New Public Managements current issues and future prospects

Tom Groot and Tjerk Budding*

*) Tom Groot is Professor of Management Accounting and Tjerk Budding is Assistant Professor at the Faculty of Economics and Business Administration, Vrije University Amsterdam. They are grateful to the editor of FAM, Irvine Lapsley, who initiated and supported this special issue, and to the anonymous referees for reviewing the papers in this edition.

Running title: NPMs current issues and future prospects Keywords: New Public Management, management reforms This special issue of FAM is about how New Public Management (NPM) ideas will develop in the future. The articles included in this special issue were selected from papers presented at the fifth NPM Seminar at Vrije University Amsterdam, 14 September 2005. The 2005 NPM seminars objective was to discuss recent experiences with NPM reforms and to look ahead to the possible future of New Public Management. Key note speakers addressed specific NPM reforms in different countries. A selection of these presentations is included in this special issue. Each speaker proposed a number of statements about NPM reforms current contributions and prospects for the future to the audience. The seminars participants, most of whom are active as manager, controller or consultant in government entities and non-profit organisations, had the opportunity to respond using a remote balloting system. Each presenter introduced his topic and presented specific questions or assertions to the audience. The presentations were done in such a way in order to minimize framing or influencing the audiences responses. This paper presents and analyses a selection of the most intriguing results. The (mainly Dutch) audiences responses enable us to draw a picture of the current appreciation of NPM and of the expectations for its future. However, we cannot state that the results obtained during the seminar are representative for the general opinion of Dutch practitioners about NPM. The audience suffers from a self-selection bias, as most of the participants occupy responsible positions in practice and show considerable interest in academic insights. This paper is structured as follows. It starts describing the most salient characteristics of New Public Management. The next section discusses the general appreciation of NPM reforms. The following sections discuss two dominant themes in NPM: planning and control, and accrual accounting. This paper concludes discussing NPMs current position and possible developments for the future. New Public Management The first New Public Management (NPM) developments began in the late 1970s and early 1980s under Prime Minister Margaret Thatcher in the United Kingdom (the Financial Management and Next Steps initiatives) and in some municipal governments in the U.S. (e.g., Sunnyvale in California), suffering from economic recession and tax revolts (Gruening, 2001). The governments of New Zealand and Australia soon followed, and their success puts the NPM reforms on the agendas of other countries as well. This makes NPM primarily a movement propelled by practitioners seeking to improve government and public administration practices. The OECD summarizes these attempts as the aim to make the public sector lean and more competitive while, at the same time, trying to make public administration more responsive to citizens needs by offering value for money, choice flexibility, and transparency (OECD, 1994).

Electronic copy available at: http://ssrn.com/abstract=997798

2 New Public Management is not the first reform movement in public management. In the beginning of the 20th century, the Progressive movement in the US aimed at reforming politics and administration by advocating a more interventionist state, the separation of politics and administration, and a more competent management. Competent management was then seen as tenured and neutral career civil servants, working in specialized units under clearly delineated lines of authority, using sound financial management techniques like line-item budgets and striving for efficiency and accountability (Schachter, 1989; Eisenach, 1994). Theoretically, NPM has been influenced by an eclectic variety of ideas, coming from different disciplines, like public-choice theory, management theory, classical public administration, neoclassical public administration, policy analysis, principal-agent theory, propertyrights theory, the neo-Austrian school, and transaction-cost economics (Gruening, 2001). These very different theoretical orientations could be grouped into three broad categories: (neo-)classical public administration and public management, management sciences and new institutional economics. The first groups main orientation is the orderly organisation of the state, applying scientific principles of government organisation and collective decision making (Waldo, 1965; Lee, 1995). We refer to the state here as the governmental system as a whole, including state entities as well as publicly funded nonprofit organisations. The second stream (management sciences) advocates the introduction in the public domain of private sector management ideas and techniques. The third orientation (new institutional economics) views governmental decision makers as self-interested subjects, working in an environment in which information asymmetry, bounded rationality and opportunism leads to transaction costs and agency costs. Each of these three orientations introduces specific themes into the NPM agenda. Different countries face different problems and follow different ideas in responding to them (a non-exhaustive list of these themes is depicted in Table 1). For instance, New-Zealand draws on managerial ideas about controllability and accountability, the use of fixed term labour contracts for senior management positions, and applies new institutional economic ideas in defining contractual relationships between different actors (Schick, 1996; Pallot, 1998; Scott, 2001). The Australian NPM reforms are partly based on a reassessment of the Australian public services values and the relationships between government and the public (Australian Public Service Commission, 2003; Australian Task Force on Management Improvement, 1993). Also, the way in which NPM reforms are implemented differs greatly among countries (Hood, 1991 and 1995). Some introduced NPM reforms in a more centralist fashion (NewZealand as an example), whereas in other countries these were mostly developed at the decentralized or municipal level (like Sweden) (Olson et al., 1998).

