Performance-Oriented Budgeting in Korea: Overview and Current Issues

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Performance-Oriented Bud-geting in Korea:

Overview and Current IssuesNowook Park

Ohio State University & Korea Institute of Public Finance

Asian Regional Seminar: Promoting Fiscal SustainabilityFebruary 28 – March 2, 2011, Kuala Lumpur, Malaysia

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I. History of Public Financial Management Re-forms in Korea

II. Overview of Performance-oriented Budget-ing in Korea

III. Current Issues and Future Directions

Contents

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I. History of PFM Reforms in Korea

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Budget process reforms are in full swing among emerging and developing economies under the auspices of international organiza-tions(IMF, World Bank, and regional devel-opment banks)

Korea has gone through major reforms in budget process during mid 2000s.◦ Medium term expenditure framework◦ Performance budgeting◦ Digital budget & accounting system Korean case may provide useful lessons

Background of Presenta-tion

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Deteriorating fiscal situation◦ Increasing government debt after 1997/1998

Asian financial crisis From 10% level to 23% of GDP in 2003, 35% in 2010

◦ Increasing government expenditure Increasing social welfare expenditure due to increas-

ing income inequality and aging population◦ Expected decreasing tax revenue

Aging population Ratio of population above 65 yr. old move from 7.2% in

2000 to 14.4% in 2019 Political need & support from top leadership

Background of reforms in Korea

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Big bang approach with PFM reforms since 2003◦ Medium term fiscal plan (2003*, 2005**)◦ Top down budgeting (2003*, 2004**)◦ Performance budgeting (2000*, 2005**)◦ Digital budget and accounting system

Program budgeting (2006**) Accrual accounting (2009*, 2010**) IT system (2007**)(Note) *: pilot project, **: comprehensive implementa-

tion

Sequence of PFM Reforms

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Efforts towards PB2000 ~ 2002

2003 ~

2005 ~

2006 ~

Performance Budgeting (Pilot Project)- Developed Strategic Goals, Performance Objectives and Performance Indicators- Designed after GPRA

Performance Goal Management System- Expanded “Performance Budgeting” to all ministries and agencies- Annual performance plan and report are required

Self-Assessment of Budgetary Program (SABP)- 1/3 of major budgetary programs are evaluated every year- Designed after PART

In-Depth Evaluation- Selected programs are subject to program evaluation- About 10 programs are subject to program evaluation

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Act was enacted in December, 2006◦ To provide a legal basis for public financial man-

agement reforms Includes articles on PB

◦ Annual performance plan and report become legal requirement for line ministries/agencies

◦ Program review & in-depth evaluation are stipu-lated

It gives stability & continuity which tend to be a problem to PB.

Enactment of “National Finance Act”

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II. Overview of Perfor-mance-oriented Budget-ing in Korea

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Purpose of PB◦ Emphasis on making link between performance

information & budget allocationGoing beyond performance monitoring system

Periodic review process is developed Outcome-oriented PB Executive branch-initiated reform

Characteristics of PB in Korea

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Performance monitoring◦ “Performance Goal Management”◦ Monitoring based on the performance indicators◦ Monitoring unit is program and sub-program

Program review◦ “Self-Assessment of Budgetary Program”◦ Review based on the checklist◦ Review unit is usually sub-program

Program evaluation◦ “In-depth Evaluation of Budgetary Program”◦ Program evaluation for selected programs◦ Evaluation unit is usually sub-program, but cross-

cut issues are sometimes evaluated

Framework for PB in Korea

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Strategic plans◦ Cover 3-5 year plans, should be updated at least 3

years Annual performance plans

◦ Cover each program activity in the agency’s budget Performance reports

◦ Include actual program performance results for the 3 preceding fiscal years

Elements of Performance Moni-toring

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Ministry of Strategy and Finance (MOSF) reviews self-as-sessment of programs done by line ministries/agencies

Budgetary authority provides a standardized checklist for reporting self-assessment

The checklist contains questions on program design, performance management system, program implemen-tation, and actual performance

Entire program will be reviewed in three years.◦ About 1/3 programs are reviewed each year

About 300 sub-programs are reviewed each year◦ Evaluation unit is usually sub-programs which are unit for

budget allocation by MOSF

Program Review

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Contents of ChecklistDesign and Planning(30)

• Program purpose• Rationale for government spending• Duplication with other programs• Efficiency of program design• Relevance of performance objectives and indicators• Relevance of performance targets

Management(20)

• Monitoring efforts• Obstacles of program implementation• Implementation as planned• Efficiency improvement or budget saving

Results and accountability(50)

• Independent program evaluation• Results• Utilization of evaluation results

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Based on social science approach Evaluation refers to the activity of systematically collecting,

analyzing and reporting information that can then be used to change attitude or improve the operation of a project or program

Purpose of evaluation◦ Challenge◦ Improvement

Issues of evaluation◦ Rationale, Measurement, Attribution

Benefit: Provide the most detailed and reliable info Shortcoming: Expensive and takes long time MOSF selects about 10 programs for in-depth evaluation each

year

Program Evaluation

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Use of performance information in budget negotiation

