Rollout of Programme Budgeting in Armenia: Experience from the 2005-08 DFID-led project

1. Rollout of Programme Budgeting in Armenia: Experience from the 2005-08 DFID-led project Mark Worledge and Suren Poghosyan February 2009

2. International Best Practice in Programme Budgeting • Focus on the link between policy and budgeting – making clear how government spending is contributing to achievement of its social and economic objectives for the community (outcomes) • Clarification of the ‘interventions’ the government is choosing to achieve its policy objectives • Clarification of what the government is spending on these interventions • Focus on performance – best realised when there is an output budgeting approach • Clarification of the services being delivered by government agencies for the budget funds allocated • Accountability for the budget funds spent - clarification of the performance expected in delivery of the services (financial / non-financial) • Integrated budgeting cycle – programme budgeting forms the basis for all aspects of the budget cycle

3. Programme Budgeting Approach – Key Concepts Outcomes Policy Actions Regulatory Services Transfers Capital Inputs

4. Programme Budgeting Attempts Fail When…….. • PB information is presented as ‘additional information’ – not fully integrated into Budget system as the basis for Budget classifications and appropriations • Lack of clarity in outcomes/output framework and relationship between outcomes, outputs (services) and inputs: • Failure to use output budgeting approach - PB can fail if attempts are made to link Budget appropriations directly to outcomes • Failure to develop appropriate budget formulation mechanisms for PB purpose – failure to link government strategic planning with the budget, to clearly identify government interventions to achieve outcomes, and to clarify cost of policy • Failure of accountability – where the PB application fails to maintain primary purpose of Budget as mechanism for financial management control – budget classifications must be linked to outputs (services being delivered) and aggregations of these ring-fenced to units of financial management control

5. Programme Budgeting Attempts Fail When…….. • Not translated into performance reporting • Failure to properly link the cycle of performance specification and reporting OR • There is a lack of integrated financial and non-financial reporting • PB not utilised as basis for whole budgeting cycle – lack of integration of ‘ex ante’ and ‘ex post’ mechanisms • Budget formulation – policy formulation and performance specification must become an integral part of the planning/budgeting process • Performance monitoring and performance-based internal and external auditing needed to complete the budgeting cycle/system • Accounting and financial management systems must support both outputs and inputs budgeting and management • Not translated into reform changes in institutional and management systems in State Budget Agencies (SBAs) • Lack of performance culture • Continuing focus on inputs as the basis for management

6. Key Priorities for Programme Budgeting Reform Approach for Armenia • Two parts to the reform – 1) short-medium term and 2) medium-longer term • Part One – Improved budgeting cycle • Redefinition of budget programmes – focus on ‘policy actions’ as basis for appropriation • Specification of performance • Reporting of performance – integrated financial and non-financial • Part Two – Link to other PFM reforms • Budget execution • Internal and external auditing • Translation into management systems • Focus on outcomes and outputs • A performance culture • Integrated management cycle in SBAs

7. Timetable of Armenian PB reform • Methodology Design Phase (2005/6) • Pilot Phase • 2006 Group 1 SBAs (4) • 2007 Group 2 SBAs (4 + 10) • 2008 Group 3 SBAs (4 + 10 + 64) • Implementation Phase • 2008Formal adoption of concept • 2009Transition year • 20102011 Annual Budget in new format

8. The Budget Cycle and the Reforms Strategic Planning Budget Planning Reporting and Audit Monitoring Adoption of the Annual Budget Law Budget Execution

9. Strategic Planning • PRSP • The Medium Term Expenditure Framework • Reforms started in 2000 • Reforms were institutionalized in 2003 • Reforms are currently being adapted and customized to the budget system (MTEF “2nd level reforms”)

10. Budget Planning The following steps have been undertaken in Armenia in recent years in the Budget Planning area: • Programme redesign by State Budget Agencies • Specification and use of non-financial indicators during budget discussions • Development of new Budget documentation:New formats present information that provides: • Policy description • Analyticalinformation (supporting decision-making) • Information on programme efficiency • Basis for fiscal control

11. Budget Adoption • Budget adoption processes have been enhanced by introduction and institutionalisation of the Medium-Term Expenditure Framework, which provides: • Improved information about fiscal and sector strategies (enhanced description of sector strategies and expected results) • Improved timing for presenting strategic and programme information to Parliament (4-5 months prior to adoption of the Annual Budget Law) • Annual Budget documentation has been enhanced by: • Programme classification as an independent classification in the Law • Performance indicators developed and adopted by the Government for monitoring purposes

12. Budget Execution Budget Execution processes and systems were reshaped earlier in the PFM reform agenda, to increase fiscal discipline and control over the release of funds. Key achievements to date in enhancing the budget execution systems are: • Fully operational centralised Treasury system by the end of the 1990s • Introduction of the Procurement system • Introduction and development of the system of Non-Commercial Enterprises

13. Budget Monitoring • Armenia is currently enhancing non-financial monitoring systems. • In addition to the traditional financial quarterly reporting systems that allow the Ministry of Finance to monitor financial performance … • … now non-financial performance monitoring systems are being introduced and operationalised. • These new monitoring systems: • Are used both within the State Budget Agencies and by the Ministry of Finance; • Allow tracking of progress of programme implementation in performance terms; and • Support the planning of the forthcoming Budget.

14. Reports and Audit • In addition to the new quarterly non-financial monitoring, annual execution reporting processes have also been enhanced by including analytical information on non-financial performance of State Budget Agencies’ programmes. The characteristics of these new reports are: • Linking execution to planned policy (and also providing a more dynamic picture of budget programmes’ performance between years) • Focus moved from purely financial information to information on the effectiveness and efficiency of programme implementation • Format suited to the maximum number of beneficiaries - hence politicians use these reports more freely and widely • Audit reforms are still in the process of being shaped. These reforms are crucial to enable successful full implementation of programme budgeting across the whole budget cycle, so audit remains a constraint on the ability to extend the reforms.

15. Going too slowly is risky... Political support may decrease The will of SBAs to continue the reforms may decrease Dual budgeting principles and approaches must be followed by the first pilot agencies for an extended period

16. … but going too quickly is even more risky • Difficulties in sectoral policy development: policy formulation capacity must also be in place to support programme budgeting reforms - otherwise the programmatic information presented in Budget documentation will not be backed-up by relevant policy design activities • Lack of performance-oriented management processes within State Budget Agencies slows down the adoption of new budgeting principles • Insufficient SBA capabilities in policy planning–design-implementation-monitoring-impact assessment processes introduce risks associated with the achievement of the expected outcomes of the programmes => Adequate attention must be paid to capacity building processes before full introduction of programme budgeting As a result – risk of failure and reputation of the reforms

17. Key Strengths of the Process Followed in Armenia • Legislation that does not contain impediments to the introduction of programme budgeting (although it would be supportive to the reforms if the legislation were amended to reflect adequate demand for the reforms) • Gradual progress of the reforms (using local adaptation) was key in enabling the current achievements – good practice budgeting experience was internalised before applying the suggested model • Strong leadership of the reforms from the government and the Ministry of Finance as the responsible organization for achievement of the expected reform objectives • Institutional approach to capability development by the Ministry of Finance is very important in tackling the capacity development issues: the Government had established a Training Centre at the Ministry of Finance to support the reforms and this institution is widely used in training civil servants in programme budgeting principles and methodologies • All the initiatives and processes are integrated into the existing budget processes (both technically and by legislation), so the reforms are not detached from the daily operations of the State Budget Agencies and the Ministry of Finance