This chapter begins with an overview of the regulatory and institutional framework for human resource management and the public sector wage bill in Peru. It then presents the budgetary process of human resource management expenditure in Peru and analyses the main associated challenges. It concludes with a series of recommendations for improving fiscal human resource management in Peru.
Public Financial Management in Peru
An OECD Peer Review
4. Ensuring a fiscally sustainable, competitive pay regime for the public service in Peru
Abstract
Civil servants’ competencies, motivations and values have a direct impact on the quality of governance processes, and thus on the quality of the services they provide, economic growth and citizens’ well-being. The government of Peru is actively working to improve the capacity of the public administration by attracting and managing a professional workforce through public employment institutions and evidence-based legal frameworks.
As in most countries, the public sector in Peru is a major employer, and public employment accounts for a significant share of the country’s total public expenditure and gross domestic product (GDP). Public employment accounted for only 8.4% of total employment in Peru in 2018, lower than the average of 12% for Latin America and the Caribbean (LAC) (OECD, 2020[1]) and 18% in OECD countries (OECD, 2021[2]). However, the public sector wage bill1 represents 29% of public spending in Peru, higher than the average of 27% in LAC and 24% in the OECD (OECD, 2020[1]). The public sector wage bill represents 5% of GDP in Peru, 8% in LAC and 9% in the OECD.
Given this high expenditure on public employment, the public administration must ensure the best value for money to promote a professional and quality public service.
This chapter examines budgetary and financial management practices regarding the remuneration of public employees in Peru and presents recommendations for maintaining fiscal sustainability while ensuring a competitive labour regime that attracts the best talent to the public sector.
4.1. Regulatory and institutional framework for human resources management and the public sector wage bill in Peru
4.1.1. The Administrative System of Human Resources Management in Peru
In Peru, the Administrative System of Human Resources Management (SAGRH) establishes, develops and executes the state’s policy on public service. The SAGRH comprises the set of rules, principles, resources, methods, procedures and techniques used by public sector entities to manage human resources (SERVIR, n.d.[3]). It is made up of the National Civil Service Authority (SERVIR), the General Directorate of Fiscal Management of Human Resources (DGGFRH) of the Ministry of Finance (MEF), and the human resources offices of the state entities and companies.
The SAGRH is composed of seven civil service management sub-systems (Figure 4.1):
1. human resources policy planning
2. work organisation and distribution
3. employment management
4. performance management
5. compensation management
6. capacity-building and development
7. human and social relations management.
Figure 4.1. Sub-systems and processes of the Administrative System of Human Resources Management
Source: SERVIR (n.d.[3]).
4.1.2. SERVIR as the governing body of the Administrative System of Human Resources Management
SERVIR, created in June 2008, is the governing body of the SAGRH. It is a specialised technical body that reports to the Presidency of the Council of Ministers. SERVIR has authority over all three levels of government and all three employment regimes (see below) of the Peruvian public administration. Its mission is to continuously and comprehensively improve the civil service to best serve the citizens. It issues guidelines for all public administration entities and formulates national policies, issues binding technical opinions, dictates norms, supervises compliance and resolves civil servants’ conflicts with their public employer.
The Civil Service Court is an integral body of SERVIR responsible for resolving individual disputes within the SAGRH. SERVIR also includes the National School of Public Administration, which is responsible for providing training for civil servants and managers.
The human resources offices of line ministries and agencies, at both the central and subnational levels, also implement the SAGRH’s statutes, principles, methods, procedures and techniques.
4.1.3. The General Directorate of Fiscal Management of Human Resources exercises an oversight function
The DGGFRH is a body of the MEF responsible for the financial management of the public service, in line with the principles of fiscal sustainability and fiscal responsibility. Its main responsibilities include2:
conducting financial and technical analysis of staff pay policies
proposing measures and evaluating sectoral proposals for the public sector wage bill in accordance with the respective laws, including issuing an opinion on each public sector entity’s analytical personnel budget and entity positions chart
supervising the Single Public Sector Payroll computer application managed through the Integrated application for the central registration of human resources data and workforce for the public sector (Aplicativo Integrado para el Registro Centralizado de Planillas y de Datos de los Recursos Humanos del Sector Público, AIRHSP)
reporting for approval of the salary scales of active personnel.
4.1.4. Issue binding opinions on the remuneration of public servants’ active staff employment schemes
Employment regimes for active staff
Public servants in Peru are governed by different labour regimes (Figure 4.2). There are currently 3 main labour regimes, accounting for a total of approximately 590 000 employees:
1. the civil service regime under Legislative Decree No. 276, frozen since 1992: 24% of civil servants
2. the private activity regime under Legislative Decree No. 728: 19% of public servants
3. the administrative service contracting (CAS) under Legislative Decree No. 1057 – a special temporary contracting regime with some employment benefits: 56% of public servants.
In addition, there are a number of specialised careers, for example in the health and education sectors. These are often in subnational governments and do not appear in official registers.
The coexistence of these employment regimes has created a system which is difficult to manage. The civil service regime has been frozen since 1992,3 when the national government restricted selection procedures through budget regulations. Entry into this regime is thus only possible when a currently occupied position becomes vacant due to age limit and/or retirement, resignation, death, dismissal, or career progression. Given that the civil service regime is frozen and the growth of posts is restricted in the private activity regime due to the limitations of the Budget Law, staff growth has mainly been under the CAS regime (OECD, 2016[4]).
Figure 4.2. Main labour regimes in the Peruvian civil service
Source: R&C Consulting (n.d.[5]).
4.1.5. Pension scheme
The pension system is another key element to consider when analysing the financial management of public sector HR. There are three main pension regimes in Peru today (Table 4.1). Only the costs of public employees (active and pensioners) associated with Law No. 25030 have a direct impact on the budget and should be considered in the budget formulation process.
Table 4.1. Main pension schemes in Peru
Source: General Directorate of Fiscal Management of Human Resources (2022[6]).
4.2. Budget process for human resources expenditure
4.2.1. The General Directorate of Fiscal Management of Human Resources determines the baseline human resources expenditure from the micro information collected in AIRHSP
In the budget programming phase, the General Directorate for Public Budget calculates the financial needs for personnel costs at the central and regional levels based on estimates provided by the DGGFRH. To make these estimates, the DGGFRH aggregates each entity’s staffing needs, at both the national and regional levels, based on previous years’ expenditures and current employee records using AIRHSP database. The estimates of human resources expenditure baselines are then transmitted to each entity and form part of the amount of expenditure that the MEF transmits to the spending agencies so that they can make their budget requests (see Chapter 2 for a discussion on budget processes).
4.2.2. The DGGFRH monitors budget execution based on the information registered in AIRSHP
Staff expenditure figures vary little between the opening institutional budget, the modified institutional budget and the implemented budget (see Chapter 2 for a discussion of the differences between these three types of budget).
During the budget execution phase, the DGGFRH is responsible for monitoring the public sector’s compensation costs at the national and regional levels. It verifies the budget availability and legality of the remuneration types and approves the new registers subject to the regulatory and budgetary framework and the corresponding remuneration types at both national and regional levels. To do so, it again uses AIRHSP.
Contrary to the central and regional governments, municipal authorities have the autonomy to set their personnel budget following the rules in force related to the employment regimes and the necessary control measures on the execution of their staff budgets.
The entities’ control units ensure that payroll payments are calculated correctly and verify whether civil servants are active, among other tasks.
The Comptroller General of the Republic (CGR) can conduct pay audits.
