Performance-Oriented Budgeting in Korea: Overview and Current Issues

1. Asian Regional Seminar: Promoting Fiscal Sustainability February 28 – March 2, 2011, Kuala Lumpur, Malaysia Performance-Oriented Budgeting in Korea:Overview and Current Issues Nowook Park Ohio State University & Korea Institute of Public Finance

2. Contents • History of Public Financial Management Reforms in Korea • Overview of Performance-oriented Budgeting in Korea • Current Issues and Future Directions

3. History of PFM Reforms in Korea

4. Background of Presentation • Budget process reforms are in full swing among emerging and developing economies under the auspices of international organizations(IMF, World Bank, and regional development banks) • Korea has gone through major reforms in budget process during mid 2000s. • Medium term expenditure framework • Performance budgeting • Digital budget & accounting system  Korean case may provide useful lessons

5. Background of reforms in Korea • Deteriorating fiscal situation • Increasing government debt after 1997/1998 Asian financial crisis • From 10% level to 23% of GDP in 2003, 35% in 2010 • Increasing government expenditure • Increasing social welfare expenditure due to increasing income inequality and aging population • Expected decreasing tax revenue • Aging population • Ratioof population above 65 yr. old move from 7.2% in 2000 to 14.4% in 2019 • Political need & support from top leadership

6. Sequence of PFM Reforms • Big bang approach with PFM reforms since 2003 • Medium term fiscal plan (2003*, 2005**) • Top down budgeting (2003*, 2004**) • Performance budgeting (2000*, 2005**) • Digital budget and accounting system • Program budgeting (2006**) • Accrual accounting (2009*, 2010**) • IT system (2007**) (Note) *: pilot project, **: comprehensive implementation

7. 2000 ~ 2002 2003 ~ 2005 ~ 2006 ~ Efforts towards PB • Performance Budgeting (Pilot Project) • Developed Strategic Goals, Performance Objectives • and Performance Indicators • - Designed after GPRA Performance Goal Management System - Expanded “Performance Budgeting” to all ministries and agencies - Annual performance plan and report are required Self-Assessment of Budgetary Program (SABP) - 1/3 of major budgetary programs are evaluated every year - Designed after PART • In-Depth Evaluation • Selected programs are subject to program evaluation • About 10 programs are subject to program evaluation

8. Enactment of “National Finance Act” • Act was enacted in December, 2006 • To provide a legal basis for public financial management reforms • Includes articles on PB • Annual performance plan and report become legal requirement for line ministries/agencies • Program review & in-depth evaluation are stipulated • It gives stability & continuity which tend to be a problem to PB.

9. Overview of Performance-oriented Budgeting in Korea

10. Characteristics of PB in Korea • Purpose of PB • Emphasis on making link between performance information & budget allocation • Going beyond performance monitoring system • Periodic review process is developed • Outcome-oriented PB • Executive branch-initiated reform

11. Framework for PB in Korea • Performance monitoring • “Performance Goal Management” • Monitoring based on the performance indicators • Monitoring unit is program and sub-program • Program review • “Self-Assessment of Budgetary Program” • Review based on the checklist • Review unit is usually sub-program • Program evaluation • “In-depth Evaluation of Budgetary Program” • Program evaluation for selected programs • Evaluation unit is usually sub-program, but cross-cut issues are sometimes evaluated

12. Elements of Performance Monitoring • Strategic plans • Cover 3-5 year plans, should be updated at least 3 years • Annual performance plans • Cover each program activity in the agency’s budget • Performance reports • Include actual program performance results for the 3 preceding fiscal years

13. Program Review • Ministry of Strategy and Finance (MOSF) reviews self-assessment of programs done by line ministries/agencies • Budgetary authority provides a standardized checklist for reporting self-assessment • The checklist contains questions on program design, performance management system, program implementation, and actual performance • Entire program will be reviewed in three years. • About 1/3 programs are reviewed each year • About 300 sub-programs are reviewed each year • Evaluation unit is usually sub-programs which are unit for budget allocation by MOSF

