## _op245 ## Source details **Canonical URL:** [_op245](https://www.imf.org/-/media/websites/imf/imported-publications/external/pubs/nft/op/245/_op245.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-publications/external/pubs/nft/op/245/_op245.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-publications/external/pubs/nft/op/245/_op245.pdf.json) --- ### Overview and purpose - Over the past two decades, many OECD countries introduced fundamental changes in budget management emphasizing performance and results rather than inputs. - The Fiscal Affairs Department (FAD) of the IMF has been called upon with increasing frequency over the past decade to assist middle-income countries, especially emerging economies, in adopting these budget reforms. - This study synthesizes FAD technical assistance (TA) experience to answer recurring questions: - OECD experience and lessons. - Applicability of the reform paradigm to non-OECD countries. - How to start and sequence reforms. - Whether countries possess the managerial capacity to implement reforms. ### The three-track reform paradigm - Reform characterized by three fundamental tracks: - Allow managers greater flexibility in managing resources. - Give managers greater certainty in resourcing. - Introduce a system of rewards and penalties to pressure managers to perform against government policy objectives. - Result: move away from detailed central controls toward decentralized, arm’s-length management with new accountability relationships oriented toward results. ### Program structure, strategic linkage, and MTBFs - First reform step: improve definition of government programs and clarify objectives to prioritize programs within a strategic policy framework. - Program structures translate broad policies into activities and projects that can be costed and approved as budget appropriations. - Medium-term budget frameworks (MTBFs) are increasingly adopted to: - Capture full costs of activities and projects over time. - Improve program planning and prioritization. - Provide discipline over resource use. - Developing and maintaining an MTBF can be difficult (see Section III). ### Performance measurement and management - Next step: link inputs with program outcomes and make performance information relevant to managers by tying it to resource allocation. - Key challenges: - Defining and measuring outputs and especially outcomes is often problematic. - Producing consistent performance information, creating incentives for managers to use it, and monitoring performance are additional demanding requirements. - Full-fledged performance management systems (e.g., New Zealand, Australia) may be difficult and costly for many emerging economies to implement. ### Public expenditure management (PEM) safeguards required - Three PEM areas often weak in emerging countries and requiring strengthening: - Internal control systems: essential before granting agencies wider resource-management responsibilities to detect errors and irregularities and to facilitate oversight and audit. - Internal audit: a central component of internal financial controls to protect the government’s financial interests. - Financial management information systems (FMIS) and IT: timely, usable management information reports tailored to management needs are critical given growing volume and complexity of government financial operations. - Costing systems: capacity to capture the full cost of programs and activities is often scarce but necessary to relate costs to performance measures. ### Accrual accounting considerations - Typical government accounting systems are cash-based or modified cash-based, emphasizing matching approved spending items with actual cash outlays. - Cash-based systems meet MoF compliance and stabilization objectives but are less relevant for department-level budget managers. - The move to accrual-based accounting is debated: - Accrual accounting can strengthen cost information. - Countries shifting to accrual accounting have found the process difficult and costly. - Many benefits from accrual-style costing may be attainable by intermediary moves (e.g., modified accruals); full accrual adoption is not always necessary. ### Institutional reorganization and the five Ds - Performance budgeting pressures governments to reorganize operations; institutional innovations can be ordered into five groups—the five Ds: - Deconcentration - Decentralization - Delegation - Devolution - Divestment - Delegation, devolution, and divestment are most closely associated with the new performance management approach. - Two widely discussed innovations: - Contracting in government (including output/performance contracting). - Autonomous devolved management units (agency model). - Caution: contracting and agency models can be problematic if administrative and accountability systems are not sufficiently robust; full output/performance contracting is resource-demanding and realized in only a few advanced countries. ### Managing the reform process - Implementing the new budget management model requires substantial political and financial investment to manage change. - Complementary changes often needed in legal frameworks and institutional organization to support the new accountability framework. - Emphasis on sequencing, preconditions, and the need to strengthen basic PEM systems before extensive delegation or performance-based contracting. ### Strain on administrative and PEM systems (Section 2) - Even limited movement toward programmatic and performance-oriented budgeting is likely to strain administrative systems in emerging economies. - Demands on PEM systems are heavy, especially regarding reporting requirements and the skills required of managers. - Concerns extend to strategies for divesting or sharing government responsibility for providing public services, including contracting and private-public partnerships (PPPs). ### Implementation problems, capacity gaps, and sequencing (Section 2) - It is difficult to find emerging economies that have made rapid progress on all three tracks of the reform process, indicating important implementation problems. - Many difficulties have arisen from the lack of basic management infrastructure within the budget system. - Capacity requirements to link policies with programs through strategic planning mechanisms include: - Skills to construct MTBFs with well-defined programs. - Analytical skills and adequate reporting systems to clarify the relationship between program resources and outputs and/or policy results (outcomes). - Program design and program costing work is unlikely to be straightforward and is likely to demand skills, such as cost accounting, which are often in short supply. - The new approach requires parallel administrative procedures to activate strategic plans and the program structure for decision making. - Implementation must reflect the reform capacity of the country and should be carefully sequenced; the transformation from traditional budgeting procedures requires a substantial effort to manage the change process. - For many countries, human resource constraints may impede, or at least slow, the move to performance budgeting. *Occasional Paper 245: Budget System Reform in Emerging Economies — The Challenges and the Reform Agenda. Jack Diamond. INTERNATIONAL MONETARY FUND, Washington DC, 2006.