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Performance elements in budget and reporting process - Norway

1st Meeting of OECD-MENA Senior Budget Officials NetworkCairo, Egypt, 24-25 November 2008

Deputy Director General Pål UllaMinistry of Finance, Norway

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• What is performance based budgeting ?• Setting performance objectives• Efficient deliveries by measuring costs• Provider as an alternative to producer• Summary of what to learn for the MENA-

countries?

Topics

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• Macro-economic framework;• Medium Term Expenditure Framework• Fiscal rule which gives predictability in the spending

• A political commitment;• to stick to the MTEF (even if the revenues are temporarily high);• Hands of for the parliament during the fiscal year; ex-post control with the results

What is performance based budgeting?

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• A budgeting framework;• Formulation of measurable performance objectives• A top-down budgeting process • Decentralised budget execution

• Decentralised human resource management • More efficient use of resources by measuring costs correctly• Accrual budgeting and accounting?

In short; introducing performance budgeting may be a huge management reform in the public sector

What is performance budgeting? (Cont.)

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The Central Government Administration in Norway

17 LineMinistries

(including MoF)

About 180 AgenciesMoF

The Cabinet

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• Used to be minority governments negotiating in the parliament

• The individual line-minister responsible to the parliament• Decentralised budget execution (with top-down

budgeting)• The Ministry of Finance coordinates the budget process

and issues Provisions on the Financial management

The Ministry of Finance is strong on the cash fiscal limits but not on the formulation of policy objectives

Assumptions for budgeting in Norway

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Each ministry present to the parliament their budget proposals including performance information:

• Guideline: performance measures to be given at the program level

• In the real world: Indicators may be at outcome-, outturn, output or even input level

• Some “indicators” may only be statistical information

To settle objectives; ministries

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General concern:• Few targets at the program-level• The higher level of the objectives, the larger are

the difficulties to link inputs to results• There are too many (lower level) objectives for

each ministry

Main problem: The parliament wants the budget proposals to be very detailed.

Performance in the budget documents

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The ministry writes a letter of allocation to each agency;

• Guidelines: the performance measures shall be more detailed than in the proposal to the parliament (if necessary divide programs into subprograms)

• In reality the measures given are too many and harm decentralisation

Main problem: The agencies may not have enough flexibility

To settle objectives; agencies

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Together with the stronger emphasis on performance:• A top-down budget framework was introduced• A decentralised budget execution has been introduced• A more skilled human resource in the line-ministries has

been build up• Updated budgeting and accounting systems such as a

treasury single account has been introduced

Norway has always had a clarified government structure which is an important assumption for the reform

The performance reform in Norway was a budgeting framework reform

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The need for accrual budgeting is due to measure use of resources even if the cash transactions are done in another period or not done at all

Especially, to make distinction between investments in fixed assets and the costs of using capital (measured as depreciations)

Why measuring the costs with accrual principles?

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Large fixed investments must be approved by the parliament. This is not a major problem because there are techniques to combine appropriations for fixed assets with accrual budgeting of depreciations at the ministry-level

How to handle non-cash appropriations in the budget execution is also a challenge. If the government has an overall treasury single account, transferring non-cash appropriations to the agencies may be easier because excess liquidity will be swept into this account.

Problems to be aware of with accruals

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• Salaries and wages•Pension liabilities for civil servants, notional funds

• Other current spending•Internal pricing, no free warehouses

• Transferring capital costs to current costs:•Rent, alternative costs set ex-ante•Financial leasing for the agencies

Measuring of costs; met the real price

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• Investments in fix capital, not depreciations, will influence the macro-fiscal stance

• Accrual principles are difficult to understand• Non-cash transactions are difficult to calculate

and may be arbitrary in a budget process

• Performance; There is a scepticism if there is a possibility to link results and costs

Norway has decided not to introduce accrual principles in the overall fiscal budget

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• One-line-appropriations for current costs and small investments

• Current costs used for larger investments, investment costs not for current cost

• 5 % of current costs may be transferred to next year (and borrowed from)

• Rents for housing

• Notional funds for future liabilities

Norway – no accrual but flexibility in the spending

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• Pilot project; 11 agencies use accrual for their internal reporting

• Creating a common chart of accounts used by all of them

• Must also report on a cash base to the central fiscal budget

Net based budgeting for some institutions with their own revenues (also accrual based)

Accrual accounting in Norway

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• Outsourcing activities

• Formula based budgeting•Universities•Public hospitals

• Public Private Partnership

Provider instead of producer as a solution

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Formula based budgeting

Appropriations based on objectives:• Basic financing; not dependent on results (2/3)• Result based financing based on the number of students

that finish a degree, no upper limit for the total appropriation.

• Result based appropriation for research; the total is fixed but the allocation between universities depends on results

Universities

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Net based budgeting; they may use their own revenues

Observed large transfers of money from one year to the next due to:

• Non-cash appropriations• Their own revenues• Not spending their appropriations correctlyProblem: there is asymmetric information between the

universities and the MoF

Solution; to collect more detailed gross information

Net budgeting; universities

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• Performance good• Financing 60% fixed and 40 % result based• One limit for new investments decided by the parliamentProblems:• Lack of decentralisation of the execution• High increases in the costs, use of draft facilities (approved

by the parliament)• Unforeseen costs covered by extra appropriations; pension

obligations

Hospitals as public enterprises

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• May be divided into:•Private financing (financial leasing)•Procurement, tendering

• Norway has little need for private financing

• Started up three trial projects for PPP to see if efficiency may be increased

• OECD: PPP-contracts are very complicated and should be handled by specialised departments for negotiations

Public private partnerships

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An overall performance-reform takes time and must be planed well.

It may need:• A medium term fiscal and expenditure framework• Acceptance that ex-post judgement of the results today will

influence on the agencies’ revenues tomorrow.• A top-down budget reform with decentralisation of the

execution• A well established budgeting and accounting framework

Summary

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Centralised processes may be to prefer because of otherwise the process is:

• Too time-consuming to implement• Too much need to build up skilled human

resources in the ministries

If you want to introduce accrual principles, consider to introduce accrual as a supplement to the cash statement in the financial statement first

Summary (cont.)

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The organisational structure of the government must be clear; All agencies must be responsible to one (and only one) ministry in each matter

Performance budgeting requires decentralisation of:• Human resource management• Budget execution• Internal control, auditing and reportingHow to keep central cost-control under performance

budgeting may be a challenge

Summary (cont.)

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Performance is good!!!

Thank you for listening to my presentation.