Aligning Accounting Systems and Performance/Cost Information – the Accrual Reform and Taximeter in Denmark Special Advisor, Ministry of Finance David Fjord Nielsen SBO, Paris October 2008

 Agenda 1.The Accrual Reform, the Chart of Account and Cost Information 2.Danish Experiences and a View on detailed Cost Information 3.Activity-based Budgeting in the Sectors of Health and Education 4.Benefits and challenges in the Taximeter Model

 Accrual Accounting/Budgeting and Cost Information Background Danish state agencies’ and departments’ operational expenditures and associated capital spending transferred to accrual accounting 2005 and budgeting 2007 Covering around 10 pct. of the state budget A new cash management scheme and a new chart of account in 2007 Purpose Increase managerial freedom and incentives to plan investments Improve cost information – “hidden” cost revealed in the agencies

 Level of Appropriation: Expenditures and Cost ExpendituresCost

 The State Chart of Account Chart of Account is aligned to handle accruals but not to provide standardised cost or performance info. to FM/Parliament State’s chart of account: Mandatory general categories (wages, depreciations) and specifications (standard wage, overtime wage) Agencies have internal accounting specifications – (types of purchases) and dimensions (project, office, time) for the agencies internal economic management Standardisation and comparability across agencies vs. local needs

 Downsides to detailed Cost Information FM focus on the big numbers. Decentralised responsibility for cost control and performance management to line ministries Unit cost info and detailed budgeting to specific services/tasks requires detailed cost allocation – no matter if the accounting system is in accruals or expenditures Need to have a purpose: comparable units, an idea of the ”right” cost, a better budget method (activity volatility) or possibly outsourcing Most agency programmes, projects or services cannot be managed by unit cost

 Beneficial use of Cost Information in specific Areas Procurement – extra mandatory specifications to the chart of account Establishment of Shared Service Centre – need for cost information (what is the cost of a support function: accounting, ICT) Efficiency Targets in Performance Contracts Activity based budgeting: - new pilots – budgeting to unit cost of production - the taximeter model in education and health care

 Taximeter in Education and Health Care Rates for each type of education are set in the annual Budget Rates for operations according to DRG (Diagnose Related Group system) Both systems: a block appropriation and activity based appropriation Rates are being paid to institutions according to the number of produced operations / number of full-time students following and completing their studies

 Rates for diff. Types of Educations in 2009 Budget Education Educational rate Complete- ment rate Support- service rate Capital rate Security Guard Euro1.000 Euro2.000 Euro Farming Euro1.000 Euro2.500 Euro2.000 Euro Fitness instructor Euro1.000 Euro2.000 Euro Baker Euro1.000 Euro2.000 Euro3.000 Euro

 Activity-based Budgeting: Efficient Allocation of Funds to Hospitals and Educational Institutions Quasi-market: Funds are automatically reallocated between different hospital/institutions and educations as a result of actual activity/demand. Transparency and equality: Allocation of funds is based on objective criteria (number of students or operations); not possible for strong institutions/hospitals to obtain bigger budgets through negotiations Effectiveness: Gives an incentive to service improvements (to attract students, patients) and output delivery (produce operations, masters) to gain funds

 Downsides of Activity-based Budgeting: Difficult to set rates according to real costs due to information asymmetry Detailed cost studies to define rates – DRG vs. political Institutions and hospitals tend only to draw the governments attention to increasing costs (and not decreasing costs) Education: Rates are based on average costs and not the marginal costs of an extra student Health care: Marginal costs above production target, but when? Lower quality as a result of the economic incentives?

 Marginal Cost at Production Target of 200 Operations