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

2. 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

3. 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

4. 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.

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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?

16. 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

17. 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

18. 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

19. 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 ?

20. 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

21. 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.

22. 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

23. 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

24. Thank you