Pokar Khemani of the International Monetary fund describes initiating a performance framework in government budgeting

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
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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
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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.
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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15. Performance Specification
SMART Approach
SMART:
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?
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16. Standards for Indicators and Targets
Standard Good Practice Poor Practice
Specific Patients with heart Illnesses
disease
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
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17. Performance: Monitor and Review
Action Issue Example
Data collection What do you need to Cost by sub-programme
sub-
measure indicators and Services delivered
targets? Changes observed
Is collection cost effective?
Data recording What system do you need to Current system – e.g. spreadsheet
keep data securely? New system – e.g. Oracle BSC
Collation & How does the information Time series, variance (budget-actual),
(budget-
analysis relate to programmes and achievement rate, unit cost
targets?
Reporting Who are the users? Senior management,
What do they need to know? Parliament/public
When do they need it? Programme achievements, efficiency
What format(s) do they Monthly, annually
prefer? Tables, charts, text, video
Quality assurance How can you be sure, Internal checking
objectively, that the data are External peer review
accurate and appropriate? External audit
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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
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19. Program Evaluations & Spending
Reviews: Basic Questions
2. What are peoples
2. What are peoples
1. What do we do?
1. What do we do? needs and expectations?
needs and expectations?
3. Do we need to
3. Do we need to
continue to do it ?
continue to do it ?
5. How can we do this
5. How can we do this
6. Who should cover the
6. Who should cover the
6. Who should cover the
6. Who should cover the better and for less
4. Who should do itit??
4. Who should do it ?
4. Who should do it ?
4. Who should do better and for less
costs ??
costs ?
costs
costs ? money?
money?
7. How should we go
7. How should we go
about change ?
about change ?
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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
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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.
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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
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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
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24. Thank you
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