69281 Performance-Based Budgeting and Medium-Term Performance-Based Budgeting and Medium-Term Performance-Based Budgeting and Medium-Term and Medium-Term Performance-Based BudgetingEmerging Europe Expenditure Frameworks in Emerging Europe Expenditure Frameworks in Emerging Europe Expenditure Frameworks in Emerging Europe Expenditure Frameworks in Edited by Edited by Edited by Leszek Kąsek and David Webber Edited by Leszek Kąsek and David Webber Leszek Kąsek and David Webber Leszek Kąsek and David Webber 2009 2009 2009 2009 Current Issues in Fiscal Reform in Central Europe & the Baltic States 2008 Performance-Based Budgeting and Medium-Term Expenditure Frameworks in Emerging Europe Edited by Leszek Kąsek and David Webber 2009 Table of Contents Acknowledgements.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 The opinions expressed in this report do not necessarily represent the views of The World executive.summAry:.AcHievements,.. Bank or its member governments. The lessons.&.cHAllenges.AHeAd. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 9 World Bank does not guarantee the accuracy I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 of the data included in this publication and II. Recent Achievements in Budget Reform . . . . . . . . . . . . 10 accepts no responsibility whatsoever for any III. Critical Success Factors . . . . . . . . . . . . . . . . . . . . . . 12 consequence of their use. IV. Lessons from the Region . . . . . . . . . . . . . . . . . . . . . 16 V. The Challenges Ahead . . . . . . . . . . . . . . . . . . . . . . 21 ISBN: 978-83-88911-17-0 cHApter.1 ... © The World Bank, Poland, pFm.reForms.–.leArning.From.globAl.lessons. . . . . 23 Warsaw Office 1. Fundamentals of PFM Reform and Sequencing . . . . . . . . 26 Edition I, Warsaw 2009 2. Systemic Approach to Performance Budgeting . . . . . . . . . 27 3. Developing a Toolkit for Improved Performance . . . . . . . 33 Publisher 4. Medium-Term Expenditure Frameworks (MTEF) . . . . . . . 38 The World Bank 5. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 53 Emilii Plater Str., 00-113 Warsaw cHApter.2 ... tel. (48 22) 520 80 00 core.FeAtures.oF.tHe.current.budget.system.. fax. (48 22) 520 80 01 in.emerging.europe email: mmichnowska@worldbank.org 1. General political and administrative structure governing budget preparation. . . . . . . . . . . . . 43 http://www.worldbank.org.pl 2. Key pieces of legislation relating to the budget and country-specific circumstances Published by influencing the budget system . . . . . . . . . . . . . . . . . . 47 HERA – Drukarnia Offsetowa S.C. 3. Recent international assessments of quality 13a Brzozy-Brzeziny Str., 05-220 Zielonka and transparency of budget systems . . . . . . . . . . . . . . . 50 tel. (48 22) 811 22 23 cHApter.3 ..generAl.progress.. fax. (48 22) 771 90 01 on.budget.reForm.in.emerging.europe 1. Recent public finance reform initiatives . and major institutional achievements . . . . . . . . . . . . . 53 Cover designed by Agnieszka Mościbrodzka 2. Motivation, champions for reform, and involvement of budget departments . . . . . . . . . . . . 57 3. Institutional changes, involvement of budget authorities and managing opposition . . . . . . . . . . . . . . . . . . . . . 60 cHApter.4 ..regionAl.overview.oF.mteF.And.pbb. polAnd reForms General Assessment (Summary) . . . . . . . . . . . . . . . . . . . 169 4.1. Adopting Medium-Term Expenditure Frameworks (MTEFs) 65 1. Core features of the current budget system . . . . . . . . . . . 170 1.1. Coverage of the MTEFs 2. General progress on budget reform . . . . . . . . . . . . . . . 173 compared to the annual budget and its legal basis . . . . . . . 66 3. Adopting Medium-Term Expenditure Frameworks . . . . . 175 cHApter.5.–.country.cAse.studies . 4. Performance-based Budgeting . . . . . . . . . . . . . . . . . 177 5. Budget Presentation and Classification . . . . . . . . . . . . . 182 bulgAriA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 6. Public Management Performance Culture . . . . . . . . . . . 185 General Assessment (Summary) . . . . . . . . . . . . . . . . . . . 109 1. Core Features of Current Budget System . . . . . . . . . . . . 110 slovAkiA 2. General Progress on Budget Reform . . . . . . . . . . . . . . 113 General Assessment (Summary) . . . . . . . . . . . . . . . . . . . 187 3. Adopting Medium-Term Expenditure Frameworks . . . . . 116 1. Core Features of Current Budget System . . . . . . . . . . . . 188 . 4. Performance-based Budgeting . . . . . . . . . . . . . . . . . 121 2. General Progress on Budget Reform . . . . . . . . . . . . . . 190 5. Budget Presentation and Classification . . . . . . . . . . . . . 125 3. Adopting Medium-Term Expenditure Frameworks . . . . . 193 6. Public Management Performance Culture . . . . . . . . . . . 127 . 4. Performance-based Budgeting . . . . . . . . . . . . . . . . . 197 5. Budget Presentation and Classification . . . . . . . . . . . . . 202 croAtiA 6. Public Management Performance Culture . . . . . . . . . . . 204 General Assessment (Summary) . . . . . . . . . . . . . . . . . . . 129 1. Core Features of Current Budget System . . . . . . . . . . . . 130 turkey 2. General Progress on Budget Reform . . . . . . . . . . . . . . 137 General Assessment (Summary) . . . . . . . . . . . . . . . . . . . 207 3. Adopting Medium-Term Expenditure Frameworks . . . . . 141 1. Core Features of the Current Budget System . . . . . . . . . . 209 4. Performance-Based Budgeting . . . . . . . . . . . . . . . . . 144 2. General Progress on Budget Reform . . . . . . . . . . . . . . 210 5. Budget Presentation and Classification . . . . . . . . . . . . . 151 3. Adopting Medium-Term Expenditure Frameworks . . . . . 213 6. Public Management Performance Culture . . . . . . . . . . . 153 . 4. Performance-based Budgeting . . . . . . . . . . . . . . . . . 215 5. Budget Presentation and Classification lAtviA and Public Management Performance Culture . . . . . . . . . 216 General Assessment (Summary) . . . . . . . . . . . . . . . . . . . 157 1. Core Features of the Current Budget System . . . . . . . . . . 158 Annex 1. Program structure in Transport – Slovakia 2008 . . . . . . . 206 2. General Progress on Budget Reform . . . . . . . . . . . . . . 159 Annex 2. Program structure in Transport – Turkey 2008 . . . . . . . . 217 3. Adopting Medium-Term Expenditure Frameworks . . . . . . 160 Annex 3. Main macroeconomic . 4. Performance-based Budgeting . . . . . . . . . . . . . . . . . 163 and fiscal indicators in Emerging Europe . . . . . . . . . . . . . . . . . 219 5. Budget Presentation and Classification and Public Management Performance Culture . . . . . . . . . . . . . . . . . . . . . . . 166 Annex 4. Questionnaire for World Bank Country Economists . . . . . 220 bibliogrApHy .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .233 ABBREVIATIONS AND ACRONYMS Acknowledgements BIS Budgetary Information System BL Budget Law This report was edited by Leszek Kąsek and David Webber, and writ- COM Council of Ministers, (the Cabinet) ten by a World Bank team. The authors of respective chapters are: Mediha COFOG Classification of the Functions of Government Agar (Turkey), Paulina Hołda (Latvia), Stella Ilieva (Bulgaria), Leszek EBF Extra Budgetary Fund Kąsek (regional overview, task team leader), Ewa Korczyc (Poland), Sanja EDP Excessive Debt Procedures Madzarevic-Sujster and Matija Laco (Croatia), Jan Marusinec (Slovakia), FLSU First Level Spending Unit Mario Sangines (currently with the IADB - Global Lessons), and Dav- FMIS Financial Management Information System id Webber (principal author of the questionnaire). The report benefited GFS Government Financial Statistics from valuable comments from the peer reviewers: James Brumby, Roland LGU Local and Regional Self-Government Unit Clarke, and Bill Dorotinsky who also provided excellent suggestions for IMF International Monetary Fund the finalization of the report. ITC Information Technology and Communications We are most grateful to national counterparts from the Ministries KPI Key Performance Indicator of Finance in Bulgaria, Croatia, Latvia, Poland, Slovakia, and Turkey, for M&E Monitoring and Evaluation their responses to a questionnaire and valuable comments to the earlier MOF Ministry of Finance draft of the study. NGO Non-Government organization MTEF Medium-Term Expenditure Framework MTO Medium-Term (Fiscal) Objective NIS National Investment System OECD Organization for Economic Cooperation and Development OMB Office of Management and Budget PART Program Assessment Rating Tool PBB Performance-Based Budgeting (often called “performance budgeting�) PDB Performance-Determined Budgeting PEFA Public Expenditure and Financial Accountability (assessment) PEIR Public Expenditure and Institutional Review PEM Public Expenditure Management PFM Public Financial Management PFMCL Public Financial Management and Control Law PFDML Public Finance and Debt Management Law PFMR Public Finance Management Reform (project) PIB Performance-Informed Budgeting PPP Public-Private Partnership PRB Performance-Reported PRSP Poverty Reduction Strategy Paper ROSC (IMF) Report on Standards and Codes SAO State (or Supreme) Audit Office SPO State Planning Office TSA Treasury Single Account WB World Bank 7 ExEcutive Summary: ACHIEVEMENTS, LESSONS & CHALLENGES AHEAD I. Introduction1 In recent years, governments in many regions have adopted a wide range of reforms to make fiscal policies more consistent and effective over the medium-term and emphasize the impact of policies and spending. Two reforms – performance budgeting and medium-term expenditure frameworks – have been central elements in improving the management of public finances. Medium-term expenditure frameworks (MTEF) have been developed and refined by many countries to help build fiscal policy credibility and predictability via a more strategic, multi-year, budget plan- ning perspective. At the same time, performance-based budgeting (PBB) concepts and methods have been especially important in many countries in bringing an increased focus on the results sought and achieved from government spending (i.e. getting better value for money). Both of these budget reforms have been on the agenda of most new European Union (EU) Member States and candidate countries. Six of these countries have been selected for this study: Bulgaria, Croatia, Latvia, Poland, Slovakia, and Turkey. These are referred to jointly throughout this report as either Emerging Europe or ‘the region’. The main purposes of this study were to: • Compile a comprehensive stock-take of the implementation of major budget reforms, including MTEF and PBB in particular. • Identify the lessons from these experiences, including the con- straints faced by these countries and some of their major challenges for the future. • Enable these and other countries in the region to better under- stand and compare these experiences and to identify some of the good practices and ideas they have developed in implementing PBB and MTEF reforms. The decision to focus on just two main public expenditure manage- ment reforms – MTEF and PBB – was taken on the basis of actual reforms strategies adopted across the region in recent years, combined with the potential opportunities and synergies these reforms provide for more gen- erally improving public financial management (PFM). PBB and MTEF 1 The report generally covers information available as of early 2009. 9 reforms, implemented together, have the potential to significantly raise es a key challenge faced by policy officials and public finance systems in the quality and consistency of forward estimates of public expenditures developed and emerging economies. through their common use of policy-based expenditure programs and Progress and achievements across the region are varied although the program- and activity-based costing methodologies. The result is more experiences of these countries have shown many similarities in terms of credible future budget commitments, more efficient expenditure priori- critical success factors and lessons learned. In the six countries addressed tization and increased consensus around what fiscal policies are seeking by this report, budget reforms involving especially MTEF and PBB ap- to achieve. proaches have been introduced only since the late 1990s and in some cases The country reports and analysis contained in this study were based even more recently. Some countries have made considerable advances in on responses to a questionnaire filled out by World Bank experts, mostly some areas, but for all six, there is still a long way to go. While the current in close consultation with the relevant national authorities. This question- global financial crisis has heightened the importance of these reforms, it naire (Annex 4) was developed to help ensure consistency and coverage has also added complexity and uncertainty to the reform environment. in the research, analysis and reporting provided from each country. The In each case, the design and implementation of MTEF and PBB ap- overall assessment and comparisons of progress, achievements and chal- proaches have been part of a broader program of public finance and ad- lenges as discussed in this report were based on the responses to the ques- ministrative reform (Chapter 2). Successful adoption of these budget tools tionnaire as well as on the views and insights of World Bank staff and is seen as vital for contributing to other positive changes in public man- national counterparts. agement culture and fiscal performance. Although there has sometimes Finally, the study recognizes that the MTEF and PBB reforms adopt- been a risk of ‘reform overload’ on the public service in several of these ed in these in six countries are far from complete. In all cases, many of the countries, in terms of implementing the financial and administrative re- full benefits of these reforms are yet to be realized in terms of improved form agendas, most have succeeded in putting in place the basic founda- budget management, more evidence-based decision-making, quality and tions for improved budget management. professionalism of administrative performance, expenditure effectiveness For all six countries, these principal achievements (Chapter 3) have and fiscal stability. Some international examples, from Chile in particular, included the following: preparation and approval of improved public fi- of how key obstacles have been overcome, and the extent of gains that can nance (organic budget) laws, adoption of programmatic budget structures be expected, are provided in Chapter 1. Overall, this study suggests that (rudimentary in some cases), revised budget classifications, and adoption these Emerging Europe countries are, to varying degrees, now taking sig- of fiscal strategies and targets conforming to EU accession requirements. nificant steps down a similar and worthwhile path. Although implementation of medium-term budgeting methods has been patchy, there is now a broad understanding across the region of how pro- II. Recent Achievements in Budget Reform grams and performance indicators need to be determined and managed Although not all innovations in budgeting have been successful or within the context of a medium-term fiscal strategy and policy objectives. long-lasting, most have contributed in some way to a gradual advance- Slovakia in particular has led the way in applying a more integrated ap- ment of public financial management, especially in developed countries. proach to the adoption of these ‘second generation’ budget reforms. Bul- Many OECD and EU countries in particular have undertaken budget garia has made good technical progress too but needs to maximize the modernization steps in the last 30 years involving MTEF and PPB ini- pay-off of reforms in terms of improved effectiveness and efficiency of tiatives (e.g. Australia, New Zealand, USA, Canada, UK, Netherlands, public spending. France, Denmark and others). More recently, many emerging economies Among the other four countries – Latvia, Croatia, Poland, and Tur- have followed a similar path (e.g. Chile, Korea, South Africa, United Arab key – key elements of these reforms have been polited and implemented Emirates, Emerging Europe and Russia). Very few countries, if any, have to varying degrees. Continuing senior policy official enthusiasm and lead- halted, much less turned back from, these developments in budget man- ership has been a key factor in determining how far and how effectively agement and public administration. Each reform or reform effort address- 10 11 these measures have progressed. In the new EU Member States, the Con- ly new managerial concepts, introduction of new IT systems and changed vergence Programs have also given considerable impetus to these reforms. behaviors of public servants. All of this requires a positive and determined Overall (Chapter 4), progress in the region has generally not yet attitude by government with good communication between the centre – reached the point of full and committed implementation in either MTEF invariably the Ministry of Finance – and line ministries and spending or PBB, nor has it been sufficient to enable the expected benefits and syn- agencies. Reform efforts tend to be more successful and sustainable where ergies of these new approaches to become fully evident, or to engender the process of reform receives as much attention as the substance, and wider interest and support within the public sector and civil society. In where teams spanning the Ministry of Finance and line agencies work to- each country, despite the best efforts of the national ministries of finance, gether to design and implement the reforms (effectively, on-the-job learn- key elements of these reforms are not yet embedded in the annual systems ing and training). of budget preparation, much less in terms of generating a ‘performance Much has been written and discussed concerning the appropriate se- culture’ around public financial management. quencing of these reforms. Unfortunately, most reforming governments don’t have the luxury of time in making major fiscal adjustments, or in III. Critical Success Factors meeting new policy targets or the specific fiscal requirements of new mul- This study identifies a number of critical factors for successful imple- tilateral agreements. In most cases, the benefits of a gradual approach, mentation of MTEF and PBB reforms. The potential list of critical factors including proper sequencing of budget reforms, must be weighed against is long and the country reports (Chapter 5) suggest that different factors the immediate and often short-lived opportunities for implementing may be more or less important in each country’s circumstances. The clear change that may be presented by a fiscal crisis and/or determined and ef- experience from the region is that good budgeting systems evolve over fective political leadership. many years, usually in parallel with other important improvements in In general, good strategic decision-making, accompanied by sound public administration and management. and enduring changes to systems and capabilities, will take considerable Factors which determine the speed and success of MTEF and PBB time to fully develop. Maintaining a specific roadmap for implementing reforms in particular include both the character and quality and of pub- these reforms can help prevent the gradualist approach from becoming lic institutions and laws within the country, plus the degree of technical an eternal one. Informing and encouraging line ministries to prepare for knowledge, degree of effort and experience applied to design and imple- these changes also helps increase their chances of being ready to accom- mentation of these methods. In most cases, these types of budget reforms modate major institutional, policy and methodological improvements, are initiated in public management environments in which institutional many of which may be needed year-on-year for a prolonged period. Some capabilities and technical understanding are less than ideal. It is there- of the countries in this study have clearly struggled to sustain and embed fore invariably a major learning experience and allowances must be made some of these reforms. Re-starting the implementation process may be for concepts and approaches that may not initially be well-suited to the even more difficult than taking the initial steps. situation, or well-received by officials in the spending ministries. Conse- Finally, it is evident that some aspects of these new methods for budg- quently, patience and persistence, including the courage to make good but et management may have been adopted without adequate thought and unpopular decisions, and on-going support and encouragement for these preparation and may have been initially too advanced for organizations ministries and agencies is essential. Proper attention to change manage- and systems that don’t yet possess basic skills and competencies in budg- ment would also improve the likelihood of success. eting, management and financial reporting. Careful assessment of these Institutionally, it is essential for government as a whole to be dedi- conditions, including the capacity of the public administration system for cated to the objectives and requirements for reform and to have strong managing these changes, is important. It is not enough for the Ministry of leaders, at both political and bureaucratic levels, providing guidance and Finance (MOF) to be ready and willing; most line ministries face a variety direction at each stage. MTEF and PBB reforms involve a range of com- of unique policy, organizational and technical constraints that also need plex steps starting from changes to budget classifications, some complete- to be overcome. MOF must find and establish mechanisms for supporting 12 13 the managers of each line ministry to ensure they have the right motiva- still in the early stages of development and positive impacts on the quality tion, capacity and resources to address these needs. of budget decision-making have so far been limited. implementation.of.medium-term.expenditure.Frameworks implementation.of.performance-based.budgeting Medium-term expenditure frameworks provide a link between the On the technical level, this study has identified many factors for suc- allocation of budget expenditures according to policy priorities and the cessful implementation of PBB concepts and methods. These start with fiscal discipline required by budget realities. Some of the concepts un- a logical, robust and transparent program architecture for budget ex- derpinning the MTEF also overlap with the PBB approach and help to penditures, to setting realistic and managerially-relevant performance improve program performance through better predictability in resource measures, through to more difficult and comprehensive changes in the flows to programs, planning beyond one year horizons and by managers management culture. These cultural changes involve particularly a firm searching for higher value of public money. understanding and acceptance, at each level of the budget organization, of Although formal adoption of MTEF’s is relatively new in Emerging the new results-oriented framework for allocating, managing and report- Europe, some elements of medium-term financial planning have been in ing on the use of budget resources. place for more than a decade. Nonetheless, this approach has brought a Regional experience has emphasized the importance of a sound pro- degree of rigor to most budget planning processes and some local adapta- grammatic structure as a basis for effective allocation and management tions to the basic methodologies have gradually developed. Learning to of resources. Well designed programs and sub-programs provide the es- allocate discretionary resources between competing spending agencies in sential linkages between policy, funding, and activities, and serve as the an informed and policy-relevant way over a multi-year horizon has been foundation for a successful performance-based budgeting system. Initial- demanding. There are still strong tendencies in most of the countries to a ly, most major programs have been designed to embody core functional degree of budget incrementalism. responsibilities and government policy objectives for each sector. How- Most countries in the region have developed their MTEF based on a ever, these program and sub-program structures have developed further three-year planning horizon (current budget year and two years beyond) over several years to provide a more accurate and informed framework though Poland expects to introduce a four-year financial planning process for expenditure policies and strategies and for performance measurement in 2009. The three- or four-year time frame seems a reasonable compro- purposes. mise between the value of longer term planning and the shorter periods With experience, each of the countries has come to appreciate the over which most government revenues and expenditures can be plausibly importance of realistic and measurable performance indicators. Initially, forecasted. For the region, longer term planning has proved especially dif- there was a tendency to concentrate too much effort on defining large sets ficult because these countries continue to face the need for large structural of possibly relevant performance measures and indicators, rather than changes in their economies. Moreover, as a consequence of the recent glo- defining a small set of indicators that are able to clearly and specifically bal financial crisis, forecasting of most economic and financial variables measure progress against the core policy objectives and strategies that has become much more complicated, even within a one-year horizon. government aims to achieve. Increasing attention has also been paid to Regional experience has indicated that successfully combining top- finding performance indicators that are comparable with those used by down and bottom-up budgeting processes depends in part on efficient other EU country members and which facilitate these regional compari- communication within government and on effective debates around sons. spending priorities. Without good communication, national policy objec- For these reasons, performance indicators that enable the budget and tives often receive little consideration in the resource allocation process line ministries to measure progress against clear policy objectives are im- and full transparency in decision-making remains problematic. portant. In most countries of the region, this performance information Slovakia, Turkey and Croatia are further along in their implementa- has so far not been well used, and it the process of improving perform- tion of MTEFs. In the remaining countries in the region, this reform is ance measures continues. Quality of information, and its effective use in 14 15 making better-informed budget management decisions, is much more 1 ..duration.of.the.reform.process important than quantity of indicators. Performance measures may point Country authorities adopting these reforms should be prepared for to strengths or gains in policy implementation, but also to areas of weak- a long implementation path – in truth, they are embarking on a process ness or inefficiency that need to be addressed and improved by budget of continual improvement in systems and performance. It is a complex managers. As in the more advanced countries, however, much more work learning process for all concerned. A number of obstacles are likely to be is required for the countries in this region to interpret indicator informa- encountered en route and the commitment of key stakeholders is required tion accurately and to use this information to inform future policy and to overcome these difficulties and ensure success. Similarly, the complex- budgeting decisions accordingly. ity of some aspects of these reforms can be easily underestimated. For Good indicators must therefore be carefully selected and information example, more attention needs to be paid to understanding how the con- on them must be accurate, timely and regularly monitored. The introduc- cepts and tools of performance budgeting need to be applied at different tion of performance-based budgeting practices requires a basic capability stages of the budget process, such as at budget formulation and execution. for data and information collection and reporting. There must be an un- derlying acceptance of the need for good information within sectors and 2 ..leadership. robust technology for collecting and analyzing it. Systems for achieving Strong leadership, backed up by political commitment and consen- this performance reporting function need to be established in each line sus, are essential for sustaining budgetary reform. Without this, there ministry. However, some proposals for combining performance monitor- are inevitably weaknesses in the link between the government’s strategy ing and reporting with the development of a modern integrated finan- and the budget, including the effects of historical inertia in spending al- cial management and information system (IFMIS) for improved financial locations that can reduce the focus on new and more important strate- management purposes have proved overly ambitious and unnecessarily gic priorities. It is particularly useful to have key individuals in multiple complicated. ministries champion change, both initially and to sustain momentum. Full understanding and acceptance of the new performance orienta- Pressure from the general public for better services and more effective tion within the public sector is still to be achieved in most of the coun- spending is especially helpful. Voters demand high quality public serv- tries covered by this study. Gains made so far in these six countries have ices and governments must deliver these in order to justify the associated been useful, but remain tenuous. Existing practices and staff expectations level of taxes. Support based on a broad consensus throughout policy and in the form, especially, of lifetime tenure, seniority-based promotion and technical circles is desirable if it is to last through the inevitable changes salaries and limited managerial flexibility and accountability create a diffi- of government. The reforms need to have broad support, based on an un- cult environment for the introduction of performance concepts. New and derstanding they are an essential part of public sector modernization and improved budgetary arrangements require changing many of these insti- efficiency, and thereby good for the country. When overly identified with tutional rules and practices within government, as well as building new one party or group, they risk being abandoned when the next group as- managerial and analytical capabilities in MOF and the spending agencies. sumes office2. IV. Lessons from the Region This study of six countries in Emerging Europe has produced a number of potentially valuable lessons in the design and implementation of budget reforms. As well as helping these countries progress their re- form programs, these lessons may be valid for other countries entering, or perhaps just considering, similar developments in their public financial In many Asian countries, such as Indonesia, great emphasis is placed on ‘socializing’ reforms, 2 management systems. meaning widespread engagement inside and outside of government with key stakeholders, so all come to a similar understanding of the problems to be addressed, options for redressing the prob- lem, and the way forward. This assures broad consensus on the reform, and getting all stakeholders involved in the solution and implementation. 16 17 3 ..experience.and.enthusiasm 6 ..recognizing.complexity.and.complementarity.in.the.reforms. Within the public sector, it is important to create, maintain and en- Each reform may have a number of technical dimensions that are courage a core group of ‘modernizers’ supporting the endeavors of policy- closely linked with other parts of the reform and with other new concepts makers. This includes offering them and their institutions relevant train- and methods for improving budget management. Even the implementa- ing opportunities. This group may comprise highly qualified younger civil tion of an effective MTEF may raise many challenges to existing capabili- servants open to modern methods in budgeting and who understand the ties and systems, including requirements for:3 changes needed to implement them. Having at least one lead organization •. Good. macro-economic. policies. and. reliable. forecasting. –. other- with capacity and experience in managing the introduction of a particular wise the credibility of the MTEF is diluted. aspect of these reforms – such as performance measurement – can be very •. Adaptable. fiscal. policy. and. instruments. – projected spending beneficial for advising and consulting other agencies. must conform with available resources. •. Reprioritization.and.reallocation – the MTEF should be used to 4 ..relevant.skills,.capacities.and.employee.attributes. enhance alignment between budget policies and resources. Building the required skills and capacity in MOF and other agencies is •. Budgetary.discipline.–.budget allocations must be based on a hard another important element for achieving systemic, as opposed to cosmet- aggregate budget constraint, distributed among line ministries. ic, change. Budget management skills necessarily comprise new technical knowledge (macroeconomic and policy analysis and sector modeling ca- •. Institutional.conformity – the MTEF must be widely understood pacity) as well as managerial and interpersonal problem-solving abilities. and adopted as the core framework within which all, or nearly The public management environment should motivate self-development all, government expenditure decisions are made. and capacity building among employees, while emphasizing new levels of •. Appropriate. parameters – these include definition of aggregate professional and personal integrity and commitment. expenditure, the relationship between sectoral needs and the government’s organizational basis for appropriation, the content 5 ..A.well-staged,.comprehensive.and.consistent.approach of expenditure envelopes, price level assumptions for estimating It may sound obvious but getting the basics right is essential for suc- future expenditures and mechanism for incorporating these pa- cessful implementation of any advanced public expenditure reforms. rameters into the annual budget process. This requires carefully identifying the shortcomings of the current pub- •. Transparency – this includes both fiscal. transparency concern- lic financial management process and developing a logically-sequenced ing the structure and functions of government, fiscal policy limi- program for introducing new and improved methods and systems. This tations and constraints, public sector accounts, and fiscal pro- program needs to incorporate both the technical changes associated with jections, and policy. transparency concerning the government’s PFM reforms – revised budget classifications, new chart of accounts, pro- budgetary objectives and intentions for social and economic de- gram and sub-program structures etc – with organizational reforms in velopment. It also refers to accounting and reporting for actual and across many public spending units, as well as engage policy-level of- performance in ways that link expenditures made to the quality ficials to enable them to understand and use the information and tolls and quantity of outputs and results achieved. available. 7 ..technical.challenges Implementing PBB and MTEF approaches involve a number of tech- nical challenges. Two particular issues that confronted the six regional countries were: Seok-Kyun Hur, 2004, Successful.Installation.of.MTEF.to.the.Korean.Fiscal.System, Korea Develop- 3 ment Institute. 18 19 • Achieving alignment between outputs with outcomes was prob- 9 ..ensuring.managers.can.apply.the.new.methods lematic. This was due to limited initial understanding of the dif- As noted by Chevauchez5 (2001), the most difficult task is often not ferent concepts involved and, in some cases, due to reluctance the technical design, but how ordinary members of the public sector may and diffused responsibility for the monitoring and achievement apply it. While some technical design aspects can be delegated to external of outcomes. consultants, this is usually not the case for application of these concepts • Integrating the information systems of multiple ministries and and tools which are placed directly into the hands of budget managers. agencies is necessary to provide more reliable and complete in- In France, regular contacts between the Ministry of Finance and budget formation necessary for these reforms. Reviewing the technical managers enable views and proposals to be exchanged on technical topics character and limitations of the existing IT system, as well as de- and joint exploration of various ideas and solutions. signing capabilities for the incorporation of new budget infor- mation and management needs, require not only specialist skills V. The Challenges Ahead but an effective processes for identifying, discussing and speci- Despite their difficulties, each of the countries covered in this study fying new needs. These additional demands must be applied in is pressing ahead with implementing these advances in public financial an environment in which the annual process of budget manage- management. In each case, they are evolving toward improved levels of ment is on-going and where other demands on PFM informa- understanding and application for both MTEF and PBB. They are achiev- tion systems – such as those associated with new EU funding or ing this through a combination of persistence, trial and error and local fiscal devolution – are growing and changing. innovation. At the ‘end’ of this evolutionary process, each system will un- doubtedly be unique and should reflect and support each country’s spe- 8 ..building.confidence.and.understanding cific governance and institutional structures and management needs. Building understanding of and confidence in the reforms among However, the road is a long one and the experience of other more public servants is essential. This requires sustained learning opportunities advanced administrations suggests that as the reforms develop, so also do and effective incentives for human development and to help overcome the professional competencies of budget managers and their expectations tendencies for bureaucratic resistance and inertia. Excellent communica- of even better performance. The roadmap for reform must be realistic but tion is also required with politicians as public finance reform is often a there is no end to the degree to which improvements are possible. Con- technical and complex field. It can be a challenge to help politicians, for stant improvement is the aim, even for those few countries which have example, understand the link between these technical reform issues and already made considerable progress. Successfully linking the human and the modernization and improvement of public services (which is what technical dimensions of these budget reforms to a strong political agenda they are really interested in) such as in the revision of budget classifica- for improved public sector performance remains essential to their suc- tions or the introduction of accrual accounting. Specialist schools for cessful development. public administration have an important role to play and can bring much- needed international experience and perspectives to local issues. Even so, variability in the quality and speed of reform implementation is unavoid- able across different institutions. This diversity is often apparent at many stages of the implementation of performance-based budget framework.4 4 Petrie M. and Webber D. (2001), reviewing the New Zealand’s experience, sug- Chevauchez B., 2001, Government. Budgeting. and. Accounting. Reforms. in. France, Ministry of Fi- 5 gests that uneven performance might result from over-extension of the supply nance of capable senior managers. They also noted considerable variations across de- France, Paper for Conference Government. Budgeting. and. Accounting. Reform. Symposium, Beijing, partments in the quality of policy advice on budget issues. China, April 11-12, 2001. 20 21 Chapter 1. PFM reforms – learning from Global lessons Mario Sangines Democracy challenges governments to be transparent and account- able in their use of public funds. Minimum standards for ensuring legal expenditure of approved budgets are no longer sufficient. Authorities must implement management practices – some of which have long been applied by the private sector – that ensure maximum value for money and align budgets with national priorities. This has proven a tall order for developing and developed countries alike. Well-meaning reform agendas are often hindered by changes in gov- ernment, competing policy agendas (generally in more politically prof- itable areas) and limited understanding of key budgeting concepts. This chapter explores lessons learned from performance budgeting reform in other parts of the world and attempts to make them relevant to reform efforts in Emerging Europe. We make a distinction between program-based performance budget- ing and everything else. This distinction is useful because, first, program- based budgeting is a systemic reform that seeks to overhaul the entire budget cycle by introducing new classifications, indicators, and evaluation processes that feed back into budget preparation6. Other more specific ini- tiatives, such as investment, staffing and procurement, can be applied to certain parts of the budget cycle. Second, many practitioners believe true performance budgeting can be obtained only through a systemic over- haul, starting with implementation of program budgeting. Making this distinction may help clarify the relative importance of program budgeting in the overall picture. We will look at program-based budgeting and then explore other tools for enhancing performance. During the 1960s the United States (US) was a pioneer of budget re- form when it designed programs around organizations’ service delivery frameworks and assigned resources according to program structures. This was an important step in linking expenditure to outputs. It promoted a holistic view of public expenditure in relation to public policy objectives. Attempts at implementing similar methods of program budgeting in other parts of the world have had mixed success and some countries still strug- gle with the complexities of applying a program structure to their budgets. There are cases where program structures have been applied selectively in certain parts of the bud- 6 get but they are the exception rather than the rule. 23 One reason for this struggle, as we will discuss later, is that many •. Enhanced. communication. between. budget. actors. and. with. citi- countries try to implement budget reforms without dismantling or even zens. Performance budgeting clarifies program goals and ob- disrupting existing budgeting practices. This results in a motley collection jectives and identifies performance targets, giving agencies and of classifications and other information that is difficult to analyze and in- employees a better sense of expectations of their performance. It tegrate. There are other reasons that make implementing program budg- helps public managers communicate more effectively about their eting difficult, such as unrealistic expectations and poor understanding activities to the executive, the legislature, and the public. of the information requirements and responsibilities, and we will look at •. Improved. management. in. government. agencies. Performance these later in the chapter. budgeting reform can help program managers specify organi- Applying a program-based budgeting framework is a systemic ap- zational goals, monitor program performance, maintain better proach towards improving efficiency and effectiveness in public service knowledge of problems with program structure and operation, delivery. It is systemic because it implies substantial reform to most as- plan for the future, improve internal control, and communicate pects of public expenditure management (PEM), including the way the program results. budget is classified, the type of information that needs to be gathered and •. More.informed.budgetary.decision.making. Performance budget- analyzed, the accountability structures for results, and the accounting ing may not rationalize and transform the political budgeting framework, as well as the type of external oversight by the legislature and process but it adds value to deliberations. This is because perfor- the state, or supreme, audit institution. mance information is taken into account when funding levels are Systemic approaches such as this are not, however, the only way to decided. promote effectiveness and value for money in managing public expendi- •. Higher.transparency.and.accountability. Performance budgeting ture. Chile, for example, has deployed program budgeting only recently classifies resources by programs and presents performance in- and selectively; most of its efficiency gains have been achieved through dicators, making it much easier for the public to get a sense of efficiency-enhancing tools that include sound project and program evalu- major government activities and their achievements. ations and management improvement programs. Chile’s program evalua- An integral part of many current reforms is the development of a tions resulted in a zero-based budgeting exercise for each program, allow- framework to assign expenditures over the medium-term, usually three ing both the implementing agency and the budgeting office to thoroughly years. If expenditure allocations can be linked to outputs, and public review every aspect of the program and, where necessary, adjust objec- sector entities have some idea of what outputs they wish to produce tives and resource requirements. over a medium-term, it makes sense to assign expenditures over the Determining the degree to which a reform strategy combines these medium-term as well. Government authorities should be able to visu- elements depends on each particular setting. As noted by Levy (2007), alize an overall budget envelope for a medium-term horizon based on there is a compelling case for combining systemic reforms “with more sound macroeconomic forecasting and, depending on policy priorities, targeted efforts – within individual sectors and across sectors – to identify determine trade-offs between sector allocations. Implementation of Me- high-return investment opportunities, plus opportunities for freeing up dium-Term Expenditure Frameworks (MTEF) has attempted to provide resources locked into low-return activities�. Whichever path is chosen, it tools for this but has often fallen short of expectations. Although the must be done for the right reasons and with full understanding of the underlying concept of an MTEF is sound and relatively simple, there is technical and political challenges to be overcome for its success. disagreement among practitioners about what it looks like in practice External pressure by donors, or the need to reduce public expendi- and what the necessary conditions are for it to be successful. We will tures, is generally an inadequate reason for embarking on a performance address some basic elements of the MTEF in this chapter and discuss its budgeting reform. As Shah and Shen (2007) have noted, advantages of challenges and shortcomings. PBB that constitute valid motivations are: 24 25 1. Fundamentals of PFM Reform and Sequencing universal.agreement,.in.principle,.that.the.basics.must.be.right.before. pFm.reform,.as.a.general.concept,.is.a.driving.force.behind.pub- moving.on.to.more.advanced.reforms. For example, Schick (2008) em- lic. sector. modernization. in. advanced. and. developing. nations. alike. phasizes that a well-functioning annual budget must be in place before In its most basic form, PFM reform can help countries emerging from a thinking about MTEFs. Others argue against accrual accounting before major crisis (such as a hyper-inflation) establish basic rules and systems cash accounting is fully reliable, or against any type of budget reform be- for budgeting and expenditure control, with a focus on macroeconomic fore expenditure can be tracked under the key classifications (economic, stability and monitoring of key fiscal aggregates. In this context, PFM re- functional and organizational). form may entail strengthening the operational capacity of the central fis- unfortunately,. this. universal. agreement. is. only. in. principle . In cal authority and its links to revenue agencies. As fiscal aggregates come practice, countries often move ahead with reforms that are in vogue with- under control, measures can be put in place to promote greater efficiency out ensuring the basic building blocks are in place. It is often the interna- in the allocations of expenditure – that is, to align the budget with public tional development community that encourages countries to move in this policy priorities, coupled with some degree of monitoring of the outputs direction, without proper regard for the institutional underpinnings and produced. It is often at this stage that countries consider migrating from a the sustainability of the reforms. For example, countries that implement line-item to a program-based budget, as well as establishing basic moni- Poverty Reduction Strategy Papers (PRSPs) are often required by donors toring and evaluation capacities; in some cases, medium-term budgeting to undertake medium-term expenditure frameworks, often without reli- frameworks are also introduced. able annual budgets or even stable macro-fiscal aggregates. This is a risky many. authors. have. emphasized. the. importance. of. getting. the. approach that in the long run has limited benefit. sequencing. right. The ‘platform’ approach that has been used in some World Bank projects identifies stages that ought to be followed sequen- 2. Systemic Approach to Performance Budgeting tially in a long-term PFM reform process. The following is the example of According.to.robinson.(2007).there.are.four.fundamental.mecha- Cambodia, as presented by Taliercio (2008): nisms.operating.under.performance.budgeting.frameworks: •. Platform.1:.More.credible.budget. (i) Comprehensiveness and in- • Program budgeting, which uses information about the costs and tegration of the budget; (ii) Strengthen macro and revenue fore- benefits of objective-based (program) expenditure categories for casting; (iii) Streamline spending processes. expenditure prioritization. •. Platform. 2:. Effective. financial. accountability. (i) Re-design ac- • Funding-linked performance targets which seek to link the level counting and budgeting classification and coding system; (ii) of funding to results targets – that is, to quantitative statements Initial design of Financial Management Information System of the output and/or outcome the agency is expected to deliver. (FMIS) for core processes; (iii) Define leadership and standards • Agency-level budgetary performance incentives to motivate for internal audit function. agencies to perform better by rewarding them financially for •. Platform.3:.Fully.affordable.policy.agenda.through.policy-budget. good performance (and possibly also financially sanctioning un- linkage. (i) Re-design budget cycle and responsibilities (e g in- satisfactory performance). clusion of MTEF); (ii) Program-based budgeting and budget • Formula funding in which funding provision is made an explicit analysis; (iii) Explore options for fiscal decentralization. function of measures of expected and/or actual results (usually •. Platform.4:.Effective.program.performance.accountability. (i) Ini- outputs, but sometimes outcomes). tial design of full FMIS; (ii) Development of an IT management program.budgeting,.or.some.variation.of.it,.has.often.been.used.as. strategy; (iii) Initial design of asset register. the.vehicle.to.implement.a.systemic.performance.budgeting.reform. In Although.there.may.be.disagreement.over.specific.elements.of.the. traditional, line-item budgeting, budget organizations identify the inputs strategy,. or. the. fact. that. some. key. and. controversial. aspects. of. pFm. required for their operation during the fiscal year and present their budget reform. are. not. addressed. here. (such. as. accrual. accounting),. there. is. estimates in a standard classification, without any reference to the outputs 26 27 expected to be produced. In some cases, such as Colombia, the budget is implementing. a. program-based. budget. Remarkably, after nearly 50 by organizations and line-items but information on performance is pre- years of accumulated experience in its implementation, there are few cases sented in parallel, without any clear impact on the actual budgetary al- where program budgeting works exceptionally well. This raises the ques- locations. This is usually referred to as Performance-Reported Budgeting tion of whether or not there is a fundamental flaw in the program budget- (PRB). ing philosophy or if we are all collectively very bad at learning from oth- There. are. cases. in. which. performance. information. informs. the. ers’ experiences. What is certain is that implementing program budgeting budget.process.but.isn’t.used.as.a.major.factor.in.allocation.decisions. presents political, institutional, and technical issues that are not easy to (Shah, 2007)..This type of budgeting, called Performance-Informed Budg- overcome. Before exploring some of the typical pitfalls in its implementa- eting (PIB), may signal either a major shortcoming in a budgeting proc- tion, let’s look at a stylized example of a program-based budget (Figure 1). ess meant to have strong influence from performance information, or a Figure 1. An Example of a Program Structure characteristic of a more advanced system that, by design, may not want performance information to directly influence actual allocations. Chile is Program II Program III an example of the latter, where reliance on other tools for efficiency gains Secondary Education Tertiary Education has more weight over performance budgeting per-se. This case will be dis- Program I cussed in greater detail in the following section Chile hasn’t implemented Primary Education a complete program budgeting structure but is applying it selectively in a Subprogram 1 Subprogram 2 few organizations. Australia has PIB with an accrual-based outputs and Primary Education in Urban Areas Primary Education in Rural Areas outcomes budgeting and reporting framework (Shah, 2007). Activities Projects program. budgeting. is. a. more. relevant. tool. when. performance. (Current Expenditures) (Capital Expenditures) information.is.a.more.important.(although.not.the.only).element.for. deciding. allocations. Performance-based Budgeting (PBB), where per- Sub-Activity A Works a formance information may play an important role in determining and re- porting on resource allocation, can take advantage of a budget structure Sub-Activity B Works b that groups expenditures in output-generating units, thereby enabling a close match between outputs and inputs. This approach sometimes views the organization rather like a ‘production chain’ with expenditure activi- Sub-Activity C Works c ties ideally matched to public service delivery targets set within a strategic planning process. However, the process by which performance informa- Source: World Bank staff tion is used to inform and adjust budget allocations is not mechanical and may not even be fully explicit; other factors, such as policy shifts or budget A.simplified.approach.to.transition.from.a.line-item.budget.to.a. rigidities, may have an equally important effect on expenditure. program.budget.would.normally.entail.the.following.steps7: cases. where. performance. information. actually. determines. allo- • Define exactly what is understood by a ‘program’. Typically, a cations. by. an. explicit,. formula-like. mechanism. are. rare. and. should. program is a coherent set of activities and projects that collec- be.discouraged.because.they.have.a.simplistic.view.of.fiscal.policy.in. tively produce units of output relevant to strategic planning. Fur- which.no.other.factors.play.an.important.role . This type of budgeting is ther elaboration of the definition may be necessary in particular called Performance-Determined Budgeting (PDB). Few, if any, countries cases. have been able to implement this approach successfully. regardless. of. the. particular. point. in. their. evolution,. most. ad- For a more complete discussion, see From.Line-Item.to.Program.Budgeting:.Global.Lessons.and.the. 7 vanced.pFm.reform.efforts.have.at.some.point.or.another.considered. Korean.Case. Kim, John, Editor. The World Bank and Korean Development Institute. 2006. (Avail- able at: http://www1.worldbank.org/publicsector/pe/bookprogrambudget.pdf). 28 29 • Define the typical program structure to be used. One example is • Information overload. This can mean either a surplus of infor- Program-Subprogram-Activity/Project-Sub-activity/Task. mation that isn’t used, or excessive requirements for information • Determine the set of entities where the methodology will be ap- that cannot be fulfilled. plied. It is advisable to understand up front that a program struc- • Immeasurable indicators. Avoid indicators that are excessively ture may not be relevant for all organizations. qualitative, have no baselines, or can only be measured at great • Define virement authority8 at each level of the program struc- expense. ture. • Adding on a program classification as an informational annex • Carry out individual functional reviews of each budget organiza- to the budget without any real effect on budget implementation. tion and identify the corresponding program structure. Although This has been observed, particularly in countries where the Min- it is possible for programs to be implemented by more than one istry of Finance hasn’t lead budget reform, so the budget process entity, it is advisable for the sake of simplicity and accountability continues as usual. that programs remain within a single budget organization. • Lack of political interest. A proper program budget may high- • Identify the units and indicators to be used to monitor perfor- light a government’s accomplishments but may also reflect its mance, and decide whether or not only outputs will be moni- shortcomings. Also, budget reforms are not generally in the fore- tored, or if outcomes will also be measured. front of the political agenda. • Define baseline indicators and establish lines of responsibility for • Making things too complicated. Start with a selected group of collection, processing and auditing of performance information. institutions and a manageable amount of indicators. Some coun- tries have, unwisely, tried to launch a performance budgeting • Ensure proper institutional capacity in the Ministry of Finance system using, simultaneously, as many as1000 indicators. and line ministries to carry out relevant budget evaluation. • Excessive budgetary and administrative rigidities. Irrespective of • Establish or modify existing financial information systems so the classification used, any reform aimed at improving alloca- they can implement a program-based budget and collect perfor- tive efficiency will have limited success if there are budget rigidi- mance-related information. Ideally, they could facilitate analysis ties, either legal (protected programs, earmarked revenues) or de as well by producing reports on, for example, unit costs. facto (high share of debt servicing, transfers and pension pay- • Train organizations, and other stakeholders such as external au- ments). These restrict the ability to redirect resources. ditors and Parliament, on how to budget by programs and on the • Fuzzy responsibilities for program implementation. A tenet of potential uses of available information. program budgeting is that a program classification does not countries. may. need. to. add. additional. steps. to. this. roadmap. or. necessarily match the organizational classification of the entity. skip. some. altogether. A detailed roadmap that considers all the above This can be problematic if there is no clear accountability of who items should be prepared and, to avoid potential pitfalls, should tap into manages the sub-programs, activities etc. global program budgeting experience. Some pitfalls identified so far are: • Separated current and capital budgets. Proper integration of cur- • Poor understanding of basic concepts. It is essential that every- rent and capital budgets is essential for both to be reflected in one involved shares the same understanding of programs, proj- the program structure and provide a full picture of expenditures ects and activities etc, and of relevant institutions’ relative roles, associated with service delivery9. and how performance information will be used to affect alloca- tions. 9 The actual costs of service delivery in a program framework that integrates current and capital ex- penditures will be seen only if accrual budgeting is applied. Under traditional cash-based budgets, That is, the bureaucratic or political level at which transfers between approved budget allocations 8 integration of current and capital expenditures in a single program structure will yield ‘lumpy’ may be authorized during budget implementation. service delivery cost estimates, as actual capital budget implementation is lumpy itself. 30 31 kim.(kim.et.al,.2008).identified.the.following.three.key.principles. a viable alternative10. In any case, it is essential to look beyond program for.adopting.program.based.budgeting.in.south.korea: budgeting and focus on a broader array of performance instruments that • A program cannot span multiple ministries. has evolved over the last few decades. • All activities with the same policy objective must be grouped un- der a single program, regardless of revenue source. 3. Developing a Toolkit for Improved Performance • Programs must be clearly differentiated from one another both program. budgeting. can. increase. value-for-money. in. public. ex- in policy objective and program name. This includes a strong penditure.but.it.is.not.the.only.instrument.available. In a sense, per- preference for maintaining programs within a single ministry formance budgeting is about building a toolkit for efficiency gains across appropriation, based on experience where the lines of account- public service delivery, of which program budgeting can be one compo- ability and management became unclear within some cross-cut- nent. Ideally, implementing program budgeting is accompanied with as ting programs. many of these other tools as possible. The tools used will depend on a country’s particular context but there is abundant international experi- chile.successfully.manages.programs.implemented.in.more.than. ence to enable any country undertaking budget reform (or more broadly, one.ministry.through.a.system.of.outsourcing.service delivery from one public management reform) to start with a menu of options which sup- ministry (which is the head of the function and program and receives the port its strategy design. In Chile, this performance-enhancing toolkit has full budgetary allocation for its implementation) to another which may been in constant development for more than 30 years (Marcel, 2007) and be better suited to delivering the service. This works well as long as the we look at this in the next section, showing components of the toolkit of subsidiary agreement is clear and overall leadership and accountability for relevance to Emerging Europe. program outcomes remain with the ministry responsible for the function. in.summary,.program.budgeting.can.be.a.useful.tool.for.organ- 3 .1 ..enhancing.capital.expenditure.efficiency. izing.public.expenditure.by.outputs,.establishing.cost.benchmarks.and. eventually. affecting. appropriations. based. on. actual. service. delivery. good.quality.capital.spending.decisions.are.essential.for.improved. targets. For some, it is the backbone of a systemic performance budget- public.spending . In the six countries included in this study, public invest- ing system that truly affects the budget. Some countries apply the funda- ment ranges from 1.9 percent of GDP in Slovakia to 7.8 percent of GDP mental concepts but change the name or simplify or expand the standard in Croatia (2007 data). Much of this investment flows through a public classification structure. The common thread is establishment of a frame- investment cycle inside each country, where guidelines for project identi- work for clustering public expenditure along identifiable production units fication, preparation, appraisal, and budgeting need to be followed before which are expected to produce a measurable quantity of a particular out- the project finds its way into the public budget. If the technical quality and put. Ideally, these units should have clear lines of accountability. comprehensive application of the process fails, a potentially large amount of public expenditure could go to waste. Unfortunately, not only are pub- A.question.not.yet.fully.answered.is.whether.or.not.program-based. lic investment institutions and processes often weak, political interference budgeting. is. an. essential. condition. for. implementing. performance- frequently finds its way into public investment decisions, further under- based.budgeting. For some, they are one and the same thing. Unless the mining what little rigor the institutional cycle may have11. This is most budget is organized in a way that clearly reflects the production function important in countries emerging from central planning, where a culture of each entity or sector, with expenses properly correlated and measur- 10 A strict across-the-board application of all program budgeting elements is generally undesirable. able indicators established, there is no way to achieve accountability for There will be certain institutions where measuring performance may not be relevant or interesting, results. Recent experience shows that a selective use of program budgeting and where pushing for full application of program budgeting may lead to situations that discredit coupled with targeted efficiency and effectiveness enhancing tools can be the technique. 