GOVERNMENT
Making the Transition
Outcome-based Budgeting:
A Six Nation Study
CASE STUDY PACK
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b | Making the Transition – September 2011
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Making the Transition – September 2011 | 1
Foreword
Around the world, governments face renewed pressure to reform their budgeting
processes. Mounting debt and sluggish growth in some regions have squeezed
government coffers, forcing municipalities to rationalize their programs and do
more with less. At the same time, demand for public services is on the rise,
kindled by large or aging populations, surging food and fuel prices, and continued
high unemployment.
In response, more public sector organizations are making the shift from input to
outcome-based budgeting (OBB) in an effort to align allocation with strategic
national priorities. Doing so, however, is no easy task. Moving to an outward-facing,
results-based budgeting process usually requires significant changes to management
frameworks, accounting policies, reporting processes, and performance management.
To understand how the transformation works, this paper profiles six governments –
in different regions and phases of economic development – that have made or are
making the transition to OBB. They include Canada, New Zealand, Malaysia, Panama,
South Africa and the province of Minas Gerais in Brazil. In each case, we sought
to understand the catalyst for change, the approach taken, and the core elements
and practices used to guide reform. We hope the range of perspectives provided
will serve as a useful reference for politicians, civil servants, and others around
the world who are considering or implementing their own OBB programs.
We are indebted to the many government officials who gave generously of
their time and insight as we researched this paper and to our network of KPMG
partners and colleagues whose OBB experience made this report possible.
KPMG Contributors
John Herhalt
Global Chair
KPMG Government and Infrastructure
KPMG International
Patrick A. Byrne
Senior Manager
KPMG in Canada
Jim H. Alexander
Associate Partner/
Senior Principal
KPMG in Canada
Souella M. Cumming
Partner
KPMG Risk Advisory
Services
KPMG in New Zealand
Fernando Aguirre
Partner
KPMG in Brazil
Mauricio Endo
Partner
KPMG in Brazil
Tai Hai Woon
Executive Director,
Advisory
KPMG in Malaysia
Thabile Dube
Associate Director
KPMG in South Africa
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KPMG International provides no client services. All rights reserved.
Contents
Executive Summary
3
Introductory Stage:
6
6
• Panama
Implementation Stage:
12
• Malaysia
12
• SouthAfrica
16
AdvancedStage:
22
22
• MinasGerais,Brazil
MatureStage:
25
• Canada
25
• NewZealand
31
Conclusion
36
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Making the Transition – September 2011 | 3
Executive Summary
Outcome-based budgeting (OBB) requires public sector spending to be aligned
behind an approved set of governmental priorities, such as reductions in crime and
unemployment or improved access to education and healthcare. Although widely
used in the private sector, the approach has been slower to take hold in government
settings where budget, policy, and appropriation processes are more complex and
transparent, involving more administrative layers and approval steps than in the
commercial environment.
Instead, governments around the world often rely on line item and input-based
budgeting. The narrower focus of this approach can lead to ad hoc spending,
unclear oversight and disjointed results. Without a framework to cascade national
priorities and calibrate appropriations, departments can be left to draft budgets from
the bottom-up, based on forecast expenditures and prior-year spending. A health
ministry, for instance, might budget based on how many beds or staff a hospital
has, rather than its ability to improve the cost of service or treatment results. In
addition, the absence of a linked, cross-agency planning structure often contributes
to departmental ‘silos’. Organizational cultures built around these principles tend
to emphasize compliance, such as minimal variance in actual-to-planned spending,
versus the specific return on investment from a citizen-centric point of view.
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4 | Making the Transition – September 2011
In light of these issues, OBB is gaining renewed interest, influence and traction.
Governments that have made the transition have seen significant results including,
improved financial standing, less debt and measurable traction on core initiatives.
As with any change program, however, the form and implementation OBB follows
must be tailored to the needs, capabilities and requirements of the location in
question. To understand the nuances, we studied six countries in various stages of
economic development and OBB maturity. Some of the key takeaways from our
research include:
1. Any organization can adopt OBB
Our research in places
as diverse as Panama,
Brazil’s Minas Gerais
and New Zealand
shows that a nation’s
size or financial standing
has little bearing on its
ability to implement
a successful OBB
program.
Our research in places as diverse as Panama, Brazil’s Minas Gerais and New
Zealand shows that a nation’s size or financial standing has little bearing on its
ability to implement a successful OBB program. Minas Gerais was insolvent, for
instance, and New Zealand was on the verge of bankruptcy when both began
their transition to OBB. Today, both places have highly effective budgeting and
performance review processes. Likewise, Panama, with a population of just
over three million, has emerged as one of the leaders in the region thanks to its
commitment to financial reform.
2. Strong, sustained leadership and political will are essential
The scale and scope of government makes wholesale reform especially challenging.
Leaders must have the vision, authority, and negotiating skill to steer through
often difficult changes and manage the requisite trade-offs. Strong leadership and
sustained engagement are essential to set the vision, orchestrate tough decisions
and persuade officials across complex bureaucracies to put their reputations on the
line and pull for a common goal.
3. Recognize and accept that reform is messy
Because there is no standard ‘playbook’ for OBB, leaders need to be
comfortable ‘learning as they go,’ responding to events on the ground by
consulting, communicating and collaborating with peers, outside advisors and
the public. Improvements often come incrementally, with some departments,
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Making the Transition – September 2011 | 5
administrators and ministers embracing the changes while others lag behind.
Managing the inherent messiness of reform requires flexibility, resourcefulness
and patience. It also requires that the process be kept as apolitical as possible.
Frequent, meaningful dialogue with internal staff, elected officials and public
stakeholders is also necessary to educate parties on the reform effort and
continuously refine the approach.
4. Don’t go it alone
OBB is complex, often involving legal, regulatory and accounting reform. To
support the process and minimize disruption, officials need to ensure they have
the right legal, accounting and specialist resources in place. That experience is
helpful in charting the implementation phases, supporting the switch to accrual
accounting and managing the underlying IT transformation. It is also a good idea
to consult with peers who have gone through the process themselves. Before
beginning planning, Panama and Malaysia met with government practitioners in
several other countries to understand what worked and what did not. In addition,
entities such as the Organisation for Economic Cooperation and Development
(OECD) have a wide body of information to assist governments in various phases
of financial reform.
5. Adopt accrual accounting
Outcome-based
budgeting (OBB):
Also known as
Performance-Based
Budgeting, OBB is a way
to allocate resources
based on achieving agreed
upon objectives, program
goals and measured
results.
Although the shift from cash-based to accrual accounting can be challenging, all
six locations studied practice or are in the process of making that transition. Doing
so brings financial practice in line with international standards, provides greater
cash flow visibility and helps governments track their real income and expenses
more effectively.
6. Measure the quality of management
The most well-thought-out reform program is only as good as the people behind it.
Yet many OBB efforts do not include a management assessment. To address this,
Canada has taken the lead on introducing a framework to evaluate management
effectiveness on a ministerial and departmental level. The findings support both
leadership development as well as outcome delivery. South Africa and others are
considering applying the same framework in their own OBB programs.
