Linking Performance and Budgeting: The Experience of Korea

Prepared for the launching meeting of the CoP-MfDR

Youngsun Koh

April 2006

Korea Development Institute

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Introduction

The Korean government embarked on an effort to overhaul its financial management system after the crisis of 1997.

A medium-term expenditure management framework (MTEF) was introduced together with a top-down budgeting system in 2004.

Performance management has been strengthened. Program budgeting is underway.

These reform initiatives are inter-related with each other and mutually reinforcing.

Of these initiatives, performance management has met with various obstacles, and was found the most difficult to implement.

I would like to share with you our experience in performance management and the lessons learned.

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Fiscal Reform since the Financial Crisis

Limitations of the previous budget system Lack of medium-term perspectives, excessive reliance on a bottom-up

approach, focus on input rather than output/outcome control

Main characteristics of the reform A medium-term perspective in budgeting, Top-down budgeting,

performance management, Program budgeting

Motivations Changing needs of the society, Rapid rise in spending and tax burden, Sudden

increase in government liabilities

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Limitations of the Previous Budget System

Lack of medium-term perspectives

Little consideration was given by the central budget office and the parliament to the out-years beyond the budget year.

Medium- to long-term planning was also quite weak in line ministries. As a result, it was difficult to link policy and budgeting, to identify and cope wit

h the trend increase in spending, and to contribute to a counter-cyclical management of the economy.

Excessive reliance on a bottom-up approach

The total size of the budget and its sectoral allocation are determined at the last stage of budget preparation by aggregating the expenditures on individual programs.

Such a bottom-up approach could not easily incorporate a strategic orientation in annual budgeting. In addition, budget requests from line ministries tended to be unrealistically large, and massive cuts by the MPB were inevitable.

Focus on input rather than output/outcome control

In reviewing the budget requests by line ministries, the central budget office used to focus on the microscopic spending control of individual programs.

Input controls limited the scope to improve the efficiency and effectiveness of budgetary programs.

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Main Characteristics of the Reform

Medium-term perspective

“National Fiscal Management Plan,” covering the current year, the budget year, and three out-years, is being published annually.

Top-down budgeting

Line ministries are given greater discretion in the preparation of budget requests within the ceilings set by the Ministry of Planning and Budget (MPB).

Performance management

Three initiatives -- Performance Management of Budgetary Programs, Self-Assessment of Budgetary Programs, and Evaluation of Budgetary Programs -- have been introduced.

Program budgeting

Budget accounts have been reorganized around a program structure.

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Motivations

Changing needs of the society The focus of government spending is moving away from economic affairs

towards welfare, which will accelerate with the rapid aging of the Korean population.

Strategic reprioritization is necessary to meet the changing demands.

Share of Central Government Spending  (% of total expenditure and net lending)

70 70 80 80 90 90 00 00 03 03

General public servicesDefensePublic order and safetyEducationHealthSocial protectionHousing and community AmenitiesRecreation, culture, and religionEconomic affairsOther expenditures

General public servicesDefensePublic order and safetyEducationHealthSocial protectionHousing and community AmenitiesRecreation, culture, and religionEconomic affairsOther expenditures

23.1 22.7

-16.7 1.3 4.9 0.3

1.4

27.4 2.2

23.1 22.7

-16.7 1.3 4.9 0.3

1.4

27.4 2.2

4.0 30.6 4.6 14.6 1.0 5.7 2.5

0.7

26.0 10.4

4.0 30.6 4.6 14.6 1.0 5.7 2.5

0.7

26.0 10.4

4.2 20.0 4.3 17.0 1.7 8.1 10.1

0.5

20.4 13.7

4.2 20.0 4.3 17.0 1.7 8.1 10.1

0.5

20.4 13.7

5.211.4 4.615.3 0.715.3 5.3

0.8

25.216.2

5.211.4 4.615.3 0.715.3 5.3

0.8

25.216.2

6.711.4 5.315.0 0.413.5 5.0

0.8

28.712.8

6.711.4 5.315.0 0.413.5 5.0

0.8

28.712.8

0

5

10

15

20

25

30

35

40

60 65 70 75 80 85 90 95 00 05 10 15 20 25 30 35 40 45 50

(% of total population)

EU

Korea

Japan

US

Australia andNew Zealand

Share of the Old (65+)

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Rapid rise in spending and tax burden Various forms of “mandatory” spending has led the spending growth since the

mid-1990s. Tax burden (including social insurance contributions) has risen to a level

comparable to those in the U.S and Japan.