11 Public expenditure, including investment, is, essentially, an instrument for implementing a public policy agenda and it is impossible to expect full isolation of the investment process from external political influence. Politically encouraged projects will always have a better chance of finding their way into the budget but certain safeguards can be put in place to prevent major investment mis- takes. 32 33 of promoting investments for mostly political or strategic reasons has to since.the.early.1970s,.chile.has.established.clear.institutional.ar- evolve to one that incorporates technical, social and economic standards rangements.and.technical.criteria.for.evaluating.projects. Its National in a framework of sustainable development. Investment System (NIS) seeks to “provide public authorities with a plen- establishing. a. technically. sound. and. reliable. public. investment. tiful portfolio of good investment projects so they can choose those suited process.is.an.effective.way.to.make.public.expenditure.more.efficient. as more convenient for society as a whole�. Projects need to “comply with It is regrettable that countries with significant development challenges quality standards in terms of elaboration, evaluation and analysis, and are have, in their capital stock, public hospitals running at minimum capac- controlled and monitored according to uniform and transparent rules and ity for lack of doctors (or excess hospital bed capacity), roads unusable with adequate democratic participation of both the public institutions and for improper prevision of maintenance costs, or infrastructure built for a the organized community or civil society� (Mimica, 2008). These uniform particular purpose (such as a sports event) that is not financially viable. and transparent rules have four characteristics: Despite the emergence of public-private partnerships (PPPs) to relieve the • a set of go/no-go criteria at the idea, profile, pre-feasibility, and public sector from some risks (though perhaps not as much as one would feasibility stages expect), improper project design remains a major issue to be addressed in • key role by the Ministry of Planning to approve projects based efforts to improve the quality of expenditure. on objective criteria, including a positive economic net present ireland.offers.a.good.example.of.a.sound.project.cycle ..In 1996, as value (i.e. NPV>0) part of its drive to improve the project cycle being promoted by the EU, • oversight, by the Ministry of Finance, of cost estimations for ex- Ireland established an Independent Evaluation Unit under its Ministry ecution, construction and operation. of Finance. In 2005, this unit issued new capital appraisal guidelines that form the backbone of a sound evaluation process. This process, which 3 .2 ...undertake.periodic,.technical,.. provides a valuable reference point for countries establishing or strength- and.thorough.reviews.of.programs ening public investment departments, includes: programs,.in.this.context,.can.mean.the.concept.described.above. • Ex ante appraisal of all capital projects, with the methodology as.used.in.program.budgeting.or.any.other.identifiable.cluster.of.ac- dependent upon the size of the project. These go from simple as- tivities.and.associated.expenditures.that.play.a.definable.role.in.pub- sessments for those under 0.5m Euro to full cost-benefit analysis lic. policy. In the United States, the Office of Management and Budget for those of more than 30m Euros. (OMB) has established good practice in this area through its Program- • The sponsoring agency is responsible for appraisal, but the sanc- Assessment Rating Tool (PART). The purpose of PART is to: tioning authority has to give its approval. • measure and diagnose program performance • Projects fall within a rolling five year envelope, in place for all • evaluate programs in a systematic, consistent and transparent investment areas, and the following steps are clearly identified: manner - definition of project needs and objectives • inform agency and OMB decisions for management, legislative - options analysis or regulatory improvements, and budget decisions - identification of constraints • focus program improvements and measure progress (making - quantification of costs comparisons with prior year ratings). - analysis of options This process enables evaluation results to feed back to four distinct - appraisal techniques (cost benefit analysis, cost effectiveness stakeholders, allowing each to use the information for their own purpose. and multi-criteria analysis) These stakeholders are the President, to inform budget decisions; Con- gress, to influence appropriations, authorizations, and oversight; the Ex- - analysis of uncertainty, risk and sensitivity. 34 35 ecutive Branch, to share best practices; and finally, the public, who are dures are sufficiently flexible to enable mangers to manage will be more informed of such evaluations through the expectmore gov website. capable of redirecting efforts towards performance-enhancing measures in.chile,.reviews.are.undertaken.to.ensure.programs.remain.rel- than another where managerial leeway is more restricted. evant,. independent,. timely. and. transparent. Programs are selected chile. is. in. the. enviable. position. of. running. a. structural. surplus. jointly with Congress and evaluations are performed by independent and.having.highly.qualified.civil.servants.as.well.as.oversight.institu- evaluators selected by public tendering, and followed with formal agree- tions . These institutions – such as the broad Civil Service and the Budget ments between the Directorate of the Budget and the executing unit. Directorate in particular – are empowered and well equipped to lead im- These agreements are extremely important and their implementation is plementation of an incentives framework. Countries that do not (yet) en- closely monitored. Under this framework, three types of evaluation are joy these advantages can still benefit from lessons learned through this conducted (Marcel, 2007): process and set future targets for its gradual deployment. • Program reviews which (i) review consistency in design, ex- in.1998,.chile.implemented.the.management.improvement.pro- ecution and reporting; (ii) are based on the logical framework grams. (mip). through. which. annual. bonuses. are. paid. to. staff. on. the. methodology; (iii) are performed by panels of three independent basis.of.the.agency’s.progress.against.goals.in.seven.key.management. experts; and (iv) issue final reports in six months. areas . These areas are human resources, customer service, strategic plan- • Impact evaluations which (i) assess program effectiveness on ning and management control, internal audit, decentralization, financial the basis of impact measures; (ii) use a methodology of exten- management, and gender focus (Marcel, 2007). Each agency establishes sive data collection, sophisticated evaluation techniques, control benchmarks in agreement with the Budget Department and results are groups; (iii) are performed by consulting firms or universities; reported to Congress as part of Comprehensive Performance Reports and (iv) issue final reports with 12 to 18 months. (CPR). As of 2007, 75 percent of staff was receiving the maximum bonus of 10 percent of their salary. This example demonstrates the feasibility of • Comprehensive expenditure reviews which (i) assess the con- combining institutional performance targets with individual monetary sistency of the ministry/agency portfolio of programs; and (ii) incentives, as well as good practice in benchmarking key areas of public search for duplications, inconsistencies and opportunities to service delivery and establishing clear lines of accountability to Congress. generate synergies and savings. mechanisms. can. also. be. developed. to. provide. incentives. to. the. 3.3. Establish an incentive system to encourage good performance institution. itself .. These include access to additional budgetary funds designing. a. framework. that. provides. tangible. incentives. for. good. or greater autonomy in its management in exchange for improved per- performers.in.the.public.sector.is.a.major.challenge.in.public.manage- formance. In addition, an objective and public process of evaluating in- ment . Should incentives be institutional or individual? How can the per- stitutional performance can place institutions under pressure to perform, formance evaluation system remain objective, impartial, and technical? thereby creating reputational risks for managers if their organization falls Where do we find the resources to pay for the incentives? Are there only into the lower tiers of performance. The specific instrument needed to de- incentives for good performers, or are there also punishments for poor liver these incentives for the institution to perform better may vary. Chile, performers? Is the expectation of an additional monetary reward compat- for example, has established a bidding fund that is allocated to innovative ible with the philosophy of public service? programs on the basis of quality and consistency of bids from ministries, These.are.questions.that.are.answered.differently.in.different.set- which fosters a culture of quality management and accountability for re- tings,.in.part.depending.on.the.public.management.tradition.and.fis- sults. As of 2007, 10 percent of government expenditure was allocated cal.position.of.the.country.in.question. A country that runs a structural through this fund. surplus policy can afford a monetary compensation scheme much more easily than one undergoing fiscal adjustment. A country with a tradition of measuring performance will have an advantage over another focused only on stewardship and legality. A country where administrative proce- 36 37 3 .4 ..design.systems.to.foster.political.accountability.for.results. ministry receives a resource envelope for the MTEF period as well as the Although.not.directly.linked.to.budget.decisions,.some.countries. agreed expected outputs and/or outcomes for their sector. The sector min- have.established.systems.that.allow.citizens.to.monitor.in.detail.fulfill- istry then prepares its annual budgets under this envelope and monitors ment. of. government. programs. and. the. associated. costs. of. achieving. agreed performance indicators. An MTEF is a natural complement to a them . To the degree that governments are willing to be publicly account- performance budgeting framework because it provides a limited, but re- able for the promises made, such systems can be a powerful incentive for alistic, timeframe within which most programs can be properly imple- public sector managers to be aware of their performance and be creative mented and have some of their impacts measured. about ways to enhance it, as well as for strengthening citizen oversight and As.a.second-generation.reform,.implementation.of.an.mteF.pre- democratic accountability. supposes. that. certain. basic. building. blocks. are. already. in. place. The colombia’s.national.system.for.evaluation.and.management.for. establishment of an MTEF can be seen as a final step in bringing together results. (sinergiA). is. an. interesting. case. Headed by the National functional systems of macroeconomic planning, strategic planning, and Planning Department, SINERGIA was started many years ago as an in- sound annual budgeting. Unfortunately, many countries (with the encour- ternal system of agreeing performance targets with individual entities and agement of development partners) have used the label MTEF for reform monitoring the outcomes for feedback. The system was initially plagued programs that incorporate many other basic reforms in annual budgeting. by an overabundance of performance indicators, minimum visibility and MTEF has thus become a catch-all acronym for any type of budget re- no real consequences for performance gaps but it has evolved into an in- form that includes development of a medium-term budget outlook, even formation platform that allows: if it requires (or worse, ignores) first-generation reforms in areas such as budget classification, accounting, or institutional planning12. LeHuerou • the President to use the system to monitor the commitments and and Taliercio (2005) raised this problem when they stated that an MTEF performance of his ministers had become a necessary condition for budget reform. • an annual report of the President to Congress, outlining achieve- A. review. of. mteFs. by. the. international. monetary. Fund. (imF). ments in public policy and associated costs the public to access concludes. that. “developing. comprehensive. [mteFs]. can. be. effective. the information via the DNP website. when.circumstances.and.capacities.permit . Otherwise, it can be a great Although there is much to be done to build a formal feedback proc- consumer of time and resources and might distract attention from the ess into the budget cycle, SINERGIA is a good vehicle for introducing a immediate needs for improving the annual budget and budget execution performance-oriented culture in the public sector. processes� (Levy, 2008). so,.what.are.the.preconditions.that.ought.to.be.in.place.before.the. 4. Medium-Term Expenditure Frameworks (MTEF) implementation. of. mteF. is. attempted? According to the IMF (Levy, An.element.present.in.most.advanced.public.expenditure.reforms. 2008), the preconditions are: has.been.the.establishment.of.medium-term.expenditure.frameworks. • reliable macroeconomic projections, linked to fiscal targets in a (mteF). An MTEF is a tool for linking policy, planning and budgeting stable economic environment over a medium-term (usually three years). It consists of a top-down re- source envelope and a bottom-up estimation of current and medium- • a satisfactory budget classification and accurate and timely ac- term costs of existing policies, and involves rolling over this exercise each counting year to reflect shifts in policy. The framework matches these forecasts in • technical capacity and disciplined policy decision-making, in- the context of the annual budget process (Swaroop, 2000). cluding budgetary discipline ideally,.an.mteF.should.provide.top.decision.makers.with.a.con- • political discipline for fiscal management. trol.panel.that.identifies.the.cost.of.different.policy.options.and.trade- One symptom of this is the proliferation of MTEF in almost all PEM-related projects funded by 12 offs,.all.within.the.limits.of.what.is.fiscally.affordable . Once policy ob- the World Bank, even in countries with major deficiencies in basic budgeting. This was discussed jectives and their associated aggregate costs are determined, each sector during a PFM workshop on 21 March 2008. 38 39 Another. way. to. view. the. preconditions. for. mteF. is. to. think. of. •. Deployment.of.the.MTEF.process. Some countries have opted for them.as.the.icing.on.a.cake: a pilot implementation of MTEF in certain sectors. Does that make sense, considering a key attribute of an MTEF is to provide a control panel for decision makers to allocate across all sectors? •. Leadership.of.the.process. Normally, public finance is mostly un- der the purview of a Ministry of Finance while planning falls un- der Ministries of Planning or Economy. As well, central banks or statistical offices often play an important role in macroeconomic forecasting, and revenue estimation may fall under an indepen- dent revenue administration. An MTEF brings all these actors together – are their roles clear? •. Linkages.between.MTEF.and.national.planning. Some countries have formal development plans that cover a specific timeframe, usually the tenure of a government. Given that an MTEF is a rolling plan, how is its consistency with the development plan An.mteF.should.build.on.existing.capacity.to.carry.out.functions. ensured? that.are.needed.anyway.for.the.annual.budget.process.to.be.effective. and.efficient . Pressure to implement reforms that are simply ‘in vogue’, or 5. Conclusions which are based on an inadequate assessment of the situation, has led to many negative experiences in the implementation of MTEFs. As noted by reforming. public. expenditure. management. is. not. easy. Despite Schick (2008), “Despite its popularity, MTEF has been effective in only a decades of international experience with budget reform, even advanced few countries. In most, it is a technical exercise that is institutionally and countries are struggling to align expenditure with policy and improve the procedurally separate from the annual budget process. Resource decisions efficiency of budget allocation. Why is this happening, especially con- are still made on an annual basis. When the two processes are separated, sidering international development institutions have been accompany- the MTEF showcases government’s strategic or developmental ambitions, ing many of these processes since their inception and have accumulated and makes extensive use of performance indicators, while the budget re- a sizeable body of knowledge and lessons learned? Why is it that a cer- mains input-based and incremental�. tain country in the region addressed by this study, despite its remarkable progress in PEM, made the mistake of assigning responsibility for collect- The.challenge.is.to.start.thinking.about.an.mteF.at.the.right.time,. ing performance data to budget officials in line ministries instead of staff based.on.an.objective.assessment.of.conditions.and.a.clear.understand- directly involved with service delivery, when that issue had been discussed ing. of. its. benefits. and. limitations . Failure to do this may devalue the and resolved many times over elsewhere in the world? Why did another concept of the MTEF which then becomes another empty term associated country attempt to implement performance-based budgeting without di- with unfulfilled expectations of public sector reform. rect participation of the Ministry of Finance, when it is well known that it in. addition. to. the. big. picture. issues. associated. with. deciding. cannot succeed without its leadership? whether.or.not.to.undertake.an.mteF,.there.are.practical.considera- These. are. questions. without. answers,. or. rather,. with. many. an- tions.to.be.understood.once.the.process.is.launched . For example: swers. There are imperfections in the collection, processing and sharing •. Integration. with. existing. budgeting. systems. and. classifications. of lessons learned and international development institutions need to play How will the MTEF implementation be monitored through trea- a much better role in creating a truly global community of knowledge. sury systems or FMIS? Is the budgetary classification the same as Political processes play an important role; short windows of opportunity the one used for the MTEF? to implement reforms force governments to leapfrog over the basics to at- 40 41 tempt more advanced options; and political negotiations to pass required Chapter 2. legislation undermine ambitious reform initiatives. Governments often CORE FEATURES OF THE CURRENT BUDGET SYSTEM stubbornly defend a national way of doing things, disregarding valuable lessons from elsewhere in the world. Even external advisors that support in Emerging Europe reform processes bear some responsibility and, when advising their cli- Leszek Kąsek ents, need to keep in mind not only the best lessons from international experience, but also the lessons which are appropriate to each country substantial.developments.have.taken.place.in.pFm.systems.over. situation. the.last.40.years. Although not all innovations in budgeting have been A.growing.number.of.countries.are.carefully.designing.a.reform. successful or long-lasting, most have contributed in some way to a grad- path.and.demonstrating.discipline.in.its.implementation. Chile is ex- ual advancement of public financial management, especially in devel- emplary in its implementation over many years of sequential and fully oped countries (see, for example, Robinson, 2007). Many OECD and EU complementary initiatives. There are also remarkable success stories from countries in particular have undertaken budget modernization steps in Commonwealth nations where the philosophy behind public administra- the last 30 years involving MTEF and PPB initiatives (e.g. Australia, New tion has evolved to a higher level. In Western Europe, nations like France Zealand, USA, Canada, UK, Netherlands, France, Denmark, and others). and the Netherlands have much to share with their eastern neighbors. The More recently, many emerging economies have followed a similar path United States has a long successful track record to share with tools for (e.g. Chile, Korea, South Africa, United Arab Emirates, Emerging Europe reviewing programs and reducing waste and duplication of effort. The fol- and Russia). Very few, if any, countries have halted, much less turned back lowing chapters explore similar issues and efforts in Emerging Europe. from, these developments in budget management and public administra- tion (Webber, 2007a). emerging. europe. as. a. whole. still. lags. behind. most. advanced. oecd. countries. in. budget. reforms. and. progress. in. recent. years. has. been.fragmented. It takes several years to establish a government-wide performance management framework over a medium-term horizon so there is a need for a systemic approach and sustained reform. For this reason, PBB and MTEF initiatives have been analyzed in this study not only in the context of a broader public finance and administrative reform process but also with regard to the political circumstances and specific institutional arrangements in each country. 1. General political and administrative structure governing budget preparation each.of.the.six.countries.covered.by.this.study.is.a.unilateral state. and.parliamentary.republic.with.its.ministry.of.Finance.(moF).taking. a.lead.role.in.budget.preparation.and.execution. A partial exception is Turkey where the budget system has a more multi-institutional character with close coordination between MOF, the State Planning Office, and the Under-secretariat of the Treasury located in the Prime Ministry. Although Parliaments can amend the budget, these amendments, with the excep- tion of Latvia, cannot lead to increased deficits in the general government 42 43 balance (Slovakia) or state budget balance13 (Croatia, Poland, Bulgaria), There. are. institutions. whose. budgets. may. not. require. an. agree- but may lead to changes in the structure of expenditures. Budget accounts ment.with.moF15. In this region, these may include the budgets of the are audited at the end of the fiscal year by an independent audit institution Parliament, the President’s Office, the National Audit Office, the Finan- which reports to parliaments on a regular (annual) basis. or acts on behalf cial Supervision Commission and the Judiciary. These institutions sub- of the Grand National Assembly (Turkey). mit their budget proposals to MOF for information purposes, on which The.role.of.the.ministry.of.Finance.in.the.budget.process.depends. MOF may provide feedback. Differences of opinion on budget proposals largely.on.the.(informal).position.of.the.Finance.minister.in.cabinet. are clarified in the parliamentary forum. In Bulgaria, the budget proposal Although MOF proposes preliminary spending limits for line ministries of the National Assembly is negotiated with the Prime Minister and the consistent with its target for fiscal balance, these can, in most cases, be Speaker of the National Assembly, while the National Assembly has sole easily changed by Cabinet. The Minister of Finance has no special pow- authority over the judiciary budget. Extra-budgetary funds (EBF), like ers in bilateral negotiations with spending agencies14. In Slovakia, MOF’s social security or health funds, are attached to the state budget and sub- informal power within the political hierarchy of the coalition parties is mitted to the Parliament. The EBFs are presented together with the state significant. In fact, the Minister is effective only as long as he or she is budget in consolidated statements of the general government. backed by the Prime Minister within Cabinet. In Latvia, recent institu- in.all.six.countries,.the.budget.year.matches.the.calendar.year. Key tional reforms were aimed at strengthening the role of MOF in the budget deadlines in the budget cycle and responsibilities of different agencies or process, including in analyzing the existing base spending. In Bulgaria, units are specified in a legal act (budget law or public finance act and also, the Minister of Finance ensures that the overall spending is within the in some countries, in the Constitution). Although the first macroeconom- limit of 40 percent of GDP and consistent with the planned fiscal balance. ic or tax forecasts are prepared by MOF in January-February (e.g. Slo- in.the.budget.preparation.phase,.line.ministries.are.largely.auton- vakia).and directions of the medium-term budget in February (Latvia), omous.in.their.decisions.on.resource.allocation. They are generally pro- the macroeconomic and fiscal assumptions are usually discussed in spring vided with total expenditure envelopes and in some countries (Bulgaria, and approved by Cabinet in early summer (see Figure 2 for more details Slovakia) with a few binding constraints from MOF (wages, capital ex- on the budget cycle). The decisive round of budget and political nego- penditures, EU resources, co-financing). They set up their program struc- tiations between the coalition partners is conducted in the summer. The tures in accordance with existing budget templates and allocate resources draft budget is ready to be sent to Parliament and available for the public to various programs, present in the required classifications, and submit (via the internet) in the late summer or early fall. However, in Bulgaria their budget proposal to MOF. In Croatia, line ministries and government and Croatia it happens a little later (end-October and mid-November, re- agencies are encouraged to prioritize resource allocation in line with the spectively). Operational guidelines for budgetary units are defined in a greatest development impact and decisions on new employment, while budget call circular. These include the forms to be used and expenditure large investments and social programs require additional supporting doc- templates (Poland), decisions or decrees of Cabinet (such as the budget umentation (feasibility studies, impact assessments etc). Discussions are agenda or proper budget draft) or decrees/guidelines of MOF (such as held with MOF before the final draft budget is approved by Cabinet. Later budget classifications or guidelines for spending units relating to the prep- they must defend their budget proposals in the parliamentary committees aration of the budget). or plenum. in.most.countries.in.the.region,.parliaments.usually.pass.the.budg- et.without.major.amendments. The draft budget submitted to Parliament normally envisages political agreements in the coalition and negotiations between MOF and line ministries. The draft is, however, thoroughly re- 13 This rule can be circumvented when Parliament finds additional revenues to finance extra spend- viewed by parliamentary budget/public finance committees which elabo- ing. In Poland the Sejm does not need to identify sources of additional revenue inflows. It may just consider the Government’s revenue projection as too cautious. 14 MOF power is more pronounced in the budget execution phase, during which it can change indi- In some countries, these may be referred to more formally as ‘appropriations under permanent 15 vidual allocations for line ministries to maintain overall deficit target. legistalive authority’. 44 45 Figure 2. Annual budget cycle in Slovakia Table 1. Key legal act relating to the budget, as of mid-2008 MOF - Financial Policy Institute / Bulgaria Croatia Latvia Poland Slovakia Turkey State Accounting Dept. / European Line-ministries Cabinet and Parliament MOF Budgetary Section and International Affairs Dept. / Debt Organic Law on Budget Act on Public Budgetary Public Financial and Liquidity Management Agency budget law, Budget and Financial Finance, Rules Law, Management adopted in Law, 20031 Management, adopted on 30 effective from and Control Law, previous budget baseline (from 1996 1994 June, 2005 2005 adopted in 2003 January to T+1) Source: World Bank staff. rate their assessment for Parliament. This is often rather a formal assess- employment and macroeconomic state fin. assets strategic plans ment as the parliamentary committees lack professional budget analysts. debt financing relationships tax revenue wage policy prognosiss EU budget operations structures prognosis estimates February program provisional. arrangements. apply. if. the. budget. is. not. adopted. by. end-december. These may involve using the Government’s budget pro- fiscal framework baseline update sector entities determination (adding T+2) other public posal (Poland) or the previous year’s budget (Bulgaria, and Slovakia with March some restrictions), or provisional financing related to the one-fourth of last year’s receipts (Croatia). These provisions take effect until the new 1st Draft Budget - Budget Circular Starting Points Starting Points and allocates expenditures publishing of budget is adopted. Non-enactment of the budget is a de facto sign of no- approves (ceilings) Cabinet April confidence in government, but a formal vote of no-confidence is done through a separate legislative process (Bulgaria and Croatia) or Parlia- breakdown of budget items ceilings into definition of objectives goals and ment may be dissolved by the President (Poland). May 2. Key pieces of legislation relating to the budget and country- employment and analysis at MOF budget requests macroeconomic state fin. assets debt financing relationships tax revenue wage policy prognosiss EU budget operations prognosis estimates June specific circumstances influencing the budget system The. key. legal. act. relating. to. the. budget. is. a. budget. law. or. pub- lic. finance. act . New financial legislation of this type has recently been budget hearings sector entities and decisions other public July adopted or significantly amended across the region, often as a result of broader budget reform initiatives (Bulgaria, Turkey), or from EU mem- bership and a need to formulate rules governing the flow of the EU funds. Draft Budget August Table 1 indicates the key piece of legislation and the time when it became effective. In line with the delegation from the budget law, more specific discussion in the and allocation of Coalition Board) Priority Projects guidelines related to MTEF or PBB implementation are set out in docu- Cabinet (also Reserve for September ments approved by Government or MOF. Examples are the Performance Management System Guidelines 2008-2013 in Latvia or Economic and Draft Budget (if Draft Budget in approval of the the Cabinet of Fiscal Policy Guidelines in Croatia. update of Ministers October needed) budget.legislation.often.also.frames.budget.preparation.and.exe- cution.for.sub-national.governments. In Emerging Europe, sub-national approval of the November Parliament Budget in authorities are independent from central authorities, but financial man- agement can be indirectly framed by the central government (e.g. through tax sharing rules). breakdown of budget items ceilings into December budget. legislation. governs. adherence. to. fiscal. rules. plus. imple- BUDGET EXECUTION ... mentation. of. medium-term. planning. and. performance. budgeting. Source:.World.Bank.staff,.based.on.national.documentation within.the.budget.cycle. The influence of international best practice on 46 47 budgeting or requirements is visible in the region. This includes ESA95 in.Latvia, a.characteristic.feature.of.the.budget.system.is.the.con- standards (in case of new EU members) and standards or best practice cept.of.base.spending . This captures the level of spending associated with promulgated by international financial organizations: (Slovakia was in- a continuation of current government functions (similar to the concept of spired by the OECD, Turkey by the World Bank and the IMF). In some ‘no policy change’) although a key difference seems to be that base spend- countries, the budget law incorporates fiscal rules relating to debt (Bul- ing is the minimum or efficient level of spending needed to continue cur- garia, Croatia, and Poland) or aggregate general government expenditures rent functions). To determine the budget, spending for new priorities is (threshold of 40 percent of GDP in Bulgaria). In Poland, a 60 percent of added to base spending. Development of the base budget has traditionally debt to GDP threshold ratio has been set in the Constitution since 1997. been a largely quantitative exercise with most ministries perceiving the In addition, the budget law invariably specifies the main roles and re- base as an entitlement, without a more robust assessment of existing pro- sponsibilities of budget actors and includes major deadlines in the budget grams being conducted. Strategic plans are being used primarily to justify preparation process. new policy initiatives. The State Chancellery, in particular the Policy Co- eu.members.must.comply.with.the.eu.acquis communitaire.and. ordination Department, has an important role in coordinating strategic rules.set.by.the.maastricht.treaty.(and.protocol.on.the.excessive.defi- planning. cit.procedure,.edp).and.the.stability.and.growth.pact. According to in.Poland,.the.council.of.ministers.(com).plays.a.leading.role.in. the EDP, the planned or actual general government deficit should not be the.budget.process . Only the COM has legislative initiative with respect higher than 3 percent of GDP, while the threshold for public debt is 60 to the budget act and only at its request can changes to the Act be intro- percent of GDP. These limits constitute the fiscal requirement for euro duced during the budget year. The lower chamber of Parliament (Sejm) adoption. The Stability and Growth Pact sets the structural deficit over the has only 20 days for reviewing/amending the budget act (for other acts medium-term. In the case of the six EU members covered by this study, it is 30 days). As mentioned, it cannot introduce any changes to the draft the medium-term fiscal objective (MTO) is set as a structural deficit of 1 which would increase the budget deficit. The President’s role is also lim- percent of GDP. ited. He or she has only seven days to sign the budget act (compared to 21 For.several.countries.in.the.region,.the.reform.process.culminated. days for other acts) and has no veto right. The President may, however, ask in.accession.to.the.european.union.in.may.2004 (Bulgaria in January the Constitutional Tribunal to check if the proposed draft is in line with 2007) when flows of funds related to the EU contribution and EU poli- the Constitution. cies had to be reflected in budget and financial management regulations. in.Bulgaria,.the.mteF.is.regulated.by.the.organic.budget.law.al- Within the fiscal policy supervision, EU members (and non-euro zone though.pbb.measures.do.not.feature.in.the.law. PBB is instead reflected members) must submit an annual update of the Convergence Program, in the COM decrees, MOF guidelines, and in the annual state budget laws. usually in late fall, while EU accession countries (Turkey, Croatia) sub- in. Turkey. the. under-secretariat. of. state. planning. organization. mit Pre-Accession Economic Programs. These documents outline major (spo),.affiliated.to.the.prime.ministry,.evaluates.investment.propos- economic and fiscal policy plans and targets in a three-year time frame. als. The MTEF is based on two main documents: the Medium-Term Pro- Although the programs are not legally binding, they envisage a clear po- gram prepared by SPO and the Medium-Term Fiscal Plan prepared by litical commitment and enhance transparency of public finance. MOF. Fixed.exchange.rate.arrangements.–.peg.within.a.narrow.band.in. Latvia.from.early.1990s.and.currency.board.in.Bulgaria.from.1997.–. introduced.more.discipline.in.fiscal.policy. Budget prudence is invari- ably a necessary condition for the smooth operation of these regimes. Fis- cal deficits leading to money supply expansion will invariably threaten the credibility of the system. 48 49 3. Recent international assessments of quality and • a large number of public enterprises, many of which engage in transparency of budget systems quasi-fiscal activities, with no clear division of tasks concerning major.strengths.and.weaknesses.in.budget.systems.in.the.region. oversight of public enterprises between line ministries, MOF and were.also.identified.in.various.international.assessments.and.country. the Privatization Fund reports, such as the OECD Budget Survey, IMF Fiscal Transparency Re- • lack of an explicit fiscal rule, instead relying on a medium-term port on Standards and Codes (ROSC), World Bank’s Country Financial expenditure and revenue strategy that aims to keep the deficit Accountability Assessment (CFAA) or Public Expenditure and Institu- within acceptable boundaries tional Review (PEIR), and the multilateral Public Expenditure and Finan- • lack of clear top-down steering of the budget process to ensure a cial Accountability (PEFA) assessment. multi-annual strategy. several.external.assessments.have.been.conducted.in.Croatia.re- recent. international. assessments. in. Poland. point. to. numerous. cently . Under the 2006 World Bank IDF grant, an assessment of the public shortcomings.in.the.fiscal.framework. These include budget fragmenta- expenditure management system was undertaken drawing on the Prad- tion and insufficient transparency, inadequate linkages between the budg- han and Campos (1995) methodology. The results show more problems et and policies, and an insufficient time perspective for budget planning16. associated with accountability and transparency than with rules. It high- Budget fragmentation, due mainly to multiple agencies and the existence lighted the following priorities for strengthening the system: of extra budgetary funds, is seen as contributing to inefficient allocation • expenditure allocations based on economic analysis consultation of budget resources. These reviews have also suggested that fiscal trans- mechanisms (especially with Parliament) parency could benefit from a harmonization of reporting standards and • dominance of central ministry (especially in relation to incentive a revision of budget classification, the budget process is only very loosely compatible contract of the Minister of Finance) connected with policy formulation, and that ministers act more like ad- ministrators of existing laws and programs rather than strategic managers • linking allocations to strategic outcomes (especially related to es- of policy and programs. tablishing correlations between forward allocations and budget bids based on evaluations of strategic outcomes) international. assessments. of. Poland. have. also. called. for. the. ac- countability. framework within. the. public. sector. to. be. strengthened. • discussion of competing priorities (especially related to the cabi- by. creating. incentives. for. improved. public. service. delivery. In addi- net review of competing priorities) tion, the budget should be made more predictable over the medium-term • identification of overspending and cutbacks of existing pro- by introducing an MTEF and strengthening the recently launched PBB grams. initiative. Amendments to the Act on Public Finance17, currently on the The.world.bank.public.Finance.review.(per).of.Croatia.in.Janu- agenda, go in the right direction and should make the budget more con- ary.2008.identified.significant.progress.during.the.last.couple.of.years. solidated, transparent and predictable over the medium-term as well as in.strengthening.public.expenditure.management . It noted additional more performance-oriented. effort required in performance and program based budgeting, analytical reports.on.the.Latvian.fiscal.sector.have included a Fiscal Trans- foundations of budget allocation decisions, budget transparency, and inte- parency ROSC.(IMF, March 2001), Public Expenditure Review (WB, Feb- gration of strategic and budgetary planning. A review of Croatia’s budget ruary 2002) and two research papers: ‘Latvia’s Macroeconomic Options in system was also carried out as part of the Budget Project of the Working the Medium-Term: Fiscal and Monetary Challenges of EU Membership’ Party of Senior Budget Officials of the OECD. This review noted: 16 International assessments include Republic.of.Poland:.Financial.Stability.Assessment (2001 and up- • an overly detailed budget account structure date 2004), International Monetary Fund; Poland:.Toward.a.Fiscal.Framework.for.Growth.–.Public. Expenditure.and.Institutional.Review (2003), The World Bank; Poland:.Developing.a.multi-annual. • a need to move towards a budget classification focused around fiscal.framework (2008), International Monetary Fund; Poland:.Country.Financial.Accountability. program objectives Assessment (2006), The World Bank. 17 Poland’s MOF, Draft. New. Act. on. Public. Finance, published on the website on 22 August, 2008, http://www.mf.gov.pl/dokument.php?const=1&dzial=153&id=135646&typ=news. 50 51 and the World Bank Policy Research Working Paper (May 2004). The Chapter 3. reports acknowledged significant progress in public sector reform and GENERAL PROGRESS ON BUDGET REFORM governance but identified some challenges, suggesting a focus on ration- alization of public expenditure and civil service reform. These analyses in Emerging Europe stressed the issue of building capacity to develop MTEF documentation Leszek Kąsek in MOF, provide adequate MOF guidance and set hard budget constraints for line ministries. These reports also indicated a need to: As.noted.in.this.study,.it.is.useful.to.view.recent.efforts.to.intro- • improve policy formulation and planning (strategic plans devel- duce.mteF.and.pbb.initiatives.as.a.part.of.broader.public.finance.and. oped by line ministries are biased toward new priorities) administrative.reform. Introducing these methods is more than a tech- nocratic budget reform. They are components of a wider reform process • address artificial fragmentation and structural rigidities of the in which successful implementation leads to positive changes in the pub- budget (about 45 percent of revenues are earmarked) lic management culture, including greater client (citizen) orientation in • reduce budget incrementalism (due to base budgeting). the provision of public services and programs. The. research. paper. on. the. fiscal. challenges. of. eu. membership. A.well-functioning.and.efficient.public.sector.may.be.one.of.the. (wb,.2004).suggests.that.in.addition.to.mteF,.Latvia would.benefit. country’s. greatest. strengths contributing to improved competitiveness from.additional.fiscal.rules.that.would.avoid.making.the.fiscal.policy. in the private sector and the national economy as a whole. A high quality pro-cyclical . The paper suggests Latvia.target the budget structural bal- public sector may be compared, for example, with favorable tax regula- ance and set upper limits on expenditure increases, in addition to the me- tions whose role is to stimulate business activity and attract foreign in- dium-term zero budget balance target within the EU Stability and Growth vestments. MTEF and PBB cannot be viewed as isolated interventions but Pact. rather as reforms contributing to better use of resources and increased in.Slovakia.the.world.bank.implemented.a.project.called.public. economic competitiveness. Finance. management. reform. in. early. 2000s. At the beginning of the both. the. mteF. and. pbb. require. smooth. processing. with. addi- reform agenda, major weaknesses included the fragmentation of public tional.information.and.appropriate.capacity.by.civil.servants to ensure finance units and insufficient oversight performed by MOF. After address- information-based decisions don’t become information-overwhelmed ing basic PFM problems, the Government’s focus shifted towards more battles between MOF and spending units. Because the road is long and advanced reforms, including MTEF and PBB. sometimes bumpy, with benefits emerging only in the long-term, strong various. external. assessments. show. the. Turkey. budget. system. is. and motivated leadership is vital. International experience points to great- well. designed. but. with. some. shortcomings. Many weaknesses identi- er success when the key role in terms of leadership within the bureaucracy fied in the World Bank PEIR from 200118, such as insufficient account- is played by the finance ministry and its budget department in particular. ability and transparency, were addressed in the following years. In 2006, the IMF Fiscal Transparency ROSC 19 report highlighted fragmentation in 1. Recent public finance reform initiatives the PFM system while in 2007 the OECD20 emphasized a need to reassess and major institutional achievements budget classification. mteF. and. pbb. are. essential. building. blocks. for. fiscal. and. eco- nomic.reform.but.they.are.complex.and.demand.careful.and.phased. implementation. As discussed in Chapter 1, they are accompanied by sup- 18 World Bank, August 2001, Turkey:.Public.Expenditure.and.Institutional.Review.–.Reforming.Budget- porting PFM reforms such as changes in budget classification, accounting, ary.Institutions.for.Effective.Government, Report No. 22530-TU, PREM, ECA, Washington D.C. audit, accountability and control systems in the public sector. Creating 19 IMF, March 2006, Turkey:.Report.on.the.Observance.of.Standards.and.Codes—Fiscal.Transparency. changes in the administrative structure, empowering budget managers, Module, IMF Country Report No. 06/126, Washington D.C. 20 Kraan, D., Bergvall D., Hawkwesworth I., 2007, Budgeting.in.Turkey, ISSN 1608-7143, OECD Jour- and strengthening management and reward systems may be necessary for nal on Budgeting, Volume 7 - No. 2, OECD, 2007. 52 53 result-oriented thinking and longer-term foresight in the public planning coordination between reform components was focused largely in the hands of one institution but required ongoing guidance and supervision from reforms.(Bulgaria,.Slovakia,.Turkey).and.as.stand-alone.reform.initiatives.in.the.case.of.the.other.four.three.countries. In the integrated approach, Source:.World.Bank.staff.countries.in.the.region.began.implementing.budget.reforms.both.within.an.integrated.package.of.economic.and.fiscal. 2001 – abolishing of extra strategic planning system in local governments and 2004 – new budget classi- fication in line with GFS gradually in central gov- tation of the comprehen- piloted in 2002 and put its amendment in 2005 2005 – introduction of ernment units by 2009. 2003 – Public Procure- process. This does not mean that all the PFM reforms should be conduct- 2003-2005 – implemen- (accrual accounting – 2003 – Law 5018 and sive PFM reform project, into practice in 2004) ed at once. Reform overload is a risk, but many synergies can be exploited budgetary funds, turkey on the back of an ambitious and broad reform agenda that includes paral- Manual 2001; lel introduction of MTEF and PBB. Table 2 summarizes the main institu- ment; tional achievements in relation to these reforms in Emerging Europe. This.approach.was.largely.successful.in.Slovakia.where.the.minis- ter.of.Finance.and.deputy.prime.minister.were.responsible.for.overall. State Treasury and Debt 1996-2001 - first efforts information System in 2004, establishment of and Liquidity Manage- Information and State to implement Budget - introduction of pro- supported Budgetary financed by the WB, economic.policy,.including.public.finances ..In Turkey far-reaching in- gram classification, and creation of IT Treasury Systems Slovakia stitutional changes in PFM were begun as part of a broader rescue plan ment Agency, introduced after a severe economic and fiscal crisis in 2001 and supported including: by the IFIs (WB, IMF, EU, OECD). Lack of fiscal transparency was regard- MOF ed as a major factor in the crisis and this led to many major changes in public finance management. Although the crisis heightened the urgency 2001-2003 – introduction requirements prior to EU cation in a programmatic assuming organizational consolidation of budget- science and higher edu- tors (mainly for outputs) 2005 – pilot budget for for a better budget system, valuable analytical work on budget reform had published by the MOF cal adjustments to EU Early 2000s – techni- August 2008 – draft Public Finance Law structure for 2006; already been done during the preparation of the 8-Year Development Plan Poland in 1999 and in the PEIR report prepared jointly by the World Bank and its Turkish counterparts21. accession; ary units Table 2. Date of initiation and coverage of major PFM reforms in Emerging Europe in.Bulgaria.the.economic.and.fiscal.crisis.in.1996-1997.also.played. a.precipitating.role.in.reform . Following adoption of the currency board, budget reforms have been underway since 1997. In the initial phase, re- 2003 – human resources 1997 – introduction of 2003 – introduction of of performance indica- reform (remuneration system), 2007 – fully forms aimed at improving overall fiscal discipline and sustainability. Roles updated budget clas- strategic planning budget programs; and responsibilities of Parliament, Cabinet and spending units were clari- Latvia fied and limits on debt issuance and quasi-fiscal activities were imposed. sification Budget units and accounts were consolidated and together with better re- porting and accounting systems, changes led to improved transparency of fiscal accounts. The results were astonishing. The headline fiscal bal- 1999 – 2002 Single Treasury reporting, improved, GFS including accounting and fective from January 2009 2002-Law on Government adopted, but rather weak 2008 (July) – new BL, ef- 2001 standards formally adherence at local level, ance moved from double digit-deficit in 1996 as a percentage of GDP to a 2003 – adoption of the 2006-2007 – Treasury 2002-first pilot PBB in one on SAP covers all line MOF (Budget Directorate), Single Account based execution processes, ministries and EBFs 1997 – adoption of the cur- organic BL: budget balanced budget in 2003 and fiscal surpluses in the immediate following Croatia years. Strict debt issuance rules (including annual ceilings on total debt stock) and efficient debt management led to a decline in public debt from more than 100 percent of GDP in 1997 to 16 percent of GDP in 2008. Bulgaria.took.the.first.steps.in.implementing.advanced.pFm.re- forms.in.the.mid.2000s, more or less at the same time as Poland Latvia 2007 - expansion of PBB to all first level spending units committee in the National 1996 – organic budget law, 2007 – creation of special rency board arrangement 2003 – reorganization in the reform champion. the Budget and Finance and Croatia launched their reforms in the early 2000s. Bulgaria started by 2006 – introduction of subcommittee under consolidating its fiscal accounts, improving transparency of the budget Bulgaria process and comprehensiveness of budget documentation, improving treasury and debt management functions. Fiscal decentralization was also Assembly ministry Account MTEF Debt World Bank, op.cit. 21 54 55 advanced and medium-term approach to budgeting and PBB were im- 2008 –2011, Convergence Program 2005, the National Strategic Reference plemented. In Poland, PBB was put on the agenda in 2006 by the State Framework 2007-2013, and the Government Strategic Plan. The latter was Secretary in the Chancellery of the Prime Minister, Teresa Lubińska, who announced in February 2008, while the previous agreements and strate- gained experience in this area from the local Government level. In 2007, gies were approved by the former Cabinet. the PBB approach was piloted in two small budget sectors (science and The.eu.integration.agenda.and.eu.membership.itself.has.contrib- higher education) and amendments were made to the Act on Public Fi- uted.to.greater.transparency.and.predictability.of.fiscal.policy.over.the. nance. These changes introduced reporting obligations in the PBB format medium-term. Although the Pre-Accession Economic Program (PEP) in the justification to the budget act starting from the budget 2008 and in or the Convergence Programs (CP) cannot be treated as fully-fledged reporting on the execution of the budget. MTEFs, and fiscal targets were not legally binding even in the short term, Although. Latvia. was. a. regional. pioneer. in. pbb. approaches. and. they have assisted these countries to understand and achieve the require- Croatia.in.the.mteF,.progress.made.over.recent.years.has.been.slow. ments for an improved fiscal stance and structural changes in budget poli- In Croatia PFM was modernized in many areas with the adoption of the cies. Convergence Programs, prepared in line with the EU requirements, budget law in 2003. This addressed budget execution, accounting, report- must include medium-term projections for expenditures and revenues as ing (GFS 2001 standards), cash management through a more functional well as projections on deficit and debt levels for the coming years. The Treasury Single Account (TSA) and a wider use of the SAP system, in- limitation of this approach is that those projections have indicative mean- cluding earmarked revenues. From 2007, emphasis was placed on inte- ing only and there is no legal obligation for governments in the future to grating PFM systems and these measures should be implemented in 2009. follow them. Transparency of public finances was also enhanced by new regulations on in.most.cases,.adoption.of.a.new.budget.law.marked.an.important. internal audit and financial control. breakthrough.in.the.development.of.budget.systems. This was the case in.Latvia,.reforms.were.initiated.early.but.it.took.several.years.to. in Bulgaria,.Croatia,.Slovakia,.and.Turkey. With new legislation, the PFM enforce. significant. change. Budget programs were introduced in 1997 reform agenda was more comprehensive and better coordinated. This leg- but in practice performance indicators focused too much on inputs. De- islation does not guarantee success but a well-drafted budget law can be velopment of more output-oriented indicators began in 2003 and these a solid base for reform. Although the region provides evidence that PBB are now being revised and aligned with a new strategic planning frame- in particular may be initially based on existing law (Bulgaria,.Latvia.and. work for the budget. From 2003, reform of the remuneration system be- Poland), international experience suggests that changes to the law make gan across all budget institutions to link pay with performance. The con- new institutions more sustainable and weaken opposition and resistance cept of three-year budget planning was approved by the Government in to change. Possibly the best example of this are the reforms to the budget the summer 2006 and became operational in 200822. structure and policies in France which were begun through the new Loi. The.region.benefited.from.projects.financed.from.external.grants. Organique.2000 (see, for example, Robinson, 2007). or.loans (mainly EU, but also World Bank, IMF, USAID, and US Treas- ury), oriented towards improvements in the budget process, both in the 2. Motivation, champions for reform, pre- and post-accession period. New EU members have made good use and involvement of budget departments of EU structural funds available for spending on institutional improve- in.countries.which.experienced.serious.fiscal.imbalances.(Bulgar- ments in the public sector. In Poland, the PBB initiative included strategic ia and Turkey),.the.necessity.for.budget.reform.was.the.mother.of.in- government documents like National Development Strategy 2007-2015, vention ..in.other.countries.external.and.internal.pressures.both.played. National Reform Program for Implementation of the Lisbon Strategy a.role. Complex restructuring in the public sector offered a good oppor- tunity to introduce ambitious second generation PFM reforms. Other Thanks to the MTEF, an appropriation reserve was introduced (to transfer funds between years) 22 and flexibility of expenditures increased (COM can, to some pre-set amounts, redistribute expen- countries were following global or regional trends and the availability of diture among programs, sub-programs, and economic classification codes. COM also considers external technical assistance (see above) and external funds was support- introduction of performance evaluations which should be based on several criteria. 56 57 ive. In-house expertise has been growing too and has been readily shared Some countries (Latvia,. Poland. and Slovakia23) created informal, cross- between countries (Chapter 1). The attractiveness of the PBB concept may sector working groups of senior officials. Their purpose was to spread also partly lie in positive feelings associated with the word ‘performance’. the new ideas more widely in government. In the beginning, the new ap- Performance budgeting, and its more or less literal translation into lo- proach was tested in selected ministries which were open to change and cal languages, sounds better (not only for the politicians) than traditional willing to run pilots projects, while various learning opportunities were (incomprehensible) budgeting based on standard data-sets and constant offered more widely to spending units. Everywhere, MOF or other lead- checks and balances. ing agencies had a key role to play as a center of expertise on concepts, in.the.globalization.era,.a.well-functioning.public.sector.provides. methods and processes. It is also a major power for both the preparation a.competitive.advantage. Also, some practices successfully tested in the of the budget and its execution. reform.leadership.had.some.different. private sector (sub-contracting, management for results, the concept of characteristics.in.each.country: value for money) were applied subsequently in the public sector. Taxpayers • In Bulgaria, a Deputy Minister of Finance with the support of a are also voters and they demand more (i.e. better public services) for their small unit with the Ministry of Finance provided much of the taxes. Slovakia’s political leaders set an ambitious target for euro adoption overall guidance for the reforms and assisted line ministries, es- and meeting the Maastricht criteria which required fiscal consolidation. pecially those which introduced pilot budgets. This helped build Fiscal policy is one of the few policy levers under the currency board ar- capacity and buy-in for the reform. rangement in Bulgaria. The aim to create fiscal space for new policy initia- • In Croatia, in the early 2000s, Treasury and analytical depart- tives or comply with political promises (e.g. infrastructure upgrade, wage ments in MOF, supervised by the deputy Minister of Finance, increases in the public sector) were reasonably common across the region, cooperated with external experts and provided good interna- including especially Croatia.and.Latvia. tional practices. Rulebooks and decrees on PBB were prepared. The.need.to.improve.the.quality.of.budget.planning.and.fiscal.pol- Currently, all budgetary users including local government units icy.predictability.has.motivated.implementation.of.mteFs . When ef- are preparing budgets in a program format. fectively implemented, an MTEF helps fulfill fiscal policy targets by: • In Latvia, MOF drove reform as it strengthened its own position, • keeping expenditure within means (through spending realloca- but the reforms were also stimulated by the State Chancellery tion between years) and the Prime Minister. MOF was the lead agency for the MTEF • establishing links between policy, planning, and budgeting while strategic planning was developed by the State Chancellery. (broader space for spending prioritization) Both institutions worked jointly on the PBB agenda. • increasing operational efficiency • In Poland, the State Secretary in the Chancellery of the Prime Minister and a Department of Performance-Based Budgeting • exploring choices within the set of sustainable fiscal policies – launched the PBB initiative in early 2006. The Chancellery of the the issue of ‘fiscal space’ (Bevan, 2006). Prime Minister was created to spearhead this initiative. In early prioritization.and.allocation.are.the.concern.of.policy-makers.but. 2008, the new Government decided to dissolve this department improvements.in.operational.efficiency.must.be.owned.by.the.public. and transfer some of its staff to MOF. The MTEF concept was administration. as. a. whole. If, however, overall public finance sustain- elaborated in MOF and based partly on the work commissioned ability is at risk, the remaining targets become less urgent. This has been by the IMF in 2008. shown in Latvia where the Government looks for considerable spending • In Slovakia, the initial champion of PFM reforms was the Minis- cuts as revenues have dropped sharply from a sudden economic slow- ter of Finance who was also the deputy chairman and economic down and the subsequent serious recession. leader of the strongest coalition party, and who pushed on many Advanced.pFm.reforms.in.emerging.europe.were.initiated.by.pol- icy-makers. inspired. by. international. lessons,. or. by. external. consult- The group in Slovakia was abandoned soon after its creation, mainly because of resistance from line 23 ants,.but.they.were.quickly.taken.over.by.educated.local.technocrats. ministries. 