Download BALANCE ESTRUCTURAL

Budgeting for Results:
news from the south
Jaime Crispi
Head of Research, Budget Office
Ministry of Finance of Chile
November 2004
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
2
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
3
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)
4
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
5
Chilean fiscal policy in the 1990s:
the standard view
Conventional balance (PSBR) and central
government net debt
(as % of GDP)
3,0%
45,0%
35,0%
2,0%
25,0%
1,0%
15,0%
5,0%
0,0%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
-1,0%
-2,0%
-5,0%
-15,0%
-25,0%
-35,0%
-3,0%
-45,0%
6
Cíclical component of the
budget 1987-1999
4,4
3,2
2,4
1,4
0,8
0,7
0,8
0,7
-0,2
0,8
-0,1
-0,3
-1,4
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
7
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
8
Structural Balance
B s ,t


 BAt  Tt  Tt


 Yt
* 
 Yt
*






  IC  IC
t
s ,t


It doesn’t in itself involve a policy
rule. It is simply an indicator on
which to base it
9
Chilean fiscal policy:
re-reading the story
3,0
2,5
2,0
1,5
1,0
0,5
0,0
-0,5
-1,0
-1,5
-2,0
1987
1988
1989
1990
1991
Effective Balance
1992
1993
1994
1995
1996
1997
1998
1999
Structural Balance
10
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)
11
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.
12
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
13
Intermediate Results
(percentage of GDP)
1997 1998 1999 2000 2001 2002 2003 2004 (e) 2005 (p)
2,1 0,4 -2,1 -0,6 -0,5 -1,2 -0,4 1,9 1,2
Effective Balance
Total Cyclical
1,2
Component
Structural Balance 0,8
-0,2 -1,3 -0,8 -1,4 -1,7 -1,2
1,0
0,3
0,6
1,0
1,0
-0,8
0,1
0,9
0,5 0,8
14
Sustainability
Public debt projection under normal cycle
15
What the markets say
(credibility)
16
Overall macro results:
External crisis and fiscal
policy
1975
ICE
GDP Growth
Unemployment (Average)
Total Public Spending (real growth)
Public Investment (real growth)
-0,4
-13,3
15,3
-22,8
-46,8
1982 - 1983
-4,7
-8,5
19,1
-2,1
-13,2
1999
-5,8
-1,1
9,8
4,7
4,7
2001-2002
-5,9
2,5
9,1
4,4
7,6
Source: Ministry of Finance and Central Bank of Chile,
(1) The Índice de Condiciones Externas is expressed as a porcentage of GDP and
incorporate the effects of changes in the exchange terms, export volumes and levels of
capital flows.
17
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,
18
where performance is not a straightforward concept
Management control in the
private sector
GOODS AND SERVICES
INPUTS
RESOURCE
PROVIDERS
CUSTOMERS
COMPANY
COSTS
$$$
BALANCE
$$$
REVENUES
$$$
19
Management control in the
public sector
PUBLIC GOODS AND SERVICES
INPUTS
GOVERN
MENT
ENTITY
RESOURCE
PROVIDERS
CITIZENS
PERFORMANCE
INFORMATION
COSTS
$$$
LINE-ITEM
BUDGET
+
PERFORMANCE
ASSESMENT
=
PERFORMANCE BUDGET
TAXES
TREASURY
20
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?
21
Chile´s Management Control
System: Instruments
Performance indicators
Bidding Fund
Management Improvement Programmes
Program Evaluation
22
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
23
Performance Indicators
2005 Budget
Government
Functions
Process
Product
Itermediate
Result
Final
Total
Total
A General
functions
85
168
36
19
55
308
B Social
Functions
224
436
108
53
161
821
87
297
64
11
75
459
396
25.0%
901
56.7%
208
13.1%
83
5.2%
291
18.3%
1.588
100%
C Economic
Functions
Total
%
Source: National Budget Office
24
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
25
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
26
Management improvement
programs
Started 1998, from agreement with public sector unions
Reward mechanism for central government employees
PUBLIC SECTOR PAY STRUCTURE
8%
22%
70%
Grade base
salary
Personal
allowances
Performancerelated
• Bonus determined by organizational performance
27
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
28
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
29
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
30
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
31
Program evaluations 1997-2004
19971999
80
2000
20
2001
2002
2003
2004
Total
18
14
13
13
158
2
4
4
(4)
14
1
2
(2)
5
19
19
19
177
Program reviews
Impact Evaluations
Comprehensive
Expenditure
Reviews
Total
80
20
20
( ) = Under progress
Program reviews+impact evaluations: US$ 3.1 bn in govt.
expenditure; 61% of program spending
32
Evaluation effects of program reviews and
evaluations 2000-2004
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%
33
Compliance with corporate agreements
Evaluated programs and institutions 1999-2003
Percentage of achievement of commitments
Qualification
Partially
Not
Total N° of Commitments
Achieved Achieved
Valid by 30/06/2004
MINISTRY OF AGRICULTURE
74%
25%
