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GOVERNMENT

Making the Transition

Outcome-based Budgeting: A Six Nation Study

CASE STUDY PACK

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b | Making the Transition – September 2011

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Making the Transition – September 2011 | 1

ForewordAround the world, governments face renewed pressure to reform their budgeting processes. Mounting debt and sluggish growth in some regions have squeezed government coffers, forcing municipalities to rationalize their programs and do more with less. At the same time, demand for public services is on the rise, kindled by large or aging populations, surging food and fuel prices, and continued high unemployment.

In response, more public sector organizations are making the shift from input to outcome-based budgeting (OBB) in an effort to align allocation with strategic national priorities. Doing so, however, is no easy task. Moving to an outward-facing, results-based budgeting process usually requires significant changes to management frameworks, accounting policies, reporting processes, and performance management.

To understand how the transformation works, this paper profiles six governments – in different regions and phases of economic development – that have made or are making the transition to OBB. They include Canada, New Zealand, Malaysia, Panama, South Africa and the province of Minas Gerais in Brazil. In each case, we sought to understand the catalyst for change, the approach taken, and the core elements and practices used to guide reform. We hope the range of perspectives provided will serve as a useful reference for politicians, civil servants, and others around the world who are considering or implementing their own OBB programs.

We are indebted to the many government officials who gave generously of their time and insight as we researched this paper and to our network of KPMG partners and colleagues whose OBB experience made this report possible.

John HerhaltGlobal ChairKPMG Government and InfrastructureKPMG International

KPMG Contributors

Patrick A. ByrneSenior ManagerKPMG in Canada

Fernando AguirrePartnerKPMG in Brazil

Jim H. AlexanderAssociate Partner/ Senior PrincipalKPMG in Canada

Mauricio EndoPartnerKPMG in Brazil

Souella M. CummingPartnerKPMG Risk Advisory ServicesKPMG in New Zealand

Tai Hai WoonExecutive Director, AdvisoryKPMG in Malaysia

Thabile DubeAssociate DirectorKPMG in South Africa


Contents

Executive Summary 3

Introductory Stage: 6

• Panama 6

Implementation Stage: 12

• Malaysia 12

• SouthAfrica 16

AdvancedStage: 22

• MinasGerais,Brazil 22

MatureStage: 25

• Canada 25

• NewZealand 31

Conclusion 36



Executive Summary

Outcome-based budgeting (OBB) requires public sector spending to be aligned behind an approved set of governmental priorities, such as reductions in crime and unemployment or improved access to education and healthcare. Although widely used in the private sector, the approach has been slower to take hold in government settings where budget, policy, and appropriation processes are more complex and transparent, involving more administrative layers and approval steps than in the commercial environment.

Instead, governments around the world often rely on line item and input-based budgeting. The narrower focus of this approach can lead to ad hoc spending, unclear oversight and disjointed results. Without a framework to cascade national priorities and calibrate appropriations, departments can be left to draft budgets from the bottom-up, based on forecast expenditures and prior-year spending. A health ministry, for instance, might budget based on how many beds or staff a hospital has, rather than its ability to improve the cost of service or treatment results. In addition, the absence of a linked, cross-agency planning structure often contributes to departmental ‘silos’. Organizational cultures built around these principles tend to emphasize compliance, such as minimal variance in actual-to-planned spending, versus the specific return on investment from a citizen-centric point of view.


4 | Making the Transition – September 2011

In light of these issues, OBB is gaining renewed interest, influence and traction. Governments that have made the transition have seen significant results including, improved financial standing, less debt and measurable traction on core initiatives. As with any change program, however, the form and implementation OBB follows must be tailored to the needs, capabilities and requirements of the location in question. To understand the nuances, we studied six countries in various stages of economic development and OBB maturity. Some of the key takeaways from our research include:

1. Any organization can adopt OBB

Our research in places as diverse as Panama, Brazil’s Minas Gerais and New Zealand shows that a nation’s size or financial standing has little bearing on its ability to implement a successful OBB program. Minas Gerais was insolvent, for instance, and New Zealand was on the verge of bankruptcy when both began their transition to OBB. Today, both places have highly effective budgeting and performance review processes. Likewise, Panama, with a population of just over three million, has emerged as one of the leaders in the region thanks to its commitment to financial reform.

2. Strong, sustained leadership and political will are essential

The scale and scope of government makes wholesale reform especially challenging. Leaders must have the vision, authority, and negotiating skill to steer through often difficult changes and manage the requisite trade-offs. Strong leadership and sustained engagement are essential to set the vision, orchestrate tough decisions and persuade officials across complex bureaucracies to put their reputations on the line and pull for a common goal.

3. Recognize and accept that reform is messy

Because there is no standard ‘playbook’ for OBB, leaders need to be comfortable ‘learning as they go,’ responding to events on the ground by consulting, communicating and collaborating with peers, outside advisors and the public. Improvements often come incrementally, with some departments,

Our research in places as diverse as Panama, Brazil’s Minas Gerais and New Zealand shows that a nation’s size or financial standing has little bearing on its ability to implement a successful OBB program.



administrators and ministers embracing the changes while others lag behind. Managing the inherent messiness of reform requires flexibility, resourcefulness and patience. It also requires that the process be kept as apolitical as possible. Frequent, meaningful dialogue with internal staff, elected officials and public stakeholders is also necessary to educate parties on the reform effort and continuously refine the approach.

4. Don’t go it alone

OBB is complex, often involving legal, regulatory and accounting reform. To support the process and minimize disruption, officials need to ensure they have the right legal, accounting and specialist resources in place. That experience is helpful in charting the implementation phases, supporting the switch to accrual accounting and managing the underlying IT transformation. It is also a good idea to consult with peers who have gone through the process themselves. Before beginning planning, Panama and Malaysia met with government practitioners in several other countries to understand what worked and what did not. In addition, entities such as the Organisation for Economic Cooperation and Development (OECD) have a wide body of information to assist governments in various phases of financial reform.

5. Adopt accrual accounting

Although the shift from cash-based to accrual accounting can be challenging, all six locations studied practice or are in the process of making that transition. Doing so brings financial practice in line with international standards, provides greater cash flow visibility and helps governments track their real income and expenses more effectively.

6. Measure the quality of management

The most well-thought-out reform program is only as good as the people behind it. Yet many OBB efforts do not include a management assessment. To address this, Canada has taken the lead on introducing a framework to evaluate management effectiveness on a ministerial and departmental level. The findings support both leadership development as well as outcome delivery. South Africa and others are considering applying the same framework in their own OBB programs.

Outcome-based budgeting (OBB):Also known as Performance-Based Budgeting, OBB is a way to allocate resources based on achieving agreed upon objectives, program goals and measured results.



