59599 October 2010 Number 161 www.worldbank.org/enbreve A regular series of notes highlighting recent lessons emerging from the operational and analytical program of the World Bank`s Latin America and Caribbean Region. THE WORLD BANK Governments that Achieve Results: Introducing Performance Mechanisms and Exploring the Trust Dimension1 Focusing on Results Over the past few decades, a significant number outputs and outcomes associated with public policy of advanced countries and, more recently, some objectives. Over two-thirds of OECD countries now developing countries have moved the focus of their include non-financial performance information in budget arrangements to emphasize performance. their budget documents and focus on what is being To varying degrees, and from very different delivered for the resources provided, rather than just starting positions, there has been a shift in budget how much money is being spent in any area.2 In many management from controlling inputs and ensuring OECD and middle income countries, performance financial compliance, to a greater emphasis on the budgeting has been associated with the use of modern techniques of public management that emphasize individual and organizational responsibility and accountability for results. Demands to improve results and to strengthen accountability have been strong incentives for some emerging economies, as in Latin America where the level of public trust in government has historically been low. Performance budgeting, as a reform aiming to improve government performance and service delivery, has the potential to contribute to increasing public trust in government and so strengthen citizens' voluntary tax compliance, adherence to the law, private investment and political participation. The recently published book Results, Performance Budgeting and Trust in Government follows from a conference on performance budgeting held in Mexico in June 2008 where a large range of experiences from Latin America and Organization for Economic Co-operation and Development (OECD) 1 This note was produced by Daniela Felcman based on the book "Results, Performance Budgeting and Trust in Government" by Arizti P. , Brumby J. , Manning N. , Senderowitsch R. and Thomas T., World Bank, 2010. 2 OECD budget database records the use of performance information in OECD countries, www.oecd.org/gov/budget/database. 1 countries was presented. Its intention is to provide The book further explores key dimensions of readers and governments wishing to improve PIB, including the institutional foundations, the elements of their performance budgeting with production of performance information, and the uses an understanding of the many elements involved of performance information: in implementing these reforms, particularly in performance-informed budgeting (PIB)3, focusing · The institutional implications of performance on the challenges and the variety of approaches budgeting and the changes to the "rules of taken to meet these challenges. the game" that countries tend to make have significant implications for roles, responsibilities, The book combines two seemingly diverse relationships, systems and practices. While there governance topics, adopts contrasting analytic styles are few hard preconditions that can prevent to address these, and seeks to draw out their inter- countries making a start with such reforms, the connections, with particular reference to OECD and book highlights the importance of: (1) the enabling Latin American countries. The first topic is PIB, which environment, including the existing systems of is discussed largely from the practical perspective budget management, accounting and monitoring, of policy makers and practitioners, reflecting that financial management; (2) managerial capacity; it is a major public administration reform that has (3) realistic incentive arrangements that emphasize been underway for several decades. The discussion dialogue rather than control; and (4) modest explores the most recent experience in PIB reforms, starts that incrementally improve the confidence introduces new perspectives on issues such as between different budget actors. performance agreements, and provides guidance on PIB implementation. The second topic is the trust · The quality of information is important, given the of citizens and firms in government. This discussion potential role of credible, relevant information in reviews the current and at times heated debate on building trust in government. The book discusses this topic and draws on the available literature and the challenges and ways to improve quality, with research data. From these, it reviews the trends in the reference to the role of audit and statistical offices public trust in government, and examines the causal and how users can create incentives for good relationship with government's performance. quality information. It also reviews the process of generating performance information, including Institutional foundations for PIB, the the different types of information such as outcomes production, and the uses of performance and outputs, expenditure classification to support PIB, models for managing the generation information of performance information, and factors for The books starts by providing an overview of PIB, determining what information to collect. building on two decades of experience and lesson- learning, and sets out the key themes that provide · In terms of the use of performance information, the basis for discussions in the subsequent chapters. the book outlines changes to the traditional It looks at the roles of key decision-makers and budget systems and institutional arrangements institutions in creating a network of structured that have typically taken place in OECD countries performance agreements4 throughout the budget in adopting performance-informed budgeting. cycle. This can be critical in fostering the cultural These new institutional arrangements all and managerial change that is often at the heart of contribute to the complex web of structured the move toward performance-informed budgeting, performance agreements that provide incentives which is likely to be the most appropriate and and opportunities for the public sector to move feasible form of performance budgeting for many beyond a control and compliance focus toward a countries. performance culture. 3 PIB is the systematic--though not exclusive--use of performance information in planning for public activities and ensuring accountability for deliverables, allowing for wide variation in how such information is used. 4 The term structured performance agreements is used here to denote situations where explicit or implicit expectations arise between different actors, whether through formal contracts or more informal understandings, which recognize performance information as the basis for dialogue around budget and/ or management actions. 