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Journal of The Concept of Value

Public Sector
for Money
1,1 by
R. Glendinning
42 International Management Centre from Buckingham, UK
The nature of value is the subject of much philosophical study although
in a practical sense it is universally recognised, especially as regards
value for money. Value for money is indeed a phrase in common use.
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The problem, for practical purposes, is attaching a precise meaning to it.

In Britain, as a result in recent years of pressure from government
to reduce expenditure in the public sector, and, in particular, in local
government, the term value for money (VFM) in that connection has
now entered widely into current speech. Understandably the term has
some appeal in regard to public sector matters, presumably because
it represents a feature of practical living familiar to most individuals,
but, unfortunately, seems to be particularly vague as regards the
services provided by government, whether central or local, and
therefore is the subject of some misunderstanding. Its general appeal
stems from the fact that the ordinary citizen never likes to pay rates
or taxes and is rarely entirely satisfied with the manner in which
government income is spent.
Because VFM is so much used in ordinary parlance, where it normally
means not paying more for an article or service than appears to be
justified by its quality and availability, it is natural that some attempt
should be made to apply the principle to government activities without
understanding the special difficulties associated with these activities.
This article attempts to explain the significance of VFM in government
spending, elaborating on some of its implications for government
activities in the United Kingdom, and, to a lesser extent, for Third World
countries, where the problems of obtaining VFM are, for various
reasons, much greater.

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
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
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.

The Nature of Value

Effectiveness is the core of the problem, namely, what are the values to be
International recognised in the activities of government, whether local or central?
Journal of Economists are well aware of studies made of the relationship of welfare in general
Public Sector to economic well-being. In this connection the largely seminal work of Pigou[1]
and the later work of Little[2] may be mentioned, though they represent only
Management a part of the considerable literature on this and associated fields that exists. Values
1,1 and welfare in general are related, but also may have some relationship to economic
values and an attempt must be made here to analyse their relationship.
44 Economic activities carried out in ordinary private enterprise circumstances for
the most part sufficiently meet the test of providing value for money for the
individual who spends it, with only slight exceptions, although in monopoly
conditions some transactions entered into may not be fair to the customer. In
general customers pay for the goods or services they want only if they regard
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the sacrifice represented by their payment as acceptable to them. The system

throughout the world so far as matching wants with the sacrifices made to satisfy
them works well enough within the areas for which it is recognised as appropriate.
But many parts of total economies everywhere do not operate on this basis.
In some situations payment may be made for goods or services even if such
payment does not sufficiently cover the resources consumed in providing them.
This tends to be true sometimes in the case of public utilities where, in pursuit
of some political or social aim, government meets part of the cost of providing
the service. Indeed even where services are provided by privately owned
organisations, the state can impose obligations to provide some of these at less
than the cost to the user of providing them. This is not uncommon in transport.
In other government fields quite obviously goods or services are often provided
at no charge to those who benefit.
This is the case throughout the world, the nature and degree of obligations
recognised by the various organisations of government varying widely as between
countries and communities.
The channels through which these obligations are recognised, largely but not
entirely, comprise what is known as the public sector, obviously by means of
activities directly pursued by central or local government but also through industries
directly owned by government, i.e. through nationalised industries or parastatals.
Moreover, as has been indicated, outside the public sector, i.e. in the private sector,
the obligation may be recognised to some, but a much lower, extent. For present
purposes, without making any attempt to define values, it may be accepted that
their essence is that they provide to the individual satisfactions of one sort or
It is important to recognise that there is in fact no clear line of demarcation
for the individual between such satisfactions as are purely economic and those
that are not, despite the fact that much work has been done by economists on
the relationship between welfare, by which is meant some forms of satisfaction
generally, and their economic aspect.
The problems of placing a value on a book purchased by an individual compared
with that placed on a visit to a theatre or concert, or indeed with that on a better
quality meal are measurable only in an economic sense. What satisfactions the
beneficiaries obtain from them are entirely personal, and individual, and no
fundamental method of measuring the satisfactions to beneficiaries is available, Value for
as has been mentioned. Money
Essentially the problem is that no two individuals derive the same enjoyment
from the same amount of spendable income, or from any element thereof even 45
if it happens to be consumed in similar quantities. The value attached by them
to the same quantity of food consumed, even if it represents the same share of
spendable income, varies considerably as between two individuals; one may eat
to live, the other live to eat!
In this connection the words of Gilbert Cannan quoted by Pigou[1] are
We must face, and face boldly, the fact there is no precise line between economic and non-economic
satisfactions, and, therefore, the province of economics cannot be marked out by a row of posts
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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
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.

