Wb Performance Budgeting Tef

Performance-Based Budgeting and Medium-TermExpenditure Frameworks in Emerging Europe

Edited by

Leszek Kąsek and David Webber

2009


Edited by


2009


Edited by


2009


Edited by


2009

Current Issues in Fiscal Reform in Central Europe & the Baltic States 2008

Performance-Based Budgeting and Medium-Term Expenditure Frameworks in Emerging Europe

Edited by Leszek Kąsek and David Webber

2009

Table of Contents

Acknowledgements.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

executive.summAry:.AcHievements,..lessons.&.cHAllenges.AHeAd. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 9

I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9II. RecentAchievementsinBudgetReform. . . . . . . . . . . . 10III. CriticalSuccessFactors. . . . . . . . . . . . . . . . . . . . . . 12IV. LessonsfromtheRegion . . . . . . . . . . . . . . . . . . . . . 16V. TheChallengesAhead . . . . . . . . . . . . . . . . . . . . . . 21

cHApter.1 ...pFm.reForms.–.leArning.From.globAl.lessons. . . . . 23

1. FundamentalsofPFMReformandSequencing . . . . . . . . 262. SystemicApproachtoPerformanceBudgeting. . . . . . . . . 273. DevelopingaToolkitforImprovedPerformance . . . . . . . 334. Medium-TermExpenditureFrameworks(MTEF). . . . . . . 385. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

cHApter.2 ...core.FeAtures.oF.tHe.current.budget.system..in.emerging.europe

1. Generalpoliticalandadministrativestructuregoverningbudgetpreparation............. 43

2. Keypiecesoflegislationrelatingtothebudgetandcountry-specificcircumstancesinfluencingthebudgetsystem . . . . . . . . . . . . . . . . . . 47

3. Recentinternationalassessmentsofqualityandtransparencyofbudgetsystems. . . . . . . . . . . . . . . 50

cHApter.3 ..generAl.progress..on.budget.reForm.in.emerging.europe

1. Recentpublicfinancereforminitiativesandmajorinstitutionalachievements. . . . . . . . . . . . . . 53

2. Motivation,championsforreform,andinvolvementofbudgetdepartments. . . . . . . . . . . . 57

3. Institutionalchanges,involvementofbudgetauthoritiesandmanagingopposition. . . . . . . . . . . . . . . . . . . . . 60

TheopinionsexpressedinthisreportdonotnecessarilyrepresenttheviewsofTheWorldBank or its member governments. TheWorldBankdoesnotguaranteetheaccuracyofthedataincludedinthispublicationandacceptsnoresponsibilitywhatsoeverforanyconsequenceoftheiruse.

ISBN:978-83-88911-17-0

©TheWorldBank,Poland,WarsawOfficeEditionI,Warsaw2009

PublisherTheWorldBank53EmiliiPlaterStr.,00-113Warsawtel. (4822)5208000fax.(4822)5208001email:[email protected]://www.worldbank.org.pl

PublishedbyHERA–DrukarniaOffsetowaS.C.13aBrzozy-BrzezinyStr.,05-220Zielonkatel. (4822)8112223fax.(4822)7719001

CoverdesignedbyAgnieszkaMościbrodzka

cHApter.4 ..regionAl.overview.oF.mteF.And.pbb.reForms

4.1. AdoptingMedium-TermExpenditureFrameworks(MTEFs) 651.1.CoverageoftheMTEFs

comparedtotheannualbudgetanditslegalbasis. . . . . . . 66

cHApter.5.–.country.cAse.studies

bulgAriA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109GeneralAssessment(Summary) . . . . . . . . . . . . . . . . . . . 1091. CoreFeaturesofCurrentBudgetSystem . . . . . . . . . . . . 1102. GeneralProgressonBudgetReform . . . . . . . . . . . . . . 1133. AdoptingMedium-TermExpenditureFrameworks . . . . . 1164. Performance-basedBudgeting. . . . . . . . . . . . . . . . . . 1215. BudgetPresentationandClassification . . . . . . . . . . . . . 1256. PublicManagementPerformanceCulture. . . . . . . . . . . 127

croAtiAGeneralAssessment(Summary) . . . . . . . . . . . . . . . . . . . 1291. CoreFeaturesofCurrentBudgetSystem . . . . . . . . . . . . 1302. GeneralProgressonBudgetReform . . . . . . . . . . . . . . 1373. AdoptingMedium-TermExpenditureFrameworks . . . . . 1414. Performance-BasedBudgeting . . . . . . . . . . . . . . . . . 1445. BudgetPresentationandClassification . . . . . . . . . . . . . 1516. PublicManagementPerformanceCulture. . . . . . . . . . . 153

lAtviAGeneralAssessment(Summary) . . . . . . . . . . . . . . . . . . . 1571. CoreFeaturesoftheCurrentBudgetSystem. . . . . . . . . . 1582. GeneralProgressonBudgetReform . . . . . . . . . . . . . . 1593. AdoptingMedium-TermExpenditureFrameworks. . . . . . 1604. Performance-basedBudgeting. . . . . . . . . . . . . . . . . . 1635. BudgetPresentationandClassificationandPublicManagement

PerformanceCulture. . . . . . . . . . . . . . . . . . . . . . . 166

polAndGeneralAssessment(Summary) . . . . . . . . . . . . . . . . . . . 1691. Corefeaturesofthecurrentbudgetsystem. . . . . . . . . . . 1702. Generalprogressonbudgetreform. . . . . . . . . . . . . . . 1733. AdoptingMedium-TermExpenditureFrameworks . . . . . 1754. Performance-basedBudgeting. . . . . . . . . . . . . . . . . . 1775. BudgetPresentationandClassification. . . . . . . . . . . . . 1826. PublicManagementPerformanceCulture. . . . . . . . . . . 185

slovAkiAGeneralAssessment(Summary) . . . . . . . . . . . . . . . . . . . 1871. CoreFeaturesofCurrentBudgetSystem. . . . . . . . . . . . 1882. GeneralProgressonBudgetReform . . . . . . . . . . . . . . 1903. AdoptingMedium-TermExpenditureFrameworks. . . . . 1934. Performance-basedBudgeting. . . . . . . . . . . . . . . . . . 1975. BudgetPresentationandClassification . . . . . . . . . . . . . 2026. PublicManagementPerformanceCulture. . . . . . . . . . . 204

turkeyGeneralAssessment(Summary) . . . . . . . . . . . . . . . . . . . 2071. CoreFeaturesoftheCurrentBudgetSystem. . . . . . . . . . 2092. GeneralProgressonBudgetReform . . . . . . . . . . . . . . 2103. AdoptingMedium-TermExpenditureFrameworks . . . . . 2134. Performance-basedBudgeting. . . . . . . . . . . . . . . . . . 2155. BudgetPresentationandClassification

andPublicManagementPerformanceCulture. . . . . . . . . 216

Annex1.ProgramstructureinTransport–Slovakia2008. . . . . . . 206

Annex2.ProgramstructureinTransport–Turkey2008. . . . . . . . 217

Annex3.MainmacroeconomicandfiscalindicatorsinEmergingEurope. . . . . . . . . . . . . . . . . 219

Annex4.QuestionnaireforWorldBankCountryEconomists. . . . . 220

bibliogrApHy .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .233

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ABBREVIATIONS AND ACRONYMSBISBL COM COFOGEBF EDPFLSU FMISGFSLGU IMFITC KPIM&E MOFNGO MTEFMTONISOECDOMB PARTPBB PDBPEFAPEIRPEM PFM PFMCLPFDMLPFMRPIB PPP PRB PRSPROSCSAO SPOTSAWB

Budgetary Information SystemBudget LawCouncil of Ministers, (the Cabinet)Classification of the Functions of GovernmentExtra Budgetary FundExcessive Debt ProceduresFirst Level Spending UnitFinancial Management Information SystemGovernment Financial StatisticsLocal and Regional Self-Government UnitInternational Monetary FundInformation Technology and CommunicationsKey Performance IndicatorMonitoring and Evaluation Ministry of FinanceNon-Government organizationMedium-Term Expenditure FrameworkMedium-Term (Fiscal) ObjectiveNational Investment SystemOrganization for Economic Cooperation and DevelopmentOffice of Management and BudgetProgram Assessment Rating ToolPerformance-Based Budgeting (often called “performance budgeting”)Performance-Determined BudgetingPublic Expenditure and Financial Accountability (assessment)Public Expenditure and Institutional Review Public Expenditure ManagementPublic Financial ManagementPublic Financial Management and Control Law Public Finance and Debt Management LawPublic Finance Management Reform (project)Performance-Informed BudgetingPublic-Private PartnershipPerformance-Reported Poverty Reduction Strategy Paper(IMF) Report on Standards and CodesState (or Supreme) Audit OfficeState Planning OfficeTreasury Single AccountWorld Bank

Acknowledgements

ThisreportwaseditedbyLeszekKąsekandDavidWebber,andwrit-tenbyaWorldBankteam.Theauthorsofrespectivechaptersare:MedihaAgar (Turkey), Paulina Hołda (Latvia), Stella Ilieva (Bulgaria), LeszekKąsek(regionaloverview,taskteamleader),EwaKorczyc(Poland),SanjaMadzarevic-SujsterandMatijaLaco(Croatia),JanMarusinec(Slovakia),Mario Sangines (currently with the IADB - Global Lessons), and Dav-idWebber(principalauthorofthequestionnaire).Thereportbenefitedfromvaluablecommentsfromthepeerreviewers:JamesBrumby,RolandClarke,andBillDorotinskywhoalsoprovidedexcellentsuggestionsforthefinalizationofthereport.

We are most grateful to national counterparts from the MinistriesofFinanceinBulgaria,Croatia,Latvia,Poland,Slovakia,andTurkey,fortheirresponsestoaquestionnaireandvaluablecommentstotheearlierdraftofthestudy.

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ExEcutive Summary: ACHIEVEMENTS, LESSONS & CHALLENGES AHEAD

I. Introduction1

Inrecentyears,governmentsinmanyregionshaveadoptedawiderangeofreformstomakefiscalpoliciesmoreconsistentandeffectiveoverthe medium-term and emphasize the impact of policies and spending.Two reforms – performance budgeting and medium-term expenditureframeworks–havebeencentralelementsinimprovingthemanagementofpublicfinances.Medium-termexpenditureframeworks(MTEF)havebeendevelopedandrefinedbymanycountriestohelpbuildfiscalpolicycredibilityandpredictabilityviaamorestrategic,multi-year,budgetplan-ningperspective.Atthesametime,performance-basedbudgeting(PBB)conceptsandmethodshavebeenespeciallyimportantinmanycountriesinbringinganincreasedfocusontheresultssoughtandachievedfromgovernmentspending(i.e.gettingbettervalueformoney).

BothofthesebudgetreformshavebeenontheagendaofmostnewEuropean Union (EU) Member States and candidate countries. Six ofthesecountrieshavebeenselectedforthisstudy:Bulgaria,Croatia,Latvia,Poland,Slovakia,andTurkey.ThesearereferredtojointlythroughoutthisreportaseitherEmergingEuropeor‘theregion’.

Themainpurposesofthisstudywereto:• Compileacomprehensivestock-takeof the implementationof

majorbudgetreforms,includingMTEFandPBBinparticular.• Identifythelessonsfromtheseexperiences,includingthecon-

straintsfacedbythesecountriesandsomeoftheirmajorchallengesforthefuture.

• Enabletheseandothercountriesintheregiontobetterunder-standandcomparetheseexperiencesandtoidentifysomeofthegoodpracticesandideastheyhavedevelopedinimplementingPBBandMTEFreforms.

Thedecisiontofocusonjusttwomainpublicexpendituremanage-mentreforms–MTEFandPBB–wastakenonthebasisofactualreformsstrategiesadoptedacross theregion inrecentyears,combinedwith thepotentialopportunitiesandsynergiesthesereformsprovideformoregen-erally improving public financial management (PFM). PBB and MTEF

1 Thereportgenerallycoversinformationavailableasofearly2009.

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reforms, implemented together, have the potential to significantly raisethequalityandconsistencyof forwardestimatesofpublicexpendituresthrough their common use of policy-based expenditure programs andprogram- and activity-based costing methodologies. The result is morecredible futurebudgetcommitments,moreefficientexpenditurepriori-tizationandincreasedconsensusaroundwhatfiscalpoliciesareseekingtoachieve.

ThecountryreportsandanalysiscontainedinthisstudywerebasedonresponsestoaquestionnairefilledoutbyWorldBankexperts,mostlyincloseconsultationwiththerelevantnationalauthorities.Thisquestion-naire(Annex4)wasdevelopedtohelpensureconsistencyandcoverageintheresearch,analysisandreportingprovidedfromeachcountry.Theoverallassessmentandcomparisonsofprogress,achievementsandchal-lengesasdiscussedinthisreportwerebasedontheresponsestotheques-tionnaire as well as on the views and insights of World Bank staff andnationalcounterparts.

Finally,thestudyrecognizesthattheMTEFandPBBreformsadopt-edintheseinsixcountriesarefarfromcomplete.Inallcases,manyofthefullbenefitsofthesereformsareyettoberealizedintermsofimprovedbudgetmanagement,moreevidence-baseddecision-making,qualityandprofessionalismofadministrativeperformance,expenditureeffectivenessandfiscalstability.Someinternationalexamples,fromChileinparticular,ofhowkeyobstacleshavebeenovercome,andtheextentofgainsthatcanbeexpected,areprovidedinChapter1.Overall,thisstudysuggeststhattheseEmergingEuropecountriesare,tovaryingdegrees,nowtakingsig-nificantstepsdownasimilarandworthwhilepath.

II. Recent Achievements in Budget ReformAlthoughnotall innovations inbudgetinghavebeen successfulor

long-lasting,mosthavecontributed insomeway toagradualadvance-mentofpublicfinancialmanagement,especiallyindevelopedcountries.Many OECD and EU countries in particular have undertaken budgetmodernization steps in the last 30 years involving MTEF and PPB ini-tiatives (e.g. Australia, New Zealand, USA, Canada, UK, Netherlands,France,Denmarkandothers).Morerecently,manyemergingeconomieshavefollowedasimilarpath(e.g.Chile,Korea,SouthAfrica,UnitedArabEmirates,EmergingEuropeandRussia).Veryfewcountries,ifany,havehalted,muchlessturnedbackfrom,thesedevelopmentsinbudgetman-agementandpublicadministration.Eachreformorreformeffortaddress-

esakeychallengefacedbypolicyofficialsandpublicfinancesystemsindevelopedandemergingeconomies.

Progressandachievementsacrosstheregionarevariedalthoughtheexperiencesofthesecountrieshaveshownmanysimilaritiesintermsofcriticalsuccessfactorsandlessonslearned.Inthesixcountriesaddressedby this report,budget reforms involvingespeciallyMTEFandPBBap-proacheshavebeenintroducedonlysincethelate1990sandinsomecasesevenmorerecently.Somecountrieshavemadeconsiderableadvancesinsomeareas,butforallsix,thereisstillalongwaytogo.Whilethecurrentglobalfinancialcrisishasheightenedtheimportanceofthesereforms,ithasalsoaddedcomplexityanduncertaintytothereformenvironment.

Ineachcase,thedesignandimplementationofMTEFandPBBap-proacheshavebeenpartofabroaderprogramofpublicfinanceandad-ministrativereform(Chapter2).Successfuladoptionofthesebudgettoolsisseenasvitalforcontributingtootherpositivechangesinpublicman-agementcultureandfiscalperformance.Althoughtherehassometimesbeenariskof‘reformoverload’onthepublicserviceinseveralofthesecountries,intermsofimplementingthefinancialandadministrativere-formagendas,mosthavesucceededinputtinginplacethebasicfounda-tionsforimprovedbudgetmanagement.

Forallsixcountries,theseprincipalachievements(Chapter3)haveincludedthefollowing:preparationandapprovalofimprovedpublicfi-nance(organicbudget)laws,adoptionofprogrammaticbudgetstructures(rudimentaryinsomecases),revisedbudgetclassifications,andadoptionoffiscalstrategiesandtargetsconformingtoEUaccessionrequirements.Althoughimplementationofmedium-termbudgetingmethodshasbeenpatchy,thereisnowabroadunderstandingacrosstheregionofhowpro-gramsandperformanceindicatorsneedtobedeterminedandmanagedwithinthecontextofamedium-termfiscalstrategyandpolicyobjectives.Slovakiainparticularhasledthewayinapplyingamoreintegratedap-proachtotheadoptionofthese‘secondgeneration’budgetreforms.Bul-gariahasmadegood technicalprogress toobutneeds tomaximize thepay-off of reforms in terms of improved effectiveness and efficiency ofpublicspending.

Amongtheotherfourcountries–Latvia,Croatia,Poland,andTur-key–keyelementsofthesereformshavebeenpolitedandimplementedtovaryingdegrees.Continuingseniorpolicyofficialenthusiasmandlead-ershiphasbeenakeyfactorindetermininghowfarandhoweffectively

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thesemeasureshaveprogressed.InthenewEUMemberStates,theCon-vergenceProgramshavealsogivenconsiderableimpetustothesereforms.

Overall (Chapter 4), progress in the region has generally not yetreachedthepointoffullandcommittedimplementationineitherMTEForPBB,norhasitbeensufficienttoenabletheexpectedbenefitsandsyn-ergiesof thesenewapproachestobecomefullyevident,ortoengenderwider interestandsupportwithinthepublicsectorandcivilsociety. Ineachcountry,despitethebesteffortsofthenationalministriesoffinance,keyelementsofthesereformsarenotyetembeddedintheannualsystemsofbudgetpreparation,muchless intermsofgeneratinga ‘performanceculture’aroundpublicfinancialmanagement.

III. Critical Success Factors Thisstudyidentifiesanumberofcriticalfactorsforsuccessfulimple-

mentationofMTEFandPBBreforms.Thepotentiallistofcriticalfactorsislongandthecountryreports(Chapter5)suggestthatdifferentfactorsmaybemoreorlessimportantineachcountry’scircumstances.Theclearexperience from the region is thatgoodbudgeting systemsevolveovermany years, usually in parallel with other important improvements inpublicadministrationandmanagement.

Factorswhichdetermine thespeedandsuccessofMTEFandPBBreformsinparticularincludeboththecharacterandqualityandofpub-licinstitutionsandlawswithinthecountry,plusthedegreeoftechnicalknowledge,degreeofeffortandexperienceappliedtodesignandimple-mentationofthesemethods.Inmostcases,thesetypesofbudgetreformsareinitiatedinpublicmanagementenvironmentsinwhichinstitutionalcapabilities and technical understanding are less than ideal. It is there-foreinvariablyamajorlearningexperienceandallowancesmustbemadeforconceptsandapproachesthatmaynotinitiallybewell-suitedtothesituation,orwell-receivedbyofficialsinthespendingministries.Conse-quently,patienceandpersistence,includingthecouragetomakegoodbutunpopulardecisions,andon-goingsupportandencouragementfortheseministriesandagenciesisessential.Properattentiontochangemanage-mentwouldalsoimprovethelikelihoodofsuccess.

Institutionally, it isessential forgovernmentasawholetobededi-cated to theobjectivesandrequirements forreformandtohavestrongleaders,atbothpoliticalandbureaucraticlevels,providingguidanceanddirectionateachstage.MTEFandPBBreformsinvolvearangeofcom-plexstepsstartingfromchangestobudgetclassifications,somecomplete-

lynewmanagerialconcepts,introductionofnewITsystemsandchangedbehaviorsofpublicservants.Allofthisrequiresapositiveanddeterminedattitudebygovernmentwithgoodcommunicationbetweenthecentre–invariably the Ministry of Finance – and line ministries and spendingagencies.Reformeffortstendtobemoresuccessfulandsustainablewherethe process of reform receives as much attention as the substance, andwhereteamsspanningtheMinistryofFinanceandlineagenciesworkto-gethertodesignandimplementthereforms(effectively,on-the-joblearn-ingandtraining).

Muchhasbeenwrittenanddiscussedconcerningtheappropriatese-quencingofthesereforms.Unfortunately,mostreforminggovernmentsdon’thavethe luxuryoftimeinmakingmajorfiscaladjustments,or inmeetingnewpolicytargetsorthespecificfiscalrequirementsofnewmul-tilateral agreements. In most cases, the benefits of a gradual approach,includingpropersequencingofbudgetreforms,mustbeweighedagainstthe immediate and often short-lived opportunities for implementingchangethatmaybepresentedbyafiscalcrisisand/ordeterminedandef-fectivepoliticalleadership.

Ingeneral,goodstrategicdecision-making,accompaniedbysoundandenduringchangestosystemsandcapabilities,willtakeconsiderabletimetofullydevelop.Maintainingaspecificroadmapforimplementingthesereformscanhelpprevent thegradualistapproachfrombecominganeternalone.Informingandencouraginglineministriestoprepareforthesechangesalsohelpsincreasetheirchancesofbeingreadytoaccom-modate major institutional, policy and methodological improvements,manyofwhichmaybeneededyear-on-yearforaprolongedperiod.Someofthecountriesinthisstudyhaveclearlystruggledtosustainandembedsome of these reforms. Re-starting the implementation process may beevenmoredifficultthantakingtheinitialsteps.

Finally,itisevidentthatsomeaspectsofthesenewmethodsforbudg-et management may have been adopted without adequate thought andpreparationandmayhavebeeninitiallytooadvancedfororganizationsandsystemsthatdon’tyetpossessbasicskillsandcompetenciesinbudg-eting,managementandfinancialreporting.Carefulassessmentoftheseconditions,includingthecapacityofthepublicadministrationsystemformanagingthesechanges,isimportant.ItisnotenoughfortheMinistryofFinance(MOF)tobereadyandwilling;mostlineministriesfaceavarietyofuniquepolicy,organizationalandtechnicalconstraintsthatalsoneedtobeovercome.MOFmustfindandestablishmechanismsforsupporting

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themanagersofeachlineministrytoensuretheyhavetherightmotiva-tion,capacityandresourcestoaddresstheseneeds.

implementation.of.medium-term.expenditure.FrameworksMedium-term expenditure frameworks provide a link between the

allocationofbudgetexpendituresaccordingtopolicyprioritiesandthefiscal discipline required by budget realities. Some of the concepts un-derpinning theMTEFalsooverlapwith thePBBapproachandhelp toimproveprogramperformancethroughbetterpredictabilityinresourceflowstoprograms,planningbeyondoneyearhorizonsandbymanagerssearchingforhighervalueofpublicmoney.

AlthoughformaladoptionofMTEF’sisrelativelynewinEmergingEurope,someelementsofmedium-termfinancialplanninghavebeeninplaceformorethanadecade.Nonetheless,thisapproachhasbroughtadegreeofrigortomostbudgetplanningprocessesandsomelocaladapta-tionstothebasicmethodologieshavegraduallydeveloped.Learningtoallocatediscretionaryresourcesbetweencompetingspendingagenciesinaninformedandpolicy-relevantwayoveramulti-yearhorizonhasbeendemanding.Therearestillstrongtendenciesinmostofthecountriestoadegreeofbudgetincrementalism.

MostcountriesintheregionhavedevelopedtheirMTEFbasedonathree-yearplanninghorizon(currentbudgetyearandtwoyearsbeyond)thoughPolandexpectstointroduceafour-yearfinancialplanningprocessin2009.Thethree-orfour-yeartimeframeseemsareasonablecompro-misebetweenthevalueoflongertermplanningandtheshorterperiodsoverwhichmostgovernmentrevenuesandexpenditurescanbeplausiblyforecasted.Fortheregion,longertermplanninghasprovedespeciallydif-ficultbecausethesecountriescontinuetofacetheneedforlargestructuralchangesintheireconomies.Moreover,asaconsequenceoftherecentglo-balfinancialcrisis,forecastingofmosteconomicandfinancialvariableshasbecomemuchmorecomplicated,evenwithinaone-yearhorizon.

Regionalexperiencehasindicatedthatsuccessfullycombiningtop-down and bottom-up budgeting processes depends in part on efficientcommunication within government and on effective debates aroundspendingpriorities.Withoutgoodcommunication,nationalpolicyobjec-tivesoftenreceive littleconsiderationintheresourceallocationprocessandfulltransparencyindecision-makingremainsproblematic.

Slovakia,TurkeyandCroatiaarefurtheralongintheirimplementa-tionofMTEFs.Intheremainingcountries intheregion,thisreformis

stillintheearlystagesofdevelopmentandpositiveimpactsonthequalityofbudgetdecision-makinghavesofarbeenlimited.

implementation.of.performance-based.budgetingOnthetechnicallevel,thisstudyhasidentifiedmanyfactorsforsuc-

cessful implementationofPBBconceptsandmethods.Thesestartwitha logical, robust and transparent program architecture for budget ex-penditures, to setting realistic and managerially-relevant performancemeasures, through to more difficult and comprehensive changes in themanagementculture.Theseculturalchanges involveparticularlyafirmunderstandingandacceptance,ateachlevelofthebudgetorganization,ofthenewresults-orientedframeworkforallocating,managingandreport-ingontheuseofbudgetresources.

Regionalexperiencehasemphasizedtheimportanceofasoundpro-grammaticstructureasabasis foreffectiveallocationandmanagementofresources.Welldesignedprogramsandsub-programsprovidethees-sentiallinkagesbetweenpolicy,funding,andactivities,andserveasthefoundationforasuccessfulperformance-basedbudgetingsystem.Initial-ly,mostmajorprogramshavebeendesignedtoembodycorefunctionalresponsibilitiesandgovernmentpolicyobjectives foreachsector.How-ever,theseprogramandsub-programstructureshavedevelopedfurtheroverseveralyears toprovideamoreaccurateandinformedframeworkforexpenditurepoliciesandstrategiesandforperformancemeasurementpurposes.

With experience, each of the countries has come to appreciate theimportanceofrealisticandmeasurableperformanceindicators.Initially,therewasatendencytoconcentratetoomucheffortondefininglargesetsof possibly relevant performance measures and indicators, rather thandefiningasmallsetofindicatorsthatareabletoclearlyandspecificallymeasure progress against the core policy objectives and strategies thatgovernmentaims toachieve. Increasingattentionhasalsobeenpaid tofindingperformance indicators thatarecomparablewith thoseusedbyotherEUcountrymembersandwhichfacilitatetheseregionalcompari-sons.

Forthesereasons,performanceindicatorsthatenablethebudgetandlineministriestomeasureprogressagainstclearpolicyobjectivesareim-portant. Inmostcountriesof the region, thisperformance informationhassofarnotbeenwellused,andittheprocessofimprovingperform-ancemeasurescontinues.Qualityofinformation,anditseffectiveusein

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making better-informed budget management decisions, is much moreimportantthanquantityofindicators.Performancemeasuresmaypointtostrengthsorgainsinpolicyimplementation,butalsotoareasofweak-nessor inefficiency thatneed tobeaddressedand improvedbybudgetmanagers.Asinthemoreadvancedcountries,however,muchmoreworkisrequiredforthecountriesinthisregiontointerpretindicatorinforma-tionaccuratelyandtousethis informationto informfuturepolicyandbudgetingdecisionsaccordingly.

Goodindicatorsmustthereforebecarefullyselectedandinformationonthemmustbeaccurate,timelyandregularlymonitored.Theintroduc-tionofperformance-basedbudgetingpracticesrequiresabasiccapabilityfordataandinformationcollectionandreporting.Theremustbeanun-derlyingacceptanceoftheneedforgoodinformationwithinsectorsandrobusttechnologyforcollectingandanalyzingit.Systemsforachievingthisperformancereportingfunctionneedtobeestablishedineachlineministry.However,someproposalsforcombiningperformancemonitor-ing and reporting with the development of a modern integrated finan-cialmanagementandinformationsystem(IFMIS)forimprovedfinancialmanagementpurposeshaveprovedoverlyambitiousandunnecessarilycomplicated.

Fullunderstandingandacceptanceofthenewperformanceorienta-tionwithinthepublicsectorisstilltobeachievedinmostofthecoun-triescoveredbythisstudy.Gainsmadesofarinthesesixcountrieshavebeenuseful,butremaintenuous.Existingpracticesandstaffexpectationsintheform,especially,oflifetimetenure,seniority-basedpromotionandsalariesandlimitedmanagerialflexibilityandaccountabilitycreateadiffi-cultenvironmentfortheintroductionofperformanceconcepts.Newandimprovedbudgetaryarrangementsrequirechangingmanyoftheseinsti-tutionalrulesandpracticeswithingovernment,aswellasbuildingnewmanagerialandanalyticalcapabilitiesinMOFandthespendingagencies.

IV. Lessons from the RegionThis study of six countries in Emerging Europe has produced a

numberofpotentiallyvaluablelessonsinthedesignandimplementationofbudgetreforms.Aswellashelping thesecountriesprogress their re-formprograms,theselessonsmaybevalidforothercountriesentering,orperhapsjustconsidering,similardevelopmentsintheirpublicfinancialmanagementsystems.

1 ..duration.of.the.reform.processCountryauthoritiesadoptingthesereformsshouldbepreparedfor

alongimplementationpath–intruth,theyareembarkingonaprocessofcontinual improvement in systemsandperformance. It isacomplexlearningprocessforallconcerned.Anumberofobstaclesarelikelytobeencounteredenrouteandthecommitmentofkeystakeholdersisrequiredtoovercomethesedifficultiesandensuresuccess.Similarly,thecomplex-ity of some aspects of these reforms can be easily underestimated. Forexample,moreattentionneedstobepaidtounderstandinghowthecon-ceptsandtoolsofperformancebudgetingneedtobeappliedatdifferentstagesofthebudgetprocess,suchasatbudgetformulationandexecution.

2 ..leadership.Strongleadership,backedupbypoliticalcommitmentandconsen-

sus, are essential for sustaining budgetary reform. Without this, thereareinevitablyweaknessesinthelinkbetweenthegovernment’sstrategyandthebudget,includingtheeffectsofhistoricalinertiainspendingal-locations thatcanreduce the focusonnewandmore importantstrate-gicpriorities.Itisparticularlyusefultohavekeyindividualsinmultipleministries champion change, both initially and to sustain momentum.Pressure from the general public for better services and more effectivespending is especiallyhelpful.Votersdemandhighqualitypublic serv-icesandgovernmentsmustdelivertheseinordertojustifytheassociatedleveloftaxes.Supportbasedonabroadconsensusthroughoutpolicyandtechnicalcirclesisdesirableifitistolastthroughtheinevitablechangesofgovernment.Thereformsneedtohavebroadsupport,basedonanun-derstandingtheyareanessentialpartofpublicsectormodernizationandefficiency,andtherebygoodforthecountry.Whenoverlyidentifiedwithonepartyorgroup,theyriskbeingabandonedwhenthenextgroupas-sumesoffice2.

2 In many Asian countries, such as Indonesia, great emphasis is placed on ‘socializing’ reforms,meaningwidespreadengagementinsideandoutsideofgovernmentwithkeystakeholders,soallcometoasimilarunderstandingoftheproblemstobeaddressed,optionsforredressingtheprob-lem,andthewayforward.Thisassuresbroadconsensusonthereform,andgettingallstakeholdersinvolvedinthesolutionandimplementation.

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3 ..experience.and.enthusiasmWithinthepublicsector,itisimportanttocreate,maintainanden-

courageacoregroupof‘modernizers’supportingtheendeavorsofpolicy-makers.Thisincludesofferingthemandtheirinstitutionsrelevanttrain-ingopportunities.Thisgroupmaycomprisehighlyqualifiedyoungercivilservantsopentomodernmethodsinbudgetingandwhounderstandthechangesneededtoimplementthem.Havingatleastoneleadorganizationwithcapacityandexperienceinmanagingtheintroductionofaparticularaspectofthesereforms–suchasperformancemeasurement–canbeverybeneficialforadvisingandconsultingotheragencies.

4 ..relevant.skills,.capacities.and.employee.attributes.BuildingtherequiredskillsandcapacityinMOFandotheragenciesis

anotherimportantelementforachievingsystemic,asopposedtocosmet-ic,change.Budgetmanagementskillsnecessarilycomprisenewtechnicalknowledge(macroeconomicandpolicyanalysisandsectormodelingca-pacity)aswellasmanagerialandinterpersonalproblem-solvingabilities.Thepublicmanagementenvironmentshouldmotivateself-developmentandcapacitybuildingamongemployees,whileemphasizingnewlevelsofprofessionalandpersonalintegrityandcommitment.

5 ..A.well-staged,.comprehensive.and.consistent.approachItmaysoundobviousbutgettingthebasicsrightisessentialforsuc-

cessful implementation of any advanced public expenditure reforms.Thisrequirescarefullyidentifyingtheshortcomingsofthecurrentpub-lic financial management process and developing a logically-sequencedprogramforintroducingnewandimprovedmethodsandsystems.ThisprogramneedstoincorporateboththetechnicalchangesassociatedwithPFMreforms–revisedbudgetclassifications,newchartofaccounts,pro-gram and sub-program structures etc – with organizational reforms inandacrossmanypublicspendingunits,aswellasengagepolicy-levelof-ficials to enable them to understand and use the information and tollsavailable.

6 ..recognizing.complexity.and.complementarity.in.the.reforms.Each reform may have a number of technical dimensions that are

closelylinkedwithotherpartsofthereformandwithothernewconceptsandmethodsforimprovingbudgetmanagement.Eventheimplementa-tionofaneffectiveMTEFmayraisemanychallengestoexistingcapabili-tiesandsystems,includingrequirementsfor:3

•. Good. macro-economic. policies. and. reliable. forecasting. –. other-wisethecredibilityoftheMTEFisdiluted.

•. Adaptable. fiscal. policy. and. instruments. – projected spendingmustconformwithavailableresources.

•. Reprioritization.and.reallocation–theMTEFshouldbeusedtoenhancealignmentbetweenbudgetpoliciesandresources.

•. Budgetary.discipline.–.budgetallocationsmustbebasedonahardaggregatebudgetconstraint,distributedamonglineministries.

•. Institutional.conformity–theMTEFmustbewidelyunderstoodandadoptedasthecoreframeworkwithinwhichall,ornearlyall,governmentexpendituredecisionsaremade.

•. Appropriate. parameters – these include definition of aggregateexpenditure, the relationship between sectoral needs and thegovernment’sorganizationalbasisforappropriation,thecontentofexpenditureenvelopes,pricelevelassumptionsforestimatingfutureexpendituresandmechanismforincorporatingthesepa-rametersintotheannualbudgetprocess.

•. Transparency – this includes both fiscal. transparency concern-ingthestructureandfunctionsofgovernment,fiscalpolicylimi-tations and constraints, public sector accounts, and fiscal pro-jections, and policy. transparency concerning the government’sbudgetaryobjectivesandintentionsforsocialandeconomicde-velopment.Italsoreferstoaccountingandreportingforactualperformanceinwaysthatlinkexpendituresmadetothequalityandquantityofoutputsandresultsachieved.

7 ..technical.challengesImplementingPBBandMTEFapproachesinvolveanumberoftech-

nical challenges. Two particular issues that confronted the six regionalcountrieswere:

3 Seok-KyunHur,2004,Successful.Installation.of.MTEF.to.the.Korean.Fiscal.System,KoreaDevelop-mentInstitute.

20 21

• Achievingalignmentbetweenoutputswithoutcomeswasprob-lematic.Thiswasduetolimitedinitialunderstandingofthedif-ferentconcepts involvedand, in somecases,due to reluctanceanddiffusedresponsibilityforthemonitoringandachievementofoutcomes.

• Integratingthe informationsystemsofmultipleministriesandagenciesisnecessarytoprovidemorereliableandcompletein-formationnecessaryforthesereforms.ReviewingthetechnicalcharacterandlimitationsoftheexistingITsystem,aswellasde-signingcapabilities for the incorporationofnewbudget infor-mationandmanagementneeds,requirenotonlyspecialistskillsbutaneffectiveprocessesforidentifying,discussingandspeci-fyingnewneeds.Theseadditionaldemandsmustbeappliedinanenvironmentinwhichtheannualprocessofbudgetmanage-ment ison-goingandwhereotherdemandsonPFMinforma-tionsystems–suchasthoseassociatedwithnewEUfundingorfiscaldevolution–aregrowingandchanging.

8 ..building.confidence.and.understandingBuilding understanding of and confidence in the reforms among

publicservantsisessential.Thisrequiressustainedlearningopportunitiesand effective incentives for human development and to help overcometendenciesforbureaucraticresistanceandinertia.Excellentcommunica-tion isalsorequiredwithpoliticiansaspublicfinancereformisoftenatechnicalandcomplexfield.Itcanbeachallengetohelppoliticians,forexample,understandthelinkbetweenthesetechnicalreformissuesandthe modernization and improvement of public services (which is whattheyarereallyinterestedin)suchasintherevisionofbudgetclassifica-tions or the introduction of accrual accounting. Specialist schools forpublicadministrationhaveanimportantroletoplayandcanbringmuch-neededinternationalexperienceandperspectivestolocalissues.Evenso,variabilityinthequalityandspeedofreformimplementationisunavoid-ableacrossdifferentinstitutions.Thisdiversityisoftenapparentatmanystagesoftheimplementationofperformance-basedbudgetframework.4

4 PetrieM.andWebberD.(2001),reviewingtheNewZealand’sexperience,sug-geststhatunevenperformancemightresultfromover-extensionofthesupplyofcapableseniormanagers.Theyalsonotedconsiderablevariationsacrossde-partmentsinthequalityofpolicyadviceonbudgetissues.

9 ..ensuring.managers.can.apply.the.new.methodsAsnotedbyChevauchez5(2001),themostdifficulttaskisoftennot

thetechnicaldesign,buthowordinarymembersofthepublicsectormayapplyit.Whilesometechnicaldesignaspectscanbedelegatedtoexternalconsultants,thisisusuallynotthecaseforapplicationoftheseconceptsandtoolswhichareplaceddirectly intothehandsofbudgetmanagers.InFrance,regularcontactsbetweentheMinistryofFinanceandbudgetmanagersenableviewsandproposalstobeexchangedontechnicaltopicsandjointexplorationofvariousideasandsolutions.

V. The Challenges AheadDespitetheirdifficulties,eachofthecountriescoveredinthisstudy

ispressingaheadwith implementing theseadvances inpublicfinancialmanagement. Ineachcase, theyareevolvingtowardimproved levelsofunderstandingandapplicationforbothMTEFandPBB.Theyareachiev-ing this throughacombinationofpersistence, trialanderrorand localinnovation.Atthe‘end’ofthisevolutionaryprocess,eachsystemwillun-doubtedlybeuniqueandshouldreflectandsupporteachcountry’sspe-cificgovernanceandinstitutionalstructuresandmanagementneeds.

However, the road is a longoneand theexperienceofothermoreadvancedadministrationssuggeststhatasthereformsdevelop,soalsodotheprofessionalcompetenciesofbudgetmanagersandtheirexpectationsofevenbetterperformance.Theroadmapforreformmustberealisticbutthereisnoendtothedegreetowhichimprovementsarepossible.Con-stant improvement is theaim,even for those fewcountrieswhichhavealreadymadeconsiderableprogress.Successfullylinkingthehumanandtechnicaldimensionsofthesebudgetreformstoastrongpoliticalagendafor improved public sector performance remains essential to their suc-cessfuldevelopment.

5 ChevauchezB.,2001,Government.Budgeting.and.Accounting.Reforms. in.France,MinistryofFi-nance

France, Paper for Conference Government. Budgeting. and. Accounting. Reform. Symposium, Beijing,China,April11-12,2001.

23

Chapter 1. PFM reforms – learning from Global lessons

Mario Sangines

Democracychallengesgovernmentstobetransparentandaccount-ableintheiruseofpublicfunds.Minimumstandardsforensuringlegalexpenditure of approved budgets are no longer sufficient. Authoritiesmustimplementmanagementpractices–someofwhichhavelongbeenappliedbytheprivatesector–thatensuremaximumvalueformoneyandalignbudgetswithnationalpriorities.

Thishasprovenatallorderfordevelopinganddevelopedcountriesalike.Well-meaningreformagendasareoftenhinderedbychangesingov-ernment, competingpolicyagendas (generally inmorepoliticallyprof-itableareas)andlimitedunderstandingofkeybudgetingconcepts.Thischapterexploreslessonslearnedfromperformancebudgetingreforminotherpartsof theworldandattemptstomakethemrelevanttoreformeffortsinEmergingEurope.

Wemakeadistinctionbetweenprogram-basedperformancebudget-ingandeverythingelse.Thisdistinctionisusefulbecause,first,program-based budgeting is a systemic reform that seeks to overhaul the entirebudgetcyclebyintroducingnewclassifications,indicators,andevaluationprocessesthatfeedbackintobudgetpreparation6.Othermorespecificini-tiatives,suchasinvestment,staffingandprocurement,canbeappliedtocertainpartsofthebudgetcycle.Second,manypractitionersbelievetrueperformance budgeting can be obtained only through a systemic over-haul, starting with implementation of program budgeting. Making thisdistinctionmayhelpclarifytherelativeimportanceofprogrambudgetingintheoverallpicture.Wewilllookatprogram-basedbudgetingandthenexploreothertoolsforenhancingperformance.

Duringthe1960stheUnitedStates(US)wasapioneerofbudgetre-formwhenitdesignedprogramsaroundorganizations’servicedeliveryframeworksandassignedresourcesaccordingtoprogramstructures.Thiswasanimportantstep in linkingexpendituretooutputs.Itpromotedaholisticviewofpublicexpenditureinrelationtopublicpolicyobjectives.Attemptsatimplementingsimilarmethodsofprogrambudgetinginotherpartsoftheworldhavehadmixedsuccessandsomecountriesstillstrug-glewiththecomplexitiesofapplyingaprogramstructuretotheirbudgets.

6 Therearecaseswhereprogramstructureshavebeenappliedselectivelyincertainpartsofthebud-getbuttheyaretheexceptionratherthantherule.

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One reason for this struggle, as we will discuss later, is that manycountriestrytoimplementbudgetreformswithoutdismantlingorevendisruptingexistingbudgetingpractices.Thisresultsinamotleycollectionofclassificationsandotherinformationthatisdifficulttoanalyzeandin-tegrate.Thereareotherreasonsthatmakeimplementingprogrambudg-etingdifficult, suchasunrealisticexpectationsandpoorunderstandingoftheinformationrequirementsandresponsibilities,andwewilllookattheselaterinthechapter.

Applying a program-based budgeting framework is a systemic ap-proach towards improvingefficiencyandeffectiveness inpublic servicedelivery.It issystemicbecause it impliessubstantialreformtomostas-pectsofpublicexpendituremanagement (PEM), including theway thebudgetisclassified,thetypeofinformationthatneedstobegatheredandanalyzed, the accountability structures for results, and the accountingframework,aswellasthetypeofexternaloversightbythelegislatureandthestate,orsupreme,auditinstitution.

Systemicapproachessuchasthisarenot,however, theonlywaytopromoteeffectivenessandvalueformoneyinmanagingpublicexpendi-ture.Chile, forexample,hasdeployedprogrambudgetingonlyrecentlyandselectively;mostof itsefficiencygainshavebeenachievedthroughefficiency-enhancingtoolsthatincludesoundprojectandprogramevalu-ationsandmanagementimprovementprograms.Chile’sprogramevalua-tionsresultedinazero-basedbudgetingexerciseforeachprogram,allow-ingboththeimplementingagencyandthebudgetingofficetothoroughlyrevieweveryaspectof theprogramand,wherenecessary,adjustobjec-tivesandresourcerequirements.

Determiningthedegreetowhichareformstrategycombinestheseelements depends on each particular setting. As noted by Levy (2007),there is a compelling case for combining systemic reforms “with moretargetedefforts–withinindividualsectorsandacrosssectors–toidentifyhigh-return investmentopportunities,plusopportunities for freeingupresourceslockedintolow-returnactivities”.Whicheverpathischosen,itmust be done for the right reasons and with full understanding of thetechnicalandpoliticalchallengestobeovercomeforitssuccess.

Externalpressurebydonors,ortheneedtoreducepublicexpendi-tures,isgenerallyaninadequatereasonforembarkingonaperformancebudgeting reform. As Shah and Shen (2007) have noted, advantages ofPBBthatconstitutevalidmotivationsare:

•. Enhanced. communication. between. budget. actors. and. with. citi-zens. Performance budgeting clarifies program goals and ob-jectivesandidentifiesperformancetargets,givingagenciesandemployeesabettersenseofexpectationsoftheirperformance.Ithelpspublicmanagerscommunicatemoreeffectivelyabouttheiractivitiestotheexecutive,thelegislature,andthepublic.

•. Improved. management. in. government. agencies. Performancebudgeting reform can help program managers specify organi-zational goals, monitor program performance, maintain betterknowledgeofproblemswithprogramstructureandoperation,planforthefuture,improveinternalcontrol,andcommunicateprogramresults.

•. More.informed.budgetary.decision.making.Performancebudget-ing may not rationalize and transform the political budgetingprocessbutitaddsvaluetodeliberations.Thisisbecauseperfor-manceinformationistakenintoaccountwhenfundinglevelsaredecided.

•. Higher.transparency.and.accountability.Performancebudgetingclassifies resources by programs and presents performance in-dicators,makingitmucheasierforthepublictogetasenseofmajorgovernmentactivitiesandtheirachievements.

Anintegralpartofmanycurrentreformsisthedevelopmentofaframeworktoassignexpendituresoverthemedium-term,usuallythreeyears. If expenditure allocations can be linked to outputs, and publicsector entities have some idea of what outputs they wish to produceover a medium-term, it makes sense to assign expenditures over themedium-termaswell.Governmentauthoritiesshouldbeabletovisu-alizeanoverallbudgetenvelopeforamedium-termhorizonbasedonsoundmacroeconomicforecastingand,dependingonpolicypriorities,determinetrade-offsbetweensectorallocations.ImplementationofMe-dium-TermExpenditureFrameworks(MTEF)hasattemptedtoprovidetools for this but has often fallen short of expectations. Although theunderlyingconceptofanMTEFissoundandrelativelysimple,thereisdisagreementamongpractitionersaboutwhat it looks like inpracticeand what the necessary conditions are for it to be successful. We willaddresssomebasicelementsoftheMTEFinthischapteranddiscussitschallengesandshortcomings.

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1. Fundamentals of PFM Reform and SequencingpFm.reform,.as.a.general.concept,.is.a.driving.force.behind.pub-

lic. sector. modernization. in. advanced. and. developing. nations. alike.Initsmostbasicform,PFMreformcanhelpcountriesemergingfromamajorcrisis(suchasahyper-inflation)establishbasicrulesandsystemsforbudgetingandexpenditurecontrol,withafocusonmacroeconomicstabilityandmonitoringofkeyfiscalaggregates.Inthiscontext,PFMre-formmayentailstrengtheningtheoperationalcapacityofthecentralfis-calauthorityanditslinkstorevenueagencies.Asfiscalaggregatescomeundercontrol,measurescanbeputinplacetopromotegreaterefficiencyintheallocationsofexpenditure–thatis,toalignthebudgetwithpublicpolicypriorities,coupledwithsomedegreeofmonitoringoftheoutputsproduced.Itisoftenatthisstagethatcountriesconsidermigratingfromaline-itemtoaprogram-basedbudget,aswellasestablishingbasicmoni-toringandevaluationcapacities;insomecases,medium-termbudgetingframeworksarealsointroduced.

many. authors. have. emphasized. the. importance. of. getting. the.sequencing. right. The ‘platform’ approach that has been used in someWorldBankprojectsidentifiesstagesthatoughttobefollowedsequen-tiallyinalong-termPFMreformprocess.ThefollowingistheexampleofCambodia,aspresentedbyTaliercio(2008):

•. Platform.1:.More.credible.budget.(i)Comprehensivenessandin-tegrationofthebudget;(ii)Strengthenmacroandrevenuefore-casting;(iii)Streamlinespendingprocesses.

•. Platform. 2:. Effective. financial. accountability. (i) Re-design ac-counting and budgeting classification and coding system; (ii)Initial design of Financial Management Information System(FMIS)forcoreprocesses;(iii)Defineleadershipandstandardsforinternalauditfunction.

•. Platform.3:.Fully.affordable.policy.agenda.through.policy-budget.linkage. (i)Re-designbudgetcycleandresponsibilities(e g in-clusion of MTEF); (ii) Program-based budgeting and budgetanalysis;(iii)Exploreoptionsforfiscaldecentralization.

•. Platform.4:.Effective.program.performance.accountability.(i)Ini-tialdesignoffullFMIS;(ii)DevelopmentofanITmanagementstrategy;(iii)Initialdesignofassetregister.

Although.there.may.be.disagreement.over.specific.elements.of.the.strategy,.or. the. fact. that. some.key.and.controversial.aspects.of.pFm.reform. are. not. addressed. here. (such. as. accrual. accounting),. there. is.

universal.agreement,.in.principle,.that.the.basics.must.be.right.before.moving.on.to.more.advanced.reforms.Forexample,Schick(2008)em-phasizes thatawell-functioningannualbudgetmustbe inplacebeforethinkingaboutMTEFs.Othersargueagainstaccrualaccountingbeforecashaccountingisfullyreliable,oragainstanytypeofbudgetreformbe-foreexpenditurecanbetrackedunderthekeyclassifications(economic,functionalandorganizational).

unfortunately,. this. universal. agreement. is. only. in. principle . Inpractice,countriesoftenmoveaheadwithreformsthatareinvoguewith-outensuringthebasicbuildingblocksareinplace.Itisoftentheinterna-tionaldevelopmentcommunitythatencouragescountriestomoveinthisdirection,withoutproperregardfortheinstitutionalunderpinningsandthesustainabilityofthereforms.Forexample,countriesthatimplementPovertyReductionStrategyPapers(PRSPs)areoftenrequiredbydonorstoundertakemedium-termexpenditureframeworks,oftenwithoutreli-ableannualbudgetsorevenstablemacro-fiscalaggregates.Thisisariskyapproachthatinthelongrunhaslimitedbenefit.

2. Systemic Approach to Performance BudgetingAccording.to.robinson.(2007).there.are.four.fundamental.mecha-

nisms.operating.under.performance.budgeting.frameworks:• Programbudgeting,whichusesinformationaboutthecostsand

benefitsofobjective-based(program)expenditurecategoriesforexpenditureprioritization.

• Funding-linkedperformancetargetswhichseektolinktheleveloffundingtoresultstargets–thatis,toquantitativestatementsoftheoutputand/oroutcometheagencyisexpectedtodeliver.

• Agency-level budgetary performance incentives to motivateagencies to perform better by rewarding them financially forgoodperformance(andpossiblyalsofinanciallysanctioningun-satisfactoryperformance).

• Formulafundinginwhichfundingprovisionismadeanexplicitfunctionofmeasuresofexpectedand/oractualresults(usuallyoutputs,butsometimesoutcomes).

program.budgeting,.or.some.variation.of.it,.has.often.been.used.as.the.vehicle.to.implement.a.systemic.performance.budgeting.reform.Intraditional,line-itembudgeting,budgetorganizationsidentifytheinputsrequiredfortheiroperationduringthefiscalyearandpresenttheirbudgetestimatesinastandardclassification,withoutanyreferencetotheoutputs

28 29

expectedtobeproduced.Insomecases,suchasColombia,thebudgetisbyorganizationsandline-itemsbutinformationonperformanceispre-sented inparallel,withoutanyclear impactontheactualbudgetaryal-locations.ThisisusuallyreferredtoasPerformance-ReportedBudgeting(PRB).

There. are. cases. in. which. performance. information. informs. the.budget.process.but.isn’t.used.as.a.major.factor.in.allocation.decisions.(Shah,2007)..Thistypeofbudgeting,calledPerformance-InformedBudg-eting(PIB),maysignaleitheramajorshortcominginabudgetingproc-essmeanttohavestronginfluencefromperformanceinformation,oracharacteristicofamoreadvancedsystemthat,bydesign,maynotwantperformanceinformationtodirectlyinfluenceactualallocations.Chileisanexampleofthelatter,whererelianceonothertoolsforefficiencygainshasmoreweightoverperformancebudgetingper-se.Thiscasewillbedis-cussedingreaterdetailinthefollowingsection Chilehasn’timplementedacompleteprogrambudgetingstructurebutisapplyingitselectivelyinafeworganizations.AustraliahasPIBwithanaccrual-basedoutputsandoutcomesbudgetingandreportingframework(Shah,2007).

program. budgeting. is. a. more. relevant. tool. when. performance.information.is.a.more.important.(although.not.the.only).element.for.deciding. allocations. Performance-based Budgeting (PBB), where per-formanceinformationmayplayanimportantroleindeterminingandre-portingonresourceallocation,cantakeadvantageofabudgetstructurethatgroupsexpendituresinoutput-generatingunits, therebyenablingaclosematchbetweenoutputsandinputs.Thisapproachsometimesviewstheorganizationratherlikea‘productionchain’withexpenditureactivi-tiesideallymatchedtopublicservicedeliverytargetssetwithinastrategicplanningprocess.However,theprocessbywhichperformanceinforma-tionisusedtoinformandadjustbudgetallocationsisnotmechanicalandmaynotevenbefullyexplicit;otherfactors,suchaspolicyshiftsorbudgetrigidities,mayhaveanequallyimportanteffectonexpenditure.

cases. where. performance. information. actually. determines. allo-cations. by. an. explicit,. formula-like. mechanism. are. rare. and. should.be.discouraged.because.they.have.a.simplistic.view.of.fiscal.policy.in.which.no.other.factors.play.an.important.role .ThistypeofbudgetingiscalledPerformance-DeterminedBudgeting(PDB).Few,ifany,countrieshavebeenabletoimplementthisapproachsuccessfully.

regardless. of. the. particular. point. in. their. evolution,. most. ad-vanced.pFm.reform.efforts.have.at.some.point.or.another.considered.

implementing. a. program-based. budget. Remarkably, after nearly 50yearsofaccumulatedexperienceinitsimplementation,therearefewcaseswhereprogrambudgetingworksexceptionallywell.Thisraisestheques-tionofwhetherornotthereisafundamentalflawintheprogrambudget-ingphilosophyorifweareallcollectivelyverybadatlearningfromoth-ers’experiences.Whatiscertainisthatimplementingprogrambudgetingpresentspolitical, institutional,andtechnical issues thatarenoteasytoovercome.Beforeexploringsomeofthetypicalpitfallsinitsimplementa-tion,let’slookatastylizedexampleofaprogram-basedbudget(Figure1).

Figure1.AnExampleofaProgramStructure

Program I Primary Education

Subprogram 2 Primary Education

in Rural Areas

Subprogram 1 Primary Education

in Urban Areas

Activities (Current Expenditures)

Projects (Capital Expenditures)

Sub-Activity A

Sub-Activity B

Sub-Activity C

Works a

Program II Secondary Education

Program III Tertiary Education

Works b Works c

Source: World Bank staff

A.simplified.approach.to.transition.from.a.line-item.budget.to.a.program.budget.would.normally.entail.the.following.steps7:

• Define exactly what is understood by a ‘program’. Typically, aprogramisacoherentsetofactivitiesandprojectsthatcollec-tivelyproduceunitsofoutputrelevanttostrategicplanning.Fur-therelaborationofthedefinitionmaybenecessaryinparticularcases.

7 Foramorecompletediscussion,seeFrom.Line-Item.to.Program.Budgeting:.Global.Lessons.and.the.Korean.Case.Kim,John,Editor.TheWorldBankandKoreanDevelopmentInstitute.2006.(Avail-ableat:http://www1.worldbank.org/publicsector/pe/bookprogrambudget.pdf).

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• Definethetypicalprogramstructuretobeused.OneexampleisProgram-Subprogram-Activity/Project-Sub-activity/Task.

• Determinethesetofentitieswherethemethodologywillbeap-plied.Itisadvisabletounderstandupfrontthataprogramstruc-turemaynotberelevantforallorganizations.

• Definevirementauthority8 at each levelof theprogramstruc-ture.

• Carryoutindividualfunctionalreviewsofeachbudgetorganiza-tionandidentifythecorrespondingprogramstructure.Althoughitispossibleforprogramstobeimplementedbymorethanoneentity,itisadvisableforthesakeofsimplicityandaccountabilitythatprogramsremainwithinasinglebudgetorganization.

• Identifytheunitsandindicatorstobeusedtomonitorperfor-mance, anddecidewhetherornotonlyoutputswillbemoni-tored,orifoutcomeswillalsobemeasured.

• Definebaselineindicatorsandestablishlinesofresponsibilityforcollection,processingandauditingofperformanceinformation.

• EnsureproperinstitutionalcapacityintheMinistryofFinanceandlineministriestocarryoutrelevantbudgetevaluation.

• Establish or modify existing financial information systems sotheycanimplementaprogram-basedbudgetandcollectperfor-mance-relatedinformation.Ideally,theycouldfacilitateanalysisaswellbyproducingreportson,forexample,unitcosts.

• Trainorganizations,andotherstakeholderssuchasexternalau-ditorsandParliament,onhowtobudgetbyprogramsandonthepotentialusesofavailableinformation.

countries. may. need. to. add. additional. steps. to. this. roadmap. or.skip.some.altogether.Adetailed roadmap that considersall theaboveitemsshouldbepreparedand,toavoidpotentialpitfalls,shouldtapintoglobalprogrambudgetingexperience.Somepitfallsidentifiedsofarare:

• Poorunderstandingofbasicconcepts.Itisessentialthatevery-oneinvolvedsharesthesameunderstandingofprograms,proj-ectsandactivitiesetc,andofrelevantinstitutions’relativeroles,andhowperformanceinformationwillbeusedtoaffectalloca-tions.

8 Thatis,thebureaucraticorpoliticallevelatwhichtransfersbetweenapprovedbudgetallocationsmaybeauthorizedduringbudgetimplementation.

• Informationoverload.Thiscanmeaneitherasurplusof infor-mationthatisn’tused,orexcessiverequirementsforinformationthatcannotbefulfilled.

• Immeasurable indicators. Avoid indicators that are excessivelyqualitative,havenobaselines,orcanonlybemeasuredatgreatexpense.

• Addingonaprogramclassificationas an informational annextothebudgetwithoutanyrealeffectonbudgetimplementation.Thishasbeenobserved,particularlyincountrieswheretheMin-istryofFinancehasn’tleadbudgetreform,sothebudgetprocesscontinuesasusual.

• Lackofpolitical interest.Aproperprogrambudgetmayhigh-light a government’s accomplishments but may also reflect itsshortcomings.Also,budgetreformsarenotgenerallyinthefore-frontofthepoliticalagenda.

• Making things too complicated. Start with a selected group ofinstitutionsandamanageableamountofindicators.Somecoun-tries have, unwisely, tried to launch a performance budgetingsystemusing,simultaneously,asmanyas1000indicators.

• Excessivebudgetaryandadministrativerigidities.Irrespectiveofthe classification used, any reform aimed at improving alloca-tiveefficiencywillhavelimitedsuccessiftherearebudgetrigidi-ties,eitherlegal(protectedprograms,earmarkedrevenues)ordefacto (highshareofdebt servicing, transfersandpensionpay-ments).Theserestricttheabilitytoredirectresources.

• Fuzzy responsibilities for program implementation. A tenet ofprogram budgeting is that a program classification does notnecessarilymatchtheorganizationalclassificationoftheentity.Thiscanbeproblematicifthereisnoclearaccountabilityofwhomanagesthesub-programs,activitiesetc.

• Separatedcurrentandcapitalbudgets.Properintegrationofcur-rentandcapitalbudgets isessential forboth tobereflected intheprogramstructureandprovideafullpictureofexpendituresassociatedwithservicedelivery9.

9 Theactualcostsofservicedeliveryinaprogramframeworkthatintegratescurrentandcapitalex-penditureswillbeseenonlyifaccrualbudgetingisapplied.Undertraditionalcash-basedbudgets,integration of current and capital expenditures in a single program structure will yield ‘lumpy’servicedeliverycostestimates,asactualcapitalbudgetimplementationislumpyitself.

32 33

kim.(kim.et.al,.2008).identified.the.following.three.key.principles.for.adopting.program.based.budgeting.in.south.korea:

• Aprogramcannotspanmultipleministries.• Allactivitieswiththesamepolicyobjectivemustbegroupedun-

derasingleprogram,regardlessofrevenuesource.• Programsmustbeclearlydifferentiatedfromoneanotherboth

in policy objective and program name. This includes a strongpreference for maintaining programs within a single ministryappropriation,basedonexperiencewherethelinesofaccount-abilityandmanagementbecameunclearwithinsomecross-cut-tingprograms.

chile.successfully.manages.programs.implemented.in.more.than.one.ministry.through.a.system.of.outsourcing.servicedeliveryfromoneministry(whichistheheadofthefunctionandprogramandreceivesthefullbudgetaryallocationfor its implementation) toanotherwhichmaybebettersuitedtodeliveringtheservice.Thisworkswellas longasthesubsidiaryagreementisclearandoverallleadershipandaccountabilityforprogramoutcomesremainwiththeministryresponsibleforthefunction.

in.summary,.program.budgeting.can.be.a.useful. tool. for.organ-izing.public.expenditure.by.outputs,.establishing.cost.benchmarks.and.eventually. affecting. appropriations. based. on. actual. service. delivery.targets.Forsome,itisthebackboneofasystemicperformancebudget-ingsystemthattrulyaffectsthebudget.Somecountriesapplythefunda-mentalconceptsbutchangethenameorsimplifyorexpandthestandardclassificationstructure.Thecommonthreadisestablishmentofaframe-workforclusteringpublicexpenditurealongidentifiableproductionunitswhichareexpectedtoproduceameasurablequantityofaparticularout-put.Ideally,theseunitsshouldhaveclearlinesofaccountability.

A.question.not.yet.fully.answered.is.whether.or.not.program-based.budgeting. is. an. essential. condition. for. implementing. performance-based.budgeting.Forsome,theyareoneandthesamething.Unlessthebudgetisorganizedinawaythatclearlyreflectstheproductionfunctionofeachentityorsector,withexpensesproperlycorrelatedandmeasur-ableindicatorsestablished,thereisnowaytoachieveaccountabilityforresults.Recentexperienceshowsthataselectiveuseofprogrambudgetingcoupledwithtargetedefficiencyandeffectivenessenhancingtoolscanbe

aviablealternative10.Inanycase,itisessentialtolookbeyondprogrambudgetingandfocusonabroaderarrayofperformanceinstrumentsthathasevolvedoverthelastfewdecades.

3. Developing a Toolkit for Improved Performanceprogram. budgeting. can. increase. value-for-money. in. public. ex-

penditure.but. it. is.not.the.only.instrument.available. Inasense,per-formancebudgetingisaboutbuildingatoolkitforefficiencygainsacrosspublicservicedelivery,ofwhichprogrambudgetingcanbeonecompo-nent. Ideally, implementingprogrambudgeting isaccompaniedwithasmany of these other tools as possible. The tools used will depend on acountry’s particular context but there is abundant international experi-encetoenableanycountryundertakingbudgetreform(ormorebroadly,publicmanagementreform)tostartwithamenuofoptionswhichsup-portitsstrategydesign.InChile,thisperformance-enhancingtoolkithasbeeninconstantdevelopmentformorethan30years(Marcel,2007)andwelookatthisinthenextsection,showingcomponentsofthetoolkitofrelevancetoEmergingEurope.