Introductory Stage


PanamaGetting Started

Panama is a small yet relatively prosperous nation of 3.4 million people. Nestled at the southernmost end of Central America, it has one of the largest and fastest-growing economies in the region. Since March 23, 2010, international ratings agencies have awarded Panama with investment-grade status, marking the first time the country has received such a designation and reinforcing Panama’s status as one of the economic leaders in the region.1

Elections in 2009 brought in a new government. Comprised of many former business leaders, the administration focused on improving productivity and performance. The new Minister of Economy and Finance, Mr. Alberto Vallarino, sought ways to foster long-term financial sustainability and better transparency. Although familiar with the premise behind outcome-based budgeting (OBB), he and other officials understood that, before Panama could embrace full-scale reform, they would have to lay the right groundwork. That groundwork has since shaped an agenda focused on improving the ministry’s policies, processes and systems.

Establishing a baseline assessment

A team from the Ministry of Economics and Finance, supported by KPMG advisors, met with officials in the national governments of Chile and Brazil, as well as the Brazilian province of Minas Gerais, all of which had recently undertaken their own financial management reforms. They also studied successful OBB programs in Canada, New Zealand, Norway, Denmark and Spain. That research helped identify effective financial management frameworks, internal audit standards, policies, controls, and reporting procedures and helped officials benchmark Panama’s performance relative to other OBB adopters.

“Among the issues the findings revealed,” says Patrick Byrne, a Senior Manager with KPMG in Canada, and advisor to the Panamanians, “were overlapping and sometimes conflicting ministerial duties, and paper-based transactional flows that slowed the course of business.” Inconsistent financial reporting standards and requirements exacerbated the situation, he added, “and a two-tiered accrual- and cash-based accounting system made it hard for officials to appropriately assess the government’s finances.”

1 “Fitch upgrades Panama rating to investment grade,” Reuters, March 23, 2010.


Preparing the foundation for OBB

To address these issues, Panama’s government is in the process of implementing a new financial management framework. “The goal,” says Aracelly Méndez, National Director of Accounting at the Ministry of Finance, “is to clarify roles and accountability, establish consistent accounting policies and internal controls and improve visibility and performance.”

The major objectives of the program include:

1. Clarifying ministerial responsibilities

Panama has two institutions charged with managing the nation’s finances, the Controller General of the Republic (Controller) and the Ministry of Economics and Finance. As an oversight body, the long-standing Controller’s office has historically wielded considerable influence. The Ministry of Economics and Finance, by contrast, was formed only about 10 years ago. Unclear accounting authority between these offices has often created confusion. For example, while the Controller’s office sets accounting policy and principles, the Economics and Finance Ministry is supposed to manage and oversee accounting processes. “But the lack of clear separation between those duties creates overlap,” explains Byrne, “with both offices involved in regulating and determining financial management processes and policies.”

To improve clarity, the new financial management framework plans to segregate policy development from operational oversight, giving the former to the Controller and the latter to the Ministry of Finance. By formally assigning responsibility for policy, internal audit and oversight responsibility to the Controller, Panama gains an independent monitoring body. Likewise, day-to-day accounting management conforms with the Ministry of Economics and Finance’s other budgetary and reporting responsibilities.



2. Removing unnecessary process steps

Panama is relatively unique in that it employs a pre-transactional review step called the Control Previo. Dating back to the 1970s, the system uses a team of administrators based in the Controller’s office to review and approve all government transactions across all ministries and departments. Although envisioned as a helpful secondary check and oversight function, the unintended consequences of so many transactions going through so few people were backlogs and delays in working with external parties. In addition, there were questions over who had ultimate authority. For instance, ministerial staff believed it was up to the Controller to ensure that transactions aligned with policy. However, the Control Previo assumed that responsibility rested with ministries. As a result, policy alignment often fell through the cracks. According to Méndez, “Poorly defined internal audit standards and a weak control environment could create inconsistent requirements for individuals transacting with the government.”

To streamline this process, the proposed new financial management framework replaces the Control Previo with a robust internal audit function, managed at the ministerial level. To remove bottlenecks, the changes embed authorization and approval controls directly into the new financial management system, reducing approval times and increasing consistency. “The changes will come into effect gradually,” says Méndez. “The proposed new financial framework requires an internal audit structure that is properly defined with the right control management process in place.”



3. Increasing ministerial accountability and reporting quality

Under the proposed financial management framework, ministers will be held responsible for the administration of their budgets and related financial statements, as well as for the quality of the overall control environment. This will mark a significant change. In the past, if something went wrong, culpability usually went to the public accounting firm that certified the accounting statements. Now ministers will be held more directly accountable. The goal is for such top-down accountability to have a cascading effect. A minister is unlikely to feel comfortable signing off on financial information, for instance, without the department controller’s assurance that the proper internal controls are in place. For that to happen, the controller and department leaders will require that their managers and staff have the appropriate training to ensure that controls are effective. “Those checks,” says Fernando Lasso de la Vega, a member of the KPMG in Panama’s advisory team, “create an accountability loop that helps reduce the likelihood of error, reinforces expectations and aligns performance evaluations.”

4. Moving to accrual-based accounting

Part of Panama’s financial reform includes the shift to accrual-based accounting. Historically, Panama has used a mix of accrual and cash-based accounting. Cash accounting records revenue upon receipt and costs upon payment. Because the timing of each can vary widely, it can be hard to track cashflow. Depending on the reporting timeline, for instance, the majority of expenses may occur in one period, while the majority of income might occur in another, making it seem as though the organization is running at a net loss or a large profit. This creates administrative challenges and can make it difficult to accurately gauge the nation’s finances.

Under the proposed financial management framework, ministers will be held responsible for the administration of their budgets and related financial statements, as well as for the quality of the overall control environment.



Accrual-based accounting manages this spread by requiring income and expenses to be recorded once the invoice is sent or a cost has been incurred. This protects against the risk of financial manipulation and allows managers to keep more accurate account of their projects. Adopted by international accounting bodies and nearly all private sector organizations, accrual-based accounting allows organizations to keep track of their real income and expenditures.

Making the switch, however, is not easy. Policies need to be updated, systems changed and training rolled out at all levels. Under the proposed framework, ministries will implement the revised structure on a department-by-department basis, giving ministers, staff and other government officials time to manage the transformation. Explains Méndez, “We are working with the Controller’s accounting office to ensure that their work is harmonized with the norms required under the International Public Sector Accounting Standards (IPSAS). Right now we are doing it on a modified accrual basis, but we hope to have the new system up and running in 2013.”

Other reforms will also be phased in to help officials refine the process as they go along, identify areas where legislation needs to be enacted or refined and provide an opportunity for officials and the public to adapt to the changes.

Lessons learned

As with any change process, the Panamanian government has had to learn as they go. With the reform process underway, some of the key challenges the government has met include:

1. Managing turnover: The frequent transitions that occur as part of any political process can sometimes dilute institutional memory. In Panama, turnover in key administrative positions has caused layers of legacy knowledge to be lost. Such turnover makes it harder to carry-out reforms and improvements, many of which require sustained planning, cross-ministry dialogue and collaboration over a period of many years. That transition can also interfere with the frequency and consistency of internal audit reviews. Weak internal controls compound the problem, explains Méndez. “If you don’t have internal controls, you are more vulnerable. That is why we are focusing so much attention on improving our internal audit infrastructure. By adopting institutional processes and automating routine internal control functions, turnover becomes less of an issue from a risk point of view.”



