The move towards performance-budget is part of the general reform

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COMPLETING THE CIRCLE
TOWARDS AN INTEGRATED
PERFORMANCE MANAGEMENT FRAMWORK
Discussion Paper by
SALLY BROWNETTE
Public Finance and Management Specialist
PDP Australia
This paper is written for the purposes of stimulating discussion amongst CoP members and
has just scratched the surface of these highly complex issues. There is much more that can
be written on all of these topics. I invite members to ask questions on and to seek more
detail during the forum on any of the issues raised in this paper.
INTRODUCTION –
The Integrated Performance Management Cycle
Improving service delivery in an environment of uncertain revenue inflows and high
mandated expenditures heightens the need for value for money and requires a focus on
public expenditure management (PEM). The role of institutions and frameworks in
improving fiscal disciple, allocative efficiency and operational efficiency has been an
important development over the past ten years. One such framework is the performance
management framework (Figure 1) that links planning, budgeting, service delivery and
accountability.
Over the past few years, PEM debate has centered on linking planning and budgeting.
Practitioners have come to realize the value of national and sectoral planning in ensuring
improved resource allocation in a decentralized environment. For most countries
(developed and developing) linking planning and budgeting has proved difficult enough.
Preoccupied with this challenge, relatively little attention has been given to linking planning
and budgeting processes with accountability systems (including monitoring and evaluation of
service delivery) and feeding this back into the planning process. This is particularly true in
countries where central agencies tend to be highly fragmented.
Recently, there has been growing recognition of the importance of an integrated
performance management framework, and a few examples where jurisdictions have
developed and practically applied a performance management framework to ensure that
results-based management achieves resource allocation outcomes in the PEM context.
Figure 1 – the Integrated Performance Management Framework
Planning
Budgeting
(Establish resource framework
and expenditure priorities)
(Mobilize and allocate
resources)
Accountability
Service Delivery
(Monitor and account for
expenditures. Evaluate and
audit performance)
(Release funds, collect
revenues and undertake
activities)
This paper argues that developing and transitional economies may gain significant benefits
by applying an integrated performance management framework. This paper first looks at
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linking planning and budgeting systems and then suggests practical measures central
government agencies can take to integrate accountability systems and processes.
Linking Planning and Budgeting Systems
Focus on the links between planning and budgeting first.
It is only relatively recently that both planning and budgeting have been seen as integral parts
of PEM systems. Traditional budgeting systems have been relatively unhelpful in addressing
strategic issues. Consequently, planning and budgeting have often been treated as distinct
activities with different objectives, timescales, procedures and participants.
The
misalignment had to do with various factors, some of which are briefly outlined below:1

Planning was about policy not funding. As such, planners viewed their role as
economists while budget officers were ‘only’ concerned with accounting and
bookkeeping;

Because planning was driven by investment for growth, it was primarily concerned
with the capital budget. Recurrent budgets were usually dealt with separately;

Planning and budgeting cycles were misaligned. Planning cycles tended to be
longer and reflect implementation periods for capital projects, whereas the budget
process was annual;

Organizational separation with different central agencies responsible for planning
and budgeting; and

Aid donors, more concerned with investment as the focus of their support,
contributed to the divergent treatment of planning and budgeting.
Despite the multitude of factors encouraging the divergence of planning and budgeting, the
need to link these two processes is evident. Plans that are not linked to budget formulation
or implementation are irrelevant. Plans that formulated without knowledge of the
effectiveness of government activities are not well informed.
What will linking planning and budgeting achieve?
The need to link planning and budgeting to improve PEM institutions is particularly
important where there is a separate national planning authority. Both planning and
budgeting agencies can benefit from greater integration – budget analysts will benefit from
consideration of longer-term perspectives and planners can focus their analytical skills on
policy and institutional issues associated with government’s ongoing activities. The outcome
should be plans that reflect realistic budgetary constraints and budgets that contain a
strategic perspective.
Linking planning and budgeting will also help the government as a whole achieve the three
objectives of PEM: fiscal disciple, allocative efficiency and operational efficiency.
The principal outcome of improved fiscal discipline in developing and transitional countries
is greater predictability of funding. In order to achieve this, governments must ensure that
1
These are discussed in more detail in Lister, 1996
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they have realistic fiscal targets, accurate revenue and expenditure estimates, and costed and
funded plans and policies.
Improved allocative efficiency will ensure that resources are linked to strategic priorities. In
the PEM context, allocative efficiency means the strategic reallocation of public spending to
poverty reducing activities.
The outcome of greater operational efficiency is high quality services delivered at the least
cost. Agencies will have predictable funding, the centre and sectors will develop credible
policy and the foundation is set for performance-based budgeting.
How do you achieve it?
Macrofiscal constraint requires a firm central control of expenditures from the top.
However, central agencies cannot just rely on bottom-up process of receiving cost estimates
from line agencies (who do not have good information about resources available to them).
Therefore a balance between the top-down and bottom up approaches is needed. This is the
purpose of the Medium-Term Expenditure Framework (MTEF).
An MTEF provides the nexus between policy objectives embodied in national plans, such as
a PRSP, and sectoral planning undertaken through various sector strategic initiatives and the
annual budget process. As an institutional device, the MTEF should ensure that resource
allocation is influenced by evaluation of policy outcomes and information on service
delivery. Typically an MTEF provides three components:

