## 1chlea2019001 ## Source details **Canonical URL:** [1chlea2019001](https://www.imf.org/-/media/files/publications/cr/2019/1chlea2019001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1chlea2019001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1chlea2019001.pdf.json) --- ### Preface and mission - IMF Fiscal Affairs Department (FAD) mission visited Santiago from January 29 to February 11, 2019, at the request of the Chilean Ministry of Finance to assist in developing processes for conducting spending reviews. - IMF team led by Ms. Teresa Curristine and comprised of Ms. Laura Doherty, Messrs. Thomas Gloy and Jon Sell (all FAD). - High‑level meetings held with: the Minister of Finance (Mr. Felipe Larrain Bascunan); the Budget Director (Mr. Rodrigo Cerda Norambuena); the Head of the Public Management and Control Division (Ms. Paula Darville); heads and senior staff of DIPRES; Head of the Budget Advisory Unit of the Special Mixed Budget Commission of Congress (Mr. Ruben Catalan Hernandez); Secretariat to the Presidency; Office of the Comptroller General; and senior officials from the Ministries of Education, Health, Labor, Social Development, and Public Works. - Consultations with the Fiscal Advisory Council (Mr. Klaus Schmidt‑Hebbel, President; Ms. Andrea Tokman, Vice‑President) and Inter‑American Development Bank staff (Messrs. Fernando Montenegro and Sebastian Miller). - IMF team conducted a seminar on international experiences with spending reviews attended by Ministry of Finance, DIPRES, and spending ministry staff. - Special thanks to Mr. Gonzalo Gaete for facilitating the mission’s work and support. - Objective: provide recommendations and options for introducing and institutionalizing spending reviews (SRs) in Chile, including framework, organizational structure, process, timeline, and institutionalization measures. ### Chile’s fiscal context and consolidation plan - Fiscal target: reduce the structural deficit by 0.2 percent of GDP for each year of the four‑year Presidential term from 2018–21. - Government announced a four‑year consolidation plan to gradually reduce expenditure each year by approximately US$1.1 billion to realize a total of US$4.4 billion in savings over the period. - The government achieved its 2018 structural balance target. - Gross public debt rose by nearly 20 percentage points of GDP from 2007–17 to 23.6 percent in 2017. - The structural deficit peaked at 2.0 percent of GDP in 2017. - Since 2017 Standard & Poor’s, Moody’s, and Fitch have all downgraded Chile’s sovereign credit rating. - 2019 structural balance target: a structural deficit of minus 1.6 percentage points of GDP. - Aim by end of Presidential term: structural balance at minus 1.0 percent of GDP. - Government cut expenditure by approximately US$1.063 billion in 2018. - 2018 budget consolidation savings breakdown: - Cuts to budgets for goods and services, personnel expenses, acquisition of nonfinancial assets: US$446 million. - Reductions to a central Presidential reserve for new initiatives: US$363 million. - One-off measures: US$238 million. - Other savings from lower than expected inflation: US$16 million. - Total ministry expenditure increased from US$45 billion in 2009 to US$69 billion in 2018. ### Role, objectives, and types of Spending Reviews (SRs) - Definition: SRs are an institutionalized process for analyzing existing expenditures to identify options to reduce or redirect expenditures and/or improve value for money. - Primary objectives: - Fiscal consolidation (support government’s fiscal targets). - Create fiscal space for new priorities or emerging pressures. - Reprioritization from lower- to higher-priority areas. - Improve efficiency and effectiveness (value for money). - Types of SRs: - Targeted reviews: limited predefined topic or area; focus on value for money and efficiency; recommended initially two to three a year. - Comprehensive reviews: unconstrained search for best saving options; cover more areas of expenditure (OECD examples cover between 20 to 100 percent of expenditure); recommended at most once every four years. - Hybrid approaches (some countries use combinations). ### International experience and lessons - Over two‑thirds of OECD countries conduct SRs (OECD Performance Budgeting Survey 2018). - Examples of practices: - Denmark: annual targeted “special studies”. - Netherlands: long tradition of special studies; 2009 comprehensive SR required each working group to propose at least one option capable of delivering a 20 percent reduction in spending or tax expenditures in the area under review over a four‑year period. - Slovak Republic: rolling targeted reviews covering around one‑fourth of central government spending each year; reported savings up to 8 percent of budget on average in first SRs. - Key success factors: - Strong political commitment and Presidential approval. - Clear objectives and targets at the outset. - Ministry of Finance leadership and integration with the budget. - Clear scope, timing, and savings targets; emphasis on implementation and monitoring. - External challenge and engagement of external expertise. ### Proposed SR framework for Chile: structure, governance, and capacity - Governance and decision rights: - President to approve SR framework, topics, TORs (including saving targets), and final decisions on saving measures. - Steering Committee: chaired by the Minister of Finance; include the Budget Director and the Minister from the review ministry; provide leadership and oversight. - DIPRES to coordinate reviews; SRU to drive process coordination. - Joint working groups per SR: include DIPRES budget sector, SRU, and relevant spending ministries; typical working group size: maximum 15–20 members; comprehensive reviews have more working groups (one per ministry or topic). - Line ministries actively involved for implementation and subject-matter knowledge. - SRU capacity: - Current SRU staffing: 1 staff member. - Recommended SRU size: six to eight people in a central SR unit. - Initial feasible workload with current staffing: oversee two or three targeted reviews a year; with enhanced capacity, increase workload. - SRU responsibilities: drive SR process (especially comprehensive SRs), coordination, capability building, communication strategy, support line ministries, track and report realized savings. - Role of sector divisions in DIPRES: - Sector teams to bring experience and be accountable (above SRU) for delivery and implementation support; sector teams’ role will need to shift from incremental control to strategic engagement in medium- to long-term priorities. ### Four‑stage SR process and typical timeline - Stage 1 — Prepare review parameters (September–October): - Establish scope, objectives, political mandate, ownership, participation, TORs, savings targets, roles, timeline. - TORs to be approved by the President by end of October. - Stage 2 — Analyze spending and develop policy options (November–March): - Rigorous analytical work: appropriateness, allocative efficiency, operational efficiency; use ex‑ante and ex‑post evaluations, qualitative and quantitative data, benchmarking. - Develop menu of policy proposals with consistent costings, impacts, implementation requirements. - Stage 3 — Decision making (April–May): - Steering Committee considers preliminary report; presents recommendations to the President; finalize approved saving measures. - Stage 4 — Implementation (June onward): - Integrate approved measures into draft budget and baselines; prepare legislative changes if required; monitor implementation; sign letters of agreement between President and implementing ministries. - Integration with budget: - Announce topics in September; final saving decisions in April or May; savings included in ministry budget proposals and baselines in subsequent years. - Comprehensive SRs require around seven months and largely replace exploratory budget phase in the year conducted. ### Legal and institutionalization requirements - Initial SR framework can be established by Presidential decree. - Legislation recommended to make SRs permanent—amend Public Finance Law to include SR framework and MTBF provisions. - Institutionalization priorities: - Integrate SRs into annual budget process so options are ready for exploratory budget phase. - Develop DIPRES capacity to monitor SR savings and ensure incorporation in baseline budget proposals, especially outer years. - Develop a formal Medium‑Term Budget Framework (MTBF) providing ministries with indicative budget ceilings for three outer years. - Integrate SRs with performance and evaluation framework: align tools, use ex‑post evaluations to follow up implementation, include SR savings and reforms in Management Improvement Program (PMG). - Assign saving targets to agency expenditure evaluations; amend ex‑ante evaluation framework to align methodologies and include costing; align budget program structure with evaluation program structure. - Publish reports on cost pressures and mandatory spending embedded in legislation. ### Selection, sequencing, and options for comprehensive SR timing - Authorities’ internal goals: 1. Demonstrate initial progress in time for the 2020 budget. 2. Consider moving to a comprehensive review within the next two years. - Recommended short‑term approach: - Start with highly targeted reviews beginning in 2019 to develop and embed SR methodology while preparing for comprehensive SR. - For 2020 budget (short timeframe): a limited or pilot SR only; candidate pilot: government property management (DIPRES already working on estate efficiency). - Two options for comprehensive SR timing: - Option A: comprehensive SR in 2021 for Budget 2022 (shorter preparation; deliver larger savings before end of term). - Option B: comprehensive SR in 2022 for Budget 2023 (extra year to build capacity and conduct additional targeted reviews; align with new administration). - Practical recommendation: first comprehensive review to cover a limited percentage of expenditures in key areas. ### Candidate targeted review topics and selection criteria - Early topic selection criteria: - Likelihood to yield savings and succeed. - Cross‑cutting areas with comparable costs for benchmarking. - Clear administrative boundaries and available data. - Political support for implementation. - Promising early candidates: - Operational/functional expenditures: property, ICT, vehicles. Government property recommended as 2019 pilot. - Hospitals/health: focus on medium‑term cost drivers and standardizing costs across hospitals; candidate for substantive 2020 review for 2021 budget. - Nursery care, school lunches, public sector training, administrative support provision (HR, finance, ICT, estates). ### Expected outputs and reporting - Core output: specific savings integrated into the budget; each SR should start with a clear savings target (examples suggested: a 5 or 10 percent reduction in current expenditure). - Reporting: - Internal report: SRU with ministry and working groups to produce internal report with analysis and options; politically challenging options may be kept internal. - Public report: publish analysis and conclusions for Congress and public; publication scope can vary (full analysis like Denmark; only conclusions like UK). - Monitoring: - SRU to develop a system to monitor realization of savings and report regularly to