How to Initiate a Performance How to Initiate a Performance Framework in BudgetingFramework in Budgeting

Pokar KhemaniPokar Khemani

ICGFM Annual Winter ConferenceICGFM Annual Winter Conference

December 2009December 2009

2

OutlineOutline Why Performance FrameworkWhy Performance Framework Performance Framework in BudgetingPerformance Framework in Budgeting Introducing Performance FrameworkIntroducing Performance Framework

Evolution, Prerequisites and Key TasksEvolution, Prerequisites and Key Tasks A well-defined implementation strategyA well-defined implementation strategy Line-item to Program-based BudgetingLine-item to Program-based Budgeting Program Classification: Key AspectsProgram Classification: Key Aspects Budget Classification, Chart of Accounts and Accounting SystemBudget Classification, Chart of Accounts and Accounting System Performance Specification: Common Issues, SMART IndicatorsPerformance Specification: Common Issues, SMART Indicators Performance: Monitor and ReviewPerformance: Monitor and Review Evaluations and Spending ReviewsEvaluations and Spending Reviews Program Budgeting and MTEFProgram Budgeting and MTEF

Key Messages Key Messages Concluding RemarksConcluding Remarks

3

Why Performance FrameworkWhy Performance Framework Increasing public demands for greater Increasing public demands for greater

government accountability, transparency and government accountability, transparency and effectivenesseffectiveness

Mounting pressures on public expenditure, Mounting pressures on public expenditure, calls for improved services for the same calls for improved services for the same moneymoney

Need for a more responsive system from Need for a more responsive system from politicians and public officialspoliticians and public officials

Performance of fiscal policy and budget Performance of fiscal policy and budget management is vital for overall performancemanagement is vital for overall performance

4

Performance of Budget Management Performance of Budget Management

Three goals:Three goals: Macroeconomic stability and aggregate fiscal Macroeconomic stability and aggregate fiscal

disciplinediscipline Allocation of resources to the strategic Allocation of resources to the strategic

priorities – expressed by the societypriorities – expressed by the society Efficiency in the use of resources in the Efficiency in the use of resources in the

implementation of government policiesimplementation of government policies

All three are closely interwoven and All three are closely interwoven and ultimately relate to efficiency.ultimately relate to efficiency.

5

Performance Framework in BudgetingPerformance Framework in Budgeting

Wide variety of approaches, practices, and methods Wide variety of approaches, practices, and methods – considerable literature has been produced– considerable literature has been produced

Common theme is applying the budget to promote Common theme is applying the budget to promote performance by the appropriate use of performance performance by the appropriate use of performance information at each stage of budget cycle to inform information at each stage of budget cycle to inform decisions on resource allocations and improve decisions on resource allocations and improve efficiency of resource usage efficiency of resource usage

No single model: performance, program, output, No single model: performance, program, output, results-oriented budgeting – a programmatic results-oriented budgeting – a programmatic approach is being commonly followedapproach is being commonly followed

OECD defines performance budgeting as relating OECD defines performance budgeting as relating funds allocated to measurable results in terms of funds allocated to measurable results in terms of outputs and/or outcomes and evaluationsoutputs and/or outcomes and evaluations

6

Performance Framework in Budgeting: Performance Framework in Budgeting: EvolutionEvolution Performance budgeting has a long history: Performance budgeting has a long history:

1960s saw the program budgeting 1960s saw the program budgeting techniques developed in USA spread to techniques developed in USA spread to many countriesmany countries

In 1980s and 1990s, UK, New Zealand, In 1980s and 1990s, UK, New Zealand, Australia, Canada and various OECD Australia, Canada and various OECD countries developed some form of countries developed some form of performance-based budgetingperformance-based budgeting

In recent years widespread interest and In recent years widespread interest and activity in this area in Eastern Europe, Latin activity in this area in Eastern Europe, Latin America, Asia and Africa region – a world America, Asia and Africa region – a world wide movementwide movement

7

Performance Framework: Performance Framework: Some PrerequisitesSome Prerequisites Credible macroeconomic and fiscal Credible macroeconomic and fiscal

frameworkframework Integration of budgeting and planningIntegration of budgeting and planning Well developed budget preparation process Well developed budget preparation process

with a MT perspective – credible budgetwith a MT perspective – credible budget Sound budget execution, accounting and Sound budget execution, accounting and

reporting frameworkreporting framework Strengthened PFM legal frameworkStrengthened PFM legal framework Clarity on budget roles of legislature and Clarity on budget roles of legislature and

executiveexecutive Get ‘basics’ work well Get ‘basics’ work well

8

Introducing Performance Framework in Introducing Performance Framework in Budgeting: Key TasksBudgeting: Key Tasks