2. Communicating with citizens: The Control Previo reforms provided the government with another early lesson: Present a clear case to the public. Opponents of the idea to automate the purchasing and procurement process mounted a campaign over concerns that the proposed changes would eliminate a key control. Newspapers took up the story amid worries over a potential increase in fraud. Although the government is certain the proposed new financial management framework will boost accountability, transparency and the control environment, it realized that it had been too slow to present its case and had ceded control of the message. The experience offered valuable insight about the importance of articulating future changes in clear, precise terms and maintaining open and early dialogue with the public.

3. Sustaining the commitment: Change is difficult. Those leading the reform effort understand that there will be pushback. Not only from ministers, who based on the proposed new financial management framework, are now called on to take greater responsibility for their reporting and control environment in their ministries, but also from department heads and managers across ministries whose powers, budgets and authority will be enhanced in light of the proposed changes.

Next steps

Key to the country’s success will be sustaining the process changes over time. The stage-setting elements described may take five to ten years to complete. In some respects, OBB implementation may be a generational change. During that time, it will be important to strengthen support, training and communication as needed. Panama’s efforts so far show that it is prepared to stay the course. Ministers and other stakeholders recognize that the reforms are necessary to Panama’s continued growth and financial stability. “This effort is not tied to any one administration or government,” concludes Méndez. “Rather, it is a state policy intended to benefit Panama for the long term.”

Key to the country’s success will be sustaining process changes over time. The stage-setting elements described may take five to ten years to complete.



Implementation Stage

2 “Malaysia 2011: Investment to the rescue?” CreditSuisse Economic Research, November 20103 Economic Report 2009/10, Public Sector Finance, Treasury Department, Government of Malaysia.

MalaysiaSetting the stage

Malaysia has a well-established infrastructure and is one of the more economically advanced countries in South Asia. In many ways, the country has been an early adopter of important financial reform programs. Starting in the late 1960s, when many peer countries were still focused on line-item budgeting, Malaysia switched to a new Program and Performance Based System (PBBS). That model shifted departmental focus from inputs to desired actions and outputs. However, because planning and budgeting activity was still controlled by individual ministries, those outputs were often poorly coordinated at a national level. To address this, the government instituted a modified budgeting system (MBS) in the early 90s. This approach leveraged the same program-based framework, but addressed gaps in the system and put program agreements in place to enforce accountability. Yet it was still based on outputs and not outcomes, and was skewed more toward compliance than performance.

Catalysts behind the OBB push

In the absence of an integrated national strategy for economic growth, Malaysia’s rapid development led to inconsistent results. While many of these developments were notable for their vision, architectural ambition and execution, the collective return to the state was often lacking. For instance, despite investing in a superb, state-of-the-art airport and a large financial center, Malaysia is not the leading aviation and financial hub for the region. That title goes to Singapore.

One consequence of the misalignment between investment and economic goals has been a pattern of economic imbalances. The country’s economy remains heavily dependent on oil exports, with petroleum accounting for 40 percent of GDP. Although oil revenues have been an important source of the nation’s wealth, crude prices have been subject to unusual volatility over the last several years. As a result, the government is keen to diversify its industry mix to manage risk.

In addition, Malaysia’s debt-to-GDP ratio is higher than officials would like. In 2011, the government expects the budget deficit-to-GDP ratio to remain at 5.4 percent. With the exception of India, that deficit burden is the highest among the Non-Japan Asian economies.2 Operating expenses are also growing. Government figures put total operating expenses (OpEx) for the 2009/10 year at RM160 billion (75 percent of total spending), compared to RM80 billion in 2004, doubling the rate of spending in only six years.3 At the same time, development expenditures needed to spur growth have declined. Salaries and associated costs account for a large share of the operating expenditures. Malaysia has about 1.3 million civil servants on its payroll for a population of about 26 million, making it one of the highest civil servant payroll-to-population ratios in the world according to the Organisation for Economic Cooperation and Development (OECD).



Putting Malaysia on a more sustainable growth path

These factors prompted the government to seek ways to reduce their debt burden, change their OpEx structure, and improve efficiency. But for a nation long-accustomed to a large, central government, and whose public sector employs five percent of the population, any restructuring carries significant political, social and cultural implications.

Malaysia’s goal for 2020 is to bring the average annual income for its citizens up to US$17,000 from its current level of US$7,000. It plans to achieve this by supporting private sector initiatives in 12 key industries, designed to boost research and development and high-value service sector jobs. Although the private sector will fund 90 percent of the program, the government intends to act as a partner, directing resources to facilitate the build-out on a national level. Officials hope it will also help stem the ‘brain drain’ of Malaysia’s young, educated population.

To do this, the government recognized that it must reform its budgetary practices. Since 2010, KPMG in Malaysia (supported by KPMG in New Zealand) has been engaged to assist the Malaysian Government in this transition to outcome-based budgeting. The Malaysian framework has four objectives:

• Ensure greater budgetary alignment with the country’s strategic agenda • Integrate operational and developmental expenditure • Empower officials to monitor and enforce the changes • Improve operational efficiency.4

The program is intended to build stronger connections between national and ministerial priorities and programming, foster clear and unified lines of responsibility and create better audit oversight and reporting.

4 “Outcome based budgeting: a way forward,” The Malaysian Ministry of Finance, http://www.myresults.treasury.gov.my/myresults/awareness/awareness_session.pdf


http://www.myresults.treasury.gov.my/myresults/awareness/awareness_session.pdf


In planning the scope of their OBB framework, Malaysia’s Ministry of Finance consulted with officials in New Zealand, Brazil and Korea and documented the approach taken by a range of other countries, including The Netherlands, Sweden, Canada, the United States and the United Kingdom. That research allowed them to compare different implementation models and helped them weigh how quickly to push through needed changes. Where some countries pursued an incremental approach to OBB, phasing reforms in over time, others chose a more rapid, revolutionary approach where a series of reforms were pushed through all at once. While both approaches had their benefits, the Malaysian government determined that an incremental, evolutionary approach would be more effective.

Phasing in the changes gives officials the opportunity to spread the cost, build capacity, trail and refine solutions as the go along. The program is expected to unfold over the next several years, with full implementation to be completed by 2016.

Lessons learned

The OBB journey for Malaysia has just started and any lessons learned or to be learned will become more apparent as the transformation moves forward. Already, the country has seen some promising results and has recovered better than many other nations during the global financial crisis. This was due in large part to improvements made to the banking system and lessons learned in the aftermath of the 1997 Asian economic crisis. In addition, a number of government transformation initiatives aimed at delivering more efficient and effective public sector services are starting to yield many positive outcomes. The central theme that surrounds these transformation initiatives is business will no longer be as usual especially with respect to government fiscal planning. The roll-out of OBB on a government-wide basis is timely to help realize the desired outcomes of these initiatives and to monitor their progress for delivery of results through a transformational management process and entrepreneurial management culture.

