INTRODUCTION
Introduction
In light of public management reforms since the 1980s, the notion of ‘New Public
New Public Management (NPM) has gained significant attention from scholars and practitioners globally, as it reflects the need to transform public sector organizations (PSOs) by incorporating private sector management practices (Dunleavy & Hood, 1994) Key characteristics of the NPM paradigm include the promotion of competitive markets and the implementation of business-like management techniques (Hood, 1995; Speklé & Verbeeten, 2014) The introduction of competitive markets enhances rational and efficient decision-making, while tools like the Balanced Scorecard (BSC) improve the professionalism of PSOs in their operations and management (Hood, 1995; Speklé & Verbeeten, 2014; Ter Bogt et al., 2010) Consequently, NPM encourages PSOs to become more rational, efficient, and professional in their functioning.
A transformation from the traditional public administration (PA) to NPM potentially instigates public sector performance and authority enhancement (Dunleavy & Hood, 1994; Hood, 1995; Moynihan, 2008) First, regarding public sector performance, Moynihan (2008, p
27) asserts that PSOs have prolonged exposure to poor performance and low efficiency driven by the traditional PA system This is because public officials are likely to be relatively disinterested in pursuing improvements in organizational performance unless they are motivated by political gains or benefits (Boyne, 2002; Bandy, 2015) Furthermore, in budgeting procedures, traditional
Public administration (PA) often adopts an input-oriented spending approach, focusing on budget allocations rather than actual outputs and outcomes This leads budget holders, or public managers, to maintain budget slacks, hindering their ability to strategically prioritize expenditures and diminishing the efficiency of public services and goods Additionally, public officials face limitations in decision-making authority regarding financial matters, as they are bound by the initial budget appropriations set at the start of the fiscal year Consequently, public sector organizations (PSOs) tend to exhibit subpar performance and possess limited control over their financial affairs.
Despite the traditional public administration system's challenges, New Public Management (NPM) has driven significant improvements in public performance and authority This transformation is evident as public sector organizations (PSOs) adopt innovative accounting practices, such as accrual-based accounting, and implement performance measurement systems (PMS) that enhance rationality and efficiency in operations.
The adoption of innovative instrumental practices enhances decision-makers' access to performance information, allowing public officials to operate with greater efficiency, effectiveness, and accountability in response to stakeholder demands Consequently, the New Public Management (NPM) reform has shifted the traditional public administration system, characterized by low performance and limited managerial authority, towards a model that emphasizes performance management, resulting in improved public performance and increased managerial authority.
The NPM reform encourages Public Service Organizations (PSOs) to enhance both public efficiency and accountability (Moynihan, 2008) Public efficiency consists of technical efficiency, which maximizes outputs with given inputs, and allocative efficiency, which aligns public service supply with demand (Andrew & Entwistle, 2014, p 5) In recent years, economic recession has pressured PSOs to meet increasing resident demands with limited resources Additionally, public accountability encompasses external accountability, where citizens seek transparency from governments, and internal accountability, which holds public servants responsible to elected officials for performance (Moynihan, 2008, p 36) Thus, improving efficiency and accountability is crucial in the context of NPM reforms.
Public sector accounting innovation is crucial for public sector reforms, emphasizing the need for both financial and non-financial information among public sector organizations, citizens, public servants, and elected officials (Guthrie, 1998; Hood, 1995) This shift towards 'accountingization' facilitates the distribution of performance information among stakeholders, highlighting the necessity of moving from traditional financial reports to a more comprehensive understanding of the financial position in public management Since the 1990s, advanced economies like New Zealand have exemplified this transition.
Australia and the UK have implemented accrual accounting in their financial statements, complemented by accrual budgeting in local income and expenditure management (Blundal, 2004; Marto, 2013; Robinson, 2009; Warren, 2015) Following their lead, countries like Canada, the USA, and Japan later adopted this accounting approach This shift enables policymakers to obtain a more comprehensive understanding of the financial landscape, particularly regarding medium and long-term aspects such as public assets and pensions, in contrast to cash-based accounting, which only reflects financial data for a specific fiscal year (Warren).
The adoption of the accrual basis of accounting can enhance public efficiency and accountability, particularly by promoting more rational management of public assets, ultimately leading to improved performance.
Performance Measurement Systems (PMS) are crucial for enhancing the accrual basis of financial reporting and budgeting, as highlighted by Martí (2013) and Schick (2007) In the context of New Public Management (NPM), performance budgeting emerges as an effective tool, shifting the focus from traditional input control methods, such as incremental and zero-based budgeting, to prioritizing outputs and outcomes (Bandy, 2015) The performance data generated by PMS can be seamlessly integrated into strategic planning and budgeting for upcoming fiscal years Moreover, this information aids in evaluating local expenditures within the limits of local revenues, allowing users to connect performance targets with budgeting processes (Robinson, 2013) Consequently, PMS not only supports proactive management activities like planning and budgeting but also enhances retrospective actions such as evaluation, control, and monitoring in public sector organizations.
This study explores key aspects of the New Public Management (NPM) paradigm through four significant investigations related to a Japanese prefectural government The first investigation focuses on the delegation and devolution of financial powers to local governments, emphasizing the role of intergovernmental grants as a vital policy tool The second analysis addresses public technical efficiency amid the financial crisis and changes in public sector accounting The third study enhances allocative efficiency and accountability by advocating for accrual-based accounting in local public asset management Finally, the research examines the design and implementation of a Performance Management System (PMS) aligned with an accrual-based accounting and budgeting framework.
Research motivations
This research aims to address the lack of academic studies on public efficiency and performance related to public finance management in Japanese municipalities, particularly when compared to other advanced economies within the Organization for Economic Co-operation and Development (OECD), such as the United Kingdom.
Since the 1990s, the Japanese government has initiated New Public Management (NPM) reforms, particularly influenced by changes in public administration during the Koizumi administration in the early 2000s The 2008 Global Financial Crisis significantly affected the socio-economic conditions of local governments in Japan However, research on these impacts remains limited, primarily focusing on regional or prefectural levels rather than local levels Identifying the determinants of public efficiency and performance can provide valuable insights for local authorities and policymakers, leading to effective policy prescriptions These points are further explored in the following subsections.
