Implementing Results-Based Budgeting

Ronnie Downes, OECD Results-Based Planning, Budgeting, Monitoring & Evaluation

Chengdu City, China 12-16 August 2013

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Implementing the Budget: Spending Money Implementing the budget entails two distinct but connected

activities: incurring expenditures and delivering services

SPENDING MONEY

Implementation is not simply a matter of executing the approved budget. In every country, the implemented budget varies from the one adopted

The variance between the approved and actual budgets depends on a country’s financial condition, the volatility of public revenues, the role of central institutions (president, cabinet, finance ministry) and the type of budget adopted

A highly itemized budget may experience greater variance because every change in a line item deviates from the budget

The contemporary trend in public management is to give service providers flexibility in implementing their budgets. But this trend may be more appropriate for highly developed countries than for developing countries

How many separate appropriations are contained in the budget?

Financial management tools: end of year flexibility End-year flexibility (carry-over)

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Q.54 - Can ministers carry-over unused funds or appropriations from

one year to another?

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Implementing the Budget: Getting Results GETTING RESULTS

Implementing the budget also entails carrying out the activities and delivering the services financed by government

The more explicit the budget is in specifying activities and services, the greater the capacity to monitor implementation

Some variance, due to changing circumstances, may be appropriate, but not purposeful disregard of the government’s intentions

Robust monitoring is essential because service providers generally know more than central agencies about what they are doing (INFORMATION ASSYMETRY)

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Monitoring the Actual Expenditure of Funds Many developing countries have significant variances

between authorized and actual expenditures

Even when funds are spent on authorized purposes, they often do not reach intended users

For example, funds budgeted for rural schools may be spent on headquarter staff instead

These practices undermine budgeting and make it impossible to link resources and results

To counter these problems, governments can implement monitoring procedures that trace the flow of money from the budget to end users

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Types of Expenditure Control

Type of Control Exercised By

What is Controlled Mode of Accountability

EXTERNAL CONTROL

Finance Ministry and other central agencies

Specific inputs (individual items of expenditures, such as each position or purchase)

Compliance with line budget, civil service rules and other rules

INTERNAL CONTROL

Spending departments

Major expenditure items (total salaries, all equipment, or supplies, etc.)

Audit of systems to assure that internal controls meet government standards

MANAGERIAL ACCOUNTABILITY

Spending or responsibility units

Global operating budget and outputs

Reports and audits on outputs, costs, quality and other results

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The Shift from External Control to Internal Control

FROM TO

Expenditures itemized in the budget Classes of expenditures specified in the budget

Spending controlled by central agencies

Spending controlled by line departments

Pre-audit (before spending occurs) Post-audit (after spending has occurred)

Audit of individual transactions Audit of internal control systems

Audit of all transactions Sample transactions to test the system

Managers cannot be given flexibility Managers must have opportunity to improve performance

Rules enforced by outside monitors Rules are internalized and accepted as legitimate

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Budget execution in Greece in 2008

Extensive focus on ensuring the legality and propriety of expenditure

Very extensive use of ex ante control Execution involves a large number of actors which

confuses responsibility Reallocation very time consuming (6,650

transactions in 2007, half < € 5000) New framework law places more emphasis on ex

post control, reducing the FAOs role, but effect too early to say

9 9

Ministry of Finance

Fiscal Audit Office

Tax and Payment

Office

Court of Accounts

Body (Ministry,

Region, etc)

Budget execution in Greece, 2008

3rd Party

* Excludes Salaries and Pensions

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Internal Control is a Key to Managing for Results - 1

Internal control is a broad term that covers rules and procedures for spending money, hiring staff, acquiring or selling assets, and maintaining records and data systems. It also covers management of risk and the role of internal auditors

Internal control is in contrast to external control, in which an agency must receive approval from a central agency before taking various actions that spend funds

Internal controls are the main instruments for assuring that government entities are capable of self management

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Internal Control is a Key to Managing for Results - 2

An entity is capable of self management when auditors find few material weaknesses in internal control. A material weakness is a practice or procedure that exposes the government to substantial risk or loss

In most advanced countries, auditors no longer audit specific transactions; instead they audit the internal control system, and “test” the system by reviewing a sample of transactions

The quality of internal control may be the most important guide in determining whether an agency can be prudently entrusted with broad discretion in running operations

