34644 INTERNATIONALBANK FOR WORLD BANK R E T C N O E N STRUCTION PM AND DEVELO November 2005 No. 81 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 CHILE: TOWARDS RESULTS-ORIENTED BUDGETING Roberto O. Panzardi Background ­ Chile in the late `90s financial management systems in place were seen as Chile successfully completed the first generation of undermining the allocation and efficiency goals of mod- reforms during the 1980's and 1990's. Privatization, ern budgeting. The system retained a focus on control- deregulation, trade liberalization, and sound fiscal and ling expenditures, not promoting the efficient and effec- monetary policies were pursued over several adminis- tive use of those resources, assessing the results of trations. Public finances improved principally as a result spending, or fully accounting for the economic costs of major structural reforms, particularly in the reduction incurred. of the state and in the reform of the pension system, but also due to tight controls on spending and extensive During the 1990's, the government initiated a series of reforms in revenue policy and administration. Signifi- reform measures, including the development of perfor- cant innovations also were made in the areas of health mance indicators, results evaluations, and performance- and education service delivery, pensions and social based pay schemes. Based on these efforts, and a security, and e-Government. concern that a more coherent and aggressive commit- ment to modernization were required, the authorities One of the pillars of Chile's state reform program has designed a comprehensive program to improve the trade- been the accelerated modernization of public expendi- offs between tight fiscal control and effective program ture management. This has facilitated the implementa- execution. It involved a three-tiered approach based on: tion of Chile's sound and consistently applied fiscal (i) increased flexibility to spending agencies in their policies, which have been successful in producing fiscal access to and uses of budget funds; (ii) greater predict- surpluses and ensuring macroeconomic stability as ability in the operating environment of spending agencies; demonstrated by the record budget surpluses in 12 of and (iii) increased pressure on agencies to pursue the last 15 years. The system is markedly "hierarchi- improvements in program results. cal" ­ the Ministry of Finance takes precedence over the sectorial ministries and agencies in the formulation It was expected that the focus on results and involvement of the budget; and the executive branch and the of stakeholders (line agencies and Congress) through the legislature have developed effective checks and bal- formulation and discussion of medium-term plans would ances in the budget approval process. The executive promote transparency and more participatory decision- branch has the exclusive prerogative to request annual making. budget expenditures. Budget execution, however, has been quite flexible, given Chile's long reliance on The World Bank's Response ­ The SIGFE decentralized "national services" (autonomous agencies Project under the coordination and normative direction of The Integrated State Financial Management System ministries). (SIGFE, for its acronym in Spanish) project was designed to support the Chilean government's efforts to address Despite its successes, by the first half of the 1990's the the following issues: 1 Nascent methodology for results-oriented budgeting. information systems in public investment, debt, procure- Chile initiated several programs to increase the focus on ment, and human resources, and the existing cash control budget results, like the Evaluation Program of Govern- systems lacked flexibility and responsiveness. mental Projects within the National Evaluation Program since 1997, and the systematic and permanent revision of In light of these challenges, the Government of Chile and the budget programs, in order to apply coherent and the SIGFE project seek to improve the effectiveness, transparent standards prior to their incorporation into the efficiency, and transparency of Chile's public adminis- budget proposal in 2001. As a result of these initiatives, tration by establishing a modern and integrated financial some 275 indicators were included in the 2001 budget, management and resource allocation system, comple- covering 72 public services. mented by ongoing or pending reforms in e-government, decentralization, civil service reform, etc. The strategy However, further efforts were required to make perfor- includes: mance evaluation a generalized practice in order to Development of a new integrated financial manage- develop a results-oriented budget. Agency budgets, in ment system. It includes core sub-systems of budget, many cases, continued to be vague as to specific goals, accounting, and treasury. The public credit, public without clear performance indicators for intermediate or investment, procurement, and public assets sub-systems final results. Allocations continued to be based on would be developed and incorporated subsequently into expenditure categories, and not on outcomes sought or the broader system. achieved, ignoring the need for value for money, and rewarding activities that were not duly justified in light of Strengthening of national norms and standards. Its government policy or that had become obsolete based on goal is to increase accountability to senior government changing social needs. The effort to focus on evaluation officials and the public and improve budget decision- and results was more a concern of the Finance Ministry making and execution. than of the agencies or their financial units, and thus the efforts to evaluate performance frequently were seen as Integration of the new system with broader institu- an imposed requirement with limited impact on daily tional reform initiatives. Chile's integrated financial resource management and administration at the institu- management and resource