This study focuses on Japanese local governments due to two significant research gaps in the existing literature Firstly, following the New Public Management (NPM) reforms in the late 1980s, many OECD countries, including the Netherlands, Germany, Italy, Portugal, and the United States, have implemented administrative changes aimed at enhancing efficiency and accountability Consequently, there has been a substantial increase in research related to public sector finance and accounting, especially concerning fiscal decentralization in these nations Notable studies on public spending volatility include works by Sachi and Salotti (2017) in Italy, Furceri (2007) for OECD countries, Denison and Guo (2015) in American states, and Albuquerque (2011).
Research on public revenue volatility in Europe has been explored by Afonso (2017) in North Carolina counties and Staley (2015) across American states In terms of public performance, various studies have highlighted findings in OECD countries, such as Storto's (2013) evaluation of technical efficiency in major municipalities in Italy, Afonso and Fernandes' (2006) analysis of 51 Portuguese municipalities, and Doumpos and Cohen's (2014) examination of Greek local government efficiency using accrual accounting data Additionally, Cuadrodo-Ballesteros et al (2014) investigated the link between public service delivery and efficiency in Spain In contrast, research on public efficiency in Japan has been limited, with Nijkamp and Suzuki (2009) assessing efficiency scores in Hokkaido and Fukuyama et al (2017) addressing public efficiency at the prefectural level Notably, studies focusing on Tokyo's local governments remain scarce.
Japanese municipalities have undergone significant changes due to national policies and environmental factors In the mid-1990s, particularly during the Hashimoto administration (1996–1998), there was a notable emphasis on New Public Management (NPM) principles at both national and local government levels, focusing on policy evaluation and fiscal decentralization Key legislative milestones include the enactment of the Law for the Promotion of Decentralization in 1995 and the Government Policy Evaluation Act (GPEA) in 2002.
During the Koizumi administration from 2004 to 2006, the 'Trinity Reforms' introduced changes to the local allocation tax (LAT) grant, national subsidies, and local taxes, providing Japanese local governments with greater flexibility in generating their own revenues However, the economic downturn in 2008 significantly affected municipalities, leading to a decline in their financial stability Despite these challenges, there is a lack of empirical research on the internal and external factors influencing Japanese local governments This study aims to explore the impacts on Tokyo's local governments since 2008.
1.2.2 Potential prescriptions for public policies.
Tokyo local governments face increasing demands for improved public efficiency and accountability, prompting an investigation into four critical dimensions of public performance First, local authorities should restructure revenue components, particularly intergovernmental grants, to mitigate budget volatility Second, a reevaluation of public efficiency and asset utilization is essential for enhancing the delivery of public goods and services Third, upgrading the current cash-based budgeting system is necessary to strategically support performance budgeting Lastly, a performance measurement system should be examined to understand the factors influencing the adoption and implementation of performance budgeting This empirical evidence addresses a research gap in Japanese literature and offers valuable policy implications for local authorities.
Research objectives
This study focuses on three key research objectives related to New Public Management (NPM) principles within the Japanese local context, an area with limited scholarly exploration We examine four main NPM principles: the shift from a unified management system to decentralized units, the pursuit of efficiency through "doing more with less," the adoption of private sector accounting standards, and the establishment of explicit performance measures in public budgeting Additionally, this research aims to enhance the existing literature on NPM practices in industrialized Asian OECD countries while analyzing fiscal disparities among sub-regions Lastly, in light of fiscal austerity measures since the late 1990s, we investigate the impact of policy changes, such as the implementation of accrual accounting in municipalities, on public organizations, and propose significant public policy recommendations for local governments.
We established four key objectives focused on enhancing public finance management, improving the efficiency of public service provisions, optimizing public asset utilization, and implementing effective public performance measurement, alongside eight corresponding research questions to guide our inquiry.
1 Which components of the volatility of revenues and grants are associated with local spending volatility in Tokyo municipalities?
2 Are the fiscal systems (taxes, grants, etc.) different between urban (special wards) and suburban (Tama cities) areas in the Tokyo metropolis, due to the different fiscal arrangement system in the face of the financial crisis?
3 What are the trends or patterns of public (technical) efficiency scores of Tokyo local governments over the 2001–2015 period, before and after the introduction of accrual accounting?
4 What is the impact of asset utilization on municipal efficiency in Tokyo local governments since the introduction of accrual accounting and compare the effect of accrual accounting mode as compare to cash accounting on public efficiency improvement?
5 What is the role of current budgetary control (cash budgeting) functions for financial stability or efficiency improvement?
6 What types of assets significantly impact municipal efficiency?
7 What are the driving factors to determine PMS use in case of Tokyo Metropolitan Government (TMG)?
8 Is the adoption and implementation of PMS for incentive or exploratory use?
We attempt to solve these research questions in chapter 3 (questions 1 and 2), 4 (question
3), 5 (questions 4, 5 and 6), and 6 (questions 7 and 8), respectively.
Research methods
This study aims to investigate the current state of public periods, utilizing positivism aligned with realist ontology as the foundational framework (Easterby-Smith, Thorpe, & Jackson, 2012) An empirical-analytical approach, defined as the objective gathering and interpretation of real-life knowledge (Van Thiel, 2014), was deliberately chosen for the research design While a purely quantitative method poses limitations, such as the inadequacy of deterministic models to accurately reflect long-term historical realities and issues with data relevance, this study adopts a mixed-methods approach, prioritizing deductive reasoning The research methods employed include econometric analysis, two-stage DEA, and a combination of qualitative and quantitative techniques.
1.4.1 Econometric analysis of panel data.
The panel data econometric method estimates the relationship between expenditure volatility, the dependent variable, and various independent variables in this study This approach utilizes panel data, which combines observations from cross-sectional units across multiple time periods, often referred to as cross-sectional time-series data or longitudinal data (Baltagi, 2005).
Panel data techniques, as noted by Baltagi (2005), effectively manage individual heterogeneity and enhance data quality by providing greater variability and reduced collinearity among variables This approach offers increased degrees of freedom and improved efficiency in analysis.