4.2.3. The General Directorate of Public Treasury manages salary and pension disbursements
The MEF’s General Directorate of Public Treasury makes salary payments through the Payroll Payment Control Module (Módulo de Control de Pago de Planillas), which is part of the Integrated System for the Financial Administration of the Public Sector (SIAF-SP). Entities register the personal and employment data of active staff and pensioners in the Payroll Payment Control Module for all Treasury operations, including payments to individual bank accounts, password delivery, electronic transfers, among others, which require validation of staff data. The Payroll Payment Control Module is under the responsibility of the General Directorate of Public Treasury. It is planned that, starting in 2023, the above-mentioned data will be provided through a solution incorporated in the Computer Application for the centralised Registration of Payroll and Human Resources Data of the Public Sector (AIRHSP) under the responsibility of the Directorate-General for Fiscal Management of Human Resources.
4.2.4. Peru’s public sector human resources management model centralises more responsibilities in the Ministry of Economy and Finance than in most OECD countries
Peru’s SAGRH is based on a clear separation between personnel management exercised by SERVIR and budgetary control exercised by the MEF’s DGGFRH. This makes it possible to take advantage of SERVIR’s specific expertise in personnel management and, at the same time, the MEF’s experience in the financial management of personnel expenditure, as well as to ensure that the budget/expenditure controls are in line with the budget cycle.
The link between SERVIR and the DGGFRH through the SAGRH allows for close co-ordination where the fiscal management of human resources has implications for civil service management control and vice versa, such as the organisation of line ministries, job creation or salary structures.
In most OECD countries, budget control of personnel expenditures is organized in a more decentralized way and is not the responsibility of a specific unit within the Ministry of Finance, but is delegated to the entities. The Ministry of Finance, through the budget law, indicates the maximum amount of expenditure on human resources in each public sector entity. The managers of these entities have the ability, within the framework established by the law, to choose the optimal mix of human resources, so that the total expenditure on human resources is below the allocated ceiling. This is the case for example in France (Box 4.1). However, some countries such as Spain also have a separate unit in the Ministry of Finance responsible exclusively for personnel expenditure (Box 4.1).
Box 4.1. Examples of public sector human resources management organisation in OECD countries
Spain
In Spain, the Directorate General of Personnel Costs of the Ministry of Finance is responsible for the management, analysis and control of public sector staff remuneration measures and the job structure of state administration staff. It is also responsible for authorising the recruitment and remuneration of state public sector staff, including management staff. Whenever foreseen, any of these responsibilities should be co-ordinated with the Directorate General of Public Administration of the Ministry of Finance, which is responsible for civil service management.
France
In France, each public entity has a programme manager who allocates the budget of its programme among the different actions and supervises their implementation. Each entity also has a manager who oversees the implementation of personnel expenditure, co-ordinating with the operational implementation units responsible for the specific actions of the programme. Thus, the responsibility for the human resources budget is highly decentralised and organised by hierarchical level. There is thus a bottom-up responsibility for budget execution, where each hierarchical level is free to use its resources according to its needs, but is accountable for their use.
4.3. Challenge #1: Reducing the complexity of the public employment system and building capacity for a competent public administration
Peru has more than 500 public employment rules, more than 400 salary criteria, no standardised job and recruitment criteria, and limited payroll planning. The combination of these factors makes the administration of the system in the entities and the financial control from the DGGFRH difficult. This situation complicates the budget formulation and execution of public sector compensation, as well as any medium- and long-term projection of personnel costs.
4.3.1. The multitude of employment regimes
The development of a competitive and fiscally sustainable pay regime for public servants ultimately depends on the design of the employment system. While the Peruvian civil service has made considerable strides towards a public service system more consistent with the design of the SAGRH, the multiple regimes make it highly complex. This makes it difficult to properly plan and execute the HR budget, especially with a more medium-term perspective, and to adopt more strategic planning of the organisations’ payroll.
Government entities and agencies may establish their own HR policies aligned with the regulatory framework. This makes monitoring compliance with merit and transparency standards difficult. In the CAS or private regime that is mainly used, the specific terms and conditions are set by the most senior person at the level of the entity. This makes public servants hired under these regimes highly dependent on their superior (OECD, 2016[4]).
4.3.2. A job classification system could help simplify public employment regimes
Currently, the complexity of the public employment system means that job classifications are complex and not standardised across public sector organisations and subnational levels of government.
Objective of a job classification
Job classification can contribute considerably to the standardisation of public management processes. During the recruitment process, job classifications help to draft job descriptions that identify the profiles necessary to perform the job. They are also used in promotions, career development and the performance appraisal process. Job classifications can be very useful in strategic HR planning and identifying training needs.
An effective job classification should combine flexibility and consistency. On the one hand, it should be flexible to adapt to the changing needs of the organisation and the skills available in the labour market. On the other, it must be consistent and stable over time to support the management of the civil service in areas such as promotions, training needs and implementing strategic planning. It also provides employees with transparency and predictability in relation to their pay and career progress, and is therefore an essential component of the attractiveness of public employment (OECD, 2021[8]).
Introducing a job classification system can help simplify employment schemes and reduce the number of regimes. In France, the number of bodies in the state administration more than halved between 2005 and 2018 (Ministry of Public Sector Transformation and the Civil Service, 2009[9]; Ministry of Action and Public Accounts, 2019[10]). This was done through the merger and suppression of corps at the proposal of the various ministries, as well as through the creation of inter-ministerial, or cross-cutting, careers. In Portugal, before 2008, there were more than 1 000 public sector careers. An administrative reform reduced them to three and put an end to automatic career progression based on seniority (Penido, 2019[11]).
Peru does not have an adequate implementation of job classification in the public sector.
Currently, Peru does not have a job classification in the public sector. The transition to the Civil Service Regime under Law 30057 provides for the elaboration of the Manual of Job Profiles for each entity based on the Standard Job Manual. This is a step towards the standardisation of job classification in the administration, but does not yet include the other regimes. Also, only a few entities have undergone the transition process, which means that it is not a widespread process. The Standard Post Manual is also not used in a standardised way in public employment management processes in the public sector.
4.3.3. The remuneration system is highly complex in Peru
Peru’s public sector compensation system suffers from several weaknesses compared to standard practices in OECD countries (Box 4.2):
There is no real job classification system in the Peruvian public employment system and a multitude of public employment regimes and types are used (see above).
The wide variety of public employment regimes gives rise to a large number of different remuneration types, some of which are not regulated. Indeed, it seems relatively common, particularly at subnational levels, for entities to use remuneration types that are not formally regulated, either due to a lack of awareness or to attract staff.
The DGGFRH has been working on regulating these concepts through the Catalogue of Revenue Concepts corresponding to Public Sector Human Resources (CUC). In addition, efforts are being made to ensure that the information recorded in the Payroll Payment Control Module needed to make the payment in the SIAF-SP is validated with the information in AIRHSP.
The wages of the regime under Legislative Decree No. 276 have been largely frozen over the last decade. This has led to a situation where the wage structure of the 276 scheme relies heavily on bonuses to effectively increase the wage (in 2022, 77% of the total wage consists of bonuses).
A study of the public employment and remuneration system in Peru is beyond the scope of this study, but the OECD could, if requested by Peru, conduct a comprehensive study on this topic and propose recommendations to improve the strategic and fiscally sustainable management of human resources in the public sector. Such a study could, for example, analyse the salary structure, to ensure that it is able to attract competent civil servants and compete with the private sector. This would be accompanied by analysis and recommendations for a fiscally sustainable and attractive remuneration policy for talent, rationalising the relationship between salaries and bonuses, and creating greater transparency and pay equity across all entities.
Box 4.2. Common features of public sector pay systems in OECD countries
A key element of any employment system is the remuneration system and the salary structure. In general, the salary structure in the public sector can be differentiated between the managerial and the financial components. The managerial component takes into account several factors. For example, the job position, including the level of responsibility, education and experience, may dictate the level of compensation. Job variables such as hardship factors and working hours may also be taken into account. The personal qualifications and performance of the person hired for the job may also influence pay. Finally, labour supply and union strength can also affect pay. These components of the salary structure and the determination of their appropriate categorisation (e.g. job classification or job description) are usually not managed by the budget authorities, but by central personnel management offices.