3 .1 ..enhancing.capital.expenditure.efficiency.good.quality.capital.spending.decisions.are.essential.for.improved.

public.spending .Inthesixcountriesincludedinthisstudy,publicinvest-mentrangesfrom1.9percentofGDPinSlovakiato7.8percentofGDPinCroatia(2007data).Muchof this investmentflowsthroughapublicinvestmentcycleinsideeachcountry,whereguidelinesforprojectidenti-fication,preparation,appraisal,andbudgetingneedtobefollowedbeforetheprojectfindsitswayintothepublicbudget.Ifthetechnicalqualityandcomprehensiveapplicationoftheprocessfails,apotentiallylargeamountofpublicexpenditurecouldgotowaste.Unfortunately,notonlyarepub-licinvestmentinstitutionsandprocessesoftenweak,politicalinterferencefrequentlyfindsitswayintopublicinvestmentdecisions,furtherunder-miningwhat little rigor the institutional cyclemayhave11.This ismostimportantincountriesemergingfromcentralplanning,whereaculture10 Astrictacross-the-boardapplicationofallprogrambudgetingelementsisgenerallyundesirable.

Therewillbecertaininstitutionswheremeasuringperformancemaynotberelevantorinteresting,andwherepushingforfullapplicationofprogrambudgetingmayleadtosituationsthatdiscreditthetechnique.

11 Publicexpenditure,includinginvestment,is,essentially,aninstrumentforimplementingapublicpolicyagendaanditisimpossibletoexpectfullisolationoftheinvestmentprocessfromexternalpoliticalinfluence.Politicallyencouragedprojectswillalwayshaveabetterchanceoffindingtheirwayintothebudgetbutcertainsafeguardscanbeputinplacetopreventmajorinvestmentmis-takes.

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ofpromotinginvestmentsformostlypoliticalorstrategicreasonshastoevolvetoonethatincorporatestechnical,socialandeconomicstandardsinaframeworkofsustainabledevelopment.

establishing. a. technically. sound. and. reliable. public. investment.process.is.an.effective.way.to.make.public.expenditure.more.efficient.It is regrettable that countries with significant development challengeshave,intheircapitalstock,publichospitalsrunningatminimumcapac-ity for lackofdoctors (orexcesshospitalbedcapacity), roadsunusableforimproperprevisionofmaintenancecosts,orinfrastructurebuiltforaparticularpurpose(suchasasportsevent)thatisnotfinanciallyviable.Despitetheemergenceofpublic-privatepartnerships(PPPs)torelievethepublicsectorfromsomerisks(thoughperhapsnotasmuchasonewouldexpect),improperprojectdesignremainsamajorissuetobeaddressedineffortstoimprovethequalityofexpenditure.

ireland.offers.a.good.example.of.a.sound.project.cycle ..In1996,aspartofitsdrivetoimprovetheprojectcyclebeingpromotedbytheEU,Ireland established an Independent Evaluation Unit under its MinistryofFinance.In2005,thisunitissuednewcapitalappraisalguidelinesthatform the backbone of a sound evaluation process. This process, whichprovidesavaluablereferencepointforcountriesestablishingorstrength-eningpublicinvestmentdepartments,includes:

• Exanteappraisalof all capitalprojects,with themethodologydependentuponthesizeoftheproject.Thesegofromsimpleas-sessmentsforthoseunder0.5mEurotofullcost-benefitanalysisforthoseofmorethan30mEuros.

• Thesponsoringagencyisresponsibleforappraisal,butthesanc-tioningauthorityhastogiveitsapproval.

• Projects fallwithinarollingfiveyearenvelope, inplace forallinvestmentareas,andthefollowingstepsareclearlyidentified:- definitionofprojectneedsandobjectives- optionsanalysis- identificationofconstraints- quantificationofcosts- analysisofoptions- appraisaltechniques(costbenefitanalysis,costeffectiveness

andmulti-criteriaanalysis)- analysisofuncertainty,riskandsensitivity.

since.the.early.1970s,.chile.has.established.clear.institutional.ar-rangements.and.technical.criteria.for.evaluating.projects.ItsNationalInvestmentSystem(NIS)seeksto“providepublicauthoritieswithaplen-tifulportfolioofgoodinvestmentprojectssotheycanchoosethosesuitedasmoreconvenientforsocietyasawhole”.Projectsneedto“complywithqualitystandardsintermsofelaboration,evaluationandanalysis,andarecontrolledandmonitoredaccordingtouniformandtransparentrulesandwithadequatedemocraticparticipationofboththepublicinstitutionsandtheorganizedcommunityorcivilsociety”(Mimica,2008).Theseuniformandtransparentruleshavefourcharacteristics:

• asetofgo/no-gocriteriaattheidea,profile,pre-feasibility,andfeasibilitystages

• keyrolebytheMinistryofPlanningtoapproveprojectsbasedonobjectivecriteria,includingapositiveeconomicnetpresentvalue(i.e.NPV>0)

• oversight,bytheMinistryofFinance,ofcostestimationsforex-ecution,constructionandoperation.

3 .2 ...undertake.periodic,.technical,..and.thorough.reviews.of.programsprograms,.in.this.context,.can.mean.the.concept.described.above.

as.used.in.program.budgeting.or.any.other.identifiable.cluster.of.ac-tivities.and.associated.expenditures.that.play.a.definable.role.in.pub-lic. policy. In the United States, the Office of Management and Budget(OMB)hasestablishedgoodpractice in thisarea through itsProgram-AssessmentRatingTool(PART).ThepurposeofPARTisto:

• measureanddiagnoseprogramperformance• evaluate programs in a systematic, consistent and transparent

manner• informagencyandOMBdecisionsformanagement,legislative

orregulatoryimprovements,andbudgetdecisions• focus program improvements and measure progress (making

comparisonswithprioryearratings).Thisprocessenablesevaluationresultstofeedbacktofourdistinct

stakeholders,allowingeachtousetheinformationfortheirownpurpose.These stakeholdersare thePresident, to informbudgetdecisions;Con-gress,toinfluenceappropriations,authorizations,andoversight;theEx-

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ecutive Branch, to share best practices; and finally, the public, who areinformedofsuchevaluationsthroughtheexpectmore govwebsite.

in.chile,.reviews.are.undertaken.to.ensure.programs.remain.rel-evant,. independent,. timely. and. transparent. Programs are selectedjointly with Congress and evaluations are performed by independentevaluatorsselectedbypublictendering,andfollowedwithformalagree-ments between the Directorate of the Budget and the executing unit.Theseagreementsareextremely importantand their implementation iscloselymonitored.Under this framework, three typesof evaluationareconducted(Marcel,2007):

• Program reviews which (i) review consistency in design, ex-ecutionandreporting; (ii)arebasedon the logical frameworkmethodology;(iii)areperformedbypanelsofthreeindependentexperts;and(iv)issuefinalreportsinsixmonths.

• Impact evaluations which (i) assess program effectiveness onthebasisof impactmeasures;(ii)useamethodologyofexten-sivedatacollection,sophisticatedevaluationtechniques,controlgroups; (iii)areperformedbyconsultingfirmsoruniversities;and(iv)issuefinalreportswith12to18months.

• Comprehensive expenditure reviews which (i) assess the con-sistencyof theministry/agencyportfolioofprograms;and(ii)search for duplications, inconsistencies and opportunities togeneratesynergiesandsavings.

3.3. Establish an incentive system to encourage good performancedesigning. a. framework. that. provides. tangible. incentives. for. good.performers.in.the.public.sector.is.a.major.challenge.in.public.manage-ment .Shouldincentivesbeinstitutionalorindividual?Howcantheper-formance evaluation system remain objective, impartial, and technical?Wheredowefindtheresourcestopayfortheincentives?Arethereonlyincentives forgoodperformers,orare therealsopunishments forpoorperformers?Istheexpectationofanadditionalmonetaryrewardcompat-iblewiththephilosophyofpublicservice?

These.are.questions.that.are.answered.differently.in.different.set-tings,.in.part.depending.on.the.public.management.tradition.and.fis-cal.position.of.the.country.in.question.Acountrythatrunsastructuralsurpluspolicycanaffordamonetarycompensationschememuchmoreeasilythanoneundergoingfiscaladjustment.Acountrywithatraditionofmeasuringperformancewillhaveanadvantageoveranotherfocusedonlyonstewardshipandlegality.Acountrywhereadministrativeproce-

duresaresufficientlyflexibletoenablemangerstomanagewillbemorecapableofredirectingeffortstowardsperformance-enhancingmeasuresthananotherwheremanagerialleewayismorerestricted.

chile. is. in. the.enviable.position.of. running.a. structural. surplus.and.having.highly.qualified.civil.servants.as.well.as.oversight.institu-tions .Theseinstitutions–suchasthebroadCivilServiceandtheBudgetDirectorateinparticular–areempoweredandwellequippedtoleadim-plementationofanincentivesframework.Countriesthatdonot(yet)en-joy theseadvantagescan stillbenefit from lessons learned through thisprocessandsetfuturetargetsforitsgradualdeployment.

in.1998,.chile.implemented.the.management.improvement.pro-grams.(mip). through.which.annual.bonuses.are.paid. to.staff.on.the.basis.of.the.agency’s.progress.against.goals.in.seven.key.management.areas .Theseareasarehumanresources,customerservice,strategicplan-ningandmanagementcontrol,internalaudit,decentralization,financialmanagement,andgenderfocus(Marcel,2007).Eachagencyestablishesbenchmarks in agreement with the Budget Department and results arereported to Congress as part of Comprehensive Performance Reports(CPR).Asof2007,75percentofstaffwasreceivingthemaximumbonusof10percentoftheirsalary.Thisexampledemonstratesthefeasibilityofcombining institutional performance targets with individual monetaryincentives,aswellasgoodpracticeinbenchmarkingkeyareasofpublicservicedeliveryandestablishingclearlinesofaccountabilitytoCongress.

mechanisms. can. also. be. developed. to. provide. incentives. to. the.institution. itself .. These include access to additional budgetary fundsorgreaterautonomy in itsmanagement inexchange for improvedper-formance.Inaddition,anobjectiveandpublicprocessofevaluatingin-stitutionalperformancecanplaceinstitutionsunderpressuretoperform,therebycreatingreputationalrisksformanagersiftheirorganizationfallsintothelowertiersofperformance.Thespecificinstrumentneededtode-livertheseincentivesfortheinstitutiontoperformbettermayvary.Chile,forexample,hasestablishedabiddingfundthatisallocatedtoinnovativeprogramsonthebasisofqualityandconsistencyofbidsfromministries,whichfostersacultureofqualitymanagementandaccountabilityforre-sults. As of 2007, 10 percent of government expenditure was allocatedthroughthisfund.

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3 .4 ..design.systems.to.foster.political.accountability.for.results.Although.not.directly.linked.to.budget.decisions,.some.countries.

have.established.systems.that.allow.citizens.to.monitor.in.detail.fulfill-ment.of.government.programs.and.the.associated.costs.of.achieving.them .Tothedegreethatgovernmentsarewillingtobepubliclyaccount-ableforthepromisesmade,suchsystemscanbeapowerfulincentiveforpublicsectormanagerstobeawareoftheirperformanceandbecreativeaboutwaystoenhanceit,aswellasforstrengtheningcitizenoversightanddemocraticaccountability.

colombia’s.national.system.for.evaluation.and.management.for.results. (sinergiA). is. an. interesting. case. Headed by the NationalPlanningDepartment,SINERGIAwasstartedmanyyearsagoasanin-ternalsystemofagreeingperformancetargetswithindividualentitiesandmonitoringtheoutcomesforfeedback.Thesystemwasinitiallyplaguedbyanoverabundanceofperformanceindicators,minimumvisibilityandnorealconsequencesforperformancegapsbutithasevolvedintoanin-formationplatformthatallows:

• thePresidenttousethesystemtomonitorthecommitmentsandperformanceofhisministers

• anannualreportofthePresidenttoCongress,outliningachieve-mentsinpublicpolicyandassociatedcoststhepublictoaccesstheinformationviatheDNPwebsite.

Althoughthereismuchtobedonetobuildaformalfeedbackproc-essintothebudgetcycle,SINERGIAisagoodvehicleforintroducingaperformance-orientedcultureinthepublicsector.

4. Medium-Term Expenditure Frameworks (MTEF)An.element.present.in.most.advanced.public.expenditure.reforms.

has.been.the.establishment.of.medium-term.expenditure.frameworks.(mteF).AnMTEFisatoolforlinkingpolicy,planningandbudgetingoveramedium-term(usuallythreeyears).Itconsistsofatop-downre-source envelope and a bottom-up estimation of current and medium-termcostsofexistingpolicies,andinvolvesrollingoverthisexerciseeachyeartoreflectshiftsinpolicy.Theframeworkmatchestheseforecastsinthecontextoftheannualbudgetprocess(Swaroop,2000).

ideally,.an.mteF.should.provide.top.decision.makers.with.a.con-trol.panel.that.identifies.the.cost.of.different.policy.options.and.trade-offs,.all.within.the.limits.of.what.is.fiscally.affordable .Oncepolicyob-jectivesandtheirassociatedaggregatecostsaredetermined,eachsector

ministryreceivesaresourceenvelopefortheMTEFperiodaswellastheagreedexpectedoutputsand/oroutcomesfortheirsector.Thesectormin-istrythenpreparesitsannualbudgetsunderthisenvelopeandmonitorsagreedperformanceindicators.AnMTEFisanaturalcomplementtoaperformancebudgetingframeworkbecauseitprovidesalimited,butre-alistic, timeframe within which most programs can be properly imple-mentedandhavesomeoftheirimpactsmeasured.

As.a.second-generation.reform,.implementation.of.an.mteF.pre-supposes. that. certain. basic. building. blocks. are. already. in. place. TheestablishmentofanMTEFcanbeseenasafinalstepinbringingtogetherfunctionalsystemsofmacroeconomicplanning,strategicplanning,andsoundannualbudgeting.Unfortunately,manycountries(withtheencour-agementofdevelopmentpartners)haveusedthelabelMTEFforreformprogramsthatincorporatemanyotherbasicreformsinannualbudgeting.MTEFhas thusbecomeacatch-all acronymforany typeofbudget re-formthatincludesdevelopmentofamedium-termbudgetoutlook,evenifitrequires(orworse,ignores)first-generationreformsinareassuchasbudget classification, accounting, or institutional planning12. LeHuerouandTaliercio(2005)raisedthisproblemwhentheystatedthatanMTEFhadbecomeanecessaryconditionforbudgetreform.

A. review. of. mteFs. by. the. international. monetary. Fund. (imF).concludes. that. “developing. comprehensive. [mteFs]. can. be. effective.when.circumstances.and.capacities.permit .Otherwise,itcanbeagreatconsumer of time and resources and might distract attention from theimmediateneedsforimprovingtheannualbudgetandbudgetexecutionprocesses”(Levy,2008).

so,.what.are.the.preconditions.that.ought.to.be.in.place.before.the.implementation. of. mteF. is. attempted? According to the IMF (Levy,2008),thepreconditionsare:

• reliablemacroeconomicprojections,linkedtofiscaltargetsinastableeconomicenvironment

• asatisfactorybudgetclassificationandaccurateandtimelyac-counting

• technical capacity and disciplined policy decision-making, in-cludingbudgetarydiscipline

• politicaldisciplineforfiscalmanagement.

12 OnesymptomofthisistheproliferationofMTEFinalmostallPEM-relatedprojectsfundedbytheWorldBank,evenincountrieswithmajordeficienciesinbasicbudgeting.ThiswasdiscussedduringaPFMworkshopon21March2008.

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Another. way. to. view. the. preconditions. for. mteF. is. to. think. of.them.as.the.icing.on.a.cake:

An.mteF.should.build.on.existing.capacity.to.carry.out.functions.that.are.needed.anyway.for.the.annual.budget.process.to.be.effective.and.efficient .Pressuretoimplementreformsthataresimply‘invogue’,orwhicharebasedonaninadequateassessmentofthesituation,hasledtomanynegativeexperiencesintheimplementationofMTEFs.AsnotedbySchick(2008),“Despiteitspopularity,MTEFhasbeeneffectiveinonlyafewcountries.Inmost,itisatechnicalexercisethatisinstitutionallyandprocedurallyseparatefromtheannualbudgetprocess.Resourcedecisionsarestillmadeonanannualbasis.Whenthetwoprocessesareseparated,theMTEFshowcasesgovernment’sstrategicordevelopmentalambitions,andmakesextensiveuseofperformanceindicators,whilethebudgetre-mainsinput-basedandincremental”.

The.challenge.is.to.start.thinking.about.an.mteF.at.the.right.time,.based.on.an.objective.assessment.of.conditions.and.a.clear.understand-ing. of. its. benefits. and. limitations . Failure to do this may devalue theconceptoftheMTEFwhichthenbecomesanotheremptytermassociatedwithunfulfilledexpectationsofpublicsectorreform.

in. addition. to. the. big. picture. issues. associated. with. deciding.whether.or.not.to.undertake.an.mteF,.there.are.practical.considera-tions.to.be.understood.once.the.process.is.launched .Forexample:

•. Integration. with. existing. budgeting. systems. and. classifications.HowwilltheMTEFimplementationbemonitoredthroughtrea-surysystemsorFMIS?IsthebudgetaryclassificationthesameastheoneusedfortheMTEF?

•. Deployment.of.the.MTEF.process.Somecountrieshaveoptedfora pilot implementation of MTEF in certain sectors. Does thatmakesense,consideringakeyattributeofanMTEFistoprovideacontrolpanelfordecisionmakerstoallocateacrossallsectors?

•. Leadership.of.the.process.Normally,publicfinanceismostlyun-derthepurviewofaMinistryofFinancewhileplanningfallsun-derMinistriesofPlanningorEconomy.Aswell,centralbanksorstatisticalofficesoftenplayanimportantroleinmacroeconomicforecasting,andrevenueestimationmayfallunderanindepen-dentrevenueadministration.AnMTEFbringsall theseactorstogether–aretheirrolesclear?

•. Linkages.between.MTEF.and.national.planning.Somecountrieshaveformaldevelopmentplansthatcoveraspecifictimeframe,usually the tenure of a government. Given that an MTEF is arollingplan,how is its consistencywith thedevelopmentplanensured?

5. Conclusionsreforming. public. expenditure. management. is. not. easy. Despite

decadesof internationalexperiencewithbudgetreform,evenadvancedcountriesarestrugglingtoalignexpenditurewithpolicyandimprovetheefficiency of budget allocation. Why is this happening, especially con-sidering international development institutions have been accompany-ingmanyoftheseprocessessincetheirinceptionandhaveaccumulatedasizeablebodyofknowledgeandlessonslearned?Whyis it thatacer-taincountryintheregionaddressedbythisstudy,despiteitsremarkableprogressinPEM,madethemistakeofassigningresponsibilityforcollect-ingperformancedatatobudgetofficialsinlineministriesinsteadofstaffdirectlyinvolvedwithservicedelivery,whenthatissuehadbeendiscussedandresolvedmanytimesoverelsewhereintheworld?Whydidanothercountryattempttoimplementperformance-basedbudgetingwithoutdi-rectparticipationoftheMinistryofFinance,whenitiswellknownthatitcannotsucceedwithoutitsleadership?

These. are. questions. without. answers,. or. rather,. with. many. an-swers.Thereareimperfectionsinthecollection,processingandsharingoflessonslearnedandinternationaldevelopmentinstitutionsneedtoplayamuchbetter role increatinga trulyglobal communityofknowledge.Politicalprocessesplayanimportantrole;shortwindowsofopportunitytoimplementreformsforcegovernmentstoleapfrogoverthebasicstoat-

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temptmoreadvancedoptions;andpoliticalnegotiationstopassrequiredlegislation undermine ambitious reform initiatives. Governments oftenstubbornlydefendanationalwayofdoingthings,disregardingvaluablelessonsfromelsewhereintheworld.Evenexternaladvisorsthatsupportreformprocessesbearsomeresponsibilityand,whenadvisingtheircli-ents,needtokeepinmindnotonlythebest lessonsfrominternationalexperience, but also the lessons which are appropriate to each countrysituation.

A.growing.number.of.countries.are.carefully.designing.a.reform.path.and.demonstrating.discipline.in.its.implementation.Chileisex-emplary in its implementation over many years of sequential and fullycomplementaryinitiatives.TherearealsoremarkablesuccessstoriesfromCommonwealthnationswherethephilosophybehindpublicadministra-tionhasevolvedtoahigherlevel.InWesternEurope,nationslikeFranceandtheNetherlandshavemuchtosharewiththeireasternneighbors.TheUnited States has a long successful track record to share with tools forreviewingprogramsandreducingwasteandduplicationofeffort.Thefol-lowingchaptersexploresimilarissuesandeffortsinEmergingEurope.

Chapter 2. CORE FEATURES OF THE CURRENT BUDGET SYSTEM

in Emerging Europe Leszek Kąsek

substantial.developments.have.taken.place. in.pFm.systems.over.the. last.40.years.Althoughnotall innovations inbudgetinghavebeensuccessfulorlong-lasting,mosthavecontributedinsomewaytoagrad-ual advancement of public financial management, especially in devel-opedcountries(see,forexample,Robinson,2007).ManyOECDandEUcountries inparticularhaveundertakenbudgetmodernization steps inthelast30yearsinvolvingMTEFandPPBinitiatives(e.g.Australia,NewZealand,USA,Canada,UK,Netherlands,France,Denmark,andothers).More recently, many emerging economies have followed a similar path(e.g.Chile,Korea,SouthAfrica,UnitedArabEmirates,EmergingEuropeandRussia).Veryfew,ifany,countrieshavehalted,muchlessturnedbackfrom,thesedevelopmentsinbudgetmanagementandpublicadministra-tion(Webber,2007a).

emerging. europe. as. a. whole. still. lags. behind. most. advanced.oecd.countries. in.budget.reforms.and.progress. in.recent.years.has.been.fragmented.It takesseveralyearstoestablishagovernment-wideperformance management framework over a medium-term horizon sothere is a need for a systemic approach and sustained reform. For thisreason,PBBandMTEFinitiativeshavebeenanalyzedinthisstudynotonlyinthecontextofabroaderpublicfinanceandadministrativereformprocess but also with regard to the political circumstances and specificinstitutionalarrangementsineachcountry.

1. General political and administrative structure governing budget preparationeach.of.the.six.countries.covered.by.this.study.is.a.unilateralstate.

and.parliamentary.republic.with.its.ministry.of.Finance.(moF).taking.a.lead.role.in.budget.preparation.and.execution.ApartialexceptionisTurkeywherethebudgetsystemhasamoremulti-institutionalcharacterwithclosecoordinationbetweenMOF,theStatePlanningOffice,andtheUnder-secretariatoftheTreasurylocatedinthePrimeMinistry.AlthoughParliamentscanamendthebudget, theseamendments,withtheexcep-tionofLatvia,cannotleadtoincreaseddeficitsinthegeneralgovernment

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balance(Slovakia)orstatebudgetbalance13(Croatia,Poland,Bulgaria),butmayleadtochangesinthestructureofexpenditures.Budgetaccountsareauditedattheendofthefiscalyearbyanindependentauditinstitutionwhichreportstoparliamentsonaregular(annual)basis.oractsonbehalfoftheGrandNationalAssembly(Turkey).

The.role.of.the.ministry.of.Finance.in.the.budget.process.depends.largely.on.the.(informal).position.of.the.Finance.minister.in.cabinet.AlthoughMOFproposespreliminaryspendinglimitsforlineministriesconsistentwith its target forfiscalbalance, thesecan, inmostcases,beeasilychangedbyCabinet.TheMinisterofFinancehasnospecialpow-ersinbilateralnegotiationswithspendingagencies14.InSlovakia,MOF’sinformalpowerwithin thepoliticalhierarchyof thecoalitionparties issignificant. In fact, theMinister is effectiveonlyas longasheor she isbackedby thePrimeMinisterwithinCabinet. InLatvia, recent institu-tionalreformswereaimedatstrengtheningtheroleofMOFinthebudgetprocess, including inanalyzing theexistingbase spending. InBulgaria,the Minister of Finance ensures that the overall spending is within thelimitof40percentofGDPandconsistentwiththeplannedfiscalbalance.

in.the.budget.preparation.phase,.line.ministries.are.largely.auton-omous.in.their.decisions.on.resource.allocation.Theyaregenerallypro-videdwithtotalexpenditureenvelopesandinsomecountries(Bulgaria,Slovakia)witha fewbindingconstraints fromMOF(wages, capital ex-penditures,EUresources,co-financing).Theysetuptheirprogramstruc-turesinaccordancewithexistingbudgettemplatesandallocateresourcestovariousprograms,present in therequiredclassifications,andsubmittheirbudgetproposaltoMOF.InCroatia,lineministriesandgovernmentagenciesareencouragedtoprioritizeresourceallocationinlinewiththegreatest development impact and decisions on new employment, whilelargeinvestmentsandsocialprogramsrequireadditionalsupportingdoc-umentation(feasibilitystudies,impactassessmentsetc).DiscussionsareheldwithMOFbeforethefinaldraftbudgetisapprovedbyCabinet.Latertheymustdefendtheirbudgetproposalsintheparliamentarycommitteesorplenum.

13 ThisrulecanbecircumventedwhenParliamentfindsadditionalrevenuestofinanceextraspend-ing.InPolandtheSejmdoesnotneedtoidentifysourcesofadditionalrevenueinflows.ItmayjustconsidertheGovernment’srevenueprojectionastoocautious.

14 MOFpowerismorepronouncedinthebudgetexecutionphase,duringwhichitcanchangeindi-vidualallocationsforlineministriestomaintainoveralldeficittarget.

There. are. institutions. whose. budgets. may. not. require. an. agree-ment.with.moF15. Inthisregion, thesemayincludethebudgetsof theParliament, thePresident’sOffice, theNationalAuditOffice, theFinan-cial Supervision Commission and the Judiciary. These institutions sub-mittheirbudgetproposalstoMOFforinformationpurposes,onwhichMOFmayprovidefeedback.Differencesofopiniononbudgetproposalsareclarifiedintheparliamentaryforum.InBulgaria,thebudgetproposaloftheNationalAssemblyisnegotiatedwiththePrimeMinisterandtheSpeakeroftheNationalAssembly,whiletheNationalAssemblyhassoleauthority over the judiciary budget. Extra-budgetary funds (EBF), likesocialsecurityorhealthfunds,areattachedtothestatebudgetandsub-mittedtotheParliament.TheEBFsarepresentedtogetherwiththestatebudgetinconsolidatedstatementsofthegeneralgovernment.

in.all.six.countries,.the.budget.year.matches.the.calendar.year.Keydeadlinesinthebudgetcycleandresponsibilitiesofdifferentagenciesorunitsarespecifiedinalegalact(budgetlaworpublicfinanceactandalso,insomecountries,intheConstitution).Althoughthefirstmacroeconom-ic or tax forecasts are prepared by MOF in January-February (e.g. Slo-vakia).anddirectionsofthemedium-termbudgetinFebruary(Latvia),themacroeconomicandfiscalassumptionsareusuallydiscussedinspringandapprovedbyCabinetinearlysummer(seeFigure2formoredetailson the budget cycle). The decisive round of budget and political nego-tiationsbetweenthecoalitionpartnersisconductedinthesummer.ThedraftbudgetisreadytobesenttoParliamentandavailableforthepublic(viathe internet) inthe latesummerorearlyfall.However, inBulgariaandCroatiaithappensalittlelater(end-Octoberandmid-November,re-spectively). Operational guidelines for budgetary units are defined in abudgetcallcircular.Theseincludetheformstobeusedandexpendituretemplates(Poland),decisionsordecreesofCabinet(suchas thebudgetagenda or proper budget draft) or decrees/guidelines of MOF (such asbudgetclassificationsorguidelinesforspendingunitsrelatingtotheprep-arationofthebudget).

in.most.countries.in.the.region,.parliaments.usually.pass.the.budg-et.without.major.amendments.ThedraftbudgetsubmittedtoParliamentnormallyenvisagespoliticalagreementsinthecoalitionandnegotiationsbetweenMOFandlineministries.Thedraftis,however,thoroughlyre-viewedbyparliamentarybudget/publicfinancecommitteeswhichelabo-

15 Insomecountries, thesemaybereferred tomore formallyas ‘appropriationsunderpermanentlegistaliveauthority’.

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ratetheirassessmentforParliament.Thisisoftenratheraformalassess-mentastheparliamentarycommitteeslackprofessionalbudgetanalysts.

provisional. arrangements. apply. if. the. budget. is. not. adopted. by.end-december.ThesemayinvolveusingtheGovernment’sbudgetpro-posal(Poland)orthepreviousyear’sbudget(Bulgaria,andSlovakiawithsomerestrictions),orprovisionalfinancingrelatedtotheone-fourthoflast year’s receipts (Croatia). These provisions take effect until the newbudgetisadopted.Non-enactmentofthebudgetisadefactosignofno-confidence in government, but a formal vote of no-confidence is donethrough a separate legislative process (Bulgaria and Croatia) or Parlia-mentmaybedissolvedbythePresident(Poland).

2. Key pieces of legislation relating to the budget and country-specific circumstances influencing the budget systemThe. key. legal. act. relating. to. the. budget. is. a. budget. law. or. pub-

lic. finance. act . New financial legislation of this type has recently beenadoptedor significantlyamendedacross theregion,oftenasa resultofbroaderbudgetreforminitiatives(Bulgaria,Turkey),orfromEUmem-bershipandaneedtoformulaterulesgoverningtheflowoftheEUfunds.Table1indicatesthekeypieceoflegislationandthetimewhenitbecameeffective.In linewiththedelegationfromthebudget law,morespecificguidelinesrelatedtoMTEForPBBimplementationaresetoutindocu-mentsapprovedbyGovernmentorMOF.ExamplesarethePerformanceManagement System Guidelines 2008-2013 in Latvia or Economic andFiscalPolicyGuidelinesinCroatia.

budget.legislation.often.also.frames.budget.preparation.and.exe-cution.for.sub-national.governments.InEmergingEurope,sub-nationalauthoritiesareindependentfromcentralauthorities,butfinancialman-agementcanbeindirectlyframedbythecentralgovernment(e.g.throughtaxsharingrules).

budget. legislation. governs. adherence. to. fiscal. rules. plus. imple-mentation. of. medium-term. planning. and. performance. budgeting.within.the.budget.cycle.Theinfluenceofinternationalbestpracticeon

Figure2.AnnualbudgetcycleinSlovakia

JanuaryFebruary

March

AprilM

ayJune

JulyAugust

September

OctoberNovem

berDecem

ber

macroeconom

ic prognosis

macroeconom

ic prognosis

tax revenue prognosiss

tax revenue prognosiss

debt financing estim

atesdebt financing

estimates

state fin. assets operations

state fin. assets operations

EU budget relationships

EU budget relationships

employm

ent and wage policy

employm

ent and wage policy

other public sector entities

other public sector entities

baseline (from

previous budget to T+1)

baseline update (adding T+2)

fiscal framework

determination

1st Draft Budget - Starting Points

budget requests analysis at M

OF

budget hearings and decisions

Draft Budgetupdate of

Draft Budget (if needed)

publishing of Budget Circular

Cabinet and Parliament

Cabinet approves

Starting Points and allocates expenditures

(ceilings)

discussion in the Cabinet (also

Coalition Board) and allocation of

Reserve for Priority Projects

approval of the Draft Budget in the Cabinet of

Ministers

approval of the Budget in

Parliament

program

structures

definition of goals and objectives

strategic plansbreakdown of ceilings into budget item

s

breakdown of ceilings into budget item

s

BUDGET EXECUTION ...

Line-ministries

MOF - Financial Policy Institute / State Accounting Dept. / European

and International Affairs Dept. / Debt and Liquidity Management Agency

MOF Budgetary Section

Source:.World.Bank.staff,.based.on.national.documentation

Table1.Keylegalactrelatingtothebudget,asofmid-2008

Bulgaria Croatia Latvia Poland Slovakia TurkeyOrganic

budgetlaw,adoptedin

1996

BudgetLaw,20031

LawonBudgetandFinancialManagement,

1994

ActonPublicFinance,

adoptedon30June,2005

BudgetaryRulesLaw,

effectivefrom2005

PublicFinancialManagement

andControlLaw,adoptedin2003

Source:WorldBankstaff.

48 49

budgetingorrequirements isvisible intheregion.ThisincludesESA95standards(incaseofnewEUmembers)andstandardsorbestpracticepromulgated by international financial organizations: (Slovakia was in-spiredbytheOECD,TurkeybytheWorldBankandtheIMF).Insomecountries, thebudget lawincorporatesfiscalrulesrelatingtodebt(Bul-garia,Croatia,andPoland)oraggregategeneralgovernmentexpenditures(thresholdof40percentofGDPinBulgaria).InPoland,a60percentofdebttoGDPthresholdratiohasbeensetintheConstitutionsince1997.In addition, the budget law invariably specifies the main roles and re-sponsibilitiesofbudgetactorsandincludesmajordeadlinesinthebudgetpreparationprocess.

eu.members.must.comply.with.the.eu.acquis communitaire.and.rules.set.by.the.maastricht.treaty.(and.protocol.on.the.excessive.defi-cit.procedure,.edp).and.the.stability.and.growth.pact.AccordingtotheEDP,theplannedoractualgeneralgovernmentdeficitshouldnotbehigherthan3percentofGDP,whilethethresholdforpublicdebt is60percent of GDP. These limits constitute the fiscal requirement for euroadoption.TheStabilityandGrowthPactsetsthestructuraldeficitoverthemedium-term.InthecaseofthesixEUmemberscoveredbythisstudy,themedium-termfiscalobjective(MTO)issetasastructuraldeficitof1percentofGDP.

For.several.countries.in.the.region,.the.reform.process.culminated.in.accession.to.the.european.union.in.may.2004(BulgariainJanuary2007)whenflowsoffundsrelatedtotheEUcontributionandEUpoli-cieshadtobereflectedinbudgetandfinancialmanagementregulations.Within the fiscal policy supervision, EU members (and non-euro zonemembers)mustsubmitanannualupdateoftheConvergenceProgram,usually in late fall,whileEUaccessioncountries (Turkey,Croatia) sub-mitPre-AccessionEconomicPrograms.Thesedocumentsoutlinemajoreconomicandfiscalpolicyplansandtargetsinathree-yeartimeframe.Althoughtheprogramsarenotlegallybinding,theyenvisageaclearpo-liticalcommitmentandenhancetransparencyofpublicfinance.

Fixed.exchange.rate.arrangements.–.peg.within.a.narrow.band.in.Latvia.from.early.1990s.and.currency.board.in.Bulgaria.from.1997.–.introduced.more.discipline.in.fiscal.policy.Budgetprudenceisinvari-ablyanecessaryconditionforthesmoothoperationoftheseregimes.Fis-caldeficitsleadingtomoneysupplyexpansionwillinvariablythreatenthecredibilityofthesystem.

in.Latvia, a.characteristic.feature.of.the.budget.system.is.the.con-cept.of.base.spending .Thiscapturesthelevelofspendingassociatedwithacontinuationofcurrentgovernmentfunctions(similartotheconceptof‘nopolicychange’)althoughakeydifferenceseemstobethatbasespend-ingistheminimumorefficientlevelofspendingneededtocontinuecur-rentfunctions).Todeterminethebudget,spendingfornewprioritiesisaddedtobasespending.Developmentofthebasebudgethastraditionallybeena largelyquantitativeexercisewithmostministriesperceiving thebaseasanentitlement,withoutamorerobustassessmentofexistingpro-gramsbeingconducted.Strategicplansarebeingusedprimarilytojustifynewpolicyinitiatives.TheStateChancellery,inparticularthePolicyCo-ordinationDepartment,hasan importantrole incoordinatingstrategicplanning.

in.Poland,.the.council.of.ministers.(com).plays.a.leading.role.in.the.budget.process .OnlytheCOMhaslegislativeinitiativewithrespecttothebudgetactandonlyatitsrequestcanchangestotheActbeintro-ducedduringthebudgetyear.ThelowerchamberofParliament(Sejm)hasonly20days forreviewing/amendingthebudgetact(forotheractsitis30days).Asmentioned,itcannotintroduceanychangestothedraftwhichwouldincreasethebudgetdeficit.ThePresident’sroleisalsolim-ited.Heorshehasonlysevendaystosignthebudgetact(comparedto21daysforotheracts)andhasnovetoright.ThePresidentmay,however,asktheConstitutionalTribunaltocheckiftheproposeddraftisinlinewiththeConstitution.

in.Bulgaria,.the.mteF.is.regulated.by.the.organic.budget.law.al-though.pbb.measures.do.not.feature.in.the.law.PBBisinsteadreflectedintheCOMdecrees,MOFguidelines,andintheannualstatebudgetlaws.

in. Turkey. the. under-secretariat. of. state. planning. organization.(spo),.affiliated.to.the.prime.ministry,.evaluates.investment.propos-als.TheMTEFisbasedontwomaindocuments:theMedium-TermPro-gram prepared by SPO and the Medium-Term Fiscal Plan prepared byMOF.

50 51

3. Recent international assessments of quality and transparency of budget systemsmajor.strengths.and.weaknesses.in.budget.systems.in.the.region.

were.also.identified.in.various.international.assessments.and.country.reports,suchastheOECDBudgetSurvey,IMFFiscalTransparencyRe-portonStandardsandCodes(ROSC),WorldBank’sCountryFinancialAccountability Assessment (CFAA) or Public Expenditure and Institu-tionalReview(PEIR),andthemultilateralPublicExpenditureandFinan-cialAccountability(PEFA)assessment.

several.external.assessments.have.been.conducted.in.Croatia.re-cently .Underthe2006WorldBankIDFgrant,anassessmentofthepublicexpendituremanagementsystemwasundertakendrawingonthePrad-hanandCampos(1995)methodology.Theresultsshowmoreproblemsassociatedwithaccountabilityandtransparencythanwithrules.Ithigh-lightedthefollowingprioritiesforstrengtheningthesystem:

• expenditureallocationsbasedoneconomicanalysisconsultationmechanisms(especiallywithParliament)

• dominanceofcentralministry(especiallyinrelationtoincentivecompatiblecontractoftheMinisterofFinance)

• linkingallocationstostrategicoutcomes(especiallyrelatedtoes-tablishingcorrelationsbetweenforwardallocationsandbudgetbidsbasedonevaluationsofstrategicoutcomes)

• discussionofcompetingpriorities(especiallyrelatedtothecabi-netreviewofcompetingpriorities)

• identification of overspending and cutbacks of existing pro-grams.

The.world.bank.public.Finance.review.(per).of.Croatia.in.Janu-ary.2008.identified.significant.progress.during.the.last.couple.of.years.in.strengthening.public.expenditure.management .Itnotedadditionaleffortrequiredinperformanceandprogrambasedbudgeting,analyticalfoundationsofbudgetallocationdecisions,budgettransparency,andinte-grationofstrategicandbudgetaryplanning.AreviewofCroatia’sbudgetsystemwasalsocarriedoutaspartoftheBudgetProjectoftheWorkingPartyofSeniorBudgetOfficialsoftheOECD.Thisreviewnoted:

• anoverlydetailedbudgetaccountstructure• aneedtomovetowardsabudgetclassificationfocusedaround

programobjectives

• alargenumberofpublicenterprises,manyofwhichengageinquasi-fiscalactivities,withnocleardivisionoftasksconcerningoversightofpublicenterprisesbetweenlineministries,MOFandthePrivatizationFund

• lackofanexplicitfiscalrule,insteadrelyingonamedium-termexpenditure and revenue strategy that aims to keep the deficitwithinacceptableboundaries

• lackofcleartop-downsteeringofthebudgetprocesstoensureamulti-annualstrategy.

recent. international. assessments. in. Poland. point. to. numerous.shortcomings.in.the.fiscal.framework.Theseincludebudgetfragmenta-tionandinsufficienttransparency,inadequatelinkagesbetweenthebudg-etandpolicies,andaninsufficienttimeperspectiveforbudgetplanning16.Budgetfragmentation,duemainlytomultipleagenciesandtheexistenceofextrabudgetaryfunds,isseenascontributingtoinefficientallocationofbudgetresources.Thesereviewshavealsosuggestedthatfiscaltrans-parencycouldbenefitfromaharmonizationofreportingstandardsandarevisionofbudgetclassification,thebudgetprocessisonlyverylooselyconnectedwithpolicyformulation,andthatministersactmorelikead-ministratorsofexistinglawsandprogramsratherthanstrategicmanagersofpolicyandprograms.

international. assessments. of. Poland. have. also. called. for. the. ac-countability. framework within. the. public. sector. to. be. strengthened.by. creating. incentives. for. improved. public. service. delivery. In addi-tion,thebudgetshouldbemademorepredictableoverthemedium-termby introducinganMTEFandstrengthening therecently launchedPBBinitiative.AmendmentstotheActonPublicFinance17,currentlyontheagenda,gointherightdirectionandshouldmakethebudgetmorecon-solidated, transparentandpredictableoverthemedium-termaswellasmoreperformance-oriented.

reports.on.the.Latvian.fiscal.sector.haveincludedaFiscalTrans-parencyROSC.(IMF,March2001),PublicExpenditureReview(WB,Feb-ruary2002)andtworesearchpapers:‘Latvia’sMacroeconomicOptionsintheMedium-Term:FiscalandMonetaryChallengesofEUMembership’16 InternationalassessmentsincludeRepublic.of.Poland:.Financial.Stability.Assessment(2001andup-

date2004),InternationalMonetaryFund;Poland:.Toward.a.Fiscal.Framework.for.Growth.–.Public.Expenditure.and.Institutional.Review(2003),TheWorldBank;Poland:.Developing.a.multi-annual.fiscal. framework (2008),InternationalMonetaryFund;Poland:.Country.Financial.Accountability.Assessment(2006),TheWorldBank.

17 Poland’s MOF, Draft. New. Act. on. Public. Finance, published on the website on 22 August, 2008,http://www.mf.gov.pl/dokument.php?const=1&dzial=153&id=135646&typ=news.

52 53

and the World Bank Policy Research Working Paper (May 2004). Thereports acknowledged significant progress in public sector reform andgovernancebutidentifiedsomechallenges,suggestingafocusonration-alization of public expenditure and civil service reform. These analysesstressedtheissueofbuildingcapacitytodevelopMTEFdocumentationinMOF,provideadequateMOFguidanceandsethardbudgetconstraintsforlineministries.Thesereportsalsoindicatedaneedto:

• improvepolicyformulationandplanning(strategicplansdevel-opedbylineministriesarebiasedtowardnewpriorities)

• address artificial fragmentation and structural rigidities of thebudget(about45percentofrevenuesareearmarked)

• reducebudgetincrementalism(duetobasebudgeting).The. research. paper. on. the. fiscal. challenges. of. eu. membership.

(wb,.2004).suggests. that. in.addition.to.mteF,.Latvia would.benefit.from.additional.fiscal.rules.that.would.avoid.making.the.fiscal.policy.pro-cyclical .ThepapersuggestsLatvia.targetthebudgetstructuralbal-anceandsetupperlimitsonexpenditureincreases,inadditiontotheme-dium-termzerobudgetbalancetargetwithintheEUStabilityandGrowthPact.

in.Slovakia.the.world.bank.implemented.a.project.called.public.Finance. management. reform. in. early. 2000s. At the beginning of thereformagenda,majorweaknesses included the fragmentationofpublicfinanceunitsandinsufficientoversightperformedbyMOF.Afteraddress-ingbasicPFMproblems, theGovernment’s focus shifted towardsmoreadvancedreforms,includingMTEFandPBB.

various. external. assessments. show. the. Turkey. budget. system. is.well. designed. but. with. some. shortcomings. Many weaknesses identi-fied in theWorldBankPEIRfrom200118, suchas insufficientaccount-abilityandtransparency,wereaddressedinthefollowingyears.In2006,theIMFFiscalTransparencyROSC19reporthighlightedfragmentationinthePFMsystemwhilein2007theOECD20emphasizedaneedtoreassessbudgetclassification.

18 WorldBank,August2001,Turkey:.Public.Expenditure.and.Institutional.Review.–.Reforming.Budget-ary.Institutions.for.Effective.Government,ReportNo.22530-TU,PREM,ECA,WashingtonD.C.

19 IMF,March2006,Turkey:.Report.on.the.Observance.of.Standards.and.Codes—Fiscal.Transparency.Module,IMFCountryReportNo.06/126,WashingtonD.C.

20 Kraan,D.,BergvallD.,HawkwesworthI.,2007,Budgeting.in.Turkey,ISSN1608-7143,OECDJour-nalonBudgeting,Volume7-No.2,OECD,2007.

Chapter 3. GENERAL PROGRESS ON BUDGET REFORM

in Emerging Europe Leszek Kąsek

As.noted.in.this.study,.it.is.useful.to.view.recent.efforts.to.intro-duce.mteF.and.pbb.initiatives.as.a.part.of.broader.public.finance.and.administrative.reform.Introducingthesemethodsismorethanatech-nocraticbudgetreform.Theyarecomponentsofawiderreformprocessinwhichsuccessfulimplementationleadstopositivechangesinthepub-licmanagementculture, includinggreaterclient(citizen)orientation intheprovisionofpublicservicesandprograms.

A.well-functioning.and.efficient.public.sector.may.be.one.of. the.country’s. greatest. strengths contributing to improved competitivenessintheprivatesectorandthenationaleconomyasawhole.Ahighqualitypublicsectormaybecompared, forexample,withfavorabletaxregula-tionswhoserole is tostimulatebusinessactivityandattract foreign in-vestments.MTEFandPBBcannotbeviewedasisolatedinterventionsbutrather as reforms contributing to better use of resources and increasedeconomiccompetitiveness.

both. the. mteF. and. pbb. require. smooth. processing. with. addi-tional.information.and.appropriate.capacity.by.civil.servantstoensureinformation-based decisions don’t become information-overwhelmedbattlesbetweenMOFandspendingunits.Becausetheroadis longandsometimesbumpy,withbenefitsemergingonlyinthelong-term,strongandmotivatedleadershipisvital.Internationalexperiencepointstogreat-ersuccesswhenthekeyroleintermsofleadershipwithinthebureaucracyisplayedbythefinanceministryanditsbudgetdepartmentinparticular.

1. Recent public finance reform initiatives and major institutional achievements mteF. and. pbb. are. essential. building. blocks. for. fiscal. and. eco-

nomic.reform.but.they.are.complex.and.demand.careful.and.phased.implementation.AsdiscussedinChapter1,theyareaccompaniedbysup-portingPFMreformssuchaschangesinbudgetclassification,accounting,audit, accountability and control systems in the public sector. Creatingchanges in the administrative structure, empowering budget managers,andstrengtheningmanagementandrewardsystemsmaybenecessaryfor

54 55

result-orientedthinkingandlonger-termforesightinthepublicplanningprocess.ThisdoesnotmeanthatallthePFMreformsshouldbeconduct-edatonce.Reformoverloadisarisk,butmanysynergiescanbeexploitedonthebackofanambitiousandbroadreformagendathatincludesparal-lelintroductionofMTEFandPBB.Table2summarizesthemaininstitu-tionalachievementsinrelationtothesereformsinEmergingEurope.

This.approach.was.largely.successful.in.Slovakia.where.the.minis-ter.of.Finance.and.deputy.prime.minister.were.responsible.for.overall.economic.policy,.including.public.finances ..InTurkey far-reachingin-stitutionalchangesinPFMwerebegunaspartofabroaderrescueplanintroducedafterasevereeconomicandfiscalcrisisin2001andsupportedbytheIFIs(WB,IMF,EU,OECD).Lackoffiscaltransparencywasregard-edasamajorfactorinthecrisisandthisledtomanymajorchangesinpublicfinancemanagement.Althoughthecrisisheightenedtheurgencyforabetterbudgetsystem,valuableanalyticalworkonbudgetreformhadalreadybeendoneduringthepreparationofthe8-YearDevelopmentPlanin1999andinthePEIRreportpreparedjointlybytheWorldBankanditsTurkishcounterparts21.

in.Bulgaria.the.economic.and.fiscal.crisis.in.1996-1997.also.played.a.precipitating.role.in.reform .Followingadoptionofthecurrencyboard,budgetreformshavebeenunderwaysince1997.Intheinitialphase,re-formsaimedatimprovingoverallfiscaldisciplineandsustainability.RolesandresponsibilitiesofParliament,Cabinetandspendingunitswereclari-fiedandlimitsondebtissuanceandquasi-fiscalactivitieswereimposed.Budgetunitsandaccountswereconsolidatedandtogetherwithbetterre-portingandaccountingsystems,changes led to improved transparencyoffiscalaccounts.Theresultswereastonishing.Theheadlinefiscalbal-ancemovedfromdoubledigit-deficitin1996asapercentageofGDPtoabalancedbudgetin2003andfiscalsurplusesintheimmediatefollowingyears.Strictdebt issuancerules(includingannualceilingsontotaldebtstock)andefficientdebtmanagementledtoadeclineinpublicdebtfrommorethan100percentofGDPin1997to16percentofGDPin2008.

Bulgaria. took.the.first.steps. in. implementing.advanced.pFm.re-forms.in.the.mid.2000s,moreorlessatthesametimeasPoland LatviaandCroatialaunchedtheirreformsintheearly2000s.Bulgariastartedbyconsolidating its fiscal accounts, improving transparency of the budgetprocess and comprehensiveness of budget documentation, improvingtreasuryanddebtmanagementfunctions.Fiscaldecentralizationwasalso

21 WorldBank,op.cit.Tabl

e2.

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orP

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56 57

advanced and medium-term approach to budgeting and PBB were im-plemented. InPoland,PBBwasputon theagenda in2006by theStateSecretaryintheChancelleryofthePrimeMinister,TeresaLubińska,whogainedexperienceinthisareafromthelocalGovernmentlevel.In2007,thePBBapproachwaspilotedintwosmallbudgetsectors(scienceandhighereducation)andamendmentsweremadetotheActonPublicFi-nance.ThesechangesintroducedreportingobligationsinthePBBformatinthejustificationtothebudgetactstartingfromthebudget2008andinreportingontheexecutionofthebudget.

Although. Latvia. was. a. regional. pioneer. in. pbb. approaches. and.Croatia.in.the.mteF,.progress.made.over.recent.years.has.been.slow.InCroatiaPFMwasmodernizedinmanyareaswiththeadoptionofthebudgetlawin2003.Thisaddressedbudgetexecution,accounting,report-ing(GFS2001standards),cashmanagementthroughamorefunctionalTreasurySingleAccount(TSA)andawideruseof theSAPsystem, in-cludingearmarked revenues.From2007, emphasiswasplacedon inte-gratingPFMsystemsandthesemeasuresshouldbeimplementedin2009.Transparencyofpublicfinanceswasalsoenhancedbynewregulationsoninternalauditandfinancialcontrol.

in.Latvia,.reforms.were.initiated.early.but.it.took.several.years.to.enforce. significant. change. Budget programs were introduced in 1997butinpracticeperformanceindicatorsfocusedtoomuchoninputs.De-velopmentofmoreoutput-oriented indicatorsbegan in2003and thesearenowbeingrevisedandalignedwithanewstrategicplanningframe-workforthebudget.From2003,reformoftheremunerationsystembe-ganacrossallbudgetinstitutionstolinkpaywithperformance.Thecon-ceptofthree-yearbudgetplanningwasapprovedbytheGovernmentinthesummer2006andbecameoperationalin200822.

The.region.benefited.from.projects.financed.from.external.grants.or.loans(mainlyEU,butalsoWorldBank,IMF,USAID,andUSTreas-ury),orientedtowardsimprovementsinthebudgetprocess,bothinthepre-andpost-accessionperiod.NewEUmembershavemadegooduseofEUstructural fundsavailable for spendingon institutional improve-mentsinthepublicsector.InPoland,thePBBinitiativeincludedstrategicgovernmentdocuments likeNationalDevelopmentStrategy2007-2015,National Reform Program for Implementation of the Lisbon Strategy

22 ThankstotheMTEF,anappropriationreservewasintroduced(totransferfundsbetweenyears)andflexibilityofexpendituresincreased(COMcan,tosomepre-setamounts,redistributeexpen-ditureamongprograms, sub-programs,andeconomicclassificationcodes.COMalsoconsidersintroductionofperformanceevaluationswhichshouldbebasedonseveralcriteria.

2008–2011,ConvergenceProgram2005,theNationalStrategicReferenceFramework2007-2013,andtheGovernmentStrategicPlan.ThelatterwasannouncedinFebruary2008,whilethepreviousagreementsandstrate-gieswereapprovedbytheformerCabinet.

The.eu.integration.agenda.and.eu.membership.itself.has.contrib-uted.to.greater.transparency.and.predictability.of.fiscal.policy.over.the.medium-term. Although the Pre-Accession Economic Program (PEP)or the Convergence Programs (CP) cannot be treated as fully-fledgedMTEFs,andfiscaltargetswerenotlegallybindingevenintheshortterm,theyhaveassistedthesecountriestounderstandandachievetherequire-mentsforanimprovedfiscalstanceandstructuralchangesinbudgetpoli-cies.ConvergencePrograms,preparedinlinewiththeEUrequirements,mustincludemedium-termprojectionsforexpendituresandrevenuesaswell asprojectionsondeficit anddebt levels for the comingyears.Thelimitationofthisapproachisthatthoseprojectionshaveindicativemean-ingonlyandthereisnolegalobligationforgovernmentsinthefuturetofollowthem.

in.most.cases,.adoption.of.a.new.budget.law.marked.an.important.breakthrough.in.the.development.of.budget.systems.ThiswasthecaseinBulgaria,.Croatia,.Slovakia,.and.Turkey.Withnewlegislation,thePFMreformagendawasmorecomprehensiveandbettercoordinated.Thisleg-islationdoesnotguaranteesuccessbutawell-draftedbudgetlawcanbeasolidbaseforreform.AlthoughtheregionprovidesevidencethatPBBinparticularmaybeinitiallybasedonexistinglaw(Bulgaria,.Latvia.and.Poland),internationalexperiencesuggeststhatchangestothelawmakenewinstitutionsmoresustainableandweakenoppositionandresistancetochange.PossiblythebestexampleofthisarethereformstothebudgetstructureandpoliciesinFrancewhichwerebegunthroughthenewLoi.Organique.2000(see,forexample,Robinson,2007).

2. Motivation, champions for reform, and involvement of budget departments in.countries.which.experienced.serious.fiscal.imbalances.(Bulgar-

ia and Turkey),.the.necessity.for.budget.reform.was.the.mother.of.in-vention ..in.other.countries.external.and.internal.pressures.both.played.a.role.Complexrestructuringinthepublicsectorofferedagoodoppor-tunity to introduce ambitious second generation PFM reforms. Othercountrieswerefollowingglobalorregionaltrendsandtheavailabilityofexternaltechnicalassistance(seeabove)andexternalfundswassupport-

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ive.In-houseexpertisehasbeengrowingtooandhasbeenreadilysharedbetweencountries(Chapter1).TheattractivenessofthePBBconceptmayalsopartlylieinpositivefeelingsassociatedwiththeword‘performance’.Performance budgeting, and its more or less literal translation into lo-callanguages,soundsbetter(notonlyforthepoliticians)thantraditional(incomprehensible)budgetingbasedonstandarddata-setsandconstantchecksandbalances.

in.the.globalization.era,.a.well-functioning.public.sector.provides.a.competitive.advantage.Also,somepracticessuccessfullytestedintheprivate sector (sub-contracting,management for results, theconceptofvalueformoney)wereappliedsubsequentlyinthepublicsector.Taxpayersarealsovotersandtheydemandmore(i.e.betterpublicservices)fortheirtaxes.Slovakia’spoliticalleaderssetanambitioustargetforeuroadoptionandmeetingtheMaastrichtcriteriawhichrequiredfiscalconsolidation.Fiscalpolicyisoneofthefewpolicyleversunderthecurrencyboardar-rangementinBulgaria.Theaimtocreatefiscalspacefornewpolicyinitia-tivesorcomplywithpoliticalpromises(e.g.infrastructureupgrade,wageincreasesinthepublicsector)werereasonablycommonacrosstheregion,includingespeciallyCroatia.and.Latvia.

The.need.to.improve.the.quality.of.budget.planning.and.fiscal.pol-icy.predictability.has.motivated.implementation.of.mteFs .Whenef-fectivelyimplemented,anMTEFhelpsfulfillfiscalpolicytargetsby:

• keepingexpenditurewithinmeans(throughspendingrealloca-tionbetweenyears)

• establishing links between policy, planning, and budgeting(broaderspaceforspendingprioritization)

• increasingoperationalefficiency• exploringchoiceswithin the setof sustainablefiscalpolicies–

theissueof‘fiscalspace’(Bevan,2006).prioritization.and.allocation.are.the.concern.of.policy-makers.but.

improvements.in.operational.efficiency.must.be.owned.by.the.public.administration. as. a. whole. If, however, overall public finance sustain-abilityisatrisk,theremainingtargetsbecomelessurgent.ThishasbeenshowninLatviawheretheGovernmentlooksforconsiderablespendingcuts as revenues have dropped sharply from a sudden economic slow-downandthesubsequentseriousrecession.

Advanced.pFm.reforms.in.emerging.europe.were.initiated.by.pol-icy-makers. inspired. by. international. lessons,. or. by. external. consult-ants,.but.they.were.quickly.taken.over.by.educated.local.technocrats.

Somecountries (Latvia,.Poland.andSlovakia23)created informal,cross-sector working groups of senior officials. Their purpose was to spreadthenewideasmorewidelyingovernment.Inthebeginning,thenewap-proachwastestedinselectedministrieswhichwereopentochangeandwillingtorunpilotsprojects,whilevariouslearningopportunitieswereofferedmorewidelytospendingunits.Everywhere,MOForotherlead-ingagencieshadakeyroletoplayasacenterofexpertiseonconcepts,methodsandprocesses.Itisalsoamajorpowerforboththepreparationofthebudgetanditsexecution.reform.leadership.had.some.different.characteristics.in.each.country:

• InBulgaria,aDeputyMinisterofFinancewiththesupportofasmallunitwith theMinistryofFinanceprovidedmuchof theoverallguidanceforthereformsandassistedlineministries,es-peciallythosewhichintroducedpilotbudgets.Thishelpedbuildcapacityandbuy-inforthereform.

• In Croatia, in the early 2000s, Treasury and analytical depart-ments in MOF, supervised by the deputy Minister of Finance,cooperated with external experts and provided good interna-tionalpractices.RulebooksanddecreesonPBBwereprepared.Currently,allbudgetaryusersincludinglocalgovernmentunitsarepreparingbudgetsinaprogramformat.

• InLatvia,MOFdrovereformasitstrengtheneditsownposition,but the reforms were also stimulated by the State ChancelleryandthePrimeMinister.MOFwastheleadagencyfortheMTEFwhilestrategicplanningwasdevelopedbytheStateChancellery.BothinstitutionsworkedjointlyonthePBBagenda.

• InPoland, theStateSecretary in theChancelleryof thePrimeMinister and a Department of Performance-Based BudgetinglaunchedthePBBinitiativeinearly2006.TheChancelleryofthePrimeMinisterwascreatedtospearheadthisinitiative.Inearly2008,thenewGovernmentdecidedtodissolvethisdepartmentand transfer someof its staff toMOF.TheMTEFconceptwaselaboratedinMOFandbasedpartlyontheworkcommissionedbytheIMFin2008.

• InSlovakia,theinitialchampionofPFMreformswastheMinis-terofFinancewhowasalsothedeputychairmanandeconomicleaderofthestrongestcoalitionparty,andwhopushedonmany

23 ThegroupinSlovakiawasabandonedsoonafteritscreation,mainlybecauseofresistancefromlineministries.

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changes.ReformwasdriveninternallyintheGovernmentandtechnicallypreparedandexecutedbyMOFstaff,assistedbyex-ternalconsultants.Therewasacleartop-downapproachinthereform implementationbut thedetailsof their executionwerepreparedinabottom-upway.TheSlovakGovernmentshowedstrong ownership of the project, assisted by the World Bankwhichactedasprojectcoordinator.

• In Turkey, reform-minded officials made good use of the mo-mentum which emerged from the 2001 economic crisis. ThismomentumhasbeenenhancedbynegotiationswiththeEU.

3. Institutional changes, involvement of budget authorities and managing oppositionAlthough.new.units.responsible.for.mteF.and.especially.pbb.im-

plementation.were.created,.the.structure.of.public.administration.re-mained.untouched.in.Latvia.and.broadly.unchanged.in.the.remaining.countries.ThoroughrestructuringofMOFwasrare,thoughmostcoun-triesundertooksomekindofre-labelinginitiative.

•. SlovakiaandBulgariawereamongtheexceptions. InSlovakia,MOFwasrestructuredandtraditionalbudgetdepartments(fi-nancinglineministries)werereplacedbyananalyticaldepart-ment, and a budget consolidation department – consolidatingdata sources and formulating the general government budget.The two departments became leaders of further reforms andtheirrolehasbeenformalizedintheMinistryofFinancestatute.

• In Bulgaria the Budget and State Treasury Directorate was re-structured into two separate (1-planning, 2-execution and re-porting) directorates. The Budget Directorate included threenewdepartments–BudgetMethodology,PublicFinanceSchool,andMicroeconomicAnalysis–andwasinstrumentalinimple-mentingbothMTEFandPBB.

• In Croatia three new units were created in 2004 and coveredTreasury System Development, Budget Analysis and InternalAuditHarmonization.TheInstituteofPublicFinance,apublicresearchinstitute,providedadviceandreformimpetus.

• InPolandnochangesweremadetothestructureofpublicad-ministrationin2006.TheworkstartedwiththecreationofaPBBdepartmentwhichwassupervisedbytheSecretaryofStateintheChancelleryofthePrimeMinister.Afterthegeneralelectionsin

October2007,MOFbecameprimarilyresponsibleforthenewPBBapproachandchangeditsnametothePublicFinanceRe-formdepartment.