Electronic copy available at: http://ssrn.com/abstract=997798

3 Table 1: Theoretical orientations and some major NPM reform themes Subjects Main themes Government and the economy Lateral relations between state entities Hierarchical relations in the state Management practices in state entities Public administration & public management Orderly organisation and decision making The active state Division of work based on specialization, homogeneity and span of control Separation of policy making and administration Optimization based on rational decision models Management sciences Responsibility and accountability --Dividing state functions into self-contained and controllable tasks Decentralisation of decision making to autonomous and accountable independent entities Business-like management styles New institutional economics Self-interested behaviour and efficient contracting Market-based coordination (vouchers, privatisation, contracting out) Open competition for governmental projects, buying arrangements Output-based, incentivised contractual arrangements Labour contracts on different terms (less lifetime employment)

General appreciation of NPM reforms At the seminar we asked a group of 105 practitioners actively involved in Dutch and Belgium government and nonprofit organisations about their appreciation of recent NPM reforms and their thoughts about future developments of NPM. The group cannot be regarded as representative for all nonprofit professionals and managers, because of their attendance at the NPM seminar. Most of our respondents are actively engaged in NPM reforms or are interested in learning more about it. Most of the participants (around 75%) are between the age of 31 and 50, and 88% have a university or postgraduate training. Most respondents are professionals working in a staff position (46%) or in a line position (18%). A minority group of 36% are managers, this group is equally divided between mangers working in a staff and in a line position. The respondents represent a large spectrum of government and independent nonprofit organisations. We classify the respondents into five different groups: (1) Central government, including governmental agencies (n=28), (2) Local government (n=23), (3) Education (n=19), (4) Other nonprofit, including health care institutions and police organisations among others (n=15), and (5) Profit organisations, mostly commercial accountancy and advisory organisations providing services to governmental and nonprofit institutions (n=20). Positions are not equally distributed across groups: most respondents from Education work as professional in line positions, whereas most profit respondents work as manager in a line position. In most countries, NPM reforms are supported by decentralizing executive tasks from the ministries to (semi-)independent entities, quangos or agencies. Examples of decentralized tasks are (parts of) regulation, management, service provision and policy advice (Pollitt and Bouckaert, 2000; van Thiel, 2004). Following the NPM themes identified by the OECD, we have put forward the following three main themes for an overall appreciation of NPM reforms (a) decentralization, (b) improved competitiveness by increased efficiency and effectiveness, and (c) accountability for performance (see Table 2).

4 Only a minority believes that the current decentralization will continue along its current NPM-orientation into the future, a comparable small minority believes the current trend in decentralization and atomization will revert back to a strong unitary state. Around 50% of the respondents perceive the current NPM reforms only as a temporary condition, which is expected to develop into new multistructured relations between the government and agencies, well beyond the NPM model. Christensen, Lie and Lgreid will in their contribution to this edition elaborate more on this theme. We could not find differences in responses between sectors or positions in our sample. Although improved effectiveness and efficiency are normally not considered negatively, some authors fear that an overriding concern with efficiency may be at the expense of longer term capabilities of governmental organisations (Newberry and Pallot, 2005). The permanent downward pressures on budget baselines and the repayment of so-called surpluses by nonprofit entities may in the long run lead to resource erosion (Newberry, 2002; Newberry and Pallot, 2005). The special emphasis on outputs may divert decision makers attention away from the final impact their conduct has on society (Paulsson, 2006). Our audience is sceptical about the role of NPM in performance improvements their organisations reached in recent years. Slightly more than one-third recognised that improved performance may have been related to NPM measures, but only to a certain extent. Three out of ten respondents report good performance that has been realized by other means than NPM. Interestingly, significantly more managers in staff positions recognised that NPM-contributions have improved performance of their units than managers in line positions (Kruskal Wallis test, p<0.039, not reported in Table 2). These results are consistent with Ter Bogts findings (see his article in this issue) that (Dutch) municipal employees and politicians perceive the impact of the various management changes on the effectiveness of their organizations to be slightly positive. Transparency and accountability may be seen as part of the NPM-agenda, most of the respondents argue that they are necessary for generating public support. Only a small minority of 13% views transparency negatively, posing the risk of being exposed to more questions and discontent by the public. These results are similar for respondents from different organisations or in different positions.

