Issue Paper 6: Controlling and Managing Personnel Costs

Controlling and Managing Personnel Costs

Part A: Introduction

In the past four decades, when most African countries have been independent, three distinct epochs on the issues of personnel costs in public expenditure may be generally discerned. The period spanning 1960s to mid-1980s was characterised by rapid growth in public sector employment and personnel costs. The mid-1970s to mid-1980s were characterised by a rapid decline in public service pay and collapse of the systems for personnel management and control. The 1990s has been a decade of efforts to manage and control personnel costs. This paper focuses on the good practices lessons of experience in this decade of reform efforts in four East and Central Africa countries, i.e. Kenya, Tanzania, Uganda and Zambia (select countries). Before presenting the “good practices” however, it is considered useful to provide an overview of pertinent issues. Therefore, the next section presents the background and context for good practices in the control and management of personnel costs. The last section describes the good practices.

Part B: Background and Context

Discussion of good practices in controlling the managing/personnel costs in Africa countries should be in the context of the following:

  • rapid expansion of government employment and personnel costs from 1960s and 1980s;
  • rising total personnel costs and declining compensation from the 1970s;
  • personnel numbers are falling but wage bills are rising in the 1990s;
  • comparatively Africa countries have the lowest Government employees per capita;
  • significance of collapse of systems of management and control;
  • not-so successful initiatives; and
  • promising good practices yet to be undertaken.

Rapid Expansion of government employment and personnel costs: 1960s to 1980s

Rapid growth in public sector personnel costs from the 1960s to 1980s was reflected in increases in both the numbers of employees and real pay in the sector. Between mid-1960s and mid-1980s, the total number of central government employees more than trebled in these countries (see Table 1). Two basic factors underpinned this rapid growth in public service numbers. First, the expansion in numbers was driven by the felt need to recruit staff to support growth in basic social services, especially education and health, these were benefits expected from the Government following independence. Second, the governments undertook to the role of employer of last resort for increasing numbers of school leavers in a period or rising urban unemployment.

Table 1: Rise in central government employees in select African countries between 1960s and 1980s.

Country / Number / Exact Year / Number / Number
Kenya
Malawi
Tanzania
Uganda
Zambia
Ghana
Somalia / 60,300
10,745
89,745
62,000
n.a.
n.a.
n.a. / 1963)
(1964)
(1961) / 42,400
50,008
301,000
310,000
110,634
310,000
56,500 / (1986)
(1987)
(1989)
(1989)
(1989)
(1987)
(1990)

For most years, generally until mid-1970s while rapidly rising, the governments were also raising average real pay for the employees. In there, the governments sought to achieve to objectives. One to redress for the discriminatory pay levels for the natives under the colonial administration, and thereby meet some of the political and economic aspirations of the emerging local elite. Two, to exercise “wage leadership” as a dominant employer, in order to pressurise private employers to follow and dissuade them from a low-wage exploitative tendency[1]. With both numbers and real average pay on the rise, the public service wage bill share of public expenditures was also in the rise. By early 1980s, Africa’s governments were generally leading those in other regions in terms of relative size of government employment in the economy (see Table 2) and the relative size of the government wage bill (see Table 3). This trend was reflected in the select countries.

Economic Group and Region

/ Percentage of Central Government Employment / Economic Group and Region / Percentage of
Central Government Wage Bill

Developing Countries

  • Africa
  • Latin America
  • Asia

Total Sample

OECD Counties

/ 30.8
20.7
13.9
23.4
8.7 /

Developing Countries

  • Africa
  • Latin America
  • Asia

Total Sample

OECD Countries

/ 22.6
14.7
17.2
19.8
8.7

Rising personnel costs and declining compensation

While government in the selected countries continued to expand until the early 1990s (see Table 3), the fiscal crisis and high rates of inflation since mid-1970s constrained wage bills at levels below what was needed to maintain the real average pay levels for the civil servants. The severity of the fiscal crisis also had governments reducing budgetary allocations to discretionary operational and maintenance (O&M) expenditures needed to ensure the availability of necessary to complement personnel in delivery of services. Consequently, in the select countries, was as indeed the case in most non-mineral exporting developing countries the trend evolved in until recently that: government employment was expanding and the total wage bill was on the rise; but at the same time the average real pay of the civil servants was on the decline, the salary structure was being decompressed and fewer complementary O&M) resources were available to enable the employees to perform. This trend significantly contributed to the decline in the morale, discipline and productivity of government employees which took hold in the 1980s. Yet, with the persistence of the fiscal crises, the need to control the wage bill (personnel) costs remains a key policy objective in these countries.