Budget Director, Minister of Finance, and President. ### Capacity, evaluation framework, and PFM linkages - Evaluation system status: - Around 1,200 programs underwent ex‑ante evaluation in past 10 years. - Around 580 programs underwent ex‑post evaluation in past 20 years. - Public Management and Control Division conducts 20 to 25 ex‑post evaluations each year; 2011–2017 total of 143 programs evaluated. - Of evaluated programs, 4 percent categorized as good performance; 58 percent underperformed. - Gaps: - Evaluations not strongly integrated with the budget process or medium‑term planning; often consider performance without cost‑effectiveness. - Program classification misalignment: approximately 700 public programs in evaluation framework vs. around 300 programs in the budget. - Recommendations for evaluation alignment: - Adjust ex‑post evaluation framework to follow up on implementation of SR saving options. - Assign saving targets to agency expenditure evaluations. - Amend ex‑ante evaluation framework to align methodologies between DIPRES and MSD; include short‑ and long‑term cost considerations and DIPRES sign‑off before program approval. - Align budget program structure with evaluation program structure to improve usability of evaluations in budgeting. - MTBF role: - Implement MTBF with indicative program‑level budgets for three outer years to make medium‑term implications and savings realization transparent and enforceable. - Accounting for savings: - Develop methodology to account for savings included in budgets to ensure savings are realized and prevent recurrence of cost pressures. - External challenge: - Engage Fiscal Council, Productivity Commission, Comptroller General, and external experts to challenge delivery approaches and support SRs. ### Key PFM checklist (status) - Credible annual budget — in place. - Fixed expenditure envelope — in place on aggregate level, not ministry level. - Clear political priorities — in place. - Financial and non‑financial performance information — in place. - Analytical capacity — in place. - Methodology for accounting for savings — needs development. - External challenge — could be supported by Fiscal Council and Productivity Commission. - Medium term budget framework — MTFF exists but no MTBF. - Ability to reprioritize expenditure — present in DIPRES but not well developed in line ministries. - Time and resources — timeline tight; adequate resources required. ### Short‑term action items and sequencing (high‑level) - Develop a concept note setting out SR framework (organizational structure, objectives, selection and conduct processes); approve by the President and enact by decree. - Resource the SRU to deliver government goals; task SRU with developing a program of SRs. - Select and announce a pilot review for the 2020 budget; develop and approve TOR; establish governance (Steering Committee and working group); conduct pilot; produce findings for inclusion in 2020 budget. - Announce first full targeted SR to Congress in September 2019; conduct review in late 2019/early 2020; results ready April 2020 for incorporation into 2021 budget. - Identify and announce SR(s) to be conducted in 2021. - Decide timing of comprehensive SR (Option A deliver for Budget 2022; Option B deliver for Budget 2023). - Recruitment to SRU to begin immediately and be phased to reach 6–8 staff prior to comprehensive review. - Develop communication and engagement plans; engage independent groups and Congress early. ### Action Plan highlights and timeline - Quarter 1 2019: develop concept note; review pilot shortlist; secure Presidential approval of TOR for pilot; begin SRU resourcing and recruitment. - Quarters 1–4 2019: deliver pilot review; establish Steering Committee; conclude review and report findings; decide options to include in 2020 budget. - Quarters 1–4 2020: agree and initiate spending reviews for 2020; preparatory work for substantive and comprehensive SRs. - If Option A: CSR planning and Stage 1–4 sequencing across 2020–2022 for Budget 2022. - If Option B: CSR planning and sequencing across 2020–2022 for Budget 2023. - Quarter 3 2019: identify and plan legislative changes for SRs and MTBF. - Quarter 4 2019: provisions approved by Minister of Finance and President. - Quarter 1 2020: present law to Congress for approval. - Quarter 1 2020 onward: publish cost pressure analyses and begin MTBF implementation steps; first cost pressure analysis to be undertaken in Quarter 2 2020 and published as of 2021. ### Template and practical tools - Annex 6 provides a template for SR reports covering: - Coverage and mandate; budget covered; background. - Key findings, methodology, and detailed reform memos. - Estimations of savings/reallocations by year and performance targets. - Detailed reform proposal structure including savings tables, milestones, implementation requirements, impacts, sensitivities, and performance metrics. *Source: PREFACE, EXECUTIVE SUMMARY, and relevant chapters and annexes (excerpts) of the IMF chapter "PREFACE", mission report to Chile on introducing spending reviews.* ### PREFACE _________________________________________________________________________________________ 6 ### PREFACE ### Mission and engagements - IMF Fiscal Affairs Department (FAD) mission visited Santiago from January 29 to February 11, 2019, at the request of the Chilean Ministry of Finance to assist in developing processes for conducting spending reviews. - IMF team led by Ms. Teresa Curristine and comprised of Ms. Laura Doherty, Messrs. Thomas Gloy and Jon Sell (all FAD). - High‑level meetings held with: the Minister of Finance (Mr. Felipe Larrain Bascunan); the Budget Director (Mr. Rodrigo Cerda Norambuena); the Head of the Public Management and Control Division (Ms. Paula Darville); heads and senior staff of DIPRES; Head of the Budget Advisory Unit of the Special Mixed Budget Commission of Congress (Mr. Ruben Catalan Hernandez); Secretariat to the Presidency; Office of the Comptroller General; and senior officials from the Ministries of Education, Health, Labor, Social Development, and Public Works. - Consultations with the Fiscal Advisory Council (Mr. Klaus Schmidt‑Hebbel, President; Ms. Andrea Tokman, Vice‑President) and Inter‑American Development Bank staff (Messrs. Fernando Montenegro and Sebastian Miller). - IMF team conducted a seminar on international experiences with spending reviews attended by Ministry of Finance, DIPRES, and spending ministry staff. ### Acknowledgements - Mission thanks Chilean authorities for hospitality and constructive discussions. - Special thanks to Mr. Gonzalo Gaete for facilitating the mission’s work and support. ### Objective of the engagement - Provide recommendations and options for introducing and institutionalizing spending reviews (SRs) in Chile, including establishment of an SR framework, organizational structure, a process for conducting SRs, timeline for introduction and implementation, and institutionalization measures. --- ### EXECUTIVE SUMMARY ### Chile’s fiscal objectives and consolidation plan - Fiscal target: reduce the structural deficit by 0.2 percent of GDP for each year of the four‑year Presidential term from 2018–21. - Government announced a four‑year consolidation plan to gradually reduce expenditure each year by approximately US$1.1 billion to realize a total of US$4.4 billion in savings over the period. - The government achieved its 2018 structural balance target. ### Role and benefits of Spending Reviews (SRs) - SRs are an institutionalized process for analyzing existing expenditures to identify options to reduce or redirect expenditures and/or improve value for money. - International experience (over two‑thirds of OECD countries have adopted SRs) shows SRs can: - identify menus of high‑quality saving measures that contribute to fiscal consolidation; - create fiscal space to meet new priorities or emerging pressures; - reprioritize expenditure from lower to higher priority areas and improve value for money by identifying inefficient spending. ### Proposed SR framework for Chile - Introduce targeted reviews on an annual rolling basis (initially, two to three a year) combined with a periodic comprehensive review at most once every four years. - Targeted reviews: limited predefined topic or area; focus on value for money and efficiency; include targets to identify savings options. - Comprehensive reviews: unconstrained search for best saving options; cover more areas of expenditure (but not all); integrated with the budget preparation process and lock in savings for subsequent budgets. - SRs to be integrated with the budget process and performance/evaluation systems. ### Organizational structure and governance - High‑level political commitment required: the President to approve the SR framework, the topic, the TOR for each review (including saving targets), and final decisions on saving measures. - Steering Committee: chaired by the Minister of Finance; include the Budget Director and the Minister from the review ministry; provide leadership and oversight. - DIPRES to coordinate reviews. - Joint working groups for each SR: include high‑level representatives from DIPRES’ budget sector, the SRU, and the relevant spending ministries; typically limited to a maximum of 15–20 members; comprehensive reviews to have more working groups (one per ministry or topic). - Line ministries to be actively involved given their implementation role and subject‑matter knowledge. ### Spending Review Unit (SRU) capacity - Current SRU staffing: 1 staff member (insufficient). - Recommended SRU team size: six to eight people in a central SR unit to: - drive the SR process (especially for comprehensive SRs); - ensure effective coordination; - develop capability building and communication strategy; - support line ministries in SR roles. - Initial feasible workload with current staffing: oversee two or three targeted reviews a year; with enhanced capacity, number can be increased. ### Four‑stage SR process and timeline - Four stages set out in report; typical annual timing: - Start in September (announce topics); - Final saving decisions in April or May of the following year; - Savings included in ministries’ budget proposal for upcoming budget and their baselines in subsequent years. - Comprehensive reviews: more resource intensive and time consuming; would largely replace the exploratory budget formulation process in the year conducted. ### Legal and institutionalization requirements - Initial SR framework to be established by Presidential decree. - Legislation required to make SRs a permanent feature of the PFM system—one option is to amend the Public Finance Law to include the SR framework. - Institutionalization priorities: - integrate SR process into annual budget process so policy options are ready for the exploratory budget phase in the spring; - develop in DIPRES capacity to monitor SR savings and ensure incorporation in baseline budget proposals in subsequent budgets, especially outer years; - develop a formal Medium‑Term Budget Framework (MTBF) providing ministries with indicative budget ceilings for outer years; - integrate SRs with the performance and evaluation framework: align tools, use ex‑post evaluations to follow up implementation, include SR savings and reforms in the Management Improvement Program (PMG) for relevant ministries; - assign a saving target