5 Table 2: General appreciation of NPM reforms Topics and statements 1 How do you appreciate the regulatory reforms in your organisation? A As a linear process towards dominance of the NPM orthodoxy B As a cyclical process rediscovering the strong centralized state C As a dialectical process towards a multistructured state beyond NPM 2 My organisation is managed consciously through NPM: it is well managed, performs well and its efficiency and effectiveness have increased in recent years A Yes, I fully agree B Yes, to some extent C Yes, we perform well, but not because of NPM D No, I do not agree 3 It is essential that my organisation increases its transparency and accountability by improving benchmarking and performance information A Yes, because central government will ask for it B Yes, because we want to increase citizens support for our entity C No, more information will only evoke more questions and discontent D No, the call for transparency and accountability will soon fade away Count 23% 27% 50% 72 0% 38% 29% 33% 77 20% 65% 13% 2% n 97

Planning and Control A good number of NPM reforms relate to the improvement of Planning and Control (P&C) of governmental and nonprofit entities. In most countries, P&C reforms started by expanding the scope or purpose of budgeting, linking it with other processes like planning, operational management, and performance measurement and assessment (Pollitt and Bouckaert, 2000). Two main external pressures were driving this process: the need to restrain the growth of public expenditure and the call for performance improvement within the public sector (Pollitt and Bouckaert, 2000). The resulting renewed P&C systems generally aim for a more strategic focus in the planning phase, concentrating on political priorities and strategic programs. More operational decisions are delegated to lower-level managers who generally have more autonomy to make operational decisions, acting entrepreneurially within their given possibilities. The control system tries to incentivise the entrepreneurial output-oriented attitude by measuring and rewarding results (Aucoin, 1990; Osborne and Gaebler, 1992; Pollitt, 1993). In reality the implementation of improved P&C systems has proven to be difficult and application of NPM-type P&C systems may lead to none or unanticipated results (Pollitt, 1993, Brignall and Modell, 2000; Pollitt, 2000; Newberry, 2002; Humphrey et al., 2005). Virtually all Dutch nonprofit and governmental sectors have experienced large and small attempts to reform P&C systems. Central and local government entities are expected to plan, execute and report their strategic plans according to a common structure, that focuses on three W-questions: what do we want to achieve, what actions do we need to perform, and what (moreover: how many) resources do we need (Burg et al, 1999; van der Burg et al., 1999; van Helden and ter Bogt, 2001; Groot and Budding, 2004). Independent nonprofit organisations like educational institutions and hospitals are increasingly controlled on the outputs they produce (Groot, 1999; Schaepkens, 2002). We asked our respondents to reflect on the impact recent changes in P&C may have had on the functioning and the performance of their organisations (refer to Table 3). No one recognized improvement in P&C as the most important contribution to improved management. Most respondents consider P&C as a hygiene condition: without a proper functioning of P&C it seems impossible to properly manage the entity. This corresponds with the OECDs view that In todays increasingly complex society, performance and control are essential for

