Can you handle it?

Financial skills within the UK's civil service ARE woefully inadequate, which is a worry for the Treasury. But are government departments willing to embrace financial management? asks Mark Conrad

Amid the economic turmoil of recent months, it's easy to forget that Prime Minister Gordon Brown forged his political reputation on his financial management skills.

As the global financial crisis deepens, Brown's reputation as the financial 'superhero' of Europe's political class (as he was recently dubbed by French journalists) will come under scrutiny.

What has been a source of embarrassment at the Treasury recently, however, is that the Prime Minister has regularly displayed a better understanding of financial management than the civil servants looking after the UK's public finances on a daily basis.

In 2004, the National Audit Office (NAO) published a critical report on Whitehall's financial management. The spending watchdog exposed a litany of shortcomings, including the fact that few finance professionals have held positions of influence within the machinery of government. For a country that spends £558 bn annually on public services - forecast to rise to £678 bn by 2011 - and manages £441 bn in assets, the absence of skilled accountants and economists at the centre of public decision-making was shocking.

Accountants on board

Worse, the NAO revealed that financial skills did not always figure in performance assessments for Whitehall's permanent secretaries, or other key budget holders.

Labour MP Don Touhig described the situation as similar to 'flying the Atlantic in a plane with a trainee pilot at the controls'. How, critics argued, could Whitehall and its agencies run effective and efficient services when the people co-ordinating spending lacked professional insight?

The NAO's assessment arrived as the government embarked on a major public services reform programme, with campaigns to extend financial and decision-making autonomy to devolved bodies such as NHS foundation trusts and private contractors. The Gershon Review, a £40 bn three-year programme to switch resources from 'back office' functions such as IT to frontline services was also launched, and moves were afoot to provide citizens with wider choice over health, education, care and welfare services. In addition, the UK had entered costly wars in Iraq and Afghanistan.

Following the NAO report, Cabinet Secretary Sir Gus O'Donnell promised to rectify problems and, four years on, progress has been made. Departments are better at identifying under-used assets and disposing of them, for example.

But the watchdog's follow-up report, published in September, exposed a glaring lack of progress on the effective use of taxpayers' cash when the requirement for prudent spending could not be greater.

Notably, the NAO found that 19% of departments (managing collective assets of £23 bn) still consider themselves 'weak' at managing balance sheets.

In 2004, the number of qualified financial personnel on the boards of Whitehall departments was a paltry 39%. Under the banner of the Professional Skills for Government (PSG) programme, Sir Gus began a campaign to place accountants on boards and train decision-makers in the art of financial management. Among the first to be recruited was Helen Kilpatrick, Director General of Finance at the Home Office, who helped break up the department after the then Home Secretary, John Reid, described it as 'unfit for purpose'.

Now, 97% of Whitehall boards include finance professionals and the NAO has reported an enhanced focus on finance issues at the apex of the civil service. Improvements were enhanced by Whitehall's long-overdue switch to resource accounting and budgeting, which led to better understanding of resource use when compared to the previous, cash-based system.

Worrying omission

Despite this, significant problems remain. Startlingly, the departments that do not have a finance professional on their executive include the Ministry of Defence and Revenue and Customs. These are currently responsible for managing budgets for two wars, the UK's national tax take, and the complex tax credits system.

Perhaps more importantly, the NAO reported that 'a lack of financial management skills among non-finance staff is a barrier to further progress'.

Auditors claimed that poor financial skills within policy teams means departmental boards are presented with poor quality information and can't plan effective resource use. Consequently, half of departments still report financial and operational information to their board separately.

Around 4,000 civil servants now hold a professional finance qualification, an increase of 8% since 2006. But the NAO and Parliament's influential Public Accounts Committee (PAC) say that is not enough. In 2006, Sir Gus introduced a finance section of the civil service fast-stream programme. But it will take time for that to deliver a critical mass of experts.

In the meantime, a recent PAC report, Managing financial resources to deliver better public services, revealed that just 41% of Whitehall's policy proposals 'always included a full financial appraisal' and a meagre 20% of departments 'based policy decisions on a thorough assessment of financial implications'.

Treasury Permanent Secretary Nick McPherson, who holds responsibility for improving Whitehall's financial skills base, said: 'That is a disappointing result. I want to see us doing better than that.'

Giving evidence to the committee, McPherson denied that Whitehall's shambolic management of the abolition of the 10p tax rate - which later required investment to help people on low incomes, negating the financial benefit of the policy - exemplified such poor planning.

Poor planning

But PAC claimed that other high-profile policies suffered from poor financial planning, including the government's welfare to work programme. The financial data for many welfare schemes was so poor, MPs said, that independent analysts could not judge their operational performance adequately.

One department, the Office of Fair Trading, revealed that 'operational decisions are never based on a thorough assessment of the financial implications' - a truly exasperating admission. And Steve Freer, chief executive of the Chartered Institute of Public Finance and Accountancy, said there was still a 'huge amount' to do to 'establish the right relationships between the finance function and the wider [government] organisation'.

He added: 'In particular it is critically important to secure finance's early and strong involvement in policy development so that value for money can be established as a much more explicit driver of policy options.'

Evidence of poor financial planning can also be found in Whitehall's figures for annual under-spends. Between 2002-03 and 2006-07, total under-spends above 5% of budgets (an accepted level) amounted to £2 bn.

Irregular under-spends could be a good thing: the Treasury allows departments to carry forward some unused cash, encouraging them to make rational investment choices. But consistent under-spends indicate an inability to match finances with policy aims.

To make matters worse, PAC claims the rush to report figures below the Treasury threshold for carry-over means there are 'insufficient incentives to avoid wasteful spending' at the end of each financial year.

Most professionals will recognise that these archaic problems have largely been dealt with in the private sector - indicating how far the public sector still has to come. Critics have also warned that the problem could undermine Whitehall's delivery of a new round of efficiency savings, worth £30 bn, by 2011.

According to PAC, the Treasury must inform departments, at the earliest stage possible, how much money they are allowed to carry over. But what do experts believe is the solution to the wider problem of poor financial management?

PAC wants all middle and senior managers within the civil service to show that they meet Sir Gus's PSG standard for financial skills within their annual appraisals. 'Where shortfalls exist, they should be required to train,' it warns.

But how do non-finance professionals train to an adequate level? Whitehall already operates several in-house training programmes, but take up of these (mostly voluntary) courses is low. McPherson launched Financial Skills for All (FSFA), an online Treasury-led training programme, in 2006. But recent figures show that in 44% of departments, no civil servant has completed the first tier of the course.

Some organisations, including the Department for Transport, insist that senior staff complete FSFA units, while others offer alternative training. Nonetheless, McPherson admits to being 'disappointed' by low FSFA take up.

Commenting on the wider challenge to improve financial management, he said: 'It's about [generating] culture change and getting senior management not to regard finance as something rather grubby which somebody else does - but as integral to what we do.'

Amid evidence that some Whitehall budget-holders still do not have their financial skills assessed regularly, McPherson also says he will pursue a remedy that could link annual pay awards to financial performance.

'It seems to me absolutely essential if we are going to avoid some of the financial disasters which this committee all too often has to engage with,' he told PAC.

Quite. By 2011 McPherson and his peers will manage £11,000 of spending for every person in the UK. But, as PAC chairman Edward Leigh said: 'There is some way to go before financial management is fully embedded within departmental cultures and given priority for services to be delivered efficiently and cost effectively.'

Mark Conrad is a freelance journalist specialising in public policy and business