The Adoption of New Public Financial Management and Public Service Improvement in Indonesia

The University of Nottingham and I Introduction This essay focuses on the adoption of New Public Financial Management (NPFM) in Indonesia. The essay compares and contrasts the theoretical implementation of NPFM with the actual implementation by the Indonesian Government. It also relates the implementation of NPFM and public services improvement. The essay takes Indonesia as the object because Indonesia is a developing country that faces many problems in adopting NPFM. The Indonesian government currently applies accrual based accounting system. Before, the country implemented the cash based system (Harun & Robinson, 2015, p239-240). As there were many demands to be more transparent and accountable, gradually the government modify the system. Finally, since 2015 all government levels must perform full accrual-based accounting system (Prabowo, 2016, 155). The essay consists of four chapters. The first chapter introduces the aim and the brief description of the essay. The second chapter describes terms which are related to the topic. The third chapter compares and contrasts the theoretical benefits of NPFM and the actual implementation by the Indonesian government. The last chapter is the conclusion. The essay concludes that the implementation of NPFM in Indonesian does not give significant improvement to the public service delivery because the government has not implemented NPFM well. New Public Financial Management Public Financial Management The discussion about public financial management is related to public money. To manage public money, public managers should understand its context. Bandy (2011, 2) explained that the definition of public money is not as simple as the fund from taxes which is spent for providing services to the public. There are subtle differences in the public money term (2011, 2).  According to Albino-War, Singh & Ahmad (2005, p3), public financial management has a correlation with a procedural and legal form of regulation. The procedure must follow the rule, and the result should be in the form of a written law (2005, p3). Every stage of bureaucracy has specific functions. To implement their functions, they must know their main purposes, classify options in spending funds, make sure the occurrence of the transactions and record it for accountability purpose (2005, p3). Financial management in public sector has a relationship with ‘strategic triangle’ which contains ‘authority’, ‘capacity’ and ‘value’ (Moore, 1995 in Bandy, 2011, p14). The authority means that the expenditure and the authorising environment obey the rule. The capacity means that the public sector has abilities and resources to afford the products or services. Finally, the government calculates the value to get the efficiency of the expenditure (Bandy, 2011, p14). Albino-War, Singh & Ahmad (2005, p5) stated that the needs of financial management that are by ‘comprehensiveness, unity and internal consistency’ principles are increasing. The base of the principle is the demand from stakeholders who require accurate and prompt information. Moreover, a government needs to apply connected budgeting, consolidated reporting and evaluation infrastructure to establish good governance (2005, p5). In the principle of ‘comprehensiveness’, the government as an organisation, consolidate the budget which covers all parts of the organisation (2005, p5). By performing consolidated budget, the complete financial planning can be seen as a unity of the government budgeting (2005, p5). The ‘unity’ principle means that the budget consists of all incomes which will be gained and outputs that should be provided. This principle is effective to raise the efficiency of the budget. The final principle is ‘internal consistency’. It promotes uniformity in treating the various components of the budget (Albino-War, Singh &Ahmad, 2005, p5). Therefore, a single budget system might be the most appropriate system for a government to manage the finance. New Public Management and Public Service Denhardt & Denhardt (2000, p550) said: “New Public Management refers to a cluster of ideas and practices (including reinvention and neomanagerialism) that seek, at their core, to use private-sector and business approaches in the public sector”. From this description, managers in the public management are expected to manage the government using company mechanism as a model. NPM gives options to the entity to manage their concerns (Manning, 2001, p298). The options are listed based on the management practices and stresses on the public demand. NPM offers decentralised management in structural or organisational options (2001, p298). The focus of NPM according to Osborne is “almost wholly upon intra-organizational processes and management, and it emphasises the economy and efficiency of these service units in producing public services” (2006, 382). It gives a picture of a mechanism where the delivery of the public services becomes more important. Moreover, NPM can be translated as an effort to adopt private-sector management. The purpose of the adoption is to improve the efficiency and effectiveness of the public services provision (Thatcher in Osborne 2006, p379). Osborne (2006, p377) stated that in the early introduction of NPM, it was considered as a new approach of ‘public administration and management’. Osborne added that NPM is a transitory phase from conventional public administration to what he called the ‘new public governance’ (2006, p377). According to Hartley (2005, p29), public administration is an approach in providing public services which is mostly derived from jurisdiction and bureaucratic. The public is supposed to be homogenous. In this approach, the professional has a significant role to translate the meaning of public demands and problems (2005, p29). The professional also standardises the service provided to the public. Furthermore, the government has authority and power to govern. They provide services to the public as a responsibility from the state (2005, p29). In the public administration approach, the policy-maker can function as a commander. They form regulations and maintain the implementation in the form of bureaucracy (2005, p29). Table 1. Competing Paradigms, Changing Ideological Conceptions of Governance and Public Management Traditional Public Administration New Public Management Context Stable Competitive Population Homogenous Atomized Needs/problem Straightforward, defined by professionals Wants, expressed through the market Strategy State and producer centred Market and customer centred Governance trough actors Hierarchies public servant Markets Purchasers and providers Client and contractors Key concepts Public goods Public choice *Source: Bennington and Hartley, 2001 in Hartley, 2005, p28 NPM, on the other hand, emerged in the 1980s as a different approach of public administration (Hartley, 2005, p30). From the table, it can be inferred that the population in this approach is atomised. Public through the market defines needs and problems. The role of the state is less significant in forming a strategy. It moves to the market, and the customer demands. Furthermore, the market in NPM also has a significant portion in governance. It is actors that influence the public management. Finally, the key concepts in new public management lie on public choice. Also, Osborne (2006, p379) summarised the key elements of NPM in several points. First, the focus of the NPM is studying ‘Private sector management’ as a model. It also focuses on studying how to manage public sector organisations under entrepreneur model leadership. It stresses on how the organisation manage their resources, performance, outputs, and evaluation (2006, p379). The next element is the division of public service into units. By dividing the units, the organisation can focus on managing their resources (2006, p379). The last element is the growth of the markets in providing the public service. For the final element, competitions, markets mechanisms, and how the providers deliver the service determine the changing of the paradigm of public management and governance (Hartley, 2005, p29). New Public Financial Management Guthrie, Olson & Humphrey (1999, p210) said that the new public management (NPM) gives significant attention to financial management improvement. As a part of reforms in public management, New Public Financial Management (NPFM) is an element of the NPM. Financial management reform is crucial in NPM. Without the reform in financial management, the implementation of NPM would be insignificant (1999, p210). Furthermore, the parties who are involved in public financial management realise that it is necessary for them to know more about financial information. They can make preparations, maintain, analyse, conform to and test the information (1999, p210). The stakeholders also can predict the upcoming even from the information.   In their article, Guthrie, Olson & Humphrey (1999, p221) argued that the implementation of the public sector financial management in several countries are diverse. The finding from their research shows that the reform of the public financial management is not based on only a single system. It is a result of reforms in levels of governments and different economic situation (1999, p221).      Guthrie, Olson & Humphrey (1999, p210) classified NPFM, as a reform in public sector financial managements, into five categories. The first is ‘changes to financial reporting systems’. The changes encourage ‘accrual-based financial statements’ in the public sector. The accrual based is intended to improve transparency and accountability of government (Harun & Robinson, 2010, p234). Also, it is implemented to improve decision-making process by the government (2010, p234). Many countries implemented cash basis in their accounting, but due to the limitation of the basis, the accrual basis grows vast in recent years (Cavanagh, Flynn & Moretti, 2016, p1). Cavanagh, Flynn & Moretti (2016, p3) added that the accrual based system has several benefits. First, it gives a wide perspective of financial management.  