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Using Performance Information to Improve Public Services

Activity Purpose Performance Measurement Provides information on expected performance; used to assess

results

Performance Targets Notifies managers and citizens of the specific outputs government entities are expected to produce

Performance Reports Compares actual and targeted performance, and analyzes significant variances

Performance Audits Independent assessment of the reliability and relevance of performance reports

Performance Benchmarks Provides basis for comparing performance to results achieved by most efficient producers

Performance Contracts Agreement between government and internal or external producers on cost and outputs

Performance Pay Links all or a portion of managers’ pay to results

Performance Budgeting Allocates resources on the basis of expected performance, with each increment of resources linked to an increment of output

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Implementing Performance-Based Budgeting (PBB) to Improve Public Services PBB allocates funds on the basis of actual or expected results

There is no standard definition of PBB: countries differ significantly in the way they define and implement it

Many countries define PBB as a system of budgeting that displays the outputs or services provided by each spending unit

This form of PBB does not require significant changes in budget practices or in public management

A few countries have PBB systems that link each increment in budget resources to an increment in output or to changes in outcomes

Implementing this type of PBB does require fundamental changes in budgeting and management

However, the closer PBB links resources and results, the greater the likelihood that it focuses on outputs rather than outcomes

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Managerial Conditions for Performance-Based Budgeting

Traditional View Budgeting “drives” management. If the budget is based on results, managers will guide their organization to improve performance

Contemporary View Budgeting is shaped by the managerial culture and context within which resources are allocated and services are provided. If managerial conditions discourage performance, efforts to base budgets on results will fail

Implication To succeed, performance-based budgeting must be part of a larger effort to restructure public management and to promote performance-based behavior in government organizations

The most avid users: line ministries

Activities Top two most common institutions responsible in OECD countries

Establishing a standard performance budgeting framework or drafting guidelines

Chief Executives (e.g. Presidents/Prime Ministers' offices) / CBAs

Setting performance targets Line ministries / agencies

Generating performance information Line ministries / agencies

Conducting evaluations Line ministries / agencies

Developing and maintaining ICT system for managing or supporting data and process needs for performance budgeting

CBAs / internal audit institutions

Allocation and/or reallocation of funds based explicitly on performance information (excluding Spending Reviews)

CBAs / line ministries

Preliminary results: not for citation

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Performance information is used for a multitude of purposes

Preliminary results: not for citation

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Time-series shown where available

0% 20% 40% 60%

Other

For eliminating programmes

For developing mngt reform proposals

Not used

To reduce spending

For setting allocations for programmes

For proposing new areas of spending

For setting allocations for Line Ministries/Agencies

For strategic planning/prioritisation

To increase spending

How is performance information generally used by line ministries in their negotiations with CBAs? Percentage of countries

2007 2011

Performance targets are set according to objectives and past performance

1

2

9

11

22

25

0 10 20 30

Other, please specify:

None

Relative to the performance of a similar programme

Relative to international benchmarks of similar programmes

Relative to the programme’s past performance

According to the performance objectives of the programme

How are performance targets set?

No. Of responding countries

Preliminary results: not for citation

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Traditional and PBB budget classification Table 1. Budget classification1 in Poland, 2010

Traditional budget structure

Example Performance-based budget structure

Example

Parts (84) Ministries, institutions, EU funds, local government grants, debt servicing

Functions (22) Main policy areas such as Function 3–Education, upbringing and care, or Function 6–State economic policy

Sections (33) Activities/areas such as industry, agriculture or transport

Tasks (145) Main programmes such as 4.4–Public debt management, or 6.1–Increase of competitiveness of the economy

Chapters (576) Sub-areas regarding sections such as industry, agriculture or transport

Sub-tasks (698) Sub-programmes such as 6.1.3–Creating conditions for increasing the innovativeness of enterprises

Paragraphs (229) Economic classifications such as wages or investment

Actions (<4 000) Sub-activities such as 6.1.3.1–Creating conditions for functioning of enterprises

1. 1. The horizontal rows of the table should not be read as though the levels of the traditional budget structure and the performance-based budget structure correspond.

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Classic issues facing the effort What institutional structure is necessary to implement

PBB? How do you ensure ownership? How does it add value? What technical issues need to be resolved? How long do you maintain piloting/ parallel systems? How do you ensure political support? What room is there for modification of the vision of the

PBB system?