Table 3: Expansion in total government employment (including teachers) in the select countries between late 1980s and early 1990s.

Country /

Employment in late 1980s

/ Employment High-Point in 1990s
Year / Number / Year / Number
Kenya
Tanzania
Uganda
Zambia / 1986
1988
1987
1989 / 424,000
301,000
310,000
110,634 / 1993
1992
1990
1997 / 477,233
355,000
320,000
139,000

Personnel numbers are falling but wage bills are rising

In the 1990s, government personnel numbers are on the decline in all the four select countries. Uganda has had by far the largest drop in numbers; from 320,000 in 1990 to about 160,000 today. It is noteworthy that Uganda has achieved this by radically restructuring and downsizing the government establishment. This has involved rationalisation of roles, functions, structures through a redefinition of the role of government accompanied by hiring-off, privatisation, contracting out and decentralising to autonomous agencies and local government, and pursuit of operational efficiencies. Tanzania is well on a similar but gradualist trend. Kenya and Zambia have adopted the same policy objectives, but the implementation of comprehensive restructuring and downsizing programmes are not yet firmly in place. Nonetheless, indications are that personnel numbers in these countries are also falling significantly.

Table 4: Reductions in Government Personnel Numbers in the Select Countries in the 1990s.

Country / Highest Employment Level in 1990s / Lowest (1988)
Employment Level
Number / Year
Kenya
Tanzania
Uganda
Zambia / 477,233
355,000
320,000
139,000 / 1993
1992
1990
1997 / 459,000
268,000
160,000
125,000

These reductions in numbers however do not translate to a fall in total personnel costs. This situation is best explified in Uganda. Despite the hefty fall in personnel numbers, from 320,00 in 1990 to 160,000 in 1998, the total wage bill has been raised in both absolute and relative terms over the years. The annual wage bill increase has been an average of 36 percent between FY 1993/94 and FY 1996/97. The wage bill share of total government expenditure increased from 15 percent in FY 1992/993 to 37 percent in FY 1996/97 (see Table 5). This is an indication that enhancing the pay for civil servants to living wage levels requires a much higher increase in the total wage bills.

Table 5: Uganda Government Employment Wage Bill Trends, 1993-1997

VARIABLE / 1992/93 / 1993/94 / 1994/95 / 1995/96 / 1996/97
Total Employees / 214,000 / 177,000 / 150,000 / 150,000 / 148,000
Wage Bill:
Amount (billion)
% Change
% Recurrent Expenditure / 65
-
15% / 89
37%
20% / 125
40%
31% / 160
28%
34% / 220
38%
37%

Source: Okutho G. (1998), Public Source Reform in Africa: The Experience of Uganda, A paper presented at the Eastern and Southern Africa Consultative Workshop on Civil Service Reform, Arusha, Tanzania.

Africa Countries have comparatively the lowest Government employee per capita

Even as the Government of select and other Africa countries strive to downsize, statistics available suggest that the region has comparatively the lowest ratio of Government employment to population (see Table 6). It is noteworthy that OECD countries have an average the highest ratio in General Government (7.7. percent) except in the area of teaching and health where the countries of Eastern Europe and former USSR lead (with 5.1 percent). In these two ratios, Africa is far at 2.0 percent and 0.8 percent respectively. These statistics indicate that economic growth and development in Africa will give rise to relatively higher levels of Government employment especially in the provisions of basic social services.

