Institutionalizing Performance Budgeting: Key Institutions and Actors - Roles and Incentive

StructuresTeresa Curristine, Senior Economist

Fiscal Affairs Department, IMFColombia

December 11-13 2014

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Overview of Presentation

1. Essential building blocks for Performance Informed Budgeting (PIB).

2. Designing PIB System: the role of key institutions.

3. Developing the right mix of incentives - motivating agencies and managers to improve performance.

4. Engaging the political leaderships – the role of politicians and developing incentive structures.

5. Dispelling the myths and framing the debate.

1) Essential Building Blocks for Developing Performance Informed Budgeting (PIB)

•Establishment of strategic goals and objectives•Develop Performance Information (PI) to measure and evaluate achievement of results (Including program evaluations).•Integration of PI into the budget preparation and decision making at both the central budget authority (CBA) and spending ministries level. •Integration of PI into accountability and management processes

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Placing Performance Budgeting (PB) in Context of PFM

• Fiscal sustainability and basic PFM processes needed for PB.• PB can contribute to PFM objectives:

– effective allocation of resources– efficient and effective delivery of public goods and

services.• PB linked to PFM reforms, especially MTBF

– MTBF and PB part of one reform package e.g. France, Korea and Austria.

• PB to succeed needs to be integrated with government budgeting an management processes

• Managing for results – financial and managerial flexibility • Accountability and reporting systems

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2) Designing PIB Reform Initiatives Requires:

• Setting key reform objectives• Developing implementation strategies

– Overall approach (top-down or bottom–up)– Introducing and managing reforms – Establishing legal frameworks – Supporting reforms: Institutional, human, and technical

capacities– Engaging stakeholders and creating the right incentives

• Developing sequenced approach to implementation.• Adapting reforms, while maintaining coherence of, and

interest in, reforms over the long-term.

Different Possible PB implementation strategies and Roles for Key Institutions

• Top-down (central agencies lead) versus bottom-up (spending ministries/agencies lead)

• Incremental approach- Australia, Canada, France or “big bang” approach- Korea and Austria

• Comprehensive coverage versus partial

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What Role Should Central Agencies play in PB?

• Varies across countries – At one end MOF/CBA has a high degree of involvement

in reforms (Developing performance measures and setting and negotiating performance targets) .

– At the opposite end it is left to individual ministries - the MOF/CBA has a low level of involvement.

• Role played is influenced by:– Wider institutional context– Approach to PB– Degree centralized of public administration– Relative power of the MOF

Trends in Roles of Central Agencies and Spending Ministries in OECD Countries

Central Agencies’ Roles• In 22 OECD countries the CBA has in place a standard

performance budgeting framework which is applied uniformly across all spending ministries.

• In 19 OECD countries the CBA developed the standard template for reporting PI.

• In 17 OECD countries the President/Prime Ministers’ office or the relevant political appointees are responsible for monitoring the performance of spending ministries

Spending Ministries’ Roles:• In over 25 OECD countries spending ministries are responsible

for setting performance targets. Spending ministries on average in OECD countries have a greater role in generating PI and conducting evaluations.

(Source OECD 2012 and 2013) n8

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Benefits RisksTop-down approach

Stronger pressure for reform Limiting flexibility to achieve results

Uniformity in approach and framework across government

Too rule-bound, and performance becomes mere compliance

More information at the centre to make decisions

Creating too many reporting requirements and becoming an expensive paper exercise

Better co-ordination and monitoring Failing to gain the support of agencies

Creating perverse incentives and distorting behaviour

Bottom-up approach

Greater flexibility Inertia due to lack of pressure to reform

Capacity to tailor reforms to agencies’ needs

Being more difficult and time-consuming to implement

Enables greater responsiveness to clients and local communities

Lack of co-ordination of reforms

Encourages ownership of reforms by agencies

Lack of information at the centre to make decisions

Source OECD 2007 Lack of consistency in reform efforts and presentation of data

Potential Benefits and Risks of Top-Down Versus bottom Up Implementation Approaches

3) Developing the Right Mix of Incentives: Motivating Agencies and Managers to Improve Performance

• Financial rewards and sanctions through the budget process

• Increase or decrease financial and managerial flexibility

• Public recognition: name and shame

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Financial Rewards and Sanctions (1/4)

Performance Informed Budgeting• CBAs do not automatically reward or punish agencies based

on performance results. • PI is used in the budget negotiations and dialogues between

CBA and spending ministries and within ministries. PI acts as a signaling device

• In some countries use “Bidding Funds” require PI (e.g. Singapore Reinvestment Fund) and it is used to decide between competing proposals.