6 successful government (OECD, 2005). However, the respondents from nonprofit-related profit organisations (providing advisory and auditing services) are significantly more critical: they perceive the contribution of P&C information to a better management of the organisation to be only minor (p<0.085). This finding is remarkable because this group plays a significant role in facilitating projects to enhance the P&C information. From previous research we know that the implementation of NPM reforms varies largely among nations and sectors (e.g., Hood, 1995; Olson et al., 1998) and that modernisation is context dependent (OECD, 2005, p. 186). The applicability of management reforms depends on the organizational setting, e.g. the institutional culture and the quality of other managerial factors. As Lapsley sets out later in this issue, an important constraint for the implementation of NPM reforms may be the existing professional boundaries. In our sample, the respondents as a group are undecided about whether NPM activities will penetrate the activities and actions of organized professional groups. Around 40% thinks NPM will successfully influence professional groups activities, and about the same number of respondents dont think this will happen. A large majority of respondents in central government entities and profit organizations disagrees, whereas a large majority in local government and educational institutions agrees with the statement (mean differences are not statistically significant). Another constraint on the implementation of NPM reforms may be a tension arising between the NPM-advocacy of entrepreneurialism and accountability (refer to Lapsley in this issue). Most respondents see such a tension, especially by respondents from central and local government organisations (although the differences are not statistically significant). A similar result is obtained for the statement that continuous use of financial incentives and rewards will lead to dysfunctional consequences for public service employees for the foreseeable future. This looks like a general concern, because we could not find differences between sectors or between respondents positions.

Table 3: NPM's contribution to improved Planning and Control Topic and statements Count 1 Changes in planning and control information have contributed in only a minor way to the improvement in the management of my organisation A Yes, I fully agree 12% B Yes, but proper P&C is a basic condition for good management 50% C No, P&C and other activities have all made relevant contributions 38% D No, P&C have made the most important contributions 0% Statements Meana) 2 In my organisation, NPM will not penetrate the activities and actions of well organised professional groups 3.04 3 In my organisation, there will be continuing advocacy of entrepreneurial behaviour - this will clash with the audit society and create tensions in NPM 3.52 4 In my organisation, continuous use of financial incentives and rewards will result in dysfunctional consequences for public service employees for the foreseeable future 3.58
a): response categories: (1)=fully disagree; (2)=disagree; (3)=neutral; (4)=agree; (5)=fully agree.

n 68

n 77 82 83

Accrual accounting An important aspect of NPM is the idea to replace traditional cash accounting by accrual accounting principles for financial reporting purposes. Accrual accounting is a basis of account-

7 ing under which transactions and other events are recognized when they occur, and not only when cash or its equivalent is received or paid. The elements recognized under accrual accounting are assets, liabilities, net assets/equity, revenue and expenses (IFAC, 2003, p. 679). Generally, a distinction is made between full and modified accrual accounting systems, depending on the extent to which the accrual accounting principles are implemented. In that sense, many different types of accrual accounting systems can be distinguished (Bryant et al., 2000). Most countries have introduced at least some elements of accrual accounting by now and remaining examples of pure cash based reporting have become scarce (OECD, 1994; Carlin, 2005). In the recent literature, two main reasons surface for adopting accrual accounting. The first reason is that accrual accounting enhances internal and external transparency, increasing the accountability of state and nonprofit entities. To the degree in which governmental accrual accounting reforms incorporate similar financial accounting standards as in the commercial sector, introducing accrual accounting may also facilitate comparison between the cost of public provision with the costs of services purchased directly from non-governmental sources (IFAC, 2003; Newberry and Pallot, 2005). The second main reason is that accrual accounting helps identifying the full cost of activities, enabling improved decision making in resource allocation, coordination and control (Webster and Kruglanski, 1994; Wong, 1998; Likierman, 2000; Bac, 2003). It is generally expected that better decision making will in turn enhance performance. These claims, however, are heavily debated. Some authors claim that accrual accounting methods for the commercial sector cannot be imported to the public sector without modification. They assert that accrual accounting is not sector neutral and point at problems of accounting for heritage and similar assets, like monuments, reserves, parks, roads and other social, cultural, and scientific assets. Perhaps they may better be thought of as liabilities, rather than assets, because of the stream of cash outflows they require to be maintained and serviced across time (Mautz, 1981). This may be the reason why accrual accounting is introduced differently in various countries. In Australia, these differences have led to more use of current costs, asset re-evaluations and higher depreciation expenses than commercial listed companies (Carlin, 2006). In New Zealand, the capital charge was biased high for governmental entities compared to private sector organisations. This may put governmental service entities at a comparable disadvantage, making privatisation initiatives more attractive (Newberry and Pallot, 2005). Accrual accounting information for management accounting and control may also need to take into account the different governmental sector requirements and circumstances. In Swedish agencies for instance, the use of accrual accounting information is dependent on type of entity and purpose of use. In particular, large agencies, getting more revenues from fees and facing financial difficulties use accrual accounting information more intensively. Accrual accounting information is more used to determine product and service cost information than for general-purpose financial statements. Generally speaking, accrual accounting information is less used for budgetary decisions and policy making, but more for performance management and control (Paulsson, 2006). This division is underlined by the impression that political decision makers may have difficulties understanding accrual accounting information. They are therefore restricted in their ability to engage in deliberations, which undermines democratic control and accountability (Ezzamel et al., 2005). In the Netherlands, agencies apply full accrual financial reporting, whereas local government bodies use a modified accrual system and central governmental entities a cash basis system with supplementary accrual data (Hoogendoorn et al., 2003; Bac and Budding, 2004; ter Bogt & van Helden, 2005; Carlin, 2005). However, for some time central government has been considering the implementation of accrual accounting and is currently experimenting with this system. These differences in the level of implementation are reflected in the responses of our respondents (see Table 4). The first statement addresses both advantages of accrual accounting (transparency and performance control) and predicts that all government

