Aligning Accounting Systems and PerformanceCost Information the Accrual Reform and Taximeter in Denm

1
Aligning Accounting Systems and Performance/Cost
Information the Accrual Reform and Taximeter in
Denmark
SBO, Paris 27-28 October 2008

• Special Advisor, Ministry of Finance
• David Fjord Nielsen

2
Agenda

• The Accrual Reform, the Chart of Account and Cost
  Information
• Danish Experiences and a View on detailed Cost
  Information
• Activity-based Budgeting in the Sectors of Health
  and Education
• Benefits and challenges in the Taximeter Model

3
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

4
Level of Appropriation Expenditures and
Cost Expenditures Cost
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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
• States 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

6
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

7
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

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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

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Rates for diff. Types of Educations in 2009 Budget
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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

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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?

12
Marginal Cost at Production Target of 200
Operations