to each agency expenditure evaluation; - amend ex‑ante evaluation framework to align methodologies and include the costing of social and non‑social programs to be agreed with DIPRES; - align budget program structure with program structure used for evaluations; - publish reports on cost pressures and analysis of mandatory spending levels in legislation. ### Recommended short‑term program and sequencing - Government internal goals: 1. demonstrate initial progress this year in time for the 2020 budget; and 2. consider moving to a comprehensive review within the next two years. - Recommended approach: a program of highly targeted reviews beginning in 2019 to develop and embed SR framework and methodology, alongside preparation for a comprehensive SR to begin within two years. - For 2020 budget (short timeframe): only a limited or pilot SR is possible. Candidate pilot topic: property management (DIPRES already working on improving efficiency here); savings could be locked into the 2020 budget with implementation continuing through the coming year. - Schedule: - Announce pilot review topic soon; develop and approve TOR; establish governance (Steering Committee and working group); conduct pilot; produce findings for inclusion in the 2020 budget. - Announce first full targeted review to Congress in September 2019; conduct review in late 2019/early 2020; results ready April 2020 for incorporation into 2021 budget. - Options for comprehensive review timing: - Option A: conduct comprehensive SR in 2021 for Budget 2022 (find larger savings before end of term; shorter time to build capacity). - Option B: conduct comprehensive SR in 2022 for Budget 2023 (allows extra year to build capacity and conduct another targeted review; can tailor to new administration’s policies). - For the first comprehensive review, consider covering a limited percentage of expenditures in key areas. ### Immediate action items to meet goals - Develop a concept note setting out SR framework (organizational structure, objectives, selection and conduct processes); approve by the President and enact by decree. - Resource the SRU to deliver government goals; task SRU with developing a program of spending reviews. - Select and announce a pilot review for the 2020 budget; develop and approve TOR; establish governance; conduct pilot; produce findings for inclusion in 2020 budget. - Announce first full targeted SR to Congress in September 2019 and begin the review for completion in April 2020; thereafter, announce the next year’s review on an annual basis. ### Table 1 — Main recommendations (high‑level extraction) - Establish SR framework with targeted reviews annually (two to three a year initially) and periodic comprehensive review every four years, at most. - Develop and agree concept note for overall framework; approve by President and enact by decree. - Strengthen SRU capacity and staffing. - Minister of Finance and President to approve pilot review in 2019; set up governance for pilot. - Announce in September 2019 to Congress the first full targeted SR to be conducted in 2019 and 2020, with final savings decided in April 2020 for inclusion in the 2021 budget. - Identify and announce SR(s) to be conducted in 2021. - Discuss and agree timing of comprehensive SR (Option A: deliver for Budget 2022; Option B: deliver for Budget 2023). - Conduct all full SRs following the four stages set out in the report. - Develop capacity within DIPRES sector divisions to monitor and implement multiyear saving measures from SRs. - Develop system within SRU to track and report realized savings and agreed measures. - Line ministries to prepare necessary legislative changes to implement SR outcomes. - Publish SR reports. - Amend Public Finance Law to include SR framework and MTBF. - Integrate SR process into annual budget cycle and develop a formal MTBF with indicative ceilings for three outer years. - Review and adjust evaluation framework to better inform budget and SR processes; use ex‑post evaluations and PMG to follow up SR implementation. - Assign saving target to each agency expenditure evaluation and align ex‑ante evaluation methodology and budget program structures. --- *Source: PREFACE and EXECUTIVE SUMMARY (pages 6–11) of the IMF chapter "PREFACE", mission report to Chile on introducing spending reviews.* ### 1. Spending reviews (SRs) are an institutionalized process for analyzing existing ### 1chlea2019001 - 1. Spending reviews (SRs) are an institutionalized process for analyzing existing ### Overview of Spending Reviews (SRs) - SRs are an institutionalized process for analyzing existing expenditures to identify options to reduce or redirect expenditures and/or improve value for money. - Objectives of SRs include helping with fiscal consolidation, creating fiscal space to fund new priorities, and increasing value for money in the public sector. ### Chile: fiscal context and recent developments - Gross public debt rose by nearly 20 percentage points of GDP from 2007–17 to 23.6 percent in 2017. - The structural deficit peaked at 2.0 percent of GDP in 2017. - Since 2017 Standard & Poor’s, Moody’s, and Fitch have all downgraded Chile’s sovereign credit rating. - The Fiscal Responsibility Law (FRL) requires the President to set a target for the structural balance at the start of the administration: - Current target (set in 2018): improvement of the structural balance by 0.2 percentage points of GDP per year over four years. - 2019 target: a structural deficit of minus 1.6 percentage points of GDP. - Aim by end of Presidential term: structural balance at minus 1.0 percent of GDP. ### 2018 consolidation program and implementation - The government’s consolidation program aims for savings of US$4.4 billion from 2018–21. - The government cut expenditure by approximately US$1.063 billion in 2018. - Remaining consolidation intended to be spread over the preceding years at around US$1.1 billion per a year, or about 1.5 percent of the 2018 budget, to achieve the program’s overall goal. - In the 2018 budget, consolidation was largely implemented with across-the-board cuts to operational expenses and one-off measures. Savings were reached mainly through: - Cuts to budgets for goods and services, personnel expenses, acquisition of nonfinancial assets (US$446 million); - Reductions to a central Presidential reserve for new initiatives (US$363 million); - One-off measures (US$238 million); - Other savings from lower than expected inflation (US$16 million). - The expenditure reduction in acquisition of nonfinancial assets was achieved with cuts to Budget Subtitles 21, 22, and 29 (examples provided in the source). - Targeted savings at specific programs, even those evaluated as ineffective, proved difficult due to the short timeline for implementing consolidation measures and political difficulty in eliminating programs. ### Budgetary pressures and fiscal challenges going forward - Key challenges identified: - Continuing the implementation of the fiscal consolidation plan with similar levels of savings in every budget for the rest of the Presidential term. - Creating additional fiscal space for reallocations to fund the US$14 billion Presidential platform within the fiscal rule. - Managing key cost pressures, such as from health and education, that have increased significantly: total expenditure of all ministries increased from US$45 billion in 2009 to US$69 billion in 2018, primarily due to increases in spending on health and education that almost doubled over the same period. - Meeting increasing citizens’ expectations in an economy where potential GDP growth could be lower than in the commodity boom decade, requiring improved value for money and greater efficiency and effectiveness in government spending and service delivery. ### Government response: establishing a Spending Review process - The government has decided to develop a process for conducting SRs. - The Directorate for Budget (DIPRES) has established a Spending Review Unit (SRU) and requested IMF support to discuss international experiences with SRs and to propose recommendations and options for establishing a spending review process in Chile. ### International experience and lessons from OECD countries - Over two-thirds of OECD countries conduct SRs, either annually or periodically (OECD Performance Budgeting Survey 2018). - SRs are flexible tools used for identifying savings and improving efficiency and effectiveness of government expenditure. Examples: - The UK’s 2010 Comprehensive Spending Review was used for significant fiscal consolidation. - Denmark’s ongoing targeted reviews focus on identifying least efficient activities and finding savings to fund new priorities. - Some OECD governments reported achieving 90 percent of their fiscal objectives from SRs; countries cited include Canada, Greece, Ireland, Italy, Latvia, Luxembourg, Mexico, Sweden, Switzerland, and the United Kingdom. - Key lessons from two decades of OECD experience: - SRs are adaptable and should form a core part of fiscal management. - Regular use of SRs increases overall efficiency and effectiveness of government spending over time. ### Objectives and types of Spending Reviews - SR objectives may include: - Value for Money: identifying inefficient spending where similar outputs/outcomes can be achieved with reduced inputs. - Creating fiscal space: making room for new policy priorities or emerging fiscal pressures. - Reprioritization: shifting expenditures from lower-priority to higher-priority areas. - Fiscal Consolidation: reducing growth or level of public expenditure. - Types of SRs: - Comprehensive SRs: unconstrained search for best savings options; cover between 20 to 100 percent of expenditure (example: Netherlands 2009 reviewed 20 policy areas). - Targeted SRs (selective reviews): limited to predefined review topics (examples: social assistance benefits, ICT acquisition and management, waste management services); Denmark and the Slovak Republic use this approach. - Some countries combine models (e.g., Canada, Netherlands). - Targeted review topics (Box 2): - Program reviews: examine specific programs for strategic and/or efficiency savings. - Process reviews: scrutinize specific business processes (procurement, IT, HR) aiming for efficiency savings. - Agency reviews: review whole government organizations to achieve efficiency savings. - Horizontal reviews: program or process reviews across multiple agencies. ### Key lessons for effective SR design and implementation - Factors associated with more successful SRs (Box 3 and text): - Strong political commitment throughout the process. - Clear objectives and targets established at the outset. - Engagement of a range of participants and external expertise. - Ministry of Finance plays a lead role in driving the process and integrating SRs into the budget. - Set clear savings targets at the start of the exercise. - Be explicit about review criteria and core review questions. - Focus on priority areas with the best opportunities for savings. - Combine internal knowledge with external challenge; consider strategic as well as efficiency measures. - Specify scope, type of savings required, and timing of savings; clarify whether “spend to save” options are permitted. - Emphasize implementation planning and monitoring; budget sector divisions hold ministries accountable for implementation. ### Chile’s