8 bodies will use accrual accounting in the year 2010. On average, our respondents did not support this proposition (a mean of 2.89 on a 5-points scale). Respondents from local governmental entities and independent nonprofit organisations supported this assertion significantly more than respondents from central government and educational institutions (p<0.03). These groups already work with some accrual accounting elements. Considerably more support could be found for the assertion that decision making in government will still be based on cash accounting, even if accrual accounting is implemented. This indicates that most respondents value cash based accounting in its own right and have already identified decision areas that will not be very much affected by the implementation of accrual accounting information. This finding is supported by Christiaens and Rommel in this issue of FAM where they show that the traditional cameralistic accounting system is still dominant in Flemish local authorities and that hardly any attention is paid to accrual accounting statements. Our third statement tries to analyse to what extent the respondents expect accrual accounting information to be used by political decision makers. Most respondents support the idea that current financial accounting information requires adaptation, converting it into new cameralistic accounting, in order to be used by political decision makers. The new cameralistic accounting system is based on cash accounting principles, supplemented by additional accrual information, mostly related to current assets and liabilities (refer also to the Christiaens and Rommel contribution to this edition). Especially local and central government officials support this claim (although the differences were not statistically significant). A reason why this may be true, is that perhaps accrual accounting may only be fully useful in businesslike parts of the governmental sector (cf. Christiaens and Rommel in this issue). Most of our respondents agree with this position. Officials from governmental and educational organisations supported this assertion more than respondents from other sectors, although these differences were not statistically significant. In sum, not much enthusiasm was found in favour of accrual accounting. Respondents from central governmental and educational entities were most critical. One of the reasons for this criticism seems to be the reduced possibilities for accrual accounting information to be used productively by political decision makers. Most respondents see the need to translate accrual accounting information into more cash-based information that is more familiar to politicians.

9 Table 4: Accrual Accounting Statements and Group responses 1 The increasing demand from society for an effective and efficient service provision by the government, combined with the so-called development of the emancipated citizen, will lead to a rapid implementation of improved information provision, which is supported by accrual accounting. Therefore, in the year 2010 all government bodies in my country will be using accrual accounting a Central government b Local government c Education d Nonprofit organisations e Profit 2 Decision making in government will still be based on cash accounting, even if accrual accounting is implemented a Central government b Local government c Education d Nonprofit organisations e Profit 3 There will be the need for political adaptation (e.g. new cameralistic accounting) or use of financial statements will further decrease 4 Accrual accounting will only survive in business-like parts of government Meana) n

2.44 3.22 2.78 3.33 2.95 3.64 3.14 3.89 3.86 3.59 3.77 3.40

27 23 18 12 19 28 21 19 14 17 90 90

a): response categories: (1)=fully disagree; (2)=disagree; (3)=neutral; (4)=agree; (5)=fully agree.

