Government Operations Committee on May 31st, 2016

[The Chair, Conservative, Tom Lukiwski]

Colleagues, I'd like to call this meeting to order.

I'm not sure if our guests in Australia can hear me.

[Stein Helgeby, Deputy Secretary, Governance & APS Transformation, Australian Department of Finance, Australian Government]

Yes, we can.

[The Chair, Conservative, Tom Lukiwski]

Thank you very much. Let me introduce myself. My name is Tom Lukiwski. I'm the chair of this committee. It's the Standing Committee on Government Operations and Estimates.

We thank you very much for your participation. I understand, gentlemen, that it's about 8:20 a.m. Australian time. Is that correct?

[Stein Helgeby]

That is right.

[The Chair, Conservative, Tom Lukiwski]

I hope you have plenty of caffeine with you. I'm very pleased to see you with us, all alert and ready to take questions.

I understand, if my information is correct, Mr. Helgeby, that you have an opening statement. Would you please, sir, introduce the colleagues you have with you and then provide us with your opening statement? Then we'll go into a round of questioning. We have approximately one hour for our visitation.

Sir, the floor is yours.

[Stein Helgeby]

Cheers. Thank you very much.

My name is Stein Helgeby. I am deputy secretary of governance and transformation in the Department of Finance. I can elaborate on that role a little later if you're interested.

With me is Alan Greenslade, the first assistant secretary, whose responsibilities include the preparation of the government's financial statements and a whole range of other things as well. Also with me is Lembit Suur, who is the first assistant secretary in the department and is responsible for our reform program.

I do wish to make an opening statement, Chair, if you're ready for that.

[The Chair, Conservative, Tom Lukiwski]

Please do so.

[Stein Helgeby]

First of all, thank you for the opportunity to present to the committee today on the Public Governance, Performance and Accountability Act and related topics. We refer to the act as the “PGPA Act”, and I'll do that for ease of reference throughout.

The PGPA Act came into effect on July 1, 2014, but it represents the third significant wave of reform in our framework since the 1980s. I can elaborate more on that a bit later. The unique part of this wave is that the PGPA Act consolidates in a single piece of legislation all of the governance, performance, and accountability requirements that apply to the key areas of government activity, and it sets out a regulatory framework for national government and for the entities which comprise it.

In terms of the budget process, the PGPA Act requires “accountable authorities”—and accountable authorities are either boards or individuals, the chief executives—to prepare budget estimates in accordance with any direction issued by the finance secretary, who is the non-parliamentary head of the finance department. It doesn't, however, address specific requirements for the budget process or the parliamentary estimates process in any given year. These sorts of issues are covered in separate legislation by the Standing Orders of our Parliament, particularly of our Senate.

In the case of legislation, there's another piece of legislation that is important here, the Charter of Budget Honesty Act 1998, which in many ways is part of the second wave of broad reforms that I talked about earlier. Then, annually, we supplement that with budget process operational rules, which cabinet approves each year and which govern the operation of the budget in any given year.

The PGPA Act drew on earlier reform attempts, including two separate pieces of legislation that covered, on the one hand, departments of state and similar activities, and on the other hand, companies and other statutory bodies. It brought all those things together into a common framework.

We also took the opportunity—and government took the opportunity—to introduce new elements and requirements, not just to replicate what was already there. In particular, the act creates positive duties on all officials. An official in our context is now defined as anyone from the head of a department to an army reservist and they are covered by this framework, so there are positive duties on all officials and the heads of all public sector organizations in terms of how resources are managed.

The act has provisions that strengthen the focus on risk, on co-operation, and on performance and accountability. It's an act that goes to the questions of budgeting and resource management, but it goes to those things in the context of governance more broadly.

There are five key principles of the act. I'll briefly refer to those.

The first is that government should act and operate as a coherent whole. The second is that a uniform and consistent set of duties should apply to all resources handled by any Commonwealth entity. The third is that public sector performance goes beyond the financial to the non-financial. The fourth is that to improve performance you need to engage constructively with risk. The fifth is that the financial framework for which we are responsible, including the rules and supporting policy, should support the requirements of the government and the Parliament to discharge their responsibilities.