A well defined implementation strategyA well defined implementation strategy Traditional (Line- Item) to Program- based Budgeting Traditional (Line- Item) to Program- based Budgeting

(PBB)(PBB) Program Classification: Key AspectsProgram Classification: Key Aspects Enhance Budget Classification, Chart of Accounts, Enhance Budget Classification, Chart of Accounts,

and Accounting System to accommodate PBBand Accounting System to accommodate PBB Performance specification – indicators and targetsPerformance specification – indicators and targets Performance: Monitor and ReviewPerformance: Monitor and Review Program/Spending ReviewsProgram/Spending Reviews Program Budgeting and MTEFProgram Budgeting and MTEF

9

PBB Implementation StrategyPBB Implementation Strategy

Well defined reform objectivesWell defined reform objectives Process for introducing and managing Process for introducing and managing

reformsreforms Institutional and human capacities Institutional and human capacities

needed to drive and support reformsneeded to drive and support reforms Sequencing and pacing of reforms: Sequencing and pacing of reforms:

Pilot vs. Big Bang approachPilot vs. Big Bang approach Executive and Legislature commitmentExecutive and Legislature commitment

10

Traditional & Program BudgetsTraditional & Program Budgets Traditional BudgetsTraditional Budgets

based largely on “ line items” e.g. salaries, based largely on “ line items” e.g. salaries, travel, travel, overheads, etc.overheads, etc.

no indication of objective/outputno indication of objective/output primarily incremental and annualprimarily incremental and annual

Program BudgetsProgram Budgets line items identified to programs, keep key input line items identified to programs, keep key input

controls – current, capital, interestcontrols – current, capital, interest programs with well defined outputs and outcomesprograms with well defined outputs and outcomes a medium-term perspectivea medium-term perspective performance informs the budget processperformance informs the budget process financial flexibility and accountabilityfinancial flexibility and accountability

11

A Programmatic Approach to BudgetingA Programmatic Approach to Budgeting

Basis of budgeting in many countries, a building Basis of budgeting in many countries, a building block for performance framework in the budget block for performance framework in the budget processprocess

Spending classified by “programs”Spending classified by “programs” Programs reflect expenditure on groups of services Programs reflect expenditure on groups of services

(outputs) and have common broad objectives (outputs) and have common broad objectives (intended outcomes)(intended outcomes)

Programs should be linked with the organizational Programs should be linked with the organizational structure to establish clear accountability for structure to establish clear accountability for performanceperformance

Programmatic classification of budget should aim at Programmatic classification of budget should aim at strengthening the link between policy objectives, strengthening the link between policy objectives, planning and allocation of resourcesplanning and allocation of resources

12

Program Classification: Key AspectsProgram Classification: Key Aspects

Development of line-ministry program structures should be a Development of line-ministry program structures should be a collaborative effort between MOF and line ministriescollaborative effort between MOF and line ministries

Number of programs should be relatively limitedNumber of programs should be relatively limited Program structure consists of various layers with different Program structure consists of various layers with different

nomenclature - most common three layers: program, sub-nomenclature - most common three layers: program, sub-program and activitiesprogram and activities

Have a “Corporate Services” program to include ministry wide Have a “Corporate Services” program to include ministry wide common services in early yearscommon services in early years

Programs should include both the current and capital budgetPrograms should include both the current and capital budget Programs should not normally stretch over several ministries- Programs should not normally stretch over several ministries-

for interministerial programs, accountability needs to be for interministerial programs, accountability needs to be established at the level of sub-programs and activities established at the level of sub-programs and activities

13

Budget Classification, Chart of Accounts Budget Classification, Chart of Accounts and Accounting System: A Must for PBBand Accounting System: A Must for PBB

Review and refine the current budget Review and refine the current budget classification structure with the introduction classification structure with the introduction of program budgeting of program budgeting

The chart of accounts (COA) needs to be The chart of accounts (COA) needs to be revised to be fully consistent with the revised revised to be fully consistent with the revised budget classification structurebudget classification structure

Prepare a well-designed COA coding Prepare a well-designed COA coding structure to support the accounting systemstructure to support the accounting system

The accounting system and the payroll The accounting system and the payroll system needs to be enhanced and adopt the system needs to be enhanced and adopt the new budget classification and COAnew budget classification and COA