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6 | Making the Transition – September 2011
Introductory Stage
Panama
Getting Started
Panama is a small yet relatively prosperous nation of 3.4 million people. Nestled
at the southernmost end of Central America, it has one of the largest and
fastest-growing economies in the region. Since March 23, 2010, international
ratings agencies have awarded Panama with investment-grade status, marking
the first time the country has received such a designation and reinforcing
Panama’s status as one of the economic leaders in the region.1
Elections in 2009 brought in a new government. Comprised of many former
business leaders, the administration focused on improving productivity and
performance. The new Minister of Economy and Finance, Mr. Alberto Vallarino,
sought ways to foster long-term financial sustainability and better transparency.
Although familiar with the premise behind outcome-based budgeting (OBB), he
and other officials understood that, before Panama could embrace full-scale reform,
they would have to lay the right groundwork. That groundwork has since shaped an
agenda focused on improving the ministry’s policies, processes and systems.
Establishing a baseline assessment
A team from the Ministry of Economics and Finance, supported by KPMG
advisors, met with officials in the national governments of Chile and Brazil, as well
as the Brazilian province of Minas Gerais, all of which had recently undertaken
their own financial management reforms. They also studied successful OBB
programs in Canada, New Zealand, Norway, Denmark and Spain. That research
helped identify effective financial management frameworks, internal audit
standards, policies, controls, and reporting procedures and helped officials
benchmark Panama’s performance relative to other OBB adopters.
“Among the issues the findings revealed,” says Patrick Byrne, a Senior Manager
with KPMG in Canada, and advisor to the Panamanians, “were overlapping and
sometimes conflicting ministerial duties, and paper-based transactional flows
that slowed the course of business.” Inconsistent financial reporting standards
and requirements exacerbated the situation, he added, “and a two-tiered accrualand cash-based accounting system made it hard for officials to appropriately
assess the government’s finances.”
1
“Fitch upgrades Panama rating to investment grade,” Reuters, March 23, 2010.
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Making the Transition – September 2011 | 7
Preparing the foundation for OBB
To address these issues, Panama’s government is in the process of implementing
a new financial management framework. “The goal,” says Aracelly Méndez,
National Director of Accounting at the Ministry of Finance, “is to clarify roles and
accountability, establish consistent accounting policies and internal controls and
improve visibility and performance.”
The major objectives of the program include:
1. Clarifying ministerial responsibilities
Panama has two institutions charged with managing the nation’s finances, the
Controller General of the Republic (Controller) and the Ministry of Economics and
Finance. As an oversight body, the long-standing Controller’s office has historically
wielded considerable influence. The Ministry of Economics and Finance, by contrast,
was formed only about 10 years ago. Unclear accounting authority between these
offices has often created confusion. For example, while the Controller’s office sets
accounting policy and principles, the Economics and Finance Ministry is supposed
to manage and oversee accounting processes. “But the lack of clear separation
between those duties creates overlap,” explains Byrne, “with both offices involved in
regulating and determining financial management processes and policies.”
To improve clarity, the new financial management framework plans to segregate
policy development from operational oversight, giving the former to the Controller
and the latter to the Ministry of Finance. By formally assigning responsibility for
policy, internal audit and oversight responsibility to the Controller, Panama gains
an independent monitoring body. Likewise, day-to-day accounting management
conforms with the Ministry of Economics and Finance’s other budgetary and
reporting responsibilities.
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8 | Making the Transition – September 2011
2. Removing unnecessary process steps
Panama is relatively unique in that it employs a pre-transactional review step
called the Control Previo. Dating back to the 1970s, the system uses a team of
administrators based in the Controller’s office to review and approve all government
transactions across all ministries and departments. Although envisioned as a helpful
secondary check and oversight function, the unintended consequences of so many
transactions going through so few people were backlogs and delays in working
with external parties. In addition, there were questions over who had ultimate
authority. For instance, ministerial staff believed it was up to the Controller to ensure
that transactions aligned with policy. However, the Control Previo assumed that
responsibility rested with ministries. As a result, policy alignment often fell through
the cracks. According to Méndez, “Poorly defined internal audit standards and a weak
control environment could create inconsistent requirements for individuals transacting
with the government.”
To streamline this process, the proposed new financial management framework
replaces the Control Previo with a robust internal audit function, managed at the
ministerial level. To remove bottlenecks, the changes embed authorization and
approval controls directly into the new financial management system, reducing
approval times and increasing consistency. “The changes will come into effect
gradually,” says Méndez. “The proposed new financial framework requires an
internal audit structure that is properly defined with the right control management
process in place.”
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Making the Transition – September 2011 | 9
3. Increasing ministerial accountability and reporting quality
Under the proposed
financial management
framework, ministers
will be held responsible
for the administration
of their budgets
and related financial
statements, as well
as for the quality of
the overall control
environment.
Under the proposed financial management framework, ministers will be held
responsible for the administration of their budgets and related financial statements,
as well as for the quality of the overall control environment. This will mark a
significant change. In the past, if something went wrong, culpability usually went to
the public accounting firm that certified the accounting statements. Now ministers
will be held more directly accountable. The goal is for such top-down accountability
to have a cascading effect. A minister is unlikely to feel comfortable signing off on
financial information, for instance, without the department controller’s assurance
that the proper internal controls are in place. For that to happen, the controller and
department leaders will require that their managers and staff have the appropriate
training to ensure that controls are effective. “Those checks,” says Fernando
Lasso de la Vega, a member of the KPMG in Panama’s advisory team, “create an
accountability loop that helps reduce the likelihood of error, reinforces expectations
and aligns performance evaluations.”
4. Moving to accrual-based accounting
Part of Panama’s financial reform includes the shift to accrual-based accounting.
Historically, Panama has used a mix of accrual and cash-based accounting. Cash
accounting records revenue upon receipt and costs upon payment. Because the
timing of each can vary widely, it can be hard to track cashflow. Depending on
the reporting timeline, for instance, the majority of expenses may occur in one
period, while the majority of income might occur in another, making it seem as
though the organization is running at a net loss or a large profit. This creates
administrative challenges and can make it difficult to accurately gauge the
nation’s finances.
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10 | Making the Transition – September 2011
Accrual-based accounting manages this spread by requiring income and expenses
to be recorded once the invoice is sent or a cost has been incurred. This protects
against the risk of financial manipulation and allows managers to keep more
accurate account of their projects. Adopted by international accounting bodies
and nearly all private sector organizations, accrual-based accounting allows
organizations to keep track of their real income and expenditures.
Making the switch, however, is not easy. Policies need to be updated, systems
changed and training rolled out at all levels. Under the proposed framework,
ministries will implement the revised structure on a department-by-department
basis, giving ministers, staff and other government officials time to manage
the transformation. Explains Méndez, “We are working with the Controller’s
accounting office to ensure that their work is harmonized with the norms required
under the International Public Sector Accounting Standards (IPSAS). Right now we
are doing it on a modified accrual basis, but we hope to have the new system up
and running in 2013.”
Other reforms will also be phased in to help officials refine the process as they go
along, identify areas where legislation needs to be enacted or refined and provide
an opportunity for officials and the public to adapt to the changes.
Lessons learned
As with any change process, the Panamanian government has had to learn as
they go. With the reform process underway, some of the key challenges the
government has met include:
1. Managing turnover: The frequent transitions that occur as part of any political
process can sometimes dilute institutional memory. In Panama, turnover in
key administrative positions has caused layers of legacy knowledge to be lost.
