GOVERNANCE GLOBAL PRACTICE MARCH 2018 THE MALAYSIA DEVELOPMENT EXPERIENCE SERIES Budgeting for Performance in Malaysia A Review of the Design, Implementation and Application of Malaysia’s Outcome Based Budgeting System CONNECT WITH US wbg.org/Malaysia @WorldBankMalaysia @WB_AsiaPacific blogs.worldbank.org/category/ countries/malaysia MARCH 2018 THE MALAYSIA DEVELOPMENT EXPERIENCE SERIES Budgeting for Performance in Malaysia A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting GOVERNANCE GLOBAL PRACTICE About KNOWLEDGE & RESEARCH The World Bank Group’s current partnership with Malaysia is focused on knowledge- sharing. It is centered on support for Malaysia’s vision to join the ranks of high-income economies by 2020 through inclusive and sustainable growth, and to share its lessons with developing countries. In March 2016, the World Bank Group officially launched its Global Knowledge and Research Hub in Malaysia. The new Hub is the first of its kind, serving both as a field presence in Malaysia and as a global knowledge and research hub. It focuses on sharing Malaysia’s people-centered development expertise and creating new innovative policy research on local, regional and global issues. Knowledge & Research reports are flagship work emanating from the teams based in the Malaysia Hub. The Malaysia Development Experience Series captures key lessons from Malaysia relevant for emerging economies in Asia, Africa and elsewhere that are transitioning out of poverty and into shared prosperity. Cover Photo attribution: © Phongphan/shutterstock The findings, interpretations, and conclusions expressed in this report do not necessarily reflect the views of the Executive Directors of 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. Please contact Bernard Myers, the lead author of this report, at bmyers@worldbank.org if you have questions or comments with respect to content. Table of Contents Acknowledgements 4 Foreword 5 List of Figures 6 List of Tables 6 List of Boxes 6 Abbreviations 7 Executive Summary 8 Origins of Performance Based Budgeting in Malaysia 12 Objectives and Design of Outcome Based Budgeting (OBB) 14 How is OBB designed to work? 16 The OBB results framework: Aligning strategic plans with budget programs 18 Information Systems to Support OBB 20 Change Management in the OBB Roll-out 22 Challenges to Managing Performance 26 Quality and completeness of performance information 27 Capacity to use performance information 27 Tools to encourage greater focus on performance 28 Authority of program managers to manage 29 Conclusions 30 Lessons from International Experience 32 Potential Next Steps for Malaysia 34 ANNEX: The Malaysian Performance Ecosystem 36 Performance management in the use of public resources 37 Performance management in the delivery of public services 37 Organizational performance management 39 Additional References on Malaysia’s Budgeting System 40 Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting 3 Acknowledgements This report on Budgeting for Performance in Malaysia was prepared by a World Bank team led by Bernard Myers (Senior Public Sector Specialist and Task Team Leader) and Robert Boothe (Public Sector Specialist), with contributions from Jana Kunicova (Senior Public Sector Specialist), Jeeva Govindasamy (Public Sector Specialist) and Alan Lau (Consultant). The report was prepared under the guidance of Robert Taliercio (Practice Manager), Faris Hadad-Zervos (Malaysia Country Manager) and Shabih Mohib (Program Leader). It benefited from peer review comments from Jens Kristensen (Lead Public Sector Specialist) and Pedro Arizti (Senior Public Sector Specialist). The authors would like to extend their grateful appreciation to the Ministry of Finance’s National Budget Office, especially officers from the Performance Management and Evaluation Sector; the National Strategy Unit under the Ministry of Finance; the Economic Planning Unit under the Prime Minister’s Department; the Ministry of International Trade and Industry; the Ministry of Education; and all others who contributed inputs, without whom this assessment would not have been possible. Special thanks and appreciation also go to Koshy Thomas for his invaluable insights and contributions to this paper. 4 Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting Foreword Ministries of Finance around the world have strived to make national budgeting processes more aligned with medium-term strategic plans and more impactful on improving public sector performance. Malaysia has been at the forefront of many trends in public sector management, and this report is aimed at providing knowledge to other countries on how Malaysia has approached this objective. Outcome Based Budgeting (OBB) has been used successfully by Malaysia to enhance the focus of its ministries, departments, and agencies on the achievement of national development outcomes. Clear results and accountability frameworks are established for ministries, programs, and activities, and performance agreements are signed by senior officials. The story of Malaysia’s design and implementation of OBB may be valuable to other countries who have embarked upon a similar path or are anticipating it in the future. The Ministry of Finance’s collaboration with the World Bank to develop this report also reflects Malaysia’s confidence that is still has much to gain from international experience and perspectives. OBB has not yet achieved its full potential, but it is through such collaboration that Malaysia has the opportunity to deepen OBB’s impact on public sector performance – to the benefit of all Malaysians. Y. Bhg. Datuk Ahmad Badri Bin Mohd Zahir Richard Record Director Acting Country Manager for Malaysia National Budget Office World Bank Group Global Knowledge Ministry of Finance & Research Hub in Malaysia Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting 5 List of Figures Figure 1. Results Framework and Performance Agreement Under OBB 16 Figure 2. Budget Building Under OBB 17 Figure 3. Aligning Development and Operating Expenditure Under a Unified Results Framework 19 Figure 4. MyResults Landing Page 21 Figure 5. Usage of Performance Data in OECD Countries with PBB 28 List of Tables Table 1. Budget Preparation Calendar and Stakeholders in Malaysia 18 List of Boxes Box 1. The Auditor General’s Accountability Index (AI) for Financial Management 38 6 Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting Abbreviations BRO Budget Review Officer CPMC Central Performance Management Committee DE Development Expenditure EPU Economic Planning Unit (of the Prime Minister’s Department) ETP Economic Transformation Programme GTP Government Transformation Programme IRBM Integrated Results-Based Management KPI Key Performance Indicator KRA Key Results Area MAMPU Malaysian Administrative Modernization and Management Planning Unit MBS Modified Budgeting System M&D Ministries and Departments M&E Monitoring and Evaluation MES Ministry Executive Summary MOF Ministry of Finance MOIC Ministry OBB Implementation Committee NBO National Budget Office NBOS National Blue Ocean Strategy NOSC National OBB Steering Committee OBA Outcomes Based Approach OBB Outcome Based Budgeting OE Operational Expenditure OECD Organization for Economic Co-operation and Development PADU Education Performance and Delivery Unit PBB Performance Based Budgeting PBS Programme Budget Sheet PEMANDU Performance Management and Delivery Unit PPBS Programme Performance Budgeting System PPMC Programme Performance Management Committee PPMF Programme Performance Management Framework ProLL Programme Logic and Linkages Model PSD Public Service Department RM Ringgit Malaysia SPPII Project Monitoring System II SRI Star Rating Index TTP Treasury Transformation Programme WBG World Bank Group Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting 7 Executive Summary 8 Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting Executive Summary Performance based budgeting (PBB) has Finance (MOF). MBS was in operation for about been a popular reform among ministries of 20 years before changes to the national planning finance across the world, accompanied by approach (reflected ultimately in the 10th Malaysia high expectations for its ability to transform Plan) drove demand for changes to the annual national budget processes. PBB offers the hope budgeting system. of a more evidence-based rationale for making budget decisions across an array of competing Malaysia’s OBB is a good example of how a policy and program areas. It offers a framework for country can successfully link high-level national linking medium-term national strategies with the strategies to specific budget programs and annual budget process, while the program logic activities using a common results framework structure gives a more transparent view of the to define accountability. The national strategies activities being undertaken than a traditional line- and priorities are guided by the five-year national item budget does. Ultimately, PBB holds out the development plans. OBB in turn links the different allure of providing incentives for improved public levels – national strategies, ministerial outcomes, service delivery. Despite significant time and effort program outcomes, and activity outcomes – devoted to PBB implementation, the experience of through an integrated results framework. While the many countries is rather mixed. budget is formulated at the activity level based on agreed outputs, each activity must be mapped to a This report explores some of M alaysia’s specific program. National strategies are comprised successes and challenges in implementing PBB of national key results areas or key focus areas, as in recent years, the rationale for undertaking well as national key performance indicators (KPIs). the reform, and how Malaysia’s experience with KPIs are in turn defined for each of the subsequent PBB compares with that of other countries. contributing levels of outcomes – ministry, program, Malaysia is an interesting case study because it was and activity. an early PBB reformer in Asia, and because it has in recent years introduced new measures to deepen The OBB reform was instrumental in enabling its implementation. As in other countries, PBB government to re-orient budget preparation implementation in Malaysia is a journey. No middle- toward the achievement of clearly defined policy or high-income country reaches a point where it is outcomes. Substantial efforts went into the design fully