Implementation of the VFM Approach

In the United Kingdom the need to obtain VFM has been recognised separately
for central and local government despite the fact that, difficult though it is to evaluate
the separate satisfactions sought by individuals, it is very much more difficult to
do so for those sought by groups of individuals or communities, and more so for
whole nations.
For central government, as well as in some other public bodies, the National
Audit Act 1983 required the Comptroller and Auditor General to review their
economy, efficiency and effectiveness as regards expenditure. For local government,
under the Local Government Finance Act 1982, the auditors of local authorities
are required to be satisfied that the bodies concerned have made proper
arrangements for ensuring that economy, efficiency and effectiveness in the
application of resources have been achieved. The requirements for both central
and local government are thus comparable.
Such requirements are not concerned with the determination of general policy, Value for
responsibility for which firmly falls on the elected representatives. On the other Money
hand, how policy, once determined, has been carried out must be officially
scrutinised to see that this has been done properly in the light of these new 47
This is the area to which much attention is now being paid, particularly by local
government auditors, and part of their efforts are directed towards ensuring that
good judgement is exercised by policy makers in establishing the objectives regarded
as providing VFM, that is, that values most appropriate to the situation have been
recognised. This is an immense task, though no doubt somewhat easier once
the objectives have been identified. In fact what policy makers have to do is to
specify what in their view must be provided to recognise most adequately the
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values desired by their own particular community — a collection of individuals

be it remembered — in the light of resources available to provide them and, once
these values are specified, to ensure that those particular requirements are met.
Against this difficult background it is a matter of applying the three criteria of
economy, efficiency and effectiveness which must be separately defined.
(Incidentally the US General Accounting Office is usually credited with establishing
the concept of these three aspects of public sector activities.)
It is a question of somehow providing community satisfaction and a community
comprises numerous individuals, all with varying requirements. Policy makers
nevertheless must decide what best provides the values or satisfactions to the
particular community they serve. In a local government unit, are these values
met by better street cleaning arrangements, or by more leisure facilities, for
example? Moreover not only do such values vary from time to time, depending
on the age and composition of the members of a community, for example, but,
as already stated, any particular community's requirements are likely to differ
entirely from those of its neighbours.
Interestingly the problem arises also in industrial and similar organisations. Here
the proposition put forward by Cyert and March[3] as regards a firm's goals might
equally well be applied in government. Substituting "values" for "goals" in their
proposition, it may be said that "People (i.e. individuals) have values: collectivities
of people do not" (by which is meant common values, of course). Clearly while
it is difficult enough to identify the values recognised by individual people, it is
much more difficult to identify the values of "collectivities" of people, i.e. of
particular communities, and certainly impossible to measure them. This is the
crux of the VFM problem.
The essence of the problem is that of establishing acceptable objectives in the
field of local and central government. The values recognised by individuals are
incapable of measurement, as has been emphasised earlier, but those likely to
be recognised by communities are infinitely more so and despite the development
of local government activities over centuries there are still no criteria which are
generally applicable.
In this connection the words of Jones and Pendlebury in their Public Sector
Accounting[4] regarding the question of audit are relevant. There they say:
International The conceptual and practical problems associated with this audit are reflected in the fact that
there is a lack of shared experience in carrying it out. One reason for the past lack of enthusiasm
Journal of is that very often there are no explicit goals or objectives embodied in policy decisions to spend
Public Sector public money. And even when there are, they are so hazily stated that good performance and
Management bad performance are difficult to judge.
1,1 These words seem to state the essence of the problem of determining values
in this field.
48 When analysed in this way all three criteria seem understandable enough in
principle, but in practice effectiveness is clearly the problem area in local
Although there is now a somewhat wider recognition of the significance of VFM
in public affairs, that it is not an entirely new matter has been exemplified by Sir
Douglas Henley[5] who mentions the interesting conflict that arose in 1888 between
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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.

VFM in the Third World

In the Third World the public sector generally forms an even greater element in
national economies than in western industrial societies in consequence of political
and social policies. This proportion is falling in Western Europe, and particularly
in Britain where for some years it has been government policy to return certain
part of nationalised industry to private ownership.
In the Third World and particularly in former British colonies, many economic
activities naturally fell into the category of public utilities such as ports and railways
and, of course, roads and irrigation systems. Since independence many manu-
facturing and extractive industries as well as agricultural have been run in the form
of parastatals.
Naturally, under British colonial administration central government and local
government developed their particular forms, taking some account of local political
and social conditions. Moreover, in many countries co-operative production and
distribution have developed to a considerable extent. Though these are not strictly
parastatal bodies some of their policies are influenced by considerations comparable
to those that apply to public sector bodies.
But everywhere in central and local government, as well as in other parts of
the public sector such as parastatals, the problems of providing VFM are serious.
These are great enough in western industrial countries where fairly highly developed
systems of government have been established over a long period of time during
which those who constitute the decision makers have acquired some experience.
While the difficulties in the United Kingdom and in other western industrial
nations are great enough, they are much greater in the Third World where
administrative organisations are less developed and where those who influence
the decision makers, not to mention the decision makers themselves, have much
International less experience. Nevertheless, despite the considerable differences in stages of
Journal of development between western industrial societies and those of the Third World,
Public Sector the essence of the problem of obtaining VFM is the same throughout so that much
of the approach adopted for the former applies also to the latter, even with the
Management differences in social, economic and political structures.
1,1 Accordingly the various aspects of VFM as they are revealed in Britain
fundamentally also apply to the Third World, despite the fact that there the
50 mechanisms for obtaining VFM may be less effective.

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.

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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