2 Why Trust in Government Matters OECD countries, particularly when the improvement Trust in government is a general public assessment is visible and is in an area of key public concern of government's right to enforce its policy decisions, such as health or education. This partly explains laws and regulations on its citizens, and of the the widespread interest in introducing PIB reforms likelihood that it will, in some way, follow through in the region, which could help to improve citizens' on its pronouncements and commitments. Trust in perception about government through the provision government is important because there is evidence of better services or governance reforms. that citizen's trust in government, in a setting of functioning democracy, strengthens the social Those trust rewards arising from public sector contract and leads to reciprocal actions in three main performance gains are key to the political attraction areas: (i) voluntary tax compliance - a citizen is more of undertaking the reforms in the first place, and also likely to pay taxes or obey laws that are imposed fundamental to the long standing question about by a trusted government, as they are more likely sequencing. If trust in government can be increased to assume that the taxes are to be used, or the through performance improvements, and if that trust regulations applied, with a good intention in mind; (ii) translates into political capital which can be used compliance with legal obligations - this might include to tackle some of the longer-standing institutional less corrupt behavior, greater participation in public bottlenecks (civil service reform for example), then the services, compliance with military conscription, etc; sequencing is clear--performance first and deeper and (iii) the exercise of political voice, through voting, institutional reforms second. The book addresses then membership of political movements, etc. the question about how to best design PIB reform to generate improvements in trust, and to create the The book explores the difficulties faced by OECD political space and momentum for further reform. countries in seeking to strengthen trust (or stem the decline) by improving public sector performance. Implementing Performance-Informed It also examines the current low levels of trust in Budgeting: Guidance for Practitioners government in Latin American countries, the possible causes discussed and the implications for tax collection If the imperative is to improve performance without and service delivery improvement considered. waiting for success in tackling long-standing Specifically, the lack of trust and low expectations that institutional problems, what is the minimum set of the state can effectively deliver services is reflected in changes that can provide a performance orientation the low fiscal capacity of the state: for example, the to the budget? While recognizing the multitude of limited capacity to raise efficient tax revenues limits different approaches and practices, the book seeks to public spending. provide practitioners with some helpful observations and lessons that form a guide on the implementation of Performance and Trust performance-informed budgeting, and particularly for those countries that may face significant governance The book further examines the relationship between challenges and capacity constraints. performance improvements and changes in the level of trust in government. The literature on the drivers The book presents a practical guide that identifies the of trust in government offers an incomplete picture typical foundations for implementation, framed around for OECD countries, and indicates that, in Latin the budget management cycle. These are not intended America, there are wide variances in the public's trust as preconditions, but highlight different aspects that in different public institutions. Drawing from the data can support the implementation of PIB. They include: and analysis available, an hypothesis is offered that a sound macroeconomic and fiscal framework and the the impact of performance on improving the trust in appropriate mix of top-down strategic and bottom- a particular public institution is likely to be greater up budgeting processes; institutional arrangements where the performance matters to citizens, they are that encourage the use of performance information aware of it, they trust the measures used, and the during budget approval; a credible annual budget; performance improvement exceeds expectations. effective internal controls and the introduction of This suggests that prospects for increasing trust systems to promote the management for results; through performance improvements are greater in the development of performance reporting and countries such as those in Latin America than in accounting systems; strengthened external audit 3 focusing on performance; the use of expenditure to be based on a deep diagnosis of the problems to reviews; a program structure for the budget and a be addressed and the desired changes, which means robust financial management information system. changing behaviors. The reforms have to move off These are summarized in a table that can be used to the page and result in improvements in the quality help countries assess their progress in these areas, of a government's regulatory functions and the and possibly to help design further reforms. delivery of services to the public. This is an ongoing In addition, aspects that can "provide leverage" in challenge for all governments to continually upgrade introducing PIB are highlighted, such as sustained their performance, even the leaders in performance political commitment, strengthening central budget budgeting reforms. functions, using sector pilots, careful planning and management of the change process, with It should also be remembered that while better budget complementary changes in budget preparation and systems can promote better decisions by politicians, presentation. The book concludes by considering some budgeting is about politics, and a well designed of the main risks and implications for the sequencing of budget system may be used to make decisions that are performance budgeting implementation, and draws good or bad in the views of budget officials. As some out the following five lessons associated with the of the cases featured in this book show, good budget implementation of performance informed budgeting: systems do not lead by themselves to strong fiscal stances and optimal final outcomes. At the end of the · Move in stages, and use building blocks. day sound policy decisions make the difference, and mastering both the technical and political side of the · Refocus and strengthen the central budget equation is paramount. Strong budget institutions are function. effective in making the political contest over resources efficient in the sense of striking the best bargains · Ensure a commitment to good basic financial available and avoiding destructive competition for management, as this will always help. resources and non-transparency. However, they are not simply technical exercises. Budget arrangements · Be prepared to begin modestly. channel information into the political contest for resources and they need to be understood in this way. · Continued effort will be required to make adjustments and to keep ahead of forces of the For more information see: status quo. www.worldbank.org/bookperformancebudgeting Conclusions In considering what reforms may be suited to a particular country, consideration should be given to the country context, their purpose and implementation experiences, and how to adapt the reforms to the country's unique conditions. As noted by many authors in this book, there is no one model and no ideal implementation approach. Reforms need Disclaimer: The findings, interpretations, and conclusions expressed herein are those of the author(s) and do not necessarily reflect the views of the Executive Directors of the International Bank for Reconstruction and Development / The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. About "en breve"... "en breve" is produced by the Knowledge and Learning Team of the Operations Services Department of the Latin America and the Caribbean Region of The World Bank ­ http://www.worldbank.org/lac. 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