Performanceinformation

Allocate budget based on evalua-tion results

Introduce perfor-mance information in their program management

Spending ministry

Enforce budget cut to ineffective programs

Provide recom-mendations for performance im-provement

MOSF

vs

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Performance information in budget statement

Spendingministries MOSF Assembly

Submitted with budget :annual performance plan

annual performance report

Submitted with budget :annual performance plan

annual performance report

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Information from monitoring system (performance plan and report) has not been systematically uti-lized so far.◦ For internal use, they are useful information◦ From the viewpoint of central budget authority, they provide

limited information

Information from review system are actively used in budget negotiation process.◦ Programs rated as ineffective are in danger of suffering budget

cut◦ Its use is systematically built into the budget process

Information from program evaluation is usually use-ful◦ Their use in budget process depends on the quality of evalua-

tion and the will of central budget authority◦ It is not systematically utilized in the budget process

Use of performance information from performance budget system

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Evaluation results◦ Quality of performance information has not improved

much◦ Programs are showing better results

Link between evaluation results and budget◦ Evaluation results are utilized at every stage of budget

process Moving away from incremental budgeting

◦ Evaluated programs are subject to bigger budget change compared to other programs

Cultural changes among line ministries◦ Performance management becomes an essential element

of program management.

Observations from program re-view process

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Evaluation Results from Program Review

(Number of Programs, %)

　 Total Effective Moderately Effective Adequate Ineffective

2005 555 (100) 28 (5.0) 100 (18.0) 340 (61.3) 87 (15.7)

2006 577 (100) 30 (5.2) 94 (16.3) 388 (67.2) 65 (11.3)

2007 585 (100) 69 (11.8) 143 (24.4) 342 (58.5) 31 (5.3)

2008 384 (100) 11 (2.9) 44 (11.5) 226 (58.9) 103 (26.8)

2009 346 (100) 5 (1.4) 14 (4.0) 257 (74.3) 70 (20.2)

2010 473 (100) 0 (0) 22 (4.7) 335 (70.8) 116 (24.5)

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Link between Evaluation and Bud-get Request by Agency in 2005

-20

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20 40 60 80 100Total Score

95% CI Fitted valuesGrowth of Budget Size based on Budget Request by Agency

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Link between Evaluation and Budget Draft by MOSF in 2005

-20

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20 40 60 80 100Total Score

95% CI Fitted valuesGrowth of Budget Size based on Budget Fomulation by MOSF

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Link between Evaluation and Budget Approval by NA in 2005

-20

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20 40 60 80 100Total Score

95% CI Fitted valuesGrowth of Budget Size based on Approved Budget at National Assembly

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Link between Evaluation and Bud-get Request by Agency in 2007

-50

510

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20 40 60 80 100Total Score

95% CI Fitted valuesGrowth of Budget Size based on Budget Request by Agency

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Link between Evaluation and Budget Draft by MOSF in 2007

-50

510

15

20 40 60 80 100Total Score

95% CI Fitted valuesGrowth of Budget Size based on Budget Fomulation by MOSF

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There has been a clear link between review results & budget allocation during 2005-2006.

However, their link became insignificant in 2007.◦ Weakening zeal of MOSF and increasing strategic behavior

from line ministries In response to this, MOSF raised threshold of pro-

gram ratings and, as a result, higher proportion of programs was rated as ineffective in 2008.◦ However, the significance of link between evaluation and

budget allocation started to re-emerge in 2010.◦ Fiscal situation played a role

2008-2009: Fiscal Stimulus Package 2010: Restoring Fiscal Sustainability

Evolution of performance bud-geting in Korea

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III.Current Issues & Lessons

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Improving alignment among budget classification (program structure), organizational structure and policy goals◦ Conflicts occurred among them partly due to big bang

approach and lack of communication between budget unit and performance management unit.

Revision of National Finance Act in 2009 includes new article requiring consistency between budget classification and annual performance plan/re-port.

Recently, efforts to improve the alignment are be-ing exerted

Current Issue 1

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Allocation of overhead costs became an issue again due to introduction of accrual accounting

Their allocation are set aside for now◦ Separate program, named as administrative support

program including salary and routine administrative costs, are established to avoid the issue of allocating overhead costs.

◦ Considering given inflexibility of human resource management in Korea, this decision may be a practi-cal one.

◦ As the Korean system matures, we plan to pursue overhead cost allocation .

Current Issue 2

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Current integrated fiscal information system does not include comprehensive perfor-mance information.

Recently, development of performance in-formation management system is being considered.◦ Its purpose is to improve on-going monitoring ef -

forts.◦ Also, it may help systematic use of performance

information.

Current Issue 3

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The Role of high-level leadership is crucial for the effective implementation of performance management system◦ Find ways to make management issues visible to

high-level leadership, politicians and general public. Fiscal situation influences the extent to which

performance information is used. Developing evaluation capacity among the

central budget authority and line ministries are crucial to have effective performance budgeting/management system.

Observations & Lessons