58 59 changes. Reform was driven internally in the Government and October 2007, MOF became primarily responsible for the new technically prepared and executed by MOF staff, assisted by ex- PBB approach and changed its name to the Public Finance Re- ternal consultants. There was a clear top-down approach in the form department. reform implementation but the details of their execution were • In Turkey.organizational changes in MOF in the General Direc- prepared in a bottom-up way. The Slovak Government showed torate of Budget and Fiscal Control resulted from the new bud- strong ownership of the project, assisted by the World Bank get law rather than requirements of advanced PFM reforms. The which acted as project coordinator. Strategy Development Units established in 2006 replaced budget • In Turkey, reform-minded officials made good use of the mo- units affiliated to MOF. Some duties of MOF in the budget pro- mentum which emerged from the 2001 economic crisis. This cess were delegated to line ministries. momentum has been enhanced by negotiations with the EU. lack.of.radical.changes.in.the.structure.of.public.administration. left.budget.managers.with.limited.managerial.flexibility.and.autono- 3. Institutional changes, involvement of budget authorities my. Accountability problems remained too. The link between responsi- and managing opposition bility and the discretion to perform flexibly and autonomously remains Although.new.units.responsible.for.mteF.and.especially.pbb.im- tenuous. There is also an inability to shift or shed civil servants in minis- plementation.were.created,.the.structure.of.public.administration.re- tries unable to demonstrate sufficient performance. mained.untouched.in.Latvia.and.broadly.unchanged.in.the.remaining. chile’s.experience,.where.the.performance.budget.toolkit.was.in- countries. Thorough restructuring of MOF was rare, though most coun- vented. and. led. by. a. powerful. and. respected. budget. department. in. tries undertook some kind of re-labeling initiative. moF,. demonstrates. useful. lessons. for. emerging. europe. (Chapter 1). •. Slovakia and Bulgaria were among the exceptions. In Slovakia, It shows that government-wide systems can be built and applied at rela- MOF was restructured and traditional budget departments (fi- tively low cost, but require discipline and persistence over long periods nancing line ministries) were replaced by an analytical depart- of time. Hierarchical budget institutions help (Marcel, 2007). Because of ment, and a budget consolidation department – consolidating its technical complexity and generally apolitical character, leadership of data sources and formulating the general government budget. PBB reforms has been necessarily taken over by committed technocrat The two departments became leaders of further reforms and champions in MOF (recently all countries in the region) or by State or PM their role has been formalized in the Ministry of Finance statute. Chancellery (as in the initial phase in Latvia and Poland). • In Bulgaria the Budget and State Treasury Directorate was re- Having.a.reform.champion.with.active.participation.of.line.minis- structured into two separate (1-planning, 2-execution and re- tries.and.their.budget.departments.in.the.spending.ministries.creates. porting) directorates. The Budget Directorate included three a. strong. sense. of. ownership within government and helps implement new departments – Budget Methodology, Public Finance School, reforms. In Chile, the Budget Department attracted well-educated peo- and Microeconomic Analysis – and was instrumental in imple- ple as career technocrats who could operate with limited influence from menting both MTEF and PBB. political pressures. At the same time, they managed to present a broad and united front of political consensus and persevered with the necessary • In Croatia three new units were created in 2004 and covered institutional changes. Treasury System Development, Budget Analysis and Internal Audit Harmonization. The Institute of Public Finance, a public As. with. much. radical. change,. some. groups. have. opposed. the. research institute, provided advice and reform impetus. mteF.and.pbb.reforms ..There have even been instances of resistance within MOF. Insufficient awareness and lack of commitment in a broader • In Poland no changes were made to the structure of public ad- public administration still remain a challenge across the region. ministration in 2006. The work started with the creation of a PBB department which was supervised by the Secretary of State in the • In Bulgaria the attitude of line ministries, Cabinet, and Parlia- Chancellery of the Prime Minister. After the general elections in ment has varied. Some ministries appreciated the value of more 60 61 strategic allocation of resource, and improved transparency and but noticed quickly that the strategic planning exercise en- accountability of public finances, but some treated the MTEF hanced their status/position during the budget process. Strategic and PBB as a purely formal exercise leading to a bigger work- development units of MOF, SPO, Prime Ministry and Treasury load. Fragmentation of some line ministries is not conducive to became role models for other strategy development units. In- PBB implementation and it has been difficult to involve senior creased authority, coupled with relevant accountability for the officials in the preparation of their budgets in a programmatic head of the spending units, also encouraged implementation of structure and make them accountable for performance. The use these reforms. of different reporting systems across ministries and agencies was also problematic. However, in tandem with the introduction of the Financial Management Information System (FMIS) some first-level spending units introduced additional analytical ele- ments to comply with the PBB format. • In Slovakia MOF middle-level management of budget depart- ments opposed reforms but were overrun by restructuring of the budget section and by changes of people in crucial positions. The opposition of line ministries was two-fold. First, some of the budget departments within line ministries were not con- vinced, mainly because the reforms were implemented quickly. Pilot projects helped MOF gain allies in the budget departments of several line ministries. Second, policy sections within line ministries needed to be convinced to change their internal pro- cedures to match the budget system changes, and to take over responsibility for the financial management of their programs. This change still needs to be accomplished in almost all line ministries. Some mild opposition has also come from the me- dia which criticized imperfections in the program structure and questioned the necessity of medium-term planning. The latter objection was successfully handled after MTEF implementation brought visible results and was shown to have no relationship to the methods used during the former era of a highly centralized command economy. • Resistance by middle-level officials in line ministries in Croa- tia, Latvia, and Poland was not unexpected because in the early stages these reforms increased their workload without bringing immediate benefits. However, the reforms did not provoke large controversies among experts. The questions were about ‘how’, not ‘why’ to implement them) and there was little coverage in mass-media and little debate among politicians. • In Turkey central policy institutions lead the reforms. The other departments were required to comply with the new regulations 62 63 Chapter 4. Regional Overview of MTEF and PBB reforms Leszek Kąsek 4.1. Adopting Medium-Term Expenditure Frameworks (MTEFs) An.mteF.provides.a.multi-year.framework.for.allocating.expen- ditures.according.to.policy.priorities,.subject.to.forecast.revenue.con- straints (Taliercio, 2007). It rests on three pillars: • top-down multi-year projections of the resource envelope (how much is available) • bottom-up multi-year cost estimates of sector programs (what has to be financed, with a focus on priorities and objectives) • institutional (political and administrative) decision-making to integrate the above two pillars (determining the necessary bud- get trade-offs). These.mteF.pillars.overlap.with.the.pbb.approach.and.help.im- prove.program.performance.through predictability in resource flows to programs, planning beyond one-year horizons and by helping managers search for higher value expenditures. The necessary shift from a tradition- al administrative and input-item budgeting approach to a results-oriented managerial approach is proving a lengthy process in Emerging Europe but budget managers mostly welcome the opportunities for increased discre- tion in allocating funds to programs under their jurisdiction. with.mteF.and.pbb.reforms,.the.devil.is.often.in.the.details.of. implementation ..In the following chapter, we look at the PBB arrange- ments from a country-by-country perspective. In this chapter we investi- gate the following more general aspects of MTEFs in the region: • coverage of MTEFs compared with the annual budget and its le- gal basis • institutional set-up and supporting arrangements (rules, ceil- ings) • methods and procedures used in compiling the MTEF • modes of introduction of MTEF’s (as a component of broader budget reforms or a discrete reformist step) • preparation and updating of forward estimates across line minis- tries 65 • impact of the MTEF on the quality and efficiency of resource Table 3. Date of initiation and coverage of recent MTEF reforms in the region allocation and budget decision-making (both from the central Bulgaria Croatia Latvia Poland Slovakia Turkey budget planning and line ministry budget management perspec- 2006 – 2003 – three- 2000 -govern- Scheduled for 2005 – three- 2005 – three- tives) three -year year Economic ment’s deci- 2010, four- year budget year rolling macroeco- and Fiscal Policy sion, year planning presented in plans, Me- • prospects for extending the use of MTEF concepts and methods. nomic Guidelines 2006 – the perspective, all existing dium-term and fiscal 2005 budget – mul- concept of binding defi- classifications Fiscal Policy framework ti-year projections three-year cit level (but (four for rev- Statement 1.1 Coverage of the MTEFs compared to the annual budget and approved of fiscal items budget amendable in enues, seven (including fis- its legal basis by COM, disaggregated to planning justified cir- for expendi- cal plans and and sectoral the fourth level approved by cumstances) tures), spending ceil- existing.mteFs.in.the.region.have.a.three-year.planning.horizon,. ceilings, only of economic clas- COM, budget targets ings for broad i.e. current budget year plus two further years (Table 3). Poland expects first year is sification; binding only categories) not yet and Medium- binding for the budget to introduce a Multi (four)-year Financial Plan of the State in 2009. The 2007 - Medium- applied in Term Plan Term Strategy for budget prepa- year, indica- three- or four-year time frame seems a reasonable compromise between Development and ration tive forecasts (with macro- economic the value of longer term planning and the shorter periods over which Modernization of as starting indicators points for most government revenues and expenditures can be plausibly forecasted. the State Treasury next year’s and policy 2007-2011 For the region, the long run is especially more difficult to envisage because budget nego- priorities) these countries continue to face the need for large structural changes in tiations their economies, including the role of the public sector. Also, as a conse- Source: World Bank staff quence of the recent global financial crisis, forecasting of most economic el in the executive body (reconciliation part in the annual budget process). and financial variables has become much more complicated, even within Slovakia is a good example in the region for achieving this integration. a one-year horizon. The.success.of.the.top-down.and.bottom-up.reconciliation.proc- Although.formal.mteFs.are.relatively.new.in.the.region,.elements. ess. depends. on. efficient. communication. within. government. and. on. of.the.three.pillars.noted.above.have.been.in.place.for.more.than.a.dec- debate. about. spending. prioritization . Without good communication, ade. In Bulgaria,.for example, the organic budget law from 1997 enabled national policy objectives receive little consideration in the resource al- MOF to prepare three-year macroeconomic and fiscal forecasts. Poland location process and transparency in decision-making is reduced. PBB doesn’t have an MTEF but its Public Debt Management Strategy operates strengthens the link between the budget and policies. In Bulgaria, selected on a three-year time frame. An explanatory note to the budget act updates ministries successfully used PBB for arguing for changes in budget alloca- fiscal data to the Convergence Program, which is in place in every new EU tions to policies and in programs. Member State, and includes three year economic projections and fiscal to.be.useful,.an.mteF.should.also.combine.rational.forward.plan- targets. Since 2007 budget units present their spending estimates for the ning.with.an.ability.to.accommodate.unforeseen.changes. As an annual following three years in a programmatic structure. EU and capital projects rolling process, an MTEF can be very useful for policy formulation. The are also planned on a multi-year basis although most forward-looking fig- framework reflects priorities within sectors and accounts for recurring ures are indicative only and medium-term expenditure planning is not cost implications of capital projects. Other key elements include projec- systematically conducted at the sector level. tions of significant entitlement programs, interest payments, and forward to. have. a. significant. impact. on. budget. decision-making,. fiscal. costs of large investment projects. plans.should.be.integrated.with.the.annual.budgetary.process. If they • In Bulgaria the MTEF sets the aggregate budget ceilings (total are not, the framework becomes a rather abstract exercise. Integration can expenditure, capital expenditure and overall fiscal balance) and be achieved by combining the bottom-up approach (where there is some defines key parameters like wage and pensions increase, staff risk of budget inertia) with expressing fiscal policy priorities at a high-lev- levels, the size of social assistance benefits, service standards etc. Macroeconomic assumptions and forecasts are coordinated 66 67 within government and with the central bank. Sectoral ceilings procedural.rules.in.the.imF.manual.of.Fiscal.transparency.(2007). then are agreed based on the approved macroeconomic and fis- apply. broadly. to. the. mteF. The manual states: “The annual budget cal framework and budget plans are prepared by each FLSU in should be realistic and should be prepared and presented within a com- PBB format. prehensive medium-term macroeconomic and fiscal policy framework. • In Croatia both the annual budget and two-year projections are Fiscal targets and any fiscal rules should be clearly stated and explained�. prepared in the same format, all on the fourth level of economic simple. and. transparent. fiscal. rules. support. the. mteF. because. classification (reduced to the third level since 2009). Although they. impose. discipline. for. spending. units. and. enhance. communica- the three-year fiscal framework is presented to Parliament, only tion.within.government ..Fiscal rules are forms of restrictions on fiscal the annual budget is approved by voting. The quality of mac- policies at an aggregate level. They often take the form of a law or binding roeconomic and fiscal projections has improved significantly in regulation. Examples of numerical or stand-alone fiscal rules include re- recent years. quirements to balance the budget, limit borrowing by the central or sub- • In Latvia the MTEF sets ceilings for broad categories of spending national governments, or limit the pace at which expenditures are permit- over a three-year period. As part of its public finance manage- ted to grow. In some cases, public borrowing is restricted to the level of ment reform, a system of strategic planning was introduced in public investment (a golden rule), or the fiscal deficit is constrained (e.g. 2003-2006. Strategic plans, however, tend to be biased toward the criteria for fiscal convergence under the EU Maastricht Treaty or the new initiatives, while the review of existing programs, which close-to-balance requirement of the EU Stability and Growth Pact). were not formulated within the overall budget constraint, at- eu.membership.or.an.integration.agenda.has.made.fiscal.policy.in. tracted less attention. emerging.europe.more.predictable.and.transparent.over.recent.years. • The medium-term fiscal plan in Turkey includes fiscal deficit and All countries adhere to the EU reporting standards and every year submit borrowing positions, plus total revenue and expenditure projec- updates of Convergence or Pre-Accession Economic Programs. EU mem- tions for three years. Its State Planning Organization (SPO) pre- bers can be called to account under the Excessive Deficit Procedure (EDP) pares an investment circular with an appropriate guide. if the general Government deficit is higher than 3 percent of GDP. transparency.requires.fiscal.rules.to.be.clearly.defined.with.speci- 1 .2 ...institutional.set-up.and.supporting.arrangements.. fied.reporting.requirements.from.the.outset ..This transparency enables. (rules,.ceilings,.guidelines) non-compliance to be easily detected and addressed. If an escape clause is mteFs.began.in.emerging.europe.in.a.quite.mechanical.way.and. included in a rule (e.g. when a departure from the rule is justified by eco- enhancements. have. been. gradual. Allocating discretionary resources nomic conditions – such as with the MTEF in Poland), the circumstances between competing spending agencies in an informed way over a multi- in which it applies should be clearly defined. Stand-alone fiscal rules en- year horizon is demanding. It is not surprising that some sectors grow at hance the credibility of macroeconomic policies by limiting the scope for a higher percent than the average, some maintain their share, and oth- discretionary intervention. ers decline. Bevan (2006) argues that, with annual updating, the system numerical.fiscal.rules.are.intended.to.be.a.permanent.constraint. should evolve away from its initial mechanical nature. on.fiscal.policy,.generally.in.terms.of.an.indicator.of.overall.fiscal.per- in.the.beginning.only.aggregate.forecasts.are.feasible.but.provide. formance. The main types of numerical rules include: a.good.starting.point.for.considering.fiscal.policy.over.the.medium- • deficit rules (balanced budget) term. Best practice requires publishing a comprehensive, rolling medi- • debt rules (ceiling ratios) um-term budget framework as a baseline scenario for fiscal management. • borrowing rules (EU members are prohibited from central bank Enhancements to the framework in the region have proceeded slowly but financing) consistently. • expenditure rules (Netherlands sets ceilings on total expenditure and major sub-categories). 68 69 The credibility of numerical rules invariably depends on the realism 1 .3 ..methods.and.procedures.used.in.compiling.an.mteF. of the budget, on the quality of the process for identifying fiscal risks and mteFs. in. the. region. are. still. in. their. infancy. and. governed. to. on political will. Exemptions (protected expenditures) should be clearly some.extent.by.budget.incrementalism. This is true irrespective of the defined so as to accommodate unforeseen shocks which could breach the mode in which the framework was implemented. Neither Slovakia25 nor (expenditure or deficit) targets. Turkey, which introduced an MTEF as a component of broader budget recent. fiscal. rules. for. many. emerging. market. economies. have. reforms, nor the remaining countries which introduced it as a discrete tended.to.rely.to.a.greater.extent.on.numerical.reference.values. Chile reform, can easily escape budget inertia. New programs are easily added has implemented a ‘structural surplus rule’ to cyclically adjust the budget but it is difficult to evaluate existing ones or change or remove them. PBB surplus for central government equal to one percent of GDP. The govern- initiatives offer a good opportunity for systematic monitoring and evalua- ment must explain any deviations in the fiscal outcome from the surplus tion of spending programs but are still insufficiently effective. rule. The rule provides useful ex ante guidance for spending plans. Exam- An.mteF.works.well.when.its.requirements.are.properly.under- ples from the region covered in this study include: stood.and.observed,.including.smooth.cooperation.between.line.min- •. Poland,. Croatia,. and. Bulgaria imposed a debt ceiling on gross istries. and. local. administration. In Turkey, strategic plans prepared general government debt as a share of GDP at the 60 percent locally as ‘wish lists’ exceeded allocations set centrally. In Bulgaria and of GDP (consistent with Maastricht fiscal criterion). Polish law Croatia, some budget units ignore spending ceilings and, to work within foresees precautionary measures when the debt-to-GDP ratio overall budget constraints, overly generous proposals have to be revised crosses 50 percent and 55 percent of GDP and there are specific in consultation with MOF. debt rules at local government level24. Although there is no for- different.models.can.be.considered.by.countries.at.different.stages. mal mechanism to ensure adherence to a debt rule in Bulgaria, of.development.but.building.capacity.across.line.ministries.and.agen- this is currently not a problem with a debt-to-GDP ratio below cies.to.forecast.expenditures.accurately.is.time.consuming . Implement- 20 percent of GDP. From 2006, in line with the informal expen- ing more advanced methods should go hand in hand with improved ad- diture rule, total public expenditures in Bulgaria cannot exceed ministrative capacity. Capacity, and reliability of data, may vary across line 40 percent of GDP (excluding the contribution to the EU bud- ministries. This was the case in Slovakia where the MOF and six major get). line ministries gained support during the PFM reform project implemen- • Although Croatia doesn’t have an explicit fiscal rule, MTEFs in tation, and in Latvia.where some ministries like agriculture, culture, envi- recent years have aimed at reducing the fiscal deficit to below the ronment or education and science were more active in reform implemen- Maastricht threshold of 3 percent of GDP. tation. In Turkey the capacity was more uniform across government. In • In recent years Latvia kept its fiscal deficit below the Maastricht most countries in the region, solid analytical capacity was built into MOF level to avoid the EDP procedure. This was readily achievable (especially in macroeconomic modeling and forecasting) but line minis- during the period of strong economic expansion, but may be- tries rely, to a large extent, on using a simple inflation (or wage-growth) come much more problematic due to the sudden slowdown in adjustment factor when forecasting future spending. 2008 and the ensuing recession. There is no formal fiscal rule as while. impact. assessment. is. obligatory. in. most. countries,. it. is. such but the MTEF sets sectoral expenditure ceilings. rather.a.pro.forma.exercise. For example, in Croatia changes in policies are sometimes reflected in budget estimates with a time lag so budgets sometimes fail to take all circumstances into account. Neither Cabinet nor MOF explain deviations in the previous year’s framework and sometimes new government policies/initiatives lead to more than 10 percent devia- tions between planned and actual spending. An incrementalist approach According to the new draft Law on Public Finance, the first precautionary public debt threshold is 24 set at 47 percent of GDP. In Slovakia an MTEF was introduced earlier and independently from PB. 25 70 71 to budgeting is somewhat more entrenched in Latvia due to a formal sep- • In Bulgaria the first level spending units propose ceilings and, aration between base budget and development spending. after negotiations with MOF, the ceilings are approved by the mteFs.in.the.region.include.some.country-specific.practices. Bul- COM. The previous year’s ceilings serve as a basis for the next garia has instituted a contingency reserve26 for structural reforms, natural round of the exercise, adjusted to changes in key macroeconomic disasters, and significant macroeconomic changes. For 2009-2011 it ac- indicators. Other changes proposed must be justified and agreed counts for 1.1 percent of GDP and is allocated for ministries responsible with MOF. for health care, judiciary, and pension reforms and, in part, for the Na- • In Croatia the MTEF has become embedded in budget manag- tional Assembly. In Slovakia, a planning reserve27 of up to 3 percent of ers’ practices and the reconciliation process between MOF and total budget spending, is set aside for political priorities and disbursed line ministries operates smoothly and in line with deadlines set before the budget is submitted to Parliament although it can be held over in legislation. within the MTEF for expenditure proposals in the later years. • In Slovakia.the MTEF is an integral part of the budget and pre- pared in line with the Budgetary Rules Law. A three-year budget 1 .4 ...preparation.of.forward.estimates.and.their.updating.mode.across. is presented to Parliament with the same level of detail for every line.ministries year, although only the annual budget law for budget year is ad- High.quality.forward.estimates.of.expenditure.are.essential.for.a. opted by voting. Allocation limits for out years are not legally sound.mteF;.without.them.the.medium-term.framework.can.have.lit- binding but are considered the starting point for next year’s bud- tle.impact.on.planning.or.policy.decisions. Best international practice get discussions. from countries like UK or Australia includes the use of forecasting and • In Turkey expenditure ceilings for each line ministry and agency presentation techniques that distinguish between a baseline path for ex- are determined by the High Planning Council and published in isting (on-going) expenditure activities and estimates of the costs of new the Official Gazette by mid-June. They can be revised annually, policies. taking into account changes in macroeconomic indicators, espe- compiling.line.ministry.estimates.based.on.different.methodolo- cially inflation. gies,.as.practiced.in.the.region,.cannot.guarantee.overall.consistency. medium-term.revenue.projections.are.prepared.by.the.moF.while. It is important to identify the cost drivers of different programs. This is on.the.expenditure.side.the.process.is.more.complex.and.interactive. In difficult without a well-established programmatic structure of expendi- all countries except Slovakia, the first steps are taken by spending units. tures (generally missing in every country in the region) and the ability to However, MOF has a later, and decisive, input before the budget estimates estimate unit costs of different activities across the public sector. are referred to COM for the final word. in.all.countries.in.the.region.only.the.expenditure.ceilings.for.the. • In Slovakia, on the basis of the Starting Points approved by next.year’s.budget.are.legally.binding;.those.for.the.following.two.years. COM, MOF sets detailed expenditure ceilings for line ministries. are.indicative and updated annually on a rolling basis. Exceptions are special purpose funds and self-governing bodies outside the direct control of central government; MOF uses their 26 A ‘Contingency Reserve’ is a line in the budget that may be used for unexpected and unforeseen ex- penditures, often associated with natural disasters. The Contingency amount is usually 2-3 percent budget proposals to compile the consolidated budget. of the total budget and there are normally rules governing how and for what it can be used. • In Turkey, expenditure proposals (based on institutional, func- 27 A ‘Planning Reserve’ is an amount of money, or percentage of the total expenditure available, that is not committed to specific allocations or purposes during the budget preparation process. It may tional and economic classification) are prepared by line minis- be around 5 percent of total expenditures but is sometimes more. Once the budgets of all ministries tries or agencies based on requests from units they control or have been prepared, money available within the Planning Reserve may be allocated to specific new supervise. These are then negotiated with MOF. Investment policies or initiatives that government wishes to pursue. The Planning Reserve therefore protects an amount of funds from the budget negotiation process and provides some scope for policy flex- proposals are submitted to the State Planning Organization for ibility and innovation. By the time the final budget is approved all Planning Reserve funds are usu- evaluation. ally committed to specific expenditure proposals. It may be desirable to identify a planning reserve in each of the budget years of the MTEF. 72 73 An.effective.mteF.requires.agreement.on.a.comprehensive.set.of. budget.issues.are.only.seasonally.debated.in.parliaments.and.are. fiscal.policy.objectives,.within.which.inconsistencies.should.be.easily. not.topics.favored.by.media. External reaction in Turkey was positive. identifiable. A strong interface between government’s national strategic In Slovakia some commentators compared the budget reforms with plan- planning (required by the EU) and the medium-term budget is needed. ning exercises during the Communist era. Reactions in the remaining Medium-term aggregate spending ceilings are useful (but optional) ele- countries were mostly neutral. ments of the framework. A well-structured picture of plans and possi- budget.and.mteF.reform.is.still.far.from.a.steady.state.in.the.re- bilities enables government to decide, in an informed way, what spending gion. can be increased, cut, or shifted across years. This benefits line ministries • Planned changes to the organic budget law in Bulgaria are de- because it reduces uncertainty about future budgets. signed to strengthen credibility of the MTEF through its further In line with the IMF manual28, an MTEF should incorporate projec- institutionalization. Hard budget constraints will be enforced tions of expenditures and revenues by individual spending agencies that across ministries and agencies; budget allocations will be better allocate resources in line with strategic priorities. It also extends analysis linked to results with clarified accountabilities at different ad- of expenditures to more detailed sectoral costing and performance meas- ministration levels. Greater capacity in line ministries and more ures (possibly including activity-based or output-based budgeting). These authority of MOF are needed to improve the quality of the bot- include production of medium-term disaggregated expenditure profiles tom-up planning process. Planned introduction of comprehen- and, in more advanced versions, detailed costing of performance meas- sive sector reviews as well as enhancement of the PBB process ures that may be monitored at aggregate and sectoral levels [IMF, 2007] will be beneficial. •. Croatia could benefit from making multi-annual expenditure 1 .5 ...impact.of.mteFs.on.the.quality.and.efficiency.of.resource. ceilings of first level budget managers binding while leaving allocation,.external.reactions.and.prospects.for.extending.the.use. more discretion at the line item level. This would combine bet- of.mteF.concepts.and.methods ter fiscal discipline with budget flexibility. Budget documenta- benefits.from.an.mteF.have.appeared.mostly.in.those.countries. tion would provide feedback on budget execution and deviations where.the.framework.has.achieved.some.maturity. For example, in Slo- from the MTEF in the past. Making this information available vakia.overall fiscal predictability and credibility have improved consider- should enhance debate on fiscal developments, especially in Par- ably. Together with other measures, the MTEF allows for effective target- liament. Further enhancements are expected from the new bud- ing for the general government budget, an improved fiscal discipline, and get law effective from July 2008 – making two outer years in the better fiscal performance. This improved performance may be reflected MTEF binding at the aggregate level – and linking MTEF to stra- in reduced costs for short-term government borrowing. The effects from tegic priorities as stipulated in the newly introduced three-year reformed PFM in line ministries are less evident although previous budg- strategy of government programs. To make this happen, bud- et overruns have disappeared and accumulation of debt in several pub- get manager need greater capacity and MOF needs to needs to lic agencies not included in the central government budget was stopped. provide guidance on the proposed programs and evaluate them Re-allocations between line ministries, however, are still occurring during more thoroughly. The planned introduction of overall govern- budget execution. Improvements have been recorded in Croatia, particu- ment and sector strategies together with PBB enhancement will larly in the quality of official macroeconomic forecasting and sensitivity improve the credibility of the MTEF. analysis. • The role and capacity of MOF in Latvia should be strengthened, in.the.remaining.countries.in.the.region,.reform.is.still.in.the.early. particularly in setting key parameters within the MTEF, evaluat- stage. of. development and their impact on decision making has so far ing line ministries’ strategic plans and budget proposals, and de- been limited. veloping PBB methodology. Reform progress on the institutional IMF, 2007, Manual.on.Fiscal.Transparency, Washington D.C. 28 74 75 front has been complicated by more severe fiscal constraints due MOF and budget units in line ministries must be strengthened. to the financial and economic crisis. This is a lengthy process. Advanced MTEFs require a country’s • Budgetary reform momentum in Slovakia slowed somewhat be- readiness to make medium-term expenditure commitments by fore the general elections in 2006. The new Government focused sectors. primarily on different policy areas (euro adoption, for example). • The framework should be based on clearly defined and fully- After the elections, the Minister of Finance was not appointed as costed policy proposals and should be accompanied by measures the deputy Prime Minister, which had an effect on policy coordi- to review individual expenditures. From this angle, the MTEF nation. Despite this, the accounting system and tax administra- benefits from parallel implementation of PBB. tion improved with a monitoring and evaluation system sched- mteFs. across. the. region. have. potential. to. provide. better,. more. uled to start in 2009 when program budgeting will be introduced transparent.tools.for.formulating,.assessing,.and.implementing.fiscal. by regional administrations. This was piloted, with MOF sup- policy. These reforms take time and, in order to work efficiently, must be port, in 30 local units during 2008. Furthermore, according to based on fundamental institutional improvements along with sustained recent amendments, from 2009 the carry-over of unspent capital political commitment. Independent oversight helps ensure robust fore- expenditures is restricted to two subsequent years. For the fu- casting capacities, accurate costing of programs, and overall budget dis- ture, strategic planning needs to be better linked with the bud- cipline. get. Among other challenges, the non-disbursed reserve (of less than 3 percent of the total budget), allocated annually according 4 .2 ..performance.budgeting. to political decision, distorts the medium-term planning by line There.is.no.one-size-fits-all.model.of.performance.budgeting. Each ministries who treat this reserve as ultimately expendable. country needs to adjust its approach to relevant political and institutional • In Turkey, the Government is considering a fiscal rule to enhance circumstances. Recent efforts in advanced economies 29 have emphasized the credibility of the Medium-Term Fiscal Plan. Technical stud- the need to increase authority and incentives for line managers to achieve ies have been initiated recently with the support from the IMF. agreed results. Some countries are developing relatively sophisticated Poland.is.expected.to.introduce.an.mteF.in.2009. Existing elements systems for performance-based (i.e. results-oriented) budgeting and ac- of the medium-term fiscal framework, like the Convergence Program, are counting. These increase the transparency of strategic and operational a good starting point. The focus should be on capacity building to produce choices made through government budgets. Emerging Europe can learn reliable bottom-up forward estimates, including their presentation in pro- from global and regional best practices. gram format and harmonizing parameters and methods applied by sec- There. is. no. single. description. or. understanding. of. performance. tors in the estimation process. Successful implementation of PBB greatly budgeting but it is widely agreed that defining objectives, developing in- increases the effectiveness of the reconciliation process within the MTEF. tervention strategies and reporting against specific achievement measures Well-structured programs group together services which have common or targets are the cornerstones of a performance budgeting approach. objectives and parameters, facilitating preparation of forward estimates. These concepts and methods, including comprehension of the appropriate regional.experience.in.mteF.implementation.highlights.the.fol- situations in which they can be applied and the degree to which resource lowing.lessons:. allocation decisions might be based on past (or expected) results, are still • Fiscal policy objectives and quantitative fiscal targets need to be evolving. A common element of performance budgeting is that it gives well defined at the highest level of government and rigorously budget managers greater autonomy, flexibility and certainty over resourc- pursued under leadership of a strong MOF responsible for re- es. In many cases, a principal trade-off against this increased managerial forms. freedom is increased responsibility and accountability for results (Web- • Robust forecasts on the revenue side and realistic expenditure ber, 2007b). targets are critical. To achieve this, the analytical capacity of 29 See, for example, Curristine T. (ed.), 2007, or Robinson M. (ed.), 2007. 76 77 options.are.available.in.institutional.arrangements.and.account- 2 .1 ..motivating.factors.behind.adoption.and.current.status.of.pbb. ability. arrangements. ranging from. a highly decentralized approach reforms (Holland) to a more centralized model (Chile). Understanding the op- Across. the. region,. pbb. reforms. have. been. seen. primarily. as. a. tions available helps governments avoid the mistakes of being too liberal means.to.improve.allocative.efficiency.of.pubic.finances. On the back in their deployment of PBB. Given Emerging Europe’s tradition of an or- of international trends or inspiration, policy makers have viewed PBB as a ganizational culture, a centralized model may be a more attractive option. tool to change the institutional culture of public administration, introduce There.is.still.some.debate.on.whether.or.not.pbb.and.mteF.work. more predictability in fiscal policy, and demonstrate links between fund- best.in.tandem ..If applied rigidly, an MTEF can be used to establish hard ing and results. Reformists believe in strengthening aggregate fiscal disci- or semi-hard budget constraints for institutions over a medium-term ho- pline (Bulgaria, Latvia,.Poland)30. Turkey’s motivation to introduce PBB rizon without much change in the way annual budgets are prepared, or in was a legally binding commitment to restructure PFM and the control the accountability mechanisms under which they operate. Performance- system. Generally, growing peer pressure, international debate on the is- based Budgeting (PBB) in its most austere form (such as Performance- sue and the fact that PFM reforms are now ‘trendy’ made the PBB concept Determined Budgeting, PDB) can report ex-post on results without the fashionable. In practice, all countries reviewed in this study opted for Per- need of substantive medium-term planning. formance Informed Budgeting (PIB) or Performance Reported Budgeting For. many. reasons,. emerging. europe. needs. improved. public. fi- (PRB) rather than PBB or the variant of PDB as outlined above. nancial.management ..These reasons include.large macroeconomic im- countries.in.the.region.have.recently.taken.the.first.steps.in.pbb. balances, compliance with Maastricht criteria (see Annex 3), or the poor implementation. (see. table. 4). and. are. now. refining. the. performance. quality of basic public services like infrastructure, health care or educa- framework. There is still considerable room for improvement. These im- tion. The current global financial crisis has placed even greater demands provements include better specification of outcomes, more relevance in on government budgets and on getting better performance from public performance indicators and institutional changes leading to increased ac- expenditures. Efficiency gains and increased effectiveness in government countability for achieving results. The.introduction.of.pbb.methods.in. expenditure policies and programs are therefore a necessary and attrac- some.parts.of.the.region.has.been.made.in.the.context.of.broader.pFm. tive means for improving the impacts of fiscal policies in the region. In- reform.programs.and.accompanied.by.changes.in.organic.budget.laws. creasing revenues or borrowing may have a negative impact on economic (Slovakia,. Latvia and. Turkey) .. In the other three countries, there was growth, especially in countries with relatively high tax-to-GDP ratios and no broader reform context and these methods were based on the existing public debt levels (Turkey, Poland, Croatia), and there are risks connected legislation that was modified later on. All countries used COM decrees with Public-Private Partnerships (PPPs). or MOF instructions/manuals/guides or the budget circular. Some PBB- Although.greater.efficiency.in.public.expenditures.is.increasingly. related adjustments in the budget law were made (e.g. Poland.– amend- sought,.pbb.initiatives.cannot.bring.immediate.results. International ments in 2006 and new Law on Public Finance 2008) or are expected experience suggests successful PBB implementation requires persistent (Bulgaria) to reflect the first lessons from the learn-by-doing process and efforts over several years, combined with an ongoing political consensus strengthened political support. In all countries, PBB was initiated together on the need for this reform. with an extensive training program and consultations with public admin- istration and some have been making use of significant financing from EU structural funds (Poland). counties.are.currently.in.different.stages.of.pbb.implementation. Slovakia is a front-runner while the two non-EU members are least ad- vanced. Croatia, four years from reform initiation in the 2005 budget, is 30 PB enables selective spending cuts instead of blind flat cuts all across the budget, which is often a reality in case of fiscal crisis. It can help relax budget rigidities but requires a complex public expen- diture and institutional review. 78 79 Table 5. PBB approach - coverage in public spending and by administrative units 2006 – PBB approach to in central Government be completed by 2010 Bulgaria Croatia Latvia Poland Slovakia Turkey Turkey As percent of total general government expenditure Around 40 Around 80 Around 80 Around 50 In 2008 – 46 Not applicable percent percent* percent percent percent, In 2009 units. – 63 percent As percent of total central government expenditure forms, World Bank project, 2000 – hiring of US Treas- tion, Academy of Science, according to the revised 2008-2009 – introduction All units All units* All units All units All units except Not applicable 2002- additional six pilot in public finance law of board in 3-level program 2001 - four pilot projects 2002 (Ministry of Educa- State Treasury IT system, 2003 – MOF reorganiza- information system and of program monitoring tion, budget division as supplemental PBB budget driving force of PBB re- under MOF leadership; 2003 – budget for 2004 and evaluation system. (2009) targeted funds of the program budget Constitutional Court), refinement of budget Supreme Court, and PBB-related amendments prepared across the By administrative units Slovakia State budget State budget, Central State budget, State budget State budget, facultative for government, sub-national units and state facultative for ury adviser, local govern- facultative for governments funds, from local govern- structure, projects, ments local govern- are independ- 2009 obligatory ments ments ent also for sub- national govern- led by the Chancellery of the Prime Minister (crea- ments ment system and mainly tion of PBB department, preparation of methodo- 1997 – budget programs, 2006 – first steps in PBB 2007 – the first (partial) of indicators and reduc- (science, higher educa- 2008 – new guidelines assistance of US Treasury objectives, better quality 2006 – pilot programs summer/fall 2008, the tion of their number, im- tion, education, labor, 2009 budget prepared supported by experts, for the preparation of Notes: *) In Croatia, PBB approach refers to the programmatic structure, while perfor- PBB documentation and state agencies, with approach (more specific logical guidelines), mance information is not in place Poland Source: World Bank staff social affairs), methodology. still without a cost allocation mechanism or a set of performance indica- tors; an organizational rather than a program approach to budget alloca- table.4 ..date.of.initiation.and.coverage.of.recent.pbb.reforms.in.the.region. 2008, tions dominates and PBB remains very much at the pilot phase. Bulgaria, Latvia, and Poland are somewhere in between, but closer to the non-EU 2008 – revision of PBB proving M&E process). 2003 - introduction of performance manage- members, compared with Slovakia. Bulgaria has, however, advanced the output indicators, implementation of the PBB with all line ministries and state agencies de- Latvia veloping now program budgets with comprehensive performance infor- mation. Latvia, which pioneered the reforms in the region in late 1990s, has revisited the approach thoroughly in 2008 and developed new guide- lines on performance indicators. Strategy for Development framework as mandatory law introduced the PBB the State Treasury 2007- implementation started 2003 – initiation of pro- selected line ministries matic format for the 2008 key aggregate perform- to be applied gradually. gram budgeting, while tion reports) in program- draft methodology for 2008 – Medium-Term only.Slovakia.is.introducing.monitoring.and.evaluation.(m&e),. and Modernization of 2011 and new budget 2004-2006 – pilots in and the World Bank; in the 2005 budget, an.advanced.element.in.the.pbb.toolkit. The benefits of M&E become Croatia ance indicators, more evident in the effective absorption of pre-accession and structural EU funds. In-depth program evaluations require special resources and considerable time, effort and funding. This is why governments in the re- gion undertake only a few such evaluations each year. It is not possible at Source: World Bank staff 2007 – all first level units this stage to assess these M&E efforts more thoroughly when only a small 2002 – pilots (Ministry plans and implementa- budgets (multi-annual 2003-2005 – pilots in proportion of programs have so far been evaluated in depth. of Environment and required to prepare other ministries, Bulgaria given. the. current. stage. of. pbb. development. in. the. region,. gov- ernments. are. more. likely. to. focus. on. systematic. performance. infor- Waters), mation. rather. than. on. program. evaluation .. Such regularly-collected budget. performance data can be useful for later in-depth program evaluations. 80 81 Most evaluations are done ex post and are influenced by how much earlier Table 6. Expenditure classifications and accounting standards as of mid-2008 performance data is available. Bulgaria Croatia Latvia Poland Slovakia Turkey on.the.implementation.side,.in.early.years.pbb.builds.on.rather. Economic V V V V, national V, national V than.replaces.existing.basic.budgetary.procedures.or.institutions. It in- Functional V V V V V (CO- V troduces a new budget classification by objectives and programs which FOG) Administrative V V V V V V exist alongside existing economic or administrative classifications. The Program V (partial) V (too frag- V (partial) V (partial) V PBB framework is usually multi-annual. The PBB system requires consid- mented) erable additional information and some efforts have been made to inte- Funding V V V V V V grate these needs into the financial management information system (Slo- Accounting Cash Cash, re- Cash, Cash, Cash, GFS 2001 Standard ports also in transferable transferable transferable from 2004, vakia). Internal audit and monitoring and evaluation arrangements gain GFS 2001, to ESA’95 or to ESA’95 or to ESA’95 or accruals importance when budget managers have more discretion selecting inputs. from 2008 GFS 2001 GFS 2001 GFS 2001 from 2004 in ESA’95 standard standard standard All.countries.in.the.region.have.been.struggling.with.performance. information.overload. In budget documentation, the emphasis is prima- Source: World Bank staff rily on transparency at an aggregate level. Going downwards in the PBB (Table 6) this information includes itemized inputs, economic, functional, architecture, more detailed information is provided because it impacts and administrative (institutional) classifications, and data on outputs or directly on budget decisions. The comprehensiveness of performance in- outcomes. This creates new information demands which must be proc- dicators is not always satisfactory in Emerging Europe but all countries in essed under tight deadlines. In the past, while focusing on outputs or out- the region have the capacity to specify clear objectives for their govern- comes instead of inputs, countries like New Zealand eliminated much line ments. item data from the budget. Schick argues that overload also occurs when governments add new expenditure classifications to the old ones. He em- 2 .2 ...budget.classifications.at.present.and.prospects.for.the.future. phasizes that while there are many ways to tell a budget’s story and explain to.help.address.the.management.challenges.of.pbb,.schick31.rec- how public money is spent, there can be only one classification for budget ommends.breaking.it.down.into.its.two.main.elements. First, PBB is a decisions. system for compiling and presenting information on actual or expected program.classification.is.usually.the.first.step.in.introducing.pbb. results. Second, it may be used as a means for ‘purchasing’ results through but.was.circumvented.in.most.countries.in.the.region ..Instead, they.fo- expenditure of public funds. These two elements are interdependent. cused on other PBB elements such as performance indicators. Only Slova- To change the way a budget is made, its content and structure must be kia developed a holistic program classification. Bulgaria, Croatia, Latvia, changed. And to implement PBB, budgets must include information on and Poland did so partially (covering only state-budget units), while Tur- results and link that new information to decisions on future expenditures. key is still debating whether or not transition to the program classification PBB always increases the cost of generating and processing budget infor- is necessary. According to Van Eden 32, program classification is a useful mation and the more comprehensive the PBB system, the more demand- planning tool even without links to performance management. To ensure ing it is to implement. This is because performance-based budgets depend ownership and comparability, PBB needs to be developed jointly by line on information gathered through special effort, while traditional budgets ministries and MOF. oriented to line items and organization units usually operate with little program. classification. has. not. replaced. traditional. line-item. regard to actual results. budget.classifications.in.the.region.and nor has any.country scheduled pbb.is.usually.launched.by.adding.performance.data.to.the.stock- this move for the future. Even where budget allocations and expenditure pile.of.information.already.processed.through.the.budget. In the region decisions are made on the basis of a full program classification, it is es- Schick A., Getting.Performance.Budgeting.to.Perform, May 2008, Performance Budgeting Confer- 31 Van Eden H., Key.issues.in.program.classification, High-Level Seminar: Performance Budgeting and 32 ence in Mexico. Information, IMF-FAD, Paris, March 2007. 82 83 sential to retain the main elements of an item classification for budget retaining.some.input.controls.after.pbb.introduction.is.common. analysis and management purposes33. Once a full program classification practice . Such controls can include actual expenditures on salaries and is in place, it will be desirable to review and revise the item classification wages, staffing numbers and capital spending at the ministry level or be- to ensure it can continue to provide essential, but not excessively detailed, low at the program or sub-program level. expenditure information. Even in the comparatively more advanced budg- with.regard.to.accounting.standards.in.the.region.(table.6),.it.is. eting system in Slovakia, program classifications are regarded as a new sufficient.at.this.stage.to.note.that.pbb.approaches.work.perfectly.well. way of presenting budget data and serves as additional information for on. the. types. of. predominantly. cash-based. systems. which. are. preva- policy makers. Traditional line-item budgeting and PBB are used simul- lent.in.the.region ..In all countries, the budget is enacted on a cash basis taneously. The budget information system connects both forms of budget but some supporting documents for a consolidated general government presentation and, since 2006, the State Treasury provides data on budget are presented on an accrual basis. (Accounting issues are not covered in execution in the program structure. In Poland it has not been decided yet this study but, as noted in Chapter 1, most Anglo-Saxon countries have whether or not a PBB approach will replace the traditional one. This deci- adopted the PBB framework under accrual budgeting34). Accounting is- sion will be made in 2014 and will be based on an evaluation of parallel sues become extremely important when designing an IT system to sup- functioning of the two forms of budget management scheduled for 2013. port budget operations. Before designing the system, it is worth reviewing These examples show the challenge in making program structure the basis government accounting standards to check for inconsistencies. Even if the for budget management, including appropriation, execution and control. accounting system is cash-based, fiscal transparency requires the system Across. the. region,. administrative. and. economic. classifications. to record commitments as well as payments. Regardless of the account- provide.the.principal.basis.on.which.budget.expenditures.are.allocated. ing basis, the system should be capable of tracking assets and liabilities and.managed. For each agency and line ministry a limit is determined and their changes. Because of the complexity of both issues, simultaneous (based on existing costing methods, in many cases incrementalism) and implementation of PBB and introduction of accrual budgeting is not rec- broken down into major economic budget lines: wages, separation of cur- ommended (see also Robinson, 2007b). rent and capital expenditures etc. It is difficult to explain why it takes so long to replace input budgeting and line-item classification with a trans- 2 .3 ...basic.architecture.of.the.pbb.approach. parent program classification. It focuses budget policy on goals and per- initial.efforts.in.introducing.pbb.usually.focus.on.classification.of. formance and offers managerial flexibility to line ministries as well as an expenditures. into. programs,. sub-programs. and. activities. and, some- opportunity to evaluate public agencies against their stated objectives. All times, sub-activities. At the more detailed levels, specificity is increasing countries in the region are combining the organizational breakdown be- and relates clearly to policy objectives. Conceptually, program classifica- side the program structure, as shown in the left panels in Figure 3. tion differs from the GFS 2001 functional classification because govern- Figure 3. Modes of combining organizational and program budget classification ment program objectives may be met by activities in several functional areas. Government activities are performed by a number of organizational Organization Program organization/program entities. All these activities are transparently consolidated in the program Ministry Ministry Agency Program Agency/Program classification, usually organized by the line ministry. Department Sub-program Department/Sub-program The. fundamental. principles. of. program. classification. are. com- Division Activity Division/Activity mon.but.the.overall.approach.is.not.standardized ..This is revealed in Source: Van Eden, op. cit. the comparison shown in Table 7. Most frequently, program classification covers from two to four layers and the nomenclature depends on the na- tional practice. Although the first layer is a full program, it is not always Ministries and governments need to know how much is being spent on travel, vehicles, and utili- 33 ties, across all programs, to identify areas for improved control measures and for improving cost- Technically, accrual accounting methods can provide greater transparency in measuring the cost of 34 efficiencies in purchasing and procurement. public policies and may sometimes support improved management of assets and liabilities. 84 85 called a program. As indicated by Van Eden35, policy objectives define on their own. The Justice Ministry provided a strong example. Subse- programs and program structure is driven by the government’s strategic quent negotiations with MOF were conducted in the context of budget objectives. The program structure arranges budget information in a useful submissions. Pilot projects enable technical adjustments to be made to way to respond to the what, how, and at what price the program manager the reform project. They are also conducive to greater acceptance by the within each spending agency wants to achieve its goals. staff concerned. In Bulgaria PBB methodology exists but its uniform im- plementation is complicated by the limited oversight and feedback that Table 7. Architecture of PBB framework, as of mid-2008 MOF provides to line ministries on the quality of the program budgets bulgaria croatia latvia poland slovakia turkey and performance information. Bulky reporting requirements and capac- level.1 Policy Main pro- Program Function Program ity constraints prevent MOF from making systematic quality assurance of gram No .of.items 72 424 22 95 PBB. To get the PBB approach operating, the region would benefit from 47 standardizing methodologies and procedures relating to the design of the level.2 Program/ Program Sub-pro- Task Sub-pro- gram gram PBB architecture and monitoring of PBB indicators. No .of.items Other Program Max .two. More than 215 targets altogether 411 Not 2 .4 ..Approach.in.sectors.with.overlapping.responsibility.of.some. level.3 Product/ Sub-pro- Items from Sub-task Element or in place institutions,.including.extra-budgetary.funds No .of.items Service gram economic Max .five project 448 classifica- 804 The.pace.of.pbb.implementation.depends.on.moF.involvement. per.task tion Even in countries were reforms were initiated by another institution (Po- level.4 Activity Activity land, Latvia) or jointly by several institutions (Turkey), the main efforts No. of items (current or capital after the initial phase were taken by MOF. This positively affected owner- project) ship of the PBB reforms in MOF. Source: Bank staff. The.vast.majority.of.programs.are.embedded.under.a.single.agen- cy.(ministry).across.the.region ..In the case of overlapping tasks of some programs.have.been.developed.by.line.ministries.in.cooperation. institutions, MOF or the Chancellery of State (or Chancellery of the Prime with. moF. (bottom-up. approach). and. include. goals,. objectives. and. Minister) took responsibility for coordination. Defining all programs un- measurable.indicators. Line ministries are responsible for further break- der line ministry structure is the most practical approach because it aligns down of given limits into classifications available to the lowest level of de- with overall ministerial accountability. With a long-lasting tradition of tail. In Poland, after the pilot phase in 2006-2007 in which line ministers sectoral breakdown, cross-agency responsibility would be too demanding had a lot of freedom in proposing the structure in their area of respon- for any country in the region. Level 1 programs have not, anywhere in the sibility, MOF decided to oversee more closely the general framework (a region, become the budget management unit and ministers or authorized delicate shift towards a top-down approach). In spring 2008, it formulated budget administrators have not become budget managers36. In the case the general architecture at Levels 1 and 2, while giving line ministers more of multi-sector (inter-ministerial) budget programs, inter-governmental freedom to formulate the lower levels. In Slovakia, ministries in many working groups have usually been created to solve policy and operational cases use the program structure actively in their policy planning. Some- conflicts. times it is treated as a rigid framework and strategic planning or costing if.the.program.overlaps.the.activities.of.more.than.one.institution,. exercises are separated from budget programs. Pressure from MOF has so a.program.leader.is.appointed . In Latvia, the Ministry of Finance, sup- far been unable to change these practices. ported by the State Chancellery organized working groups with repre- pilot.projects.in.selected.sectors.were.very.useful.but.additional.ef- sentatives from other institutions to solve specific issues of the division of forts.are.needed.to.make.the.pbb.approach.operational. Line ministries inter-sectoral responsibility. In Slovakia, five of its 70 programs are multi- in Slovakia could develop program structures and performance measures Conversely, in France, a dedicated program manager is in charge of implementation with fundable 36 Van Eden, op.cit. 35 credit lines within the program allowing for more flexible management. 86 87 sectoral and a lead ministry is appointed with responsibility for program ture rather than to government strategy. M&E systems are on the coordination. Other participating ministries create their sub-programs agenda only in Slovakia. It is still unclear whether, when and to with goals consistent with program goals. what degree the PBB approach will replace traditional budgets. nowhere. in. the. region. have. extra-budgetary. funds. (ebF). been. •. Insufficient.capacity.and.the.lack.of.clarity.about.ownership ..Train- brought. fully. within. the. pbb. process. Usually only selected EBFs or ing in public administration is an extensive rather than intensive agencies have been included. For example, in Croatia all social secu- process and difficult to conduct without a clear vision. Different rity EBFs follow program budgeting requirements but agencies such as knowledge is needed by policy makers and those responsible for Croatian Roads and Croatian Highways do not. Because not all sources planning and budgeting. of funding and planned outlays were considered, the overall picture is not •. Resistance.to.change.in.public.administration Inevitably individ- fully consistent with broad policy statements and commitments37. EBF uals are threatened by the disruption of well-established operat- can undermine transparency of public spending and distort resource al- ing procedures and resist change. Reforms have to be ‘sold’ to location from the announced policies. This makes it essential to include agencies which must accept the need for the new system and un- EBFs into the PBB framework and ensure they carry out government poli- derstand that it will provide managers with useful information. cies transparently and subject to the same accountability requirements as In Latvia, PBB was perceived as a tool for punishment which, in other budgeted expenditures. They should also follow the same basis as conjunction with insufficient training, led to resistance. In Slo- budget reporting with expenditure presented on existing classifications, vakia, PBB implementation in the early stages was not to punish including the program classification. or reward performance but to gain support for the changes. This lessened the risk of opposition from the public administration. 2 .5 ...main.problems.impeding.effective.adoption.of.the.pbb.structure. •. Lack.of.aligned,.holistic.and.robust.program.classification In Lat- chapter. 1. summarized. most. problems. impeding. effective. adop- via, programs are broad and allow for flexibility but the links tion.of.pbb,.based.on.international.experience. In Emerging Europe, between them and strategic priorities are blurred and there is the following issues are particularly relevant: unjustified focus on performance indicators. Croatia has a pro- •. Insufficient.commitment.of.government.or.selected.line.ministers. liferation of programs with weak links to strategic priorities and Public finance reform has been on the agenda for many years but limited to an individual ministry’s policy agenda. Overly frag- progress has been limited. Many governments in the region still mented programs prohibit design of an adequate M&E system. treat PBB as a trial initiative. Changing behavior in public ad- •. Ineffective.budget.negotiation.processes should be changed to fo- ministration is difficult; strong leadership and commitment are cus on results and achievements. Although the budget manual vital. Slovakia lacks political commitment in several line minis- defines program classification as a basis for budget preparation, tries and this was reflected in the quality of their programs and it is often carried out on the basis of organizational classification indicators. – i.e. in terms of expenditures per organization units. There is •. Lack.of.clear.vision.and.conceptual.clarity In many countries the no institutionalized process for using high quality indicators (re- required PBB system (whether PIB, PRB, PBB, or PDB) has been sults of research, performance and efficiency benchmarks etc.) unspecified and the associated methodology therefore unclear. during the budget negotiation process. Too much attention has been paid to performance indicators and •. Inadequate.IT.systems.for.budget.operations.