existing capacities conducive to SRs - Chile’s strengths that will aid SR introduction: - A well-established and credible annual budget process combining top-down fiscal space forecasts with bottom-up budget projections. - A widely understood process for year-to-year budgetary control anchored by an established fiscal target. - A longstanding and recently strengthened evaluation toolkit and good evaluation capability. - A modest but disciplined approach to realizing savings in cross-cutting areas of operational expenditure in the current budget year. - The annual budget process is effective in achieving discipline in year-to-year budgetary planning, demonstrated by the government’s delivery of its fiscal target in 2018, with clarity on objectives, process, roles, responsibilities, and required information. *Source: 1chlea2019001* ### 19. The annual budget cycle in Chile, however, predominantly focuses on prioritizing ### 1chlea2019001 - 19. The annual budget cycle in Chile, however, predominantly focuses on prioritizing ### Current budgetary challenges and rationale for Spending Reviews (SRs) - The annual budget process is incremental and focuses on prioritizing additional resources among new initiatives for the coming year; baseline expenditure is not routinely assessed. - Drivers requiring change: - Ambition for fiscal consolidation and increasing debt pressures. - Existing cost pressures within the baseline (e.g., pharmaceuticals, above inflation trends in public sector wage costs). - Desire for an active program of new Presidential initiatives. - Institutional response: DIPRES has decided to adopt an SR approach and establish a SR unit in DIPRES to regularize evidence-based scrutiny of the baseline. ### Limitations of medium-term planning and implications - Although a medium-term fiscal framework exists, there is no formal medium-term budget framework. - Consequences: - Difficult to assess or anticipate full multiyear costs of initiatives or discuss medium-term trade-offs. - DIPRES and some line ministries prepare medium-term forecasts, but they do not share them or use them as the basis for allocation decisions. - Commitments to new multiyear expenditures are not predicated on ministries agreeing internal funding trade-offs or baseline savings. ### Evaluation system: strengths and gaps - Existing tools: - Ex-ante and ex-post evaluations and performance indicators exist. - Around 1,200 programs have undergone ex-ante evaluation in the past 10 years. - Around 580 programs have undergone ex-post evaluation in the past 20 years. - Recent additions focus on institutional performance and program impact. - Gaps: - Evaluation tools are not strongly integrated with the budget process and do not inform medium-term planning. - Evaluations too often consider performance without assessing cost-effectiveness. - Different program structures between the evaluation framework and the budget limit usability of evaluation outputs in budgeting. - Negative evaluations more often lead to modification rather than elimination of programs, risking inefficient program mixes. - Role of SRs: SRs are appropriate to fill these gaps by strengthening alignment of expenditure to strategic goals and increasing efficiency in the program mix. ### Objectives of Spending Reviews in Chile - Primary fiscal objective: - Support achievement of the government’s fiscal targets and reallocations to Presidential priorities by identifying and realizing savings. - Government savings target: US$4.4 billion over the term of the current administration. - Structural objectives: - Increase efficiency and effectiveness; improve strategic alignment of activities; seek structural reforms to address long-term pressures (changing demand, cost pressures, evolving political objectives). - Recommendation: explicitly include structural objectives within the SR framework to ensure sustainable savings realization and long-term planning. ### Recommended SR structure and cadence - Proposed model: - Targeted annual reviews on a rolling basis (two or three a year). - Periodic comprehensive review at most once every four years. - Targeted reviews: focus on improving efficiency, effectiveness, and value for money. - Comprehensive reviews: focus more on savings. - OECD context note: comprehensive reviews in OECD countries cover anywhere from 20 to 100 percent of government spending. - Practical recommendation: for the first comprehensive review, cover a limited percentage of expenditures and focus on key areas. ### Implementation timeline and two options - Authorities’ internal goals: 1. Demonstrate initial progress in time for budget year 2020. 2. Move towards a comprehensive review within the next two years. - Assessment: goals are ambitious but deliverable with political will and adequate resourcing. - Option A: - Begin targeted reviews in 2019 and conduct a comprehensive review for the 2022 budget. - Pros: gains momentum, establishes SR framework, builds capability ahead of comprehensive review. - Cons: limited preparation time; relies heavily on existing ministry capabilities; implementation occurs in last year of existing administration and an election year. - Option B: - Implement comprehensive review in time for the 2023 budget (first year of new administration). - Pros: allows an extra year to conduct at least one further substantive targeted review and embed the SR framework; space for three targeted reviews in 2019, 2020, and 2021 to feed into the comprehensive SR. - Trade-off: Option B gives longer lead time; Option A accelerates benefits but risks weaker outcomes due to short preparation time. - Decision timing: government can decide during 2019 as scope and requirements are developed by DIPRES. ### Selecting early targeted reviews: criteria and promising candidates - Criteria for early topics: - Likelihood to yield savings and succeed. - Cross-cutting reviews where costs are comparable and can be benchmarked. - Specific program areas with clear boundaries and delivery systems suitable for comprehensive assessment within review resources. - Availability of data and political support for implementing savings. - Promising early candidate areas: - Operational/functional expenditures: - Review property, ICT, vehicles. - Property services identified as a pilot opportunity; work underway to gather lease renewal forward plans and market assessments to identify realistic savings for the 2020 budget. - Hospitals: - Ministry of Health work on long-term cost drivers and standardizing costs across hospitals. - Productivity Commission reviewing health care could provide supporting data. - Candidate for targeted review to be announced to Congress in September 2019 and integrated into the 2021 budget (agreed by Congress in November 2020); review should be tightly scoped (e.g., focusing on medium-term cost drivers). - Other areas DIPRES flagged: - Nursery care (complex provider market) to assess efficiency. - School lunches to assess targeting and efficiency. - Training for public sector staff to explore standardization and bulk purchasing savings. - Administrative support provision (HR, finance, ICT, estates) where services are replicated across ministries. ### Outputs and expectations from SRs - Core output: - Specific savings integrated into the budget; each SR should begin with a clear savings target (e.g., a 5 or 10 percent reduction in current expenditure). - Savings may align with reforms improving efficiency and effectiveness; elimination of underperforming activities must be part of SR options. - Reporting outputs: - Internal report: SRU with the ministry and working groups produces an internal report outlining conclusions and supporting analysis; can include politically challenging options kept internal unless implemented. - Public report: share analysis and conclusions with Congress and the public to build understanding and support; publication scope can range from all options and analysis (Danish model) to only conclusions (UK model). ### Organizing structure, governance, and resourcing - Presidential support: - Critical success factor; SR framework requires Presidential approval and direction to ensure ministries cooperate with DIPRES. - Governance must report to the President and seek Presidential direction on scope, timing, selection of reviews, and implementation decisions. - Engagement needed at the start (terms of reference and savings objectives) and at the end (agreement on changes to implement). - Leadership roles: - Minister of Finance and the Budget Director essential to drive the process, engage with ministries, and agree recommendations to present to the President. - Budget Director likely to need to provide personal, ongoing leadership and strategic guidance. - Steering Committee: - Recommended to support DIPRES leadership and coordination; chaired by the Minister of Finance and attended by the Budget Director. - For targeted reviews, relevant ministers should attend; comprehensive reviews may require a Cabinet subcommittee including major spending ministries. - Functions: provide overall direction, review conclusions, report results to the President; meet regularly every one or two months depending on budget cycle timing. - SR Unit (SRU) capacity: - Current staffing: SRU has one staff member. - Recommended staffing: a team of six to eight people in a central SRU to drive the process and ensure effective coordination. - Expected workload: initially oversee two to three targeted reviews a year; oversee comprehensive reviews as capacity grows. - SRU responsibilities: - Build capacity, develop communication strategies, transfer lessons between reviews. - Help ministries build capacity via guidance, training, and seminars. - Communicate with Congress, the Fiscal Council, and the public. - Recruit staff with analytical and communication skills and collaborative ability. - Role of sector divisions in DIPRES: bring experience and knowledge of review areas and be accountable (above SRU) for successful delivery and implementation support. *Source: IMF team analysis and recommendations as presented in the supplied chapter excerpt.