In planning the scope of their OBB framework, Malaysia’s Ministry of Finance consulted with officials in New Zealand, Brazil and Korea and documented the approach taken by a range of other countries, including The Netherlands, Sweden, Canada, the United States and the United Kingdom.



Next steps

Given the centrality of performance management under the OBB, the whole performance management process involving planning for outcomes, resourcing, monitoring and evaluation and results reporting must be institutionalized at the national and ministry level to be effective. Hence this aspect of the process will have to be monitored and managed closely. Other areas that will warrant equal priority include integration of resourcing functions, implementation of accrual accounting, human resource empowerment and OBB legal implementation to drive the performance culture reform initiatives in the country.

The OBB system provides a structured mechanism to link and streamline the national transformation initiatives from conceptualization to attainment of results through effective and efficient implementation of programs and activities, in line with the government’s efforts to rationalize public sector management through better expenditure management and delivery of effective outcomes. This represents the start of the OBB journey for Malaysia as it looks forward to reaping the benefits of this major initiative in the coming years, albeit inevitably facing challenges as they progress.




South AfricaEarly days of reform

South Africa’s process of budgetary reform began in 1994. Years of apartheid rule had kept its public service isolated from international developments in public sector reform. Along with limited transparency and accountability, a heavily centralized structure gave the country’s provinces little to no voice in budgetary allocation, priority setting and decision-making.

In the post-apartheid era, South Africa began tackling a backlog of necessary reforms. Starting in 1994 and continuing through 2002, the government, led by the African National Congress (ANC), enacted a series of policy and legislative frameworks to clarify and establish standards, improve accountability, and bring reporting in compliance with international best practices. These changes put South Africa’s public sector on a similar footing to that of its global peers and laid the groundwork for performance-based governance.

But challenges remained, chief among them were a lack of vertical integration, unclear linkage between inputs, outputs and outcomes, and a low level of compliance with the established performance management framework. As Thabile Dube, an Associate Director in KPMG in South Africa’s advisory practice, observed, “There was planning; there was reporting; and there was managing to a budget, but the priorities were inconsistent and the outcomes often poorly structured. The Department of Public Works, for instance, might decide that it should build more schools when the larger national priority might be to create jobs. If that larger outcome had been defined and the delivery partners made aware of their role in achieving it, the Department of Public Works might better calibrate its efforts.”


5 Agence France Presse (AFP) South Africa unemployment drops to 24% – Feb 8, 2011

Pressure to improve performance

By 2009, South Africa faced other challenges. On taking office, President Jacob Zuma confronted unemployment levels of over 20 percent.5 There were also questions about how effectively public funds were being used. Although major social services, such as education and healthcare, had seen large boosts in public funding since apartheid, the country had yet to see commensurate gains in many areas. For instance, despite one of the highest education spending rates in the world – nearly six percent of GDP – South Africa’s test scores and matriculation rates remained low by international standards. Likewise, significant inequalities in healthcare budgeting and service delivery existed among provinces, leaving some to question how well the nearly nine percent of GDP spent on healthcare was being used.

A new level of performance management maturity

Within the Zuma government, the desire to bring about more tangible, trackable results drew focus to outcome-based planning and budgeting. With job creation a primary goal, the government announced a major effort to reform budgeting and governance in 2009.



As part of a strategic overhaul, the South African government resolved to rationalize what had become a spiraling series of policy priorities. Over the course of 24 months, they assessed their planning processes, identified gaps, and in deliberation with the Cabinet and relevant ministries, decided to split the planning function between two cabinet-level bodies. The country’s long-term strategic planning would continue to be conducted by the ANC government, but with input from a new National Planning Commission.

This coordinated approach to planning culminated in 12 discrete outcomes derived from the ANC Manifesto, such as, “Improved quality of basic education” and “Decent employment through inclusive economic growth,” and marked the first time in the country’s history that a clear agenda for growth was developed across multiple agencies and made publicly available.

Today, responsibility for converting those goals into manageable outcomes rests with a new Ministry of Performance, Monitoring and Evaluation (PME).

Performance, Monitoring and Evaluation Unit: The PME was established out of recognition that a centralized, executive oversight function was needed to ensure cohesion of overall outcomes and functional line deliverables at the ministerial, provincial and municipal levels. Its creation signaled the government’s willingness to take a more developmental role in state affairs.

Established as an independent department within the presidency, the PME has three missions: to lead and facilitate the outcomes approach; to develop plans for achieving those outcomes; and to report and monitor on the progress made toward achieving them. According to Dr. Sean Phillips, the Director General of the Performance Monitoring and Evaluation Unit, “The idea is to institutionalize progress and reporting at the highest level, keep cabinet ministers focused on what they agree needs to be done and support the country’s strategic agenda.”



The new system is designed to forge better cohesion between and within departments in support of national priorities.

Performance improvement is

a process, not an event.

Dr. Sean PhillipsDirector General, South African Performance Monitoring and Evaluation Unit


Phillips is quick to note that this will take time, adding, “Performance improvement is a process, not an event. We are at the start of a learning curve. Changing the way government works and transforming management into a more businesslike structure is a long-term process. Our goal is to see improvement each quarter and help the cabinet look across government, assess where progress has been made, and identify those areas that need additional support.”

What this means for South Africa

The new system is designed to forge better cohesion between and within departments in support of national priorities. To improve literacy rates, for instance, multiple departments need to pull together. Dube adds, “The Department of Public Works may have to build more schools so that students are not educated under trees, the Department of Health must ensure that children receive appropriate immunizations to minimize absences, and the Department of Education may need to revamp teacher recruiting and salary levels to ensure that educators are paid on time and have adequate working conditions.” By delineating the actions required to meet the overall goal, each department knows exactly what it is supposed to be doing, and those tasked with overseeing the project at the national level can better align performance measures and reporting.

Challenges

1. Generating buy-in: Because the program is new, there are ongoing questions about how to bring various ministries on board and into alignment. Some ministers are worried that the new process might reduce the funds previously available to them, and with it, their department’s influence. Others have expressed concern about the lack of a specific legal framework for the performance agreements. In response, the government has reached out to other countries, with extensive experience in OBB such as New Zealand, to review and apply those learnings in South Africa.


2. Linking joint planning to the budgeting process: Having already improved the planning process, the government has embarked on the next phase: refining and rolling out a more transparent and aligned budgeting process. Developing the service delivery agreements has proven a lengthy process partly because they are still new, and the required analysis and reporting has needed refinements. Joint planning among agencies that is required for most goals adds another layer of complexity to the process. As a result, it has been difficult to synchronize the timing with the country’s budgeting calendar. This has resulted in some unfunded delivery agreements. Recognizing that plans are inherently dynamic, the PME and others are working to find a way to allow changes to be made mid-stream without having to redo all the stages of the service delivery agreement process.

3. Developing necessary skill sets: South Africa has made enormous strides in transforming its performance management structure in a relatively short period of time. However, there remains a need for administrators and officials across the government to understand, interpret and apply planning frameworks, financial reporting standards, international accounting frameworks and internal controls. While the country’s formal financial statements are prepared under international accounting standards, that approach may still be challenging to some managers, particularly in municipal levels governments.