satisfied with its level of PBB implementation. of the OBB logical framework so that programs and Malaysia’s experience reflects a particular stage in activities could better reflect their contribution to this journey, and also provides some insights into high-level, cross-sectoral outcomes. Under the 9th the types of challenges that other countries may Malaysia Plan (2006–2010) – which preceded the need to confront to reap the full benefits that PBB introduction of OBB – it was unclear how programs promises. and activities were mapped to national and ministerial plans. There was no consistent method Outcome Based Budgeting (OBB) represents an to document or validate the linkages between evolutionary step in Malaysia’s implementation budget activities and the ministerial strategies and of PBB, building on a foundation of budget outcomes. Moreover, budget discussions focused reforms first rolled out in the early 1990s as primarily on input utilization due to a lack of visibility the Modified Budgeting System (MBS). MBS on the outcomes expected. Starting with the 10th incorporated the principle of devolving authority Malaysia Plan (2011–2015) and the government’s to managers, while setting up an accountability adoption of the Outcome Based Approach (OBA), framework built around the definition of program the MOF required ministries to show how their outputs and measurable targets. MBS introduced programs and activities would contribute to national the notion of program agreements and set up the development goals. Implementation of OBB has skeleton of a potential reporting system for line also enabled MOF to better identify potential ministries and agencies back to the Ministry of duplication across spending agencies. Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting 9 Executive Summary Change management, staff training , and Many countries with PBB have found that stakeholder outreach were all key components merely collecting performance information of the MOF’s strategy for rolling out OBB. from ministries is not enough; Malaysia is still Anticipating the potential time pressures imposed at a stage where it can carefully contemplate on staff by reform activities, the MOF established a strategies that will enable information to be small independent unit to manage the design and used effectively in decision-making. Performance implementation of the OBB system. The OBB team reporting adds little value unless the broader organized their work around three dimensions of processes for budgeting and per formance the budget transformation strategy : i) the budget management provide appropriate motivation for model and framework – program-activity structure, people to care about their program performance vertical and horizontal linkages; ii) the people and and empowers them to act on such information. stakeholders involved in the budget process – While the normal exchanges between BROs and change management, capacity building, enhanced program managers include discussions about accountability through greater empowerment to financial and non-financial performance, BROs are the CEOs; and iii) the management information at an information disadvantage compared to the system that facilitates budget planning, monitoring, program managers in their ability to understand and reporting. Specific requirements and strategies the program issues and they may lack the right were identified for each of these dimensions. During experience to conduct in-depth evaluation. the first two years of the transition period (2010– Ultimately, whether to make significant changes 2012), the OBB team developed the conceptual to the design of the program or the level of the framework for OBB, creating the necessary training funding allocation, or to terminate a program, all materials to support the reform. Through extensive require a level of authority beyond the BRO and a use of Strategic Programming Workshops, the demand for performance information from senior OBB team was able to work with each ministry to officials. define outcome statements and determine the specific interventions needed to address identified Few ministries of finance have developed the problems, using a logical framework methodology. procedures within the annual budget cycle to systematically evaluate performance across While the “front-end” program and results government and to take action on it. Lessons structure of OBB is very well developed, the from more than two decades of PBB worldwide stages related to performance reporting suggest that senior decision-makers can only act and performance evaluation are much less on a limited number of performance related issues developed. Budget Review Officers (BROs) can and that such interventions need to be strategic. request performance information as they need it to Finance ministries are constantly challenged to facilitate their consideration of new requests. The manage the volume and quality of information annual budget circular states that programs should that comprehensive, government-wide PBB can be evaluated by the ministry every five years, but generate each year. For the line ministries that there is no enforcement mechanism for BROs must generate the reports, the incentives to take to ensure that such performance assessments such reporting seriously diminishes over time if are submitted to MOF. While under MBS there there are few consequences to non-compliance. was a requirement for ministries to report output International experience suggests that performance variances that were outside the mutually agreed management may be more impactful when it goes range, this proved to be impractical to enforce and beyond the tight deadlines of the annual budget was generally limited to financial performance. The cycle and targets a selective number of policy most recent enhancement of OBB (as of January areas. The actual number should be consistent 2018) was to request ministries to report on their with the absorptive and technical capacity of the outcome KPIs on a quarterly basis. administration to manage. 10 Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting Executive Summary As countries gradually take stock of what has worked and what has not, they are applying those lessons to the next generation of PBB. The World Bank has helped curate some of the international experiences in the book “Toward Next-Generation Performance Budgeting” (2016). Five lessons drawn from this diversity of experience and relevant for Malaysia are: 1. Set realistic objectives of what PBB can achieve 2. Create space for performance discussions to go beyond the tight annual budget cycle 3. Take into account the administrative and analytical capacity constraints that exist 4. Tightly control the amount of data generated so as not to overload those who review it 5. Prioritize those programs that have a genuine service delivery component For OBB to have a more direct impact on public sector performance in Malaysia, MOF may need to enhance the value of performance information to policy makers and improve the institutional capacity to evaluate such information. The challenges that Malaysian reformers face are not unlike those found in other middle- and high-income countries who started before them. Indeed, for Malaysia to enhance the value of OBB it may wish to prioritize the following: (1) Encouraging timely and accurate reporting on performance by ministries, when and where it is most relevant; (2) Developing the technical capacity to evaluate performance information and presenting it in ways helpful for senior level decision-making; and (3) Stimulating demand for performance information, possibly by linking it to individual and institutional recognition/reward systems. Achievements and Future Directions Key Features of OBB • The focus of national budgeting shifts from outputs to outcomes; • Clear links are established between ministry outcomes and the medium-term national strategic thrusts and national outcomes; • Multi-sectoral contributions to national outcomes are more visible; • Ministry outcomes cascade down into articulation of program outcomes and activity outcomes, with key performance indicators established at both levels; • Performance agreements document the accountability for all levels; • Budget activities are mapped to a single program to enhance transparency and accountability; • Programs are defined in terms of interventions, rather than institutions or organizations; • Program managers have flexibility to manage line-item allocations within the program; • Allocations for operating expenditures and development expenditures can both be reflected within the budget program; • Logical frameworks are used to validate the rationale for the budget program, i.e., why the specific intervention is needed and who it benefits; and • An online information system (MyResults) captures the mapping of programs/activities and the complete set of results frameworks. Further Enhancements Planned • Systematic reporting on performance indicators to MOF • Capacity to evaluate performance information effectively • Additional IT modules to facilitate budget preparation and performance reporting Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting 11 Origins of Performance Based Budgeting in Malaysia 12 Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting Origins of Performance Based Budgeting in Malaysia Malaysia was an early leader in Asia in applying performance management to annual budgeting, starting in 1969 with the introduction of its Programme Performance Budgeting System (PPBS). This system drew inspiration from the United States’ approach to program budgeting first pioneered in the 1960s. It recognized the shortcomings of a traditional line-item, input-control approach to budgeting and instead introduced a program-structure approach, with dedicated indicators related to specific managerial responsibilities. Activities were measured and used as an indicator of performance. PPBS brought with it more explicit prioritization of budget items, modernization of the accounting system from strict cash to a modified cash basis, and harmonization of budget codes and classification across agencies. This provided a foundation for future budget reforms. Responding to the limitations of PPBS and global trends around “New Public Management,” Malaysia introduced in 1989 a new system called the Modified Budgeting System (MBS). During the late 1980s, government was growing in size, but retained highly centralized controls, which inhibited responsiveness, accountability, and flexibility. As such, a primary objective of MBS was to devolve managerial and spending powers away from the center and towards program and project managers, improving flexibility and responsiveness. With this devolution came the need to hold managers accountable for results and to define measurable targets. These results chains were articulated through program agreements between line agencies and the MOF, which specified inputs and outputs at the ministry level and the activity level. The MBS also featured a set of expenditure targets, with the objective of improving selectivity of spending, while also imposing a degree of fiscal discipline. In practice, MBS perpetuated a focus on input utilization; program managers were more likely to draw attention if they failed to meet financial targets for budget execution. The MOF has not been the only Malaysian institution with initiatives to improve public sector performance. Performance management today takes multiple forms, and is carried out for different purposes. Malaysia’s performance initiatives can broadly be broken down into three different categories covering: i) expenditure and revenue management, i.e., use of public resources, ii) service delivery, and iii) organizational performance. Some of the major initiatives under each category are outlined in the Annex. Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting 13 Objectives and Design of Outcome Based Budgeting (OBB) The Prime Minister’s decision to adopt a more outcome-based approach to national development planning became the driver for MOF to begin looking at ways to update the annual budget process. The 10th Malaysia Plan (2011–2015) was designed to be outcomes focused, establishing a development vision for Malaysia that was linked to the achievement of outcomes across various national key results areas. 14 Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting Objectives and Design of Outcome Based Budgeting (OBB) To strengthen the linkages between policies, also establishes a logical structure on how program planning, and budgeting, the MOF determined information is strategically collected and utilized that the annual budget should also be outcomes- for planning, budgeting, and M&E. Each program focused. Six key transformation levers were under OBB is an intervention aimed at addressing identified to guide the development of the new a specific problem, compared to programs under budgeting system: i) a strong focus on outcomes, MBS, where many were institutional in nature. ii) clear vertical alignment of national priorities and Activities are a common unit for under MBS ministry programs and activities, iii) management and OBB, but they can only be mapped to one of cross-cutting initiatives, iv) coordination of specific program, even where they may contribute development and operating expenditure, v) to achieving multiple program outcomes. This accountability for results and authority over helps to create a one-to-one match between the resources, and vi) a systematic monitoring and administrative and program-activity structures to evaluation mechanism. preserve accountability and line of sight. Outcome objectives, along with relevant KPIs, are defined at OBB was designed to address some specific all three levels of ministry, program, and activity. As shortcomings recognized by MOF in the the budget book is still approved by program, the implementation of MBS. The primary shortcoming activity level detail is used for internal management was a perceived focus on input utilization and purposes within the ministry. outputs at the expense of performance and results. Additionally, MBS did not adequately support clear OBB was also designed to better integrate linkages between government policies, national development and operating expenditure planning, and the annual budget process. Ministries processes under a unified results framework. could claim that budget activities supported Like many countries in Southeast Asia, Malaysia has ministerial strategies, but there was no means to link an institutional separation between the budgeting these to the broader national strategies outlined functions for capital or development expenditure in the five-year plan. Therefore, MBS did not (DE), which fall within the Economic Planning Unit function effectively as a strategic planning tool, as (EPU) under the Prime Minister’s Department, program agreements were not based on top-down and the budgeting functions for operational strategic planning. Without good information on expenditure (OE), which fall within the National results from line agencies, Budget Review Officers Budget Office (NBO) at the Ministry of Finance. (BROs) continued to focus on line items rather than This institutional separation can sometimes create accountability for results. Under-execution of one’s issues such as poor alignment between policy budget allocation could be more easily assessed objectives under different types of spending than performance outcomes. or inadequate resourcing of operational costs for new development projects. Thus, OBB was OBB has created an integrated results designed to help manage this issue by requiring framework at every level of the budget process. spending agencies to coordinate and prepare both Under OBB, the program structures are reviewed operational and development budget submissions and refined through an integrated program- under a single, unified results framework. Doing so activity structure, which provides hierarchical was intended to eliminate redundancy in funding linkages of ministry programs and activities, and and promote better value for money through systematically aligns them to national priorities. It improved coordination of DE and OE. Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting 15 Objectives and Design of Outcome Based Budgeting (OBB) How is OBB designed to work? Conceptually, the OBB system is grounded on the performance agreement for the budget year. in a results framework involving top-down strategic planning and alignment, followed Performance agreements capture the target by bottom-up budgeting and reporting. The outcomes and establish the institutional national level strategies and priorities are guided accountability for their achievement at all levels. by the five-year national development plan. OBB in Performance agreements at the activity level, namely turn links the different levels – national strategies, the Activity Performance Management Framework ministerial outcomes, program outcomes, and (APMF), are accompanied by the Activity Budget activity outcomes – through an integrated results Sheet (ABS). At the next level up, the Programme framework. While the budget is formulated at Performance Management Framework (PPMF) the activity level based on agreed outputs, each displays the agreed outcomes and KPIs for each activity must be mapped to a specific program. program, and it is accompanied by the Programme National strategies are comprised of national key Budget Sheet (PBS). The Ministry Executive results areas or key focus areas, as well as national Summary (MES) summarizes the Ministry’s overall key performance indicators (KPIs). KPIs are in Results Framework and total inputs required for the turn defined at each of the subsequent levels of implementation of all its programs and activities. outcomes – ministry, program, and activity. Each Figures 1 and 2 detail the conceptual framework program is comprised of individual activities, each for OBB. In summary, each results framework, with its own results framework, specific outcome starting with the activity level, forms the basis of a areas, KPIs, and outputs. The budget is built at the performance agreement that is rolled up into the activity level, aggregated up to the program level, ministry-wide executive summary agreement.1 and finally consolidated at the ministry level, based FIGURE 1. Results Framework and Performance Agreement Under OBB National Level Results Framework Strategic Alignment & Performance Planning • National Strategic Thrusts Malaysia’s 5-Year • National Key Results/Focus Area • National Outcome Development Plan »» Key Performance Indicator Budgeting & Performance Reporting Ministry Level Results Framework Ministry Executive • Ministry’s Outcome »» Key Performance Indicator Summary • Program (of intervention) (MES) Program Level Results Framework Programme Performance • Program Outcome »» Key Performance Indicator Management Framework • Activity (PPMF) Programme Budget Sheet (PBS) Activity Level Results Framework • Activity Outcome Activity Performance »» Key Performance Indicator Management Framework • Activity Output »» Performance Indicator (APMF) Activity Budget Sheet (ABS) 1 The ministry agreements are shared with the MOF for their purposes; they are not published or shared with the Parliament. 16 Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting Objectives and Design of Outcome Based Budgeting (OBB) FIGURE 2. Budget Building Under OBB Programme Budget Activity Budget Ministry Budget Sheet (PBS) Sheet (ABS) Ministry 1 Programme 1 Activity 1 Budget Budget Budget National Budget Ministry 2 Programme 2 Activity 2 Budget Budget Budget Programme 3 ‘Single view’ of Budget OE & DE Programne N Activity 3 Budget Budget Activity N Budget Source: Adapted from National Budget Office Ministries justify their new programs, following enhance the quality and relevance of KPIs. OBB also transmission of the budget circular in January, created the opportunity to strengthen the focus of using an online analytical framework called the organizational accountability more directly on the Program Logic and Linkages model (ProLL). 