• PI also used by spending ministries and agencies in budget process to: – Setting allocations for programs– Proposing new areas for spending– Strategic planning and prioritization and in spending reviews

Financial Rewards and Sanctions: Budget Negotiations Between Ministries and their Agencies (2/4)

• PI more often used by spending ministries • Agency performance agreements and contracts e.g.

Australia, Netherlands, NZ, and Nordic countries• Depending on flexibility in wider budget structure used to

redistribute resources • Used to manage programs• Across and within countries wide variation in use of PI in

decision making. • Depended on quality of PI, political pressure, and strong

organizational leadership

Financial Rewards and Sanctions (3/4)

Performance Bonus or Top Up Schemes• States or agencies are given a financial bonus for meeting

targets, achieving performance improvements or implementing institutional capacity building in selected programs or areas.

Bonus linked to achieving targets – US Department of Transportation highway safety belt scheme– UK local governments when they achieved 60% of targets received

grants from the center for capacity building.

Bonus linked to institutional capacity building reforms– EU structural fund 4% performance reserve– US race to the top educational program

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Financial Rewards and Sanctions (4/4)

Direct Performance Budgeting• Direct and explicit linking of funding to performance

(usually outcomes or outputs)• Provide incentives for agencies to achieve targets or

outcomes• Used in specific sectors e.g in Nordic countries in higher

education and health care (DRGs). In Singapore in tax collection agencies, health care, and universities.

• Issues with • Dysfunctional behavior and gaming in health sector• Quality of service provision • Implications for control of aggregate financial control

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Increase or Decrease Financial and Managerial Flexibility (1/3)

• Strongly influenced by:– Historical factors – A country’s existing budgeting and public

management and accountability systems.• Norway- historically decentralised system later

introduced performance system• UK –historically centralised and target driven

system later introduced flexibility.• Key Question: Does current system of controls

restrict managers capacity to improve performance?

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Increase or Decrease Financial and Managerial Flexibility (2/3)

• In practice no clear trend across OECD countries of reducing in input controls

• In selected countries PB reforms accompanied by reduction in input controls (Andrews 2010)

• In US States new reporting requirements and IT systems increased control (Moynihan 2006)

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Increase or Decrease Financial and Managerial Flexibility (3/3)

Increased flexibility as a reward for good performance- Local Authorities in UK reduction of inspections and

regulations.

Decreasing flexibility as a punishment poor performance– Increased monitoring or control for poor performing

agencies– Continuous poor performers –e.g. schools in UK and US

No child left behind – removing staff, or ultimate sanction closure

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Making Performance Public: Name and Shaming

• In 2000s significant increase in volume of PI released to the public although quality varies.

• Including government wide performance reports, league tables for schools and hospital (e.g UK) and benchmarking( e.g. states in Australia).

• Can place pressure on poor performers and generate competition among similar service providers to improve performance.

• Assumption citizen, interest groups ,and external bodies will use PI to monitor organizations and push for improved performance

• Research indicates citizens mostly interested in services that impact them directly ( health, education) and evaluate these services relative to their individual experiences or by media reports.

• Public recognition of good staff performance- reward ceremony, or letter or meeting with a minister. Promote training and cross-organizational teamwork and network. Promote culture of performance service and integrity

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4) Engaging the Political Leadership: Roles and Incentives

What role can the political leadership in the executive and the legislature play in PI systems?– Agree/set objectives or wide strategic goals for the

government and programs– Monitoring performance of agencies/programs– Use PI in decision making on budget/ programs/policy– Oversight and accountability- hold the government

accountable for results– Create pressure to improve performance

Issues and Challenges– Getting political leadership to set clear objectives – goals can be

vague or a product of political compromise, or conflicting with one another.

– Getting political leadership to use PI in decision making.

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Political Leadership in the legislature: Challenges and Incentives

• Only limited use of PI, especially in budgetary allocation decisions• Although research on US States indicates PI is being used in some

states to inform the budget debate and promote a greater focus on outcomes in discussions.

• Newer legislative members more open to using PI than those who have been in power for a number of years.

• Legislatures tend to use PI more for accountability purposes to pose questions on program performance in a selective as opposed to systematic manner.