Lessons learned

1. Gauging the quality of management: It is not enough to have the right systems in place. Organizations also need to have the right management to execute the strategy effectively. Some in South Africa’s government have looked to Canada’s Management Accountability Framework as a possible model. That framework supplements other program-based processes by assessing the quality of management and its ability to get the job done. As Dr. Phillips observed, “Strategic planning looks at outcomes, but this is rendered moot if there isn’t the management or institutional machinery to affect the needed changes.”



2. Communication and outreach: Three years ago, South Africa’s Auditor General started conducting roadshows, traveling to different provinces to meet with local administrators, officials, members of the press and the public. The purpose being to educate those charged with governance to understand what the audit opinion means for the entity and for governance as a whole. The meetings are open, candid and non-judgmental -- an effective mix. Over the past three years, the program has continued to gain attention and momentum. In part, this is due to the Auditor General’s hard work in breaking down perceived barriers. Where the old style of governance was largely impositional ‘We’ll tell you what to do and how to do it’ the tone of these new sessions is ‘We’re all in this together.’ By removing the technical jargon used in published financial reports, laying out expectations and advising how to troubleshoot disclaimers, qualified audits and other issues, the forums have encouraged dialogue and engagement. In addition, press coverage of these events has played an important role in building awareness among the wider public of what the office is doing.

Next steps

“We’re in the key part of the process right now,” says Dr. Sean Phillips. “It’s important that the Cabinet keeps its commitment to producing the quarterly reports and using them as intended.” Sustaining the commitment and maintaining emphasis on performance is the key challenge for many governments. The Zuma administration has put monitoring quite high on its agenda, which should help build commitment within the government. “The ultimate proof, of course,” says Dube, “will rest in whether ordinary citizens notice an improvement in service delivery. It’s an exciting time right now for South Africa. Service delivery has long been a source of concern for South Africans. It will be interesting to check back in a year or two after the budgeting and service delivery program has had a chance to take root to assess how far we have come.” Auditing is another important element of the process (i.e. planning, budgeting, implementation of plans, then auditing) that lies downstream for South Africa. Even though auditing happens later on in the process, it is influencing the bigger objective of outcomes-based planning and budgeting.


We’re in the key part of the

process right now. It’s important that the Cabinet keeps its commitment to producing the quarterly reports and using them as intended.

Dr. Sean PhillipsDirector General,South African Performance Monitoring and Evaluation Unit


Advanced Stage

BrazilWhen Itamar Franco, governor of Minas Gerais, Brazil’s fourth largest state, declared a moratorium on paying its debt payments totaling US$15 billion debt on January 6, 1999, it set in motion a chain of events that nearly led to the country’s collapse. The announcement came at a time when Brazil was battling a series of economic challenges, including currency devaluation and a downgrading of the country’s credit rating. Within Brazil, the state of Minas Gerais faced an even more challenging set of financial conditions. The state was running at a constant deficit: 80 percent of the state’s revenues went to salaries, 33 percent to pensions and debt payments accounted for an additional 13 percent. The total bill came to 126 percent of expected income.6 With high costs, low revenues, and little accountability, Minas Gerais faced a turbulent few years.

New financial discipline

In 2003, Minas Gerais elected Aécio Neves, a reform-minded governor who resolved to put an end to the cycle of debt, inflation and financial uncertainty. As part of a wider austerity plan known as the ‘Management Shock,’ his government introduced new frameworks and regulations to cut excess spending, improve accountability and establish greater linkage between budgeting and planning. Under a zero-deficit mandate, and buoyed by wide popular support, Neves trimmed the size of government – abolishing six ministries and 59 supervisory and control positions.

In addition to creating new frameworks, the government stepped up enforcement of existing federal legislation. Chief among them were Fiscal Responsibility Laws which prohibited salaries and benefits from being padded while costs and services elsewhere were being cut. Such controls tamped the excessive wage inflation that had contributed to the state’s financial troubles. As part of that effort, and in a gesture of good faith, Neves cut his own salary by 45 percent. Other parts of the process included:

1. High expectations and clear goals: The governor laid-out an ambitious dual track program. One track focused on near-term (current year) actions needed to restore fiscal balance, and the other charted long-term development over 20 years. Developed in collaboration with the Finance Secretary and a specialized project office, the plan stipulated detailed performance objectives and milestones, with very aggressive targets. After 20 years, Minas Gerais aimed to have the highest literacy rate of any state in Brazil.

6 World Policy Journal, Kenneth Maxwell, Spring 1999.



With the broader strategy in place, the project created individual long-term, medium-term and short-term plans for each secretariat. Those plans laid-out a set of specific performance goals, establishing targets for such things as literacy, infrastructure development, public safety, and access to healthcare. Based on those targets, the finance team could effectively allocate state funds.

2. Trial and error: At the beginning, the reform was so new and its scope so wide, that the government faced a process of learning by doing. The finance team often began by taking a department’s prior year’s budget that laid-out a baseline number and assigned budgets accordingly. Although somewhat autocratic at the start, most secretaries acquiesced, recognizing the need to establish baseline budgets and bring a tighter correlation between spending and results.



3. Incentivizing the right behavior: The government created incentives to encourage secretaries and others to make sometimes painful reforms. Taking a page from the private sector, they adopted performance programs that rewarded departments that met performance milestones. Furthermore, secretarial performance reviews took place in front of fellow secretaries, creating subtle social pressure to conform. There was internal pressure from within departments as well. Staff were part of the incentive pool, earning bonuses when milestones were achieved. Performance results were also made available to the general public, published online and in local newspapers, providing an impetus for secretaries and their departments to demonstrate real results.

4. Benchmarking and analysis: Early on in the process, the finance team broke the state into regions and compared a range of economic and social indicators, such as per capita income, relative GDP, graduation rates, and disease and mortality statistics. These data helped them target the areas most in need of development, and prioritize programs and funding accordingly. They also reached out to experienced practitioners in other locations and consulted with development experts from the World Bank and the International Monetary Fund (IMF).

5. Creating an informed electorate: Recognizing that a healthy democracy relies on an informed electorate, the reform program also included a component focused on community outreach. A committee within the Secretariat of Finance goes out to local communities to provide guidance on where citizens can get information on what the government is doing, what they should expect from government, and what individuals can do to hold their leaders accountable. Civics courses are also a required part of the curriculum in grade schools.

Lessons learned

One might think that it is easier for more developed nations such as New Zealand and Canada to adopt OBB, but the Brazilian state of Minas Gerais shows that discipline, rigor and long-term commitment are more critical success factors. The Management Shock program restored financial stability and the confidence of the international lending community. As the world economy grew rapidly in the late 1990s and through the 2000s, Minas Gerais attracted new businesses, such as Mercedes Benz, Lafarge and Sandvik. Today, Brazil’s fourth largest state is regarded as a model of governance. There has been a 76 percent jump in literacy rates between 2006 and 2010, a sharp increase in healthcare oversight (31 hospitals were audited for quality-of-care standards versus 0 in 2007) and a sustained improvement in the investment climate.7

The Management Shock program restored financial stability and the confidence of the international lending community.