2 program manager. Senior managers use ProLL to identify and outline program objectives. They are required to begin with After results frameworks have been developed a demand analysis, which helps to identify clients/ at the ministry, program, and activity levels, stakeholders, what their problems and needs are, spending units beg in to develop budget and which policies will best address these problems submissions from the bottom up. The inputs and needs. In principle, it is from this demand required to under take various activities are analysis that a program is defined with preliminary budgeted for, and then rolled up to the program outcomes to be achieved. Using ProLL, strategies and eventually the ministry level. Ideally by March, for achievement of outcomes are also identified budget proposals are submitted to the NBO, with short-, medium- and long-term actions. This which then disseminates budget proposals to the strategic planning exercise helps lay out a clear Central Performance Management Committee results chain from inputs all the way to outputs, (CPMC). The CPMC is responsible for reviewing outcomes and impact. Of course, in the transition all ministry proposals and results frameworks, and from MBS to OBB there was already a substantial for performing a challenge function against the legacy of programs that had a set of pre-defined ministerial requests. Once the CPMC has reviewed beneficiaries and a set of existing performance and approved the various ministries’ allocations, the indicators. What MOF gained from OBB was a proposals are submitted for the Budget Director’s fresh opportunity to revisit that existing structure approval, before proceeding to the cabinet and of budget programs, validate their consistency with subsequently Parliament. The budget process and the higher-level strategic priorities, strengthen the timeline are summarized in Table 1. results chain between outputs and outcomes, and 2 ProLL © 2010, Arunaselam Rasappan and Jerome Winston CeDRE International Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting 17 Objectives and Design of Outcome Based Budgeting (OBB) TABLE 1. Budget Preparation Calendar and Stakeholders in Malaysia STEP TIME ACTOR ACTION 1.a Y0 Q1-Q4 MOICs Top-down planning, propose programs based on 5-year plan Y0 Q2 Evaluates and rationalizes new/existing programs and activities in partnership with MOICs 1.b PRC Y1 Q1 based on 5-year plan Y1 Q1 FED Updates 3-year Medium Term Fiscal Framework to inform expenditure estimates 2 Y1 Q1 NBO Issues call circular with proposed expenditure estimates guidelines 3.a Y1 Q1 MOICs Finalize Ministry Results Framework, with program and activity managers 3.b Y1 Q1 PPMCs Finalize Programme Performance Management Framework 3.c Y1 Q1 APMC Finalize Activity Performance Management Framework 4 Y1 Q1 MOICs Undertake bottom-up budgeting from activity, to program, to ministry level 5 Y1 Q2 NBO BROs received budget proposals and reviews ministry proposals 6.a Y1 Q2 CPMC Reviews and challenges ministry proposals 6.b Y1 Q2 CPMC Reviews ministry allocations 7 Y1 Q3 NBO Allocations approved by Budget Director 8 Y1 Q3 NBO Consolidates budget, briefs cabinet 9 Y1 Q4 NBO Prepares and presents budget estimates to parliament 10 Y1 Q4 Parliament Reviews, debates, and promulgates budget 11 Y1 Q4 NBO Issues general warrant authorizing expenditure 12 Y2 Q1 MOICs Commence spending APMC Activity Performance Management Committee MOIC Ministry OBB Implementation Committee BROs Budget Review Officers NBO National Budget Office CPMC Central Performance Management Committee PPMC Programme Performance Management Committee FED Fiscal and Economics Division of MOF PRC Programme Rationalisation Committee Source: National Budget Office The OBB results framework: Aligning strategic plans with budget programs The OBB results framework was instrumental in enabling government to re-orient budget preparation around the achievement of national policy outcomes. Substantial efforts went into the design of the OBB logical framework so that programs and activities could better reflect their contribution to high-level strategies and cross-sectoral outcomes. Under the 9th Malaysia Plan – which preceded the introduction of OBB – the mapping of programs and activities to national and ministerial plans was not well understood. There was no consistent method to document or validate the linkages between budget activities and the ministerial strategies and outcomes. Moreover, budget discussions focused primarily on input utilization due to a lack of visibility on the outcomes expected. When EPU decided to introduce its Outcome Based Approach (OBA), the mapping of such linkages was reflected in the preparation of the 10th Malaysia Plan. Responding to this new direction, the MOF was able to require ministries to show how their programs and activities contribute to national policy goals. OBB also enabled MOF to establish accountability for achievement of outcomes at multiple levels of a ministry. Ministry outcomes are cascaded down and supported by program outcomes, which are in turn supported by the achievement of activity outcomes. Performance agreements are signed at the activity level and at the program level, accompanied by a series of KPIs. The Ministry Executive Summary (MES) is the only one that is seen by Parliament, but all performance agreements are available within the MOF. The explicit mapping of programs from OBB implementation has enabled government to show the cross- sectoral contributions to national strategies. The OBB framework is also helping to facilitate coordination 18 Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting Objectives and Design of Outcome Based Budgeting (OBB) of operating and development expenditures, which are currently planned and managed separately by MOF and EPU, respectively. As of the 2018 Budget, the OBB framework covers a total of 34 ministries and agencies, 116 programs, and 740 activities. Figure 3 provides an example of how the OBB results framework looks in practice. At the highest level of the 11th Malaysia Plan is the National Strategic Thrust. “Enhancing inclusiveness towards an equitable society” is one of six strategic thrusts. Within this strategic thrust, one of the five national key focus areas is “Uplifting the bottom 40 percent of households (B40 households) towards a middle-class society” with one measurable outcome, namely “Size of middle-class households increased”. The Ministry of Agriculture and Agro-based Industry is one of the ministries that contribute to this national outcome, through its ministerial outcome “Competitive and Sustainable Agrofood Development”. It does so through a program of intervention called “Agropreneur Development and Agrofood Industry”. The Ministry of Rural and Regional Development also contributes, through its ministerial outcome “Sustainable rural development”, with a program named “Rural Economic Empowerment.” The program will then be implemented by activities of both ministries with inputs from OE and DE. Figure 3. Aligning Development and Operating Expenditure Under a Unified Results Framework National Strategic Thrust Enhancing Inclusiveness Towards an Equitable Society Key Results/Focus Area Uplifting B40 Households Towards a Middle-class Society National Outcome Size of Middle-class Households Increased MINISTRY Ministry of Agriculture and Ministry of Rural and Agro-based Industry Regional Development Competitive and Sustainable Ministry’s Outcome Sustainable Rural Development Agrofood Development PROGRAM Agropreneur Development and Rural Economic Empowerment (of intervention) Agrofood Industry DE OE DE OE ACTIVITY Construct irrigation Training to farmers Construct rural Rural Economy (Single view Budget - roads Funding Scheme Construct farm Provision of inputs coordinated DE & OE) access roads Emoluments Provide skills Rural utilities training provision Agriculture R&D Source: National Budget Office OBB has also enabled MOF to better identify potential duplication across spending agencies. Multi- day Strategic Programming Workshops with ministries allowed the OBB team to work systematically through a logical framework instrument (ProLL) to identify the target outcomes, programs, and activities needed to support the key national results or focus areas. The more rigorous activity and program mapping for each ministry could then be captured in an online database (see Figure 4). From its vantage point at the center, the NBO can now more easily identify where overlaps exist when scrutinizing proposals, and suggest either elimination of overlapping programs or revision and coordination across different spending agencies. Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting 19 Information Systems to Support OBB To support the implementation of OBB, MOF embarked upon development of an integrated IT platform called MyResults. 20 Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting Information Systems to Support OBB MyResults is an online application that is intended to eventually Figure 4. MyResults Landing Page serve as a complete, integrated results and budget management information system. MyResults has a number of different modules. These modules are being rolled out in stages based on technical readiness as well as absorptive capacity and training with users. The first module focuses on strategic planning. The second module, which is still under development and testing, is intended to enable spending agencies to input their budget requests directly online – currently there is a mix of online and manual submissions. When fully implemented, MyResults will enable BROs to view and scrutinize results frameworks under a single user interface, and connect them with Source: https://www.myresults.gov.my/portal/ spending proposals. MOF envisions two additional modules being developed and rolled out over the medium term; one will facilitate in-year budget management and the other will capture reporting of performance indicators. Some testing has already begun of a module that allows agencies to manage cash flow and spending within the MyResults system. This module will be linked directly with the Government Financial Management Accounting System under the Accountant General’s Department and the Project Monitoring System II (SPP II) under the Implementation Coordination Unit of the Prime Minister’s Department. It will be used to track and report on spending performance against targeted allocations. The later-stage modules of MyResults will focus on performance monitoring and reporting. Currently, budget monitoring is largely restricted to actual expenditure against budgeted allocations. Going forward, MyResults is intended to serve as a platform for monitoring and reporting on performance targets outlined in results frameworks at the ministry, program, and activity levels. These performance monitoring and reporting modules are currently being tested and checked while training is being provided to spending agencies on their use. MOF also sees the eventual development of the MyResults system as a way to automate production of the annual budget book, and to reduce many of the heavy manual processes. Currently, a major activity for the NBO is compiling, consolidating, and publishing the annual budget book. This process demands significant time and resources, with heavy staff involvement, reducing the time and resources available for more strategic activities. By integrating submission of results frameworks, budget proposals, and budget management under a single management information system, MyResults is intended to facilitate the timely and efficient generation of the annual budget book going forward, replacing the current manual approach. Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting 21 Change Management in the OBB Roll-out At the outset of the reform, MOF created a high-level committee to set the policy, steer the process, and study possible approaches for the new system. In preparation for the design of the OBB, the MOF in 2010 created the National OBB Steering Committee (NOSC) chaired by the Secretary General to the Treasury, with representation from key stakeholders including the NBO, EPU, MAMPU, the Public Service Department (PSD), the National Audit Department, the Accountant General’s Department of Malaysia, the Attorney General’s Chambers of Malaysia, and the Ministry of Works. An independent unit was also formed – the OBB team – to act as the secretariat to the NOSC and to study the budget systems of interest. 22 Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting Change Management in the OBB Roll-out The OBB team drew on both local and international experience to expand on the foundation provided by MBS. For example, the OBB team made benchmarking visits to Canada, New Zealand, and Singapore. They also recruited a team of international consultants to assist in developing the OBB conceptual framework and the design process. The initial framework, which drew heavily on the MBS, was developed by a local research institution called the Center for Development & Research in Evaluation, which later upscaled to meet the requirements of the Integrated Results-Based Management (IRBM) system. The OBB team had a broad range of activities to coordinate: conceptual design, outreach and change management programs, developing training materials, providing training to BROs and line ministries, setting the OBB implementation strategies, hand-holding the pilot agencies on implementation coordination, and developing the MyResults system to support OBB implementation. The OBB team had the institutional freedom to work full-time on developing the reform. Recognizing the challenges of undertaking reform while also managing core daily tasks, and in line with the Treasury Transformation Programme (TTP), the OBB team was moved to the NBO in 2014 to form a new wing called the Performance Management and Evaluation Sector. This team is responsible for supporting, coordinating, and managing the implementation of OBB. This sector is also tasked with developing a systematic monitoring and evaluation (M&E) framework to complete the full strategic cycle of OBB, as well as with maintaining continuous engagement and capacity building at the NBO and line ministries. The OBB team organized their work around three dimensions of the budget transformation system. These dimensions were: i) the budget model and framework – program-activity structure, vertical and horizontal linkages; ii) the people and stakeholders involved in the budget process – change management, capacity building, enhanced accountability through greater empowerment to the CEOs; and iii) the management information system to complement M&E, as well as the Decision Support System through which OBB is applied and managed. Specific requirements and strategies were identified for each of these dimensions. For example, model development was guided by strong vertical alignment between policies, programs, and activities, with horizontal linkages between related programs, as well as by an integrated approach to budget preparation and review. An OBB policy framework and guidelines were required to ensure the model’s consistent application across the public sector. People and stakeholder strategies were informed by the principles of accountability at all levels, a comprehensive training and capacity building program, special sessions with senior management, and a carefully constructed communications strategy. The information technology system strategies focused on development of a robust online system for budget submission and review, with modules for performance monitoring and reporting. Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting 23 Change Management in the OBB Roll-out Changes to the budget system were driven administratively, rather than through changes to the legal framework governing the budget process. Malaysia’s organic budget law (Financial Procedures Act of 1957) serves as the foundation for its management of public finances. However, the move to the OBB system was accomplished through administrative channels, rather than through changes to the underlying legislation. The OBB roll-out was accompanied by an MOF circular to spending agencies. This circular described the OBB concepts, detailed the process and regulatory changes necessary for implementation of OBB, and outlined the new responsibilities of spending agencies with regards to preparation and submission of results frameworks, as well as performance monitoring and reporting. This allowed for a smoother and more efficient transition where civil servants could drive change within an existing legal framework. The first two years of the transition period were devoted to design of the reform, communication with key stakeholders, and development of a pilot program. From 2010–2012, the OBB team was engaged in developing the conceptual framework for the OBB, creating the necessary training materials to support the reform, and visiting the ministries and departments to give talks and run forums whereby line agency input could be incorporated into the design. Five ministries were chosen to participate in a pilot program for OBB, with another joining voluntarily. Ministries were chosen for specific reasons, with a view to testing OBB across a range of different stakeholders. For example, MOF was chosen as a core central ministry; the Public Works Department was chosen to test OBB in a setting with significant Development Expenditure; the Ministry of Transportation and Ministry of Human Resources were chosen as ministries with very specific mandates; and the Ministry of Education was chosen as a large, complex ministry; and the Ministry of International Trade and Industry volunteered based on its recognition of the importance of OBB as a strategic planning tool. Initial success with the pilot ministries led to an attempted full roll-out in 2013, which was subsequently scaled back as being too ambitious. After successfully testing the OBB with the original 5+1 pilot ministries, the OBB team attempted to roll the system out across the whole of government. However, it quickly became apparent that there was a low level of understanding about the details of performance budgeting. The results frameworks that were submitted were of poor quality, with significant confusion between inputs, outputs, and preliminary, intermediate, and tertiary level outcomes. Concluding that more individual training and capacity building was necessary, the OBB team rolled back the scope to focus on three “champion ministries” with whom they could have detailed discussions on how to develop appropriate results chains. The demonstration effect of OBB being effectively used as a strategic planning tool in the three champion ministries led to additional ministries volunteering in subsequent years. 24 Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting Change Management in the OBB Roll-out The OBB team has since focused on providing specific training and capacity building on a ministry-by-ministry basis to ensure good understanding of the principles of performance management and support the development of quality results frameworks. At the central agency level, resource leaders were identified, comprising all the BROs at the NBO, desk officers at the EPU who are overseeing development budgets for line ministries, and desk officers at the Public Service Department who are responsible for public sector organizational development. Resource leaders serve as reference points to give advice on OBB matters to line ministries (since the OBB team has a limited number of staff and is mandated to focus on more complex issues and advancing the OBB agenda). Continuous Resource Leaders Training (RLT) is being conducted by the OBB team to provide the resource leaders with the necessary conceptual and technical knowledge on OBB. A key feature of Malaysia’s change management strategy was the extensive program of training and awareness-raising across all levels of stakeholders. At the national level, the OBB team employed a multi-faceted approach with a combination of awareness briefings, forums and seminars, structured training programs, and information sessions on the MyResults portal. In addition to the national level training, the OBB communication strategy focused on agency specific training at various levels. These included targeting top management as champions and sponsors of the reform, working with activity heads to establish technical activists at the “user” level, liaising with human resource units to leverage trainers as OBB coaches, and identifying focal persons and end users, typically at the deputy director/assistant head of department level. Training and communication materials were developed and delivered domestically through collaboration between members of the OBB team and the domestic think tank which worked on the conceptual framework. In addition, the team used a “training of trainers” approach to develop expertise within ministries. Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting 25 Challenges to Managing Performance Some institutional challenges that were evident during the period of MBS could still be constraints to OBB implementation now, despite a significant increase in performance information available to MOF. Even when ministries of finance are able to obtain substantial amounts of data on program results – i.e., reporting against agreed indicators – it may not lead to improvements in service delivery. Many factors could affect how data generated from PBB reforms gets used, and whether it helps generate a change in budget culture or changes in policy design and implementation. The World Bank’s 2011 review of public expenditure management in Malaysia highlighted challenges to performance management that are still potentially relevant today: (1) Quality and completeness of the performance reports submitted by ministries; (2) Technical capacity of the MOF to use performance information effectively in the annual budget process; (3) Encouragement for program managers and senior officials to draw on performance information and to take actions based on it; and (4) The level of authority and freedom of managers to deliver on performance agreements. 