8

10

12

14

16

18

20

22

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04

(% of GDP)

Discretionary spending

Interest payments

Mandatory grants to local governments

Social insurance benefits

Financial-sector restructuringcosts

Central Government Spending

0

5

10

15

20

25

30

35

40

45

65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01

(% of GDP)

Korea

US

EU

Japan

Australia and New Zealand

Tax Burden

8

Sudden increase in government liabilities When the surplus in the National Pension Fund (NPF) is excluded, the

government has been in deficits since the late 1980s. The enormous costs of financial-sector restructuring produced a sudden

increase government liabilities.

0

5

10

15

20

25

30

35

40

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04

Central government guarantees

Central government liabilities

(% of GDP)

Central Government Liabilities

-6

-5

-4

-3

-2

-1

0

1

2

3

4

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04

(% of GDP)

NPF balance

Excluding NPFCentral government balance

including NPF

Central Government Balance

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Performance Management Framework

Steps of performance management Setting targets, designing and implementing programs, and assessing

performance

Framework of performance management Mission, strategic goals, performance goals, and performance indicators

Tools for performance assessment Program evaluation, performance monitoring, program review

Uses of performance information Improving decision-making, assisting in resource allocation, enhancing

accountability

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Steps of Performance Management

Setting performance targets - Delineating the mission and strategic goals of the organization - Defining quantitative and/or non-quantitative performance indicators - Establishing performance targets

Designing the program - Designing the program structure, including the service delivery system - Planning human and financial resources - Drawing up evaluation plans

Implementing the program - Delivering services with inputs of human and financial resources

Assessing the performance - Performance monitoring - Program evaluation - Program review

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Framework of Performance Management

missionmission

More concrete and objective

Medium- to long-term strategic plans

Medium- to long-term strategic plans

Annual performance plans

Annual performance plans

Annualperformance reports

Annualperformance reports

Monitoring

Evaluation

Review

Monitoring

Evaluation

Review

performance goal

performance goal

performance goal

performance goal

performance goal

performance goal

performance indicator

performance indicator

performance indicator

performance indicator

performance indicator

performance indicator

strategic goal

strategic goal

Strategicgoal

Strategicgoal

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Tools for Performance Assessment

Program evaluation

Program evaluation

Addresses the question of why and how the program produced certain outputs and outcomes.

Employs analytical tools with varying degrees of sophistication. Usually requires large amounts of money and time, and cannot be

performed on all programs.

Addresses the question of why and how the program produced certain outputs and outcomes.

Employs analytical tools with varying degrees of sophistication. Usually requires large amounts of money and time, and cannot be

performed on all programs.

Performance monitoring

Performance monitoring

Measures the program performance with a predetermined set of indicators.

Can produce information on outputs and outcomes in a frequent and timely manner at relatively low costs.

By itself, can rarely explain the causality between inputs and outputs or outcomes.

Measures the program performance with a predetermined set of indicators.

Can produce information on outputs and outcomes in a frequent and timely manner at relatively low costs.

By itself, can rarely explain the causality between inputs and outputs or outcomes.

Program review

Program review

Assesses the performance and other aspects of a given program with an explicit aim of helping budgetary decision-making.

Relies on information from various sources including monitoring and evaluation.

Is usually led by the central budget office (e.g., Ministry of Finance).

Requires a medium effort (in between monitoring and evaluation).

Assesses the performance and other aspects of a given program with an explicit aim of helping budgetary decision-making.

Relies on information from various sources including monitoring and evaluation.

Is usually led by the central budget office (e.g., Ministry of Finance).

Requires a medium effort (in between monitoring and evaluation).

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Uses of Performance Information

Use 1: Improving decision-making

Performance information provides an opportunity to learn and improve. Performance management can only be effective if people working within the

system actually believe in the value of a results-orientation.

Use 2: Assisting in resource allocation

Performance information serves as a reference in resource allocation. The budget authorities take other social, economic, and political factors into

account when deciding on budgeting. Poorly performing programs are not necessarily cut back or discontinued.

Use 3: Enhancing accountability

Performance information can be used to assure accountability. But we should avoid fostering a “silo-view” in the public service. Performance contracts can also generate rancor and lower the morale if the

employees find the performance assessment as unfair.