• InTurkey.organizationalchangesinMOFintheGeneralDirec-torateofBudgetandFiscalControlresultedfromthenewbud-getlawratherthanrequirementsofadvancedPFMreforms.TheStrategyDevelopmentUnitsestablishedin2006replacedbudgetunitsaffiliatedtoMOF.SomedutiesofMOFinthebudgetpro-cessweredelegatedtolineministries.

lack.of.radical.changes.in.the.structure.of.public.administration.left.budget.managers.with.limited.managerial.flexibility.and.autono-my.Accountabilityproblemsremainedtoo.The linkbetweenresponsi-bilityandthediscretiontoperformflexiblyandautonomouslyremainstenuous.Thereisalsoaninabilitytoshiftorshedcivilservantsinminis-triesunabletodemonstratesufficientperformance.

chile’s.experience,.where.the.performance.budget.toolkit.was.in-vented. and. led. by. a. powerful. and. respected. budget. department. in.moF,. demonstrates. useful. lessons. for. emerging. europe. (Chapter 1).Itshowsthatgovernment-widesystemscanbebuiltandappliedatrela-tively lowcost,butrequiredisciplineandpersistenceover longperiodsoftime.Hierarchicalbudgetinstitutionshelp(Marcel,2007).Becauseofits technicalcomplexityandgenerallyapoliticalcharacter, leadershipofPBB reforms has been necessarily taken over by committed technocratchampionsinMOF(recentlyallcountriesintheregion)orbyStateorPMChancellery(asintheinitialphaseinLatviaandPoland).

Having.a.reform.champion.with.active.participation.of.line.minis-tries.and.their.budget.departments.in.the.spending.ministries.creates.a. strong. sense. of. ownership within government and helps implementreforms. InChile, theBudgetDepartmentattractedwell-educatedpeo-pleascareertechnocratswhocouldoperatewithlimitedinfluencefrompolitical pressures. At the same time, they managed to present a broadandunitedfrontofpoliticalconsensusandperseveredwiththenecessaryinstitutionalchanges.

As. with. much. radical. change,. some. groups. have. opposed. the.mteF.and.pbb.reforms ..Therehaveevenbeen instancesof resistancewithinMOF.Insufficientawarenessandlackofcommitmentinabroaderpublicadministrationstillremainachallengeacrosstheregion.

• InBulgaria theattitudeof lineministries,Cabinet,andParlia-menthasvaried.Someministriesappreciatedthevalueofmore

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strategicallocationofresource,andimprovedtransparencyandaccountability of public finances, but some treated the MTEFandPBBasapurely formalexercise leading toabiggerwork-load.FragmentationofsomelineministriesisnotconducivetoPBBimplementationandithasbeendifficulttoinvolveseniorofficials in thepreparationof theirbudgets inaprogrammaticstructureandmakethemaccountableforperformance.Theuseofdifferentreportingsystemsacrossministriesandagencieswasalsoproblematic.However,intandemwiththeintroductionofthe Financial Management Information System (FMIS) somefirst-level spending units introduced additional analytical ele-mentstocomplywiththePBBformat.

• In Slovakia MOF middle-level management of budget depart-ments opposed reforms but were overrun by restructuring ofthebudgetsectionandbychangesofpeopleincrucialpositions.The opposition of line ministries was two-fold. First, some ofthe budget departments within line ministries were not con-vinced,mainlybecausethereformswereimplementedquickly.PilotprojectshelpedMOFgainalliesinthebudgetdepartmentsof several line ministries. Second, policy sections within lineministriesneededtobeconvincedtochangetheirinternalpro-cedures tomatch thebudget systemchanges,and to takeoverresponsibility for thefinancialmanagementof theirprograms.This change still needs to be accomplished in almost all lineministries.Somemildoppositionhasalsocome fromtheme-diawhichcriticizedimperfectionsintheprogramstructureandquestioned the necessity of medium-term planning. The latterobjectionwassuccessfullyhandledafterMTEFimplementationbroughtvisibleresultsandwasshowntohavenorelationshiptothemethodsusedduringtheformereraofahighlycentralizedcommandeconomy.

• Resistance by middle-level officials in line ministries in Croa-tia,Latvia,andPolandwasnotunexpectedbecauseintheearlystagesthesereformsincreasedtheirworkloadwithoutbringingimmediatebenefits.However,thereformsdidnotprovokelargecontroversies among experts. The questions were about ‘how’,not ‘why’ to implement them)and therewas little coverage inmass-mediaandlittledebateamongpoliticians.

• InTurkeycentralpolicyinstitutionsleadthereforms.Theotherdepartmentswererequiredtocomplywiththenewregulations

but noticed quickly that the strategic planning exercise en-hancedtheirstatus/positionduringthebudgetprocess.StrategicdevelopmentunitsofMOF,SPO,PrimeMinistryandTreasurybecame role models for other strategy development units. In-creased authority, coupled with relevant accountability for theheadofthespendingunits,alsoencouragedimplementationofthesereforms.

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Chapter 4. Regional Overview of MTEF and PBB reforms

Leszek Kąsek

4.1. Adopting Medium-Term Expenditure Frameworks (MTEFs) An.mteF.provides.a.multi-year.framework.for.allocating.expen-

ditures.according.to.policy.priorities,.subject.to.forecast.revenue.con-straints(Taliercio,2007).Itrestsonthreepillars:

• top-downmulti-yearprojectionsoftheresourceenvelope(howmuchisavailable)

• bottom-upmulti-year cost estimatesof sectorprograms (whathastobefinanced,withafocusonprioritiesandobjectives)

• institutional (political and administrative) decision-making tointegratetheabovetwopillars(determiningthenecessarybud-gettrade-offs).

These.mteF.pillars.overlap.with.the.pbb.approach.and.help.im-prove.program.performance.throughpredictabilityinresourceflowstoprograms,planningbeyondone-yearhorizonsandbyhelpingmanagerssearchforhighervalueexpenditures.Thenecessaryshiftfromatradition-aladministrativeandinput-itembudgetingapproachtoaresults-orientedmanagerialapproachisprovingalengthyprocessinEmergingEuropebutbudgetmanagersmostlywelcometheopportunitiesforincreaseddiscre-tioninallocatingfundstoprogramsundertheirjurisdiction.

with.mteF.and.pbb.reforms,.the.devil.is.often.in.the.details.of.implementation ..Inthefollowingchapter,welookatthePBBarrange-mentsfromacountry-by-countryperspective.Inthischapterweinvesti-gatethefollowingmoregeneralaspectsofMTEFsintheregion:

• coverageofMTEFscomparedwiththeannualbudgetanditsle-galbasis

• institutional set-up and supporting arrangements (rules, ceil-ings)

• methodsandproceduresusedincompilingtheMTEF• modesof introductionofMTEF’s (asacomponentofbroader

budgetreformsoradiscretereformiststep)• preparationandupdatingofforwardestimatesacrosslineminis-

tries

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• impact of the MTEF on the quality and efficiency of resourceallocation and budget decision-making (both from the centralbudgetplanningandlineministrybudgetmanagementperspec-tives)

• prospectsforextendingtheuseofMTEFconceptsandmethods.

1.1 Coverage of the MTEFs compared to the annual budget and its legal basisexisting.mteFs.in.the.region.have.a.three-year.planning.horizon,.

i.e.currentbudgetyearplustwofurtheryears(Table3).PolandexpectstointroduceaMulti(four)-yearFinancialPlanoftheStatein2009.Thethree-orfour-yeartimeframeseemsareasonablecompromisebetweenthe value of longer term planning and the shorter periods over whichmostgovernmentrevenuesandexpenditurescanbeplausiblyforecasted.Fortheregion,thelongrunisespeciallymoredifficulttoenvisagebecausethesecountriescontinuetofacetheneedforlargestructuralchangesintheireconomies,includingtheroleofthepublicsector.Also,asaconse-quenceoftherecentglobalfinancialcrisis,forecastingofmosteconomicandfinancialvariableshasbecomemuchmorecomplicated,evenwithinaone-yearhorizon.

Although.formal.mteFs.are.relatively.new.in.the.region,.elements.of.the.three.pillars.noted.above.have.been.in.place.for.more.than.a.dec-ade.InBulgaria,.forexample,theorganicbudgetlawfrom1997enabledMOFtopreparethree-yearmacroeconomicandfiscal forecasts.Polanddoesn’thaveanMTEFbutitsPublicDebtManagementStrategyoperatesonathree-yeartimeframe.AnexplanatorynotetothebudgetactupdatesfiscaldatatotheConvergenceProgram,whichisinplaceineverynewEUMember State, and includes three year economic projections and fiscaltargets.Since2007budgetunitspresenttheirspendingestimatesforthefollowingthreeyearsinaprogrammaticstructure.EUandcapitalprojectsarealsoplannedonamulti-yearbasisalthoughmostforward-lookingfig-ures are indicative only and medium-term expenditure planning is notsystematicallyconductedatthesectorlevel.

to. have. a. significant. impact. on. budget. decision-making,. fiscal.plans.should.be.integrated.with.the.annual.budgetary.process.Iftheyarenot,theframeworkbecomesaratherabstractexercise.Integrationcanbeachievedbycombiningthebottom-upapproach(wherethereissomeriskofbudgetinertia)withexpressingfiscalpolicyprioritiesatahigh-lev-

elintheexecutivebody(reconciliationpartintheannualbudgetprocess).Slovakiaisagoodexampleintheregionforachievingthisintegration.

The.success.of.the.top-down.and.bottom-up.reconciliation.proc-ess. depends. on. efficient. communication. within. government. and. on.debate. about. spending. prioritization . Without good communication,nationalpolicyobjectivesreceive littleconsiderationintheresourceal-location process and transparency in decision-making is reduced. PBBstrengthensthelinkbetweenthebudgetandpolicies.InBulgaria,selectedministriessuccessfullyusedPBBforarguingforchangesinbudgetalloca-tionstopoliciesandinprograms.

to.be.useful,.an.mteF.should.also.combine.rational.forward.plan-ning.with.an.ability.to.accommodate.unforeseen.changes.Asanannualrollingprocess,anMTEFcanbeveryusefulforpolicyformulation.Theframework reflects priorities within sectors and accounts for recurringcostimplicationsofcapitalprojects.Otherkeyelementsincludeprojec-tionsofsignificantentitlementprograms,interestpayments,andforwardcostsoflargeinvestmentprojects.

• InBulgaria theMTEFsets theaggregatebudgetceilings (totalexpenditure,capitalexpenditureandoverallfiscalbalance)anddefines key parameters like wage and pensions increase, stafflevels, the size of social assistance benefits, service standardsetc.Macroeconomicassumptionsandforecastsarecoordinated

Table3.DateofinitiationandcoverageofrecentMTEFreformsintheregion

Bulgaria Croatia Latvia Poland Slovakia Turkey2006–three-yearmacroeco-nomicandfiscalframeworkapprovedbyCOM,andsectoralceilings,onlyfirstyearisbinding

2003–three-yearEconomicandFiscalPolicyGuidelines2005budget–mul-ti-yearprojectionsoffiscalitemsdisaggregatedtothefourthlevelofeconomicclas-sification;2007-Medium-TermStrategyforDevelopmentandModernizationoftheStateTreasury2007-2011

2000-govern-ment’sdeci-sion,2006–theconceptofthree-yearbudgetplanningapprovedbyCOM,notyetappliedinbudgetprepa-ration

Scheduledfor2010,four-yearplanningperspective,bindingdefi-citlevel(butamendableinjustifiedcir-cumstances)

2005–three-yearbudgetpresentedinallexistingclassifications(fourforrev-enues,sevenforexpendi-tures),budgettargetsbindingonlyforthebudgetyear,indica-tiveforecastsasstartingpointsfornextyear’sbudgetnego-tiations

2005–three-yearrollingplans,Me-dium-termFiscalPolicyStatement(includingfis-calplansandspendingceil-ingsforbroadcategories)andMedium-TermPlan(withmacro-economicindicatorsandpolicypriorities)

Source:WorldBankstaff

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withingovernmentandwiththecentralbank.Sectoralceilingsthenareagreedbasedontheapprovedmacroeconomicandfis-calframeworkandbudgetplansarepreparedbyeachFLSUinPBBformat.

• InCroatiaboththeannualbudgetandtwo-yearprojectionsarepreparedinthesameformat,allonthefourthlevelofeconomicclassification(reduced to the third level since2009).Althoughthethree-yearfiscalframeworkispresentedtoParliament,onlythe annual budget is approved by voting. The quality of mac-roeconomicandfiscalprojectionshasimprovedsignificantlyinrecentyears.

• InLatviatheMTEFsetsceilingsforbroadcategoriesofspendingoverathree-yearperiod.Aspartofitspublicfinancemanage-mentreform,asystemofstrategicplanningwas introducedin2003-2006. Strategic plans, however, tend to be biased towardnew initiatives, while the review of existing programs, whichwere not formulated within the overall budget constraint, at-tractedlessattention.

• Themedium-termfiscalplaninTurkeyincludesfiscaldeficitandborrowingpositions,plustotalrevenueandexpenditureprojec-tionsforthreeyears.ItsStatePlanningOrganization(SPO)pre-paresaninvestmentcircularwithanappropriateguide.

1 .2 ...institutional.set-up.and.supporting.arrangements..(rules,.ceilings,.guidelines)mteFs.began.in.emerging.europe.in.a.quite.mechanical.way.and.

enhancements. have. been. gradual. Allocating discretionary resourcesbetweencompetingspendingagenciesinaninformedwayoveramulti-yearhorizonisdemanding.Itisnotsurprisingthatsomesectorsgrowatahigherpercent than theaverage, somemaintain their share,andoth-ersdecline.Bevan(2006)arguesthat,withannualupdating,thesystemshouldevolveawayfromitsinitialmechanicalnature.

in.the.beginning.only.aggregate.forecasts.are.feasible.but.provide.a.good.starting.point.for.considering.fiscal.policy.over.the.medium-term. Best practice requires publishing a comprehensive, rolling medi-um-termbudgetframeworkasabaselinescenarioforfiscalmanagement.Enhancementstotheframeworkintheregionhaveproceededslowlybutconsistently.

procedural.rules.in.the.imF.manual.of.Fiscal.transparency.(2007).apply. broadly. to. the. mteF. The manual states: “The annual budgetshouldberealisticandshouldbepreparedandpresentedwithinacom-prehensive medium-term macroeconomic and fiscal policy framework.Fiscaltargetsandanyfiscalrulesshouldbeclearlystatedandexplained”.

simple. and. transparent. fiscal. rules. support. the. mteF. because.they. impose. discipline. for. spending. units. and. enhance. communica-tion.within.government ..Fiscalrulesare formsofrestrictionsonfiscalpoliciesatanaggregatelevel.Theyoftentaketheformofalaworbindingregulation.Examplesofnumericalorstand-alonefiscalrulesincludere-quirementstobalancethebudget,limitborrowingbythecentralorsub-nationalgovernments,orlimitthepaceatwhichexpendituresarepermit-tedtogrow.Insomecases,publicborrowingisrestrictedtothelevelofpublicinvestment(agoldenrule),orthefiscaldeficitisconstrained(e.g.thecriteriaforfiscalconvergenceundertheEUMaastrichtTreatyortheclose-to-balancerequirementoftheEUStabilityandGrowthPact).

eu.membership.or.an.integration.agenda.has.made.fiscal.policy.in.emerging.europe.more.predictable.and.transparent.over.recent.years.AllcountriesadheretotheEUreportingstandardsandeveryyearsubmitupdatesofConvergenceorPre-AccessionEconomicPrograms.EUmem-berscanbecalledtoaccountundertheExcessiveDeficitProcedure(EDP)ifthegeneralGovernmentdeficitishigherthan3percentofGDP.

transparency.requires.fiscal.rules.to.be.clearly.defined.with.speci-fied.reporting.requirements.from.the.outset ..Thistransparencyenables.non-compliancetobeeasilydetectedandaddressed.Ifanescapeclauseisincludedinarule(e.g.whenadeparturefromtheruleisjustifiedbyeco-nomicconditions–suchaswiththeMTEFinPoland),thecircumstancesinwhichitappliesshouldbeclearlydefined.Stand-alonefiscalrulesen-hancethecredibilityofmacroeconomicpoliciesbylimitingthescopefordiscretionaryintervention.

numerical.fiscal.rules.are.intended.to.be.a.permanent.constraint.on.fiscal.policy,.generally.in.terms.of.an.indicator.of.overall.fiscal.per-formance.Themaintypesofnumericalrulesinclude:

• deficitrules(balancedbudget)• debtrules(ceilingratios)• borrowingrules(EUmembersareprohibitedfromcentralbank

financing)• expenditurerules(Netherlandssetsceilingsontotalexpenditure

andmajorsub-categories).

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Thecredibilityofnumericalrulesinvariablydependsontherealismofthebudget,onthequalityoftheprocessforidentifyingfiscalrisksandonpoliticalwill.Exemptions(protectedexpenditures)shouldbeclearlydefinedsoastoaccommodateunforeseenshockswhichcouldbreachthe(expenditureordeficit)targets.

recent. fiscal. rules. for. many. emerging. market. economies. have.tended.to.rely.to.a.greater.extent.on.numerical.reference.values.Chilehasimplementeda‘structuralsurplusrule’tocyclicallyadjustthebudgetsurplusforcentralgovernmentequaltoonepercentofGDP.Thegovern-mentmustexplainanydeviationsinthefiscaloutcomefromthesurplusrule.Theruleprovidesusefulexanteguidanceforspendingplans.Exam-plesfromtheregioncoveredinthisstudyinclude:

•. Poland,. Croatia,. and. Bulgaria imposed a debt ceiling on grossgeneral government debt as a share of GDP at the 60 percentofGDP(consistentwithMaastrichtfiscalcriterion).Polishlawforesees precautionary measures when the debt-to-GDP ratiocrosses50percentand55percentofGDPandtherearespecificdebtrulesatlocalgovernmentlevel24.Althoughthereisnofor-malmechanismtoensureadherencetoadebtruleinBulgaria,thisiscurrentlynotaproblemwithadebt-to-GDPratiobelow20percentofGDP.From2006,inlinewiththeinformalexpen-diturerule,totalpublicexpendituresinBulgariacannotexceed40percentofGDP(excludingthecontributiontotheEUbud-get).

• AlthoughCroatiadoesn’thaveanexplicitfiscalrule,MTEFsinrecentyearshaveaimedatreducingthefiscaldeficittobelowtheMaastrichtthresholdof3percentofGDP.

• InrecentyearsLatviakeptitsfiscaldeficitbelowtheMaastrichtlevel to avoid the EDP procedure. This was readily achievableduring theperiodof strongeconomicexpansion,butmaybe-comemuchmoreproblematicduetothesuddenslowdownin2008andtheensuingrecession.ThereisnoformalfiscalruleassuchbuttheMTEFsetssectoralexpenditureceilings.

24 AccordingtothenewdraftLawonPublicFinance,thefirstprecautionarypublicdebtthresholdissetat47percentofGDP.

1 .3 ..methods.and.procedures.used.in.compiling.an.mteF.mteFs. in. the. region. are. still. in. their. infancy. and. governed. to.

some.extent.by.budget.incrementalism.Thisistrueirrespectiveofthemodeinwhichtheframeworkwasimplemented.NeitherSlovakia25norTurkey,which introducedanMTEFasacomponentofbroaderbudgetreforms, nor the remaining countries which introduced it as a discretereform,caneasilyescapebudgetinertia.Newprogramsareeasilyaddedbutitisdifficulttoevaluateexistingonesorchangeorremovethem.PBBinitiativesofferagoodopportunityforsystematicmonitoringandevalua-tionofspendingprogramsbutarestillinsufficientlyeffective.

An.mteF.works.well.when.its.requirements.are.properly.under-stood.and.observed,.including.smooth.cooperation.between.line.min-istries. and. local. administration. In Turkey, strategic plans preparedlocally as ‘wish lists’ exceeded allocations set centrally. In Bulgaria andCroatia,somebudgetunitsignorespendingceilingsand,toworkwithinoverallbudgetconstraints,overlygenerousproposalshavetoberevisedinconsultationwithMOF.

different.models.can.be.considered.by.countries.at.different.stages.of.development.but.building.capacity.across.line.ministries.and.agen-cies.to.forecast.expenditures.accurately.is.time.consuming .Implement-ingmoreadvancedmethodsshouldgohandinhandwithimprovedad-ministrativecapacity.Capacity,andreliabilityofdata,mayvaryacrosslineministries.Thiswasthecase inSlovakiawheretheMOFandsixmajorlineministriesgainedsupportduringthePFMreformprojectimplemen-tation,andinLatvia.wheresomeministrieslikeagriculture,culture,envi-ronmentoreducationandscienceweremoreactiveinreformimplemen-tation.InTurkey thecapacitywasmoreuniformacrossgovernment.Inmostcountriesintheregion,solidanalyticalcapacitywasbuiltintoMOF(especiallyinmacroeconomicmodelingandforecasting)butlineminis-triesrely,toalargeextent,onusingasimpleinflation(orwage-growth)adjustmentfactorwhenforecastingfuturespending.

while. impact. assessment. is. obligatory. in. most. countries,. it. is.rather.a.pro.forma.exercise.Forexample,inCroatiachangesinpoliciesare sometimes reflected inbudget estimateswitha time lag sobudgetssometimesfailtotakeallcircumstancesintoaccount.NeitherCabinetnorMOFexplaindeviationsinthepreviousyear’sframeworkandsometimesnewgovernmentpolicies/initiativesleadtomorethan10percentdevia-tionsbetweenplannedandactualspending.Anincrementalistapproach

25 InSlovakiaanMTEFwasintroducedearlierandindependentlyfromPB.

72 73

tobudgetingissomewhatmoreentrenchedinLatviaduetoaformalsep-arationbetweenbasebudgetanddevelopmentspending.

mteFs.in.the.region.include.some.country-specific.practices.Bul-gariahasinstitutedacontingencyreserve26forstructuralreforms,naturaldisasters,andsignificantmacroeconomicchanges.For2009-2011 itac-countsfor1.1percentofGDPandisallocatedforministriesresponsibleforhealthcare, judiciary,andpensionreformsand, inpart, fortheNa-tionalAssembly. InSlovakia, aplanning reserve27ofup to3percentoftotal budget spending, is set aside for political priorities and disbursedbeforethebudgetissubmittedtoParliamentalthoughitcanbeheldoverwithintheMTEFforexpenditureproposalsinthelateryears.

1 .4 ...preparation.of.forward.estimates.and.their.updating.mode.across.line.ministriesHigh.quality.forward.estimates.of.expenditure.are.essential.for.a.

sound.mteF;.without.them.the.medium-term.framework.can.have.lit-tle.impact.on.planning.or.policy.decisions.Bestinternationalpracticefromcountries likeUKorAustralia includestheuseof forecastingandpresentationtechniquesthatdistinguishbetweenabaselinepathforex-isting(on-going)expenditureactivitiesandestimatesofthecostsofnewpolicies.

compiling.line.ministry.estimates.based.on.different.methodolo-gies,.as.practiced.in.the.region,.cannot.guarantee.overall.consistency.It is importanttoidentifythecostdriversofdifferentprograms.Thisisdifficult without a well-established programmatic structure of expendi-tures(generallymissingineverycountryintheregion)andtheabilitytoestimateunitcostsofdifferentactivitiesacrossthepublicsector.

in.all.countries.in.the.region.only.the.expenditure.ceilings.for.the.next.year’s.budget.are.legally.binding;.those.for.the.following.two.years.are.indicativeandupdatedannuallyonarollingbasis.

26 A‘ContingencyReserve’isalineinthebudgetthatmaybeusedforunexpectedandunforeseenex-penditures,oftenassociatedwithnaturaldisasters.TheContingencyamountisusually2-3percentofthetotalbudgetandtherearenormallyrulesgoverninghowandforwhatitcanbeused.

27 A‘PlanningReserve’isanamountofmoney,orpercentageofthetotalexpenditureavailable,thatisnotcommittedtospecificallocationsorpurposesduringthebudgetpreparationprocess.Itmaybearound5percentoftotalexpendituresbutissometimesmore.Oncethebudgetsofallministrieshavebeenprepared,moneyavailablewithinthePlanningReservemaybeallocatedtospecificnewpoliciesorinitiativesthatgovernmentwishestopursue.ThePlanningReservethereforeprotectsanamountoffundsfromthebudgetnegotiationprocessandprovidessomescopeforpolicyflex-ibilityandinnovation.BythetimethefinalbudgetisapprovedallPlanningReservefundsareusu-allycommittedtospecificexpenditureproposals.ItmaybedesirabletoidentifyaplanningreserveineachofthebudgetyearsoftheMTEF.

• InBulgaria thefirst level spendingunitsproposeceilingsand,after negotiations with MOF, the ceilings are approved by theCOM.Thepreviousyear’sceilingsserveasabasisforthenextroundoftheexercise,adjustedtochangesinkeymacroeconomicindicators.OtherchangesproposedmustbejustifiedandagreedwithMOF.

• InCroatiatheMTEFhasbecomeembeddedinbudgetmanag-ers’practicesandthereconciliationprocessbetweenMOFandlineministriesoperatessmoothlyandinlinewithdeadlinessetinlegislation.

• InSlovakia.theMTEFisanintegralpartofthebudgetandpre-paredinlinewiththeBudgetaryRulesLaw.Athree-yearbudgetispresentedtoParliamentwiththesamelevelofdetailforeveryyear,althoughonlytheannualbudgetlawforbudgetyearisad-opted by voting. Allocation limits for out years are not legallybindingbutareconsideredthestartingpointfornextyear’sbud-getdiscussions.

• InTurkeyexpenditureceilingsforeachlineministryandagencyaredeterminedbytheHighPlanningCouncilandpublishedintheOfficialGazettebymid-June.Theycanberevisedannually,takingintoaccountchangesinmacroeconomicindicators,espe-ciallyinflation.

medium-term.revenue.projections.are.prepared.by.the.moF.while.on.the.expenditure.side.the.process.is.more.complex.and.interactive.InallcountriesexceptSlovakia,thefirststepsaretakenbyspendingunits.However,MOFhasalater,anddecisive,inputbeforethebudgetestimatesarereferredtoCOMforthefinalword.

• In Slovakia, on the basis of the Starting Points approved byCOM,MOFsetsdetailedexpenditureceilingsforlineministries.Exceptionsarespecialpurposefundsandself-governingbodiesoutsidethedirectcontrolofcentralgovernment;MOFusestheirbudgetproposalstocompiletheconsolidatedbudget.

• InTurkey,expenditureproposals(basedoninstitutional,func-tionalandeconomicclassification)arepreparedbylineminis-tries or agencies based on requests from units they control orsupervise. These are then negotiated with MOF. InvestmentproposalsaresubmittedtotheStatePlanningOrganizationforevaluation.

74 75

An.effective.mteF.requires.agreement.on.a.comprehensive.set.of.fiscal.policy.objectives,.within.which.inconsistencies.should.be.easily.identifiable.Astronginterfacebetweengovernment’snationalstrategicplanning(requiredbytheEU)andthemedium-termbudgetisneeded.Medium-termaggregatespendingceilingsareuseful(butoptional)ele-ments of the framework. A well-structured picture of plans and possi-bilitiesenablesgovernmenttodecide,inaninformedway,whatspendingcanbeincreased,cut,orshiftedacrossyears.Thisbenefitslineministriesbecauseitreducesuncertaintyaboutfuturebudgets.

InlinewiththeIMFmanual28,anMTEFshouldincorporateprojec-tionsofexpendituresandrevenuesbyindividualspendingagenciesthatallocateresourcesinlinewithstrategicpriorities.Italsoextendsanalysisofexpenditurestomoredetailedsectoralcostingandperformancemeas-ures(possiblyincludingactivity-basedoroutput-basedbudgeting).Theseincludeproductionofmedium-termdisaggregatedexpenditureprofilesand, inmoreadvancedversions,detailedcostingofperformancemeas-uresthatmaybemonitoredataggregateandsectorallevels[IMF,2007]

1 .5 ...impact.of.mteFs.on.the.quality.and.efficiency.of.resource.allocation,.external.reactions.and.prospects.for.extending.the.use.of.mteF.concepts.and.methodsbenefits.from.an.mteF.have.appeared.mostly.in.those.countries.

where.the.framework.has.achieved.some.maturity.Forexample,inSlo-vakia.overallfiscalpredictabilityandcredibilityhaveimprovedconsider-ably.Togetherwithothermeasures,theMTEFallowsforeffectivetarget-ingforthegeneralgovernmentbudget,animprovedfiscaldiscipline,andbetterfiscalperformance.This improvedperformancemaybereflectedinreducedcostsforshort-termgovernmentborrowing.TheeffectsfromreformedPFMinlineministriesarelessevidentalthoughpreviousbudg-etoverrunshavedisappearedandaccumulationofdebt inseveralpub-licagenciesnotincludedinthecentralgovernmentbudgetwasstopped.Re-allocationsbetweenlineministries,however,arestilloccurringduringbudgetexecution.ImprovementshavebeenrecordedinCroatia,particu-larlyinthequalityofofficialmacroeconomicforecastingandsensitivityanalysis.

in.the.remaining.countries.in.the.region,.reform.is.still.in.the.early.stage. of. development and their impact on decision making has so farbeenlimited.

28 IMF,2007,Manual.on.Fiscal.Transparency,WashingtonD.C.

budget.issues.are.only.seasonally.debated.in.parliaments.and.are.not.topics.favored.by.media.Externalreaction inTurkeywaspositive.InSlovakiasomecommentatorscomparedthebudgetreformswithplan-ning exercises during the Communist era. Reactions in the remainingcountriesweremostlyneutral.

budget.and.mteF.reform.is.still.far.from.a.steady.state.in.the.re-gion.

• Plannedchangestotheorganicbudget lawinBulgariaarede-signedtostrengthencredibilityoftheMTEFthroughitsfurtherinstitutionalization. Hard budget constraints will be enforcedacrossministriesandagencies;budgetallocationswillbebetterlinked to results with clarified accountabilities at different ad-ministrationlevels.GreatercapacityinlineministriesandmoreauthorityofMOFareneededtoimprovethequalityofthebot-tom-upplanningprocess.Plannedintroductionofcomprehen-sivesectorreviewsaswellasenhancementof thePBBprocesswillbebeneficial.

•. Croatia could benefit from making multi-annual expenditureceilings of first level budget managers binding while leavingmorediscretionatthelineitemlevel.Thiswouldcombinebet-ter fiscal discipline with budget flexibility. Budget documenta-tionwouldprovidefeedbackonbudgetexecutionanddeviationsfromtheMTEFinthepast.Makingthis informationavailableshouldenhancedebateonfiscaldevelopments,especiallyinPar-liament.Furtherenhancementsareexpectedfromthenewbud-getlaweffectivefromJuly2008–makingtwoouteryearsintheMTEFbindingattheaggregatelevel–andlinkingMTEFtostra-tegicprioritiesasstipulatedinthenewlyintroducedthree-yearstrategy of government programs. To make this happen, bud-getmanagerneedgreatercapacityandMOFneedstoneedstoprovideguidanceontheproposedprogramsandevaluatethemmore thoroughly.Theplanned introductionofoverall govern-mentandsectorstrategiestogetherwithPBBenhancementwillimprovethecredibilityoftheMTEF.

• TheroleandcapacityofMOFinLatviashouldbestrengthened,particularlyinsettingkeyparameterswithintheMTEF,evaluat-inglineministries’strategicplansandbudgetproposals,andde-velopingPBBmethodology.Reformprogressontheinstitutional

76 77

fronthasbeencomplicatedbymoreseverefiscalconstraintsduetothefinancialandeconomiccrisis.

• BudgetaryreformmomentuminSlovakiaslowedsomewhatbe-forethegeneralelectionsin2006.ThenewGovernmentfocusedprimarilyondifferentpolicyareas(euroadoption,forexample).Aftertheelections,theMinisterofFinancewasnotappointedasthedeputyPrimeMinister,whichhadaneffectonpolicycoordi-nation.Despitethis,theaccountingsystemandtaxadministra-tionimprovedwithamonitoringandevaluationsystemsched-uledtostartin2009whenprogrambudgetingwillbeintroducedby regional administrations. This was piloted, with MOF sup-port, in30 localunitsduring2008.Furthermore,accordingtorecentamendments,from2009thecarry-overofunspentcapitalexpenditures is restricted to two subsequentyears.For the fu-ture,strategicplanningneedstobebetterlinkedwiththebud-get.Amongotherchallenges,thenon-disbursedreserve(oflessthan3percentofthetotalbudget),allocatedannuallyaccordingtopoliticaldecision,distortsthemedium-termplanningbylineministrieswhotreatthisreserveasultimatelyexpendable.

• InTurkey,theGovernmentisconsideringafiscalruletoenhancethecredibilityoftheMedium-TermFiscalPlan.Technicalstud-ieshavebeeninitiatedrecentlywiththesupportfromtheIMF.

Poland.is.expected.to.introduce.an.mteF.in.2009.Existingelementsofthemedium-termfiscalframework,liketheConvergenceProgram,areagoodstartingpoint.Thefocusshouldbeoncapacitybuildingtoproducereliablebottom-upforwardestimates,includingtheirpresentationinpro-gramformatandharmonizingparametersandmethodsappliedbysec-torsintheestimationprocess.SuccessfulimplementationofPBBgreatlyincreasestheeffectivenessofthereconciliationprocesswithintheMTEF.Well-structuredprogramsgrouptogetherserviceswhichhavecommonobjectivesandparameters,facilitatingpreparationofforwardestimates.

regional.experience.in.mteF.implementation.highlights.the.fol-lowing.lessons:.

• Fiscalpolicyobjectivesandquantitativefiscaltargetsneedtobewelldefinedat thehighest levelofgovernmentandrigorouslypursuedunder leadershipofa strongMOFresponsible for re-forms.

• Robust forecasts on the revenue side and realistic expendituretargets are critical. To achieve this, the analytical capacity of

MOFandbudgetunitsinlineministriesmustbestrengthened.Thisisalengthyprocess.AdvancedMTEFsrequireacountry’sreadinesstomakemedium-termexpenditurecommitmentsbysectors.

• The framework should be based on clearly defined and fully-costedpolicyproposalsandshouldbeaccompaniedbymeasuresto review individual expenditures.From this angle, theMTEFbenefitsfromparallelimplementationofPBB.

mteFs. across. the. region. have. potential. to. provide. better,. more.transparent.tools.for.formulating,.assessing,.and.implementing.fiscal.policy.Thesereformstaketimeand,inordertoworkefficiently,mustbebasedon fundamental institutional improvementsalongwithsustainedpolitical commitment. Independent oversight helps ensure robust fore-castingcapacities,accuratecostingofprograms,andoverallbudgetdis-cipline.

4 .2 ..performance.budgeting.There.is.no.one-size-fits-all.model.of.performance.budgeting.Each

countryneedstoadjustitsapproachtorelevantpoliticalandinstitutionalcircumstances.Recenteffortsinadvancedeconomies29haveemphasizedtheneedtoincreaseauthorityandincentivesforlinemanagerstoachieveagreed results. Some countries are developing relatively sophisticatedsystemsforperformance-based(i.e.results-oriented)budgetingandac-counting. These increase the transparency of strategic and operationalchoicesmadethroughgovernmentbudgets.EmergingEuropecanlearnfromglobalandregionalbestpractices.

There. is. no. single. description. or. understanding. of. performance.budgetingbutitiswidelyagreedthatdefiningobjectives,developingin-terventionstrategiesandreportingagainstspecificachievementmeasuresor targets are the cornerstones of a performance budgeting approach.Theseconceptsandmethods,includingcomprehensionoftheappropriatesituationsinwhichtheycanbeappliedandthedegreetowhichresourceallocationdecisionsmightbebasedonpast(orexpected)results,arestillevolving.Acommonelementofperformancebudgeting is that itgivesbudgetmanagersgreaterautonomy,flexibilityandcertaintyoverresourc-es.Inmanycases,aprincipaltrade-offagainstthisincreasedmanagerialfreedomis increasedresponsibilityandaccountability forresults(Web-ber,2007b).

29 See,forexample,CurristineT.(ed.),2007,orRobinsonM.(ed.),2007.

78 79

options.are.available.in.institutional.arrangements.and.account-ability. arrangements. ranging from. a highly decentralized approach(Holland) to a more centralized model (Chile). Understanding the op-tionsavailablehelpsgovernmentsavoidthemistakesofbeingtooliberalintheirdeploymentofPBB.GivenEmergingEurope’straditionofanor-ganizationalculture,acentralizedmodelmaybeamoreattractiveoption.

There.is.still.some.debate.on.whether.or.not.pbb.and.mteF.work.best.in.tandem ..Ifappliedrigidly,anMTEFcanbeusedtoestablishhardorsemi-hardbudgetconstraintsforinstitutionsoveramedium-termho-rizonwithoutmuchchangeinthewayannualbudgetsareprepared,orintheaccountabilitymechanismsunderwhichtheyoperate.Performance-basedBudgeting(PBB) in itsmostaustere form(suchasPerformance-DeterminedBudgeting,PDB)canreportex-postonresultswithouttheneedofsubstantivemedium-termplanning.

For. many. reasons,. emerging. europe. needs. improved. public. fi-nancial.management ..Thesereasons include. largemacroeconomic im-balances,compliancewithMaastrichtcriteria(seeAnnex3),orthepoorqualityofbasicpublicserviceslikeinfrastructure,healthcareoreduca-tion.Thecurrentglobalfinancialcrisishasplacedevengreaterdemandsongovernmentbudgetsandongettingbetterperformancefrompublicexpenditures.Efficiencygainsandincreasedeffectivenessingovernmentexpenditurepoliciesandprogramsarethereforeanecessaryandattrac-tivemeansforimprovingtheimpactsoffiscalpoliciesintheregion.In-creasingrevenuesorborrowingmayhaveanegativeimpactoneconomicgrowth,especiallyincountrieswithrelativelyhightax-to-GDPratiosandpublicdebtlevels(Turkey,Poland,Croatia),andtherearerisksconnectedwithPublic-PrivatePartnerships(PPPs).

Although.greater.efficiency.in.public.expenditures.is.increasingly.sought,.pbb.initiatives.cannot.bring.immediate.results. Internationalexperience suggests successful PBB implementation requires persistenteffortsoverseveralyears,combinedwithanongoingpoliticalconsensusontheneedforthisreform.

2 .1 ..motivating.factors.behind.adoption.and.current.status.of.pbb.reformsAcross. the. region,. pbb. reforms. have. been. seen. primarily. as. a.

means.to.improve.allocative.efficiency.of.pubic.finances.Onthebackofinternationaltrendsorinspiration,policymakershaveviewedPBBasatooltochangetheinstitutionalcultureofpublicadministration,introducemorepredictabilityinfiscalpolicy,anddemonstratelinksbetweenfund-ingandresults.Reformistsbelieveinstrengtheningaggregatefiscaldisci-pline(Bulgaria,Latvia,.Poland)30.Turkey’smotivationtointroducePBBwas a legally binding commitment to restructure PFM and the controlsystem.Generally,growingpeerpressure,internationaldebateontheis-sueandthefactthatPFMreformsarenow‘trendy’madethePBBconceptfashionable.Inpractice,allcountriesreviewedinthisstudyoptedforPer-formanceInformedBudgeting(PIB)orPerformanceReportedBudgeting(PRB)ratherthanPBBorthevariantofPDBasoutlinedabove.

countries.in.the.region.have.recently.taken.the.first.steps.in.pbb.implementation. (see. table. 4). and. are. now. refining. the. performance.framework.Thereisstillconsiderableroomforimprovement.Theseim-provements includebetterspecificationofoutcomes,morerelevance inperformanceindicatorsandinstitutionalchangesleadingtoincreasedac-countabilityforachievingresults.The.introduction.of.pbb.methods.in.some.parts.of.the.region.has.been.made.in.the.context.of.broader.pFm.reform.programs.and.accompanied.by.changes.in.organic.budget.laws.(Slovakia,. Latvia and. Turkey) .. In the other three countries, there wasnobroaderreformcontextandthesemethodswerebasedontheexistinglegislation thatwasmodified lateron.AllcountriesusedCOMdecreesorMOFinstructions/manuals/guidesorthebudgetcircular.SomePBB-relatedadjustmentsinthebudgetlawweremade(e.g.Poland.–amend-ments in 2006 and new Law on Public Finance 2008) or are expected(Bulgaria)toreflectthefirstlessonsfromthelearn-by-doingprocessandstrengthenedpoliticalsupport.Inallcountries,PBBwasinitiatedtogetherwithanextensivetrainingprogramandconsultationswithpublicadmin-istrationandsomehavebeenmakinguseofsignificantfinancingfromEUstructuralfunds(Poland).

counties.are.currently.in.different.stages.of.pbb.implementation.Slovakia isafront-runnerwhilethetwonon-EUmembersareleastad-vanced.Croatia,fouryearsfromreforminitiationinthe2005budget,is

30 PBenablesselectivespendingcutsinsteadofblindflatcutsallacrossthebudget,whichisoftenarealityincaseoffiscalcrisis.Itcanhelprelaxbudgetrigiditiesbutrequiresacomplexpublicexpen-ditureandinstitutionalreview.

80 81

stillwithoutacostallocationmechanismorasetofperformanceindica-tors;anorganizationalratherthanaprogramapproachtobudgetalloca-tionsdominatesandPBBremainsverymuchatthepilotphase.Bulgaria,Latvia,andPolandaresomewhereinbetween,butclosertothenon-EUmembers,comparedwithSlovakia.Bulgariahas,however,advancedtheimplementationofthePBBwithalllineministriesandstateagenciesde-velopingnowprogrambudgetswithcomprehensiveperformanceinfor-mation.Latvia,whichpioneeredthereformsintheregioninlate1990s,hasrevisitedtheapproachthoroughlyin2008anddevelopednewguide-linesonperformanceindicators.

only.Slovakia. is. introducing.monitoring.and.evaluation.(m&e),.an.advanced.element.in.the.pbb.toolkit.ThebenefitsofM&Ebecomemoreevidentintheeffectiveabsorptionofpre-accessionandstructuralEU funds. In-depth program evaluations require special resources andconsiderabletime,effortandfunding.Thisiswhygovernmentsinthere-gionundertakeonlyafewsuchevaluationseachyear.ItisnotpossibleatthisstagetoassesstheseM&Eeffortsmorethoroughlywhenonlyasmallproportionofprogramshavesofarbeenevaluatedindepth.

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Table5.PBBapproach-coverageinpublicspendingandbyadministrativeunits

Bulgaria Croatia Latvia Poland Slovakia Turkey

AspercentoftotalgeneralgovernmentexpenditureAround40

percentAround80

percent*Around80

percentAround50

percentIn2008–46

percent,In2009–63percent

Notapplicable

AspercentoftotalcentralgovernmentexpenditureAllunits Allunits* Allunits Allunits

(2009)Allunitsexcepttargetedfunds

Notapplicable

ByadministrativeunitsStatebudget Statebudget,

facultativeforlocalgovern-

ments

Centralgovernment,facultativeforlocalgovern-

ments

Statebudget,sub-nationalgovernmentsareindepend-

ent

Statebudgetunitsandstate

funds,from2009obligatory

alsoforsub-nationalgovern-

ments

Statebudget,facultativeforlocalgovern-

ments

Notes: *) InCroatia,PBBapproachrefers to theprogrammaticstructure,whileperfor-manceinformationisnotinplaceSource:WorldBankstaff

82 83

Mostevaluationsaredoneexpostandareinfluencedbyhowmuchearlierperformancedataisavailable.

on.the.implementation.side,.in.early.years.pbb.builds.on.rather.than.replaces.existing.basic.budgetary.procedures.or.institutions.Itin-troducesanewbudget classificationbyobjectivesandprogramswhichexist alongside existing economic or administrative classifications. ThePBBframeworkisusuallymulti-annual.ThePBBsystemrequiresconsid-erableadditionalinformationandsomeeffortshavebeenmadetointe-gratetheseneedsintothefinancialmanagementinformationsystem(Slo-vakia).Internalauditandmonitoringandevaluationarrangementsgainimportancewhenbudgetmanagershavemorediscretionselectinginputs.

All.countries.in.the.region.have.been.struggling.with.performance.information.overload.Inbudgetdocumentation,theemphasisisprima-rilyontransparencyatanaggregatelevel.GoingdownwardsinthePBBarchitecture, more detailed information is provided because it impactsdirectlyonbudgetdecisions.Thecomprehensivenessofperformancein-dicatorsisnotalwayssatisfactoryinEmergingEuropebutallcountriesintheregionhavethecapacitytospecifyclearobjectivesfortheirgovern-ments.

2 .2 ...budget.classifications.at.present.and.prospects.for.the.future.to.help.address.the.management.challenges.of.pbb,.schick31.rec-

ommends.breaking.it.down.into.its.two.main.elements.First,PBBisasystemforcompilingandpresentinginformationonactualorexpectedresults.Second,itmaybeusedasameansfor‘purchasing’resultsthroughexpenditure of public funds. These two elements are interdependent.Tochange thewayabudget ismade, itscontentandstructuremustbechanged.AndtoimplementPBB,budgetsmustincludeinformationonresultsandlinkthatnewinformationtodecisionsonfutureexpenditures.PBBalwaysincreasesthecostofgeneratingandprocessingbudgetinfor-mationandthemorecomprehensivethePBBsystem,themoredemand-ingitistoimplement.Thisisbecauseperformance-basedbudgetsdependoninformationgatheredthroughspecialeffort,whiletraditionalbudgetsoriented to line itemsandorganizationunitsusuallyoperatewith littleregardtoactualresults.

pbb.is.usually.launched.by.adding.performance.data.to.the.stock-pile.of.information.already.processed.through.the.budget.Intheregion

31 SchickA.,Getting.Performance.Budgeting.to.Perform,May2008,PerformanceBudgetingConfer-enceinMexico.

(Table6)thisinformationincludesitemizedinputs,economic,functional,andadministrative(institutional)classifications,anddataonoutputsoroutcomes.Thiscreatesnew informationdemandswhichmustbeproc-essedundertightdeadlines.Inthepast,whilefocusingonoutputsorout-comesinsteadofinputs,countrieslikeNewZealandeliminatedmuchlineitemdatafromthebudget.Schickarguesthatoverloadalsooccurswhengovernmentsaddnewexpenditureclassificationstotheoldones.Heem-phasizesthatwhiletherearemanywaystotellabudget’sstoryandexplainhowpublicmoneyisspent,therecanbeonlyoneclassificationforbudgetdecisions.

program.classification.is.usually.the.first.step.in.introducing.pbb.but.was.circumvented.in.most.countries.in.the.region ..Instead,they.fo-cusedonotherPBBelementssuchasperformanceindicators.OnlySlova-kiadevelopedaholisticprogramclassification.Bulgaria,Croatia,Latvia,andPolanddidsopartially(coveringonlystate-budgetunits),whileTur-keyisstilldebatingwhetherornottransitiontotheprogramclassificationisnecessary.AccordingtoVanEden32,programclassificationisausefulplanningtoolevenwithoutlinkstoperformancemanagement.Toensureownershipandcomparability,PBBneedstobedevelopedjointlybylineministriesandMOF.

program. classification. has. not. replaced. traditional. line-item.budget.classifications.in.the.region.andnorhasany.countryscheduledthismoveforthefuture.Evenwherebudgetallocationsandexpendituredecisionsaremadeonthebasisofafullprogramclassification,it ises-

32 VanEdenH.,Key.issues.in.program.classification,High-LevelSeminar:PerformanceBudgetingandInformation,IMF-FAD,Paris,March2007.

Table6.Expenditureclassificationsandaccountingstandardsasofmid-2008

Bulgaria Croatia Latvia Poland Slovakia TurkeyEconomic V V V V,national V,national VFunctional V V V V V(CO-

FOG)V

Administrative V V V V V VProgram V(partial) V(toofrag-

mented)V(partial) V(partial) V

Funding V V V V V VAccountingStandard

Cash Cash,re-portsalsoinGFS2001,from2008inESA’95

Cash,transferabletoESA’95or

GFS2001standard


GFS2001standard


GFS2001standard

GFS2001from2004,

accrualsfrom2004


84 85

sential to retain the main elements of an item classification for budgetanalysisandmanagementpurposes33.Onceafullprogramclassificationisinplace,itwillbedesirabletoreviewandrevisetheitemclassificationtoensureitcancontinuetoprovideessential,butnotexcessivelydetailed,expenditureinformation.Eveninthecomparativelymoreadvancedbudg-eting system in Slovakia, program classifications are regarded as a newwayofpresentingbudgetdataandservesasadditional information forpolicymakers.Traditionalline-itembudgetingandPBBareusedsimul-taneously.Thebudgetinformationsystemconnectsbothformsofbudgetpresentationand,since2006,theStateTreasuryprovidesdataonbudgetexecutionintheprogramstructure.InPolandithasnotbeendecidedyetwhetherornotaPBBapproachwillreplacethetraditionalone.Thisdeci-sionwillbemadein2014andwillbebasedonanevaluationofparallelfunctioningofthetwoformsofbudgetmanagementscheduledfor2013.Theseexamplesshowthechallengeinmakingprogramstructurethebasisforbudgetmanagement,includingappropriation,executionandcontrol.

Across. the. region,. administrative. and. economic. classifications.provide.the.principal.basis.on.which.budget.expenditures.are.allocated.and.managed.Foreachagencyandlineministrya limit isdetermined(basedonexistingcostingmethods,inmanycasesincrementalism)andbrokendownintomajoreconomicbudgetlines:wages,separationofcur-rentandcapitalexpendituresetc.Itisdifficulttoexplainwhyittakessolongtoreplaceinputbudgetingandline-itemclassificationwithatrans-parentprogramclassification.Itfocusesbudgetpolicyongoalsandper-formanceandoffersmanagerialflexibilitytolineministriesaswellasanopportunitytoevaluatepublicagenciesagainsttheirstatedobjectives.Allcountriesintheregionarecombiningtheorganizationalbreakdownbe-sidetheprogramstructure,asshownintheleftpanelsinFigure3.

Figure3.Modesofcombiningorganizationalandprogrambudgetclassification

Organization Program organization/programMinistry Ministry

Agency Program Agency/ProgramDepartment Sub-program Department/Sub-program

Division Activity Division/Activity

Source:VanEden,op.cit.

33 Ministriesandgovernmentsneedtoknowhowmuchisbeingspentontravel,vehicles,andutili-ties,acrossallprograms,toidentifyareasforimprovedcontrolmeasuresandforimprovingcost-efficienciesinpurchasingandprocurement.

retaining.some.input.controls.after.pbb.introduction.is.common.practice .Suchcontrolscan includeactualexpendituresonsalariesandwages,staffingnumbersandcapitalspendingattheministrylevelorbe-lowattheprogramorsub-programlevel.

with.regard.to.accounting.standards.in.the.region.(table.6),.it.is.sufficient.at.this.stage.to.note.that.pbb.approaches.work.perfectly.well.on. the. types. of. predominantly. cash-based. systems. which. are. preva-lent.in.the.region ..Inallcountries,thebudgetisenactedonacashbasisbutsomesupportingdocumentsforaconsolidatedgeneralgovernmentarepresentedonanaccrualbasis.(Accountingissuesarenotcoveredinthisstudybut,asnotedinChapter1,mostAnglo-SaxoncountrieshaveadoptedthePBBframeworkunderaccrualbudgeting34).Accountingis-suesbecomeextremelyimportantwhendesigninganITsystemtosup-portbudgetoperations.Beforedesigningthesystem,itisworthreviewinggovernmentaccountingstandardstocheckforinconsistencies.Eveniftheaccountingsystemiscash-based,fiscaltransparencyrequiresthesystemtorecordcommitmentsaswellaspayments.Regardlessoftheaccount-ingbasis, thesystemshouldbecapableof trackingassetsand liabilitiesandtheirchanges.Becauseofthecomplexityofbothissues,simultaneousimplementationofPBBandintroductionofaccrualbudgetingisnotrec-ommended(seealsoRobinson,2007b).

2 .3 ...basic.architecture.of.the.pbb.approach.initial.efforts.in.introducing.pbb.usually.focus.on.classification.of.

expenditures. into. programs,. sub-programs. and. activities. and, some-times,sub-activities.Atthemoredetailedlevels,specificityisincreasingandrelatesclearlytopolicyobjectives.Conceptually,programclassifica-tiondiffersfromtheGFS2001functionalclassificationbecausegovern-mentprogramobjectivesmaybemetbyactivities inseveral functionalareas.Governmentactivitiesareperformedbyanumberoforganizationalentities.Alltheseactivitiesaretransparentlyconsolidatedintheprogramclassification,usuallyorganizedbythelineministry.

The. fundamental. principles. of. program. classification. are. com-mon.but.the.overall.approach.is.not.standardized ..Thisisrevealed inthecomparisonshowninTable7.Mostfrequently,programclassificationcoversfromtwotofourlayersandthenomenclaturedependsonthena-tionalpractice.Althoughthefirstlayerisafullprogram,itisnotalways

34 Technically,accrualaccountingmethodscanprovidegreatertransparencyinmeasuringthecostofpublicpoliciesandmaysometimessupportimprovedmanagementofassetsandliabilities.

86 87

called a program. As indicated by Van Eden35, policy objectives defineprogramsandprogramstructureisdrivenbythegovernment’sstrategicobjectives.Theprogramstructurearrangesbudgetinformationinausefulwaytorespondtothewhat,how,andatwhatpricetheprogrammanagerwithineachspendingagencywantstoachieveitsgoals.

Table7.ArchitectureofPBBframework,asofmid-2008

bulgaria croatia latvia poland slovakia turkey

level.1No .of.items

Policy72

Mainpro-gram

47

Program424

Function22

Program95

Notinplace

level.2No .of.items

Program/OtherProgramMorethan215

altogether

Program Sub-pro-gram

TaskMax .two.

targets

Sub-pro-gram

411level.3

No .of.itemsProduct/Service

Sub-pro-gram448

Itemsfromeconomicclassifica-

tion

Sub-taskMax .fiveper.task

Elementorproject

804

level.4No.ofitems

Activity(currentor

capitalproject)

Activity

Source:Bankstaff.

programs.have.been.developed.by.line.ministries.in.cooperation.with. moF. (bottom-up. approach). and. include. goals,. objectives. and.measurable.indicators.Lineministriesareresponsibleforfurtherbreak-downofgivenlimitsintoclassificationsavailabletothelowestlevelofde-tail.InPoland,afterthepilotphasein2006-2007inwhichlineministershadalotoffreedominproposingthestructureintheirareaofrespon-sibility,MOFdecidedtooverseemorecloselythegeneralframework(adelicateshifttowardsatop-downapproach).Inspring2008,itformulatedthegeneralarchitectureatLevels1and2,whilegivinglineministersmorefreedom to formulate the lower levels. In Slovakia, ministries in manycasesusetheprogramstructureactivelyintheirpolicyplanning.Some-timesitistreatedasarigidframeworkandstrategicplanningorcostingexercisesareseparatedfrombudgetprograms.PressurefromMOFhassofarbeenunabletochangethesepractices.

pilot.projects.in.selected.sectors.were.very.useful.but.additional.ef-forts.are.needed.to.make.the.pbb.approach.operational.LineministriesinSlovakiacoulddevelopprogramstructuresandperformancemeasures35 VanEden,op.cit.

on their own. The Justice Ministry provided a strong example. Subse-quentnegotiationswithMOFwereconducted in thecontextofbudgetsubmissions. Pilot projects enable technical adjustments to be made tothereformproject.Theyarealsoconducivetogreateracceptancebythestaffconcerned.InBulgariaPBBmethodologyexistsbutitsuniformim-plementation iscomplicatedby the limitedoversightand feedback thatMOFprovides to lineministriesonthequalityof theprogrambudgetsandperformanceinformation.Bulkyreportingrequirementsandcapac-ityconstraintspreventMOFfrommakingsystematicqualityassuranceofPBB.TogetthePBBapproachoperating,theregionwouldbenefitfromstandardizingmethodologiesandproceduresrelatingtothedesignofthePBBarchitectureandmonitoringofPBBindicators.

2 .4 ..Approach.in.sectors.with.overlapping.responsibility.of.some.institutions,.including.extra-budgetary.fundsThe.pace.of.pbb.implementation.depends.on.moF.involvement.

Evenincountrieswerereformswereinitiatedbyanotherinstitution(Po-land,Latvia)orjointlybyseveral institutions(Turkey),themaineffortsaftertheinitialphaseweretakenbyMOF.Thispositivelyaffectedowner-shipofthePBBreformsinMOF.

The.vast.majority.of.programs.are.embedded.under.a.single.agen-cy.(ministry).across.the.region ..Inthecaseofoverlappingtasksofsomeinstitutions,MOFortheChancelleryofState(orChancelleryofthePrimeMinister)tookresponsibilityforcoordination.Definingallprogramsun-derlineministrystructureisthemostpracticalapproachbecauseitalignswith overall ministerial accountability. With a long-lasting tradition ofsectoralbreakdown,cross-agencyresponsibilitywouldbetoodemandingforanycountryintheregion.Level1programshavenot,anywhereintheregion,becomethebudgetmanagementunitandministersorauthorizedbudget administratorshavenotbecomebudgetmanagers36. In thecaseofmulti-sector(inter-ministerial)budgetprograms, inter-governmentalworkinggroupshaveusuallybeencreatedtosolvepolicyandoperationalconflicts.

if.the.program.overlaps.the.activities.of.more.than.one.institution,.a.program.leader.is.appointed .InLatvia,theMinistryofFinance,sup-ported by the State Chancellery organized working groups with repre-sentativesfromotherinstitutionstosolvespecificissuesofthedivisionofinter-sectoralresponsibility.InSlovakia,fiveofits70programsaremulti-36 Conversely,inFrance,adedicatedprogrammanagerisinchargeofimplementationwithfundable

creditlineswithintheprogramallowingformoreflexiblemanagement.

88 89

sectoralandaleadministryisappointedwithresponsibilityforprogramcoordination. Other participating ministries create their sub-programswithgoalsconsistentwithprogramgoals.

nowhere. in. the. region. have. extra-budgetary. funds. (ebF). been.brought. fully. within. the. pbb. process. Usually only selected EBFs oragencies have been included. For example, in Croatia all social secu-rity EBFs follow program budgeting requirements but agencies such asCroatianRoadsandCroatianHighwaysdonot.Becausenotallsourcesoffundingandplannedoutlayswereconsidered,theoverallpictureisnotfully consistent with broad policy statements and commitments37. EBFcanunderminetransparencyofpublicspendinganddistortresourceal-locationfromtheannouncedpolicies.ThismakesitessentialtoincludeEBFsintothePBBframeworkandensuretheycarryoutgovernmentpoli-ciestransparentlyandsubjecttothesameaccountabilityrequirementsasotherbudgetedexpenditures.Theyshouldalsofollowthesamebasisasbudgetreportingwithexpenditurepresentedonexistingclassifications,includingtheprogramclassification.

2 .5 ...main.problems.impeding.effective.adoption.of.the.pbb.structure.chapter. 1. summarized. most. problems. impeding. effective. adop-

tion.of.pbb,.based.on.international.experience. InEmergingEurope,thefollowingissuesareparticularlyrelevant:

•. Insufficient.commitment.of.government.or.selected.line.ministers.Publicfinancereformhasbeenontheagendaformanyyearsbutprogresshasbeenlimited.ManygovernmentsintheregionstilltreatPBBasa trial initiative.Changingbehavior inpublicad-ministrationisdifficult;strongleadershipandcommitmentarevital.Slovakialackspoliticalcommitmentinseverallineminis-triesandthiswasreflectedinthequalityoftheirprogramsandindicators.

•. Lack.of.clear.vision.and.conceptual.clarity InmanycountriestherequiredPBBsystem(whetherPIB,PRB,PBB,orPDB)hasbeenunspecifiedand theassociatedmethodology thereforeunclear.Toomuchattentionhasbeenpaidtoperformanceindicatorsandnot enough to linking program structures to broader strategicgoals.Programsstilltendtobealignedtoorganizationalstruc-

37 Thisisespeciallytrueforsectorslikehealth.Forexample,inPolandtheNationalHealthFundcon-trolsforaround90percentofpublicexpenditureonhealthwhiletheMinisterofHealthcontrolstheremaining10percentandisresponsibleforsupervisingthefund.

tureratherthantogovernmentstrategy.M&EsystemsareontheagendaonlyinSlovakia.Itisstillunclearwhether,whenandtowhatdegreethePBBapproachwillreplacetraditionalbudgets.

•. Insufficient.capacity.and.the.lack.of.clarity.about.ownership ..Train-inginpublicadministrationisanextensiveratherthanintensiveprocessanddifficulttoconductwithoutaclearvision.Differentknowledgeisneededbypolicymakersandthoseresponsibleforplanningandbudgeting.

•. Resistance.to.change.in.public.administration Inevitablyindivid-ualsarethreatenedbythedisruptionofwell-establishedoperat-ingproceduresand resist change.Reformshave tobe ‘sold’ toagencieswhichmustaccepttheneedforthenewsystemandun-derstandthatitwillprovidemanagerswithusefulinformation.InLatvia,PBBwasperceivedasatoolforpunishmentwhich,inconjunctionwithinsufficienttraining, ledtoresistance.InSlo-vakia,PBBimplementationintheearlystageswasnottopunishorrewardperformancebuttogainsupportforthechanges.Thislessenedtheriskofoppositionfromthepublicadministration.

•. Lack.of.aligned,.holistic.and.robust.program.classification InLat-via, programs are broad and allow for flexibility but the linksbetween them and strategic priorities are blurred and there isunjustifiedfocusonperformanceindicators.Croatiahasapro-liferationofprogramswithweaklinkstostrategicprioritiesandlimited toan individualministry’spolicyagenda.Overly frag-mentedprogramsprohibitdesignofanadequateM&Esystem.

•. Ineffective.budget.negotiation.processesshouldbechangedtofo-cusonresultsandachievements.Althoughthebudgetmanualdefinesprogramclassificationasabasisforbudgetpreparation,itisoftencarriedoutonthebasisoforganizationalclassification– i.e. in termsofexpendituresperorganizationunits.There isnoinstitutionalizedprocessforusinghighqualityindicators(re-sultsof research,performanceandefficiencybenchmarksetc.)duringthebudgetnegotiationprocess.

•. Inadequate.IT.systems.for.budget.operations.(planning,.execution.and.reporting).and.collection.of. indicators.Even ifa fullycom-puterizedbudgetsystemexists,additionalsolutionsareneededto create user-friendly tools. Establishing an IT system shouldnot be seen as merely computerizing existing procedures butratheras anorganizational reformwhich includes redesigning

90 91

informationflowsandwhichsupportsallbudgetclassifications.Buildingsuchasystemtakestimeandeffort.Thestepsarewellknown:preparatoryrequirementsanalysis,systemdesign,devel-opmentandtesting;procurementandinstallation;testingofthefullsystemintheuserenvironment,trainingandconversion.Itisimportanttogetthesestepsrightbecausefixingmistakeslaterisnevereasy.Aswell,itisdifficulttospecifyfunctionalityintheoriginaldesignphasebecausethemethodsofthenewPBBap-proachmaybesubjecttofurtherchange.