Such turnover makes it harder to carry-out reforms and improvements, many
of which require sustained planning, cross-ministry dialogue and collaboration
over a period of many years. That transition can also interfere with the frequency
and consistency of internal audit reviews. Weak internal controls compound the
problem, explains Méndez. “If you don’t have internal controls, you are more
vulnerable. That is why we are focusing so much attention on improving our
internal audit infrastructure. By adopting institutional processes and automating
routine internal control functions, turnover becomes less of an issue from a risk
point of view.”
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Making the Transition – September 2011 | 11
2. Communicating with citizens: The Control Previo reforms provided the
government with another early lesson: Present a clear case to the public.
Opponents of the idea to automate the purchasing and procurement process
mounted a campaign over concerns that the proposed changes would eliminate
a key control. Newspapers took up the story amid worries over a potential
increase in fraud. Although the government is certain the proposed new financial
management framework will boost accountability, transparency and the control
environment, it realized that it had been too slow to present its case and had
ceded control of the message. The experience offered valuable insight about the
importance of articulating future changes in clear, precise terms and maintaining
open and early dialogue with the public.
Key to the country’s
success will be
sustaining process
changes over time. The
stage-setting elements
described may take
five to ten years to
complete.
3. Sustaining the commitment: Change is difficult. Those leading the reform
effort understand that there will be pushback. Not only from ministers, who based
on the proposed new financial management framework, are now called on to take
greater responsibility for their reporting and control environment in their ministries,
but also from department heads and managers across ministries whose powers,
budgets and authority will be enhanced in light of the proposed changes.
Next steps
Key to the country’s success will be sustaining the process changes over time.
The stage-setting elements described may take five to ten years to complete.
In some respects, OBB implementation may be a generational change. During
that time, it will be important to strengthen support, training and communication
as needed. Panama’s efforts so far show that it is prepared to stay the course.
Ministers and other stakeholders recognize that the reforms are necessary to
Panama’s continued growth and financial stability. “This effort is not tied to any
one administration or government,” concludes Méndez. “Rather, it is a state
policy intended to benefit Panama for the long term.”
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12 | Making the Transition – September 2011
Implementation Stage
Malaysia
Setting the stage
Malaysia has a well-established infrastructure and is one of the more economically
advanced countries in South Asia. In many ways, the country has been an early
adopter of important financial reform programs. Starting in the late 1960s, when many
peer countries were still focused on line-item budgeting, Malaysia switched to a new
Program and Performance Based System (PBBS). That model shifted departmental
focus from inputs to desired actions and outputs. However, because planning and
budgeting activity was still controlled by individual ministries, those outputs were
often poorly coordinated at a national level. To address this, the government instituted
a modified budgeting system (MBS) in the early 90s. This approach leveraged the
same program-based framework, but addressed gaps in the system and put program
agreements in place to enforce accountability. Yet it was still based on outputs and
not outcomes, and was skewed more toward compliance than performance.
Catalysts behind the OBB push
In the absence of an integrated national strategy for economic growth, Malaysia’s
rapid development led to inconsistent results. While many of these developments
were notable for their vision, architectural ambition and execution, the collective
return to the state was often lacking. For instance, despite investing in a superb,
state-of-the-art airport and a large financial center, Malaysia is not the leading
aviation and financial hub for the region. That title goes to Singapore.
One consequence of the misalignment between investment and economic goals
has been a pattern of economic imbalances. The country’s economy remains
heavily dependent on oil exports, with petroleum accounting for 40 percent of
GDP. Although oil revenues have been an important source of the nation’s wealth,
crude prices have been subject to unusual volatility over the last several years. As
a result, the government is keen to diversify its industry mix to manage risk.
In addition, Malaysia’s debt-to-GDP ratio is higher than officials would like. In
2011, the government expects the budget deficit-to-GDP ratio to remain at
5.4 percent. With the exception of India, that deficit burden is the highest
among the Non-Japan Asian economies.2 Operating expenses are also
growing. Government figures put total operating expenses (OpEx) for the
2009/10 year at RM160 billion (75 percent of total spending), compared to
RM80 billion in 2004, doubling the rate of spending in only six years.3 At the
same time, development expenditures needed to spur growth have declined.
Salaries and associated costs account for a large share of the operating
expenditures. Malaysia has about 1.3 million civil servants on its payroll for
a population of about 26 million, making it one of the highest civil servant
payroll-to-population ratios in the world according to the Organisation for
Economic Cooperation and Development (OECD).
2
“Malaysia 2011: Investment to the rescue?” CreditSuisse Economic Research, November 2010
Economic Report 2009/10, Public Sector Finance, Treasury Department, Government of Malaysia.
3
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Making the Transition – September 2011 | 13
Putting Malaysia on a more sustainable growth path
These factors prompted the government to seek ways to reduce their debt
burden, change their OpEx structure, and improve efficiency. But for a nation
long-accustomed to a large, central government, and whose public sector
employs five percent of the population, any restructuring carries significant
political, social and cultural implications.
Malaysia’s goal for 2020 is to bring the average annual income for its citizens
up to US$17,000 from its current level of US$7,000. It plans to achieve this
by supporting private sector initiatives in 12 key industries, designed to boost
research and development and high-value service sector jobs. Although the
private sector will fund 90 percent of the program, the government intends
to act as a partner, directing resources to facilitate the build-out on a national
level. Officials hope it will also help stem the ‘brain drain’ of Malaysia’s young,
educated population.
To do this, the government recognized that it must reform its budgetary practices.
Since 2010, KPMG in Malaysia (supported by KPMG in New Zealand) has been
engaged to assist the Malaysian Government in this transition to outcome-based
budgeting. The Malaysian framework has four objectives:
••
••
••
••
Ensure greater budgetary alignment with the country’s strategic agenda
Integrate operational and developmental expenditure
Empower officials to monitor and enforce the changes
Improve operational efficiency.4
The program is intended to build stronger connections between national
and ministerial priorities and programming, foster clear and unified lines of
responsibility and create better audit oversight and reporting.
4
“Outcome based budgeting: a way forward,” The Malaysian Ministry of Finance,
http://www.myresults.treasury.gov.my/myresults/awareness/awareness_session.pdf
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14 | Making the Transition – September 2011
In planning the scope of
their OBB framework,
Malaysia’s Ministry of
Finance consulted with
officials in New Zealand,
Brazil and Korea and
documented the
approach taken by
a range of other
countries, including The
Netherlands, Sweden,
Canada, the United
States and the United
Kingdom.
In planning the scope of their OBB framework, Malaysia’s Ministry of Finance
consulted with officials in New Zealand, Brazil and Korea and documented the
approach taken by a range of other countries, including The Netherlands, Sweden,
Canada, the United States and the United Kingdom. That research allowed them
to compare different implementation models and helped them weigh how quickly
to push through needed changes. Where some countries pursued an incremental
approach to OBB, phasing reforms in over time, others chose a more rapid,
revolutionary approach where a series of reforms were pushed through all at once.
While both approaches had their benefits, the Malaysian government determined that
an incremental, evolutionary approach would be more effective.