A key element we've been working on lately is the performance aspect of this framework. We introduced two new elements through that set of reforms: corporate plans, which are forward-looking documents for entities, and annual performance statements, which are intended to strengthen the focus on performance that entities provide. Together, they are meant to be read as the start point, and subsequently, in reporting against the annual performance statements, the end point of a full cycle.

A key element in our thinking is to see the management of the public sector as a cycle, from planning and resourcing to implementation and evaluation. Historically, we've been good at some of those things, but not at others. We're trying to use these reforms to get good at all of them.

We've also been working on a range of other things that are still to be worked through in terms of this third wave of reform. I'll briefly describe those.

We're working on our appropriations basis and how we provide resources to entities. We think we have a very complex appropriations framework, and we think there's, at the very least, a job to do to simplify and streamline appropriations. We're working on cash management—how cash is treated in our system—and in particular on ensuring that the legitimate interests of government in a whole-of-government approach to cash management are given force.

We're working on joining up, which is really about how entities and organizations in the public sector connect with each other. We find that there are no problems or issues in our policy areas these days that can reasonably and effectively be best managed within a silo. In fact, all of them require cross-entity, cross-program, and cross-jurisdiction co-operation, and our systems really haven't been designed to facilitate that.

We call our approach “differential regulation”, which is to say that if risk is fundamental to how we should think about government and how it works, then risk needs to be differentiated. Some aspects of public management are riskier than others. Some organizations have a different risk profile than others. Our regulations need to recognize that.

Very importantly, on the performance framework, as I've mentioned, given that we are a national government and have organizations spread across the country, we need to get better at providing information and guidance in a way that people can take advantage of, because we recognize that the success of any reform program is dependent on people's ability to work within the context that is provided.

I might leave it at that as the opening statement. I'm happy to go to questions.

[The Chair, Conservative, Tom Lukiwski]

Thank you very much, sir.

As you know, our study is on the budget and the estimates processes in an attempt to try to better align those processes. We will engage in a series of questions.

We have approximately 50 to 55 minutes left. The first round of questions will start at seven minutes. We'll go down to five minutes after that, and our first questioner will be from the government side.

Madam Ratansi, please. You have seven minutes.

[Yasmin Ratansi, Liberal, Don Valley East, ON]

Thank you for being awake, gentlemen, and for helping us out here. We are quite engaged in the study of matching the estimates to the budget process. We have spoken to our Auditor General and to our CPAs.

Here's what I would like to know. You did three rounds of consultation—or this is your third wave—and I'd like to know what your Charter of Budget Honesty Act is. That's number one.

Number two, what are the challenges you faced when you tried to match the estimates and the budget process?

Number three, I understand that you were on an accrual accounting basis, or that you moved to accrual accounting, and you're back to cash. If I am incorrect, correct me.

Thank you.

[Stein Helgeby]

Thank you.

There were a few questions there. Please remind me if I forget one of them.

[Yasmin Ratansi, Liberal, Don Valley East, ON]

I will.

[Stein Helgeby]

The Charter of Budget Honesty Act is a piece of legislation passed in the 1990s that sets out the expectations that Parliament has about what documents will be provided, who will produce them and on what basis they will be provided.

For example, they specify—and this is relevant to the fact that we're now in a “caretaker” period here—that 10 days after the issuing of the writs for an election, the secretaries of the Department of Treasury and the Department of Finance will produce an economic statement and a fiscal statement, and they specify how budgets will be produced, in a very high-level sense, and ex-post reporting. For example, it is specified that we will have an annual consolidated financial statement for the whole of government and also monthly financial statements. It's a piece of legislation that does not have any punitive measures to it, but it is a statement, in many ways, of Parliament's expectations in this area.

It was introduced as part of the same wave of reform that introduced accruals to our budgeting system. Around that time—I call that the second wave—we also revised the financial legislation. The financial legislation was changed, the Charter of Budget Honesty Act was put in place, and the accruals framework was put into place.

We have an accruals framework. We sometimes hear that we've moved from an accruals framework, and we struggle to recognize ourselves in that. We produce a full set of accrual financial statements for every document we produce. We have an operating statement, a balance sheet, and a cash flow statement. We have the notes that go with that, all produced on an accrual basis.