In panel data methods, the unobserved effect due to the heterogeneity of observations accounts for a discrepancy between the fixed effects (FE) model and random effects (RE) model
The Fixed Effects (FE) model, as described by Wooldridge (2013), utilizes a pooled Ordinary Least Squares regression focusing on time-invariant variables, treating unobserved heterogeneity as a varying intercept over time In contrast, the Random Effects (RE) model assumes that unobserved effects are uncorrelated with explanatory variables and incorporates these effects as an error component within the composite error term Although the RE model can estimate the impact of time-invariant variables, it may produce inconsistent parameter estimates when correlation exists, failing to accurately reflect unobserved heterogeneity While the FE model is less efficient than the RE model, it mitigates potential variance by stratifying observations into groups (Drew & Dollery, 2016) Kennedy (2008) further asserts that RE estimators are biased due to potential correlation between individual effects and independent variables, making FE estimators a more reliable choice for estimation.
In economic production theory, efficiency can be measured using two main approaches: parametric and non-parametric methods Parametric techniques encompass Stochastic Frontier Analysis (SFA), Ordinary Least Squares (OLS), and Fixed Effects (FE) regressions, while non-parametric methods include Data Envelopment Analysis (DEA) and m-order analysis Our research focuses on DEA due to its widespread use in assessing municipal efficiency, as noted by Worthington (2000) and Storto (2016).
DEA measures typically rely on mathematical linear programming techniques Farrell’s seminal work (1957) provided a definition of technical and allocative efficiency in production
The technical component of production involves the relationship between outputs and inputs, where improving technical efficiency can be achieved by either reducing inputs to produce the same outputs or maximizing outputs with the existing inputs This can be approached through either an input-oriented strategy focused on waste elimination or an output-oriented strategy aimed at maximizing results Additionally, the allocative component assesses technical efficiency based on current price conditions, as outlined by Fried, Lovell, and others.
Data Envelopment Analysis (DEA) calculates relative efficiency scores based on the assumption of convexity, meaning that observed efficiency scores are bounded by a technology frontier, as established by Charnes, Cooper, and Rhodes in 1978 The Constant Returns to Scale (CRS) DEA model, also known as the CCR model, posits that proportional changes in input lead to proportional changes in output However, since this assumption is rarely applicable in practice, Banker, Charnes, and Cooper expanded the model to include Variable Returns to Scale (VRS) in 1984, allowing for constraints on the relationship between inputs and outputs Since the development of the CCR and BCC models, there has been significant growth in literature exploring theoretical and empirical applications of DEA across various sectors, particularly in evaluating public efficiency for benchmarking public entities (Worthington, 2000; De Borger & Kerstens).
Data Envelopment Analysis (DEA) evaluates the relative economic performance of entities but does not identify the factors influencing their efficiency To address this, a two-stage analysis was developed, where potential environmental factors are regressed against the efficiency estimates obtained from the first stage This second stage utilizes various methods to enhance the understanding of efficiency determinants.
In this study, we utilize Data Envelopment Analysis (DEA) to estimate efficiency scores and apply truncated regression with double bootstraps to analyze the relationship between various environmental variables and these efficiency scores While Banker and Natarajan (2008) support the use of parametric regression estimation methods such as OLS and MLE for their consistent estimators of contextual factors' impact, Simar and Wilson (2007) advocate for truncated regression with a bootstrap algorithm They argue that this approach, grounded in a coherent data-generating process, effectively addresses issues like serial correlation and boundary constraints in second-stage analysis, thereby producing more reliable statistical confidence intervals through data resampling.
In performance measurement and management, we favor using mixed research methods, specifically explanatory sequential mixed methods, which integrate both qualitative and quantitative data collection and analysis.
Creswell (2014) emphasizes that combining quantitative and qualitative methods enhances research interpretation, as relying solely on one approach limits the depth of findings Consequently, we adopt an explanatory sequential mixed-method design, starting with a quantitative analysis using Partial Least Squares Structural Equation Modeling (PLS-SEM), followed by qualitative interviews to enrich the results.
Structural Equations Modeling (SEM) encompasses a range of multivariate techniques designed to explore complex dependence relationships simultaneously Unlike traditional methods such as multiple regression, SEM effectively delineates multiple regression equations among various independent and dependent variables, while also accommodating mediating and moderating effects Two primary types of models are estimated within this framework.
The article discusses two key models in structural equation modeling: the structural (inner) model and the measurement (outer) model The structural model illustrates the relationships among variables, while the measurement model focuses on the indicators that represent latent variables or constructs It's essential to differentiate between reflective and formative measurement models In the reflective model, indicators are manifestations of a latent variable, reflecting its characteristics Conversely, in the formative model, indicators contribute to the formation of the underlying construct through causal effects (Hair et al., 2017).
Structural Equation Modeling (SEM) encompasses two main multivariate techniques: Covariance-based SEM (CB-SEM) and Partial Least Squares SEM (PLS-SEM) CB-SEM is predominantly utilized for confirmatory analysis of theoretical relationships, while PLS-SEM serves an exploratory role in theory development, particularly in fields like management accounting PLS-SEM is favored for its advantages, including fewer stringent assumptions regarding distribution and independence of observations compared to CB-SEM Additionally, PLS-SEM utilizes least-squares algorithms, allowing for effective parameter estimation even with limited data, resulting in smaller sample size requirements than those needed for CB-SEM.
(1999) state that ‘minimum recommended ranges from 30 to 100 cases’ for PLS analysis
Subsequently, due to its superior features, we opt for the PLS-SEM technique in performance management research in this study.
In the second stage of our research, we aim to gain a deeper insight into the interrelated associations among constructs by conducting interviews with selected participants from the first stage These participants respond to semi-structured questionnaires, and we analyze the verbal data using content analysis and conceptual mapping This study employs a mixed-methods approach, incorporating both SEM analysis and semi-structured questionnaires to enhance our findings.
Structure of the thesis
This dissertation is structured into seven sections to provide a comprehensive understanding of public finance, public sector accounting, and public performance management within Tokyo's local governments.