14

Performance Specification Performance Specification Common IssuesCommon Issues Need for right type of robust performance indicatorsNeed for right type of robust performance indicators Better balance of output and outcome indicators and Better balance of output and outcome indicators and

improved specification of outputsimproved specification of outputs Various dimensions of output performance including Various dimensions of output performance including

quantity, quality, efficiency and cost; lack of quantity, quality, efficiency and cost; lack of volumes for key outputsvolumes for key outputs

Mixing of outcome and output indicators, outcomes Mixing of outcome and output indicators, outcomes are not expressed in a measurable form, and some are not expressed in a measurable form, and some outputs are specified in a way that is outside the outputs are specified in a way that is outside the control of the ministry to delivercontrol of the ministry to deliver

Performance Targets: too many, difficult to measure, Performance Targets: too many, difficult to measure, absence of baseline indicators, arbitrary targets (too absence of baseline indicators, arbitrary targets (too easy, too tough), reliability issueeasy, too tough), reliability issue

15

Performance SpecificationPerformance SpecificationSMART ApproachSMART ApproachSMART:SMART: SSpecificpecific – What is the most critical success factor(s)? – What is the most critical success factor(s)? MMeasuredeasured – What are the quantifiable – What are the quantifiable

characteristics? characteristics? AAchievablechievable – Can you improve on past performance? – Can you improve on past performance? RRelevantelevant – Do clients think the target is most – Do clients think the target is most

important?important? TTimedimed – How quickly can it be achieved? How long – How quickly can it be achieved? How long

will it take to respond to needs?will it take to respond to needs?

16

Standards for Indicators and TargetsStandards for Indicators and Targets

StandardStandard Good PracticeGood Practice Poor PracticePoor Practice

SSpecificpecific Patients with heart Patients with heart diseasedisease

IllnessesIllnesses

MMeasuredeasured Recovery rateRecovery rate ImproveImprove

AAchievablechievable 5% increase on last 5% increase on last yearyear

World’s best practiceWorld’s best practice

RRelevantelevant National policy priorityNational policy priority Doctor’s preferenceDoctor’s preference

TTimedimed One yearOne year In the futureIn the future

17

Performance: Monitor and ReviewPerformance: Monitor and Review

ActionAction IssueIssue ExampleExampleData collectionData collection What do you need to What do you need to

measure indicators and measure indicators and targets? targets? Is collection cost effective?Is collection cost effective?

Cost by sub-programmeCost by sub-programmeServices deliveredServices deliveredChanges observedChanges observed

Data recordingData recording What system do you need to What system do you need to keep data securely?keep data securely?

Current system – e.g. spreadsheetCurrent system – e.g. spreadsheetNew system – e.g. Oracle BSCNew system – e.g. Oracle BSC

Collation & Collation & analysisanalysis

How does the information How does the information relate to programmes and relate to programmes and targets?targets?

Time series, variance (budget-Time series, variance (budget-actual),actual),achievement rate, unit costachievement rate, unit cost

ReportingReporting Who are the users? Who are the users? What do they need to know? What do they need to know? When do they need it? When do they need it? What format(s) do they What format(s) do they prefer?prefer?

Senior management, Senior management, Parliament/publicParliament/publicProgramme achievements, efficiencyProgramme achievements, efficiencyMonthly, annuallyMonthly, annuallyTables, charts, text, videoTables, charts, text, video

Quality assuranceQuality assurance How can you be sure, How can you be sure, objectively, that the data are objectively, that the data are accurate and appropriate?accurate and appropriate?

Internal checkingInternal checkingExternal peer reviewExternal peer reviewExternal auditExternal audit

18

Program Evaluations & Spending Program Evaluations & Spending ReviewsReviews A variety of models and approaches: annual and periodic, A variety of models and approaches: annual and periodic,

targeted and comprehensivetargeted and comprehensive UK “comprehensive spending reviews” are primarily used for UK “comprehensive spending reviews” are primarily used for

an examination of department’s budgetary requirements for the an examination of department’s budgetary requirements for the coming three year period in light of existing spending coming three year period in light of existing spending pressures, opportunities for improving efficiency, and the pressures, opportunities for improving efficiency, and the costs of new policy proposalscosts of new policy proposals

US “Program Assessment Rating Tool” (PART) assesses the US “Program Assessment Rating Tool” (PART) assesses the management and performance of individual programmes- each management and performance of individual programmes- each PART asks departments to answer 25 basic questionsPART asks departments to answer 25 basic questions

