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Performance-Oriented Bud-geting in Korea:
Overview and Current IssuesNowook Park
Ohio State University & Korea Institute of Public Finance
Asian Regional Seminar: Promoting Fiscal SustainabilityFebruary 28 – March 2, 2011, Kuala Lumpur, Malaysia
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I. History of Public Financial Management Re-forms in Korea
II. Overview of Performance-oriented Budget-ing in Korea
III. Current Issues and Future Directions
Contents
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Budget process reforms are in full swing among emerging and developing economies under the auspices of interna-tional 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
Background of Presenta-tion
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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 increas-
ing income inequality and aging population◦ Expected decreasing tax revenue
Aging population Ratio of population above 65 yr. old move from 7.2% in
2000 to 14.4% in 2019
Political need & support from top leadership
Background of reforms in Ko-rea
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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 implementa-
tion
Sequence of PFM Reforms
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Efforts towards PB
2000 ~ 2002
2003 ~
2005 ~
2006 ~
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
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Act was enacted in December, 2006◦ To provide a legal basis for public financial man-
agement reforms Includes articles on PB
◦ Annual performance plan and report become legal requirement for line ministries/agencies
◦ Program review & in-depth evaluation are stipu-lated
It gives stability & continuity which tend to be a problem to PB.
Enactment of “National Fi-nance Act”
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Purpose of PB◦ Emphasis on making link between performance
information & budget allocationGoing beyond performance monitoring system
Periodic review process is developed Outcome-oriented PB Executive branch-initiated reform
Characteristics of PB in Korea
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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
Framework for PB in Korea
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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
Elements of Performance Moni-toring
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Ministry of Strategy and Finance (MOSF) reviews self-assessment of programs done by line ministries/agen-cies
Budgetary authority provides a standardized checklist for reporting self-assessment
The checklist contains questions on program design, performance management system, program imple-mentation, 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
Program Review
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Contents of Checklist
Design and Planning(30)
• Program purpose• Rationale for government spending• Duplication with other programs• Efficiency of program design• Relevance of performance objectives and indicators• Relevance of performance targets
Management(20)
• Monitoring efforts• Obstacles of program implementation• Implementation as planned• Efficiency improvement or budget saving
Results and accountability(50)
• Independent program evaluation• Results• Utilization of evaluation results
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Based on social science approach Evaluation refers to the activity of systematically collect-
ing, 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
Program Evaluation
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Use of performance information in budget negotiation
Performanceinformation
Allocate budget based on evalua-tion results
Introduce perfor-mance information in their program management
Spending ministrySpending ministry
Enforce budget cut to ineffective programs
Provide recom-mendations for performance im-provement
MOSFMOSF
vs
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Performance information in budget statement
Spendingministries MOSF Assembly
Submitted with budget :annual performance plan
annual performance report
Submitted with budget :annual performance plan
annual performance report
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Information from monitoring system (perfor-mance plan and report) has not been systemati-cally utilized so far.◦ For internal use, they are useful information◦ From the viewpoint of central budget authority, they pro-
vide 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 eval-
uation and the will of central budget authority◦ It is not systematically utilized in the budget process
Use of performance information from performance budget system
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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 ele-
ment of program management.
Observations from program re-view process
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Evaluation Results from Program Review
(Number of Programs, %)
Total EffectiveModerately Effective
Adequate Ineffective
2005 555 (100) 28 (5.0) 100 (18.0) 340 (61.3) 87 (15.7)
2006 577 (100) 30 (5.2) 94 (16.3) 388 (67.2) 65 (11.3)
2007 585 (100) 69 (11.8) 143 (24.4) 342 (58.5) 31 (5.3)
2008 384 (100) 11 (2.9) 44 (11.5) 226 (58.9) 103 (26.8)
2009 346 (100) 5 (1.4) 14 (4.0) 257 (74.3) 70 (20.2)
2010 473 (100) 0 (0) 22 (4.7) 335 (70.8) 116 (24.5)
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Link between Evaluation and Bud-get Request by Agency in 2005
-20
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20 40 60 80 100Total Score
95% CI Fitted valuesGrowth of Budget Size based on Budget Request by Agency
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Link between Evaluation and Budget Draft by MOSF in 2005
-20
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20 40 60 80 100Total Score
95% CI Fitted valuesGrowth of Budget Size based on Budget Fomulation by MOSF
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Link between Evaluation and Budget Approval by NA in 2005
-20
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20 40 60 80 100Total Score
95% CI Fitted valuesGrowth of Budget Size based on Approved Budget at National Assembly
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Link between Evaluation and Bud-get Request by Agency in 2007
-50
510
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20 40 60 80 100Total Score
95% CI Fitted valuesGrowth of Budget Size based on Budget Request by Agency
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Link between Evaluation and Budget Draft by MOSF in 2007
-50
510
15
20 40 60 80 100Total Score
95% CI Fitted valuesGrowth of Budget Size based on Budget Fomulation by MOSF
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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 behav-
ior from line ministries In response to this, MOSF raised threshold of pro-
gram 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
Evolution of performance bud-geting in Korea
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Improving alignment among budget classifica-tion (program structure), organizational struc-ture 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 in-cludes new article requiring consistency be-tween budget classification and annual perfor-mance plan/report.
Recently, efforts to improve the alignment are being exerted
Current Issue 1
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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 practi-cal one.
◦ As the Korean system matures, we plan to pursue overhead cost allocation .
Current Issue 2
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Current integrated fiscal information system does not include comprehensive perfor-mance information.
Recently, development of performance in-formation management system is being considered.◦ Its purpose is to improve on-going monitoring ef-
forts.◦ Also, it may help systematic use of performance
information.
Current Issue 3
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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.
Observations & Lessons