Performance-Based Budgeting in Governments

1. Performance-Based Budgeting in Governments Public Financial Management Reform Programme in Cambodia Country Case Presentation – Cambodia Singapore, 24 February to 08 March 2008

2. Content • Brief Background of Cambodia’s Public Financial Management (PFM). • An analysis of gaps in PFM and areas of potential financial reforms. • Public Financial Management Reform Program (PFMRP). 4. Challenges and Issues in the way forward.

3. 1. Brief Background of Cambodia’s Public Financial Management (PFM) • Before 1993, a sort of decentralised PFM adopted, two-tier budget allocation: central level & provincial level; focus on military spending, continued budget deficit, increased public debts • Starting from 1993, a new financial system has been introduced: Budget Line Item • Centralised financial management system has been adopted • National Budget:

4. 1. Brief Background of Cambodia’s Public Financial Management (PFM) (con’t.) • Revenue: - Domestic Source: a. Tax Revenue: a1. Import taxes a2. VAT & other taxes b. Non-Tax Revenue: Logging, fishery, telecommunication, casino license & royalty, privatisation of state enterprise, etc. - External Source: Multilateral & Bilateral in form of: a. Loans and b. Grants

5. 1. Brief Background of Cambodia’s Public Financial Management (PFM) (con’t.) • Expenditure: (14.9% of GDP, year 2008) • Recurrent expenditure (9% of GDP) • Capital expenditure (8.2% of GDP, of which 62.2% financed by external sources) • Debt services (Interest payment 0.7 of GDP) • From 1993 – 2007 experienced budget deficit.

6. 2. An analysis of gaps in PFM and areas of potential financial reforms • Current PFM considered as an incredible instrument of strategic and operational management of public resources. • Incomprehensiveness in formulation and execution of budget • Unrealism of the budget in term of forecasting and debt management • Weak tax and non tax revenue collection,

7. 2. An analysis of gaps in PFM and areas of potential financial reforms (Con’t.) • Inadequate ability of resource managers in the Executive Agencies to spend in accordance with their budget allocation. • Extra-budgetary spending. • Poor procurement procedures. • Poor coordination and decision making within Ministry of Economy & Finance. • Poor internal control.

8. 2. An analysis of gaps in PFM and areas of potential financial reforms (Con’t.) • Unclear lines of accountability and government roles, functions, and responsibilities • Weak accounting data and management • Weak reporting for managerial and performance management • Weak internal and external auditing • Weak and unaccountable budget management

9. 3. Public Financial Management Reform (PFMR).A. The launch of Public Financial Management Reform Program. • The Prime Minister of the Royal Government of Cambodia commented in the foreword to the Public Financial Management Reform Program (PFMRP) dated on 30th June 2004 that there is an urgent need to strengthen PFM and this was at heart of the Royal Government Rectangular Strategy for Growth, Employment, Equity, and Efficiency in Cambodia and that the PFMRP is consistent with Socio-Economic Development Plan 2001-2005 and the National Poverty Reduction Strategy 2003-2005.

10. A. The Launch of Public Financial Management Reform Program (Con’t) Enhancing public financial management is a crucial element for the strengthening of good governance, and therefore the Royal Government of Cambodia has formulated and established a clear vision of public financial management, and the necessary steps toward the achievement of the vision. The Royal Government understands that the establishment of enhanced public financial management will take many years and much effort. • Four ‘platforms’ were identified reflecting a staged approach to development starting with, as Platform 1, steps to make the budget more credible than it has previously been.

11. B. Current Public Financial Management Reform Program • The reform strategy developed by MEF and endorsed by the Prime Minister set an overarching framework for the reform of public financial management systems in Cambodia. It reflected three key elements. • Firstly, the firm establishment of the leadership of the strategy development and implementation process within RGC. This importance of both political support and leadership arrangements within the administration were clearly recognised. Attention was paid to coordination arrangements and the assignment of responsibilities within the administration for implementing the different activities. Furthermore, steps were taken to establish clear, positive and efficient arrangements with the development partners that would support the reform process with both resources and advice.

12. B. Current Public Financial Management Reform Program (Con’t) • Secondly, attention was paid to the sequencing of reforms. It was recognised that not everything can be done at once, but also that some things need to be done before others can work effectively. Sequencing cannot be planned based on the importance of individual technical improvements alone: Some must wait until more basic things are put in place. To guide this sequencing, potential activities were grouped in terms of a series of Platforms with each Platform representing a real and measurable improvement in the performance of the public financial management system, but also being a step to the next Platform. The series of Platforms decided upon at that time are shown in the diagram below:

13. B. Current Public Financial Management Reform Program (Con’t) • Thirdly, it was considered important that the plans to implement each Platform should encompass not just technical and process developments, but also complementary organisational, capacity and motivational developments. It was recognised that without attention to all these different dimensions each Platform would not be a robust step to the next. Reforms would be shallow and subject to degradation during the reform process unless these aspects of reform support each other.

14. B. Current Public Financial Management Reform Program (Con’t) • It was also decided not to try and produce detailed activity plans for the whole reform programme all at once. Given the long time scales that it was recognised would be required to implement the programme as a whole (probably running up to at least the middle of the next decade) to attempt such planning would be impractical and introduce rigidities into the development process that would not be helpful. Instead, detailed activity planning within the framework of the overall strategy would focus on the first Platform. Furthermore, it was considered important to achieve engagement of staff at all levels in the reform process. This was achieved by combining a ‘top down’ approach in identifying broad activities with the ‘bottom up’ development of specific action plans to implement those activities prepared by the operational departments most involved.

16. 4. Challenges and Issues in the way forward A. Challenges: • Continue to apply the budget line items. • Changes in reform process seem to be hart to implement due to lack of clear norms and guidelines. • Lack of public participation. • Very limited number of merit-based payment Incentive (MBPI).

17. B. Issues: - Expand & introduce the PFM Reform to others ministries. - Extend the MBPI to an appropriate number. - Reinforce Platform 1 achievement: improve in revenue policy & administration, debt management, cash & bank account management, & public procurement. - Moving on to Platform 2, Accountable Budget: Identify objectives to be achieved,develop key activities, develop detailed work plans, etc. - Managing Platform 2 implementation.

18. Thank you for your attention.