Canada evaluations – “Management Resources Results Canada evaluations – “Management Resources Results Structure” (MRRS) links strategic outcomes to resources, Structure” (MRRS) links strategic outcomes to resources, performance measures and actual results for all programmes performance measures and actual results for all programmes

19

Program Evaluations & Spending Program Evaluations & Spending Reviews: Basic QuestionsReviews: Basic Questions

1. What do we do?1. What do we do? 2. What are peoples needs and expectations?

2. What are peoples needs and expectations?

4. Who should do it ?4. Who should do it ?

7. How should we go about change ?

7. How should we go about change ?

6. Who should cover the costs ?

6. Who should cover the costs ?

5. How can we do this better and for less

money?

5. How can we do this better and for less

money?

3. Do we need to continue to do it ?3. Do we need to

continue to do it ?

4. Who should do it ?4. Who should do it ? 6. Who should cover the costs ?

6. Who should cover the costs ?

20

Program Budgeting and MTEFProgram Budgeting and MTEF

Introduction of a program structure improves Introduction of a program structure improves the efficiency of MTEF, both in preparing the the efficiency of MTEF, both in preparing the forecasts and later in detailing out the budget forecasts and later in detailing out the budget as per the agreed MTEF ceilingsas per the agreed MTEF ceilings

A credible MTEF could facilitate linking A credible MTEF could facilitate linking resources to policy objectives and resources to policy objectives and performance – multi-year spending performance – multi-year spending allocations tied with multi-year performance allocations tied with multi-year performance targetstargets

21

Some Key MessagesSome Key Messages

Introduction of PBB takes time (4-5 years). Reform needs widespread Introduction of PBB takes time (4-5 years). Reform needs widespread political support and intellectual acceptancepolitical support and intellectual acceptance

The role and power of the Ministry of Finance is crucial to the success The role and power of the Ministry of Finance is crucial to the success of PBB of PBB

PBB should focus on budget reforms and linked with wider reforms on PBB should focus on budget reforms and linked with wider reforms on performance management – an initiative more than an incremental to performance management – an initiative more than an incremental to the budget reform processthe budget reform process

Performance information is potentially limitless, complex and Performance information is potentially limitless, complex and expensive to collect, needs to be selective. Too many targets create expensive to collect, needs to be selective. Too many targets create information overloadinformation overload

Performance Information needs to be used efficiently and widely, Performance Information needs to be used efficiently and widely, including for improving resource allocations, managing for better including for improving resource allocations, managing for better performance and increasing public accountabilityperformance and increasing public accountability

Establishing some link between financial information and performance Establishing some link between financial information and performance information needs the right mix of incentives – whether financial information needs the right mix of incentives – whether financial rewards should be given for good performance and bad performance rewards should be given for good performance and bad performance should be punished – if so, how? Contd.should be punished – if so, how? Contd.

22

Key MessagesKey Messages

Empowering Managers is not about removing Empowering Managers is not about removing controls but devolving the responsibility for controls but devolving the responsibility for applying some of them – MOF needs to applying some of them – MOF needs to monitor effectiveness of financial monitor effectiveness of financial managementmanagement

A change in behavior and culture across A change in behavior and culture across government is essential - a struggle and government is essential - a struggle and long-term process long-term process

Realistic expectations needed - what can be Realistic expectations needed - what can be achieved and how long will it take achieved and how long will it take

23

Concluding RemarksConcluding Remarks Performance Budgeting is a modern management Performance Budgeting is a modern management

tool and not a panacea for all evils – it is the way to tool and not a panacea for all evils – it is the way to go forward for public sector efficiency and go forward for public sector efficiency and performance performance

A way forward:A way forward: evaluate the ongoing budget reforms, identify gaps and evaluate the ongoing budget reforms, identify gaps and

problems, and think on solutions and what is achievableproblems, and think on solutions and what is achievable prepare a realistic and sequenced reform plan and ensure that prepare a realistic and sequenced reform plan and ensure that

there is sufficient capability to support and implementthere is sufficient capability to support and implement OECD states “ journey is as important as the destinationOECD states “ journey is as important as the destination a long-term approach and persistence are needed: it takes time a long-term approach and persistence are needed: it takes time

to overcome the technical issues and change the behavior of to overcome the technical issues and change the behavior of public servants and politicianpublic servants and politician

strong leadership and champion for change and reformsstrong leadership and champion for change and reforms

24

Thank youThank you