Phasing in the changes gives officials the opportunity to spread the cost, build
capacity, trail and refine solutions as the go along. The program is expected to unfold
over the next several years, with full implementation to be completed by 2016.
Lessons learned
The OBB journey for Malaysia has just started and any lessons learned or to be
learned will become more apparent as the transformation moves forward. Already,
the country has seen some promising results and has recovered better than
many other nations during the global financial crisis. This was due in large part to
improvements made to the banking system and lessons learned in the aftermath of
the 1997 Asian economic crisis. In addition, a number of government transformation
initiatives aimed at delivering more efficient and effective public sector services are
starting to yield many positive outcomes. The central theme that surrounds these
transformation initiatives is business will no longer be as usual especially with respect
to government fiscal planning. The roll-out of OBB on a government-wide basis is
timely to help realize the desired outcomes of these initiatives and to monitor their
progress for delivery of results through a transformational management process and
entrepreneurial management culture.
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Making the Transition – September 2011 | 15
Next steps
Given the centrality of performance management under the OBB, the whole
performance management process involving planning for outcomes, resourcing,
monitoring and evaluation and results reporting must be institutionalized at the
national and ministry level to be effective. Hence this aspect of the process will have
to be monitored and managed closely. Other areas that will warrant equal priority
include integration of resourcing functions, implementation of accrual accounting,
human resource empowerment and OBB legal implementation to drive the
performance culture reform initiatives in the country.
The OBB system provides a structured mechanism to link and streamline the
national transformation initiatives from conceptualization to attainment of results
through effective and efficient implementation of programs and activities, in line
with the government’s efforts to rationalize public sector management through
better expenditure management and delivery of effective outcomes. This
represents the start of the OBB journey for Malaysia as it looks forward to reaping
the benefits of this major initiative in the coming years, albeit inevitably facing
challenges as they progress.
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16 | Making the Transition – September 2011
South Africa
Early days of reform
South Africa’s process of budgetary reform began in 1994. Years of apartheid rule
had kept its public service isolated from international developments in public sector
reform. Along with limited transparency and accountability, a heavily centralized
structure gave the country’s provinces little to no voice in budgetary allocation, priority
setting and decision-making.
In the post-apartheid era, South Africa began tackling a backlog of necessary reforms.
Starting in 1994 and continuing through 2002, the government, led by the African
National Congress (ANC), enacted a series of policy and legislative frameworks
to clarify and establish standards, improve accountability, and bring reporting in
compliance with international best practices. These changes put South Africa’s public
sector on a similar footing to that of its global peers and laid the groundwork for
performance-based governance.
But challenges remained, chief among them were a lack of vertical integration,
unclear linkage between inputs, outputs and outcomes, and a low level of compliance
with the established performance management framework. As Thabile Dube, an
Associate Director in KPMG in South Africa’s advisory practice, observed, “There was
planning; there was reporting; and there was managing to a budget, but the priorities
were inconsistent and the outcomes often poorly structured. The Department of
Public Works, for instance, might decide that it should build more schools when the
larger national priority might be to create jobs. If that larger outcome had been defined
and the delivery partners made aware of their role in achieving it, the Department of
Public Works might better calibrate its efforts.”
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Making the Transition – September 2011 | 17
Pressure to improve performance
By 2009, South Africa faced other challenges. On taking office, President Jacob
Zuma confronted unemployment levels of over 20 percent.5 There were also
questions about how effectively public funds were being used. Although major
social services, such as education and healthcare, had seen large boosts in public
funding since apartheid, the country had yet to see commensurate gains in many
areas. For instance, despite one of the highest education spending rates in the
world – nearly six percent of GDP – South Africa’s test scores and matriculation
rates remained low by international standards. Likewise, significant inequalities in
healthcare budgeting and service delivery existed among provinces, leaving some
to question how well the nearly nine percent of GDP spent on healthcare was
being used.
A new level of performance management maturity
Within the Zuma government, the desire to bring about more tangible, trackable
results drew focus to outcome-based planning and budgeting. With job creation a
primary goal, the government announced a major effort to reform budgeting and
governance in 2009.
5
Agence France Presse (AFP) South Africa unemployment drops to 24% – Feb 8, 2011
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18 | Making the Transition – September 2011
As part of a strategic overhaul, the South African government resolved to
rationalize what had become a spiraling series of policy priorities. Over the course
of 24 months, they assessed their planning processes, identified gaps, and in
deliberation with the Cabinet and relevant ministries, decided to split the planning
function between two cabinet-level bodies. The country’s long-term strategic
planning would continue to be conducted by the ANC government, but with input
from a new National Planning Commission.
This coordinated approach to planning culminated in 12 discrete outcomes derived
from the ANC Manifesto, such as, “Improved quality of basic education” and
“Decent employment through inclusive economic growth,” and marked the first
time in the country’s history that a clear agenda for growth was developed across
multiple agencies and made publicly available.
Today, responsibility for converting those goals into manageable outcomes rests
with a new Ministry of Performance, Monitoring and Evaluation (PME).
Performance, Monitoring and Evaluation Unit: The PME was established
out of recognition that a centralized, executive oversight function was needed
to ensure cohesion of overall outcomes and functional line deliverables at the
ministerial, provincial and municipal levels. Its creation signaled the government’s
willingness to take a more developmental role in state affairs.
Established as an independent department within the presidency, the PME has
three missions: to lead and facilitate the outcomes approach; to develop plans
for achieving those outcomes; and to report and monitor on the progress made
toward achieving them. According to Dr. Sean Phillips, the Director General of
the Performance Monitoring and Evaluation Unit, “The idea is to institutionalize
progress and reporting at the highest level, keep cabinet ministers focused on
what they agree needs to be done and support the country’s strategic agenda.”
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Making the Transition – September 2011 | 19
Performance
improvement is
a process, not an
event.
Phillips is quick to note that this will take time, adding, “Performance
improvement is a process, not an event. We are at the start of a learning curve.
Changing the way government works and transforming management into a more
businesslike structure is a long-term process. Our goal is to see improvement
each quarter and help the cabinet look across government, assess where
progress has been made, and identify those areas that need additional support.”
Dr. Sean Phillips
Director General,
South African Performance
Monitoring and Evaluation Unit
What this means for South Africa
The new system is
designed to forge
better cohesion
between and within
departments in
support of national
priorities.
The new system is designed to forge better cohesion between and within
departments in support of national priorities. To improve literacy rates, for
instance, multiple departments need to pull together. Dube adds, “The
Department of Public Works may have to build more schools so that students are
not educated under trees, the Department of Health must ensure that children
receive appropriate immunizations to minimize absences, and the Department of
Education may need to revamp teacher recruiting and salary levels to ensure that
educators are paid on time and have adequate working conditions.” By delineating
the actions required to meet the overall goal, each department knows exactly
what it is supposed to be doing, and those tasked with overseeing the project at
the national level can better align performance measures and reporting.
Challenges
1. Generating buy-in: Because the program is new, there are ongoing
questions about how to bring various ministries on board and into alignment.
Some ministers are worried that the new process might reduce the funds
previously available to them, and with it, their department’s influence. Others
have expressed concern about the lack of a specific legal framework for the
performance agreements. In response, the government has reached out to other
countries, with extensive experience in OBB such as New Zealand, to review
and apply those learnings in South Africa.
