Thou shalt not squander public money

On September 5 of last year, a grim-faced Geir Haarde covered the distance between his house and the Reykjavik courthouse where he was due to give testimony. Haarde was the conservative prime minister of Iceland between 2006 and 2009, when he resigned under a hail of criticism for his management of the financial crisis, which pushed this small northern European country of 320,000 inhabitants to the brink of the abyss.

Iceland is no doubt a unique country and Haarde's case is truly exceptional. A year after his resignation, the national parliament agreed to charge him with negligence for failing to act in the face of the imminent collapse of the country's three largest banks. Haarde, who faces two years in prison if convicted, has pleaded not guilty in this controversial trial.

Iceland is one of the few countries in the developed world that puts its politicians in the dock for bad management. Yet Spain's finance minister, Cristóbal Montoro, has something similar in mind. In a recent interview with SER radio station, he stated that "a public manager cannot spend beyond the budget limits." He also suggested that the Popular Party (PP) government of Mariano Rajoy was considering "penal accountability for those who fail to respect spending ceilings set out in the budgets."

Montoro illustrated his point by talking about "public officials who hide invoices in the drawer. This causes a lack of transparency and an accumulation of debts that become impossible to repay."

Should the Penal Code be reformed? Who determines what bad management is?

The minister's words prompted a deluge of public statements. All the main leaders in regions run by the PP rushed to back the measure. They were following their party's strategy of trying to convince public opinion that previous regional government teams - many of them Socialist - had covered up existing debt to hide their real economic situations. This is a mantra that is repeated by conservative leaders every time they talk about the economy. Extremadura's premier, José Antonio Monago, even went so far as to demand that this measure be "retroactive" to make sure that the governments who left huge debts behind will be held to account.

But the idea of holding bad managers criminally accountable is a complex measure that raises several questions: how do you apply penal sanctions to bad managers? Must the Penal Code be reformed? Who determines what bad management is?

The Finance Ministry initially held that the Penal Code would have to be changed to accommodate the reform to make bad public managers criminally accountable. But later, ministry sources backtracked and explained that the code already contains several articles that could be applicable to such cases - articles 419 through 444 cover the crimes of bribery, fraud and banned activities for public officials.

Montoro's announcement, viewed by some as a test of the political waters, soon began to sound like nothing more than a verbal excess. But that was until Deputy Prime Minister Soraya Sáenz de Santamaría said in a post-Cabinet meeting press conference that the government is working on a transparency law that will set out the legal obligations of public managers. Santamaría added that this piece of legislation will include "administrative or accounting sanctions" for public officials who fail to meet their obligations with regard to good governance. Additionally, there will be penal responsibilities for the most serious offenses: "Cases that may involve deceitfulness or concealment."

What we need to do is apply the existing laws to sanction bad managers"

But the truth is that public administration already has enough means to sanction and try to avoid such bad practices. Local and regional inspectors, as well as the Audit Court, are there to air dodgy accounting methods.

"The Audit Court investigates all unjustified outstanding balances, unpaid debts and missing records," explains Felipe García Ortiz, a member of the court. Eulalio Ávila, president of the Association of Secretaries, Inspectors and Treasurers of Local Administration, wants a legislative change to make inspectors more independent from mayors. "There could also be a legislative change to define exactly what constitutes mismanagement," he says, admitting that the law already has some mechanisms in place to sanction bad managers. "What we need to do is to apply the law."

When the talk turns to hiding invoices in the drawer, some experts insist on underscoring the difference between delaying payment of bills due to the usual treasury troubles at the end of the fiscal year (which affects nearly every local and regional government) and the less common practice of actually concealing bills to hide the extent of the debt.

Manuel Villoria, a professor at King Juan Carlos University, considers that "the idea of demanding penal accountability for mismanagement of public accounts is madness." He holds that the concept of bad management is "very diffuse. There are already concepts such as embezzlement or perversion of the course of justice to persecute certain irregularities," he says. Villoria says the Audit Court can already pursue bookkeeping irregularities of the kind that current PP leaders accuse their predecessors of: hiding bills in the back of drawers.