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Performance Management in Korea

Performance monitoring Performance Management of Budgetary Programs

Program review Self-Assessment of Budgetary Programs

Program Evaluation Evaluation of Budgetary Programs

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Performance Management of Budgetary Programs

Led by the Ministry of Planning and Budget (MPB).

Adopting the framework of GPRA (Government Performance and Results Act 1993) of the U.S federal government.

But does not require strategic plans.

Based on the pilot project on performance budgeting carried out in 1999-2002.

Requires line ministries to

Set up performance goals and indicators, Prepare annual performance plans and reports, and Submit them to MPB at the start of the annual budget cycle.

MissionMission

ProgramsPrograms

ProgramsPrograms

ProgramsPrograms

ProgramsPrograms

Performance indicatorPerformance indicator

Performance indicatorPerformance indicator

Performance indicatorPerformance indicator

Performance indicatorPerformance indicator

Performance goalPerformance goal

Performance goalPerformance goal

Performance goalPerformance goal

Performance goalPerformance goal

Strategic goalStrategic goal

Strategic goalStrategic goal

Strategic goalStrategic goal

Strategic goalStrategic goal

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Covers only part of ministerial programs

Activities not involving large sums of expenditure (such as pure policy-making) or involving wages and salaries or general administrative expenses only are excluded from performance monitoring.

Has not been very successful.

Lukewarm support from the top management of MPB. Little enthusiasm from line ministries. Difficulty in setting up performance indicators. Performance indicators not derived from ministerial missions in a systematic

fashion. Performance reports not open to the public.

From this year on,

All activities (budgetary and non-budgetary) will be covered. Reports will be open to the public.

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Self-Assessment of Budgetary Programs

Led by the MPB and designed after PART (Program Assessment Rating Tool) of the U.S federal government.

Requires line ministries to assess their own programs with spending levels above a certain threshold every 3 years.

The assessment is based on 16 questions common for all types of programs and a few additional questions specific to different types of programs.

Types of programs: infrastructure investment, procurement of large-scale facilities and equipment, provision of direct services, capital injection, subsidies to private entities, grants to local governments, and R&D

The MPB reviews the assessment results and takes them into account when preparing annual draft budgets and the National Fiscal Management Plan.

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Common questions

Performanceassessment

andfeedback

Performanceassessment

andfeedback

Has an objective and comprehensive program evaluation been conducted?

Did the program achieve the intended objectives? Are customers and stakeholders satisfied with the program performance? Is the agency utilizing the assessment results for program improvement

and budget planning?

Has an objective and comprehensive program evaluation been conducted?

Did the program achieve the intended objectives? Are customers and stakeholders satisfied with the program performance? Is the agency utilizing the assessment results for program improvement

and budget planning?

Program management

Program management

Is the implementation regularly being monitored? Is the program being implemented as planned? Are efforts being made to reduce costs or increase efficiency?

Is the implementation regularly being monitored? Is the program being implemented as planned? Are efforts being made to reduce costs or increase efficiency?

Programdesign

Programdesign

Does the program have clear purposes and legal or other bases? Can the government intervention be justified? Is government spending necessary to achieve the objectives? Is the program duplicative of other program? Has the program been subjected to an objective feasibility study? Is the proposed program design most cost-effective? Are performance goals and indicators in place? Do performance goals and indicators fully reflect program objectives? Are the targets set at reasonable levels?

Does the program have clear purposes and legal or other bases? Can the government intervention be justified? Is government spending necessary to achieve the objectives? Is the program duplicative of other program? Has the program been subjected to an objective feasibility study? Is the proposed program design most cost-effective? Are performance goals and indicators in place? Do performance goals and indicators fully reflect program objectives? Are the targets set at reasonable levels?

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Answers to the questions take the form of “yes (1)” or “no (0).”

To the questions on the achievement of program objectives and the customer satisfaction, 4-scale answers (1.00, 0.67, 0.33, 0.00) are given.

The overall assessment (0-100) is based on the weighted sum of the individual answers.

Programs are classified as “effective (85-100),” “moderately effective (70-84),” “adequate (50-69),” and “not effective (0-50).”

In 2005, 555 programs were assessed.

Among them, 87 (15.7%) were classified as “not effective,” and the budget was cut by 10% for these programs.

