on how these systems might be fundamentally restructured, dramatically altering their orientations from that of controlling inputs (personnel actions) to that of holding managers accountable for the performance of those inputs in the production of the agency's outputs. Since such fundamental change is likely to be difficult in the short run, the study also offers a variety of recommendations for improving human resource management capacities within the existing legal framework found in most LAC countries. These latter recommendations address salary restructuring as well as various other core personnel policies, such as recruitment, promotions, employee performance reviews, etc.

Conclusions and Recommendations

D. The basic thrust of all the recommendations is to increase the use of competitive pressures upon public managers in order to improve performance. Accordingly, a fundamentally restructured civil service system should replace input controls with accountability for productivity; that is, reward management for cost-effectively producing agreed-upon outputs and sanction management failing to do this -- as has been accomplished in New Zealand. This approach requires that managers be granted considerable autonomy over individual personnel decisions -- comparable to that enjoyed by managers of domestic private sector enterprises -- in exchange for accepting and being held responsible for the effects of those decisions upon the productivity of their units or agencies. E. Should such fundamental restructuring of the human resource management framework be infeasible in the short run, LAC governments should resort to a variety of devices for enhancing competitive pressures in all core personnel policy areas, including salary setting, recruitment, promotions, employee performance reviews, etc. By contrast, policies that create monopolies -- such as designating a single agency to provide all training or to handle recruitment -- undermine competitive pressures. Policies that restrict competition for public employment slots in other ways -- for example, prohibiting recruitment to position or restricting the recruitment pool to internal candidates -- reduce the competitive forces required to assure that the public sector has access to the best employees it can afford to hire. Guarantees of the right to career advancement and ironclad tenure guarantees dramatically undermine the competitive pressures that can be brought to bear on public employees to perform well. Employee evaluation procedures that create strong incentives for evaluators to assign virtually all employees the same, highest rating inexorably undermine efforts to reward employees on the basis of performance. Trivial investment in training sends a signal that the institution does not value skills and reduces the attractiveness of public sector employment -- makes it less competitive. Failure to hold agencies and their managers accountable for their employees' performance or their own resource allocation decisions including how well they target their training resources also undermines the system's ability to impose competitive pressures on managers. F. These anticompetitive consequences of civil service policies and practices can be avoided. The experience of agencies such as the Superintendencia de Valores y Seguros and the Superintendencia de Bancos e Instituciones Financieras in Chile and the Banco Central de Venezuela, demonstrate that public agencies can enhance competitive pressures on the civil service. This can be done, for example, by recruiting from external as well as internal sources, eliminating de facto or de jure promotion guarantees, eliminating monopoly control over particular elements of the human resource management system.