The measure turns judges into the managers of the economic system

"If penal accountability for bad management were applied to all politicians, public officials would end up in jail. That is why there is a principle of special protection for certain politicians," says Villoria, who questions the validity of the measure trailed by the current executive.

Meanwhile José Luis Ramírez, spokesman for Jueces para la Democracia, an association of progressive magistrates, believes that Montoro's idea "gives citizens the wrong idea about the origins of the crisis and its solutions."

"The measure turns judges into the managers of the economic system," he adds, insisting that there is already clear legislation in place to cover accounting wrongdoing on the part of public officials.

On the other side of the debate are the self-employed workers who see Montoro's proposal as a solution to the constant delays they suffer when trying to get paid by public administrations. The Federation of Self-Employed Workers' Association (ATA) estimates there are around four million unpaid invoices for a total amount of over 15 billion euros. Falling revenues at the local and regional levels have derailed many governments, who have opted for postponing payment to suppliers to prioritize their own workers' wages and cover basic services.

Many Socialist leaders also question Montoro's announcement on the basis that enough instruments are already in place to punish bad public managers. The Socialist Party wondered ironically whether new Justice Minister Alberto Ruiz-Gallardón would apply it to his own tenure as mayor of Madrid between 2003 and 2011. During that period, Gallardón increased local debt levels to nearly 7.2 billion euros, more than other Spanish city.

His flagship (and most expensive) project was to bury part of the M-30 beltway underground and revamp Madrid's riverside land that was cleared of traffic. That project alone cost over five billion euros. Yet Madrid presented a financial plan to the previous Socialist administration and justified the investment. The plan included a detailed payment schedule. So who is a bad manager in this case?

During the real estate boom, many regional governments watched their revenues skyrocket. Their coffers were overflowing and they embarked on ambitious projects. Airports began mushrooming in every province, as did new roads, tramways and major infrastructure projects marked by a sizeable dose of megalomania. It was all included in the budgets, and citizens voted for the governments that pushed for these plans.

The Valencia region is a case study: it invested billions of euros in organizing high-profile events such as Formula 1 races, the America's Cup, the pope's visit to Valencia and the construction of the City of Arts and Sciences. It is one of the Spanish regions with the highest deficit and most-mortgaged public accounts. The Economist recently named it as an example of spendthrift regions with problems reining in their deficits. Yet Valencia's budgets planned for all those projects, and its citizens supported grandiose policies that so many now seem to regret. At times of excess, nobody paid heed to the warnings that a few individuals issued over the dangers of runaway debt.

It is to prevent such conduct in future that the government is now putting the finishing touches on a budget stability law that will try to control spending at all administrative levels. It will also raise the bar on the information that regions and towns must provide the Finance Ministry with, thereby complicating the task of hiding inconvenient bills in the back of drawers.

Maybe that is why Rajoy's executive justified the regulatory change to demand penal accountability for bad public managers: to go after politicians who deliberately conceal their debt. Later, however, Rajoy added a nuance by focusing the measure on officials who go over the budget caps approved by the corresponding regional parliament.

Jesús Lizcano, president of Transparency International, which investigates bad practices by public managers, among other issues, admits that it is hard to set the limits on what constitutes bad management. A professor of economics at Madrid's Autónoma University, Lizcano believes "it would be necessary, rather, to demand some sort of civil or administrative responsibility from those who misspend or squander other people's money."

"I understand that sometimes it is hard to estimate an administration's budget. But once it has been approved by parliament or the regional assemblies, you cannot deviate from it," he adds.

But what if the budget cannot be honored because the economic cycle has depressed revenues? "Let them raise taxes and then let the citizens decide in elections whether the government did the right thing," said Montoro recently.