Second, it also can assist stakeholder to focus on government’s resources and liabilities. Third, by implementing accrual system, the government can get more comprehensive information on the financial situation. Finally, it has international standards that can help the user to enhance the quality and validity of government financial information (2016, p3). The second category is ‘the development of commercially minded, market-oriented management systems and structures’. It relates to the mechanisms of the public sector to calculate tariffs or costs in providing public services and the processes to negotiate an agreement with third parties (Guthrie, Olson & Humphrey, 1999, p209). From this point of view, public managers are expected to search creative ways to achieve the targets or privatise the service from the government From (Denhardt & Denhardt, 2002, p13). The third category is ‘the development of a performance measurement approach’. The approach values individual performance by using several methods. The performance measurement gives valuable information to the management compared to the traditional approach which is very dependent on the financial matter (Ittner & Larcker, 1998, p206). The fourth category is ‘devolvement/decentralisation, or delegation of budgets’. It is integrated with the management, financial and economics (Guthrie, Olson & Humphrey 1999, p210).  Decentralisation is intended to strengthen the autonomy (Harun, 2007, p369) and therefore improve the public service provision. Disaggregation of the public service is one of the key elements in NPM (Osborne, 2006, p379). By dividing the service into units, the organisation can provide service from the most basic part (2006, p379). The last category is ‘changes to internal and external public sector audit’. It monitors the provision of public services and reports the provision of the services and evaluates the program (Guthrie, Olson & Humphrey, 1999, p209). The Institute of Internal Auditors (IIA) in Bandy (2011, p224-225) defines Internal audit as: “An independent, objective assurance and consulting activity designed to add value and improve an organisation’s operation. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.” On the other hand, an external audit is performed by an appointed auditor who is unassociated with the organisation. The auditor is appointed to audit and then states an opinion on entity’s financial report (Bandy, 2011, p223).   One of the principles promoted by NPFM is the use of accrual accounting system (Sejati, 2013b). The implementation accrual based system encourages the quality of transparency and accountability in an organisation. It also gives valid information about the equity and the liabilities of the organisation. Moreover, the implementation of accrual-based to replace the cash-based system is a crucial factor in public sector improvement (Harun & Robinson, 2015, p234). The Implementation of NPFM in Indonesia and Its Effect on Public Service Improvement As a part of NPM, NPFM utilises the conventional mechanism of the private sector in designing the organisation’s agenda and problem-solving to be applied in the public sector (Mir & Sutiyono, 2013, p98). As stated before, one of the features NPFM is the implementation of the accrual-based system. It is believed to promote transparency and accountability more than the previous system. Lind and Etenyo in Kristiansen, et al. (2009, p69) defined transparency as “legal, political, and institutional structures that make information about internal characteristics of government and society available to actors both inside and outside of the domestic political system”. As a part of NPFM, the transparency is required so the public can access public information. Indonesia has promoted transparency by issuing The Public Information Disclosure Law. One of the objectives of the law is “achieve good public governance, i.e., transparent, effective and efficient, accountable and responsible” (Subagjo, p4). Based on the law, each level of governments must publish their financial report. However, the publication has not come up with the quality improvement of the financial report (Mir & Sutiyono, 2013, p111). Mir & Sutiyono added that the publication is merely a ritual which brings no impact on the quality of financial information (2013, p111). From the explanation, it can be inferred that the public cannot obtain accurate information services because ‘transparency’ is only an obligation. Furthermore, it shows that the implementation of NPFM is insignificant to the improvement of public services. NPFM, through accrual-based implementation, also promote accountability. However, Indonesia still faces many problems to implement it. Firstly, the promotion of accurate financial monitoring and reporting has threatened bureaucrats and executives who are involved in corrupt behaviour (Harun, 2015, p371). Harun added that it had brought a serious impact in the accountability promotion since a few decades earlier (2015, p372). As the accountability is not implemented well, the quality of the public service is also doubtful, because the presented data might be inaccurate. Secondly, the infrastructure to build consolidated reporting system is inadequate. Many local governments in Indonesia do not have integrated accounting information system (Sejati, 2013b). Separated accounting systems mean the accounting staffs need extra time to accomplish their work. Furthermore, there are many differences in Indonesian reporting system between the old system and new system. Table 2. Comparison on the Indonesian Reporting System. Accounting System Features Old System (pre-2005) Budget realisation report New System (After 2005) Budget realisation Balance Sheets Financial Performance Changes in Equities Cash Flows Notes on Financial Statements *source: Harun & Robinson, 2010, p240 Accrual based system is more complex than the previous system (Sejati, 2013b). It has several phases of implementation (Cavanagh, 2016, p19). From the comparison, the responsibility for accounting staff and manager is much more than it was. They must compose several documents to be consolidated. Therefore, it probably consumes more time and needs more staffs to do the tasks, and may affect the quality of the provision of the public service. Third, to apply accrual based system as the feature of NPFM, Indonesian government also faces problems regarding human resources. First, it is caused by the lack of the quality of human resources in public sector accounting (Harun & Robinson, 2010, p243). The lack of experienced staffs can thwart the transformation from cash basis to accrual basis as a financial management reform (Hepworth, 2003, p42). Later, the government still requires a huge number of new employees (Ika & Widagdo, 2013, p56). Therefore, if the government is only prioritising to recruit new accountants, the public service provision will be affected because other sectors also need sufficient employees.   Fourth, the accountability can be improved by hiring external auditors to audit the public sectors. It is to review government’s financial statements and provide the accountability to the stakeholders (Bandy, 2011, p213). It is also expected to be a foundation in decision making processes (Mir & Sutiyono, 2013, p111). Indonesia has a State Audit Board which one of its duties are performing performance audit (Rai, 2008, p39). It aims to strengthen the government controlling mechanism in running the government organisation (2008, p39). Also, Pollit et al. (in English, 2007, p313) said            “Performance auditing developed from the need to provide assurance of the achievement of the administrative objectives of New Public Management (NPM) in the public sector: economy, efficiency, effectiveness and ‘good management’ of government programs”. It means that the government can measure their performance in the public service delivery by using the performance audit reports. However, Mir & Sutiyono (2013, p111) argued that the Indonesian government does not prioritise the accounting information in decision-making processes. Therefore, the implementation of NPFM in Indonesia does not bring significant improvement to the public service delivery. NPFM also suggests the decentralisation in budgets. The decentralisation brings the governments closer to the public (Bahl, 1999, p4). By implementing decentralisation, the lower governments can also allocate their budget to meet the demands of the citizens (Litvack, Ahmad & Bird, 1998, p5). Therefore, the decentralisation promotes the improvement and equalisation of the public service particularly citizens in provinces and districts. The implementation of decentralisation in budgets needs support from the central government and law instruments. However, there are many regulations that are not synchronous and potentially distract the implementation of NPFM. According to Harun & Robinson (2010, p241), the government accounting standards (GAS) is arranged by an independent committee. However, the government still fully funds the committee (2010, p241). It shows the contradiction between the government’s willingness and actual actions. Also, Mir & Sutiyono (2010, p110) added that there is a contradiction between regulations of financial information and reporting process. The regulations often overlap and make the staffs who deal with the financial report feels confuse (2010, p110). Also, sometimes local governments must compose different kinds of financial reports as required by different central departments (2010, p110). These problems can disrupt to the improvement of public financial management and affect the provision of the public services. Therefore, the central government must synchronise the regulations. The implementation of NPFM promotes the accuracy of the equity and liability. By improving the accuracy of the information, the government can manage their resources and expenditures well. Also, the government can produce reliable financial reports (Sejati, 2013a). However, the implementation of NPFM in all levels of government in Indonesia needs a huge amount of money. It is not only to build infrastructure and provide an appropriate computer programme but also for human resources training (Sejati, 2013a). Moreover, training the existing workers sometimes is not effective due to the complexity of public sector accounting and the government might finds alternative by hiring new experienced workers (Harun & Robinson, 2010, p244). The government, therefore, must find the best solution to solve this problem by considering all possibilities. CONCLUSION As the government faces many obstacles in implementing NPFM, it can be inferred that the effect of the implementation of NPFM in Indonesia is insignificant to the improvement of public service delivery. Furthermore, the adoption of NPFM might deter the provision of the public services because many government officers are involved in the adoption of NPFM. Therefore, the government should focus on solving every obstacle in the implementation of NPFM. If the NPFM is well implemented, it will promote the of public service improvement. From the explanation above, the Indonesian government has not implemented the NPFM well. 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