assessing the past decade of the korean performance budgeting experience by nowook park

ASSESSING THE PAST DECADE OF THE KOREAN PERFORMANCE BUDGETING EXPERIENCE

NOWOOK PARK CENTER FOR PERFORMANCE EVALUATION & MANAGEMENT

KOREA INSTITUTE OF PUBLIC FINANCE

OECD SBO Network on Performance & Results Paris, November 24-25, 2014

CONTENTS Background of Korean PB reform Evolution of Korean PB Characteristics of Korean PB Assessment of Korean PB

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PART OF PFM REFORM PACKAGE PB reform was introduced as a component of PFM reform package after the late 1990s Asian Financial Crisis The focus of PFM reform was MTEF with top down approach and PB reform was a secondary concern. PFM was included due to support from domestic and international expert groups. The policy makers within the Ministry of Planning and Budget were not sure about the feasibility and usefulness of PB

• Initially just replicated the failed approach of the pilot test in early 2000s

• Repeating a pilot test with annual performance plan and report from selected line ministries

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PFM REFORM PROGRAMS IN KOREA

MTEF Top-down budgeting

Performance Budgeting

Program budget

classification IFMIS Accrual

Accounting

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SEQUENCE OF PFM REFORMS

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PB pilot 2000

2003 MTEF &

Top Down pilot

Top Down 2004

2005 MTEF

& PB

Program Budget 2006

2007 FMIS

Accrual Accounting

2010

NO FISCAL DEMAND FOR PB REFORM The Korean economy was quickly recovered after the Asian financial crisis in the late 1990s

• Fiscal Balance was quickly recovered within 2 -3 years

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-50

-40

-30

-20

-10

0

10

20

30

40

50

Consolidated Fiscal Balance

Consolidated Fiscal Balance - Surplusof social security funds +RepaymentObligation of emergency public funds

PB REFORM AS AN ACCOUNTABILITY TOOL PB reform was considered essential because it was viewed as an accountability tool in the context of top down budgeting PB reform was sold to line ministries as an integral part of top down budgeting

• “Accountability mechanism is necessary in return for enhanced autonomy to line ministries”

Initially active involvement of the central budget office was sought after, but eventually separate performance management bureau was established.

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MILESTONES OF KOREAN PB 1

Comprehensive introduction of PB (2005) Periodic Review Process

In-depth Evaluation Expanding Performance Management Team

within the Center for Fiscal Analysis

Introducing PB as a component of PFM reform package(2003)

Annual Performance Plan/Report Establishing the Center for Fiscal Analysis within KIPF

Demonstration Project of PB (1999-2002)

Annual Performance Plan/Report Selected division within selected ministries/agencies

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Weakening initial spirit of PFM reforms (2008-2012)

Merge MOFE and MPB into MOSF Abolishing Performance Management Bureau while retaining related teams

Legalization of PB (2007)

Enactment of the National Finance Act Official roles were given to the legislature and the Board of Audit and Inspection

Establishment of Performance Management Bureau at MPB (2006~2007)

Upgraded M&E capacity within MPB Establishment of the Center for Performance Evaluation and Management within KIPF

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Various attempts to reform the existing PB approach are going on

Performance Information Board for quarterly monitoring

Consolidating duplicative M&E activities Contemplating decentralizing M&E system

Consolidating and strengthening research & supporting function for M&E (2014)

Running quarterly meeting of M&E related supporting institutes

Expansion of the Center for Performance Evaluation and Management

Reemphasizing importance of M&E and PB (2013)

New Administration highlighted importance of M&E activities

Deliberating establishing a separate institute for performance evaluation of budgetary programs

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EVOLUTION OF KOREA PB 1 Legalization of PB in 2007

• Enactment of the National Finance Act which includes clauses on PB

• Official roles were given to the National Assembly and the Board of Audit and Inspection

Increased engagement of the National Assembly • E.g. Revision of the National Finance Act which requires

improving consistency between program budget classification and line ministries’ annual performance plan/report

• Criticizing the quality of performance information • Questioning link between program ratings and budget

formulation

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EVOLUTION OF KOREA PB 2 Increased engagement of the Board of Audit and Inspection

• Examination report of annual performance plan and report was produced as a part of regular examination process of administration’s budget settlement report.

• Examine credibility of performance information • Inspect the operation of PB system by the MOSF

Recently, understanding on the PB’s purposes and role is in flux among the decision makers in the MOSF

• Ambitious attempt to introduce comprehensive quarterly monitoring system by the MOSF

• Lack of sustained efforts to build capacity among officials in the MOSF and line ministries

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EVOLUTION OF KOREA PB 3 The MOSF has tried to avoid duplicative M&E efforts with the Prime Minister’s Office

• However, the confusion still persists • It prohibits integrated analysis of policies and budgetary

programs • Concerns about M&E inflation exist

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CHARACTERISTICS OF PFM REFORMS IN KOREA

Big bang approach • Introducing all major components of PFM reforms

within a single presidential term (5 year) • All initiatives are pursued in a parallel manner

Practical adjustment of reform programs • Some delays in program budget classification and

accrual accounting

Executive branch initiated reforms • Almost no engagement of the legislature

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CHARACTERISTICS OF KOREAN PB 1

Equipped with a comprehensive set of M&E tools

• Monitoring – Periodic Review – In-depth Evaluation

Institutionalized and routinized PB system

• PB processes are legalized and repeated every year

Explicit link with budget cuts, but weak link with macro fiscal situation • At least 10% budget cut rule to “ineffective” programs • No explicit targets for fiscal consolidation based on PB

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CHARACTERISTICS OF KOREAN PB 2

Centralized PB system • Guidance was issued by the MOSF • Quality of performance information is monitored by the MOSF • Review and evaluation process is centralized

Separation between central budget office and PB Bureau • Although there is cooperation between them, it is not always

formalized and well-established relationship.

