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 -1- 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 -2- 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 -3- 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 -4- 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. -5- 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& -6- 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 -7-