(planning,.execution. not enough to linking program structures to broader strategic and.reporting).and.collection.of.indicators. Even if a fully com- goals. Programs still tend to be aligned to organizational struc- puterized budget system exists, additional solutions are needed to create user-friendly tools. Establishing an IT system should This is especially true for sectors like health. For example, in Poland the National Health Fund con- 37 not be seen as merely computerizing existing procedures but trols for around 90 percent of public expenditure on health while the Minister of Health controls rather as an organizational reform which includes redesigning the remaining 10 percent and is responsible for supervising the fund. 88 89 information flows and which supports all budget classifications. in. the. uk. approach,. design. of. performance. measures. has. been. Building such a system takes time and effort. The steps are well closely. related. to. the. selection. of. targets. at. each. level. of. the. system. known: preparatory requirements analysis, system design, devel- (Webber39). The UK has established eight criteria for performance meas- opment and testing; procurement and installation; testing of the ures: full system in the user environment, training and conversion. It • relevant to what the organization is aiming to achieve is important to get these steps right because fixing mistakes later • able to avoid perverse incentives is never easy. As well, it is difficult to specify functionality in the original design phase because the methods of the new PBB ap- • attributable – the activity must be influenced by actions of the proach may be subject to further change. institution, •. Insufficient.use.of.performance.information.in.the.decision-mak- • well-defined, ing.process..Across the region, budgetary decisions haven’t been • timely – produces data regularly and quickly enough and probably won’t for several years be made on the basis of • reliable performance. However, performance information may be used • comparable with either past periods or similar programs else- with other types of information for policy decisions. Even in ad- where vanced countries, integration of performance and budgeting re- • verifiable with clear documentation behind it. mains difficult. According to Breul38 this is because performance planning, budgeting and cost accounting systems often operate A.discussion.about.the.nature.of.indicators.(outcome/output/re- in parallel silos. Breul believes a mechanistic link in the budget sult).which.work.best.for.users.of.the.pbb.framework.was.held.in.the. process between resources and results is neither possible nor de- region. As is the case internationally, it is far from being settled (see Box sirable. Performance data can inform but should not drive bud- 1). getary decision-making. countries.in.the.region.spent.much.time.debating.between.moF. •. Timing.issues.and.unrealistically.short.project.timetables. In hind- and.line.ministries.whether.or.not.particular.measures.are.outputs.or. sight, these changes may have been made too quickly in Lat- outcomes. and. the. quality. of. indicators. remains. an. issue. As Schick40 via, especially for building sufficient capacity in MOF and for points out, spending units often deal with the cost problem by producing strengthening expertise in sectoral expenditure policy and man- vast amounts of data on the activities and work of spending units. Having agement. In Slovakia, rapid change led to reluctant cooperation a surfeit of data is often a substitute for having the right kind of data. In among some middle-management staff in line ministries, espe- the PBB framework, agencies are tempted to itemize all the things they cially in the policy sections. do; this is why PBB systems, especially in this region, may be inundated with far too many low quality indicators. There is no independent audit of •. Insufficient.involvement.of.budget.people.from.MOF Aside from indicators, for example by a national audit office. the additional work burden, budget staff may have felt threat- ened by the level of transparency an FMIS imposes on them. performance.targets.and.indicators.are.generally.defined.in.a.bot- tom. up. process,. which. suffers. from. some. weaknesses. Performance 2 .6 ...performance.indicators:.their.selection.mode,.number.and. measures were based on criteria outlined in the budget circular and ex- accountability.processes.attached.to.their.achievement planatory note to the budget act (the latter case in Poland) or in meth- odological guidelines issued by MOF (remaining countries). In Poland, Application.of.pbb.methods.in.the.region.is.still.evolving in paral- before the revision of the PBB approach in spring 2008, budget units had lel with other developments and improvements in public administration to define performance targets for tasks and subtasks (Levels 1 and 2) in and management. 39 Webber D., 2007, Good.Budgeting,.Better.Justice:.Modern.Budget.Practices.for.the.Judicial.Sector, Breul, Jonathan D., Performance-Based.Budgeting.in.the.United.States, Presentation at the Interna- 38 Law & Development Working Papers series, No. 3, World Bank. tional Conference on Performance-Based Budgeting, Warsaw, November 2007. 40 Schick A., op.cit. 90 91 consultation with MOF and external experts. Because methodological Figure 4. The Public Expenditure Manageme nt Process guidelines were quite general, line ministries relied on their best knowl- edge in selecting indicators. This approach was criticized by Misiąg41 be- Appropriation Spending Programme/Activity Impacts cause the entities responsible for achieving targets have little motivation Outcomes to set ambitious ones. It failed to force managers to use budgetary resourc- es in a manner expected by the public. This happened in Slovakia where Needs achievement of planned results varies across different line ministries in Results Efficiency tandem with the quality of their objectives. Weak or outstanding perform- Design ance can be attributed mainly to poor definition of targets (exaggerated or underestimated) rather than excellent program management. In Latvia Objectives Inputs Operations Outputs and Bulgaria the number of indicators is excessive, lacks a clear hierarchy, Relevance and is mostly output oriented. In Turkey, due to the absence of a relevant Effectiveness standard, agencies determined their performance indicators individually Sustainability and this led to differences in the number and quality of indicators. Source: Webber 2004 44 Box 1. Some insights from debate on the nature of performance indicators outcomes.are.at.the.end.of.the.pem.process. For this reason they may often be The.argument.for.downplaying.the.role.of.outputs,.while.giving.increased.at- the most difficult to identify and intervention is required. Performance measures flow tention.to.outcomes, is well summarized by Brumby and Robinson (2004)42. A.strong. upwards from outputs to results and finally outcomes. The latter indicate the sustain- argument. can. be. made. for. outcome-focused. performance. budgeting . Outcomes. are. the. ability of the range of government expenditure policies in realization of the society-wide intended.effects.of.government.programs,.whereas.outputs.—.the.goods.or.services.deliv- goals. Outputs help ministries formulate decisions and program design in a practical ered.by.government.—.are.the.means.of.achieving.those.outcomes .It.can.be.argued.that. way. Their direct consequences or the impacts of the expenditure are results. These re- outcomes.are.what.really.matter.and.that.to.focus.too.much.on.outputs.in.a.performance. sults from the policy or program and their impact is detectable within a policy-relevant budgeting.system.is.to.run.the.risk.of.focusing.too.little.upon.the.effectiveness.and.quality.of. period; at this level the effectiveness of interventions can be measured. services .Nevertheless,.it.can.be.argued.that.outputs.must.have.a.central.role.in.a.workable. Figure 4 indicates the links between the components of the PEM process in a way form.of.performance.budgeting that meets relevance, efficiency, effectiveness, and sustainability criteria. The issue was also discussed by Webber43 based on New Zealand’s experience. A gradual re-orientation from outputs to outcomes is also visible in subsequent PSA (Pub- schick. (2008). emphasizes. the. issue. of. asymmetric. information. lic Sector Agreements) rounds in the UK. Outputs still exist at a more operational level When their budgets are at risk and performance measures are used, budg- and are much more likely to be available than those pertaining to outcomes or impacts et managers have incentives to provide misleading information or even so they are often given prominence in PBB systems. deceive. One sensible tactic would be to identify a small number of pow- However, the linkage of resources and results is much stronger in budgeting for outputs, even though outcomes generally are regarded as the more appropriate meas- erful measures that represent the main objectives of an organization or ure of performance. The resources-to-results link is weak because outcomes often derive program and verify the results independently. from multiple causes, some of which are beyond government control. Although. indicators. are. not. the. most. important. element. of. the. Key relationships in the budgeting and expenditure management process are dem- pbb. approach,. especially. in. the. early. phase. of. its. implementation,. onstrated in.Figure 4 . This process shows that operational activities sit at the centre of program management and resource allocation decisions and the impacts of these deci- their.uneven.quality.has.exposed.pbb.to.some.criticism ..Initial diffi- sions may be measured and assessed in varying ways, and at varying distances, from the culties in identifying and selecting suitable performance indicators can programme delivery function. undermine the overall PBB reform efforts. However, this needs to be bal- 42 Brumby, J. and M. Robinson (2004), Performance.Budgeting,.an.Overview, paper prepared for IMF and Brazilian Ministry of Planning, Budget and Management seminar: International.Seminar.on. Performance.Budgeting, Brasilia, March 2004. 43 Webber D., Wrestling.with.Outcomes:.The.New.Zealand.Experience, Agenda, Volume 11, Number 4, Misiąg W., 2007, Performance-based.Budget.for.2008.and.what.is.next? (Budżet zadaniowy na rok 41 2004. 2008 – i co dalej?), Public Finance Bulletin, IBnGR. 44 Adapted from an idea in a European Community (2000) Working Paper on designing evaluations. 92 93 anced against the risks of allowing line ministries to choose simple and 2 .7 ...Accountability.processes readily available indicators that may not reveal the true focus or impact of Although.good.cost.accounting.capabilities.are.rare.in.many.gov- their expenditure activities. ernments,.these.skills.are.especially.useful.in.the.context.of.pbb ..A key These.different.attitudes.and.technical.capacities.are.reflected.in. requirement of PBB involves.allocating costs among the units of outputs the. quality. of. performance. indicators. across. budget. units . In Poland or outcomes produced by the public sector. Unit cost data enables govern- some indicators used in the 2008 budget were imprecisely defined, im- ments to focus on efficiency and performance management, including as- measurable and, in a few cases, without a baseline value. In one case, sisting with making trade-offs among competing claims for budget funds. the target value was below the baseline. Indicators published in the 2008 This requires a capacity to apportion costs among the results produced by budget were not subject to internal or external control and some indica- public agencies, including an ability to distinguish between fixed and vari- tors in the 2009 budget share these weaknesses. able costs. A challenging element is attributing indirect costs, like legal it.is.difficult.to.judge.the.appropriate.number.and.relevance.of.per- services45. Computerized financial management information systems can formance.measures.in.the.region.but.it.is.clear.that.many.are.not.ideal. greatly facilitate cost accounting in a modern government expenditure As shown in Table 8, there are differences across the region regarding the system. number and coverage of indicators. Too many indicators pose a risk for The. traditional. one-year. budget. horizon. does. not. suit. pbb. sys- credibility and for remaining unused. A collection of (numerous) indi- tems.and.focusing.only.on.outcomes.is.insufficient. When government cators fails to provide information about the efficiency of expenditures. wants to generate significant changes in outcomes, it needs to budget over International experience suggests each country should seek to improve at least a medium-term horizon. The MTEF becomes a very useful tool, the quality of its indicator sets and its capacity for good monitoring over provided it is not merely a technical exercise. A monitoring system based time. A small number of key measures is preferable. The United States’ only on outcomes rarely provides a useful signal of either the efficiency or PART model offering simple summary measures has merit, but it may be effectiveness of individual agencies or expenditure programs. Outcomes too early to adopt this tool in Emerging Europe. may suit policy makers as a means for better explaining policy goals and expectations, but budget managers need also to monitor and analyze out- Table 8. Performance indicators in 2008 budgets put measures. bulgaria croatia latvia poland slovakia turkey Slovakia. illustrates. the. benefits. of. an. integral. database. for. col- no ..of.indi- lecting. and. analyzing. performance. indicators . Program performance cators N/A 496 approx. 950 631 Outcomes indicators is monitored through the budget IT system twice a year, in addition to N/A 1597 675 Outputs routine monitoring by policy makers. Line ministers in Slovakia as well coverage.of. Baseline Baseline Budget Baseline, budget Three previ- Two previ- as in Bulgaria are obliged to submit monitoring results to MOF, Cabinet, indicators year and year and year year, and two ous years, ous years, and Parliament. In Poland, in the 2007-2008 budgets, performance indi- three two years years beyond budget year, budget years beyond and two year, and cators were presented only in the justification of the budget act. Without beyond years beyond two years a proper mechanism for data collection, analyzing, and verification, the beyond exercise at the very early stage of the PBB implementation was of limited specific. Max. three Previous use. In Latvia MOF prepares a report on implementation of the perform- guidelines. indicators per limits on for.indica- tasks and one the number ance management system within the previous year. From 2009, ministries tors indicator per of indica- are expected to report on results and performance indicators. sub-task tors were cancelled Accountability.processes.relating.to.the.achievement.of.perform- Source: World Bank staff ance.indicators.in.the.region.are.weak.or.non-existent . In Turkey there are annual accountability reports and internal control assurance state- See Robinson, 2007, op.cit. for more discussion. 45 94 95 ments, and performance outcomes are evaluated within the framework mandate to achieve its mission (objectives). Performance would be a key of managerial responsibility. In Latvia information resulting mainly from driver for the minister and staff because they would be judged on their international commitments has been regularly monitored and updated. achievements. If successful, such a pilot project could have a powerful Collecting performance indicators is treated as a formal exercise with no impact on other public sector units. impact on budget allocations. In Bulgaria, where there is no formal ac- some. countries. in. the. region. (Bulgaria,. Poland and. Slovakia). countability related to achievement of performance targets, line ministries started. with. government-wide. implementation. and. a. few. agencies. have no incentives to improve the quality of program budgets. Lack of working.more.intensively.on.budget.reform. This had beneficial results. program evaluations in Slovakia is acknowledged as a weakness in the sys- It quickly yielded results showing other agencies the promise of the sys- tem but there are proposals for change in 2009. Given that projects aimed tem and highlighted problems to be addressed. Pilots, however, risk send- at implementing M&E systems were started in 2006, this is long overdue. ing the message that government is not fully committed to PBB reform. A clear shift from pilots to government-wide implementation is essential. 2 .8 ...examples.of.the.best.practice.or.poor.performers.in.pbb. The pilot should not delay agencies from taking the effort seriously and preparation using the time to master the basic concepts. progress.in.pbb.implementation.is.understandably.uneven.across. sectors . Certain sectors (e.g. health, education46) usually find it easier to 2 .9 ...impact.of.pbb.on.budget.allocations.and.the.quality. adopt PBB methods while other sectors where the impacts of policy may of.budget.preparation.and.oversight,.and.future.plans.for.pbb. be harder to quantify (e.g. justice) have greater difficulty. Sectors where implementation independent agencies execute government policy (such as transport) can most.countries.in.the.region.have.adopted.performance-informed. also adapt readily to PBB methods and structures when strategic objec- budgets.but.their.impact.on.resource.allocation.has.so.far.been.mar- tives are well defined and flows of funds are adequately managed. For the ginal. Performance programs in Turkey have been used to provide in- first few years since the reform initiation, many departments (ministries formation in the course of budget preparation, rather than for resource and agencies) struggled to develop a set of clear, meaningful and achiev- allocation purposes. Ideally, PBB should inform government budget prep- able outcomes. Other challenges have since emerged such as developing aration through better prioritization and increased pressure to perform. effective links between outputs and intended outcomes and underpinning performance. information. is. not. used. when. decisions. are. made. outcomes with useful and consistent performance measures. Unless this issue is resolved, PBB initiatives in this region may be discred- differences.may.also.result.from.participation.in.pilot.programs. ited and spending units will further base their decisions on incremental or. involvement. of. (inter)national. experts. In Poland, variable quality norms to ascertain the amounts needed for specific expenditures. This across spending agencies was attributable to inconsistencies in the organ- may reduce the quality of information provided. izing principle underlying the selection of ‘tasks’. Some ministries defined with.the.exception.of.Slovakia,.countries.in.the.region.are.still.in. their tasks partly on broad policy objectives and partly on existing pro- an. early. stage. of. pbb. application. but. some. are. showing. positive. re- grams of expenditure. In Slovakia, the logical basis of the program struc- sults. The key challenge in the remaining EU members is to improve ex- ture is coherent, but some line ministries still fail to follow best practice. isting program structure by aligning it better to government’s strategic The.value.of.some.pilot.projects.in.demonstrating.the.advantages. policies. Nonetheless, PBB cannot yet be considered a fully developed tool of.the.pbb.approach.were.constrained.because.the.agencies.involved. for helping to identify potential spending cuts across the region. were. required. to. continue. with. parallel. systems. and. rules. for. tradi- An.oecd.study47.shows.that.only.a.few.oecd.member.countries. tional.budgets. It may be worthwhile to select one ministry and provide have.so.far.used.pbb.as.a.tool.for.reducing.public.expenditures,.though. the minister with full discretion over personnel, organizational structure, most. countries. use. it. in. achieving. significant. improvements. in. pub- management etc. At the same time, the ministry would be given a clear Examples from Slovakia show that while education may serve as a good example, there were dif- 46 ficulties defining strategic goals for health care. Curristine T. (ed.), 2007, Performance Budgeting in OECD countries, OECD, Paris. 47 96 97 lic.expenditure.management.systems . 48 Positive effects usually emerge 4 .3 ..budget.presentation.and.classification within a few years from introduction of the reform – expenditure cuts making.fiscal.information.available.to.the.public.is.a.core.require- are generally less painful when applied to less effective programs. At the ment. of. fiscal. transparency. According to the IMF manual on fiscal very least, performance information may provoke agencies to undertake a transparency49 “principles and practices in this regard concern provision more detailed review of these expenditures. of comprehensive information on fiscal activity and government objec- m&e. has. an. essential. role. to. play. in. streamlining. performance. tives and the presentation of such information in a way that facilitates information. and. making. it. useful. to. decision. makers, enabling them policy analysis and promotes accountability. A cornerstone for ensuring to take this information into account when allocating budget resources. timely and uniform availability of fiscal information is that it can be read- In all countries there is more awareness and support for the concept of ily accessed free of charge on the internet. (…) Also, any changes to the managing for results, where budget accounts are more transparent and classification or presentation of items from year to year should be dis- budget managers held accountable. Latvia, for example, plans to strength- closed�. en its M&E system to close the gap between performance information and budget allocations. 3 .1 ...components.of.core.budget.documentation.capturing.mteF.and. All.countries.in.the.region.will.inevitably.struggle.with.the.quality,. pbb.methods relevance,.and.credibility.of.their.performance.measures. PBB imple- changes.in.budgeting.practices.in.the.region.have.been.reflected. mentation needs to be well-managed at various levels, from encouraging in.expanded.budget.documentation.and.increased.complexity. As well politicians to use it in decision making to changing the behavior of civil as the traditional budget documentation, there is an MTEF showing a servants. In some countries, e.g. Bulgaria, creation of a fiscal accountabil- medium-term macroeconomic and fiscal scenario and either a separate ity institution would help systematize more comprehensive use of per- document, describing the budget in PBB framework, or a chapter in the formance information. budget explanatory note50 (the latter in the case of Poland). A lot of prac- political.commitment.and.a.positive.attitude.by.public.adminis- tical information related to MTEF or PBB has been included in budget tration.are.key.factors.keeping.pbb.reforms.on.track. Even in Slovakia, circulars or special handbooks or manuals (the latter in Slovakia). The there is a risk of these reforms being reversed. In every country, top-down system and documentation has become so complex that in countries like action is needed and should be accompanied by capacity building in pub- Slovakia some simplification and refinement would help to sustain these lic administration to convince public servants that reforms will increase achievements. efficiency. This is the best citizens can expect from the public administra- countries. use. their. own. document. sets. and. nomenclatures. (see tion, not least in an era of global financial crisis. As Schick (2008) pointed case studies in Chapter 5). In Slovakia and Croatia, budget documenta- out, “without exception, performance-oriented approaches are effective tion relies on data provided by the budget IT system and follows various only in well-managed governments which have low corruption, elevated classifications. Based on this, a book is published (in Slovakia.only) con- levels of public trust, reasonably efficient and fair public services, and me- taining all programs, fund allocations, policy goals, and indicators. The dia and interest groups that pay attention to results. When these condi- quality of these documents and analysis has been improving. In Poland, tions are lacking, no PBB system is capable of fulfilling its ambitions�. It during 2007, the Chancellery of the Prime Minister spearheaded produc- is a paradox of improved management of public finances that developing tion of a sizeable document describing key tasks and sub-tasks together highly professional public administration people and systems will be as- with the Zloty amount in 2008 budget proposals from each ministry. It sisted, in part, by improved budget processes. included performance indicators (in terms of both baselines and target values) associated with each of these tasks. However, this document did not set a sufficient basis for sustainable implementation of PBB reforms in the future and, following stronger involvement from MOF, was replaced Korea is an exception. After PBB implementation, it announced a 10 percent budget cut for ineffec- 48 tive programs. Korea is one of few countries worldwide opting for a big bang in PBB implementa- IMF, 2007, Manual.on.Fiscal.Transparency, Washington D.C. 49 tion. This is an appendix to the state budget. 50 98 99 with new documentation. The new chapter in the explanatory note to the program structure through improvements in design processes, including budget act, however, adjusts to the existing status.quo rather than reshapes subjective elements, but at the end of the day should be based on govern- government’s prioritization process. ment’s strategic objectives. A.more.or.less.comprehensive.pbb.component.is.presented.with. All. countries. in. the. region. opted. for. separate. rather. than. com- the.traditional.budget.but there is little ownership of this documenta- bined.classifications. While this duplicates information and requires spe- tion by many ministries and programs. Generally, policies were not based cific ‘keys’ to move from one classification to the other, it allows flexibility on clear overall strategies and procedures for monitoring and reporting to introduce further changes. These changes are gradual but necessary if a remained weak. Ministries that later started developing their program full rather than ad-hoc use of program classification is to materialize, at all budgets face difficulties identifying programs and performance indica- budget stages, in the future. Budget decisions can be strongly influenced tors, not to mention developing other aspects like program evaluation. by the way information is presented. in.accordance.with.best.practices,.emphasis.should.be.on.explain- it. supported.budget. systems. operate. across. the. region. but. with. ing.the.government’s.expenditure.policies.and.objectives.and.their.re- varying.integration.(fragmentation).and.functionality. flection.in.the.program.structure. More attention could also be given to • A budget IT system in Bulgaria has been deployed to major but identifying new policies and projects. And sector ministries and agencies not all budget units and does not support the program structure need guidelines on new performance-related documentation they must of the budget. be able to demonstrate how their expenditures (including new policies) • Since 2007, Latvia.has had a unified and comprehensive IT sys- contribute to government’s broader strategic aims. tem, based on integrated SAP platform, with all ministries con- performance.information.demonstrates.future.plans.and.expected. nected online. achievements.but.is.yet.to.show.clearly.what.has.been.achieved. PBB • A centralized IT system, called TREZOR, is being implemented documentation resembles a statement of intent or a planning framework, in Poland to support budget planning, execution and reporting informing how each department will contribute to government’s overall and, ultimately, link all budget holders. For management and ac- policy objectives. Integrating these statements into a coherent government counting purposes, however, different institutions installed their program and demonstrating that it is being achieved is another matter. own systems which are not centrally integrated. This means in- formation from individual budget institutions’ accounting sys- 3 .2 ...current.state.of.development.and.plans.in.budget.classifications. tems must be entered separately into TREZOR. and.coding. •. Turkey has had an integrated and centrally monitored on-line introducing. better. budget. classification. and. an. improved. ac- accounting and reporting system since 2004, covering all general counting.systems.has.emerged.as.a.most.time-consuming.and.difficult. government units. element.in.effective.pbb.implementation ..This is because it is unique •. Croatia has a SAP based system which is particularly helpful in for every country and every ministry and requires complex interactions budget preparation. betweens inputs, outputs and outcomes. For the region, most programs have been developed initially on the basis of current activities within the •. Slovakia’s. budget IT system has made a major contribution to existing public administration organizational structure. implementing budget management reform. It offers different modules, from budget preparation, through budget execution, while. the. top-down. approach. program. structure. can. optimize. to budget monitoring, and transitions among different classifica- organizational. structure. it. can. disrupt. current. activities. Van Eden51 tions. advises against making too many changes to organizational structure and give a program structure time to mature. This may take several years. In in.no.country.in.the.region.does.the.accounting.system.provide.a. the longer term, an organizational structure could align more with the program.classification which is the appropriate classification not only for PBB but for an MTEF’s sectoral allocation. Classifying expenditures is im- Van Eden, op.cit. 51 100 101 portant for policy and budget formulation and measuring resource alloca- sential for changing incentives in the budget process and enabling per- tion among sectors. The system should allow categorizing expenditure by formance and accountability. Spending ministries under an MTEF have sector and avoid double accounting. The sum of all the sectoral spending a greater role in developing sectoral policy within resource constraints. should equal total spending. Poland plans to create an integrated IT sys- Access to accurate public finance information is important for the general tem supporting budget documentation in PBB framework around 2013. public and for markets, and makes agencies more receptive to cut-backs Box 2. Financial Management Information System (FMIS) in spending when they are needed. FMIS usually refers to computerization of public expenditure management proc- esses including budget formulation, budget execution, and accounting with the help of 4 .4 ..public.management.performance.culture a fully integrated system for financial management by line ministries and other spend- ing agencies. The full system should secure integration and communication with other pbb. requires. a. radical. change. in. public. sector. management. be- relevant information systems. cause.it.shifts.the.focus.from.public.spending.inputs.and.amounts.to. According. to. diamond,. khemani5a. well-designed. Fmis. features. nine. at- outputs.and.results. PBB improves the transparency of public spending tributes:. and puts greater emphasis on long-term financial planning. This requires • modular and capable of progressive upgrading to cater to future needs changes in both human resource policies and public servants’ attitudes. • offers a common platform and user interface to the stakeholders The. civil. service. in. emerging. europe. does. not. have. a. perform- • maintains a historical database of budget and expenditure plans, transaction data, ance-oriented.culture. Rather, it is characterized by life-long job security, cash flows, and bank account operations seniority-based systems for promotion and non-merit based salary, short- • has dedicated modules to handle monthly, rolling, short-term and longer-term for- term tenure of high level policy makers. These leave little incentive for ward estimates of revenues, and expenditures prepared by agencies bureaucrats to change, a critical factor for the success of the reform initia- • has built-in analytical tools to offer trend analysis of various elements of fiscal tive. As Schick53 says, “when employees arrive to work late and leave early, operations to permit a forward look on the fiscal stance when using public money for private gain is accepted practice, when pay • compiles formal government accounts from the database of authorizations and cash allocations, and promotions are determined by favoritism or bribes, when official pay • enables real-time reconciliation of parallel but related streams of transaction data rates are so low that civil servants are on multiple payrolls, sounding the - at the agency level call for performance will not make much of a difference, nor will efforts • mechanizes all routine tasks at the central and spending agencies, generating vari- such as awarding bonuses to high-performing employees�. ous forms/authorizations, checks, outputting hard copies of key registers and state- ments etc 4 .1 ..links.between.budget.reforms.(especially.pbb).and.other. • is flexible enough to provide user-defined management information from the data- measures.or.monitoring.and.evaluation.systems.to.improve. base, aggregated at the desired level of detail. performance.in.the.public.sector no.country.in.the.region.regularly.publishes.a.citizens’.guide.to. As.of.2008,.m&e.systems.were.missing.across.the.region.although. the.budget,.apart.from.information.available.on.official.websites.and. some.countries.produced.official.reports.on.pbb.with.regular.audits . sporadic. messages. released. by. media. Simplified PBB documentation M&E is usually left to the later stages of PBB implementation. Slovakia, would explain the main features of the budget in PBB format, and in plain for example, is initiating it in 2009. Program performance in Slovakia is language, making it easier for the general public to understand. Some monitored twice a year and official reports based on the program struc- countries (Croatia, Poland.and Slovakia) have issued a budget guide for ture of expenditures have been prepared since 2003. In Bulgaria, budget citizens. Lack of public interest ended this practice in Slovakia. managers are required to report in PBB format with semi-annual and an- greater. transparency. is. a. prerequisite. for. successful. pbb. and. nual frequency. Annual implementation reports are available to the pub- mteFs.– good budget classification, accounting and reporting – are es- lic but these documents tend to meet formal compliance requirements, rather than provide easily readable policy and impact information. Poland 52 Diamond J., Khemani P., 2005, Introducing.Financial.Management.Information.Systems.in.Develop- ing.Countries, IMF Working Paper, WP/05/196, IMF, Washington D.C. Schick, Mexico 53 102 103 will produce its first budget execution reports in 2009, in accordance with non-monetary.and.monetary.rewards.have.a.role.to.play ..Hatry54 budget law, and these will refer to the 2008 budget. list the potential benefits as: budget. reform,. and. particularly. performance. re-orientation,. is. Non-monetary.rewards: more. about. improving. people’s. managerial. and. decision-making. ca- • offer more flexibility to ministries, agencies and their pro- pacities. than. about. budget. figures. or. indicators .. Human resources grams in exchange for achieving results (in procurements, management in the public sector is designed to support sound fiscal poli- personnel changes, flexibility in use of their funds etc) cies, improve service to the public and rationalize the distribution of tasks • provide added opportunities for outside training between private and public sectors. Evaluations have a crucial role to play, as demonstrated by the success in countries like Chile, Australia, USA and • distribute performance reports to personnel so they know Canada. the progress their programs are making it.takes.many.years.to.establish.an.effective.evaluation.system.and. • call for agencies and programs to report outcomes to the countries.in.the.region.could.select.areas.for.evaluation.according.to. public strategic.priorities. At present, their purpose would be both funding and • hold regular program review meetings with staff in which reorganization of programs. This can be achieved if the evaluator is fully performance is a major topic, demonstrating management’s independent, has access to reliable data, and minimal scope room for sub- commitment to a results-oriented approach jectivity. Evaluations, in particular their organizational set-up, should be • include performance criteria as part of annual individual coordinated with national supreme audit institutions which are mostly performance appraisals independent institutions experienced in reviewing fiscal activities. • recognize good performance in one part of the program by Few. incentives. are. available. to. motivate. public. servants. to. im- asking staff to provide technical assistance to another part of prove.efficiency.and.performance.though.latvia.is.an.exception. Pre- the program. dominantly, existing arrangements in the civil service are not based on Monetary rewards: an accountability framework. In most of these six countries, financial • provide monetary awards to programs or agencies rewards and sanctions are not systematically used. Current management culture offers little scope for increasing financial or managerial flexibility • link individual salary to performance in exchange for more accountability. There are also sporadic opportunities • provide one-off bonuses to individuals or to teams. for public recognition. In Latvia, however, a public sector wage reform program.classification.is.not.the.leading.classification.so.the.struc- introduced gradually since 2003 links wages with responsibilities and ture.of.public.administration.doesn’t.lean.in.this.direction. Current ad- performance. In Croatia civil service reform started in 2005 but has pro- ministrative structures are not best suited to the concept of managing for ceeded slowly and salary reform stalled in negotiations with trade unions. results because flexibility is limited and accountability blurred. Consistent Although Slovakia introduced a new public service remuneration system administrative and program structures would be more effective. in 2004, it remains rigid with remuneration based on an employee’s posi- tion and age rather than his or her performance. The civil/public service attracts people who prefer stability over performance pay. Hatry H.P., Nayyar-Stone R., 2004, Establishing.a.Performance.Management.Strategy:.Governing.for. 54 Results, The Urban Institute, 2004 Korea conference. 104 105 4 .2 ..The.idea.of.a.performance.management.culture.in.the.public. analyses and national policy priorities. Line ministries may gradually sector acquire greater discretion and flexibility in decision making in planning The.civil.service.in.emerging.europe.lacks.a.performance-orient- and prioritization within sectors and implementing policy and executing ed.culture.but.this.is.only.gradually.being.established..Outcome man- budget. Greater discretion over budgetary decisions should go hand-in- agement requires a shift in thinking for government employees tradition- hand with greater accountability for results. ally focused on inputs. When they think of their products, government managers typically think of physical outputs. Switching their focus to out- 4 .3 ..readiness.of.the.civil.service.and.the.public.administration. comes requires institutions to think more about what good they can do for system.to.implement.the.principle.of.increased.managerial. citizens. MOFs and budget departments in line ministries have grasped flexibility.in.return.for.increased.accountability the idea of PBB; progress is a little slower in policy departments. pbb.reforms.give.greater.autonomy.to.budget.managers.but.there. A. performance. management. culture. requires. staff. to. adopt. the. is. a. trade-off. against. in. the. form. of. increased. responsibility. and. ac- values,.beliefs.and.behaviors.that.better.enable.governments.to.achieve. countability.for.results. Increased responsibility should go hand-in-hand policy. goals. This requires better human resources management and with increased flexibility in resource management, strong internal audit re-orientation through training programs, workshops, seminars. Gov- and monitoring mechanisms, and financial and non-financial reporting ernments need to use performance information and tools like regular systems. In a mature PBB system, budget appropriations may be more program reviews to motivate employees. At the same time, they must broadly based, giving managers increased flexibility. In many cases, rules demonstrate its commitment to reform and convince employees that ad- pertaining to personnel expenditures may be more tightly controlled, justment is inevitable. State audit offices also have a major role to play in though internationally adjustments in salary levels are increasingly based promoting performance culture, for example through performance au- on performance. dits. This is already a practice in Croatia where the national SAO has con- pbb. works. well. in. countries. with. common. law. tradition. while. ducted six pilot performance audits. middle-income.countries.rely.on.a.principle.of.limited.trust.in.public. A.major.barrier.to.altering.public.manager.culture.is.managers’. sector. management. In the first group of countries, flexibility is given concern.that.performance.information.will.be.used.against.them. Gov- to medium-level managers in spending public funds to achieve objec- ernments can alleviate this concern by emphasizing the use of perform- tives (e.g. New Zealand, UK and USA). In middle-income countries, PBB ance information for making service improvements (including turning systems assign less trust to middle-level managers (e.g. Chile). Mutually- organizations into learning organizations). Performance information can enforcing objectives of performance budgeting cover improvements in be used to reward the staff for high performance or identify knowledge both allocative and managerial efficiency of public expenditure, with the gaps among staff. Knowing this will help managers become less wary of former predominant in transition and developing countries, and the lat- collecting performance information. Where performance targets aren’t ter in developed countries. Both approaches permit greater managerial met, for example due to external factors beyond their control (see Hatry freedom as long as they can produce the desired outputs and outcomes. 200455), staff should be given the opportunity to explain why. in.regional.countries.with.a.more.socialist.or.communist.history. moF.and.line.ministries.may.resist.reforms. With a smaller role in (excluding. Turkey),. and. no. tradition. of. common. law,. it. may. be. too. allocating resources, MOF may be concerned with the potential loss of in- early.to.give.public.managers.substantial.autonomy. Decentralization fluence and power or prestige. Line ministries may perceive the changes as of authority from central ministers may be unsuitable if the MOF favors a additional work without any real pay-off. Other concerns may arise from Chilean model in which significant control and oversight are maintained limited knowledge of the new budgeting methods, uncertainty about in- in a MOF. Increased delegation requires robust systems for accountabil- dividual incentives, and potential shifts in the work burden from people ity.. To ensure budgets are effectively spent and accountability based on executing micro-level activities to staff responsible for macroeconomic program result, the nature of expenditure controls must be changed, with Harry P. Hatry, Ritu Nayyar-Stone, 2004, Establishing.a.Performance.Management.Strategy:.Govern- 55 formal mechanisms put in place and financial authority and accountabil- ing.for.Results, The Urban Institute, 2004 Korea conference. ity strengthened at the spending agency level 106 107 changing.the.culture.of.control.is.difficult.in.emerging.europe .. Chapter 5 – country case studies Financial control systems are centralized in MOFs unwilling to delegate Bulgaria funds and responsibility to implementing agents. Agency managers must have the capacity, incentives and willingness to adopt change and accept Stella Ilieva57 accountability. Delegation of managerial accountability often becomes a topic of political intervention. General Assessment (Summary) countries. with. the. best. and. most. advanced. pbb. systems. are. Bulgaria has made good progress implementing medium-term ex- among.the.best.managed.in.the.world.(schick56). These advanced sys- penditure framework and introducing performance-based budgeting. tems generally have low levels of corruption, an efficient public admin- Reforms to the budget system have been designed well and in line with in- istration service, effective accountability arrangements, political and ad- ternational good practices. They have been implemented consistently over ministrative channels for citizens to express preferences and grievances, the last several years to improve the aggregate fiscal discipline and support and procedures for monitoring the quality of public services. Of course, greater allocative efficiency in public spending. The reforms have effec- PBB will work best where there is trust and confidence in government tively instilled a prudent fiscal management culture with practices sup- leaders and public institutions, where civil servants are recruited and pro- ported by constraints imposed by the currency board. The budget prepa- moted on the basis of merit and where there is relatively low turnover in ration process as well as budget documents and procedures have become civil service jobs when the governing party loses an election. However, it more transparent and consistent with improved international practices. is precisely these attributes that PBB systems help to achieve. Since it was introduced in 2006 the MTEF has increasingly become an important instrument for enhancing strategic allocation of resources, improving the predictability of the aggregate expenditure envelope and supporting the sustainability of public finances. The Ministry of Finance (MOF) has a good capacity to lead preparation of the MTEF and sup- port line ministries develop three-year budget plans. Sustainability of the MTEF has been strengthened with implementation of program budgets. Now, first level spending units develop their medium-term budgets in programmatic format. Further refinement of the processes and methods already used, including changes to the organic budget law, would improve the credibility of the MTEF. Better capacity and more authority of MOF are needed to evaluate first level spending units’ (FLSU) budget proposals and provide meaningful feedback to them to improve public finance ef- ficiency and effectiveness. Ministries’ capacity for medium-term planning linked to strategic priorities should be strengthened. Bulgaria’s planned introduction of comprehensive sector reviews as well as enhancement of its performance budgeting process should contribute to greater effective- ness of its MTEF. Program budgeting reform was initiated in 2002 on a pilot basis and is now being applied to all FLSUs which are preparing their budget plans and implementation reports in program format with performance in- dicators identified for each program. However, the current institutional Schick, op.cit. 56 Based on responses kindly provided by the Bulgaria’s Ministry of Finance staff. 57 108 109 setting needs to be adjusted to respond to a performance management MOF also reviews the proposed budgets of agencies and institutions culture. This requires legislative amendments to the organic budget law to with autonomous budgets that are approved only by Parliament (National reinforce the program budgeting approach and link it better to perform- Assembly). During budget execution, the Minister of Finance could, on ance. Incentives to all players in the budget process need to be established FLSUs’ request, reallocate budgets between spending units or give consent to make better use of performance information and support enforcement for reallocation of expenditure within the budget of the spending unit. procedures. The capacity of ministries and agencies to develop good pro- The Minister of Finance could stop transfer of state subsidies or other gram budgets should be improved, especially for those ministries that transfers to budget entities in the case of a breach of law or breach of fi- started the process later. MOF capacity and authority to review and evalu- nancial discipline. ate the quality of program budgets and performance indicators need to be The.council.of.ministers.(cabinet).participates.actively.in.budget. strengthened. preparation. and. consultations .. It approves the medium-term budget Sustaining these reforms and improving their payoff requires in- framework and main macroeconomic assumptions for the three-year pe- creased political commitment and use of these budget tools to enhance riod and submits them for information to the Budget and Finance Com- effectiveness and efficiency of resource allocation and improve public sec- mittee and other related committees in the National Assembly. Based tor accountability. Putting in place an evaluation and monitoring system on the approved fiscal framework, MOF develops the MTEF including would help Cabinet and Parliament improve resource allocation and in- expenditure ceilings by FLSU and updates the State Government Debt crease accountability. Strategy. These are also approved by Cabinet, usually in end-July. Draft budget law and all budget documents, including FLSUs’ program budgets, 1. Core Features of Current Budget System are also approved by Cabinet and submitted to the National Assembly at bulgaria’s. budget. system. has. undergone. substantial. transforma- least two months before the start of the fiscal year, usually end-October. tion.over.the.last.decade ..Improvements have been made in all stages of While Cabinet does not approve budgets of autonomous entities or intui- the budget process; the roles and responsibilities of all institutions have tions, it provides its opinion on their draft budgets. Once the budget law been clarified; and core functions of budgeting, control and management is adopted, Cabinet adopts a decree on the budget implementation which of public resources have been strengthened. The result is greater predict- details the budgets and various indicators and standards for FLSUs and ability of the budget, improved aggregate fiscal discipline, and transpar- municipalities, including the standards for delegated functions to munici- ency of the budget process. palities. moF.plays.a.key.role.in.the.budget.process,.responsible for: line.ministries.now.have.more.flexibility.in.allocating.and.using. resources. within. the. agreed. expenditure. ceilings .. Line ministries and • issuing guidelines and instructions for the different stages of the government agencies are autonomous in their decisions on resource al- budgetary procedure location within a few protected items like wages, social contributions and • developing the medium-term budget framework debt. Line ministries develop and submit to MOF their medium-term • reviewing budget proposals of line ministries and agencies that budget plans (including in program format) and draft annual budget once are FLSUs58, including in PBB format the expenditure ceilings are agreed with MOF and approved by Cabinet. • providing feedback to FLSUs on whether or not proposed spend- budgets. of. pension. and. health. insurance. funds. are. approved. by. ing programs are realistic and feasible the. national. Assembly. separately. and. do. not. constitute. part. of. the. • preparing draft state budget law and submitting it to Cabinet state.budget.law ..The National Social Security Institute (NSSI) budget is with all budget documents. presented to Cabinet for approval by the Minister of Labor and Social Policy. The National Health Insurance Fund (NHIF) budget is presented by the Minister of Health. Usually these draft budget laws are considered These are all ministries (16), the COM, four government agencies—State Agency for ITC, State 58 Forestry Agency (est. 2007), State Agency for Youth and Sports, and State Agency for National together with the draft state budget law by the National Assembly. Security (est. 2007). 110 111 The. national. Assembly. approves. the. annual. budget. law. taking. and.the.nHiF ..The organic budget law was approved in 1996 and governs into. account. budget. documents. submitted. together. with. the. draft . the budget process-planning, approval, execution and reporting of the budget.law ..The annual budget law is based on the economic classifica- state budget as well as fiscal relations between central and local govern- tion of the budget while program budgets of the FLSUs are attached to ments and the scope of extra-budgetary accounts. Amendments in 2007 the budget documents submitted to the National Assembly together with incorporate issues related to EU membership or the independence of the the draft budget law. The draft budget is discussed by various parliamen- budget of the National Assembly. While there are provisions in the or- tary committees while the Budget and Finance Committee summarizes ganic budget law related to the MTEF, the performance-based budgeting the proposals of all committees within the overall budget proposed by does not feature in the law. Instead it is reflected in Cabinet decrees and in Cabinet. Therefore all changes proposed and approved by the National the annual state budget laws. Assembly need to be accompanied by a proposal for offsetting the respec- tive increase or decrease of a budget item. Line ministries are required 2. General Progress on Budget Reform to reflect respective changes in their program budgets. In 2007 a special budget.reforms.have.been.implemented.since.1997.following.in- subcommittee was set up under the Budget and Finance Committee in the troduction.of.the.currency.board.in.bulgaria ..Initially budget reforms National Assembly to improve accountability in the public sector. It is yet aimed to improve aggregate fiscal discipline to ensure sustainability of to be seen how this committee will function. public finances. These reforms involved clarifying roles and responsibili- There. are. a. number. of. institutions. with. special. status,. whose. ties of spending units, Parliament and Cabinet, introducing strict lim- budgets.are.approved.only.by.the.national.Assembly.although.they.are. its on debt issuance, reducing the quasi-fiscal activities of non-financial included.in.the.state.budget.law ..These include the budgets of the: public corporations, improving the comprehensiveness of the budget by • Judiciary reducing the number of extra-budgetary accounts, and improving the re- • National Assembly porting, accounting, and transparency of fiscal accounts etc. • National Audit Office These. reform. initiatives. have. instilled. a. prudent. fiscal. manage- ment. culture. and. practices .. Supported by constraints imposed by the • Financial Supervision Commission. currency board, overall fiscal deficits declined from double digits in 1996 All these institutions submit their budget proposals to MOF for in- to a balanced budget in 2003 and fiscal surpluses thereafter. Restrictions formation. MOF comments on the appropriateness of the budget requests on the issuance of new debt were introduced with a list of new investment and provides feedback to these institutions. Differences of opinion on the projects financed by external sources approved each year and included in budget proposal of the National Assembly are resolved in consultation the annual budget law. In addition, ratification by the National Assembly with the Prime Minister and the Speaker of the National Assembly. The of all external obligations of Government is required. The annual budget National Assembly has sole authority over the judiciary budget. law specifies ceilings on total debt stock and on the issuance of new gov- municipal.budgets.are.adopted.by.municipal.councils ..MOF signs ernment debt, including state guarantees. Stricter rules on debt issuance an agreement with the National Association of Municipalities in the Re- brought public and publicly guaranteed debt down from more than 100 public of Bulgaria (NAMRB) on the total amount of subsidies to munici- percent of GDP in 1997 to below 20 percent in 2007. This was helped by a palities. Line ministries, MOF and NAMRB agree on expenditure stand- series of active debt management operations. ards for activities delegated by the state. Municipalities have flexibility to running. fiscal. surpluses. revealed. the. need. to. make. further. ad- reallocate resources within delegated state activities (except expenditure justments.to.the.public.finance.management.system ..This.was.because. on compensation of employees and scholarships) and even more flexibil- some.of.the.tools.and.practices.used.to.maintain.fiscal.discipline.did. ity on municipal activities. not. correspond. to. a. more. developed. budget. system .. For example, to key.pieces.of.legislation.related.to.the.budget.system.are.the.con- ensure the overall balance supports the macroeconomic framework, rev- stitution,.the.organic.budget.law,.social.security.code,.the.municipal. enues were systematically underestimated. The rationale for this was that budget.law,.and.the.annual.budget.laws.of.the.state.budget,.the.nssi,. 