Budgeting for Results: news from the south

1. Budgeting for Results:news from the south Jaime Crispi Head of Research, Budget Office Ministry of Finance of Chile November 2004

2. General Propositions • Instruments are means towards objectives • The government budget is a complex assembly of public policy instruments oriented to multidimensional objectives • Objectives are operationally expressed through (measurable) results • Budgeting must be geared towards (multidimensional) measurable results

3. This Presentation • The Macro Dimension: Chile´s Fiscal Rule • The Micro Dimension: Chile´s management control system • News from the South: they can (and should) be integrated

4. Macro Dimension of the Budget: Objectives (expected results) From the macro dimension fiscal policy has several complementary objectives: • Support short term stability of the economy • Assure long term sustainability of public finances (government´s net worth) • Support a stable pattern of interannual financing for public programs • Provide stability to different agents of the economy (credibility)

5. Macro Dimension of the Budget:Instruments and conditions To obtain these results fiscal instrument must (at least) be: • Technically well designed • Well adapted to the normative framework (laws and norms) in which they are to operate • Politically sustainable

6. Chilean fiscal policy in the 1990s: the standard view

7. Cíclical component of the budget 1987-1999

8. Structural balance in Chile • The structural balance reflects the budget balance that would obtain if GDP was at its trend level and copper price is at its long term level. It is thus adjusted by the effect the economic cycle and the price cycle of Chile´s main commodity ongovernment revenues. • Trend GDP is estimated through the standard method. • Production function Y = A KL • Trend level of inputs is provided by a comittee of external experts • Long term copper price is provided by comittee of external experts • Tax revenues are adjusted by GDP gap • Copper revenues are adjusted by the price gap

9. Structural Balance It doesn’t in itself involve a policy rule. It is simply an indicator on which to base it

10. Chilean fiscal policy: re-reading the story Effective Balance Structural Balance

11. Why a rule targeting the Structural Balance • It allows automatic stabilizers to operate, thus softening the economic cycle (supports stability) • With right target neutral long term effect on government’s net worth (sustainability) • Limits the need for abrupt expenditure changes in the extremes of the cycle (stable financing for government programs) • If transparently implemented, provides a clear time horizon for other agents (credibility)

12. Institutional conditions • Centralized fiscal authority: only the executive power has initiative in fiscal matters; centralized and broad based tax system; only central government can levy taxes and issue debt. • Constitutional ban for revenue earmarking • Mid term fiscal projections incorporated into budget process.

13. Political conditions • Political stability associated to democratic consolidation. • Fiscal deterioration in previous years (fiscal deficit of 1,4% of GDO in 1999) • As new government assumes (2000) incipient economic recovery generates political space (short period between Asian crisis and posterior global slowdown) • Overall: generally broad consensus over fiscal responsibility

14. Intermediate Results (percentage of GDP)

15. Sustainability Public debt projection under normal cycle

16. What the markets say (credibility)

17. Overall macro results:External crisis and fiscal policy

18. Micro Dimension of the Budget: the nature of the problem • Governments experienced a significant change in the scope of their activities throughout most of the 20th century • Such change implied moving from the provision of classical public goods to become massive service providers • Today 3/4 of government activity is providing services • Yet service provision from governments is supposed to happen in a transparent, objective way • This results in government organizations having: • Multiple mandates • Broad, sometimes diffuse objectives • Free service provision • This involves a peculiar framework for public management, where performance is not a straightforward concept

19. Management control in the private sector GOODS AND SERVICES INPUTS CUSTOMERS RESOURCE PROVIDERS COMPANY BALANCE $$$ COSTS $$$ REVENUES $$$

20. Management control in the public sector PUBLIC GOODS AND SERVICES INPUTS CITIZENS RESOURCE PROVIDERS GOVERN MENT ENTITY PERFORMANCE INFORMATION FUNDING COSTS $$$ LINE-ITEM BUDGET TREASURY TAXES + PERFORMANCE ASSESMENT = PERFORMANCE BUDGET

21. Micro Dimension: performance questions • Ex-ante questions: • Are programs/policies likely to achieve their aims? • Have programs/policies been designed cost-effectively? • Are investment projects socially profitable? • Ongoing: • Have programs/policies operated as planned? • Were public goods and services provided transparently? • Did programs/policies achieve their aims? • Was the set of programs/policies in an area consistent? • Are things improving? • Is contribution of public managers and employees to results properly acknowledged/rewarded?

