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February 08, 2010

How to Initiate a Performance Framework in Budgeting

Posted by Pokar Khemani 

A large number of countries over the last decade have reformed their budgeting process to enhance its performance orientation. Virtually all  countries have found enhancing the performance orientation of their budgeting process quite challenging, but lessons can be drawn from the now vast body of experience accumulated.
My presentation (copy attached) at the ICGFM Annual Winter Conference held at Inter-American Development Bank, Washington D.C. on December 4 focused on “How to Initiate a Performance Framework in Budgeting”; it lays out my views and shares my practical experience with public finance professionals from over 30 countries on how best to approach the introduction of a performance framework in budgeting. 

The triggers for introducing performance reforms have varied across countries. In most cases, the major reform motivators were a financial crisis, pressure to reduce public expenditure, or a change in government. Fiscal reforms in Sweden and Denmark were an offshoot of an expenditure control policy introduced during the economic crisis of the 1980s and early 1990s. Similarly the rapid deterioration of public finances in Korea after the financial crisis turned out to be a trigger for wide-ranging budget reforms. In UK, with the election of the Labor party in 1997, a number of reforms were introduced, including MTEF, comprehensive spending reviews and emphasis on performance through public service agreements.

The experience of a number of countries suggests that reforms like performance budgeting and accrual accounting can only succeed when the “basics” of public financial management are working well. The presentation identifies a number of prerequisites for introducing performance reforms. It is necessary that budgets should be policy-based, realistic and drawn from a credible medium-term fiscal framework. Similarly budget execution, accounting and reporting systems should work well and comply with the legal framework. Building a performance framework in a weak budget process is not likely to be fruitful.   

Performance budgeting has a long history; and there are variety of approaches and practices followed by countries. However, the common theme is applying the budget to promote use of performance information to inform decisions. The presentation introduces a step-by-step approach for a switch from traditional (line-item) budgeting to program-based budgeting (PBB) – a commonly followed approach for introducing performance framework in budgeting. As a start, it is necessary for governments to develop a reform strategy with well defined reform objectives, and a well sequenced action plan for introducing and managing reforms. Other critical areas for introducing a performance framework are program design and classification structure; budget classification, chart of accounts and accounting system to adopt program structure; performance indicators and targets; monitoring and review framework; and use of performance information to enhance performance.

The presentation describes good practices and common issues in the design of program structure and formulation of programs, sub-programs and activities. Program classification should aim at strengthening the link between policy objectives, planning and allocation of resources, and it should be a collaborative effort between MOF and line ministries. With the incorporation of a program classification, the chart of accounts needs to be revised to be fully consistent with the revised budget classification structure. Similarly, the accounting application needs to be enhanced to support the use of revised chart of accounts and record expenditure by program classification. In too many countries this is not done and the budget presented by programs cannot be executed accordingly because the accounting system is not capable of applying revised chart of accounts and record expenditure by programs. 

The PBB framework needs to provide for “objective” performance information, which can facilitate better decision making for the efficient use of resources, central resource allocation, expenditure prioritization decisions and management of programs. The presentation provided common issues in creating performance specifications, including mixing output and outcome indicators, and having too many performance targets. It is equally important to institute an improved monitoring and reporting framework and conduct program/ spending reviews, like comprehensive spending reviews in UK, Program Assessment Rating Tool in the U.S. and Management Resources Results Structure in Canada.

For successful introduction of a performance framework in budgeting, a number of key points were stressed:

• Introduction of PBB takes time (a minimum of 4-5 years). PBB reform needs widespread political support and intellectual acceptance; and a change in behavior and culture across government.
• The role and power of the Ministry of Finance is crucial to the success of PBB.
• PBB should focus on budget reforms and linked with wider reforms on performance management – an initiative more than an incremental to the budget reform process.
• Performance Information needs to be used efficiently  and widely, including for improving resource allocations, managing for better performance and increasing public accountability
• Establishing some link between financial information and performance information needs the right mix of incentives – whether financial rewards should be given for good performance and bad performance should be punished – if so, how?
• Empowering Managers is not about removing controls but devolving the responsibility for applying some of them – MOF needs to monitor effectiveness of financial management.
• Realistic expectations are needed - what can be achieved and how long will it take.

In conclusion, I think that introducing a performance framework cannot be successful if governments expect “business as usual”. Performance budgeting requires a fundamental change in how the budget process operates. For successful implementation a realistic and sequenced reform plan is essential. 

Download ICGFM Conference - Performance Framework in Budgeting


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