An aggregated budget constraint, inclusive of all resources available

Contestability between policy options for priority and funding

Costed policy options over the medium term
The first step in achieving the balance between top-down and bottom-up approaches is to
develop a process whereby high-level consensus on strategy and process is decided. The
Budget Strategy Paper (a key component of an MTEF) spells out priority actions that
underlie that year’s budget. The Budget Strategy Paper is a high-level government policy
statement that encompasses government priorities, which is approved by Cabinet before the
budget is presented to parliament. It thus serves as the nexus between planning and
budgeting in the short-term horizon and ensures critical political ownership. As part of the
MTEF, each sector then prepares sector-specific budget strategy papers based on the
government’s overarching Budget Strategy Paper.
Secondly, central agencies need to base aggregate targets of annual budget on a coherent
macroeconomic framework of accurate revenue and expenditure targets. In the Philippines,
a lack of predictable funding and wider budget uncertainty is hampering efforts to move to
results-based management. Because of unrealistic revenue estimates and an ad hoc policy
process (that result in changes to policy direction made during budget execution) cash
release is subject to an in-year squeeze on discretionary expenditure.
The third step is for central agencies to develop sector resource envelopes with forward
estimates. Central agencies then delegate responsibility for intra-sector resource allocation to
line agencies (within the ceilings) at the same time as making agencies accountable for
outputs and outcomes. Sector resource envelopes are the decisive nexus between top down
and bottom-up approaches. They both break the aggregate expenditure ceiling between the
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main ministries at the same time as giving line agencies greater predictability of funding so
they can plan activities over the medium term. To achieve this, national plans (such as
Investment Plans and PRSPs) should be costed in order to be adequately funded. Once
costed, national plans can set the framework for sectoral planning and be revised on the
basis of sector policy statements and intentions. These plans can also specific national and
sectoral targets and monitoring indicators for assessing progress in implementation.
While the MTEF is not the only way to align planning and budgeting, it has proved a most
effective institutional framework to achieve this.2
Sequencing Reform
The sequencing of reform is critical. Whilst the most appropriate sequence for reform
differs from country to country and depends on issues such as the political environment, the
existing institutional framework and capacity constraints, experience over the past ten years
experience has yielded some patterns.
In broad terms, the logical sequence of public expenditure reform is: macrofiscal reform,
resource allocation improvement and results based management. This sequence has been
applied with success in many developing countries.3 However, there is growing evidence that
countries don’t need to strictly follow this sequence. Whilst it is generally accepted that
getting the macro framework right must be done first, countries are increasingly choosing to
improve resource allocation and move towards results based management simultaneously.
This is the approach that the Philippines government is taking – introducing forward
estimates and a paper on budget strategy at the same time as rolling out the organizational
performance indicator framework (OPIF) to national government departments. Whilst it is
relatively early days yet, and much more work needs to be done to integrate these processes,
the signs are that it is both possible and feasible to simultaneously introduce improvements
to resource allocation and results-based management.
Timing and Monitoring and Evaluation
The other point to make about timing is that links between planning and budgeting need to
occur throughout the whole cycle, not just at the budget preparation stage. This is where
monitoring and evaluation (M&E) becomes critical. Too often M&E is discussed in
abstract, i.e. there is acceptance of the need to monitor and evaluate at the project, agency,
sector and national level, but the results do not feedback into any decision making process.
In terms of results-based management in the budgeting context, M&E should be talked of in
terms of feeding back into the baseline. For example if agencies are requested to submit
performance information with budget submissions, agencies should specify what can be
achieved with the additional money compared with the baseline (both in terms of outputs
and outcomes). In this way, M&E data is able to feed back into the budget process in a
strategic and meaningful way.4
2
Standout case studies include South Africa and Uganda. See Box 1 for more details.
The most notable example is Uganda.
4
This discussion is related to the discussion of monitoring systems and the PRSP process, explored in
detail in Booth and Lucas, ODI Working Paper 172 (see references below).
3
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Box 1: Case Study on MTEF in Uganda & South Africa
South Africa and Uganda are both considered leading case studies of linking planning
and budgeting through an MTEF. They have gone the farthest in institutionalizing
MTEF principles into their public financial management systems. Both countries use the
MTEF as the basis of annual budget preparations as well as the mechanism for disclosing
resource and expenditure projections to the legislature. They have successfully integrated
the various phases of the budget cycle (including the MTEF) and have also integrated the
budget process with other key processes (such as the PRSP in Uganda).
Both Uganda and South Africa carefully sequenced the introduction of the MTEF.
South Africa ensured that the budget basics (e.g., fiscal stability, control of expenditure
during budget execution, timely and reliable financial information) were in place first.
The MTEF was then introduced for the 1998/99 Budget as part of a broader reform
agenda aimed at delivering results to citizens.
In contrast, Uganda’s introduction of an MTEF provided the impetus to build the basics.
Uganda introduced a medium term fiscal framework in 1992 to address the deteriorating
macro-fiscal environment and the inability of the Government to meet its counterpart
funding commitments on donor-financed projects. It wasn’t really until 1998 that the
MTEF was used to formally integrate planning and budgeting and began to improve
resource allocation by facilitating shifts in sectoral allocations, particularly to pro-poor
sectors.
In both countries, fiscal stability and sustainability was achieved first in order to ensure
funding predictability. This depended on honest and accurate aggregate projections.
Sources: A Review of Experience in Implementing Medium Term Expenditure Frameworks in a PRSP
Context: A Synthesis of Eight Country Studies and CABRI Budget Reform Seminar: Country Case Studies
Linking in Accountability Systems
To achieve performance management, it is essential that planning and budgeting
frameworks be integrated with accountability systems
A coordinated and integrated approach to performance management will ensure a consistent
approach by agencies and strengthen the links of the performance management cycle
(planning, budgeting and accountability). It is only by linking these three core aspects of the
performance management cycle that results-based management will achieve operational
efficiency. The benefits of an integrated performance management framework are:

Strengthened linkages between planning, budgeting and accountability processes

Greater stability in planning, budgeting and accountability processes, with events and
key dates known in advance

Institutionalization of the focus on delivering outputs to achieve Government
outcomes – rather than inputs and compliance
This is all very well in theory, but again the question is how to achieve this? Whilst the
specific answer will differ from country to country, I have suggested some starting points
below.
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The first step is to develop a performance management framework
Central agencies should work together to develop an integrated performance management
framework that mandates agencies to deliver on performance management requirements and
provides consistent guidance on developing departmental (corporate/strategic) plans,
individual performance agreements and annual reports.
Alongside mandating these requirements, central agencies should develop an integrated
performance management calendar that outlines indicative dates for planning, budgeting and
accountability (including reporting) requirements for agencies throughout the year. 5 Not
only would this be a useful reference document for agencies, it may also lead to
rationalization of central agency reporting requirements and greater stability in planning,
budgeting and accountability with key dates known in advance. Central agencies should also
be encouraged to improve their own knowledge networks and provide opportunities for
agencies to gain access to this information and share information about best practice
planning processes.
Consistency and Rationalization
In order for performance management to achieve operational efficiency, it is critical that the
elements of planning, budgeting and accountability be fully integrated, in terms of
nomenclature, a consistent set of performance indicators and alignment with strategic
planning concepts. Taking the issue of performance indicators, it is sensible for the same set
of performance indicators to be used through various planning, budgeting and accountability
documents. For example agencies should use the same set of indicators for the purpose of
performance-based budgeting agreements, corporate/strategic planning and individual
performance agreements.
Incentives institutionalize change
Alongside developing an integrated performance management framework and mandating
these requirements from agencies, central agencies must consider an appropriate incentive
scheme to avoid agencies treating this as ‘just another’ compliance exercise. Three
mechanisms are suggested: committing to a framework and timetable for devolution of
central controls to agencies; changing the rules of the budget preparation and execution
processes; and giving public recognition for good performance. These incentives are
relatively low risk and in many cases can be built into the budget process in the short-term.
With further development of the performance management framework, additional incentives
would need to be considered.
Conclusion
Although results will differ from country to country, many developing countries that have
achieved progress in stabilizing their macroeconomic framework can expect substantial
results from developing an integrated performance management framework at the centre
and cascading down to the sector and agency level. For example:
5
For two examples in Australia visit the Strategic Management Planner at
http://www.treasury.qld.gov.au/office/clients/state-govt/strategic-planner/index.shtml and the Integrated
Management Cycle Calendar at
http://www.dtf.vic.gov.au/dtf/rwp323.nsf/Web+Pages/D5870E9A696DDE1ECA256AD4001D07BD?Open
Document&Expand=7.2&
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
There will be a clear line of sight between planning and budgeting within agencies
(operational efficiency and allocative efficiency at the sector/agency level)

Agencies will be better prepared for the devolution of responsibility and control over
resources that will come with a fully operational results-based management system

The centre will have more confidence in the ability in agencies to manage on a
performance basis

The centre will strengthen their capacity to monitor and evaluate agency
performance – skills required for the change from a culture of rules-based and input
controls to a culture of results-based management

Fragmented performance management practices in agencies and other performance
management initiatives will be consolidated

Capitalization on current reform momentum and the ever-increasing level of
understanding of PEM and RBM concepts
References & Further Reading
Booth, D and Lucas H (2002) Good Practice in the Development of PRSP Indicators and
Monitoring Systems, Overseas Development Institute (ODI) Working Paper 172
Collaborative Africa Budget Reform Initiative (CABRI) (2004) Country Case Studies: Budget
Reform Seminar 1-3 December 2003, Pretoria, South Africa
Holmes, M with Evans, A (2003) A Review of Experience in Implementing Medium Term
Expenditure Frameworks in a PRSP Context: A Synthesis of Eight Country Studies,
Overseas Development Institute
Lister, S (1996) Linking Planning and Budgeting, Mokoro Ltd, Oxford, UK
Queensland Government Strategic Management Planner
Victorian Government Integrated Management Cycle
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