EffectiveEffective Moderately effectiveModerately effective AdequateAdequate Not effectiveNot effective

28(5.0%)

28(5.0%)

99(17.9%)

99(17.9%)

341(61.4%)

341(61.4%)

87(15.7%)

87(15.7%)

TotalTotal

555(100.0%)

555(100.0%)

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Evaluation of Budgetary Programs

MPB commissions evaluation studies on the programs that it considers need critical assessment.

KDI organizes evaluation teams and oversees the process. Three programs were evaluated from late last year through early this year on

a pilot basis. About 10 programs will be evaluated annually from this year on.

Pilot studies indicated…

General lack of clearly specified program goals and necessary performance data to assess the achievement of goals,

Difficulty in understanding the structure and context of individual programs by outside evaluators,

Difficulty in reconciling the different perspectives of MPB and line ministries, with the former focusing on funding decisions while the latter on better program management.

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Our strategy… at the start of each evaluation study,

Define the program objectives in cooperation with the ministries in charge of the program.

Define the purpose and scope of the evaluation, which need to be agreed on by the ministries and the MPB.

Ask the ministries to provide sufficient details of the program, including its intervention logic.

Administers a road-safety campaign

Administers a road-safety campaign

Campaign reaches the target population

Campaign reaches the target population

Drivers become more concerned about safety

Drivers become more concerned about safety

Pedestrians become more concerned about safety

Pedestrians become more concerned about safety

Traffic accidents decline

Traffic accidents decline

Personal and social costs of traffic accidents decline

Personal and social costs of traffic accidents decline

Activities /Outputs

Intermediate outcomes

Final outcomes

Proportion of childrenreached by the campaign,Proportion of male drivers aged 18-24 reached by the campaign

Fall in theaverage speed in‘high-risk’ areas

Fall in accidentsin ‘high-risk’ areas

Intervention logic of a road-safety campaign and its performance indicators

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Lessons Learned

Strategic planning and performance monitoring by themselves are seldom enough to foster performance orientation in government. Program evaluation and program review should supplement strategic

plans and performance monitoring.

The central budget office should play a leading role in introducing performance management. A top-down budgeting can increase their need for performance

information.

The central budget office and line ministries should be prepared for the increased workload due to performance management. A top-down budgeting system and the streamlining of various

performance management initiatives can help reduce the workload.

Strong leadership from the top is a must to fight evaluation fatigue and institutional fragmentation of performance management.

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Strategic plans by themselves are seldom enough.

An abstract structure of mission, strategies, and performance goals is a necessary condition for good performance management.

But they are often short of providing detailed information on individual programs (including the causality between inputs and outputs/outcomes), and accordingly

Lack an incentive mechanism that guarantees an active involvement by concerned parties -- the central budget office, line ministries, legislature, and general public.

Program evaluation and program review should be in place to complement strategic planning.

They will provide additional information essential for important decision-making (including budgeting), and help invoke interests by concerned parties.

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Budget examiners in the central budget office should assume the primary responsibility for reviewing ministerial strategic plans and conducting program reviews.

When not influencing the budget process, all efforts can degenerate into wasteful paper-work.

A top-down approach in budgeting can increase the need for information on program performance by the budget office.

Prior to the introduction of top-down budgeting, most of the MPB staff showed little interest in performance management, and support from the top management was quite weak.

With a substantial part of budgeting delegated to line ministries under a top-down system, MPB is losing control on inputs and has to rely on output and outcome control.

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The central budget office and line ministries should be prepared for the increased workload due to performance management.

The overall workload of budget examiners increased substantially with the introduction of various performance management initiatives, even though the increase was partly offset by the top-down budgeting system.

In line ministries, there are some indications that the uncoordinated, overlapping systems of performance management have increased workload and invoked cynicism, and have been counter-productive. MPB: three initiatives mentioned above, Evaluation of Public Funds, Evaluation of

Public Institutions Office of Government Policy Coordination: Government Operations Assessment Ministry of Government Administration: Management by Objectives Board of Audit and Inspection: Performance Audit

A top-down budgeting system and the streamlining of various performance management initiatives can help reduce the workload.

Top-down budgeting not only requires less work for the central budget office but also spreads out their workload throughout the year.

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Strong leadership from the top is a must to fight evaluation fatigue and institutional fragmentation of performance management.

After more than a decade since the introduction of GPRA, the U.S federal government is still struggling with establishing an effective performance management system.

Performance management is in its early stage of development in Korea, and a consistent effort will be required for its success.

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Thank you…