•. Insufficient.use.of.performance.information.in.the.decision-mak-ing.process..Acrosstheregion,budgetarydecisionshaven’tbeenand probably won’t for several years be made on the basis ofperformance.However,performance informationmaybeusedwithothertypesofinformationforpolicydecisions.Eveninad-vancedcountries,integrationofperformanceandbudgetingre-mainsdifficult.AccordingtoBreul38thisisbecauseperformanceplanning,budgetingandcostaccountingsystemsoftenoperateinparallelsilos.Breulbelievesamechanisticlinkinthebudgetprocessbetweenresourcesandresultsisneitherpossiblenorde-sirable.Performancedatacaninformbutshouldnotdrivebud-getarydecision-making.

•. Timing.issues.and.unrealistically.short.project.timetables.Inhind-sight, these changes may have been made too quickly in Lat-via, especially for building sufficient capacity in MOF and forstrengtheningexpertiseinsectoralexpenditurepolicyandman-agement.InSlovakia,rapidchangeledtoreluctantcooperationamongsomemiddle-managementstaffinlineministries,espe-ciallyinthepolicysections.

•. Insufficient.involvement.of.budget.people.from.MOF Asidefromthe additional work burden, budget staff may have felt threat-enedbytheleveloftransparencyanFMISimposesonthem.

2 .6 ...performance.indicators:.their.selection.mode,.number.and.accountability.processes.attached.to.their.achievementApplication.of.pbb.methods.in.the.region.is.still.evolvinginparal-

lelwithotherdevelopmentsandimprovementsinpublicadministrationandmanagement.

38 Breul,JonathanD.,Performance-Based.Budgeting.in.the.United.States,PresentationattheInterna-tionalConferenceonPerformance-BasedBudgeting,Warsaw,November2007.

in. the. uk. approach,. design. of. performance. measures. has. been.closely. related. to. the. selection. of. targets. at. each. level. of. the. system.(Webber39).TheUKhasestablishedeightcriteriaforperformancemeas-ures:

• relevanttowhattheorganizationisaimingtoachieve• abletoavoidperverseincentives• attributable–theactivitymustbe influencedbyactionsof the

institution,• well-defined,• timely–producesdataregularlyandquicklyenough• reliable• comparable with either past periods or similar programs else-

where• verifiablewithcleardocumentationbehindit.A.discussion.about.the.nature.of.indicators.(outcome/output/re-

sult).which.work.best.for.users.of.the.pbb.framework.was.held.in.the.region.Asisthecaseinternationally,itisfarfrombeingsettled(seeBox1).

countries.in.the.region.spent.much.time.debating.between.moF.and.line.ministries.whether.or.not.particular.measures.are.outputs.or.outcomes. and. the. quality. of. indicators. remains. an. issue. As Schick40pointsout,spendingunitsoftendealwiththecostproblembyproducingvastamountsofdataontheactivitiesandworkofspendingunits.Havingasurfeitofdataisoftenasubstituteforhavingtherightkindofdata.InthePBBframework,agenciesaretemptedto itemizeall thethingstheydo;thisiswhyPBBsystems,especiallyinthisregion,maybeinundatedwithfartoomanylowqualityindicators.Thereisnoindependentauditofindicators,forexamplebyanationalauditoffice.

performance.targets.and.indicators.are.generally.defined.in.a.bot-tom. up. process,. which. suffers. from. some. weaknesses. Performancemeasureswerebasedoncriteriaoutlinedinthebudgetcircularandex-planatorynote to thebudgetact(the lattercase inPoland)or inmeth-odologicalguidelines issuedbyMOF(remainingcountries). InPoland,beforetherevisionofthePBBapproachinspring2008,budgetunitshadtodefineperformancetargetsfortasksandsubtasks(Levels1and2)in

39 WebberD.,2007,Good.Budgeting,.Better.Justice:.Modern.Budget.Practices. for.the.Judicial.Sector,Law&DevelopmentWorkingPapersseries,No.3,WorldBank.

40 SchickA.,op.cit.

92 93

consultation with MOF and external experts. Because methodologicalguidelineswerequitegeneral,lineministriesreliedontheirbestknowl-edgeinselectingindicators.ThisapproachwascriticizedbyMisiąg41be-causetheentitiesresponsibleforachievingtargetshavelittlemotivationtosetambitiousones.Itfailedtoforcemanagerstousebudgetaryresourc-esinamannerexpectedbythepublic.ThishappenedinSlovakiawhereachievementofplannedresultsvariesacrossdifferent lineministries intandemwiththequalityoftheirobjectives.Weakoroutstandingperform-ancecanbeattributedmainlytopoordefinitionoftargets(exaggeratedorunderestimated) rather than excellent program management. In LatviaandBulgariathenumberofindicatorsisexcessive,lacksaclearhierarchy,andismostlyoutputoriented.InTurkey,duetotheabsenceofarelevantstandard,agenciesdeterminedtheirperformanceindicatorsindividuallyandthisledtodifferencesinthenumberandqualityofindicators.

Box 1. Some insights from debate on the nature of performance indicators

The.argument.for.downplaying.the.role.of.outputs,.while.giving.increased.at-tention.to.outcomes,iswellsummarizedbyBrumbyandRobinson(2004)42.A.strong.argument. can. be. made. for. outcome-focused. performance. budgeting . Outcomes. are. the.intended.effects.of.government.programs,.whereas.outputs.—.the.goods.or.services.deliv-ered.by.government.—.are.the.means.of.achieving.those.outcomes .It.can.be.argued.that.outcomes.are.what.really.matter.and.that.to.focus.too.much.on.outputs.in.a.performance.budgeting.system.is.to.run.the.risk.of.focusing.too.little.upon.the.effectiveness.and.quality.of.services .Nevertheless,.it.can.be.argued.that.outputs.must.have.a.central.role.in.a.workable.form.of.performance.budgeting

TheissuewasalsodiscussedbyWebber43basedonNewZealand’sexperience.Agradualre-orientationfromoutputstooutcomesisalsovisibleinsubsequentPSA(Pub-licSectorAgreements)roundsintheUK.OutputsstillexistatamoreoperationallevelandaremuchmorelikelytobeavailablethanthosepertainingtooutcomesorimpactssotheyareoftengivenprominenceinPBBsystems.

However, the linkageofresourcesandresults ismuchstronger inbudgeting foroutputs,eventhoughoutcomesgenerallyareregardedas themoreappropriatemeas-ureofperformance.Theresources-to-resultslinkisweakbecauseoutcomesoftenderivefrommultiplecauses,someofwhicharebeyondgovernmentcontrol.

Keyrelationshipsinthebudgetingandexpendituremanagementprocessaredem-onstratedin.Figure4 .Thisprocessshowsthatoperationalactivitiessitatthecentreofprogrammanagementandresourceallocationdecisionsandtheimpactsofthesedeci-sionsmaybemeasuredandassessedinvaryingways,andatvaryingdistances,fromtheprogrammedeliveryfunction.

41 MisiągW.,2007,Performance-based.Budget.for.2008.and.what.is.next?(Budżetzadaniowynarok2008–icodalej?),PublicFinanceBulletin,IBnGR.

Figure4.ThePublicExpenditureManagementProcess

Appropriation Spending Programme/Activity Impacts

Needs

Objectives Inputs Operations Outputs

Results

Outcomes

Relevance

SustainabilityEffectiveness

EfficiencyDesign

Source:Webber2004 44

outcomes.are.at.the.end.of.the.pem.process.Forthisreasontheymayoftenbethemostdifficulttoidentifyandinterventionisrequired.Performancemeasuresflowupwards fromoutputs toresultsandfinallyoutcomes.The latter indicate thesustain-abilityoftherangeofgovernmentexpenditurepoliciesinrealizationofthesociety-widegoals. Outputs help ministries formulate decisions and program design in a practicalway.Theirdirectconsequencesortheimpactsoftheexpenditureareresults.Thesere-sultsfromthepolicyorprogramandtheirimpactisdetectablewithinapolicy-relevantperiod;atthisleveltheeffectivenessofinterventionscanbemeasured.

Figure4indicatesthelinksbetweenthecomponentsofthePEMprocessinawaythatmeetsrelevance,efficiency,effectiveness,andsustainabilitycriteria.

schick. (2008). emphasizes. the. issue. of. asymmetric. information.Whentheirbudgetsareatriskandperformancemeasuresareused,budg-etmanagershave incentives toprovidemisleading informationorevendeceive.Onesensibletacticwouldbetoidentifyasmallnumberofpow-erfulmeasures that represent themainobjectivesofanorganizationorprogramandverifytheresultsindependently.

Although. indicators. are. not. the. most. important. element. of. the.pbb. approach,. especially. in. the. early. phase. of. its. implementation,.their.uneven.quality.has.exposed.pbb.to.some.criticism ..Initialdiffi-culties in identifying and selecting suitable performance indicators canunderminetheoverallPBBreformefforts.However,thisneedstobebal-42 Brumby,J.andM.Robinson(2004),Performance.Budgeting,.an.Overview,paperpreparedforIMF

andBrazilianMinistryofPlanning,BudgetandManagementseminar:International.Seminar.on.Performance.Budgeting,Brasilia,March2004.

43 WebberD.,Wrestling.with.Outcomes:.The.New.Zealand.Experience,Agenda,Volume11,Number4,2004.

44 AdaptedfromanideainaEuropeanCommunity(2000)WorkingPaperondesigningevaluations.

94 95

ancedagainsttherisksofallowinglineministriestochoosesimpleandreadilyavailableindicatorsthatmaynotrevealthetruefocusorimpactoftheirexpenditureactivities.

These.different.attitudes.and.technical.capacities.are.reflected.in.the.quality.of.performance. indicators.across.budget.units . InPolandsome indicatorsused in the2008budgetwere impreciselydefined, im-measurable and, in a few cases, without a baseline value. In one case,thetargetvaluewasbelowthebaseline.Indicatorspublishedinthe2008budgetwerenotsubjecttointernalorexternalcontrolandsomeindica-torsinthe2009budgetsharetheseweaknesses.

it.is.difficult.to.judge.the.appropriate.number.and.relevance.of.per-formance.measures.in.the.region.but.it.is.clear.that.many.are.not.ideal.AsshowninTable8,therearedifferencesacrosstheregionregardingthenumberandcoverageofindicators.Toomanyindicatorsposeariskforcredibilityand for remainingunused.Acollectionof (numerous) indi-cators fails toprovide informationabout theefficiencyofexpenditures.International experience suggests each country should seek to improvethequalityofitsindicatorsetsanditscapacityforgoodmonitoringovertime.Asmallnumberofkeymeasures ispreferable.TheUnitedStates’PARTmodelofferingsimplesummarymeasureshasmerit,butitmaybetooearlytoadoptthistoolinEmergingEurope.

Table8.Performanceindicatorsin2008budgets

bulgaria croatia latvia poland slovakia turkeyno ..of.indi-catorsOutcomesOutputs

N/A 496 approx.950indicators

631N/A 1597 675

coverage.of.indicators

Baselineyearand

threeyears

beyond

Baselineyearandtwoyearsbeyond

Budgetyear

Baseline,budgetyear,andtwoyearsbeyond

Threeprevi-ousyears,

budgetyear,andtwo

yearsbeyond

Twoprevi-ousyears,

budgetyear,andtwoyearsbeyond

specific.guidelines.for.indica-tors

Max.threeindicatorspertasksandoneindicatorper

sub-task

Previouslimitson

thenumberofindica-torswerecancelled


2 .7 ...Accountability.processesAlthough.good.cost.accounting.capabilities.are.rare.in.many.gov-

ernments,.these.skills.are.especially.useful.in.the.context.of.pbb ..AkeyrequirementofPBBinvolves.allocatingcostsamongtheunitsofoutputsoroutcomesproducedbythepublicsector.Unitcostdataenablesgovern-mentstofocusonefficiencyandperformancemanagement,includingas-sistingwithmakingtrade-offsamongcompetingclaimsforbudgetfunds.Thisrequiresacapacitytoapportioncostsamongtheresultsproducedbypublicagencies,includinganabilitytodistinguishbetweenfixedandvari-ablecosts.Achallengingelement isattributing indirectcosts, like legalservices45.Computerizedfinancialmanagementinformationsystemscangreatly facilitate cost accounting in a modern government expendituresystem.

The. traditional. one-year. budget. horizon. does. not. suit. pbb. sys-tems.and.focusing.only.on.outcomes.is.insufficient.Whengovernmentwantstogeneratesignificantchangesinoutcomes,itneedstobudgetoveratleastamedium-termhorizon.TheMTEFbecomesaveryusefultool,provideditisnotmerelyatechnicalexercise.Amonitoringsystembasedonlyonoutcomesrarelyprovidesausefulsignalofeithertheefficiencyoreffectivenessofindividualagenciesorexpenditureprograms.Outcomesmaysuitpolicymakersasameansforbetterexplainingpolicygoalsandexpectations,butbudgetmanagersneedalsotomonitorandanalyzeout-putmeasures.

Slovakia. illustrates. the. benefits. of. an. integral. database. for. col-lecting. and. analyzing. performance. indicators . Program performanceismonitored throughthebudget ITsystemtwiceayear, inaddition toroutinemonitoringbypolicymakers.LineministersinSlovakiaaswellasinBulgariaareobligedtosubmitmonitoringresultstoMOF,Cabinet,andParliament.InPoland,inthe2007-2008budgets,performanceindi-catorswerepresentedonlyinthejustificationofthebudgetact.Withoutapropermechanismfordatacollection,analyzing,andverification,theexerciseattheveryearlystageofthePBBimplementationwasoflimiteduse.InLatviaMOFpreparesareportonimplementationoftheperform-ancemanagementsystemwithinthepreviousyear.From2009,ministriesareexpectedtoreportonresultsandperformanceindicators.

Accountability.processes.relating.to.the.achievement.of.perform-ance.indicators.in.the.region.are.weak.or.non-existent .InTurkeythereare annual accountability reports and internal control assurance state-

45 SeeRobinson,2007,op.cit.formorediscussion.

96 97

ments, andperformanceoutcomesare evaluatedwithin the frameworkofmanagerialresponsibility.InLatviainformationresultingmainlyfrominternational commitmentshasbeen regularlymonitoredandupdated.Collectingperformanceindicatorsistreatedasaformalexercisewithnoimpactonbudgetallocations.InBulgaria,wherethere isnoformalac-countabilityrelatedtoachievementofperformancetargets,lineministrieshave no incentives to improve the quality of program budgets. Lack ofprogramevaluationsinSlovakiaisacknowledgedasaweaknessinthesys-tembutthereareproposalsforchangein2009.GiventhatprojectsaimedatimplementingM&Esystemswerestartedin2006,thisislongoverdue.

2 .8 ...examples.of.the.best.practice.or.poor.performers.in.pbb.preparationprogress.in.pbb.implementation.is.understandably.uneven.across.

sectors .Certainsectors(e.g.health,education46)usuallyfinditeasiertoadoptPBBmethodswhileothersectorswheretheimpactsofpolicymaybehardertoquantify(e.g. justice)havegreaterdifficulty.Sectorswhereindependentagenciesexecutegovernmentpolicy(suchastransport)canalsoadaptreadilytoPBBmethodsandstructureswhenstrategicobjec-tivesarewelldefinedandflowsoffundsareadequatelymanaged.Forthefirstfewyearssincethereforminitiation,manydepartments(ministriesandagencies)struggledtodevelopasetofclear,meaningfulandachiev-ableoutcomes.Otherchallengeshavesinceemergedsuchasdevelopingeffectivelinksbetweenoutputsandintendedoutcomesandunderpinningoutcomeswithusefulandconsistentperformancemeasures.

differences.may.also.result.from.participation.in.pilot.programs.or. involvement. of. (inter)national. experts. In Poland, variable qualityacrossspendingagencieswasattributabletoinconsistenciesintheorgan-izingprincipleunderlyingtheselectionof‘tasks’.Someministriesdefinedtheirtaskspartlyonbroadpolicyobjectivesandpartlyonexistingpro-gramsofexpenditure.InSlovakia,thelogicalbasisoftheprogramstruc-tureiscoherent,butsomelineministriesstillfailtofollowbestpractice.

The.value.of.some.pilot.projects.in.demonstrating.the.advantages.of.the.pbb.approach.were.constrained.because.the.agencies.involved.were. required. to. continue. with. parallel. systems. and. rules. for. tradi-tional.budgets.Itmaybeworthwhiletoselectoneministryandprovidetheministerwithfulldiscretionoverpersonnel,organizationalstructure,managementetc.Atthesametime,theministrywouldbegivenaclear46 ExamplesfromSlovakiashowthatwhileeducationmayserveasagoodexample,thereweredif-

ficultiesdefiningstrategicgoalsforhealthcare.

mandatetoachieveitsmission(objectives).Performancewouldbeakeydriverfortheministerandstaffbecausetheywouldbe judgedontheirachievements. If successful, such a pilot project could have a powerfulimpactonotherpublicsectorunits.

some. countries. in. the. region. (Bulgaria,. Poland and. Slovakia).started. with. government-wide. implementation. and. a. few. agencies.working.more.intensively.on.budget.reform.Thishadbeneficialresults.Itquicklyyieldedresultsshowingotheragenciesthepromiseofthesys-temandhighlightedproblemstobeaddressed.Pilots,however,risksend-ingthemessagethatgovernmentisnotfullycommittedtoPBBreform.Aclearshiftfrompilotstogovernment-wideimplementationisessential.Thepilotshouldnotdelayagenciesfromtakingtheeffortseriouslyandusingthetimetomasterthebasicconcepts.

2 .9 ...impact.of.pbb.on.budget.allocations.and.the.quality.of.budget.preparation.and.oversight,.and.future.plans.for.pbb.implementationmost.countries.in.the.region.have.adopted.performance-informed.

budgets.but.their.impact.on.resource.allocation.has.so.far.been.mar-ginal. Performance programs in Turkey have been used to provide in-formationinthecourseofbudgetpreparation,ratherthanforresourceallocationpurposes.Ideally,PBBshouldinformgovernmentbudgetprep-arationthroughbetterprioritizationandincreasedpressuretoperform.

performance. information. is. not. used. when. decisions. are. made.Unlessthisissueisresolved,PBBinitiativesinthisregionmaybediscred-itedandspendingunitswillfurtherbasetheirdecisionsonincrementalnorms to ascertain the amounts needed for specific expenditures. Thismayreducethequalityofinformationprovided.

with.the.exception.of.Slovakia,.countries.in.the.region.are.still.in.an. early. stage. of. pbb. application. but. some. are. showing. positive. re-sults.ThekeychallengeintheremainingEUmembersistoimproveex-isting program structure by aligning it better to government’s strategicpolicies.Nonetheless,PBBcannotyetbeconsideredafullydevelopedtoolforhelpingtoidentifypotentialspendingcutsacrosstheregion.

An.oecd.study47.shows.that.only.a.few.oecd.member.countries.have.so.far.used.pbb.as.a.tool.for.reducing.public.expenditures,.though.most. countries. use. it. in. achieving. significant. improvements. in. pub-

47 CurristineT.(ed.),2007,PerformanceBudgetinginOECDcountries,OECD,Paris.

98 99

lic.expenditure.management.systems .48Positiveeffectsusuallyemergewithin a few years from introduction of the reform – expenditure cutsaregenerallylesspainfulwhenappliedtolesseffectiveprograms.Attheveryleast,performanceinformationmayprovokeagenciestoundertakeamoredetailedreviewoftheseexpenditures.

m&e. has. an. essential. role. to. play. in. streamlining. performance.information.and.making. it.useful. to.decision.makers, enabling themtotakethisinformationintoaccountwhenallocatingbudgetresources.Inallcountries there ismoreawarenessandsupport fortheconceptofmanaging for results, where budget accounts are more transparent andbudgetmanagersheldaccountable.Latvia,forexample,planstostrength-enitsM&Esystemtoclosethegapbetweenperformanceinformationandbudgetallocations.

All.countries.in.the.region.will.inevitably.struggle.with.the.quality,.relevance,.and.credibility.of.their.performance.measures.PBBimple-mentationneedstobewell-managedatvariouslevels,fromencouragingpoliticianstouseitindecisionmakingtochangingthebehaviorofcivilservants.Insomecountries,e.g.Bulgaria,creationofafiscalaccountabil-ity institution would help systematize more comprehensive use of per-formanceinformation.

political.commitment.and.a.positive.attitude.by.public.adminis-tration.are.key.factors.keeping.pbb.reforms.on.track.EveninSlovakia,thereisariskofthesereformsbeingreversed.Ineverycountry,top-downactionisneededandshouldbeaccompaniedbycapacitybuildinginpub-licadministrationtoconvincepublicservantsthatreformswillincreaseefficiency.Thisisthebestcitizenscanexpectfromthepublicadministra-tion,notleastinaneraofglobalfinancialcrisis.AsSchick(2008)pointedout, “without exception, performance-oriented approaches are effectiveonlyinwell-managedgovernmentswhichhavelowcorruption,elevatedlevelsofpublictrust,reasonablyefficientandfairpublicservices,andme-diaandinterestgroupsthatpayattentiontoresults.Whenthesecondi-tionsarelacking,noPBBsystemiscapableoffulfillingitsambitions”.Itisaparadoxofimprovedmanagementofpublicfinancesthatdevelopinghighlyprofessionalpublicadministrationpeopleandsystemswillbeas-sisted,inpart,byimprovedbudgetprocesses.

48 Koreaisanexception.AfterPBBimplementation,itannounceda10percentbudgetcutforineffec-tiveprograms.KoreaisoneoffewcountriesworldwideoptingforabigbanginPBBimplementa-tion.

4 .3 ..budget.presentation.and.classificationmaking.fiscal.information.available.to.the.public.is.a.core.require-

ment. of. fiscal. transparency. According to the IMF manual on fiscaltransparency49“principlesandpracticesinthisregardconcernprovisionofcomprehensive informationonfiscalactivityandgovernmentobjec-tives and the presentation of such information in a way that facilitatespolicyanalysisandpromotesaccountability.Acornerstoneforensuringtimelyanduniformavailabilityoffiscalinformationisthatitcanberead-ilyaccessedfreeofchargeontheinternet.(…)Also,anychangestotheclassification or presentation of items from year to year should be dis-closed”.

3 .1 ...components.of.core.budget.documentation.capturing.mteF.and.pbb.methodschanges.in.budgeting.practices.in.the.region.have.been.reflected.

in.expanded.budget.documentation.and.increased.complexity.Aswellas the traditional budget documentation, there is an MTEF showing amedium-termmacroeconomicandfiscalscenarioandeitheraseparatedocument,describingthebudgetinPBBframework,orachapterinthebudgetexplanatorynote50(thelatterinthecaseofPoland).Alotofprac-tical informationrelatedtoMTEForPBBhasbeen included inbudgetcirculars or special handbooks or manuals (the latter in Slovakia). ThesystemanddocumentationhasbecomesocomplexthatincountrieslikeSlovakiasomesimplificationandrefinementwouldhelptosustaintheseachievements.

countries. use. their. own. document. sets. and. nomenclatures. (seecasestudiesinChapter5).InSlovakiaandCroatia,budgetdocumenta-tionreliesondataprovidedbythebudgetITsystemandfollowsvariousclassifications.Basedonthis,abookispublished(inSlovakia.only)con-tainingallprograms, fundallocations,policygoals,and indicators.Thequalityofthesedocumentsandanalysishasbeenimproving.InPoland,during2007,theChancelleryofthePrimeMinisterspearheadedproduc-tionofasizeabledocumentdescribingkeytasksandsub-taskstogetherwiththeZlotyamount in2008budgetproposals fromeachministry. Itincludedperformance indicators (in termsofbothbaselinesand targetvalues)associatedwitheachofthesetasks.However,thisdocumentdidnotsetasufficientbasisforsustainableimplementationofPBBreformsinthefutureand,followingstrongerinvolvementfromMOF,wasreplaced49 IMF,2007,Manual.on.Fiscal.Transparency,WashingtonD.C.50 Thisisanappendixtothestatebudget.

100 101

withnewdocumentation.Thenewchapterintheexplanatorynotetothebudgetact,however,adjuststotheexistingstatus.quoratherthanreshapesgovernment’sprioritizationprocess.

A.more.or.less.comprehensive.pbb.component.is.presented.with.the.traditional.budget.but there is littleownershipof thisdocumenta-tionbymanyministriesandprograms.Generally,policieswerenotbasedonclearoverallstrategiesandproceduresformonitoringandreportingremained weak. Ministries that later started developing their programbudgets face difficulties identifying programs and performance indica-tors,nottomentiondevelopingotheraspectslikeprogramevaluation.

in.accordance.with.best.practices,.emphasis.should.be.on.explain-ing.the.government’s.expenditure.policies.and.objectives.and.their.re-flection.in.the.program.structure.Moreattentioncouldalsobegiventoidentifyingnewpoliciesandprojects.Andsectorministriesandagenciesneedguidelinesonnewperformance-relateddocumentation theymustbeabletodemonstratehowtheirexpenditures(includingnewpolicies)contributetogovernment’sbroaderstrategicaims.

performance.information.demonstrates.future.plans.and.expected.achievements.but.is.yet.to.show.clearly.what.has.been.achieved.PBBdocumentationresemblesastatementofintentoraplanningframework,informinghoweachdepartmentwillcontributetogovernment’soverallpolicyobjectives.Integratingthesestatementsintoacoherentgovernmentprogramanddemonstratingthatitisbeingachievedisanothermatter.

3 .2 ...current.state.of.development.and.plans.in.budget.classifications.and.coding.introducing. better. budget. classification. and. an. improved. ac-

counting.systems.has.emerged.as.a.most.time-consuming.and.difficult.element. in.effective.pbb.implementation ..This isbecause it isuniqueforeverycountryandeveryministryandrequirescomplexinteractionsbetweensinputs,outputsandoutcomes.Fortheregion,mostprogramshavebeendevelopedinitiallyonthebasisofcurrentactivitieswithintheexistingpublicadministrationorganizationalstructure.

while. the. top-down. approach. program. structure. can. optimize.organizational. structure. it. can. disrupt. current. activities. Van Eden51advisesagainstmakingtoomanychangestoorganizationalstructureandgiveaprogramstructuretimetomature.Thismaytakeseveralyears.Inthe longer term, an organizational structure could align more with the

51 VanEden,op.cit.

programstructurethroughimprovementsindesignprocesses,includingsubjectiveelements,butattheendofthedayshouldbebasedongovern-ment’sstrategicobjectives.

All. countries. in. the. region. opted. for. separate. rather. than. com-bined.classifications.Whilethisduplicatesinformationandrequiresspe-cific‘keys’tomovefromoneclassificationtotheother,itallowsflexibilitytointroducefurtherchanges.Thesechangesaregradualbutnecessaryifafullratherthanad-hocuseofprogramclassificationistomaterialize,atallbudgetstages,inthefuture.Budgetdecisionscanbestronglyinfluencedbythewayinformationispresented.

it.supported.budget.systems.operate.across. the.region.but.with.varying.integration.(fragmentation).and.functionality.

• AbudgetITsysteminBulgariahasbeendeployedtomajorbutnotallbudgetunitsanddoesnotsupporttheprogramstructureofthebudget.

• Since2007,Latvia.hashadaunifiedandcomprehensiveITsys-tem,basedonintegratedSAPplatform,withallministriescon-nectedonline.

• AcentralizedITsystem,calledTREZOR,isbeingimplementedinPolandtosupportbudgetplanning,executionandreportingand,ultimately,linkallbudgetholders.Formanagementandac-countingpurposes,however,differentinstitutionsinstalledtheirownsystemswhicharenotcentrallyintegrated.Thismeansin-formation from individualbudget institutions’accountingsys-temsmustbeenteredseparatelyintoTREZOR.

•. Turkey has had an integrated and centrally monitored on-lineaccountingandreportingsystemsince2004,coveringallgeneralgovernmentunits.

•. CroatiahasaSAPbasedsystemwhichisparticularlyhelpfulinbudgetpreparation.

•. Slovakia’s. budget IT system has made a major contribution toimplementing budget management reform. It offers differentmodules, from budget preparation, through budget execution,tobudgetmonitoring,andtransitionsamongdifferentclassifica-tions.

in.no.country.in.the.region.does.the.accounting.system.provide.a.program.classificationwhichistheappropriateclassificationnotonlyforPBBbutforanMTEF’ssectoralallocation.Classifyingexpendituresisim-

102 103

portantforpolicyandbudgetformulationandmeasuringresourcealloca-tionamongsectors.Thesystemshouldallowcategorizingexpenditurebysectorandavoiddoubleaccounting.Thesumofallthesectoralspendingshouldequaltotalspending.PolandplanstocreateanintegratedITsys-temsupportingbudgetdocumentationinPBBframeworkaround2013.Box 2. Financial Management Information System (FMIS)

FMISusuallyreferstocomputerizationofpublicexpendituremanagementproc-essesincludingbudgetformulation,budgetexecution,andaccountingwiththehelpofafullyintegratedsystemforfinancialmanagementbylineministriesandotherspend-ingagencies.Thefullsystemshouldsecureintegrationandcommunicationwithotherrelevantinformationsystems.

According. to. diamond,. khemani5a. well-designed. Fmis. features. nine. at-tributes:.• modular and capable of progressive upgrading to cater to future needs

• offers a common platform and user interface to the stakeholders

• maintains a historical database of budget and expenditure plans, transaction data, cash flows, and bank account operations

• has dedicated modules to handle monthly, rolling, short-term and longer-term for-ward estimates of revenues, and expenditures prepared by agencies

• has built-in analytical tools to offer trend analysis of various elements of fiscal operations to permit a forward look on the fiscal stance

• compiles formal government accounts from the database of authorizations and cash allocations,

• enables real-time reconciliation of parallel but related streams of transaction data - at the agency level

• mechanizes all routine tasks at the central and spending agencies, generating vari-ous forms/authorizations, checks, outputting hard copies of key registers and state-ments etc

• is flexible enough to provide user-defined management information from the data-base, aggregated at the desired level of detail.

no.country.in.the.region.regularly.publishes.a.citizens’.guide.to.the.budget,.apart.from.information.available.on.official.websites.and.sporadic. messages. released. by. media. Simplified PBB documentationwouldexplainthemainfeaturesofthebudgetinPBBformat,andinplainlanguage, making it easier for the general public to understand. Somecountries(Croatia,Poland.andSlovakia)haveissuedabudgetguideforcitizens.LackofpublicinterestendedthispracticeinSlovakia.

greater. transparency. is. a. prerequisite. for. successful. pbb. and.mteFs.–goodbudgetclassification,accountingandreporting–arees-

52DiamondJ.,KhemaniP.,2005,Introducing.Financial.Management.Information.Systems.in.Develop-ing.Countries,IMFWorkingPaper,WP/05/196,IMF,WashingtonD.C.

sential forchanging incentives in thebudgetprocessandenablingper-formanceandaccountability.SpendingministriesunderanMTEFhaveagreater role indevelopingsectoralpolicywithinresourceconstraints.Accesstoaccuratepublicfinanceinformationisimportantforthegeneralpublicandformarkets,andmakesagenciesmorereceptivetocut-backsinspendingwhentheyareneeded.

4 .4 ..public.management.performance.culturepbb. requires. a. radical. change. in. public. sector. management. be-

cause.it.shifts.the.focus.from.public.spending.inputs.and.amounts.to.outputs.and.results.PBBimprovesthetransparencyofpublicspendingandputsgreateremphasisonlong-termfinancialplanning.Thisrequireschangesinbothhumanresourcepoliciesandpublicservants’attitudes.

The. civil. service. in. emerging. europe. does. not. have. a. perform-ance-oriented.culture.Rather,itischaracterizedbylife-longjobsecurity,seniority-basedsystemsforpromotionandnon-meritbasedsalary,short-term tenure of high level policy makers. These leave little incentive forbureaucratstochange,acriticalfactorforthesuccessofthereforminitia-tive.AsSchick53says,“whenemployeesarrivetoworklateandleaveearly,whenusingpublicmoneyforprivategainisacceptedpractice,whenpayandpromotionsaredeterminedbyfavoritismorbribes,whenofficialpayratesaresolowthatcivilservantsareonmultiplepayrolls,soundingthecallforperformancewillnotmakemuchofadifference,norwilleffortssuchasawardingbonusestohigh-performingemployees”.

4 .1 ..links.between.budget.reforms.(especially.pbb).and.other.measures.or.monitoring.and.evaluation.systems.to.improve.performance.in.the.public.sectorAs.of.2008,.m&e.systems.were.missing.across.the.region.although.

some.countries.produced.official.reports.on.pbb.with.regular.audits .M&EisusuallylefttothelaterstagesofPBBimplementation.Slovakia,forexample,isinitiatingitin2009.ProgramperformanceinSlovakiaismonitoredtwiceayearandofficialreportsbasedontheprogramstruc-tureofexpenditureshavebeenpreparedsince2003.InBulgaria,budgetmanagersarerequiredtoreportinPBBformatwithsemi-annualandan-nualfrequency.Annualimplementationreportsareavailabletothepub-licbut thesedocuments tend tomeet formalcompliancerequirements,ratherthanprovideeasilyreadablepolicyandimpactinformation.Poland

53 Schick,Mexico

104 105

willproduceitsfirstbudgetexecutionreportsin2009,inaccordancewithbudgetlaw,andthesewillrefertothe2008budget.

budget. reform,. and. particularly. performance. re-orientation,. is.more. about. improving. people’s. managerial. and. decision-making. ca-pacities. than. about. budget. figures. or. indicators .. Human resourcesmanagementinthepublicsectorisdesignedtosupportsoundfiscalpoli-cies,improveservicetothepublicandrationalizethedistributionoftasksbetweenprivateandpublicsectors.Evaluationshaveacrucialroletoplay,asdemonstratedbythesuccessincountrieslikeChile,Australia,USAandCanada.

it.takes.many.years.to.establish.an.effective.evaluation.system.and.countries.in.the.region.could.select.areas.for.evaluation.according.to.strategic.priorities.Atpresent,theirpurposewouldbebothfundingandreorganizationofprograms.Thiscanbeachievediftheevaluatorisfullyindependent,hasaccesstoreliabledata,andminimalscoperoomforsub-jectivity.Evaluations,inparticulartheirorganizationalset-up,shouldbecoordinated with national supreme audit institutions which are mostlyindependentinstitutionsexperiencedinreviewingfiscalactivities.

Few. incentives. are. available. to. motivate. public. servants. to. im-prove.efficiency.and.performance.though.latvia.is.an.exception.Pre-dominantly, existingarrangements in thecivil servicearenotbasedonan accountability framework. In most of these six countries, financialrewardsandsanctionsarenotsystematicallyused.Currentmanagementcultureofferslittlescopeforincreasingfinancialormanagerialflexibilityinexchangeformoreaccountability.Therearealsosporadicopportunitiesforpublic recognition. InLatvia,however, apublic sectorwage reformintroduced gradually since 2003 links wages with responsibilities andperformance.InCroatiacivilservicereformstartedin2005buthaspro-ceededslowlyandsalaryreformstalledinnegotiationswithtradeunions.AlthoughSlovakiaintroducedanewpublicserviceremunerationsystemin2004,itremainsrigidwithremunerationbasedonanemployee’sposi-tionandageratherthanhisorherperformance.Thecivil/publicserviceattractspeoplewhopreferstabilityoverperformancepay.

non-monetary.and.monetary.rewards.have.a.role.to.play ..Hatry54listthepotentialbenefitsas:

Non-monetary.rewards:• offermoreflexibilitytoministries,agenciesandtheirpro-

gramsinexchangeforachievingresults(inprocurements,personnelchanges,flexibilityinuseoftheirfundsetc)

• provideaddedopportunitiesforoutsidetraining• distributeperformancereports topersonnelso theyknow

theprogresstheirprogramsaremaking• call for agencies and programs to report outcomes to the

public• holdregularprogramreviewmeetingswithstaff inwhich

performanceisamajortopic,demonstratingmanagement’scommitmenttoaresults-orientedapproach

• include performance criteria as part of annual individualperformanceappraisals

• recognizegoodperformanceinonepartoftheprogrambyaskingstafftoprovidetechnicalassistancetoanotherpartoftheprogram.

Monetaryrewards:• providemonetaryawardstoprogramsoragencies• linkindividualsalarytoperformance

• provideone-offbonusestoindividualsortoteams.program.classification.is.not.the.leading.classification.so.the.struc-

ture.of.public.administration.doesn’t.lean.in.this.direction.Currentad-ministrativestructuresarenotbestsuitedtotheconceptofmanagingforresultsbecauseflexibilityislimitedandaccountabilityblurred.Consistentadministrativeandprogramstructureswouldbemoreeffective.

54 HatryH.P.,Nayyar-StoneR.,2004,Establishing.a.Performance.Management.Strategy:.Governing.for.Results,TheUrbanInstitute,2004Koreaconference.

106 107

4 .2 ..The.idea.of.a.performance.management.culture.in.the.public.sectorThe.civil.service.in.emerging.europe.lacks.a.performance-orient-

ed.culture.but.this.is.only.gradually.being.established..Outcomeman-agementrequiresashiftinthinkingforgovernmentemployeestradition-ally focusedoninputs.Whentheythinkof theirproducts,governmentmanagerstypicallythinkofphysicaloutputs.Switchingtheirfocustoout-comesrequiresinstitutionstothinkmoreaboutwhatgoodtheycandoforcitizens.MOFsandbudgetdepartmentsinlineministrieshavegraspedtheideaofPBB;progressisalittleslowerinpolicydepartments.

A. performance. management. culture. requires. staff. to. adopt. the.values,.beliefs.and.behaviors.that.better.enable.governments.to.achieve.policy. goals. This requires better human resources management andre-orientation through training programs, workshops, seminars. Gov-ernments need to use performance information and tools like regularprogram reviews to motivate employees. At the same time, they mustdemonstrateitscommitmenttoreformandconvinceemployeesthatad-justmentisinevitable.Stateauditofficesalsohaveamajorroletoplayinpromoting performance culture, for example through performance au-dits.ThisisalreadyapracticeinCroatiawherethenationalSAOhascon-ductedsixpilotperformanceaudits.

A.major.barrier. to.altering.public.manager.culture. is.managers’.concern.that.performance.information.will.be.used.against.them.Gov-ernmentscanalleviatethisconcernbyemphasizingtheuseofperform-ance information for making service improvements (including turningorganizationsintolearningorganizations).Performanceinformationcanbeusedtorewardthestaffforhighperformanceoridentifyknowledgegapsamongstaff.Knowingthiswillhelpmanagersbecomelesswaryofcollecting performance information. Where performance targets aren’tmet,forexampleduetoexternalfactorsbeyondtheircontrol(seeHatry200455),staffshouldbegiventheopportunitytoexplainwhy.

moF.and.line.ministries.may.resist.reforms.Withasmallerroleinallocatingresources,MOFmaybeconcernedwiththepotentiallossofin-fluenceandpowerorprestige.Lineministriesmayperceivethechangesasadditionalworkwithoutanyrealpay-off.Otherconcernsmayarisefromlimitedknowledgeofthenewbudgetingmethods,uncertaintyaboutin-dividualincentives,andpotentialshiftsintheworkburdenfrompeopleexecuting micro-level activities to staff responsible for macroeconomic55 HarryP.Hatry,RituNayyar-Stone,2004,Establishing.a.Performance.Management.Strategy:.Govern-

ing.for.Results,TheUrbanInstitute,2004Koreaconference.

analyses and national policy priorities. Line ministries may graduallyacquiregreaterdiscretionandflexibilityindecisionmakinginplanningandprioritizationwithinsectorsandimplementingpolicyandexecutingbudget.Greaterdiscretionoverbudgetarydecisionsshouldgohand-in-handwithgreateraccountabilityforresults.

4 .3 ..readiness.of.the.civil.service.and.the.public.administration.system.to.implement.the.principle.of.increased.managerial.flexibility.in.return.for.increased.accountabilitypbb.reforms.give.greater.autonomy.to.budget.managers.but.there.

is. a. trade-off. against. in. the. form. of. increased. responsibility. and. ac-countability.for.results.Increasedresponsibilityshouldgohand-in-handwithincreasedflexibilityinresourcemanagement,stronginternalauditandmonitoringmechanisms,andfinancialandnon-financialreportingsystems. In a mature PBB system, budget appropriations may be morebroadlybased,givingmanagersincreasedflexibility.Inmanycases,rulespertaining to personnel expenditures may be more tightly controlled,thoughinternationallyadjustmentsinsalarylevelsareincreasinglybasedonperformance.

pbb. works. well. in. countries. with. common. law. tradition. while.middle-income.countries.rely.on.a.principle.of.limited.trust.in.public.sector. management. In the first group of countries, flexibility is givento medium-level managers in spending public funds to achieve objec-tives(e.g.NewZealand,UKandUSA).Inmiddle-incomecountries,PBBsystemsassignlesstrusttomiddle-levelmanagers(e.g.Chile).Mutually-enforcing objectives of performance budgeting cover improvements inbothallocativeandmanagerialefficiencyofpublicexpenditure,withtheformerpredominantintransitionanddevelopingcountries,andthelat-ter in developed countries. Both approaches permit greater managerialfreedomaslongastheycanproducethedesiredoutputsandoutcomes.

in.regional.countries.with.a.more.socialist.or.communist.history.(excluding. Turkey),. and. no. tradition. of. common. law,. it. may. be. too.early.to.give.public.managers.substantial.autonomy.DecentralizationofauthorityfromcentralministersmaybeunsuitableiftheMOFfavorsaChileanmodelinwhichsignificantcontrolandoversightaremaintainedinaMOF.Increaseddelegationrequiresrobustsystemsforaccountabil-ity..Toensurebudgetsareeffectively spentandaccountabilitybasedonprogramresult,thenatureofexpenditurecontrolsmustbechanged,withformalmechanismsputinplaceandfinancialauthorityandaccountabil-itystrengthenedatthespendingagencylevel

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changing.the.culture.of.control. is.difficult. in.emerging.europe ..FinancialcontrolsystemsarecentralizedinMOFsunwillingtodelegatefundsandresponsibilitytoimplementingagents.Agencymanagersmusthavethecapacity,incentivesandwillingnesstoadoptchangeandacceptaccountability.Delegationofmanagerialaccountabilityoftenbecomesatopicofpoliticalintervention.

countries. with. the. best. and. most. advanced. pbb. systems. are.among.the.best.managed.in.the.world.(schick56).Theseadvancedsys-temsgenerallyhave lowlevelsofcorruption,anefficientpublicadmin-istrationservice,effectiveaccountabilityarrangements,politicalandad-ministrativechannelsforcitizenstoexpresspreferencesandgrievances,andproceduresformonitoringthequalityofpublicservices.Ofcourse,PBB will work best where there is trust and confidence in governmentleadersandpublicinstitutions,wherecivilservantsarerecruitedandpro-motedonthebasisofmeritandwherethereisrelativelylowturnoverincivilservicejobswhenthegoverningpartylosesanelection.However,itispreciselytheseattributesthatPBBsystemshelptoachieve.

56 Schick,op.cit.

Chapter 5 – country case studies Bulgaria

Stella Ilieva57

General Assessment (Summary) Bulgaria has made good progress implementing medium-term ex-

penditure framework and introducing performance-based budgeting.Reformstothebudgetsystemhavebeendesignedwellandinlinewithin-ternationalgoodpractices.Theyhavebeenimplementedconsistentlyoverthelastseveralyearstoimprovetheaggregatefiscaldisciplineandsupportgreaterallocativeefficiency inpublic spending.Thereformshaveeffec-tively instilledaprudentfiscalmanagementculturewithpractices sup-portedbyconstraintsimposedbythecurrencyboard.Thebudgetprepa-rationprocessaswellasbudgetdocumentsandprocedureshavebecomemoretransparentandconsistentwithimprovedinternationalpractices.

Sinceitwasintroducedin2006theMTEFhasincreasinglybecomeanimportantinstrumentforenhancingstrategicallocationofresources,improving thepredictabilityof theaggregate expenditureenvelopeandsupportingthesustainabilityofpublicfinances.TheMinistryofFinance(MOF) has a good capacity to lead preparation of the MTEF and sup-portlineministriesdevelopthree-yearbudgetplans.SustainabilityoftheMTEFhasbeenstrengthenedwithimplementationofprogrambudgets.Now, first level spending units develop their medium-term budgets inprogrammaticformat.Furtherrefinementoftheprocessesandmethodsalreadyused,includingchangestotheorganicbudgetlaw,wouldimprovethecredibilityoftheMTEF.BettercapacityandmoreauthorityofMOFareneededtoevaluatefirstlevelspendingunits’(FLSU)budgetproposalsandprovidemeaningfulfeedbacktothemtoimprovepublicfinanceef-ficiencyandeffectiveness.Ministries’capacityformedium-termplanninglinked to strategicpriorities shouldbe strengthened.Bulgaria’splannedintroductionofcomprehensivesectorreviewsaswellasenhancementofitsperformancebudgetingprocessshouldcontributetogreatereffective-nessofitsMTEF.

Programbudgetingreformwasinitiatedin2002onapilotbasisandisnowbeingappliedtoallFLSUswhicharepreparingtheirbudgetplansand implementation reports in program format with performance in-dicators identified foreachprogram.However, thecurrent institutional

57 BasedonresponseskindlyprovidedbytheBulgaria’sMinistryofFinancestaff.

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setting needs to be adjusted to respond to a performance managementculture.Thisrequireslegislativeamendmentstotheorganicbudgetlawtoreinforcetheprogrambudgetingapproachandlinkitbettertoperform-ance.Incentivestoallplayersinthebudgetprocessneedtobeestablishedtomakebetteruseofperformanceinformationandsupportenforcementprocedures.Thecapacityofministriesandagenciestodevelopgoodpro-gram budgets should be improved, especially for those ministries thatstartedtheprocesslater.MOFcapacityandauthoritytoreviewandevalu-atethequalityofprogrambudgetsandperformanceindicatorsneedtobestrengthened.

Sustaining these reforms and improving their payoff requires in-creasedpoliticalcommitmentanduseof thesebudgettools toenhanceeffectivenessandefficiencyofresourceallocationandimprovepublicsec-toraccountability.PuttinginplaceanevaluationandmonitoringsystemwouldhelpCabinetandParliamentimproveresourceallocationandin-creaseaccountability.

1. Core Features of Current Budget Systembulgaria’s. budget. system. has. undergone. substantial. transforma-

tion.over.the.last.decade ..Improvementshavebeenmadeinallstagesofthebudgetprocess; therolesandresponsibilitiesofall institutionshavebeenclarified;andcorefunctionsofbudgeting,controlandmanagementofpublicresourceshavebeenstrengthened.Theresultisgreaterpredict-abilityofthebudget,improvedaggregatefiscaldiscipline,andtranspar-encyofthebudgetprocess.

moF.plays.a.key.role.in.the.budget.process,.responsiblefor:• issuingguidelinesandinstructionsforthedifferentstagesofthe

budgetaryprocedure• developingthemedium-termbudgetframework• reviewingbudgetproposalsoflineministriesandagenciesthat

areFLSUs58,includinginPBBformat• providingfeedbacktoFLSUsonwhetherornotproposedspend-

ingprogramsarerealisticandfeasible• preparing draft state budget law and submitting it to Cabinet

withallbudgetdocuments.

58 Theseareallministries (16), theCOM,fourgovernmentagencies—StateAgency for ITC,StateForestryAgency (est. 2007),StateAgency forYouthandSports, andStateAgency forNationalSecurity(est.2007).

MOFalsoreviewstheproposedbudgetsofagenciesandinstitutionswithautonomousbudgetsthatareapprovedonlybyParliament(NationalAssembly).Duringbudgetexecution,theMinisterofFinancecould,onFLSUs’request,reallocatebudgetsbetweenspendingunitsorgiveconsentfor reallocation of expenditure within the budget of the spending unit.The Minister of Finance could stop transfer of state subsidies or othertransferstobudgetentitiesinthecaseofabreachoflaworbreachoffi-nancialdiscipline.

The.council.of.ministers.(cabinet).participates.actively.in.budget.preparation. and. consultations .. It approves the medium-term budgetframeworkandmainmacroeconomicassumptionsforthethree-yearpe-riodandsubmitsthemforinformationtotheBudgetandFinanceCom-mittee and other related committees in the National Assembly. Basedon the approved fiscal framework, MOF develops the MTEF includingexpenditure ceilings by FLSU and updates the State Government DebtStrategy.ThesearealsoapprovedbyCabinet,usually inend-July.Draftbudgetlawandallbudgetdocuments,includingFLSUs’programbudgets,arealsoapprovedbyCabinetandsubmittedtotheNationalAssemblyatleasttwomonthsbeforethestartofthefiscalyear,usuallyend-October.WhileCabinetdoesnotapprovebudgetsofautonomousentitiesorintui-tions,itprovidesitsopinionontheirdraftbudgets.Oncethebudgetlawisadopted,Cabinetadoptsadecreeonthebudgetimplementationwhichdetails thebudgetsandvariousindicatorsandstandardsforFLSUsandmunicipalities,includingthestandardsfordelegatedfunctionstomunici-palities.

line.ministries.now.have.more.flexibility.in.allocating.and.using.resources.within.the.agreed.expenditure.ceilings ..Lineministriesandgovernmentagenciesareautonomousintheirdecisionsonresourceal-locationwithinafewprotecteditemslikewages,socialcontributionsanddebt. Line ministries develop and submit to MOF their medium-termbudgetplans(includinginprogramformat)anddraftannualbudgetoncetheexpenditureceilingsareagreedwithMOFandapprovedbyCabinet.

budgets.of.pension.and.health. insurance. funds.are.approved.by.the. national. Assembly. separately. and. do. not. constitute. part. of. the.state.budget.law ..TheNationalSocialSecurityInstitute(NSSI)budgetispresented to Cabinet for approval by the Minister of Labor and SocialPolicy.TheNationalHealthInsuranceFund(NHIF)budgetispresentedbytheMinisterofHealth.UsuallythesedraftbudgetlawsareconsideredtogetherwiththedraftstatebudgetlawbytheNationalAssembly.

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The. national. Assembly. approves. the. annual. budget. law. taking.into. account. budget. documents. submitted. together. with. the. draft.budget.law ..Theannualbudgetlawisbasedontheeconomicclassifica-tionof thebudgetwhileprogrambudgetsof theFLSUsareattachedtothebudgetdocumentssubmittedtotheNationalAssemblytogetherwiththedraftbudgetlaw.Thedraftbudgetisdiscussedbyvariousparliamen-tarycommitteeswhile theBudgetandFinanceCommitteesummarizesthe proposals of all committees within the overall budget proposed byCabinet. Therefore all changes proposed and approved by the NationalAssemblyneedtobeaccompaniedbyaproposalforoffsettingtherespec-tive increaseordecreaseof abudget item.Lineministries are requiredtoreflectrespectivechangesintheirprogrambudgets.In2007aspecialsubcommitteewassetupundertheBudgetandFinanceCommitteeintheNationalAssemblytoimproveaccountabilityinthepublicsector.Itisyettobeseenhowthiscommitteewillfunction.

There. are. a. number. of. institutions. with. special. status,. whose.budgets.are.approved.only.by.the.national.Assembly.although.they.are.included.in.the.state.budget.law ..Theseincludethebudgetsofthe:

• Judiciary• NationalAssembly• NationalAuditOffice• FinancialSupervisionCommission.AlltheseinstitutionssubmittheirbudgetproposalstoMOFforin-

formation.MOFcommentsontheappropriatenessofthebudgetrequestsandprovidesfeedbacktotheseinstitutions.Differencesofopiniononthebudget proposal of the National Assembly are resolved in consultationwiththePrimeMinisterandtheSpeakeroftheNationalAssembly.TheNationalAssemblyhassoleauthorityoverthejudiciarybudget.

municipal.budgets.are.adopted.by.municipal.councils ..MOFsignsanagreementwiththeNationalAssociationofMunicipalitiesintheRe-publicofBulgaria(NAMRB)onthetotalamountofsubsidiestomunici-palities.Lineministries,MOFandNAMRBagreeonexpenditurestand-ardsforactivitiesdelegatedbythestate.Municipalitieshaveflexibilitytoreallocateresourceswithindelegatedstateactivities(exceptexpenditureoncompensationofemployeesandscholarships)andevenmoreflexibil-ityonmunicipalactivities.

key.pieces.of.legislation.related.to.the.budget.system.are.the.con-stitution,.the.organic.budget. law,.social.security.code,.the.municipal.budget.law,.and.the.annual.budget.laws.of.the.state.budget,.the.nssi,.

and.the.nHiF ..Theorganicbudgetlawwasapprovedin1996andgovernsthe budget process-planning, approval, execution and reporting of thestatebudgetaswellasfiscalrelationsbetweencentralandlocalgovern-mentsandthescopeofextra-budgetaryaccounts.Amendmentsin2007incorporateissuesrelatedtoEUmembershiportheindependenceofthebudgetof theNationalAssembly.While thereareprovisions in theor-ganicbudgetlawrelatedtotheMTEF,theperformance-basedbudgetingdoesnotfeatureinthelaw.InsteaditisreflectedinCabinetdecreesandintheannualstatebudgetlaws.

2. General Progress on Budget Reformbudget.reforms.have.been.implemented.since.1997.following.in-

troduction.of.the.currency.board.in.bulgaria ..Initiallybudgetreformsaimed to improve aggregate fiscal discipline to ensure sustainability ofpublicfinances.Thesereformsinvolvedclarifyingrolesandresponsibili-ties of spending units, Parliament and Cabinet, introducing strict lim-itsondebt issuance,reducingthequasi-fiscalactivitiesofnon-financialpubliccorporations,improvingthecomprehensivenessofthebudgetbyreducingthenumberofextra-budgetaryaccounts,andimprovingthere-porting,accounting,andtransparencyoffiscalaccountsetc.

These. reform. initiatives. have. instilled. a. prudent. fiscal. manage-ment. culture. and. practices .. Supported by constraints imposed by thecurrencyboard,overallfiscaldeficitsdeclinedfromdoubledigitsin1996toabalancedbudgetin2003andfiscalsurplusesthereafter.Restrictionsontheissuanceofnewdebtwereintroducedwithalistofnewinvestmentprojectsfinancedbyexternalsourcesapprovedeachyearandincludedintheannualbudgetlaw.Inaddition,ratificationbytheNationalAssemblyofallexternalobligationsofGovernmentisrequired.Theannualbudgetlawspecifiesceilingsontotaldebtstockandontheissuanceofnewgov-ernmentdebt,includingstateguarantees.Stricterrulesondebtissuancebroughtpublicandpubliclyguaranteeddebtdownfrommorethan100percentofGDPin1997tobelow20percentin2007.Thiswashelpedbyaseriesofactivedebtmanagementoperations.

running. fiscal. surpluses. revealed. the. need. to. make. further. ad-justments.to.the.public.finance.management.system ..This.was.because.some.of.the.tools.and.practices.used.to.maintain.fiscal.discipline.did.not. correspond. to. a. more. developed. budget. system .. For example, toensuretheoverallbalancesupportsthemacroeconomicframework,rev-enuesweresystematicallyunderestimated.Therationaleforthiswasthat

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itwasdifficulttojustifyafiscalsurpluswhenalotofbudgetfundedfunc-tions suffered fromunder-investment formore thanadecade.Asa re-sult, thefiscal surplusvoted inParliamentwas twoor threepercentagepoints lowerthantheactualsurplus.Inaddition,a90percentrulewasintroducedtolimitlineministries’spendingtoonly90percentofplannedallocations and ensure fiscal accounts were responsive to the worsenedexternalenvironment.Thisrulewasimbeddedintheannualdraftlegis-lation.ItmeantallFLSUs’spendingwasrestrainedlegallytillthefourthquarteroftheyear.FLSUseitherdidn’tgettheremaining10percentastheexternalcurrentaccountdeficitwaswideningorendedupspendingahugeamountofpublicresourcesinthelastcoupleofmonthsoftheyear.Useofthisruleendedin2007.

cabinet’s.discretion.to.approve. large.amounts.of. the.fiscal.over-performance.was.limited.with.amendments.to.the.organic.budget.law.in.2005 ..Cabinetcannowapprove,duringtheyear,spendingofadditionalresourcesornewsourcesofrevenuesonlyupto1.5percentofestimatedrevenuesfromtheconsolidatedgovernmentbudget.AllotheradditionalspendingissubjecttoParliamentaryapproval.However,withsubstantialover-performanceofrevenuesinrecentyears,governmentdiscretionaryspendingstillrepresentsasubstantialamountofthebudget.Forexamplein2007additionalend-ofyearspendingaccountedforabout2percentoftheGDP.

A.contingency.reserve.was.incorporated.in.the.annual.budget.law.to.protect.against.unexpected.worsening.of.the.macroeconomic.frame-work,.natural.disasters.or.higher.costs.of.structural.reforms. In2008thisreservewasincreasedtoalmost5percentoftherepublicanbudgetasthe90percentrulewasabolished.Thejudiciary’sbudgetalsohasacon-tingencywhichin2008accountedfor0.2percentoftotalappropriations.

recent. reforms. have. been. geared. to. improving. allocative. and.technical.efficiency.of.public.spending ..TheMTEFwasestablishedandstrengthenedwiththeintroductionofprogrambudgeting.MOF,whichhashada leadingrole inmovingforwardbudgetreforms,hasbeenre-structuredandaPublicFinanceSchoolestablished.Substantialimprove-mentsintransparencyandaccountabilityofthebudgetprocesshavetak-enplaceandthequalityandcomprehensivenessofbudgetdocumentationhasbeenenhanced.Requirementsformakingpubliclyavailablebudget-relateddocumentswereformalizedandwellmet.Fiscaldecentralizationadvancedwithimprovementsmadeintheformulaforallocatingresourcestomunicipalitiesandstandardsfordelegatingcentralgovernmentfunc-tions developed and enforced. Restructuring and optimization in some

sectors as well as in the government administration advanced furtherwhichallowedshiftingresourcestoqualityimprovements.

moF.has.developed.good.capacity.to.design,.implement.and.en-hance.all.these.reform.initiatives ..In2003theBudgetandStateTreas-uryDirectoratewasrestructuredintotwodistinctdirectoratestoseparatebudgetplanning frombudgetexecutionandreporting.TheBudgetDi-rectorate includedthreenewdepartments:BudgetMethodology,PublicFinanceSchoolandMicroeconomicAnalysis.TheBudgetMethodologyDepartment is responsible fordevelopingand implementing themeth-odology,standards,andguidelinesrelatedtotheintroductionofthepro-grammaticandperformance-basedbudgetingaswell asonmonitoringthe implementationof theprocess.ThePublicFinanceSchoolprovidestheoreticalandpracticaltrainingtostaffintheministryandalllinemin-istries and other players in the budget process on public finance man-agement issues.TheMicroeconomicAnalysisDepartmentanalyzesandevaluatesthemicro-economicimpactsofhorizontalandsectoralpolicies.

moF’s.budget.directorate.was.instrumental.in.implementing.two.large-scale. budget. reforms:. the. mteF. and. program. budgets .. A coreunitledbytheDeputyMinisterofFinancereviewedgoodinternationalpracticesanddevelopedthemethodologicalunderpinningsoftheMTEFand program budgets. Detailed guidelines and manuals were preparedand made available to all line ministries’ staff with the Public FinanceSchool providing extensive training. MOF’s Budget Directorate workedcloselywithalllineministriesandprovidedextensivetechnicalsupportinpreparationof theprogrambudgets.Thephasedapproachtothe in-troductionoftheprogrambudgetingandMOF’ssupporttopilotminis-triesensuredbuy-inofthereformandbuiltcapacityinFLSUs.AllFLSUs(exceptmunicipalitiesandautonomousbudgets)arecurrentlypreparingbudgetsinprogramformatandwiththe2009budgetthreemoreinstitu-tionsareincluded:theNationalAssembly,theadministrationofCabinet,andanewlycreatedagency.

program.budgeting.started.on.a.pilot.basis.with.one.ministry.and.a. plan. for. step. by. step. inclusion. of. other. ministries. and. agencies. to.2007 ..OnapolicylevelthisprocesswassupportedbytheWorldBank’sProgrammaticAdjustmentLoanwhichincludedapublicsectorgovern-ancecomponent.Underthiscomponent,Governmentagreedtoexpandthescopeandscaleofprogrambudgetsbyincludingmoreministriesinthe pilot. Some ministries started preparing program budgets ahead oftheplan.OnatechnicallevelthisprocesswassupportedbyEUfundedprojectsandIMFtechnicalassistance.Thepilotministryappliedthepro-

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grambudgetingapproachtoallstagesofthebudgetcycle,includingex-ternalauditofthebudgetexecutionreport.These,andallprogrambudgetplansandreportsdevelopedbyotherpilotministries,havebeensubmit-tedtotheNationalAssemblyforinformation.WorkshopsandseminarswereorganizedtoacquaintMPswiththenewbudgettools.

Support.for.these.reforms.by.line.ministries,.cabinet.and.parlia-ment.has.varied ..Thebenefitsofmorestrategicallocationofresources,and improved transparency and accountability of public finances, havebeenunderstoodandvaluedbysomelineministrieswhileothersformallycompliedbutviewedtheMTEFandPBBasaformalexercisethatonlyincreases their reporting requirements. Ministries’ capacity to developbudgetscloselylinkedtosectorpoliciesandprioritiesneedsfurtherde-velopmentwhileperformanceinformationincludedinthebudgetdocu-mentsneedstobeimprovedandusedforbudgetdecisionsandaccount-abilitypurposes.MOFcapacitytoevaluateprogrambudgetproposalsandperformanceindicatorscouldbestrengthenedaswellasitsauthoritytoprovidemeaningfulfeedbacktoFLSUsonspecificprograms,policiesorperformanceindicators.Theorganizationalstructureofsomelineminis-triesisfragmentedandnotconducivetoperformance-basedbudgeting.Theexistingorganizationalstructureinsomelineministriesobstructsco-ordinationofaprogramforwhichseveralentitieshaveresponsibility,in-cludingsecondandthirdlevelspendingunits.Inaddition,responsibilityforachievingresultsisunclear.Seniorlevelinvolvementintheprepara-tionofprogrambudgetsneedstobeensuredaswellasaccountabilityforperformance.ThechallengenowistoshowmorebroadlythebenefitsofPBBandprovideincentivestoimproveitsqualityandusefulness.