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20 | Making the Transition – September 2011
2. Linking joint planning to the budgeting process: Having already improved
the planning process, the government has embarked on the next phase: refining
and rolling out a more transparent and aligned budgeting process. Developing the
service delivery agreements has proven a lengthy process partly because they
are still new, and the required analysis and reporting has needed refinements.
Joint planning among agencies that is required for most goals adds another layer
of complexity to the process. As a result, it has been difficult to synchronize the
timing with the country’s budgeting calendar. This has resulted in some unfunded
delivery agreements. Recognizing that plans are inherently dynamic, the PME and
others are working to find a way to allow changes to be made mid-stream without
having to redo all the stages of the service delivery agreement process.
3. Developing necessary skill sets: South Africa has made enormous strides in
transforming its performance management structure in a relatively short period
of time. However, there remains a need for administrators and officials across
the government to understand, interpret and apply planning frameworks, financial
reporting standards, international accounting frameworks and internal controls.
While the country’s formal financial statements are prepared under international
accounting standards, that approach may still be challenging to some managers,
particularly in municipal levels governments.
Lessons learned
1. Gauging the quality of management: It is not enough to have the right
systems in place. Organizations also need to have the right management to
execute the strategy effectively. Some in South Africa’s government have looked
to Canada’s Management Accountability Framework as a possible model. That
framework supplements other program-based processes by assessing the quality
of management and its ability to get the job done. As Dr. Phillips observed,
“Strategic planning looks at outcomes, but this is rendered moot if there isn’t the
management or institutional machinery to affect the needed changes.”
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Making the Transition – September 2011 | 21
We’re in the
key part of the
process right now.
It’s important that
the Cabinet keeps
its commitment to
producing the quarterly
reports and using them
as intended.
Dr. Sean Phillips
Director General,
South African Performance
Monitoring and Evaluation Unit
2. Communication and outreach: Three years ago, South Africa’s Auditor General
started conducting roadshows, traveling to different provinces to meet with local
administrators, officials, members of the press and the public. The purpose being
to educate those charged with governance to understand what the audit opinion
means for the entity and for governance as a whole. The meetings are open, candid
and non-judgmental -- an effective mix. Over the past three years, the program
has continued to gain attention and momentum. In part, this is due to the Auditor
General’s hard work in breaking down perceived barriers. Where the old style of
governance was largely impositional ‘We’ll tell you what to do and how to do it’
the tone of these new sessions is ‘We’re all in this together.’ By removing the
technical jargon used in published financial reports, laying out expectations and
advising how to troubleshoot disclaimers, qualified audits and other issues, the
forums have encouraged dialogue and engagement. In addition, press coverage of
these events has played an important role in building awareness among the wider
public of what the office is doing.
Next steps
“We’re in the key part of the process right now,” says Dr. Sean Phillips. “It’s
important that the Cabinet keeps its commitment to producing the quarterly
reports and using them as intended.” Sustaining the commitment and maintaining
emphasis on performance is the key challenge for many governments. The Zuma
administration has put monitoring quite high on its agenda, which should help
build commitment within the government. “The ultimate proof, of course,” says
Dube, “will rest in whether ordinary citizens notice an improvement in service
delivery. It’s an exciting time right now for South Africa. Service delivery has long
been a source of concern for South Africans. It will be interesting to check back in
a year or two after the budgeting and service delivery program has had a chance
to take root to assess how far we have come.” Auditing is another important
element of the process (i.e. planning, budgeting, implementation of plans, then
auditing) that lies downstream for South Africa. Even though auditing happens
later on in the process, it is influencing the bigger objective of outcomes-based
planning and budgeting.
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22 | Making the Transition – September 2011
Advanced Stage
Brazil
When Itamar Franco, governor of Minas Gerais, Brazil’s fourth largest state,
declared a moratorium on paying its debt payments totaling US$15 billion debt on
January 6, 1999, it set in motion a chain of events that nearly led to the country’s
collapse. The announcement came at a time when Brazil was battling a series of
economic challenges, including currency devaluation and a downgrading of the
country’s credit rating. Within Brazil, the state of Minas Gerais faced an even
more challenging set of financial conditions. The state was running at a constant
deficit: 80 percent of the state’s revenues went to salaries, 33 percent to pensions
and debt payments accounted for an additional 13 percent. The total bill came
to 126 percent of expected income.6 With high costs, low revenues, and little
accountability, Minas Gerais faced a turbulent few years.
New financial discipline
In 2003, Minas Gerais elected Aécio Neves, a reform-minded governor who
resolved to put an end to the cycle of debt, inflation and financial uncertainty. As
part of a wider austerity plan known as the ‘Management Shock,’ his government
introduced new frameworks and regulations to cut excess spending, improve
accountability and establish greater linkage between budgeting and planning. Under
a zero-deficit mandate, and buoyed by wide popular support, Neves trimmed the size
of government – abolishing six ministries and 59 supervisory and control positions.
In addition to creating new frameworks, the government stepped up enforcement
of existing federal legislation. Chief among them were Fiscal Responsibility Laws
which prohibited salaries and benefits from being padded while costs and services
elsewhere were being cut. Such controls tamped the excessive wage inflation
that had contributed to the state’s financial troubles. As part of that effort, and in a
gesture of good faith, Neves cut his own salary by 45 percent. Other parts of the
process included:
1. High expectations and clear goals: The governor laid-out an ambitious dual
track program. One track focused on near-term (current year) actions needed
to restore fiscal balance, and the other charted long-term development over 20
years. Developed in collaboration with the Finance Secretary and a specialized
project office, the plan stipulated detailed performance objectives and milestones,
with very aggressive targets. After 20 years, Minas Gerais aimed to have the
highest literacy rate of any state in Brazil.
6
World Policy Journal, Kenneth Maxwell, Spring 1999.
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Making the Transition – September 2011 | 23
With the broader strategy in place, the project created individual long-term,
medium-term and short-term plans for each secretariat. Those plans laid-out
a set of specific performance goals, establishing targets for such things as
literacy, infrastructure development, public safety, and access to healthcare.
Based on those targets, the finance team could effectively allocate state funds.
2. Trial and error: At the beginning, the reform was so new and its scope so
wide, that the government faced a process of learning by doing. The finance
team often began by taking a department’s prior year’s budget that laid-out
a baseline number and assigned budgets accordingly. Although somewhat
autocratic at the start, most secretaries acquiesced, recognizing the need to
establish baseline budgets and bring a tighter correlation between spending
and results.
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24 | Making the Transition – September 2011
3. Incentivizing the right behavior: The government created incentives to
encourage secretaries and others to make sometimes painful reforms. Taking a
page from the private sector, they adopted performance programs that rewarded
departments that met performance milestones. Furthermore, secretarial
performance reviews took place in front of fellow secretaries, creating subtle
social pressure to conform. There was internal pressure from within departments
as well. Staff were part of the incentive pool, earning bonuses when milestones
were achieved. Performance results were also made available to the general
public, published online and in local newspapers, providing an impetus for
secretaries and their departments to demonstrate real results.
