Public Sector Governance

Public sector governance is a new area to the ACCA P1 exam. From December 2014 onwards, candidates will be expected to be familiar with governance in a wider range of organisations, such as public sector organisations. Let’s take a look at some of the key areas of public sector governance.

What is the Public Sector?

In most cases, public sector organisations are operated by the state, if not completely, then in part. They provide public goods or services that cannot be, or should not be provided by ‘for profit’ businesses. Examples of public sector organisations include the police, tax office and fire brigades.

Measuring Public Sector performance

Public sector organisations generally don’t operate to make a profit for their stakeholders, they are there to fulfil a society need or some other objective. It wouldn’t be appropriate to assess their performance on turnover or profit like we would a commercial organisation.

Instead, we assess them using the three Es: Economy, Efficiency and Effectiveness.

  • Economy – Value for money. Has the organisation provided its service within budget and any other time constraints?
  • Efficiency – Although the organisation isn’t expected to make a profit, it shouldn’t squander the funds allocated to it. Has the organisation provided a sufficient return for the funds allocated to it?
  • Effectiveness – Has the organisation delivered what it intended to deliver.

Agency in the Public Sector

Agency in a public sector organisation is no different to agency in a company. The management of a public sector organisation must report to civil servants and politicians, they then report to the electorate (who vote them in).

Conflict can arise when there are differences in interests between these three categories. For example, the general public (electorate) may want tax decreases and improvements in the quality of service. However, the politicians may be required to increase taxes and reduce service quality, because of economic conditions.

Also, management of public sector organisations may fear losing out on their budget allocation if they fail to spend their budget in full this year. This can lead to agency conflicts.

Keep in mind; stakeholders of public sector organisations can differ for many other reasons, e.g. political stance.

Strategic Objectives in Public Sector Organisations

Unlike private companies, public sector organisations cannot make their own strategic decisions in isolation. They must work within the overall public sector infrastructure. For example, the army has a very specific role to play and the government must control its aims and objectives. Similarly, a school or hospital must operate within the confines of the education or healthcare structures put in place.

Public Sector organisations often do get some autonomy and decision-making ability, however, these are usually restricted to the objectives for which it was established, or according to government policy. As they are funded with public (taxpayers) money, they must operate efficiently, and make best use of its resources.

Governance of Public Sector Organisations

Methods of governing public sector organisations vary. Many organisations report to an external oversight body. These may be a board of governors, trustees, an oversight board, or something similar.

There are four key areas an oversight board oversees:

  1. Compliance with government rules
  2. Performance measurement
  3. Budget negotiations
  4. Senior appointments

External auditors may review the work of an organisation to ensure it is operating effectively. These may report to the oversight body or higher levels of government.