7 “How the world’s most improved school systems keep getting better,” McKinsey and Company, 2010.



Mature Stage


CanadaOverview

The government of Canada has a long history of performance-based budgeting, dating back to the late 1970s. Today, all departments are required to submit programs for review and manage them against planned results. The country’s well-established frameworks and review cycles make it one of the more effective and highly regarded outcome-based budgeting (OBB) systems in the world.

A gradual maturity

In contrast to other places, Canada’s embrace of OBB stemmed less from a financial or budgetary crisis than a gradual maturity in the public sector organization. “In part,” says Jim Alexander, an associate partner in KPMG’s government advisory practice and former Deputy Chief Information Officer of the federal government, “this is because public service has always been very strongly valued by Canadians.” Canada’s tradition of public sector independence also helped. “Having a public sector that can serve either party in power is very much a part of the Canadian identity,” adds Alexander. Because the reform program was not politically driven, administrators could carry out improvements out of the spotlight and without partisan pressure.

The Canadian budgetary transformation was a case of steady evolution rather than swift transformation. The initial move from inputs to outputs to results-based budgeting took nearly 20 years to complete. Additional reforms, begun in 1995, sought to augment financial information with performance measurement data. Throughout the last decade, frustration over misalignment between outputs and outcomes drove the government to pursue greater consistency and granularity into outcomes under a consistent framework. The result was a new, broader management reporting framework, one that has since been adopted by many other countries.

Program elements

Canada’s expenditure management system hinges on the idea of a whole-of-government framework with clearly defined accountability. The system consists of several elements that synchronize national and departmental programs with higher-level outcome priorities.



1. Management, Resources and Results Structures (MRRS): The MRRS consists of clearly defined and measurable strategic outcomes and a Program Activity Architecture (PAA) that captures how a department allocates and manages its resources to achieve those goals. Under the MRRS, each department is required to gather, manage and report on a series of financial and non-financial measures related to their programs. The intent is to sustain a common, government-wide approach to program evaluation. The results are core to the government of Canada’s Expenditure Management System and form the basis of several formal parliamentary reports on accountability, such as the annual Reports on Plans and Priorities and the Departmental Performance Reports.

2. Program Activity Architecture (PAA): The PAA is a structured inventory of the programs that a department commits to support. It provides a framework to integrate operational planning and reporting processes. Within the architecture, programs and their sub-activities are aligned against the outcome they are designed to support. Because the PAA framework is consistent across departments, results can be rolled up. This makes it easier for oversight bodies, such as the Treasury Board Secretariat, evaluators, and fellow ministers to look at agency activity and progress toward shared outcomes, such as crime reduction or public health improvements. Results are made publically available through annual disclosures, called ‘Results for Canadians.’

To enforce use of the PAA, departments must file their annual Report on Plans and Priorities (RPP), which lays out the department’s three-year agenda, and their one-year Department Performance Report (DPR), using the architecture. In addition, any new policy proposals and submissions must also be done within the PAA in order to be reviewed by the Cabinet and Treasury Board.

“The PAA process has allowed us to more clearly convey to ministers how departmental programs and activities are laid out,” says one Canadian official interviewed. “The PAA serves as a lens, allowing ministers to compare initiatives and spending across departments. That visibility allows them to more easily challenge spending proposals and make better informed expenditure decisions.”


3. The Performance Measurement Framework (PMF): The PMF details the performance milestones and indicators used to track and evaluate the department’s progress in achieving its outcome agenda. It is also used to support day-to-day program delivery. Ongoing collection and analysis of performance information not only helps to support good program management, it also highlights gaps and areas where outcome, program or measurement indicators need to be adjusted.

4. The Management Accountability Framework (MAF): Where the PAA and MRRS are primarily designed as public facing programs, the MAF serves as an annual internal measure on the quality of public sector management effectiveness. Deputies are assessed on such things as their ability to deliver on the minister’s outcomes, whether they succeeded in getting a new immigration policy through Cabinet, as well as morale, employee turnover, and the quality of management skills.

Canada was the first country to institute this type of management assessment. A Treasury Board Secretariat official, notes, “The performance pay of deputy ministers is linked to the MAF results of their departments, making it more relevant to them. Because the results are public and broadly known, departments and deputy ministers can see how their departments perform compared to their peers. The MAF also provides the Treasury Board Secretariat with a whole-of-government perspective on the state of management practices, highlighting areas of strength and those needing more attention.”

Encouraging adoption

Although the government was successful in rolling out MRRS and PAA, evaluators learned that it is one thing to install a system and another to get people to use it. Reviews found that departments viewed the system mainly as a compliance check and were not integrating it into their day-to-day planning and operations. To change this, the government instituted new rules requiring that all policy and program submissions made to ministers, the Treasury and the Cabinet come through the PAA or risk being unfunded. That change meant that the PAA was no longer simply a reporting vehicle, but critical to a department’s ability to advance its programming objectives.

To give the program teeth, the government also introduced a quadrennial Strategic Review process using the PAA as the underlying logic model. The Strategic Review allows senior management to perform a detailed assessment of direct program spending to see where programs are being managed effectively and where improvements need to be made. The process stipulates that management follow a result-based approach to show how federal funds are being used and the specific benefits being delivered to citizens as a result.



Moreover, the Strategic Review provides an opportunity for management to rebalance program funding, identifying low impact or underperforming programs and reallocate dollars accordingly. “The Strategic Reviews really drove the managing-for-results process to ground,” says a Canadian official. “That’s because a strong strategic review requires a strong PAA. If the PAA is not clear or the performance measures around it are not focused on the right things, it all comes out in the wash during the strategic review process.”

Through strategic review, the Treasury Board analyzed about 25% of the federal government’s direct spending annually over a four year period. The mission, in part, was to reduce and in some cases realign the least relevant and less effective program spending.

Collaboration and integration

Six main bodies have a hand in establishing spending priorities, making appropriations, and designing the programs needed to execute the government’s agenda.

1. The Cabinet sets and appropriates resources based on the policy outcomes established in the annual Speech from the Throne and the Budget.

2. The Privy Council Office advises the Prime Minister and Cabinet on events that might require a shift in planned outcomes and priorities.

3. The Department of Finance develops the budget and assesses the financial impact of submissions and policy recommendations put forth by other departments.

4. The Treasury Board provides management oversight and governance and is responsible for presenting the annual Estimates, or spending plan, to Parliament.

5. Parliament approves the budget and appropriations.

6. Departments, around 90 in all, design and implement program proposals. and manage program delivery.8

Continuous improvement

Canada’s public sector has undergone a significant transformation as a result of its OBB initiatives. But like many transformations, there is room for further improvement.

Canada’s public sector has witnessed a significant transformation as a result of its OBB initiatives.

8 “Performance budgeting in OECD countries,” OECD, 2007.