* ### conclusions. ### conclusions. ### Working groups and external input - Working groups are an important component of the SR approach: they allow for the detailed considering of the questions to be tested; the gathering and analyzing of evidence; and the process of working through the options, benefits, and risks that should be put to ministers. - DIPRES should set up working groups for each SR, bringing together DIPRES lead officials (the sector leads and SRU) and the relevant leads from the spending ministry concerned with the review. - External input is valuable in supporting SR analysis and testing options. - Some countries (for example, the Netherlands) have external representatives on working groups. - Other countries (for example, the UK) have established a separate advisory group to engage external experts. - Initially, Chile might consider the advisory group option, particularly while DIPRES is encouraging ministries to bring radical options to working group discussions, which they may be reluctant to do if external members are present. - Working groups perform an important function in ensuring that each SR is a collaborative effort: the Ministry of Finance will rely on the ministry concerned for detailed evidence, sector knowledge, and access to relevant stakeholders. ### Role of budget sector teams and SRU - SRs imply a change in role for the budget sector teams: shift from incremental, year-to-year expenditure control to a more strategic role, engaging ministries in discussions about medium- to long-term priorities, pressures, and reforms. - The introduction of SRs is likely to significantly enhance the role of sector teams; their contribution will be critical in delivering reviews. - During SRs, relevant sector teams will need to reprioritize their work so that the SR becomes a core component of their “day jobs.” - During a comprehensive review, this will be true for all of DIPRES; it will need to consider how it can achieve this, for example, by stopping or scaling back on some nonessential routine activities. - SRU should be strengthened and resourced to deliver the government’s goals and tasked with developing a program of SRs. ### Short-term recommendations - Introduce a SR framework with targeted reviews on an annual rolling basis (two to three a year initially), and a periodic comprehensive review, at most every four years. - Develop and agree to the concept note for the overall SR framework (a suggested outline is included in Annex 3). The concept note should set out the SR framework, including the organizational structure, the objectives, and the process for selecting and conducting reviews. This should be approved by the President and enacted by decree. - Strengthen SRU capacity so that it is resourced to deliver the government’s goals; task it with developing a program of SRs. - Agree with the Ministry of Finance and Budget Director that the pilot review will be carried out in 2019 for the 2020 budget. Obtain Presidential approval for the targeted review pilot. Set up a governance structure to oversee the pilot. - Identify targeted SRs to be carried out in 2019 for 2020 budget. - Identify targeted SRs to be carried out in 2020 for 2021 budget. - Discuss options on the timing of the Comprehensive Spending Review (CSR). Agree on the timing of the CSR with the President, the Minister of Finance, and the Budget Director as part of the overall SR program for the coming three years. - If Option A: Deliver a comprehensive SR for budget 2022. - If Option B: Deliver a comprehensive SR for budget 2023. ### Process for conducting a spending review — overview - The process for undertaking the review—whether targeted or comprehensive—is largely the same, although comprehensive SRs require more resources. - Four key stages (timing shown for a targeted SR to be integrated in the Chilean budget process): - Stage 1: Prepare review parameters - Objective: establish scope and objectives, political mandate, ownership and participation - Key steps: set overall objectives; establish review targets; identify key roles and responsibilities; set review timeline - Responsibility: President; Ministers; DIPRES; Ministries - Timing: September to October - Stage 2: Analyze spending, and develop policy options - Objective: undertake rigorous analytical work to inform development of options and assessment of impacts - Key steps: review spending; undertake benchmarking and analysis; identify savings options; prepare documentation - Responsibility: DIPRES; Ministries - Timing: November to March - Stage 3: Decision making - Objective: engage ministers to determine which savings options should be implemented, based on the outcomes of the SR - Key steps: present findings & recommendations; decisions at minister level - Responsibility: President; Ministers; DIPRES - Timing: April to May - Stage 4: Implementation - Objective: ensure that decisions are implemented as anticipated - Key steps: integrate into budget; enact legislation; monitor implementation of decisions - Responsibility: President; Ministries; Congress; DIPRES - Timing: June onward ### Stage 1: Prepare review parameters — specifics - Stage 1 establishes the scope and objectives of the SR, the political mandate, selects review areas, identifies key review questions, defines roles and responsibilities, and provides clear objectives and savings targets. - Selecting review areas: - Vertical reviews (individual spending ministries) are administratively simpler but limit across-government prioritization. - Horizontal reviews (by functions or policy objectives) can better examine spending efficiency and effectiveness across whole-of-government and identify duplicative activities, but are more cumbersome to manage. - The SRU should prepare terms of reference (TORs) for the reviews in the coming year that will be issued by Presidential decree. - TORs should be coordinated with the Budget Director and the Minister of Finance and include parameters such as: - The ministries involved and the scope of the review. - The ministers that participate in the steering committee (that is, the Minister of Finance the Budget Director, and relevant line minister). - The chair (high-level staff from DIPRES) and members of the spending review team. - The priorities for each spending review (for example, improve value for money for programs, consolidate spending within administrative items, or identify funding to be reprioritized to strategic priorities). - The specific targets set for each review (for example, if a percentage of savings is required to be returned to the budget or to be reprioritized). - The expected outputs of the SR. - The requirements of the line ministry, agencies, and other stakeholders to provide information to the SR team in a timely manner. - TORs should be approved by the President by the end of October. - September and October can be used to formulate the first list of questions and to collect necessary data; analysis and development of policy options should start in November. ### Stage 2: Analyze spending and develop policy options — Analyzing existing spending - Stage 2 is where analytical work occurs. Working groups should review policy instruments and spending patterns, and examine relationships among inputs, outputs, and outcomes. - Two streams: analyzing existing spending, and developing policy options. - SRs should examine: - Appropriateness of the program to determine alignment with government policy priorities. - Effectiveness of different interventions (allocative efficiency) to assess how well programs and policies meet or contribute to their intended objectives. - Efficiency to determine whether similar outputs or outcomes could be achieved with fewer inputs or different productive processes (operational efficiency). - The SRU should obtain relevant ex-ante and ex-post evaluations and provide these to working groups to inform analysis. - Use a mix of qualitative and quantitative data: - Qualitative: literature reviews, laws, regulations, interviews, surveys/questionnaires. - Quantitative: input data (financial and employment information), output data (number of hospital beds or schools), outcome data (improved literacy rates, reduced in income inequality). - Draw on key performance indicators monitored by DIPRES Public Management and Control Division. - Types of analysis include: - Analysis of spending inputs and trends: by economic classification, by function, or by types of services; cross-country comparisons. - Evaluating spending efficiency or effectiveness: compare unit costs across delivery forms or jurisdictions; examine input-output relationships; use program logic analysis. - Benchmarking of data: international benchmarking to identify outlying costs or expenditure levels; select comparator countries appropriately and consider exogenous factors (geography, demographics). ### Stage 2: Analyze spending and develop policy options — Developing policy options - The SR should develop a menu of policy proposals based on in-depth expenditure analysis; focus on analytical and technical elements rather than predicting political responses. - SRU should define criteria to guide program evaluation and development of policy options, for example: - Is the activity aligned with the government’s priorities? Does the need for which the activity was originally designed still exist? - Are activities effective in meeting their objectives, or is there a need to reconsider the program’s design? - Can the activity be better targeted? - Are activities being delivered in a cost-effective way? Is there scope for reduced cost via changes in service delivery or simplified administrative arrangements? - Is there room for larger contributions from the individuals who benefit? - Is there scope to reduce duplication or consolidate programs aimed at achieving similar objectives? - Examples of possible measures to consider: - Closure or reduction of redundant activities - Better targeting of activities - Consolidation of overlapping activities across government - Merging administrative units - Merging functions (shared services) - Better work-time management - Better procurement and management of stocks - Outsourcing of activities - Increased user-charges - Price or regulatory changes to affect incentives and behavior - Use of more cost-efficient instruments - The preliminary report from the working group with saving measures will be finalized for technical review within DIPRES and submitted to the Steering Committee. The preliminary report will include analysis, short-term measures for the upcoming budget, and medium-term measures relevant for future budgets. - Policy proposals should be assessed for potential impact on key stakeholders and budgetary implications over the medium term. Each option should include: - Rationale for the proposal. - Impact on affected stakeholders and citizens. - Any social, regional, and economic consequences. - Implementation requirements (legislation, consultations). - Assessment of medium-term fiscal impacts, with costings using consistent methodologies and assumptions across proposals. *Source: IMF team.