Chapter 1 introduces the research background in public efficiency and performance- oriented management simulating the business management style in the wake of public management reforms, urging many countries across the world to carry out innovations and improvements in public finance, public sector accounting, and public performance management Particularly, with a primary focus on Tokyo local governments in Japan, we raise research motivations, research gaps, and potential policy implications for local authorities We outline eight contemporary research questions that we address in four main chapters (Chapters 3-6)
Chapter 2 presents a scholarly corpus of literature regarding the research topics First, we introduce NPM principles from international perspectives and, particularly, NPM in Japan Second, in the field of public finance, we synthesize the theory of fiscal federalism and decentralization, which support the research of budgetary volatility in Chapter 3 Third, the public efficiency and public sector accounting innovations are introduced Finally, we depict PMS in the field of management accounting and focus on its implementation and use In addition, underlying theories such as agency theory, institutional theory, and contingency theory are introduced to support the use of PMS.
Chapter 3 aims at solving the problem associated with the impact of revenue volatility on expenditure volatility in the case of 49 Tokyo local governments The public incomes, including various taxes, intergovernmental grants, fees, charges, subsidiaries, and local bonds, could potentially affect public expenditure in the financial austerity aftermath of the GFC The volatility of many types of incomes makes the spending decisions of public authority harder in terms of pursuing fiscal sustainability and stability It is necessary to fine-tune some incomes to smooth out the spending volatility
Chapter 4 merely introduces the empirical analysis of public efficiency scores in 49 Tokyo local governments Based on the logic production model, in which inputs are local demanding expenditures (described in Chapter 3) translated into public goods and services provision, we estimate the public efficiency by the means of Data Envelopment Analysis (DEA) over the 2001–2015 period We also benchmark the efficiency scores prior to and after the introduction of the accrual accounting system in Tokyo local governments in 2008
Chapter 5 extends the research in Chapter 4 by implementing the second stage analysis after DEA estimation We recognize the decline of public efficiency in 49 Tokyo local governments since the introduction of the accrual accounting system in 2008 We examine the regression of public efficiency on various environmental variables and identify which determinants affect the public efficiency scores by using the Simar-Wilson (2007) approach The analysis results in terms of cash-based and accrual-based accounting are presented We notice that the budgeting in accrual-based accounting is better than that in cash-based accounting Therefore, we recommend the adoption of accrual budgeting in public management reform We also deconstruct the study on public asset utilization into special wards and Tama cities and investigate the various assets affecting efficiency scores
In the context of NPM, accrual budgeting offers significant advantages over performance budgeting, especially when a justification for Performance Management Systems (PMS) has been established in the public sector Chapter 6 explores the implementation of PMS and the factors influencing its effectiveness at TMG and local governments This study utilizes mixed research methods, specifically sequential exploratory research, incorporating Partial Least Squares Structural Equation Modeling (PLS-SEM) during the quantitative phase, followed by semi-structured interviews to gain deeper insights into the application of PMS at both TMG and local levels.
Chapter 7 concludes by addressing the need to mitigate expenditure volatility and improve public efficiency scores, emphasizing the significance of asset utilization and the preference for incentive-based over exploratory use of Performance Management Systems (PMS) It also outlines public policy recommendations for local and prefectural governments, specifically the Tokyo Metropolitan Government (TMG) Additionally, the chapter discusses research limitations and suggests directions for future studies.
: Indicating the research method used in each chapter : Indicating the underlying theories and studies built for ahead subjects
Figure 1 Structure of the thesis
LITERATURE REVIEW
New Public Management (NPM)
Since the 1980s, New Public Management (NPM) has emerged as a key framework in global public sector reforms, attracting significant scholarly interest (Lapsley, 1999) NPM emphasizes enhanced public efficiency, effectiveness, and accountability (Dunleavy & Hood, 1994; Hood, 1995; Lapsley, 1999) The model was first implemented by UK Prime Minister Margaret Thatcher in the late 1980s and subsequently spread to advanced economies, including Australia, New Zealand, the USA, and Canada By the late 1990s, NPM principles had also reached countries beyond the Anglosphere, including Japan and various developing nations in Asia (Diefenbach, 2009; Hood & Dixon, 2013).
Public sector management under New Public Management (NPM) shares objectives with private sector management, focusing on reducing bureaucratic inefficiencies and incompetence (Hood, 1991, 1995) Public Sector Organizations (PSOs) have adopted business management techniques like the Balanced Scorecard (BSC) and Key Performance Indicators (KPIs) to enhance their operational effectiveness Additionally, NPM encourages public authorities to pursue greater autonomy in areas such as spending, staffing, and outsourcing (Dunleavy & Hood, 1994; Hood, 1995) Consequently, Hood (1995) identified seven essential principles that underpin the NPM theory.
The public sector is being transformed through the unbundling of services into corporatized units focused on specific products This shift promotes contract-based competitive provision, incorporating internal markets and term contracts to enhance efficiency Additionally, there is a growing emphasis on adopting private sector management styles, alongside a commitment to discipline and frugality in resource utilization.
‘more emphasis on visible hands-on top management’, (6) ‘explicit formal measurable standards and measures of performance and success’, and (7) ‘greater emphasis on output controls’ (Hood,
1991, 1995) Public sector reforms over the past decades have adopted these seven principles, bringing about positive consequences of efficiency, effectiveness, and accountability improvement
The New Public Management (NPM) theory has evolved significantly, as highlighted by Dunleavy et al (2006), who define it through disaggregation, competition, and incentivization NPM operates at two levels: the doctrinal level, which incorporates business concepts and values into public sector management, and the mundane level, which focuses on output-oriented measurements, disaggregated organizations, and treating public service recipients as customers Diefenbach (2009) further clarifies NPM principles by distinguishing between external factors—such as market demands, stakeholder influences, and customer satisfaction—and internal management goals that emphasize efficiency, effectiveness, and cost-effectiveness Additionally, Pollitt (2016) advocates for integrating NPM with managerialism to enhance public management reforms.