3. Adopting Medium-Term Expenditure FrameworksThe.mteF.was.introduced.in.2006.although.some.of.its.elements.

have.been.in.place.for.more.than.a.decade ..Themedium-termapproachtobudgetingwasintroducedin1997withtheorganicbudgetlawgivingMOFresponsibilityforpreparingathree-yearmacroeconomicandbudg-etforecastandpresentingittoCabinetforapproval.Themedium-termfiscal plan is presented to the National Assembly as part of the budgetdocuments(usuallyonlyataggregatelevel–totalrevenues,expenditure,and overall fiscal balance). The MTEF was introduced with an amend-ment to theOrganicBudgetproviding for the settingof spendingceil-ings forallFLSUs thatareapprovedbyCabinet.TheMTEF isupdatedannuallyand isbindingonly in thefirstyearwhile theouter twoyearsareindicative.FLSUsupdatetheirthree-yearbudgetplansandagreewith

MOFonthethree-yearbudgetceilings.Theseceilingsusuallydonotun-dergosubstantialrevisions(relativetoGDPastheaggregatespendingisconstrainedto40percentofGDP)atthetimewhentheMTEFfornextfiscalyearisdeveloped.Thepreviousyear’sindicativeceilingsareusedasabasisofdevelopingthethree-yearbudgetplansadjustedforchangesinkeymacroeconomicindicators.AnyotherchangestotheceilingshavetobejustifiedbyFLSUswhenagreeingthreeyearsectorceilingswithMOF.OnlychangestopolicyarereasonablegroundsforjustificationalthoughthesearenotexplicitlyshownintheMTEFapprovedbyCabinet.SomeFLSUsdon’tconsidertheseceilingsbindingandpresenttoMOFthree-yearbudgetrequeststhatexceedtheceilingsagreedduringthepreviousyear’sbudgetprocess,andwithoutanyreasonablegrounds.Thesediffer-ences are usually resolved in consultation with MOF which ensures allbudgetrequestsfallwithintheaggregatebudgetconstraint.

The.link.between.budget.and.policies.was.strengthened.with.the.introduction.of.program.budgeting.but.a.meaningful.integration.be-tween.the.mteF.and.program.budgeting.will.take.a.while ..Since2007allFLSUshavebeenrequiredtopresenttheirthree-yearbudgetplansinaprogrammaticformat.Someministriesandagencieshaverecognizedthevalueofmedium-termplanningbyprogramsandhaveusedittonegoti-atetheiroverallspendingceilingproposalswithchangesinpoliciesandprograms.Others saw thisasanadditional reportingrequirementwithonly presentational purposes. This inconsistent application of programbudgeting was apparent in the 2008-2010 MTEF budget document ap-provedbyCabinet;policiesandprogramswerepresentedwiththeirmainobjectivesbuttherewaslittleifanyinformationonplannedchangesorimprovementstoprograms.GiventheshortperiodofimplementationofprogrambudgetingandtheMTEF,theirintegrationneedstobestrongerandinstitutionalized.

mteF.preparation.starts.early.in.the.year.with.development.of.the.three-year.macroeconomic.and.fiscal.framework..Aschematicpresenta-tionofthebudgetprocedurefor2009isshowninFigure1.Thefirststageoftheprocedurecoversdevelopmentofthemedium-termbudgetframe-work(MTBF)andkeyassumptionswhichwouldbeusedforpreparingthethree-yearspendingceilingsduringthesecondstage.TheMTBFsetstheaggregatebudgetceilings(totalexpenditure,capitalexpenditureandoverallfiscalbalance)anddefineskeyparametersofbudgetpolicy(wageandpensionsincrease,stafflevels,sizeofsocialassistancebenefits,serv-icestandardsetc).TheMTBFisapprovedbyCabinetandsubmittedfor

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informationtotheNationalAssemblywhileMOFpreparesguidelinesforFLSUstoprepareanMTEF.

The second stage of the budget procedure covers preparation andapprovalof theMTEF. It startswithFLSUsdeveloping their three-yearbudgetplanswithinoverallbudgetconstraintsandonthebasisofbothkey parameters approved during the first stage and budget ceilings ap-provedduringthepreviousyear.MOFreviewsthesethree-yearplans,in-cludinginprogramformat,andconsultswithFLSUs.Three-yearbudgetceilingsareagreedwithMOFandmemorandaofunderstandingsignedwithallFLSUs.MOFconsolidates theMTEFandsubmits it toCabinetforapproval togetherwithdetailedanalysisof themacroeconomicout-lookandunderlyingassumptions,goalsoftheeconomicandfiscalpoli-cyandassumptionsaboutstrategicdirectionsoftaxpolicy,expenditureprogramsbysectors,aswellasassessmentofthesustainabilityofpublicfinancesandassessmentofstructuralbalances.AnupdateoftheGovern-mentDebtStrategy isalsoapprovedbyCabinetaswellasa listofnewinvestmentprojectsfinancedbystateorstate-guaranteedloans.Theap-provedpackage issubmittedto theNationalAssembly for information.MOFthenissuesguidelinesforthepreparationofFLSUs’annualbudgetplans.

Figure5.Bulgaria:2009BudgetProcedure

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Law

First stage(step 1-3)

Second stage(steps 4-9)

Third stage(steps 10-17 )

List and justification of proposals

for new investment

projects (reviewed by COM)

Decision for

financing of new

investment projects financed with state or state-

guaranteed loans in

20092

3

4 5

1

1

2

3

6

7

8

9

10

11

13

12

14

15

16

17

FLSU

sA

EAF

Source:.Bulgaria’s.Ministry.of.Finance

moF. leads. preparation. of. the. medium-term. fiscal. framework.Themedium-termmacroeconomicforecastispreparedbytheAgencyforEconomicAnalysisandForecasting(AEAF),asecondlevelspendingunitunderMOF.ThisagencycoordinatesitsforecastsandassumptionswiththeBulgarianNationalBankandotheragencies.ThemodelusedforthemacroeconomicforecastshasbeendevelopedwithEUtechnicalassistanceandhasbeenwidelyconsultedwithgovernmentandnon-governmentor-ganizations.Annualconsultationsonthemacroeconomicprospectswiththepublic,however,arenotbeingheld.Thescopeandqualityofpresenta-tionofthemacroeconomicframeworkhasimprovedsubstantiallyinre-centyearswithdetailedpresentationoftheriskstotheoutlookandfiscalrisks.Themedium-termfiscal framework ispreparedbyMOF’sbudgetdepartment inconsultationswithotherMOFdepartments (responsibleforupdatingthedebtstrategy)andexpenditureexecution.ProjectionsforrevenuesandexpendituresareshownindetailbyeconomicclassificationinnominaltermsandasapercentageofGDP.MOFisinvolvedinexten-siveconsultationswithFLSUsduringthesettingofthree-yearspendingceilings and evaluates the feasibility and quality of budget proposals inthe medium-term and by program. MOF also prepares draft proposals

120 121

forbudgetsofautonomousandindependentinstitutions.ConsultationsareheldbetweenlineministriesandtheNationalAssociationofMunici-palitiesonthestandardsandproposedallocationsfordelegatedcentralgovernmentfunctionstomunicipalities.

The.existing.mteF.is.intended.to.strengthen.sustainability.of.the.fiscal.rules.laid.down.in.the.program.of.the.government,.in.the.con-vergence.program,.in.the.law.on.the.Annual.state.budget.and.in.other.documents ..Oneofthefiscalrulesthathasbeenappliedandstrictlyad-heredtosince2006istheexpenditurerule.Underthisrule,aggregateex-penditurelevelcannotexceed40percentofGDP(thecontributiontotheEUbudgetisexcluded).ThisrulehasnotbeenregulatedinanylegislationbutconstitutespartofGovernment’sstrategicdocuments,includingtheMTEF.Similarly,theoverallfiscalbalanceruleispresentedasapercent-ageofGDPbutcouldbechangedeveryyear.Theonlyaggregatefiscalruledefined in permanent legislation is the debt rule which limits issuanceofnewgovernmentandgovernmentguaranteeddebtsothatdebtstockattheendoftheyeardoesnotexceed60percentofGDP.Therearealsolimitationsontheissuanceofnewdebtandthetotaldebtstockinabsolutetermsintheannualbudgetlawdespitethefactthatthelevelofpublicdebtismuchlowerthan60percentofGDP.Therearenoformalmechanismsforenforcingtheserulesbuttheyaregenerallyadheredto.

The.mteF.includes.a.contingency.reserve.for.structural.reforms,.natural.disasters,.and.significant.changes.to.the.macroeconomic.envi-ronment ..Thecontingencyreserveplannedinthe2009-2011fiscalframe-workaccountsfor1.1percentofGDP.Partofthecontingencyisallocatedforstructuralreformscarriedoutbyspecificministriesorentities–forhealthreform,reformofthejudiciaryaswellasfortheNationalAssem-bly,and thepension fund.Thesizeof thecontingencyvarieseachyeardependingonthespecificneeds.Cabinetdefinestherulesforspendingthecontingency fundforstructuralreformsandnaturaldisasterswhiletheportionofthecontingencyrelatedtochangesinthemacroeconomicenvironment are spent only if the consolidated budget balance has notworsened59.

next. steps. in. strengthening. the. mteF’s. credibility. include. fur-ther.refining.processes.and.methods.already.used.to.better. integrate.resource.allocation,. strategic.goals.of. the.government.and.value. for.money .. This requires further institutionalization of the MTEF includ-ingenforcingbudgetconstraintsonallministriesandagencies.Planned59 The2008BudgetLawspecifiesdisbursementisallowedonlyiftheexpectedconsolidatedbudget

surplusexceeds3percentofGDP.

changestotheorganicbudget lawneedtotackletheseissuesaswellasissuesrelatedtotheneedtobetterlinkbudgetallocationstothedesiredresultsofgovernmentpoliciesandprogramswithrespectivemechanismsforaccountabilitiesatthedifferentlevels.WhiletheMTEFhasbeenmoreor lesswelldevelopedusinga top-downapproach,bottom-upstrategicplanningneedsfurtherenhancementandtopmanagementengagementintheprocessensured.Thisrequiresbettercapacityoflineministriestodevelopmedium-termplanswithasupportingorganizationalstructure.MOFneedsmorecapacityandauthoritytoevaluateFLSUs’budgetpro-posalsandprovidemeaningfulfeedbacktoimprovetheefficiencyandef-fectivenessofpublicfinance.MOF’sorganizationalstructurealsoneedstobereviewedtomaximizethebenefitsoftheMTEF.PlannedintroductionofcomprehensivesectorreviewsaswellasenhancementofthePBBproc-esswouldhelpincreasetheMTEF’seffectivenessinBulgaria.

4. Performance-based Budgeting introducing. performance-based. budgeting. reform. was. seen. as. a.

means. of. strengthening. aggregate. fiscal. discipline. but. more. impor-tantly.improving.allocative.efficiency.of.public.finances ..Itwasfeltthatthisnewtoolwouldchangeinstitutionalculturetowardsgreaterpredict-abilityandaccountabilityofresourceallocationandgreaterattentiontoresultsofpublicfinancepolicy.Theobjectivesoftheprogramandresults-orientedbudgetingasstatedingovernmentbudgetdocumentsaretohelppolicymakers:

• defineprioritiesandselectthebenefitstobepursuedbythemin-istry

• identifythesetofproducts/servicesformingtheprogram’sstruc-ture

• justify changes in the structure of policies and programs toachievetargetedstandardsfortheproducts/services

• identifyriskstoachievingthebenefitsplannedincludingusingperformanceinformationasanindicationofprogressachieved

• makeadjustmentstostrategicplansandplannedproducts/ser-vicesbasedonfindingsfromtheevaluationofprogrambudgetimplementation.

program.budget.reform.was.initiated.in.2002.and.is.now.more.or.less.integrated.into.the.budget.process ..Apilotprogrambudgetwasde-veloped for the Ministry of Environment and Waters (MOEW) for the2003budget.Ayearlatertwomorelineministrieswereincludedinthe

122 123

pilotandanothersevenin2004.AtthattimetheMinistryofEnvironmentpresenteditsfirstbudgetexecutionreportinprogrammaticformat.ThiswasauditedbytheNationalAuditOffice.In2005ministriesparticipatinginthepilotincreasedto11whileMOEW’sprogrambudgetfor2006waspresentedtotheNationalAssemblytogetherwiththeannualbudgetlaw.By2007thepilotwascompletedandalllineministriesandtwoagenciespreparedtheirbudgetsinprogrammaticformatforthe2008budget.Min-istries includedearlyintheprocesspreparedreportsontheimplemen-tationof theirprogrambudgets.AllFLSUsmust submit theirprogrambudgets to the National Assembly and publish them on their websites.Forthefirsttime,theannualbudgetlawincludedprovisionsforadjustingtheprogrambudgetsofministriesandagenciesfollowingapprovaloftheannualbudgetlaw.

preparation.of.program.budget.plans.and.implementation.reports.was.formalized.in.a.com.decree.and.moF.instructions.rather.than.in.the.organic.budget.law ..ItwasfeltthatamendmentstotheorganicbudgetlawwouldbedifficulttointroducegiventheheavylegislativeprogramoftheNationalAssemblybeforeEUaccession.Despitethelackofperma-nentlegislationrelatedtoprogrambudgeting,itwasintroducedandisbe-ingfurtherenhancedonthebasisofexperienceaccumulatedduringthefiveyearsofpilotimplementation.Regulatingperformance-basedbudg-etinginapermanentlegislation,however,wouldstrengthenpoliticalsup-portforlinkingbudgettoperformance.DetailedguidelinesandamanualweredevelopedbyMOFandrefinedeachyearwiththebudgetcircular.ThemanualisbasedongoodPBBpracticesaroundtheworldandeffec-tivelyexplainsalltheelementsofPBBwithpracticalexamplesfromtheprogrambudgetsofBulgaria’sMinistriesofEnvironmentandTransport.Extensive training and consultations have helped line ministries betterunderstandthebenefitsofPBBandapplyitstechniques.Workshopshavebeenorganized for theBudgetandFinanceCommitteeof theNationalAssemblyaswellasstaffoftheNationalAuditoffice.

Figure2.StructureofthePerformance-basedBudget

BENEFIT/IMPACT

PROGRAM

PROJECTS

PRODUCT/SERVICE

PRODUCT/SERVICE

ACTIVITY (A)

INDICATORS FOR BENEFITS/IMPACTS

INDICATOR FOR PRODUCT/SERVICE

ACTIVITY (B) ACTIVITY (Z)

INDICATOR

INDICATORS FOR

ACTIVITY

STRATEGIC OBJECTIVE X

OPERATIONAL OBJECTIVES X1, X2, …

PROGRAMS

Source:.Manual.for.Ministries.Implementing.PBB,.2005,.Ministry.of.Finance

program. budget. documents. prepared. by. Flsus. follow. moF.guidelines. although. their. quality. varies .. Program budget documentsincludeageneralsectionstatingthemissionandmedium-termprioritiesof the ministry/agency, explanation of key assumptions underlying theMTEF(theseareusuallymacroeconomicindicators,changesintaxandwagepolicy,whichhavebeendevelopedbyMOF),allocationofexpen-dituresbytheprogramandoverallrevenuesof theministrybysourcesoffinancing.Thisisfollowedbyadetailedpresentationoftheministry’spolicies,strategicandoperationalobjectives,andananalysisontheben-efitstosociety.Performanceindicatorsandtargetsforthemedium-termareshownatthepolicylevel.Ashortsectioncommentsontheavailabilityandqualityofdatausedforperformanceindicatorsaswellastheinstitu-tionalrelationshipswithotheragenciescontributingtorespectivepolicyimplementation(usuallysecondlevelspendingunits).Underonepolicythereareusuallyanumberofprograms.Presentationofprogramsstartswithastatementofprogramobjectivesanddescriptionoftheinstitutionalarrangementsforimplementingtheprogram(theagenciesordirectoratesoftheministry,municipalitiesetc)withthenameofthemanagerleadingtheprogramimplementation(usuallyministerordeputyminister).Per-formanceindicatorsarepresentedforthebaselineyearandtargetsforthenextthreeyearswithinformationaboutthedataavailabilityandqualityandexternalfactorsaffectingtheachievingofthetargets.Programsare

124 125

alsobrokendownbyproductsandservices.FollowingMOF’sinstructionsalladministrativefunctions(e.g.accounting,ITservicesetc)thatcan’tbeallocatedtoaspecificprogramareaggregatedinanadministrativepro-gram.

The.four.elements.of.the.programmatic.classification.are.policies,.programs,. other. programs. which. don’t. fall. within. the. framework. of.particular.policies,.and.products/services ..ThesearepresentedinFigure2.Ifaprogramfallsoutsidethestrategicobjectives/policiesofthemin-istryoragency,itisshownas‘otherprogram’andconsideredlaterifitsactivitiesshouldbetransferredtoanotherFLSU,outsourcedordiscon-tinued. Programmatic classification applies to expenditures only whichinturnareclassifiedaseitherinstitutionaloradministeredexpenditures.InstitutionalexpendituresarethoseforwhichtheFLSUhasdirectcontrolwhileadministeredexpendituresareexpendituresforservicesexternallyprovidedtoafinalbeneficiaryandoverwhichtheFLSUdoesnothavedirect impact (e.g. subsidies to universities, pensions, social assistancebenefits).Programsarealsobrokendownbyaggregatedeconomicclas-sification(salaries,operatingandcapitalexpenditure).

The.program.budget.structure.has.been.consistently.adopted.by.all.ministries.and.agencies.that.are.Flsus.and.currently.covers.some.60.percent.of.the.consolidated.fiscal.program ..Whileministriesandagen-ciesgenerallyfollowtheprogrambudgetguidelinesdevelopedbyMOF,thereiswidevariationinthequalityoftheperformanceindicatorsused.Ministriesthatjoinedtheprogrambudgetingprocesslatefinditdifficultto identify programs and links between budget and performance. The2009budgetincludesprogrambudgetsfortheNationalAssembly,Cabi-netandarecentlyestablishedagency.Extra-budgetaryfunds,municipali-tiesandautonomousentitieswhosebudgetsarenotsubjecttoCabinet’sendorsementarenotrequiredtofollowthePBBapproach.

while.important.elements.of.the.performance.budgeting.reform.are.already.in.place,.the.most.difficult.part.of.maximizing.the.benefits.of.this.reform.is.still.ahead ..Bulgariaimplementsperformance-informedbudgetingandindicatorshavebeendevelopedbypolicyandprogram,buttheiruseislimitedinthebudgetdecisionprocess.ThebudgetisapprovedonthebasisofeconomicbudgetclassificationwhileprogrambudgetsarepresentedtotheNationalAssemblyonlyforinformation.Furthereffortisneededtocreateincentivestoimprovethepresentationofperformancebudgetsincludingthequalityofperformanceinformation.Incentivesarealsoneeded toextend theuseofperformance information for strategicbudgeting, reporting, and accountability purposes, including legislative

amendmentstotheorganicbudgetlaw.Organizationalstructuresinsomeministriesdon’tadequatelysupporteffectiveuseofperformancebudgets.Replacingtraditionalline-itembudgetingwithprogrambudgetswilltaketimebutestablishingaPublicFinanceAccountabilitySubcommittee intheNationalAssemblywouldhelpimprovedemandforperformancein-formation.

A.challenge.facing.ministries.and.agencies.in.results.planning.and.reporting.is.to.define.indicators.by.policies.and.programs,.and.identify.their.target.values ..Outputindicatorsareusuallyrepresentedmorethanoutcomeindicators.Usually,therearetoomanyperformanceindicators,someofwhichcoverinputsorareinconsistentwithprogramobjectivesandoutcomes.Thismakesmonitoringandevaluationdifficult.Ministriesdeveloptheirownsetofperformanceindicatorsbecausetheyhaveabet-terknowledgeoftheperformanceofthesector.Butmoreeffectiveevalu-ationandfeedback,whenreviewingprogrambudgets,wouldimprovese-lectionanduseofperformanceindicators.WithallFLSUsincludedintheprogrambudgeting,however,thisrepresentsquiteachallengeforMOFstaffwhomustreviewaround25programbudgetplansandimplementa-tionreports.Giventhatnoformalaccountabilityforgoodperformanceisattachedtotheprogrambudgetsandimplementationofperformancetargets,lineministriesdon’thaveincentivestoimprovethequalityoftheprogrambudgetsandthisreducestheirimpactonthequalityofspendingallocations.

program. budgeting. contributed. to. improved. accountability. and.transparency. of. programs. funded. by. the. budget .. Despite the weak-nessesinprogrambudgetimplementation,ithashelpedintroduceastra-tegicmanagementapproachtobudgetingandafocusonefficiencyandeffectiveness.Growingattentionbyseniormanagement to theprogrambudgetingprocessandunderstandingofitsbenefits,andgreatercapacityinministriesandagenciestodevelopperformanceindicatorsandtargets,willhelpdemonstratethebenefitsofprogrambudgeting.GreaterdemandforperformanceinformationbyCabinet,Parliamentandthegeneralpub-licwouldprovideincentivesforimprovingthequalityandimpactofpro-grambudgetingonpublicexpendituremanagement.

5. Budget Presentation and Classificationprogrammatic.budgeting.has.made.budget.documents.more.com-

prehensive,.meaningful.and.transparent ..Thefollowingdocumentsre-latingtotheMTEFandPBBarebeingusedtopreparethebudget:

126 127

•. Budget.circularincludesinformationaboutthestages,rolesandresponsibilitiesofthemainplayers,establishingrulesandtimeschedules.

•. Medium-term.budget.framework.and.key.assumptionsincludein-formationaboutthemedium-termobjectivesofthefiscalframe-work,macroeconomicprojections,economicandfiscalpoliciesandtheparametersofthefiscalframework,analysisofthelong-termsustainabilityofpublicfinances,aswellasunderlyingas-sumptionsnecessary fordevelopmentof thethree-yearbudgetframeworkwithceilingsbyFLSUs.

•. The.three-year.budget.framework.and.expenditure.ceilings.by.FL-SUs.representsthepreliminaryassessmentsofproposedparam-etersoftheconsolidatedfiscalprogram,thecentralstatebudgetand of the budgets of the first-level spending units within thethree-yearperiod.

•. The.Budget.Policy.Statement.presented to theNationalAssem-blytogetherwiththedraftannualbudgetlaw.Thebudgetpolicystatement presents Government priorities for the next year bysector,alongwithananalysisofimplementationinthecurrentyear budget, and medium-term priorities and macroeconomicoutlook,fiscalrisksandallocationofbudgetresourcesbysector.ProgrambudgetsofallFLSUsareattached to this report,pre-sentedtoParliamentandusedduringbudgetdeliberations.

•. Decree.of. the.Council.of.Ministers.on.the. implementation.of. the.State.Budgetwhichspecifiestheessentialelementsofthebudgetsofthestatebodies,includingprogrambudgetsofministriesandthestateagencieswhichareFLSUsforbudgetappropriations.

economic.classification.plays.a.leading.role.in.the.budget.process ..ThisclassificationisbasedonthenationalUniformBudgetClassificationdevelopedbyMOF.TheunifiedbudgetclassificationissupportedbytheGovernmentFinanceManagementInformationSystem(GFMIS)whichhasnotbeendeployedtoallbudgetunits.Programclassification isnotused in theannualbudget lawapprovedby theNationalAssemblyandisnotsupportedbyaunifiedinformationsystem.Someministrieshaveadjustedtheiraccountingsystemstoallowforallocationofexpendituresbyprograms.Athoroughreviewofexistingprogramsisneededbeforetheprogramclassificationiscodifiedacrossgovernment.Therearecloseto80programs,makingtheirmonitoringandevaluationdifficult.

6. Public Management Performance Culture A.regular.reporting.of.performance.budgets.has.been.in.place.for.

a.couple.of.years ..FLSUsarerequiredtoreportonanannualandsemi-annual basis, on both execution by programs and performance indica-tors.ReportsarepresentedtoMOFandtheNationalAssemblyandtakenintoaccountduringdiscussionsinParliamentorwhentheannualbudgetreport is auditedby theNationalAuditOffice.Annual implementationreportsincludeperformanceinformationandareopentothepublic.Im-plementationreportsarereviewedbythePublicAccountabilitySubcom-mitteeinTheNationalAssemblywhosemainfunctionistoreviewandassessFLSUs’implementationreports.Thereisnofunctioningsystemformonitoring and evaluation that would support improvement of imple-mentationreports.

129

Croatia Sanja Madzarevic-Sujster and Matija Laco

General Assessment (Summary) Duringthe lastcoupleofyearsCroatiahasmadegoodprogress in

strengthening public expenditure management. The budget executionprocesses,includingaccountingandreportingstructures,haveimproved.GFS2001 standardshavebeen formallyadopted inaccountingandre-portingalthoughadherencetothesestandardsbysomelocalgovernmentsremainsquestionable.TheTreasurySingleAccounthasbeenexpandedto cover bank accounts of all line ministries and the remaining extra-budgetaryfunds(thehealthinsurance,pensionandemploymentfunds).TheMinistryofFinance(MOF)hascarriedoutpreparatoryworktoin-tegrateexistingfinancialmanagementinformationsystemsusedbysomelineministriesin2008.Thebudgetpreparationprocessaswellasbudgetdocumentsandproceduresbecamemoretransparentandconsistentwithgoodinternationalpractices,althoughkeepingupwiththelegallybindingtimetablecouldfurtherbeimproved.Functionallyindependentunitsofinternalaudithavebeenestablishedinallministries,budgetaryusersandtheCityofZagreb.Strongerfinancialmanagementprocessesandcontrolhashelpedstrengthenfiscaldiscipline,evidentindecliningdeficits,andincreasetransparencyofpublicfinances.

Croatiahasmadeconsistenteffortsoverthelastfouryearstoimprovetherulesandrelevanceofmulti-yearfiscalplanning.Theseeffortsweresupportedbytheneedtointroduceathree-yearperspectiveinthePre-AccessionEconomicPrograms(PEP)aswellasbytheneedforageneralimprovement in quality of macroeconomic forecasting and fiscal plan-ning.Whileimplementationofamedium-termfiscalframework(MTFF)hasbeenwellintegratedintopublicexpendituremanagementsystemsandisnowembeddedinallbudgetmanagers’practices,additionaleffortsareneededtomakethemmoremandatoryandcredible.Deviationsbetweennextyear’sbudgetsandplannedexpendituresintheMTFFexceed10per-cent, sometimes ledbyunplanned liabilities createdbynew legislation.ThenewbudgetlawfromJuly2008aimstoimprovetherelevanceoftheMTFFbymakingfiscalprojectionsmorebindingandlinkedtostrategicprioritiesasstipulatedinthree-yearstrategyofGovernmentprograms.Acleartop-downsteeringofthebudgetprocesstoenforcethemulti-annualstrategyisneededtoyieldthedesiredresults.

130 131

Moves to more performance-oriented budgeting have been slow.While program budgeting has been in place for more than four years,performanceindicatorshavenotmovedbeyondthepilotphase.Within-ternational donors’ assistance, two pilot projects have been undertakeninselectedlineministriesandstateagencies,andamethodologyforkeyperformancefinancialandpersonnelindicatorsdevelopedandtested,butthere’sbeennopoliticalcommitmenttorollitout.Strategicandbudget-aryplanningneedtobeintegratedandpropermonitoringandevaluationsystemsintroduced.ThisbecameevidentintheEUpre-accessionproc-ess. Government’s adoption of the Strategic Development Framework2006-2013inJuly2006providedanopportunitytolinkbroaderstrategicconsiderationswithoperationalbudgetarydecisionsbut,withoutsystemsto integrate strategic priorities and strategic goals with budget alloca-tions,policyeffectivenessandefficiencyisconstrained.TheStrategyfortheDevelopmentandModernizationoftheStateTreasury2007–2011,acoreforward-lookingdocumentforpublicfinancemanagementimprove-ments,wasadoptedinOctober2007tointroduceperformanceinforma-tiontomeasureprograms’effectivenessandrewardeffectivefunctioning.ThechampionofthesereformeffortsistheMinistryofFinance.

Sustainingthesereformsandimprovingresourceallocationefficien-cyrequiresgreaterpoliticalcommitmentandmoreperformance-orientedbudgeting.TherelevanceofthesebudgettoolsforCabinettoefficientlyfulfillitsstrategicprioritiesandforParliamenttomonitorandholdCabi-netaccountablehasbeenproveninanumberofcountries.Croatianeedstocontinuewithitsplansinamoredecisivemanner.

1. Core Features of Current Budget SystemThe. budget. system. and. rules. are. set. under. constitutional. law,.

the.organic.budget.law,.several.social.security.and.assistance.laws,.the.financing.of. local.and.regional.self-government. law,.and.the.annual.budget.execution.laws ..Theneworganicbudgetlaw,approvedin2008,governsthebudgetprocess(planning,approval,executionandreportingof the state budget, extra-budgetary funds and local and regional self-governmentunits).Italsoreconfirmsthemedium-termfiscalframeworkwhichbecamemandatoryin2003aswellasprogramclassificationofthebudget

The.budget.preparation.cycle.starts.with.preparation.of.economic.and.Fiscal.policy.guidelines.for.a.three-year.period.by.moF ..Thisisakeydocumentforsettingthemedium-termfiscalandeconomicframe-

workandprovidesananalyticalandstrategicbasis forbudgetprepara-tion.ItisadoptedbyGovernmentbymid-toend-Mayofthecurrentyear.Immediatelyafterwards,MOFissuesInstructionsforthePreparationoftheStateBudgetProposal(budgetcircular)toallbudgetandextra-budgetmanagers. This contains key variables and aggregate envelopes by lineministriesandotherbudgetmanagersthattheyneedtotakeintoaccountwhenpreparingtheirfinancialplanproposals.Budgetmanagersdelivertheirfinancialplanproposals to their responsibleministrywhich, aftercertainadjustments,submitthemtoMOF,preferablybytheendofJune.Sometimesalloftheabovestepsfallbehindbytwomonths.

moF.leads.preparation.of.the.draft.state.budget.and.draft.consoli-dated. state. budget. (which. includes. extra-budgetary. funds. and. agen-cies).for.the.coming.budget.year.with.projections.for.two.consecutive.years, in consultation with line ministries and other budget and extra-budget managers. MOF presents it to Government by October 15 foradoption.Governmentisobligedtosubmitthefinaldraftstatebudgetbill

Table9.BudgetPreparationandExecutionTimetable

due.dates ActivitiesByend-April Guidelinesforeconomicandfiscalpolicies(medium-termeconomicandfiscal

outlook)preparedbyMOFandpresentedtoGovernment.Bymid-May Governmentenactsbudgetguidelines.Byend-May Onthebasisoftheguidelines,MOFissuesinstructionsforthepreparationof

thebudgetproposaltobudgetmanagersandextra-budgetmanagersoftheStatebudget,andtolocalandregionalself-governmentunits,forthedevelopmentof

theStatebudgetproposal.Bymid-June Budgetmanagersdelivertheirfinancialplanproposalstotheresponsible

ministry.Byend-July ResponsibleministersdeliverharmonizedfinancialplanproposalstoMOF.August-October MOFreviewsproposalsandreconcilesthemwithestimatedrevenuesand

receipts.DetailednegotiationsbetweenMOFandtheresponsibleministries.October15 MOFpreparesthedraftStatebudgetanddraftconsolidatedbudgetanddelivers

toGovernment.LateOctober Governmentdeliberationanddecisionoverfinalbudgetproposal,onthebasis

ofcompetingproposalsfromMOandlineministries.ByNovember15 GovernmentdeliversthebudgetproposalandconsolidatedbudgettoParlia-

ment.Byend-Decem-ber

Parliamentpassesthebudget.TheapprovedbudgetispublishedintheOfficialGazette.

ByMay1 MOFdrawsuptheannualaccountsofthestatebudgetandconsolidatedbudgetfortheproceedingyearandreportstoGovernment.

ByJuly1 GovernmentdeliversthebudgetexecutionforthepreviousyearandtheStateAuditOfficereportstotheParliamentaboutauditsbeingdone.

BySeptember5 MOFprepareshalf-yearexecutionoftheBudgetandsendsittoGovernment.ByAugust5 Governmentforwardsthehalf-yearexecutionofthebudgetandsendsitto

Parliamentforenactment.Onenactment,itispublishedintheOfficialGazette.

132 133

andconsolidatedbudget toParliament forenactmentbyNovember15.The lawonstatebudgetexecution(whichdefinesborrowingandguar-antees’ issuancelimits,reportingandexecutionrules,abudgetarybasisthatservesasathresholdforsocialbenefitsandvariousotherelements)issubmittedforenactmentalongwiththeannualbudget.Thislawdefinesstandards for delegated functions to municipalities. The budget year inCroatiamatchesthecalendaryear.

Although.moF.guidelines.provide.a.framework.for.a.multi-year.budgeting.approach,.and.a.detailed.budget.is.prepared.for.three.years.(based. on. economic,. organizational. and. program. classifications),.budget. projections. serve. informational. purposes. only .. They. are. not.mandatory.and.the.budget.is.passed.for.only.one.budget.year ..Parlia-mentenactsthebudgetandtheconsolidatedcentralGovernmentbudget60(thatincludesextra-budgetaryfundsandagencies)forthecomingbudgetyear and receives, for information only, projections for the subsequenttwoyears.DuringparliamentarydebateontheStateBudgetproposalandfinancialplansofextra-budgetmanagers,MembersofParliament(MPs)presenttheirproposalsforamendments,whichGovernmentmayadoptorreject.AnamendmentproposinganincreaseinexpenditureabovetheamountestablishedintheBudgetProposalmaybeacceptedonlyifitisfinancedbyacommensuratecutinanotheritemofexpenditure,notfrombudgetary reserves or additional borrowing. This means that adoptedamendmentsmaynotexceedproposedandprojecteddeficitsofthecon-solidatedbudgetoftheRepublicofCroatia.Equallyimportant,anyleg-islativeproposalorstrategicdocumentadoptedwithinafiscalyearcan-notbecomeeffectiveinthecurrentbudgetyearunlessfundshavebeensecured in the budget proposal (or revised budget) based on the fiscalimpactassessment(FIA).FIAmustbesubmittedwiththe legislativeorstrategicdocumentandexanteapprovedbyMOF.

moF.plays.a.central.role.in.the.budget.process.andisresponsible,amongotherthings,for:

• issuingMedium-TermGuidelinesandInstructionsforthebud-getpreparationprocedure

• reviewingandprovidingfeedbackonmedium-termbudgetpro-posalsofalllineministries,budgetmanagersandextra-budget-aryfundsandagencies(EBFs)

60 Additionally,theconsolidatedcentralgovernmentbudgetcombinedwithlocalandre-gionalgovernments’budgetsformstheConsolidatedGeneralGovernment(CGG).

• ensuring medium-term budget proposals remain within theexpenditure,deficitanddebttargetsasdefinedintheMedium-TermGuidelines

• developingthemedium-termbudgetproposalandsubmittingittoCabinetwithexplanatorynotes

• preparingmedium-termdebtstrategy• givingconsentforreallocationofexpenditurewithinthebudget

ofthespendingunitduringbudgetexecution• reporting on the budget’s execution, monthly to Cabinet and

twiceyearlytoParliament• monitoringcompliancewithbudgetlawandinformingCabinet

ofanyrevisionsthatmaybeneededinthefiscalyear.ADepartmentforBudgetPreparationinMOFisdividedintothree

units:theBudgetAnalysisUnit(fourstaff);theBudgetPreparationUnit(eightstaff);andtheUnitforLocalGovernment(fourstaff).TheDirec-torofthisdepartmentisaprofessional,employedthroughacompetitiveselection process. Compared with the approved number of establishedpositions,allthreeunitsareunderstaffed(42establishedversus23filledpositions). In 2008, a functional review of MOF, including its BudgetPreparationDepartment,suggestedtheneedforrestructuringofthemin-istrytostrengthentwogroupsoffunctions:analysisofpublicpolicyandcoordinationandsupervisionofadministrativefunctions,movingthelat-terawayfromadministrativesupportservices.Thiswouldhelpincreaseefficiencyandpromotecontinuous improvement intheStateTreasury’splanningactivities.

cabinet. participates. actively. in. budget. preparation. and. consul-tations ..Itapprovesthemedium-termfiscalframeworkandmainmacr-oeconomicassumptionsforathree-yearperiod.Althoughtheseareavail-abletothegeneralpublicafterGovernmentadoption,theMedium-TermEconomicandFiscalGuidelinesarenotofficiallysubmittedtoParliament.Themostimportantexpenditureallocationdecisions,andarbitrationsbe-tweenMOFandlineministries,arecarriedoutinaclosedCabinetsessionwhichusuallytakesplacebeforeafinaldraftbudgetsubmissiontoParlia-ment.Thedraftbudgetandconsolidatedbudget,thatincludesallextra-budgetary funds and agencies following organizational, economic andprogramclassifications togetherwithallbudgetdocumentsandbudgetexecutionlaw,arethenapprovedbyCabinetandsubmittedtoParliamentbymid-October.Ifduringthebudgetyeartheexpensesand/orexpendi-turesincrease,orifbudgetrevenuesand/orreceiptsbecomereduceddue

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totheoccurrenceofnewbudgetaryobligationsorchangesineconomicdevelopments,Governmentmay,atMOF’sproposal,suspendforupto45daysexecutionofspecificexpensesand/orexpenditures.Ifthebudgetbal-ancecan’tbereached,Governmentproposesabudgetrevisionaccordingtothesamerulesappliedtotheoriginalbudgetpreparation.

with. ex. ante. agreed. medium-term. expenditure. framework. and.consolidation.of.all.line.ministries’.accounts.into.a.single.treasury.Ac-count,.line.ministries.have.an.increasingly.important.role.in.efficient.expenditure.allocation ..Followingagreedexpenditureceilings,linemin-istriesandgovernmentagenciesareencouragedtoproposeresourceallo-cationswhichprovidethegreatestdevelopmentimpact.Decisionsonnewemployment, large investments and social programs require additionalsupportingdocumentation(feasibilitystudies,lawsorjobsystematizationdecree)tobeapprovedbyCabinetuponthefiscalimpactassessmentap-provedbyMOF.LineministriesaredevelopingandsubmittingtoMOFtheir medium-term budgets, in program format once MOF agrees andCabinetapprovesexpenditureceilings.MOFisauthorizedtoclearalllineministries’requestsforopeningnewprogramsintheSAPsystem.OnceenactedbyParliament,budgetmanagershavelimitedflexibilitytoreal-locatefundsamongvariouslineitems.Thisisduepartlytoahighlevelofstatebudgetdetail.Budgetaryfundsmaynotbereallocated,exceptun-der the terms and in the manner stipulated by budget law and law onbudgetexecution.Anexceptiontothisisthatreallocationofbudgetitemswithinbudgetmanagers’linesorbetweendifferentbudgetmanagersmaymakeuptofivepercentofexpensesandexpendituresatmost,iftheMin-isterofFinanceapprovesit.Thenewbudgetactenvisagesalowerlevelofstatebudgetdetail(athirdlevelofeconomicclassificationratherthanthefourth levelprescribed inthe2003BudgetAct)whichshouldallowformoreflexibilityinreallocatingfunds.

on.receipt.of.the.draft.state.budget.and.consolidated.budget,.to-gether. with. the. draft. budget. execution. law. and. budget. explanation,.parliament.has.six.weeks.to.debate.and.enact.the.budget ..Thebudgetis presented according to economic and program classifications with abudgetexplanatorynoteandcorrespondinglaws.BudgetdocumentationisdiscussedbyvariousparliamentarycommitteesincludingtheFinanceandBudgetCommitteewhichisobligedtogiveParliamentitsopiniononthebudget.ThisCommitteedoesn’temployprofessionalbudgetanalystsbutengagesthreeindependentnon-parliamentarymembersfromscien-tificandprofessional institutions.Usually, theCommittee recommendsParliamentapprovethebudgetbuttheremaybetimeswhentheproposed

budgetandtheassociatedbudgetexecutionlawhavenotbeensatisfacto-rilydrawnup.InthesecasesParliament’sSpeakersendsthemback,attheCommittee’srecommendation,forMOFandGovernmenttoreconsider.ThisisoneofthereasonswhytheCommitteeshouldhavewell-informed,professionalpersonnelabletodetectshortcomingsinbudgetproposals.

parliamentary.debate.has.a.limited.impact.on.budget.policy ..Dur-ingparliamentarydebateonthestatebudgetproposalandfinancialplansofextra-budgetarymanagers,MembersofParliamentpresenttheirpro-posalsfornumerousamendments,whichGovernmentmayadoptorre-ject. Amendments are rarely accepted. All proposed amendments needtobeaccompaniedbyaproposalforoffsettingtherespectiveincreaseordecreaseofthebudgetitem.Duringthecourseofthefinancialyear,Par-liament receives information on the execution of central Government’sbudget. The budget act requires Government to prepare a semi-annualstatementonbudgetexecutionandsubmitittoParliamentnolaterthanthebeginningofAugustof thecurrentbudgetyear.Parliamentdebatesthesemi-annualexecutioninmid-Julyattheearliest;thissuggestsmoni-toringofbudgetimplementationbyParliamentisnotstronglydeveloped.

while.non-enactment.of.the.budget.is.a.sign.of.no.confidence.in.the.government,.and.requires.approval.of.temporary.financing,.legal-ly,.voting.no-confidence.is.done.through.a.separate.legislative.process ..IfParliamentfailstopassthebudgetbeforethebeginningofthebudgetyear, financing central, local and regional government units, and otherbudgetmanagers,continuesonthebasisoftemporaryfinancing(provi-sionalfinancing)andontherightsofbudgetfundrecipientsestablishedby laws and other regulations. Temporary financing is carried out pro-portionallytorevenuecollectedinthesameperiodofthepreviousyearandupto25percentofthetotalincomerealized,excludingthefinancingreceipts.Temporaryfinancingisallowedonlyforthefirst12weeksofthebudgetyear.

local.and.regional.self-government.units.(lgus).prepare.and.ex-ecute.their.budgets.independently.although.there.are.several.channels.through.which.central.government.frames.local.government.budgets .MOF issues Instructions for thePreparationof theLocal andRegionalSelf-GovernmentUnits.Budgetsforathree-yearperiod.Theseprovideba-sicmacroandfiscalassumptionsforLGUsdevelopingtheirbudgetsaspertheearlieradoptedMedium-TermEconomicandFiscalGuidelines.Themedium-termfiscalframeworkalsounderlinesthegeneralgovernmentdeficittargetwithaseparatedeficitlimitproposedforLGUs.Budgetex-ecutionlawsetstheoverallborrowinglimitforallLGUswhileindividual

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LGU’sannualamortizationrepaymentcannotexceed20percentoftheirownrevenues.Therearefirmrulesfordelegatedfunctionsandthesearefundedbysharedtaxrevenuesandequalizationoffundresources.MOFdiscusses with line ministries additional capital transfers planned forupgradingLGUs’physicalandsocial infrastructure.Municipalitiesmayreallocate their own resources, including for their own expenditure oncompensationofemployees,currentspending,othertransfersandcapitalspending.

The budget is enacted on a cash basis although in the explanatorybudget documents, Government presents a consolidated central andgeneralgovernmentbudgetbalanceonaccrualbasis.Budgetdocumentswouldbenefit fromanexplanationonhowconversion fromcash toanaccrualbasisisdone,aswellasfromafullinclusionofall576localgov-ernmentunits(asopposedtoasampleofthelargest53),allextra-budg-etaryagencies,quasi-fiscalactivitiesofpublicenterprisesandcumulativechangesinthestockofarrears.Anattemptwasmadein2001-2002tocal-culatetaxexpendituresbutthiswasneverrepeated.Withoutthisinforma-tionitisdifficultforParliamenttoassessthegeneralbudgetarystrategyinthecontextofthemedium-termfiscalframework.Whilefollowingafullaccrualbasisaccountingwouldbedifficultatthisstage–thereareotherpressingPFMpriorities– this information isessential forassessing therealfiscalpolicyimpactontheeconomyandunderstandingwhatdrivesthedifferencesbetweencashandaccrualnumbers.

2. General Progress on Budget Reformsince.it.adopted.the.budget.law.in.2003,.croatia.has.made.good.

progress. modernizing. its. public. expenditure. management. system.(pems).Budgetexecutionprocesses,includingaccountingandreportingstructures,haveimproved.GFS2001standardshavebeenformallyadopt-ed inaccountingandreporting,althoughadherence to these standardsbysomelocalgovernmentswarrantsfurtherimprovement.TheTreasurySingleAccount(TSA)isnowfunctioning,withthewideruseoftheSAPsystem,andin2006wasexpandedtocoverbankaccountsofalllineminis-triesand,in2007,theremainingextra-budgetaryfunds(healthinsurance,pensionandemploymentfunds).AllbudgetaryrevenuesandreceiptsarechanneledintotheTSAfromwhichallpayrolls,currentandcapitalex-penditurepaymentsaremade.Thisfacilitatesdailyliquiditymanagementandprovidesasolidbasisforeffectivefinancialplanning.

despite.some.budget.managers’.skepticism,.implementation.of.a.tsA.allowed.more.rational.management.of.public.funds,.without.in-fringing.on.the.managerial. independence.of.budget.managers .From2006,allrevenuesofbudgetmanagers,revenuesunderspecialregulations(administrativefeesandotherearmarkedrevenues)andEUgrantshavebeenincorporatedintothebudgetandchanneledthroughtheTSA.Thishas facilitatedgreatercontrolover thecollectionanduseof earmarkedrevenues. Preparatory steps to integrate existing financial managementinformation systems were undertaken in 2007 and, with the use of EUfunds,willbeimplementedin2009,facilitatingswifterandmoretrans-parentexchangeof informationandfunds.GovernmenthaspassedtheStrategyofDevelopmentofthePublicInternalFinancialControlSystem.Functionally independent units of internal audit have been establishedinallministries,budgetmanagersandtheCityofZagreb.TheadoptedRulebookonInternalAuditofbudgetarybeneficiariesprovides,amongother things,workmethodologyandrequirements forappointmentsofcertifiedinternalauditors.TheInternalAuditManualhasbeenpreparedandtrainingofinternalauditorsandFMCstaffisunderway.InDecem-ber2006,ParliamentpassedtheLawontheSystemofInternalFinancialControls inthePublicSector.Strongerfinancialmanagementprocessesandcontrolhashelpedstrengthenfiscaldiscipline,evident indecliningdeficitsandgreatertransparencyofpublicfinances.

budget. preparation. processes. as. well. as. budget. documents. and.procedures. are. more. transparent. and. consistent. with. good. interna-tional.practices .Governmentsubmits toParliament(public) thesemi-annual statement on the state budget execution for the first half of thecurrentbudgetyearby theendof July.MOFprepares theconsolidatedstatementoftheRepublicofCroatia’sannualbudgetaccountsandsubmitsittoGovernmentbyMay1ofthecurrentyear.Thisisdetailedinforma-tion.AggregatedatafollowingGFS2001methodology,orESA1995from2008,forconsolidatedcentralgovernmentaccountsarepublishedeverymonthandforconsolidatedgeneralgovernmentaccountseveryquarter(withalagofaroundtwomonths).Thestatebudgetproposalisaccompa-niedbyanexplanatorynotethatonlyrecentlycontainssomesensitivityanalysisofpublicdebt,andsomeselectiveanalysisoflong-termsustain-abilityofpublicfinances (healthandpensionexpenditures specifically)overahorizonof45years.In2005,Governmentprescribedthatcentralbodiesofstateadministration,whensubmittingtheirlegislativeandregu-latoryproposalsforapproval,encloseastatementontheprojectedimpactofproposedlegislationonthestatebudget,localandregionalself-govern-

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mentbudgetsandpublicsectoremployment(thesameappliestoanylawsthatGovernmentsubmitstoParliamentforadoption).Thisisavailabletothegeneralpublicinanabbreviatedform.ThefiscalimpactassessmentisprovidedonaFiscalImpactAssessmentFormandrequiresexanteMOFapproval.

several. formal. and. informal. fiscal. rules. have. been. introduced.but.need.to.be.better.enforced.to.ensure.fiscal.discipline.in.the.budget.process ..Theorganicbudgetactfrom2003introducedafiscalrulethatlimitscentralgovernmentdebttoGDPratio.Theneworganicbudgetactfrom2008envisagesthattheratioofunsettledamountsofGovernmentdebt at the end of the year and gross domestic product (GDP) projec-tions may be greater than the last year’s ratio, provided the mentionedratio does not exceed 60 percent of GDP. Government and Parliamentaremonitoringcompliancewiththefiscalrule.Furthermore,theBudgetExecutionActforthefiscalyearestablishesthetotalamountofnewGov-ernmentdebtandstatesguaranteesthatmaybeassumedorissueddur-ing thefiscalyear.Enforcementproceduresarenotdefinedexante.Aswell,thereisanexpenditure(nominalexpenditureceiling)andabudgetbalance (as percentage of GDP) rule introduced through the Medium-TermEconomicandFiscalGuidelines,whicharebeingrevisedannuallyandreceiveonlypoliticalcommitmentofGovernment.Theseguidelinesdefineexpenditureenvelopesperbudgetaryinstitutions,economicclas-sification,anddeficit targets for themedium-term.MOF is responsibleformonitoringcompliancewith those targetsbutwithoutanyenforce-mentproceduresdeviationsarecommon,eveninthebudgetproposalforanimmediatefiscalyear.Onceexpenditureceilingsareestablishedintheguidelines,controlsforbudgetpreparationaresetintheSAPsystemandbudgetmanagerscannotindependentlychangethem.However,ifMOFandbudgetmanagers,during theirnegotiations, identifyaneed for re-definingsomeexpenditureceilings,Cabinet,atMOF’sproposal,consid-ersandestablishesnewceilings.Whiledeficittargetshavegenerallybeenrespected, deviations from these guidelines are still common, even inbudgetproposalsforanimmediatefiscalyear.

budget.reforms.have.been.implemented.in.response.to. large.de-viations. of. budget. out-turn. compared. with. plans. and. this. has. made.fiscal.policy.unpredictable ..Eachyearsince2003therehasbeenabudgetrevisionenactedinthesecondhalfoftheyearwithaggregateexpenditureincreasedfollowingrevenueover-performance.Initially,budgetreformsweredesignedtoimprovetheaggregatefiscaldisciplinetoensuresustain-abilityofpublicfinances.Thesereformssetoutto:

• clarify the roles and responsibilities of spending units, Parlia-mentandcabinet

• introducestrict limitsondebt issuanceandpenalties forover-spending

• reducequasi-fiscalactivitiesandcontrolarrearsandlineminis-triesover-commitments

• improvemacroeconomicforecastingandcomprehensivenessofthebudgetbyreducingthenumberofextra-budgetaryaccounts

• improve reporting, accounting, and transparency of fiscal ac-counts.

Lateron,reformsweredirectedatimprovingallocativeandtechnicalefficiencyofpublic spending.TheMTEFwasestablishedandstrength-ened with the introduction of program budgeting. Reforms in selectedsectorshaveadvancedandenabledshiftingofresourcestootherpriori-ties.MOFhastakentheleadinmovingbudgetreformsforward.

external. aid. to. moF. in. early. 2000. was. used. to. inform. croatia’s.reform.directions .USAID, theUSTreasury, IMFand theWorldBank(WB)helpedmakeTreasury functional; strengthenedaccounting, fore-casting,monitoringandbudgetreportingrules;restructureddebtandthecashmanagementsystem;establishedanMTEF;helpeddraftthe2003or-ganicbudgetlaw(whichwasalsosupportedbytheWBStructuralAdjust-mentLoanin2002and2003);andsetuptheadvancedreformagendaforbudgetplanningandmonitoring(throughanIDFgrant).ReformsupportfromtheWBProgrammaticAdjustmentLoan1and2andEUgrantfundshelped further strengthen the Treasury system, auditing standards andcapacity, and the move towards more performance-oriented budgeting.TheyhavehelpedinitiatetheserecentreformsalongwithadoptionoftheMedium-TermStrategyforDevelopmentandModernizationoftheStateTreasuryfor2007-2011.TheStrategyisacoreforward-lookingdocumentoftheGovernmentforpublicfinancemanagement,settinggoalsandanactionplanformodernizationoftheStateTreasurysystem.

Additional. efforts. and. priorities. outlined. in. the. government’s.strategy.are,.among.others:.

• shiftingtowardsperformance-informedbudgeting• strengtheninganalyticalfoundationsofbudgetallocationdeci-

sions• strengtheningconsultationmechanisms(especiallywithParlia-

ment)andbudgettransparency

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• increasingflexibilityofbudgetexecution• integratingstrategicandbudgetaryplanningbylinkingalloca-

tionstostrategicoutcomes.Until2008thestatebudgetwasadoptedonthefourthlevelofeco-

nomicclassificationwhichreducedflexibilityinexecutionandincreasedthenumberofnecessaryreallocationsoffunds.Becauseitlacksdetailedenough information, Parliament opposes raising the level of economicclassification(e.g.fromfourthtothird)onwhichthebudgetisenacted.Aneworganicbudgetlaw,enactedinJuly2008andeffectivefromJanuary2009,envisagesadoptionofthestatebudgetonthethirdlevelofeconomicclassification,whilereportingonbudgetexecutionwillbesubmittedonthefourthlevel.Thislawconfirmedintentionstostrengthen,andmakemorerelevantandbinding,anMTEF.TheMTEFwillbeenactedbyPar-liamentasawhole,whichwasnotthecasesofar.Introductionofstrategicmedium-termplansasamandatoryfirststepinthebudgetpreparationprocess is expected to strengthen program budgeting. Future financialplansofbudgetmanagersshouldincludeprogramsestablishedbyalong-termdevelopmentstrategy,speciallawsandotherregulationspassedonthe basis of law, accompanied by the expected performance indicators.Financialplanswillinclude,amongotherthings,areportontheachievedgoalsandresultsofthepreviousyear’sprogramsaswellasexpectedfutureresults.. Although allocation of funds will remain, to some extent, sub-jecttopoliticaldecisions,performance-informedbudgetingshouldhelpMOFimproveallocationoffundsandgetbettervalueformoney,aswellasfacilitateadherencetoGovernment-setfiscalrules.Butwithoutwell-developed programs for appropriation and reporting, the performancesideofPBBisunlikelytocontributereliableinformationonprogressto-wardspolicyobjectives.

The.approach.to.reform.has.combined.top-down.and.bottom-up.decision-making. Inearly2000,externalassistancereceivedsignificantattentionfromtopmanagementandmanychangesoccurredquicklydur-ingthatperiod, includingchanges indebtandcashmanagement,TSA,the MTEF, accounting rules, and program budgeting. Starting in 2004,reformsweredrivenmostlyattechnicallevelsandmanyinitiativeshavebeentestedthroughpilotprojects.Examplesincludefiscalimpactassess-ment,consolidationofbankaccounts,internalauditunits,andperform-ance-based budgeting. All line ministries’ budget units were consultedduringtheinitialprocessandtrainingeffortswerecomprehensive.Since2004, threenewunits, instrumental inrecent reformefforts,havebeenestablished:aTreasurySystemDevelopment,BudgetAnalysisUnitand

aUnitforInternalAuditHarmonization.TheInstituteofPublicFinance,apublic research institute,hasprovidedadviceandreformimpetus forstrengtheningpublicexpendituremanagement.

key. drivers. of. the. mtFF. implementation. and. program. budget-ing. have. been. treasury. and. moF’s. budget. preparation. and. macro.Analysis.and.Forecasting.departments ..AcoreunitledbytheDeputyMinister of Finance in the early 2000s used external assistance to pro-vide MOF with good international practices and recommendations forprogrambudgeting.The2003budgetlawintroducedprogrambudgetingbutimplementationbeganonlyin2005.Rulebooksanddecreeswerepre-paredandtrainingundertakentoeducatebudgetmanagersonprogrambudgeting.Treasuryworkedcloselywithalllineministriesandprovidedextensive technical support for a swift introduction of program budg-ets.Allbudgetmanagersincludinglocalgovernmentunitsarecurrentlypreparingbudgets inprogramformat.These,however,arenotused forbudget decision making and don’t control policies effectively across allbudgetmanagers.Organizationalandeconomicclassificationsstilldomi-natebudgetallocationpoliciesandnegotiations.

3. Adopting Medium-Term Expenditure Frameworks consistent.efforts.have.been.made.over.the.last.four.years.to.im-

prove.the.rules.and.the.relevance.of.multi-year.fiscal.planning .Theseweresupportedby theneed fora three-yearperspective in thePre-Ac-cessionEconomicPrograms(PEP)andforbetterqualitymacroeconomicforecastingandfiscalplanning.

The. mtFF. was. introduced. in. 2003. with. the. organic. budget. law.giving.moF.responsibility.for.its.preparation.and.cabinet.for.its.ap-proval ..TheMTFFcoverstheannualbudgetplusprojectionsfortwofol-lowingyears,allpreparedonthefourthlevelofeconomicclassification.Projectionsarepreparedonthesamestructureandlevelofdetailastheannualbudget.AlthoughtheMTFFispresentedtoParliament,itismost-lyusedforbudgetplanningpurposes,becauseParliamentapprovesonlyappropriationsforthefirstyear.TheMTFFisupdatedannuallyandonlythefirstyearisbinding;theothertwoyearsareindicative.

until.2003.the.mtFF.was.not.formally.adopted.by.government ..it.was.a.mere.analytical.exercise,.focusedmainly.on.the.macroeconomic.framework,. aggregate. revenue. and. expenditure. items. Initial efforts,supported by the IMF and US Treasury, aimed to improve the qualityand realism of the macroeconomic framework, and budget procedure

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and documentation, and introduce sectoral ceilings. Ownership of theTreasuryDepartmentwascrucialforadvancingtheMTFFtoitscurrentform.The2005budget,forthefirsttime,containedmulti-yearlineitemestimatesasprescribedbybudgetlaw.Ithasbeendisaggregateddowntothe fourth level of economic classification for all budget managers andhasbecomeacorepartofbudgetdocumentationsubmittedtoParliamentafterCabinet’sformalapproval.

moF.plays.a.leading.role.in.the.mtFF.preparation.Themedium-termmacroeconomicforecastsarepreparedbytheBureauforMacroeco-nomicAnalysisandPlanning,adepartmentinMOF.TheBureaucoordi-natesitsforecastsandassumptionswiththeCroatianNationalBank;morerecentlyMOFhasbegunconsultingwith independent research institu-tionsortheprivatesector.ThemodelusedformacroeconomicforecastshasbeendevelopedwithIMFsupport.Thescopeandqualityofpresenta-tionof themacroeconomic frameworkhas improvedsubstantiallywithpresentationoffiscalandmacrorisks,aswellassensitivityanalysis.Themedium-termfiscalframeworkispreparedbyMOF’sBudgetPreparationDepartment in consultation with the Treasury and the Debt and CashManagementDepartment.Projectionsforrevenuesandexpendituresareshownindetailbyeconomicclassificationinnominaltermsandasaper-centofGDP.Oncethismedium-termfiscalframework,presentedintheMedium-TermEconomicandFiscalGuidelines,areapprovedbyCabinet,aBudgetCircularwithsectorceilingsandkeyfiscalandmacroassump-tionsissharedwithallbudgetmanagers.Budgetmanagerspresenttheirmedium-termbudgetstotheMOFbyend-Juneafterwhichbilateralne-gotiationswithMOFstart.

line.ministries’.estimates.of.their. institution’s.medium-term.ex-penditure.are.as.detailed.as.the.budget.but.it.is.questionable.how.real-istic.they.are .Budgetprojectionsaren’tmandatoryandtheyareoftenonlysimple inflationorwage-growthadjusted forecastsofcurrentprogramsorprojectionsofpaymentsforcivilworkaspersignedcontracts.Budgetmanagers don’t make sufficient effort to provide realistic estimates andtheirsubmissionsmakenoimpactonthebudgetnegotiationsprocess.Forallnewpoliciesandlaws,theforward-lookingfiscalimpactassessmentispreparedinanobligatoryformbut, inpractice, theseestimatescande-viate from thefinalbudgetedamount.Sincepolicy changesand savingmeasuresoftenrequirelongleadtimesbeforetheyarereflectedinbudgetestimates, it is important thatallpolicydiscussion ingovernment (andnotonlybudgetpolicyissues)isaccuratelyinformedonmulti-annualfis-calconsequencesandtherequiredchangesinmulti-annualestimates.

The. mtFF. implementation. has. been. well. integrated. into. public.expenditure.management.systems.and.embedded.in.budget.managers’.practices.but.more.effort.is.needed.to.make.it.credible .CroatialacksanexplicitfiscalruleforthetotalorcurrentdeficitsoMTFFservesasamul-ti-annualexpenditureandrevenuestrategyforkeepingthedeficitwithinacceptableboundaries.Overthelastfouryears,theMTFFhasaimedtoreducetheconsolidatedgeneralgovernmentdeficitbelowthe3percentmargin, a Maastricht criteria for entering the Economic and MonetaryUnion. But deviations from expenditure and deficit targets are typical.Whiledeficitdeviationsarewithinacceptableboundariesandsometimesevenreflectover-performance,deviationsbetweennextyear’sbudgetsandplannedexpenditures,ascontained inthepreviousyear’sMTFF,some-timesexceed10percent.Theseareledbyunplannedliabilitiescreatedbynewlegislationornewgovernmentprograms.ThebudgetismadefromyeartoyearwithoutmuchattentionpaidtotheMTFFadoptedinthepre-viousyear.Sofar,neitherMOFnorCabinethasprovidedanexplanationforexpendituredeviations fromthepreviousyear’sMTFF.AndneitherParliamentnorexternalreviewershaveraisedthisissueandtherelevanceoftheMTFFexercisehasn’tbeenadequatelyrespected(e.g.atthelevelofaggregateexpenditureceilings).

croatia. would. benefit. from. making. multi-annual. expenditure.totals.of.first. level.budget.managers.mandatory,.while.allowing.flex-ibility.at.the.line.item.multi-annual.estimates .Expendituretotalscouldbe rigorously enforced from year to year during budget formulation aswell as during budget execution. Unexpected developments, includingoverspendingonentitlementprograms,ornewspendingprioritiescouldbeaccommodatedbyreallocationwithin the totalsor savingmeasures.Althoughlineitembudgetaryandmulti-annualestimatescanbeflexible,totalsoffirstlevelbudgetsshouldnotbe.Enforcingaggregateexpenditureceilingsisaprioritytaskfortopdecision-makers.Itisalsoimportanttoexplaininbudgetdocumentshowbudgetaryandmulti-annuallineitemestimatesrelatetothepreviousyear’smulti-annualestimatesandtherea-sonsforchange.MakingthisinformationavailabletoParliamentwouldhelpMPsmakemoreinformedproposalsandexternalreviewersprovidemoreinformedjudgmentsonfiscaldevelopments.

new.budget.law.from.July.2008.aims.to.improve.the.mteF’s.rel-evance.ThislawprovidedforthetwoouteryearsintheMTFFtobebind-ingat theaggregate levelandlinkedtostrategicpriorities,asstipulatedin the newly introduced three-year strategy of government programs.Butwithoutaclear top-downsteeringof thebudgetprocess toenforce

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themulti-annualstrategythismaynotyieldthedesiredresults..Buildingbudgetmanagers’capacitytodevelopmedium-termplanswithmoreac-curacy,whilebeingrealistic,andstrengtheningMOF’sauthoritytoevalu-ateandprovideagreement/disagreementwiththeirproposals,wouldsig-nificantly improvepublicfinanceeffectiveness.Planned introductionofathree-yearsectorandanoverallgovernmentstrategy,alongwithbettergeneralperformanceofthebudgetingprocess,wouldincreasetheMTFFeffectivenessinCroatia.