NPMs current position and prospects for the future Our audiences general appreciation of NPM reforms to date convey that much has been done in rearranging organisational relations and improving accountability. Most respondents expect structural arrangements between public sector entities to become even more complex and multistructured in the near future. This opinion resembles the OECDs position that governments must keep adjusting their structure to remain relevant (OECD, 2005, p. 205). NPM reforms have to a certain extent contributed to improved efficiency and effectiveness, although our respondents opinions appear to be divided about the question to what extent improved P&C systems directly impact on the work and performance of professionals. Some dilemmas could be identified, such as between entrepreneurialism and accountability and between the use of incentives and dysfunctional behaviour. Most respondents do not consider accrual accounting the standard for future financial reporting, although respondents from local government and independent nonprofit organisations are much more supportive of accrual accounting and these groups already have some experience with this system. A basic problem for accrual accounting seems to be its limited potential to support political decision making. We tried to find associations between opinions across the three themes in order to identify coherent sets of ideas. We found remarkably few associations across themes, except for a significant positive relation between the opinion that NPM will not penetrate the activities and actions of well organised professional groups (see Table 3) and the idea that decision making in government will still be based on cash accounting, even if accrual accounting is implemented (Table 4). Our respondents formed a non-representative group of Dutch public sector managers, controllers and consultants. Their opinions may not be shared by other managers in public sector entities in the Netherlands or elsewhere. However, our respondents opinions present

10 an interesting image of the current state of NPM reforms. Many and major changes have been implemented, new topics are emerging from recent NPM reforms. The recent NPM reforms have certainly changed the way the public sector operates and have become a permanent characteristic of public sector management. However, it still remains unclear how and to what extent specific (clusters of) NPM reforms actually changed public sector decision making, activities and performance. Specific issues of interest are the introduction of accrual accounting and reforms in Planning and Control systems. As NPM reforms progress and possibly convert into new public management approaches, researchers will continuously be challenged to provide insightful analyses of the relationship between these reforms, decision making, and public sector performance. References Aucoin, P. (1990), 'Administrative Reform in Public Management: Paradigms, Principles, Paradoxes and Pendulums', Governance, pp. 115-137. Australian Public Service Commission (2003), The Australian Experience of Public Sector Reform (No. Occasional Paper 2) (Canberra, Australia: Australian Public Service Commission). Australian Task Force on Management Improvement (1993), The Australian Public Service reformed: an evaluation of a decade of management reform (Canberra: Australian Governmental Public Service). Bac, A. (2003), 'The Netherlands', in K. Lder and R. Jones (Eds.), 'Reforming governmental accounting and budgeting in Europe' (Frankfurt am Main, Fachverlag Moderne Wirtschaft). Bac, A.D. and G.-Tj. Budding (2004), 'De gemeentelijke en de provinciale overheid', in M.N. Hoogendoorn, J. Klaassen and F. Krens (eds.), Externe Verslaggeving in theorie en praktijk ('s Gravenhage, Reed Business Information), pp. 1690-1714. Bogt, H. J. ter & G.J. van Helden (2005), 'A Reflection on Accounting Reforms in Dutch Government', in J. Guthrie, C. Humphrey, O. Olson & L. Jones (Eds.), International Public Financial Management Reform: Progress, Contractions and Challenges (USA: InformationAge Press). Bouckaert, G. and W. van Reeth (1998), 'Budget modelling for efficiency and effectiveness: the case of the Flemish Government', in G. de Graan and F. Volmer (eds.), Performance budgeting: a perspective on modelling and strategic planning (Delft, Eburon), pp. 43-53. Brignall, S. and S. Modell (2000), 'An institutional perspective on performance measurement and management in the 'new public sector'. Management Accounting Research, Vol. 11, No. 3, pp. 281-306. Bryant, L., D. Jones, and S.K. Widener (2000), The Balanced Scorecard: A Cross-sectional Investigation of Lead/Lag Relations, Paper presented at the AAA Annual Conference (13-16 August, Philadelphia). Burg, C. van der, H.W.O.L.M. Korte and R.P. van Oosteroom (1999), 'Van beleidsbegroting tot beleidsverantwoording', Openbare Uitgaven, Vol. 31, No. 5, pp. 226-233. Carlin, T.M. (2005), 'Debating the impact of accrual accounting and reporting in the public sector', Financial Accountability and Management, Vol. 21, No. 3, pp. 309-336. Carlin, T.M. (2006), 'Victoria's accrual output based budgeting system - delivering as promised? Some empirical evidence', Financial Accountability and Management, Vol. 22, No. 1, pp. 1-19. Eisenach, E.E.J. (1994), The lost promise of progressivism (Lawrence, University Press of Kansas).

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