The New Public Management (NPM) doctrine has evolved over time, yet key features such as fiscal and administrative decentralization, enhanced efficiency and effectiveness, innovations in public sector accounting, and performance management have remained consistent NPM principles are adaptable to local contexts, including history, culture, politics, and economics, resulting in variations across different countries Our research focuses on characterizing these principles specifically within Japanese local governments.
Since the late 1990s, Japan has implemented unique central and local administrative reforms in response to New Public Management (NPM), distinguishing itself from other OECD countries Unlike English-speaking nations that have embraced NPM, Japan has placed less emphasis on its principles Notably, Japanese public management reforms focus on privatization, deregulation, and tax reform, which diverge from traditional NPM tenets Additionally, while countries like New Zealand and the UK prioritize market-oriented mechanisms in their reforms, Japan emphasizes social equity and customer needs over market forces.
Sweden who ‘let manager manage’ In this regard, Japanese public management has followed the second line of practice (‘let manager manage’ but with less flexibility and responsibility)
Japanese public administration presents significant opportunities but lacks motivation to fully embrace New Public Management (NPM) principles (Eshima et al., 2001; Yamamoto, 1999) Furthermore, Hori (2004) highlights that it is bureaucrats, rather than politicians, who have primarily influenced reforms in Japanese public management As a result, the focus of Japanese public management appears to align more closely with new public administration than with NPM.
In Japan's central administration, two key actions—policy evaluation and agentification—impact local governments significantly The Government Policy Evaluation Act (GPEA), enacted by the National Diet in 2002, serves as a guideline for governmental agencies to assess policy and performance within the executive branch Additionally, agentification involves delegating autonomous or semi-autonomous agencies to lower levels, acting as representatives of ministerial organizations to execute specific functions, a system adapted from UK practices While the UK model emphasizes the executive branch and the US model focuses on the legislative branch, Japan's approach to performance management finds a balance between these two extremes.
In contrast to the UK and US, which primarily focus on performance, Japan emphasizes both performance and evaluation in its governance approach This distinctive characteristic of Japan's New Public Management (NPM) governance is shaped by its unique environmental context, making it stand out globally.
In the unique context of Japanese public administration, transitioning from theoretical New Public Management (NPM) principles to practical applications requires specific conditions Notably, public servants often resist reforms in public administration, highlighting the challenges of implementing change.
Yamamoto (2003) highlights that while reforms are often accepted, they lack sufficient incentives for widespread adoption (Yamamoto, 1999) To address this, it is essential for governments to implement regulations that encourage bureaucrats to engage in New Public Management (NPM) practices Additionally, NPM requires public servants to possess advanced skills, such as accrual accounting and double-entry bookkeeping, which are typically understood by elite bureaucrats Therefore, providing training for lower-level public servants is crucial to facilitate the acceptance of NPM reforms Although NPM has emerged as a global paradigm in public management, it is not a universal solution; specific conditions within local governments must be considered for successful implementation.
In summary, the Japanese administration has embraced innovations in public management influenced by New Public Management (NPM) This theoretical framework guides our research on four key areas: fiscal decentralization in public finance, public efficiency, public sector accounting reform, and performance management The following sections provide the foundational context for our study.
Public Sector Finance
Since the 1950s, fiscal federalism has undergone significant theoretical development, characterized by two distinct generations of theory The first generation spanned from the 1950s to the mid-1990s, while the second generation emerged in the mid-1990s Fiscal federalism focuses on the financial relationships and responsibilities between different levels of government.
Fiscal federalism theory, as articulated by Oates (1999), examines the assignment of functions across various government levels and the fiscal instruments necessary for their execution This theory aims to explain the decentralization observed in different countries Four key theoretical frameworks have emerged in this context: the Tiebout model, which emphasizes sorting (Tiebout, 1956); Olson's fiscal equalization principle (Olson, 1969); Oates' decentralization theorem (1972); and the constraining Leviathan concept proposed by Brennan and Buchanan (1980).
The Tiebout model, introduced in "A Pure Theory of Local Expenditure," has made significant contributions to fiscal federalism despite initially receiving limited attention (Grant & Drew, 2017, p 138) This model posits that consumers or voters can choose their ideal living environment based on their preferences It highlights two key aspects of fiscal decentralization: community participation and inter-jurisdictional mobility First, individuals can express dissatisfaction with local authorities through voting, exercising their 'voice' to indicate their preferences Second, they have the option to relocate to a jurisdiction that better aligns with their needs, a concept referred to as 'voting with their feet.'
The Tiebout model suggests that individuals will "exit" areas where tax burdens and public services do not meet their needs, advocating for municipal separation and enhancing mobility This approach emphasizes the importance of flexibility in the revenue-expenditure structure to better align with community requirements (Litvack, Ahmad, & Bird, 1999).
Olson (1969) identified a critical discrepancy between the boundaries of collective goods and government boundaries, a concept he termed 'fiscal equivalence.' For Pareto efficiency to be achieved, the provision of collective goods must align with government boundaries; otherwise, efficiency is compromised To optimize the supply of public goods, it is essential that the boundaries of collective goods correspond with those of the government Consequently, delegating responsibilities from central to lower levels of government can effectively address the mismatch between these two entities, enabling more tailored public service provision.
In his influential 1969 work, Olson emphasized the importance of the government providing a diverse range of collective goods tailored to various cultural and racial groups, which would enhance fiscal equivalence and economic efficiency He also suggested that central governments could offer grants and subsidies to local governments to mitigate losses from external benefits experienced by neighboring areas Olson ultimately argued for a balanced approach to decentralization, advocating for the clear assignment of responsibilities among different governmental levels to achieve Pareto-efficient public service provision, while cautioning against excessive centralization or decentralization.
Oates (1972) introduced the Decentralization Theorem, highlighting the importance of economies of scale and local preferences in enhancing welfare The theory posits that welfare levels are higher when Pareto-efficient consumption is tailored to individual jurisdictions rather than maintained uniformly across all areas Decentralized governments can achieve greater economic welfare by offering public services that align with local needs, as they are better positioned to understand community preferences Additionally, variations in local tastes and costs mean that a one-size-fits-all approach can be detrimental Thus, fiscal decentralization is essential for optimizing public service delivery.