Some of the current challenges the government must tackle include:

1. Acting on evidence-based data: Politicians tend to be swayed by the feelings of their constituents. This means that evidence-based data can fall second to such things as polling data when it comes to influencing policy and decision-making. The Canadian government, for instance, recently eliminated the long-form census. Although privacy concerns were cited as the main reason, the fact that the census sometimes delivered statistics that were at odds with the ruling government’s political position is also considered by some to have been a factor. Reformers should note that objective guidance alone is not always enough to compel leaders to act.

2. Horizontal reviews remain weak: Canada has proven adept at integrating results-based performance vertically within departments, but it has struggled to do so across government. Most strategic outcomes are cascaded top-down. The government would like to encourage greater horizontal planning, but that is a big job, one that will involve aligning systems, processes and financial coding. Some parts of the government are starting to do this now, but this is not a quick process.

3. Many provinces have yet to embrace MRRS, MAF and PAA: Most of the OBB activity in Canada exists at the federal level. In some ways, the provinces have less incentive to adopt it. The populace tends to look more to short-term needs than long-term efficiency on the local level, and the rigor required of OBB can also be seen as taking away flexibility from political leadership.

Lessons learned

1. Don’t rush change: The move to OBB in Canada was incremental. “In Canada,” says an official interviewed, “we are getting to a level of sophistication where government has much better evidence of what works and what doesn’t, experience that in the past could only be acquired, to a large degree, through trial and error.” Reformers learned that even where there is strong leadership and clear accountability, full implementation resulting in a real change in management culture requires seven to ten years. However, the help of experienced advisors in the field can help mitigate the volatile, unpredictable nature of change.



2. A common framework is essential: Government reformers recognized that the only way to apply results-based management principles across the public sector was with a uniform approach, including clear evaluation and reporting requirements. This fosters accountability while also making it easier to refine the system as needs dictate. “Be sure to stick with the doctrine,” the Canadian official adds. “There may be deputies who challenge the approach or point out how their agency has unique circumstances that make it hard to comply, but it’s important to conduct outreach and education and keep pushing the program forward.”

3. Identify and manage risks that could threaten outcomes: Canada requires departments to complete an annual corporate risk profile to flag issues, concerns and risks that could jeopardize their ability to deliver outcomes. One department, for instance, became concerned about a looming shortage of senior scientists. By flagging that in their risk profile, they were able to operationalize it and designate a course of action. While public sector organizations in other countries may have their own integrated risk management programs, the process of developing corporate risk profiles is more common in Canada. “That may be because it is considered by the MAF, and has become a key strategic and operational planning tool,” notes one official.

4. Quality relationships matter: “It’s important to bring a human scale to planning,” says Alexander. “Find a way to meet regularly, by phone, in person or through video conferences. This makes it easier for colleagues to reach out to one another easily when questions or concerns arise,” agrees a Canadian government official interviewed, stressing, “You can’t run the process behind your desk. It is important to visit departments one-on-one and talk to people at a variety of levels to understand how the program is working and identify additional opportunities to improve performance.”

Putting it all together

“People have a better understanding of where the money is going and the results they are getting from it,” says an official. Annual departmental spending patterns have often been characterized by increased spending at year-end. Today, better financial linkage, better program planning and more frequent reporting have evened out the spending curve. ”There is much more rigor in the system now.”

People have a better

understanding of where the money is going and the results they are getting from it.

Canadian Government Official




New ZealandAn economy in crisis

In the early 1980s, New Zealand’s economy was battered by rising debt, high unemployment, interest rates and inflation. Years of protectionist trade policies compounded the matter, adding layers of cost and bureaucracy. Together, this brought the country to near-bankruptcy, a fact reflected in the country’s slide from the top to the bottom percentile in Organisation for Economic Cooperation and Development (OECD) rankings.

Staunching the bleeding

National elections in 1984 marked a turning point. The ruling conservative party was replaced by a cadre of young, ambitious Labour Party members who were determined to make good on promises of a sweeping economic overhaul. Over the next several years, they removed many of the decades old constraints on the New Zealand economy. These included import restrictions, trade barriers, agricultural and other subsidies.

The guiding impetus was the desire to have New Zealand’s economic model more closely mirror that of the private sector. Rose Anne MacLeod, Senior Fellow at Victoria University and a former senior finance leader for the Treasury and the Ministry of Education explains, “Financial reforms were part of the bigger picture.” “At the time,” she notes, “the government was a champion of the new economic thinking coming out of such places as the Chicago School of Economics.“ The prevailing wisdom argued for getting government out of business; commercial services were privatized where possible, shrinking the size of government.”


Building the foundation for outcome-based budgeting

Decentralizing spending authority: Supported by a public weary of economic troubles and public sector inefficiency, New Zealand passed three major pieces of legislation in the late 1980s. The State Sector Act, the State Owned Enterprises Act, and the Public Finance Act transformed budgeting, policy making and the business of governing. Together, these laws peeled away what had been a heavily centralized budgeting structure, run principally by the Treasury, and replaced it with a newly decentralized organization. “At the time,” says Souella Cumming, a KPMG in New Zealand partner and advisor to the New Zealand government, “It wasn’t clear who was ultimately responsible for policy setting and who was accountable for managing resources, partly because everything was funneled through the Treasury.” The new structure addressed those issues by distributing spending and decision-making authority across 41 ministries. This was topped by a centralized hub comprising a pared-back Treasury, a policy-setting arm, and an advisory body to the Prime Minister.

Aligning fiscal strategy: To gain better visibility over its finances, New Zealand adopted accrual-based accounting. As noted in other case studies, the switch from cash-based accounting allowed the country to better match income with expenditures on both a national and a project level, something it had been unable to do before.

At the same time, the government instituted a new performance management framework. While ministers used to present budgets containing a list of planned expenditures, or inputs, they now had to specify what actions, or outputs, they could achieve. Ministers also had to show how their outputs and appropriations tied to outcomes agreed upon by the Cabinet and ministers at the beginning of the fiscal year. An evaluation framework, consisting of metrics and reporting requirements was instituted to gauge progress against those targets on a ministry-by-ministry basis.



Refining the management structure: As part of the reforms, each ministry was empowered to hire and manage its own staff and budget, a liberty that had previously been controlled centrally by the State Services Commission and the Treasury. In addition, a new accountability framework clarified roles, responsibilities and reporting obligations.

One of the more important changes that occurred was giving permanent secretaries, or chief executives as they are now called, broad authority to govern staffing, salaries and purchasing, and placing them on fixed-term contracts. These changes put increased decision-making power in the hands of apolitical administrators, fostering continuity and helping to sustain the institutional knowledge that reforms such as outcome-based-budgeting require.

Although some worried that the decision to decentralize budgeting would cause the government to lose control over spending, the move helped streamline the larger bureaucracy, allowing senior leaders in the government to focus on big picture decisions while ensuring that all parties had ‘skin in the game.’ As Graham Scott, Secretary to the Treasury during the reform, put it, “Treasury sought to give away control of the small numbers in exchange for control of the large numbers.”9

Improving accountability and oversight: The new financial management structure holds each department accountable for its fiscal decisions, from the ministerial level on down. In return for broader financial autonomy, departments are required to detail their performance against the plan at regular intervals. In addition, they are expected to collaborate in setting strategic priorities and follow an agreed fiscal plan to see that outcomes are achieved within the boundaries set by the government.