1%
134
MINISTRY OF NATIONAL RESOURCES
100%
0%
0%
15
MINISTRY OF NATIONAL DEFENSE
57%
43%
0%
14
MINISTRY OF ECONOMY, DEVELOPMENT AND RECONSTRUCTION
80%
20%
0%
64
MINISTRY OF EDUCATION
70%
20%
10%
205
MINISTRY OF FINANCE
92%
8%
0%
24
MINISTRY OF JUSTICE
88%
12%
0%
33
MINISTRY OF MINING
54%
41%
5%
22
MINISTRY OF PUBLIC WORKS
85%
15%
0%
33
MINISTRY OF PLANNING AND COOPERATION
77%
16%
7%
206
MINISTRY OF FOREING AFFAIRS
45%
44%
11%
54
MINISTRY OF HEALTH
74%
23%
3%
66
MINISTRY OF TRANSPORT AND TELECOMMUNICATIONS
64%
26%
10%
39
MINISTRY OF HOUSING
90%
9%
1%
76
MINISTRY OF INTERNAL AFFAIRS
72%
18%
10%
102
MINISTRY OF LABOR AND SOCIAL SECURITY
52%
44%
4%
54
Note:GENERAL
The current
commitmentsMINISTRY
correspond to a universe of 77 evaluated
programs
institutions.
GOVERNMENT
SECRETARIAT
39%
26% and 8 evaluated
35%
188
PRESIDENTIAL GENERAL SECRETARIAT MINISTRY
82%
16%
2%
49
34
Average/Total
69%
22%
9%
1378
Ministry
Achieved
Use of evaluation results in resource
allocation
Uses of Evaluations at the Public Agencies
(Period 2000 – 2003)
Survey results
Agency level
Ministry level
Managers of the
Program
56%
-
Head of Planning Unit
61%
60%
-
47%
Ministerial Coordinators
35
Use of evaluation results in budget
preparation at agency level
- Justifying existing allocation.
30%
(Head of Planning Unit and
of the program)
- Allocating resources within the
program.
Managers
32%
(Head of Planning Unit)
- Compelling or pushing change of
work processes in the program.
31%
(Managers of the program)
36
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
37
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
38
Quest for complementarity,
consistency
MANAGEMENT
IMPROVEMENT
PROGRAMS
COMPREHENSIVE
PERFORMANCE
REPORTS
BUDGET
PERFORMANCE
INDICATORS
PROGRAM
EVALUATIONS
BUDGET BIDDING FUND
39
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
Comprehensive
to PMS
performance reports
40
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,
41
adaptation of budget preparation procedures
STAGES IN
BUDGET
PREPARATION
CONVENTIONAL
PROCEDURE
Evaluation
 Done by budget officials
Exploratory budget
 Funding ceiling
Analysis of budget bids
 Agencies bid for
additional funding
 Proposals analyzed at
technical committee
Draft budget from
Finance
 Based on budget officials’
opinion
Budget proposal
 Negotiated with line
ministers
 Includes only revenue and
spending data
CURRENT
PROCEDURE
 Done by budget officials with
ministries
 Performance indicators, MIPs,
and evaluations analyzed
 Inertial spending
 Inertial spending estimates
reviewed with ministries
 Performance goals proposed
and analyzed
 Proposals to bidding fund
submitted for technical
assesment to MIDEPLAN,
prioritized by line ministers
 Inertial spending plus
allocation of bidding fund
 BF allocation approved by
President
 Minor adjustments proposed
by line ministers
 Includes corporate statement,
performance goals, indicators,
evaluations
42
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
43
BUDGET SYSTEM IN CHILE
PRE-1990
1990-95
-Limited power of Congress to ammend
-Constitutional deadline, Executive’s
proposal by default
-Special quorum for borrowing
1996-2004
-Strong limitations to overspend
-Pre-approval by Comptroler General
-Approval of investments by Budget Office
-Congress Joint Budget Committtee
-Overall spending limits
-MoF statement
-Comprehensive budget
documentation with:
indicators, evaluations, MIP
-Budget Protocol, with studies, evaluation
program, transparency, reform
commitments
-Fisal statistics program
-Reporting on specific operations
-Borrowing from Central Bank forbidden
-Public finance report, with
MTEF, contingent liabilities
-Budget flexibility
-Cash allotments-descentralized payments
APPROVAL
-Strong MoF
-Decentralized procurement
-Comprehensive budget
-Centralized contingency reserve
-Earmarked taxes forbidden
-Monthly execution reports to CG and BO
-Copper fund
-Fiscal statistics yearbook
--Project appraisal
--Unified pay scale
PREPARATION
EXECUTION
-GFS2001 accruals-based accounting
-Arrears funding prohibited
-Bilateral technical committees
-Integrated financial management system
-Structural surplus rule
-Electronic procurement
-MTEF
-Transfers to municipalities, public
enterprises only by law
-Bidding fund
-GFS2001-compatible classifier
EVALUATION
-Govt accounting by CG
-Departmental evaluation by
Budget
-Recommendations and
commitments from program
evaluations
-Performance pay
-Financial management report and
estimates update
-Comprehensive performance
reports
-Performance indicators
-Permanent budget committee
-Management Improvement Programs
-Program evaluations
44
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
45
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
46