Bridging Policy and Finance: Integrating Financial Consideration into the Policy Life-Cycle

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Bridging Policy and FinanceIntegrating
Financial Consideration into the Policy Life-Cycle

• Murray Lindo
• Director, Financial Management Control Policy
• Office of the Provincial Controller
• Ministry of Finance

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1. Purpose

• To understanding the key strategic challenges,
  facing the government is pivotal to designing
  policy and achieving program value-for-money.
• Describe five key financial lenses that can
  enable you to identify, assess and mitigate the
  financial risks and establish risk-based
  financial measures.
• Provide a framework to better integrate financial
  considerations and measures, across the policy
  life-cycle from design, implementation,
  maintenance and evaluation.

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2. Policy and Financial Management Definitions

• What is Policy?
• Policy is the translation of governments
  political priorities and principles into
  programmes and courses of action to deliver
  desired outcomes.
• What is Financial Management?
• Financial management is the process by which
  financial aspects of public sector organizations
  are directed and controlled in order to achieve
  the organization's goals.

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3. Strategic Financial/Policy Challenges

• Economic managing program expenditure and
  evaluating performance/alternatives during a
  global economic recession that has constrained
  revenues.
• Stewardship of the Long-term balancing immediate
  program funding over infrastructure investments,
  while understanding the long-term financial
  legacy of current policy/program decisions.
• Public Expectations access to information and
  heighten public expectations will drive greater
  transparency and the need to demonstrate
  effectiveness, efficiency and value-for-money.
• Core Programs demographics changes will impact
  the sustainability of large, open programs in
  the health, social services and education
  sectors.
• Broader Public Sector (BPS) changing
  governments role as a social-investor
  overseeing BPS management and leveraging
  performance through agreements that codify
  expectations.
• Capital and Investments Increasing complexity of
  integrating financing, capital investment and
  operations planning to ensure efficient and
  effective delivery of services.
• Public Reporting Strengthen public accounting
  and financial disclosure standards will
  necessitate more rigorous financial analysis and
  data supported by attestations of its integrity.

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4. 2009-10 Budget Expense
Program expense equals total expense minus
interest on debt.
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5. Key Messages

• Only by integrating financial analysis into
  policy and programs proposals can ministries
  design high-quality, sustainable and cost
  effective policies.
• In an constrained economic environment, the
  strengthen of your policy proposal (and its
  success) will depend on the ability to
  demonstrate savings, value-for-money and positive
  cost/benefit analysis.
• Evaluating your existing portfolio of policies
  and programs, using objectives financial
  analysis, to find efficiencies and effectiveness
  improvements is going to be essential to maintain
  services with less resources.

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6. Financial and Policy Decision Process
Legislature
Voted Appropriations
Proposals with Financial Implications
Cabinet
Governance
Treasury Board/ Management Board of Cabinet
Eight (Policy) Subcommittee (e.g. Legislation and
Regulations Committees)

• Treasury Board authorizes annual and in-year
  spending plans and ensure compliance.
• Reviews policies with financial implications.
• It approves the government's overall human
  resource, information technology plans and also
  makes decisions about government land and
  buildings.

• Ministry of Environment
• focused on policy development
• program delivery and managing service partners
• managing within the fiscal envelope
• establishing performance expectations and
  evaluating program outcomes
• financial management and results reporting

• Policy committees review and make recommendations
  to Cabinet on the policies and programs
  government delivers.

Mandate

• Ministry of Finance
• (Treasury Board Office)
• supporting Treasury Board in its fiduciary
  responsibilities
• financial long-term stewardship
• responsible for the development of the fiscal
  plan (budget), Fall Economic Statement and
  publishing the Public Accounts.
• managing the Results-based Planning process.
• developing financial policies

• Cabinet Office
• supports Cabinet and sub-committees
• manages how the government makes decisions
• works with ministries to coordinate policy,
  communications and intergovernmental strategy
• monitors government strategies and supports
  implementation and delivery of results

Processes
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7. Five Financial Lenses for Developing
Policy/Programs

• Efficiency
• Inputs over outputs
• Effectiveness
• Outputs over outcomes
• Economy
• Cost/benefits against alternatives

• Economic/ Fiscal Impact
• What are the economic and fiscal implications and
  risks?
• How can these risks be mitigated through policy
  and program design?
• What are the financial and fiscal trade-offs
  in supporting the decisions?

• Financial Transparency Risks
• Disclosure of financial information consistent
  with public accounting and financial reporting
  standards.
• Financial information is completes, reliable,
  timely, comparable, relevant, clear and
  verifiable.

• Impairing Future Decisions
• Impacts on (future) revenues/ assets/
  liabilities (e.g. auto sector pensions)
• Impacts on budgets, the multi-year
  fiscal/capital plans, transfers/ cash flows and
  appropriations.

• Public Reporting (consolidation)
• Ensuring appropriate financial accountability
  and transparency provisions are incorporated into
  program delivery and design.