22. Chile´s Management Control System: Instruments • Performance indicators • Bidding Fund • Management Improvement Programmes • Program Evaluation

23. Performance Indicators • Aimed at telling how a government organization is performing over time • Agencies compete with their past record • Ongoing, periodical information • Measure performance in different: • Dimensions (effectiveness, efficiency, economy, service quality) • Delivery levels (process, output, outcome) • Need reliable data collection methods • Chilean experience: • Started 1994 • Incrementalist approach, starting on voluntary basis • Budget-related • Disclosure policy: Congress and general public • Subject to growing quality standards

24. Performance Indicators2005 Budget

25. Bidding Fund • Started 2000 with preparation of 2001 Budget • Competitive bidding mechanism to improve rationale of budget allocations • Aimed at moving away from incrementalist practices • Inertial spending strictly constrained • From comparison with spending ceilings, unallocated pool of resources Unallocated pool Current Budget Inertial spending

26. Bidding Fund • Ministries submit bids for resources from pool • Bids require submission based on logical framework matrix (aims, goals, expected results, components, indicators, target population) • Many programs with sunset clauses • Finance makes proposal on basis of quality, consistency with government priorities and strategies, President makes final decision • Provides benchmark for future assessment

27. Management improvement programs • Started 1998, from agreement with public sector unions • Reward mechanism for central government employees • Bonus determined by organizational performance

28. Management improvement programs • First two years: performance against quantitative goals, 1,200 indicators • Budget unable to assess relevance and accuracy, 99.5% received maximum benefit • In 2000 focus changed towards assessing progress in managerial systems development • Managerial systems in 7 areas: • Human resources • Customer service • Strategic planning and management control • Internal auditing • Decentralization • Financial management • Gender focus • For each of the above, previous regulations, directives, but little compliance

29. Program evaluation • Assesses ongoing programs against their stated aims and expected results • Requirements: relevance, independence, timeliness, transparency • Started 1997 • Budget-related • Programs selected with Congress • Performed by independent evaluators selected by public tendering • Evaluators with authority to request information, commission studies • Counterpart in ministries/agencies in charge of programs • Reports to Budget, full disclosure to Congress and the public • Followed by formal agreements between Budget and Agency

30. Types of Evaluations • Program reviews • Review consistency in design, execution and reporting • Based on logical framework methodology • Performed by panels of 3 independent experts, selected by public tendering • Final reports in 6 months • Program evaluations • Assess program effectiveness on basis of impact measures • Methodology includes extensive data collection, more sophisticated evaluations techniques (CBA, CEA), control groups • Performed by consulting firms, universities, selected by public tendering • Final reports in 1-11/2 years • Comprehensive expenditure reviews • Assess consistent of ministry/agency portfolio of programs • Search for duplications, inconsistencies, opportunities to generate sinergies and savings

31. EVALUACIÓN – PROCESO • Selección de Programas • Selección de Evaluadores • Preparación de Antecedentes • Capacitación y Preparación Marcos Lógicos Preliminares • Evaluación. • Resultados • Recomendaciones Envío al Congreso • Compromisos Institución / Ministerio de Hacienda • Acciones Específicas • Plazos Seguimiento

32. 1997-1999 2000 2001 2002 2003 2004 Total Program reviews 80 20 18 14 13 13 158 Impact Evaluations 2 4 4 (4) 14 Comprehensive Expenditure Reviews 1 2 (2) 5 Total 80 20 20 19 19 19 177 Program evaluations 1997-2004 ( ) = Under progress Program reviews+impact evaluations: US$ 3.1 bn in govt. expenditure; 61% of program spending

33. Effects Percentage of Programs 1.- Minor adjustments 24% 2.- Important changes on program design and management processes 39% 3.- Major program re-design 21% 4.- Institutional re-location 6% 5.- Program ending 10% Total 100% Evaluation effects of program reviews and evaluations 2000-2004

34. Compliance with corporate agreements Evaluated programs and institutions 1999-2003 Note: The current commitments correspond to a universe of 77 evaluated programs and 8 evaluated institutions.

35. Use of evaluation results in resource allocation Agency level Ministry level Managers of the Program 56% - Head of Planning Unit 61% 60% Ministerial Coordinators - 47% Uses of Evaluations at the Public Agencies (Period 2000 – 2003) Survey results

36. Use of evaluation results in budget preparation at agency level - Justifying existing allocation. 30% (Head of Planning Unit and Managers of the program) - Allocating resources within the program. 32% (Head of Planning Unit) - Compelling or pushing change of work processes in the program. 31% (Managers of the program)

37. Assessment • Strong integration into decisionmaking • Mostly due to link with budgeting • But also due to openess, availability to Congress • Timeliness and independence as key features • Extensive training, development of evaluations community inside and outside government