4. Benchmarking and analysis: Early on in the process, the finance team broke
the state into regions and compared a range of economic and social indicators,
such as per capita income, relative GDP, graduation rates, and disease and
mortality statistics. These data helped them target the areas most in need of
development, and prioritize programs and funding accordingly. They also reached
out to experienced practitioners in other locations and consulted with development
experts from the World Bank and the International Monetary Fund (IMF).
5. Creating an informed electorate: Recognizing that a healthy democracy
relies on an informed electorate, the reform program also included a component
focused on community outreach. A committee within the Secretariat of Finance
goes out to local communities to provide guidance on where citizens can get
information on what the government is doing, what they should expect from
government, and what individuals can do to hold their leaders accountable. Civics
courses are also a required part of the curriculum in grade schools.
Lessons learned
The Management
Shock program
restored financial
stability and the
confidence of the
international lending
community.
One might think that it is easier for more developed nations such as New Zealand
and Canada to adopt OBB, but the Brazilian state of Minas Gerais shows that
discipline, rigor and long-term commitment are more critical success factors.
The Management Shock program restored financial stability and the confidence
of the international lending community. As the world economy grew rapidly in
the late 1990s and through the 2000s, Minas Gerais attracted new businesses,
such as Mercedes Benz, Lafarge and Sandvik. Today, Brazil’s fourth largest state
is regarded as a model of governance. There has been a 76 percent jump in
literacy rates between 2006 and 2010, a sharp increase in healthcare oversight
(31 hospitals were audited for quality-of-care standards versus 0 in 2007) and a
sustained improvement in the investment climate.7
7
“How the world’s most improved school systems keep getting better,” McKinsey and Company, 2010.
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Making the Transition – September 2011 | 25
Mature Stage
Canada
Overview
The government of Canada has a long history of performance-based budgeting, dating
back to the late 1970s. Today, all departments are required to submit programs for
review and manage them against planned results. The country’s well-established
frameworks and review cycles make it one of the more effective and highly regarded
outcome-based budgeting (OBB) systems in the world.
A gradual maturity
In contrast to other places, Canada’s embrace of OBB stemmed less from
a financial or budgetary crisis than a gradual maturity in the public sector
organization. “In part,” says Jim Alexander, an associate partner in KPMG’s
government advisory practice and former Deputy Chief Information Officer of the
federal government, “this is because public service has always been very strongly
valued by Canadians.” Canada’s tradition of public sector independence also
helped. “Having a public sector that can serve either party in power is very much
a part of the Canadian identity,” adds Alexander. Because the reform program
was not politically driven, administrators could carry out improvements out of the
spotlight and without partisan pressure.
The Canadian budgetary transformation was a case of steady evolution rather
than swift transformation. The initial move from inputs to outputs to results-based
budgeting took nearly 20 years to complete. Additional reforms, begun in 1995,
sought to augment financial information with performance measurement data.
Throughout the last decade, frustration over misalignment between outputs and
outcomes drove the government to pursue greater consistency and granularity
into outcomes under a consistent framework. The result was a new, broader
management reporting framework, one that has since been adopted by many
other countries.
Program elements
Canada’s expenditure management system hinges on the idea of a whole-ofgovernment framework with clearly defined accountability. The system consists
of several elements that synchronize national and departmental programs with
higher-level outcome priorities.
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26 | Making the Transition – September 2011
1. Management, Resources and Results Structures (MRRS): The MRRS
consists of clearly defined and measurable strategic outcomes and a Program
Activity Architecture (PAA) that captures how a department allocates and
manages its resources to achieve those goals. Under the MRRS, each department
is required to gather, manage and report on a series of financial and nonfinancial measures related to their programs. The intent is to sustain a common,
government-wide approach to program evaluation. The results are core to the
government of Canada’s Expenditure Management System and form the basis of
several formal parliamentary reports on accountability, such as the annual Reports
on Plans and Priorities and the Departmental Performance Reports.
2. Program Activity Architecture (PAA): The PAA is a structured inventory of
the programs that a department commits to support. It provides a framework to
integrate operational planning and reporting processes. Within the architecture,
programs and their sub-activities are aligned against the outcome they are
designed to support. Because the PAA framework is consistent across
departments, results can be rolled up. This makes it easier for oversight bodies,
such as the Treasury Board Secretariat, evaluators, and fellow ministers to look at
agency activity and progress toward shared outcomes, such as crime reduction or
public health improvements. Results are made publically available through annual
disclosures, called ‘Results for Canadians.’
To enforce use of the PAA, departments must file their annual Report on Plans and
Priorities (RPP), which lays out the department’s three-year agenda, and their one-year
Department Performance Report (DPR), using the architecture. In addition, any new
policy proposals and submissions must also be done within the PAA in order to be
reviewed by the Cabinet and Treasury Board.
“The PAA process has allowed us to more clearly convey to ministers how
departmental programs and activities are laid out,” says one Canadian official
interviewed. “The PAA serves as a lens, allowing ministers to compare initiatives
and spending across departments. That visibility allows them to more easily
challenge spending proposals and make better informed expenditure decisions.”
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Making the Transition – September 2011 | 27
3. The Performance Measurement Framework (PMF): The PMF details
the performance milestones and indicators used to track and evaluate the
department’s progress in achieving its outcome agenda. It is also used to support
day-to-day program delivery. Ongoing collection and analysis of performance
information not only helps to support good program management, it also
highlights gaps and areas where outcome, program or measurement indicators
need to be adjusted.
4. The Management Accountability Framework (MAF): Where the PAA
and MRRS are primarily designed as public facing programs, the MAF serves
as an annual internal measure on the quality of public sector management
effectiveness. Deputies are assessed on such things as their ability to deliver on
the minister’s outcomes, whether they succeeded in getting a new immigration
policy through Cabinet, as well as morale, employee turnover, and the quality of
management skills.
Canada was the first country to institute this type of management assessment.
A Treasury Board Secretariat official, notes, “The performance pay of deputy
ministers is linked to the MAF results of their departments, making it more
relevant to them. Because the results are public and broadly known, departments
and deputy ministers can see how their departments perform compared to their
peers. The MAF also provides the Treasury Board Secretariat with a whole-ofgovernment perspective on the state of management practices, highlighting areas
of strength and those needing more attention.”
Encouraging adoption
Although the government was successful in rolling out MRRS and PAA, evaluators
learned that it is one thing to install a system and another to get people to use
it. Reviews found that departments viewed the system mainly as a compliance
check and were not integrating it into their day-to-day planning and operations.
To change this, the government instituted new rules requiring that all policy and
program submissions made to ministers, the Treasury and the Cabinet come
through the PAA or risk being unfunded. That change meant that the PAA was no
longer simply a reporting vehicle, but critical to a department’s ability to advance
its programming objectives.
To give the program teeth, the government also introduced a quadrennial
Strategic Review process using the PAA as the underlying logic model. The
Strategic Review allows senior management to perform a detailed assessment
of direct program spending to see where programs are being managed
effectively and where improvements need to be made. The process stipulates
that management follow a result-based approach to show how federal funds are
being used and the specific benefits being delivered to citizens as a result.