112 113 it was difficult to justify a fiscal surplus when a lot of budget funded func- sectors as well as in the government administration advanced further tions suffered from under-investment for more than a decade. As a re- which allowed shifting resources to quality improvements. sult, the fiscal surplus voted in Parliament was two or three percentage moF.has.developed.good.capacity.to.design,.implement.and.en- points lower than the actual surplus. In addition, a 90 percent rule was hance.all.these.reform.initiatives ..In 2003 the Budget and State Treas- introduced to limit line ministries’ spending to only 90 percent of planned ury Directorate was restructured into two distinct directorates to separate allocations and ensure fiscal accounts were responsive to the worsened budget planning from budget execution and reporting. The Budget Di- external environment. This rule was imbedded in the annual draft legis- rectorate included three new departments: Budget Methodology, Public lation. It meant all FLSUs’ spending was restrained legally till the fourth Finance School and Microeconomic Analysis. The Budget Methodology quarter of the year. FLSUs either didn’t get the remaining 10 percent as Department is responsible for developing and implementing the meth- the external current account deficit was widening or ended up spending a odology, standards, and guidelines related to the introduction of the pro- huge amount of public resources in the last couple of months of the year. grammatic and performance-based budgeting as well as on monitoring Use of this rule ended in 2007. the implementation of the process. The Public Finance School provides cabinet’s. discretion. to. approve. large. amounts. of. the. fiscal. over- theoretical and practical training to staff in the ministry and all line min- performance.was.limited.with.amendments.to.the.organic.budget.law. istries and other players in the budget process on public finance man- in.2005 ..Cabinet can now approve, during the year, spending of additional agement issues. The Microeconomic Analysis Department analyzes and resources or new sources of revenues only up to 1.5 percent of estimated evaluates the micro-economic impacts of horizontal and sectoral policies. revenues from the consolidated government budget. All other additional moF’s.budget.directorate.was.instrumental.in.implementing.two. spending is subject to Parliamentary approval. However, with substantial large-scale. budget. reforms:. the. mteF. and. program. budgets .. A core over-performance of revenues in recent years, government discretionary unit led by the Deputy Minister of Finance reviewed good international spending still represents a substantial amount of the budget. For example practices and developed the methodological underpinnings of the MTEF in 2007 additional end-of year spending accounted for about 2 percent of and program budgets. Detailed guidelines and manuals were prepared the GDP. and made available to all line ministries’ staff with the Public Finance A.contingency.reserve.was.incorporated.in.the.annual.budget.law. School providing extensive training. MOF’s Budget Directorate worked to.protect.against.unexpected.worsening.of.the.macroeconomic.frame- closely with all line ministries and provided extensive technical support work,.natural.disasters.or.higher.costs.of.structural.reforms. In 2008 in preparation of the program budgets. The phased approach to the in- this reserve was increased to almost 5 percent of the republican budget as troduction of the program budgeting and MOF’s support to pilot minis- the 90 percent rule was abolished. The judiciary’s budget also has a con- tries ensured buy-in of the reform and built capacity in FLSUs. All FLSUs tingency which in 2008 accounted for 0.2 percent of total appropriations. (except municipalities and autonomous budgets) are currently preparing recent. reforms. have. been. geared. to. improving. allocative. and. budgets in program format and with the 2009 budget three more institu- technical.efficiency.of.public.spending ..The MTEF was established and tions are included: the National Assembly, the administration of Cabinet, strengthened with the introduction of program budgeting. MOF, which and a newly created agency. has had a leading role in moving forward budget reforms, has been re- program.budgeting.started.on.a.pilot.basis.with.one.ministry.and. structured and a Public Finance School established. Substantial improve- a. plan. for. step. by. step. inclusion. of. other. ministries. and. agencies. to. ments in transparency and accountability of the budget process have tak- 2007 ..On a policy level this process was supported by the World Bank’s en place and the quality and comprehensiveness of budget documentation Programmatic Adjustment Loan which included a public sector govern- has been enhanced. Requirements for making publicly available budget- ance component. Under this component, Government agreed to expand related documents were formalized and well met. Fiscal decentralization the scope and scale of program budgets by including more ministries in advanced with improvements made in the formula for allocating resources the pilot. Some ministries started preparing program budgets ahead of to municipalities and standards for delegating central government func- the plan. On a technical level this process was supported by EU funded tions developed and enforced. Restructuring and optimization in some projects and IMF technical assistance. The pilot ministry applied the pro- 114 115 gram budgeting approach to all stages of the budget cycle, including ex- MOF on the three-year budget ceilings. These ceilings usually do not un- ternal audit of the budget execution report. These, and all program budget dergo substantial revisions (relative to GDP as the aggregate spending is plans and reports developed by other pilot ministries, have been submit- constrained to 40 percent of GDP) at the time when the MTEF for next ted to the National Assembly for information. Workshops and seminars fiscal year is developed. The previous year’s indicative ceilings are used as were organized to acquaint MPs with the new budget tools. a basis of developing the three-year budget plans adjusted for changes in Support.for.these.reforms.by.line.ministries,.cabinet.and.parlia- key macroeconomic indicators. Any other changes to the ceilings have to ment.has.varied ..The benefits of more strategic allocation of resources, be justified by FLSUs when agreeing three year sector ceilings with MOF. and improved transparency and accountability of public finances, have Only changes to policy are reasonable grounds for justification although been understood and valued by some line ministries while others formally these are not explicitly shown in the MTEF approved by Cabinet. Some complied but viewed the MTEF and PBB as a formal exercise that only FLSUs don’t consider these ceilings binding and present to MOF three- increases their reporting requirements. Ministries’ capacity to develop year budget requests that exceed the ceilings agreed during the previous budgets closely linked to sector policies and priorities needs further de- year’s budget process, and without any reasonable grounds. These differ- velopment while performance information included in the budget docu- ences are usually resolved in consultation with MOF which ensures all ments needs to be improved and used for budget decisions and account- budget requests fall within the aggregate budget constraint. ability purposes. MOF capacity to evaluate program budget proposals and The.link.between.budget.and.policies.was.strengthened.with.the. performance indicators could be strengthened as well as its authority to introduction.of.program.budgeting.but.a.meaningful.integration.be- provide meaningful feedback to FLSUs on specific programs, policies or tween.the.mteF.and.program.budgeting.will.take.a.while ..Since 2007 performance indicators. The organizational structure of some line minis- all FLSUs have been required to present their three-year budget plans in a tries is fragmented and not conducive to performance-based budgeting. programmatic format. Some ministries and agencies have recognized the The existing organizational structure in some line ministries obstructs co- value of medium-term planning by programs and have used it to negoti- ordination of a program for which several entities have responsibility, in- ate their overall spending ceiling proposals with changes in policies and cluding second and third level spending units. In addition, responsibility programs. Others saw this as an additional reporting requirement with for achieving results is unclear. Senior level involvement in the prepara- only presentational purposes. This inconsistent application of program tion of program budgets needs to be ensured as well as accountability for budgeting was apparent in the 2008-2010 MTEF budget document ap- performance. The challenge now is to show more broadly the benefits of proved by Cabinet; policies and programs were presented with their main PBB and provide incentives to improve its quality and usefulness. objectives but there was little if any information on planned changes or improvements to programs. Given the short period of implementation of 3. Adopting Medium-Term Expenditure Frameworks program budgeting and the MTEF, their integration needs to be stronger The.mteF.was.introduced.in.2006.although.some.of.its.elements. and institutionalized. have.been.in.place.for.more.than.a.decade ..The medium-term approach mteF.preparation.starts.early.in.the.year.with.development.of.the. to budgeting was introduced in 1997 with the organic budget law giving three-year.macroeconomic.and.fiscal.framework..A schematic presenta- MOF responsibility for preparing a three-year macroeconomic and budg- tion of the budget procedure for 2009 is shown in Figure 1. The first stage et forecast and presenting it to Cabinet for approval. The medium-term of the procedure covers development of the medium-term budget frame- fiscal plan is presented to the National Assembly as part of the budget work (MTBF) and key assumptions which would be used for preparing documents (usually only at aggregate level – total revenues, expenditure, the three-year spending ceilings during the second stage. The MTBF sets and overall fiscal balance). The MTEF was introduced with an amend- the aggregate budget ceilings (total expenditure, capital expenditure and ment to the Organic Budget providing for the setting of spending ceil- overall fiscal balance) and defines key parameters of budget policy (wage ings for all FLSUs that are approved by Cabinet. The MTEF is updated and pensions increase, staff levels, size of social assistance benefits, serv- annually and is binding only in the first year while the outer two years ice standards etc). The MTBF is approved by Cabinet and submitted for are indicative. FLSUs update their three-year budget plans and agree with 116 117 information to the National Assembly while MOF prepares guidelines for Figure 5. Bulgaria: 2009 Budget Procedure FLSUs to prepare an MTEF. MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER The second stage of the budget procedure covers preparation and First stage Second stage Third stage National Assembly (step 1-3) (steps 4-9) (steps 10-17 ) approval of the MTEF. It starts with FLSUs developing their three-year 3 MTEF 9 17 budget plans within overall budget constraints and on the basis of both MTBF and key (2009- 2011) & Draft 2009 Annual Budget updated key parameters approved during the first stage and budget ceilings ap- assumptions (2009-2011) 3 Debt Strategy Law Council of Ministers for proved during the previous year. MOF reviews these three-year plans, in- information only Decision for (for informati on only) cluding in program format, and consults with FLSUs. Three-year budget financing 2 16 of new 8 investment List and ceilings are agreed with MOF and memoranda of understanding signed justification projects MTEF Draft 2009 MTBF financed (2009- Annual of proposals and key with state 2011) & Budget for new with all FLSUs. MOF consolidates the MTEF and submits it to Cabinet 2 assumpt ions investment projects or state- guaranteed loans in updated Debt 13 Law inc. program (2009- (reviewed Strategy budgets for approval together with detailed analysis of the macroeconomic out- 2011) by COM) 2009 (for Ministry of Finance informati Draft 2009 6 look and underlying assumptions, goals of the economic and fiscal poli- 1 Review of on only) annual budget 15 MTEF inc. cy and assumptions about strategic directions of tax policy, expenditure Proposals policies and programs 11 for new programs by sectors, as well as assessment of the sustainability of public investment projects— Guidelines for 3-year budget MTEF 2009-2011 Guideli nes for 2009 Draft 2009 annual Consultati Updated program external & finances and assessment of structural balances. An update of the Govern- (2009-2011), ons budgets domestic ceilings by Consultations annual budget inc. policies state and FLSU budget law & (exc. and 7 estimates ment Debt Strategy is also approved by Cabinet as well as a list of new state- programs law 14 FLSUs guaranteed municipali for 2010 loans in ties) 10 and 2011 investment projects financed by state or state-guaranteed loans. The ap- 2009 4 5 proved package is submitted to the National Assembly for information. 1 12 AEAF MOF then issues guidelines for the preparation of FLSUs’ annual budget Macro projections Macro projections plans. Source:.Bulgaria’s.Ministry.of.Finance moF. leads. preparation. of. the. medium-term. fiscal. framework. The medium-term macroeconomic forecast is prepared by the Agency for Economic Analysis and Forecasting (AEAF), a second level spending unit under MOF. This agency coordinates its forecasts and assumptions with the Bulgarian National Bank and other agencies. The model used for the macroeconomic forecasts has been developed with EU technical assistance and has been widely consulted with government and non-government or- ganizations. Annual consultations on the macroeconomic prospects with the public, however, are not being held. The scope and quality of presenta- tion of the macroeconomic framework has improved substantially in re- cent years with detailed presentation of the risks to the outlook and fiscal risks. The medium-term fiscal framework is prepared by MOF’s budget department in consultations with other MOF departments (responsible for updating the debt strategy) and expenditure execution. Projections for revenues and expenditures are shown in detail by economic classification in nominal terms and as a percentage of GDP. MOF is involved in exten- sive consultations with FLSUs during the setting of three-year spending ceilings and evaluates the feasibility and quality of budget proposals in the medium-term and by program. MOF also prepares draft proposals 118 119 for budgets of autonomous and independent institutions. Consultations changes to the organic budget law need to tackle these issues as well as are held between line ministries and the National Association of Munici- issues related to the need to better link budget allocations to the desired palities on the standards and proposed allocations for delegated central results of government policies and programs with respective mechanisms government functions to municipalities. for accountabilities at the different levels. While the MTEF has been more The.existing.mteF.is.intended.to.strengthen.sustainability.of.the. or less well developed using a top-down approach, bottom-up strategic fiscal.rules.laid.down.in.the.program.of.the.government,.in.the.con- planning needs further enhancement and top management engagement vergence.program,.in.the.law.on.the.Annual.state.budget.and.in.other. in the process ensured. This requires better capacity of line ministries to documents ..One of the fiscal rules that has been applied and strictly ad- develop medium-term plans with a supporting organizational structure. hered to since 2006 is the expenditure rule. Under this rule, aggregate ex- MOF needs more capacity and authority to evaluate FLSUs’ budget pro- penditure level can not exceed 40 percent of GDP (the contribution to the posals and provide meaningful feedback to improve the efficiency and ef- EU budget is excluded). This rule has not been regulated in any legislation fectiveness of public finance. MOF’s organizational structure also needs to but constitutes part of Government’s strategic documents, including the be reviewed to maximize the benefits of the MTEF. Planned introduction MTEF. Similarly, the overall fiscal balance rule is presented as a percent- of comprehensive sector reviews as well as enhancement of the PBB proc- age of GDP but could be changed every year. The only aggregate fiscal rule ess would help increase the MTEF’s effectiveness in Bulgaria. defined in permanent legislation is the debt rule which limits issuance of new government and government guaranteed debt so that debt stock 4. Performance-based Budgeting at the end of the year does not exceed 60 percent of GDP. There are also introducing. performance-based. budgeting. reform. was. seen. as. a. limitations on the issuance of new debt and the total debt stock in absolute means. of. strengthening. aggregate. fiscal. discipline. but. more. impor- terms in the annual budget law despite the fact that the level of public debt tantly.improving.allocative.efficiency.of.public.finances ..It was felt that is much lower than 60 percent of GDP. There are no formal mechanisms this new tool would change institutional culture towards greater predict- for enforcing these rules but they are generally adhered to. ability and accountability of resource allocation and greater attention to The.mteF.includes.a.contingency.reserve.for.structural.reforms,. results of public finance policy. The objectives of the program and results- natural.disasters,.and.significant.changes.to.the.macroeconomic.envi- oriented budgeting as stated in government budget documents are to help ronment ..The contingency reserve planned in the 2009-2011 fiscal frame- policy makers: work accounts for 1.1 percent of GDP. Part of the contingency is allocated • define priorities and select the benefits to be pursued by the min- for structural reforms carried out by specific ministries or entities – for istry health reform, reform of the judiciary as well as for the National Assem- • identify the set of products/services forming the program’s struc- bly, and the pension fund. The size of the contingency varies each year ture depending on the specific needs. Cabinet defines the rules for spending the contingency fund for structural reforms and natural disasters while • justify changes in the structure of policies and programs to the portion of the contingency related to changes in the macroeconomic achieve targeted standards for the products/services environment are spent only if the consolidated budget balance has not • identify risks to achieving the benefits planned including using worsened59. performance information as an indication of progress achieved next. steps. in. strengthening. the. mteF’s. credibility. include. fur- • make adjustments to strategic plans and planned products/ser- ther.refining.processes. and.methods. already. used. to. better.integrate. vices based on findings from the evaluation of program budget resource. allocation,. strategic. goals. of. the. government. and. value. for. implementation. money .. This requires further institutionalization of the MTEF includ- program.budget.reform.was.initiated.in.2002.and.is.now.more.or. ing enforcing budget constraints on all ministries and agencies. Planned less.integrated.into.the.budget.process ..A pilot program budget was de- The 2008 Budget Law specifies disbursement is allowed only if the expected consolidated budget 59 veloped for the Ministry of Environment and Waters (MOEW) for the surplus exceeds 3 percent of GDP. 2003 budget. A year later two more line ministries were included in the 120 121 pilot and another seven in 2004. At that time the Ministry of Environment Figure 2. Structure of the Performance-based Budget presented its first budget execution report in programmatic format. This was audited by the National Audit Office. In 2005 ministries participating STRATEGIC OBJECTIVE X INDICATORS FOR BENEFIT/IMPACT in the pilot increased to 11 while MOEW’s program budget for 2006 was BENEFITS/IMPACTS presented to the National Assembly together with the annual budget law. By 2007 the pilot was completed and all line ministries and two agencies prepared their budgets in programmatic format for the 2008 budget. Min- istries included early in the process prepared reports on the implemen- tation of their program budgets. All FLSUs must submit their program PROGRAM INDICATOR OPERATIONAL OBJECTIVES X1, X2, … budgets to the National Assembly and publish them on their websites. For the first time, the annual budget law included provisions for adjusting the program budgets of ministries and agencies following approval of the INDICATOR FOR PRODUCT/SERVICE PRODUCT/ PRODUCT/ SERVICE SERVICE annual budget law. PROJECTS PROGRAMS preparation.of.program.budget.plans.and.implementation.reports. was.formalized.in.a.com.decree.and.moF.instructions.rather.than.in. INDICATORS FOR ACTIVITY (A) ACTIVITY (B) ACTIVITY (Z) the.organic.budget.law ..It was felt that amendments to the organic budget ACTIVITY law would be difficult to introduce given the heavy legislative program of Source:.Manual.for.Ministries.Implementing.PBB,.2005,.Ministry.of.Finance the National Assembly before EU accession. Despite the lack of perma- nent legislation related to program budgeting, it was introduced and is be- program. budget. documents. prepared. by. Flsus. follow. moF. ing further enhanced on the basis of experience accumulated during the guidelines. although. their. quality. varies .. Program budget documents five years of pilot implementation. Regulating performance-based budg- include a general section stating the mission and medium-term priorities eting in a permanent legislation, however, would strengthen political sup- of the ministry/agency, explanation of key assumptions underlying the port for linking budget to performance. Detailed guidelines and a manual MTEF (these are usually macroeconomic indicators, changes in tax and were developed by MOF and refined each year with the budget circular. wage policy, which have been developed by MOF), allocation of expen- The manual is based on good PBB practices around the world and effec- ditures by the program and overall revenues of the ministry by sources tively explains all the elements of PBB with practical examples from the of financing. This is followed by a detailed presentation of the ministry’s program budgets of Bulgaria’s Ministries of Environment and Transport. policies, strategic and operational objectives, and an analysis on the ben- Extensive training and consultations have helped line ministries better efits to society. Performance indicators and targets for the medium-term understand the benefits of PBB and apply its techniques. Workshops have are shown at the policy level. A short section comments on the availability been organized for the Budget and Finance Committee of the National and quality of data used for performance indicators as well as the institu- Assembly as well as staff of the National Audit office. tional relationships with other agencies contributing to respective policy implementation (usually second level spending units). Under one policy there are usually a number of programs. Presentation of programs starts with a statement of program objectives and description of the institutional arrangements for implementing the program (the agencies or directorates of the ministry, municipalities etc) with the name of the manager leading the program implementation (usually minister or deputy minister). Per- formance indicators are presented for the baseline year and targets for the next three years with information about the data availability and quality and external factors affecting the achieving of the targets. Programs are 122 123 also broken down by products and services. Following MOF’s instructions amendments to the organic budget law. Organizational structures in some all administrative functions (e.g. accounting, IT services etc) that can’t be ministries don’t adequately support effective use of performance budgets. allocated to a specific program are aggregated in an administrative pro- Replacing traditional line-item budgeting with program budgets will take gram. time but establishing a Public Finance Accountability Subcommittee in The.four.elements.of.the.programmatic.classification.are.policies,. the National Assembly would help improve demand for performance in- programs,. other. programs. which. don’t. fall. within. the. framework. of. formation. particular.policies,.and.products/services ..These are presented in Figure A.challenge.facing.ministries.and.agencies.in.results.planning.and. 2. If a program falls outside the strategic objectives/policies of the min- reporting.is.to.define.indicators.by.policies.and.programs,.and.identify. istry or agency, it is shown as ‘other program’ and considered later if its their.target.values ..Output indicators are usually represented more than activities should be transferred to another FLSU, outsourced or discon- outcome indicators. Usually, there are too many performance indicators, tinued. Programmatic classification applies to expenditures only which some of which cover inputs or are inconsistent with program objectives in turn are classified as either institutional or administered expenditures. and outcomes. This makes monitoring and evaluation difficult. Ministries Institutional expenditures are those for which the FLSU has direct control develop their own set of performance indicators because they have a bet- while administered expenditures are expenditures for services externally ter knowledge of the performance of the sector. But more effective evalu- provided to a final beneficiary and over which the FLSU does not have ation and feedback, when reviewing program budgets, would improve se- direct impact (e.g. subsidies to universities, pensions, social assistance lection and use of performance indicators. With all FLSUs included in the benefits). Programs are also broken down by aggregated economic clas- program budgeting, however, this represents quite a challenge for MOF sification (salaries, operating and capital expenditure). staff who must review around 25 program budget plans and implementa- The.program.budget.structure.has.been.consistently.adopted.by.all. tion reports. Given that no formal accountability for good performance ministries.and.agencies.that.are.Flsus.and.currently.covers.some.60. is attached to the program budgets and implementation of performance percent.of.the.consolidated.fiscal.program ..While ministries and agen- targets, line ministries don’t have incentives to improve the quality of the cies generally follow the program budget guidelines developed by MOF, program budgets and this reduces their impact on the quality of spending there is wide variation in the quality of the performance indicators used. allocations. Ministries that joined the program budgeting process late find it difficult program. budgeting. contributed. to. improved. accountability. and. to identify programs and links between budget and performance. The transparency. of. programs. funded. by. the. budget .. Despite the weak- 2009 budget includes program budgets for the National Assembly, Cabi- nesses in program budget implementation, it has helped introduce a stra- net and a recently established agency. Extra-budgetary funds, municipali- tegic management approach to budgeting and a focus on efficiency and ties and autonomous entities whose budgets are not subject to Cabinet’s effectiveness. Growing attention by senior management to the program endorsement are not required to follow the PBB approach. budgeting process and understanding of its benefits, and greater capacity while.important.elements.of.the.performance.budgeting.reform. in ministries and agencies to develop performance indicators and targets, are.already.in.place,.the.most.difficult.part.of.maximizing.the.benefits. will help demonstrate the benefits of program budgeting. Greater demand of.this.reform.is.still.ahead ..Bulgaria implements performance-informed for performance information by Cabinet, Parliament and the general pub- budgeting and indicators have been developed by policy and program, but lic would provide incentives for improving the quality and impact of pro- their use is limited in the budget decision process. The budget is approved gram budgeting on public expenditure management. on the basis of economic budget classification while program budgets are presented to the National Assembly only for information. Further effort 5. Budget Presentation and Classification is needed to create incentives to improve the presentation of performance programmatic.budgeting.has.made.budget.documents.more.com- budgets including the quality of performance information. Incentives are prehensive,.meaningful.and.transparent ..The following documents re- also needed to extend the use of performance information for strategic lating to the MTEF and PBB are being used to prepare the budget: budgeting, reporting, and accountability purposes, including legislative 124 125 •. Budget.circular includes information about the stages, roles and 6. Public Management Performance Culture responsibilities of the main players, establishing rules and time A.regular.reporting.of.performance.budgets.has.been.in.place.for. schedules. a.couple.of.years ..FLSUs are required to report on an annual and semi- •. Medium-term.budget.framework.and.key.assumptions include in- annual basis, on both execution by programs and performance indica- formation about the medium-term objectives of the fiscal frame- tors. Reports are presented to MOF and the National Assembly and taken work, macroeconomic projections, economic and fiscal policies into account during discussions in Parliament or when the annual budget and the parameters of the fiscal framework, analysis of the long- report is audited by the National Audit Office. Annual implementation term sustainability of public finances, as well as underlying as- reports include performance information and are open to the public. Im- sumptions necessary for development of the three-year budget plementation reports are reviewed by the Public Accountability Subcom- framework with ceilings by FLSUs. mittee in The National Assembly whose main function is to review and •. The.three-year.budget.framework.and.expenditure.ceilings.by.FL- assess FLSUs’ implementation reports. There is no functioning system for SUs.represents the preliminary assessments of proposed param- monitoring and evaluation that would support improvement of imple- eters of the consolidated fiscal program, the central state budget mentation reports. and of the budgets of the first-level spending units within the three-year period. •. The. Budget. Policy. Statement. presented to the National Assem- bly together with the draft annual budget law. The budget policy statement presents Government priorities for the next year by sector, along with an analysis of implementation in the current year budget, and medium-term priorities and macroeconomic outlook, fiscal risks and allocation of budget resources by sector. Program budgets of all FLSUs are attached to this report, pre- sented to Parliament and used during budget deliberations. •. Decree.of.the.Council.of.Ministers.on.the.implementation.of.the. State.Budget which specifies the essential elements of the budgets of the state bodies, including program budgets of ministries and the state agencies which are FLSUs for budget appropriations. economic.classification.plays.a.leading.role.in.the.budget.process .. This classification is based on the national Uniform Budget Classification developed by MOF. The unified budget classification is supported by the Government Finance Management Information System (GFMIS) which has not been deployed to all budget units. Program classification is not used in the annual budget law approved by the National Assembly and is not supported by a unified information system. Some ministries have adjusted their accounting systems to allow for allocation of expenditures by programs. A thorough review of existing programs is needed before the program classification is codified across government. There are close to 80 programs, making their monitoring and evaluation difficult. 126 127 Croatia Sanja Madzarevic-Sujster and Matija Laco General Assessment (Summary) During the last couple of years Croatia has made good progress in strengthening public expenditure management. The budget execution processes, including accounting and reporting structures, have improved. GFS 2001 standards have been formally adopted in accounting and re- porting although adherence to these standards by some local governments remains questionable. The Treasury Single Account has been expanded to cover bank accounts of all line ministries and the remaining extra- budgetary funds (the health insurance, pension and employment funds). The Ministry of Finance (MOF) has carried out preparatory work to in- tegrate existing financial management information systems used by some line ministries in 2008. The budget preparation process as well as budget documents and procedures became more transparent and consistent with good international practices, although keeping up with the legally binding timetable could further be improved. Functionally independent units of internal audit have been established in all ministries, budgetary users and the City of Zagreb. Stronger financial management processes and control has helped strengthen fiscal discipline, evident in declining deficits, and increase transparency of public finances. Croatia has made consistent efforts over the last four years to improve the rules and relevance of multi-year fiscal planning. These efforts were supported by the need to introduce a three-year perspective in the Pre- Accession Economic Programs (PEP) as well as by the need for a general improvement in quality of macroeconomic forecasting and fiscal plan- ning. While implementation of a medium-term fiscal framework (MTFF) has been well integrated into public expenditure management systems and is now embedded in all budget managers’ practices, additional efforts are needed to make them more mandatory and credible. Deviations between next year’s budgets and planned expenditures in the MTFF exceed 10 per- cent, sometimes led by unplanned liabilities created by new legislation. The new budget law from July 2008 aims to improve the relevance of the MTFF by making fiscal projections more binding and linked to strategic priorities as stipulated in three-year strategy of Government programs. A clear top-down steering of the budget process to enforce the multi-annual strategy is needed to yield the desired results. 129 Moves to more performance-oriented budgeting have been slow. Table 9. Budget Preparation and Execution Timetable While program budgeting has been in place for more than four years, due.dates Activities performance indicators have not moved beyond the pilot phase. With in- By end-April Guidelines for economic and fiscal policies (medium-term economic and fiscal ternational donors’ assistance, two pilot projects have been undertaken outlook) prepared by MOF and presented to Government. in selected line ministries and state agencies, and a methodology for key By mid- May Government enacts budget guidelines. By end-May On the basis of the guidelines, MOF issues instructions for the preparation of performance financial and personnel indicators developed and tested, but the budget proposal to budget managers and extra-budget managers of the State there’s been no political commitment to roll it out. Strategic and budget- budget, and to local and regional self-government units, for the development of ary planning need to be integrated and proper monitoring and evaluation the State budget proposal. By mid-June Budget managers deliver their financial plan proposals to the responsible systems introduced. This became evident in the EU pre-accession proc- ministry. ess. Government’s adoption of the Strategic Development Framework By end-July Responsible ministers deliver harmonized financial plan proposals to MOF. 2006-2013 in July 2006 provided an opportunity to link broader strategic August- October MOF reviews proposals and reconciles them with estimated revenues and considerations with operational budgetary decisions but, without systems receipts. Detailed negotiations between MOF and the responsible ministries. to integrate strategic priorities and strategic goals with budget alloca- October 15 MOF prepares the draft State budget and draft consolidated budget and delivers to Government. tions, policy effectiveness and efficiency is constrained. The Strategy for Late October Government deliberation and decision over final budget proposal, on the basis the Development and Modernization of the State Treasury 2007–2011, a of competing proposals from MO and line ministries. core forward-looking document for public finance management improve- By November 15 Government delivers the budget proposal and consolidated budget to Parlia- ment. ments, was adopted in October 2007 to introduce performance informa- By end-Decem- Parliament passes the budget. The approved budget is published in the Official tion to measure programs’ effectiveness and reward effective functioning. ber Gazette. The champion of these reform efforts is the Ministry of Finance. By May 1 MOF draws up the annual accounts of the state budget and consolidated budget for the proceeding year and reports to Government. Sustaining these reforms and improving resource allocation efficien- By July 1 Government delivers the budget execution for the previous year and the State cy requires greater political commitment and more performance-oriented Audit Office reports to the Parliament about audits being done. budgeting. The relevance of these budget tools for Cabinet to efficiently By September 5 MOF prepares half-year execution of the Budget and sends it to Government. fulfill its strategic priorities and for Parliament to monitor and hold Cabi- By August 5 Government forwards the half-year execution of the budget and sends it to net accountable has been proven in a number of countries. Croatia needs Parliament for enactment. On enactment, it is published in the Official Gazette. to continue with its plans in a more decisive manner. work and provides an analytical and strategic basis for budget prepara- tion. It is adopted by Government by mid- to end-May of the current year. 1. Core Features of Current Budget System Immediately afterwards, MOF issues Instructions for the Preparation of The. budget. system. and. rules. are. set. under. constitutional. law,. the State Budget Proposal (budget circular) to all budget and extra-budget the.organic.budget.law,.several.social.security.and.assistance.laws,.the. managers. This contains key variables and aggregate envelopes by line financing.of.local.and.regional.self-government.law,.and.the.annual. ministries and other budget managers that they need to take into account budget.execution.laws ..The new organic budget law, approved in 2008, when preparing their financial plan proposals. Budget managers deliver governs the budget process (planning, approval, execution and reporting their financial plan proposals to their responsible ministry which, after of the state budget, extra-budgetary funds and local and regional self- certain adjustments, submit them to MOF, preferably by the end of June. government units). It also reconfirms the medium-term fiscal framework Sometimes all of the above steps fall behind by two months. which became mandatory in 2003 as well as program classification of the moF.leads.preparation.of.the.draft.state.budget.and.draft.consoli- budget dated. state. budget. (which. includes. extra-budgetary. funds. and. agen- The.budget.preparation.cycle.starts.with.preparation.of.economic. cies).for.the.coming.budget.year.with.projections.for.two.consecutive. and.Fiscal.policy.guidelines.for.a.three-year.period.by.moF ..This is a years, in consultation with line ministries and other budget and extra- key document for setting the medium-term fiscal and economic frame- budget managers. MOF presents it to Government by October 15 for adoption. Government is obliged to submit the final draft state budget bill 130 131 and consolidated budget to Parliament for enactment by November 15. • ensuring medium-term budget proposals remain within the The law on state budget execution (which defines borrowing and guar- expenditure, deficit and debt targets as defined in the Medium- antees’ issuance limits, reporting and execution rules, a budgetary basis Term Guidelines that serves as a threshold for social benefits and various other elements) • developing the medium-term budget proposal and submitting it is submitted for enactment along with the annual budget. This law defines to Cabinet with explanatory notes standards for delegated functions to municipalities. The budget year in • preparing medium-term debt strategy Croatia matches the calendar year. • giving consent for reallocation of expenditure within the budget Although.moF.guidelines.provide.a.framework.for.a.multi-year. of the spending unit during budget execution budgeting.approach,.and.a.detailed.budget.is.prepared.for.three.years. (based. on. economic,. organizational. and. program. classifications),. • reporting on the budget’s execution, monthly to Cabinet and budget. projections. serve. informational. purposes. only .. They. are. not. twice yearly to Parliament mandatory.and.the.budget.is.passed.for.only.one.budget.year ..Parlia- • monitoring compliance with budget law and informing Cabinet ment enacts the budget and the consolidated central Government budget60 of any revisions that may be needed in the fiscal year. (that includes extra-budgetary funds and agencies) for the coming budget A Department for Budget Preparation in MOF is divided into three year and receives, for information only, projections for the subsequent units: the Budget Analysis Unit (four staff); the Budget Preparation Unit two years. During parliamentary debate on the State Budget proposal and (eight staff); and the Unit for Local Government (four staff). The Direc- financial plans of extra-budget managers, Members of Parliament (MPs) tor of this department is a professional, employed through a competitive present their proposals for amendments, which Government may adopt selection process. Compared with the approved number of established or reject. An amendment proposing an increase in expenditure above the positions, all three units are understaffed (42 established versus 23 filled amount established in the Budget Proposal may be accepted only if it is positions). In 2008, a functional review of MOF, including its Budget financed by a commensurate cut in another item of expenditure, not from Preparation Department, suggested the need for restructuring of the min- budgetary reserves or additional borrowing. This means that adopted istry to strengthen two groups of functions: analysis of public policy and amendments may not exceed proposed and projected deficits of the con- coordination and supervision of administrative functions, moving the lat- solidated budget of the Republic of Croatia. Equally important, any leg- ter away from administrative support services. This would help increase islative proposal or strategic document adopted within a fiscal year can- efficiency and promote continuous improvement in the State Treasury’s not become effective in the current budget year unless funds have been planning activities. secured in the budget proposal (or revised budget) based on the fiscal cabinet. participates. actively. in. budget. preparation. and. consul- impact assessment (FIA). FIA must be submitted with the legislative or tations ..It approves the medium-term fiscal framework and main macr- strategic document and ex ante approved by MOF. oeconomic assumptions for a three-year period. Although these are avail- moF.plays.a.central.role.in.the.budget.process.and is responsible, able to the general public after Government adoption, the Medium-Term among other things, for: Economic and Fiscal Guidelines are not officially submitted to Parliament. • issuing Medium-Term Guidelines and Instructions for the bud- The most important expenditure allocation decisions, and arbitrations be- get preparation procedure tween MOF and line ministries, are carried out in a closed Cabinet session • reviewing and providing feedback on medium-term budget pro- which usually takes place before a final draft budget submission to Parlia- posals of all line ministries, budget managers and extra-budget- ment. The draft budget and consolidated budget, that includes all extra- ary funds and agencies (EBFs) budgetary funds and agencies following organizational, economic and program classifications together with all budget documents and budget execution law, are then approved by Cabinet and submitted to Parliament by mid-October. If during the budget year the expenses and/or expendi- Additionally, the consolidated central government budget combined with local and re- 60 gional governments’ budgets forms the Consolidated General Government (CGG). tures increase, or if budget revenues and/or receipts become reduced due 132 133 to the occurrence of new budgetary obligations or changes in economic budget and the associated budget execution law have not been satisfacto- developments, Government may, at MOF’s proposal, suspend for up to 45 rily drawn up. In these cases Parliament’s Speaker sends them back, at the days execution of specific expenses and/or expenditures. If the budget bal- Committee’s recommendation, for MOF and Government to reconsider. ance can’t be reached, Government proposes a budget revision according This is one of the reasons why the Committee should have well-informed, to the same rules applied to the original budget preparation. professional personnel able to detect shortcomings in budget proposals. with. ex. ante. agreed. medium-term. expenditure. framework. and. parliamentary.debate.has.a.limited.impact.on.budget.policy ..Dur- consolidation.of.all.line.ministries’.accounts.into.a.single.treasury.Ac- ing parliamentary debate on the state budget proposal and financial plans count,.line.ministries.have.an.increasingly.important.role.in.efficient. of extra-budgetary managers, Members of Parliament present their pro- expenditure.allocation ..Following agreed expenditure ceilings, line min- posals for numerous amendments, which Government may adopt or re- istries and government agencies are encouraged to propose resource allo- ject. Amendments are rarely accepted. All proposed amendments need cations which provide the greatest development impact. Decisions on new to be accompanied by a proposal for offsetting the respective increase or employment, large investments and social programs require additional decrease of the budget item. During the course of the financial year, Par- supporting documentation (feasibility studies, laws or job systematization liament receives information on the execution of central Government’s decree) to be approved by Cabinet upon the fiscal impact assessment ap- budget. The budget act requires Government to prepare a semi-annual proved by MOF. Line ministries are developing and submitting to MOF statement on budget execution and submit it to Parliament no later than their medium-term budgets, in program format once MOF agrees and the beginning of August of the current budget year. Parliament debates Cabinet approves expenditure ceilings. MOF is authorized to clear all line the semi-annual execution in mid-July at the earliest; this suggests moni- ministries’ requests for opening new programs in the SAP system. Once toring of budget implementation by Parliament is not strongly developed. enacted by Parliament, budget managers have limited flexibility to real- while.non-enactment.of.the.budget.is.a.sign.of.no.confidence.in. locate funds among various line items. This is due partly to a high level the.government,.and.requires.approval.of.temporary.financing,.legal- of state budget detail. Budgetary funds may not be reallocated, except un- ly,.voting.no-confidence.is.done.through.a.separate.legislative.process .. der the terms and in the manner stipulated by budget law and law on If Parliament fails to pass the budget before the beginning of the budget budget execution. An exception to this is that reallocation of budget items year, financing central, local and regional government units, and other within budget managers’ lines or between different budget managers may budget managers, continues on the basis of temporary financing (provi- make up to five percent of expenses and expenditures at most, if the Min- sional financing) and on the rights of budget fund recipients established ister of Finance approves it. The new budget act envisages a lower level of by laws and other regulations. Temporary financing is carried out pro- state budget detail (a third level of economic classification rather than the portionally to revenue collected in the same period of the previous year fourth level prescribed in the 2003 Budget Act) which should allow for and up to 25 percent of the total income realized, excluding the financing more flexibility in reallocating funds. receipts. Temporary financing is allowed only for the first 12 weeks of the on.receipt.of.the.draft.state.budget.and.consolidated.budget,.to- budget year. gether. with. the. draft. budget. execution. law. and. budget. explanation,. local.and.regional.self-government.units.(lgus).prepare.and.ex- parliament.has.six.weeks.to.debate.and.enact.the.budget ..The budget ecute.their.budgets.independently.although.there.are.several.channels. is presented according to economic and program classifications with a through.which.central.government.frames.local.government.budgets . budget explanatory note and corresponding laws. Budget documentation MOF issues Instructions for the Preparation of the Local and Regional is discussed by various parliamentary committees including the Finance Self-Government Units.Budgets for a three-year period. These provide ba- and Budget Committee which is obliged to give Parliament its opinion on sic macro and fiscal assumptions for LGUs developing their budgets as per the budget. This Committee doesn’t employ professional budget analysts the earlier adopted Medium-Term Economic and Fiscal Guidelines. The but engages three independent non-parliamentary members from scien- medium-term fiscal framework also underlines the general government tific and professional institutions. Usually, the Committee recommends deficit target with a separate deficit limit proposed for LGUs. Budget ex- Parliament approve the budget but there may be times when the proposed ecution law sets the overall borrowing limit for all LGUs while individual 134 135 LGU’s annual amortization repayment cannot exceed 20 percent of their despite.some.budget.managers’.skepticism,.implementation.of.a. own revenues. There are firm rules for delegated functions and these are tsA.allowed.more.rational.management.of.public.funds,.without.in- funded by shared tax revenues and equalization of fund resources. MOF fringing.on.the.managerial.independence.of.budget.managers . From discusses with line ministries additional capital transfers planned for 2006, all revenues of budget managers, revenues under special regulations upgrading LGUs’ physical and social infrastructure. Municipalities may (administrative fees and other earmarked revenues) and EU grants have reallocate their own resources, including for their own expenditure on been incorporated into the budget and channeled through the TSA. This compensation of employees, current spending, other transfers and capital has facilitated greater control over the collection and use of earmarked spending. revenues. Preparatory steps to integrate existing financial management The budget is enacted on a cash basis although in the explanatory information systems were undertaken in 2007 and, with the use of EU budget documents, Government presents a consolidated central and funds, will be implemented in 2009, facilitating swifter and more trans- general government budget balance on accrual basis. Budget documents parent exchange of information and funds. Government has passed the would benefit from an explanation on how conversion from cash to an Strategy of Development of the Public Internal Financial Control System. accrual basis is done, as well as from a full inclusion of all 576 local gov- Functionally independent units of internal audit have been established ernment units (as opposed to a sample of the largest 53), all extra-budg- in all ministries, budget managers and the City of Zagreb. The adopted etary agencies, quasi-fiscal activities of public enterprises and cumulative Rulebook on Internal Audit of budgetary beneficiaries provides, among changes in the stock of arrears. An attempt was made in 2001-2002 to cal- other things, work methodology and requirements for appointments of culate tax expenditures but this was never repeated. Without this informa- certified internal auditors. The Internal Audit Manual has been prepared tion it is difficult for Parliament to assess the general budgetary strategy in and training of internal auditors and FMC staff is underway. In Decem- the context of the medium-term fiscal framework. While following a full ber 2006, Parliament passed the Law on the System of Internal Financial accrual basis accounting would be difficult at this stage – there are other Controls in the Public Sector. Stronger financial management processes pressing PFM priorities – this information is essential for assessing the and control has helped strengthen fiscal discipline, evident in declining real fiscal policy impact on the economy and understanding what drives deficits and greater transparency of public finances. the differences between cash and accrual numbers. budget. preparation. processes. as. well. as. budget. documents. and. procedures. are. more. transparent. and. consistent. with. good. interna- 2. General Progress on Budget Reform tional.practices . Government submits to Parliament (public) the semi- since.it.adopted.the.budget.law.in.2003,.croatia.has.made.good. annual statement on the state budget execution for the first half of the progress. modernizing. its. public. expenditure. management. system. current budget year by the end of July. MOF prepares the consolidated (pems). Budget execution processes, including accounting and reporting statement of the Republic of Croatia’s annual budget accounts and submits structures, have improved. GFS 2001 standards have been formally adopt- it to Government by May 1 of the current year. This is detailed informa- ed in accounting and reporting, although adherence to these standards tion. Aggregate data following GFS 2001 methodology, or ESA 1995 from by some local governments warrants further improvement. The Treasury 2008, for consolidated central government accounts are published every Single Account (TSA) is now functioning, with the wider use of the SAP month and for consolidated general government accounts every quarter system, and in 2006 was expanded to cover bank accounts of all line minis- (with a lag of around two months). The state budget proposal is accompa- tries and, in 2007, the remaining extra-budgetary funds (health insurance, nied by an explanatory note that only recently contains some sensitivity pension and employment funds). All budgetary revenues and receipts are analysis of public debt, and some selective analysis of long-term sustain- channeled into the TSA from which all payrolls, current and capital ex- ability of public finances (health and pension expenditures specifically) penditure payments are made. This facilitates daily liquidity management over a horizon of 45 years. In 2005, Government prescribed that central and provides a solid basis for effective financial planning. bodies of state administration, when submitting their legislative and regu- latory proposals for approval, enclose a statement on the projected impact of proposed legislation on the state budget, local and regional self-govern- 136 137 ment budgets and public sector employment (the same applies to any laws • clarify the roles and responsibilities of spending units, Parlia- that Government submits to Parliament for adoption). This is available to ment and cabinet the general public in an abbreviated form. The fiscal impact assessment is • introduce strict limits on debt issuance and penalties for over- provided on a Fiscal Impact Assessment Form and requires ex ante MOF spending approval. • reduce quasi-fiscal activities and control arrears and line minis- several. formal. and. informal. fiscal. rules. have. been. introduced. tries over-commitments but.need.to.be.better.enforced.to.ensure.fiscal.discipline.in.the.budget. • improve macroeconomic forecasting and comprehensiveness of process ..The organic budget act from 2003 introduced a fiscal rule that the budget by reducing the number of extra-budgetary accounts limits central government debt to GDP ratio. The new organic budget act from 2008 envisages that the ratio of unsettled amounts of Government • improve reporting, accounting, and transparency of fiscal ac- debt at the end of the year and gross domestic product (GDP) projec- counts. tions may be greater than the last year’s ratio, provided the mentioned Later on, reforms were directed at improving allocative and technical ratio does not exceed 60 percent of GDP. Government and Parliament efficiency of public spending. The MTEF was established and strength- are monitoring compliance with the fiscal rule. Furthermore, the Budget ened with the introduction of program budgeting. Reforms in selected Execution Act for the fiscal year establishes the total amount of new Gov- sectors have advanced and enabled shifting of resources to other priori- ernment debt and states guarantees that may be assumed or issued dur- ties. MOF has taken the lead in moving budget reforms forward. ing the fiscal year. Enforcement procedures are not defined ex ante. As external. aid. to. moF. in. early. 2000. was. used. to. inform. croatia’s. well, there is an expenditure (nominal expenditure ceiling) and a budget reform. directions . USAID, the US Treasury, IMF and the World Bank balance (as percentage of GDP) rule introduced through the Medium- (WB) helped make Treasury functional; strengthened accounting, fore- Term Economic and Fiscal Guidelines, which are being revised annually casting, monitoring and budget reporting rules; restructured debt and the and receive only political commitment of Government. These guidelines cash management system; established an MTEF; helped draft the 2003 or- define expenditure envelopes per budgetary institutions, economic clas- ganic budget law (which was also supported by the WB Structural Adjust- sification, and deficit targets for the medium-term. MOF is responsible ment Loan in 2002 and 2003); and set up the advanced reform agenda for for monitoring compliance with those targets but without any enforce- budget planning and monitoring (through an IDF grant). Reform support ment procedures deviations are common, even in the budget proposal for from the WB Programmatic Adjustment Loan 1 and 2 and EU grant funds an immediate fiscal year. Once expenditure ceilings are established in the helped further strengthen the Treasury system, auditing standards and guidelines, controls for budget preparation are set in the SAP system and capacity, and the move towards more performance-oriented budgeting. budget managers cannot independently change them. However, if MOF They have helped initiate these recent reforms along with adoption of the and budget managers, during their negotiations, identify a need for re- Medium-Term Strategy for Development and Modernization of the State defining some expenditure ceilings, Cabinet, at MOF’s proposal, consid- Treasury for 2007-2011. The Strategy is a core forward-looking document ers and establishes new ceilings. While deficit targets have generally been of the Government for public finance management, setting goals and an respected, deviations from these guidelines are still common, even in action plan for modernization of the State Treasury system. budget proposals for an immediate fiscal year. Additional. efforts. and. priorities. outlined. in. the. government’s. budget.reforms.have.been.implemented.in.response.to.large.de- strategy.are,.among.others:. viations. of. budget. out-turn. compared. with. plans. and. this. has. made. • shifting towards performance-informed budgeting fiscal.policy.unpredictable ..Each year since 2003 there has been a budget • strengthening analytical foundations of budget allocation deci- revision enacted in the second half of the year with aggregate expenditure sions increased following revenue over-performance. Initially, budget reforms were designed to improve the aggregate fiscal discipline to ensure sustain- • strengthening consultation mechanisms (especially with Parlia- ability of public finances. These reforms set out to: ment) and budget transparency 138 139 • increasing flexibility of budget execution a Unit for Internal Audit Harmonization. The Institute of Public Finance, • integrating strategic and budgetary planning by linking alloca- a public research institute, has provided advice and reform impetus for tions to strategic outcomes. strengthening public expenditure management. Until 2008 the state budget was adopted on the fourth level of eco- key. drivers. of. the. mtFF. implementation. and. program. budget- nomic classification which reduced flexibility in execution and increased ing. have. been. treasury. and. moF’s. budget. preparation. and. macro. the number of necessary reallocations of funds. Because it lacks detailed Analysis.and.Forecasting.departments ..A core unit led by the Deputy enough information, Parliament opposes raising the level of economic Minister of Finance in the early 2000s used external assistance to pro- classification (e.g. from fourth to third) on which the budget is enacted. A vide MOF with good international practices and recommendations for new organic budget law, enacted in July 2008 and effective from January program budgeting. The 2003 budget law introduced program budgeting 2009, envisages adoption of the state budget on the third level of economic but implementation began only in 2005. Rulebooks and decrees were pre- classification, while reporting on budget execution will be submitted on pared and training undertaken to educate budget managers on program the fourth level. This law confirmed intentions to strengthen, and make budgeting. Treasury worked closely with all line ministries and provided more relevant and binding, an MTEF. The MTEF will be enacted by Par- extensive technical support for a swift introduction of program budg- liament as a whole, which was not the case so far. Introduction of strategic ets. All budget managers including local government units are currently medium-term plans as a mandatory first step in the budget preparation preparing budgets in program format. These, however, are not used for process is expected to strengthen program budgeting. Future financial budget decision making and don’t control policies effectively across all plans of budget managers should include programs established by a long- budget managers. Organizational and economic classifications still domi- term development strategy, special laws and other regulations passed on nate budget allocation policies and negotiations. the basis of law, accompanied by the expected performance indicators. Financial plans will include, among other things, a report on the achieved 3. Adopting Medium-Term Expenditure Frameworks goals and results of the previous year’s programs as well as expected future consistent.efforts.have.been.made.over.the.last.four.years.to.im- results.. Although allocation of funds will remain, to some extent, sub- prove.the.rules.and.the.relevance.of.multi-year.fiscal.planning . These ject to political decisions, performance-informed budgeting should help were supported by the need for a three-year perspective in the Pre-Ac- MOF improve allocation of funds and get better value for money, as well cession Economic Programs (PEP) and for better quality macroeconomic as facilitate adherence to Government-set fiscal rules. But without well- forecasting and fiscal planning. developed programs for appropriation and reporting, the performance The. mtFF. was. introduced. in. 2003. with. the. organic. budget. law. side of PBB is unlikely to contribute reliable information on progress to- giving.moF.responsibility.for.its.preparation.and.cabinet.for.its.ap- wards policy objectives. proval ..The MTFF covers the annual budget plus projections for two fol- The.approach.to.reform.has.combined.top-down.and.bottom-up. lowing years, all prepared on the fourth level of economic classification. decision-making. In early 2000, external assistance received significant Projections are prepared on the same structure and level of detail as the attention from top management and many changes occurred quickly dur- annual budget. Although the MTFF is presented to Parliament, it is most- ing that period, including changes in debt and cash management, TSA, ly used for budget planning purposes, because Parliament approves only the MTEF, accounting rules, and program budgeting. Starting in 2004, appropriations for the first year. The MTFF is updated annually and only reforms were driven mostly at technical levels and many initiatives have the first year is binding; the other two years are indicative. been tested through pilot projects. Examples include fiscal impact assess- until.2003.the.mtFF.was.not.formally.adopted.by.government ..it. ment, consolidation of bank accounts, internal audit units, and perform- was.a.mere.analytical.exercise,.focused mainly.on.the.macroeconomic. ance-based budgeting. All line ministries’ budget units were consulted framework,. aggregate. revenue. and. expenditure. items. Initial efforts, during the initial process and training efforts were comprehensive. Since supported by the IMF and US Treasury, aimed to improve the quality 2004, three new units, instrumental in recent reform efforts, have been and realism of the macroeconomic framework, and budget procedure established: a Treasury System Development, Budget Analysis Unit and 140 141 and documentation, and introduce sectoral ceilings. Ownership of the The. mtFF. implementation. has. been. well. integrated. into. public. Treasury Department was crucial for advancing the MTFF to its current expenditure.management.systems.and.embedded.in.budget.managers’. form. The 2005 budget, for the first time, contained multi-year line item practices.but.more.effort.is.needed.to.make.it.credible . Croatia lacks an estimates as prescribed by budget law. It has been disaggregated down to explicit fiscal rule for the total or current deficit so MTFF serves as a mul- the fourth level of economic classification for all budget managers and ti-annual expenditure and revenue strategy for keeping the deficit within has become a core part of budget documentation submitted to Parliament acceptable boundaries. Over the last four years, the MTFF has aimed to after Cabinet’s formal approval. reduce the consolidated general government deficit below the 3 percent moF.plays.a.leading.role.in.the.mtFF.preparation. The medium- margin, a Maastricht criteria for entering the Economic and Monetary term macroeconomic forecasts are prepared by the Bureau for Macroeco- Union. But deviations from expenditure and deficit targets are typical. nomic Analysis and Planning, a department in MOF. The Bureau coordi- While deficit deviations are within acceptable boundaries and sometimes nates its forecasts and assumptions with the Croatian National Bank; more even reflect over-performance, deviations between next year’s budgets and recently MOF has begun consulting with independent research institu- planned expenditures, as contained in the previous year’s MTFF, some- tions or the private sector. The model used for macroeconomic forecasts times exceed 10 percent. These are led by unplanned liabilities created by has been developed with IMF support. The scope and quality of presenta- new legislation or new government programs. The budget is made from tion of the macroeconomic framework has improved substantially with year to year without much attention paid to the MTFF adopted in the pre- presentation of fiscal and macro risks, as well as sensitivity analysis. The vious year. So far, neither MOF nor Cabinet has provided an explanation medium-term fiscal framework is prepared by MOF’s Budget Preparation for expenditure deviations from the previous year’s MTFF. And neither Department in consultation with the Treasury and the Debt and Cash Parliament nor external reviewers have raised this issue and the relevance Management Department. Projections for revenues and expenditures are of the MTFF exercise hasn’t been adequately respected (e.g. at the level of shown in detail by economic classification in nominal terms and as a per- aggregate expenditure ceilings). cent of GDP. Once this medium-term fiscal framework, presented in the croatia. would. benefit. from. making. multi-annual. expenditure. Medium-Term Economic and Fiscal Guidelines, are approved by Cabinet, totals. of. first. level. budget. managers. mandatory,. while. allowing. flex- a Budget Circular with sector ceilings and key fiscal and macro assump- ibility.at.the.line.item.multi-annual.estimates . Expenditure totals could tions is shared with all budget managers. Budget managers present their be rigorously enforced from year to year during budget formulation as medium-term budgets to the MOF by end-June after which bilateral ne- well as during budget execution. Unexpected developments, including gotiations with MOF start. overspending on entitlement programs, or new spending priorities could line.ministries’.estimates.of.their.institution’s.medium-term.ex- be accommodated by reallocation within the totals or saving measures. penditure.are.as.detailed.as.the.budget.but.it.is.questionable.how.real- Although line item budgetary and multi-annual estimates can be flexible, istic.they.are . Budget projections aren’t mandatory and they are often only totals of first level budgets should not be. Enforcing aggregate expenditure simple inflation or wage-growth adjusted forecasts of current programs ceilings is a priority task for top decision-makers. It is also important to or projections of payments for civil work as per signed contracts. Budget explain in budget documents how budgetary and multi-annual line item managers don’t make sufficient effort to provide realistic estimates and estimates relate to the previous year’s multi-annual estimates and the rea- their submissions make no impact on the budget negotiations process. For sons for change. Making this information available to Parliament would all new policies and laws, the forward-looking fiscal impact assessment is help MPs make more informed proposals and external reviewers provide prepared in an obligatory form but, in practice, these estimates can de- more informed judgments on fiscal developments. viate from the final budgeted amount. Since policy changes and saving new.budget.law.from.July.2008.aims.to.improve.the.mteF’s.rel- measures often require long lead times before they are reflected in budget evance. This law provided for the two outer years in the MTFF to be bind- estimates, it is important that all policy discussion in government (and ing at the aggregate level and linked to strategic priorities, as stipulated not only budget policy issues) is accurately informed on multi-annual fis- in the newly introduced three-year strategy of government programs. cal consequences and the required changes in multi-annual estimates. But without a clear top-down steering of the budget process to enforce 142 143 the multi-annual strategy this may not yield the desired results..Building Table 10. Transport Sector Program-Budgeting, 2008 Budget budget managers’ capacity to develop medium-term plans with more ac- HRK Programs Ministry of sea, transport and infrastructure (065) curacy, while being realistic, and strengthening MOF’s authority to evalu- 8,259,997,126 ate and provide agreement/disagreement with their proposals, would sig- 1200 Administration and governance 186,709,092 nificantly improve public finance effectiveness. Planned introduction of 1202 International cooperation of inland water navigation 4,460,000 a three-year sector and an overall government strategy, along with better 1204 Restructuring and modernization of railways 510,050,000 general performance of the budgeting process, would increase the MTFF 1205 Modernization and development of ports of state interest 217,037,000 effectiveness in Croatia. 