26 Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting Challenges to Managing Performance Quality and completeness of performance information Managing the quantity and quality of performance information is a struggle for many countries, and a strategic decision point for OBB going forward. Malaysia’s experience with MBS showed the limitations of performance reporting. Under MBS, ministries submitted exception reports only when performance deviated by an agreed range; but report submission was not consistently enforced, and reports focused on the wrong things. OBB has improved on MBS by incorporating outcome information that was previously missing. In addition, training and capacity building for line ministries and departments helped them to improve their specification of programs, activities, and performance indicators. However, until January 2018, ministries were not required to report on performance. It was only recently that the budget circular requested ministries to report quarterly on their performance indicators. This is considered by NBO as a first step in performance monitoring and they will assess its implementation over the year. The potential risks for MOF under the current approach are already well understood: i) there is no enforcement mechanism to ensure that ministries submit the data when required; ii) there is no mechanism to verify and validate the quality of the data submitted; and iii) the volume of data generated risks overwhelming staff and in turn obscuring potentially meaningful findings. Capacity to use performance information Even when countries can generate extensive data, the bigger challenge is having the capacity to interpret it and generate appropriate policy responses. This is a fundamental challenge for PBB globally. For example, failure to achieve a given performance level does not necessarily provide a justification to cut future budgets; on the contrary, it could reflect a deeper underlying problem that would require more budget to resolve. Thus, the interpretation of major variances requires time and judgment that does not always align well with the time pressures of the annual budget cycle. For this reason, some countries find that they need to be quite selective in the number of programs that they can review in-depth, and others find it best to stretch the period of performance evaluation beyond the confines of the annual budget cycle. Staff capacity is still a relevant consideration for PBB implementation, and collaboration with line ministries is critical to success. Staff who review budget submissions do not necessarily have the right skill profile or experience to conduct credible performance evaluations. Furthermore, even with capable staff, there will be a natural asymmetry between MOF and line ministries in terms of program knowledge. Line ministries themselves are usually the best-placed to understand and exploit the performance data and to apply it to their future program management. The strategic question for Malaysia would be how to encourage line ministries and program managers to use the performance information that is available, and to work jointly with MOF to identify and solve program challenges. Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting 27 Challenges to Managing Performance Tools to encourage greater focus on performance PBB initiatives aim to stimulate good performance and spur evidence-based decision-making; however, this is more challenging when reward systems are not well aligned. In theory, the establishment of performance agreements and the requirement to report on performance should motivate program managers in a positive manner. But in many countries, there is traditionally a lack of effective rewards or sanctions aligned to performance agreements. For program managers that are motivated and capable, PBB could be a promising tool to showcase what they have achieved and to be recognized for it. In Malaysia, some line ministries appeared to be early adapters of OBB because of the potential benefits they perceived from it. However, if outstanding performance and poor performance are not addressed through the system, then there is a risk that ministries and departments will lose interest and view PBB as only another reporting burden placed upon them. At the level of individual performance, it is worth noting that Malaysia’s civil service management policies and practices for talent management were not developed with OBB in mind; rather they preceded it. The Public Service Division has maintained its existing approaches to career management, which may use other metrics to assess performance and determine rewards. Performance information may not be perceived by senior policy makers or Parliament as sufficiently valuable to inform their decisions on budget. Few OECD countries that have implemented PBB reforms are able to realize a high level of interest and demand from Members of Parliament or their Budget Committees, at least not in proportion to the volume of information that is at their disposal. Even within the Government itself, Ministers of Finance and other senior officials have limited bandwidth to absorb and process the information that is available to them. Moreover, many national budget processes start with a high degree of constraints on the budget allocations across sectors and sub-sectors, and therefore, the “room to maneuver” is often quite limited. Many of the policy decisions hinge around the approval of new initiatives – using the space between the “baseline” and the projected revenues as the envelope – rather than a review or rationalization of existing programs. Demand for selected program evaluations – a small number of programs selected each year – needs to be cultivated and not assumed. In an effort to provide policymakers with a comprehensive coverage of the budget at all times, PBB reforms sometimes overwhelm the decision- making processes of government, with the result that very limited information is used in practice. Figure 5 shows the experience of OECD countries in the use of performance information for budgeting. Figure 5. Usage of Performance Data in OECD Countries with PBB Where 0=Never, 1 = Rarely, 2 = Usually, 3 = Always Ministries use of data for management purposes Ministries use of performance data for resource allocation Legislative use of performance data for accountability purposes 0 0.5 1.0 1.5 2.0 Source: “Toward Next-Generation Performance Budgeting”, World Bank, 2016. 28 Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting Challenges to Managing Performance Authority of program managers to manage Accountability for performance needs to be aligned with authority to manage; budget predictability is one element of that. During MBS, program managers in Malaysia faced constraints on their authority to manage programs against their performance agreements. For example, Malaysia’s budget data showed a high degree of variability between the original budget estimates and the actual expenditures at year end. While there may have been national and global macroeconomic factors that contributed to this “credibility gap” between the planned and actual spending of ministries, the effect was to undermine the budget predictability needed by managers to implement their programs. Recalibrating budgets and outputs is generally difficult to manage, and therefore, few countries (including Malaysia) bother to do it. Malaysia’s expenditure reports from 2015 and 2016 suggest that budget variability for operational expenses has declined significantly. OBB has given program managers greater flexibility over reallocation of funds between line items, although there are still some constraints. Within the OE budget, managers can do virements within the program without prior permission, and within DE they can shift as much as 15 percent across projects. There remain appropriate controls on the ability to increase personnel spending. In addition, ministries are usually locked into the staff levels and composition of skills that they currently have. Over the medium to longer term, this could become an issue when some skill sets become outdated and others are in high demand. Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting 29 Conclusions Malaysia’s OBB provides an excellent example of how strategic planning processes can be linked effectively with budget programs through an integrated results framework. OBB built on the program budgeting structure that was in place under MBS, and improved on it by emphasizing national development outcomes and mapping the contribution of the budget to them. OBB strengthened the focus on outcomes by driving it down to all levels of the central government – from the national level to the ministry level, then to ministry programs and finally to activities. OBB also reinforced the accountability for outcomes by establishing performance agreements at ministry, program, and activity level. Although budget planning is still based around specific activities, these must be able to show their contribution to the five-year national plan. In principle, these programs are comprised of both OE and DE allocations and will facilitate greater coordination among the two institutions responsible for the planning of both budgets. 