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28 | Making the Transition – September 2011
Moreover, the Strategic Review provides an opportunity for management to
rebalance program funding, identifying low impact or underperforming programs
and reallocate dollars accordingly. “The Strategic Reviews really drove the
managing-for-results process to ground,” says a Canadian official. “That’s
because a strong strategic review requires a strong PAA. If the PAA is not clear
or the performance measures around it are not focused on the right things, it all
comes out in the wash during the strategic review process.”
Through strategic review, the Treasury Board analyzed about 25% of the federal
government’s direct spending annually over a four year period. The mission, in
part, was to reduce and in some cases realign the least relevant and less effective
program spending.
Collaboration and integration
Six main bodies have a hand in establishing spending priorities, making appropriations,
and designing the programs needed to execute the government’s agenda.
1. The Cabinet sets and appropriates resources based on the policy outcomes
established in the annual Speech from the Throne and the Budget.
2. The Privy Council Office advises the Prime Minister and Cabinet on events that
might require a shift in planned outcomes and priorities.
3. The Department of Finance develops the budget and assesses the financial
impact of submissions and policy recommendations put forth by other
departments.
Canada’s public
sector has witnessed
a significant
transformation as
a result of its OBB
initiatives.
4. The Treasury Board provides management oversight and governance and
is responsible for presenting the annual Estimates, or spending plan, to
Parliament.
5. Parliament approves the budget and appropriations.
6. Departments, around 90 in all, design and implement program proposals. and
manage program delivery.8
Continuous improvement
Canada’s public sector has undergone a significant transformation as a result of its
OBB initiatives. But like many transformations, there is room for further improvement.
8
“Performance budgeting in OECD countries,” OECD, 2007.
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Making the Transition – September 2011 | 29
Some of the current challenges the government must tackle include:
1. Acting on evidence-based data: Politicians tend to be swayed by the
feelings of their constituents. This means that evidence-based data can fall second
to such things as polling data when it comes to influencing policy and decisionmaking. The Canadian government, for instance, recently eliminated the long-form
census. Although privacy concerns were cited as the main reason, the fact that
the census sometimes delivered statistics that were at odds with the ruling
government’s political position is also considered by some to have been a factor.
Reformers should note that objective guidance alone is not always enough to
compel leaders to act.
2. Horizontal reviews remain weak: Canada has proven adept at integrating
results-based performance vertically within departments, but it has struggled
to do so across government. Most strategic outcomes are cascaded top-down.
The government would like to encourage greater horizontal planning, but that is
a big job, one that will involve aligning systems, processes and financial coding.
Some parts of the government are starting to do this now, but this is not a quick
process.
3. Many provinces have yet to embrace MRRS, MAF and PAA: Most of the
OBB activity in Canada exists at the federal level. In some ways, the provinces
have less incentive to adopt it. The populace tends to look more to short-term
needs than long-term efficiency on the local level, and the rigor required of OBB
can also be seen as taking away flexibility from political leadership.
Lessons learned
1. Don’t rush change: The move to OBB in Canada was incremental. “In
Canada,” says an official interviewed, “we are getting to a level of sophistication
where government has much better evidence of what works and what doesn’t,
experience that in the past could only be acquired, to a large degree, through trial
and error.” Reformers learned that even where there is strong leadership and
clear accountability, full implementation resulting in a real change in management
culture requires seven to ten years. However, the help of experienced advisors in
the field can help mitigate the volatile, unpredictable nature of change.
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30 | Making the Transition – September 2011
2. A common framework is essential: Government reformers recognized that
the only way to apply results-based management principles across the public
sector was with a uniform approach, including clear evaluation and reporting
requirements. This fosters accountability while also making it easier to refine
the system as needs dictate. “Be sure to stick with the doctrine,” the Canadian
official adds. “There may be deputies who challenge the approach or point out
how their agency has unique circumstances that make it hard to comply, but
it’s important to conduct outreach and education and keep pushing the program
forward.”
3. Identify and manage risks that could threaten outcomes: Canada requires
departments to complete an annual corporate risk profile to flag issues, concerns
and risks that could jeopardize their ability to deliver outcomes. One department,
for instance, became concerned about a looming shortage of senior scientists. By
flagging that in their risk profile, they were able to operationalize it and designate
a course of action. While public sector organizations in other countries may have
their own integrated risk management programs, the process of developing
corporate risk profiles is more common in Canada. “That may be because it is
considered by the MAF, and has become a key strategic and operational planning
tool,” notes one official.
People have
a better
understanding of
where the money is
going and the results
they are getting from
it.
Canadian Government
Official
4. Quality relationships matter: “It’s important to bring a human scale to
planning,” says Alexander. “Find a way to meet regularly, by phone, in person or
through video conferences. This makes it easier for colleagues to reach out to one
another easily when questions or concerns arise,” agrees a Canadian government
official interviewed, stressing, “You can’t run the process behind your desk. It is
important to visit departments one-on-one and talk to people at a variety of levels
to understand how the program is working and identify additional opportunities to
improve performance.”
Putting it all together
“People have a better understanding of where the money is going and the results
they are getting from it,” says an official. Annual departmental spending patterns
have often been characterized by increased spending at year-end. Today, better
financial linkage, better program planning and more frequent reporting have
evened out the spending curve. ”There is much more rigor in the system now.”
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Making the Transition – September 2011 | 31
New Zealand
An economy in crisis
In the early 1980s, New Zealand’s economy was battered by rising debt, high
unemployment, interest rates and inflation. Years of protectionist trade policies
compounded the matter, adding layers of cost and bureaucracy. Together, this
brought the country to near-bankruptcy, a fact reflected in the country’s slide from
the top to the bottom percentile in Organisation for Economic Cooperation and
Development (OECD) rankings.
Staunching the bleeding
National elections in 1984 marked a turning point. The ruling conservative party
was replaced by a cadre of young, ambitious Labour Party members who were
determined to make good on promises of a sweeping economic overhaul. Over the
next several years, they removed many of the decades old constraints on the New
Zealand economy. These included import restrictions, trade barriers, agricultural and
other subsidies.
The guiding impetus was the desire to have New Zealand’s economic model more
closely mirror that of the private sector. Rose Anne MacLeod, Senior Fellow at
Victoria University and a former senior finance leader for the Treasury and the Ministry
of Education explains, “Financial reforms were part of the bigger picture.” “At the
time,” she notes, “the government was a champion of the new economic thinking
coming out of such places as the Chicago School of Economics.“ The prevailing
wisdom argued for getting government out of business; commercial services were
privatized where possible, shrinking the size of government.”
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32 | Making the Transition – September 2011
Building the foundation for outcome-based budgeting
Decentralizing spending authority: Supported by a public weary of economic
troubles and public sector inefficiency, New Zealand passed three major pieces of
legislation in the late 1980s. The State Sector Act, the State Owned Enterprises Act,
and the Public Finance Act transformed budgeting, policy making and the business
of governing. Together, these laws peeled away what had been a heavily centralized
budgeting structure, run principally by the Treasury, and replaced it with a newly
decentralized organization. “At the time,” says Souella Cumming, a KPMG in New
Zealand partner and advisor to the New Zealand government, “It wasn’t clear who
was ultimately responsible for policy setting and who was accountable for managing
resources, partly because everything was funneled through the Treasury.” The new
structure addressed those issues by distributing spending and decision-making
authority across 41 ministries. This was topped by a centralized hub comprising a
pared-back Treasury, a policy-setting arm, and an advisory body to the Prime Minister.