Most OECD countries structure the remuneration of public employees so that the basic salary constitutes the most significant possible proportion, allowing some additional payments to compensate for special characteristics of some jobs and some level of flexibility in pay scales on an exceptional basis. This reinforces the transparency and fairness of the pay system and facilitates its management. Nevertheless, additional payments can constitute a considerable part of the public sector wage bill. For example, in the central public administrations of France, Italy and Spain, additional payments can represent up to 30% of gross salary, and sometimes 50%, especially in the case of senior or high-level managerial positions.
Source: OECD (2021[8]), The Public Sector Pay System in Israel.
4.3.4. An independent pay review body could support the implementation of a pay policy
Many countries have an independent pay review body to guide the setting of pay policy and make pay recommendations based on strategic priorities (Box 4.3). The creation of such a body and taking into consideration its recommendations could also contribute to building trust between employers, employees and trade unions. Peru does not have such an institution.
Box 4.3. Independent wage review bodies
Ireland: In 2016, the Irish government approved the establishment of an independent Public Service Pay Commission to advise the government on public service pay. The commission consists of a chairman and seven members, all of whom are appointed by the Minister for Public Expenditure and Reform. The commission produces a series of reports making recommendations to the government on a range of issues relating to the influence of pay on attractiveness, recruitment and retention.
United Kingdom: The Office of Manpower Economics provides an independent secretariat to the following eight pay review bodies which make recommendations affecting 2.5 million workers (about 45% of public sector staff) and a pay bill of GBP 100 billion: Armed Forces Pay Review Body; Review Body on Doctors’ and Dentists’ Remuneration; National Health Service Pay Review Body; Prison Service Pay Review Body; School Teachers’ Review Body; Senior Salaries Review Body; Police Remuneration Review Body; and National Crime Agency Remuneration Review Body.
United States: Under the Federal Employees Pay Comparability Act of 1990, the Federal Wage Council makes recommendations on federal pay. In 2019, these recommendations covered estimated locality rates; the establishment or modification of pay localities; the coverage of wage surveys conducted by the Bureau of Labor Statistics for use in the Locality Pay Program; the level of comparability payments; and the process of comparing General Schedule pay with non-federal pay.
Source: OECD (2021[8]), The Public Sector Pay System in Israel.
4.3.5. The transition to the civil service regime is confusing and time-consuming
The new Civil Service Law (of 2013)
To simplify the public employment regime, Peru set out an ambitious reform agenda associated with the implementation of the new Civil Service Law (Law 30057). As analysed in the OECD Public Governance Review of Peru (2016[4]), the new Civil Service Law has been designed in line with OECD best practice and, once implemented, could address some of the shortcomings described above.
The new Civil Service Law aims to restructure and professionalise the management of civil servants, strengthen merit-based standards and develop more strategic HRM processes with respect to recruitment, salary structure, competency and performance management, and workforce planning in line with the evolving needs of government at all three levels of the administration. The potential impact of these reforms is significant, given the scope of the issues the reforms are intended to address (OECD, 2016[4]).
The new Civil Service Law establishes a single and exclusive regime for civil servants at national, regional and local levels, articulating a strategic policy rationale for civil service reform, with an emphasis on merit and professionalism. The law is designed to consolidate the three existing employment regimes. Along with its secondary legislation, it provides a broad framework for a comprehensive and integrated merit‑based civil service, with SERVIR as the lead agency. In addition, it regulates HRM practices by establishing a common standard for open and transparent merit-based recruitment processes, development and training, and performance management, and standardises terms and conditions of employment, including working time, holidays, health and social security (OECD, 2016[4]).
Challenges for the implementation of the new Civil Service Law
The law envisaged a six-year implementation horizon, so it should have been implemented from 2020. However, in June 2022, the Entity Post Table of only 14 entities was approved, which is a condition for an entity to be considered as having transitioned to the new regime.
The implementation of the new Civil Service Law is quite complicated and burdensome. It has two interrelated components. First, all entities must undertake an organisational realignment, according to the following steps:
1. analysis of its human resources and the development of their functions
2. proposed reorganisation of the human resources structure
3. valorisation of the entity’s job descriptions based on a new job profile system (OECD, 2016[4]).
Second, civil servants have to make the transition to the new regime. To do so, civil servants must apply for positions in the new regime through a competitive process. They cannot be forced into the new regime, but must choose the transition. Civil servants who do not want to transition to the new regime remain in their post under the old regime.
This explains why the transition is a long-term commitment. By 2022, only 0.3% of civil servants had transitioned. There are no explicit incentives to transition to the new regime.
While the establishment of the new Civil Service Law is a commendable step towards a more mature civil service system and towards standardisation and harmonisation of the employment system, it will only produce the desired results if it is well implemented. Given the low degree of implementation so far, it might be appropriate to launch a dialogue on how to update the process to ensure implementation. This would also ensure that the law is up to date and takes into account the latest developments and knowledge. The OECD is at Peru's disposal if it wishes to conduct an in-depth study on the Civil Service Law and its implementation, and to facilitate co-ordination between the different institutions that should collaborate on this objective, such as SERVIR and the DGGFRH in particular.
4.4. Challenge #2: Capacities are weak for strategic personnel management, internal human resources and financial controls, especially at subnational levels
In OECD countries, human resources units within organisations often play an important role, and therefore need to have a high level of capacity.
The new Civil Service Law greatly strengthens the role of HR units within the entities. First, HR units play a key role in driving the transition process and the reorganisation of the entities. Second, once the transition is completed, HR units assume greater responsibilities in the implementation of the seven SAGRH sub‑systems: 1) human resources policy planning; 2) work organisation and itsdistribution; 3) employment management; 4) performance management; 5) compensation management; 6) capacity-building and development; 7) human and social relations management.
4.4.1. The low management capacity of the Peruvian civil service has a direct impact on the quality of the services it provides
Public administration in Peru is characterised by high staff turnover. As assessed in the OECD Survey of Public Governance in Peru, this high level of turnover has a negative impact on the capacity of the Peruvian public administration to develop new services or improve existing ones. In this way, the Peruvian civil service’s low management capacity directly impacts the quality of the services it provides to citizens (OECD, 2016[4]). This makes it challenging to build a professional civil service and to strengthen knowledge and capacities through experience building or training. As seen in Figure 4.3, there is room for improvement in terms of knowledge of public budgeting, strategic planning and the modernisation of public management at the regional level. From the interviews, it is to be expected that this will be reflected at the national level and probably be extended to the local level.
Figure 4.3. Assessment of the distribution of knowledge of the Peruvian civil service across regions
Source: OECD (2016[4]), OECD Public Governance Reviews: Peru: Integrated Governance for Inclusive Growth.
4.4.2. Financial and human resources management is essential to assess budgetary needs to develop the right workforce for the future
Weaknesses in strategic planning have an impact on HRM, in particular strategic workforce planning. Limited skills weaken forward workforce planning, which aims to recruit and build the skills needed in the medium and long term. Given the complexity of the employment system, administrative processes absorb most of the HR units’ time. This has an impact on their ability to plan strategically and to assessing the current situation and the future needs to be met.
It also has consequences on financial planning, which means that HR budget requirements are often based on immediate needs without considering future workforce needs and developments. This is partly due to restrictive recruitment practices and the limitation of authorised new vacancies. When there are opportunities for new vacancies, entities try to take advantage of them without necessarily planning if and how they are needed. There is, thus, no strategic workforce planning.
The limited capacities in HRM and public budgeting, as shown in Figure 4.3, mean that the DGGFRH receives a large number of requests for advice and clarification from HR units on the legality of the public employment regimes and/or remuneration types. This is also due to the complexity of the employment regimes and types. Consequently, this has become one of the DGGFRH’s main tasks, which in turn takes resources away from strategic planning within the DGGFRH.
