Risk Awareness after the Adoption of New Steering Model in German Public Administrations – a Case Study

Authors: Markus Bodemanna*a, Dorin Maiera a, Mircea Sandru a, Gregor Weber a

a PhD-Student, Bucharest University of Economic Studies, Bucharest, Romania

Abstract:

The New Steering Model in Germany, as adoption of the New Public Management wave in the 90ies, focuses to bridge the distinctions between private and public management. Risk management could be one of the selected tools. In Germany, the public administrations have to declare their detected individual chances and threads for a sustainable allocation of services to the citizens in the annual status report. A theoretical introduction considering risk management and risk awareness in public administration shows the asymmetries between public and private sector. A relationship between recognized risks and the financial status is presented to show the different estimations of the support by risk management. The findings show a spectrum from complains about the entire financial situation to a very clear and distinct description of roots, causes and possible countermeasures for threats and chances. As one result it has to be accepted that a public entrepreneur has to cope with risk and uncertainty as component of the environment of public management; decisions and their developments have to be observed, evaluated and, in the case of adverse expectations measures, established to minimize the negative consequences for sustainable execution of operations in public administration.

1. Introduction

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Continental Europe is not seldom regarded as a late comer in terms of introduction and application of the tools from the New Public Management - toolbox. With the application and the adoption of some of the elementary columns of New Public Management (NPM) the public municipalities and counties in Germany tend to transform themselves towards a service provider. The sector has to focus all efforts to enhance welfare as constitutional task, but also to follow laws and political strategies. Further, private sector organizations have in focus profit maximization; public administrations have to improve welfare. So the organizational and procedural environment have to be very dynamic to cope with the requirements of resources by the different parties. Already Woodrow Wilson has pointed to these permanently changing demands (Wilson, 1887). However, obviously the local public administrations are already demanded too much for many years with these duties. The gap between the provided resources and the demands by politics and society appears very clearly in the indebtedness degree of the public sector.

The results, considering the German federal states, give a more concrete impression of the financial status as entire look. Without appropriate instruments to control costs and identify undesired expenses, at least those under direct influence of politicians and administration, this level will rise for the next years.

Source: Statistisches Bundesamt, Wiesbaden https://www.destatis.de/DE/ZahlenFakten/GesellschaftStaat/OeffentlicheFinanzenSteuern/Oeffentli cheFinanzen/Schulden/Tabellen/ SchuldenGemeinden_311213.html;jsessionid=2B5E259E5DA0197116734DA17171D428.cae1

The presented values give only cursorily an impression of the perception of the duties against. In the other European countries the situation looks similarly menacing. The gap between the given budget and the costs for increasing duties and surprising costs has to be bridged, by reducing the expenses, being prepared by reserves, or by avoiding surprising and undesired expenses.

At the beginning of the new century the government in North Rhine-Westphalia has decided to build up the finance calculation, similar the private sector. The "Kameralistik" (cash-accounting), which excludes for example depreciations, is replaced by the double-entry-accounting. But the finance perspective was only one instrument suggested by the wave of NPM, to try to convert private sector management tools for application in public sector. Contracts, agreed and measurable aims, and the participation in corporate success are only some examples of assumed tools of the NPM; the German version was called New Steering Model (NSM). After ten years of introduction and maintaining of the new system the researchers present a very different evaluation of the success of the application. Banner is convinced that the recent legislation on accrual-based local budget, a spin-off of the NSM, is giving a new boast to the implementation of basic NSM elements such a single-line lump-sum budget, targeting, indicators performance contracts and cost accounting (Banner, 2008). Others, like Kuhlmann, Bogumil and Grohs (2008) come to different results in the realization. They speak even of a renaissance of the Weberian Bureaucratic Model. However, the Local Authority Budget Ordinance requested the following considering risk management: In each annual status report chances and threads of the future development considering the sustainable allocation of services and products of the local public administration is to declare; further it is to present the basement and origins of these assumptions (Local Authority Budget Ordinance, § 48).

2. What risk management stands for?

Risk management for private sector has different objectives than for the public sector. While this tool of management is used in private sector as an instrument to maintain and guarantee the existence and survival of an organization or enterprise, risk management in public sector is more focused to the enhance welfare to the people, thought this expression remains vague and let freedom for interpretation. So the National Audit Office in the United Kingdom points out that “the main focus of private sector risk management is on maintaining and enhancing profitability – in contrast in departments the focus is on implementation of objectives and services to the citizenry” (NAO, 2000). Welfare to the people is a vague expression and leaves a diffuse notion what increases welfare and what decreases welfare. The different geographical, social, or financial situations of all citizens are rarely to compare rather than to get any consensus of acceptance, support and approval of decision for projects or measures. But this is a complex area of research to encompass; the question for a way to collect, process, and to handle meaning for and of majorities and minorities is not target, rather to be answered in this work. Reinhard (2004) describes network a public administration is working in and what can create events which could cause desired and undesired consequences as follows:

Risks, in the meaning of chances and threads for executing public services and providing products, have therefore different linked impacts to the players.