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CASE: Chile and performance budgeting Goal of performance management in Chile:

effectiveness of policy-making and management create performance incentives for civil servants, to make the budget results-oriented

Overall the responsibility of Budget Directorate (DIPRES). It consists of five elements 1. the strategic framework (strategy statement, link to gov.

priorities) 2. performance indicators and performance targets (linked to

strategic products in strategy statement) 3. evaluation – a prominent feature (impact, logic, institutions) 4. the process for presenting and appraising new spending

proposals (template, assessment, intervention logic) 5. performance incentives

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Chile faces typical challenges in creating fiscal space with performance information

Some strategies suffer from output/process focus, are disconnected from operational plans, unclear link to budget structure.

Budgeting vs. management: while evaluations often do generate valuable management/program design changes, they relatively rarely impact on budget funding of programs

The program budget structure may not provide a sufficiently detailed classification of expenditure by objective. Some programs may need more focus on outputs and outcomes.

The budget classification is not integrated into the performance management framework; e.g. "strategic products" are not clearly linked to budgetary programs.

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Behavioral Conditions for Performance-Based Budgeting Traditional View

Changing the content and classification of information (by measuring outputs/outcomes and implementing a performance or program structure in budgeting) orients budgeting and management to a performance basis

Contemporary View

It is necessary to change the incentives/behavior of budget-makers and spenders. If these are not changed, adding information on outputs and results will not significantly change budget allocations

Two Approaches to Change Incentives/Behavior

Managerialism: Shift budgeting and management from control and compliance to performance and results by enabling managers to use judgment and flexibility within fixed budget constraints

Market: Establish internal markets within government to force managers to efficiently use resources and accomplish preset objectives

Performance budgeting in Sweden Experiences from Sweden points at the following: 1. Performance targets, indicators and appropriations are

directed to agencies, not programs. The link between tasks and organisations is thus vital if performance information is to be used.

2. It is advisable to keep the system of targets, objectives and evaluations as simple as possible. This limits the risk of information overload.

3. A performance system needs continual pruning, as there are always arguments for making it more detailed, but this will detract from its usefulness.

4. It is difficult but important to keep the information relevant for the political level

5. While performance information should be used selectively in the budget process, government performance needs a multi-year perspective.

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Measuring Outputs and Outcomes Producing results is dependent on reliable and timely information on

the volume and cost of the outputs or outcomes resulting from public expenditure

Output and outcome measures depend on different sources and types of information

Outputs depend on information that is internal to the spending entity: a well-run organization routinely compiles output-information in the course of operating its programs

Outcomes depend on information that is wholly or partly external to the spending entity. To obtain information on outcomes, an organization must measure what is happening outside its boundaries

Organizations have strong control of outputs they produce: They generally have weak control of the outcomes that result from their activities

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The Human Factor in Delivering Public Service The performance of government depends on the performance

of public employees and their commitment to serve the public

The public service ethic tends to be weak when public employees are low-paid, get their jobs through political connections, and regard their job as a right rather than an obligation

A weak public service ethic opens the door to corruption, “ghost workers” who often are absent (except on paydays), indifference to the quality of services, uncaring treatment of clients, and other deficiencies that retard performance

Motivating public employees who deal directly with the public (such as teachers, health professionals and tax officials) may be exceedingly difficult, but is essential to improving public service

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Accountability for Results Performance-based management and budgeting are based on the

principle that managers should be accountable for the results they produce – the volume and quality of services, the efficiency with which they are provided, and other dimensions of performance; as well as the impact on social and economic conditions

This expanded concept of accountability is often accompanied by administrative reforms that give managers greater discretion in managing their agencies and shift the focus of budgeting from inputs to outputs and outcomes

Difficult to hold managers accountable for results

One widely used method to strengthen accountability is to specify performance targets in advance, and to compare results against these targets. Another method is to give public employees bonuses for superior performance