To mitigate these weaknesses, there is a need to develop a strategic approach to human resources planning at the public sector and entity level to strengthen financial and HR management capacities across government. Responsibility would lie with SERVIR in coordination with DGGFRH in the area of fiscal management.
4.4.3. High staff turnover makes it very difficult to build human resource management capacity and to professionalise the human resources function
The DGGFRH has conducted regular capacity-building seminars with employees in HR units; however, given the high staff turnover, the long-term impact of these trainings is relatively limited. Newly trained HR staff may not stay in post long enough to get the most out of their training, and training may have to be repeated frequently to train new incoming staff. Capacity building in this context needs to focus on avenues that can have an impact in an unstable environment
This is a frequent challenge in all countries, especially at sub-national levels. It is beyond the scope of this report to analyse this challenge and propose recommendations, but the OECD has supported other countries in this type of analysis. Some solutions implemented in countries are for example:
Develop detailed guides, manuals and checklists for HR units on the different financial processes to support their work in a context of high turnover. These guides for new employees detail step-by-step all the processes they need to follow.
These guides are sometimes supported by an online help tool, such as an automated chatbot and the most common problems encountered.
The national government may have teams of people to support the HR teams in the entities.
At the sub-national government level, some countries provide incentives for sub-national governments to pool and share services, such as having financial or HR services shared among several sub-national governments, which allows hiring people with higher capacities, giving them more responsibilities and sharing costs.
Professionalisation of the HR function is common, both for HR officials responsible for HR management and for finance officials responsible for HR financial management. The establishment of an HR profession helps to mitigate high staff turnover by ensuring a minimum level of qualification and potentially attracting more candidates with the opportunity to rotate through various entities.
4.5. Challenge # 3: Internal control system still insufficient
4.5.1. Peruvian National Control System
In addition to administrative and financial HR management, risk management and internal control are crucial to ensure operational effectiveness and efficiency; reliability of financial reporting; and compliance with HR laws, regulations and policies. The basic pillars of the Peruvian National Control System are Law 27.785 (Law of the National Control System and the Office of the Comptroller General of the Republic and its amendments) and Law 28.716 (Law of Internal Control of State Entities). The Office of the Comptroller General of the Republic is the leading entity, supported by the institutional control bodies responsible for control and internal audit in the entities (OECD, 2017[12]).
According to the Institute of Internal Auditors, there should be three levels of control for the proper functioning of organisations. The first line is management control and supervision. The second line is internal controls, e.g. through an entity’s own financial control or HRM unit. Internal control units and ministry officials are designed to monitor compliance with financial and HRM rules, as well as to control staff costs. They are best placed to guide and support managers in complying with these rules. The third line of assurance includes the internal audit function, which ensures that the first two lines are working effectively. This is complemented by external monitoring and control. In the case of budget execution control in Peru, this would consist of the MEF, the Comptroller General’s Office, the central HRM agency (SERVIR), etc. (OECD, 2017[13]).
4.5.2. Weaknesses of the internal control system in Peru
The OECD Survey on Integrity in Peru (2017[12]) identified several weaknesses in internal control processes at all levels of government. Internal control is perceived as an administrative, box-ticking exercise, carried out in a rather restrictive and isolated manner, without integration into the management cycle. Similarly, risk management processes are weak. At the subnational level, entities struggle to produce robust data on policy performance and service delivery, which undermines forward-looking planning and policy prioritisation. These factors result in an environment where effective controls and safeguards are very weak, which can create opportunities for corrupt employment practices and weaken the public administration’s capacities (OECD, 2017[12]).
4.5.3. The development of external controls to compensate for insufficient internal controls
This limited capacity and knowledge within the HR units and the weaknesses of the institutional control body to implement effective risk management and internal control processes have also led to a situation where SERVIR and the DGGFRH have implemented additional control mechanisms to ensure that the regimes are correctly applied ex ante.
The DGGFRH issues a prior opinion for the approval of the Analytical Personnel Budget4 to ensure that the staff positions to be filled are duly financed with the correct amounts according to the income policy5 determined for each employment regime.
Likewise, the DGGFRH and the General Directorate for Public Budget control that the necessary budget is available and that the public employment regime used is in line with those defined in the Catalogue of Revenue Concepts corresponding to the Human Resources of the Public Sector.
Despite the efforts of the DGGFRH, it seems that it is still quite common to use public employment concepts that are not formally regulated and have to be validated by a court ruling a posteriori.
The OECD countries have stronger internal controls, which allows them to have weaker external controls. OECD countries generally use the three-line model (Box 4.4). This of course requires a high level of capacity in the human resources units of the entities.
Box 4.4. The Institute of Internal Auditors' three-line model
The model followed in many OECD countries is that ministries have flexibility to recruit and manage their human resources within very strict and unchangeable limits set in the budget.
According to the three-line model, managerial control and supervision (first line), internal control through HR offices and the financial control unit (second line), and internal audit (third line) ensure the correct implementation of concepts and the availability of financial resources.
Source: Authors.
4.5.4. The role of external audit in human resources is limited in Peru
Many OECD countries have thematic external audit mechanisms that support the financial management of human resources. OECD countries have conducted human resources audits on a variety of topics, such as cost efficiency, recruitment practices, payroll planning and skills in the civil service or similar. For example, in 2015, the UK National Audit Office conducted a report on central government staff costs and analysed the extent to which bodies have reduced civil service staff costs as a result of the government's financial policy of cutting staff costs to help reduce the deficit (Comptroller and Auditor General, 2015[14]) The report concludes with clear recommendations for both entities and the centre of government.
4.6. Challenge #4: Underdeveloped fiscal framework for collective bargaining reduces predictability of human resource expenditures
4.6.1. The fiscal framework for collective bargaining
From a public financial management point of view, collective bargaining in the public sector has different characteristics than it does in the private sector. In relation to the budget, collective bargaining in the public sector has a unique position, as there is no real affordability constraint. In the private sector, union demands are constrained by the available budget, as unions have no interest in negotiating an unsustainable wage level that threatens to put the company out of business and put its members out of work. In the public sector, this constraint is less palpable, as governments can finance wage increases through tax increases, the reallocation of funds or deficit spending/debt. Given the magnitude of public sector pay (30% of general government pay in Peru), unions can have a significant impact on the public budget (OECD, 2021[8]).
The Peruvian Constitution guarantees the right to collective bargaining for public and private sector workers at central and decentralised levels. However, the right to negotiate terms and conditions of work and employment, including remuneration and other working conditions with economic consequences, through collective bargaining has only been regulated since 2021. In this respect, Peru is in line with the evolution of many OECD countries in the first years after the 2008 financial crisis, which have implemented reforms to strengthen collective bargaining (Box 4.5).
Box 4.5. Collective bargaining reforms during the global financial crisis
France, Greece, Portugal and Spain passed sweeping labour market reforms during or after the global financial crisis that changed the way collective bargaining works.
In Greece, the collective bargaining system was completely overhauled during the crisis. The principle of favourability1 was suspended, giving priority to company-level agreements. In addition, new provisions allowed “associations of persons” (i.e. associations of workers, not necessarily affiliated with a trade union) to sign company-level agreements over trade unions. Extensions of collective agreements to non-signatory companies were also suspended and limits on the duration and ultra-activity2 of collective agreements were introduced. Finally, the system of unilateral recourse to arbitration was abolished. Since Greece has exited the European Stability Mechanism’s stability support programme (i.e. the financial support programme set up during the crisis) in September 2018, the principle of favourability and the possibility to extend sectoral collective agreements signed by the representative parties have been reintroduced. Since September 2018, 12 sectoral or local collective agreements have been extended, covering more than 200 000 workers. Unilateral recourse to arbitration was also reinstated by a Council of State ruling in 2014, but some incentives for a consensual solution have been introduced. The Greek government elected in June 2019 has expressed its intention to again limit unilateral recourse to arbitration and the use of extensions, as well as to introduce opt-out mechanisms for sectoral agreements.