Leviathan constraints of Brennan and Buchanan (1980)
Brennan and Buchanan's 1980 work, "The Power to Tax," enhances the understanding of the Tiebout model by examining inter-jurisdictional mobility in a competitive market They propose a federation as a solution to mitigate the risks posed by a revenue-maximizing Leviathan government, which seeks to impose high taxes By advocating for decentralization, they argue that lower-tier governments can attract more taxpayers through lower tax rates, fostering competition among local governments regarding tax policies Ultimately, Brennan and Buchanan assert that smaller, decentralized governments contribute to greater economic efficiency.
The foundational theoretical frameworks of public finance, including the Tiebout model, fiscal equivalence, decentralization theorem, and Leviathan hypothesis, support the concept of decentralization in fiscal federalism Currently, the second-generation theory of fiscal federalism has garnered significant scholarly interest, highlighting its evolving relevance in economic discussions.
The second generation of fiscal federation literature, sparked by Qian and Weingast (1997), remains controversial They argued that an optimal level of decentralization from central to local government can enhance the provision of public goods while maintaining market efficiency Their proposed public finance mechanism involves rewarding or punishing governments based on economic performance to uphold market incentives In cases of fiscal distress, the central government tends to bail out lower-tier governments, a phenomenon known as the 'soft budget constraint' problem.
Oates (2008) introduced the concept of soft budget constraints as part of second-generation theory, highlighting the incentive structures at decentralized government levels where local authorities often engage in detrimental behaviors, leading to deficits and debt accumulation This can result in local market failures and negatively impact the national economy, necessitating central government bailouts to prevent fiscal crises at lower levels A notable example is Yubari city in Hokkaido, which requested a municipal bailout in 2007 due to excessive sub-national borrowing (Aoki, 2008; Mochida, 2008) In 2006, local authorities in Yubari concealed growing debts, resulting in fiscal insolvency (Hattori & Miyake, 2015; Mochida, 2008) Ultimately, this theory emphasizes the risks associated with soft budget constraints, distinguishing them from hard budget controls, and illustrates how destabilizing fiscal behavior at the decentralized level can lead to broader fiscal crises.
The second strand of the second generation of political economy theory is more traditional and theoretical compared to the practical focus of the first strand (Oates, 2008) This theory examines how fiscal decentralization influences the utility-making behaviors of public agents, resulting in both welfare gains and losses Ultimately, it explores the degree of decentralization of local government by the central government, highlighting the tradeoff between improved coordination under centralization and the increased sensitivity of local outputs to local preferences and costs, as well as enhanced accountability through decentralization (Oates, 2008, p 322).
Fiscal decentralization presents dual incentives, each highlighting distinct concerns The first perspective emphasizes its beneficial impacts on the public sector, while the second warns that it may encourage rent-seeking behaviors among public agents, potentially leading to variations in social welfare outcomes (Oates, 2008).
Fiscal decentralization involves transferring taxation and expenditure responsibilities from the central government to lower levels of government, as highlighted by Bird & Vaillancourt (2009) and Tanzi (1995) Over recent decades, both advanced economies and developing nations have increasingly embraced fiscal decentralization, albeit with varying degrees of autonomy influenced by their unique fiscal and political contexts This process encompasses three main types of autonomous decision-making: de-concentration, delegation, and devolution De-concentration specifically pertains to the redistribution of responsibilities from the central government to local administrative bodies or provincial and state branches.
The policy of decentralization often shifts responsibilities to lower levels of government without granting them full autonomy, a common characteristic in unitary systems (Vaillancourt, 2009; Litvack et al., 1999) Delegation involves transferring specific responsibilities from the central government to local governments, which then act as public agents to deliver certain services and goods on behalf of the central authority (Bird & Vaillancourt, 2009; Litvack et al., 1999) An example of this is seen in Japan, where a system of delegated functions at the local government level was previously in place but was abolished following the enactment of the Local Autonomy Law (Ohsugi).
Public sector financial management
Over the past two decades, the economic and financial crisis has driven governors to innovate public sector financial management, focusing on reforms such as fiscal rules, medium-term budget frameworks, fiscal risk management, accrual-based accounting, and performance budgeting These innovations aim to achieve fiscal sustainability, efficient resource allocation, and improved public service efficiency Our research project specifically examines public financial management innovations related to accrual-based accounting reforms and performance budgeting, emphasizing their impact on public effectiveness and efficiency.
Efficiency is a key component of the '3E' model—economy, efficiency, and effectiveness—often referred to as 'Value for Money' in the public sector Economy focuses on minimizing input costs, while efficiency emphasizes maximizing outputs derived from those inputs Effectiveness, on the other hand, pertains to achieving desired outcomes from service delivery As public sector demands for services like healthcare, education, and infrastructure grow, public managers strive to enhance their ability to meet these needs within budget constraints, thereby improving their technical efficiency and delivering more value with limited resources.
Figure 2 The production performance model
In recent decades, numerous empirical studies have examined local government performance across various contexts, focusing primarily on two key areas: the efficiency of individual local services and the effectiveness of multiple bundled services Research in the first area includes analyses of local road maintenance (Kalb, 2014) and evaluations of waste management and recycling services (Worthington & Dollery).
2001) In the second strand, studies evaluate the overall local government efficiency in Australia (Worthington, 2000; Fogarty & Mugera, 2013), Belgium (De Borger & Kerstens, 1996),
Germany (Kalb, 2010; Kalb et al., 2012; Lampe, Hilgers, & Ihl, 2015), Greece (Dumpos & Cohen, 2014), Italy (Storto, 2013, 2016), Portugal (da Cruz & Marques, 2014; Afonso &
Numerous studies have examined local efficiency across various countries, including works by Fernandes (2006) and Cordero et al (2017) in Portugal, as well as Balaguer-Coll et al (2013, 2007) and Balaguer-Coll & Prior (2009) in Spain In Japan, research has focused on public performance at the prefectural level, with significant contributions from Nijkamp and Suzuki (2009), Fukuyama et al (2017), Nakazawa (2013, 2014), Haneda et al (2012), and Otsuka et al (2014) However, there is a notable gap in studies addressing public efficiency at the municipal level within the Tokyo metropolis This research aims to fill that gap by investigating public efficiency in local governments in Tokyo from 2001 onwards.
