Thursday, 22 September 2016

Increasing evidence that privatisation and outsourcing do not work

For a generation now the assumption has been that outsourcing and privatisation are appropriate and efficient ways of providing public services.

These have always contested narratives, but increasingly this evidence is clear that market-oriented ‘reforms’ in the provision of at least health, education and public safety services have failed.

Not only do we now have the evidence, but the political will is increasingly for direct public sector provision of essential services.  That is why people vote for Bernie Sanders in the US, Jeremy Corbyn in Britain (again!), Syriza in Greece, Podemos in Spain, agains the ANC in South Africa etc etc.

For a useful review of the recent evidence see the following article:

The author, John Quiggin is an Australian laureate fellow in economics at the University of Queensland. He is prominent both as a research economist and as a commentator on Australian economic policy. He is a fellow of the Econometric Society, the Academy of the Social Sciences in Australia and many other learned societies and institutions.

The 2008 financial crisis laid bare many of the assumptions behind market liberalism – the theory that markets always know best, regardless of the problem. For decades, its advocates had dominated economics, helping to create an unthinking faith in markets, in which speculative investments were seen as fundamentally safe. The crisis seemed to kill off such ideas, but they still live on in the minds of many – members of the public, commentators, politicians, economists, and even those charged with cleaning up the mess. In his book, Zombie Economics, John Quiggin explains how dead ideas still walk among us – and why we must find a way to kill them once and for all if we are to avoid an even bigger crisis in the future.

Across much of the Global South we have another reason for avoiding outsourcing, contracting, private sector provision etc etc - the challenge of corruption.  Contracting is a major risk area for fraud and corruption - so if we have direct public sector provision of public services (including capital contracts, building etc) we avoid the risk - easy!!

Saturday, 27 August 2016

Cash Basis IPSAS

I have a comment piece on the IMF Public Financial Management blog:

It would be great to have some comments and thoughts about this piece - do we know what good practice looks like?  Don't we need to identify this before issuing a revised Cash Basis IPSAS?

No government in the world managed to implement the Cash Basis IPSAS after over 13 years!  This is because not a single government in the world provides fully consolidated financial statements.

After this experience the IPSAS Board needs to support research to identify good practices from around the world.  Their standards should encourage incremental improvements with proven good practice - not dictating impractical approaches that do not work.

Friday, 29 July 2016

Amendments to the Cash Basis IPSAS – some thoughts

Andy Wynne[1]

The IPSAS Board has issued an exposure draft to revise its Cash Basis IPSAS and comments are being requested by the end of this month:

Below I have outlined some thoughts on how the Cash Basis IPSAS could be further refined.


We welcome the proposed amendments to the Cash Basis IPSAS. We believe that the proposed IPSAS should be relatively simple for almost any government to implement in the relatively near future.  

However, we are concerned by the additional emphasis that is provided promoting further the adoption of the accrual basis of accounting for the public sector. Despite a sustained campaign by the accounting profession over the last couple of decades, the overwhelming majority of governments in the world are still adopting the cash basis for their annual financial statements.

The proposed Cash Basis IPSAS includes very limited requirements which are currently exceeded by most governments.  As a result, it does not require ‘good practice’ merely ‘minimal practice’.  For example, it does not even require the government’s budget to be made public nor stipulate any timeframe for the issues of the audited financial statements.

Other items of existing good practice should be included, for example:
     a commentary to explain the main aspects of the financial statements
     the overall level of government debt reconciled to the main financial statement
     summary financial statements compared to the annual budget for the last three years
     the salaries and benefits of senior politicians and public officials to be disclosed in the notes to the financial statements
     details of losses, fruitless or wasteful expenditure
     proceeds of privatisation and details of any outstanding payments
     outstanding loans, advances and imprests and amounts of any written off during the year.

We do not consider that part 2 should be retained as it undermines the requirements for part 1 and this approach is not used for the other accrual basis IPSASs.  In addition, it includes elements that have proved not to be practical, for example, full consolidation of controlled entities and third party payments.

More detailed considerations

The Cash Basis IPSAS is now being fundamentally revised as not a single government in the world has been able to comply with its core requirements - over 13 years after it was first issued.

We need to try and ensure that the Cash Basis IPSAS does represent tried and tested good practice.  So, if it has been proved that it is important for governments to keep track of their financial liabilities, then why does the IPSAS not require a financial balance sheet which almost all English speaking governments have been providing for the best part of 100 years or more?

If accrual accounting is so good, why have so few governments adopted this approach?  Why has it only been adopted by a minority of the central governments of OECD countries or the members of the EU?  Why is there no objective evidence that it actually delivers the presumed benefits – can anyone provide one objective post-implementation study that shows that the significant costs of introducing accrual accounting actually delivers significant benefits?  Of course the accounting profession continues to push for this reform – it provides jobs for their members and fees for the big four firms (and others).  But should this be a priority for most governments in these times of austerity?

There is almost no objective evidence that the assumed benefits of accrual accounting have actually been achieved by the few governments which have adopted to this approach (despite the significant costs involved), see:

The IPSAS Board is firmly wedded to accrual accounting, but the language in the Cash Basis IPSAS could be moderated to recognise that, at the very least, most governments will stay on the cash basis for the foreseeable future.

The British Government claims to have the most comprehensive consolidation, but still omits many significant entities like the nationalised banks and further education institutions.  Again the benefits of this exercise are not clear – it provides an alternative view of the size of the government debt (over 12 months after the year end) - compared to the standard statistical figure which is provided within a month of each month end!  Whole of Government Accounts have now been produced by the British Government for six years.  The audited accounts are still only issued just over a year after the year end and still include significant qualifications, see:

However, the British Government does much better than the US Government!  They have been trying to produce consolidated accrual based financial statements for two decades, but the GAO is still unable to provide an audit opinion on these financial statements, see:

Perhaps the reason that the proposed Cash Basis IPSAS does not require the audited financial statements to be provided within nine months is that it still takes the British government and the US government almost 14 months!  This does demonstrate the cost and complexity of accrual based accounting and consolidation in the public sector.  Almost all African governments now provide audited financial statements within nine months of the year end.

Providing timely simple financial statements that most literate citizens can understand, provides much better public accountability than complex financial statements with an qualified audit report which are not issued promptly.

Accrual accounting may provide more information than cash accounting. But is this useful?  Surely the IPSAS should be defining the key information that needs to be provided so that governments can find the most efficient method of providing their citizens with this information.  

Many governments already provide more information than is required by the proposed Cash Basis IPSAS.  So this standard does not represent existing good practice – we need more research to determine what this is.  As my limited research demonstrated (see below), many governments in Africa do consistently provided information which is more comprehensive than the Cash Basis IPSAS – and these disclosures are not even necessarily included in Part 2 of the proposed IPSAS.

I think that Part 2 of the Cash Basis IPSAS should be dropped as its requirements are not actual good practice (no governments actually comply with its requirements on consolidation nor third party payments) and it does not include good practices which are adopted by many governments – see for example:

Why do we need a two tier standard for the Cash Basis?  This approach is not adopted in any other of the IPSAS.  If this approach is to be adopted then more research is required to identify what may be considered to be aspirational good practice – and so indicate to the relevant governments a direction for them to take to further improve financial accountability.

Many governments would benefit from a revised Cash Basis IPSAS which actually documented good practice in terms of cost effective public financial accountability. 

Unfortunately, the suggested draft from the IPSAS Board does not yet provide this.

[1] Freelance public finance management consultant, most recently with the Office of the Auditor General for the Federation, Nigeria