In Spain, the 2012 reform reversed the principle of favourability by giving priority to company-level agreements over sectoral or regional agreements. The reform also made it easier for companies to opt out of higher level or company-level agreements, either by agreement with workers’ representatives or by unilaterally referring the matter to arbitration by a tripartite public body. So far, Spanish companies do not seem to have made significant use of these new provisions.
In Portugal, successive reforms between 2011 and 2015 initially froze collective agreement extensions and then granted them only if the signatory employers’ organisations met specific criteria. The duration and ultra-activity of collective agreements were reduced. Works councils in companies with at least 150 employees (as opposed to 500) were allowed to negotiate company-level agreements at the mandate of the trade unions and the possibility for employers to temporarily suspend a collective agreement in case of crisis was introduced. Since 2015, these reforms have been partly reversed: in 2017, a tripartite pact removed the representativeness criteria for extensions and set a 35-day limit for their issuance to avoid the usual long pre-reform delays. The limits on ultra-activity were suspended for 18 months between 2017 and 2018 to create stability for negotiating a tripartite agreement to amend the Labour Code. Sectoral bargaining has now resumed. However, although the new provisions have remained valid, there has been very limited acceptance of the possibility of negotiating at company level.
In France, there have been two main reforms in recent years. In 2016, the Labour Law (Loi El Khomri) strengthened the role of company-level agreements in defining working time, holidays and rest period. The reforms included raising the threshold for defining which unions are representative and authorised to sign company-level agreements and introduced the possibility of approving agreements through an internal referendum. In addition, opt-out clauses have been introduced in case of economic hardship, with the aim of ring-fencing employment (but not wages). In 2018, the Law ratifying the Ordinances of September 2017 encouraged company-level bargaining by allowing bargaining even in the absence of a trade union in companies with less than 50 employees. Additionally, in companies with fewer than 20 workers, the employer can submit a collective agreement proposal directly to an internal referendum. The reform also sought to make extensions of sectoral agreements less automatic by making them conditional on the presence of different provisions depending on the size of the company and by introducing the possibility of blocking them for public interest considerations (in particular if an agreement is used as an anti-competitive instrument against non-signatory companies) on the basis of an assessment by an ad hoc group of experts. However, by 2020 no request for an extension has been rejected and no agreement has included different provisions for large and small companies. The reform of the ordinances also merged and streamlined different workers’ representative bodies at the company level into one to simplify the dialogue at the company level.
1. Principle governing the relationship between a collective agreement and the individual employment contract: if the terms of the individual contract are more favourable to the worker than the provisions of the relevant collective agreement, the former prevail. The normative provisions of collective agreements are intended to serve as minimum standards of protection.
2. Ultra activity means that a collective agreement will continue to apply beyond its expiry or termination date if a new collective agreement has not been reached.
Sources: (OECD, 2019[15]) (OECD, 2021[8]).
In Peru, Law 31188 of 2021 allowed for centralised and decentralised collective bargaining in the public sector on terms and conditions of work and employment, including remuneration and other conditions of work with economic consequences, as well as all aspects of employer-worker relations, and relations between employers’ and workers’ organisations. At the central level, the bargaining process took place for the first time in 2022 between the 21 most representative public sector trade unions and the 21 employer representatives appointed by the Presidency of the Council of Ministers (PCM). At least four representatives have to be chosen from the PCM and the MEF, while the other representatives can be chosen depending on the subject under negotiation.
4.6.2. The role of the Ministry of Finance and Economy in wage negotiations in the OECD and Peru
In OECD countries, the Ministry of Finance usually represents the government in all matters. In this way, it can oversee and authorise agreements and ensure fiscal sustainability. This also means that centralisation is a prominent feature of the negotiation process. Decentrally negotiated issues are usually more limited than centrally negotiated ones. At the central level, collective bargaining usually concerns base pay, wage costs and overall working conditions. Decentralised bargaining tends to focus on new management tools and pay for performance (OECD, 2021[8]). Where pay negotiations are decentralised, managers have more discretion to design pay to reward high performers or attract specific profiles (Box 4.6).
In Peru, decentralised negotiations can include pay as long as it covers the respective area and does not cover the subject matter agreed upon at the central level.
Box 4.6. Decentralisation of bargaining in the public sector in Sweden and the United Kingdom
Sweden’s resilience to the economic crisis of 2008 can be partly explained by the strong social dialogue system and the active involvement of the social partners. The Swedish bargaining system is a centralised two-tier system – bargaining first takes place at sectoral level, then at the organisational level – and there has been a clear trend towards decentralising wage determination and other issues to the organisational level.
Swedish public sector employees are subject to the same labour market regulations as private employees. Therefore, all employees have legally guaranteed rights to bargaining and industrial action. There is a single labour law for all workers (except in very specific cases such as judges).
SAGE, the Swedish Agency for Government Employers, has 250 member bodies and 240 000 employees in the central government sector. At the local government level, the Swedish Association of Local Authorities and Regions is the employers’ organisation, and represents 290 municipalities and 20 regions.
Due to the high level of social conflict in the Swedish labour market, a central national agreement was established in 1938 to support the value of collective agreements for both employers and workers. The agreement stated that social conflicts were not allowed during the period of validity of collective agreements at the national or sectoral level. In 1974, this rule was included in Swedish labour market legislation.
An “Industry Agreement” on co-operation in industrial development and wage formation, established in 1997, is still in force. It is the basis for wage revisions in the Swedish labour market. The agreement stipulates that wage negotiations must start in the industry sector, as this sector is internationally competitive. The other sectoral agreements are to be negotiated afterwards, and with reference to the industry agreement. This harmonisation has made the period of wage negotiations much more peaceful, without generating social conflicts. Social agreements are binding, but legal acts are not necessary. The agreements complement labour market legislation, such as pension and occupational safety agreements.
In the United Kingdom, under the delegated pay framework, negotiation with unions on pay is conducted at departmental (ministerial) level. Departments are encouraged to work constructively with unions in developing their overall pay and reward strategies. Departments should also engage constructively with unions for pay purposes, both in terms of annual pay competitions and the development of pay flexibility cases. Departments can enter into formal negotiations with trade unions once the relevant secretary of state has approved their terms of reference.
When it works well, decentralised bargaining can lead to win-win situations through the collective bargaining agreement. At its best, the organisation – in this case each department – evaluates payroll reforms to improve efficiency, productivity and public service improvement. This may be a mix of eliminating obsolete pay and practices, longer and more flexible working arrangements for the payroll, and so on. The savings identified from these improvements are offered as “benefit-sharing” arrangements to unions/employees as a higher wage to be given if a collective agreement is reached to reform contracts, conditions and working arrangements. The result is a more transparent wage system, better retention and recruitment of skilled workers, better public services, more motivated employees, and better industrial relations. However, it is not a simple process. It requires time and skill to design agreements that work well for all three participants (unions/employees, public/finance/treasury and organisations).
Source: OECD (2021[8]), The Public Sector Pay System in Israel.
The challenge for collective bargaining is distinguishing between the budget domain and the collective bargaining domain. This distinction is crucial to be transparent in the available fiscal space while protecting the government’s right to allocate public expenditure in line with its political priorities. In OECD countries, this is done, for example, through decentralisation that allocates “lump sum” appropriations to entities. This can help set transparent limits on what is available and limit spillover to other sectors. Affordability constraints can also be created by separating budget and employment functions. For example, in Canada, where negotiations are centralised, the Treasury Board Secretariat, not the Department of Finance, is the employer and manages all wage negotiations. Finally, another option is to set affordability constraints in national framework agreements, taking into account macroeconomic data, and using that agreement to constrain agreements accordingly (OECD, 2021[8]).