Aligning fiscal strategy: To gain better visibility over its finances, New Zealand
adopted accrual-based accounting. As noted in other case studies, the switch from
cash-based accounting allowed the country to better match income with expenditures
on both a national and a project level, something it had been unable to do before.
At the same time, the government instituted a new performance management
framework. While ministers used to present budgets containing a list of planned
expenditures, or inputs, they now had to specify what actions, or outputs, they could
achieve. Ministers also had to show how their outputs and appropriations tied to
outcomes agreed upon by the Cabinet and ministers at the beginning of the fiscal
year. An evaluation framework, consisting of metrics and reporting requirements was
instituted to gauge progress against those targets on a ministry-by-ministry basis.
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Making the Transition – September 2011 | 33
Refining the management structure: As part of the reforms, each ministry was
empowered to hire and manage its own staff and budget, a liberty that had previously
been controlled centrally by the State Services Commission and the Treasury. In
addition, a new accountability framework clarified roles, responsibilities and reporting
obligations.
One of the more important changes that occurred was giving permanent secretaries,
or chief executives as they are now called, broad authority to govern staffing, salaries
and purchasing, and placing them on fixed-term contracts. These changes put
increased decision-making power in the hands of apolitical administrators, fostering
continuity and helping to sustain the institutional knowledge that reforms such as
outcome-based-budgeting require.
Although some worried that the decision to decentralize budgeting would cause the
government to lose control over spending, the move helped streamline the larger
bureaucracy, allowing senior leaders in the government to focus on big picture
decisions while ensuring that all parties had ‘skin in the game.’ As Graham Scott,
Secretary to the Treasury during the reform, put it, “Treasury sought to give away
control of the small numbers in exchange for control of the large numbers.”9
Improving accountability and oversight: The new financial management structure
holds each department accountable for its fiscal decisions, from the ministerial level
on down. In return for broader financial autonomy, departments are required to detail
their performance against the plan at regular intervals. In addition, they are expected
to collaborate in setting strategic priorities and follow an agreed fiscal plan to see that
outcomes are achieved within the boundaries set by the government.
Under the auspices of the chief executive, departments submit a Statement of
Intent (a three-to-five-year business plan), which is also signed by the responsible
minister. The performance targets for each year are set out in the budget estimates
documents. The department’s Annual Report, a public accountability document
subject to independent audit, includes a Statement of Service Performance, which
sets out its achievements in relation to the performance targets. The Annual Report is
signed by the chief executive and is tabled in Parliament. In addition, chief executives
agree on priorities and targets with their respective ministers at the start of each
year. This agreement is documented in an Output Plan, against which performance is
reviewed three or four times per year. The Treasury prepares a Fiscal Strategy Report
detailing the long-term fiscal policy impacts, economic forecasts and other data for the
government as a whole, and these are signed by the Minister of Finance.
9
“Government Reform in New Zealand,” by Graham Cecil Scott, International Monetary Fund, 1996, p 89.
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34 | Making the Transition – September 2011
Sustaining the commitment
New Zealand’s path to reform was not without challenges, as many close to the
process are quick to acknowledge. Neil Walter has held a variety of senior public
service positions since before the reforms. Today, he is a lead assessor in New
Zealand’s State Services Commission’s Performance Improvement Framework
and a member of several public sector boards and advisory committees. One of
the things he credits for New Zealand’s success has been its ability to stomach
the messiness and uncertainty that comes with change. He recalls that, “while the
desperate state of New Zealand’s finances created a wide mandate for reform in the
early years, casualties started to mount later in the process and officials and the public
grew tired of turbulence and the slow pace of economic recovery.” Eventually, the
dissatisfaction led to a change in government, and posed the most severe test to the
country’s long-term commitment to improving its financial management processes.
“There was a real rift,” adds Walter, “between those that wanted to keep going with
the reforms and those that wanted to mellow down and return to quieter life.”
Fortunately, the Treasury’s Graham Scott, a politically neutral civil servant, and his
team managed to sustain the effort, working on an administrative level to push
through reforms department by department. Says Walter, “Although they had to
figure many things out as they went along, there was a rock-hard certainty about their
intentions. Over time, that determination and clarity of view got New Zealand through
the first bumpy stages of reform and onto the more stable situation it is in now.”
Results
A decade or so after the forms were instituted, New Zealand had brought its
inflation rates down to the low single digits. Economic growth also rebounded.
During the 1990s, in fact, New Zealand enjoyed faster economic growth than
either Germany or Japan, an outcome that few could have imagined at the start.
National debt also improved, falling from 50 percent of GDP during the peak of the
reform process to just above 10 percent in 2008. As of 2009, New Zealand ranks
among the top four nations in a comparison of government debt, ahead of most
other developed countries.
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Making the Transition – September 2011 | 35
Lessons learned
OBB is a journey, not an end. With that in mind, these are among the key takeaways
from New Zealand’s process:
1. Be flexible: “While textbooks say you should start with a plan at the beginning
of the year,” says Walter, “the reality is that as soon as the plan is signed, the
world changes. Recognizing that, it is important to agree on the larger direction
then use regular feedback and reporting to refine the scope, agenda and overall
alignment.”
2. Measuring the right things: Although New Zealand’s budget process has a
performance management system in place, the focus can occasionally be too
narrow. MacLeod recalls, “In the early days, the Statement of Service Performance
was fraught with challenges. Government departments are required to specify
performance measures of quantity, quality, timeliness and cost of each good or
service (output) the department produces. Until very recently, measures were audited
based on whether they were achieved, and a clean audit report was given, whether or
not the measures adequately reflected performance.”
New Zealand has a
new audit standard
that requires quantity,
quality and timeliness
measures to be
appropriate.
Since then, New Zealand has adopted a new audit standard that requires quantity,
quality and timeliness measures to be appropriate. Still, advisors like Cumming note
that it can be hard for organizations to stay focused on the big picture. “Funding
and performance is based on individual programs, and it requires coordinated
efforts to plan and manage benefits across the system as a whole.” That
requirement forces department managers to step back and consider the links
between their programs and work being carried out in other departments or
sectors.
3. Widening the performance measurement scope: “One of the things I
discovered,” adds Walter, “is that although every department is measured and
assessed against agreed-upon performance objectives, there is also a need to
assess ministers and departments for things that have not happened, for tariffs
that have not increased and for wars that have not occurred.” The ability to steer
an organization free from those problems is essential to good management.
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36 | Making the Transition – September 2011
Conclusion
Outcome-based budgeting is a proven means of increasing financial transparency and
accountability in the public sector. By clarifying roles and expectations, establishing
management frameworks and standardizing reporting processes, departments
can better align program spending and demonstrate tangible value. Navigating
through the necessary political, legal, accounting and regulatory steps takes
sustained commitment, strong leadership and experienced advisors. For those that
have persevered, the effort has been worthwhile. In places like Canada and New
Zealand, OBB has been a key factor in lowering debt, reducing waste and improving
coordination. As pressure for improved public sector accountability mounts around the
globe, OBB is expected to become a universally accepted operating standard.
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KPMG Contacts
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Publication name: Making the Transition.
Publication number: 110757
Publication date: September 2011