Table 6: Government employment, as percent of population by World regions in early 1990s

Regions / No of Countries Surveyed / General Government / Government Administration / Teaching & Health
Central / Local
Africa
Asia
Eastern Europe & former USSR
Latin America & Caribbean
Middle East & North Africa
OECD
Overall / 20
11
17
9
8
21
86 / 2.0
2.6
6.9
3.0
3.9
7.7
4.7 / 0.9
0.9
1.0
1.2
1.4
1.8
1.2 / 0.3
0.7
0.8
0.7
0.9
2.5
1.1 / 0.8
1.0
5.1
1.1
1.6
3.4
2.4

Source: Schiavo-Campo S. et al, (1998), Government Employment and Pay: A Global and Regional Perspective, The World Bank.

Significance of collapse of systems of control management and management

Uncontrolled growth, volatility and weak management of Government personnel/costs are underpinned by collapse of the systems of control and management. These systems are associated with the following problems:

  • Poor personnel data and management information: The most pervasive problem in control and management of personnel the select countries has been the break-down in the systems for collecting, storing and disseminating data on government employees. Information available on Government employment has been generally incomplete and unreliable. This break-down in the systems has availed the opportunities for frauds in the payroll, such as the entry of ghosts workers. The prominent features of the crisis in personnel data and management information are:

(a)poor maintenance of personnel records;

(b) fragmented and local payrolls;

(c)control gaps in the central payroll; and

(d)shortcomings in the central personnel data base; and

  • professionalism of a career civil service abandoned service: The select countries, which at independence inherited a British administration model. Historically, employment in the government was structured so that there was clearly a professional cadre of permanent and pensionable officers, (career civil servants) as contrasted with the non-pensionable cadre of support staff. The permanent and pensionable status in government employment was reserved for a relatively small and stable cadre, entry into the cadre was controlled, and the offices were declared by the Head of State. The beginning of loss of control of employment and professionalism in the civil service generally coincides with the abandonment of the dichotomy between the career civil service cadre of permanent and pensionable employees, and the support services cadre;
  • Ambiguous and fragmented institutional framework; Overall the past two decades, there has been progressive erosion of the authority of the traditional institutional pillars of functional responsibility for the exercise of control in the personnel management functions in the select countries. The responsibilities for personnel control and management are scattered without clear demarcations of functions or authority levels among a relatively large number of institutions;
  • Indiscipline in the civil service: The one personnel control and management aspect which has very much underlined the inefficiencies, misconduct and malpractices in the civil service is the breakdown in discipline. The breakdown has been attributed to:

(a)the politicisation of the service under the single party regimes that ruled in the 1970s and 1980s;

(b)weak and ambiguous exercise of authority by responsible government officers;

(c)breakdown of the complimentary systems of personnel records and performance reporting;

  • lack of transparency in the promotion practices as merit principles were abandoned.

Not-so-successful initiatives

Governments in the region have attempted all sorts measures to control the size and costs of personnel. In brief, such measures have included:

  • Census and headcount activities: Most census and headcount in the region, geared to identify “ghost employees” form government payrolls initiatives have not been successful.[2] This experience is not confined to the select countries. For example, between 1986 and 1988 Ghana carried out census or “headcounts” of civil servants. which did not yield expected results. The census numbers could not be reconciled with existing payroll. In 1988, Tanzania carried out a census of civil servants for which data was not processed until 1991, by which time it was difficult to ascertain the results. A similar excise in 1994 did not fair better;
  • Cash payments to control ghosts: All the governments in the select countries have at some stage in recent years attempted to suspend bank-based payroll payments and adopt cash payment with the aim of identifying “ghost employees”. However, in every instance, this approach has failed because it was difficult to organise and administrate it effectively. In a number of occasions the cash was in fact lost. Furthermore, with cash payments, cases of fraud with scattered payroll, increase;
  • Early retirement of employees: Recently there was a proposal in Kenya, for example, to lower the mandatory retirement age from 55 to 50 years and allow voluntary early retirement of those who are 45 years. However, lowering the retirement age will reduce the numbers, but then raise the costs of retirement benefits. It was therefore proposed to defer pension benefits for the early retirees until they attain the age of 55 years[3]. This was found to be totally unacceptable to these retirees, especially with the thought of the prospect of dying before enjoyment of the benefits. It was also found that the impact of this on the quality of the service would need to be carefully considered. The scheme has therefore aborted.
  • Centrally imposed ministerial personnel expenditure cuts: Directives of such cuts can be on the bias of either an overall ministerial wage bill ceiling, or mandatory targets of personnel expenditure (PE) to operational and maintenance (O&M) expenditure ratio. The Kenya CSRP undertook PE/O&M ratio studies with a view to imposing a 60:40 ratio for ministries. Implementation of these was however not feasible because with the weak personal and public expenditure systems ministries had all sorts of excuses for failure to comply;
  • Reducing the total wage bill: Macroeconomic analysis of the total government wage bill in the select countries yield the conclusion that it is necessary and feasible to reduce the total government wage bill by restraining or curtailing employment numbers. Under one such scenario, the Government of Republic of Zambia was in 1997 persuaded to commit itself to reduce the total wage bill from Kwach 215 billion in June 1997, to Kwach 180 billion in 2002. This goal was to be achieved by reducing the size of the civil service from 139,000 in 1997 to 80,000 by 2002 since then, this policy has been abandoned because it was simplistic and not feasible;
  • Freeze of increases in pay levels: Temporary freeze pay levels is an option that governments have in recent years taken for either or both of the following reasons: (i) facilitate attainment of short term wage bill targets, especially when these targets have been agreed as fiscal performance benchmarks in structural adjustment credits (SACs); (ii) to keep low the costs of retrenchment when these are based on the pay levels. The freeze has usually taken two forms. One, freeze on nominal values. Two, a curb on increase in real pay levels, so that pay increases are limited to compensation for inflation. The latter is the most prevalent practice, and indeed was the default policy of most governments in the region. In 1997, the Government of Zambia explicitly adopted a combination of the two approaches. Thus, pay increased would be limited to compensating for inflation for all personnel, until 1988. Thereafter, however, this policy would apply only for lower ranking and and unskilled staff (classified daily employees). Such policies have, however, rarely held. In 1999, the policy collapsed in Zambia when the President ordered for a 100 percent rise in minimum basic pay.

Promising good practices yet to be undertaken

There are also some promising good practices which have been intimated but, for various reasons, have yet to be implemented in the select countries. Among these are the following two:

Budgetary incentives for MDAs that reduce personnel costs: In Tanzania the budget guidelines for FY 1998/99 promised budgetary incentives for MDAs that reduced personnel costs. In Kenya, a Ministry of Finance task force has been working on a scheme by which MDAs will be allowed to shift savings on PE costs within a ceiling to O&M. This practice has however been difficult to implement under the cost budget system in the select countries.

Restoration of budgetary controls: At present, the ministries of finance in the select countries control personnel expenditures on a cash budget basis, releasing funds (exchequer issues) only on the basis of the actual staff in post. When budgetary controls on personnel expenditure are restored, funds will be released to ministries on the basis of approved establishment. This will facilitate decentralised management of human resources, and the practice of budgetary incentives outlined above.

Part C: Good Practices

Overview

Good practices in managing and controlling personnel costs revolve around:

Controlling the numbers on the government payroll(s);

Imposing a resources envelope for compensation of personnel;

Enforcing controls to restrict expenditures within the resources envelope;

Eliminating expenditure leaks that allow extra-budgetary expenditures on personnel; and

Installing improved systems.

As a matter of fact, total effectiveness is likely to require a combination of all these facets of good practice. Nevertheless, on the basis of a survey of select countries the following range of distinct “good practices” have been identified:

Flushing out ghost employees;

Special payroll audits;

Recruitment freeze;

Slicing away redundant unskilled workers;

Abolishing vacant posts

Rationalisation of roles, and functions;

Application of staffing Norms;

Zero-base reconstitution of the establishment;

Firm wage bill freeze;