AUSTRALIAN PBB REFORMS – an outline of the steps taken over several years

Presented by Pat McMahon

Budget Advisor,

Australian Department of Finance and Deregulation

Aims of the next two sessions:

• Gain a better understanding of the steps Australia took in its PBB reforms (1st Session);

• Examine some practical examples of how PBB could be applied in Indonesia (2nd Session); and• This afternoon we will address MTEF and then

start addressing the practicalities involved in moving to a mature MTEF and PBB

Graphic of five stages taken in implementing & improving Performance Based Budgeting in

Australia

19851985

1. Program budgets Accrual-based outcome budgets

5. New Financial Management & Audit Acts

5. Charter of Budget Honesty Act

20052005200020001995199519901990

3. Operating Cost Flexibility

4. Program Evaluation Plans

2. Financial Management Improvement Program

4. Strategic

Review

Initiative

Stages 1 & 2: Implement concepts and Financial Management Training (from the mid 1980s)

Stage 1: Initial implementation of a framework.

– Specification of programs, objectives and performance indicators; and

– Reporting, budget estimates and appropriations presented on a program (“non-running cost”) and “running” cost basis.

Stage 2: Financial management training of line agencies.

– Financial management education and training of line agencies (conducted by Department of Finance).

Stage 3: Introduce operating cost flexibilities – “running cost reforms” (from the late 1980s)

• Greater operating cost flexibility for chief executives has been the most important part of PBB reforms.

– It was from small beginnings, gradually broadening “Running cost budgets” & new laws to provide greater flexibility, i.e.: ▪ Rolling “Property Operating”, “Repairs and Maintenance”,

“Legal” and “Minor new capital” expenditures into “Running Cost Budgets” (early 1990’s);

▪ Amending laws: New financial management and audit acts to give greater powers to CEOs of Departments (mid 1990s);

▪ Replacing “Running Costs” with “Departmental” (end of 1990’s upon the introduction of accruals budgeting).

Stage 3. Appropriations split by “running costs” & “non-running costs” from 1988-89

Stage 3. More flexibility by expanding the running cost budget: rolling in Repairs & Maintenance

By 1994-95 Budget: Repairs and Maintenance costs were reallocated to line ministries and

appropriated within their “Running Costs” appropriation. Same for some other costs rolled into

running costs (i.e. legal, property expenses, capital).

1988-89 Budget: Repairs and Maintenance appropriations to Dept of Administrative Services

Stage 3. Other flexibilities and returns

– Allowing carry forward of unspent running costs other than salary to the next year & to bring forward expenditure (e.g. to 2%)

– Expecting agencies to make efficiencies and return an efficiency dividend to Government (e.g. 1 % a year).

Stage 3. The latest evolution - to “Departmental” and “Administered”

Stage 4. Ever changing review and evaluation frameworks

First phase – Portfolio Evaluation Plans (PEPs)• Evaluation in 1995 after 7-8 years showed a number of problems:

– Many program objectives ill defined - often stated processes not outcomes being sought by the government

– Portfolio Evaluation Plans increasingly became an irrelevant process to be endured by agencies but not used by agencies or Cabinet

Second phase – Outcomes & Outputs Framework from late 1990s• Greater focus on outcomes• Greater focus on relevance to Agencies for management

Third phase – Strategic Reviews commissioned by Cabinet from mid 2000s

Stage 5. Requirements for accountability & performance increased

Requirements for performance & accountability has increased throughout the period since mid 1980s including:

– New laws increasing accountability of agency chief executives

for efficient, effective and ethical use of resources

– Charter of Budget Honesty Act increasing the accountability of

Governments

– Audit committees established in each agency

Stage 5. Who now uses performance information & evaluations? 1. ManagementFrom Australian Customs Service Portfolio Budget

Statement• Performance is subject to internal and external audits, performance

audits by Auditor General and regular management reviews of performance information

• Customs also collects complaints and compliments from their clients to judge compliance with their client charter

• Customs also participates in informal international benchmarking programs from time to time

Stage 5. Who now uses performance information & results of evaluations? 2. Parliament

Stage 5. User Guide Statement of a Portfolio Budget Statement to the Parliament

“The purpose of the 2008-09 Portfolio Budget Statements (PB Statements) is to inform Senators and Members of Parliament of the proposed allocation of resources to Government outcomes by agencies within the portfolio. Agencies receive resources from the annual appropriations acts, special appropriations (including standing appropriations and special accounts), and revenue from other sources.

A key role of the PB Statements is to facilitate the understanding of proposed annual appropriations in Appropriation Bills No. 1 and No. 2 2008-09 (or Appropriation Bill [Parliamentary Departments] No. 1 2008-09 for the parliamentary departments). In this sense the PB Statements are Budget related papers and are declared by the Appropriation Acts to be ‘relevant documents’ to the interpretation of the Acts according to section 15AB of the Acts Interpretation Act 1901.

The PB Statements provide information, explanation and justification to enable

Parliament to understand the purpose of each outcome proposed in the Bills.”

Who now uses performance information & evaluations? 3. Strategic Reviews by Cabinet

Under the Australian system Cabinet is not the main user of performance information

• The use of performance information and evaluations by Cabinet in the Budget process is limited to strategic issues

• Cabinet can, and does, ask for strategic reviews• Department of Finance will use performance information to support

savings proposals in the Budget process where there is evidence that programs are performing badly

The Role of the Australian Dept of Finance - leader of financial management reform

Innovation and reform in management was strongly encouraged

• Introduction of MTEF & PBB – Followed by continuous improvement & incentives to perform:

– Being prepared to accept a balance between the “questioning” role and “letting the managers manage” – this was not easy for a Finance department but it was necessary to get performance.

– Allowing carry forward of unspent administrative funds other than salary to the next year & to bring forward expenditure (e.g. to 2%)

– Expecting agencies to make efficiencies and return an efficiency dividend to Government (e.g. 1 % a year).

What worked well in Australia and why?

What has gone well?1. MTEF involving firm forward estimates/ Running costs and

devolution of responsibility– Followed by accrual reporting & then accrual budgeting

Why has it gone well?1. The adoption of firm forward estimates linked to the budget was a

source of greater predictability to Governments & line managers– it gave the capacity to better plan & manage– Predictability created the climate and expectation for performance

2. Finance provided leadership: It drove reform from mid 1980s on.

Three possible areas for the Indonesian Ministry of Finance to focus on

Step 1: adopt a budgeting system with firm Forward Year Estimates split into well defined programs and further split into

– “running costs”, with well defined efficiency and effectiveness indicators; and– “non running costs” with well defined effectiveness indicators

Step 2: provide financial management and performance training for line ministries

Step 3: create incentives to let the managers manage

Step 4: create a system to measure performance/evaluations