1208 Modernization and construction of railway tracks and junctions 4,000,000 1209 Support for Croatian shipping industry 85,500,000 4. Performance-Based Budgeting 1210 Support to port traffic 4,110,000 1213 Subsidization of railway traffic 414,000,000 progress.towards.more.performance-oriented.budgeting.has.not. 1215 Monitoring and development of the postal services 2,900,000 advanced. as. much. as. the. mtFF . Croatia’s budget preparation process 1217 Accession to NATO - map program 300,000 had a transition from line-item budgeting to program budgeting, start- Transport connection of mainland and islands, and between ing with the 2005 budget. Four years later most budget managers seem to 1218 islands 100,000,000 think that program budgeting is only about consolidating spending into 1219 Development of road transport and safety on roads 1,620,000 activities, projects and programs. They don’t recognise it as a major shift 1221 Development of air transport 95,575,000 of methodological focus, from type and size of expenditure to expected 1222 Security and safety in air transport 41,472,000 outcomes and results. 1224 Safety of sea water transport 70,690,000 1229 Environment protection in transport 12,818,000 program. budgeting. was. formally. introduced. four. years. ago. but. 1497 Transport infrastructure construction 3,418,006,441 has. limited. relevance .. It’s not used as a budget allocation and control 1510 Development of inland waterways navigation 1,830,000 mechanism and there is no set of measurable program performance in- Monitoring and development of telecommunications and postal dicators. Organizational views on the budget still dominate over program 1511 markets 4,200,000 perspective and this limits transparency in budgetary presentations and 1544 Safety and oversight of navigation on inland waterways 10,500,000 consultations. Consequently, the impact on budget allocation decisions of 1545 Support for river transport 2,500,000 various economic and social analyses of present and future public expen- 1546 Developments of inland waterways ports of state interest 50,300,000 ditures remains limited. 1547 Construction and technical maintenance of inland waterways 450,000 A. need. to. integrate. strategic. and. budgetary. planning. and. in- 1688 Implementation of national railway infrastructure program 2,248,172,000 Transport connection of mainland and islands, and between troduce. proper. monitoring. and. evaluation. became. more. evident. in. 1218 themselves 378,647,500 the. eu. pre-accession. process . Adoption of the Strategic Development 1547 Construction and technical maintenance of inland waterways 78,704,000 Framework (SDF) 2006-2013, the first consistent longer-term government 1215 Monitoring and development of postal system and traffic 2,569,251 strategy, in July 2006, provided an opportunity to link broader strategic Source: Official Gazette considerations with operational budgetary decisions. But policy effective- ness and efficiency were constrained by the absence of systems to integrate anced growth and fiscal decentralization. Budget allocation for regional strategic priorities and strategic goals with budget allocations. A compari- development programs almost doubled relative to 2006, and tripled rela- son of priority rankings implied by the SDF 2006-2013 and the budget for tive to 2003. Looking at the SDF, balanced regional development is re- 2007 illustrates the gap between strategic goals and annual budgetary al- flected in the definition of only two goals among seven in section VI on locations. The framework for comparisons is weak because definitions of Space, Nature, Environment and Regional Development. This does not strategic areas and goals in the SDF cannot easily be matched to budgetary indicate a high priority ranking. On the other hand, SDF’s top priority is allocations. The top priority in budget 2007 is attached to regionally bal- reflected in the section on People and Knowledge and is comparable with the section on Education and Science in the Budget. This budgetary allo- 144 145 cation has been increased by 5.5 percent which, again, seems mismatched • P3 – sub-program belongs to one program; belongs to one agen- with SDF’s priorities. cy level; has one function. There are three types of sub-programs: several.attempts.have.been.made.to.launch.pbb.but.introduction. activity (coded A), current project (coded T) and capital project of. performance. elements. remains. at. the. pilot. phase . With help from (coded K). the US Treasury and the World Bank, two rounds of pilot projects have In MOF budget terminology an ‘activity’ is a part of a program for been undertaken in 2004-2006 for selected line ministries (Justice; Sea, which expenses and expenditures are planned to achieve program objec- Tourism, Transport and Development – program Tourism; Finance – cus- tives. A ‘project’ is a component of a program, planned on an ad hoc ba- toms Directorate; Health and Social Welfare – program Health; Agricul- sis, in which expenses and expenditures are planned to achieve objectives ture, Forestry and Water Management – program Agriculture) and a state established for a program. A ‘program’ is a set of independent, closely re- agency (State Geodetic Institute). They aimed to collect information on lated activities and projects oriented towards achieving a common goal. the ministry’s mission, policies, strategic and operational objectives. Pro- A ‘main program’ is a set of programs that contribute to realizing the ex- grams were accompanied by a statement of objectives and a description of ecutive body’s objectives established by its decision. However, in the In- institutional arrangements for implementing the program. Names of the struction for 2009-2011 Budget Preparation, budget managers are asked responsible manager for the program implementation were included. Per- to provide program objectives and performance indicators when explain- formance indicators are presented for the baseline year and targets for the ing their financial plans. next three years with the source of information identified. A draft meth- Table 11. Croatia’s Budget Structure: Organizational and Program Classifications odology for key aggregate financial and personnel performance indicators budget.classification classification.categories has been developed and tested on pilot programs but no decisions have been made on rolling it out further. Persistent focus on input budgeting Ministry (Razdjel) Organizational Agency (Glava) has led many line ministries to inflate and fragment the number of ex- Budget end user isting programs, hindering meaningful performance measurement. For Main program example, the transport sector in the 2008 state budget has 27 programs, Program many of which are activities contributing to a meaningful performance Sub-program Program area. Further advancement towards performance budgeting requires con- Activity (A) solidation of programs. In the transport sector, this means consolidating Current project (T) from 27 to 10 programs. Capital project (K) budget. architecture. involves. the. programmatic. structure. but. Source: MOF needs.to.be.complemented.by.strategic.and.operational.objectives,.per- formance.indicators.and.medium-term.policy.targets.for.the.medium- term .. Expenditures are classified and reported on four-levels. Program classification, as described in the Rulebook on Budget Classifications, has three levels: • P1 – main program has one or more programs: sector-wide or cross-cutting program; can be executed in one or more different ministry levels. • P2 – program: belongs to one main program; belongs to one ministry level; has one or more sub-programs; can be executed in one or more agency levels. 146 147 Figure 6. Example of Organizational, Program and Economic classification basis for budget preparation, it is effectively done on the basis üüü 2008 of organizational classification. Budget is conducted in terms of 065 Ministry of sea, transport and infrastructure 8,259,997,126 expenditures per organization units and there is no institution- 06505 Ministry of sea transport and infrastructure 7,797,027,941 alized process for using quality indicators (results of research, 1213 Subsidization of railway traffic 414,000,000 performance and efficiency benchmarks etc). A761010 Subsidies to railway passenger traffic 400,000,000 35121 Subsidies to public corporations 400,000,000 •. ICT.system.support to create user-friendly tools. The SAP-based IT system supports all budget classifications. An application for managing budget classifications has been developed which helps Organizational to improve budget preparation process. •. Political.support.from.decision-makers that not only lifts the bud- Program get process above excessively narrow or partial interests, but en- sures greater focus on strategic management and on ensuring Economic external control and accountability for the delivery of programs. The.strategy.for.the.development.and.modernization.of.the.state. treasury. 2007-2011,. a. core. forward-looking. document. for. public. fi- The. following. six. pre-conditions. are. necessary. for. successful. in- nance.management.improvements,.was.adopted.in.october.2007 ..The. troduction.of.pbb:. aim. is. performance. information. to. measure. programs’. effectiveness. • Further alignment.of.program.classification to measure and mon- and.reward.effective.functioning.by:61 itor program performance in terms of their economy, efficiency • At the state.level, strengthening overall fiscal discipline to ensure and effectiveness, and enable them to be followed up in a better and maintain macroeconomic stability. This task, inter alia, re- way (alignment of programs with the Key Performance Areas quires detailed and comprehensive macroeconomic analyses and (KPAs). some form of a multi-year budget framework to maintain the • Systematic.collection.of.the.lists.of.indicators currently available sustainability of current programs and public debt policy. and/or in use in the state administrations (for example CRO- • At the inter-sectoral (inter-ministerial) level, ensuring effective STAT, Financial Agency) and recognition of the need for addi- inter-sectoral allocation of resources, i.e. allocation of resources tional measures and indicators and to identify sets of Key Perfor- consistent with the strategic priorities of the State. Institutional mance Indicators (KPIs) for programs and sub-programs. solutions and tools for enhancing strategic allocation of resources • Stronger. capacity. of. line. ministries in terms of understanding include the top-down development approach to budgetary plan- the log frame (inputs, outputs and strategic objectives). In the ning and the development of a multi-year budget framework. past two years, together with the budget proposal, Parliament • At the programmatic/managerial level, coordinating budgetary received the explanation of select programs which included authorizations and operative effectiveness. Getting the right bal- some performance information. But the implementing agencies ance between flexibility during the execution phase of the bud- providing these performance reports focused mostly on output get and budgetary restraint is essential. Measures will be directed measures which are easier to collect but provide little under- towards strengthening fiscal controls, improving inter-sectoral standing of sector performance. allocation of resources and providing greater flexibility for effec- • Changes.to.the.budget.negotiation.process to achieve results. Al- tive management and the development of accountability mecha- though the budget manual defines program classification as a nisms. The Strategy for the Development and Modernization of the State Treasury 2007–2011, August 61 2007, page 20 148 149 integrating. established. strategic. priorities. and. budgetary. proc- accountability of the executive. MOF plans to use performance informa- esses. would. significantly. increase. government’s. ability. to. meet. its. tion to monitor programs’ effectiveness, and in budget negotiations and obligations. in. a. timely. fashion .. An element of the MTEF, introduced provide a foundation for rewarding effective functioning. MOF recogniz- through the 2008 Budget Act, is preparation of strategic plans. Plans will es performance won’t be the only element directly affecting allocation of be prepared by line ministries for their scope of work and, based on these, funds according to programs; it calls this a transition towards perform- the Strategy of Government Programs for a three-year period (Financial ance-informed budgeting, as opposed to performance-based budgeting. Strategy) will be prepared and submitted for adoption by Government, The. institutional. framework. of. budget. process. and. its. classifi- as stipulated by the budget act. Preparation of the Financial Strategy and cations. needs. no. changes .. Programs will be redefined to reduce their other activities for the integration of strategic and budgetary planning will number, align them with the strategic framework and determine their be done in close cooperation with the Central Office for Development measurability. This work will be supported by the EU Phare 2006-funded Strategy and Coordination of EU funds. This Office is already engaged project. Because this modernization effort is complex, establishing per- in formulating the development strategy of the Republic of Croatia and formance indicators will initially be restricted to pilot ministries. Or- monitoring its implementation. The Financial Strategy will clearly define ganizational structures in some ministries and across government don’t Government priorities, goals and policies and will be reflected in three- support effective use of performance budgets. For example, there are 17 year budgets ensuring adequate resources are allocated to meet them. It institutions dealing with environmental programs, many of which overlap will have to be supplemented with performance indicators, but initially across several ministries and agencies. Recent functional reviews of state for selected programs and ministries only. institutions to prepare for government organizational reform should com- Figure 7: Comparison of Desired and Current Processes of Strategic and Budgetary Plan- plement and support effective PBB implementation. ning 5. Budget Presentation and Classification Strategic Framework Visions for Development 2006- budget.documentation.is.better.and.more.comprehensive ..The fol- 2013 lowing budget documents are used in preparing the budget: Strategic goals •. The.Economic.and.Fiscal.Policy.Guidelines for a three-year period. Guidelines Draft until 30.4 Polices, measures, Guidelines acceptance until prepared by MOF and adopted by Government at the beginning instruments 15.5 of the budget preparation process. These Guidelines include a ANALYSIS ANALYSIS Budget Manual until 30.5 Budget proposals until 30.6 description of the current macroeconomic and fiscal setting; Action plans and programs Budget proposal until 15.10 analysis of the long-term sustainability of public finances; mac- Acceptance and sending to Budget Parliament until 15.11 roeconomic and fiscal assumptions for the budget year and the following two years; estimates of revenues and expenditures, and Policy evaluation, receipts and expenses at all government levels; a proposal of ag- effectiveness, Key element missing: efficiency, deviation Evaluation gregate budget managers’ expenditure ceilings for a medium- analysis term by FLSUs; projected changes in assets of central, regional and local governments, and debt of regional and local govern- Source: Arhivanalitika ltd, Strategic Planning and Budgeting Process for the Government ments; and an overview of central government obligations to be of Croatia, World Bank, IDF Grant: Croatia – Strengthening Budget Management, Sep- met in the coming years and the policy plan for the develop- tember 2006 ment/investment programs. moF. stands. firmly. behind. this. reform . Its goal is to implement •. Instructions. for. the. Preparation. of. the. State. Budget. Proposal. proper program budgeting over the next few years. It sees performance (‘budget.circular’) and Instructions for the Preparation of the Lo- information as valuable for the budget planning process but also for the 150 151 cal and Regional Self-Government Units. These are prepared by familiarize the public with the state budget, budget procedures MOF and based on the Guidelines. They include key informa- and the way it affects the economy and society. tion about the budget managers’ responsibilities, time schedules, The.2003.budget.Act.identified.the.following.types.of.budget.clas- key documents to be delivered, FLSUs’ expenditure ceilings and sification:. organizational,. economic,. functional,. location. and. pro- macro and fiscal assumptions to be used in preparing medium- gram. Economic and organization classifications dominate the budget term financial proposals. process. Budget classifications and coding are further regulated by the. •. State. Budget. and. the. Consolidated. Budget. MTFF. which. repre- Rulebook on Budget Classifications from 2007. This Rulebook prescribes sents the draft state budget and consolidated budget medium- types, content and application of budget classifications and determines term fiscal program for a three-year period. It is presented at the sources of financing. economic and program classification. •. Organizational classification is a presentation of expenditures •. The. Budget. Explanatory. Note. is presented to Parliament with and expenses according to organizational structure of central the draft annual budget and MTFF. It explains, in a general way, government and local and regional self-governments, broken Government priorities for the next year, macro and fiscal as- down by first and second level budget managers. sumptions as well as allocation of budget resources by sector. •. Economic classification comprises revenues and receipts classi- •. Budget.Execution.Law details the rules behind implementation fied by economic type, and expenditures and expenses classified of the state budget as well as other levels of general government. by the economic purpose they serve. It is submitted to Parliament with the above two documents. •. Functional classification is a set of operations, functions and pro- •. Reports.on.the.semi-annual.and.annual.execution.of.the.consoli- grams of central, local and regional governments. dated.and.the.state.budget present the semi-annual and annual •. Location classification presents expenditures and expenses ac- budget execution to Parliament by end-June and end-September, cording to the territorial organization of the Republic of Croatia. at the same level of detail as the budget law and MTFF. MOF also Although MOF has tried to establish it, this is yet to be pub- issues a promotional publication on the execution of the previ- lished. ous year’s budget, outlining main performance indicators of the •. Program classification is a presentation of budget programs, and budget, some output indicators and financial outcomes of the fis- their integral parts – activities and projects. cal policy. This is widely disseminated. •. Sources.of.financing,.introduced by the new Budget Act, although •. Annual.Report.of.the.Ministry.of.Finance is issued for the previ- operational 2007, and based on the Book of Rules on Budget ous year’s budget execution with some ten months lag. It has a Classifications. wide distribution including through the MOF website. It pro- vides an overview of macroeconomic and fiscal setting, revenue All expenditures, expenses, revenues and receipts must be reported and expenditure developments of state budget, consolidated cen- in accordance with budget classifications. Revenues and receipts are also tral and general government by economic, functional and orga- monitored by sources of financing. nizational classification, debt developments of central and local governments, and any institutional change that may have hap- 6. Public Management Performance Culture pened. program. budgeting. has. been. in. place. for. a. couple. of. years. but. • A promotional.publication.on.budget for the following year.62 further. advancement. is. constrained. by. lack. of. certain. performance. • A Budget.Guide.for.Citizens was prepared jointly with the Insti- elements . The execution of programs with some results and/or achieve- tute of Public Finance five years ago. Its main purpose was to ments information is reported to Parliament on an annual and semi-an- nual basis. The State Audit Office (SAO), according to INTOSAI Auditing Standards and State Audit Act, is obliged to implement the performance http://www.mfin.hr/adminmax/docs/Proracun2008.pdf 62 152 153 audit, in addition to financial and special audits. The financial audit is the system proposed to social partners allows for the above principle to be most frequent type of audit carried out by SAO. It is an audit of public in- implemented but resistance, generated by the fear of decreased job secu- come and expenditure; financial statements audit and an audit of financial rity, and a non-objective staff appraisal system need to be addressed first. transactions in public bodies, local and regional self-government units, le- gal entities financed partly or entirely from the budget, public companies, companies and other legal entities in which the Republic of Croatia (i.e. local and regional self-government) is a major shareholder. It covers the use of funds from the EU and other international organizations or institu- tions to finance public needs. sAo’s.role.in.promoting.a.performance.culture.is.significant.but. would.benefit.from.more.capacity . SAO’s powers to conduct perform- ance audits is defined by the State Audit Act which stipulates that audit- ing include an assessment of the efficiency and effectiveness of business operations, and an assessment of performance in the realization of par- ticular program outputs. So far, six pilot performance audits have been conducted. SAO has developed an audit manual which dates back to the mid-1990s. Up-to-date and more detailed manuals are needed. Drafts of a Financial Audit Manual and a Performance Audit Manual have been pre- pared in line with INTOSAI – Auditing Standards, INTOSAI – Practical Guidelines for Performance Audit, European Implementing Guidelines for the INTOSAI Auditing Standards, as well as examples of good practice and Manuals of Supreme Audit Institutions from other countries. The.ongoing.civil.service.reform.program.of.the.government.of. croatia. should. complement. and. mutually. reinforce. pbb. initiatives. Better understanding of the benefits of a more performance-oriented culture is important but achieving it requires an effective program and performance budget framework. For example, development of job de- scriptions for position holders and of staff appraisal systems needs to be informed by program performance measurement and objectives. The civil service reform, which started in 2005 with enactment of a new Civil Serv- ice Law, set the basis for a merit-based promotion and pay system and has professionalized top civil servants’ ranks. These were previously po- litical appointees. Reform proceeded slowly with de-politicization taking place only in early 2008, while salary reform is still being discussed with stakeholders, particularly unions. The major disagreement between un- ions and Government is about the replacement of tenure (years of service in administration) and bonuses (currently creating a large part of the sal- ary) with performance-related bonuses. Despite efforts to professionalize top managerial posts, the public administration system is not ready to increase flexibility in return for increased accountability. The new salary 154 155 Latvia Paulina Hołda General Assessment (Summary)63 Latvia has undertaken a number of important institutional reforms to strengthen fiscal policy making. These include extending budget anal- ysis beyond a single year by introducing the medium-term expenditure framework (MTEF) and implementing program budgeting. This includes establishing and monitoring targets for outputs and Government spend- ing objectives. A performance-oriented culture has been strengthened by ongoing public wage reform which envisages a closer link between pay levels and the professional content of different positions, plus actual per- formance. Support from the State Chancellery, and within the Ministry of Fi- nance (MOF), at the outset of these reforms helped set the pace and qual- ity of reforms. Despite this, their implementation suffered from some problems and, while significant progress has been made, challenges re- main. These include improving policy formulation and planning, address- ing artificial fragmentation of the budget, building capacity to develop a meaningful medium-term budget framework and improving the struc- ture and policy applicability of the performance information system. Reforms aimed to improve control over the budget process, with MOF playing a more strategic role. To be successful, these public finance management reforms need first to get the basics right to support three functions of the budget: control of public resources, planning for future allocation and efficient and effective management of resources64. Control of public resources comes first, so reformers need to control inputs before seeking to control outputs. The Latvian experience illustrates the need to focus on the architecture and rationale of the system and not on its par- ticular technical parameters. Recently, Latvia’s political and economic environment for public fi- nance reforms has changed. The economy is undergoing major adjust- ment and more short-term pressures are emerging on the fiscal side. In this changed environment it may be difficult to enforce the MTEF devel- oped in 2007, or to encourage hard choices between expenditure options. 63 We are grateful for excellent and timely assistance provided by the Latvian Ministry of Finance, and in particular Ms. Ilonda Stepanova, Director of Budget Department. 64 World Bank, 1998, Public.Expenditure.Management.Handbook, Washington D.C. 157 On the other hand, tightening constraints may stimulate further reform despite.significant.progress.in.public.sector.reform.and.govern- to better prioritize and improve efficiency of public spending. The neces- ance,.challenges.remain. As identified in the World Bank Public Expend- sity for this may have not been obvious to all stakeholders during times of iture Review (2002) a primary task facing Latvia in the fiscal area was ra- successful economic performance. tionalizing public expenditure and reforming the civil service. Reforms in these areas are being implemented but work is yet to be done to improve 1. Core Features of the Current Budget System policy formulation and planning, address artificial fragmentation of the latvia.has.achieved.many.of.the.basic.requirements.of.fiscal.trans- budget, build capacity to develop a meaningful MTEF and improve the parency .. As noted in the IMF assessment65, Latvia has been a leader structure and policy applicability of the performance information system. among economies in transition. It adopted improved accounting and fis- cal management practices and provided financial markets with relevant 2. General Progress on Budget Reform information on fiscal activities. In particular, the state treasury established reform. efforts. have. been. made. in. public. finance. management,. an accounting and reporting system that is widely recognized as effective including. introduction. of. an. mteF. and. program. and. performance- and reliable. The budget process is open and soundly based on a macr- based. budgeting. To limit discretion in fiscal policy, Government de- oeconomic framework with reliable estimates of expenditure and revenue. cided in 2000 to move towards an MTEF and making this framework The.budget.process.is.transparent.with.an.emphasis.on.financial. operational from 2008 was the key achievement in strengthening policy compliance ..it.also.provides.for.development.of.performance.budget- planning. Strategic planning to link policies with budget allocation has ing.and.medium-term.planning ..The annual budget process is well de- been developed since 2003. Budget programs were introduced in 1997, fined and clear about timelines and the roles and responsibilities of key performance management developed since 2003, with the second cycle agencies. Important steps for further improvement have been identified of reform starting from 2008 to revise and improve results and perform- and authorities are undertaking institutional reforms to strengthen fiscal ance indicators. Public wage reform across all budget institutions began policy making. This includes extending budget analysis beyond a single in 2003 to introduce clear job descriptions and base wages on revised job year by introducing the MTEF with the 2008 budget. Government is al- classifications linked to professional content and actual performance. This ready implementing a program budgeting framework which includes es- is a major positive shift from the traditional seniority rules. tablishing and monitoring targets for outputs and government spending institutional.reforms.aimed.at.strengthening.fiscal.policy,.giving. objectives. Further work is required to put these elements into effective moF. a. more. strategic. role. MOF has traditionally played a weak role practice. in the budget process which, to a large extent, has been based on non- moF.needs.to.play.a.more.strategic.role.if.fiscal.policy.making.is. scrutinized base spending. There was a strong internal drive for reform to. improve .. An important feature of Latvia’s budget system is the con- at MOF, as well as external stimulus from the State Chancellery and the cept of base spending. This captures the level of spending associated with Prime Minister, to improve control over the budget process. MOF has continuing current government functions, similar to the concept of un- been the lead agency in introducing the MTEF, with the State Chancellor changed policy. To determine the budget, spending for new priorities is developing a system of strategic planning. added to base spending. Developing the base budget has traditionally under. strong. fiscal. performance,. political. support. for. reducing. been a quantitative driven exercise with most ministries perceiving the base.spending.has.been.limited ..This.has.meant.limited.fiscal.space.for. base as an entitlement to be carried forward, with little concern for scru- new.policy.initiatives. Under impressive economic growth following EU tiny and rationalization. Institutional reform aimed to strengthen MOF’s accession and the resulting revenue over-performance, political support role in the budget process, including analyzing existing base spending, for cutting base spending has been limited and attempts to revise existing evaluating strategic plans and budget requests and developing methodol- budget programs haven’t been successful. Existing expenditure programs ogy for program and performance budgeting. have limited fiscal space for new policy initiatives, as well as for wage in- creases committed at the political level. Report.on.Observance.of.Standards.and.Codes,.Latvia.–.Fiscal.Transparency, March 2001. 65 158 159 Against.this.background,.implementation.of.reforms.has.suffered. reflect the MTEF. The medium-term macroeconomic development and Introducing the MTEF is intended to better align budgeting with policy fiscal policy framework has been operating since 2008. priorities but strategic plans developed by line ministries have been bi- The. mteF. provides. for. a. three-year. rolling. expenditure. frame- ased toward new initiatives with little attention paid to reviewing and ra- work.for.broad.categories.of.spending. Medium-term macroeconomic tionalizing existing programs. Furthermore, strategic plans haven’t been development and fiscal policy framework, to be approved by Cabinet by constrained by resource availability. On performance systems, the reforms May 1, includes forecasts of fiscal aggregates for the next budget year and tended to focus on particular techniques, i.e. on results and performance two following years. By May 5, the Minister of Finance will inform the indicators, without revising more fundamental issues of program struc- Saeima on the framework approved by Cabinet. The framework includes: ture and failing to use performance information in budget decision mak- • a forecast of the medium-term State macroeconomic situation ing. As a result, identifying and measuring results and performance in- dicators is viewed as a formal exercise which bears no relation to the real • the fiscal policy aims of the Government in the medium-term performance of public administration institutions. • a forecast of revenues in the medium-term The.economic.and.political.environments.have.changed.recently .. • the maximum permitted total amount of State budget expendi- The.severe.economic.downturn.has.focused.efforts.on.short-term.con- tures in the medium-term cerns ..Following a period of above-potential economic growth, the Latvi- • the planned State budget appropriation reserve in the medium- an economy entered a phase of substantial adjustment with significant term short-term challenges emerging on the fiscal side. Faltering revenues on • the maximum permitted total amount of State budget expendi- the back of sharp economic slowdown resulted in increased pressure on tures for each ministry and other central government institu- budget expenditure, including on the 2009 draft budget, and renewed in- tions in the medium-term. terest in tools and techniques for finding cross-cutting savings. Given the By September 1 of the current year, the Minister of Finance submits changed political environment, it may be difficult to enforce the MTEF or an updated medium-term macroeconomic development and fiscal policy encourage hard choices between expenditure options. In July 2008, faced framework to Cabinet, along with the draft budget law (package of draft by deteriorating macroeconomic fundamentals, Government revised the budget laws) and explanations. state budget from a planned surplus of 1 percent of GDP by adjusting both the revenue and the expenditure side. As.a.part.of.public.finance.management.reform,.a.system.of.stra- tegic. planning. has. been. introduced. Strategic planning allows for for- mulation and prioritization of policies and links them with budget deci- 3. Adopting Medium-Term Expenditure Frameworks sions. Lead by the State Chancellery, which is responsible for establishing The.mteF.has.been.adopted.as.part.of.broader.reform.of.public. a policy formulation system, this was introduced in Latvia in 2003-2006 finance. management .. Reform towards an MTEF was initiated in 2000 alongside training and introduction of structural funds. From 2007 all with MOF playing the leading role. The reform program includes several ministries are required to prepare strategic plans. This marks significant elements of the MTEF, such as a medium-term fiscal policy statement, a progress in policy formulation although in practice results have been only budget priorities statement, and development of guidelines for line minis- partially successful. tries to design their own strategic plans. The legal basis of the budget proc- despite.reform.efforts,.the.budget.process.is.still.based.largely.on. ess, the Law on Budget and Financial Management, has been amended to incremental.budgeting . Budget practice in a number of developing coun- tries shows it is easier to add new policies than remove old ones. For this reason, linking policy, planning and budgeting should start with a review of policies and programs of the previous planning and implementation period. In Latvia, the budget still remains artificially fragmented into base 160 161 budget and development spending. This creates a perception in line min- 4. Performance-based Budgeting istries that base budget expenditures can be carried forward with little program. based. budgeting. has. been. introduced. within. broader. concern for scrutiny and rationalization. public.finance.management.reforms. Program based budgeting reform strategic.planning.has.so.far.failed.to.address.weaknesses.in.policy. was initiated in the second half of the 1990s, starting with budget pro- formulation.and.the.budget.system ..Weak policy formulation has been grams. At that time, the focus was on controlling inputs in terms of the identified as an area for improvement.66 Strategic planning should im- number of subordinated institutions and staff, rather than on controlling prove policy formulation but instead has revealed a key weakness of the outputs. As a result, the introduction of performance indicators failed. budget process, i.e. artificial fragmentation of the budget. Strategic plans Later in 2003, within a broader scope of introduction of unified policy developed by line ministries are biased toward new priorities and initia- making system in 2001-2003, performance indicators were defined main- tives without fully reviewing and rationalizing existing programs. New ly for outputs. Starting from 2008 there has been a second cycle of reforms programs are only vaguely prioritized and inadequately integrated with in performance management and the system is now being revised. Work the MTEF. focused on new guidelines on performance indicators68 approved by Cabi- strategic.plans.have.not.been.formulated.within.an.overall.budg- net in June 2008. et.constraint. A successful MTEF assists and requires relevant decision The.system.architecture.includes.programs.and.subprograms.with. makers to balance what is affordable in aggregate against policy priorities. defined.objectives,.outcomes.and.outputs ..The basic architecture of the The MTEF comprises a top-down resource envelope, a bottom-up esti- system comprises two levels – programs and subprograms – for which ex- mation of the current and medium-term costs of exiting policy and, ulti- penditure is classified by economic codes. Each program and subprogram mately, these costs with available resources.67 In Latvia, sequencing these has a defined objective for which policy results (outcomes) and activity stages has been different with strategic plans developed without guidance results (outputs) are specified (see Table 12 for an example) and, where from indicative medium-term resource envelopes at the ministry level. possible, measured by performance indicators. The programmatic struc- Thus, strategic plans haven’t been realistically fitted in to the overall fiscal ture has been consistently adopted across central government, with local and macroeconomic framework. governments choosing whether or not to adopt the system. moF.should.be.strengthened.and.technical.capacity.further.devel- Table 12. Budget program: objective, policy results and activity results, example from the oped. MOF still needs to improve its capacity to build a meaningful MTEF Ministry of Education. and, in particular, provide projections of base spending. Its role needs to objective be significantly enhanced, particularly in determining key parameters of Provide each citizen with opportunity to receive qualitative lifelong professional education in the MTEF, evaluating line ministries’ strategic plans and budget requests, accordance with individual interests and abilities, as well as in compliance with state economic and developing methodology for program and performance budgeting. development needs. policy.results • number of learners financed from state budget (thousands of learners) • number of graduate, whose education has been financed from state budget • percentage of 25-64 year olds’ participation in further education and non-formal education • number of regional education centers for adults. Activity results • professions for which content of centralized exams for qualifications has been elaborated • percentage of learners who have received qualification in relation to the total number of learners financed from the state budget • percentage of teachers improving professional skills in relation to the total number of teachers • number of modernized rooms for professional courses and workshops. 66 As noted in Pubic Expenditure Review for Latvia (2002), policy formulation in some sectors re- mains poor and the lack of clearly defined policy priorities has often led to an increase in unfunded Source:.Ministry.of.Finance mandates and ineffectiveness of the budget formulation process. Another weakness is ad hoc com- mitment to unfunded policy proposals during budget preparation or execution (World Bank, 2002, Republic.of.Latvia.-.Public.Expenditure.Review, Washington D.C.). 67 World Bank, 1998, Public.Expenditure.Management.Handbook, Washington D.C. Performance.Management.System.Guidelines.2008-2013. 68 162 163 moF.leads.the.way.with.cross-sectoral.working.groups.created.to. Table 13. Budget program structure in the Ministry of Transport. solve.the.issue.of.overlapping.tasks ..Budget and performance manage- Budget ment system is being developed primarily by MOF. To solve issues of divi- allocation sion of inter-sectoral responsibility for overlapping tasks between institu- Budget program in 2008 (in percent tions, MOF is organizing working groups with representatives from other of total) institutions. The State Chancellery, which is responsible for coordinating TOTAL 100.0 policy planning and implementation, is making a significant contribution 03.00.00 Branch Management 4.7 to the process. 08.00.00 Ensuring Operation of the State Agency „Riga Motor Museum� 0.1 09.00.00 Installments in International Organizations 0.0 program.and.subprogram.design.remains.input-oriented.with.lit- 11.00.00 Ensuring Operation of the State Railway Technical Inspectorate 0.1 tle.performance.orientation. The programmatic structure of the system 12.00.00 Ensuring Operation the State Railway Administration 0.1 has its drawbacks with budget programs in many cases input-oriented and 14.00.00 Coordination and Technical Support of European Union and International 0.0 similar to traditional spending lines (see Table 13) for which it is impos- Funding sible to set outcome indicators. Programs tend to be broad to allow minis- 23.00.00 State Road Fund 50.9 26.00.00 Port Development Fund 0.0 tries budget flexibility. Links between priorities and budget programs are 29.00.00 Implementation of Projects Financed from the Cohesion Fund the Road unclear. In practice, the system seems unhelpful for policy planning, es- Branch 10.1 pecially as performance information isn’t used in budget decision making. 31.00.00 Public Transport 16.1 33.00.00 Implementation of Railway Infrastructure Development Projects Financed Adopting. a. performance-based. system. has. met. challenges. and. 6.2 from the Cohesion Fund constraints,. mainly. on. the. capacity. side .. A major challenge has been. 34.00.00 Port Development Projects Financed from the Cohesion Fund 2.9 resistance to change with program based budgeting perceived as a tool for 35.00.00 Airport Development Projects Financed from the Cohesion Fund 1.1 punishment rather than improving efficiency. The rapid pace of reforms 37.00.00 Technical Support Projects Financed from the Cohesion Fund 0.1 has not been accompanied by adequate capacity building, both in MOF 38.00.00 Trans – European Network Projects of Common Interest 0.1 and line ministries. Training for better understanding of the rationale 39.00.00 Ensuring Operation of the Transport Accident and Incident Investigation 0.0 Bureau behind program based budgeting has been inadequate, focusing only on 40.00.00 Ensuring Operation of the Road Transport Inspectorate 0.2 technical parameters and indicators. More fundamental issues of program 41.00.00 Ensuring Operation of the Civil Aviation Agency 0.3 structure require revisiting. 42.00.00 Wide-Band Communication Infrastructure Development in Rural Area 0.5 Financed from the European Regional Development Fund (ERDF) There.is.room.for.considerable.improvement.in.the.current.system. 43.00.00 Road Development Projects financed from the Cohesion Fund in the Pro- of. output. and.outcome. indicators. Ministries responsible for develop- gramming Period 2007-2013 0.0 ing indicators tend to focus on inputs and processes and their capacity to 44.00.00 Ensuring aviation safety, emergency operations and medical services in the 1.2 prepare outcome-based indicators is underdeveloped. Reporting require- International Airport Riga 45.00.00 Preparation of documentation and construction of East - West transport ments are comprehensive with too many indicators (496 for outcomes and corridor projects 5.1 1597 for outputs) and no clear hierarchy. There is duplication in planning Source:.Ministry.of.Finance and reporting systems concerning performance indicators (identified in Cabinet), activity strategies of direct public administration institutions, able.and.useful.to.decision.makers. Results and performance indicators budget explanations, financial and annual public reports69. are not systematically analyzed and monitored and nor has responsibil- There.is.no.systematic.analysis.and.monitoring.of.results.and.per- ity for information analysis, collection and collation has been identified. formance.indicators.and.nor.is.information.aggregated.to.make.it.avail- As a result, comparative aggregate information is often unavailable when needed for optimizing budget programs and analyzing the cost-efficiency There are no clear links between results and indicators featured in the policy planning documents 69 of inputs. So far, the information that has been kept up-to-date is that and the results and indicators used in the activity strategies of public administration institutions. needed to meet international commitments. Identifying and measuring Therefore, the same policy may have different results and performance indicators across various documents. results and performance indicators is viewed as a formal exercise bearing 164 165 no relation to performance. As a consequence, program budgeting has budget.classification.has.a.programmatic.structure.with.expendi- made little impact on budget allocations. ture. recorded. in. economic. classification .. Budget classification of ex- weaknesses. of. the. performance. management. system. will. be. ad- penditures includes division by programs, sub-programs and economic dressed. in. the. second. cycle. of. reform. which. began. in. 2008. Current classification codes. Sections of programs and sub-programs are further performance systems will be improved with new basic principles for divided, including information on resources for covering expenditure, preparation and use of results and performance indicators. These are set remuneration, maintenance expenditure and capital expenditure. Budget in the Performance Management System Guidelines 2008-2013, approved classifications of revenues, expenditures, financing and debt are compat- by Cabinet in June 2008. New guidelines are expected to minimize the ible with ESA’95 and, in part, consistent with GFSM 2001. number and increase the quality of indicators allowing for gradual transi- latvia.has.developed.a.unified.it.system.based.on.an.integrated. tion from monitoring inputs to monitoring results (outputs). Monitoring sAp.platform . Since 2007 all participants in the budget process have been and evaluation will be improved to ensure policies are based on verifiable using a unified IT system, based on an integrated SAP platform (except information (ex ante evaluation) and accumulation of data on results and for some annexes to the budget law). Ministries and other central govern- performance indicators will be available for ex post evaluation of poli- ment institutions have internet access to the system which is used to pro- cies. Performance information will be linked more closely with budget duce and submit budget documents. The system consists of two modules program allocations which will be based on identified spending purpose, – budget planning (under the Budget Department of MOF) and budget planning and approval of deliverable results. execution (under the Treasury) – the latter still under construction. while.the.new.phase.of.the.reform.will.improve.the.system,.some. public. wage. reform. has. been. a. major. step. in. improving. public. basic. challenges. remain. The new system guidelines, although techni- management.performance.culture ..Since 2003, wage reform in the public cally sound, are limited in scope and focus largely on preparation and use sector has been developed under the leadership of the State Chancellery. of results and performance indicators. Indicators form only a small subset Its aim is to include all budget institutions and gradually all civil servants of an effective performance management system. Even more important is (teachers will be included in 2010). This reform has introduced clear job the analysis behind the indicator results and the program structure they descriptions, with positions divided in clusters and levels, and depending are built on. A phased implementation may be advisable because indi- on functions. Ultimately, wage setting has been linked to a new job clas- cators for some functions are easier to develop, and more useful, as for sification structure based on professional content and actual performance example in the areas that deliver services to the public. To develop an rather than seniority or length of service. The system has been in place efficient and useful system, MOF needs to build its capacity to assess the since June 2006, with all 300 central government institutions included by policy-relevance of indicators and strengthen sectoral policy expertise to April 2007. Each institution still has its own system of salaries which are interpret the indicators and understand the factors affecting them. to be aligned for corresponding job classifications by 2011. greater. capacity. is. needed. to. improve. application. of. public. fi- 5. Budget Presentation and Classification and Public nance. management. reforms. MOF needs more capacity in evaluating Management Performance Culture line ministries’ strategies and budget requests, developing methodology budget. documentation. provides. information. on. the. annual. for program and performance budgeting, and using effectively the per- budget. and. the. mteF,. operational. from. 2008 . Core budget planning formance information in the budget process. Line ministries’ capacity to documents include a scenario of macroeconomic development and fiscal prepare outcome-based performance indicators is under-developed and policy, the medium-term macroeconomic development and fiscal policy there is a need for performance information to be more closely linked to framework (MTEF), package of the draft State budget law and explana- decision making and budget allocations. tions, and convergence program. The complete budget documents are submitted by MOF to Cabinet by September 1, and by October 1 to the Saeima for approval. 166 167 Poland Ewa Korczyc General Assessment (Summary)70 Poland is committed to making its budget more predictable over the medium-term and more transparent. A Medium-term expenditure framework (MTEF) and performance-based budgeting (PBB) are recog- nized as necessary and important developments for improving manage- ment of public finances and economic competitiveness. PBB is a major step in modernizing and improving its management and administration of public finances. It is also a key component in the strategy to improve the organization and efficiency of the public sector71. Poland is still in the early phase of reform. Strong political leadership and support is crucial for its successful implementation. Political com- mitment can help embed modern public finance management into the public sector. A critical factor for Poland is to ensure PBB reform is a part of a broad reform agenda. Improved capacity is needed to pursue reforms related to civil service, the introduction of an MTEF, and establishment of an integrated financial management information system. Work is needed to design the budget in a performance framework, particularly methodo- logical guidelines for creating program structures and setting perform- ance targets and indicators. This is central to PBB reform. Other areas of work include aligning programs to strategic documents of the Govern- ment and establishing an effective monitoring and evaluation system. Poland’s greatest challenge is to make PBB reform work. The cru- cial factor is not only to prepare legislative amendments, design program structure and select performance indicators but how to combine these techniques and integrate them into the budget strategies and the civil service’s day-to-day financial management procedures. 70 We are grateful for excellent and timely assistance provided by the Polish Ministry of Finance, and in particular Ms. Marta Postuła, Director of Public Finance Reform Department. 71 Webber D. 2007, The. Introduction. of. Performance-based. Budgeting. in. Poland:. An. Assessment. of. Progress,.Achievements.and.Next.Steps, World Bank, Warsaw. 169 1. Core features of the current budget system Constitution. If Parliament fails to pass the annual budget within four poland’s.budget.process.is.similar.to.most.oecd.parliamentary. months after Government has submitted it, the President may call new democracies . Budget initiative is exclusively in the hands of Cabinet. In elections although he or she is not obliged to do so. If the budget is not ap- cooperation with analytical departments in the Ministries of Economy proved by the start of the new fiscal year (January 1) the executive’s budget and of Labour and Social Affairs, MOF prepares general macroeconomic proposal takes effect. assumptions for the draft budget. These are then supplemented with pre- moF’s.role.in.the.budget.process.depends.on.the.position.of.the. liminary estimates of aggregate revenues and expenditures and submitted Finance.minister.in.the.cabinet . Although MOF proposes preliminary to Cabinet for discussion and approval. At the same time, the Minister of spending limits for line ministries consistent with its target for the fiscal Finance prepares a budget circular. This contains a set of rules for budget balance, these can be changed by Cabinet. The Minister of Finance has no preparation and the main forms to be used when submitting estimates. special powers in bilateral negotiations with spending agencies and can- The budget circular, along with macroeconomic assumptions and spend- not cut a specific ministry’s request72. The Minister can act only with full ing ceilings, is then sent to line ministries. Since 2008, the budget circular support of the Prime Minister. has obliged line ministries to justify their spending requests. The budget poland’s. budget. process. is. to. some. extent. strengthened. by. fiscal. circular is usually sent in April and line ministries have 21 days to provide rules ..The debt rule is set out in the Constitution of the Republic of Poland MOF with their spending requests. Bilateral budget negotiations between and the Public Finance Act. The overall objective is to ensure the debt MOF and line ministries take place throughout the summer. The aggre- level does not go beyond 60 percent of GDP (compatible with the EU’s gated budget draft (modified by Cabinet) must be submitted to parlia- Stability and Growth Pact). The Public Finance Act spells out actions to be ment by September 30. taken if there is a risk of breaching this limit, with different triggers tak- The.legislature.plays.a.limited.role.in.the.budget.process ..The Sejm, ing effect when debt levels reach thresholds set at 50, 55 and 60 percent. the lower chamber of the Polish Parliament, cannot introduce any changes There are doubts about the effectiveness of the debt rule. First, it puts no to the budget act that would increase the budget deficit. Amendments must effective constraint on the budget deficit, as long as public debt is below be neutral with regard to the budget balance which in practice means the 50 percent of GDP. Second, if thresholds are reached with high deficits Sejm can raise expenditures beyond Government’s proposal but has to in- and low economic growth, the constitutional level may be breached before clude corresponding revenue increases. The Sejm may, however, propose corrective actions take effect. And third, given a low share of discretionary changes in the composition of expenditure. After three readings, amend- expenditures, corrective actions may not be politically feasible73. ments are voted and a vote on the full budget takes place. The approved it.is.worth.stressing.that.the.budget.balance.rule.was.introduced. budget act has to be reviewed by the Senat, Parliament’s upper chamber. in.2006. This rule, more a kind of budget policy than a traditional budget The Senat also makes amendments to the budget act but these have to be rule, sets the maximum state budget deficit at PLN 30 billion. It is based voted again by the Sejm which can overrule Senat proposals. only on political commitment and doesn’t involve any constitutional or The.president.has.no.formal.role.in.the.budget.process . While the legal obligation. This rule, introduced by Marcinkiewicz’s Government, President can veto normal legislation, he or she cannot veto the budget. was supposed to put Poland on track to meet the Maastricht fiscal criteria. Constitutionally, the President is required to sign the budget bill within Following its introduction, the budget deficit hasn’t exceeded the 30bln seven days after receiving it from the Sejm. The President may ask the PLN level but it remains questionable whether or not it is the rule that Constitutional Tribunal to check if the proposed draft is in line with the stopped expansion of the deficit or political commitment and a favourable business cycle. The. constitution. and. the. public. Finance. Act. set. some. general. rules. for. the. budget. process .. specific. issues. are. regulated. by. the. de- 72 Hallerberg M., Von Hagen J., 2006, Budget. Processes. in. Poland:. Promoting. Fiscal. and. Economic. Stability, Ernst and Young 73 Allen R., 2008, Poland:.Developing.a.multi-annual.fiscal.framework,.International Monetary Fund 170 171 crees.of.cabinet.and.the.Finance.minister ..Since 1997 the Constitution • The budget needs to be made more predictable over the medium has specified roles and responsibilities of budget managers in preparing, period by introducing an MTEF and PBB. executing and controlling the budget along with major deadlines in the The.amended.public.Finance.Act75.has.been.widely.debated.by.the. budget preparation process. Apart from introducing a legally binding debt sejm’s.public.Finance.commission ..The draft act incorporates institu- rule, the Constitution prohibits financing of budget deficit from credits tional measures aimed at making the budget more consolidated, transpar- from the National Bank of Poland. The Public Finance Act describes in ent and predictable over the medium-term as well as more performance- detail the most important definitions and rules governing the budget. oriented. Table 14. Limitations set by organic budget laws • Budgetary units (funds and agencies) will be consolidated, also limitations.set.by.constitution limitations.set.by.public.Finance.Act at local level. The law proposes dis-establishing numerous ex- Possibility of changing the draft of the State Expenditures set in the State budget constitute tra-budgetary funds or agencies although new executive agen- budget in Parliament limit for public expenditures cies will be created to perform the duties of some dis-established Ban on covering a budget deficit by way of con- State budget cannot embrace regulations units. The purpose funds at the central level will become budget tracting credit obligations to the State’s central changing other acts bank units without separate legal status will be funded directly from Exclusive right to introduce legislation concern- State budget can determine expenditure limits the budget. ing a budget for multi-annual programs Restrictions concerning a national public debt Multi-annual programs are set by Cabinet • An MTEF will be implemented with introduction of the Multi- year Financial Plan of the State (MFPS) covering a four-year Source:.Organic.Budget.Law,.Ministry.of.Finance.(Presentation.from.SBO.meeting,.OECD,. 2006 period and updated every year on a rolling basis (including the current fiscal year and three years ahead). recent. international. assessments. point. to. numerous. shortcom- • As well as recurrent activities, the programmatic structure will ings.in.the.fiscal.framework74 ..These shortcomings are: cover public investment and long-term programs. The new • Budget fragmentation, due mainly to multiple extra budgetary Multi-year Financial Plan of the State will be presented in a pro- funds leading to inefficient allocation of budget resources. Al- grammatic structure. though some progress in this area has been made, there are still agencies and funds that don’t appear in the budget. Their num- 2. General progress on budget reform ber has declined in recent years but the amount of money they introduction.of.pbb.and.an.mteF.has.not.been.part.of.a.broad.re- receive has increased. form.aimed.at.improving.the.organization.of.public.finance ..However, • The budget process is only loosely connected to Government some elements of these reforms are in place. With amendments to the policy. Spending ministers act more like administrators of exist- Public Finance Act, the number of extra budgetary units has been system- ing laws and programs rather than managers of policy and pro- atically reduced. Efforts have also been made to make the existing budget grams. more predictable over the medium-term with introduction of a medium- • International assessments call for strengthening the accountabil- term fiscal framework. Steps have also been taken to ensure efficiency and ity framework in the public sector with incentives for improved effectiveness of public expenditure through improved transparency and public service delivery. accountability arrangements connected with performance-based budget- ing. progress. has. been. made. in. eliminating. budget. fragmentation .. International assessments include: Republic.of.Poland:.Financial.Stability.Assessment (2001.and.up- 74 Several state agencies and special funds have been dis-established and date.2004), International Monetary Fund, Poland:.Toward.a.Fiscal.Framework.for.Growth.–.Public. their responsibilities taken over by other agencies or line ministries. Ex- Expenditure.and.Institutional.Review.