* ### 66. The third stage of the SR process is determining which policy proposals will be ### 1chlea2019001 - 66. ### Stage 3: Decision making (SR process) - Purpose: determine which policy proposals will be implemented. - Process notes: - Allocate sufficient time for Steering Committee and President requests for additional information or amendments. - Budget Director should meet regularly with working groups to provide strategic guidance and challenge robustness of costs and estimated impacts. - The preliminary SR report should be considered by the Steering Committee and agreement reached on recommended options. - The Steering Committee presents the preliminary report to the President to get agreement on approved saving measures. ### Stage 4: Implementation - Draft budget and reporting: - The draft budget should include the approved measures and be presented to Congress with the final SR report. - The SRU will finalize the report based on Presidential decisions and include only approved saving measures. - After technical and editorial review by DIPRES, the report should be sent to Congress with the budget submission and implemented saving measures reflected in the current budget year. - Accountability instruments: - Letters of agreement should be signed between the President and implementing line ministries identifying key implementation actions, milestones, and reporting requirements to hold services accountable for agreed saving measures. - Legislative timing: - If saving measures require changes in legislation, these changes should be submitted in time for approval before the start of the budget year. - Required legislative changes should be prepared in parallel with budget preparation by the line ministry with input from DIPRES and consultation with the Secretary for the Presidency, allowing presentation to Congress with the budget or shortly after. - Monitoring and responsibilities: - Establish a process in DIPRES to monitor implementation of SR outcomes to ensure identified measures are implemented. - Ultimate responsibility for implementing measures lies with respective line ministries, especially when legislative changes are required. - In DIPRES, budget sector divisions should ensure: - Approved measures will be included in the upcoming budget and in the following years. - Approved measures are not subject to renegotiation aimed at postponement or exemptions. - Measures in the budget are followed by practical implementation plans and progress reports by line ministries. - The SRU should develop a system to monitor realization of savings and provide regular reports to the Budget Director, Minister of Finance, and President on outcomes and usefulness for fiscal consolidation targets. ### Recommendations — Short term (spending review framework covering four stages) - Introduce a spending review framework that covers: - Stage 1: Prepare review parameters and issue TORs: - Select review areas. - Set overall objectives. - Establish review targets. - Identify key roles and responsibilities. - Set review timeline. - Identify key review questions and data requirements. - Stage 2: Undertake analysis of spending and develop policy options: - Commence meetings of working groups to review spending. - Undertake spending analysis and benchmarking, as required. - Identify savings options. - Prepare documentation. - Stage 3: Decision making: - Present findings and recommendations in the SR report. - Arrive at decisions at the Steering Committee and Presidential level to determine measures to be included in budget. - Stage 4: Implementation: - Submit the budget law to Congress that incorporates the measures. - Enact any legislative amendments required to implement measures. - Publish the SR report with agreed measures. - Monitor the implementation of decisions. - Capacity and systems: - Develop capacity within DIPRES’ sector divisions to monitor and implement multiyear saving measures. - Develop a system within the SRU to track and report on realization of savings and other measures agreed through SR processes. ### Recommendations — Medium term - At the end of each spending review, the President should sign letters of agreement with ministries on SR outcomes. - Line ministries should prepare and pursue necessary legislative changes required to implement SR outcomes. ### Institutionalizing Spending Reviews — Introduction and legal basis - Objectives: - Establish a legal basis and integrate SRs with key elements of the PFM system, especially the budget process and performance and evaluation system. - Develop capacity at DIPRES and in line ministries. - Legal mandate: - Add provisions to the Public Finance Law to ensure the SR framework is integrated into the budget process and conducted routinely. - First round of SRs can be carried out by Presidential decree, but amending the Public Finance Law is important. - Medium-term budget framework (MTBF): - Incorporate SR provisions into introduction of an MTBF to support implementation of identified savings over the medium term. - Building on the current medium-term fiscal framework (MTFF), a MTBF would add three outer years in every budget with indicative program-level budgets for each ministry. - The MTBF would make clear expected development in mandatory spending under current policy and legislation and when SR savings must be realized. - The MTBF would supplement the current MTFF, which would be adjusted in the current year and the outer years to incorporate changes in total expenditures expected from SR savings. ### Integrating SRs into the budget process - Timing and linkage: - Decisions to initiate SRs should be taken when budget priorities and fiscal outlook are discussed. - In Chile, SR process can commence in September to provide enough time for results to be ready for the exploratory budget phase in the spring. - The proposed SR process allows for four months of analysis and development of saving options. - The SRU in DIPRES will coordinate the process, guide working groups, and ensure saving options are ready for the exploratory budget phase. - Savings options should be ready for the exploratory budget phase because a large part of budget priorities are decided in the exploratory budget phase that starts in April. - Budget frameworks and line ministries: - Decisions on savings options should be included in budget frameworks sent to line ministries (usually sent in mid-June). - Line ministries should incorporate agreed savings in their budget submissions in July and prepare any necessary changes to existing laws. - After receiving budget frameworks, line ministries usually have two to three weeks to prepare their budget submissions. - Sector divisions in DIPRES will work with line ministries to ensure submissions include savings and prepare necessary legislative changes to present to Congress with the budget. - Transparency: - It is good international practice to publish the results of the SR. - The report can be published and sent to Congress with the budget on the last day of September to improve transparency. ### Comprehensive Spending Review (scope and calendar implications) - Characteristics: - A comprehensive SR requires significantly more time and major changes to the budget process in the year undertaken. - Analyzing a larger share of expenditure increases reallocation and reform options but is resource-intensive. - A comprehensive SR will take around seven months and cannot be conducted within the existing budget calendar. - Resource implications: - All line ministries must allocate substantial resources; sector and evaluation divisions in DIPRES must be dedicated to working groups as their primary job during the review. - For the year it occurs, a comprehensive SR largely replaces the internal exploratory budget phase; budgets and ceilings must be developed cooperatively between DIPRES and line ministries. ### Linking SRs with the evaluation framework - New review types: - SRs introduce up to two new types of reviews into the Chilean performance and evaluation system. - Use of existing evaluations: - The Public Management and Control Division in DIPRES conducts 20 to 25 ex-post evaluations of existing public programs each year. - From 2011 to 2017, a total of 143 programs was evaluated. - Of these programs, only 4 percent could be categorized as having good performance, while 58 percent underperformed. - Evaluation insights can guide SR topic selection (e.g., merging overlapping programs) and inform SR analysis (cost-benefit and efficiency indicators). - Improving evaluation support for SRs: - Adjust ex-post evaluation framework to follow up on implementation of saving options and inform upcoming SRs, for example by redesigning impact evaluations to include costing and assessing practicality of fixing underperforming programs. - Adjust budget performance indicators to reflect changes in targets, outputs, and outcomes after an SR. - Include implementation of SR measures in the PMGs, which are used for performance bonuses, to support realization of savings. - Ex-ante and agency evaluations: - DIPRES conducts one to two agency expenditure evaluations per year; to date these have not been successful in identifying savings. - Assigning a target for the size of saving options in these evaluations could provide more data on efficiency and options for future SRs. - The ex-ante evaluation framework is currently shared between DIPRES and MSD with differing methodologies and incentives; amend the framework to align methodologies and ensure evaluations include short- and long-term cost considerations, value for money, and DIPRES sign-offs before approval of new programs. - Evaluation workload and alignment: - Review the annual number of ex-post evaluations to avoid evaluation fatigue across ministries as SRs add another layer to the system. - Align program structures in the budget with program structures used for evaluations: - Number of public programs in evaluation framework: approximately 700. - Number of programs in the budget: around 300. - Current budget program classification is too high and hinders using ex-post evaluations to inform the budget. - Better alignment would include more details of actual programs, policy objectives, and budget allocation exclusively for that objective. ### Supporting PFM reform and building capacity for SRs - Preconditions and gaps: - Certain PFM elements must be in place for successful SRs; Chile has a strong PFM system but gaps remain. - The lack of an MTBF will be challenging for implementing SR-identified savings over the medium term. - Budgeting culture: - The exploratory phase provides ministries with spending envelopes that act as “floors” rather than “ceilings”; ministries expect upward adjustments during the process, which reduces incentives for internal trade-offs. - This approach requires DIPRES to resolve ministries’ pressures through increased allocations rather than encouraging ministry-level reallocations. - Accounting for savings: - Develop a methodology to account for savings included in the budget to ensure savings are realized and to prevent recurrence of cost pressures in subsequent budgets. - External challenge and transparency: - External institutions can support SRs by challenging existing delivery approaches: - The Fiscal Council could take on such a role when it receives a new and broader mandate in the spring of 2019, making the council independent of the government. - The Productivity Commission could provide new ideas and challenges in key sectors. - DIPRES should publish reports on cost pressures and undertake an exercise to understand mandatory expenditure commitments in existing legislation to inform public debate and upcoming SRs, and to develop benchmark data useful for SRs. ### Key PFM elements checklist (status in Chile) - Credible annual budget — Implement the budget as planned. This is in place. - Fixed expenditure envelope — Require decision-makers to make trade-offs. This is in place on an aggregate level, not ministry level. - Clear political priorities — Ensure consistency between political ambitions and available resources over the medium-term. This is in place. - Financial and non-financial performance information — Compare trends in expenditure, inputs, outputs, and outcomes. This is in place. - Analytical capacity — Develop ability to identify inefficiency and develop reform proposals. This is in place. - Methodology for accounting for savings — Ensure savings identified can be used to offset spending pressures within budgets. This needs to be developed. - External challenge — Challenge existing ways of working and inject new ideas. This could be done by the Fiscal Council and Productivity Commission. - Medium term budget framework — Incorporate results of the review in multiyear budget allocations for each ministry. Chile has an MTFF but no MTBF. - Ability to reprioritize expenditure — Improve capacity to move resources from lower to higher priority areas. This is in place in DIPRES, but not well developed in line ministries. - Time and resources — Allow sufficient time and resources to undertake analysis, develop reform options, integrate options into budgets, and plan implementation. Timeline is tight; adequate resources are needed to achieve the government’s objectives. *Source: IMF team (content unit 1chlea2019001 - 66).