14. Contents of Checklist

15. Program Evaluation • Based on social science approach • Evaluation refers to the activity of systematically collecting, analyzing and reporting information that can then be used to change attitude or improve the operation of a project or program • Purpose of evaluation • Challenge • Improvement • Issues of evaluation • Rationale, Measurement, Attribution • Benefit: Provide the most detailed and reliable info • Shortcoming: Expensive and takes long time • MOSF selects about 10 programs for in-depth evaluation each year

16. Use of performance information in budget negotiation Performance information MOSF Spending ministry Allocate budget based on evaluation results Introduce performance information in their program management Enforce budget cut to ineffective programs Provide recommendations for performance improvement vs

17. Performance information in budget statement Spending ministries MOSF Assembly Submitted with budget : annual performance plan annual performance report Submitted with budget : annual performance plan annual performance report

18. Use of performance information from performance budget system • Information from monitoring system (performance plan and report) has not been systematically utilized so far. • For internal use, they are useful information • From the viewpoint of central budget authority, they provide limited information • Information from review system are actively used in budget negotiation process. • Programs rated as ineffective are in danger of suffering budget cut • Its use is systematically built into the budget process • Information from program evaluation is usually useful • Their use in budget process depends on the quality of evaluation and the will of central budget authority • It is not systematically utilized in the budget process

19. Observations from program review process • Evaluation results • Quality of performance information has not improved much • Programs are showing better results • Link between evaluation results and budget • Evaluation results are utilized at every stage of budget process • Moving away from incremental budgeting • Evaluated programs are subject to bigger budget change compared to other programs • Cultural changes among line ministries • Performance management becomes an essential element of program management.

20. Evaluation Results from Program Review

21. Link between Evaluation and Budget Request by Agency in 2005

22. Link between Evaluation and Budget Draft by MOSF in 2005

23. Link between Evaluation and Budget Approval by NA in 2005

24. Link between Evaluation and Budget Request by Agency in 2007

25. Link between Evaluation and Budget Draft by MOSF in 2007

26. Evolution of performance budgeting in Korea • There has been a clear link between review results & budget allocation during 2005-2006. • However, their link became insignificant in 2007. • Weakening zeal of MOSF and increasing strategic behavior from line ministries • In response to this, MOSF raised threshold of program ratings and, as a result, higher proportion of programs was rated as ineffective in 2008. • However, the significance of link between evaluation and budget allocation started to re-emerge in 2010. • Fiscal situation played a role • 2008-2009: Fiscal Stimulus Package • 2010: Restoring Fiscal Sustainability

27. Current Issues & Lessons

28. Current Issue 1 • Improving alignment among budget classification (program structure), organizational structure and policy goals • Conflicts occurred among them partly due to big bang approach and lack of communication between budget unit and performance management unit. • Revision of National Finance Act in 2009 includes new article requiring consistency between budget classification and annual performance plan/report. • Recently, efforts to improve the alignment are being exerted

29. Current Issue 2 • Allocation of overhead costs became an issue again due to introduction of accrual accounting • Their allocation are set aside for now • Separate program, named as administrative support program including salary and routine administrative costs, are established to avoid the issue of allocating overhead costs. • Considering given inflexibility of human resource management in Korea, this decision may be a practical one. • As the Korean system matures, we plan to pursue overhead cost allocation .

30. Current Issue 3 • Current integrated fiscal information system does not include comprehensive performance information. • Recently, development of performance information management system is being considered. • Its purpose is to improve on-going monitoring efforts. • Also, it may help systematic use of performance information.

31. Observations & Lessons • The Role of high-level leadership is crucial for the effective implementation of performance management system • Find ways to make management issues visible to high-level leadership, politicians and general public. • Fiscal situation influences the extent to which performance information is used. • Developing evaluation capacity among the central budget authority and line ministries are crucial to have effective performance budgeting/management system.