(2003), The World Bank, Poland:.Developing.a.multi-annual. fiscal.framework.(2008), International Monetary Fund, Poland:.Country.Financial.Accountability. Draft of Public Finance Act, October 2008 (nr druku 1181). The new Law on Public Finance was 75 Assessment.(2006), The World Bank. passed through Parliament in August 2009, and signed by the President in September 2009. 172 173 amples are the National Labor Office which was merged with the Ministry and description of objectives, indicators and multi-year expenditure for of Labor, and customs administration which was incorporated into MOF. these tasks in the justification to the budget act for 2008. The report on The number and the variety of extra budgetary funds and agencies call for the execution of budget law must contain information on realization of further consolidation. A recent draft of the Public Finance Act envisages tasks, expenditure, with description of objectives, indicators, and multi- removing more extra budgetary funds, agencies and special funds. year expenditure, and also on funds spent on executing tasks. Introducing to.address.shortcomings.of.the.budget.system,.poland.has.taken. program structure and certain performance elements in the form of per- steps. to. introduce. a. medium-term. fiscal. framework .. Multi-annual formance indicators and targets clearly changed the way line ministries targets appear in three forms, with the first two included in the national think about their budgets. documents. The Debt.Management.Strategy considers projections of the After.the.elections.in.2007.and.the.change.of.government,.moF. public debt to GDP for the medium-term perspective (three years). The took.over.reform.efforts . The existing group, responsible for the reform, Justification. to. the. budget. act includes deficit targets for the next three was partially moved to MOF’s Department for Public Finance Reform. years. Convergence Programs, prepared in line with EU requirements The new arrangement slightly stalled the reform momentum because the must include figures for expenditures and revenues in addition to projec- new owners wanted to revisit existing rules and guidelines. tions on deficit and debt levels for the next three years. The problem is that those figures have indicative meaning only and there is no legal obligation 3. Adopting Medium-Term Expenditure Frameworks for governments in the future to follow them. poland. does. not. have. an. operating. mteF .. Some elements of the Following. the. global. trend,. polish. authorities. decided. to. intro- medium-term perspective in public finances exist but they don’t fit into duce.program.structure.to.the.budget.in.2006.and.eventually.move.to. a fully developed MTEF. Introducing multi-year budgetary planning will performance-based. budgeting. (pbb) .. Clearly, the increasing popular- be an essential element of a broad initiative to reform Poland’s budgetary ity of modern public finance management systems and the need for fur- system. The initiative was included in the Convergence Program prepared ther expenditure rationalization were important triggers for this reform. in 2005 in collaboration with the EU. According to Polish authorities, PBB reform is a milestone in the public The.draft.of.the.public.Finance.Act.provides.for.introduction.of.an. finance reform and a major step for Poland in modernizing and improv- mteF . Expenditure ceilings in Medium-Term Fiscal Plans will not be le- ing the management and administration of its public finances to improve gally binding. An MTEF will be implemented with the introduction of the public sector organization and efficiency. Multiyear Financial Plan of the State (MFPS) covering a four-year time since.2006,.performance.budgeting.reform.has.been.high.on.the. perspective and updated every year on a rolling basis (including the cur- agenda. The reform was initiated by Marcinkiewicz’s Government and led rent fiscal year and three years ahead). The plan will include macroeco- by Teresa Lubińska, State Secretary in the Chancellery of the Prime Min- nomic projection (growth and inflation), forecasts of state budget revenues ister (KPRM). Ms. Lubińska, whose experience in introducing perform- and expenditures (the latter also in programmatic mode), financing needs ance budgeting at the local government level, championed this reform. and sources of financing, and a forecast of general government balance. She created a special department in the KPRM responsible for preparing For. now,. the. multi-annual. macroeconomic. estimates. appear. in. a methodological framework for PBB. This department was supported several.forms: by an inter-ministerial working group and independent experts. Under Lubińska’s leadership methodological guidelines were prepared (Perform- • A Debt Management Strategy considers projections of public ance. Budget:. Rationality-. Transparency-Effectiveness76) and PBB was pi- debt to GDP for the medium-term perspective. loted in the budget chapters Science and Higher Education. • The Justification to the budget act includes deficit targets for the reform. entailed. amendments. to. the. public. Finance. Act. These next three years. obligated budget managers to specify tasks, with planned expenditures • Convergence Programs, prepared in line with EU requirements Performance-based. Budget:. Rationality,. Transparency,. Effectiveness . Methodology, Chancellery of 76 must include figures for expenditures and revenues in addition the Prime Minister, Warsaw, 2006 to projections on deficit and debt levels for the next three years. 174 175 Since 2007 budget managers have been required to prepare estimates The.deficit.ceiling.from.the.new.public.Finance.Act.will.not.be.ful- for their expenditures for the next three years in program structure. EU ly.binding ..There is a safety valve and in justified cases Government may projects and some other capital projects are already planned on a multi- adopt a higher deficit and explain it in detail in the justification to budget year basis and there are annexes in the budget documentation which pro- law. Such a deficit ceiling may prove ineffective, particularly in pre-elec- vide three year projections of such expenditures. Good quality medium tion or election years when Government may want to inflate spending or and longer-term projections of. pension expenditures. are also prepared. both Parliament and Cabinet change and a new government may not treat All those figures have indicative meaning only so there is no legal obliga- the deficit ceiling as binding. tion for governments in the future to follow them. greater.capacity.is.needed.to.produce.reliable.bottom-up.forward. macroeconomic.forecasts.are.supported.by.several.fiscal.rules ..The estimates .. So far, line ministries prepare expenditure estimates for one source of the rules is both national and EU regulations. The debt rule set year only which aren’t subject to any kind of analysis or quality control by out in the Constitution of the Republic of Poland bans contracting loans MOF. As long as expenditures were below the ceiling given to line min- and granting guarantees which would result in the public debt exceeding istries, MOF could not question or cut proposed programs. The obliga- 60 percent of GDP. This is in line with protocol on the excessive deficit tion to prepare three-year expenditure estimates, together with a program procedure annexed to the Maastricht Treaty. There are also specific rules framework for the budget document, is a good starting point for intro- that apply to debt issuance by local governments. These provide that the ducing forward estimates in the Polish budget system. However, as these level of debt cannot exceed 60 percent of projected revenues and the level estimates are not legally binding, not much attention is being paid to their of debt servicing costs plus principal repayment cannot exceed 15 percent quality. And there is no process for agreeing what is to be considered as of such revenues. Although there is no formal fiscal limit, the EU Strategy existing policy for the purpose of their preparation, or for agreeing on and Growth Pact established that fiscal deficit target for the deficit cannot parameters to be applied in the estimation process. be higher than 3 percent of GDP. A.good.process.is.needed.for.reconciling.top-down.and.bottom-up. poland. needs. to. strengthen. its. efforts. implementing. an. mteF .. elements. of. the. mteF .. This requires a strong link between policy for- Work is needed on the three core pillars of the MTEF: mulation and the budget, as well as a good mechanism for prioritizing • top-down multi-year projections of resource envelope targets expenditure. It is the phase in which performance budgeting can greatly (what is affordable) increase the effectiveness of the MTEF. When the reconciliation process reveals the need to cut expenditures, program budget closely linked to • bottom-up multi-year cost estimates of sector programs (what government priorities will help avoid cuts across the board and enable an has to be financed, with a focus on performance) intelligent reduction in spending. Poland started working on introducing • institutional (political-administrative) decision-making process program/ performance budgeting in 2006 and this element will surely be to integrate the above two pillars (making the necessary trade- used once Government decides to fully introduce an MTEF. offs). medium-term.fiscal.framework.exists.but.fiscal.targets.are.not.le- 4. Performance-based Budgeting gally.binding ..Macroeconomic forecasts prepared in line with the Public performance-based.budgeting.has.been.on.the.agenda.in.poland. Finance Act recommendations for the budget process (deficit and debt since.early.2006. The initiative to introduce program framework to the estimates for the budget year and subsequent two years,) along with rev- budget is included in the most relevant strategic documents: 2007-2015. enues and expenditures forecast for the Convergence Program, provide a National. Development. Strategy,. 2008-2011. National. Reform. Program. for. good basis for developing top-down resource envelope targets for budget Implementation. of. the. Lisbon. Strategy and 2007-2013. National. Strategic. chapters/line ministries. These estimates, prepared by analytical depart- Reference. Framework. The Government elected in 2007 confirmed its ments in MOF and National Bank of Poland, and reviewed by an inde- commitment to continue with PBB reform and the program for its imple- pendent panel of experts, are good quality and provide a sound departure point for further development of an MTEF. 176 177 mentation was included in the Government Strategic Plan announced by Table 15. Schedule for PBB implementation in Poland (extract) the Prime Minister in February 2008. Main Steps This.reform.was.motivated.by.the.eu.which,.in.its.assessment.of. 2008 - Reviewing legislative changes necessary for PBB implementation - Initiating work on methodological guidelines for PBB the.polish.convergence.program,.mentioned.results-oriented.budget- 2009 - Final methodology for PBB implementation ing. as. a. priority. for. public. finance. reform . Introducing PBB is a key - Establishing guidelines for reporting in performance framework. support area of the Operational Program 2007-13 Human Capital. PBB is - Preparing main IT system requirements also regarded by authorities as a tool for better fiscal discipline. A new way 2010 - Preparing concept of monitoring in performance framework of budgeting is recognized as necessary for the transition to a more eco- - Completing the first stage of work on reporting system. nomically stable and competitive economy. It’s about creating good and 2011 - Establishing performance indicators database efficient governance within the public sector. - Completing second stage of work on reporting system reform.started.in.2006.and.was.coordinated.by.the.chancellery.of. - First trial of reporting and monitoring in performance framework 2012 - First performance-based budget for Poland for 2013 (in parallel with traditional budget) the.prime.minister.(kprm). A Special Department for State Perform- - Implementing guidelines for effective management of public funds via multi-year budget- ance Budget was established to develop the methodological framework ing and comprehensive performance indicators database and guidelines for performance budgeting. This department was support- 2013 - Preparing methodological guidelines for program evaluations ed by the inter-ministerial group of experts, mainly from MOF and the - Implementing IT system for PBB Ministry of Regional Development. After the 2007 elections this depart- 2014 - First report on budget execution (based on budget in performance framework from 2013) ment was moved to MOF where work on PBB has since been coordinated. - Evaluating 2013 performance budget 2015 - Reporting on the impact of performance budgeting on the public finance system methodological. guidelines. developed. in. 2006. are. based. on. best. international. practice . The Department for State Performance Budget Source:.Ministry.of.Finance,.http://www MOFnet gov pl/index php?const=5&dzial=1822&wy- sw=4&sub=sub2 was involved in international cooperation with countries already using a program/performance framework (France, the Netherlands, Slovakia) or The.first.operational.budget.was.prepared.for.the.fiscal.year.2008 .. on a similar level of development (Latvia, Bulgaria). Best practice exam- It included many, but not all, of government’s expenditure, activities and ples were reviewed during the International Conference of Performance- agencies77. At the time there was a two-level programmatic design of the based Budgeting: Lessons for Poland. This conference was organized by budget structure: tasks and subtasks. The quality and specification of tasks the KPRM in cooperation with the World Bank. A similar conference was and sub-tasks varied across spending agencies. It appeared the organiz- held in Krakow in 2008. ing principle underlying the selection of tasks was not entirely consistent moF.is.fine.tuning.methodological.guidelines.and.concentrating. b ecause some ministries defined tasks partly on the basis of broad policy its.effort.on.making.pbb.work. The schedule for PBB implementation objectives and partly on the basis of existing programs of expenditure. (Table 15) says very little about the final shape of the framework but it sets This approach made it difficult for them to separate actual expenditures major reform milestones for the next few years. between these tasks for both budget appropriation and execution and re- porting purposes. pbb.has.been.introduced.in.three.phases:.pilot.programs,.first.op- erational. budget. 2008,. and. second. operational. budget. 2009 .. In 2006 After.responsibility.for.the.reform.was.transferred.to.moF,.chang- KPRM prepared pilot projects of budget for 2007 using the program es.were.made.to.the.methodological.framework.of.pbb ..MOF adopted framework. New techniques were tested in budgetary sections devoted a functional approach as a new methodology. Tasks were no longer placed to the Ministry of Science and Higher Education, and budgetary parts Science and Higher Education were published in the justification to the budget law for 2007 in PBB framework. Initial versions of pilot projects The budget covered all ministries and central government offices, 19 special purpose funds and 77 seven government agencies. It excluded 15 managers whose financial plans are included in the were created in the Ministry of National Education and Ministry of Labor justification to budget act project (sacred cows). A simplified performance budget was prepared for and Social Affairs. the Ministry of National Defense, Central Anti-corruption Bureau, Foreign Intelligence Agency, and Internal Security Agency 178 179 in various budgetary parts. Instead they became building blocks in newly organizational changes in MOF since then appear to have stalled reform defined state functions78. efforts. poland.operates.a.four-level.program.classification.framework ..It As.well.as.inclusion.in.broad.strategic.documents,.pbb.is.incorpo- includes division into functions, tasks, subtasks and activities: rated.into.the.public.Finance.Act ..Amendments to the Public Finance • Function is the highest level in the new PBB architecture and Act were introduced in December 2006 establishing a legal requirement groups expenditures with certain areas of government activity. for budget managers to present their spending in program framework. Jus- There are 22 government functions. The classification is not en- tification to the budget act has to specify tasks with planned expenditure tirely in line with COFOG methodology. The functions were de- and defined objectives, indicators and multi-year expenditures for tasks rived from the structure of government administration as speci- (Article 124, Public Finance Act). The report on the execution of budget fied in the Polish law.79 law must contain information on the realization of tasks, expenditure with description of objectives, indicators and multi-year expenditures. • Tasks group expenditures with common objectives. Amendments.enable.development.of.the.performance.budget.but. • Subtasks are operational. don’t.show.the.importance.of.these.changes . The light nature of current • Activities comprise key steps in achieving the objectives of tasks regulations gives authorities managing the reform process a great deal of and subtasks. This level was created to avoid very detailed speci- flexibility. It also reflects a ‘try before you buy’ attitude80. The Public Fi- fication of subtasks and ensure budget transparency. nance Act doesn’t specify how and where the new budgetary structure will program. classification. is. independent. and. functions. in. parallel. replace existing categories and procedures and nor does it specify a date to. the. existing. section-chapter-paragraph. budget. classification. The by when PBB is to be adopted. four-level design of the program budget is just enough to ensure adequate Further.regulations.are.needed.to.firmly.establish.pbb ..New leg- accountability and control. More work is needed to clearly define func- islation is needed to specify performance budget coverage in relation to tions and tasks. This will help stabilize the programmatic framework and various types of government organizations; make changes to budget doc- ensure analysis of budget expenditures and their impacts are comparable umentation; allow for a new financial control framework and changes to over time. Some matters are yet to be addressed, e.g. the approach to inter- the budget classification and accounting systems. Additional regulations sectoral responsibilities for overlapping tasks, and performance account- are needed to standardize methodology and procedures around the de- ability in entities where responsibility is delegated to special agencies. sign of tasks and sub-tasks, and the role and monitoring of performance budget. for. 2009. was. prepared. according. to. the. new. methodol- indicators, multi-year expenditure planning etc81. ogy . Budget managers submitted expenditures in program framework performance. targets. and. indicators. are,. generally,. defined. bot- along with performance measures and targets, and presented MOF with tom-up ..The budget circular obliges budget managers to define perform- three-year spending estimates. Coverage of the budget increased in rela- ance targets for tasks and subtasks. Sometimes there are methodological tion to 2008 and covered central government. Only sensitive institutions consultations with MOF or (inter)national experts. However, there are no (defense, intelligence etc.) prepare performance budgets in a simplified methodological guidelines for preparing performance indicators. Line framework. ministries rely on internal knowledge and experience from other coun- Following.the.change.of.government.in.2008.moF.took.the.lead. tries. Moves to make the entities responsible for achieving targets define in.the.reform.process ..Until then, the Chancellery of the Prime Minister those targets and their performance indicators have been criticized82, but was responsible for managing and funding the design and development this approach has support. Internal setting of performance indicators cre- phase of PBB. The move to MOF was a step in the right direction but 80 Allam M. The.Development.of.Performance.Budgeting.in.Poland, (2008), draft version 78 Current budget structure is explained in the chapter: Budget Presentation and Classification 81 Webber D, op.cit. 79 Law on Central Government Sectors of September 4, 1997 (Art. 5 ustawy z dnia 4 września 1997 r. 82 Misiąg W., 2007, Performance-based.Budget.for.2008.and.what.is.next?.(Budżet.zadaniowy.na.rok. o działach administracji rządowej (Dz. U. z 2007 r. Nr 65, poz. 437 oraz z 2008 r. Nr 12, poz. 20)). 2008.–.i.co.dalej?), Public Finance Bulletin, IBnGR. 180 181 ates better accountability within the relevant ministry which has the best The. performance. budget. is. generally. well. presented .. Budget jus- sector knowledge. tification, added to the budget act for 2008 and the draft of the budget Quality.of.performance.indicators.varies.across.budget.managers . for 2009 in a performance framework, is more transparent and easier to More effort is needed to develop proper performance indicators. Some in- understand. Breaking expenditures down into tasks and subtasks, with dicators used so far are difficult to define, some are not measurable, and in key performance targets and indicators, provides much more information a few cases, there is no baseline value for indicators. In other cases target than the traditional line-item budget. However, information submitted by value was below the baseline. Much public discussion is around perform- particular budget managers still show a need for quality control, particu- ance indicators when more attention should be given to putting in place larly in defining performance indicators and targets. Various experts and the best possible program structure. economists welcomed the Government’s initiative to introduce perform- ance elements to the budget but at the same time they expressed the ur- There.is.no.integrated.database.for.collecting.and.analyzing.per- gent need for further improvements84. formance. indicators .. nor. is. there. an. efficient. information. system. to. make. them. fully. usable . Performance indicators are presented only pbb.is.not.yet.included.in.core.budget.documents ..Making PBB an in documents in the justification to the Budget Act. There is no proper integral part of budget law is an important first step but its current inclu- mechanism for collecting, analyzing and verifying performance informa- sion in the justification to the budget act is not its final place in budget tion. This makes the whole exercise artificial and useless. Government ex- documentation. The budget justification for 2008 has 12 chapters. One of pects to cooperate with statistical units in line ministries, and the Central these chapters is devoted entirely to PBB. It includes a short description Statistical Office, to establish an integrated framework for performance of PBB as a budgeting method and key features of the Polish system as information. well as program breakdown of expenditures along with desired outcomes, measures and target values. poland. is. in. the. early. stage. of. developing. pbb .. The country ac- knowledges the need to manage for results and has increased transpar- guidelines.on.presenting.pbb.are.needed ..While it undecided what ency and accountability of its budget system. Although it is still undecided to include in standard budget documentation, international best practice what it will look like, performance budgeting will soon be in place. suggests emphasis should be put on explaining Government’s expenditure policies and objectives and how the task structure supports these. More The. key. challenge. now. is. to. improve. the. program. structure by attention could also be given to identifying new policies in the budget, aligning it better to Government’s strategic policies. Only then will it serve including their specific objectives and costs. Performance budgets should its purpose83. establish clear links to strategic plans and explain how the expenditure A. proper. monitoring. and. evaluation. system. is. needed .. Perform- tasks and subtasks contribute to achieving broad strategic goals. ance-based budgeting can’t function without a firm monitoring and eval- program.classification.plays.only.an.auxiliary.role.in.traditional. uation (M&E) system. Performance information doesn’t always answer budget.classification ..PBB has not brought changes to the existing budget questions about a program and good quality evaluation is essential for classification and MOF does not intend to change the classification in the efficiently allocating resources. near future. The Department of Performance Budget in the Central Statis- tical Office, which helped prepare the program structure, will ensure the 5. Budget Presentation and Classification existing framework is compatible with traditional line-item budget and good.budget.documentation.increases.budget.transparency ..PBB international statistical standards. increases transparency of the budget system, showing clearly what public current. budget. documentation. shows. expenditures. in. line-item. money is spent on, but of budget documentation. This has a lot to do with classification ..Poland operates on a four-level budget classification: parts, the existing budget classification and the level of IT development. sections, chapters and paragraphs. Current practice to submit the budget in performance framework two weeks after traditional bud- 83 get indicates shows PBB is still treated as secondary and, perhaps, as a purely mechanical exercise. Misiag W., op.cit. 84 182 183 • Part (część) corresponds to an administrative classification (or- 6. Public Management Performance Culture ganizational) There.is.no.regular.monitoring.and.evaluation.of.programs ..Po- • section (dział) is similar to a functional classification land is still in the very early stage of reform and little attention has been • chapter (rozdział), in some cases, corresponds to an organization paid to establishing a formal mechanism for linking M&E systems with or program the budget process. Line ministries rely on their internal monitoring sys- • paragraph (paragraf) is a line item in the economic classification. tems. Government has concentrated efforts on designing program struc- ture and setting performance targets and indicators rather than strength- current.program.classification.is.not.supported.by.the.it.system. ening the M&E framework. Successful implementation of PBB must go Government plans to create an integrated IT system to support budget beyond performance indicators. As Robinson put it, “indicators rarely tell documentation but work is yet to start. According to the revised schedule, the whole story. They need to be put in context. And if a program is not the system should be in place by the end of 2013. When it’s complete, delivering value for money, they do not answer the really vital question – the IT system should support programmatic structure and standardize can the program be salvaged by, say, redesign? Or should it simply be cut and modernize other aspects of the financial reporting process. At present out? It is for this reason that evaluation linked to the budget process is central state administration units (line ministries and their underlying now enjoying resurgence�. budgetary units) are decentralized. Most of them have their own IT and accounting systems, later entering information from these into the cen- civil.servants.are.administrators.rather.than.managers.of.spend- tralized TREZOR system. This is an inter-system interface connecting the ing.programs ..The public/civil service is not based on an accountability NBP system with the central budget, making possible an online correla- framework. Much more effort goes into design and preparation of legis- tion between pending payment orders and State Budget cash availability. lative initiatives than operation of the program. Performance budgeting TREZOR works at first and second levels but is expected to later include reform requires a lot of support from the public administration and a ca- all sub-national entities. Because the system is being implemented in pacity to change. This is a critical success factor. stages, information flows are currently both paper-based and electronic. The.structure.of.the.public.administration.is.not.well.suited.to.the. TREZOR is not an integrated accounting system so budgetary reporting, concept. of. managing. for. results . The whole public sector is dispersed in line with current budget classification, is based on aggregated informa- over numerous and largely autonomous entities with no managerial su- tion as entered periodically by budget mangers, usually monthly. Infor- pervision. There is limited cooperation between central and local govern- mation available from TREZOR relates to actual transfers broken down by ment, and across and within line ministries. main budget paragraphs according to cash requirements. A fully operat- civil.servants.are.unused.to.performance.evaluation.and.need.to. ing program classification structure would improve budget analysis and change.the.way.they.think.about.working.in.the.public.sector. Perform- create performance indicators to strengthen monitoring and make public ance-based budgeting puts public servants into the role of service provid- expenditures more efficient. High priority should be given to ensuring ers to the public. And performance targets and indicators serve as a basis public budget units use accounting software that meets current standards, for their evaluation. Getting ministry staff to be more client-focused is a e.g. for security and access, and facilitates on-line reporting to MOF in a challenge. Meeting it will require design and implementation of systems format that consolidates data and documents audit trails. MOF needs to that provide reliable and timely feedback from clients, as well as an or- set medium and long-term objectives to develop an integrated financial ganizational culture that values feedback and employs it to continuously accounting system, allowing the central treasury system to draw directly improve services to those clients. It demands an organizational culture on electronic accounting data from all public budget units’ accounting that rewards achievements of agreed objectives and encourages all staff systems. and units to learn from their mistakes and engage in continuous improve- ment. 184 185 The.quality.of.the.civil.service.must.be.upgraded ..Its performance SLOVAKIA management culture is underdeveloped and future civil servants are un- Ján Marušinec aware of modern management systems. Greater capacity in this area is needed. MOF is aware of the problem and has initiated a massive training effort. Training for public administration (both managerial and opera- General Assessment (Summary) tional) is co-financed from EU structural funds85. The main purpose is to Slovakia made good progress in budget system reforms within a short introduce higher standards of public service and improve policy design time (2003-2005). Changes were driven by the need to decrease the fis- and implementation. Training is organized by the Warsaw branch of EIPA cal burden on the economy (deficit, revenues, and expenditures) and the and focuses on PBB best practice with practical guidelines for preparing MTEF and PBB served as tools for accomplishing this goal. budget documents in a performance framework for the 2009 budget. The MTEF has been an integral part of the budget process since 2005, when.capacity.is.enhanced,.retaining.and.motivating.high.qual- covering the budget year and two following years. Only budget year alloca- ity.staff.becomes.a.challenge ..This issue is related to the management of tions are adopted by Parliament as a binding constraint within the budget- human resources in the public sector. A worrying feature of recruitment ary process. Technically, a mix of line-item budgeting and PBB is used to is that most new entrants don’t see the public sector as a long-term career prepare expenditure projections. Line ministries are given clear expendi- but rather as a stepping stone to better prospects in the private sector. ture ceilings at the beginning of the budget process and are responsible for Retaining staff demands attractive incentives. The current salary system explaining their budget proposals within those limits. A separate reserve is complex and opaque. Major distortions exist in the salaries paid by dif- is used for financing Government priorities and this is disbursed during ferent ministries. The promotion system is non-merit based, discretion- budget negotiations in Cabinet in September. This reserve, though rela- ary and non-transparent. The overall human resource system lacks strong tively small, distorts the medium-term focus of line ministries. The MTEF, central control and, while some ministries are better than others in this re- particularly the binding nature of out-years, needs to be stronger. spect, leadership is weak, modern techniques of management are lacking, and not enough resource or management time is devoted to personnel Slovakia chose a decentralized approach to PBB. Line ministries are issues. All of this tends to reduce staff motivation. Chronic politicization responsible for designing their program structures, including goals, ob- of the system affects staff quality, particularly at senior levels. 86. jectives, and measurable indicators. MOF gives them methodological and practical support. PBB currently covers all central government activities strong.top-down.leadership.will.engage.civil.servants ..Only when and from 2009 will cover regional and municipal self-governments. staff understand the reform process and accept it as one of Government’s top priorities will their opposition weaken. Civil servants have to see ben- PBB has dramatically increased budget transparency although im- efits in the reform. If they don’t, the reforms will not succeed. plementation results vary from one line ministry to another. Program structures are yet to be fully used to design and cost Government policies which causes inconsistencies in Government’s agenda. A performance management culture is still missing. Communication between budget and policy departments within line ministries is poor and there is no compre- hensive education system for public employees. Performance pay is pos- sible, although limited to some extent by the Civil Service Act. Flexible procurement methods are still under-used. The Public Finance Management Reform (PFMR) project, financed by the World Bank (WB), made fiscal policy more predictable and cred- ible and can be considered a success, mainly on the central budget plan- European Social Fund, Human Capital, Priority 5: Good governance 85 ning level. But it brought limited progress at the micro management level Public. Administration. Reform. and. Capacity. in. the. EU-8 . Poland. –. Background. Paper, 2006, The 86 although it has made budget documentation more transparent and im- World Bank 186 187 proved accountability of program managers (line ministries and agen- line.ministries.are.autonomous.in.their.resource.allocations. MOF cies). Monitoring and evaluation (M&E) need to be stronger. gives them total expenditure ceilings and some binding constraints (wag- A separate PFMR project was prepared and launched in coopera- es, capital expenditures, EU resources, co-financing). They set up their tion with the WB to systematically address all major shortcomings in the program structures, allocate expenditures to various programs, break budget system. Political commitment to change, leadership and support them down into different required classifications and send their budget of the Minister of Finance were critical success factors, as were a robust IT proposal to MOF. Discussions are held with MOF before the final draft system, good methodology, and committed MOF officials. budget is approved by Cabinet. They later defend their budget proposals in parliamentary committees. The speed of reform had a negative impact. The rapidity of change, insufficient training and lack of preparation among policy sections in line cabinet.discusses.the.starting.points.in.April.and.usually.adopts. ministries highlighted cracks in the PFMR project implementation. The a. decree. governing. further. details. of. the. budget. process, setting the budget system became quite complex and it needs to be simplified (espe- deficit and debt targets for the general government budget, and indicating cially the system of classifications) if progress is to be sustained. expenditure ceilings for individual line ministries. In September Cabinet discusses the draft budget in several rounds. Usually, the Coalition Board Better results might have been achieved with more careful phasing in is involved in these discussions because the budget is always politically and a lot of pilot projects. PBB needs to be further refined and the budget sensitive. After all disputes are settled, Cabinet adopts the draft budget by system simplified. A training program for line ministry staff would help a decree and sends it to Parliament for final approval. spread the performance management culture throughout the bureaucracy. parliament.discusses.the.draft.budget.in.committees.and.in.ple- The key to success is offering stakeholders a trade-off. If changes bring num. The committees also discuss the budget proposals of individual line new tasks and challenges, old tasks should be redesigned or removed to ministries and may recommend the plenum adopt changes to them. After avoid overload. Focusing on technical preparation and especially the clas- discussion in plenum, Parliament adopts the budget (annual budget law sification system, IT support, and presentation format of the budget are covering only central government) by simple majority voting. Because the important and staff will see the benefits. If there is a clear vision, finding budget is discussed and political agreements are already reached in the allies will be much easier. Coalition Board, Parliament usually passes the budget without any major amendments. 1. Core Features of Current Budget System The.key.piece.of.legislation.regarding.the.budget.system.is.the.Act. slovakia.is.a.parliamentary.republic ..its.cabinet.is.formed.from. no ..523/2004.coll ..on.budget.rules.of.the.public.service.(budgetary. several.coalition.parties.gaining.the.majority.of.votes.in.parliament. rules.law). This came into force on January 1, 2005 and governs dead- Usually three to four parties form the coalition so a Coalition Board (an lines in the budget process. The budget year is the same as the calendar informal political body) is created to resolve important or sensitive politi- year. Starting Points have to be submitted to Cabinet for discussion by cal disputes before they are discussed in Cabinet or Parliament. April 15 and the draft budget before August 15. After discussion and ap- traditionally,.moF.coordinates.the.budget.process. It starts by pre- proval by Cabinet, the final draft budget has to be submitted to Parliament paring a macroeconomic and revenue forecast, and submits the first draft before October 15. All other practical issues of budget preparation process budget – called Starting Points – for discussion in Cabinet. After discus- are governed by Cabinet decrees (early decree on Starting Points) or MOF sion and/or approval by Cabinet, MOF sends an expenditure ceiling to guidelines (budget call circular). line ministries and asks them to prepare detailed budget proposals. MOF budgetary.rules.law.also.reflects.government.decisions.to.imple- collects these and runs a series of budget discussions with line ministries. ment. medium-term. and. program. budgeting. It defines the budget as MOF then compiles a draft budget and submits it to Cabinet. Following a mid-term economic policy instrument, set up for a three year period. It Cabinet approval, MOF send the final budget draft to Parliament for dis- also includes the requirement to set expenditure ceilings for government cussion and final approval. programs, as well as goals and objectives. Evaluation of these should be a 188 189 part of the closing account of the line ministry. Slovak Budgetary Rules accountability for sound financial management. MOF now focuses on Law was influenced by OECD best practice on budgeting. Requirements overall fiscal developments rather than on micro managing the budget. of ESA95 methodology were also given a priority in the revision of the budget.coverage.has.improved.dramatically.since.2003. With the Act. Currently only minor amendments, related to EU structural funds, 2004 budget, across-the-board implementation of program budgeting subsidies, and use of capital expenditures are considered. made information provided to Parliament and the public much more com- traditionally.moF.played.an.influential.role.in.the.budget.proc- prehensive. With the 2005 budget, Slovakia shifted to a two year budget in ess. and. still. does. This is visible in the budget execution phase during its full complexity (all classification used for all three years). Despite the which MOF can change individual allocations for line ministries without fact that figures for the outer years aren’t legally binding, everybody con- Parliament approval, as long as they don’t exceed the overall deficit. The siders the limits as a starting point for the next year’s budget negotiations. President, Prime Minister and the Minister of Finance have no special Only minor amendments based on changes in the macroeconomic frame- budget powers. The Minister of Finance has only one vote in Cabinet and work and high level political decisions are done to out-year projections. cannot effectively veto proposals with unsustainable fiscal impact. His or A. new. classification. was. introduced. with. program. budgeting. her informal power within the political hierarchy is crucial, as is the role making.it.a.more.demanding.task. Traditional classifications remain but of MOF and its position in the budget system. have been reshaped to reflect ESA95 methodology. Slovakia now uses four types of revenue and seven types of expenditure classifications. The com- 2. General Progress on Budget Reform plexity of the coding required a change in IT support for budgeting. Two major.changes.in.the.budget.system.occurred.between.2003.and. major systems provide data for budgeting purposes: Budgetary Informa- 2005, supported by the World Bank financed Public Finance Manage- tion System and State Treasury System. A separate system manages EU ment Reform (PFMR) project. These changes focused on creating com- funds. patible and modern public finance management processes based on EU state. treasury. and. a. debt. and. liquidity. management. Agency. and OECD best practice. The PFMR project included the following key were.established.to.centralize.the.financial.flows.of.public.institutions. elements: This brought a new quality to monitoring budget execution and substan- • strengthening MOF’s macro-analytical and fiscal forecasting ca- tial savings related to debt financing. Hand in hand with these changes, pacities budgeting transparency and accountability have improved. Reform also • enhancing capacity for coordinating Slovak fiscal policy with the brought a new approach to financial control and sanctioning mecha- EU and matching fiscal reporting requirements nisms. Subjective approaches – such as capacity for granting exceptions and excusing violations of financial discipline – were avoided in the new • implementing and improving multi-annual budgeting legislation. Also, emphasis is no longer solely on disciplinary sanctions • implementing and improving program budgeting but on increased education of officials. • strengthening institutional capacity for budgeting (in the above The.national.control.office.(local.sAo).gives.parliament.its.opin- mentioned areas) ion. on. the. budget. and. the. closing. account,. focusing on performance • qualification support for the State Treasury staff and its full inte- data provided by MOF and line ministries. An internal audit function gration into the public finance management system has been introduced and is being continuously strengthened under MOF • improving debt and liquidity management through a new insti- oversight. Monitoring and evaluation of program performance is being tutional set-up. prepared and will start operating during 2008-2009. within.pFmr,.moF’s.position.as.guardian.of.fiscal.stability.has. in.the.early.stages.of.pFmr,.moF’s.budget.departments.were.ob- been.strengthened although the focus of its activity was narrowed by the servers.only.of.the.changes. Since the moment of the MTEF and PBB im- reforms. A lot of decision making power was delegated to line ministries plementation, these departments opposed the changes and this prompted (binding indicators in the appropriation were reduced), increasing their a reorganization of MOF. Its budget section was restructured and tradi- 190 191 tional budget departments (aimed at financing line ministries) were re- changes. were. implemented. largely. because. of. a. commitment. to. placed by two – one analytical department to work with line ministries reduce.the.excessive.fiscal.burden on the economy (e.g. decrease the def- and independent public agencies, and another to compile data and for- icit and debt) and the level of overall taxation and public expenditure. The mulate the general government budget. These two departments became MTEF and PBB were good tools for accomplishing these high level po- leaders of the reform process. Their role has been formalized in the MOF litical goals. This fiscal consolidation was driven by pressure from outside Statute and MOF’s budget section became the methodological centre for and by Slovakia’s ambition to enter the Euro zone and meet Maastricht budgeting. criteria. to.successfully.implement.the.changes,.moF.established.a.cross. pFm. reforms. were. championed. by. the. minister. of. Finance. who. sector.working.group.of.senior.officials responsible for financial man- was.also.the.deputy.chairman.and.the.economic.leader.of.the.strong- agement in line ministries and agencies (covering all government activ- est.coalition.party. His willingness to move forward on the reform path, ity). This group was led by MOF’s general director of the budget section. combined with his informal influence within his party and Cabinet, Institutional and methodological issues were discussed by this section brought about many changes. Until then discussion of these changes had before they were fully implemented. The group didn’t have a formal sta- been restricted to a small group of experts. Reform was driven internally, tus although members were appointed by particular ministers or heads of technically prepared and executed by MOF staff, with help from external agencies. The group was soon abandoned because of resistance from sev- consultants. eral line ministries but a piloting approach was introduced before changes For. political. reasons,. reform. activity. slowed. down. a. year. before. were legalized. Pilots were selected not by sector but by the willingness of the. elections. in. 2006. and. has. remained. slow. The new Government particular line ministries to cooperate. has focused on different priorities, failing to give PFM due regard as a line. ministries’. opposition. was. two-fold. First, some budget de- key element of successful public management. The Minister for Finance partments in line ministries thought the changes were being implemented is no longer the Deputy Prime Minister and informal power in Cabinet too quickly and, second, officials weren’t ready for them. This was partially has shifted to other line ministries, mainly from the social sector. MOF’s true because everything was done in a hurry. A new approach, piloting the commitment remains strong but the changes had an effect on policy co- changes before their full implementation, gained MOF allies in several ordination. MOF’s reform agenda is now focused on technical changes in line ministries. accounting and tax administration. A.necessary. step. was.to. convince.line. ministries’.policy. sections. to.change.internal.procedures.to.match.the.budget.system.changes and 3. Adopting Medium-Term Expenditure Frameworks take over responsibility for the financial management of their programs. slovakia. started. implementing. an. mteF. relatively. early. in. the. This reform is yet to happen in many line ministries. Only some pilot reform.process . The MTEF began as a separate document discussed by ministries have complied with the new PBB financial management re- Cabinet each April and gave a brief overview of the macroeconomic and quirements. fiscal forecasts (revenues, expenditure, and deficit). It had no binding na- slovakia.took.ownership.of.pFmr.project.while.the.world.bank. ture, nor did it discuss alignment of priorities and budget allocations. The acted. as. project. coordinator. There was a clear top-down approach to MTEF covered three years (the budget year and two following years). Its changes within the PFMR, although the details of their execution were implementation was independent of PBB although it was helpful to have prepared in a bottom-up way. Politicians motivated civil servants with the MTEF present when government programs were formed and alloca- their willingness to change and gave them sufficient freedom to come up tions determined. with specific solutions. Political commitment to reform the budget system since.2005.the.mteF.has.been.an.integral.part.of.the.budget.with. was important and gave the necessary institutional changes credibility. a.detailed.budget.prepared.for.three.years.instead.of.one. It is revised MOF demonstrated how the changes could happen, an example followed annually on a rolling basis and adjustments are made according to chang- by several line ministries. es in macroeconomic predictions and political decisions. A full three year 192 193 budget is presented to Parliament although only the annual budget law is support from MOF staff, they need more methodological and institution- adopted by voting. Allocation limits for out years are not legally binding al support. although their adoption by Cabinet establishes them as the starting point moF’s. Financial. policy. institute. uses. standard. forecast. models. for the next year’s budget discussions. Regulations concerning the MTEF for. macroeconomic. and. tax. revenue. projections. An in-house model preparation are covered by the Budgetary Rules Law. for non-tax revenue forecasting was developed by its budget section. Pre- The.mteF.is.used.a.fiscal.policy.management.tool. MOF sets de- dictions of the expenditure side of the budget depend either on macr- tailed revenue and expenditure ceilings for lined ministries, prepared oeconomic variables (social or unemployment benefits) or discretionary within the MTEF. These ministries are obliged to prepare their budget decisions of Cabinet (certain subsidies, wage rises). Generally, inflation proposals within these limits. Exceptions are special purpose funds (So- adjustment is used for other expenditure items (goods and services, in- cial Insurance Fund, Healthcare Insurance Companies, National Property vestment expenditures). Fund) and self-governing bodies outside the direct control of central gov- A.non-allocated.reserve,.not.higher.than.3.percent.of.total.budget. ernment (regional and local self-governments, public media). MOF uses spending,.is.set.aside.for.political.priorities.which.are.determined.later. projections of their budget proposals for the consolidated budget but can- in.the.budget.process (during discussion of the draft budget by Cabinet not directly influence their budget decisions. and Coalition Board in September). This reserve is disbursed before the with. the. mteF. an. integral. part. of. the. budget,. all. government. budget is submitted to Parliament but it can be kept in the medium-term agencies.are.involved.in.its.preparation. MOF’s macro and fiscal fore- budget for the out-years. Sensitivity or risk analysis is not currently used cast unit – the Financial Policy Institute (FPI) – is responsible for prepar- in Slovakia. ing the underlying macroeconomic and tax revenue prognosis and set- Theoretically,.medium-term.expenditure.projections.prepared.by. ting total deficit and expenditure ceilings in line with actual economic line.ministries.in.their.budget.proposals.provide.the.same.level.of.de- development. Forecasts are updated three times a year and, before they are tail.as.the.current.year’s.budget. The same classifications are applied and published, are subject to discussion by macroeconomic and tax commit- the same level of detail is provided, as in the case of the budget year. The tees. Representatives of the central bank, academy, commercial banks and reliability of the data, however, varies between line ministries. Some line financial market take part in these discussions. ministries with sound internal financial management procedures pro- Afterwards,.the.budget.section,.in.close.cooperation.with.the.eu. vide detailed and reliable data on all programs (Ministry of Labor and relations.section,.prepares.the.budget.starting.points.and.sends.it.to. Social Affairs, Ministry of Interior); some provide only inflation-adjusted cabinet. for. discussion, usually at the end of March. Starting Points is expenditure forecasts (mostly agencies with administrative character – a document containing macroeconomic and revenue (tax and non-tax) Presidential Office, Parliament Office etc). The reason for such variation forecasts, deficit targets, and expenditure framework, for the budget year is the uneven distribution of human capacity across line ministries and, and three following years. It covers all government activity sometimes, limited access to training and education. Another factor is After.the.starting.points.are.approved.by.cabinet,.moF.informs. line ministries’ reluctance to disclose future policy decisions to MOF and/ line.ministries.of.their.expenditure.ceilings.and, by end May, line min- or the public. Despite this, the MTEF is relatively stable and this is due to istries provide MOF with their budgets. MOF analyses the draft budg- MOF’s strict oversight of expenditure planning in line ministries. ets and in June/July negotiates them line ministries. The final budget is expenditure.forecasts.are.revised.annually.and.the.limits.for.out- adopted by Parliament at the end of the (calendar) year. years.within.the.mteF.aren’t.legally.binding. These revisions are man- institutional. capacity. for. performing. the. mteF. tasks. is. concen- aged by MOF and all adjustments have to be justified either by a change trated.mostly.in.moF where staff have undergone a series of education in macroeconomic variables or by a political decision taken by Cabinet programs. Six major line ministries gained support, and strengthened ca- or Parliament. Estimates are fine tuned twice a year, following revision of pacity, within the PFMR project. While other line ministries are getting macroeconomic and revenue forecast prepared by FPI. Expenditure limits are politically binding and respected by line ministries. Cabinet discusses, 194 195 although does not formally adopt, expenditure ceilings for out-years to- 4. Performance-based Budgeting gether with the budget. pbb. has. been. introduced. gradually. since. 2000. driven by the Fi- The.biggest.benefits.of.the.mteF.are.visible.at.the.central.budget. nance Minister’s reform minded approach and the necessity to institu- planning.level. Overall fiscal predictability and credibility have improved tionalize a tool for improving public spending efficiency. An aim was to dramatically. Before PFM reform, and the MTEF in particular, were im- maintain or increase the quality of public services at lower cost. plemented, the general government budget deficit wasn’t targeted and the At.the.minister’s.request,.a.us.treasury.adviser.was.assigned.to. fiscal outcome was known only after the fiscal year was over. The MTEF, work. on. this. and (two) staff from the budget section was dedicated to together with other measures, now allows for effective fiscal targeting for help him. They were isolated from real execution of budget policy but the general government budget. This has substantially improved fiscal dis- during a short period of time were able to prepare a basic methodology cipline and resulted in better fiscal performance with lower borrowing and build awareness among the key players. In 2001 the first four pilot costs for the Government. chapters (Ministry of Education, Slovak Academy of Sciences, Supreme The.mteF.has.led.to.better.financial.management.in.line.minis- Court, and Constitutional Court) prepared their budgets for 2002 based tries. although. the. results. are. not. as. clear. as. they. are. in. central. gov- on expenditure programs. In 2002 another six line ministries joined the ernment. It was not unusual for budget expenditures to be over run by exercise for the 2003 budget. Understanding of the programs was lim- some line ministries with poor fiscal planning in several public agencies ited, however, to time-limited government activities, mainly related to EU led to accumulated debt. Now, line ministries comply with expenditure structural funds management. ceilings although adjustments to the budget (reallocations between line when.the.government.changed.in.2002,.the.new.Finance.minister. ministries) are still frequent during budget execution. Formal rules, how- continued. to. support. the. idea. and. stepped. up. preparatory. work. for. ever, limit the extent of adjustments that can be made to the budget after full.pbb.implementation. In 2003, MOF was restructured and its budget its adoption. section departments took the lead in driving PBB related changes. With linking.strategic.policy.preparation.with.the.budget.is.a.challenge. political support and resources within the PFMR project (human and fi- for.the.future. It requires better fiscal impact assessment when prepar- nancial), the necessary institutional and legal adjustments were soon im- ing key strategic policies. The World Bank recommends that Slovakia plemented. strengthen the binding nature of the MTEF and make out-years binding. since.the.2004.budget,.all.34.budget.chapters.(line.ministries.and. According to recent amendments from 2009 the carry over of unspent other.government.agencies).apply.a.full.program.structure. Major revi- capital expenditures was restricted to two subsequent years. sion of Budgetary Rules Law was passed in 2004, including institutionali- The.non-disbursed.reserve.allocated.each.year.according.to.politi- zation of PBB. New methodology on PBB was published and implement- cal.decision.remains.a.big.challenge. Compared with the total budget it ed in 2004, establishing a logical framework for the program structure. A is not a big amount (less than 3 percent) but it distorts line ministries’ major revision of existing programs, goals and objectives reduced dupli- medium-term focus because when they prepare their budget proposals, cation. The budgetary information (BIS) and State Treasury IT systems they take into account the possibility of extra money from this reserve. were reshaped to support new program classification. A manual on M&E When the budget is submitted to Cabinet, some important policy areas was prepared in 2007 and today MOF is working on implementing it. are under-financed because of line ministers’ tendency to rely on their po- since.pbb.was.introduced,.the.quality.of.budget.preparation.and. litical influence to get additional resources from the reserve fund. Some- oversight. has. improved. significantly. New ways of classifying expen- times they ask for non-discretionary expenditures from this reserve while ditures brought more clarity and transparency to the budget. MOF, and in their budget proposals they plan for discretionary expenditures. Cabinet and Parliament, and the general public, can now concentrate on fostering greater efficiency of public spending. This is indeed happening during budget negotiations with line ministries, where program structures are actively used to support the arguments of both sides. There were no 196 197 major objections during implementation, apart from opposition by sever- with intended results. Some line ministries still don’t follow best practice al line ministries. Current discussion (Parliament and public) is aimed at and lack clear motivation to do so. Government goals and objectives presented in the program budget. This generally,. the. architecture. allows. line. ministries. to. form. stra- means any objections are about content and not method. tegic. policy. within. the. logical. framework. of. programs. They can set pbb.neither.replaced.nor.supplemented.the.traditional.budget. It goals, strategic objectives and specific objectives and assign measurable is simply a new way of presenting budget data in budget documentation, indicators to them. Line ministries also allocate resources for accomplish- providing policy makers with additional information. Traditional line- ing those goals and objectives. In many cases line ministries use the pro- item budgeting methodology and program budgeting methodology are gram structure to actively plan their policies although this is not the case used at the same time. The BIS effectively connects both kinds of budgets. across the board. Some line ministries still use the program structure in Since 2006, the State Treasury has provided data on budget execution in a rigid and formal way, forming strategic policy separately from budget the program structure. All other classifications have been preserved and programs. the budget is still, on request, presented in different classifications. The traditionally,. policies. were. adopted. by. cabinet. in. the. form. of. program book is a separate document from the text explanation of rev- decrees,. where. policy. objectives. were. stated,. but. there. was. no. direct. enue and expenditure development in the budget document. link.between.those.objectives.and.the.budget. The MTEF and PBB have with.regard.to.fund.allocation,.the.leading.classification.is.organi- changed this and policy should now, ideally, be prepared in line with the zational. For each entity and line ministry a limit is developed (based program structure and budget allocations. There is a methodology for on costing methods and expenditure indexation) and broken down into preparing materials for Cabinet discussion. This includes a part on policy major economic categories – wages, capital expenditures and the rest. EU costing although the quality of materials with budgetary impact prepared resources and their co-financing are earmarked by MOF. Programs are by line ministries and discussed by Cabinet varies. developed by line ministries and include goals, objectives and measur- some.line.ministries.use.pbb.to.develop.policies.and.cost.the.pre- able indicators. The line ministry is responsible for further break-down pared.programs.with.their.objectives.accordingly ..Others use it only as a of given limits into all the classifications available, to the lowest level of formality and still rely on the willingness of Cabinet to adopt policies that detail. This work is supported by the BIS provided by MOF. are neither costed nor properly reflected in their programs. MOF, as an There. are. three. levels. in. the. program. budgeting. system. –. pro- important hub in the inter-ministerial commenting procedure, is putting grams,. sub-programs. and. elements/projects. Currently, there are 95 a lot of emphasis on using the program structure to design and cost poli- programs in Slovakia, a few of them multi-ministerial. Line ministries cies, and to keep them only within the scope of the budget envelope. Like can, but are not required to, form sub-programs and elements/projects any other minister, however, the Minister of Finance has only one vote in under the programs. Element is a time-unlimited part of a program, while Cabinet. project is time-limited. Specific objectives are required at the lowest level indicators.were.defined.from.bottom-up.but.several.rounds.of.dis- of detail but, usually, higher levels have strategic objectives or goals. Ob- cussions. took. place. between. the. policy. owners. (line. ministries). and. jectives and goals differ. An objective has a specific value (short- or long- moF. After these discussions MOF prepared a comprehensive guideline term, output or outcome), and a goal describes a desired change or result. on setting objectives and measurable indicators. This guide is now pub- Each objective must have a measurable indicator (at least one) assigned licly available and gives helpful examples of good and bad practices. There to it. More than one indicator is allowed to measure the progress of ac- are 675 output indicators in the budget for 2008 and 631 outcome indica- complishing objectives. tors respectively. The mix of output and outcome indicators is not spread The.logical.framework.of.a.program.structure.is.coherent.and.can. evenly across line ministries. Some of them tend to use output indicators be.used.across.various.government.agencies. It allows for demonstrating while some prefer outcome indicators. Only a few ministries use a com- how a ministry wants to intervene and achieve certain socio-economic prehensive mix of both types. The quality of objectives and indicators is objectives. It also enables resources used for this intervention to be linked probably currently the weakest point of program formulation. 