30 Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting Conclusions These formal linkages established under OBB Systematic reporting and evaluation of have the potential to help policymakers validate performance information are not yet well- the relevance of long-standing activities to the developed; thus, the eventual impact of OBB achievement of national strategies. While IT on service delivery is still to unfold. Quarterly systems facilitate this mapping of programs and reporting against KPIs began only in January 2018, activities to national strategies, the story of OBB and it will require time to assess the compliance has more to do with the NBO’s policy guidance than and the impact of such. There are no requirements the IT system. Nevertheless, the current modules in place to compel ministries to report on their of MyResults provide the facility for ministries to achievement of performance agreements. Nor plan the results chain to justify the creation of new are there any mechanisms in place to validate the programs and activities. It also enables BROs to see accuracy of the information or to parse which data more clearly the range of programs and activities are most useful to analyze. Capacity to evaluate across ministries, and to identify potential overlaps performance information will understandably that may exist. take time to build. The pace of capacity building, however, could be affected by the degree to Managing the change process was at the which senior policy makers or Parliament demand forefront of OBB implementation and was performance evaluation as an input to their addressed by MOF from multiple angles. From decision-making and oversight, respectively. the start, MOF recognized the challenges inherent in implementing a complex reform process The most challenging part of any PBB reform is and created a dedicated unit to manage OBB to create and sustain demand for performance implementation. It then gave this unit access to information. Demand can be reflected at multiple both international and local consultants to help levels within the government, as well as external backstop staff during the development process. to the government. Presenting information in Communication and outreach to stakeholders new ways that are informative and useful for each across government figured prominently in the audience is part of the equation, and potentially change management plan, and substantial time could be developed over time in Malaysia. But and effort were devoted to developing a training- human resource and career management practices of-trainers approach to build capacity in developing can also help encourage a performance orientation results frameworks. Although there were some among managers and directors. In Malaysia, as in initial starts and stops, officials learned to pace the many other countries, human resource policies are reform roll-out in line with their capacity to work generally set centrally and not driven by MOF. While with line ministries on their results frameworks. OBB makes program managers directly responsible for program performance, it did not usher in major The design of a comprehensive IT system to changes to the reward or recognition systems support OBB reflected foresight, although of government. Such changes can contribute to actual implementation has been slower than program performance, the quality of performance expected. Substantial work remains to realize the information, and, in turn, to the sustainability of the vision that was laid out for the MyResults system. demand for such information. However, if the remaining modules are fully developed and rolled out as planned, MOF will have succeeded in creating a single online system for ministries to input their budget submissions, plan expenditures during the year, and report on non-financial performance. Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting 31 Lessons from International Experience The opportunity to link budget allocations to program performance has been a compelling selling point for PBB over the past decade, although the reality has often fallen short of expectations. Consequently, many of the countries that have been leaders in PBB have been progressively taking stock of what has worked and what has not, and applying those lessons to the next generation of PBB. The World Bank has helped curate some of the international experiences in a book called “Toward Next- Generation Performance Budgeting,” published in 2016. 32 Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting Lessons from International Experience Drawing on a series of case studies from countries across the world, the authors have attempted to synthesize some lessons for countries that are still on the journey. The ten lessons below are adapted from the book, with some refinements. 1. Set realistic objectives of what PBB can achieve based on the political and administrative context: rarely does PBB lead to major changes in budget allocations, but it can contribute to better service delivery in select areas 2. Create space for performance discussions to go beyond the tight annual budget cycle: understanding the causes and remedies of poor performance may take more time and may need to be delinked 3. Take into account the administrative and analytical capacity constraints that exist: it can be counter-productive to pursue government-wide reforms if capacity is limited to manage it; meanwhile invest in expanding capacity (e.g., skills, data systems) 4. Tightly control the amount of data generated so as not to overload those who review it: excessive data undermines its value, and risks obscuring where the real problems lie; data can be tailored to audiences 5. Prioritize those programs that have a genuine service delivery component: trying to cover all programs to the same standard may dilute attention from those areas that matter most to citizens and where impact could be greatest 6. Avoid creating incentives for “gaming the system” by not exaggerating the importance of performance indicators: gaming undermines credibility of the system, and indicators can only be a starting point for dialogue 7. Diversify the opportunities to obtain performance-related data and to learn from it (e.g., program evaluation, performance audits, spending reviews, learning events, etc.) 8. Create a performance culture through the human resource management policies and practices, and allow time for these to take hold: PBB requires reforms beyond merely the budget process 9. Balance the need for both political and bureaucratic support for reforms to be accepted: both types of champions must see value 10. Take an honest look at past shortcomings and what specific actions are needed to address them: early reformers are not abandoning PBB, but adapting it over time to their context Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting 33 Potential Next Steps for Malaysia 34 Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting Potential Next Steps for Malaysia Drawing on the wider international experience, Malaysia could prioritize its future OBB development along three core dimensions: (1) Encouraging timely and accurate reporting on performance by ministries, when and where it is most relevant; (2) Developing the technical capacity to evaluate performance information and presenting it in ways helpful for senior level decision-making; and (3) Stimulating demand for performance information, possibly by linking it to individual and institutional recognition/reward systems. • Encouraging Performance Reporting: Senior level officials in government have a limited amount of performance information that they can usefully act on. The same can be applied to BROs, although their intake of information would be narrower but deeper. The challenge for MOF officials is to engage different stakeholders to understand how such information can be made more timely and more relevant to the policy decisions of the day. The volume, frequency, and timing of reporting should be structured to fit the needs of different audiences – whether the audience is BROs, the National Budget Director, the line minister, or the Cabinet. • Building Technical Capacity: Ministries of finance are challenged to build high- quality technical capacity to evaluate the data that is generated from government- wide performance frameworks. Some skills/experience may be already available within the MOF, but some may need to be acquired externally (e.g., from consultants) or developed intensively over time. As capacity emerges, MOF may wish to select a limited number of programs to evaluate or assess each year and create space in the budget calendar to use the information consistently. Some countries are known to engage policymakers at an early stage to discuss programs that are of special interest or high risk. Attention also needs to be given to how conclusions can be presented most effectively to different audiences for their action. • Stimulating Demand for Performance Information: Demand for performance information entails developing among program managers a culture of using performance information to enhance their programs. This could be stimulated if MOF were to coordinate with the Cabinet or Prime Minister’s Office to develop options to recognize and reward those managers or entities whose programs are positively evaluated from the start or who have successively implemented changes coming out of an assessment. The objective would be to reinforce for managers and directors that performance matters at the highest levels. Such recognition does not necessarily need to be monetary. Malaysia has a robust culture of public sector management on which to build, and OBB can be a constructive tool to strengthen that even further. Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting 35 ANNEX: The Malaysian Performance Ecosystem OBB operates in a broader context of performance management in Malaysia. Performance budgeting, which constitutes one example of a broader approach to public sector management, places results at its core. Malaysia was an early adopter of the results-based management paradigm, and today, many different performance initiatives can be observed in the public sector. Some Malaysian observers have suggested that harmonization of the different systems should be considered. Performance initiatives in Malaysia can broadly be broken down into three different categories: those dealing with expenditure and revenue management, those dealing with service delivery performance, and those dealing with organizational performance. 