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8. An Integrated Financial-Policy Model
Policy Analysis
Risk-based reviews
Policy Decision
Financial non-financial risks/options
Program Implementation
Program Evaluation
Financial Analysis
Asset Management
Asset Implications
Efficiency
Financial Performance and Public reporting
Consolidated Public Reporting
Forecasts/ fiscal impacts
Effectiveness
Integrity of financial data and reporting
Sustainability and Value-for-Money
Assurance of controls
Value-for-money
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9. Integrating Financial Considerations into
Policy-Making

• Integrated Policy should be
• Positive benefits complete and objective
  cost/benefit analysis that includes immediate and
  on-going capital, operational and administrative
  costs
• Forward looking consider the complete and
  long-term fiscal and financial impacts over the
  policys lifetime
• Outward looking understand the financial
  trade-offs of the recommendation
• Innovative and creative embed the identification
  and management of financial risks in the policy
  design and implementation
• Evidence based costing, budgeting and estimates
  must be build on complete information, solid
  assumptions and objective analysis
• Joined up horizontal connect with other policy
  areas and ministries. Provide opportunity to
  realize efficiencies or economies of scale
• Evaluated financial and non-financial
  performance must be measured against objective
  and weighted leading and lagging indicators and
• Demonstrate Value-for-money the initiative must
  be able to efficiency (outputs/inputs),
  effectiveness (outputs/outcomes) and economy
  (cost effective comparisons).

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10. Policy and Program Design Financial
Considerations

• Cost-benefit analysis all options should be
  valued against full net benefits and costs
  calculations. Costs should be expressed in terms
  of relevant opportunity costs. Categorising costs
  (fixed, variable and semi-variable) will
  strengthen sensitivity analysis, including
  market interest and demographic fluctuations.
• Cost-effectiveness analysis assess the
  comparative costs and merits of different
  delivery mechanisms. This should be balanced
  against an assessment of the relative financial
  risks.
• Delivery Options transfer payments and agency
  methods of service delivery place increasing
  (financial) oversight, evaluation and
  accountability requirements on the ministry.
• Short and Long-term Financial and Fiscal Impact
  understand integrated program, operating and
  capital costs. Amortized capital costs and sunk
  program commitments will constrain downstream
  ministry fiscal envelopes.
• Full cost of service delivery All costs
  associated with the program should be factored
  into its cost/benefits analysis. Direct and
  indirect costs borne by another ministry or
  central agency (e.g. OSS) come from the same
  Central Revenue Fund Peter/Paul scenario.
• Investment Proposals Capital projects (for
  example buildings, ITT and fleet vehicles)
  require a complete asset life-cycle analysis from
  the initial investment, post-build and periodic
  cost/asset evaluations, maintenance, replacement
  and disposal.
• Cost utility analysis accurate forecasting and
  modeling. Fees and revenues program need to be
  substantiated by robust sensitivity analysis
  using different scenarios.

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11. Policy Implementation, Maintenance and
Evaluation

• Sustainability using robust forecasting and
  modeling to assess the fiscal and financial
  sustainability and opportunity cost of the
  program. Should alternatives delivery mechanisms
  or changes in service offerings be considered?
• Transfer Payment/ Agency Oversight review of the
  recipients or service delivery organizations
  service and financial results. Assurance of
  effective controls, accurate financial reporting
  and analysis of the organization's financial
  well-being.
• Non Tax Revenue legal constraints on fees (Eurig
  decisions), the need to demonstrate transparent
  costing and pricing, and associated accounting
  structures for Special Purpose Accounts. Are the
  revenues directly adversely and
  disproportionately effecting another government
  revenue stream?
• Cost Recoveries what are the full and associated
  costs of collecting fees, fines and defaults
  (particularly during an economic recession)?
• Influence and Control the concept of
  arms-length is governed by an understanding of
  the degree of influence and control over a given
  organization. Provincial control defines
  whether an entity is consolidated into the Public
  Accounts and is subject to Ministerial
  responsibility.
• Oversight, Program and Technology Enhancements
  sustainability of a program with a substantial
  infrastructure footprint requires an evaluation
  of the key enhancement milestones and their
  associated costs.
• Assessment of Outcomes performance measures
  should be able to indicate whether the intended
  client are benefiting (and to what extend) from
  the program/policy and demonstrate its
  cost-effectiveness as a service delivery method.

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12. Policy Design Questions

• What are the key financial risks faced by your
  programs and core policies? How do you mitigated
  these financial risks?
• What financial analysis gaps do you typically
  find when developing a policy proposal?
• What are the key financial drivers impacting the
  sustainability of your policies and programs?
• What tools and approaches are you using to
  evaluate policies and programs efficiency,
  effectiveness and value-for-money?

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13. Looking Forward

• Integrating financial risks, analysis and
  measures are critical to evaluating policy,
  programs and ensuring sector sustainability.
• Only by balancing and weighting efficiency,
  effectiveness and value-for-money measures can a
  full picture of a policy/programs performance be
  established.
• Increasing financial reporting requirements and
  the complex relationships between capital,
  financing and operational require an integration
  of these considerations into policy decisions.
• Forward looking policy that seeks horizontal
  sectoral solutions cannot be divorced from robust
  financial, cost/benefit, business and capital
  investment decisions.