Linking Performance and Budgeting: The Experience of Korea

1. Linking Performance and Budgeting: The Experience of Korea Prepared for the launching meeting of the CoP-MfDR Youngsun Koh April 2006 Korea Development Institute

2. Introduction • The Korean government embarked on an effort to overhaul its financial management system after the crisis of 1997. • A medium-term expenditure management framework (MTEF) was introduced together with a top-down budgeting system in 2004. • Performance management has been strengthened. • Program budgeting is underway. • These reform initiatives are inter-related with each other and mutually reinforcing. • Of these initiatives, performance management has met with various obstacles, and was found the most difficult to implement. • I would like to share with you our experience in performance management and the lessons learned.

3. Fiscal Reform since the Financial Crisis • Limitations of the previous budget system • Lack of medium-term perspectives, excessive reliance on a bottom-up approach, focus on input rather than output/outcome control • Main characteristics of the reform • A medium-term perspective in budgeting, Top-down budgeting, performance management, Program budgeting • Motivations • Changing needs of the society, Rapid rise in spending and tax burden, Sudden increase in government liabilities

4. Limitations of the Previous Budget System • Lack of medium-term perspectives • Little consideration was given by the central budget office and the parliament to the out-years beyond the budget year. • Medium- to long-term planning was also quite weak in line ministries. • As a result, it was difficult to link policy and budgeting, to identify and cope with the trend increase in spending, and to contribute to a counter-cyclical management of the economy. • Excessive reliance on a bottom-up approach • The total size of the budget and its sectoral allocation are determined at the last stage of budget preparation by aggregating the expenditures on individual programs. • Such a bottom-up approach could not easily incorporate a strategic orientation in annual budgeting. In addition, budget requests from line ministries tended to be unrealistically large, and massive cuts by the MPB were inevitable. • Focus on input rather than output/outcome control • In reviewing the budget requests by line ministries, the central budget office used to focus on the microscopic spending control of individual programs. • Input controls limited the scope to improve the efficiency and effectiveness of budgetary programs.

5. Main Characteristics of the Reform • Medium-term perspective • “National Fiscal Management Plan,” covering the current year, the budget year, and three out-years, is being published annually. • Top-down budgeting • Line ministries are given greater discretion in the preparation of budget requests within the ceilings set by the Ministry of Planning and Budget (MPB). • Performance management • Three initiatives -- Performance Management of Budgetary Programs, Self-Assessment of Budgetary Programs, and Evaluation of Budgetary Programs -- have been introduced. • Program budgeting • Budget accounts have been reorganized around a program structure.

6. (% of total expenditure and net lending) (% of total population) 40 70 80 90 00 03 35 General public services Defense Public order and safety Education Health Social protection Housing and community Amenities Recreation, culture, and religion Economic affairs Other expenditures 23.1 22.7 - 16.7 1.3 4.9 0.3 1.4 27.4 2.2 4.0 30.6 4.6 14.6 1.0 5.7 2.5 0.7 26.0 10.4 4.2 20.0 4.3 17.0 1.7 8.1 10.1 0.5 20.4 13.7 5.2 11.4 4.6 15.3 0.7 15.3 5.3 0.8 25.2 16.2 6.7 11.4 5.3 15.0 0.4 13.5 5.0 0.8 28.7 12.8 Japan 30 25 20 US EU 15 Australia and New Zealand 10 Korea 5 0 60 65 70 75 80 85 90 95 00 05 10 15 20 25 30 35 40 45 50 Motivations • Changing needs of the society • The focus of government spending is moving away from economic affairs towards welfare, which will accelerate with the rapid aging of the Korean population. • Strategic reprioritization is necessary to meet the changing demands. Share of the Old (65+) Share of Central Government Spending

7. Rapid rise in spending and tax burden • Various forms of “mandatory” spending has led the spending growth since the mid-1990s. • Tax burden (including social insurance contributions) has risen to a level comparable to those in the U.S and Japan. Tax Burden Central Government Spending (% of GDP) (% of GDP) 45 Mandatory grants to local governments Financial-sector restructuring costs 22 Australia and New Zealand EU 40 20 35 Interest payments Social insurance benefits 18 30 25 16 US 20 14 Japan Korea 15 12 10 10 Discretionary spending 5 8 0 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04

8. (% of GDP) (% of GDP) 4 40 Central government guarantees 3 35 Central government liabilities 2 NPF balance 30 1 25 0 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 20 -1 -2 15 -3 10 -4 5 Central government balance including NPF -5 Excluding NPF 0 -6 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 • Sudden increase in government liabilities • When the surplus in the National Pension Fund (NPF) is excluded, the government has been in deficits since the late 1980s. • The enormous costs of financial-sector restructuring produced a sudden increase government liabilities. Central Government Balance Central Government Liabilities