Under the auspices of the chief executive, departments submit a Statement of Intent (a three-to-five-year business plan), which is also signed by the responsible minister. The performance targets for each year are set out in the budget estimates documents. The department’s Annual Report, a public accountability document subject to independent audit, includes a Statement of Service Performance, which sets out its achievements in relation to the performance targets. The Annual Report is signed by the chief executive and is tabled in Parliament. In addition, chief executives agree on priorities and targets with their respective ministers at the start of each year. This agreement is documented in an Output Plan, against which performance is reviewed three or four times per year. The Treasury prepares a Fiscal Strategy Report detailing the long-term fiscal policy impacts, economic forecasts and other data for the government as a whole, and these are signed by the Minister of Finance.

9 “Government Reform in New Zealand,” by Graham Cecil Scott, International Monetary Fund, 1996, p 89.



Sustaining the commitment

New Zealand’s path to reform was not without challenges, as many close to the process are quick to acknowledge. Neil Walter has held a variety of senior public service positions since before the reforms. Today, he is a lead assessor in New Zealand’s State Services Commission’s Performance Improvement Framework and a member of several public sector boards and advisory committees. One of the things he credits for New Zealand’s success has been its ability to stomach the messiness and uncertainty that comes with change. He recalls that, “while the desperate state of New Zealand’s finances created a wide mandate for reform in the early years, casualties started to mount later in the process and officials and the public grew tired of turbulence and the slow pace of economic recovery.” Eventually, the dissatisfaction led to a change in government, and posed the most severe test to the country’s long-term commitment to improving its financial management processes. “There was a real rift,” adds Walter, “between those that wanted to keep going with the reforms and those that wanted to mellow down and return to quieter life.”

Fortunately, the Treasury’s Graham Scott, a politically neutral civil servant, and his team managed to sustain the effort, working on an administrative level to push through reforms department by department. Says Walter, “Although they had to figure many things out as they went along, there was a rock-hard certainty about their intentions. Over time, that determination and clarity of view got New Zealand through the first bumpy stages of reform and onto the more stable situation it is in now.”

Results

A decade or so after the forms were instituted, New Zealand had brought its inflation rates down to the low single digits. Economic growth also rebounded. During the 1990s, in fact, New Zealand enjoyed faster economic growth than either Germany or Japan, an outcome that few could have imagined at the start. National debt also improved, falling from 50 percent of GDP during the peak of the reform process to just above 10 percent in 2008. As of 2009, New Zealand ranks among the top four nations in a comparison of government debt, ahead of most other developed countries.



Lessons learned

OBB is a journey, not an end. With that in mind, these are among the key takeaways from New Zealand’s process:

1. Be flexible: “While textbooks say you should start with a plan at the beginning of the year,” says Walter, “the reality is that as soon as the plan is signed, the world changes. Recognizing that, it is important to agree on the larger direction then use regular feedback and reporting to refine the scope, agenda and overall alignment.”

2. Measuring the right things: Although New Zealand’s budget process has a performance management system in place, the focus can occasionally be too narrow. MacLeod recalls, “In the early days, the Statement of Service Performance was fraught with challenges. Government departments are required to specify performance measures of quantity, quality, timeliness and cost of each good or service (output) the department produces. Until very recently, measures were audited based on whether they were achieved, and a clean audit report was given, whether or not the measures adequately reflected performance.”

Since then, New Zealand has adopted a new audit standard that requires quantity, quality and timeliness measures to be appropriate. Still, advisors like Cumming note that it can be hard for organizations to stay focused on the big picture. “Funding and performance is based on individual programs, and it requires coordinated efforts to plan and manage benefits across the system as a whole.” That requirement forces department managers to step back and consider the links between their programs and work being carried out in other departments or sectors.

3. Widening the performance measurement scope: “One of the things I discovered,” adds Walter, “is that although every department is measured and assessed against agreed-upon performance objectives, there is also a need to assess ministers and departments for things that have not happened, for tariffs that have not increased and for wars that have not occurred.” The ability to steer an organization free from those problems is essential to good management.

New Zealand has a new audit standard that requires quantity, quality and timeliness measures to be appropriate.



Conclusion


Outcome-based budgeting is a proven means of increasing financial transparency and accountability in the public sector. By clarifying roles and expectations, establishing management frameworks and standardizing reporting processes, departments can better align program spending and demonstrate tangible value. Navigating through the necessary political, legal, accounting and regulatory steps takes sustained commitment, strong leadership and experienced advisors. For those that have persevered, the effort has been worthwhile. In places like Canada and New Zealand, OBB has been a key factor in lowering debt, reducing waste and improving coordination. As pressure for improved public sector accountability mounts around the globe, OBB is expected to become a universally accepted operating standard.

KPMG Contacts

KPMG’s Government and Public Sector Practice is made up of a network of experienced professionals based in member firms around the world.

Global Chair, Government and InfrastructureJohn HerhaltT: +1 416 777 8778 E: [email protected]

AfricaTshidi MokgabudiT: +27 11 647 7075 E: [email protected]

ArgentinaClaudio BouekeT: +54 1 14 316 5713 E: [email protected]

AustraliaMick AllworthT: +61 (2) 6248 1201 E: [email protected]

Brazil/Latin America Mauricio EndoT: +55 11 3245 8322 E: [email protected]

CanadaArchie JohnstonT: +1 604 527 3757 E: [email protected]

Central and Eastern EuropeEva VarnaiT: +36 70 3331 411 E: [email protected]

Miroslaw ProppeT: +48 604 496 390 E: [email protected]

FrancePierre-Mathieu DuhamelT: +33 1 55 68 86 50 E: [email protected]

François CaubriereT: +33 1 5568 9006 E: [email protected]

GermanyUlrich MaasT: +49 30 2068 4888 E: [email protected]

IndiaNavin AgrawalT: +91 22 3090 1720 E: [email protected]

IrelandPaul TonerT: +353 1 410 1277 E: [email protected]

ItalyRoberto JannelliT: +39 06 8097 1419 E: [email protected]

Franco PeroneT: +39 06 8097 1439 E: [email protected]

MalaysiaWoon Tai HaiT: +603 7721 3388 E: [email protected]

MexicoJavier MoralesT: +01 55 5246 8518 E: [email protected]

NetherlandsWouter BosT: +31 20 656 7428 E: [email protected]

Wim TouwT: +31 70 338 2176 E: [email protected]

New ZealandSouella M. CummingT: +64 4 816 4519 E: [email protected]

Panama/Central America Héctor Castillo T: +50 7 208 0700 E: [email protected]

SpainCandido Pérez SerranoT: +349 1451 3091 E: [email protected]

Singapore/Asia PacificSatyanarayan RamamurthyT: +65 6213 2060 E: [email protected]

United KingdomAlan DowneyT: +44 20 7311 6541 E: [email protected]

United StatesNancy ValleyT: +1 518 427 4610 E: [email protected]

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Publication name: Making the Transition.

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Publication date: September 2011

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