* ### 96. The lack of a MTBF and the limited scope of the budget process for considering ### 96. The lack of a MTBF and the limited scope of the budget process for considering ### Key findings - Absence of an MTBF and one-year-ahead budgeting means DIPRES cannot drive medium-term reprioritization by requiring ministries to demonstrate affordability of existing and proposed activities over the medium term. - Medium-term pressures (demand trends, cost inflation) are not given sufficient focus during decision-making. - Weak incentives exist to implement structural reforms that deliver savings in future years rather than in the upcoming budget year. - Forward estimates are provided to ministries and Congress at an aggregate level, rather than ministry-by-ministry or program-by-program, so there is no agreed expenditure path to form the basis for budget strategy. ### Short-term recommendations - Amend the Public Finance Law to include provisions of an ongoing SR process and the introduction of a medium-term budget framework. - Integrate the SR process into the annual budget process so that policy options are ready for the exploratory budget phase in the spring. - Review and adjust the performance and evaluation framework to better inform the budget and SR processes, including reviewing the number of existing evaluations. - Use ex-post evaluations and the PMGs to follow up on the implementation of the SR savings options and reforms. - Assign a saving target to each agency expenditure evaluation to ensure that saving options are identified for inclusion in the budget process. - Amend the ex-ante evaluation framework to align the methodology across DIPRES and MSD and to include the budgetary impacts of a new program and sign-off from DIPRES before final approval. ### Medium-term recommendations - Implement an MTBF that provides all ministries with indicative budget for three outer years, which can serve as baseline for upcoming budgets and for analysis of cost pressures in key policy areas. - Align the program structure in the budget with the program structure used for evaluations to make it easier to use program evaluations to inform the budget process and to improve the transparency of the budget. - Publish reports of key costs in the public sector pressures and undertake measures to understand the level of mandatory spending in existing legislation to help inform the public debate and thereby priming upcoming SRs. ### Next steps — Develop a Concept Note and reinforce the SRU (paragraphs 97–101) - DIPRES should develop a concept note setting out: - Objectives of the SR framework, including context and motivation. - Roles, responsibilities, and governance structures. - SR approach, timing of reviews, how they will be conducted, and recommendation on timing of the first comprehensive review. - Criteria for selecting targeted reviews and identifying which light-touch pilot review will be conducted in 2019. - Required actions (including legal changes) to formally introduce the SR framework and the role of the President in securing commitments across government. - Implementation arrangements, monitoring, integration of SR outcomes into the budget process, and required budget process changes—foremost: (1) ensuring savings targets are set against an agreed baseline agreed between DIPRES and ministries earlier than the current exploratory budget; and (2) agreed medium-term forecasts between DIPRES and ministries disaggregated at ministry and program levels. - Timing and governance: - Concept note should be sent to the Budget Director and Minister of Finance in the first quarter of 2019. - Once a pilot review is agreed, establish a working group (SRU, relevant DIPRES leads, relevant ministries). - Build SRU capacity urgently to coordinate and deliver the concept note elements; develop a resourcing plan linked to the concept note. - Recruitment to the SRU should begin immediately and can be phased to build the team to full capacity (6-8 people) in advance of a comprehensive review. - Develop communication and engagement plans for ministries and public bodies; prepare a capability improvement plan for guidance and training. - Engage independent groups (Fiscal Council, Productivity Commission, Comptroller General) and consider early engagement with Congress; set up formal groups to engage external experts for each review when the first review topic is agreed. ### Selection of reviews for FY2020 and beyond (paragraphs 102–104) - Pilot 2019 review selection criteria: - Likely to succeed. - Reasonable existing data or potential to gather them quickly. - Can deliver “quick wins” in realizing savings. - Likely to be politically palatable. - Government property recommended as the 2019 pilot: - DIPRES work underway to improve estate efficiency and gather forward pipeline of lease renewals across government. - A commission to ministries to complete data could identify leases due to be renewed in the next three years and benchmark estate costs against market rental prices. - An ambitious but realistic savings target could be agreed by September for ministries expecting lease renewals in the next three years and incorporated into 2020 budget allocations. - Although likely to result in modest initial contributions to the US$1.1 billion per annual target, the priority is to establish and prove the framework and deliver tangible results for budget year 2020. - Substantive targeted review for 2020: - Health—hospitals in particular—is a good option for a substantive 2020 review to deliver savings for 2021 budget onward. - Ministry of Health is gathering data on long-term cost pressures and demand trends and reviewing structure of provision for standardized non-specialist care and more precise healthcare targeting. - SRU should undertake its own analysis with sector teams, shortlist deliverable options for the Budget Director and Minister of Finance, and apply the same deliverability tests as the 2019 review. ### Action Plan highlights (Annex 1) - Timeline and sequencing (selected highlights): - Quarter 1 2019: Develop a concept note; review pilot shortlist; secure Presidential approval of TOR for pilot; begin SRU resourcing plan and recruitment. - Quarters 1–4 2019: Deliver the pilot review; establish Steering Committee; conclude review and report findings; decide options to include in the 2020 budget. - Quarters 1–4 2020: Agree on and initiate spending reviews for 2020; conduct preparatory work for substantive and comprehensive SRs. - If Option A: Comprehensive SR for budget 2022 with CSR planning, Stage 1–4 sequencing across 2020–2022. - If Option B: Comprehensive SR for budget 2023 with similar multi-year staging. - Institutional reforms and outputs: - Strengthen SRU capacity: develop resourcing plan; recruit toward 6-8 staff. - After pilot, conduct full SR following four stages: Stage 1 Prepare (TOR, objectives, targets, roles, timeline); Stage 2 Analysis and options; Stage 3 Decision making; Stage 4 Implementation (submit budget law incorporating measures; President sign letters of agreement with ministries; enact legislation amendments; publish SR report). - Develop tools within DIPRES sector divisions to monitor and implement multiyear saving measures and a system within SRU to track and report realized savings; report quarterly to Budget Director. - Ministries to prepare and pursue necessary legislative changes; submit legislative changes with budget law where applicable. - Publish SR reports (pilot outcomes in Quarter 3 following pilot). - Institutionalizing SRs and MTBF: - Quarter 3 2019: Identify and plan legislative changes to implement SRs and MTBF; Quarter 4 2019: new provisions approved by Minister of Finance and President; Quarter 1 2020: present law to Congress for approval. - Develop and introduce a formal MTBF with indicative budgets for ministries for three outer years; DIPRES and line ministries to share MTBF forecasts and include outer years in budget frameworks when sent to line ministries. - Integrate SR process into the annual budget process so policy options are ready for exploratory budget: reflect pilot outputs in 2020 allocations; share baselines with ministries to allow for savings target calculations; incorporate baseline and forecast discussions into exploratory budgets; monitor savings realization and effects on baselines in the budget. - Adjust performance and evaluation framework: review evaluation structure; include saving options from pilot SR in next year’s PMGs; use ex-post evaluations to follow up on implementation and impacts. - Assign a saving target to each agency expenditure evaluation: Quarter 4 2019 update AEE guidance and implement revised model. - Amend ex-ante evaluation framework to align methodologies and include costing of social and non-social programs to be agreed with DIPRES; agree with MSD on alignment in Quarter 3 2019; present law to Congress and implement new ex-ante model from 2021. - Align program structure in the budget with the program structure used for evaluations; review program structure in Quarter 4 2019 and implement reforms thereafter. - Publish reports of key cost pressures and analyze mandatory spending in existing legislation: Quarter 1 2020 develop work program for cost pressure analysis; Quarter 2 2020 undertake first analysis on cost pressures from mandatory spending; publish cost pressure analysis as of 2021. *Source: IMF team (excerpts from the provided chapter).