9. Performance Management Framework • Steps of performance management • Setting targets, designing and implementing programs, and assessing performance • Framework of performance management • Mission, strategic goals, performance goals, and performance indicators • Tools for performance assessment • Program evaluation, performance monitoring, program review • Uses of performance information • Improving decision-making, assisting in resource allocation, enhancing accountability

10. Steps of Performance Management Setting performance targets - Delineating the mission and strategic goals of the organization - Defining quantitative and/or non-quantitative performance indicators - Establishing performance targets Designing the program - Designing the program structure, including the service delivery system - Planning human and financial resources - Drawing up evaluation plans Implementing the program - Delivering services with inputs of human and financial resources Assessing the performance - Performance monitoring - Program evaluation - Program review

11. Framework of Performance Management mission Medium- to long-term strategic plans strategic goal Strategic goal Annual performance plans More concrete and objective performance goal performance goal performance goal Annual performance reports performance indicator Monitoring Evaluation Review performance indicator performance indicator

12. Tools for Performance Assessment Performance monitoring • Measures the program performance with a predetermined set of indicators. • Can produce information on outputs and outcomes in a frequent and timely manner at relatively low costs. • By itself, can rarely explain the causality between inputs and outputs or outcomes. Program evaluation • Addresses the question of why and how the program produced certain outputs and outcomes. • Employs analytical tools with varying degrees of sophistication. • Usually requires large amounts of money and time, and cannot be performed on all programs. Program review • Assesses the performance and other aspects of a given program with an explicit aim of helping budgetary decision-making. • Relies on information from various sources including monitoring and evaluation. • Is usually led by the central budget office (e.g., Ministry of Finance). • Requires a medium effort (in between monitoring and evaluation).

13. Uses of Performance Information • Use 1: Improving decision-making • Performance information provides an opportunity to learn and improve. • Performance management can only be effectiveif people working within the system actually believe in the value of a results-orientation. • Use 2: Assisting in resource allocation • Performance information serves as a reference in resource allocation. • The budget authorities take other social, economic, and political factors into account when deciding on budgeting. • Poorly performing programs are not necessarily cut back or discontinued. • Use 3: Enhancing accountability • Performance information can be used to assure accountability. • But we should avoid fostering a “silo-view” in the public service. • Performance contracts can also generate rancor and lower the morale if the employees find the performance assessment as unfair.

14. Performance Management in Korea • Performance monitoring • Performance Management of Budgetary Programs • Program review • Self-Assessment of Budgetary Programs • Program Evaluation • Evaluation of Budgetary Programs

15. Strategic goal Programs Performance goal Performance indicator Strategic goal Programs Performance goal Performance indicator Mission Strategic goal Programs Performance goal Performance indicator Performance goal Performance indicator Strategic goal Programs Performance Management of Budgetary Programs • Led by the Ministry of Planning and Budget (MPB). • Adopting the framework of GPRA (Government Performance and Results Act 1993) of the U.S federal government. • But does not require strategic plans. • Based on the pilot project on performance budgeting carried out in 1999-2002. • Requires line ministries to • Set up performance goals and indicators, • Prepare annual performance plans and reports, and • Submit them to MPB at the start of the annual budget cycle.

16. Covers only part of ministerial programs • Activities not involving large sums of expenditure (such as pure policy-making) or involving wages and salaries or general administrative expenses only are excluded from performance monitoring. • Has not been very successful. • Lukewarm support from the top management of MPB. • Little enthusiasm from line ministries. • Difficulty in setting up performance indicators. • Performance indicators not derived from ministerial missions in a systematic fashion. • Performance reports not open to the public. • From this year on, • All activities (budgetary and non-budgetary) will be covered. • Reports will be open to the public.

17. Self-Assessment of Budgetary Programs • Led by the MPB and designed after PART (Program Assessment Rating Tool) of the U.S federal government. • Requires line ministries to assess their own programs with spending levels above a certain threshold every 3 years. • The assessment is based on 16 questions common for all types of programs and a few additional questions specific to different types of programs. • Types of programs: infrastructure investment, procurement of large-scale facilities and equipment, provision of direct services, capital injection, subsidies to private entities, grants to local governments, and R&D • The MPB reviews the assessment results and takes them into account when preparing annual draft budgets and the National Fiscal Management Plan.

18. Common questions Program design • Does the program have clear purposes and legal or other bases? • Can the government intervention be justified? • Is government spending necessary to achieve the objectives? • Is the program duplicative of other program? • Has the program been subjected to an objective feasibility study? • Is the proposed program design most cost-effective? • Are performance goals and indicators in place? • Do performance goals and indicators fully reflect program objectives? • Are the targets set at reasonable levels? Program management • Is the implementation regularly being monitored? • Is the program being implemented as planned? • Are efforts being made to reduce costs or increase efficiency? Performance assessment and feedback • Has an objective and comprehensive program evaluation been conducted? • Did the program achieve the intended objectives? • Are customers and stakeholders satisfied with the program performance? • Is the agency utilizing the assessment results for program improvement and budget planning?