allocation system has been tional level. complemented with other initiatives, including monitoring and evaluation, procurement, e-government, decentrali- Deficient public sector financial management infor- zation, civil service reform, etc. mation system. Chile did not have a fully modern, integrated financial management system, in terms of its Utilization of a selective pilot implementation ap- policies, procedures, and information technology. The proach. This reflects a careful concern to learn and Government as a whole had some 117 different financial apply lessons, and first target the reforms in agencies management information "systems", with 16 entities with proven leadership and commitment. By piloting with semi-manual systems. The systems themselves organizational reforms in the Budget Directorate of the were rigid (financial transactions had to be reported to Ministry of Finance (DIPRES, for its acronym in agency headquarters to be entered into the system, Spanish) and the Comptroller General's Office (CGO), rather than having a single entry at the source of the and the rector organizations, these agencies would lead operation); inadequately integrated and interconnected by example. (within the agencies, and even less so with the Ministry of Finance and Comptroller General's Office-CGO), and Development of methodologies for incorporation of lacked real time information or sufficient performance agencies with special needs. In the case of the Armed monitoring data. Consequently, there were delays of up Forces, for example, which had a robust financial to seven weeks or more in reporting some financial management system, the project would support the transactions to the Finance Ministry. Information was development of methodologies to synchronize the exist- provided in different formats, inhibiting financial and ing system with the SIGFE network. economic analysis. Transaction and maintenance costs were high, given the various software and hardware Create and maintain a positive technical dialogue systems and need for multiple data entry. There also was during implementation. The Bank provides qualified inadequate control over the budget commitment process, technical assistance to openly discuss vertical and as the diffusion of government bank accounts was costly horizontal integration alternatives, aggregation levels, to administer and undermined cash and debt manage- reporting requirements, and strategic choices to be made ment. Not only that, the systems were not linked to other down the road. 2 Results on the Ground systems, like procurement and inventory management; the lack of clear coordination and standardization of the To date, the project has been successful in achieving its central level requirements (i.e. - DIPRES and the goals. It has advanced in both the development and the Ministry of Health); and the need for faster response to implementation of the new system according as planned. the requests of specific and standardized reports. The Bank's team has been flexible enough to understand the client's urgent need to design and deploy a basic financial management system to allow for the registra- Lessons Learned tion of transactions. The main results obtained or in The SIGFE Project provides a series of lessons that progress to date are: could guide the design of new projects or reshape The stabilization of SIGFE and its ample coverage existing ones: of the basic systems of budget, commitment, trea- sury and accounting. Leadership, clear strategic direction, and commit- The consolidation of information at the central level, ment are critical for success. DIPRES has led the which is nearing completion, to provide reports to project from the beginning. Through the passage of the support the decision-making processes for the dif- annual budget laws, the project's recommendations have ferent levels of government, such as the Ministry of been incorporated. For example, the budget and ac- Finance, sectoral ministries and agencies. counting indicators were simplified and improved in The implementation of SIGFE in 297 of the 391 accordance with the International Monetary Fund (IMF) organizations of the Central Government. It is and international standards to better integrate accounting important to emphasize that it has been implemented information. in the entire health sector (182 hospitals and the central agencies), and that 6,850 agents have been Balanced project design and adequate team supervi- trained through a comprehensive training program. sion is critical to achieve agreed intermediate indica- The close collaboration with selected agencies, tors and final goals. As the project's implementation including the Army, Navy and Air Force, to adjust progressed, it was imperative to understand the the synchronization process of its systems in order country's particularities in order to adapt the fully- to facilitate its integration into the SIGFE network. integrated financial management model, generally advo- The support to the Evaluation Division within cated by the Bank in Latin America and the Caribbean, DIPRES with regards to the improvement of the into a more custom-made model where full integration is monitoring of performance indicators and proce- not an end but a result of institutional efforts. The dures. aggregation of information is now understood as a result The design of the Human Resources Management of the coordination among agencies to achieve better System (SIAPER, for its acronym in Spanish), results and effective use of scarce public sector re- which is expected to be piloted in 2006. sources rather than an obligation of management control. The advances in the coordination among the differ- ent agencies involved, especially between DIPRES Context matters. The project has benefited from a very and the Comptroller General's Office, maximizing stable environment, and it has proven an ideal context for the impact of the initiatives. For example, the institutional reforms. The SIGFE project was