Considering the fundamental differences, although the boundaries between both sectors are blurring, as different researches show, the application and direction of risk management and the basement of risk awareness come in focus. Especially when goals of the public administration are in a situation of competition: The Dictionary of Philosophy puts it as follows: "achieving one goal may conflict with achieving another, and therefore require that a rational action by one that best achieves one's goal only when these goals are considered forming a system" (Audi, Eds., 2009).

It is crucial to develop an organization-wide system to identify, analyze and estimate chances and threads. But also to define standards and indicators to measure especially undesired developments in monetary units. The annual status report represents the risk awareness by declaring the risk situation, but also the origins, sources and possible consequences, if executed in an appropriate and effective way.

3. Status report as publicly strategic discussion

For a successful application with effective results providing services to enhance welfare risk awareness has to be established all over the organization. Some will argue that the application of the Weberian Bureaucratic Model prevents the organization on the one hand to act as an entrepreneur; on the other hand personal involvement in results is intentionally excluded. The elements of absence of personal responsibility in the case of correct execution of rules and regulations, hierarchical structures and workflows, and no direct participation to success and failure, are presented as reasons for the peculiar organization and processes in the public sector (Weber, 2008).

Recognizing these important cultural and organizational distinctions leads to another important perspective: The public administration in Germany was established as an executive organ for governmental programs at the different levels. Local politics, given by the local and decentralized parliament and governmental policies, given by the federal and state government, are in conflict with local demands and in conflict with scarce resources. If we assume that local public budget is used in the best economical way, but the debt level is nevertheless increasing, than there must be expected a structural imbalance. In 17 of the 39 examined annual status reports is complained about the limited resources and the forecast of financial budgets. Especially the legal codified connectivity principle is quoted: The gap between the ordered or transferred additional tasks and the given resources are given as one reason for the negative developments. The steady violation of that connectivity principle, which stands for the assumption, that the governmental level, that is responsible for additional duties, has to provide a proportional compensation, will lead to undesired consequences. First, it will lead to an increase of the debt level, delays of projects or stop of services; but secondly, the risk awareness could be driven out by the futility trap. That means that it doesn't matter how effective and efficient any institution will execute her duties, the negative development is determined because of the imbalance of additional costs and additional compensation. The trap based on the estimation that, although using every measure to stay in budget, additional duties and increasing costs will lead to additional debts. Beneath the NPM wave the focus is directed to change: Reforming the organizations from governmental level to local administration as one instrument to ensure the sustainable provision of public services and products (Fernandez and Rainey, 2006).

For Fernandez and Rainey most important is to communicate the need for change, analogue managerial leaders have to convince the individuals of the need for risk awareness and a compelling model. If one follows the results from Kers de Vries and Balazs (1999) that is most successful, if argued by the expectation of relief from stress or discomfort (Kers de Vries and Balasz, 1999, as cited in Fernandez and Rainey, 2006). But Fernandez and Rainey put forward another factor for successful organizational change: They see the top-management support and commitments critical cornerstones for a change.

4. Diffuse reflection of risks as result of the survey

The annual status report is only one fragment and provided results of a vivid risk management system. Legally demanded, the report focused to a description of a status at the end of the year. Only few of the examined status reports give a situation report, based on a review of origin, current implications and impacts, and further expectations of the source. Metric analyses, for example evaluation of monetary compensation requirements, are missing.

Given by the § 48 Local Authority Budget Ordinance, the local administration in North-Rhine-Westphalia have to describe chances and risks. Risk, as term, is used in the meaning of a not desired event or a consequence for sustainable providing and executing public services and products. Risks have therefore negative impacts to the execution of duties to local administrations. Only 11 out of 39 examined municipalities have given a comprehensive overview of chances and risks, defined by the number of chances and risks more than 2; most of the others concentrate in their reports exclusively to negative impacts. This implementation could be used as an indicator that the model of risk management, recognizing of not-desired and desired developments, is not put into practice. Options and opportunities are limited by a high threshold; sometimes timely and in terms of content: The opposite side, chances, therefore desired events and consequences have to be declared also. We examined 39 municipalities (9%), of them 8 counties (27%). In the average, 3 risks and 0.6 chances are named by the examined public administrations, while only 15 of 39 pointed out chances. 5 of 39 named no risks and no chances. But the quality, considering the term risk and chances, is very diffuse. Few described in a very detailed way the origin of the current financial status; others complain in general the finances and the expectations. Because of the short definition of risk and chances in the ordinance, origins, consequences, outputs, and outcomes for the provision of public services are used in a wide spread way. Some stated the results without a timeframe, others described clear the genesis of the current circumstances and expectations. Remarkably, no one of the examined municipalities tried to convert the risks and chances into monetary values or in consequences for their operations. Compelling consequences are described only in a vague way.

