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January 26, 2017

Sequencing of Performance-Based Budget Reforms

PerformanceBudgeting

Posted by Maarten de Jong[1] and Alfred T. Ho[2]

Performance budgeting (PB) is increasingly viewed as challenging by countries with advanced PFM systems, but continues to be popular with many governments and development partners.  In response to its far from trouble-free history, attitudes towards PB reform have gone through a transformation during the last decade. Overrated expectations have been lowered and lessons are being learned. Today, PB is no longer considered as an effective tool to alter budget allocation but rather as a way to increase fiscal transparency, align government priorities with activities and spending, and foster organizational learning. As a result, the line between performance management and performance budgeting has become increasingly blurred. Two lessons in particular surface from recent academic studies. First, the degree to which performance information will actually be used by public sector organizations is key to the success of PB reforms. Second, the use of such information is highly dependent upon institutions such as power relationships, leadership and culture.

Apart from macro-factors such as the economic and political environment, specific institutional factors include acceptance by stakeholders, codification in laws and procedures, capacity (both people and systems), incentives and safeguards for employees to use performance logic, and power relationships between the center of government and other stakeholders. Culturally, specific barriers may stand in the way of embracing PB’s underlying assumptions of technical rationality, openness and transparency, especially in non-western cultures and political systems. Ignoring these factors may nullify a reform effort or make it vulnerable to window dressing.

During a recent Association for Budgeting and Financial Management (ABFM) Conference in Seattle, a panel of scholars and practitioners discussed how institutional factors affect the planning and sequencing of PB reform[3]. Case studies from Afghanistan, the Philippines, Poland, the Chinese city of Jiaozuo and the province of Guandong were presented and discussed, as well as evidence from various other countries in Africa, the Middle East and Asia. The discussion led to a preliminary consensus on a number of issues:

  • Donor-driven PB reform may severely damage basic budgeting functions in countries where PFM processes and capacity are already weak. The Afghan case demonstrates that by adding complexity to the system (e.g. a tenfold increase in required documentation that often went untranslated from English) and the absence of computerized accounting systems led to a large increase in the number of errors and disputes related to budget allocations. This resulted in budget execution virtually coming to a standstill, thus dealing a serious blow to an already frail budgetary process.
  • More genuine and durable outcomes from PB reform are likely to be achieved when the motivation for reform is internalized – e.g., a drive by the government to improve fiscal transparency or reduce waste or fraud – rather than driven by external circumstances, e.g., an attempt by government to obtain grants from a donor, or membership of an international organization such as the EU. 
  • Home grown and incremental reform seems to have a higher likelihood of success as it enables the objectives and design of the PB system to be customized, and to take into account local institutional factors. This can sometimes lead to surprising and promising innovations such as in Jiaozuo, where the finance department hired independent experts to conduct performance assessments.
  • Cultural factors - such as an emphasis on stability, seniority, rule compliance and avoiding embarrassment to leaders - can play an important role. In former communist countries such as Poland civil servants felt reluctant to embrace a PB infrastructure that was built around political goals, because the administrative class had recently engaged in a struggle to affirm its neutral role in policy-making, and its independence from the political class.
  • Coupling PB reform with fiscal decentralization is a particularly risky strategy as it tends to fragment and weaken already scarce analytical capacity. 
  • A political system where the executive branch dominates the legislative branch further blurs the increasingly vague separation between performance management and performance budgeting. This lesson applies especially in countries where the legislature has only a limited impact on budget allocation and appropriations. Perhaps ironically, such conditions seem to better fit today’s notion that PB is most likely to achieve results through the use of performance information within the executive branch.

Recognizing the relevance of local institutional circumstances, and using this knowledge to determine the right form and sequence of PB reform is the next great challenge for governments and practitioners. The discussion in Seattle was an early attempt to use academic evidence from PB implementation to feed this debate, on which further study and analysis is required.

[1] Maarten de Jong PhD. is a senior budget specialist at the Netherlands Ministry of Finance and has been involved in TA and research projects in over 10 countries on behalf of the Netherlands, the World Bank, the IMF, the OECD and the EC.  m.jong@minfin.nl

[2] Alfred T. Ho is Professor of Public Administration at the University of Kansas at Lawrence. His research topics include budgeting and performance management, and he has worked on projects with IBM, the ADB, and various local governments in the US and China.  alfredho@ku.edualfredho@ku.edu

[3] This discussion took place on October 8, 2016. Members of the panel were Alfred T. Ho (University of Kansas), Maarten de Jong (Ministry of Finance of the Netherlands), Wenbin Li (South China University of Science and Technology), , Arwiphawee Srithongrung (Wichita State University), Kurt Thurmaier (Northern Illinois University), Mary Venner (University of Canberra), and Zaozao Zhao (Chinese Academy of Social Sciences).

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.

Comments

Your Blog is Fabulous. Good article rather.Very interesting.I admire the valuable information you offered in your article. Excellent submission very good post.

Points well taken; but in the capacity constraints scenario, external help in moderate proportion may do well. Sure, the internal will in the system to drive the PB will hold the key!

My experience based upon working in Eastern Europe is exactly as described in this article. Failure to take into account the local cultural circumstances, power structures and political/civil service relationships is a serious mistake in attempting to introduce any public management reform. Yet all the time international and bilateral institutions are constantly seeking to make such reforms without any recognition of these issues. At best such reforms become the Ministry of Finance reforms rather than the management reforms that they really are. Frequently the management dimension is completely ignored and terms of reference have no regard to this aspect of reform. One of the most significant problems is establishing who the managers actually are and the context in which those managers work. Management is about risk because choices have to be made. Frequently there is no absolute in terms of right and wrong but the risk is that if you are deemed to be wrong you are punished and maybe sacked with no prospect of alternative employment.

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