4. Performance-Based Budgeting progress. towards.more.performance-oriented.budgeting.has.not.

advanced. as. much. as. the. mtFF . Croatia’s budget preparation processhada transition fromline-itembudgeting toprogrambudgeting, start-ingwiththe2005budget.Fouryearslatermostbudgetmanagersseemtothinkthatprogrambudgetingisonlyaboutconsolidatingspendingintoactivities,projectsandprograms.Theydon’trecogniseitasamajorshiftofmethodologicalfocus,fromtypeandsizeofexpendituretoexpectedoutcomesandresults.

program. budgeting. was. formally. introduced. four. years. ago. but.has. limited. relevance .. It’s not used as a budget allocation and controlmechanismandthereisnosetofmeasurableprogramperformancein-dicators.Organizationalviewsonthebudgetstilldominateoverprogramperspectiveandthislimitstransparencyinbudgetarypresentationsandconsultations.Consequently,theimpactonbudgetallocationdecisionsofvariouseconomicandsocialanalysesofpresentandfuturepublicexpen-dituresremainslimited.

A. need. to. integrate. strategic. and. budgetary. planning. and. in-troduce. proper. monitoring. and. evaluation. became. more. evident. in.the. eu. pre-accession. process . Adoption of the Strategic DevelopmentFramework(SDF)2006-2013,thefirstconsistentlonger-termgovernmentstrategy,inJuly2006,providedanopportunitytolinkbroaderstrategicconsiderationswithoperationalbudgetarydecisions.Butpolicyeffective-nessandefficiencywereconstrainedbytheabsenceofsystemstointegratestrategicprioritiesandstrategicgoalswithbudgetallocations.Acompari-sonofpriorityrankingsimpliedbytheSDF2006-2013andthebudgetfor2007illustratesthegapbetweenstrategicgoalsandannualbudgetaryal-locations.TheframeworkforcomparisonsisweakbecausedefinitionsofstrategicareasandgoalsintheSDFcannoteasilybematchedtobudgetaryallocations.Thetoppriorityinbudget2007isattachedtoregionallybal-

ancedgrowthandfiscaldecentralization.Budgetallocationforregionaldevelopmentprogramsalmostdoubledrelativeto2006,andtripledrela-tive to 2003. Looking at the SDF, balanced regional development is re-flectedinthedefinitionofonlytwogoalsamongseveninsectionVIonSpace, Nature, Environment and Regional Development. This does notindicateahighpriorityranking.Ontheotherhand,SDF’stoppriorityisreflectedinthesectiononPeopleandKnowledgeandiscomparablewiththesectiononEducationandScienceintheBudget.Thisbudgetaryallo-

Table10.TransportSectorProgram-Budgeting,2008Budget

Programs Ministryofsea,transportandinfrastructure(065) HRK8,259,997,126

1200 Administrationandgovernance 186,709,0921202 Internationalcooperationofinlandwaternavigation 4,460,0001204 Restructuringandmodernizationofrailways 510,050,0001205 Modernizationanddevelopmentofportsofstateinterest 217,037,000

1208 Modernizationandconstructionofrailwaytracksandjunctions 4,000,0001209 SupportforCroatianshippingindustry 85,500,0001210 Supporttoporttraffic 4,110,0001213 Subsidizationofrailwaytraffic 414,000,0001215 Monitoringanddevelopmentofthepostalservices 2,900,0001217 AccessiontoNATO-mapprogram 300,000

1218Transportconnectionofmainlandandislands,andbetween

islands 100,000,0001219 Developmentofroadtransportandsafetyonroads 1,620,0001221 Developmentofairtransport 95,575,0001222 Securityandsafetyinairtransport 41,472,0001224 Safetyofseawatertransport 70,690,0001229 Environmentprotectionintransport 12,818,0001497 Transportinfrastructureconstruction 3,418,006,4411510 Developmentofinlandwaterwaysnavigation 1,830,000

1511Monitoringanddevelopmentoftelecommunicationsandpostal

markets 4,200,0001544 Safetyandoversightofnavigationoninlandwaterways 10,500,0001545 Supportforrivertransport 2,500,0001546 Developmentsofinlandwaterwaysportsofstateinterest 50,300,0001547 Constructionandtechnicalmaintenanceofinlandwaterways 450,0001688 Implementationofnationalrailwayinfrastructureprogram 2,248,172,000

1218Transportconnectionofmainlandandislands,andbetween

themselves 378,647,5001547 Constructionandtechnicalmaintenanceofinlandwaterways 78,704,0001215 Monitoringanddevelopmentofpostalsystemandtraffic 2,569,251

Source:OfficialGazette

146 147

cationhasbeenincreasedby5.5percentwhich,again,seemsmismatchedwithSDF’spriorities.

several.attempts.have.been.made.to.launch.pbb.but.introduction.of. performance. elements. remains. at. the. pilot. phase . With help fromtheUSTreasuryandtheWorldBank,tworoundsofpilotprojectshavebeenundertaken in2004-2006 for selected lineministries (Justice;Sea,Tourism,TransportandDevelopment–programTourism;Finance–cus-tomsDirectorate;HealthandSocialWelfare–programHealth;Agricul-ture,ForestryandWaterManagement–programAgriculture)andastateagency(StateGeodeticInstitute).Theyaimedtocollect informationontheministry’smission,policies,strategicandoperationalobjectives.Pro-gramswereaccompaniedbyastatementofobjectivesandadescriptionofinstitutionalarrangementsforimplementingtheprogram.Namesoftheresponsiblemanagerfortheprogramimplementationwereincluded.Per-formanceindicatorsarepresentedforthebaselineyearandtargetsforthenextthreeyearswiththesourceofinformationidentified.Adraftmeth-odologyforkeyaggregatefinancialandpersonnelperformanceindicatorshasbeendevelopedandtestedonpilotprogramsbutnodecisionshavebeenmadeonrollingitoutfurther.Persistentfocusoninputbudgetinghas ledmany lineministries to inflateandfragment thenumberofex-isting programs, hindering meaningful performance measurement. Forexample,thetransportsectorinthe2008statebudgethas27programs,manyofwhichareactivitiescontributing toameaningfulperformancearea.Furtheradvancementtowardsperformancebudgetingrequirescon-solidationofprograms.Inthetransportsector,thismeansconsolidatingfrom27to10programs.

budget. architecture. involves. the. programmatic. structure. but.needs.to.be.complemented.by.strategic.and.operational.objectives,.per-formance.indicators.and.medium-term.policy.targets.for.the.medium-term .. Expenditures are classified and reported on four-levels. Programclassification,asdescribedintheRulebookonBudgetClassifications,hasthreelevels:

• P1–mainprogramhasoneormoreprograms:sector-wideorcross-cuttingprogram;canbeexecutedinoneormoredifferentministrylevels.

• P2 – program: belongs to one main program; belongs to oneministrylevel;hasoneormoresub-programs;canbeexecutedinoneormoreagencylevels.

• P3–sub-programbelongstooneprogram;belongstooneagen-cylevel;hasonefunction.Therearethreetypesofsub-programs:activity(codedA),currentproject(codedT)andcapitalproject(codedK).

InMOFbudgetterminologyan‘activity’ isapartofaprogramforwhichexpensesandexpendituresareplannedtoachieveprogramobjec-tives.A‘project’isacomponentofaprogram,plannedonanadhocba-sis,inwhichexpensesandexpendituresareplannedtoachieveobjectivesestablishedforaprogram.A‘program’isasetofindependent,closelyre-latedactivitiesandprojectsorientedtowardsachievingacommongoal.A‘mainprogram’isasetofprogramsthatcontributetorealizingtheex-ecutivebody’sobjectivesestablishedbyitsdecision.However,intheIn-structionfor2009-2011BudgetPreparation,budgetmanagersareaskedtoprovideprogramobjectivesandperformanceindicatorswhenexplain-ingtheirfinancialplans.

Table11.Croatia’sBudgetStructure:OrganizationalandProgramClassifications

budget.classification classification.categories

OrganizationalMinistry(Razdjel)

Agency(Glava)Budgetenduser

Program

MainprogramProgram

Sub-programActivity(A)

Currentproject(T)Capitalproject(K)

Source:MOF

148 149

Figure6.ExampleofOrganizational,ProgramandEconomicclassification

üüü 2008 065 Ministry of sea, transport and infrastructure 8,259,997,126 06505 Ministry of sea transport and infrastructure 7,797,027,941 1213 Subsidization of railway traffic 414,000,000 A761010 Subsidies to railway passenger traffic 400,000,000 35121 Subsidies to public corporations 400,000,000

Organizational

Program

Economic

The.following.six.pre-conditions.are.necessary. for. successful. in-troduction.of.pbb:.

• Furtheralignment.of.program.classificationtomeasureandmon-itorprogramperformanceintermsoftheireconomy,efficiencyandeffectiveness,andenablethemtobefollowedupinabetterway (alignment of programs with the Key Performance Areas(KPAs).

• Systematic.collection.of. the. lists.of. indicatorscurrentlyavailableand/or in use in the state administrations (for example CRO-STAT,FinancialAgency)andrecognitionoftheneedforaddi-tionalmeasuresandindicatorsandtoidentifysetsofKeyPerfor-manceIndicators(KPIs)forprogramsandsub-programs.

• Stronger. capacity. of. line. ministries in terms of understandingthe log frame (inputs, outputs and strategic objectives). In thepast two years, together with the budget proposal, Parliamentreceived the explanation of select programs which includedsomeperformanceinformation.Buttheimplementingagenciesprovidingtheseperformancereportsfocusedmostlyonoutputmeasures which are easier to collect but provide little under-standingofsectorperformance.

• Changes.to.the.budget.negotiation.processtoachieveresults.Al-though the budget manual defines program classification as a

basis forbudgetpreparation, it is effectivelydoneon thebasisoforganizationalclassification.Budgetisconductedintermsofexpendituresperorganizationunitsandthereisnoinstitution-alized process for using quality indicators (results of research,performanceandefficiencybenchmarksetc).

•. ICT.system.supporttocreateuser-friendlytools.TheSAP-basedITsystemsupportsallbudgetclassifications.Anapplicationformanagingbudgetclassificationshasbeendevelopedwhichhelpstoimprovebudgetpreparationprocess.

•. Political.support.from.decision-makersthatnotonlyliftsthebud-getprocessaboveexcessivelynarroworpartialinterests,buten-sures greater focus on strategic management and on ensuringexternalcontrolandaccountabilityforthedeliveryofprograms.

The.strategy.for.the.development.and.modernization.of.the.state.treasury. 2007-2011,. a. core. forward-looking. document. for. public. fi-nance.management.improvements,.was.adopted.in.october.2007 ..The.aim. is. performance. information. to. measure. programs’. effectiveness.and.reward.effective.functioning.by:61

• Atthestate.level,strengtheningoverallfiscaldisciplinetoensureandmaintainmacroeconomicstability.Thistask,interalia,re-quiresdetailedandcomprehensivemacroeconomicanalysesandsome form of a multi-year budget framework to maintain thesustainabilityofcurrentprogramsandpublicdebtpolicy.

• At the inter-sectoral (inter-ministerial) level, ensuring effectiveinter-sectoralallocationofresources,i.e.allocationofresourcesconsistentwiththestrategicprioritiesoftheState.Institutionalsolutionsandtoolsforenhancingstrategicallocationofresourcesincludethetop-downdevelopmentapproachtobudgetaryplan-ningandthedevelopmentofamulti-yearbudgetframework.

• At the programmatic/managerial level, coordinating budgetaryauthorizationsandoperativeeffectiveness.Gettingtherightbal-ancebetweenflexibilityduringtheexecutionphaseofthebud-getandbudgetaryrestraintisessential.Measureswillbedirectedtowards strengthening fiscal controls, improving inter-sectoralallocationofresourcesandprovidinggreaterflexibilityforeffec-tivemanagementandthedevelopmentofaccountabilitymecha-nisms.

61 TheStrategy for theDevelopmentandModernizationof theStateTreasury2007–2011,August2007,page20

150 151

integrating. established. strategic. priorities. and. budgetary. proc-esses. would. significantly. increase. government’s. ability. to. meet. its.obligations. in. a. timely. fashion .. An element of the MTEF, introducedthroughthe2008BudgetAct,ispreparationofstrategicplans.Planswillbepreparedbylineministriesfortheirscopeofworkand,basedonthese,theStrategyofGovernmentProgramsforathree-yearperiod(FinancialStrategy)willbepreparedandsubmitted foradoptionbyGovernment,asstipulatedbythebudgetact.PreparationoftheFinancialStrategyandotheractivitiesfortheintegrationofstrategicandbudgetaryplanningwillbe done in close cooperation with the Central Office for DevelopmentStrategy and Coordination of EU funds. This Office is already engagedinformulatingthedevelopmentstrategyoftheRepublicofCroatiaandmonitoringitsimplementation.TheFinancialStrategywillclearlydefineGovernmentpriorities,goalsandpoliciesandwillbereflectedinthree-yearbudgetsensuringadequateresourcesareallocatedtomeetthem.Itwillhave tobesupplementedwithperformance indicators,but initiallyforselectedprogramsandministriesonly.

Figure7:ComparisonofDesiredandCurrentProcessesofStrategicandBudgetaryPlan-ning

Visions

Strategic goals

Polices, measures, instruments

Action plans and programs Budget

Policy evaluation, effectiveness,

efficiency, deviation analysis

Strategic Framework for Development 2006-

2013

Guidelines Draft until 30.4 Guidelines acceptance until 15.5 Budget Manual until 30.5 Budget proposals until 30.6 Budget proposal until 15.10 Acceptance and sending to Parliament until 15.11

Key element missing: Evaluation

AN

ALY

SIS

AN

ALY

SIS

Source:Arhivanalitikaltd,StrategicPlanningandBudgetingProcessfortheGovernmentofCroatia,WorldBank,IDFGrant:Croatia–StrengtheningBudgetManagement,Sep-tember2006

moF. stands. firmly. behind. this. reform . Its goal is to implementproperprogrambudgetingoverthenextfewyears.Itseesperformanceinformationasvaluableforthebudgetplanningprocessbutalsoforthe

accountabilityoftheexecutive.MOFplanstouseperformanceinforma-tiontomonitorprograms’effectiveness,andinbudgetnegotiationsandprovideafoundationforrewardingeffectivefunctioning.MOFrecogniz-esperformancewon’tbetheonlyelementdirectlyaffectingallocationoffundsaccordingtoprograms;itcallsthisatransitiontowardsperform-ance-informedbudgeting,asopposedtoperformance-basedbudgeting.

The. institutional. framework. of. budget. process. and. its. classifi-cations. needs. no. changes .. Programs will be redefined to reduce theirnumber, align them with the strategic framework and determine theirmeasurability.ThisworkwillbesupportedbytheEUPhare2006-fundedproject.Because thismodernizationeffort is complex, establishingper-formance indicators will initially be restricted to pilot ministries. Or-ganizationalstructures insomeministriesandacrossgovernmentdon’tsupporteffectiveuseofperformancebudgets.Forexample,thereare17institutionsdealingwithenvironmentalprograms,manyofwhichoverlapacrossseveralministriesandagencies.Recentfunctionalreviewsofstateinstitutionstoprepareforgovernmentorganizationalreformshouldcom-plementandsupporteffectivePBBimplementation.

5. Budget Presentation and Classificationbudget.documentation.is.better.and.more.comprehensive ..Thefol-

lowingbudgetdocumentsareusedinpreparingthebudget:•. The.Economic.and.Fiscal.Policy.Guidelinesforathree-yearperiod.

preparedbyMOFandadoptedbyGovernmentatthebeginningof the budget preparation process. These Guidelines include adescription of the current macroeconomic and fiscal setting;analysisofthelong-termsustainabilityofpublicfinances;mac-roeconomicandfiscalassumptionsforthebudgetyearandthefollowingtwoyears;estimatesofrevenuesandexpenditures,andreceiptsandexpensesatallgovernmentlevels;aproposalofag-gregate budget managers’ expenditure ceilings for a medium-termbyFLSUs;projectedchangesinassetsofcentral,regionaland localgovernments,anddebtofregionaland localgovern-ments;andanoverviewofcentralgovernmentobligationstobemet in the coming years and the policy plan for the develop-ment/investmentprograms.

•. Instructions. for. the. Preparation. of. the. State. Budget. Proposal.(‘budget.circular’)andInstructionsforthePreparationoftheLo-

152 153

calandRegionalSelf-GovernmentUnits.ThesearepreparedbyMOFandbasedontheGuidelines.Theyincludekey informa-tionaboutthebudgetmanagers’responsibilities,timeschedules,keydocumentstobedelivered,FLSUs’expenditureceilingsandmacroandfiscalassumptionstobeusedinpreparingmedium-termfinancialproposals.

•. State. Budget. and. the. Consolidated. Budget. MTFF. which. repre-sents thedraft statebudget andconsolidatedbudgetmedium-term fiscal program for a three-year period. It is presented ateconomicandprogramclassification.

•. The. Budget. Explanatory. Note. is presented to Parliament withthedraftannualbudgetandMTFF.Itexplains,inageneralway,Government priorities for the next year, macro and fiscal as-sumptionsaswellasallocationofbudgetresourcesbysector.

•. Budget.Execution.Lawdetails therulesbehindimplementationofthestatebudgetaswellasotherlevelsofgeneralgovernment.ItissubmittedtoParliamentwiththeabovetwodocuments.

•. Reports.on.the.semi-annual.and.annual.execution.of.the.consoli-dated.and.the.state.budgetpresentthesemi-annualandannualbudgetexecutiontoParliamentbyend-Juneandend-September,atthesamelevelofdetailasthebudgetlawandMTFF.MOFalsoissuesapromotionalpublicationontheexecutionoftheprevi-ousyear’sbudget,outliningmainperformanceindicatorsofthebudget,someoutputindicatorsandfinancialoutcomesofthefis-calpolicy.Thisiswidelydisseminated.

•. Annual.Report.of.the.Ministry.of.Financeisissuedfortheprevi-ousyear’sbudgetexecutionwithsometenmonthslag.Ithasawide distribution including through the MOF website. It pro-videsanoverviewofmacroeconomicandfiscalsetting,revenueandexpendituredevelopmentsofstatebudget,consolidatedcen-tralandgeneralgovernmentbyeconomic,functionalandorga-nizationalclassification,debtdevelopmentsofcentralandlocalgovernments,andany institutionalchangethatmayhavehap-pened.

• Apromotional.publication.on.budgetforthefollowingyear.62• ABudget.Guide.for.CitizenswaspreparedjointlywiththeInsti-

tute of Public Finance five years ago. Its main purpose was to

62 http://www.mfin.hr/adminmax/docs/Proracun2008.pdf

familiarizethepublicwiththestatebudget,budgetproceduresandthewayitaffectstheeconomyandsociety.

The.2003.budget.Act.identified.the.following.types.of.budget.clas-sification:. organizational,. economic,. functional,. location. and. pro-gram. Economic and organization classifications dominate the budgetprocess. Budget classifications and coding are further regulated by the.RulebookonBudgetClassificationsfrom2007.ThisRulebookprescribestypes, content and application of budget classifications and determinesthesourcesoffinancing.

•. Organizational classification is a presentation of expendituresand expenses according to organizational structure of centralgovernment and local and regional self-governments, brokendownbyfirstandsecondlevelbudgetmanagers.

•. Economic classificationcomprises revenuesandreceiptsclassi-fiedbyeconomictype,andexpendituresandexpensesclassifiedbytheeconomicpurposetheyserve.

•. Functionalclassificationisasetofoperations,functionsandpro-gramsofcentral,localandregionalgovernments.

•. Location classification presents expenditures and expenses ac-cordingtotheterritorialorganizationoftheRepublicofCroatia.Although MOF has tried to establish it, this is yet to be pub-lished.

•. Programclassificationisapresentationofbudgetprograms,andtheirintegralparts–activitiesandprojects.

•. Sources.of.financing,.introducedbythenewBudgetAct,althoughoperational 2007, and based on the Book of Rules on BudgetClassifications.

Allexpenditures,expenses,revenuesandreceiptsmustbereportedinaccordancewithbudgetclassifications.Revenuesandreceiptsarealsomonitoredbysourcesoffinancing.

6. Public Management Performance Cultureprogram. budgeting. has. been. in. place. for. a. couple. of. years. but.

further. advancement. is. constrained. by. lack. of. certain. performance.elements .Theexecutionofprogramswithsomeresultsand/orachieve-mentsinformationisreportedtoParliamentonanannualandsemi-an-nualbasis.TheStateAuditOffice(SAO),accordingtoINTOSAIAuditingStandardsandStateAuditAct,isobligedtoimplementtheperformance

154 155

audit,inadditiontofinancialandspecialaudits.ThefinancialauditisthemostfrequenttypeofauditcarriedoutbySAO.Itisanauditofpublicin-comeandexpenditure;financialstatementsauditandanauditoffinancialtransactionsinpublicbodies,localandregionalself-governmentunits,le-galentitiesfinancedpartlyorentirelyfromthebudget,publiccompanies,companiesandotherlegalentitiesinwhichtheRepublicofCroatia(i.e.localandregionalself-government)isamajorshareholder.ItcoverstheuseoffundsfromtheEUandotherinternationalorganizationsorinstitu-tionstofinancepublicneeds.

sAo’s.role.in.promoting.a.performance.culture.is.significant.but.would.benefit.from.more.capacity .SAO’spowers toconductperform-anceauditsisdefinedbytheStateAuditActwhichstipulatesthataudit-ingincludeanassessmentoftheefficiencyandeffectivenessofbusinessoperations,andanassessmentofperformanceintherealizationofpar-ticularprogramoutputs.So far, sixpilotperformanceauditshavebeenconducted.SAOhasdevelopedanauditmanualwhichdatesbacktothemid-1990s.Up-to-dateandmoredetailedmanualsareneeded.DraftsofaFinancialAuditManualandaPerformanceAuditManualhavebeenpre-paredinlinewithINTOSAI–AuditingStandards,INTOSAI–PracticalGuidelines for Performance Audit, European Implementing GuidelinesfortheINTOSAIAuditingStandards,aswellasexamplesofgoodpracticeandManualsofSupremeAuditInstitutionsfromothercountries.

The.ongoing.civil.service.reform.program.of.the.government.of.croatia. should. complement. and. mutually. reinforce. pbb. initiatives.Better understanding of the benefits of a more performance-orientedculture is important but achieving it requires an effective program andperformance budget framework. For example, development of job de-scriptionsforpositionholdersandofstaffappraisalsystemsneedstobeinformedbyprogramperformancemeasurementandobjectives.Thecivilservicereform,whichstartedin2005withenactmentofanewCivilServ-iceLaw, set thebasis foramerit-basedpromotionandpay systemandhasprofessionalizedtopcivilservants’ranks.Thesewerepreviouslypo-liticalappointees.Reformproceededslowlywithde-politicizationtakingplaceonlyinearly2008,whilesalaryreformisstillbeingdiscussedwithstakeholders,particularlyunions.Themajordisagreementbetweenun-ionsandGovernmentisaboutthereplacementoftenure(yearsofserviceinadministration)andbonuses(currentlycreatingalargepartofthesal-ary)withperformance-relatedbonuses.Despiteeffortstoprofessionalizetop managerial posts, the public administration system is not ready toincreaseflexibilityinreturnforincreasedaccountability.Thenewsalary

systemproposed tosocialpartnersallows for theaboveprinciple tobeimplementedbutresistance,generatedbythefearofdecreasedjobsecu-rity,andanon-objectivestaffappraisalsystemneedtobeaddressedfirst.

157

Latvia Paulina Hołda

General Assessment (Summary)63

Latviahasundertakenanumberofimportantinstitutionalreformstostrengthenfiscalpolicymaking.Theseincludeextendingbudgetanal-ysisbeyondasingleyearby introducingthemedium-termexpenditureframework(MTEF)andimplementingprogrambudgeting.ThisincludesestablishingandmonitoringtargetsforoutputsandGovernmentspend-ingobjectives.Aperformance-orientedculturehasbeenstrengthenedbyongoingpublicwagereformwhichenvisagesacloser linkbetweenpaylevelsandtheprofessionalcontentofdifferentpositions,plusactualper-formance.

SupportfromtheStateChancellery,andwithintheMinistryofFi-nance(MOF),attheoutsetofthesereformshelpedsetthepaceandqual-ity of reforms. Despite this, their implementation suffered from someproblemsand,while significantprogresshasbeenmade, challenges re-main.Theseincludeimprovingpolicyformulationandplanning,address-ingartificialfragmentationofthebudget,buildingcapacitytodevelopameaningful medium-term budget framework and improving the struc-tureandpolicyapplicabilityoftheperformanceinformationsystem.

Reforms aimed to improve control over the budget process, withMOFplayingamorestrategicrole.Tobesuccessful,thesepublicfinancemanagement reforms need first to get the basics right to support threefunctionsofthebudget:controlofpublicresources,planningforfutureallocationandefficientandeffectivemanagementofresources64.Controlofpublicresourcescomesfirst,soreformersneedtocontrolinputsbeforeseekingtocontroloutputs.TheLatvianexperienceillustratestheneedtofocusonthearchitectureandrationaleofthesystemandnotonitspar-ticulartechnicalparameters.

Recently,Latvia’spoliticalandeconomicenvironmentforpublicfi-nance reforms has changed. The economy is undergoing major adjust-mentandmoreshort-termpressuresareemergingonthefiscalside.InthischangedenvironmentitmaybedifficulttoenforcetheMTEFdevel-opedin2007,ortoencouragehardchoicesbetweenexpenditureoptions.

63 WearegratefulforexcellentandtimelyassistanceprovidedbytheLatvianMinistryofFinance,andinparticularMs.IlondaStepanova,DirectorofBudgetDepartment.

64 WorldBank,1998,Public.Expenditure.Management.Handbook,WashingtonD.C.

158 159

Ontheotherhand,tighteningconstraintsmaystimulatefurtherreformtobetterprioritizeandimproveefficiencyofpublicspending.Theneces-sityforthismayhavenotbeenobvioustoallstakeholdersduringtimesofsuccessfuleconomicperformance.

1. Core Features of the Current Budget Systemlatvia.has.achieved.many.of.the.basic.requirements.of.fiscal.trans-

parency .. As noted in the IMF assessment65, Latvia has been a leaderamongeconomiesintransition.Itadoptedimprovedaccountingandfis-calmanagementpracticesandprovidedfinancialmarketswithrelevantinformationonfiscalactivities.Inparticular,thestatetreasuryestablishedanaccountingandreportingsystemthatiswidelyrecognizedaseffectiveandreliable.Thebudgetprocess isopenandsoundlybasedonamacr-oeconomicframeworkwithreliableestimatesofexpenditureandrevenue.

The.budget.process.is.transparent.with.an.emphasis.on.financial.compliance ..it.also.provides.for.development.of.performance.budget-ing.and.medium-term.planning ..Theannualbudgetprocessiswellde-finedandclearabouttimelinesandtherolesandresponsibilitiesofkeyagencies.Importantstepsforfurtherimprovementhavebeenidentifiedandauthoritiesareundertakinginstitutionalreformstostrengthenfiscalpolicymaking.ThisincludesextendingbudgetanalysisbeyondasingleyearbyintroducingtheMTEFwiththe2008budget.Governmentisal-readyimplementingaprogrambudgetingframeworkwhichincludeses-tablishingandmonitoringtargetsforoutputsandgovernmentspendingobjectives.Furtherworkisrequiredtoputtheseelements intoeffectivepractice.

moF.needs.to.play.a.more.strategic.role.if.fiscal.policy.making.is.to. improve ..An important featureofLatvia’sbudget system is thecon-ceptofbasespending.Thiscapturesthelevelofspendingassociatedwithcontinuingcurrentgovernmentfunctions,similartotheconceptofun-changedpolicy.Todeterminethebudget,spendingfornewprioritiesisadded to base spending. Developing the base budget has traditionallybeenaquantitativedrivenexercisewithmostministriesperceiving thebaseasanentitlementtobecarriedforward,withlittleconcernforscru-tinyandrationalization.InstitutionalreformaimedtostrengthenMOF’srole in the budget process, including analyzing existing base spending,evaluatingstrategicplansandbudgetrequestsanddevelopingmethodol-ogyforprogramandperformancebudgeting.

65 Report.on.Observance.of.Standards.and.Codes,.Latvia.–.Fiscal.Transparency,March2001.

despite.significant.progress. in.public.sector.reform.and.govern-ance,.challenges.remain.AsidentifiedintheWorldBankPublicExpend-itureReview(2002)aprimarytaskfacingLatviainthefiscalareawasra-tionalizingpublicexpenditureandreformingthecivilservice.Reformsintheseareasarebeingimplementedbutworkisyettobedonetoimprovepolicyformulationandplanning,addressartificialfragmentationofthebudget,buildcapacitytodevelopameaningfulMTEFandimprovethestructureandpolicyapplicabilityoftheperformanceinformationsystem.

2. General Progress on Budget Reformreform. efforts. have. been. made. in. public. finance. management,.

including. introduction. of. an. mteF. and. program. and. performance-based. budgeting. To limit discretion in fiscal policy, Government de-cided in 2000 to move towards an MTEF and making this frameworkoperationalfrom2008wasthekeyachievementinstrengtheningpolicyplanning. Strategic planning to link policies with budget allocation hasbeendeveloped since2003.Budgetprogramswere introduced in1997,performancemanagementdeveloped since2003,with the secondcycleofreformstartingfrom2008toreviseandimproveresultsandperform-anceindicators.Publicwagereformacrossallbudgetinstitutionsbeganin2003tointroduceclearjobdescriptionsandbasewagesonrevisedjobclassificationslinkedtoprofessionalcontentandactualperformance.Thisisamajorpositiveshiftfromthetraditionalseniorityrules.

institutional.reforms.aimed.at.strengthening.fiscal.policy,.giving.moF. a. more. strategic. role. MOF has traditionally played a weak rolein thebudgetprocesswhich, toa largeextent,hasbeenbasedonnon-scrutinizedbasespending.TherewasastronginternaldriveforreformatMOF,aswellasexternalstimulusfromtheStateChancelleryandthePrime Minister, to improve control over the budget process. MOF hasbeentheleadagencyinintroducingtheMTEF,withtheStateChancellordevelopingasystemofstrategicplanning.

under. strong. fiscal. performance,. political. support. for. reducing.base.spending.has.been.limited ..This.has.meant.limited.fiscal.space.for.new.policy.initiatives.UnderimpressiveeconomicgrowthfollowingEUaccessionandtheresultingrevenueover-performance,politicalsupportforcuttingbasespendinghasbeenlimitedandattemptstoreviseexistingbudgetprogramshaven’tbeensuccessful.Existingexpenditureprogramshavelimitedfiscalspacefornewpolicyinitiatives,aswellasforwagein-creasescommittedatthepoliticallevel.

160 161

Against.this.background,.implementation.of.reforms.has.suffered.IntroducingtheMTEFisintendedtobetteralignbudgetingwithpolicyprioritiesbut strategicplansdevelopedby lineministrieshavebeenbi-asedtowardnewinitiativeswithlittleattentionpaidtoreviewingandra-tionalizingexistingprograms.Furthermore,strategicplanshaven’tbeenconstrainedbyresourceavailability.Onperformancesystems,thereformstendedtofocusonparticulartechniques,i.e.onresultsandperformanceindicators,withoutrevisingmorefundamental issuesofprogramstruc-tureandfailingtouseperformanceinformationinbudgetdecisionmak-ing.Asaresult, identifyingandmeasuringresultsandperformancein-dicatorsisviewedasaformalexercisewhichbearsnorelationtotherealperformanceofpublicadministrationinstitutions.

The.economic.and.political.environments.have.changed.recently ..The.severe.economic.downturn.has.focused.efforts.on.short-term.con-cerns ..Followingaperiodofabove-potentialeconomicgrowth,theLatvi-an economy entered a phase of substantial adjustment with significantshort-termchallengesemergingonthefiscalside.Falteringrevenuesonthebackofsharpeconomicslowdownresultedinincreasedpressureonbudgetexpenditure,includingonthe2009draftbudget,andrenewedin-terestintoolsandtechniquesforfindingcross-cuttingsavings.Giventhechangedpoliticalenvironment,itmaybedifficulttoenforcetheMTEForencouragehardchoicesbetweenexpenditureoptions.InJuly2008,facedbydeterioratingmacroeconomicfundamentals,Governmentrevisedthestatebudgetfromaplannedsurplusof1percentofGDPbyadjustingboththerevenueandtheexpenditureside.

3. Adopting Medium-Term Expenditure FrameworksThe.mteF.has.been.adopted.as.part.of.broader.reform.of.public.

finance. management .. Reform towards an MTEF was initiated in 2000withMOFplayingtheleadingrole.ThereformprogramincludesseveralelementsoftheMTEF,suchasamedium-termfiscalpolicystatement,abudgetprioritiesstatement,anddevelopmentofguidelinesforlineminis-triestodesigntheirownstrategicplans.Thelegalbasisofthebudgetproc-ess,theLawonBudgetandFinancialManagement,hasbeenamendedto

reflect theMTEF.Themedium-termmacroeconomicdevelopmentandfiscalpolicyframeworkhasbeenoperatingsince2008.

The. mteF. provides. for. a. three-year. rolling. expenditure. frame-work.for.broad.categories.of.spending.Medium-termmacroeconomicdevelopmentandfiscalpolicyframework,tobeapprovedbyCabinetbyMay1,includesforecastsoffiscalaggregatesforthenextbudgetyearandtwofollowingyears.ByMay5, theMinisterofFinancewill informtheSaeimaontheframeworkapprovedbyCabinet.Theframeworkincludes:

• aforecastofthemedium-termStatemacroeconomicsituation• thefiscalpolicyaimsoftheGovernmentinthemedium-term• aforecastofrevenuesinthemedium-term• themaximumpermittedtotalamountofStatebudgetexpendi-

turesinthemedium-term• theplannedStatebudgetappropriationreserveinthemedium-

term• themaximumpermittedtotalamountofStatebudgetexpendi-

tures for each ministry and other central government institu-tionsinthemedium-term.

BySeptember1ofthecurrentyear,theMinisterofFinancesubmitsanupdatedmedium-termmacroeconomicdevelopmentandfiscalpolicyframeworktoCabinet,alongwiththedraftbudgetlaw(packageofdraftbudgetlaws)andexplanations.

As.a.part.of.public.finance.management.reform,.a.system.of.stra-tegic.planning.has.been. introduced. Strategicplanningallows for for-mulationandprioritizationofpoliciesandlinksthemwithbudgetdeci-sions.LeadbytheStateChancellery,whichisresponsibleforestablishingapolicyformulationsystem,thiswasintroducedinLatviain2003-2006alongside training and introduction of structural funds. From 2007 allministriesarerequiredtopreparestrategicplans.Thismarkssignificantprogressinpolicyformulationalthoughinpracticeresultshavebeenonlypartiallysuccessful.

despite.reform.efforts,.the.budget.process.is.still.based.largely.on.incremental.budgeting .Budgetpracticeinanumberofdevelopingcoun-triesshowsitiseasiertoaddnewpoliciesthanremoveoldones.Forthisreason,linkingpolicy,planningandbudgetingshouldstartwithareviewofpoliciesandprogramsof thepreviousplanningand implementationperiod.InLatvia,thebudgetstillremainsartificiallyfragmentedintobase

162 163

budgetanddevelopmentspending.Thiscreatesaperceptioninlinemin-istries that base budget expenditures can be carried forward with littleconcernforscrutinyandrationalization.

strategic.planning.has.so.far.failed.to.address.weaknesses.in.policy.formulation.and.the.budget.system ..Weakpolicyformulationhasbeenidentified as an area for improvement.66 Strategic planning should im-provepolicyformulationbutinsteadhasrevealedakeyweaknessofthebudgetprocess,i.e.artificialfragmentationofthebudget.Strategicplansdevelopedbylineministriesarebiasedtowardnewprioritiesandinitia-tives without fully reviewing and rationalizing existing programs. Newprogramsareonlyvaguelyprioritizedand inadequately integratedwiththeMTEF.

strategic.plans.have.not.been.formulated.within.an.overall.budg-et.constraint.AsuccessfulMTEFassistsandrequiresrelevantdecisionmakerstobalancewhatisaffordableinaggregateagainstpolicypriorities.TheMTEFcomprisesa top-downresourceenvelope,abottom-upesti-mationofthecurrentandmedium-termcostsofexitingpolicyand,ulti-mately,thesecostswithavailableresources.67InLatvia,sequencingthesestageshasbeendifferentwithstrategicplansdevelopedwithoutguidancefrom indicative medium-term resource envelopes at the ministry level.Thus,strategicplanshaven’tbeenrealisticallyfittedintotheoverallfiscalandmacroeconomicframework.

moF.should.be.strengthened.and.technical.capacity.further.devel-oped.MOFstillneedstoimproveitscapacitytobuildameaningfulMTEFand,inparticular,provideprojectionsofbasespending.Itsroleneedstobesignificantlyenhanced,particularlyindeterminingkeyparametersoftheMTEF,evaluatinglineministries’strategicplansandbudgetrequests,anddevelopingmethodologyforprogramandperformancebudgeting.

66 AsnotedinPubicExpenditureReviewforLatvia(2002),policyformulationinsomesectorsre-mainspoorandthelackofclearlydefinedpolicyprioritieshasoftenledtoanincreaseinunfundedmandatesandineffectivenessofthebudgetformulationprocess.Anotherweaknessisadhoccom-mitmenttounfundedpolicyproposalsduringbudgetpreparationorexecution(WorldBank,2002,Republic.of.Latvia.-.Public.Expenditure.Review,WashingtonD.C.).

67 WorldBank,1998,Public.Expenditure.Management.Handbook,WashingtonD.C.

4. Performance-based Budgeting program. based. budgeting. has. been. introduced. within. broader.

public.finance.management.reforms.Programbasedbudgetingreformwas initiated in the secondhalfof the1990s, startingwithbudgetpro-grams.Atthattime,thefocuswasoncontrollinginputsintermsofthenumberofsubordinatedinstitutionsandstaff,ratherthanoncontrollingoutputs. As a result, the introduction of performance indicators failed.Later in2003,withinabroader scopeof introductionofunifiedpolicymakingsystemin2001-2003,performanceindicatorsweredefinedmain-lyforoutputs.Startingfrom2008therehasbeenasecondcycleofreformsinperformancemanagementandthesystemisnowbeingrevised.Workfocusedonnewguidelinesonperformanceindicators68approvedbyCabi-netinJune2008.

The.system.architecture.includes.programs.and.subprograms.with.defined.objectives,.outcomes.and.outputs ..Thebasicarchitectureofthesystemcomprisestwolevels–programsandsubprograms–forwhichex-penditureisclassifiedbyeconomiccodes.Eachprogramandsubprogramhasadefinedobjectiveforwhichpolicyresults(outcomes)andactivityresults(outputs)arespecified(seeTable12foranexample)and,wherepossible,measuredbyperformanceindicators.Theprogrammaticstruc-turehasbeenconsistentlyadoptedacrosscentralgovernment,withlocalgovernmentschoosingwhetherornottoadoptthesystem.

Table12.Budgetprogram:objective,policyresultsandactivityresults,examplefromtheMinistryofEducation.

objectiveProvideeachcitizenwithopportunitytoreceivequalitativelifelongprofessionaleducationinaccordancewithindividualinterestsandabilities,aswellasincompliancewithstateeconomicdevelopmentneeds.policy.results•numberoflearnersfinancedfromstatebudget(thousandsoflearners)•numberofgraduate,whoseeducationhasbeenfinancedfromstatebudget•percentageof25-64yearolds’participationinfurthereducationandnon-formaleducation•numberofregionaleducationcentersforadults.Activityresults•professionsforwhichcontentofcentralizedexamsforqualificationshasbeenelaborated•percentageoflearnerswhohavereceivedqualificationinrelationtothetotalnumberoflearners

financedfromthestatebudget•percentageofteachersimprovingprofessionalskillsinrelationtothetotalnumberofteachers•numberofmodernizedroomsforprofessionalcoursesandworkshops.

Source:.Ministry.of.Finance

68 Performance.Management.System.Guidelines.2008-2013.

164 165

moF.leads.the.way.with.cross-sectoral.working.groups.created.to.solve.the.issue.of.overlapping.tasks ..Budgetandperformancemanage-mentsystemisbeingdevelopedprimarilybyMOF.Tosolveissuesofdivi-sionofinter-sectoralresponsibilityforoverlappingtasksbetweeninstitu-tions,MOFisorganizingworkinggroupswithrepresentativesfromotherinstitutions.TheStateChancellery,whichisresponsibleforcoordinatingpolicyplanningandimplementation,ismakingasignificantcontributiontotheprocess.

program.and.subprogram.design.remains.input-oriented.with.lit-tle.performance.orientation.Theprogrammaticstructureofthesystemhasitsdrawbackswithbudgetprogramsinmanycasesinput-orientedandsimilartotraditionalspendinglines(seeTable13)forwhichitisimpos-sibletosetoutcomeindicators.Programstendtobebroadtoallowminis-triesbudgetflexibility.Linksbetweenprioritiesandbudgetprogramsareunclear.Inpractice,thesystemseemsunhelpfulforpolicyplanning,es-peciallyasperformanceinformationisn’tusedinbudgetdecisionmaking.

Adopting. a. performance-based. system. has. met. challenges. and.constraints,. mainly. on. the. capacity. side .. A major challenge has been.resistancetochangewithprogrambasedbudgetingperceivedasatoolforpunishmentratherthanimprovingefficiency.Therapidpaceofreformshasnotbeenaccompaniedbyadequatecapacitybuilding,bothinMOFand line ministries. Training for better understanding of the rationalebehindprogrambasedbudgetinghasbeeninadequate,focusingonlyontechnicalparametersandindicators.Morefundamentalissuesofprogramstructurerequirerevisiting.

There.is.room.for.considerable.improvement.in.the.current.system.of.output.and.outcome.indicators.Ministries responsible fordevelop-ingindicatorstendtofocusoninputsandprocessesandtheircapacitytoprepareoutcome-basedindicatorsisunderdeveloped.Reportingrequire-mentsarecomprehensivewithtoomanyindicators(496foroutcomesand1597foroutputs)andnoclearhierarchy.Thereisduplicationinplanningandreportingsystemsconcerningperformanceindicators(identifiedinCabinet), activity strategies of direct public administration institutions,budgetexplanations,financialandannualpublicreports69.

There.is.no.systematic.analysis.and.monitoring.of.results.and.per-formance.indicators.and.nor.is.information.aggregated.to.make.it.avail-

69 Therearenoclearlinksbetweenresultsandindicatorsfeaturedinthepolicyplanningdocumentsandtheresultsandindicatorsusedintheactivitystrategiesofpublicadministrationinstitutions.Therefore,thesamepolicymayhavedifferentresultsandperformanceindicatorsacrossvariousdocuments.

able.and.useful.to.decision.makers.Resultsandperformanceindicatorsarenotsystematicallyanalyzedandmonitoredandnorhasresponsibil-ityforinformationanalysis,collectionandcollationhasbeenidentified.Asaresult,comparativeaggregateinformationisoftenunavailablewhenneededforoptimizingbudgetprogramsandanalyzingthecost-efficiencyof inputs. So far, the information that has been kept up-to-date is thatneeded tomeet internationalcommitments. Identifyingandmeasuringresultsandperformanceindicatorsisviewedasaformalexercisebearing

Table13.BudgetprogramstructureintheMinistryofTransport.

Budgetprogram

Budgetallocation

in2008(inpercent

oftotal)TOTAL 100.0

03.00.00BranchManagement 4.708.00.00EnsuringOperationoftheStateAgency„RigaMotorMuseum” 0.109.00.00InstallmentsinInternationalOrganizations 0.011.00.00EnsuringOperationoftheStateRailwayTechnicalInspectorate 0.112.00.00EnsuringOperationtheStateRailwayAdministration 0.114.00.00CoordinationandTechnicalSupportofEuropeanUnionandInternationalFunding 0.0

23.00.00StateRoadFund 50.926.00.00PortDevelopmentFund 0.029.00.00ImplementationofProjectsFinancedfromtheCohesionFundtheRoadBranch 10.1

31.00.00PublicTransport 16.133.00.00ImplementationofRailwayInfrastructureDevelopmentProjectsFinancedfromtheCohesionFund 6.2

34.00.00PortDevelopmentProjectsFinancedfromtheCohesionFund 2.935.00.00AirportDevelopmentProjectsFinancedfromtheCohesionFund 1.137.00.00TechnicalSupportProjectsFinancedfromtheCohesionFund 0.138.00.00Trans–EuropeanNetworkProjectsofCommonInterest 0.139.00.00EnsuringOperationoftheTransportAccidentandIncidentInvestigationBureau 0.0

40.00.00EnsuringOperationoftheRoadTransportInspectorate 0.241.00.00EnsuringOperationoftheCivilAviationAgency 0.342.00.00Wide-BandCommunicationInfrastructureDevelopmentinRuralAreaFinancedfromtheEuropeanRegionalDevelopmentFund(ERDF) 0.5

43.00.00RoadDevelopmentProjectsfinancedfromtheCohesionFundinthePro-grammingPeriod2007-2013 0.0

44.00.00Ensuringaviationsafety,emergencyoperationsandmedicalservicesintheInternationalAirportRiga 1.2

45.00.00PreparationofdocumentationandconstructionofEast-Westtransportcorridorprojects 5.1

Source:.Ministry.of.Finance

166 167

no relation to performance. As a consequence, program budgeting hasmadelittleimpactonbudgetallocations.

weaknesses. of. the. performance. management. system. will. be. ad-dressed. in. the. second. cycle. of. reform. which. began. in. 2008. Currentperformance systems will be improved with new basic principles forpreparationanduseofresultsandperformanceindicators.ThesearesetinthePerformanceManagementSystemGuidelines2008-2013,approvedbyCabinet in June2008.Newguidelinesareexpected tominimize thenumberandincreasethequalityofindicatorsallowingforgradualtransi-tionfrommonitoringinputstomonitoringresults(outputs).Monitoringandevaluationwillbeimprovedtoensurepoliciesarebasedonverifiableinformation(exanteevaluation)andaccumulationofdataonresultsandperformance indicators will be available for ex post evaluation of poli-cies. Performance information will be linked more closely with budgetprogramallocationswhichwillbebasedonidentifiedspendingpurpose,planningandapprovalofdeliverableresults.

while.the.new.phase.of.the.reform.will.improve.the.system,.some.basic. challenges. remain. The new system guidelines, although techni-callysound,arelimitedinscopeandfocuslargelyonpreparationanduseofresultsandperformanceindicators.Indicatorsformonlyasmallsubsetofaneffectiveperformancemanagementsystem.Evenmoreimportantistheanalysisbehindtheindicatorresultsandtheprogramstructuretheyare built on. A phased implementation may be advisable because indi-cators forsomefunctionsareeasier todevelop,andmoreuseful,as forexample in the areas that deliver services to the public. To develop anefficientandusefulsystem,MOFneedstobuilditscapacitytoassessthepolicy-relevanceofindicatorsandstrengthensectoralpolicyexpertisetointerprettheindicatorsandunderstandthefactorsaffectingthem.

5. Budget Presentation and Classification and Public Management Performance Culturebudget. documentation. provides. information. on. the. annual.

budget. and. the. mteF,. operational. from. 2008 . Core budget planningdocumentsincludeascenarioofmacroeconomicdevelopmentandfiscalpolicy,themedium-termmacroeconomicdevelopmentandfiscalpolicyframework(MTEF),packageofthedraftStatebudgetlawandexplana-tions, and convergence program. The complete budget documents aresubmittedbyMOFtoCabinetbySeptember1,andbyOctober1totheSaeimaforapproval.

budget.classification.has.a.programmatic.structure.with.expendi-ture. recorded. in. economic. classification .. Budget classification of ex-penditures includesdivisionbyprograms, sub-programsandeconomicclassificationcodes.Sectionsofprogramsandsub-programsarefurtherdivided, including information on resources for covering expenditure,remuneration,maintenanceexpenditureandcapitalexpenditure.Budgetclassificationsofrevenues,expenditures,financinganddebtarecompat-iblewithESA’95and,inpart,consistentwithGFSM2001.

latvia.has.developed.a.unified.it.system.based.on.an.integrated.sAp.platform .Since2007allparticipantsinthebudgetprocesshavebeenusingaunifiedITsystem,basedonanintegratedSAPplatform(exceptforsomeannexestothebudgetlaw).Ministriesandothercentralgovern-mentinstitutionshaveinternetaccesstothesystemwhichisusedtopro-duceandsubmitbudgetdocuments.Thesystemconsistsoftwomodules–budgetplanning(undertheBudgetDepartmentofMOF)andbudgetexecution(undertheTreasury)–thelatterstillunderconstruction.

public. wage. reform. has. been. a. major. step. in. improving. public.management.performance.culture ..Since2003,wagereforminthepublicsectorhasbeendevelopedundertheleadershipoftheStateChancellery.Itsaimistoincludeallbudgetinstitutionsandgraduallyallcivilservants(teacherswillbeincludedin2010).Thisreformhasintroducedclearjobdescriptions,withpositionsdividedinclustersandlevels,anddependingonfunctions.Ultimately,wagesettinghasbeenlinkedtoanewjobclas-sificationstructurebasedonprofessionalcontentandactualperformanceratherthanseniorityor lengthofservice.ThesystemhasbeeninplacesinceJune2006,withall300centralgovernmentinstitutionsincludedbyApril2007.Eachinstitutionstillhasitsownsystemofsalarieswhicharetobealignedforcorrespondingjobclassificationsby2011.

greater. capacity. is. needed. to. improve. application. of. public. fi-nance. management. reforms. MOF needs more capacity in evaluatinglineministries’strategiesandbudgetrequests,developingmethodologyforprogramandperformancebudgeting,andusingeffectively theper-formanceinformationinthebudgetprocess.Lineministries’capacitytoprepareoutcome-basedperformanceindicators isunder-developedandthereisaneedforperformanceinformationtobemorecloselylinkedtodecisionmakingandbudgetallocations.

169

Poland Ewa Korczyc

General Assessment (Summary)70

Poland is committed to making its budget more predictable overthe medium-term and more transparent. A Medium-term expenditureframework(MTEF)andperformance-basedbudgeting(PBB)arerecog-nizedasnecessaryandimportantdevelopmentsforimprovingmanage-mentofpublicfinancesandeconomiccompetitiveness.PBB isamajorstepinmodernizingandimprovingitsmanagementandadministrationofpublicfinances.Itisalsoakeycomponentinthestrategytoimprovetheorganizationandefficiencyofthepublicsector71.

Polandisstillintheearlyphaseofreform.Strongpoliticalleadershipand support is crucial for its successful implementation. Political com-mitment can help embed modern public finance management into thepublicsector.AcriticalfactorforPolandistoensurePBBreformisapartofabroadreformagenda.Improvedcapacityisneededtopursuereformsrelatedtocivilservice,theintroductionofanMTEF,andestablishmentofanintegratedfinancialmanagementinformationsystem.Workisneededtodesignthebudgetinaperformanceframework,particularlymethodo-logical guidelines for creating program structures and setting perform-ancetargetsandindicators.ThisiscentraltoPBBreform.Otherareasofwork includealigningprograms to strategicdocumentsof theGovern-mentandestablishinganeffectivemonitoringandevaluationsystem.

Poland’s greatest challenge is to make PBB reform work. The cru-cialfactorisnotonlytopreparelegislativeamendments,designprogramstructure and select performance indicators but how to combine thesetechniques and integrate them into the budget strategies and the civilservice’sday-to-dayfinancialmanagementprocedures.

70 WearegratefulforexcellentandtimelyassistanceprovidedbythePolishMinistryofFinance,andinparticularMs.MartaPostuła,DirectorofPublicFinanceReformDepartment.

71 Webber D. 2007, The. Introduction. of. Performance-based. Budgeting. in. Poland:. An. Assessment. of.Progress,.Achievements.and.Next.Steps,WorldBank,Warsaw.

170 171

1. Core features of the current budget systempoland’s.budget.process. is.similar.to.most.oecd.parliamentary.

democracies .BudgetinitiativeisexclusivelyinthehandsofCabinet.Incooperation with analytical departments in the Ministries of EconomyandofLabourandSocialAffairs,MOFpreparesgeneralmacroeconomicassumptionsforthedraftbudget.Thesearethensupplementedwithpre-liminaryestimatesofaggregaterevenuesandexpendituresandsubmittedtoCabinetfordiscussionandapproval.Atthesametime,theMinisterofFinancepreparesabudgetcircular.Thiscontainsasetofrulesforbudgetpreparationandthemainformstobeusedwhensubmittingestimates.Thebudgetcircular,alongwithmacroeconomicassumptionsandspend-ingceilings,isthensenttolineministries.Since2008,thebudgetcircularhasobligedlineministriestojustifytheirspendingrequests.ThebudgetcircularisusuallysentinAprilandlineministrieshave21daystoprovideMOFwiththeirspendingrequests.BilateralbudgetnegotiationsbetweenMOFandlineministriestakeplacethroughoutthesummer.Theaggre-gated budget draft (modified by Cabinet) must be submitted to parlia-mentbySeptember30.

The.legislature.plays.a.limited.role.in.the.budget.process ..TheSejm,thelowerchamberofthePolishParliament,cannotintroduceanychangestothebudgetactthatwouldincreasethebudgetdeficit.AmendmentsmustbeneutralwithregardtothebudgetbalancewhichinpracticemeanstheSejmcanraiseexpendituresbeyondGovernment’sproposalbuthastoin-cludecorrespondingrevenueincreases.TheSejmmay,however,proposechangesinthecompositionofexpenditure.Afterthreereadings,amend-mentsarevotedandavoteonthefullbudgettakesplace.TheapprovedbudgetacthastobereviewedbytheSenat,Parliament’supperchamber.TheSenatalsomakesamendmentstothebudgetactbutthesehavetobevotedagainbytheSejmwhichcanoverruleSenatproposals.

The.president.has.no.formal.role.in.the.budget.process .WhilethePresidentcanvetonormallegislation,heorshecannotvetothebudget.Constitutionally,thePresidentisrequiredtosignthebudgetbillwithinseven days after receiving it from the Sejm. The President may ask theConstitutionalTribunaltocheckiftheproposeddraftisinlinewiththe

Constitution. If Parliament fails to pass the annual budget within fourmonthsafterGovernmenthassubmitted it, thePresidentmaycallnewelectionsalthoughheorsheisnotobligedtodoso.Ifthebudgetisnotap-provedbythestartofthenewfiscalyear(January1)theexecutive’sbudgetproposaltakeseffect.

moF’s.role.in.the.budget.process.depends.on.the.position.of.the.Finance.minister.in.the.cabinet .AlthoughMOFproposespreliminaryspendinglimitsforlineministriesconsistentwithitstargetforthefiscalbalance,thesecanbechangedbyCabinet.TheMinisterofFinancehasnospecialpowersinbilateralnegotiationswithspendingagenciesandcan-notcutaspecificministry’srequest72.TheMinistercanactonlywithfullsupportofthePrimeMinister.

poland’s. budget. process. is. to. some. extent. strengthened. by. fiscal.rules ..ThedebtruleissetoutintheConstitutionoftheRepublicofPolandand the Public Finance Act. The overall objective is to ensure the debtleveldoesnotgobeyond60percentofGDP(compatiblewiththeEU’sStabilityandGrowthPact).ThePublicFinanceActspellsoutactionstobetakenifthereisariskofbreachingthislimit,withdifferenttriggerstak-ingeffectwhendebtlevelsreachthresholdssetat50,55and60percent.Therearedoubtsabouttheeffectivenessofthedebtrule.First,itputsnoeffectiveconstraintonthebudgetdeficit,aslongaspublicdebtisbelow50percentofGDP.Second, if thresholdsare reachedwithhighdeficitsandloweconomicgrowth,theconstitutionallevelmaybebreachedbeforecorrectiveactionstakeeffect.Andthird,givenalowshareofdiscretionaryexpenditures,correctiveactionsmaynotbepoliticallyfeasible73.

it.is.worth.stressing.that.the.budget.balance.rule.was.introduced.in.2006.Thisrule,moreakindofbudgetpolicythanatraditionalbudgetrule,setsthemaximumstatebudgetdeficitatPLN30billion.Itisbasedonlyonpoliticalcommitmentanddoesn’t involveanyconstitutionalorlegal obligation. This rule, introduced by Marcinkiewicz’s Government,wassupposedtoputPolandontracktomeettheMaastrichtfiscalcriteria.Following its introduction, thebudgetdeficithasn’texceededthe30blnPLNlevelbut it remainsquestionablewhetherornot it is therule thatstoppedexpansionofthedeficitorpoliticalcommitmentandafavourablebusinesscycle.

The. constitution. and. the. public. Finance. Act. set. some. general.rules. for. the. budget. process .. specific. issues. are. regulated. by. the. de-72 Hallerberg M., Von Hagen J., 2006, Budget. Processes. in. Poland:. Promoting. Fiscal. and. Economic.

Stability,ErnstandYoung73 AllenR.,2008,Poland:.Developing.a.multi-annual.fiscal.framework,.InternationalMonetaryFund

172 173

crees.of.cabinet.and.the.Finance.minister ..Since1997theConstitutionhasspecifiedrolesandresponsibilitiesofbudgetmanagersinpreparing,executingandcontrollingthebudgetalongwithmajordeadlinesinthebudgetpreparationprocess.Apartfromintroducingalegallybindingdebtrule, theConstitutionprohibitsfinancingofbudgetdeficit fromcreditsfromtheNationalBankofPoland.ThePublicFinanceActdescribesindetailthemostimportantdefinitionsandrulesgoverningthebudget.

Table14.Limitationssetbyorganicbudgetlaws

limitations.set.by.constitution limitations.set.by.public.Finance.ActPossibilityofchangingthedraftoftheState

budgetinParliamentExpendituressetintheStatebudgetconstitute

limitforpublicexpendituresBanoncoveringabudgetdeficitbywayofcon-tractingcreditobligationstotheState’scentral

bank

Statebudgetcannotembraceregulationschangingotheracts

Exclusiverighttointroducelegislationconcern-ingabudget

Statebudgetcandetermineexpenditurelimitsformulti-annualprograms

Restrictionsconcerninganationalpublicdebt Multi-annualprogramsaresetbyCabinet

Source:.Organic.Budget.Law,.Ministry.of.Finance.(Presentation.from.SBO.meeting,.OECD,.2006

recent. international. assessments. point. to. numerous. shortcom-ings.in.the.fiscal.framework74 ..Theseshortcomingsare:

• Budget fragmentation,duemainly tomultipleextrabudgetaryfunds leading to inefficient allocation of budget resources. Al-thoughsomeprogressinthisareahasbeenmade,therearestillagenciesandfundsthatdon’tappearinthebudget.Theirnum-berhasdeclinedinrecentyearsbuttheamountofmoneytheyreceivehasincreased.

• The budget process is only loosely connected to Governmentpolicy.Spendingministersactmorelikeadministratorsofexist-inglawsandprogramsratherthanmanagersofpolicyandpro-grams.

• Internationalassessmentscallforstrengtheningtheaccountabil-ityframeworkinthepublicsectorwithincentivesforimprovedpublicservicedelivery.

74 Internationalassessmentsinclude:Republic.of.Poland:.Financial.Stability.Assessment(2001.and.up-date.2004),InternationalMonetaryFund,Poland:.Toward.a.Fiscal.Framework.for.Growth.–.Public.Expenditure.and.Institutional.Review.(2003),TheWorldBank,Poland:.Developing.a.multi-annual.fiscal. framework.(2008), InternationalMonetaryFund,Poland:.Country.Financial.Accountability.Assessment.(2006),TheWorldBank.

• ThebudgetneedstobemademorepredictableoverthemediumperiodbyintroducinganMTEFandPBB.

The.amended.public.Finance.Act75.has.been.widely.debated.by.the.sejm’s.public.Finance.commission ..Thedraftact incorporates institu-tionalmeasuresaimedatmakingthebudgetmoreconsolidated,transpar-entandpredictableoverthemedium-termaswellasmoreperformance-oriented.

• Budgetaryunits(fundsandagencies)willbeconsolidated,alsoat local level. The law proposes dis-establishing numerous ex-tra-budgetary fundsoragenciesalthoughnewexecutiveagen-cieswillbecreatedtoperformthedutiesofsomedis-establishedunits.Thepurposefundsatthecentrallevelwillbecomebudgetunitswithoutseparatelegalstatuswillbefundeddirectlyfromthebudget.

• AnMTEFwillbeimplementedwithintroductionoftheMulti-year Financial Plan of the State (MFPS) covering a four-yearperiodandupdatedeveryyearonarollingbasis(includingthecurrentfiscalyearandthreeyearsahead).

• Aswellasrecurrentactivities,theprogrammaticstructurewillcover public investment and long-term programs. The newMulti-yearFinancialPlanoftheStatewillbepresentedinapro-grammaticstructure.

2. General progress on budget reform introduction.of.pbb.and.an.mteF.has.not.been.part.of.a.broad.re-

form.aimed.at.improving.the.organization.of.public.finance ..However,some elements of these reforms are in place. With amendments to thePublicFinanceAct,thenumberofextrabudgetaryunitshasbeensystem-aticallyreduced.Effortshavealsobeenmadetomaketheexistingbudgetmorepredictableoverthemedium-termwithintroductionofamedium-termfiscalframework.Stepshavealsobeentakentoensureefficiencyandeffectivenessofpublicexpenditure through improvedtransparencyandaccountabilityarrangementsconnectedwithperformance-basedbudget-ing.

progress. has. been. made. in. eliminating. budget. fragmentation ..Several state agencies and special funds have been dis-established andtheirresponsibilitiestakenoverbyotheragenciesorlineministries.Ex-

75 DraftofPublicFinanceAct,October2008(nrdruku1181).ThenewLawonPublicFinancewaspassedthroughParliamentinAugust2009,andsignedbythePresidentinSeptember2009.

174 175

amplesaretheNationalLaborOfficewhichwasmergedwiththeMinistryofLabor,andcustomsadministrationwhichwasincorporatedintoMOF.Thenumberandthevarietyofextrabudgetaryfundsandagenciescallforfurtherconsolidation.ArecentdraftofthePublicFinanceActenvisagesremovingmoreextrabudgetaryfunds,agenciesandspecialfunds.

to.address.shortcomings.of.the.budget.system,.poland.has.taken.steps. to. introduce. a. medium-term. fiscal. framework .. Multi-annualtargetsappearinthreeforms,withthefirsttwoincludedinthenationaldocuments.TheDebt.Management.StrategyconsidersprojectionsofthepublicdebttoGDPforthemedium-termperspective(threeyears).TheJustification. to. the. budget. act includes deficit targets for the next threeyears. Convergence Programs, prepared in line with EU requirementsmustincludefiguresforexpendituresandrevenuesinadditiontoprojec-tionsondeficitanddebtlevelsforthenextthreeyears.Theproblemisthatthosefigureshaveindicativemeaningonlyandthereisnolegalobligationforgovernmentsinthefuturetofollowthem.