38. Assessment by World Bank team (forthcoming) • Seeks to generate useful information on programs for budget process even comprising abstract standards • External evaluators guarantee objective, transparent evaluations • “Factory” of evaluations, generates value added for policy decisions at low cost • Quality of some evaluations is compromised by shortcomings in program design more than by evaluation methods • Advantages of centralization outweight disadvantages • Need to further stregthen ownership of evaluations by ministries and agencies

39. Quest for complementarity, consistency MANAGEMENT IMPROVEMENT PROGRAMS BUDGET PERFORMANCE PAY COMPREHENSIVE PERFORMANCE REPORTS PUBLIC REPORTING PERFORMANCE INDICATORS PROGRAM EVALUATIONS BUDGET BIDDING FUND

40. Integration into Budget cycle Performance targets Programs for evaluation APPROVAL Program evaluations Project appraisal Performance pay PREPARATION EXECUTION Performance indicators and targets Indicators EVALUATION New requirements to PMS Comprehensive performance reports

41. Keys To “Success” • Chile’s experience shows that it is possible to build and operate a performance monitoring system in a developing country. • The Chilean reform process was motivated not by crisis, but by frustration • But, be aware of enabling factors: • Strong public institutions • Honest civil servants • Long tradition of strong executive agencies • Streamlined public sector: privatization, decentralization, contracting out • Healthy public finances, growth environment • Hierarchical budget institutions provide drive to Finance over other ministries • Budget process, procedures and tight schedules link with public sector culture • Performance information and budget decision-making, adaptation of budget preparation procedures

43. Recap: Performance-related Budgeting and implementation Strategy • Rationale of performance control system • There is no single instrument that would respond to all questions • Instead, a monitoring and evaluation system • Feedback from citizens is not an issue of marketing but of democracy • Performance-related budgeting • Avoid mechanical association of budget allocations to performance measures • Ability to carry out a “smart” discussion of budgets, supported by performance information. Opposite to incrementalism • Implementation strategy • Build trust • Voluntary introduction, improving standards • Pragmatic, sequenced approach to prevent “reform fatigue” • Consistent, self-enforcing set of tools to avoid “pigeonholing” of initiatives

44. BUDGET SYSTEM IN CHILE -Limited power of Congress to ammend -Constitutional deadline, Executive’s proposal by default -Special quorum for borrowing -Congress Joint Budget Committtee -Strong limitations to overspend -Pre-approval by Comptroler General -Approval of investments by Budget Office PRE-1990 1990-95 1996-2004 -Overall spending limits -Fisal statistics program -Reporting on specific operations -MoF statement -Budget Protocol, with studies, evaluation program, transparency, reform commitments -Comprehensive budget documentation with: indicators, evaluations, MIP -Public finance report, with MTEF, contingent liabilities • Borrowing from Central Bank forbidden • Budget flexibility • -Cash allotments-descentralized payments • -Decentralized procurement • -Centralized contingency reserve • -Monthly execution reports to CG and BO APPROVAL • Strong MoF • Comprehensive budget • Earmarked taxes forbidden • Copper fund • -Project appraisal • -Unified pay scale -Fiscal statistics yearbook PREPARATION EXECUTION -GFS2001 accruals-based accounting -Arrears funding prohibited -Integrated financial management system -Electronic procurement -Transfers to municipalities, public enterprises only by law -Bilateral technical committees -Structural surplus rule -MTEF -Bidding fund -GFS2001-compatible classifier EVALUATION -Govt accounting by CG -Departmental evaluation by Budget -Recommendations and commitments from program evaluations -Performance pay -Performance indicators -Financial management report and estimates update -Comprehensive performance reports -Permanent budget committee -Management Improvement Programs -Program evaluations

45. Overall assessment • Contribution of government expenditure to growth depends not only on investment but on the whole arrange of programs, policies, regulation, and the way they are managed • Distinction between public investment and current expenditure is artificial; social or fiscal returns to education higher than to roads • Performance monitoring and evaluation should be as comprehensive as possible, answer to fungibility issues • No one methodology can answer everything, variety of tools and methodologies may be needed • In Chile, new methods are not displacing old ones but supplementing them • 60% of government expenditure subject to some sort of evaluation

46. Overall assessment • Some information is always preferrable to none as long as it ensures: • Consistency • Transparency and independence • Impact on government decisionmaking • Follow-up • Chile’s choice: budget process • Chile’s experience demonstrates that: • Government-wide systems can be built and applied at relatively low cost • Requires discipline and persistence over long periods of time • Hierarchical budget institutions help a lot