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What has brought VFM to the fore in connection particularly with local government
has been great public concern in recent years about the basis for raising income
and especially the manner in which it has been spent. Over decades the whole
system of local government finance has been investigated and occasionally severely
criticised, but only in recent years has any attempt been made in this field to define
and therefore maximise VFM which lies at the crux of many of the spending
problems.
While there is now more general agreement on the need for VFM, a greater
understanding of what is meant by it in this particular context, since it is not
measurable by ordinary economic methods, is desirable. Because of dissatisfaction Value for
with the manner in which government income has been applied, in attempting Money
to improve it greater precision has been officially attached to the term VFM in
the government environment and has indeed been the subject of legislation. 43
Meaning of VFM
Before any aspects of VFM are considered, it may be useful to state its essentials.
These have been subsumed under the three headings of economy, efficiency and
effectiveness, all of these being elements in VFM.
The criterion of economy is an obvious one. It means the provision of what,
in the light of any given policy, at any given time, is required at minimum cost.
The requirement must, of course, be initially assessed in terms of quantity and
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quality; thereafter the resources needed to provide it are evaluated in money terms.
Efficiency means achieving maximum output from the resources provided for
meeting the requirement and is thus closely related to economy. Effectiveness
means ensuring that the intended result is fully attained from the application of
the resources.
In each of these separate problems arise. Of these three approaches economy
is simplest to apply since it is possible to set standards of expenditure by means
of budgets and it is relatively easy to see if these are met, on the assumption
that the required quality of services is indeed provided. This particular approach,
adopted some long time ago, is well established in both local and central government,
and, unfortunately perhaps, for a long time it was regarded as meeting the
requirements adequately.
Efficiency is more difficult to achieve because it means ensuring that the
objectives aimed at are in fact met. Understandably it has some relationship to
economy but economy can be attained without efficiency, and vice versa. Obviously
it is important to specify the precise quantity and quality of services required as
against intended expenditure and to see that not only is that expenditure not
exceeded but also that the objectives in terms of quantity and quality are also
achieved.
Finally, effectiveness relates to the extent to which the real aim of the policy
makers is achieved and it is here that the main problem arises — the problem
of establishing this aim. This means in other words establishing the particular
values to be aimed at. Effectiveness may be expressed as output in value divided
by input in economic terms. Patently both are not measurable in terms of the
same units, however, and indeed output in value is not normally held to be
measurable at all. The problem of effectiveness is the establishment of acceptable
objectives in the field of local and central government, and fundamentally the
situation is that the values recognised by individuals are incapable of measurement
while those appropriate for communities are infinitely more complex conceptual
matters and, despite the development of local government activities over centuries,
there are no criteria for them which are generally applicable.
or a fence, like a political territory or a landed property. We can proceed from the undoubtedly
economic at one end of the scale to the undoubtedly non-economic at the other end without
finding anywhere a fence to climb or a ditch to cross.
This is the crux of the matter as regards individuals earning and spending an income.
Whereas the value of economic goods can be readily measured, that of the non-
economic type cannot. Yet non-economic values lie close to the heart of satisfactory
living and it is these with which VFM is concerned.
What is significant here is that in modern societies they are also very much
the subject of services provided by local and central government. Since no means
of measuring these in economic terms exists, the problem of evaluating the nature
and extent of the services to be provided by government is a major and much
greater one.
Although this has been the situation ever since any sort of government has
existed, what has happened in recent years is that recognition of much waste and
inefficiency in the public sector in Britain has caused the public to face the practical
need for establishing, if possible, criteria for non-economic values — in fact finding
some way of evaluating what is not subject to the ordinarily available means of
doing so. There is not, as there is for a large part of economic activity in any
country, the yardstick of transfer of economic resources to determine whether
the values placed on wants are acceptable.
Cost-Benefit Analysis
Of course, in some areas measurement of non-economic values where not paid
for by the consumer is possible. These are the areas to which what is known
as cost-benefit analysis can apply. Cost-benefit analysis may be regarded as a special
form of attempting to evaluate VFM, often arising in public utilities where those
benefiting pay nothing for the cost of the benefit received, or only some fraction
thereof.
The Victoria Line of London Transport is a well-known example of a cost-benefit
study in Britain. When this project was under consideration it was clear enough
that in ordinary financial terms it could not pay its way. But although the income
directly accruing to London Transport from the new service would be inadequate
for meeting the full expenses, including interest, of providing it, this was not held
to be an adequate reason for rejecting the project. The value of the project to
International the community derived from lower congestion on other London Transport lines
Journal of and on the roads, as well as from the shorter travelling time and reduced
Public Sector inconvenience for certain categories of passenger resulting from the existence
Management of the new line. Even though the benefits from time, fuel, etc, saved could be
evaluated, the benefits by way of reduced strain on the part of drivers and travellers
1,1 could not.
Once those that were measurable were evaluated and, with direct financial factors
46 (the operating expenditure, and the income) taken into account, they were assessed
by the ordinary capital evaluation procedures. While there was thus a non-economic
value element in the situation, for much of the rest some economic evaluation
could be made. Consequently cost-benefit analysis is somewhat easier than most
types of VFM decisions needed in government activities, for which there is a
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far greater element of benefit that obviously cannot be evaluated in any sort of
economic manner.
The problem thus arises where little or no possibility of measurement exists,
i.e. where the satisfaction obtained by the individual cannot be measured in the
normal way.