2015 Specifically, we attempt to observe the efficiency trends of these municipalities before and after the introduction of the accrual accounting system in 2008 This is the focus of Chapter 4
The advent of NPM was primarily motivated by changes in public sector accounting (Carlin, 2005; Guthrie, 1998; Hyndman & Lapsley, 2016; Lapsley, 1999), also known as the
The phenomenon of 'accountingization' emphasizes the need for enhanced public accountability and improved practices within public sector organizations (PSOs) This shift advocates for transitioning from traditional cash-based accounting, commonly used in the public sector, to accrual-based accounting, which is prevalent in the business environment This change aims to align PSOs with best practices and promote greater financial transparency and efficiency.
2016) Some exemplary pioneers in this reform are New Zealand (Carlin, 2005; Newberry & Pallot, 2004), Australia (Guthrie, 1998), the Netherlands (van der Hoek, 2005), and Japan
The reform efforts aimed to transition from cash-based budgeting to accrual-based budgeting, which is essential for aligning financial reports with fiscal planning in the public sector (Kobayashi, Yamamoto, & Ishikawa, 2016).
Accruals and cash accounting represent two distinct approaches in financial management, with cash-based accounting recognizing transactions only when cash is exchanged, while accrual-based accounting records them when revenues are earned or expenses are incurred, regardless of cash flow (Blửndal, 2004) The key difference lies in the timing of transaction recording Furthermore, it is crucial to differentiate between accounting and budgeting; accounting focuses on past financial reporting, whereas budgeting involves planning for future financial scenarios In the public sector, effective budgeting and accounting should work together to ensure proper reporting, monitoring, and control of public funds, as seen in advanced economies like New Zealand and Australia.
Canada utilizes an accrual-based regime for both budgeting and financial reports (Warren, 2015), while countries like France and Japan continue to employ a combined approach, integrating accrual accounting with cash-based budgeting (Kobayashi et al., 2016).
Accrual-based accounting, or double-entry bookkeeping, is favored over cash-based accounting due to its ability to enhance transparency and accountability in the public sector By providing a more accurate representation of public service costs, accrual accounting supports better decision-making regarding resource allocation This long-term perspective allows organizations to prioritize resources more effectively, leading to improved efficiency and overall performance Ultimately, adopting an accrual accounting system can significantly boost organizational effectiveness, transparency, and accountability.
Budgeting is a forward-looking process that involves the strategic allocation of resources According to Warren (2015), accrual budgeting emphasizes the forecasting and decision-making regarding the establishment and receipt of resource rights, as well as the incurrence and settlement of obligations In contrast, cash budgeting concentrates solely on the forecasting and allocation of cash as a critical economic resource.
115) In practice, some countries still maintain cash-based budgeting in the public sector, while others have evolved to use accrual-based budgeting in tandem with accrual financial reporting.
Accrual budgeting is highly recommended for its numerous advantages, including its alignment with accrual reporting, which is essential for countries still relying on cash budgeting to produce year-end accrual financial reports Despite this alignment, mismatches can occur Moreover, accrual budgeting offers a comprehensive view of full costs, enhancing decision-making by accounting for both cash items and non-cash consumption, such as asset depreciation and pension payments This approach emphasizes measuring spending on a cost basis rather than a cash basis, as noted by Schick Additionally, accrual budgeting supports long-term fiscal sustainability in public finances and serves as a catalyst for further management reforms within the public sector.
Accrual budgeting enhances performance budgeting by improving the effectiveness and efficiency of expenditure, as noted by Robinson (2009) This method also provides better management of public assets, making accrual budgeting significantly superior to cash budgeting in the context of public management reforms (Martí, 2013).
The accrual accounting system is believed to enhance efficiency and effectiveness in public asset management by facilitating better decision-making regarding asset acquisition, disposal, maintenance, and management (Robinson, 2009; 2016) Effective decisions require comprehensive information, including depreciation and opportunity costs, to accurately assess assets at market value (Robinson, 2009, 2016; Van de Hoek, 2005) However, many local governments often overlook the importance of balance sheets in asset-related decision-making and lack clarity in asset valuation (Kaganova & Nayyar-Stone, 2000) Consequently, adopting private sector accounting practices, such as an accrual system, can significantly enhance the management of public assets (Kaganova & Nayyar-Stone, 2000; Van der Hoek, 2005).
Public Sector Organizations (PSOs) are often perceived as inefficient in managing public assets, leading to significant underutilization (Kaganova & Nayyar-Stone, 2000; Phelp, 2011) This inefficiency is primarily due to the lack of cost imputation for asset usage In response, advanced nations like Australia, New Zealand, the UK, and the US have implemented cost efficiency measures in public asset management since the late 1980s (Kaganova & Telgarsky, 2018) Numerous theoretical and empirical studies have explored this issue, including works by Bond and Dent (1998), Kaganova and Nayyar-Stone (2000), Tanzi and Prakash (2000), Grubišić, Nušinović, and Roje (2009), and Phelp (2010; 2011).
However, surprisingly, little is known about asset utilization in the public sector
This study addresses the limited empirical research on the relationship between asset utilization and public efficiency, specifically within Japanese local governments in the Tokyo metropolis In Chapter 5, we emphasize the significance of effective asset utilization in enhancing efficiency scores and explore how an accrual-based system can improve the valuation of municipal assets for informed decision-making.
Performance measurement and management
Accrual budgeting is closely linked to performance measurement and management, which are crucial for effective budgetary activities (Martí, 2013; Speklé & Verbeeten, 2014; Verbeeten, 2008; Moynihan, 2008; Robinson, 2013) The primary functions of managerial accounting that pertain to budgeting include goal achievement, resource allocation, and performance measurement This section will explore the role of performance measurement in enhancing performance management within the public sector.