1 1.5 2 2.5 3 3.5 4 4.5 5

Pay cut for head of programme/organisation

Programme transferred to other Ministry/Agency

Negative consequences for leaders' evaluations

Programme eliminated

More staff assigned to programme/organisation

New leadership brought in

Budget freezes

Budget increases

More training provided to staff assigned

Budget decreases

More intense monitoring in the future

Poor performance made public

No consequences

What happens when performance targets are not met? OECD average

2007 2011

There is not a straight-forward answer to poor performance

Never Occasionally Always

Preliminary results

27 Time-series shown where available, averages for the sample in each respective year.

… nor to good performance

1 1.5 2 2.5 3 3.5 4 4.5 5

Staff reduction/transfers

Requirements for reporting on performance reduced

Special recognition of senior civil servants responsible

Leadership/staff asked to train others

Senior Civil servants receive pay raise

Budget increase beyond regulara increase

Leadership moved to “re-create” good performance

Line Ministry/Department allowed to transfer remaining budget

Remaining budget allowed to be carried over to next FY

Positive results made public

No consequences

What happens when performance targets are met? OECD average

Never Occasionally Always

Preliminary results

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Accountability for Results, continued

Targets work best when they are realistic but challenging, provide for continuing improvement in performance, are transparent, and results are measured against them

Performance pay schemes rarely are effective when the bonuses are granted for individual performance; but more effective when group performance is rewarded

Some governments employ senior managers under term contracts that specify performance targets and expectations

In a few countries, auditors have assumed responsibility for reviewing statements of results issued by government agencies. But the principles for auditing results have not been standardized

Performance budgeting in France

Parliament evaluation (2009) concluded: 1. Indicators need to be more reliable and result from better

information systems 2. Better comparability between indicators through more

standardization 3. Better ownership of indicators and objectives in ministries 4. Often the performance based approach is disconnected from

operational management. 5. Stronger relationship between performance measurement

and the budgetary process (vs. Sweden!). The relationship should not be automatic, but performance should not be part of the process.

6. The involvement of Parliament is necessary to maintain the momentum

7. Managers have complained increased complexity, bureaucracy, lengthening of administrative channels and increase in payment delays.

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Accountability for Costs Costs are a measure of resources used and liabilities

incurred, in contrast to expenditures which measure payments

The accrual basis account for costs, the cash basis accounts for payments

Holding managers accountable for costs is a key feature of modern management systems

Accountability for costs often is impaired by the failure/inability of government to allocate various costs to the activities that incur them

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Accountability for Costs, continued

In many countries spending units are not charged for the pensions of civil servants or for use of IT systems

Simple allocation schemes, such as pro-rating building maintenance costs on the basis of the proportion of space occupied, provides a fuller account of resources used in government

Few governments have cost accounting systems that enable them to compute the unit costs of services. This inadequacy impedes governments from linking resources and results

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Cash Versus Accrual Accounting Expenditure and Payment

In cash accounting, expenditure is recorded when payment is made: in accrual accounting, it is recorded when liability in incurred

Many countries report finances on the accrual basis, but most still use the cash basis for budgeting

The accrual basis provides a more accurate account of financial condition, especially in countries that have significant arrears (unpaid bills) or long-term obligations for pensions and other benefits

The accrual basis may also provide stronger incentives for managers to control the costs they incur, for example, the cost of using government-provided offices

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Cash Versus Accrual Accounting, continued

Expenditure and Payment, continued

The accrual basis facilitates full costing of government services and operations by charging managers for payments made in a later fiscal period or by other administrative units

However, a country can reliably adopt the accrual basis only when it has a sound cash accounting system

“Cashbox” budgeting (the government pays bills based on the amount of cash on hand) is common in countries with fragile/volatile economies. It is not efficient, but enables the government to finance activities from one fiscal period or month to the next

Performance budgeting in the Netherlands 1. Detailed performance targets, monitoring, reporting 2. Experience of recent years: “information overload”

Too much data Too “industrial-scale”, “mechanistic”, “bureaucratic” Not used by parliamentarians or by public Not useful in identifying savings quickly

3. Now: More streamlined approach … 4. Note: the difficulty of introducing mechanisms and

processes in “good economic times”

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Performance budgeting in Austria, Ireland 1. Budgets restructured into “strategic programmes” -

linked to central plans, Statements of Strategy, Mission Statements

2. All information on plans, priorities, budgets in presented in one format – an integrated approach

3. Budgets show financial information and performance information together Ireland: “1-page rule” Austria: “3 to 5 key priorities” Avoids information overload

4. Also a good basis for Citizen Engagement E.g. “Ireland Stat” Compare approach used in Estonia – open data, used by

non-governmental organisations (NGOs) 36