198 199 oecd.and.other.internationally.used.indicators.were.used.to.set. was unable to define high level goals and objectives and financial resourc- up.a.monitoring.framework.of.major.government.policies. Domestic es are disbursed without any link to performance. data was also used for policies where international comparisons were una- sectors.with.a.lot.of.independent.agencies.executing.government. vailable and, on a lower level of the program structure, to support high policy. (transport. for. instance). can. be. managed. well by the program level objectives. These indicators have different data sources, the main one structure if the goals and objectives formed at the top level are well de- being the Statistical Office. The final list of indicators was reviewed by fined and the flow of money gives them the right incentives to achieve MOF to ensure quality. Further improvements are made annually during them. The Ministry of Transport in Slovakia still focuses on output indica- budget discussions. An independent audit of indicators – preferably by tors rather than outcomes which doesn’t make best use of PBB’s potential. the National Control Office (local SAO) – is yet to be done. if.a.government.policy.has.a.multi-sectoral.character,.multi-min- The. quality. of. objectives. and. performance. (achievement. of. isterial.programs.are.created.to.cover.the.tasks.of.different.line.minis- planned.results).varies.across.different.line.ministries. The quality of tries.or.agencies. A lead ministry is always appointed to oversee a pro- performance can be attributed mainly to how well targets were defined gram. This ministry is responsible for achieving goals and objectives and (exaggerated or underestimated) rather than program management. for monitoring and evaluation. Other line ministries or agencies act like in. the. early. stages. of. pbb. implementation. a. decision. was. made. program participants, creating sub-programs with goals and objectives not.to.reward.or.punish.good.or.bad.performance. This decision was referring to the overarching program goals. The performance of multi- aimed at gaining line ministry support for the changes. If they thought ministerial programs varies significantly from one program to another. they would be punished for poor performance, their opposition would In some cases, where the lead ministry puts pressure on participants, the have been greater. Program performance is monitored through the BIS management of multi-ministerial programs seems free of problems. But twice a year, although monitoring is performed by the policy managers there are cases where the program exists only to cover expenditure in a themselves. Monitoring of program performance is required as a part of certain area (economic mobilization for instance); it is poorly managed the closing account and line ministries are obliged to submit monitor- and failing to bring about measurable results. ing results to MOF, Cabinet, and the respective parliamentary committee. two. major. sources. of. problems. in. pbb. implementation. can. be. Further development of M&E is underway and, in the near future, should identified: enable Government to apply incentives for good performance. • Lack of political commitment, mainly from line ministers, has central.government.was.the.first.public.sector.entity.to.introduce. reduced the quality of program structures in several line minis- pbb. From 2009 regional and municipal self-governments will be obliged tries. Ministries, where top management supported PBB reform, to prepare their budgets using the PBB approach. This may be a problem prepared well structured and technically sound programs, objec- for smaller municipalities (there are almost 2900 municipalities in Slova- tives and indicators. kia). Some targeted funds (Social Insurance Fund, health care insurance • The extent of the change and the speed of implementation cre- companies) are using PBB because they are legally required to do so. Line ated reluctance on the part of some line ministries’ middle-man- ministries responsible for complex sectors (like education and health) set agement, largely because they lacked capacity. Policy sections’ strategic objectives in their program structures for policies they can influ- involvement also proved sensitive and difficult. Better prepared ence only indirectly, through their regulatory activity. and more sensitively phased-in changes in budgeting proce- various.implementation.results.can.be.tracked.in.complex.sectors. dures, supported by formal training program for budget officials, Because of their decentralized nature and private service provision, edu- would probably have brought better results. cation and health care are complex sectors. Education is a good example. legislation.and.methodological.guidelines.covering.pbb.include: It has clear goals and objectives, developed centrally, and financial flows are designed to motivate different areas to achieve desired results. Health • the Budgetary Rules Law care, on the other hand, is a poor example because the Ministry of Health • MOF’s methodological handbook on program budgeting 200 201 • manual on formulating goals, objectives, and measurable indica- publish a citizens’ guide to the budget (in 2004) but lack of public interest tors quashed this. • manual on monitoring and evaluation of programs. slovakia.operates.seven.classifications.in.its.budget.system. slovakia.now.operates.an.almost.fully.fledged.pbb.system. There •. economic classification of revenues and expenditures is stan- are some weaknesses in its operations although all the essential building dard with GFS guidelines although it doesn’t yet fully reflect blocks of its application are in place. Program costing lags behind the GFSM 2001. Adjustments have been made to incorporate ESA95 countries with best PBB application practices but is at a sufficient stand- standards. ard. The program’s weaknesses are, first, in program performance evalu- •. Functional classification of expenditures is based on COFOG ation and feedback for policy making, which are being addressed, and and has two additional levels for detailed tracking of expendi- second, encouraging greater responsibility and accountability among pro- tures. This level of detail became obsolete when program clas- gram managers. sification was introduced but is still used for statistical purposes. in.the.first.years.after.implementation,.slovakia.operated.a.prb. •. organizational classification of revenues and expenditures system ..it.is.now.somewhere.between.pib.and.pbb.(since.2005-2006). aligns with Government structure – line ministries and agencies PBB is still perceived as a tool for strengthening institutional manage- – and includes their budgetary and subsidiary organizations. ment rather than fiscal discipline and there has been no major progress •. type.of.budget classification determines the type of public en- on its implementation since 2005. Many M&E projects started in 2006 are tity in the consolidated general government budget (one level still running. Overall, the current situation can be described as stagnation. above the state budget). The causes are reform overload from the previous period (2003-2005) and a lack of political commitment. If the situation doesn’t improve there is a •. program classification of expenditures has three levels: pro- slight risk of reform reversal. The focus needs to shift to simplifying the grams, subprograms and elements/projects. It covers the state current system and building capacity in the public administration – par- budget and three of the remaining state funds and, from 2009, ticularly in policy sections – to cope more easily with the changes. will be used by regional and local self-governments although they will develop their own program structure. 5. Budget Presentation and Classification •. source.of.funds classification tracks the financial means com- ing from the EU through the Government budget. It also distin- budget.documentation.relies.on.data.provided.by.the.budgetary. guishes national co-financing of EU resources. information. system. (bis) which is the core of budget management. Based on data from this system, analytical comments are provided in • A register. of. investments which separately codes all capital budget documentation. These follow separate classifications, mainly or- expenditures into several categories of projects. This classifica- ganizational and economic (traditionally). An annex is prepared to show tion is suitable for merging with the program classification but a the full extent of the program budget and published as a separate book detailed analysis hasn’t been prepared and no decision has been with all programs, their parts, financial allocations, goals, objectives and made to do so. measurable indicators. it.support.for.budgeting.was.crucial.to.the.program’s.success. The since.2003,.the.quality.of.documents.and.analysis.has.improved. Budgetary Information System (BIS) proved a tremendous help in the significantly. 2005 was the first year in which the budget was published in budgeting reform. It has been developed gradually as the complexity of this new structure. Since then only minor revisions have been made to the the budget system increased. All methodological changes were reflected template which provides all the necessary information. Unfortunately it is immediately in the architecture of the system and the user interfaces. It is written in a style, and with a lot of tables and charts, that makes it difficult a powerful tool for focusing line ministries’ attention on complying with for a non-informed reader to understand. Attempts have been made to MOF methodology and expenditure ceilings. The IT system supports all classifications and can sort data according to user needs. Pre-defined and 202 203 random views can be exported to various formats (PDF, MS Excel etc). their.budget.proposals.and.final.accounts. It also publishes reports on its Being a multi-modular program it allows not only for budget preparation findings which can be sector specific or topic based. Several audit reports but also execution (automatic data transfer with the State Treasury System on the quality of program structures and performance data of particular is ensured on an on-line basis) and monitoring of the budget and admin- line ministries have recently been produced. Methodology for perform- istration of classifications (ledgers, automatic bridge tables etc). ance audits, however, still needs to be developed and implemented. The.budget.system.at.present.is.too.complicated.and.without.fur- Although. pbb. has. caught. on. among. key. players. (staff. in. moF. ther.work.there.is.a.risk.of.reform.reversal. Simplifying the budget sys- and. line. ministries’. budget. departments), a. performance. manage- tem and especially the currently used classifications would help budget ment. culture. hasn’t. Policy departments only partially understand the managers. Unofficial discussions are underway about integrating some PBB concept. Traditionally they have focused on designing policy design classifications but ideas haven’t been presented to MOF management. Re- and ignored its budgetary implications. This is an internal problem in line ducing workloads and avoiding data entry errors might be the first results ministries but MOF can help address it with targeted education for pro- of the budget system simplification and would lead to wider acceptance of gram managers. the PBB culture. Focus could be shifted from formal compliance to stra- public. sector. employment. and. remuneration. systems. were. re- tegic thinking. And simplification could be supplemented with targeted formed.in.2004 to better reflect individual performance but the new sys- training to help line ministries with their program structures and expend- tem is quite rigid. Remuneration is based on position and age rather then iture planning procedures. performance. Further reform of the civil service (remuneration system and flexibility in employment contracts) is needed to fully benefit from 6. Public Management Performance Culture the PBB culture. slovakia.doesn’t.yet.have.regular.evaluation.of.program.perform- public. procurement. procedures. have. been. modified. to. meet. eu. ance. Generally, the M&E function is weak. A separate project aimed at standards.and.allow.for.a.certain.level.of.discretion.among.public.serv- addressing this shortcoming was conducted during 2006-2007 with 19 pi- ants. Modern methods of procurement (electronic, joint procurement, lot evaluations produced, a training system designed, and more than 100 auctions etc.) are still rare but efforts are being made to use them more civil servants trained. Several line ministries were involved in this project. frequently. The organizational set-up of M&E is determined by Government and three options were considered: • evaluation cells in line ministries coordinated by MOF • coordination by the National Control Office • integration of M&E tasks with line ministries’ internal audits. When PBB was introduced, a decentralized approach was taken for managing M&E but the methodology is coordinated centrally. The. role. of. the. national. control. office. (local. sAo). in. the. pbb. framework. implementation. is. important. In the beginning NCO was passive and reluctant to change it methodology for external audits. Since PBB reforms were implemented, NCO’s position has changed and it start- ed to catch up with MOF activities. The PBB methodology was discussed with NCO and MOF provided several training courses for NCO auditors. nco. is. an. independent. body. responsible. for. external. audit. and. control.of.public.entities ..it.provides.parliament.with.its.opinion.on. 204 205 Annex 1. Program structure in Transport – Slovakia 2008 TURKEY Mediha Agar General Assessment (Summary) In the 1990s, leading up to the 2001 economic crisis, a fragmented budget and ineffective fiscal accountability mechanisms in Turkey’s pub- lic sector contributed to large fiscal imbalances. Fiscal policy was outside policy makers’ control and a fragmented budget made both maintenance of fiscal discipline and management of fiscal risks difficult. Multiple lay- ers of inspections and internal controls were ineffective but provided in- centives for agencies to establish off-budget flows to evade controls. This further fragmented the budget. Extensive off-budget activities made it difficult to estimate and therefore manage the full extent of government finance and expenditure.87 Past pre-crisis periods (1994, 1999 and 2001) were characterized by large public sector borrowing requirements, due to a sharp increase in public wages, widening of social security deficits and transfer of expendi- tures, including to state banks.88 State banks kept accumulating so-called ‘duty losses’ incurred as they funded government programs and provided subsidized lending to certain borrowers. With limited public information about the extent of these duty losses, and the widespread perception that they constituted a contingent government liability, the sustainability of public debt came into question. Large off-budget expenditures or so-called extra-budgetary funds (EBF) added to concerns about fiscal sustainability. Until 2001, PFM in Turkey was dominated by an outdated legal framework (Public Accounting Law dated 1927). A multitude of extra- budgetary funds and revolving funds seriously jeopardized budget dis- cipline. A plethora of control and inspection agencies focused on com- pliance rather than ensuring effectiveness of management and control systems. The Turkish Court of Account (TCA), Turkey’s supreme audit institution, was limited by its restricted mandate; it didn’t cover the entire public sector and its scope was confined to conformity audits only. Gener- al government institutions lacked uniform accounting and reporting and a chart of accounts that could be readily consolidated. Accounting was cash-based; PFM systems were unable to capture expenditure arrears and government assets and liabilities, including contingent liabilities. 87 Underlying public sector structural and management issues were analyzed in the 2000 and 2003 CEMs and the 2001 PEIR Source:.Bank.staff.based.on.national.documentation 88 Transfer to state banks was in the form of either capital injection or duty losses 206 207 The 2001 economic crisis provided the impetus for policy-makers to • introducing Medium-Term Program and Medium-Term Fiscal comprehensively address economic, social and structural issues, includ- Plans covering three years ing PFM. In response to the 2001 crisis, Turkey adopted a new medium- • a new, more comprehensive budget classification(including term macro-economic program and launched a renewed structural re- functional and institutional classification) system for the budget form program in December 2001.89 The renewed program incorporated a • starting a shift from input- to performance-based budgeting three-pronged strategy to achieve macroeconomic stability supported by which embraces strategic planning improved social cohesion: • transferring responsibility for internal financial controls and au- • macroeconomic policies to restore fiscal stability and growth, diting from MOF to line agencies and aggressively support the disinflation process • a formal legal schedule and calendar for budget preparation, • structural policies and institutional reforms to address the finan- implementation and monitoring processes. cial sector and weaknesses in the PFM system There is more to be done. What’s needed is greater commitment to • enhanced social dialogue with increased emphasis on protecting fiscal transparency, better links between programs and budgets, align- the most vulnerable groups. ment of fiscal reforms with other public administration reforms (in areas Accordingly, public sector reform since 2001 has focused on achiev- like civil service reform) and a better equipped external auditing system. ing the significant fiscal adjustment required to underpin macroeconomic stabilization, while simultaneously addressing underlying structural/in- 1. Core Features of the Current Budget System stitutional weaknesses. There has been significant progress on both fronts. The.multi-institutional.nature.of.turkish.economic.policy.making. A major effort at modernizing Turkey’s fiscal institutions was under- is.a.key.aspect.of.the.budget.system ..MOF (budget preparation, revenue taken after 2001 and supported by the World Bank (WB) and the IMF. policies and fiscal control), the State Planning Office (macro plans and Two background documents laid the grounds for legislative, institutional investment policies) and the Under-secretariat of Treasury (cash and debt and systemic reform initiatives – the Special Ad-hoc Committee report management) are the central control agencies with varying degrees of re- on Restructuring.the.Public.Financial.Management.and.Fiscal.Tranparen- sponsibility, during the budget process. The High Planning Council and cy-1999 prepared by the Government in the context of the Development Cabinet act as ultimate political decision makers for the final shape of the Plan and Public.Expenditure.and.Institutional.Review-2001 prepared joint- budget. Public Procurement Agency and State Personnel Office determine ly by Government and the WB. procurement policies and policies for civil service recruitment. The Turk- Following these documents, the two main pillars of renewal were the ish Court of Accounts is the external audit institution acting on behalf of Public Finance and Debt Management Law (PFDML) adopted in 2002 and the Grand National Assembly. the Public Financial Management and Control Law (PFMCL) adopted in division.of.labor.between.the.three.economic.management.insti- 2003. Both have been framed along best practice. The PFMCL aimed to tutions.demands.close.coordination ..This.is.important.for.policy.mak- thoroughly restructure public expenditure management by consolidating ing.which.requires.strong.political.leadership.for.improved.coordina- all government fiscal operations in an integrated approach, from prepara- tion.among.central.control.units ..The role of the State Planning Office tion to execution and ex-post monitoring of the budget. The law provided (SPO) on investment planning and the investment budget and the Under- the legal framework for reforming the budgeting process, including: secretariat of Treasury (UT) on debt and cash management, forces MOF • broadening the scope of financial management and fiscal control to cooperate closely with them. Although the division of responsibilities • extending coverage of the budget and financial accounts to all is regarded as a weakness in the structure of budget organizations, it pro- sectors of government in accordance with international stan- vides useful checks and balances against undue expenditure demands. dards of national accounting (SNA93, ESA95) two.key.pieces.of.legislation.–.public.Financial.management.and. Supported by an IMF Stand-by Arrangement (SBA) and the Bank’s Programmatic Financial and 89 control.law.(pFmcl).and.public.Finance.and.debt.management.law. Public Sector Adjustment Loans (PFPSALs) 208 209 (pFdml).–.regulate.the.budget.process.and.financing.of.government. identified major weaknesses of the system and proposed a num- entities ..PFMCL governs the main provisions of the Turkish budget sys- ber of steps to correct them. tem. It regulates the structure and functioning of public financial manage- • In 2001, a Public Expenditure and Institutional Review (PEIR) ment, preparation and implementation of public budgets, accounting and was prepared jointly by WB staff and Turkish counterparts, most reporting of all financial transactions and financial control. This ensures of who also participated in PFMP and ad hoc committee work. accountability, transparency and the effective, economic and efficient col- The. relative. success. of. budget. reforms. after. 2001. can. largely. be. lection and use of public resources. The Minister of Finance has discre- attributed.to.the.2001.crisis.and.eu.processes ..The.two.policy.docu- tionary powers to govern budget implementation. PFDML lays the princi- ments.mentioned.above.created.an.impetus.for.policy.makers.to.ad- ples of debt and asset management which are acquired during the budget dress.economic,.social.and.structural.issues,.including.budget.reform,. process. It also sets borrowing limits for financing the budget deficit. It in. a. comprehensive. manner.. The PFMC Law and Public Finance and regulates debt and asset management and contingent liabilities between Debt Management Law benefited from the recommendations of these central government and local authorities and other public entities. documents. The 2001 financial crisis, which had links with the weak pub- civil.society.plays.a.minor.role.in.budgetary.decisions.although. lic financial management system, helped raise awareness of the need for a there.is.growing.interest.in.budgetary.issues.and.monitoring ..Because better budget system. Accession to EU helped to speed up the process and of the budget’s complexity, and limited budget literacy, the general pub- reform-minded officials championed the work. External dynamics also lic cannot easily participate in budgetary decisions at national and local played an important role. levels. This attitude is changing and NGOs and think-tanks are keeping a enactment.of.the.pFmc.law.in.2003.provided.a.new.legal.frame- closer eye on budgetary matters and, gradually, taking a more active role. work.for.modern.public.expenditure.management.and.accountability. various. international. assessments. (imF,. wb. and. oecd). show. Objectives of the new PFMC Law are to improve the quality of public the.turkish.budget.system.is.on.the.right.track.but.more.needs.to.be. service delivery, enhance government functions and increase public sec- done ..These assessments show that, with implementation of PFMC law, tor accountability and transparency. The law introduced strategic man- the budget system has been well-designed and strengthened but work is agement by: needed to re-assess budget classifications to improve PBB efficiency and • linking plans and policies with the budgets the quality of parliamentary debate on the budget.. • initiating institutional strategic plans and performance budgets 2. General Progress on Budget Reform • introducing medium-term fiscal framework into the budgeting process. turkey. has. initiated. a. number. of. programs. to. reform. its. finan- cial.management.system ..In 1995, in the context of World Bank-financed The law strengthens the link between the responsibilities of officials Public Financial Management Project (PFMP), some steps were taken to and politicians and their accountability to the public. It also improves pub- streamline and improve the budget process particularly in the areas of lic expenditure and financial management processes in line with interna- budget classification and cash management. A lack of political and bu- tional practices. A number of systemic reforms have been implemented to reaucratic interest limited its success but two documents pushed for re- support these new management concepts. These include a Government forms: Financial Statistics (GFS) compliant budget classification, an online budg- et management information system, an online networked accounting sys- • During preparations for the 8thYear Development Plan in 1999, a tem for the central government, and an IT based tax management system. special ad hoc committee was established with participants from Government (most of who also participated in PFMP), academia reforms.in.this.area.sought.sustainable.fiscal.adjustment.as.well.as. and NGOs. This committee issued a report called Restructuring. greater.budgetary.transparency ..lack.of.these.is.regarded.as.the.ulti- of.Public.Financial.Management.and.Fiscal.Transparency which mate.source.of.the.crisis ..The reform program expanded coverage of the budget to all central government institutions and adopted international standards – IMF’s GFS classification – of budget classification to enable 210 211 economic, functional, and institutional breakdown for the entire govern- ronment and mostly for two reasons. First, many reform areas (strategic ment. It: planning, multi-year budgeting, internal control and audit) were made • abolished all budgetary funds, with the exception of the Support legally binding, and second, departments found strategic planning exer- Price Stabilization Fund (DFIF), and all but five EBFs (i.e. the cises a useful way to improve and/or advance their institutional identity. Social Solidarity Fund, the Defense Fund, the Promotion Fund, Training sessions and seminars facilitated the process. Savings Deposit Insurance Fund (SDIF) and the Privatization Fund) 3. Adopting Medium-Term Expenditure Frameworks • increased credibility of the budget formulation by introducing An.mteF.has.been.operating.since.2005.and.is.being.adopted.as. medium-term program and fiscal plan part.of.broader.reform.of.public.finance.management ..Reform toward • enhanced transparency by disclosing information on detailed the MTEF has been a key component of the reform initiative, with MOF fiscal balances of EBF, local administrations, social security in- and SPO taking the lead. The MTEF in Turkey involves two documents. stitutions, and revolving funds as an attachment of the budget These include several important elements of an MTEF, such as a medium- submitted to Parliament term fiscal policy statement (including expenditure ceilings and three year fiscal plans) prepared by MOF, and a medium-term plan including • eliminated the ex ante control function of MOF and TCA, trans- priority areas and macroeconomic indicators to be used by spending de- ferring this authority to line agencies partments) prepared by SPO. SPO also developed guidelines for line min- • developed automated Online Public Accounting System istries to design their own strategic plans. The legal basis of the MTEF is (Say2000i) for the entire central government PFMC Law, marking a key initiative in strengthening fiscal planning and • moved gradually from cash-based to accrual-based accounting. public finance management. These. legal. and. institutional. reforms. aimed. to. strengthen. fiscal. The. mteF. provides. for. a. three-year. rolling. expenditure. frame- policy.creating.a.more.strategic.role.for.moF.which.now plays a more. work. for. broad. categories. of. spending. The medium-term economic critical role in the overall design of fiscal policy. However, this necessitates plan, to be approved by Cabinet by May 30, includes forecasts of macr- better coordination between MOF, SPO and UT. MOF was restructured oeconomic variables for the next budget year and two following years. By to ensure it carried out its duties, assigned by PFMC law, effectively and June 15, the Minister of Finance issues the three year medium-term fiscal efficiently. Four departments responsible for central harmonization have plan to be approved by High Planning Council and based on the medium- been established under the General Directorate of Budget and Fiscal Con- term plan. These documents comprise: trol. An Internal Audit Coordination Board, which has an inter-minis- • a forecast of the medium-term macroeconomic situation and terial structure, has been established. To increase efficiency and ensure macroeconomic targets such as inflation, growth, balance of standardization of implementation among public administrations, budget payments etc (Medium-Term Economic Plan) units affiliated to MOF were closed and Strategy Development Units es- • sectoral policies and priority areas (Medium-Term Economic tablished in administrations. Plan) lack.of.awareness.and.limited.commitment.in.public.administra- • medium-term fiscal policy objectives of Government (Medium- tion.hindered.reform.management ..but.thanks.to.the.facilitating.role. Term Fiscal Plan) of.training,.seminars.and.informative.meetings.organized.during.the. reform.process,.the.new.methods.and.structures.gradually.introduced. • forecast of revenues in the medium-term (Medium-Term Fiscal by.the.reform.have.been.adopted . Budget reforms were mostly prepared Plan) within MOF, SPO and the Treasury. Spending units were usually taken on • expenditure ceilings for the spending departments (Medium- board after legislation had been passed which created a feeling of isolation Term Fiscal Plan). and made internalization of the reforms by others difficult. But it has been observed that other departments have felt obliged to adopt the new envi- 212 213 In July, the Minister of Finance issues to the public an updated cur- subject to change with rolling years added every year. MOF recently an- rent year fiscal policy outlook (Mid-year Fiscal Update). nounced in the Medium-Term Fiscal Plan covering 2009-2011 that it A. system. of. strategic. planning. was. introduced. in. 2005. Strategic would implement fiscal rules but failed to announce any detailed state- planning is expected to allow for formulation and prioritization of poli- ment to that effect. cies and link them with budget decisions. The system has been introduced gradually, first for local authorities and then for central government units. 4. Performance-based Budgeting Introduction should be completed in 2009. While it is too early to com- program.based.budgeting.has.been.introduced.in.broader.public. ment on results, the initial experience of local authorities suggests that finance.management.reforms. Transition to performance-based budget- linking strategic goals with the budgets has been problematic (see below). ing (PBB) studies have been made widely available in central government The. mteF. is. still. largely. based. on. incremental. budgeting . PBB, and social security institutions in accordance with the ‘transition to strate- strategic planning and an MTEF have been introduced as interrelated gic planning calendar’ and in local administrations in line with their own components of financial management reform. The MTEF was expected legislation. Provisions regarding PBB have been included in primary and to provide macro fiscal discipline by providing top-down expenditure secondary legislation and a Guide. for. Performance-based. Budgeting has ceilings while strategic planning and PBB provided efficiency and effec- been prepared by MOF. Rather than a big bang approach, public admin- tiveness in resource management under those ceilings. Ensuring links istrations phased in PBB. The transition period began in 2006 and will be between plans, programs and budgets will take time. As is the case in a complete by the end of 2010. number of developing countries, it is easier to add new policies than to re- The. architecture. of. the. budget. and. accounting. system. includes. move old ones. For the time being, spending ministries regard the MTEF economic,. functional. and. institutional. expenditure. classifications. as kind of rough guideline for preparing budgets. They are yet to link their without. any. program. structure. The GFS consistent budget classifica- strategic plans to their budgets. PBB may be a useful tool to help them do tion is new and Government is considering how best to integrate the pro- this. gram structure within the current budget classification in the short term. practice. at. the. local. level. indicates. that. strategic. plans. have. not. Whether or not a transition from current budget classification to program been.formulated.within.an.overall.budget.constraint ..This.may.impede. based budget classification is necessary for effective implementation of reform. A successful MTEF helps and requires decision makers to bal- PBB in Turkey is still being discussed. ance what is affordable in aggregate against national policy priorities. The The.motivation.behind.the.pbb.approach.is.the.legal.requirement. MTEF comprises a top-down resource envelope, a bottom-up estimation for.restructuring.public.financial.management.and.control.system ..The of current and medium-term costs of existing policy and ultimately the basic approach which leads to the adoption of PBB has the following fa- matching of these costs with available resources. In Turkey, strategic plan- miliar logic prevailing in all modern budget reforms: ning is fully operational at local administrations and experience suggests • macro fiscal discipline (i.e. top-down budgeting MTEF expendi- that strategic plans are being developed without guidance from indicative ture ceilings) medium-term resource envelopes at the mayoral level. As a result, strate- gic plans have not been realistically fitted in the overall fiscal framework • strategic priorities (strategic planning) of local authorities. It is necessary to bear this in mind and more closely • efficiency end effectiveness (performance-based budgeting) monitor the links between strategic plans and budgets at central levels. when implementing the budget. Another risk factor might be that budget expenditures can be carried for- The first item has been discussed and supported by bureaucrats. The ward with little concern for scrutiny and rationalization of existing poli- second has been a fashionable concept (visions, missions, institutional cies even through the use of strategic planning. identity, targets etc) which seemed attractive to spending departments. The.mteF.is.not.geared.towards.providing.fiscal.rules ..Expendi- PBB has been the subject of rhetoric rather than actual implementation ture ceilings in medium-term fiscal plans aren’t legally binding and are but once all these basic principles have been made legally binding both institutional capacity and fiscal discipline will be stronger. 214 215 since.the.pbb.is.in.a.transition.period.and.not.fully.operational. Annex 2. Program structure in Transport – Turkey 2008 it.is.too.early.to.assess.the.system.in.detail ..The PBB model in Turkey Example: 2008 Performance Program of General Directorate of State Highways has been built on a structure comprising strategic planning, performance STRATEGIC GOAL Road and Traffic Safety budgeting and accountability reports. Consistency is sought between the strAtegic.obJective Accidents with deaths and injuries caused by highways will be less- performance objectives listed in performance programs and the goals ened at the ratio of 40 percent in five years. 40 percent of the works as placement of horizontal and vertical signs and objectives listed in strategic plans. Performance programs prepared perFormAnce.obJec- as well as fog lightening on the dangerous points of roads completed tive every year in the budget process include strategic goals and objectives, in 2008. performance objectives, performance indicators, activities and projects of Activities.And. (t-2) (t-1) (t) (t+1) (t+2) the administration concerned. MOF has issued a Performance. Program. proJects 2006 2007 2008 2009 2010 Preparation.Guideline to help administrations determine their indicators, Road maintenance and 8.080.000 9.400.000 9.450.000 9.363.500 9.881.675 repair services in compliance with the standards, principles and examples included in the Administrative services 104.052 44.835 58.990 60.644 63.344 guide. Since each public administration determines its performance indi- Traffic Safety Project 250.000 500.000 600.000 400.000 600.000 cators individually, no relevant standard is in place and practices among Total Resource Require- administrations vary. For all these reasons it is too early to comment on ment (YTL) 8.434.052 9.944.835 10.108.990 9.824.144 10.545.019 the overall success of PBB in Turkey. PERFORMANCE INDI- CATORS Traffic accidents with 5. Budget Presentation and Classification and Public deaths due to dangerous Management Performance Culture points where drivers are 8 4 10 12 10 alerted with horizontal and budget.documentation.enriches.and.provides.information.on.the. vertical signs various. aspects. of. budget. and. the. mteF .. Core budget documents in- Number of foggy places where fog lightening is 1 1 1 3 3 clude medium-term program, medium-term fiscal plan (MTEF), package provided of draft central government budget law and explanations, and debt man- Decrease rate of accidents ND (no ND agement report by UT and investment program prepared by SPO. The with deaths data) complete budget documents are submitted by MOF following approval Decrease rate of complaints ND ND received from citizens by Cabinet, to the Grand National Assembly in mid October. In the year following implementation, administrations publish and publicize their Source:.World.Bank.staff,.based.on.national.documentation accountability reports where their performances and activities realized in trally monitored on-line accounting system covering all general govern- the previous year are evaluated. A General Accountability Report records ment institutions. the performances and activities of all administrations within the scope improving. public. management. culture. requires. time. and. effort .. of central government. This is publicized and submitted to the Turkish This cultural change is in the development stage in Turkey. To spread Grand National Assembly by MOF, making the Turkish budget system the reforms to all public administrations, and ensure their sound imple- more transparent and accountable. mentation, progress is needed in areas such as human resources through turkey. has. a. well. established. it. system. to. monitor. budget. ac- training, workshops and seminars. Increasing administrative capacity and counts.and.statistics . A new budget classification system, in compliance support from senior management is also critical for successful implemen- with GFS 2001, has been operating since 2004. In line with the mentioned tation. classification, budget proposals are received over an e-budget system civil.service.reform.is.necessary.to.improve.public.management. managed by MOF and budget appropriations are monitored by this sys- performance.culture ..Civil service reform should go hand in hand with tem. Budget implementation results are accounted for and reported by PBB, particularly in regard to measuring and awarding personal per- means of an IT system called SAY2000i. These two systems are compatible formance. Turkey needs to consider shifting from life-long employment and provide consistent information. They provide an integrated and cen- 216 217 to contracted personnel status. Trade unions, staff representatives and Annex 3. Main macroeconomic and fiscal indicators in Emerging Europe NGOs need to be engaged in the process if the whole reform process is Bulgaria Latvia Poland Slovakia Croatia Turkey 2005 6.2 10.6 3.6 6.5 4.2 8.4 not to be undermined. 2006 6.3 12.2 6.2 8.5 4.7 6.9 effective. application. of. public. finance. management. reforms. de- Real GDP growth, % 2007 6.2 10.0 6.8 10.4 5.5 4.5 2008 6.0 -4.6 5.0 6.4 2.4 1.1 mands.greater.capacity. Experience suggests that MOF needs to invest 2009F -6.5 -18.0 1.0 -4.7 -5.2 -6.5 more in building staff capacity for evaluating line ministries’ strategies 2005 6.0 6.9 2.1 2.7 3.3 8.2 2006 7.4 6.6 1.0 4.5 3.2 9.6 and budget requests, developing methodology for program and perform- CPI, % 2007 7.6 10.1 2.5 2.7 2.9 8.8 ance budgeting, and effectively using performance information in the 2008 12.0 15.3 4.2 4.6 6.1 10.4 2009F 2.7 3.1 3.4 1.5 2.8 6.2 budget process. Closer links between performance information and deci- 2005 -12.4 -12.4 -1.2 -8.5 -5.7 -4.6 sion making and budget allocations are also needed. Current account 2006 -18.5 -22.7 -2.7 -7.0 -6.7 -6.0 2007 -25.2 -21.6 -4.7 -5.3 -7.6 -5.8 balance (% of GDP) 2008 -25.5 -12.6 -5.5 -6.5 -9.4 -5.7 2009F -11.4 4.5 -2.2 -8.0 -6.1 -1.9 2005 70.9 99.4 44.1 58.2 71.8 35.2 Gross External Debt 2006 81.9 114.0 46.6 50.9 75.1 39.2 (% of GDP) 2007 100.2 127.6 48.2 54.7 76.8 38.4 2008 107.7 128.2 56.7 55.2 84.1 38.1 2005 1.9 -0.4 -4.3 -2.8 -3.5 -0.6 General 2006 3.0 -0.5 -3.9 -3.5 -3.0 0.8 Government 2007 0.1 -0.4 -1.9 -1.9 -2.5 -1.0 Balance (% of GDP) 2008 1.5 -4.0 -3.9 -2.2 -1.4 -2.2 2005 29.2 12.4 47.1 34.2 38.3 52.3 Public Debt (% of 2006 22.7 10.7 47.7 30.4 35.7 46.1 GDP) 2007 18.2 9.0 44.9 29.4 33.1 39.4 2008 14.1 19.5 47.1 27.6 33.5 39.5 Source: Eurostat. For 2009, International Monetary Fund, World Economic Outlook (WEO), October 2009. 218 219 Annex.4 ..Questionnaire.for.world.bank.country.economists. each country has managed these budget modernization aspects of the David.Webber transition process. The picture this provides should be directly helpful in determining where and how to assist further, not only with these coun- introduction tries but with others who may be contemplating developing their public The purpose of this questionnaire is to help World Bank country financial management systems along similar lines. economists in the countries selected for this study90 to undertake a com- prehensive stock-take of the implementation of some major budget re- forms in their respective countries. The particular focus of this study is on the progress made by these countries in introducing Performance-based Budgeting (PBB) and Medium-Term Expenditure Frameworks (MTEF) as discussed in the Concept Note.91 The questionnaire has been developed, in part, to ensure consistency and coverage in the research undertaken in each of these countries. None- theless, in making their assessments, it will be important for WB econo- mists to use both the questionnaire and their own judgment in seeking out what has been achieved, or not achieved, in these countries, and why. In other words, the questionnaire should be used as a guide to gathering the kind of information on which to base well-informed comparative assess- ments which will be interesting and potentially useful for others working in these areas of budget reform. The principal focus of the questionnaire on the above two major areas of budget reform should not lead econo- mists to exclude analysis and discussion of other potentially important and related steps in budget modernization in their countries. The questionnaire should be used in conjunction with the general ‘template’ that the task team leader has designed for presentation of in- formation and analysis that will underpin the budget reform assessments in each country. Both the questionnaire and the results presentation tem- plate, however, have been developed to cover all six countries; it is fully expected that some sections of both documents will have varying rele- vance for each country, based on what they have achieved and the type and quantity of information available. Remember that the study does not set out to present a detailed ac- count of what each country has achieved in these areas of budget reform for references purposes. That would be become dated very quickly. Nor is it a PEFA-type assessment. Rather, we are concerned to understand what has been achieved in the context of how successfully, or unsuccessfully, Bulgaria, Croatia, Latvia, Poland, Slovakia, and Turkey. 90 “Current Issues in Fiscal Reform in Central Europe and the Baltic States 2008: Performance-based 91 budgeting (PBB) and medium-term expenditure frameworks (MTEF) in Emerging Europe – From. Diagnosis.to.Remedy�, Concept Note, December, 2007, 220 221 Questionnaire [Questions in italics were sent to national counterparts] Section 1: Core Features of Current Budget System (1 page) 1 .1 .. What is the general political and administrative structure govern- ing budget preparation?.Provide.a.brief.description.of.the.key.agen- cies.and.their.roles.and.responsibilities.in.the.annual.budget.process . Include.briefly.at.what.stage,.and.with.what.responsibilities,.the.parlia- ment.is.involved . 1 .2 .. What are the key pieces of legislation relating to the Budget? In. addition. to. citing. the. relevant. legislation,. include. description. of. key. sources.or.influences.on.this.legislation,.when.it.was.passed,.and.any. notable.provisions.with.regard.to.any.PBB.or.MTEF.requirements.(in- cluding.any.relevant.proposed.amendments.under.consideration ) 1 .3 .. Are.there.any.unique.political.or.cultural.factors.which.influence. the.structure.and.implementation.of.the.budget.system?.This may include the roles of particular institutions, the part played by civil society, any special budget powers of the president or prime minister etc. 1 .4 .. Have.there.been.any.international.assessments.made.since.2000.of. the.quality.and.transparency.of.the.budget.system;.such.as.oecd. budget.survey,.imF.Fiscal.transparency,.cFAA,.peFA,.or.peir,?. Describe briefly any major strengths or weaknesses that were identi- fied and whether any changes have been made as a result. Section 2: General Progress on Budget Reform (1-2 pages) 2 .1 .. Have there been any major programs or initiatives undertaken in budget reform in recent years? Consider.also.whether.these.initiatives. have.been.sustained,.variable,.and/or.influenced.by.elections.or.other. political.factors.over.time . 2 .2 .. What progress has been made so far in terms of the adoption of spe- cific new methods for improving the budget processes? List/describe. what.are.clearly.the.main.achievements.of.budget.reform.to.2008 .This. may.include.institutional.reforms,.changes.to.budget.coverage,.struc- 223 ture.and.presentation,.classification,.reporting,.accounting.issues,.incl . Section 3: Adopting Medium-Term Expenditure Frameworks IT. system(s),. transparency. improvements,. better. fiscal. control,. en- (MTEFs)92 hanced.internal.and.external.audit,.etc (3 Pages) 2 .3 .. what.has.been.the.motivation.for.this.reform.process? Consider 3 .1 .. What is the coverage of the MTEFs compared to the annual budget also whether there has been a champion for the reforms, the role and approved by the Parliament? What is the period of coverage (e.g. impact of political parties, public opinion, reform-minded officials, 2+1?). What is the legal basis of the MTEF? Is.the.budget.presented. NGOs, external / international pressures and obligations etc. to. parliament. on. a. multi-year. basis,. with. annual. appropriation,. or. 2 .4 .. Has.there.been.and.is.there.still.a.‘lead.agency(s)’.responsible.for. are.medium-.term.revenue.and.expenditure.forecasts.for.budget.plan- driving. further. budget. reforms. within. the. bureaucracy? Try to ning.purposes.only .Indicate.how.many.forward.years.are.used.and.the. give a sense of their effectiveness and their current level of commit- depth.of.detail.in.budget.documents.on.revenue.and.expenditure.for. ment to this task. these.forward.years . 2 .5 .. To what extent were budget departments involved in the reform 3 .2 .. Which institution/unit assumes responsibility for the MTEF? Try. process?. Explain if budget departments in MOF were directly in- to.capture.the.institutional.capacity.in.this.area,.including.any.special. volved in the reforms. Consider whether they can be regarded as resourcing,.skill.development,.modeling.capacity.or.other.unique.fea- reform drivers or observers? Clarify whether the cooperation with tures Is.there.a.particular.organizational.unit.(within.the.Ministry.of. budget department was conducted on ongoing (and informal) basis Finance.or.elsewhere).with.specific.responsibility.for.the.development. or rather formalized and limited to the extent necessary. of.the.medium-term.budget.framework? 2 .6 .. Has.this.agency(s).changed.its.institutional.structure.or.ways.of. 3 .3 .. Does the MTEF, if it exists, operate in support of any formal fis- working.that.have.been.clearly.effective.in.promoting.and/or.sup- cal rules; does it assist in setting budget expenditure ceilings for the porting.budget.reforms.reform?.Has their approach been inclusive, ministries, or medium-term fiscal guidelines or strategies with re- consultative and comprehensive? Explain whether the approach has gard to movements in the fiscal balance?.This.question.should.cap- been top-down or rather bottom-up one or it combined elements of ture.the.degree.to.which.the.MTEF.provides.framework.for.managing. the two. Identify whether the use of pilot projects has figured promi- aggregate.fiscal.policy.and.guidance.to.line.ministries.in.formulating. nently and what sectors were addressed first. their.budgets . 2 .7 .. Are there any particular sectors or groups – either within or outside 3 .4 .. What are the main methods or procedures used in compiling the the public sector - that have consistently opposed and impeded (or MTEF? These.might.include.the.use.of.particular.types.of.revenue.fore- supported) these budget reforms?.Describe.any.apparent.reasons.for. cast.models,.standardized.or.non-standardized.cost.inflation.factors,. this. opposition. or. support. –. e g . capacity. for. change,. influence. over. retention.of.a.‘Planning.Reserve’.in.allocating.future.indicative.budget. budget.resources,.fears.of.retrenchment.etc.–.and.how.important.they. ceilings.to.line.ministries,.sensitivity.analyses.etc . continue.to.be.to.further.progress .(Clearly,.analysis.and.reporting.of. 3 .5 .. Was the MTEF approach introduced as a component within wider these.issues.may.have.to.be.managed.sensitively,.with.an.emphasis.on. budget reforms, such as PBB, or simply as a discrete step in budget the. general. nature. of. such. influences,. rather. than. specific. groups. or. development?. individuals ). 3 .6 .. How. detailed. are. the. line. ministries’. estimates. of. their. institu- tion’s.medium-term.expenditure?.do.they.provide.the.same.de- gree.of.detail.as.the.budget?.In many cases, these may be simple in- flation-adjusted forecasts of current policies and programs, but they may also be the result of much more elaborate exercises aimed at generating a comprehensive costing of future policies. Note whether Pre-accession economic programs or convergence programs should not be considered as MTEFs. 92 224 225 donor funding has played an important role in setting up the MTEF If the answer is yes, indicate the stages in which the PBB should replace process and capability. the traditional budget. 3.7. Are the expenditure forecasts for forward years indicative, and there- 4 .4 .. what.have.been.the.motivating.factors.behind.the.adoption.of.(or. fore updated/revised on the rolling basis, or not? Does the MTEF interest.in).a.pbb.approach?.What has been the main motivation process have credibility with spending ministries? behind the PB initiative? This may involve a specific donor project, Describe also how frequently they are revised, to what degree, and the an initiating conference, steps taken by neighboring countries, indi- main reasons for the revisions. vidual ministerial initiative, etc. Try to give a sense of how broadly based the support for this development has been within and outside 3 .8 .. Has. the. application. of. the. mteF. varied. significantly. in. quality. the bureaucracy. Indicate whether it is supposed to strengthen insti- and.usefulness.across.line.ministries.and,.if.so,.what.the.reasons. tutional management (PIB, PRB) or introduce more fiscal discipline for.this?.International experience suggests considerable variation in (PDB)? this regard. Consider also the question of MTEF sustainability 4 .5 .. what.is.the.basic.‘architecture’.of.the.pbb.approach.as.taken.so. 3 .9 .. Has.the.introduction.of.an.mteF.improved.the.quality.and.effi- far. by. the. authorities. in. your. country?. The architecture involves ciency.of.resource.allocation.and.budget.decision-making.-.from. the ‘programmatic’ (or outputs) structure on which objectives and both.the.central.budget.planning.and.line.ministry.budget.man- performance indicators are based. Describe, as far as you can, the agement.perspectives?.Try to capture the nature and extent of any different (how many?) levels at which expenditure is classified and worthwhile changes in terms of budget (re)allocation decisions and/ reported (e.g. programs, sub-programs and activities/projects, etc.) or budget management, or in better enabling inclusion of budget At what levels are specific objectives and indicators required? De- provision from, or for co-funding, EU or other external funding scribe how PBB may be linked to improved strategic planning pro- sources? In other words, has the MTEF led to more strategic fiscal cesses. policy? 4 .6 .. How.would.you.assess.the.‘quality’.of.the.programmatic.structure. 3 .10 ..Has.there.been.any.reaction.of.parliament,.media.or.the.public.to. adopted.so.far?.what.are.the.strengths.and.weaknesses?.This as- the.publication.or.availability.of.a.medium-term.budget.frame- sessment will require consideration particularly of the basic logic (or work?. organizing principle) underlying the design of programs and sub- 3 .11 ..What are the authorities’ intentions and priorities, if any, for ex- programs. What is this logic and how readily and consistently can it tending the use of MTEF concepts and methods? (Explain) be applied given the administrative structure of Government? Does section.4:.performance-based.budgeting. it, for example, provide a sound framework for developing perfor- (5 Pages) mance concepts and methods by demonstrating where and how the 4 .1 .. What achievements have been accomplished so far with regard to ministry or agency proposes to intervene in the pursuit of economic PBB (as at mid-2008?) This.may.range.from.almost.complete.unfa- or social welfare objectives? miliarity,.to.discussions/workshops.etc.for.assessing.potential.relevance. 4 .7 .. Has the PBB structure been consistently adopted across the public and.application,.to.pilot.applications,.to.comprehensive.and.legislated. sector (general government/central government)? Indicate.whether. application . Try. to. be. precise. about. accomplishments,. including. any. some.or.all.ministries.have.adopted.and.are.using.the.structure,.either. legislated.changes,.achieved.to.date . fully.or.partially .To.what.extent.have.similar.principles.been.applied.to. 4 .2 .. What is the budget classification structure? (program, economic, public.entities.outside.the.budget,.in.particular.extra-budgetary.funds. functional, etc) and.local.governments?.Indicate,.if.possible,.the.percentage.of.central. government.expenditures.covered.by.the.PBB.approach 4 .3 .. Are there plans for PBB to replace fully the traditional line-item budget in the specific time perspective or should PBB rather supple- 4 .8 .. What was the approach in sectors where ministries are responsible ment the traditional budget? for overall sector performance, but have a small influence on fund- 226 227 ing (e.g. health, education) or the execution of tasks is delegated to 4 .16 ..present. in. a. table/diagram,. as. an. example. of. the. methodology. specialized agency (e.g. in transport)? Try to examine the issue of and.structure,.a.pbb.budget.framework.for.one.line.ministry.(e .g .. how intra-sectoral division or delegation of tasks and allocated funds transport),.including.major.performance.indicators ..Refer to the works within the PBB framework. basic structure in Annex 2, but highlight differences in transport sec- 4 .9 .. How was the division of inter-sectoral responsibility for over-lap- tor. ping tasks between two or more institutions organized? Issue of 4 .17 ..Has there been any impact of PBB on budget allocations, the qual- tasks /outcomes for which several institutions are responsible. ity of budget preparation and oversight? Describe.any.strong.com- 4 .10 ..What are the main problems impeding effective adoption of the plaints,. objections. or. disputes. around. this. methodology . Have. these. PBB structure? This.may.just.be.a.timing.issue,.or.it.may.be.that.the. been.resolved?.Separate.by.institutions:.line.ministries,.MOF,.PM,.Par- uptake.of.the.new.architecture.has.stalled.for.political.or.technical.rea- liament,.external.audit.etc . sons,.lack.of.capacity,.or.insufficient.involvement.of.budget.people.from. 4 .18 ..What is the plan, if any, for PBB implementation in your country MOF in the next two years? Assess.whether.this.is.moving.ahead,.muddling. 4 .11 ..How.well.defined.and.effective.are.the.links.between.policy.objec- along,.or.stalled.and.possibly.under.threat.of.being.abandoned?. tives.and.budget.program.allocations.(in.terms.of.assisting.insti- tutions.to.meet.their.key.objectives)?.Indicate the nature of these Section 5: Budget Presentation and Classification objectives and whether they are defined in the budget documenta- (1-2 pages) tion or produced/available elsewhere. Describe any formal or infor- 5 .1 .. What constitutes the core budget documentation that now captures mal processes that applied to drafting and agreeing the objectives? MTEF and PBB methods and to what degree does it measure up to 4.12. How were the indicators defined and determined (e.g. imposed from international best practice? Try.to.provide.an.overview.of.the.quality. the top or negotiated with MOF or ‘leading agency’ with a high de- and.extent.of.the.budget.documentation,.including.any.documents.that. gree of freedom of line ministries)? Explain the process of indicator may.be.issued.or.published.during.the.budget.preparation.cycle .Is.the. selection, its definition together with baseline and target values and budget.documentation.significantly.more.comprehensive,.meaningful. indicate which institution prepared the first proposal of indicators. and.transparent.than.it.in.previous.years?.Where.are.the.gaps?. Also, describe briefly the source of input and output/outcome indi- 5 .2 .. what. reaction. has. there. been,. if. any,. from. the. parliament. and. cators (external or provided by budget departments, measurement public.to.the.new.budget.documentation?. process) and indicate whether the final list was reviewed or audited 5 .3 .. What is the current state of development in budget classifications by any institution to ensure quality. and coding (especially in relation to improved IT systems)? Assess. 4 .13 ..How many outcome and output indicators have been used in total/ current.practices.in.terms.of.the.degree.to.which.they.support.any.new. per program/ per ministry? Indicate the balance in use of outcome program.and.output.structures,.are.compliant.or.consistent.with.inter- and output indicators. Try also to assess the quality and rigor of the national. (IMF/GFS. or. ESA’95). standards,. and. provide. a. sound. and. indicators. Are they likely to provide a good framework for perfor- transparent.basis.for.expenditure.reporting mance evaluation or so they still require a lot of work? 5 .4 .. What are the needs and plans of the authorities with regard to im- 4 .14 ..What accountability processes are attached to the achievement of proving budget classifications, including giving better support for these indicators and what incentives exist for good performance? PBB etc? What are the key constraints on these developments? This This.may.range.from.none,.to.formal.annual.performance.review.pro- may include unresolved budget architecture issues, financial infor- cesses,.possibly.including.allocation.of.bonuses.etc .Are.there.concrete. mation system technology limitations, financial management and plans.to.develop.specific.processes.in.the.future?. accounting capacity and skill shortages, determination of policy- 4 .15 ..Are.there.any.best.practices.or.poor.performers.across.the.differ- makers etc. ent.line.ministry.budgets.and.what.might.explain.that.result?. 228 229 Section 6: Public Management Performance Culture 7 .2 .. How might they have been managed differently so as achieve better (1 Page) or more rapid results? Are there any thoughts of turning back, or 6 .1 .. To what extent have these budget reforms (especially PBB) been taking a different track? linked to other measures or monitoring and evaluation systems to 7 .3 .. Are there any unexpected ideas or developments, especially of a improve performance in the public sector? Describe.what.these.other. positive nature, emerging as a result of these budget reforms which measures.are.how.much.progress.has.been.made.with.them – although they were not foreseen at the beginning – may prove in- 6 .2 .. is.it.a.problem.that.the.idea.of.a.‘performance.management.cul- teresting and applicable to other countries? ture’. in. the. public. sector. has. not. yet. caught. on. and. this. has. di- minished.the.understanding.and.effectiveness.of.these.reforms?. Describe some of the changes that need to occur for a performance culture to develop, either in budgeting and financial management, or more widely across the public sector.. 6 .3 .. is.there.much.more.that.needs.to.be.done.in.terms.of.civil.service. reform.before.these.performance.concepts.can.really.be.applied. effectively?.Try to be specific about the key weaknesses (including specific institutions) that must be tackled. 6 .4 .. is.the.public.administration.system.ready.to.implement.the.prin- ciple. of. increased. managerial. flexibility. in. return. for. increased. accountability?.Has.this.been.achieved.already.through.recent.re- forms,.to.some.degree?.what.is.needed.before.this.concept.can.be. (more).effectively.applied? Section 7: General Assessment (Summary) (1 page) This section requires you to make an assessment of these budget re- forms in your country, taking into account the state of development and successes, issues and problems that you have described above. Remember the broad aim of this study is generate comparative assessments of the six countries that may help to illuminate useful ideas or approaches to applying these budgeting methods, and/or which may suggest successful, transformational, processes in managing these reforms. The core goals in undertaking these budget reforms are to improve efficiency,. effectiveness,. transparency. and accountability in the man- agement of fiscal resources. Your summary comments should consider the progress and developments against these specific goals, but the follow- ing questions may also help you to frame your judgments. 7 .1 .. What have been the critical factors overall in determining the pace and quality of these budget reforms? 230 231 BIBLIOGRAPHY 1. Arhivanalitika ltd, 2006,.Strategic.Planning.and.Budgeting.Process.for.the.Government. of.Croatia, World Bank, IDF Grant: Croatia – Strengthening Budget Management. 2. 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