2.4.1 Background on performance measurement and management
Performance can be defined from various perspectives, often likened to a production model where it encompasses the outputs and outcomes of activities within a production process (Van Dooren, Bourkaert, & Halligan, 2015) It is characterized by several dimensions, including productivity, the accuracy of work produced, the number of innovations, process improvements, a reputation for excellence, the attainment of production or service goals, operational efficiency, and the morale of unit personnel.
Performance is defined as the potential for future successful actions aimed at achieving objectives and targets (Lebas, 1995) This concept encompasses various criteria, including job creation, societal benefits, innovation in processes and products, customer satisfaction, and market share growth In the public sector, performance is measured through effectiveness, efficiency, and legitimacy (De Bruijn, 2007).
Performance measurement is essential for effective management, as highlighted by Peter Drucker’s assertion that "if you cannot measure it, you cannot manage it." Defined by Neely et al (1995), performance measurement quantifies the efficiency and effectiveness of actions in marketing, where efficiency refers to the economical use of resources to satisfy customer needs, and effectiveness measures the extent to which those needs are met Radnor and Barnes (2007) further describe performance measurement as the quantification of input, output, or activity levels, encompassing both quantitative (financial) and qualitative (non-financial) indicators that align with organizational strategy (Franco-Santos, Lucianetti, & Bourne, 2012).
A Performance Management System (PMS) is defined as a collection of metrics that quantify the efficiency and effectiveness of actions (Neely et al., 1995) It encompasses various performance measures and interacts with its external environment The primary focus of a PMS is to develop performance metrics, establish goals, and systematically collect, analyze, and interpret performance data This process aims to evaluate the efficiency and effectiveness of actions taken (Melnyk et al., 2014).
While performance measurement deals with four aspects – what to measure, how to
A Performance Measurement System (PMS) is a tool that evaluates both financial and non-financial performance functions (Ogden, 2009) Exemplary PMSs include the Balanced Scorecard (BSC) and Key Performance Indicators (KPI) (Franco-Santos et al., 2012; Fryer et al., 2009) Unlike traditional systems such as budgeting or Activity-Based Costing (ABC), which focus solely on financial data, a PMS integrates both financial and non-financial metrics (Franco-Santos et al., 2012) Researchers emphasize that a PMS effectively links to organizational business strategies through various performance indicators, thereby enhancing decision-making and performance evaluation (Franco-Santos et al., 2012).
Performance management is a comprehensive concept that has developed from recommendations for performance measurement, frameworks, and systems (Folan & Browne, 2005) According to Radnor and Barnes (2007), it is viewed through the lens of operations management.
Performance management is a systematic approach that utilizes performance information from a Performance Management System (PMS) to enhance decision-making, policy-making, budgeting, and contract management It serves three primary functions: learning, steering and controlling, and accountability (Van Dooren et al., 2015) Moynihan (2008) describes it as a framework that generates performance data through strategic planning and measurement routines, linking this information to decision-making processes The implementation of performance management in the public sector has led to significant managerial benefits, including improved technical and allocative efficiency, as well as increased responsiveness of bureaucrats to elected officials and enhanced government accountability to the public.
Performance measurement and management are interconnected concepts that cannot be separated, as highlighted by Lebas (1995) Performance management serves as a guiding philosophy that frames both the design and implementation of a Performance Measurement System (PMS), while performance measurement focuses on evaluating past outcomes Broadbent and Laughlin (2009) emphasize that performance measurement involves retrospective analysis, whereas performance management is proactive and oriented towards future improvements Thus, understanding this distinction is crucial for effective organizational performance.
Broadbent and Laughlin (2009) developed a conceptual model for performance management systems that focuses on the management of outcomes (ends) and the factors that influence them (means) They emphasize that a performance management system is dedicated to defining, controlling, and managing both the achievement of societal and organizational outcomes and the methods employed to reach these results Thus, the performance management system serves a dual purpose, functioning as both the ultimate results and the means to achieve them.
Ferreira and Otley (2009) enhanced the literature on performance management systems by introducing a comprehensive framework that outlines the essential components of these systems, including vision and mission, key success factors, organizational structure, strategies and plans, key performance measures, target setting, performance evaluation, and reward systems Additionally, they emphasized that these elements are shaped by external influences such as organizational culture and contextual factors.
A Performance Management System (PMS) not only guides the creation of a metrics set and oversees the implementation of measurements but also translates performance data effectively It assesses the disparity between actual and desired outcomes, while also identifying the reasons behind these gaps (Melnyk et al., 2014).
Accordingly, a PMS is an important but conditional requirement for performance management
A performance management system is a sufficient condition and becomes a complementary tool for a PMS (Melnyk et al., 2014)
The literature on performance management is continually evolving, highlighting the need for comprehensive research on concepts such as performance, performance measurement, and performance management Our study specifically examines the application of Performance Management Systems (PMS) within local governments.
2.4.2.1 Benefits and risks of PMS
Implementation and use of PMS aligning with strategies and management control can have strengths and weakness for organizations De Bruijn (2007) listed a numbers of strengths:
A Performance Measurement System (PMS) serves as a vital catalyst for innovation and transparency in public management, as highlighted by Johnsen (2005) It effectively rewards performance, minimizes bureaucracy, and fosters a culture of learning while enhancing intelligence By monitoring efficiency, effectiveness, and equity, a PMS improves control and reduces information asymmetry, incentivizing users to engage with performance data Furthermore, it increases accountability, optimizes resource allocation, and bolsters transparency, credibility, and legitimacy As noted by Verbeeten & Speklé (2015), OECD countries leverage PMSs as essential tools for public management reform, underscoring their significant potential to enhance overall performance.
Overusing or misusing a Performance Management System (PMS) can lead to significant challenges for Public Sector Organizations (PSOs) De Bruijn (2007) highlights that a PMS may incentivize strategic behavior while hindering innovation, distorting actual performance, and neglecting essential management principles like quality and responsibility Cuganesan, Guthrie, and Vranic (2014) further emphasize that the risks associated with a PMS can outweigh its benefits, including misalignment with strategic goals, encouragement of data manipulation, and restrictions on flexibility and innovation Additionally, Van Dooren et al (2015) identify dysfunctional behaviors resulting from PMS, such as misrepresentation of performance data and the emergence of misleading indicators.