In Peru, both wage bargaining and budgeting at the central level are carried out by the MEF (in addition to other employer representatives in the negotiations). To ensure budgetary feasibility, Law 31188 regulated by Supreme Decree 008-2022-PCM establishes that the employers’ representatives must prepare a report detailing the cost of implementing the draft collective agreement and the available budget. Before issuing the report, the employer is requested to take into account the MEF’s Final Situation Report on the Financial Administration of the Public Sector, which determines the fiscal space for the implementation of centralised and decentralised collective bargaining processes. Before issuing the report, the MEF submits the proposed situation report to the PCM. On this basis, the PCM makes recommendations to determine the available fiscal space. The DGGFRH prepares the progress report in co-ordination with the MEF’s line bodies. In this way, fiscal space can be clearly established and act as a kind of affordability clause.
A related challenge is to consider the outcome of the negotiations in the budget formulation process, given that the decision must be reached before 30 June and therefore during the final stages of the budget formulation process. To better project costs, the DGGFRH, in co-ordination with the General Directorate for Public Budget, could calculate the budget based on the fiscal space available and the initial proposal received from the workers’ representatives. The DGGFRH has created a module to register all proposals from the central and decentralised levels, which is a useful step to be able to assess the possible budgetary impact and plan accordingly.
4.6.3. An independent entity responsible for preparing the fiscal situation report could increase confidence in the process
To build trust and a common understanding among all stakeholders, Peru could consider commissioning an independent entity to conduct this analysis, which could help inform framework agreements, which could in turn set ceilings. This could help reinforce the perception of neutrality regarding the availability of fiscal space and help to avoid conflicts. Joint data collection and research between government, social partners and third parties, such as independent research bodies, helps to build shared values, common analysis and trust (Box 4.7).
Box 4.7. United Kingdom: Wage reviews and data collection
In the United Kingdom, eight different pay review bodies make recommendations on pay adjustments for 2.5 million workers (representing about 45% of the public sector workforce). Each body collects data from employers and trade unions and submits a recommendation to the government on pay reforms. The recommendations are not binding; it is up to the government to decide how to use the information. Nevertheless, an independent and public review helps to ensure that pay reforms are justified and can inform public opinion. In the United Kingdom, pay reviews help to bring different actors together to agree on a description of the reality and, consequently, on solutions to address shortcomings in the pay system. Pay review bodies have replaced collective bargaining for employees working as school teachers, health workers, correctional officers and in the armed forces.
Source: OECD (2021[8]), The Public Sector Pay System in Israel.
4.6.4. Dispute resolution mechanisms are in line with international standards
In terms of dispute resolution mechanisms, in cases where collective bargaining processes have ended without agreement, mediation or, in a second step, arbitration may be options. In general, mediation consists of the choice of an independent authority that attempts to arbitrate between the parties’ positions. However, it lacks enforcement power and, in the case of a difficult dispute, only serves to delay the resolution of the dispute. Arbitration involves a third party that examines the dispute or negotiation process, provides data and recommendations, and exerts political pressure to negotiate. Here, too, the arbitrator cannot force the parties to accept the resolution. In addition, arbitration may encourage the parties to adopt extreme positions rather than moving towards a compromise, as the third party is likely to propose a middle ground (OECD, 2021[8]).
Dispute resolution mechanisms in Peru are largely in line with international standards. The law provides for mediation involving a specialised technical body appointed by the Ministry of Labour and Employment Promotion. In case of failure to reach an agreement, either party may request the initiation of an optional arbitration process. The arbitrator’s binding decision may consider one of the parties’ final proposals or an alternative that takes into account the parties’ proposals. The final decision cannot include different, additional or greater concessions than those expressly requested by the union in the draft collective agreement.
4.7. Challenge #5: The process of formulating staff costs is based on a micro approach where entities submit their demands to the MEF without a credible maximum allocation for human resources
4.7.1. Peru's human resources budget formulation process lacks credible spending ceilings
In Peru, the formulation of personnel expenditures is based on the micro-level estimate of the baseline rather than on macro-level estimates and ceilings compatible with fiscal sustainability objectives. The General Directorate for Public Budget calculates the baseline personnel expenditure for each public entity based on an analysis performed by the DGGFRH. The DGGFRH analyses each entitiy’s personnel expenditure based on the employment information recorded in AIRHSP.
Based on this, the General Directorate for Public Budget prepares what it calls a “staff expenditure and staff numbers ceiling” for each entity at the national and regional level (local governments have greater autonomy and can programme their budget independently of the national level).
According to OECD terminology, this does not correspond to an “expenditure ceiling” but to a “baseline calculation”. Effectively, it is, in practice, a “floor” of expenditure rather than a maximum expenditure since each entity then prepares its staffing needs, which may exceed the previously allocated “ceiling”.
As mentioned in Chapter 2, discussions with the pliegos take place before setting a maximum amount of spending that the MEF would determine based on fiscal space and its fiscal sustainability objective. Therefore, there is a risk that the sum of the demands received by the MEF is greater than the state's financial capacity. This type of system where the discussion between the MEF and the pliegos is initiated by the pliegos' demands and not by maximum spending amounts determined by the MEF was prevalent in many OECD countries until recently. However, many OECD countries have moved (and others are still moving) towards systems where the formulation of the budget (and the human resources budget as well) is initiated by the maximum (and credible) amounts set by the MEF, and not by the demands of the entities. As mentioned in the previous section, OECD countries then use different mechanisms to control total human resources spending. It is noteworthy that OECD countries do not perform these controls at the micro level (of the payroll), but at the macro level (total expenditure on human resources of the entity, total number of employees, etc.).
4.7.2. The micro approach does not allow for strategic management of personnel expenditures or human resources and creates rigidities
In Peru, personnel expenditures are formulated with a detailed micro-level approach rather than a high‑level aggregation of costs. The records of each employee are thus considered in the budget formulation.
This creates a number of difficulties:
The difficulty with this micro-level approach is that it does not provide entities with any flexibility to structure their staff costs according to their needs: they are relatively limited on how they can use the allocated staff costs. Both the initial analysis developed by the DGGFRH and the entities’ budget presentations are based on line-by-line financial needs. Entities receive very little guidance on preparing their overall staff expenditure limits.
This bottom-up approach can lead entities to overstate their needs, putting upward pressure on spending. By having a spending floor rather than a maximum staff expenditure, entities could calculate their spending generously to ensure that a certain percentage of their calculations are earmarked funds.
There is no incentive for entities to strategically structure their payrolls to identify savings opportunities in certain programme areas to reallocate as needed. Staff ceilings have several drawbacks.
The headcount ceiling is an ineffective measure on its own unless it is implemented in a more precise way that recognises different categories of employees. A standard job classification system can help to structure the different categories.
Ccontrolling the number of employees at such a micro level at the central level is an onerous administrative burden.
4.7.3. Despite very strong MEF monitoring of inputs, there are still slippages
Finally, it is also not a fully effective system, entities may hire consultants or external staff to circumvent staff ceilings, which still leads to increased staff costs. This has also sometimes been the case in Peru, where the CAS regime has been used to circumvent the freezing of various employment regimes.
Today, the MEF exercises a high degree of control over the execution of the budget as far as personnel expenditures are concerned. Civil servants can only be recruited once the MEF has validated the public employment regime and budget availability. All public employment regimes must be registered in AIRHSP to be paid. In addition, introducing the Catalogue of Revenue Concepts corresponding to Public Sector Human Resources has led to more and more public employment regimes being formally regulated. However, despite the MEF’s strong control, entity-specific public employment regimes are still used which have not been regulated and therefore do not initially appear in the budget. The budget for these unregulated regimes often has to be disbursed over and above the budget already allocated at the end of the budget year due to court decisions obliging the payment of these regimes.