• Informational and Institutional factors limit their incentives to use PI. – Information overload, poor quality or poorly presented information. – Priorities are influenced by political and constituency interests. They

often lack of time, resources, and expertise to examine PI.

Improving Legislative Oversight and Use of PI

• Improve quality, presentation, and relevance of PI.• Tailor PI to politicians needs and present it in clear,

concise, and readable form• Audit PI• Develop systematic and structured oversight agenda

which includes review of PI and reports• Set schedule so PI is available to inform budget and

oversight processes when needed• Supplement rather than a replacement for traditional

accountability mechanisms and information• Build capacity and resources to review information –

training staff, having experts, and holding hearings.

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Political Leadership in the Executive: PI Use, Challenges, and Incentives

• More widespread use of PI by politicians in the executive• PI used to varying degrees for budgeting, monitoring, and management

purposes.• Executive politicians and their appointees using PI at national, state, city

and local governments levels• PI used by the governors, chief executives, political appointees, in US

States. Government Performance Project highlighted ten states as leaders in performance budgeting including Washington, Texas, Maryland, Oregon, Utah and Delaware.

• PI is most often used by politicians for monitoring and control purposes. • In Mexico, Colombia, and Chile, Presidents have developed new or used

existing performance systems to monitor progress towards achieving high priority goals and targets.

• In UK under the Blair and Brown governments ministers held accountable for performance targets and a cabinet committee monitored progress.

• In US under Government Modernization Act 2010-cabinet secretaries held accountable for high priority goals.

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Political Leadership in the Executive: PI Use, Challenges, and Incentives

• Motivating politicians to use PI in budget decisions remains challenging. – Politicians do not necessarily use PI in the manner reformers intend. – A larger volume of PI is produced than ever is used. – The interest in, and use of, PI waxes and wanes with the political salience or sensitivity

of an issue, with changes in political regimes, and with individual political leaders.• Growing, recognition of the value of performance systems as governing and

monitoring tools.– When regimes change, it is important to engage new politicians– Present PI in a manner which is useful for them, given their interests and time

constraints– Changing accountability structures can create motivational incentives.– If top leaders establish systems to hold their ministers and political appointees

accountable for performance, this creates incentives for ministers in turn to monitor progress within their departments.

– Potentially performance systems can be used by politicians to obtain more information and control over senior career civil servants, who traditionally have an information advantage.

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5. Dispelling the Myths and Framing the debateFraming the debate and dispelling some myths about PB and PM.• Performance reforms will lead to rational decision making and an end to

politics in budgeting – Experience has proven this is rarely the case, especially in political competitive

environments with strong ideological and partisan divides. PI is one source of information in decision making.

• Performance information is only performance targets. – This is rarely the case governments produce a mix of performance information, and

extensively develop evaluations because performance measures and targets provide only a snapshot of performance in time.

• More information is always better.– Overloading decision makers with information makes it difficult for them to discern what is

relevant and useful. Awareness is growing that too many indicators make it difficult to focus on key priorities and are costly to monitor.

• Performance budgeting automatically or mechanically links funds and performance results. – PIB is the most common form of PB adopted in OECD countries. In this approach there is

no automatic or mechanical link between resources and results. Financially rewarding good performance and punishing bad does not take account of government priorities or the underlying cause of poor performance,

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5. Dispelling the Myths and Framing the debate• Performance systems inevitably fail when gaming occurs.

– All budgeting systems involve gaming to some extent, as agency supporters seek to obtain more money for their interests. Gaming, however, does not preclude improved performance it highlights the importance of performance regimes being dynamic systems that change rules and incentives as reforms evolve.

• Performance budgeting stands alone. – PB goes hand in hand with performance management

• Performance budgeting is always accompanied by increased managerial flexibilities and relaxation of input controls. – The impulse to relax controls and the speed at which it is accomplished depends on the country and

institutional context. The fundamental question is if the current system of control restricts managers’ capacity to improve performance and what is needed to balance the risks.

• Performance budgeting inevitably turns into a compliance exercise. – This is more likely when the reforms increase reporting requirements and controls. This development

can be avoided if reform design reduces and minimizes reporting requirements and removes a rule for each one added, if managers can see PI as useful for their jobs, and if incentives to use PI are related to the wider management and accountability systems.

• Performance reforms are a failure if the whole government is not using PI to produce large-scale improvements.– Expectations of uniform application of reforms across the entire government are not realistic. For

most PFM reforms progress is mixed. Some agencies and programs are reform leaders, some are laggards, and some never engage.

Thank You

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