Performance elements in budget
and reporting process - Norway
1st Meeting of OECD-MENA Senior Budget Officials Network
Cairo, Egypt, 24-25 November 2008
Deputy Director General Pål Ulla
Ministry of Finance, Norway
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Finansdepartementet
Topics
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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 MENAcountries?
Finansdepartementet
What is performance based
budgeting?
• 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; expost control with the results
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Finansdepartementet
What is performance budgeting?
(Cont.)
• 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
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Finansdepartementet
The Central Government
Administration in Norway
The Cabinet
17 Line
Ministries
(including MoF)
MoF
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About 180 Agencies
Finansdepartementet
Assumptions for budgeting in Norway
• 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
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Finansdepartementet
To settle objectives; ministries
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
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Finansdepartementet
Performance in the budget documents
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.
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Finansdepartementet
To settle objectives; agencies
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
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Finansdepartementet
The performance reform in Norway
was a budgeting framework reform
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
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Finansdepartementet
Why measuring the costs with accrual
principles?
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)
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Finansdepartementet
Problems to be aware of with accruals
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.
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Finansdepartementet
Measuring of costs; met the real price
• 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
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Finansdepartementet
Norway has decided not to introduce
accrual principles in the overall fiscal
budget
• 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
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Finansdepartementet
Norway – no accrual but flexibility in
the spending
• 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
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Finansdepartementet
Accrual accounting in Norway
• 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)
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Finansdepartementet
Provider instead of producer as a
solution
• Outsourcing activities
• Formula based budgeting
•Universities
•Public hospitals
• Public Private Partnership
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Finansdepartementet
Universities
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
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Finansdepartementet
Net budgeting; universities
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 correctly
Problem: there is asymmetric information between the
universities and the MoF
Solution; to collect more detailed gross information
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Finansdepartementet
Hospitals as public enterprises
• Performance good
• Financing 60% fixed and 40 % result based
• One limit for new investments decided by the parliament
Problems:
• 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
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Finansdepartementet
Public private partnerships
• 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
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Finansdepartementet
Summary
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
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Finansdepartementet
Summary (cont.)
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
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Finansdepartementet
Summary (cont.)
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 reporting
How to keep central cost-control under performance
budgeting may be a challenge
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Performance is good!!!
Thank you for listening to my presentation.
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