The following model of a financial statement shows the private sector standards, measuring objectives and gives examples for calculated numeric statement, for better comparison, with data from the past or with similar organizations.

Obvious, objectives, services and products provided by public and private sector are not similar; especially the definition of services and products was out of focus until NPM. Measurement of success is different because of the reasons pointed out above. Dobell (1989) argued that the government’s job is to protect the public from risk after all. So it is remarkable that the reports neglect pure risks, like change in severe weather or weather phenomena like dry outs, thunderstorms or heavy rains. There are no final empirical findings that a climate change is ongoing in Europe, but the intensity is increasing and the intervals decreasing. Preventive measures by rules and regulations, to ensure the public safety, based on models of the last century; but to enhance and to act as an guarantor of public safety as one segment of public welfare, those consequences have to be kept in the forecast for measures and costs. Beneath the direct effect to the public, indirect threats are also ignored: No one of the examined public administration has argued that the growing dependence to IT-based services and the internet creates a holistic threat: IT-Systems could be hijacked. As one result the basic provision of fresh water, electricity and energy could be stopped sharply. The consequences are not scientific examined rather than a plan for establishing of minimizing the consequences established. Results of the internal analyses of past developments, current and anticipated events, and the

Markus Bodemann et al. / Procedia Economics and Finance 23 (2015) 1046 – 1053 1051 consequences are predominant from a financial standpoint. Missing are holistic notions, analyzing public risk

administration in legal, social, contractual, and financial framework.

5. Kinds of impacts and consequences

Concerning risk management, local public administration is able to act within a limited freedom to choose; for examples to give guarantees, to plan and order personal developments, or choose different kinds for financing mandatory or voluntarily tasks and projects. That leads to a different approach analyzing the presented risks. As to see in Fig. 2, the spectrum of named risks is wide, almost 44% complained, out of an input oriented view, the forecasts of fiscal income.

Figure 2: Indication of threats for sustainable execution of allocation of services and products
Source: By authors, annual status reports of municipalities and counties in North Rhine-Westphalia, Germany, n=39

Loevenich (2011) reviews risks in another approach: Operational risks are based on organizational-operational facts and therefore so not-economic risks which could cause damage to the organization. Loevenich distincts between operational risks, economic risks, business risks and strategic risks, while economic risks are described by loss of debtors, market price risk or liquidity risks. For a better estimation and notion of the risks, we have to distinct the origin and possibilities to show the effectiveness and efficiency of countermeasures. At least all of them will have a direct impact to the liquidity and the available finance, for mandatory and voluntarily tasks. In the analysis of the reports we distinct as declared above between the following risks:

5.1. Endogenous impacts

Originated from sources inside the responsibility of the local administration; decisions under no certainty made by decision makers by political, strategic and/or rational choice. Set up of origin is located in decision by the local administration/ local political parliament.

Examples: guarantees, delays in maintaining buildings, size of staff

Source: By authors, annual status reports of municipalities and counties in North Rhine-Westphalia, Germany, n=39

5.2. Exogenous impacts

Origins given by external impacts or events; depending on the general economic situation, on legal framework and changes by political and societal progress and processes; preparation by anticipation or reaction; using of compensations is limited.

Examples: legal framework, societal developments, technological innovations

Source: By authors, annual status reports of municipalities and counties in North-Rhine-Westphalia, Germany, n=39

6. Expectations and recommendations for increasing risk environment

The term in the Local Authority Budget Ordinance to describe chances and risks contents a bandwidth of vagueness and freedom to interpret. Most of the examined public administration used this legal demand for a political statement, predominantly the downside, not desired events and consequences are described. Only in a few cases expected positive effects are presented. For a more precise description and therefore a better analysis of the current status of chances and risks, the terms have to be better defined; especially the distinction of causes, events, consequences and the conversion to monetary values will enhance the meaningfulness of this part of the reports, in best practice in direct correlation with the financial statement. Exogenous impacts or events could be influenced only superficially; the framework of adjusting screws lay often outside of reach of the local government. Exogenous impacts are to handle like pure risks, they could be absorbed politically or monetary prepared and compensated; By comparing the reports of a certain period of time a correlation of risks, deviations from a planned budget will be recognizable; using the identified chances and avoiding risks contributes to cope sustainable with the mandatory task to improve welfare.

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