36 Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting ANNEX: The Malaysian Performance Ecosystem Performance management in the use of public resources The Auditor General’s Accountability Index (AI) rating system aims to improve performance on financial compliance and controls. The AI rating system was introduced in 2007 as a response to concerns about poor compliance by ministries and agencies with public financial management policies, regulations and statutory requirements. It provides a framework for comparison on the quality of financial management and controls across government bodies, with a weighted index comprising such dimensions as organizational management, internal controls and audits, system and procedural performance compliance, and human resource development. The framework is championed by the Auditor General’s office and appears to have driven improvements in financial management controls, with a significant increase in 4 star ratings (the highest possible score). Box 1 summarizes the key dimensions of the AI rating system. The Economic Planning Unit (EPU) is continuing its effort to enhance the performance monitoring framework for its five-year development plans. The EPU has developed its own “Outcomes Based Approach” (OBA) for the performance monitoring framework for the development planning function, focusing on the achievement of high-level objectives. As with the OBB, the OBA draws on a single unified results framework which is grounded in the five-year development plan; however, the OBA reporting dashboard is intended to measure performance and achievement of high-level outcomes, including the National and Ministerial Key Results Areas, across the whole of government, as opposed to program and activity level achievements of line agencies. The OBA is being developed in consultation with the Performance Unit at the NBO. Performance management in the delivery of public services The Performance Management and Delivery Unit (PEMANDU) has a cross-cutting mandate to drive performance for major economic and service delivery initiatives. In 2010, the Prime Minister of Malaysia launched two major initiatives intended to help Malaysia achieve “high income” status by 2020: the Government Transformation Programme (GTP), and the Economic Transformation Programme (ETP). Both are broadly linked to the framework of Malaysia’s five-year national development plan; the GTP focuses on improvements in seven critical social areas such as health, education and security, while the ETP focuses on developing twelve key areas of the economy. PEMANDU was created to facilitate and oversee delivery of these two programs. PEMANDU developed and deployed a range of delivery mechanisms including a “lab” based approach for developing specific results indicators and action plans across the various program dimensions, and a series of project management mechanisms to monitor, report, evaluate and refine initiatives. Process owners are held accountable through various committees, which at the highest level are chaired by the Prime Minister, and results are reported to the public at regular intervals.3 While the ETP and GTP are grounded in the same high-level policy framework of the national development plan, these initiatives operate independently of the OBB system, with separate processes, an independent timeline, and separate monitoring and reporting functions. 3 For more detailed discussion on PEMANDU, please see World Bank report “PEMANDU: Driving Performance from the Center” (2017) Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting 37 ANNEX: The Malaysian Performance Ecosystem BOX 1 The Auditor General’s Accountability Index (AI) for Financial Management The AI index was first introduced in 2007 as part of the Auditor General’s ongoing efforts to improve financial management and compliance with financial control systems. It is an objective, quantitative assessment of the extent to which auditees, which include Federal and State Government Ministries, Departments, Statutory Bodies, Local Authorities and Islamic Religious Councils, comply with prescribed financial management controls. For federal and state level ministries and departments (M&Ds), compliance is assessed across six dimensions: i. Organizational management control ii. Budgetary control iii. Receipts control iv. Expenditure control v. Trust accounts/trust funds/deposits accounts management vi. Assets and inventory management For federal and state statutory bodies, local authorities and Islamic religious councils, an additional three elements are assessed: vii. Investment management viii. Loans management ix. Financial statement compliance Each dimension is broken down into a set of indicators which is assessed by the Auditor General’s office. Assessments take place on a yearly basis. Dimensions are weighted based on perceived importance; weights differ for M&Ds versus other government agencies. For example, budgetary controls, receipts controls and expenditure controls together comprise 60 percent of the total score for M&Ds, whereas they only comprise 45 percent of the total score for other statutory bodies – reflecting the relative importance of these tasks for M&Ds. The weighted dimensions are used to calculate a score out of 100, on which basis a number of stars (between 1 and 4) are assigned, with 90%-100% being required for the full complement of stars. Source: Auditor Generals Department, Government of Malaysia 38 Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting ANNEX: The Malaysian Performance Ecosystem The National Blue Ocean Strategy (NBOS) under the Ministry of Finance’s National Strategy Unit seeks to deliver low-cost, high-impact public service results. First introduced in 2009, the NBOS was adapted from principles outlined in the eponymous private sector initiative, which focuses on opening uncontested market space and utilizing cost reduction strategies to achieve business results. In the Malaysian public sector, these principles are applied through an annual NBOS summit, in which key stakeholders from all levels of government as well as the private sector come together to identify initiatives which are low cost, high impact and can be rapidly executed. Broadly speaking, projects should be aligned with the national development plan, and are selected on the basis of delivering economic growth and development, as well as enhancing the level of public well-being through service delivery. Examples of projects include the establishment of Urban Transformation Centers, which repurpose existing but underutilized public assets to serve as one-stop shops for services such as utilities and other bill payments, or ID and passport applications. The NBOS reports creating savings in excess of RM721 million over the past five years, and has a number of high profile success stories. The initiative appears to achieve results in part due to the application of the innovative NBOS principles, and in part due to the strong convening power of the NBOS management, which sit in the MOF’s National Strategy Unit. The annual summit, which is chaired by the Chief Secretary of Government, brings together senior managers from across more than 80 ministries and departments, and appears to be effective in bridging government silos to achieve service delivery improvements. Individual ministries and departments may also have performance initiatives related to their specific service delivery responsibilities. For example, the Ministry of Education has the Education Performance and Delivery Unit (PADU) responsible for helping to manage delivery of education initiatives outlined in the Malaysia Education Blueprint. The Blueprint is a 12-year plan (2013-2025) which articulates strategies and action plans to improve education in line with the goals established in the national development plan and the GTP. PADU undertakes such activities as weekly monitoring of KPIs, hosting problem-solving labs, and ensuring regular monitoring and reporting to internal management. There is a financial element, whereby budgets are driven by the activities needed to achieve program objectives under the Blueprint. Formal review includes a bi-annual performance review to assess progress and achievements, and a yearly auditing process where external auditors verify the accuracy of reported results. Other ministries, such as the Ministry of International Trade and Industry, and the Ministry of Agriculture and Agro-based Industry, employ their own internal performance tools in a similar fashion. Organizational performance management The Star Rating Index (SRI) seeks to measure and motivate organizational performance across government ministries and departments. The SRI was first introduced in 2007 and is managed by the Malaysian Modernization and Administrative Planning Unit (MAMPU) under the Prime Minister’s Office. The framework uses performance criteria and indicators determined jointly between MAMPU and the relevant agencies, which cover such areas as customer orientation, continuous improvement, project management capability, human resource development, and financial management. The index is also intended to promote healthy competition across public sector agencies related to organizational performance, and to recognize agencies that have demonstrated high standards of governance and continuous improvement in public service delivery. The index is not grounded explicitly in any national plan or vision, but instead serves to drive organizational and management improvement on an ongoing basis. Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting 39 Additional References on Malaysia’s Budgeting System 1. IMF Technical Assessment Report on OBB Malaysia https://www.imf.org/external/pubs/ft/scr/2015/cr15266.pdf 2. Malaysia Open Data Portal (i.e. MAMPU open data portal) http://www.data.gov.my/data/en_US/group/bajet 3. MOF Circular on OBB (in Malay language) file:///C:/Users/wb502940/Downloads/PB%20(6).pdf 4. MOF 2017 Estimated Federal Expenditure http://www.treasury.gov.my/index.php/en/budget/estimated-federal-expenditure.html 5. MOF Economic Report 2017 (includes information Public Finance) http://www.treasury.gov.my/index.php/en/economy/economic-report.html 6. MOF Website – Stats and Data on Public Finance http://www.treasury.gov.my/index.php/en/economy/economic-data.html 7. MyResults Portal (i.e. OBB reporting and monitoring portal) https://www.myresults.gov.my/portal/ 8. OBB Budget Manual (from MyResults Portal) https://www.myresults.gov.my/portal/panduan/Manual_Bajet.pdf 9. OBB Planning Manual (from MyResults Portal) https://www.myresults.gov.my/portal/panduan/Manual_Perancangan.pdf 10. World Bank GET (Global Experts Team) Note on Performance Budgeting https://openknowledge.worldbank.org/handle/10986/12778 40 Budgeting for Performance in Malaysia: A Review of the Design, Implementation, and Application of Malaysia’s Outcome Based Budgeting CONNECT WITH US wbg.org/Malaysia @WorldBankMalaysia @WB_AsiaPacific blogs.worldbank.org/category/ countries/malaysia