* ### Section 1 ### I Overview ### Background and purpose - Over the past two decades, many countries in the Organization for Economic Cooperation and Development (OECD) have introduced fundamental changes in budget management emphasizing performance and results rather than inputs. - The Fiscal Affairs Department (FAD) of the IMF has been called upon with increasing frequency over the past decade to assist middle-income countries, especially emerging economies, in adopting these budget reforms. - This study synthesizes FAD technical assistance (TA) experience to answer recurring questions: OECD experience and lessons; applicability of the reform paradigm to non-OECD countries; how to start and sequence reforms; and whether countries possess the managerial capacity to implement reforms. ### The three-track reform paradigm - Reform characterized by three fundamental tracks (Section II): - Allow managers greater flexibility in managing resources. - Give managers greater certainty in resourcing. - Introduce a system of rewards and penalties to pressure managers to perform against government policy objectives. - Result: a move away from detailed central controls toward decentralized, arm’s-length management with new accountability relationships oriented toward results. ### Program structure, strategic linkage, and MTBFs - First reform step: improve definition of government programs and clarify objectives to prioritize programs within a strategic policy framework. - Program structures translate broad policies into activities and projects that can be costed and approved as budget appropriations. - Medium-term budget frameworks (MTBFs) are increasingly adopted to: - Capture full costs of activities and projects over time. - Improve program planning and prioritization. - Provide discipline over resource use. - Developing and maintaining an MTBF can be difficult (see Section III). ### Performance measurement and management - Next step: link inputs with program outcomes and make performance information relevant to managers by tying it to resource allocation. - Challenges (Section IV): - Defining and measuring outputs and especially outcomes is often problematic. - Producing consistent performance information, creating incentives for managers to use it, and monitoring performance are additional demanding requirements. - Full-fledged performance management systems (e.g., New Zealand, Australia) may be difficult and costly for many emerging economies to implement. ### Public expenditure management (PEM) safeguards required (Section V) - Three PEM areas often weak in emerging countries and requiring strengthening: - Internal control systems: essential before granting agencies wider resource-management responsibilities to detect errors and irregularities and to facilitate oversight and audit. - Internal audit: a central component of internal financial controls to protect the government’s financial interests. - Financial management information systems (FMIS) and IT: timely, usable management information reports tailored to management needs are critical given growing volume and complexity of government financial operations. - Costing systems: capacity to capture the full cost of programs and activities is often scarce but necessary to relate costs to performance measures. ### Accrual accounting considerations (Section VI) - Typical government accounting systems are cash-based or modified cash-based, emphasizing matching approved spending items with actual cash outlays. - Cash-based systems meet MoF compliance and stabilization objectives but are less relevant for department-level budget managers. - The move to accrual-based accounting is debated: - Accrual accounting can strengthen cost information. - Countries shifting to accrual accounting have found the process difficult and costly. - Many benefits from accrual-style costing may be attainable by intermediary moves (e.g., modified accruals); full accrual adoption is not always necessary. ### Institutional reorganization and the five Ds (Section VII) - Performance budgeting pressures governments to reorganize operations; institutional innovations can be ordered into five groups—the five Ds—representing progressive shifts away from centralized models: - Deconcentration - Decentralization - Delegation - Devolution - Divestment - Delegation, devolution, and divestment are most closely associated with the new performance management approach. - Two widely discussed innovations: - Contracting in government (including output/performance contracting). - Autonomous devolved management units (agency model). - Caution: contracting and agency models can be problematic if administrative and accountability systems are not sufficiently robust; full output/performance contracting is resource-demanding and realized in only a few advanced countries. ### Managing the reform process - Implementing the new budget management model requires substantial political and financial investment to manage change. - Complementary changes often needed in legal frameworks and institutional organization to support the new accountability framework. - The study emphasizes sequencing, preconditions, and the need to strengthen basic PEM systems before extensive delegation or performance-based contracting. *Occasional Paper 245: Budget System Reform in Emerging Economies — The Challenges and the Reform Agenda. Jack Diamond. INTERNATIONAL MONETARY FUND, Washington DC, 2006.* ### Section 2 ### _op245 - Section 2 ### Strain on administrative and PEM systems - Even limited movement toward programmatic and performance-oriented budgeting is likely to strain administrative systems in emerging economies. - Demands on PEM systems are heavy, especially regarding reporting requirements and the skills required of managers. - Concerns extend to strategies for divesting or sharing government responsibility for providing public services, including contracting and private-public partnerships (PPPs). ### Implementation problems and capacity gaps - It is difficult to find emerging economies that have made rapid progress on all three tracks of the reform process, indicating important implementation problems. - Many difficulties have arisen from the lack of basic management infrastructure within the budget system. - The capacity to link policies with programs through strategic planning mechanisms requires: - Skills to construct MTBFs with well-defined programs. - Analytical skills and adequate reporting systems to clarify the relationship between program resources and outputs and/or policy results (outcomes). - Program design and program costing work is unlikely to be straightforward and is likely to demand skills, such as cost accounting, which are often in short supply. ### Administrative procedures, sequencing, and change management - The new approach to budget management requires parallel administrative procedures to activate strategic plans and the program structure for decision making. - Implementation must reflect the reform capacity of the country and should not be implemented too rapidly; it should be carefully sequenced. - The transformation from traditional budgeting procedures is likely to require a substantial effort to manage the change process, a dimension often overlooked. - For many countries, human resource constraints may impede, or at least slow, the move to performance budgeting. *Source: _op245 - Section 2* --- _Source: https://www.imf.org/-/media/websites/imf/imported-publications/external/pubs/nft/op/245/_op245.pdf_