Following. the. global. trend,. polish. authorities. decided. to. intro-duce.program.structure.to.the.budget.in.2006.and.eventually.move.to.performance-based. budgeting. (pbb) .. Clearly, the increasing popular-ityofmodernpublicfinancemanagementsystemsandtheneedforfur-therexpenditurerationalizationwereimportanttriggersforthisreform.AccordingtoPolishauthorities,PBBreformisamilestoneinthepublicfinancereformandamajorstepforPolandinmodernizingandimprov-ingthemanagementandadministrationofitspublicfinancestoimprovepublicsectororganizationandefficiency.

since.2006,.performance.budgeting.reform.has.been.high.on.the.agenda.ThereformwasinitiatedbyMarcinkiewicz’sGovernmentandledbyTeresaLubińska,StateSecretaryintheChancelleryofthePrimeMin-ister(KPRM).Ms.Lubińska,whoseexperienceinintroducingperform-ance budgeting at the local government level, championed this reform.ShecreatedaspecialdepartmentintheKPRMresponsibleforpreparinga methodological framework for PBB. This department was supportedbyan inter-ministerialworkinggroupand independentexperts.UnderLubińska’sleadershipmethodologicalguidelineswereprepared(Perform-ance. Budget:. Rationality-. Transparency-Effectiveness76) and PBB was pi-lotedinthebudgetchaptersScienceandHigherEducation.

reform. entailed. amendments. to. the. public. Finance. Act. Theseobligated budget managers to specify tasks, with planned expenditures76 Performance-based. Budget:. Rationality,. Transparency,. Effectiveness . Methodology, Chancellery of

thePrimeMinister,Warsaw,2006

anddescriptionofobjectives, indicatorsandmulti-yearexpenditureforthesetasksinthejustificationtothebudgetactfor2008.Thereportontheexecutionofbudget lawmustcontaininformationonrealizationoftasks,expenditure,withdescriptionofobjectives,indicators,andmulti-yearexpenditure,andalsoonfundsspentonexecutingtasks.Introducingprogramstructureandcertainperformanceelementsintheformofper-formance indicatorsandtargetsclearlychangedtheway lineministriesthinkabouttheirbudgets.

After.the.elections. in.2007.and.the.change.of.government,.moF.took.over.reform.efforts .Theexistinggroup,responsibleforthereform,was partially moved to MOF’s Department for Public Finance Reform.Thenewarrangementslightlystalledthereformmomentumbecausethenewownerswantedtorevisitexistingrulesandguidelines.

3. Adopting Medium-Term Expenditure Frameworks poland. does. not. have. an. operating. mteF .. Some elements of the

medium-termperspectiveinpublicfinancesexistbuttheydon’tfitintoafullydevelopedMTEF.Introducingmulti-yearbudgetaryplanningwillbeanessentialelementofabroadinitiativetoreformPoland’sbudgetarysystem.TheinitiativewasincludedintheConvergenceProgrampreparedin2005incollaborationwiththeEU.

The.draft.of.the.public.Finance.Act.provides.for.introduction.of.an.mteF .ExpenditureceilingsinMedium-TermFiscalPlanswillnotbele-gallybinding.AnMTEFwillbeimplementedwiththeintroductionoftheMultiyearFinancialPlanof theState(MFPS)coveringa four-year timeperspectiveandupdatedeveryyearonarollingbasis(includingthecur-rentfiscalyearandthreeyearsahead).Theplanwillincludemacroeco-nomicprojection(growthandinflation),forecastsofstatebudgetrevenuesandexpenditures(thelatteralsoinprogrammaticmode),financingneedsandsourcesoffinancing,andaforecastofgeneralgovernmentbalance.

For. now,. the. multi-annual. macroeconomic. estimates. appear. in.several.forms:

• A Debt Management Strategy considers projections of publicdebttoGDPforthemedium-termperspective.

• TheJustificationtothebudgetactincludesdeficittargetsforthenextthreeyears.

• ConvergencePrograms,preparedinlinewithEUrequirementsmustincludefiguresforexpendituresandrevenuesinadditiontoprojectionsondeficitanddebtlevelsforthenextthreeyears.

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Since2007budgetmanagershavebeenrequiredtoprepareestimatesfortheirexpendituresforthenextthreeyearsinprogramstructure.EUprojectsandsomeothercapitalprojectsarealreadyplannedonamulti-yearbasisandthereareannexesinthebudgetdocumentationwhichpro-videthreeyearprojectionsofsuchexpenditures.Goodqualitymediumand longer-termprojectionsof.pensionexpenditures.arealsoprepared.Allthosefigureshaveindicativemeaningonlysothereisnolegalobliga-tionforgovernmentsinthefuturetofollowthem.

macroeconomic.forecasts.are.supported.by.several.fiscal.rules ..ThesourceoftherulesisbothnationalandEUregulations.ThedebtrulesetoutintheConstitutionoftheRepublicofPolandbanscontractingloansandgrantingguaranteeswhichwouldresultinthepublicdebtexceeding60percentofGDP.Thisis in linewithprotocolontheexcessivedeficitprocedureannexedtotheMaastrichtTreaty.Therearealsospecificrulesthatapplytodebtissuancebylocalgovernments.Theseprovidethatthelevelofdebtcannotexceed60percentofprojectedrevenuesandthelevelofdebtservicingcostsplusprincipalrepaymentcannotexceed15percentofsuchrevenues.Althoughthereisnoformalfiscallimit,theEUStrategyandGrowthPactestablishedthatfiscaldeficittargetforthedeficitcannotbehigherthan3percentofGDP.

poland. needs. to. strengthen. its. efforts. implementing. an. mteF ..WorkisneededonthethreecorepillarsoftheMTEF:

• top-down multi-year projections of resource envelope targets(whatisaffordable)

• bottom-upmulti-year cost estimatesof sectorprograms (whathastobefinanced,withafocusonperformance)

• institutional(political-administrative)decision-makingprocesstointegratetheabovetwopillars(makingthenecessarytrade-offs).

medium-term.fiscal.framework.exists.but.fiscal.targets.are.not.le-gally.binding ..MacroeconomicforecastspreparedinlinewiththePublicFinance Act recommendations for the budget process (deficit and debtestimatesforthebudgetyearandsubsequenttwoyears,)alongwithrev-enuesandexpendituresforecastfortheConvergenceProgram,provideagoodbasisfordevelopingtop-downresourceenvelopetargetsforbudgetchapters/lineministries.Theseestimates,preparedbyanalyticaldepart-mentsinMOFandNationalBankofPoland,andreviewedbyaninde-pendentpanelofexperts,aregoodqualityandprovideasounddeparturepointforfurtherdevelopmentofanMTEF.

The.deficit.ceiling.from.the.new.public.Finance.Act.will.not.be.ful-ly.binding ..ThereisasafetyvalveandinjustifiedcasesGovernmentmayadoptahigherdeficitandexplainitindetailinthejustificationtobudgetlaw.Suchadeficitceilingmayproveineffective,particularlyinpre-elec-tionorelectionyearswhenGovernmentmaywanttoinflatespendingorbothParliamentandCabinetchangeandanewgovernmentmaynottreatthedeficitceilingasbinding.

greater.capacity.is.needed.to.produce.reliable.bottom-up.forward.estimates .. So far, line ministries prepare expenditure estimates for oneyearonlywhicharen’tsubjecttoanykindofanalysisorqualitycontrolbyMOF.Aslongasexpenditureswerebelowtheceilinggiventolinemin-istries,MOFcouldnotquestionorcutproposedprograms.Theobliga-tiontopreparethree-yearexpenditureestimates,togetherwithaprogramframeworkforthebudgetdocument, isagoodstartingpointfor intro-ducingforwardestimatesinthePolishbudgetsystem.However,astheseestimatesarenotlegallybinding,notmuchattentionisbeingpaidtotheirquality.Andthereisnoprocessforagreeingwhatistobeconsideredasexisting policy for the purpose of their preparation, or for agreeing onparameterstobeappliedintheestimationprocess.

A.good.process.is.needed.for.reconciling.top-down.and.bottom-up.elements.of. the.mteF ..This requires a strong linkbetweenpolicy for-mulationand thebudget, aswell as agoodmechanism forprioritizingexpenditure.ItisthephaseinwhichperformancebudgetingcangreatlyincreasetheeffectivenessoftheMTEF.Whenthereconciliationprocessreveals the need to cut expenditures, program budget closely linked togovernmentprioritieswillhelpavoidcutsacrosstheboardandenableanintelligentreductioninspending.Polandstartedworkingonintroducingprogram/performancebudgetingin2006andthiselementwillsurelybeusedonceGovernmentdecidestofullyintroduceanMTEF.

4. Performance-based Budgeting performance-based.budgeting.has.been.on.the.agenda.in.poland.

since.early.2006.Theinitiativetointroduceprogramframeworktothebudget is includedinthemostrelevantstrategicdocuments:2007-2015.National.Development.Strategy,.2008-2011.National.Reform.Program.for.Implementation. of. the. Lisbon. Strategy and 2007-2013. National. Strategic.Reference. Framework. The Government elected in 2007 confirmed itscommitmenttocontinuewithPBBreformandtheprogramforitsimple-

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mentationwasincludedintheGovernmentStrategicPlanannouncedbythePrimeMinisterinFebruary2008.

This.reform.was.motivated.by.the.eu.which,.in.its.assessment.of.the.polish.convergence.program,.mentioned.results-oriented.budget-ing. as. a. priority. for. public. finance. reform . Introducing PBB is a keysupportareaoftheOperationalProgram2007-13HumanCapital.PBBisalsoregardedbyauthoritiesasatoolforbetterfiscaldiscipline.Anewwayofbudgetingisrecognizedasnecessaryforthetransitiontoamoreeco-nomicallystableandcompetitiveeconomy.It’saboutcreatinggoodandefficientgovernancewithinthepublicsector.

reform.started.in.2006.and.was.coordinated.by.the.chancellery.of.the.prime.minister.(kprm).ASpecialDepartmentforStatePerform-ance Budget was established to develop the methodological frameworkandguidelinesforperformancebudgeting.Thisdepartmentwassupport-edbytheinter-ministerialgroupofexperts,mainlyfromMOFandtheMinistryofRegionalDevelopment.Afterthe2007electionsthisdepart-mentwasmovedtoMOFwhereworkonPBBhassincebeencoordinated.

methodological. guidelines. developed. in. 2006. are. based. on. best.international. practice . The Department for State Performance Budgetwasinvolvedininternationalcooperationwithcountriesalreadyusingaprogram/performanceframework(France,theNetherlands,Slovakia)oronasimilarlevelofdevelopment(Latvia,Bulgaria).Bestpracticeexam-pleswerereviewedduringtheInternationalConferenceofPerformance-basedBudgeting:LessonsforPoland.ThisconferencewasorganizedbytheKPRMincooperationwiththeWorldBank.AsimilarconferencewasheldinKrakowin2008.

moF.is.fine.tuning.methodological.guidelines.and.concentrating.its.effort.on.making.pbb.work.ThescheduleforPBBimplementation(Table15)saysverylittleaboutthefinalshapeoftheframeworkbutitsetsmajorreformmilestonesforthenextfewyears.

pbb.has.been.introduced.in.three.phases:.pilot.programs,.first.op-erational. budget. 2008,. and. second. operational. budget. 2009 .. In 2006KPRM prepared pilot projects of budget for 2007 using the programframework. New techniques were tested in budgetary sections devotedto the Ministry of Science and Higher Education, and budgetary partsScienceandHigherEducationwerepublishedinthejustificationtothebudgetlawfor2007inPBBframework.InitialversionsofpilotprojectswerecreatedintheMinistryofNationalEducationandMinistryofLaborandSocialAffairs.

The.first.operational.budget.was.prepared.for.the.fiscal.year.2008 ..Itincludedmany,butnotall,ofgovernment’sexpenditure,activitiesandagencies77.Atthetimetherewasatwo-levelprogrammaticdesignofthebudgetstructure:tasksandsubtasks.Thequalityandspecificationoftasksandsub-tasksvariedacrossspendingagencies.Itappearedtheorganiz-ingprincipleunderlyingtheselectionoftaskswasnotentirelyconsistentbecausesomeministriesdefinedtaskspartlyonthebasisofbroadpolicyobjectives and partly on the basis of existing programs of expenditure.Thisapproachmadeitdifficultforthemtoseparateactualexpendituresbetweenthesetasksforbothbudgetappropriationandexecutionandre-portingpurposes.

After.responsibility.for.the.reform.was.transferred.to.moF,.chang-es.were.made.to.the.methodological.framework.of.pbb ..MOFadoptedafunctionalapproachasanewmethodology.Taskswerenolongerplaced

77 Thebudgetcoveredallministriesandcentralgovernmentoffices,19specialpurposefundsandseven government agencies. It excluded 15 managers whose financial plans are included in thejustificationtobudgetactproject(sacredcows).AsimplifiedperformancebudgetwaspreparedfortheMinistryofNationalDefense,CentralAnti-corruptionBureau,ForeignIntelligenceAgency,andInternalSecurityAgency

Table15.ScheduleforPBBimplementationinPoland(extract)

MainSteps2008 -ReviewinglegislativechangesnecessaryforPBBimplementation

-InitiatingworkonmethodologicalguidelinesforPBB2009 -FinalmethodologyforPBBimplementation

-Establishingguidelinesforreportinginperformanceframework.-PreparingmainITsystemrequirements

2010 -Preparingconceptofmonitoringinperformanceframework-Completingthefirststageofworkonreportingsystem.

2011 -Establishingperformanceindicatorsdatabase-Completingsecondstageofworkonreportingsystem

-Firsttrialofreportingandmonitoringinperformanceframework2012 -Firstperformance-basedbudgetforPolandfor2013(inparallelwithtraditionalbudget)

-Implementingguidelinesforeffectivemanagementofpublicfundsviamulti-yearbudget-ingandcomprehensiveperformanceindicatorsdatabase

2013 -Preparingmethodologicalguidelinesforprogramevaluations-ImplementingITsystemforPBB

2014 -Firstreportonbudgetexecution(basedonbudgetinperformanceframeworkfrom2013)-Evaluating2013performancebudget

2015 -Reportingontheimpactofperformancebudgetingonthepublicfinancesystem

Source:.Ministry.of.Finance,.http://www MOFnet gov pl/index php?const=5&dzial=1822&wy-sw=4&sub=sub2

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invariousbudgetaryparts.Insteadtheybecamebuildingblocksinnewlydefinedstatefunctions78.

poland.operates.a.four-level.program.classification.framework ..Itincludesdivisionintofunctions,tasks,subtasksandactivities:

• Function is the highest level in the new PBB architecture andgroupsexpenditureswithcertainareasofgovernmentactivity.Thereare22governmentfunctions.Theclassificationisnoten-tirelyinlinewithCOFOGmethodology.Thefunctionswerede-rivedfromthestructureofgovernmentadministrationasspeci-fiedinthePolishlaw.79

• Tasksgroupexpenditureswithcommonobjectives.• Subtasksareoperational.• Activitiescomprisekeystepsinachievingtheobjectivesoftasks

andsubtasks.Thislevelwascreatedtoavoidverydetailedspeci-ficationofsubtasksandensurebudgettransparency.

program. classification. is. independent. and. functions. in. parallel.to. the. existing. section-chapter-paragraph. budget. classification. Thefour-leveldesignoftheprogrambudgetisjustenoughtoensureadequateaccountabilityandcontrol.Moreworkisneededtoclearlydefinefunc-tionsandtasks.Thiswillhelpstabilizetheprogrammaticframeworkandensureanalysisofbudgetexpendituresandtheirimpactsarecomparableovertime.Somemattersareyettobeaddressed,e.g.theapproachtointer-sectoralresponsibilitiesforoverlappingtasks,andperformanceaccount-abilityinentitieswhereresponsibilityisdelegatedtospecialagencies.

budget. for. 2009. was. prepared. according. to. the. new. methodol-ogy . Budget managers submitted expenditures in program frameworkalongwithperformancemeasuresandtargets,andpresentedMOFwiththree-yearspendingestimates.Coverageofthebudgetincreasedinrela-tionto2008andcoveredcentralgovernment.Onlysensitiveinstitutions(defense, intelligence etc.) prepare performance budgets in a simplifiedframework.

Following.the.change.of.government.in.2008.moF.took.the.lead.in.the.reform.process ..Untilthen,theChancelleryofthePrimeMinisterwasresponsibleformanagingandfundingthedesignanddevelopmentphase of PBB. The move to MOF was a step in the right direction but

78 Currentbudgetstructureisexplainedinthechapter:BudgetPresentationandClassification79 LawonCentralGovernmentSectorsofSeptember4,1997(Art.5ustawyzdnia4września1997r.

odziałachadministracjirządowej(Dz.U.z2007r.Nr65,poz.437orazz2008r.Nr12,poz.20)).

organizationalchangesinMOFsincethenappeartohavestalledreformefforts.

As.well.as.inclusion.in.broad.strategic.documents,.pbb.is.incorpo-rated.into.the.public.Finance.Act ..AmendmentstothePublicFinanceActwereintroducedinDecember2006establishingalegalrequirementforbudgetmanagerstopresenttheirspendinginprogramframework.Jus-tificationtothebudgetacthastospecifytaskswithplannedexpenditureanddefinedobjectives, indicatorsandmulti-yearexpendituresfortasks(Article124,PublicFinanceAct).Thereportontheexecutionofbudgetlawmustcontaininformationontherealizationoftasks,expenditurewithdescriptionofobjectives,indicatorsandmulti-yearexpenditures.

Amendments.enable.development.of.the.performance.budget.but.don’t.show.the.importance.of.these.changes .Thelightnatureofcurrentregulationsgivesauthoritiesmanagingthereformprocessagreatdealofflexibility.Italsoreflectsa ‘trybeforeyoubuy’attitude80.ThePublicFi-nanceActdoesn’tspecifyhowandwherethenewbudgetarystructurewillreplaceexistingcategoriesandproceduresandnordoesitspecifyadatebywhenPBBistobeadopted.

Further.regulations.are.needed.to.firmly.establish.pbb ..Newleg-islationisneededtospecifyperformancebudgetcoverageinrelationtovarioustypesofgovernmentorganizations;makechangestobudgetdoc-umentation;allowforanewfinancialcontrolframeworkandchangestothebudgetclassificationandaccountingsystems.Additionalregulationsareneededtostandardizemethodologyandproceduresaroundthede-signoftasksandsub-tasks,andtheroleandmonitoringofperformanceindicators,multi-yearexpenditureplanningetc81.

performance. targets. and. indicators. are,. generally,. defined. bot-tom-up ..Thebudgetcircularobligesbudgetmanagerstodefineperform-ancetargetsfortasksandsubtasks.SometimestherearemethodologicalconsultationswithMOFor(inter)nationalexperts.However,therearenomethodological guidelines for preparing performance indicators. Lineministriesrelyoninternalknowledgeandexperiencefromothercoun-tries.Movestomaketheentitiesresponsibleforachievingtargetsdefinethosetargetsandtheirperformanceindicatorshavebeencriticized82,butthisapproachhassupport.Internalsettingofperformanceindicatorscre-

80 AllamM.The.Development.of.Performance.Budgeting.in.Poland,(2008),draftversion81 WebberD,op.cit.82 MisiągW.,2007,Performance-based.Budget.for.2008.and.what.is.next?.(Budżet.zadaniowy.na.rok.

2008.–.i.co.dalej?),PublicFinanceBulletin,IBnGR.

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atesbetteraccountabilitywithintherelevantministrywhichhasthebestsectorknowledge.

Quality.of.performance.indicators.varies.across.budget.managers .Moreeffortisneededtodevelopproperperformanceindicators.Somein-dicatorsusedsofararedifficulttodefine,somearenotmeasurable,andinafewcases,thereisnobaselinevalueforindicators.Inothercasestargetvaluewasbelowthebaseline.Muchpublicdiscussionisaroundperform-anceindicatorswhenmoreattentionshouldbegiventoputtinginplacethebestpossibleprogramstructure.

There.is.no.integrated.database.for.collecting.and.analyzing.per-formance. indicators .. nor. is. there. an. efficient. information. system. to.make. them. fully. usable . Performance indicators are presented onlyindocuments in the justificationto theBudgetAct.There isnopropermechanismforcollecting,analyzingandverifyingperformanceinforma-tion.Thismakesthewholeexerciseartificialanduseless.Governmentex-pectstocooperatewithstatisticalunitsinlineministries,andtheCentralStatisticalOffice, to establishan integrated framework forperformanceinformation.

poland. is. in. the. early. stage. of. developing. pbb .. The country ac-knowledges theneed tomanage forresultsandhas increased transpar-encyandaccountabilityofitsbudgetsystem.Althoughitisstillundecidedwhatitwilllooklike,performancebudgetingwillsoonbeinplace.

The. key. challenge. now. is. to. improve. the. program. structure byaligningitbettertoGovernment’sstrategicpolicies.Onlythenwillitserveitspurpose83.

A.proper.monitoring.and.evaluation.system.is.needed ..Perform-ance-basedbudgetingcan’tfunctionwithoutafirmmonitoringandeval-uation (M&E) system. Performance information doesn’t always answerquestions about a program and good quality evaluation is essential forefficientlyallocatingresources.

5. Budget Presentation and Classification good.budget.documentation.increases.budget.transparency ..PBB

increasestransparencyofthebudgetsystem,showingclearlywhatpublicmoneyisspenton,butofbudgetdocumentation.ThishasalottodowiththeexistingbudgetclassificationandthelevelofITdevelopment.

83 Currentpracticetosubmitthebudgetinperformanceframeworktwoweeksaftertraditionalbud-getindicatesshowsPBBisstilltreatedassecondaryand,perhaps,asapurelymechanicalexercise.

The. performance. budget. is. generally. well. presented .. Budget jus-tification,added to thebudgetact for2008and thedraftof thebudgetfor2009inaperformanceframework,ismoretransparentandeasiertounderstand. Breaking expenditures down into tasks and subtasks, withkeyperformancetargetsandindicators,providesmuchmoreinformationthanthetraditionalline-itembudget.However,informationsubmittedbyparticularbudgetmanagersstillshowaneedforqualitycontrol,particu-larlyindefiningperformanceindicatorsandtargets.VariousexpertsandeconomistswelcomedtheGovernment’sinitiativetointroduceperform-anceelementstothebudgetbutatthesametimetheyexpressedtheur-gentneedforfurtherimprovements84.

pbb.is.not.yet.included.in.core.budget.documents ..MakingPBBanintegralpartofbudgetlawisanimportantfirststepbutitscurrentinclu-sioninthejustificationtothebudgetactisnotitsfinalplaceinbudgetdocumentation.Thebudgetjustificationfor2008has12chapters.OneofthesechaptersisdevotedentirelytoPBB.ItincludesashortdescriptionofPBBasabudgetingmethodandkeyfeaturesof thePolishsystemaswellasprogrambreakdownofexpendituresalongwithdesiredoutcomes,measuresandtargetvalues.

guidelines.on.presenting.pbb.are.needed ..Whileitundecidedwhattoincludeinstandardbudgetdocumentation,internationalbestpracticesuggestsemphasisshouldbeputonexplainingGovernment’sexpenditurepoliciesandobjectivesandhowthetaskstructuresupportsthese.Moreattentioncouldalsobegiven to identifyingnewpolicies in thebudget,includingtheirspecificobjectivesandcosts.Performancebudgetsshouldestablishclear links to strategicplansandexplainhow theexpendituretasksandsubtaskscontributetoachievingbroadstrategicgoals.

program.classification.plays.only.an.auxiliary.role.in.traditional.budget.classification ..PBBhasnotbroughtchangestotheexistingbudgetclassificationandMOFdoesnotintendtochangetheclassificationinthenearfuture.TheDepartmentofPerformanceBudgetintheCentralStatis-ticalOffice,whichhelpedpreparetheprogramstructure,willensuretheexisting framework is compatiblewith traditional line-itembudgetandinternationalstatisticalstandards.

current. budget. documentation. shows. expenditures. in. line-item.classification ..Polandoperatesonafour-levelbudgetclassification:parts,sections,chaptersandparagraphs.

84 MisiagW.,op.cit.

184 185

• Part(część)correspondstoanadministrativeclassification(or-ganizational)

• section(dział)issimilartoafunctionalclassification• chapter(rozdział),insomecases,correspondstoanorganization

orprogram• paragraph(paragraf)isalineitemintheeconomicclassification.current.program.classification.is.not.supported.by.the.it.system.

Governmentplans tocreatean integrated IT system to supportbudgetdocumentationbutworkisyettostart.Accordingtotherevisedschedule,the system should be in place by the end of 2013. When it’s complete,the IT system should support programmatic structure and standardizeandmodernizeotheraspectsofthefinancialreportingprocess.Atpresentcentral state administration units (line ministries and their underlyingbudgetaryunits)aredecentralized.MostofthemhavetheirownITandaccountingsystems,laterenteringinformationfromtheseintothecen-tralizedTREZORsystem.Thisisaninter-systeminterfaceconnectingtheNBPsystemwiththecentralbudget,makingpossibleanonlinecorrela-tionbetweenpendingpaymentordersandStateBudgetcashavailability.TREZORworksatfirstandsecondlevelsbutisexpectedtolaterincludeall sub-national entities. Because the system is being implemented instages,informationflowsarecurrentlybothpaper-basedandelectronic.TREZORisnotanintegratedaccountingsystemsobudgetaryreporting,inlinewithcurrentbudgetclassification,isbasedonaggregatedinforma-tionasenteredperiodicallybybudgetmangers,usuallymonthly. Infor-mationavailablefromTREZORrelatestoactualtransfersbrokendownbymainbudgetparagraphsaccordingtocashrequirements.Afullyoperat-ingprogramclassificationstructurewouldimprovebudgetanalysisandcreateperformanceindicatorstostrengthenmonitoringandmakepublicexpenditures more efficient. High priority should be given to ensuringpublicbudgetunitsuseaccountingsoftwarethatmeetscurrentstandards,e.g.forsecurityandaccess,andfacilitateson-linereportingtoMOFinaformatthatconsolidatesdataanddocumentsaudittrails.MOFneedstosetmediumandlong-termobjectivestodevelopanintegratedfinancialaccountingsystem,allowingthecentraltreasurysystemtodrawdirectlyon electronic accounting data from all public budget units’ accountingsystems.

6. Public Management Performance Culture There.is.no.regular.monitoring.and.evaluation.of.programs ..Po-

landisstillintheveryearlystageofreformandlittleattentionhasbeenpaidtoestablishingaformalmechanismforlinkingM&Esystemswiththebudgetprocess.Lineministriesrelyontheirinternalmonitoringsys-tems.Governmenthasconcentratedeffortsondesigningprogramstruc-tureandsettingperformancetargetsandindicatorsratherthanstrength-eningtheM&Eframework.Successful implementationofPBBmustgobeyondperformanceindicators.AsRobinsonputit,“indicatorsrarelytellthewholestory.Theyneedtobeputincontext.Andifaprogramisnotdeliveringvalueformoney,theydonotanswerthereallyvitalquestion–cantheprogrambesalvagedby,say,redesign?Orshoulditsimplybecutout? It is for thisreasonthatevaluation linkedto thebudgetprocess isnowenjoyingresurgence”.

civil.servants.are.administrators.rather.than.managers.of.spend-ing.programs ..Thepublic/civilserviceisnotbasedonanaccountabilityframework.Muchmoreeffortgoesintodesignandpreparationoflegis-lativeinitiativesthanoperationoftheprogram.Performancebudgetingreformrequiresalotofsupportfromthepublicadministrationandaca-pacitytochange.Thisisacriticalsuccessfactor.

The.structure.of.the.public.administration.is.not.well.suited.to.the.concept. of. managing. for. results . The whole public sector is dispersedovernumerousandlargelyautonomousentitieswithnomanagerialsu-pervision.Thereislimitedcooperationbetweencentralandlocalgovern-ment,andacrossandwithinlineministries.

civil.servants.are.unused.to.performance.evaluation.and.need.to.change.the.way.they.think.about.working.in.the.public.sector.Perform-ance-basedbudgetingputspublicservantsintotheroleofserviceprovid-erstothepublic.Andperformancetargetsandindicatorsserveasabasisfortheirevaluation.Gettingministrystafftobemoreclient-focusedisachallenge.Meetingitwillrequiredesignandimplementationofsystemsthatprovidereliableandtimely feedbackfromclients,aswellasanor-ganizationalculturethatvaluesfeedbackandemploysittocontinuouslyimprove services to those clients. It demands an organizational culturethat rewardsachievementsofagreedobjectivesandencouragesall staffandunitstolearnfromtheirmistakesandengageincontinuousimprove-ment.

186 187

The.quality.of.the.civil.service.must.be.upgraded ..Itsperformancemanagementcultureisunderdevelopedandfuturecivilservantsareun-aware of modern management systems. Greater capacity in this area isneeded.MOFisawareoftheproblemand hasinitiatedamassivetrainingeffort. Training for public administration (both managerial and opera-tional)isco-financedfromEUstructuralfunds85.Themainpurposeistointroducehigherstandardsofpublicserviceandimprovepolicydesignandimplementation.TrainingisorganizedbytheWarsawbranchofEIPAandfocusesonPBBbestpracticewithpracticalguidelinesforpreparingbudgetdocumentsinaperformanceframeworkforthe2009budget.

when.capacity.is.enhanced,.retaining.and.motivating.high.qual-ity.staff.becomes.a.challenge ..Thisissueisrelatedtothemanagementofhumanresourcesinthepublicsector.Aworryingfeatureofrecruitmentisthatmostnewentrantsdon’tseethepublicsectorasalong-termcareerbut rather as a stepping stone to better prospects in the private sector.Retainingstaffdemandsattractiveincentives.Thecurrentsalarysystemiscomplexandopaque.Majordistortionsexistinthesalariespaidbydif-ferentministries.Thepromotionsystemisnon-meritbased,discretion-aryandnon-transparent.Theoverallhumanresourcesystemlacksstrongcentralcontroland,whilesomeministriesarebetterthanothersinthisre-spect,leadershipisweak,moderntechniquesofmanagementarelacking,and not enough resource or management time is devoted to personnelissues.Allofthistendstoreducestaffmotivation.Chronicpoliticizationofthesystemaffectsstaffquality,particularlyatseniorlevels.86.

strong.top-down.leadership.will.engage.civil.servants ..OnlywhenstaffunderstandthereformprocessandacceptitasoneofGovernment’stopprioritieswilltheiroppositionweaken.Civilservantshavetoseeben-efitsinthereform.Iftheydon’t,thereformswillnotsucceed.

85 EuropeanSocialFund,HumanCapital,Priority5:Goodgovernance86 Public.Administration.Reform.and.Capacity. in. the.EU-8 .Poland.–.Background.Paper, 2006,The

WorldBank

SLOVAKIA Ján Marušinec

General Assessment (Summary) Slovakiamadegoodprogressinbudgetsystemreformswithinashort

time(2003-2005).Changesweredrivenbytheneedtodecreasethefis-calburdenontheeconomy(deficit,revenues,andexpenditures)andtheMTEFandPBBservedastoolsforaccomplishingthisgoal.

TheMTEFhasbeenanintegralpartofthebudgetprocesssince2005,coveringthebudgetyearandtwofollowingyears.Onlybudgetyearalloca-tionsareadoptedbyParliamentasabindingconstraintwithinthebudget-aryprocess.Technically,amixofline-itembudgetingandPBBisusedtoprepareexpenditureprojections.Lineministriesaregivenclearexpendi-tureceilingsatthebeginningofthebudgetprocessandareresponsibleforexplainingtheirbudgetproposalswithinthoselimits.AseparatereserveisusedforfinancingGovernmentprioritiesandthisisdisbursedduringbudgetnegotiationsinCabinetinSeptember.Thisreserve,thoughrela-tivelysmall,distortsthemedium-termfocusoflineministries.TheMTEF,particularlythebindingnatureofout-years,needstobestronger.

SlovakiachoseadecentralizedapproachtoPBB.Lineministriesareresponsiblefordesigningtheirprogramstructures, includinggoals,ob-jectives,andmeasurableindicators.MOFgivesthemmethodologicalandpracticalsupport.PBBcurrentlycoversallcentralgovernmentactivitiesandfrom2009willcoverregionalandmunicipalself-governments.

PBB has dramatically increased budget transparency although im-plementation results vary from one line ministry to another. ProgramstructuresareyettobefullyusedtodesignandcostGovernmentpolicieswhich causes inconsistencies in Government’s agenda. A performancemanagementcultureisstillmissing.Communicationbetweenbudgetandpolicydepartmentswithinlineministriesispoorandthereisnocompre-hensiveeducationsystemforpublicemployees.Performancepayispos-sible,althoughlimitedtosomeextentbytheCivilServiceAct.Flexibleprocurementmethodsarestillunder-used.

ThePublicFinanceManagementReform(PFMR)project,financedbytheWorldBank(WB),madefiscalpolicymorepredictableandcred-ibleandcanbeconsideredasuccess,mainlyonthecentralbudgetplan-ninglevel.Butitbroughtlimitedprogressatthemicromanagementlevelalthough ithasmadebudgetdocumentationmore transparentand im-

188 189

proved accountability of program managers (line ministries and agen-cies).Monitoringandevaluation(M&E)needtobestronger.

A separate PFMR project was prepared and launched in coopera-tionwiththeWBtosystematicallyaddressallmajorshortcomingsinthebudgetsystem.Politicalcommitmenttochange,leadershipandsupportoftheMinisterofFinancewerecriticalsuccessfactors,aswerearobustITsystem,goodmethodology,andcommittedMOFofficials.

Thespeedofreformhadanegativeimpact.Therapidityofchange,insufficienttrainingandlackofpreparationamongpolicysectionsinlineministrieshighlightedcracksinthePFMRprojectimplementation.Thebudgetsystembecamequitecomplexanditneedstobesimplified(espe-ciallythesystemofclassifications)ifprogressistobesustained.

Betterresultsmighthavebeenachievedwithmorecarefulphasinginandalotofpilotprojects.PBBneedstobefurtherrefinedandthebudgetsystemsimplified.Atrainingprogramforlineministrystaffwouldhelpspreadtheperformancemanagementculturethroughoutthebureaucracy.

Thekeytosuccessisofferingstakeholdersatrade-off.Ifchangesbringnewtasksandchallenges,oldtasksshouldberedesignedorremovedtoavoidoverload.Focusingontechnicalpreparationandespeciallytheclas-sificationsystem,ITsupport,andpresentationformatofthebudgetareimportantandstaffwillseethebenefits.Ifthereisaclearvision,findingallieswillbemucheasier.

1. Core Features of Current Budget System slovakia.is.a.parliamentary.republic ..its.cabinet.is.formed.from.

several.coalition.parties.gaining.the.majority.of.votes. in.parliament.UsuallythreetofourpartiesformthecoalitionsoaCoalitionBoard(aninformalpoliticalbody)iscreatedtoresolveimportantorsensitivepoliti-caldisputesbeforetheyarediscussedinCabinetorParliament.

traditionally,.moF.coordinates.the.budget.process.Itstartsbypre-paringamacroeconomicandrevenueforecast,andsubmitsthefirstdraftbudget–calledStartingPoints–fordiscussioninCabinet.Afterdiscus-sionand/orapprovalbyCabinet,MOFsendsanexpenditureceiling tolineministriesandasksthemtopreparedetailedbudgetproposals.MOFcollectstheseandrunsaseriesofbudgetdiscussionswithlineministries.MOFthencompilesadraftbudgetandsubmitsittoCabinet.FollowingCabinetapproval,MOFsendthefinalbudgetdrafttoParliamentfordis-cussionandfinalapproval.

line.ministries.are.autonomous.in.their.resource.allocations.MOFgivesthemtotalexpenditureceilingsandsomebindingconstraints(wag-es, capital expenditures, EU resources, co-financing). They set up theirprogram structures, allocate expenditures to various programs, breakthemdownintodifferentrequiredclassificationsandsendtheirbudgetproposal toMOF.DiscussionsareheldwithMOFbeforethefinaldraftbudgetisapprovedbyCabinet.Theylaterdefendtheirbudgetproposalsinparliamentarycommittees.

cabinet.discusses.the.starting.points.in.April.and.usually.adopts.a. decree. governing. further. details. of. the. budget. process, setting thedeficitanddebttargetsforthegeneralgovernmentbudget,andindicatingexpenditureceilingsforindividuallineministries.InSeptemberCabinetdiscussesthedraftbudgetinseveralrounds.Usually,theCoalitionBoardis involved in thesediscussionsbecause thebudget isalwayspoliticallysensitive.Afteralldisputesaresettled,CabinetadoptsthedraftbudgetbyadecreeandsendsittoParliamentforfinalapproval.

parliament.discusses.the.draft.budget. in.committees.and.in.ple-num.Thecommitteesalsodiscussthebudgetproposalsofindividuallineministriesandmayrecommendtheplenumadoptchangestothem.Afterdiscussioninplenum,Parliamentadoptsthebudget(annualbudgetlawcoveringonlycentralgovernment)bysimplemajorityvoting.Becausethebudget isdiscussedandpoliticalagreementsarealreadyreached in theCoalitionBoard,Parliamentusuallypassesthebudgetwithoutanymajoramendments.

The.key.piece.of.legislation.regarding.the.budget.system.is.the.Act.no ..523/2004.coll ..on.budget.rules.of.the.public.service.(budgetary.rules.law).ThiscameintoforceonJanuary1,2005andgovernsdead-linesinthebudgetprocess.Thebudgetyearisthesameasthecalendaryear. Starting Points have to be submitted to Cabinet for discussion byApril15andthedraftbudgetbeforeAugust15.Afterdiscussionandap-provalbyCabinet,thefinaldraftbudgethastobesubmittedtoParliamentbeforeOctober15.AllotherpracticalissuesofbudgetpreparationprocessaregovernedbyCabinetdecrees(earlydecreeonStartingPoints)orMOFguidelines(budgetcallcircular).

budgetary.rules.law.also.reflects.government.decisions.to.imple-ment. medium-term. and. program. budgeting. It defines the budget asamid-termeconomicpolicyinstrument,setupforathreeyearperiod.Italsoincludestherequirementtosetexpenditureceilingsforgovernmentprograms,aswellasgoalsandobjectives.Evaluationoftheseshouldbea

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partoftheclosingaccountofthelineministry.SlovakBudgetaryRulesLawwasinfluencedbyOECDbestpracticeonbudgeting.RequirementsofESA95methodologywerealsogivenapriority intherevisionof theAct.Currentlyonlyminoramendments,relatedtoEUstructuralfunds,subsidies,anduseofcapitalexpendituresareconsidered.

traditionally.moF.played.an.influential.role.in.the.budget.proc-ess. and. still. does. This is visible in the budget execution phase duringwhichMOFcanchangeindividualallocationsforlineministrieswithoutParliamentapproval,aslongastheydon’texceedtheoveralldeficit.ThePresident, Prime Minister and the Minister of Finance have no specialbudgetpowers.TheMinisterofFinancehasonlyonevoteinCabinetandcannoteffectivelyvetoproposalswithunsustainablefiscalimpact.Hisorherinformalpowerwithinthepoliticalhierarchyiscrucial,asistheroleofMOFanditspositioninthebudgetsystem.

2. General Progress on Budget Reform major.changes. in.the.budget.system.occurred.between.2003.and.

2005, supported by the World Bank financed Public Finance Manage-mentReform(PFMR)project.Thesechangesfocusedoncreatingcom-patibleandmodernpublicfinancemanagementprocessesbasedonEUandOECDbestpractice.ThePFMRproject includedthefollowingkeyelements:

• strengtheningMOF’smacro-analyticalandfiscalforecastingca-pacities

• enhancingcapacityforcoordinatingSlovakfiscalpolicywiththeEUandmatchingfiscalreportingrequirements

• implementingandimprovingmulti-annualbudgeting• implementingandimprovingprogrambudgeting• strengtheninginstitutionalcapacityforbudgeting(intheabove

mentionedareas)• qualificationsupportfortheStateTreasurystaffanditsfullinte-

grationintothepublicfinancemanagementsystem• improvingdebtandliquiditymanagementthroughanewinsti-

tutionalset-up.within.pFmr,.moF’s.position.as.guardian.of.fiscal.stability.has.

been.strengthenedalthoughthefocusofitsactivitywasnarrowedbythereforms.Alotofdecisionmakingpowerwasdelegatedtolineministries(bindingindicatorsintheappropriationwerereduced),increasingtheir

accountability for sound financial management. MOF now focuses onoverallfiscaldevelopmentsratherthanonmicromanagingthebudget.

budget.coverage.has.improved.dramatically.since.2003.Withthe2004 budget, across-the-board implementation of program budgetingmadeinformationprovidedtoParliamentandthepublicmuchmorecom-prehensive.Withthe2005budget,Slovakiashiftedtoatwoyearbudgetinitsfullcomplexity(allclassificationusedforallthreeyears).Despitethefactthatfiguresfortheouteryearsaren’tlegallybinding,everybodycon-sidersthelimitsasastartingpointforthenextyear’sbudgetnegotiations.Onlyminoramendmentsbasedonchangesinthemacroeconomicframe-workandhighlevelpoliticaldecisionsaredonetoout-yearprojections.

A. new. classification. was. introduced. with. program. budgeting.making.it.a.more.demanding.task.TraditionalclassificationsremainbuthavebeenreshapedtoreflectESA95methodology.Slovakianowusesfourtypesofrevenueandseventypesofexpenditureclassifications.Thecom-plexityofthecodingrequiredachangeinITsupportforbudgeting.Twomajorsystemsprovidedataforbudgetingpurposes:BudgetaryInforma-tionSystemandStateTreasurySystem.AseparatesystemmanagesEUfunds.

state. treasury. and. a. debt. and. liquidity. management. Agency.were.established.to.centralize.the.financial.flows.of.public.institutions.Thisbroughtanewqualitytomonitoringbudgetexecutionandsubstan-tialsavingsrelatedtodebtfinancing.Handinhandwiththesechanges,budgetingtransparencyandaccountabilityhave improved.Reformalsobrought a new approach to financial control and sanctioning mecha-nisms.Subjectiveapproaches–suchascapacityforgrantingexceptionsandexcusingviolationsoffinancialdiscipline–wereavoidedinthenewlegislation. Also, emphasis is no longer solely on disciplinary sanctionsbutonincreasededucationofofficials.

The.national.control.office.(local.sAo).gives.parliament.its.opin-ion. on. the. budget. and. the. closing. account,. focusing on performancedata provided by MOF and line ministries. An internal audit functionhasbeenintroducedandisbeingcontinuouslystrengthenedunderMOFoversight.Monitoringandevaluationofprogramperformance isbeingpreparedandwillstartoperatingduring2008-2009.

in.the.early.stages.of.pFmr,.moF’s.budget.departments.were.ob-servers.only.of.the.changes.SincethemomentoftheMTEFandPBBim-plementation,thesedepartmentsopposedthechangesandthispromptedareorganizationofMOF.Itsbudgetsectionwasrestructuredandtradi-

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tionalbudgetdepartments(aimedatfinancing lineministries)werere-placedbytwo–oneanalyticaldepartmenttoworkwithlineministriesand independentpublicagencies,andanother tocompiledataandfor-mulatethegeneralgovernmentbudget.Thesetwodepartmentsbecameleadersofthereformprocess.TheirrolehasbeenformalizedintheMOFStatuteandMOF’sbudgetsectionbecamethemethodologicalcentreforbudgeting.

to.successfully. implement.the.changes,.moF.established.a.cross.sector.working.group.of.senior.officialsresponsibleforfinancialman-agementinlineministriesandagencies(coveringallgovernmentactiv-ity).ThisgroupwasledbyMOF’sgeneraldirectorofthebudgetsection.Institutional and methodological issues were discussed by this sectionbeforetheywerefullyimplemented.Thegroupdidn’thaveaformalsta-tusalthoughmemberswereappointedbyparticularministersorheadsofagencies.Thegroupwassoonabandonedbecauseofresistancefromsev-erallineministriesbutapilotingapproachwasintroducedbeforechangeswerelegalized.Pilotswereselectednotbysectorbutbythewillingnessofparticularlineministriestocooperate.

line. ministries’. opposition. was. two-fold. First, some budget de-partmentsinlineministriesthoughtthechangeswerebeingimplementedtooquicklyand,second,officialsweren’treadyforthem.Thiswaspartiallytruebecauseeverythingwasdoneinahurry.Anewapproach,pilotingthechanges before their full implementation, gained MOF allies in severallineministries.

A.necessary.step.was. to.convince. line.ministries’.policy.sections.to.change.internal.procedures.to.match.the.budget.system.changesandtakeoverresponsibilityforthefinancialmanagementoftheirprograms.This reform is yet to happen in many line ministries. Only some pilotministries have complied with the new PBB financial management re-quirements.

slovakia.took.ownership.of.pFmr.project.while.the.world.bank.acted.as.project.coordinator.Therewasa clear top-downapproach tochangeswithin thePFMR,although thedetailsof their executionwereprepared in a bottom-up way. Politicians motivated civil servants withtheirwillingnesstochangeandgavethemsufficientfreedomtocomeupwithspecificsolutions.Politicalcommitmenttoreformthebudgetsystemwas important and gave the necessary institutional changes credibility.MOFdemonstratedhowthechangescouldhappen,anexamplefollowedbyseverallineministries.

changes.were. implemented. largely.because.of.a.commitment. to.reduce.the.excessive.fiscal.burdenontheeconomy(e.g.decreasethedef-icitanddebt)andthelevelofoveralltaxationandpublicexpenditure.TheMTEFandPBBweregoodtoolsforaccomplishingthesehighlevelpo-liticalgoals.ThisfiscalconsolidationwasdrivenbypressurefromoutsideandbySlovakia’sambitiontoenter theEurozoneandmeetMaastrichtcriteria.

pFm. reforms. were. championed. by. the. minister. of. Finance. who.was.also.the.deputy.chairman.and.the.economic.leader.of.the.strong-est.coalition.party.Hiswillingnesstomoveforwardonthereformpath,combined with his informal influence within his party and Cabinet,broughtaboutmanychanges.Untilthendiscussionofthesechangeshadbeenrestrictedtoasmallgroupofexperts.Reformwasdriveninternally,technicallypreparedandexecutedbyMOFstaff,withhelpfromexternalconsultants.

For.political. reasons,. reform.activity. slowed.down.a.year.before.the. elections. in. 2006. and. has. remained. slow. The new Governmenthas focused on different priorities, failing to give PFM due regard as akeyelementofsuccessfulpublicmanagement.TheMinisterforFinanceisnolongertheDeputyPrimeMinisterandinformalpowerinCabinethasshiftedtootherlineministries,mainlyfromthesocialsector.MOF’scommitmentremainsstrongbutthechangeshadaneffectonpolicyco-ordination.MOF’sreformagendaisnowfocusedontechnicalchangesinaccountingandtaxadministration.

3. Adopting Medium-Term Expenditure Frameworksslovakia. started. implementing. an. mteF. relatively. early. in. the.

reform.process .TheMTEFbeganasaseparatedocumentdiscussedbyCabineteachAprilandgaveabriefoverviewofthemacroeconomicandfiscalforecasts(revenues,expenditure,anddeficit).Ithadnobindingna-ture,nordiditdiscussalignmentofprioritiesandbudgetallocations.TheMTEFcoveredthreeyears(thebudgetyearandtwofollowingyears).ItsimplementationwasindependentofPBBalthoughitwashelpfultohavetheMTEFpresentwhengovernmentprogramswereformedandalloca-tionsdetermined.

since.2005.the.mteF.has.been.an.integral.part.of.the.budget.with.a.detailed.budget.prepared.for.three.years.instead.of.one.Itisrevisedannuallyonarollingbasisandadjustmentsaremadeaccordingtochang-esinmacroeconomicpredictionsandpoliticaldecisions.Afullthreeyear

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budgetispresentedtoParliamentalthoughonlytheannualbudgetlawisadoptedbyvoting.AllocationlimitsforoutyearsarenotlegallybindingalthoughtheiradoptionbyCabinetestablishesthemasthestartingpointforthenextyear’sbudgetdiscussions.RegulationsconcerningtheMTEFpreparationarecoveredbytheBudgetaryRulesLaw.

The.mteF.is.used.a.fiscal.policy.management.tool.MOFsetsde-tailed revenue and expenditure ceilings for lined ministries, preparedwithin the MTEF. These ministries are obliged to prepare their budgetproposalswithintheselimits.Exceptionsarespecialpurposefunds(So-cialInsuranceFund,HealthcareInsuranceCompanies,NationalPropertyFund)andself-governingbodiesoutsidethedirectcontrolofcentralgov-ernment(regionalandlocalself-governments,publicmedia).MOFusesprojectionsoftheirbudgetproposalsfortheconsolidatedbudgetbutcan-notdirectlyinfluencetheirbudgetdecisions.

with. the. mteF. an. integral. part. of. the. budget,. all. government.agencies.are.involved.in.its.preparation.MOF’smacroandfiscalfore-castunit–theFinancialPolicyInstitute(FPI)–isresponsibleforprepar-ing theunderlyingmacroeconomicand tax revenueprognosisandset-ting total deficit and expenditure ceilings in line with actual economicdevelopment.Forecastsareupdatedthreetimesayearand,beforetheyarepublished,aresubjecttodiscussionbymacroeconomicandtaxcommit-tees.Representativesofthecentralbank,academy,commercialbanksandfinancialmarkettakepartinthesediscussions.

Afterwards,.the.budget.section,.in.close.cooperation.with.the.eu.relations.section,.prepares.the.budget.starting.points.and.sends.it.to.cabinet. for. discussion, usually at the end of March. Starting Points isadocumentcontainingmacroeconomicandrevenue(taxandnon-tax)forecasts,deficittargets,andexpenditureframework,forthebudgetyearandthreefollowingyears.Itcoversallgovernmentactivity

After.the.starting.points.are.approved.by.cabinet,.moF.informs.line.ministries.of.their.expenditure.ceilings.and,byendMay,linemin-istries provide MOF with their budgets. MOF analyses the draft budg-etsand inJune/Julynegotiates themlineministries.Thefinalbudget isadoptedbyParliamentattheendofthe(calendar)year.

institutional.capacity. for.performing.the.mteF.tasks. is.concen-trated.mostly.in.moFwherestaffhaveundergoneaseriesofeducationprograms.Sixmajorlineministriesgainedsupport,andstrengthenedca-pacity,withinthePFMRproject.Whileotherlineministriesaregetting

supportfromMOFstaff,theyneedmoremethodologicalandinstitution-alsupport.

moF’s. Financial. policy. institute. uses. standard. forecast. models.for. macroeconomic. and. tax. revenue. projections. An in-house modelfornon-taxrevenueforecastingwasdevelopedbyitsbudgetsection.Pre-dictions of the expenditure side of the budget depend either on macr-oeconomicvariables(socialorunemploymentbenefits)ordiscretionarydecisionsofCabinet (certain subsidies,wage rises).Generally, inflationadjustmentisusedforotherexpenditureitems(goodsandservices, in-vestmentexpenditures).

A.non-allocated.reserve,.not.higher.than.3.percent.of.total.budget.spending,.is.set.aside.for.political.priorities.which.are.determined.later.in.the.budget.process(duringdiscussionofthedraftbudgetbyCabinetandCoalitionBoardinSeptember).ThisreserveisdisbursedbeforethebudgetissubmittedtoParliamentbutitcanbekeptinthemedium-termbudgetfortheout-years.SensitivityorriskanalysisisnotcurrentlyusedinSlovakia.

Theoretically,.medium-term.expenditure.projections.prepared.by.line.ministries.in.their.budget.proposals.provide.the.same.level.of.de-tail.as.the.current.year’s.budget.Thesameclassificationsareappliedandthesamelevelofdetailisprovided,asinthecaseofthebudgetyear.Thereliabilityofthedata,however,variesbetweenlineministries.Somelineministries with sound internal financial management procedures pro-vide detailed and reliable data on all programs (Ministry of Labor andSocialAffairs,MinistryofInterior);someprovideonlyinflation-adjustedexpenditure forecasts (mostly agencies with administrative character –PresidentialOffice,ParliamentOfficeetc).Thereasonforsuchvariationistheunevendistributionofhumancapacityacrosslineministriesand,sometimes, limited access to training and education. Another factor islineministries’reluctancetodisclosefuturepolicydecisionstoMOFand/orthepublic.Despitethis,theMTEFisrelativelystableandthisisduetoMOF’sstrictoversightofexpenditureplanninginlineministries.

expenditure.forecasts.are.revised.annually.and.the.limits.for.out-years.within.the.mteF.aren’t.legally.binding.Theserevisionsareman-agedbyMOFandalladjustmentshavetobejustifiedeitherbyachangeinmacroeconomicvariablesorbyapoliticaldecisiontakenbyCabinetorParliament.Estimatesarefinetunedtwiceayear,followingrevisionofmacroeconomicandrevenueforecastpreparedbyFPI.Expenditurelimitsarepoliticallybindingandrespectedbylineministries.Cabinetdiscusses,

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althoughdoesnotformallyadopt,expenditureceilingsforout-yearsto-getherwiththebudget.

The.biggest.benefits.of.the.mteF.are.visible.at.the.central.budget.planning.level.Overallfiscalpredictabilityandcredibilityhaveimproveddramatically.BeforePFMreform,andtheMTEFinparticular,wereim-plemented,thegeneralgovernmentbudgetdeficitwasn’ttargetedandthefiscaloutcomewasknownonlyafterthefiscalyearwasover.TheMTEF,togetherwithothermeasures,nowallowsforeffectivefiscaltargetingforthegeneralgovernmentbudget.Thishassubstantiallyimprovedfiscaldis-cipline and resulted in better fiscal performance with lower borrowingcostsfortheGovernment.

The.mteF.has.led.to.better.financial.management.in.line.minis-tries. although. the. results. are. not. as. clear. as. they. are. in. central. gov-ernment.Itwasnotunusualforbudgetexpenditurestobeoverrunbysomelineministrieswithpoorfiscalplanninginseveralpublicagenciesled toaccumulateddebt.Now, lineministriescomplywithexpenditureceilingsalthoughadjustments to thebudget (reallocationsbetween lineministries)arestillfrequentduringbudgetexecution.Formalrules,how-ever,limittheextentofadjustmentsthatcanbemadetothebudgetafteritsadoption.

linking.strategic.policy.preparation.with.the.budget.is.a.challenge.for.the.future. It requiresbetterfiscal impactassessmentwhenprepar-ing key strategic policies. The World Bank recommends that SlovakiastrengthenthebindingnatureoftheMTEFandmakeout-yearsbinding.According to recent amendments from 2009 the carry over of unspentcapitalexpenditureswasrestrictedtotwosubsequentyears.

The.non-disbursed.reserve.allocated.each.year.according.to.politi-cal.decision.remains.a.big.challenge.Comparedwiththetotalbudgetitisnot abigamount (less than3percent)but itdistorts lineministries’medium-termfocusbecausewhentheypreparetheirbudgetproposals,theytake intoaccountthepossibilityofextramoneyfromthisreserve.Whenthebudget issubmittedtoCabinet,someimportantpolicyareasareunder-financedbecauseoflineministers’tendencytorelyontheirpo-liticalinfluencetogetadditionalresourcesfromthereservefund.Some-timestheyaskfornon-discretionaryexpendituresfromthisreservewhileintheirbudgetproposalstheyplanfordiscretionaryexpenditures.

4. Performance-based Budgeting pbb. has. been. introduced. gradually. since. 2000. driven by the Fi-

nance Minister’s reform minded approach and the necessity to institu-tionalizeatoolforimprovingpublicspendingefficiency.Anaimwastomaintainorincreasethequalityofpublicservicesatlowercost.

At.the.minister’s.request,.a.us.treasury.adviser.was.assigned.to.work.on. this.and (two) staff from thebudget sectionwasdedicated tohelp him. They were isolated from real execution of budget policy butduringashortperiodoftimewereabletoprepareabasicmethodologyandbuildawarenessamong thekeyplayers. In2001 thefirst fourpilotchapters(MinistryofEducation,SlovakAcademyofSciences,SupremeCourt,andConstitutionalCourt)preparedtheirbudgetsfor2002basedonexpenditureprograms.In2002anothersixlineministriesjoinedtheexercise for the 2003 budget. Understanding of the programs was lim-ited,however,totime-limitedgovernmentactivities,mainlyrelatedtoEUstructuralfundsmanagement.

when.the.government.changed.in.2002,.the.new.Finance.minister.continued. to. support. the. idea. and. stepped. up. preparatory. work. for.full.pbb.implementation.In2003,MOFwasrestructuredanditsbudgetsectiondepartmentstooktheleadindrivingPBBrelatedchanges.WithpoliticalsupportandresourceswithinthePFMRproject(humanandfi-nancial),thenecessaryinstitutionalandlegaladjustmentsweresoonim-plemented.

since.the.2004.budget,.all.34.budget.chapters.(line.ministries.and.other.government.agencies).apply.a.full.program.structure.Majorrevi-sionofBudgetaryRulesLawwaspassedin2004,includinginstitutionali-zationofPBB.NewmethodologyonPBBwaspublishedandimplement-edin2004,establishingalogicalframeworkfortheprogramstructure.Amajorrevisionofexistingprograms,goalsandobjectivesreduceddupli-cation.Thebudgetary information(BIS)andStateTreasury ITsystemswerereshapedtosupportnewprogramclassification.AmanualonM&Ewaspreparedin2007andtodayMOFisworkingonimplementingit.

since.pbb.was.introduced,.the.quality.of.budget.preparation.and.oversight. has. improved. significantly. New ways of classifying expen-dituresbroughtmoreclarityandtransparencytothebudget.MOF,andCabinetandParliament,andthegeneralpublic,cannowconcentrateonfosteringgreaterefficiencyofpublicspending.Thisisindeedhappeningduringbudgetnegotiationswithlineministries,whereprogramstructuresareactivelyusedtosupporttheargumentsofbothsides.Therewereno

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majorobjectionsduringimplementation,apartfromoppositionbysever-allineministries.Currentdiscussion(Parliamentandpublic)isaimedatGovernmentgoalsandobjectivespresentedintheprogrambudget.Thismeansanyobjectionsareaboutcontentandnotmethod.

pbb.neither.replaced.nor.supplemented.the.traditional.budget.Itissimplyanewwayofpresentingbudgetdatainbudgetdocumentation,providing policy makers with additional information. Traditional line-item budgeting methodology and program budgeting methodology areusedatthesametime.TheBISeffectivelyconnectsbothkindsofbudgets.Since2006,theStateTreasuryhasprovideddataonbudgetexecutionintheprogramstructure.Allotherclassificationshavebeenpreservedandthebudget is still,onrequest,presented indifferentclassifications.Theprogrambookisaseparatedocumentfromthetextexplanationofrev-enueandexpendituredevelopmentinthebudgetdocument.

with.regard.to.fund.allocation,.the.leading.classification.is.organi-zational. For each entity and line ministry a limit is developed (basedoncostingmethodsandexpenditureindexation)andbrokendownintomajoreconomiccategories–wages,capitalexpendituresandtherest.EUresources and their co-financing are earmarked by MOF. Programs aredeveloped by line ministries and include goals, objectives and measur-able indicators.Thelineministry isresponsible for furtherbreak-downofgivenlimitsintoalltheclassificationsavailable,tothelowest levelofdetail.ThisworkissupportedbytheBISprovidedbyMOF.

There. are. three. levels. in. the. program. budgeting. system. –. pro-grams,. sub-programs. and. elements/projects. Currently, there are 95programs in Slovakia, a few of them multi-ministerial. Line ministriescan, but are not required to, form sub-programs and elements/projectsundertheprograms.Elementisatime-unlimitedpartofaprogram,whileprojectistime-limited.Specificobjectivesarerequiredatthelowestlevelofdetailbut,usually,higherlevelshavestrategicobjectivesorgoals.Ob-jectivesandgoalsdiffer.Anobjectivehasaspecificvalue(short-orlong-term,outputoroutcome),andagoaldescribesadesiredchangeorresult.Eachobjectivemusthaveameasurableindicator(atleastone)assignedtoit.Morethanoneindicatorisallowedtomeasuretheprogressofac-complishingobjectives.

The.logical.framework.of.a.program.structure.is.coherent.and.can.be.used.across.various.government.agencies.Itallowsfordemonstratinghowaministrywants to interveneandachievecertain socio-economicobjectives.Italsoenablesresourcesusedforthisinterventiontobelinked

withintendedresults.Somelineministriesstilldon’tfollowbestpracticeandlackclearmotivationtodoso.

generally,. the. architecture. allows. line. ministries. to. form. stra-tegic. policy. within. the. logical. framework. of. programs. They can setgoals, strategicobjectivesandspecificobjectivesandassignmeasurableindicatorstothem.Lineministriesalsoallocateresourcesforaccomplish-ingthosegoalsandobjectives.Inmanycaseslineministriesusethepro-gramstructuretoactivelyplantheirpoliciesalthoughthisisnotthecaseacrosstheboard.Somelineministriesstillusetheprogramstructureinarigidandformalway,formingstrategicpolicyseparatelyfrombudgetprograms.

traditionally,. policies. were. adopted. by. cabinet. in. the. form. of.decrees,.where.policy.objectives.were. stated,.but. there.was.no.direct.link.between.those.objectives.and.the.budget.TheMTEFandPBBhavechangedthisandpolicyshouldnow,ideally,bepreparedinlinewiththeprogram structure and budget allocations. There is a methodology forpreparingmaterialsforCabinetdiscussion.ThisincludesapartonpolicycostingalthoughthequalityofmaterialswithbudgetaryimpactpreparedbylineministriesanddiscussedbyCabinetvaries.

some.line.ministries.use.pbb.to.develop.policies.and.cost.the.pre-pared.programs.with.their.objectives.accordingly ..OthersuseitonlyasaformalityandstillrelyonthewillingnessofCabinettoadoptpoliciesthatareneithercostednorproperlyreflectedintheirprograms.MOF,asanimportanthubintheinter-ministerialcommentingprocedure,isputtingalotofemphasisonusingtheprogramstructuretodesignandcostpoli-cies,andtokeepthemonlywithinthescopeofthebudgetenvelope.Likeanyotherminister,however,theMinisterofFinancehasonlyonevoteinCabinet.

indicators.were.defined.from.bottom-up.but.several.rounds.of.dis-cussions. took. place. between. the. policy. owners. (line. ministries). and.moF.AfterthesediscussionsMOFpreparedacomprehensiveguidelineonsettingobjectivesandmeasurableindicators.Thisguideisnowpub-liclyavailableandgiveshelpfulexamplesofgoodandbadpractices.Thereare675outputindicatorsinthebudgetfor2008and631outcomeindica-torsrespectively.Themixofoutputandoutcomeindicatorsisnotspreadevenlyacrosslineministries.Someofthemtendtouseoutputindicatorswhilesomepreferoutcomeindicators.Onlyafewministriesuseacom-prehensivemixofbothtypes.Thequalityofobjectivesandindicatorsisprobablycurrentlytheweakestpointofprogramformulation.

