How to Initiate a Performance Framework in Budgeting Pokar Khemani ICGFM Annual Winter Conference December 2009

Outline Why Performance Framework Performance Framework in Budgeting Introducing Performance Framework Evolution, Prerequisites and Key Tasks A well-defined implementation strategy Line-item to Program-based Budgeting Program Classification: Key Aspects Budget Classification, Chart of Accounts and Accounting System Performance Specification: Common Issues, SMART Indicators Performance: Monitor and Review Evaluations and Spending Reviews Program Budgeting and MTEF Key Messages Concluding Remarks

Why Performance Framework Increasing public demands for greater government accountability, transparency and effectiveness Mounting pressures on public expenditure, calls for improved services for the same money Need for a more responsive system from politicians and public officials Performance of fiscal policy and budget management is vital for overall performance

Performance of Budget Management Three goals: Macroeconomic stability and aggregate fiscal discipline Allocation of resources to the strategic priorities – expressed by the society Efficiency in the use of resources in the implementation of government policies All three are closely interwoven and ultimately relate to efficiency.

Performance Framework in Budgeting Wide variety of approaches, practices, and methods – considerable literature has been produced Common theme is applying the budget to promote performance by the appropriate use of performance information at each stage of budget cycle to inform decisions on resource allocations and improve efficiency of resource usage No single model: performance, program, output, results-oriented budgeting – a programmatic approach is being commonly followed OECD defines performance budgeting as relating funds allocated to measurable results in terms of outputs and/or outcomes and evaluations

Performance Framework in Budgeting: Evolution Performance budgeting has a long history: 1960s saw the program budgeting techniques developed in USA spread to many countries In 1980s and 1990s, UK, New Zealand, Australia, Canada and various OECD countries developed some form of performance-based budgeting In recent years widespread interest and activity in this area in Eastern Europe, Latin America, Asia and Africa region – a world wide movement

Performance Framework: Some Prerequisites Credible macroeconomic and fiscal framework Integration of budgeting and planning Well developed budget preparation process with a MT perspective – credible budget Sound budget execution, accounting and reporting framework Strengthened PFM legal framework Clarity on budget roles of legislature and executive Get ‘basics’ work well

Introducing Performance Framework in Budgeting: Key Tasks A well defined implementation strategy Traditional (Line- Item) to Program- based Budgeting (PBB) Program Classification: Key Aspects Enhance Budget Classification, Chart of Accounts, and Accounting System to accommodate PBB Performance specification – indicators and targets Performance: Monitor and Review Program/Spending Reviews Program Budgeting and MTEF

PBB Implementation Strategy Well defined reform objectives Process for introducing and managing reforms Institutional and human capacities needed to drive and support reforms Sequencing and pacing of reforms: Pilot vs. Big Bang approach Executive and Legislature commitment

Traditional & Program Budgets Traditional Budgets based largely on “ line items” e.g. salaries, travel, overheads, etc. no indication of objective/output primarily incremental and annual Program Budgets line items identified to programs, keep key input controls – current, capital, interest programs with well defined outputs and outcomes a medium-term perspective performance informs the budget process financial flexibility and accountability

A Programmatic Approach to Budgeting Basis of budgeting in many countries, a building block for performance framework in the budget process Spending classified by “programs” Programs reflect expenditure on groups of services (outputs) and have common broad objectives (intended outcomes) Programs should be linked with the organizational structure to establish clear accountability for performance Programmatic classification of budget should aim at strengthening the link between policy objectives, planning and allocation of resources

Program Classification: Key Aspects Development of line-ministry program structures should be a collaborative effort between MOF and line ministries Number of programs should be relatively limited Program structure consists of various layers with different nomenclature - most common three layers: program, sub-program and activities Have a “Corporate Services” program to include ministry wide common services in early years Programs should include both the current and capital budget Programs should not normally stretch over several ministries- for interministerial programs, accountability needs to be established at the level of sub-programs and activities

Budget Classification, Chart of Accounts and Accounting System: A Must for PBB Review and refine the current budget classification structure with the introduction of program budgeting The chart of accounts (COA) needs to be revised to be fully consistent with the revised budget classification structure Prepare a well-designed COA coding structure to support the accounting system The accounting system and the payroll system needs to be enhanced and adopt the new budget classification and COA