Cost-benefit studies are also common enough in Third World countries in regard
to transport and irrigation projects, for example, where some, if not all, of the
benefits to the nation are measurable.
Three types of situation are involved, namely, where a benefit is directly paid
for and therefore is already evaluated, so far as that is done by economic
assessment, where in a cost-benefit situation it can be evaluated, in part at least,
and where in others in no way can it be evaluated in economic terms.
Even in the case of public utilities (of which London Transport, already
mentioned, is one), most of which, at least in the past, have been expected to
match income to expenditure or better, value considerations enter and some
reference to their special situation is made later. But the problem of values of
the type that cannot be evaluated in the ordinary economic sense is at the heart
of government expenditure, whether local or central.
the Army Council and the Comptroller and Auditor General (C & AG) over the
question of economy and efficiency (but not effectiveness) in placing a contract
for Army ribbon. It was established that the C & AG was within his rights in
querying the matter of economy instead of merely being satisfied that the
expenditure concerned was properly authorised. (Had he regarded himself as having
some responsibility for effectiveness, he might have put forward views on the
colour of the ribbon!)
It may be useful to refer to Sir Douglas' apt illustration of the relationship of
the three key factors regarding a lawn outside a government office. This illustration
specifies that to meet an adequate standard of appearance, the grass can be cut
economically once a week. A heavier mower costing twice as much as the present
one would do the work faster, reducing expenditure of time and money. Its use
would thus be both economic and efficient. But the objective is to provide an
environment that is attractive so that, instead of a lawn, a paved unit, possibly
with a fountain and a pool, might prove more attractive to onlookers and could
possibly be cheaper to maintain. The latter might produce greater VFM. As Sir
Douglas says "In a remote research establishment, but not in the City of London,
it might make sense and be more 'effective' to let sheep graze the grass and
dispense with cutting it altogether". This exemplifies the problems concerned
with establishing effectiveness which in essence would seem to be unique for every
set of circumstances.
Even in any given set of circumstances as between policy makers and those
whom they serve there may be conflict of aims. This is particularly evident in
local government affairs because of the conflict between short-term and long-term
interests. Elected representatives are much more concerned with short-term
considerations since they know they may not be re-elected, or may even die before
a project is completed. Against this those using the service may prefer a benefit
from it arising over a longer period. In other words, the policy makers may want
to see the cake eaten soon, while the rate-payers (or others) want to eat it more
slowly or perhaps at some future date.
It follows from all this that the inclusion of the requirement of effectiveness
in VFM means in practical terms that those responsible for framing policy must
establish clear aims so that auditors in the public sector field do in fact have some
criteria with which to compare output.
Performance Indicators Value for
In the nationalised industries part of the public sector measures of effectiveness Money
have been considered. No formal obligation rests on the nationalised industries
to recognise VFM, however. A few years ago the government initiated a policy 49
of inviting publication of performance indicators for these industries. This policy
recognised that for some utilities the public expected observance of standards
that were not purelyfinancial,that is, they were expected to reveal the extent
to which they were held to be effective in certain directions.
Obviously the form of these performance indicators varies very much as between
different industries, and in some cases special difficulties or objections applied,
for example, as in the case of the British Ports Authority (as it was then) because
of the nature of the industry. Some other industries were able to provide a few
but, as it happens, British Railways published, and continues to publish, many
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performance indicators, doing so partly for historical reasons, but also for others
that arose from the nature of the industry and were therefore readily available.
While such railway performance indicators are no longer statutorily required
many continue to be produced. As has been indicated the nature of the industry
is such that in the past it tends to have been managed more by means of statistical
than financial data so that much statistical information about performance is available.
Conclusion
The present situation is that policy makers are now confronted with new problems
since they must focus attention on the provision of values, however ascertained,
more appropriate to the communities they serve. This is at present a much more
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difficult task since, for long, increasing levels of expenditure had been expected
and permitted in Britain by the public, but now no longer. The adjustment to the
new circumstances of more limited resources is a painful exprience as many local
authorities have clearly found.
But it seems to have meant the need for a clearer perception of what is meant
by VFM and how it is attainable, to the benefit of society at large. This concludes
a review of some aspects of VFM in Britain, mention having been made of instances
outside local and central government where the application of some criteria of
effectiveness such as performance indicators in some of the nationalised industries
have been established.
The problems of VFM exist equally in the Third World, where the organisations
for decision making have not developed to such an extent and over so long a period
as in the UK and indeed in other developed countries. Recognition of the proper
value objectives is, however, the first requisite supported by competent managers
in the various parts of the public sector. Here it may be mentioned incidentally
that the particular contribution of accountants at all levels is also important for
revealing whether not only the expected degrees of economy and efficiency but
also of effectiveness, as laid down by the policy makers, have been achieved.
Although there is a dearth of accountants at all levels of skill and experience in
most Third World countries, the far greater problem for them as indeed also for
the western world, is that of ensuring that policy makers do establish proper and
acceptable value criteria.
References
1. Pigou, A.C., The Economics of Welfare.
2. Little, I.M.D., A Critique of Welfare Economics.
3. Cyert, R.M. and March, J.G., Behavioural Theory of the Firm.
4. Jones, R. and Pendlebury, M., Public Sector Accounting.
5. Henley, Sir D. et al., Public Sector Accounting and Financial Control.
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