What people are sometimes talking about is the relationship between that accrual information and the appropriation framework. We did include, in the late 1990s, reforms in terms of appropriations on a full accrual basis to agencies. That's just the departmental funding, if you like; that's the bit that helps government to run. That's not programs. That included, for example, funding for depreciation, which is an accrual concept.

As we've gone through, our experience is that some of these elements haven't really met their full intent. The inclusion of depreciation in agency financing was a key area. We've decided to centralize that, effectively, and to manage it through a normal allocation process of government. That means people only get appropriated each year for the cash they require in order to meet their capital needs.

We still retain accrual appropriations as far as they relate to, for example, leave liabilities, which is also an accrual concept, but depreciation is not included in our system anymore. I think that is the main departure from the accrual appropriation framework.

I would still say that we run accrual appropriations.

[Lembit Suur, First Assistant Secretary, Governance and Public Management, Australian Government]

I might state in relation to the Charter of Budget Honesty Act that it includes provisions about accuracy of information published by the government in its budget documentation.

These aren't fiscal targets, but they're accuracy targets, if you like, for the information published by the executive, and there are variation tolerances in relation to the forward estimates, budget years, and so on. This is a feature that isn't typical in budget-related legislation internationally, but it nevertheless is a feature of ours.

[Yasmin Ratansi, Liberal, Don Valley East, ON]

My question, then, is in terms of the alignment between the estimates and the budgets. What challenges have you faced?

I was looking at your timing. In the timing you utilize, your fiscal year is July 1 to June 30. I looked at your process about cabinet submissions and the ministers' input, etc., and then there is an expenditure review committee. When you do your budget and your annual appropriations—one is in April, one is in May—are they both on an accrual basis? I know you told me that for the appropriation framework you do not now fund for depreciation on an accrual basis. Is this true?

[Stein Helgeby]

Yes. We do not fund depreciation on an accrual basis. We do fund the cash requirements in any given year through the appropriations system.

When you talk about “alignment”, I would use the language “integrated”. Our appropriations and our estimates are fully integrated, that is, we produce one set of documents, all of which get released at budget time, which for us is traditionally the start of May. We release a set of documents that covers the full forward estimates period—the four-year period—and the treasurer, in our case, introduces the annual appropriation bills, which cover the coming financial year.

The numbers in the appropriation bills are fully derived from the accrual statements and fully derived from the forward estimates system, so I would say that we are integrated, rather than aligned. Thirty years ago that wasn't the case, but it has been for some time here.

[The Chair, Conservative, Tom Lukiwski]

Thank you, sir.

Mr. McCauley, please, for seven minutes.

[Kelly McCauley, Conservative, Edmonton West, AB]

Gentlemen, thank you for joining us today. We appreciate it.

From our briefing notes that we've received, we understand from feedback on the Australian way that there were some issues about transparency with the accrual system, with perhaps ministers hoarding money, accruing it, and then spending it without proper oversight. Is that correct or accurate?

[Stein Helgeby]

Let's differentiate the two types of appropriations we run here: annual appropriations and standing appropriations. Standing appropriations are the things that cover, for example, personal benefits, those with the programs. They do not go through the annual budget cycle, but they are recorded in the annual—

[Kelly McCauley, Conservative, Edmonton West, AB]

Some of them....

[Stein Helgeby]

Yes. In terms of the annual appropriations, which is how we fund departments, the issue I referred to before about depreciation was a case where we found that agencies were appropriated for depreciation, yet when it came to the point where people had to replace the asset which the depreciation was intended to replace, the money had been used in other ways. That was one of the prompts to removing depreciation from the accrual appropriation framework.

[Lembit Suur]

To give some examples of the other ways in which the money was used, the accumulated cash reserves from depreciation funding were used to do things such as funding pay increases. They were used for operating expenses. They were used to upgrade fit-outs out of cycle.

Having a lot of cash sitting out with individual agencies wasn't an effective form of cash management. One way in which we have reasserted some degree of central control over the total pool of cash held by the national government is by funding capital expenses on an as-needed basis.

[Stein Helgeby]

That change was made four or five years ago now, I think.

[Lembit Suur]

Yes.

[Stein Helgeby]

It is the most significant change we've made to the accrual appropriation framework. Since then, capital needs have been met through the normal budget and appropriation process. People still get the cash, but they have to make the case to government.