Performance Specification Common Issues Need for right type of robust performance indicators Better balance of output and outcome indicators and improved specification of outputs Various dimensions of output performance including quantity, quality, efficiency and cost; lack of volumes for key outputs Mixing of outcome and output indicators, outcomes are not expressed in a measurable form, and some outputs are specified in a way that is outside the control of the ministry to deliver Performance Targets: too many, difficult to measure, absence of baseline indicators, arbitrary targets (too easy, too tough), reliability issue

Performance Specification SMART Approach Specific – What is the most critical success factor(s)? Measured – What are the quantifiable characteristics? Achievable – Can you improve on past performance? Relevant – Do clients think the target is most important? Timed – How quickly can it be achieved? How long will it take to respond to needs?

Standards for Indicators and Targets Good Practice Poor Practice Specific Patients with heart disease Illnesses Measured Recovery rate Improve Achievable 5% increase on last year World’s best practice Relevant National policy priority Doctor’s preference Timed One year In the future

Performance: Monitor and Review Action Issue Example Data collection What do you need to measure indicators and targets? Is collection cost effective? Cost by sub-programme Services delivered Changes observed Data recording What system do you need to keep data securely? Current system – e.g. spreadsheet New system – e.g. Oracle BSC Collation & analysis How does the information relate to programmes and targets? Time series, variance (budget-actual), achievement rate, unit cost Reporting Who are the users? What do they need to know? When do they need it? What format(s) do they prefer? Senior management, Parliament/public Programme achievements, efficiency Monthly, annually Tables, charts, text, video Quality assurance How can you be sure, objectively, that the data are accurate and appropriate? Internal checking External peer review External audit

Program Evaluations & Spending Reviews A variety of models and approaches: annual and periodic, targeted and comprehensive UK “comprehensive spending reviews” are primarily used for an examination of department’s budgetary requirements for the coming three year period in light of existing spending pressures, opportunities for improving efficiency, and the costs of new policy proposals US “Program Assessment Rating Tool” (PART) assesses the management and performance of individual programmes- each PART asks departments to answer 25 basic questions Canada evaluations – “Management Resources Results Structure” (MRRS) links strategic outcomes to resources, performance measures and actual results for all programmes

Program Evaluations & Spending Reviews: Basic Questions 1. What do we do? 2. What are peoples needs and expectations? 4. Who should do it ? 7. How should we go about change ? 6. Who should cover the costs ? 5. How can we do this better and for less money? 3. Do we need to continue to do it ?

Program Budgeting and MTEF Introduction of a program structure improves the efficiency of MTEF, both in preparing the forecasts and later in detailing out the budget as per the agreed MTEF ceilings A credible MTEF could facilitate linking resources to policy objectives and performance – multi-year spending allocations tied with multi-year performance targets

Some Key Messages Introduction of PBB takes time (4-5 years). Reform needs widespread political support and intellectual acceptance The role and power of the Ministry of Finance is crucial to the success of PBB PBB should focus on budget reforms and linked with wider reforms on performance management – an initiative more than an incremental to the budget reform process Performance information is potentially limitless, complex and expensive to collect, needs to be selective. Too many targets create information overload Performance Information needs to be used efficiently and widely, including for improving resource allocations, managing for better performance and increasing public accountability Establishing some link between financial information and performance information needs the right mix of incentives – whether financial rewards should be given for good performance and bad performance should be punished – if so, how? Contd.

Key Messages Empowering Managers is not about removing controls but devolving the responsibility for applying some of them – MOF needs to monitor effectiveness of financial management A change in behavior and culture across government is essential - a struggle and long-term process Realistic expectations needed - what can be achieved and how long will it take

Concluding Remarks Performance Budgeting is a modern management tool and not a panacea for all evils – it is the way to go forward for public sector efficiency and performance A way forward: evaluate the ongoing budget reforms, identify gaps and problems, and think on solutions and what is achievable prepare a realistic and sequenced reform plan and ensure that there is sufficient capability to support and implement OECD states “ journey is as important as the destination a long-term approach and persistence are needed: it takes time to overcome the technical issues and change the behavior of public servants and politician strong leadership and champion for change and reforms

Thank you