19. Total Effective Moderately effective Adequate Not effective 555 (100.0%) 28 (5.0%) 99 (17.9%) 341 (61.4%) 87 (15.7%) • Answers to the questions take the form of “yes (1)” or “no (0).” • To the questions on the achievement of program objectives and the customer satisfaction, 4-scale answers (1.00, 0.67, 0.33, 0.00) are given. • The overall assessment (0-100) is based on the weighted sum of the individual answers. • Programs are classified as “effective (85-100),” “moderately effective (70-84),” “adequate (50-69),” and “not effective (0-50).” • In 2005, 555 programs were assessed. • Among them, 87 (15.7%) were classified as “not effective,” and the budget was cut by 10% for these programs.

20. Evaluation of Budgetary Programs • MPB commissions evaluation studies on the programs that it considers need critical assessment. • KDI organizes evaluation teams and oversees the process. • Three programs were evaluated from late last year through early this year on a pilot basis. • About 10 programs will be evaluated annually from this year on. • Pilot studies indicated… • General lack of clearly specified program goals and necessary performance data to assess the achievement of goals, • Difficulty in understanding the structure and context of individual programs by outside evaluators, • Difficulty in reconciling the different perspectives of MPB and line ministries, with the former focusing on funding decisions while the latter on better program management.

21. Our strategy… at the start of each evaluation study, • Define the program objectives in cooperation with the ministries in charge of the program. • Define the purpose and scope of the evaluation, which need to be agreed on by the ministries and the MPB. • Ask the ministries to provide sufficient details of the program, including its intervention logic. Intervention logic of a road-safety campaign and its performance indicators Activities /Outputs Intermediate outcomes Final outcomes Drivers become more concerned about safety Campaign reaches the target population Traffic accidents decline Personal and social costs of traffic accidents decline Administers a road-safety campaign Fall in the average speed in ‘high-risk’ areas Proportion of children reached by the campaign, Proportion of male drivers aged 18-24 reached by the campaign Fall in accidents in ‘high-risk’ areas Pedestrians become more concerned about safety

22. Lessons Learned • Strategic planning and performance monitoring by themselves are seldom enough to foster performance orientation in government. • Program evaluation and program review should supplement strategic plans and performance monitoring. • The central budget office should play a leading role in introducing performance management. • A top-down budgeting can increase their need for performance information. • The central budget office and line ministries should be prepared for the increased workload due to performance management. • A top-down budgeting system and the streamlining of various performance management initiatives can help reduce the workload. • Strong leadership from the top is a must to fight evaluation fatigue and institutional fragmentation of performance management.

23. Strategic plans by themselves are seldom enough. • An abstract structure of mission, strategies, and performance goals is a necessary condition for good performance management. • But they are often short of providing detailed information on individual programs (including the causality between inputs and outputs/outcomes), and accordingly • Lack an incentive mechanism that guarantees an active involvement by concerned parties -- the central budget office, line ministries, legislature, and general public. • Program evaluation and program review should be in place to complement strategic planning. • They will provide additional information essential for important decision-making (including budgeting), and help invoke interests by concerned parties.

24. Budget examiners in the central budget office should assume the primary responsibility for reviewing ministerial strategic plans and conducting program reviews. • When not influencing the budget process, all efforts can degenerate into wasteful paper-work. • A top-down approach in budgeting can increase the need for information on program performance by the budget office. • Prior to the introduction of top-down budgeting, most of the MPB staff showed little interest in performance management, and support from the top management was quite weak. • With a substantial part of budgeting delegated to line ministries under a top-down system, MPB is losing control on inputs and has to rely on output and outcome control.

25. The central budget office and line ministries should be prepared for the increased workload due to performance management. • The overall workload of budget examiners increased substantially with the introduction of various performance management initiatives, even though the increase was partly offset by the top-down budgeting system. • In line ministries, there are some indications that the uncoordinated, overlapping systems of performance management have increased workload and invoked cynicism, and have been counter-productive. • MPB: three initiatives mentioned above, Evaluation of Public Funds, Evaluation of Public Institutions • Office of Government Policy Coordination: Government Operations Assessment • Ministry of Government Administration: Management by Objectives • Board of Audit and Inspection: Performance Audit • A top-down budgeting system and the streamlining of various performance management initiatives can help reduce the workload. • Top-down budgeting not only requires less work for the central budget office but also spreads out their workload throughout the year.

26. Strong leadership from the top is a must to fight evaluation fatigue and institutional fragmentation of performance management. • After more than a decade since the introduction of GPRA, the U.S federal government is still struggling with establishing an effective performance management system. • Performance management is in its early stage of development in Korea, and a consistent effort will be required for its success.

27. Thank you…