Limited scope of PB due to fragmented M&E system • There are multiple central actors responsible for M&E of programs

and policies

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ACHIEVEMENTS Explicit use of performance information for budget formulation Cultural changes among stakeholders

• Outcome oriented performance management becomes norm • Performance indicators become essential information for

policy dialogue Quality of performance information has been improved, although there is room for further improvement Some programs’ performance has been improved by changing program design

• Clarifying program goals • Introducing explicit performance contract

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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 • Recently it gained visibility by formalizing the reporting process. • 3 trillion won had been saved during 2009-2013.

USE OF PERFORMANCE INFORMATION

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Budget Cut for Ineffective Programs

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Year No. of

Ineffective Programs

Total Budget in

FY (t)

Total Budget for

FY (t+1)

Budget cut (%)

2008 103 5.7 4.6 -19.3

2009 93 2.8 2.6 -6.8

2010 133 3.9 3.4 -12.5

2011 132 4.3 3.9 -10.0

2012 112 1.9 1.5 -18.4

(Billion USD, %)

329 recommendations are produced from the in-depth evaluation between 2008 and 2012.

• 166 are finished with follow-up actions • 144 are in progress • 19 are delayed Program consolidation, program design and implementation improvement, improvement of performance management

Example: Program for the improvement of energy efficiency ESCO (Energy Service Company) program

• Government provides subsidy and tax exemption to the company renovating facilities to improve energy efficiency.

• 20% of the expense was exempt from corporate income tax. • The problem was government subsidy was counted as expense,

which means double-counting. One of the in-depth evaluation’s recommendation was the

elimination of the double-counting practice, which was implemented by the Ministry of Strategy and Finance

USE OF IN-DEPTH EVALUATION INFORMATION

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Monitoring & evaluation activities become essential elements of program design and management.

• Many big programs set up M&E system. In particular, subsidy or grant programs are implicitly required to operate M&E system.

Performance contracts are tried in some programs to improve program performance.

• The initial evidence shows big improvement of performance. • However, contract management capacity is an issue to be

addressed.

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CULTURAL CHANGES IN LINE MINISTRIES

CLASSICAL ISSUES OF PB Goal Ambiguity

• PB reform may help to clarity program goals and expose ambiguous and redundant programs.

Technical difficulty of performance measurement • Investment and training may reduce the degree of difficulty.

Balancing political priority and program effectiveness • At higher level resource allocation, political priority may

prevail, but at lower level resource allocation, performance information may play a bigger role.

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SUCCESS FACTORS

Incentives

Capacity

Effective PB

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CHALLENGES 1 Struggling to produce helpful performance information for decision makers Lack of efforts in establishing and using performance management system by top decision makers

• Management issues are usually secondary concerns unless embarrassing incidents happen

Weak professionalization of PFM function • Recently accounting is recognized as a specialized area in

the government, but evaluation, contracting, project management and other PFM functions have not been respected in the government HR practice.

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CHALLENGES 2 Lack of government-wide evaluation policy

• Too much centralized evaluation activities • low quality evaluation activities among line ministries • No systematic channel for producing quality information from

line ministries • Lack of sustained commitment for developing and improving

PB system within government Persistent confusion about the role of PB

• Accountability tool vs. Managerial tool vs. Budgeting tool • Achieving all three goals is not easy and need to customize

the system depending on the policy priority

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CHALLENGES 3 Lack of flexibility in the PB Process

• Periodic review process is depending on detailed review guidelines rather than reviewers’ expertise.

• The engagement of the external stakeholders (the Board of Audit and Inspection, the National Assembly) brings in the danger of making the PB compliance mechanism.

PB system’s limited challenging function • Quite often, politically important or sensitive programs are not

seriously challenged by the review or evaluation process. • No systematic support from top decision makers

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WHERE TO GO? After a decade of PB implementation, the Korean PB is at the critical juncture.

• Increasing demand for improving or overhauling the PB system

• Symbolic budget cuts based on PB may not be sustainable Need to find a way to make PB useful for decision makers and various stakeholders at a reasonable cost

• Need to establish government-wide M&E policy • Professionalization of PFM function • Enhance ownership of line ministries • Enhance capacity in the center of government

• Need to enhance link between macro fiscal situation and PB

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THANK YOU! NOWOOK PARK [email protected]

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assessing the past decade of the korean performance budgeting experience by nowook park

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