* ### Annex 2. International Experience with Spending Reviews ### Annex 2. International Experience with Spending Reviews ### A. Denmark’s Experience with Targeted Spending Reviews - System of SRs known as “special studies,” operating on an annual cycle as part of the budget preparation process. - Review topics and terms of reference (TORs): - Prepared and nominated by the Ministry of Finance in cooperation with the relevant line ministry. - Subject to approval by the Economic Coordination Committee (ECC) of the Cabinet. - Typically initiated in February in connection with the first discussion of next year’s budget in the ECC. - Typical scope and objectives: - Typically vertical reviews focusing on a specific agency or program. - Primary objective: increase fiscal space for new priorities. - Other objectives: facilitate fiscal consolidation and increase value for money. - Possible saving measures considered: - Increasing efficiency in back-office functions. - Better harmonizing grants with similar programs to improve incentives and target public service delivery. - Analytical approach and tools: - Benchmarking organizational entities within the policy area (e.g., procurement costs across schools; administrative costs across police stations; time in direct contact with citizens across job centers). - Identify specific actions and behaviors that make up best practices and cost potential savings from spreading best practices. - Governance and process: - Working groups consisting of the Ministry of Finance and the relevant line ministry carry out special studies. - External consultants are often engaged. - Working groups usually present findings to the ECC for a decision in June. - Final report intended as a joint report agreed by Ministry of Finance and line ministry; where disagreement exists, separate recommendations may be made. ### B. The Netherlands’ Experience with Spending Reviews - Long tradition of “special studies” SRs as part of the annual budget cycle. - TORs and process: - TORs prepared by the Ministry of Finance and presented to the Cabinet at the same meeting as the budget for the upcoming year; TORs are included in the budget as annexes. - Budget Director chairs an interdepartmental steering committee overseeing the process; working groups carry out specific reviews. - Working group composition and independence: - Each working group led by an independent chairman and composed of independent experts and civil servants (director level or higher) from the Ministry of Finance, the Prime Minister’s Office, and line ministries. - A secretariat with employees from the Ministry of Finance and the most relevant line ministry supports each working group. - Independence: SR reports hold an independent, analytical, and nonpolitical status; options proposed can go against current government policy. - No right of veto within working groups on policy proposals being considered. - Cabinet decides which options to include in the budget but does not change the reports before publishing; instead publishes a “Cabinet’s View” with the report. - Scale and notable examples: - Number of SRs typically from three to seven reviews per year. - Comprehensive SRs undertaken in 1981 and 2009. - In 2009: - Government identified 20 policy areas to be reviewed. - Each working group required to develop a menu of saving options with at least one option capable of delivering a 20 percent reduction in spending or tax expenditures in the area under review over a four-year period. - Purpose: encourage creativity and bold thinking. - Impact: parties used the options in their manifestos before the 2010 election. - An estimated 20 percent of the measures in the 2010 Coalition Agreement originated in the comprehensive SR reports. ### C. The Slovak Republic’s Experience with Spending Reviews - Program objective: - SRs initiated by the Slovak Ministry of Finance (MOF) to improve efficiency of public expenditure and meet medium-term objective of restoring general government finances to balance or surplus. - Rollout and political backing: - Rolling series of policy and targeted reviews covering around one-fourth of central government spending each year, aiming to cover most of central government over the four-year parliament. - Strong political backing: SR project (known as "Value for Money" project) included in the manifesto of the new government after the March 2016 elections; included in the National Reform Program and in the Stability Program for 2016. - Timeline and coverage: - SR began in Fall 2015 with a set of pilot reviews reported in March 2016. - Based on three pilots (including schools), first full reviews covering health, transport, and IT launched in April 2016. - TORs for these three reviews attached to the Slovak Stability Program sent to the European Commission in April 2016. - TORs included clear financial objectives: cost containment, providing the same services with less resources, and improving allocative efficiency within a sector. - In 2017, a second round with three reviews including education, labor and social policies, and environment was undertaken. - Transparency, findings, and implementation: - Slovakia publishes SR results and the TORs, interim and final reports, and implementation reports. - First set of SRs helped strengthen MOF understanding of policy areas under review. - SRs identified significant savings (up to 8 percent of the budget, on average); these savings could be retained within respective ministries. - Implementation identified as a challenge; an implementation unit was established within the Deputy Prime Minister’s office. *Source: Annex 2. International Experience with Spending Reviews* ### Annex 6. Template for the Spending Review Report ### Annex 6. Template for the Spending Review Report ### A. Summary and Overview - Purpose: Provide a structured template for documenting a Spending Review (SR), including coverage, background, methodology, findings, recommendations, and detailed reform memos. - Structure: Section A (Summary and Overview), Section B (Annex: Detailed Assessment of the Reform Proposals), and C (Documentation). ### I. Coverage of Spending Review I.a. Mandate and scope of the SR - Questions to specify: - What ministry, organizational units, programs, and agencies are covered by this review? (for example, secondary vocational education, higher education, and other educational institutions) - What areas of expenditure are the focus of this review? (for example, administrative costs, subsidies and transfers, personnel costs) - Table 1. Areas of Expenditure - Areas of expenditure | Description - [Administrative costs] | [Few notes on what is the focus of the review] - [Subsidies] | [Few notes on what is the focus of the review] - [Personnel costs] | [Few notes on what is the focus of the review] - [Fill in] | [Few notes on what is the focus of the review] I.b. Budget covered within the SR - Question to specify: How much expenditure is covered by this review? - Table 2. Public Expenditure by Area - Review area | 2018 | 2019 | 2020 | 2021 - Total expenditure for Ministry/sector - [Area of interest] - [Area of interest] - [Area of interest] - Total public expenditure covered by SR I.c. Background of the areas - Background elements to document: - Recent trends in expenditure, the key cost drivers, and their expected impacts on future expenditure (for example, the analysis of education sector showed increase costs over time and/or different average costs per student) - Public rationale for expenditure (for example, Is this service important? Is it linked to national and sectoral plans?) - Environmental context (for example, for education: show decline in number of students and excess capacity in the sector, number and organizational set up of related institutions) - Financial relations and arrangement, such as formulas - Recent reforms and their impacts on expenditure and quality of service - Reform plans/proposals from government, international organizations, and other stakeholders ### II. Key Findings II.a. Objectives of analysis - Document the main objective (e.g., consolidation, reprioritization, improved value for money) and rationale linking objectives to the overall fiscal situation and national planning. II.b. Methodology - Methodologies to describe, as applicable: - Joint work group between DIPRES and Ministry of [xxx] - Benchmarking - Used analysis already undertaken (for example, DIPRES/MSD ex-ante and ex-post evaluations, studies from international organizations, recommendations by Productivity Commission) - Analysis of statistical data - Qualitative review (for example, surveys, focus groups) - Also document: - What data were used - What data gaps were identified II.c. Findings - Main findings of the analysis/evaluation of expenditure in each focus area (for example, large differences in costs per student across schools and the reasons for these differences). ### III. Overview of Recommendations - A. What reforms are recommended to meet the review’s objectives in each area (as discussed in section II.a)? - B. How much would each reform save (net) over the next three years? - Table 3. Estimations of Savings/Reallocations from Reform Proposals - Reform proposals | 2020 (‘000) | 2021 (‘000) | 2022 (‘000) - [Proposal 1] - [Proposal 2] - [Proposal 3] - [Proposal 4] - Total savings/reallocations (potential) - Note: Each reform proposal (including an estimation of saving impact) is explained in detail in the 1-2 page memos in section B. - Table 4. Milestones - Reform proposals | 2020 | 2021 | 2022 | Comments - 1. [Reform proposal 1] - 2. [Reform proposal 2] - 3. [Reform proposal 3] - How should we measure the success of the reform proposal in 2020—22? - Table 5. Performance Targets - Reform proposals | 2020 | 2021 | 2022 | Comments - 1. [Reform proposal 1] - 2. [Reform proposal 2] - 3. [Reform proposal 3] ### B. Annex: Detailed Assessment of the Reform Proposals For each reform proposal provide the following structured content. Reform proposal 1: [Name] - Reform proposal: - Short description of the reform proposal. - Background: - Background of the current policy/structure/program (including current allocation). - Why was the current policy/structure/program originally designed this way? - What key findings from the analysis led to this specific proposal (more in-depth about the proposal than the key findings chapter in the main report: including benchmark results and best practice) - Economic consequences: - What savings/reallocations can be realized with the proposal? - What is driving the savings? - What methodology was used to describe the savings? - Presentation of reform options (if relevant) - What costs are associated with the realization of these savings? What is driving the costs? - Table 6. Savings from Reform Proposal (when one option) - 2020 (‘000) | 2021 (‘000) | 2022 (‘000) - Change in program expenditure: - Change in administrative expenditure: - Change in personnel expenditure: - Total change in resourcing: - Change in staffing levels (‘000) - Table 7. Savings from Reform Proposal (when several options) - Reform proposals | 2020 (‘000) | 2021 (‘000) | 2022 (‘000) - Option 1: xxx - Savings/reallocations - Costs - Net saving from proposal - Option 2: xxx - Savings/reallocations - Costs - Net saving from proposal - Option 3: xxx - Savings/reallocations - Costs - Net saving/reallocations from proposal - Impact and sensitivities: - Who will be affected by the policy change? How many will be impacted? Will there be different impacts on men and women? - What is the financial impact/cost to those affected? - What are the social/economic consequences? - Are there any spillovers to other programs? - Implementation: - How much time is required for implementation? - What legal, organization, or operational changes are required? - Who is responsible for implementation (will other agencies outside of the Ministry need to be involved)? - How will progress in implementing these reforms be measured? What are the respective milestones? - Is further consultation/negotiation required within the government or with third parties? If so, detail the recommended process. - Table 8. Milestones - Reform proposals | 2020 | 2021 | 2022 | Comments - 1. [Reform proposal 1] - 2. [Reform proposal 2] - 3. [Reform proposal 3] - How should we measure the success of the reform proposal in 2020—22? - Table 9. Performance Targets - Reform proposals | 2020 | 2021 | 2022 | Comments - 1. [Reform proposal 1] - 2. [Reform proposal 2] - 3. [Reform proposal 3] Reform proposal 2: [Name] - Reform proposal: - Short description of the reform proposal. ### C. Documentation - Data, studies, reports and analyses used for the SR. *Annex 6. Template for the Spending Review Report* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1chlea2019001.pdf_