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oecd.and.other.internationally.used.indicators.were.used.to.set.up.a.monitoring.framework.of.major.government.policies.Domesticdatawasalsousedforpolicieswhereinternationalcomparisonswereuna-vailableand,onalowerleveloftheprogramstructure,tosupporthighlevelobjectives.Theseindicatorshavedifferentdatasources,themainonebeing the Statistical Office. The final list of indicators was reviewed byMOFtoensurequality.Furtherimprovementsaremadeannuallyduringbudgetdiscussions.An independentauditof indicators–preferablybytheNationalControlOffice(localSAO)–isyettobedone.

The. quality. of. objectives. and. performance. (achievement. of.planned.results).varies.across.different. line.ministries.Thequalityofperformancecanbeattributedmainly tohowwell targetsweredefined(exaggeratedorunderestimated)ratherthanprogrammanagement.

in. the. early. stages. of. pbb. implementation. a. decision. was. made.not.to.reward.or.punish.good.or.bad.performance.Thisdecisionwasaimedatgaining lineministrysupport for thechanges. If they thoughtthey would be punished for poor performance, their opposition wouldhavebeengreater.Programperformance ismonitored through theBIStwiceayear,althoughmonitoringisperformedbythepolicymanagersthemselves.Monitoringofprogramperformanceisrequiredasapartofthe closing account and line ministries are obliged to submit monitor-ingresultstoMOF,Cabinet,andtherespectiveparliamentarycommittee.FurtherdevelopmentofM&Eisunderwayand,inthenearfuture,shouldenableGovernmenttoapplyincentivesforgoodperformance.

central.government.was.the.first.public.sector.entity.to.introduce.pbb.From2009regionalandmunicipalself-governmentswillbeobligedtopreparetheirbudgetsusingthePBBapproach.Thismaybeaproblemforsmallermunicipalities(therearealmost2900municipalitiesinSlova-kia).Sometargetedfunds(SocialInsuranceFund,healthcareinsurancecompanies)areusingPBBbecausetheyarelegallyrequiredtodoso.Lineministriesresponsibleforcomplexsectors(likeeducationandhealth)setstrategicobjectivesintheirprogramstructuresforpoliciestheycaninflu-enceonlyindirectly,throughtheirregulatoryactivity.

various.implementation.results.can.be.tracked.in.complex.sectors.Becauseoftheirdecentralizednatureandprivateserviceprovision,edu-cationandhealthcarearecomplexsectors.Educationisagoodexample.Ithascleargoalsandobjectives,developedcentrally,andfinancialflowsaredesignedtomotivatedifferentareastoachievedesiredresults.Healthcare,ontheotherhand,isapoorexamplebecausetheMinistryofHealth

wasunabletodefinehighlevelgoalsandobjectivesandfinancialresourc-esaredisbursedwithoutanylinktoperformance.

sectors.with.a.lot.of.independent.agencies.executing.government.policy. (transport. for. instance). can. be. managed. well by the programstructureifthegoalsandobjectivesformedatthetoplevelarewellde-finedand theflowofmoneygives themthe right incentives toachievethem.TheMinistryofTransportinSlovakiastillfocusesonoutputindica-torsratherthanoutcomeswhichdoesn’tmakebestuseofPBB’spotential.

if.a.government.policy.has.a.multi-sectoral.character,.multi-min-isterial.programs.are.created.to.cover.the.tasks.of.different.line.minis-tries.or.agencies.Aleadministryisalwaysappointedtooverseeapro-gram.Thisministryisresponsibleforachievinggoalsandobjectivesandformonitoringandevaluation.Otherlineministriesoragenciesactlikeprogram participants, creating sub-programs with goals and objectivesreferring to the overarching program goals. The performance of multi-ministerial programs varies significantly from one program to another.Insomecases,wheretheleadministryputspressureonparticipants,themanagementofmulti-ministerialprogramsseemsfreeofproblems.Buttherearecaseswheretheprogramexistsonlytocoverexpenditureinacertainarea(economicmobilizationfor instance); it ispoorlymanagedandfailingtobringaboutmeasurableresults.

two. major. sources. of. problems. in. pbb. implementation. can. be.identified:

• Lackofpoliticalcommitment,mainly fromlineministers,hasreducedthequalityofprogramstructuresinseverallineminis-tries.Ministries,wheretopmanagementsupportedPBBreform,preparedwellstructuredandtechnicallysoundprograms,objec-tivesandindicators.

• Theextentofthechangeandthespeedofimplementationcre-atedreluctanceonthepartofsomelineministries’middle-man-agement, largely because they lacked capacity. Policy sections’involvementalsoprovedsensitiveanddifficult.Betterpreparedand more sensitively phased-in changes in budgeting proce-dures,supportedbyformaltrainingprogramforbudgetofficials,wouldprobablyhavebroughtbetterresults.

legislation.and.methodological.guidelines.covering.pbb.include:• theBudgetaryRulesLaw• MOF’smethodologicalhandbookonprogrambudgeting

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• manualonformulatinggoals,objectives,andmeasurableindica-tors

• manualonmonitoringandevaluationofprograms.slovakia.now.operates.an.almost.fully.fledged.pbb.system.There

aresomeweaknessesinitsoperationsalthoughalltheessentialbuildingblocks of its application are in place. Program costing lags behind thecountrieswithbestPBBapplicationpracticesbutisatasufficientstand-ard.Theprogram’sweaknessesare,first,inprogramperformanceevalu-ation and feedback for policy making, which are being addressed, andsecond,encouraginggreaterresponsibilityandaccountabilityamongpro-grammanagers.

in.the.first.years.after.implementation,.slovakia.operated.a.prb.system ..it.is.now.somewhere.between.pib.and.pbb.(since.2005-2006).PBB is still perceived as a tool for strengthening institutional manage-mentratherthanfiscaldisciplineandtherehasbeennomajorprogressonitsimplementationsince2005.ManyM&Eprojectsstartedin2006arestillrunning.Overall,thecurrentsituationcanbedescribedasstagnation.Thecausesarereformoverloadfromthepreviousperiod(2003-2005)andalackofpoliticalcommitment.Ifthesituationdoesn’timprovethereisaslightriskofreformreversal.Thefocusneedstoshifttosimplifyingthecurrentsystemandbuildingcapacityinthepublicadministration–par-ticularlyinpolicysections–tocopemoreeasilywiththechanges.

5. Budget Presentation and Classificationbudget.documentation.relies.on.data.provided.by.the.budgetary.

information. system. (bis) which is the core of budget management.Based on data from this system, analytical comments are provided inbudgetdocumentation.These followseparateclassifications,mainlyor-ganizationalandeconomic(traditionally).Anannexispreparedtoshowthefullextentof theprogrambudgetandpublishedasaseparatebookwithallprograms,theirparts,financialallocations,goals,objectivesandmeasurableindicators.

since.2003,. the.quality.of.documents.and.analysis.has. improved.significantly.2005wasthefirstyearinwhichthebudgetwaspublishedinthisnewstructure.Sincethenonlyminorrevisionshavebeenmadetothetemplatewhichprovidesallthenecessaryinformation.Unfortunatelyitiswritteninastyle,andwithalotoftablesandcharts,thatmakesitdifficultforanon-informedreader tounderstand.Attemptshavebeenmade to

publishacitizens’guidetothebudget(in2004)butlackofpublicinterestquashedthis.

slovakia.operates.seven.classifications.in.its.budget.system.•. economic classification of revenues and expenditures is stan-

dard with GFS guidelines although it doesn’t yet fully reflectGFSM2001.AdjustmentshavebeenmadetoincorporateESA95standards.

•. Functional classification of expenditures is based on COFOGandhas twoadditional levels fordetailed trackingofexpendi-tures.This levelofdetailbecameobsoletewhenprogramclas-sificationwasintroducedbutisstillusedforstatisticalpurposes.

•. organizational classification of revenues and expendituresalignswithGovernmentstructure–lineministriesandagencies–andincludestheirbudgetaryandsubsidiaryorganizations.

•. type.of.budgetclassificationdeterminesthetypeofpublicen-tity in the consolidated general government budget (one levelabovethestatebudget).

•. program classification of expenditures has three levels: pro-grams, subprograms and elements/projects. It covers the statebudgetandthreeoftheremainingstatefundsand,from2009,will be used by regional and local self-governments althoughtheywilldeveloptheirownprogramstructure.

•. source.of.fundsclassificationtracks thefinancialmeanscom-ingfromtheEUthroughtheGovernmentbudget.Italsodistin-guishesnationalco-financingofEUresources.

• A register. of. investments which separately codes all capitalexpenditures intoseveralcategoriesofprojects.Thisclassifica-tionissuitableformergingwiththeprogramclassificationbutadetailedanalysishasn’tbeenpreparedandnodecisionhasbeenmadetodoso.

it.support.for.budgeting.was.crucial.to.the.program’s.success.TheBudgetary Information System (BIS) proved a tremendous help in thebudgetingreform.Ithasbeendevelopedgraduallyasthecomplexityofthebudgetsystemincreased.Allmethodologicalchangeswerereflectedimmediatelyinthearchitectureofthesystemandtheuserinterfaces.Itisapowerfultoolforfocusinglineministries’attentiononcomplyingwithMOFmethodologyandexpenditureceilings.TheITsystemsupportsallclassificationsandcansortdataaccordingtouserneeds.Pre-definedand

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randomviewscanbeexportedtovariousformats(PDF,MSExceletc).Beingamulti-modularprogramitallowsnotonlyforbudgetpreparationbutalsoexecution(automaticdatatransferwiththeStateTreasurySystemisensuredonanon-linebasis)andmonitoringofthebudgetandadmin-istrationofclassifications(ledgers,automaticbridgetablesetc).

The.budget.system.at.present.is.too.complicated.and.without.fur-ther.work.there.is.a.risk.of.reform.reversal.Simplifyingthebudgetsys-temandespecially thecurrentlyusedclassificationswouldhelpbudgetmanagers. Unofficial discussions are underway about integrating someclassificationsbutideashaven’tbeenpresentedtoMOFmanagement.Re-ducingworkloadsandavoidingdataentryerrorsmightbethefirstresultsofthebudgetsystemsimplificationandwouldleadtowideracceptanceofthePBBculture.Focuscouldbeshiftedfromformalcompliancetostra-tegicthinking.Andsimplificationcouldbesupplementedwithtargetedtrainingtohelplineministrieswiththeirprogramstructuresandexpend-itureplanningprocedures.

6. Public Management Performance Culture slovakia.doesn’t.yet.have.regular.evaluation.of.program.perform-

ance.Generally,theM&Efunctionisweak.Aseparateprojectaimedataddressingthisshortcomingwasconductedduring2006-2007with19pi-lotevaluationsproduced,atrainingsystemdesigned,andmorethan100civilservantstrained.Severallineministrieswereinvolvedinthisproject.The organizational set-up of M&E is determined by Government andthreeoptionswereconsidered:

• evaluationcellsinlineministriescoordinatedbyMOF• coordinationbytheNationalControlOffice• integrationofM&Etaskswithlineministries’internalaudits.WhenPBBwasintroduced,adecentralizedapproachwastakenfor

managingM&Ebutthemethodologyiscoordinatedcentrally.The. role. of. the. national. control. office. (local. sAo). in. the. pbb.

framework. implementation. is. important. In the beginning NCO waspassiveandreluctanttochangeitmethodologyforexternalaudits.SincePBBreformswereimplemented,NCO’spositionhaschangedanditstart-edtocatchupwithMOFactivities.ThePBBmethodologywasdiscussedwithNCOandMOFprovidedseveraltrainingcoursesforNCOauditors.

nco.is.an. independent.body.responsible. for.external.audit.and.control.of.public.entities ..it.provides.parliament.with.its.opinion.on.

their.budget.proposals.and.final.accounts.Italsopublishesreportsonitsfindingswhichcanbesectorspecificortopicbased.Severalauditreportsonthequalityofprogramstructuresandperformancedataofparticularlineministrieshaverecentlybeenproduced.Methodologyforperform-anceaudits,however,stillneedstobedevelopedandimplemented.

Although. pbb. has. caught. on. among. key. players. (staff. in. moF.and. line. ministries’. budget. departments), a. performance. manage-ment. culture. hasn’t. Policy departments only partially understand thePBBconcept.Traditionallytheyhavefocusedondesigningpolicydesignandignoreditsbudgetaryimplications.ThisisaninternalprobleminlineministriesbutMOFcanhelpaddressitwithtargetededucationforpro-grammanagers.

public. sector. employment. and. remuneration. systems. were. re-formed.in.2004tobetterreflectindividualperformancebutthenewsys-temisquiterigid.Remunerationisbasedonpositionandageratherthenperformance. Further reform of the civil service (remuneration systemandflexibility inemploymentcontracts) isneededtofullybenefitfromthePBBculture.

public.procurement.procedures.have.been.modified. to.meet.eu.standards.and.allow.for.a.certain.level.of.discretion.among.public.serv-ants. Modern methods of procurement (electronic, joint procurement,auctionsetc.)arestillrarebuteffortsarebeingmadetousethemmorefrequently.

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Annex1.ProgramstructureinTransport–Slovakia2008

Source:.Bank.staff.based.on.national.documentation

TURKEY Mediha Agar

General Assessment (Summary) Inthe1990s, leadinguptothe2001economiccrisis,afragmented

budgetandineffectivefiscalaccountabilitymechanismsinTurkey’spub-licsectorcontributedtolargefiscalimbalances.Fiscalpolicywasoutsidepolicymakers’controlandafragmentedbudgetmadebothmaintenanceoffiscaldisciplineandmanagementoffiscalrisksdifficult.Multiplelay-ersofinspectionsandinternalcontrolswereineffectivebutprovidedin-centivesforagenciestoestablishoff-budgetflowstoevadecontrols.Thisfurther fragmented the budget. Extensive off-budget activities made itdifficulttoestimateandthereforemanagethefullextentofgovernmentfinanceandexpenditure.87

Pastpre-crisisperiods(1994,1999and2001)werecharacterizedbylarge public sector borrowing requirements, due to a sharp increase inpublicwages,wideningofsocialsecuritydeficitsandtransferofexpendi-tures,includingtostatebanks.88Statebankskeptaccumulatingso-called‘dutylosses’incurredastheyfundedgovernmentprogramsandprovidedsubsidizedlendingtocertainborrowers.Withlimitedpublicinformationabouttheextentofthesedutylosses,andthewidespreadperceptionthatthey constituted a contingent government liability, the sustainability ofpublicdebtcameintoquestion.Largeoff-budgetexpendituresorso-calledextra-budgetaryfunds(EBF)addedtoconcernsaboutfiscalsustainability.

Until 2001, PFM in Turkey was dominated by an outdated legalframework (PublicAccountingLawdated1927).Amultitudeof extra-budgetary funds and revolving funds seriously jeopardized budget dis-cipline.Aplethoraofcontroland inspectionagencies focusedoncom-pliance rather than ensuring effectiveness of management and controlsystems.TheTurkishCourtofAccount (TCA),Turkey’s supremeauditinstitution,waslimitedbyitsrestrictedmandate;itdidn’tcovertheentirepublicsectoranditsscopewasconfinedtoconformityauditsonly.Gener-algovernmentinstitutionslackeduniformaccountingandreportinganda chartof accounts that couldbe readily consolidated.Accountingwascash-based;PFMsystemswereunabletocaptureexpenditurearrearsandgovernmentassetsandliabilities,includingcontingentliabilities.87 Underlyingpublicsectorstructuralandmanagementissueswereanalyzedinthe2000and2003

CEMsandthe2001PEIR88 Transfertostatebankswasintheformofeithercapitalinjectionordutylosses

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The2001economiccrisisprovidedtheimpetusforpolicy-makerstocomprehensivelyaddresseconomic,socialandstructuralissues,includ-ingPFM.Inresponsetothe2001crisis,Turkeyadoptedanewmedium-term macro-economic program and launched a renewed structural re-formprograminDecember2001.89Therenewedprogramincorporatedathree-prongedstrategytoachievemacroeconomicstabilitysupportedbyimprovedsocialcohesion:

• macroeconomic policies to restore fiscal stability and growth,andaggressivelysupportthedisinflationprocess

• structuralpoliciesandinstitutionalreformstoaddressthefinan-cialsectorandweaknessesinthePFMsystem

• enhancedsocialdialoguewithincreasedemphasisonprotectingthemostvulnerablegroups.

Accordingly,publicsectorreformsince2001hasfocusedonachiev-ingthesignificantfiscaladjustmentrequiredtounderpinmacroeconomicstabilization, while simultaneously addressing underlying structural/in-stitutionalweaknesses.Therehasbeensignificantprogressonbothfronts.

AmajoreffortatmodernizingTurkey’sfiscalinstitutionswasunder-takenafter2001andsupportedby theWorldBank(WB)andtheIMF.Twobackgrounddocumentslaidthegroundsforlegislative,institutionalandsystemicreforminitiatives– theSpecialAd-hocCommitteereportonRestructuring.the.Public.Financial.Management.and.Fiscal.Tranparen-cy-1999preparedbytheGovernmentinthecontextoftheDevelopmentPlanandPublic.Expenditure.and.Institutional.Review-2001preparedjoint-lybyGovernmentandtheWB.

Followingthesedocuments,thetwomainpillarsofrenewalwerethePublicFinanceandDebtManagementLaw(PFDML)adoptedin2002andthePublicFinancialManagementandControlLaw(PFMCL)adoptedin2003.Bothhavebeenframedalongbestpractice.ThePFMCLaimedtothoroughlyrestructurepublicexpendituremanagementbyconsolidatingallgovernmentfiscaloperationsinanintegratedapproach,fromprepara-tiontoexecutionandex-postmonitoringofthebudget.Thelawprovidedthelegalframeworkforreformingthebudgetingprocess,including:

• broadeningthescopeoffinancialmanagementandfiscalcontrol• extendingcoverageof thebudgetandfinancial accounts toall

sectors of government in accordance with international stan-dardsofnationalaccounting(SNA93,ESA95)

89 SupportedbyanIMFStand-byArrangement(SBA)andtheBank’sProgrammaticFinancialandPublicSectorAdjustmentLoans(PFPSALs)

• introducingMedium-TermProgramandMedium-TermFiscalPlanscoveringthreeyears

• a new, more comprehensive budget classification(includingfunctionalandinstitutionalclassification)systemforthebudget

• starting a shift from input- to performance-based budgetingwhichembracesstrategicplanning

• transferringresponsibilityforinternalfinancialcontrolsandau-ditingfromMOFtolineagencies

• a formal legal schedule and calendar for budget preparation,implementationandmonitoringprocesses.

Thereismoretobedone.What’sneededisgreatercommitmenttofiscal transparency, better links between programs and budgets, align-mentoffiscalreformswithotherpublicadministrationreforms(inareaslikecivilservicereform)andabetterequippedexternalauditingsystem.

1. Core Features of the Current Budget SystemThe.multi-institutional.nature.of.turkish.economic.policy.making.

is.a.key.aspect.of.the.budget.system ..MOF(budgetpreparation,revenuepolicies and fiscal control), the State Planning Office (macro plans andinvestmentpolicies)andtheUnder-secretariatofTreasury(cashanddebtmanagement)arethecentralcontrolagencieswithvaryingdegreesofre-sponsibility,duringthebudgetprocess.TheHighPlanningCouncilandCabinetactasultimatepoliticaldecisionmakersforthefinalshapeofthebudget.PublicProcurementAgencyandStatePersonnelOfficedetermineprocurementpoliciesandpoliciesforcivilservicerecruitment.TheTurk-ishCourtofAccountsistheexternalauditinstitutionactingonbehalfoftheGrandNationalAssembly.

division.of.labor.between.the.three.economic.management.insti-tutions.demands.close.coordination ..This.is.important.for.policy.mak-ing.which.requires.strong.political.leadership.for.improved.coordina-tion.among.central.control.units ..TheroleoftheStatePlanningOffice(SPO)oninvestmentplanningandtheinvestmentbudgetandtheUnder-secretariatofTreasury(UT)ondebtandcashmanagement,forcesMOFtocooperatecloselywiththem.Althoughthedivisionofresponsibilitiesisregardedasaweaknessinthestructureofbudgetorganizations,itpro-videsusefulchecksandbalancesagainstundueexpendituredemands.

two.key.pieces.of.legislation.–.public.Financial.management.and.control.law.(pFmcl).and.public.Finance.and.debt.management.law.

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(pFdml).–.regulate.the.budget.process.and.financing.of.government.entities ..PFMCLgovernsthemainprovisionsoftheTurkishbudgetsys-tem.Itregulatesthestructureandfunctioningofpublicfinancialmanage-ment,preparationandimplementationofpublicbudgets,accountingandreportingofallfinancialtransactionsandfinancialcontrol.Thisensuresaccountability,transparencyandtheeffective,economicandefficientcol-lectionanduseofpublicresources.TheMinisterofFinancehasdiscre-tionarypowerstogovernbudgetimplementation.PFDMLlaystheprinci-plesofdebtandassetmanagementwhichareacquiredduringthebudgetprocess. Italsosetsborrowing limits forfinancingthebudgetdeficit. Itregulatesdebtandassetmanagementandcontingent liabilitiesbetweencentralgovernmentandlocalauthoritiesandotherpublicentities.

civil.society.plays.a.minor.role.in.budgetary.decisions.although.there.is.growing.interest.in.budgetary.issues.and.monitoring ..Becauseofthebudget’scomplexity,andlimitedbudgetliteracy,thegeneralpub-liccannoteasilyparticipateinbudgetarydecisionsatnationalandlocallevels.ThisattitudeischangingandNGOsandthink-tanksarekeepingaclosereyeonbudgetarymattersand,gradually,takingamoreactiverole.

various. international. assessments. (imF,. wb. and. oecd). show.the.turkish.budget.system.is.on.the.right.track.but.more.needs.to.be.done ..Theseassessmentsshowthat,withimplementationofPFMClaw,thebudgetsystemhasbeenwell-designedandstrengthenedbutworkisneededtore-assessbudgetclassificationstoimprovePBBefficiencyandthequalityofparliamentarydebateonthebudget..

2. General Progress on Budget Reformturkey. has. initiated. a. number. of. programs. to. reform. its. finan-

cial.management.system ..In1995,inthecontextofWorldBank-financedPublicFinancialManagementProject(PFMP),somestepsweretakentostreamline and improve the budget process particularly in the areas ofbudget classificationandcashmanagement.A lackofpolitical andbu-reaucraticinterestlimiteditssuccessbuttwodocumentspushedforre-forms:

• Duringpreparationsforthe8thYearDevelopmentPlanin1999,aspecialadhoccommitteewasestablishedwithparticipantsfromGovernment(mostofwhoalsoparticipatedinPFMP),academiaandNGOs.ThiscommitteeissuedareportcalledRestructuring.of.Public.Financial.Management.and.Fiscal.Transparencywhich

identifiedmajorweaknessesofthesystemandproposedanum-berofstepstocorrectthem.

• In2001,aPublicExpenditureandInstitutionalReview(PEIR)waspreparedjointlybyWBstaffandTurkishcounterparts,mostofwhoalsoparticipatedinPFMPandadhoccommitteework.

The. relative. success. of. budget. reforms. after. 2001. can. largely. be.attributed.to.the.2001.crisis.and.eu.processes ..The.two.policy.docu-ments.mentioned.above.created.an.impetus.for.policy.makers.to.ad-dress.economic,.social.and.structural.issues,.including.budget.reform,.in. a. comprehensive. manner.. The PFMC Law and Public Finance andDebt Management Law benefited from the recommendations of thesedocuments.The2001financialcrisis,whichhadlinkswiththeweakpub-licfinancialmanagementsystem,helpedraiseawarenessoftheneedforabetterbudgetsystem.AccessiontoEUhelpedtospeeduptheprocessandreform-minded officials championed the work. External dynamics alsoplayedanimportantrole.

enactment.of.the.pFmc.law.in.2003.provided.a.new.legal.frame-work.for.modern.public.expenditure.management.and.accountability.Objectives of the new PFMC Law are to improve the quality of publicservicedelivery,enhancegovernmentfunctionsandincreasepublicsec-toraccountabilityand transparency.The law introduced strategicman-agementby:

• linkingplansandpolicieswiththebudgets• initiatinginstitutionalstrategicplansandperformancebudgets• introducingmedium-termfiscalframeworkintothebudgeting

process.Thelawstrengthensthelinkbetweentheresponsibilitiesofofficials

andpoliticiansandtheiraccountabilitytothepublic.Italsoimprovespub-licexpenditureandfinancialmanagementprocessesinlinewithinterna-tionalpractices.Anumberofsystemicreformshavebeenimplementedtosupport thesenewmanagementconcepts.These includeaGovernmentFinancialStatistics(GFS)compliantbudgetclassification,anonlinebudg-etmanagementinformationsystem,anonlinenetworkedaccountingsys-temforthecentralgovernment,andanITbasedtaxmanagementsystem.

reforms.in.this.area.sought.sustainable.fiscal.adjustment.as.well.as.greater.budgetary.transparency ..lack.of.these.is.regarded.as.the.ulti-mate.source.of.the.crisis ..Thereformprogramexpandedcoverageofthebudget toallcentralgovernment institutionsandadopted internationalstandards–IMF’sGFSclassification–ofbudgetclassificationtoenable

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economic,functional,andinstitutionalbreakdownfortheentiregovern-ment.It:

• abolishedallbudgetaryfunds,withtheexceptionoftheSupportPriceStabilizationFund (DFIF), andallbutfiveEBFs (i.e. theSocialSolidarityFund,theDefenseFund,thePromotionFund,Savings Deposit Insurance Fund (SDIF) and the PrivatizationFund)

• increased credibility of the budget formulation by introducingmedium-termprogramandfiscalplan

• enhanced transparency by disclosing information on detailedfiscalbalancesofEBF,localadministrations,socialsecurityin-stitutions,andrevolving fundsasanattachmentof thebudgetsubmittedtoParliament

• eliminatedtheexantecontrolfunctionofMOFandTCA,trans-ferringthisauthoritytolineagencies

• developed automated Online Public Accounting System(Say2000i)fortheentirecentralgovernment

• movedgraduallyfromcash-basedtoaccrual-basedaccounting.These. legal. and. institutional. reforms. aimed. to. strengthen. fiscal.

policy.creating.a.more.strategic.role.for.moF.which.nowplaysamore.criticalroleintheoveralldesignoffiscalpolicy.However,thisnecessitatesbettercoordinationbetweenMOF,SPOandUT.MOFwasrestructuredtoensureitcarriedoutitsduties,assignedbyPFMClaw,effectivelyandefficiently.FourdepartmentsresponsibleforcentralharmonizationhavebeenestablishedundertheGeneralDirectorateofBudgetandFiscalCon-trol. An Internal Audit Coordination Board, which has an inter-minis-terial structure, has been established. To increase efficiency and ensurestandardizationofimplementationamongpublicadministrations,budgetunitsaffiliatedtoMOFwereclosedandStrategyDevelopmentUnitses-tablishedinadministrations.

lack.of.awareness.and.limited.commitment.in.public.administra-tion.hindered.reform.management ..but.thanks.to.the.facilitating.role.of.training,.seminars.and.informative.meetings.organized.during.the.reform.process,.the.new.methods.and.structures.gradually.introduced.by.the.reform.have.been.adopted .BudgetreformsweremostlypreparedwithinMOF,SPOandtheTreasury.Spendingunitswereusuallytakenonboardafterlegislationhadbeenpassedwhichcreatedafeelingofisolationandmadeinternalizationofthereformsbyothersdifficult.Butithasbeenobservedthatotherdepartmentshavefeltobligedtoadoptthenewenvi-

ronmentandmostlyfortworeasons.First,manyreformareas(strategicplanning, multi-year budgeting, internal control and audit) were madelegallybinding,andsecond,departmentsfoundstrategicplanningexer-cisesausefulwaytoimproveand/oradvancetheirinstitutionalidentity.Trainingsessionsandseminarsfacilitatedtheprocess.

3. Adopting Medium-Term Expenditure Frameworks An.mteF.has.been.operating.since.2005.and.is.being.adopted.as.

part.of.broader.reform.of.public.finance.management ..ReformtowardtheMTEFhasbeenakeycomponentofthereforminitiative,withMOFandSPOtakingthelead.TheMTEFinTurkeyinvolvestwodocuments.TheseincludeseveralimportantelementsofanMTEF,suchasamedium-term fiscal policy statement (including expenditure ceilings and threeyearfiscalplans)preparedbyMOF,andamedium-termplanincludingpriorityareasandmacroeconomicindicatorstobeusedbyspendingde-partments)preparedbySPO.SPOalsodevelopedguidelinesforlinemin-istriestodesigntheirownstrategicplans.ThelegalbasisoftheMTEFisPFMCLaw,markingakeyinitiativeinstrengtheningfiscalplanningandpublicfinancemanagement.

The. mteF. provides. for. a. three-year. rolling. expenditure. frame-work. for. broad. categories. of. spending. The medium-term economicplan,tobeapprovedbyCabinetbyMay30, includesforecastsofmacr-oeconomicvariablesforthenextbudgetyearandtwofollowingyears.ByJune15,theMinisterofFinanceissuesthethreeyearmedium-termfiscalplantobeapprovedbyHighPlanningCouncilandbasedonthemedium-termplan.Thesedocumentscomprise:

• a forecast of the medium-term macroeconomic situation andmacroeconomic targets such as inflation, growth, balance ofpaymentsetc(Medium-TermEconomicPlan)

• sectoral policies and priority areas (Medium-Term EconomicPlan)

• medium-termfiscalpolicyobjectivesofGovernment(Medium-TermFiscalPlan)

• forecastofrevenuesinthemedium-term(Medium-TermFiscalPlan)

• expenditure ceilings for the spending departments (Medium-TermFiscalPlan).

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InJuly,theMinisterofFinanceissuestothepublicanupdatedcur-rentyearfiscalpolicyoutlook(Mid-yearFiscalUpdate).

A.system.of.strategic.planning.was. introduced. in.2005. Strategicplanningisexpectedtoallowforformulationandprioritizationofpoli-ciesandlinkthemwithbudgetdecisions.Thesystemhasbeenintroducedgradually,firstforlocalauthoritiesandthenforcentralgovernmentunits.Introductionshouldbecompletedin2009.Whileitistooearlytocom-ment on results, the initial experience of local authorities suggests thatlinkingstrategicgoalswiththebudgetshasbeenproblematic(seebelow).

The. mteF. is. still. largely. based. on. incremental. budgeting . PBB,strategic planning and an MTEF have been introduced as interrelatedcomponentsoffinancialmanagement reform.TheMTEFwasexpectedto provide macro fiscal discipline by providing top-down expenditureceilingswhilestrategicplanningandPBBprovidedefficiencyandeffec-tiveness in resource management under those ceilings. Ensuring linksbetweenplans,programsandbudgetswilltaketime.Asisthecaseinanumberofdevelopingcountries,itiseasiertoaddnewpoliciesthantore-moveoldones.Forthetimebeing,spendingministriesregardtheMTEFaskindofroughguidelineforpreparingbudgets.Theyareyettolinktheirstrategicplanstotheirbudgets.PBBmaybeausefultooltohelpthemdothis.

practice. at. the. local. level. indicates. that. strategic. plans. have. not.been.formulated.within.an.overall.budget.constraint ..This.may.impede.reform.AsuccessfulMTEFhelpsandrequiresdecisionmakers tobal-ancewhatisaffordableinaggregateagainstnationalpolicypriorities.TheMTEFcomprisesatop-downresourceenvelope,abottom-upestimationofcurrentandmedium-termcostsofexistingpolicyandultimatelythematchingofthesecostswithavailableresources.InTurkey,strategicplan-ningisfullyoperationalatlocaladministrationsandexperiencesuggeststhatstrategicplansarebeingdevelopedwithoutguidancefromindicativemedium-termresourceenvelopesatthemayorallevel.Asaresult,strate-gicplanshavenotbeenrealisticallyfittedintheoverallfiscalframeworkoflocalauthorities.Itisnecessarytobearthisinmindandmorecloselymonitor the linksbetweenstrategicplansandbudgetsat central levels.Anotherriskfactormightbethatbudgetexpenditurescanbecarriedfor-wardwithlittleconcernforscrutinyandrationalizationofexistingpoli-cieseventhroughtheuseofstrategicplanning.

The.mteF.is.not.geared.towards.providing.fiscal.rules ..Expendi-tureceilings inmedium-termfiscalplansaren’t legallybindingandare

subjecttochangewithrollingyearsaddedeveryyear.MOFrecentlyan-nounced in the Medium-Term Fiscal Plan covering 2009-2011 that itwould implementfiscalrulesbut failed toannounceanydetailedstate-menttothateffect.

4. Performance-based Budgeting program.based.budgeting.has.been.introduced.in.broader.public.

finance.management.reforms.Transitiontoperformance-basedbudget-ing(PBB)studieshavebeenmadewidelyavailableincentralgovernmentandsocialsecurityinstitutionsinaccordancewiththe‘transitiontostrate-gicplanningcalendar’andinlocaladministrationsinlinewiththeirownlegislation.ProvisionsregardingPBBhavebeenincludedinprimaryandsecondary legislation and a Guide. for. Performance-based. Budgeting hasbeenpreparedbyMOF.Ratherthanabigbangapproach,publicadmin-istrationsphasedinPBB.Thetransitionperiodbeganin2006andwillbecompletebytheendof2010.

The. architecture. of. the. budget. and. accounting. system. includes.economic,. functional. and. institutional. expenditure. classifications.without. any. program. structure. The GFS consistent budget classifica-tionisnewandGovernmentisconsideringhowbesttointegratethepro-gramstructurewithinthecurrentbudgetclassificationintheshortterm.Whetherornotatransitionfromcurrentbudgetclassificationtoprogrambased budget classification is necessary for effective implementation ofPBBinTurkeyisstillbeingdiscussed.

The.motivation.behind.the.pbb.approach.is.the.legal.requirement.for.restructuring.public.financial.management.and.control.system ..ThebasicapproachwhichleadstotheadoptionofPBBhasthefollowingfa-miliarlogicprevailinginallmodernbudgetreforms:

• macrofiscaldiscipline(i.e.top-downbudgetingMTEFexpendi-tureceilings)

• strategicpriorities(strategicplanning)• efficiency end effectiveness (performance-based budgeting)

whenimplementingthebudget.Thefirstitemhasbeendiscussedandsupportedbybureaucrats.The

second has been a fashionable concept (visions, missions, institutionalidentity, targets etc) which seemed attractive to spending departments.PBBhasbeenthesubjectofrhetoricratherthanactualimplementationbutonceall thesebasicprincipleshavebeenmadelegallybindingbothinstitutionalcapacityandfiscaldisciplinewillbestronger.

216 217

since.the.pbb.is.in.a.transition.period.and.not.fully.operational.it.is.too.early.to.assess.the.system.in.detail ..ThePBBmodelinTurkeyhasbeenbuiltonastructurecomprisingstrategicplanning,performancebudgetingandaccountabilityreports.Consistencyissoughtbetweentheperformance objectives listed in performance programs and the goalsandobjectives listedinstrategicplans.Performanceprogramspreparedevery year in the budget process include strategic goals and objectives,performanceobjectives,performanceindicators,activitiesandprojectsoftheadministrationconcerned.MOFhas issuedaPerformance.Program.Preparation.Guidelinetohelpadministrationsdeterminetheirindicators,incompliancewiththestandards,principlesandexamplesincludedintheguide.Sinceeachpublicadministrationdeterminesitsperformanceindi-catorsindividually,norelevantstandardisinplaceandpracticesamongadministrationsvary.ForallthesereasonsitistooearlytocommentontheoverallsuccessofPBBinTurkey.

5. Budget Presentation and Classification and Public Management Performance Culturebudget.documentation.enriches.and.provides.information.on.the.

various.aspects.of.budget.and.the.mteF ..Corebudgetdocuments in-cludemedium-termprogram,medium-termfiscalplan(MTEF),packageofdraftcentralgovernmentbudgetlawandexplanations,anddebtman-agement report by UT and investment program prepared by SPO. Thecomplete budget documents are submitted by MOF following approvalbyCabinet,totheGrandNationalAssemblyinmidOctober.Intheyearfollowing implementation, administrations publish and publicize theiraccountabilityreportswheretheirperformancesandactivitiesrealizedinthepreviousyearareevaluated.AGeneralAccountabilityReportrecordsthe performances and activities of all administrations within the scopeof centralgovernment.This ispublicizedand submitted to theTurkishGrand National Assembly by MOF, making the Turkish budget systemmoretransparentandaccountable.

turkey. has. a. well. established. it. system. to. monitor. budget. ac-counts.and.statistics .Anewbudgetclassificationsystem,incompliancewithGFS2001,hasbeenoperatingsince2004.Inlinewiththementionedclassification, budget proposals are received over an e-budget systemmanagedbyMOFandbudgetappropriationsaremonitoredbythissys-tem. Budget implementation results are accounted for and reported bymeansofanITsystemcalledSAY2000i.Thesetwosystemsarecompatibleandprovideconsistentinformation.Theyprovideanintegratedandcen-

trallymonitoredon-lineaccountingsystemcoveringallgeneralgovern-mentinstitutions.

improving. public. management. culture. requires. time. and. effort ..This cultural change is in the development stage in Turkey. To spreadthereformstoallpublicadministrations,andensuretheirsoundimple-mentation,progressisneededinareassuchashumanresourcesthroughtraining,workshopsandseminars.Increasingadministrativecapacityandsupportfromseniormanagementisalsocriticalforsuccessfulimplemen-tation.

civil.service.reform.is.necessary.to.improve.public.management.performance.culture ..CivilservicereformshouldgohandinhandwithPBB, particularly in regard to measuring and awarding personal per-formance.Turkeyneedstoconsidershiftingfromlife-longemployment

Annex2.ProgramstructureinTransport–Turkey2008Example:2008PerformanceProgramofGeneralDirectorateofStateHighways

STRATEGICGOAL RoadandTrafficSafety

strAtegic.obJective Accidentswithdeathsandinjuriescausedbyhighwayswillbeless-enedattheratioof40percentinfiveyears.

perFormAnce.obJec-tive

40percentoftheworksasplacementofhorizontalandverticalsignsaswellasfoglighteningonthedangerouspointsofroadscompleted

in2008.Activities.And.

proJects(t-2)2006

(t-1)2007

(t)2008

(t+1)2009

(t+2)2010

Roadmaintenanceandrepairservices 8.080.000 9.400.000 9.450.000 9.363.500 9.881.675

Administrativeservices 104.052 44.835 58.990 60.644 63.344

TrafficSafetyProject 250.000 500.000 600.000 400.000 600.000TotalResourceRequire-

ment(YTL) 8.434.052 9.944.835 10.108.990 9.824.144 10.545.019

PERFORMANCEINDI-CATORS

Trafficaccidentswithdeathsduetodangerouspointswheredriversare

alertedwithhorizontalandverticalsigns

8 4 10 12 10

Numberoffoggyplaceswherefoglighteningis

provided1 1 1 3 3

Decreaserateofaccidentswithdeaths

ND(nodata) ND

Decreaserateofcomplaintsreceivedfromcitizens ND ND

Source:.World.Bank.staff,.based.on.national.documentation

218 219

to contracted personnel status. Trade unions, staff representatives andNGOsneedtobeengagedintheprocessifthewholereformprocessisnottobeundermined.

effective. application. of. public. finance. management. reforms. de-mands.greater.capacity.ExperiencesuggeststhatMOFneedstoinvestmore in building staff capacity for evaluating line ministries’ strategiesandbudgetrequests,developingmethodologyforprogramandperform-ance budgeting, and effectively using performance information in thebudgetprocess.Closerlinksbetweenperformanceinformationanddeci-sionmakingandbudgetallocationsarealsoneeded.

Annex3.MainmacroeconomicandfiscalindicatorsinEmergingEurope

Bulgaria Latvia Poland Slovakia Croatia Turkey2005 6.2 10.6 3.6 6.5 4.2 8.42006 6.3 12.2 6.2 8.5 4.7 6.92007 6.2 10.0 6.8 10.4 5.5 4.52008 6.0 -4.6 5.0 6.4 2.4 1.1

2009F -6.5 -18.0 1.0 -4.7 -5.2 -6.52005 6.0 6.9 2.1 2.7 3.3 8.22006 7.4 6.6 1.0 4.5 3.2 9.62007 7.6 10.1 2.5 2.7 2.9 8.82008 12.0 15.3 4.2 4.6 6.1 10.4

2009F 2.7 3.1 3.4 1.5 2.8 6.22005 -12.4 -12.4 -1.2 -8.5 -5.7 -4.62006 -18.5 -22.7 -2.7 -7.0 -6.7 -6.02007 -25.2 -21.6 -4.7 -5.3 -7.6 -5.82008 -25.5 -12.6 -5.5 -6.5 -9.4 -5.7

2009F -11.4 4.5 -2.2 -8.0 -6.1 -1.92005 70.9 99.4 44.1 58.2 71.8 35.22006 81.9 114.0 46.6 50.9 75.1 39.22007 100.2 127.6 48.2 54.7 76.8 38.42008 107.7 128.2 56.7 55.2 84.1 38.12005 1.9 -0.4 -4.3 -2.8 -3.5 -0.62006 3.0 -0.5 -3.9 -3.5 -3.0 0.82007 0.1 -0.4 -1.9 -1.9 -2.5 -1.02008 1.5 -4.0 -3.9 -2.2 -1.4 -2.22005 29.2 12.4 47.1 34.2 38.3 52.32006 22.7 10.7 47.7 30.4 35.7 46.12007 18.2 9.0 44.9 29.4 33.1 39.42008 14.1 19.5 47.1 27.6 33.5 39.5

Gross External Debt (% of GDP)

General Government

Balance (% of GDP)

Public Debt (% of GDP)

Real GDP growth, %

CPI, %

Current account balance (% of GDP)

Source: Eurostat. For 2009, International Monetary Fund, World Economic Outlook(WEO),October2009.

220 221

Annex.4 ..Questionnaire.for.world.bank.country.economists.David.Webber

introductionThe purpose of this questionnaire is to help World Bank country

economistsinthecountriesselectedforthisstudy90toundertakeacom-prehensive stock-take of the implementation of some major budget re-formsintheirrespectivecountries.TheparticularfocusofthisstudyisontheprogressmadebythesecountriesinintroducingPerformance-basedBudgeting(PBB)andMedium-TermExpenditureFrameworks(MTEF)asdiscussedintheConceptNote.91

Thequestionnairehasbeendeveloped,inpart,toensureconsistencyandcoverageintheresearchundertakenineachofthesecountries.None-theless,inmakingtheirassessments,itwillbeimportantforWBecono-miststouseboththequestionnaireandtheirownjudgmentinseekingoutwhathasbeenachieved,ornotachieved,inthesecountries,andwhy.Inotherwords,thequestionnaireshouldbeusedasaguidetogatheringthekindofinformationonwhichtobasewell-informedcomparativeassess-mentswhichwillbeinterestingandpotentiallyusefulforothersworkingintheseareasofbudgetreform.Theprincipalfocusofthequestionnaireontheabovetwomajorareasofbudgetreformshouldnot leadecono-mists to exclude analysis and discussion of other potentially importantandrelatedstepsinbudgetmodernizationintheircountries.

The questionnaire should be used in conjunction with the general‘template’ thatthetaskteamleaderhasdesignedforpresentationof in-formationandanalysisthatwillunderpinthebudgetreformassessmentsineachcountry.Boththequestionnaireandtheresultspresentationtem-plate,however,havebeendevelopedtocoverallsixcountries;itisfullyexpected that some sections of both documents will have varying rele-vanceforeachcountry,basedonwhattheyhaveachievedandthetypeandquantityofinformationavailable.

Rememberthatthestudydoesnotsetouttopresentadetailedac-countofwhateachcountryhasachievedintheseareasofbudgetreformforreferencespurposes.Thatwouldbebecomedatedveryquickly.NorisitaPEFA-typeassessment.Rather,weareconcernedtounderstandwhathasbeenachievedinthecontextofhowsuccessfully,orunsuccessfully,90 Bulgaria,Croatia,Latvia,Poland,Slovakia,andTurkey.91 “CurrentIssuesinFiscalReforminCentralEuropeandtheBalticStates2008:Performance-based

budgeting(PBB)andmedium-termexpenditureframeworks(MTEF)inEmergingEurope–From.Diagnosis.to.Remedy”,ConceptNote,December,2007,

each country has managed these budget modernization aspects of thetransitionprocess.Thepicturethisprovidesshouldbedirectlyhelpfulindeterminingwhereandhowtoassistfurther,notonlywiththesecoun-triesbutwithotherswhomaybecontemplatingdevelopingtheirpublicfinancialmanagementsystemsalongsimilarlines.

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Questionnaire [Questions in italics were sent to national counterparts]

Section 1: Core Features of Current Budget System (1 page)

1 .1 .. What is the general political and administrative structure govern-ing budget preparation?.Provide.a.brief.description.of.the.key.agen-cies.and.their.roles.and.responsibilities.in.the.annual.budget.process .Include.briefly.at.what.stage,.and.with.what.responsibilities,.the.parlia-ment.is.involved .

1 .2 .. What are the key pieces of legislation relating to the Budget? In.addition. to. citing. the. relevant. legislation,. include. description. of. key.sources.or.influences.on.this.legislation,.when.it.was.passed,.and.any.notable.provisions.with.regard.to.any.PBB.or.MTEF.requirements.(in-cluding.any.relevant.proposed.amendments.under.consideration )

1 .3 .. Are.there.any.unique.political.or.cultural.factors.which.influence.the.structure.and.implementation.of.the.budget.system?.Thismayinclude therolesofparticular institutions, thepartplayedbycivilsociety,anyspecialbudgetpowersofthepresidentorprimeministeretc.

1 .4 .. Have.there.been.any.international.assessments.made.since.2000.of.the.quality.and.transparency.of.the.budget.system;.such.as.oecd.budget.survey,.imF.Fiscal.transparency,.cFAA,.peFA,.or.peir,?.Describebrieflyanymajorstrengthsorweaknessesthatwereidenti-fiedandwhetheranychangeshavebeenmadeasaresult.

Section 2: General Progress on Budget Reform (1-2 pages)

2 .1 .. Have there been any major programs or initiatives undertaken in budget reform in recent years? Consider.also.whether.these.initiatives.have.been.sustained,.variable,.and/or.influenced.by.elections.or.other.political.factors.over.time .

2 .2 .. What progress has been made so far in terms of the adoption of spe-cific new methods for improving the budget processes? List/describe.what.are.clearly.the.main.achievements.of.budget.reform.to.2008 .This.may.include.institutional.reforms,.changes.to.budget.coverage,.struc-

224 225

ture.and.presentation,.classification,.reporting,.accounting.issues,.incl .IT. system(s),. transparency. improvements,. better. fiscal. control,. en-hanced.internal.and.external.audit,.etc

2 .3 .. what.has.been.the.motivation.for.this.reform.process?Consideralsowhethertherehasbeenachampionforthereforms,theroleandimpactofpoliticalparties,publicopinion,reform-mindedofficials,NGOs,external/internationalpressuresandobligationsetc.

2 .4 .. Has.there.been.and.is.there.still.a.‘lead.agency(s)’.responsible.for.driving. further. budget. reforms. within. the. bureaucracy? Try togiveasenseoftheireffectivenessandtheircurrentlevelofcommit-menttothistask.

2 .5 .. To what extent were budget departments involved in the reform process?. Explain if budget departments in MOF were directly in-volved in the reforms. Consider whether they can be regarded asreformdriversorobservers?Clarifywhetherthecooperationwithbudgetdepartmentwasconductedonongoing(andinformal)basisorratherformalizedandlimitedtotheextentnecessary.

2 .6 .. Has.this.agency(s).changed.its.institutional.structure.or.ways.of.working.that.have.been.clearly.effective.in.promoting.and/or.sup-porting.budget.reforms.reform?.Hastheirapproachbeeninclusive,consultativeandcomprehensive?Explainwhethertheapproachhasbeentop-downorratherbottom-uponeoritcombinedelementsofthetwo.Identifywhethertheuseofpilotprojectshasfiguredpromi-nentlyandwhatsectorswereaddressedfirst.

2 .7 .. Are there any particular sectors or groups – either within or outside the public sector - that have consistently opposed and impeded (or supported) these budget reforms?.Describe.any.apparent.reasons.for.this. opposition. or. support. –. e g . capacity. for. change,. influence. over.budget.resources,.fears.of.retrenchment.etc.–.and.how.important.they.continue.to.be.to.further.progress .(Clearly,.analysis.and.reporting.of.these.issues.may.have.to.be.managed.sensitively,.with.an.emphasis.on.the. general. nature. of. such. influences,. rather. than. specific. groups. or.individuals ).

Section 3: Adopting Medium-Term Expenditure Frameworks (MTEFs)92 (3 Pages)

3 .1 .. What is the coverage of the MTEFs compared to the annual budget approved by the Parliament? What is the period of coverage (e.g. 2+1?). What is the legal basis of the MTEF? Is.the.budget.presented.to. parliament. on. a. multi-year. basis,. with. annual. appropriation,. or.are.medium-.term.revenue.and.expenditure.forecasts.for.budget.plan-ning.purposes.only .Indicate.how.many.forward.years.are.used.and.the.depth.of.detail. in.budget.documents.on.revenue.and.expenditure.for.these.forward.years .

3 .2 .. Which institution/unit assumes responsibility for the MTEF? Try.to.capture.the.institutional.capacity.in.this.area,.including.any.special.resourcing,.skill.development,.modeling.capacity.or.other.unique.fea-tures Is.there.a.particular.organizational.unit.(within.the.Ministry.of.Finance.or.elsewhere).with.specific.responsibility.for.the.development.of.the.medium-term.budget.framework?

3 .3 .. Does the MTEF, if it exists, operate in support of any formal fis-cal rules; does it assist in setting budget expenditure ceilings for the ministries, or medium-term fiscal guidelines or strategies with re-gard to movements in the fiscal balance?.This.question.should.cap-ture.the.degree.to.which.the.MTEF.provides.framework.for.managing.aggregate.fiscal.policy.and.guidance.to.line.ministries.in.formulating.their.budgets .

3 .4 .. What are the main methods or procedures used in compiling the MTEF? These.might.include.the.use.of.particular.types.of.revenue.fore-cast.models,.standardized.or.non-standardized.cost. inflation.factors,.retention.of.a.‘Planning.Reserve’.in.allocating.future.indicative.budget.ceilings.to.line.ministries,.sensitivity.analyses.etc .

3 .5 .. Was the MTEF approach introduced as a component within wider budget reforms, such as PBB, or simply as a discrete step in budget development?.

3 .6 .. How. detailed. are. the. line. ministries’. estimates. of. their. institu-tion’s.medium-term.expenditure?.do.they.provide.the.same.de-gree.of.detail.as.the.budget?.Inmanycases,thesemaybesimplein-flation-adjustedforecastsofcurrentpoliciesandprograms,buttheymay also be the result of much more elaborate exercises aimed atgeneratingacomprehensivecostingoffuturepolicies.Notewhether

92 Pre-accessioneconomicprogramsorconvergenceprogramsshouldnotbeconsideredasMTEFs.

226 227

donorfundinghasplayedanimportantroleinsettinguptheMTEFprocessandcapability.

3.7. Aretheexpenditureforecastsforforwardyearsindicative,andthere-foreupdated/revisedon the rollingbasis,ornot?Does theMTEFprocesshavecredibilitywithspendingministries?

Describe also how frequently they are revised, to what degree, and themainreasonsfortherevisions.

3 .8 .. Has. the. application. of. the. mteF. varied. significantly. in. quality.and.usefulness.across.line.ministries.and,.if.so,.what.the.reasons.for.this?.Internationalexperiencesuggestsconsiderablevariationinthisregard.ConsideralsothequestionofMTEFsustainability

3 .9 .. Has.the.introduction.of.an.mteF.improved.the.quality.and.effi-ciency.of.resource.allocation.and.budget.decision-making.-.from.both.the.central.budget.planning.and.line.ministry.budget.man-agement.perspectives?.Trytocapturethenatureandextentofanyworthwhilechangesintermsofbudget(re)allocationdecisionsand/or budget management, or in better enabling inclusion of budgetprovision from, or for co-funding, EU or other external fundingsources?Inotherwords,hastheMTEFledtomorestrategicfiscalpolicy?

3 .10 ..Has.there.been.any.reaction.of.parliament,.media.or.the.public.to.the.publication.or.availability.of.a.medium-term.budget.frame-work?.

3 .11 ..What are the authorities’ intentions and priorities, if any, for ex-tending the use of MTEF concepts and methods? (Explain)

section.4:.performance-based.budgeting.(5Pages)4 .1 .. What achievements have been accomplished so far with regard to

PBB (as at mid-2008?) This.may.range.from.almost.complete.unfa-miliarity,.to.discussions/workshops.etc.for.assessing.potential.relevance.and.application,.to.pilot.applications,.to.comprehensive.and.legislated.application . Try. to. be. precise. about. accomplishments,. including. any.legislated.changes,.achieved.to.date .

4 .2 .. What is the budget classification structure? (program, economic, functional, etc)

4 .3 .. Are there plans for PBB to replace fully the traditional line-item budget in the specific time perspective or should PBB rather supple-ment the traditional budget?

Iftheanswerisyes,indicatethestagesinwhichthePBBshouldreplacethetraditionalbudget.

4 .4 .. what.have.been.the.motivating.factors.behind.the.adoption.of.(or.interest.in).a.pbb.approach?.WhathasbeenthemainmotivationbehindthePBinitiative?Thismayinvolveaspecificdonorproject,aninitiatingconference,stepstakenbyneighboringcountries,indi-vidualministerialinitiative,etc.Trytogiveasenseofhowbroadlybasedthesupportforthisdevelopmenthasbeenwithinandoutsidethebureaucracy.Indicatewhetheritissupposedtostrengtheninsti-tutionalmanagement(PIB,PRB)orintroducemorefiscaldiscipline(PDB)?

4 .5 .. what.is.the.basic.‘architecture’.of.the.pbb.approach.as.taken.so.far. by. the. authorities. in. your. country?. The architecture involvesthe ‘programmatic’ (oroutputs)structureonwhichobjectivesandperformance indicatorsarebased.Describe, as far asyoucan, thedifferent(howmany?)levelsatwhichexpenditureisclassifiedandreported(e.g.programs,sub-programsandactivities/projects,etc.)Atwhat levels are specificobjectives and indicators required?De-scribehowPBBmaybelinkedtoimprovedstrategicplanningpro-cesses.

4 .6 .. How.would.you.assess.the.‘quality’.of.the.programmatic.structure.adopted.so.far?.what.are.the.strengths.and.weaknesses?.Thisas-sessmentwillrequireconsiderationparticularlyofthebasiclogic(ororganizing principle) underlying the design of programs and sub-programs.WhatisthislogicandhowreadilyandconsistentlycanitbeappliedgiventheadministrativestructureofGovernment?Doesit, forexample,provideasoundframeworkfordevelopingperfor-manceconceptsandmethodsbydemonstratingwhereandhowtheministryoragencyproposestointerveneinthepursuitofeconomicorsocialwelfareobjectives?

4 .7 .. Has the PBB structure been consistently adopted across the public sector (general government/central government)? Indicate.whether.some.or.all.ministries.have.adopted.and.are.using.the.structure,.either.fully.or.partially .To.what.extent.have.similar.principles.been.applied.to.public.entities.outside.the.budget,.in.particular.extra-budgetary.funds.and.local.governments?.Indicate,.if.possible,.the.percentage.of.central.government.expenditures.covered.by.the.PBB.approach

4 .8 .. What was the approach in sectors where ministries are responsible for overall sector performance, but have a small influence on fund-

228 229

ing (e.g. health, education) or the execution of tasks is delegated to specialized agency (e.g. in transport)? Trytoexaminetheissueofhowintra-sectoraldivisionordelegationoftasksandallocatedfundsworkswithinthePBBframework.

4 .9 .. How was the division of inter-sectoral responsibility for over-lap-ping tasks between two or more institutions organized? Issue oftasks/outcomesforwhichseveralinstitutionsareresponsible.

4 .10 ..What are the main problems impeding effective adoption of the PBB structure? This.may.just.be.a.timing.issue,.or.it.may.be.that.the.uptake.of.the.new.architecture.has.stalled.for.political.or.technical.rea-sons,.lack.of.capacity,.or.insufficient.involvement.of.budget.people.from.MOF

4 .11 ..How.well.defined.and.effective.are.the.links.between.policy.objec-tives.and.budget.program.allocations.(in.terms.of.assisting.insti-tutions.to.meet.their.key.objectives)?.Indicatethenatureoftheseobjectivesandwhethertheyaredefinedinthebudgetdocumenta-tionorproduced/availableelsewhere.Describeanyformalorinfor-malprocessesthatappliedtodraftingandagreeingtheobjectives?

4.12.Howweretheindicatorsdefinedanddetermined(e.g.imposedfromthetopornegotiatedwithMOFor‘leadingagency’withahighde-greeoffreedomoflineministries)?Explaintheprocessofindicatorselection,itsdefinitiontogetherwithbaselineandtargetvaluesandindicatewhichinstitutionpreparedthefirstproposalofindicators.Also,describebrieflythesourceofinputandoutput/outcomeindi-cators(externalorprovidedbybudgetdepartments,measurementprocess)andindicatewhetherthefinallistwasreviewedorauditedbyanyinstitutiontoensurequality.

4 .13 ..How many outcome and output indicators have been used in total/ per program/ per ministry? Indicatethebalanceinuseofoutcomeandoutputindicators.Tryalsotoassessthequalityandrigoroftheindicators.Aretheylikelytoprovideagoodframeworkforperfor-manceevaluationorsotheystillrequirealotofwork?

4 .14 ..What accountability processes are attached to the achievement of these indicators and what incentives exist for good performance? This.may.range.from.none,.to.formal.annual.performance.review.pro-cesses,.possibly.including.allocation.of.bonuses.etc .Are.there.concrete.plans.to.develop.specific.processes.in.the.future?.

4 .15 ..Are.there.any.best.practices.or.poor.performers.across.the.differ-ent.line.ministry.budgets.and.what.might.explain.that.result?.

4 .16 ..present. in. a. table/diagram,. as. an. example. of. the. methodology.and.structure,.a.pbb.budget.framework.for.one.line.ministry.(e .g ..transport),.including.major.performance.indicators ..RefertothebasicstructureinAnnex2,buthighlightdifferencesintransportsec-tor.

4 .17 ..Has there been any impact of PBB on budget allocations, the qual-ity of budget preparation and oversight? Describe.any.strong.com-plaints,. objections. or. disputes. around. this. methodology . Have. these.been.resolved?.Separate.by.institutions:.line.ministries,.MOF,.PM,.Par-liament,.external.audit.etc .

4 .18 ..What is the plan, if any, for PBB implementation in your country in the next two years? Assess.whether.this.is.moving.ahead,.muddling.along,.or.stalled.and.possibly.under.threat.of.being.abandoned?.

Section 5: Budget Presentation and Classification (1-2 pages)

5 .1 .. What constitutes the core budget documentation that now captures MTEF and PBB methods and to what degree does it measure up to international best practice? Try.to.provide.an.overview.of.the.quality.and.extent.of.the.budget.documentation,.including.any.documents.that.may.be.issued.or.published.during.the.budget.preparation.cycle .Is.the.budget.documentation.significantly.more.comprehensive,.meaningful.and.transparent.than.it.in.previous.years?.Where.are.the.gaps?.

5 .2 .. what. reaction. has. there. been,. if. any,. from. the. parliament. and.public.to.the.new.budget.documentation?.

5 .3 .. What is the current state of development in budget classifications and coding (especially in relation to improved IT systems)? Assess.current.practices.in.terms.of.the.degree.to.which.they.support.any.new.program.and.output.structures,.are.compliant.or.consistent.with.inter-national. (IMF/GFS.or.ESA’95). standards,.and.provide.a. sound.and.transparent.basis.for.expenditure.reporting

5 .4 .. What are the needs and plans of the authorities with regard to im-proving budget classifications, including giving better support for PBB etc? Whatarethekeyconstraintsonthesedevelopments?Thismayincludeunresolvedbudgetarchitecture issues,financial infor-mation system technology limitations, financial management andaccounting capacity and skill shortages, determination of policy-makersetc.

230 231

Section 6: Public Management Performance Culture (1 Page)

6 .1 .. To what extent have these budget reforms (especially PBB) been linked to other measures or monitoring and evaluation systems to improve performance in the public sector? Describe.what.these.other.measures.are.how.much.progress.has.been.made.with.them

6 .2 .. is.it.a.problem.that.the.idea.of.a.‘performance.management.cul-ture’. in. the.public.sector.has.not.yet.caught.on.and.this.has.di-minished.the.understanding.and.effectiveness.of. these.reforms?.Describesomeofthechangesthatneedtooccurforaperformanceculturetodevelop,eitherinbudgetingandfinancialmanagement,ormorewidelyacrossthepublicsector..

6 .3 .. is.there.much.more.that.needs.to.be.done.in.terms.of.civil.service.reform.before.these.performance.concepts.can.really.be.applied.effectively?.Trytobespecificaboutthekeyweaknesses(includingspecificinstitutions)thatmustbetackled.

6 .4 .. is.the.public.administration.system.ready.to.implement.the.prin-ciple. of. increased. managerial. flexibility. in. return. for. increased.accountability?.Has.this.been.achieved.already.through.recent.re-forms,.to.some.degree?.what.is.needed.before.this.concept.can.be.(more).effectively.applied?

Section 7: General Assessment (Summary) (1 page)Thissectionrequiresyoutomakeanassessmentofthesebudgetre-

formsinyourcountry,takingintoaccountthestateofdevelopmentandsuccesses,issuesandproblemsthatyouhavedescribedabove.Rememberthe broad aim of this study is generate comparative assessments of thesix countries that may help to illuminate useful ideas or approaches toapplyingthesebudgetingmethods,and/orwhichmaysuggestsuccessful,transformational,processesinmanagingthesereforms.

Thecoregoalsinundertakingthesebudgetreformsaretoimproveefficiency,. effectiveness,. transparency. and accountability in the man-agement of fiscal resources. Your summary comments should considertheprogressanddevelopmentsagainstthesespecificgoals,butthefollow-ingquestionsmayalsohelpyoutoframeyourjudgments.7 .1 .. What have been the critical factors overall in determining the pace

and quality of these budget reforms?

7 .2 .. How might they have been managed differently so as achieve better or more rapid results? Are there any thoughts of turning back, or taking a different track?

7 .3 .. Are there any unexpected ideas or developments, especially of a positive nature, emerging as a result of these budget reforms which – although they were not foreseen at the beginning – may prove in-teresting and applicable to other countries?

233

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