Contents of the Presentation• Definition of Budget• Definition of Budgeting• Importance of Budgeting• An Overview about types of Budgeting• Performance based budgeting: • MFRs • Definition • The basics of PBB • Performance Information Fundamentals • Performance Measures and the Budget • Evaluation and performance budgeting • Role of Evaluation • Advantages & Disadvantages of PBB • References
Budget• A budget (from old French bougette, purse) is a financial plan and a list of all planned expenses and revenues. It is a plan for saving, borrowing and spending.• A budget can be deﬁned as ‗a tool used to relate planned resource consumption to a period of time‘ (Mellett et al. 1993).• A "budget" is a plan for the accomplishment of programs related to objectives and goals within a definite time period, including an estimate of resources required, together with an estimate of resources available, usually compared with one or more past periods and showing future requirements This deﬁnition highlights the three main features of a budget:• It is a plan that is developed before an event has occurred;• It can include a broad range of resources – not just money;• It relates to a specific period of time.
Budgeting• Budgeting is the systemic way to allocate resources, it answers ‗Who gets What‘ question.• Budgeting is making sure that youre spending less than youre bringing in and planning for both the short- and long-term.• Budgeting is an important component of financial success. Its not difficult to implement, and its not just for people with limited funds. Budgeting makes it easier for people with incomes and expenses of all sizes to make conscious decisions about how theyd prefer to allocate their money
Importance of Budgeting:Why Should I Budget?• A Process of tracking your expenses• A safety valve to prevent over expenditures• Financial control of inputs• Management of ongoing activities• Planning and setting priorities• Accountability• Ensures that the finances are spent for true purpose of spending. Controlling your financial affairs requires a budget. For many people, the word "budget" has a negative connotation. Instead of thinking of a budget as financial handcuffs, think of it as a means to achieve financial success.• Whether you make thousands of dollars a year or hundreds of thousands of dollars a year, a budget is the first and most important step you can take towards putting your money to work for you instead of being controlled by it and forever falling short of your financial goals.
Importance of Budgeting:Why Should I Budget?(cont)• To those of you my Fellows..!! who think you know where your money goes without keeping detailed records, I issue this challenge: keep track of every cent you spend for one month. I promise youll be surprised and perhaps shocked by how much some of your "small" expenditures add up to.• Budgeting and tracking your expenses gives you a strong sense of where your money goes and can help you reach your financial goals, whether they are saving for a down payment on a house, starting a college fund for your kids, buying a new car, planning for retirement, paying off the credit cards, or saving for that trip to Ayubia.
Types of Budgeting1. The Traditional Line-Item Budget2. Incremental Budgeting2. Zero Based Budgeting (ZBB)3. Performance based Budgeting (PBB)
1. Line-Item BudgetThe traditional line-item budget, wherein legislators specifyallowable spending on inputs (salaries, supplies, travel) wasfirst developed to guard against the misuse of public funds.Line Item Budgeting is arguably the simplest form ofbudgeting, this approach links the inputs of the system to thesystem. These budgets typically appear in the form ofaccounting documents that express minimal informationregarding purpose within the system.
2. Incremental BudgetingOften used with line-item budget, assumes thatfunding for existing programs will continue atabout the same level as in the past.
3. Zero Based Budgeting (ZBB)• Zero-based budgeting, by contrast, assumes the previous year‘s budget to be quite irrelevant and begins from scratch to identify and cost all of the inputs that will be required to achieve the desired level of activity.• Zero-based budgeting is a response to an incremental decision making process where the budget of a given fiscal year (FY) is largely decided upon by the existing budget of FY-1. In contrast to incrementalism, the allocation of scarce resources—funding—is determined from a zero-sum accounting method.
4. Performance Based Budgeting(PBB)• Performance budgeting aims to improve the effectiveness and efficiency of public expenditure, by linking the funding of public sector organizations to the results they deliver.• It uses systematic performance information (indicators, evaluations, program costings etc) to make this link. The impact of performance budgeting may be felt in improved prioritization of expenditure, and in improved service effectiveness and/or efficiency.
• Performance Based Budgeting attempts to solve decision making problems based on a programs ability to convert inputs to outputs and/or use inputs to affect certain outcomes.• Performance may be judged by a certain programs ability to meet certain objectives that contribute to a more abstract goal as calculated by that programs ability to use resources (or inputs) efficiently—by linking inputs to outputs—and/or effectively—by linking inputs to outcomes. A decision making—or allocation of scarce resources—problem is solved by determining which project maximizes efficiency and efficacy.• Performance budgets hold agencies accountable for what they achieve
Managing for Results (MFR)• Performance budgeting should be viewed in the broader context of a set of related ―managing for‐results‖ (MFR) reforms.• MFR can be defined as the use of formal performance information to improve public sector efficiency and effectiveness. Its fundamental starting point is maximum clarity about the outcomes which government is attempting to achieve, and about the relationship of outputs, activities and resources used to those desired outcomes.• Good strategic planning and business planning are an essential element of MFR.