4.7.4. Peru has no alternative instruments to guarantee the fiscal sustainability of personnel spending
Mechanisms used in OECD countries to ensure fiscal sustainability of personnel spending.
Given the magnitude of the public sector wage bill, budgeting and controlling these expenditures is one of the main tasks of any government to ensure fiscal sustainability in the short and long term. There are a number of fiscal human resource management tools used by OECD countries in the budget formulation and execution phases.
Tools used during the budget formulation phase.
Analysis of sectoral policies and programmes: Throughout budget formulation, budgetary control can be exercised by analysing sectoral policies and programmes. This means a thorough and operational review of public expenditures in relation to staff costs and an assessment of the need and scope of staff with regard to the entities’ responsibilities. This can help identify where more resources are needed or can be reduced.
Ceilings on the number of public employees: In some of the OECD countries, the Ministry of Finance may also use ceilings on the number of public employees pre-determined at the entity level based on sectoral analysis. Ceilings are usually stated in the form of the number of full-time equivalent positions that the Ministry of Finance will consider for funding.
Staff expenditure ceilings: The staff expenditure ceilings throughout the budget formulation phase are another tool for controlling staff expenditure. They can give greater flexibility to entities in how they structure their staffing within the pre‑determined spending limit. Staff expenditure ceilings should be subject to transparent controls and higher levels of capacity and trust throughout the system. Even so, and regardless of the level of control, there is a risk of hiring outside employment regimes in less transparent processes (consultants) to circumvent regulations. Mature risk management processes must be implemented to mitigate this risk (Box 4.8).
In most of OECD countries, when preparing their budgets, institutions must respect these ceilings without additional funding options for HR costs.
Box 4.8. Staff numbers and expenditure ceilings in OECD countries
OECD countries that use staff ceilings base them on the number of full-time equivalent staff or on consumption or expenditure, which gives entities more flexibility.
Australia uses Average Staffing Level (ASL) data, which counts staff by the time they work. Full-time employees are counted as 1.0 ASL, while part-time staff working for 2.5 days are counted as 0.5 ASL.
In France, the staff ceiling shows the annual limit of a budget programme and is calculated as an average of the consumption, or the equivalent of the salary payment.
It is also common to use staff expenditure ceilings. The United Kingdom has a fairly advanced model for managing staff costs. The traditional model of government operation in the United Kingdom has been one of departmental autonomy, within an overall spending framework set by the Treasury. The Treasury defines departmental budgets and departments work within those budgets with autonomy over how to allocate the detailed breakdown of the budget.
Source: Comptroller and Auditor General (2015[14]).
Throughout budget execution, Ministries of Finance in OECD countries also use different tools to control staff expenditure.
Tools used in the budget implementation phase:
Regulations prohibiting the transfer of non-staff costs to staff costs : Many countries also have regulations prohibiting the transfer of non-staff costs to staff costs (or vice versa) during budget execution. While the possibility of transferring funds within the entity throughout budget execution may provide entities with more flexibility, it may also reduce oversight and control.
4.8. Challenge #6: Difficulties in developing reliable medium-term projections of staff costs
Within its HR financial management mandate, the DGGFRH has responsibilities related to the multiannual financial framework, specifically concerning HR expenditure. In this regard, the Directorate of Human Resources Fiscal Management Programming is responsible for:
formulating and proposing directives and guidelines for the multiannual programming of staff revenue and the effective financial management of human resources revenue
developing economic and financial statistics on active staff and retirees in the public sector that contribute to better analysis, programming and costing of public sector compensation.
Economic and financial statistics and multiannual programming guidelines are used to develop a multiannual macroeconomic framework for forecasting payroll developments, as well as a baseline within the budget formulation process.
However, the DGGFRH uses an approach based on spreadsheet and micro data to make macro projections. This methodology is very difficult to implement and yields unreliable projections.6
4.8.1. Challenges in producing reliable forecasts
The DGGFRH has expressed several challenges in developing reliable forecasts for staff costs, given a number of hard-to-predict liabilities.
First, the multitude of pension systems raises the question of when to account for pension liabilities throughout the formulation of the personnel budget. Countries that use accrual accounting, such as New Zealand, account for unfunded pension costs and schemes within the budgetary limits of each entity (Pimenta and Seco, 2021[16]).
Second, although the DGGFRH has made a considerable efforts to regularise all the employment regimes, as stated above, there are still a significant number of regimes, both remuneration and bonuses, at the entity level that are neither included in the CUC nor recorded in AIRHSP. This means the DGGFRH does not have a concrete framework for projecting the possible liabilities arising from these regimes, which are not usually included throughout the budget formulation process, given that the information available through the information systems is limited.
Third, the financial impact of implementing the transition process to the new Civil Service Law is complex to project given the duration in the absence of a predictable implementation schedule. Civil servants can choose between joining the new civil service regime or remaining in their original employment regime. In most cases, the new civil service regime would imply a salary increase. This further compounds the difficulty of projecting how much and when the budgetary obligations arising from the transition would materialise.
Fourth, the DGGFRH has expressed difficulties in assessing the outcome of the collective bargaining process and its impact on staff expenditure, especially in the medium and long terms.
4.8.2. Establish contingency funds to ensure fiscal sustainability in the medium term
While no tool can perfectly project the evolution of staff costs over the medium and long term, projections can approximate costs. Budget projections support the development of a strategic approach to human resources planning, build policy and ensure fiscal sustainability. HR expenditure is the result of active planning.
Many OECD countries create contingency reserves to ensure the fiscal sustainability of their human resources expenditures in the medium term. This consists of leaving a percentage of the funds under the budget ceilings unallocated, within each entity, which can be mobilised in case of unforeseen events (such as the outcome of court cases). In such cases, Ministries of Finance can release these additional resources during budget execution to address urgent priorities without breaching the macroeconomic constraint (International Monetary Fund, n.d.[17]).
For example, in France, the 2014 programming law stipulated that for each year of the programming period and for all expenditure subject to limiting authorisation, at least 0.5% of payment authorisations should be set aside for staff costs (Moretti and Kraan, 2018[18]).
4.9. Challenge #7: The potential of AIRHSP as a strategic tool for planning and fiscal management of human resources by entities is not fully exploited.
4.9.1. Key features of payroll systems in OECD countries
Administrative payroll systems in the public sector can provide useful information on employee spending. They centralise employee information on pay, financial information, job tracking and the number of occupied positions. Well-managed payroll systems can also help facilitate budget preparation and monitoring, as well as the evaluation of HR policies.
Payroll systems can be structured in a centralised or decentralised manner, depending on the ecosystem. A lead agency oversees the administrative system and provides a single information system to manage and record information in a centralised system. Consolidating the management of the payroll information system in a single entity can save costs and improve efficiency, transparency and control, as well as standardise processes. The lead agency usually bears the costs of developing and maintaining the information system, and the use of the system is often mandated by law. Most countries in Latin America have designated government bodies to oversee the administrative system, such as human resources, procurement, budget or similar. This is rooted in the countries’ ecosystem, which is characterised by a high degree of centralisation.
In a decentralised system, payroll systems are structured so that each entity manages and records its payroll data through the HR unit. The data are reported to the Ministry of Finance for budget formulation and execution. While the decentralised system allows greater flexibility for entities to design a system according to individual needs, it is more complex to monitor, with fewer tools to identify fraud and higher costs. It can also be difficult to enforce data and quality standards.
4.9.2. The Peruvian payroll system is moving from partially centralised to centralised
In Peru, the system can be characterised as partially centralised. The compensation management component of the SAGRH is supported by a computer system with characteristics defined by the MEF, and a decentralised model of payroll systems is in place, in which each ministry or entity developed or acquired its own payroll system, sometimes following certain functional and interface guidelines previously defined with the SIAF. However, in recent years, the MEF has proposed to move to a centralised system, AIRHSP administered by the DGGFRH, which is, in effect, more aligned with the governing body approach adopted in the country.