instrumen- Comptroller General's Office performed an overall tal in supporting these reforms, leading to an evolution as evaluation of the SIGFE, facilitating the identifica- opposed to a revolution. tion of the problems and proposals among users. Governance can be strengthened and public effi- When the project team visited Region VIII in April 2005, ciency is possible. Chile has been a good example for the general response of users was highly satisfactory many nations. It has decided to take longer, but critical highlighting: (i) the simplification and standardization of steps. By doing so, transparency and governance the administrative processes among the different agen- indicators compared with international benchmarks have cies; (ii) the equipment and training provided with the been stable and even facilitated the increase of foreign system as representing an important contribution to the investment and economic growth. The efficient alloca- administrative units; and (iii) the permanent support tion of resources and timely reporting have promoted and from, and increased dialogue with, DIPRES. The users benefited from efficiency gains. also mentioned some problems like poor connectivity that has a direct impact on the performance of SIGFE's web- Technology facilitates internal communications and interface; the burden of double entry of data in other the simplification of bureaucratic processes. Au- 3 tomatization of internal processes has immediately Challenges within the scope of the project include to: reduced red tape and facilitated the flow of information Finalize the implementation effort in the rest of the and the identification of bottlenecks. The decentraliza- agencies by December 2006. tion process and transfer of resources have been Implement the homologation model in the specific accelerated, while central authorities receive budget agencies of the 39 agencies identified to date. execution information in real time. Complete the development of the aggregation and reporting tools to support the decision-making pro- Training and technical support throughout SIGFE's cess by January 2006, with initial implementation in implementation and beyond are critical. As in many the health sector. other public sector projects, the process of reform has Utilize the information gathered to improve the been slower than anticipated. A critical mass of monitoring and evaluation system. (See Box 1) officials at the managerial and operational level has to be trained in the use and benefits of the new instruments. Such activities demanded more Box 1 ­ Chile Monitoring and Evaluation time, budget, and effort than initially anticipated. System The project was flexible enough to understand The Evaluation Program is one of six instruments in the System of such needs, and corrections were made in time to Management Control and Results-Based Budgeting (SCG) of train more than 9,000 public officials. DIPRES. The other instruments of the SCG are: i) the Strategic Definitions, ii) the Management Improvement Program, iii) Perfor- With regards to the project's execution, the mance Indicators, iv) the Comprehensive Management Reports, following key lessons were learned: and v) the Competitive Fund. Together, the instruments of the SCG seek to orient public management towards results and improve the Learn from pilots. The pilot implementation efficiency and effectiveness of public spending. The evaluation approach allowed the project to identify problems, instrument itself consists of three components: i) Program Evalua- tions, ii) Impact Evaluations, and iii) Comprehensive Spending develop best practices, and generate economies Reviews. of scale in the full implementation. The government originally launched the evaluation system after the Help is needed along the way. It was critical to 1996 political agreement with Congress, which aimed to enrich the provide timely and adequate support to users information available on the budgetary decision-making process. In during implementation. The Chilean model sup- the beginning, the evaluations were exclusively rapid desk reviews ported the development of reports; the facilitation that were primarily based on secondary sources. The creation of the of the different training programs from basic Program Evaluations was in part a response to demands from the computer use to specific techniques, such as legislature to improve the quality of information about government accounting or treasury; and the installation of a programs, in order to increase its ability to affect budget decisions. help desk able to solve urgent problems on the spot to ease the implementation of the project. Establish formal coordination mechanisms with the Coordination is key. The Central Agencies needed to Controller General's Office to simplify the central- coordinate both the message and the actions in order to ized procedures framework. avoid confusion among the other agencies, and to Challenges outside the scope of the project are to: maximize the impact on government functioning. Complete the integration of the system with the rest of the related systems, like ChileCompra, Invest- Be open and flexible. Finally, the importance of ment Project Management, and Payroll. institutional tolerance to mistakes and the open discus- Promote the implementation of the SIGFE and sion of alternative solutions protected the project goals. SIAPER in the Congress, Judicial Branch and the In the case of SIGFE, the project corrected an initially Municipalities in 2007. complex design that was interfering with the diffusion process as soon as it was identified instead of insisting on following the original plan. About the Authors Next Steps/Moving Forward Roberto Panzardi is a Senior Public Sector Management Specialist in the Poverty Reduction and Economic Man- The project has achieved its key objectives, but there agement Unit in the Latin America and Caribbean region are still major issues both within and beyond its scope. of the World Bank. 4