The Basics of PBB• Objectives.. Organizations should develop strategic plans of what they intend to accomplish. These plans should contain objectives based on outcomes that the public values.• Performance Measures… Based on their strategic plans, organizations should develop specific, systematic measures of the outcome that can be used to determine how well organizations are meeting their objectives. E.g. mortality rates for health programs.• Linkage… Objectives and performance measures are integral parts of budgetary process. Appropriations are linked to organizations results; how well they are meeting their objectives as indicated by performance measures.
Performance Information Fundamentals• ―Outcomes‖ and ―outputs‖ play a central role in all models of performance budgeting, and it is essential for any discussion of performance budgeting that these and related concepts are clearly understood.Performance Concepts: the Results Chain• In the results chain framework, outputs are produced using inputs (resources) via activities and processes, and outputs generate outcomes for the community.
Outputs• Outputs are goods or services – the “products” – which a ministry or other government organization delivers to external parties.• This usually means services delivered to or for the direct benefit of the community. Examples of outputs include: medical treatments; advice received by farmers from agricultural extension officers; students taught; and police criminal investigations.• Most government outputs are services.
Outcomes• Outcomes are the intended impacts of outputs – more precisely, the changes brought about by public programs upon individuals, social structures, or the physical environment. Health inspections of restaurants are an output, the intended outcome of which is that fewer diners fall sick. Criminal investigations are a police output, and reduced crime the outcome.• Many government services aim to achieve more than one outcome. For example, school education aims to increase the level of education of the population. But it also aims, amongst other things, to improve economic performance. Both a higher level of education and a stronger economy are outcomes. Because it is by means of the first of these that the second is achieved, a more educated population is said to be an intermediate outcome, and a stronger economy a higher‐level outcome.• The relation between proximate and high‐level outcomes is one of logical causality (i.e. the proximate outcomes induce the high‐level outcomes).
• The way in which outputs are produced is conceptualized in the results chain in exactly the same way as the use of inputs in production activities and processes.• For example, the treatment which seriously injured person receives in hospital involves the use of a set of inputs (skilled staff, operating equipment and facilities, medical supplies, electricity etc) and a set of activities including anesthesia, surgery and nursing, as well as supporting activities such as supplies and facility management.
Inputs• Inputs, as this example indicates, refer to all inputs, assets and capabilities which are or may be drawn on in the production process to deliver the outputs and outcomes desired.• Although ―inputs‖ is the conventional results chain term, and therefore will be used here, the term ―resources‖ actually captures better the scope of what is referred to.• Thus inputs which contribute to the capability to deliver results include not only equipment and buildings by, for example, organizational culture and staff morale.
Activities• The term activities may seem self‐explanatory, but confusion between activities and outputs is very common. Some examples can help avoid this confusion:• In a hospital, anesthesia and cleaning are activities rather than outputs because they are components of the overall service provided to the patient, rather than the complete service.• The patient can‘t recover through anesthesia or cleaning in isolation, and it is only via the combination of all the necessary activities that the complete service (the output) is delivered.
Performance Measures and the Budget…• There are two basic types of performance information: performance measures and evaluation.. Performance Indicators• Performance indicators are quantitative measures which provide information on the effectiveness and efficiency of programs and organizations. An indicator is representative to the degree to which it succeeds in measuring the dimension of performance which it seeks to measure.• Performance indicators should be selected according to the extent to which they are:• Relevant• Representative• Cost‐effective• Comparable
Objectives..Indicators..Targets• We also need to be careful not to confuse objectives, indicators and targets.• An objective is a statement of what one is trying to achieve – for example “reducing death from HIV/AIDS‖.• By contrast, a performance indicator is quantified (e.g. “the percentage of the population which is HIV/AIDS positive‖, or ―the number of persons dying annually from HIV/AIDS‖).• A target goes one step further and sets a precise aim to be achieved by a specific date (e.g. ―reducing the percentage of HIV/AIDS‐positive persons in the population by at least one‐third by 2020‖).
Linking Funding to Outputs Challenges…Issues!!• The main focus in PB system is the creation of links between the quantity of output (i.e. volume of services provided) and the level of funding.1. Heterogeneous Outputs:• For many outputs produced by government, there is a much stronger link between funding provided and outputs delivered (or deliverable) than is the case for outcomes.• However, quite a few government services are not standardized. They are, rather, heterogeneous outputs. This means that the level of service provided to different clients, or in different cases, is deliberately varied so as to address differences in client conditions or circumstances.
• Police criminal investigations are a classic example – the amount of effort put in per case, even for the same types of case (e.g. murder investigations) varies enormously depending on the circumstances of the case.• Even in school education, which is quite standardized for the great majority of students heterogeneity is present when additional teaching and care activity is devoted to children suffering an intellectual or physical disability.• This means that these forms of performance budgeting can only be applies selectively to the right types of services.