4.9.3. The objective of AIRHSP is not clearly defined to take advantage of the available data
AIRHSP is a step towards an integrated system for financing human resources at the national and regional levels. However, its purpose needs to be defined.
It currently serves as a baseline for staff expenditure at the budget formulation stage and for monitoring staff expenditure. However, AIRHSP micro data are not useful for formulating the budget based on headcount, as changing circumstances cannot be taken into account in a pre-emptive manner with such a precise figure. As mentioned above, OECD countries usually formulate their budgets based on macro projections and maximum expenditure amounts for human resources determined on the basis of the evolution of the baseline and available fiscal space.
The AIRHSP provides extensive information on the employment and remuneration concepts used in the entities, as well as the posts allocated. In this way, it could serve as an input for salary disbursement and as a strategic tool for planning and fiscal management of human resources by the entities.
Today, the deployment of the AIRHSP in national and regional government bodies is helping to make the items of income (remuneration) that have a legal basis transparent, thereby ensuring that the State's expenditure on personnel is duly substantiated. The above, together with the work to update the CUC, are tools that should be shared with the entities so that they can use this information to help them in their fiscal management of human resources. In the meantime, entities have little incentive to integrate their data into AIRHSP.
4.9.4. The lack of interoperability between AIRHSP and the Integrated Public Resource Financial Management System requires additional efforts for entities to integrate their information
The DGGFRH has already successfully undertaken efforts to ensure interoperability with key information systems such as RENIEC, MINSA and SERVIR. However, there are still some interoperability problems internally in the MEF. AIRHSP is not automatically interoperable with the Payroll Payment Control Module or the Integrated System of Financial Management of Public Resources (SIAF-RP) in general. This involves a rather cumbersome process for entities to register data in the different systems.
Ensuring greater interoperability with other IT systems would facilitate data recording and, ideally, automate it.
To this end, Peru has initiated the development of the new Integrated System for the Financial Administration of Public Resources, which aims to support all the processes of the Financial Administration of the Public Sector, including those of fiscal management of human resources, guaranteeing the integration of information.
4.9.5. Audits of the information registered in AIRHSP could mitigate the risk of incorrect data
As discussed above, public sector pay is vulnerable to inefficiency and corruption. Strong payroll system controls can help ensure data accuracy and mitigate risks of corruption and fraud. For example, in Brazil, automated audits of the centralised payroll database generated annual financial savings of 1-2% in the total cost of the federal government payroll (Pimenta and Seco, 2021[16]) (Box 4.9). Currently, Peru conducts few regular or systematic audits of AIRHSP data. The audit mechanisms only include storing the date of creation and modification of the registration, deregistration and modification operations on AIRHSP records.
The DGGFRH, as the body responsible for AIRHSP, could consider introducing the following basic audits:
checking employee lists, pay rates and hours worked
confirming details of pay and hours worked
reconciling payroll records with tax forms or other records
identifying areas for improvement in the payroll process (e.g. payroll deductions)
ensuring compliance with labour legislation and relevant registrations
reviewing beneficiaries’ bank accounts (Lasker, 2021[19]; Pimenta and Seco, 2021[16]).
Box 4.9. Integrated database for personnel administration in Brazil
The Integrated Human Resources Administration System (SIAPE), an online database, is the main tool for managing civilian personnel in the federal administration in Brazil. The Ministry of Economy administers it.
SIAPE was implemented throughout the federal public sector in the 1990s, with federal universities being the last to join the system in 1996 due to strong political resistance. The federal government went so far as to not pay civil servants to agree to be included in SIAPE and to send the required information digitally.
Following the establishment of a single payroll database, a number of mechanisms for data validation and correct application of adjustments to legislation were put in place, eliminating a number of undue expenditures. By the end of the 1990s, automated audits of this centralised payroll database generated 1‑2% cuts and financial savings by identifying officials who were improperly accumulating positions, obtaining benefits and other improper payments, or exceeding the maximum allowable salary ceiling in the federal administration.
SIAPE currently processes the pay of some 2 million active staff, retired staff and dependants of deceased staff in 231 organisations, including the federal administration, federal educational organisations, former federal territories, agencies (autarchies), foundations, public enterprises and mixed-economy companies. It does not include the Public Prosecutor’s Office, the Central Bank of Brazil, public enterprises and mixed-economy companies that do not receive money from the Treasury to pay their staff, or embassy staff.
The system is audited by the local and national audit units (Office of the Comptroller General of the Union) through automatic, systematic and ad hoc processes. The Office of the Comptroller General of the Union creates audit trails that would indicate irregularities in the payroll. Data cross-checks and compilations in the SIAPE data warehouse (which includes other sources of information) are used. In addition to traditional audits, there are automated pre-audits, which try to detect possible fraud or inconsistencies before the payment is made.
SIAPE data are published monthly in the Painel Estatístico de Pessoal (statistical personnel panel).1 Both the latest and previous figures can be downloaded on line. The publication is organised in sections with data on payroll expenditure, the number of people on the payroll, pay levels for each cadre, competitions and retired staff.
Sources: (OECD, 2010[20]); (Pimenta and Seco, 2021[16]).
4.10. Recommendations to ensure a competitive and fiscally sustainable salary regime for the Peruvian civil service
Based on the analysis presented in the previous sections, this report proposes the following recommendations (Table 4.2).
Table 4.2. Recommendations to ensure a competitive and fiscally sustainable salary regime for the Peruvian civil service
References
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Notes
← 1. Note that the System of National Accounts used in most countries classifies government expenditures into: intermediate consumption, compensation of employees, subsidies, property income, social benefits, grants and other expenditures. In the System of National Accounts, the term "revenue" designates "all resources acquired by the government", such as taxes, social contributions, current revenues, capital transfers receivable (Lequiller and Blades, 2018[21]). In Peru, the term "revenues" is used to designate income paid by the public sector and received by public employees. This is what is referred to as "remunerations" in the System of National Accounts. This report uses the term "remuneration of public employees" when referring to OECD countries, but uses the term "personnel income (remuneration of public employees)" to describe the Peruvian system.
← 2. The enabling framework is defined by Article 15 of Legislative Decree No. 1436, Framework Legislative Decree on the Financial Administration of the Public Sector, published on 16 September 2018, and Legislative Decree No. 1442, Legislative Decree on the Fiscal Management of Human Resources in the Public Sector. These provisions, upon the repeal of Legislative Decree No. 1442 (through Law No. 31188, Law on Collective Bargaining in the State Sector), were established through Emergency Decree No. 044-2021, and provided for their permanent validity through Article 30 of Law No. 31538.
← 3. Except for subsequent authorisations for the appointment of personnel in some sectors, for example, Law No. 28560, which authorised the Ministry of Health to appoint technical and administrative personnel, service personnel, and auxiliary personnel who, at the date of entry into force of the law, are providing services as contracted personnel under any modality. Likewise, the 2009 and 2010 budget laws, as well as the 2019 budget law and the Emergency Decree No. 016-2020, authorised the appointment of personnel of Legislative Decree No. 276.
← 4. The Analytical Personnel Budget is an institutional management document whose purpose is to systematise the budget of vacant or occupied positions, which corresponds to the personnel income (remuneration of public employees) received by the public servant on a permanent, periodic, exceptional or occasional basis, including the contributions that by law are included in the institutional budget of the Entities that have an approved budget appropriation.
← 5. La OCDE suele utilizar el término “política de remuneraciones” para designar lo que en Perú se llama “política de ingresos”
← 6. By the law of large numbers, the margin of error of projections based on macro elements will always be smaller than the margin of error of projections based on micro inputs, since errors are compensated in the macro approach while they are added in the micro approach.