1 Performance elements in budget and reporting process - Norway 1st Meeting of OECD-MENA Senior Budget Officials Network Cairo, Egypt, November 2008 Deputy Director General Pål Ulla Ministry of Finance, Norway

Finansdepartementet 2 What is performance based budgeting ? Setting performance objectives Efficient deliveries by measuring costs Provider as an alternative to producer Summary of what to learn for the MENA- countries? Topics

Finansdepartementet 3 Macro-economic framework; Medium Term Expenditure Framework Fiscal rule which gives predictability in the spending A political commitment; to stick to the MTEF (even if the revenues are temporarily high); Hands of for the parliament during the fiscal year; ex- post control with the results What is performance based budgeting?

Finansdepartementet 4 A budgeting framework; Formulation of measurable performance objectives A top-down budgeting process Decentralised budget execution Decentralised human resource management More efficient use of resources by measuring costs correctly Accrual budgeting and accounting? In short; introducing performance budgeting may be a huge management reform in the public sector What is performance budgeting? (Cont.)

Finansdepartementet 5 The Central Government Administration in Norway 17 Line Ministries (including MoF) About 180 Agencies MoF The Cabinet

Finansdepartementet 6 Used to be minority governments negotiating in the parliament The individual line-minister responsible to the parliament Decentralised budget execution (with top-down budgeting) The Ministry of Finance coordinates the budget process and issues Provisions on the Financial management The Ministry of Finance is strong on the cash fiscal limits but not on the formulation of policy objectives Assumptions for budgeting in Norway

Finansdepartementet 7 Each ministry present to the parliament their budget proposals including performance information: Guideline: performance measures to be given at the program level In the real world: Indicators may be at outcome-, outturn, output or even input level Some indicators may only be statistical information To settle objectives; ministries

Finansdepartementet 8 General concern: Few targets at the program-level The higher level of the objectives, the larger are the difficulties to link inputs to results There are too many (lower level) objectives for each ministry Main problem: The parliament wants the budget proposals to be very detailed. Performance in the budget documents

Finansdepartementet 9 The ministry writes a letter of allocation to each agency; Guidelines: the performance measures shall be more detailed than in the proposal to the parliament (if necessary divide programs into subprograms) In reality the measures given are too many and harm decentralisation Main problem: The agencies may not have enough flexibility To settle objectives; agencies

Finansdepartementet 10 Together with the stronger emphasis on performance: A top-down budget framework was introduced A decentralised budget execution has been introduced A more skilled human resource in the line-ministries has been build up Updated budgeting and accounting systems such as a treasury single account has been introduced Norway has always had a clarified government structure which is an important assumption for the reform The performance reform in Norway was a budgeting framework reform

Finansdepartementet 11 The need for accrual budgeting is due to measure use of resources even if the cash transactions are done in another period or not done at all Especially, to make distinction between investments in fixed assets and the costs of using capital (measured as depreciations) Why measuring the costs with accrual principles?

Finansdepartementet 12 Large fixed investments must be approved by the parliament. This is not a major problem because there are techniques to combine appropriations for fixed assets with accrual budgeting of depreciations at the ministry-level How to handle non-cash appropriations in the budget execution is also a challenge. If the government has an overall treasury single account, transferring non-cash appropriations to the agencies may be easier because excess liquidity will be swept into this account. Problems to be aware of with accruals

Finansdepartementet 13 Salaries and wages Pension liabilities for civil servants, notional funds Other current spending Internal pricing, no free warehouses Transferring capital costs to current costs: Rent, alternative costs set ex-ante Financial leasing for the agencies Measuring of costs; met the real price

Finansdepartementet 14 Investments in fix capital, not depreciations, will influence the macro-fiscal stance Accrual principles are difficult to understand Non-cash transactions are difficult to calculate and may be arbitrary in a budget process Performance; There is a scepticism if there is a possibility to link results and costs Norway has decided not to introduce accrual principles in the overall fiscal budget

Finansdepartementet 15 One-line-appropriations for current costs and small investments Current costs used for larger investments, investment costs not for current cost 5 % of current costs may be transferred to next year (and borrowed from) Rents for housing Notional funds for future liabilities Norway – no accrual but flexibility in the spending

Finansdepartementet 16 Pilot project; 11 agencies use accrual for their internal reporting Creating a common chart of accounts used by all of them Must also report on a cash base to the central fiscal budget Net based budgeting for some institutions with their own revenues (also accrual based) Accrual accounting in Norway

Finansdepartementet 17 Outsourcing activities Formula based budgeting Universities Public hospitals Public Private Partnership Provider instead of producer as a solution

Finansdepartementet 18 Formula based budgeting Appropriations based on objectives: Basic financing; not dependent on results (2/3) Result based financing based on the number of students that finish a degree, no upper limit for the total appropriation. Result based appropriation for research; the total is fixed but the allocation between universities depends on results Universities

Finansdepartementet 19 Net based budgeting; they may use their own revenues Observed large transfers of money from one year to the next due to: Non-cash appropriations Their own revenues Not spending their appropriations correctly Problem: there is asymmetric information between the universities and the MoF Solution; to collect more detailed gross information Net budgeting; universities

Finansdepartementet 20 Performance good Financing 60% fixed and 40 % result based One limit for new investments decided by the parliament Problems: Lack of decentralisation of the execution High increases in the costs, use of draft facilities (approved by the parliament) Unforeseen costs covered by extra appropriations; pension obligations Hospitals as public enterprises

Finansdepartementet 21 May be divided into: Private financing (financial leasing) Procurement, tendering Norway has little need for private financing Started up three trial projects for PPP to see if efficiency may be increased OECD: PPP-contracts are very complicated and should be handled by specialised departments for negotiations Public private partnerships

Finansdepartementet 22 An overall performance-reform takes time and must be planed well. It may need: A medium term fiscal and expenditure framework Acceptance that ex-post judgement of the results today will influence on the agencies revenues tomorrow. A top-down budget reform with decentralisation of the execution A well established budgeting and accounting framework Summary

Finansdepartementet 23 Centralised processes may be to prefer because of otherwise the process is: Too time-consuming to implement Too much need to build up skilled human resources in the ministries If you want to introduce accrual principles, consider to introduce accrual as a supplement to the cash statement in the financial statement first Summary (cont.)

Finansdepartementet 24 The organisational structure of the government must be clear; All agencies must be responsible to one (and only one) ministry in each matter Performance budgeting requires decentralisation of: Human resource management Budget execution Internal control, auditing and reporting How to keep central cost-control under performance budgeting may be a challenge Summary (cont.)

25 Performance is good!!! Thank you for listening to my presentation.