2. Contingency There is one other type of service for which tight links between outputs and funding are problematic. This is contingent capacity outputs, (which are subject to chance) of which a fire department is a good example.• The fire department maintains capacity to provide at very short notice an output (firefighting) for which the demand is highly unpredictable. It would be unrealistic to seek to build a very close link between the number of fires attended by the fire service and the level of funding.• Fire services cannot therefore be funded on a per‐output basis, but must instead be funded in such a way as to deliver a certain level of capacity to fight fires.
3. Quality with Quantity• There is also the question of potentially linking funding to output quality.• In funding only for output quantity, one creates incentives for agencies to cut costs by reducing quality. Including a quality component in funding could, in principle, resolve this problem. In practice, however, this is not easy, given the limits to our capacity to measure quality and the consequently highly imperfect nature of most quality measures.• In general, the best hope for linking funding to output quality is through some element of performance bonus funding based on quality measures (similar to outcome bonuses) – in other words, by adding on to a system in which the main funding is based on output quantity a small additional element of quality‐based funding.
Evaluation and Performance Budgeting• Performance budgeting is often represented as being only about the use of performance indicators in the budget. This is wrong, because it overlooks the crucially important role of evaluation. A Definition of Evaluation• ―The systematic and objective assessment of an ongoing or completed project, program or policy, its design, implementation and results. The aim is to determine the relevance and fulfillment of objectives, development efficiency, effectiveness, impact and sustainability. An evaluation should provide information that is credible and useful, enabling the incorporation of lessons learned into the decision– making process of both recipients and donors.• Evaluation also refers to the process of determining the worth or significance of an activity, policy or program. An assessment, as systematic and objective as possible, of a planned, ongoing, or completed development intervention.‖ Keith McKay (2007), How to Build M&E Systems to Support Better Government (World Bank Independent Evaluation Group).
Role of Evaluation in PBB• Identify components of programs which can potentially be cut: this means programs which are not cost‐effective and which cannot readily be made cost‐effective through policy design or management changes.• Identify savings which can be made by improving the efficiency of service delivery. Evaluating Program Effectiveness• The evaluation of program effectiveness has a particularly important role to play in those forms of performance budgeting which focus on the allocation of resources in the government‐wide budget, of which program budgeting is the most important form. As we have seen, this means in particular that:• Decisions about expenditure prioritization – where to allocate limited resources – are informed by good information on program effectiveness,• Decisions about funding for specific ministries and agencies – and in particular decisions on their requests for additional resources – are informed by reliable information on how effectively the ministry or agency has used funding it has received in past budget.• Evaluation is crucial in this context because performance indicators are frequently insufficient in isolation to permit judgments on program or agency effectiveness.
Pros and cons of PBB• Limit vs. Target PBB works with targets and goals. It may set a goal to put computers in 100 hospitals, for instance, instead of setting a limit on how much money can be spent on computers. While this has its advantages, it also creates difficulties. For instance, how much money should be spent on computers? What types of computers are best suited for the hospitals in question? A budget with limits helps answer these questions. A budget with only targets can be too nebulous, leading to inaccurate forecasts and over-expenditure.• Measurement Issues Another problem with the target system that PBB uses is measurement. Even if an organized budget can be developed and the project is carried through to completion, defining completion can pose problems. Some goals can be vague e.g.-- improving technology in a district hospital. An organization may have conflicting views on when that goal has been reached, which makes it difficult to spot an end for the project and a turning point for the budget.
• Cost Analysis Because PBB is so vague, it does not present a clear cost framework for organizations to follow. In other words, PBB can create a lot of extra work for analysts. They have to focus on a target, but also perform separate cost analysis to set individual prices on the steps involved. This extra cost analysis is a drain on funds and adds confusion to the budget.• Flexibility Problems Flexibility is one of the primary advantages of PBB. But it also opens the door for broad changes that can make previous cost analyses and budgets obsolete. PBB places a great deal of strategic power in the hands of public leaders and programs, but these have a habit of changing. A new director may be appointed and switch the target to 500 computers in hospitals, which requires a complete reworking of the budget.
References:• CLEAR Manual Performance Budgeting by Marc Robinson• Potter, B. and J. Diamond (1999), Guidelines for Public Expenditure Management (Washington: IMF),.• Schiavo‐Campo, S. & D. Tommasi (1999), Managing government expenditure (Manila : Asian Development Bank), obtainable at http://www.adb.org/documents/manuals/govt_expenditure/• Robinson, M (2007), ―Performance Budgeting Models and Mechanisms‖ in M. Robinson (ed.)• Performance Budgeting: Linking Funding and Results.• WikiPedia• Investopedia• Robinson, M (2007), ―Informing Performance Budgeting‖ and ―Results Information‖, in M. Robinson (ed.) Performance Budgeting: Linking Funding and Results.• HM Treasury et al (2001), Choosing the Right Fabric – a Framework for Performance Information, obtainable at http://archive.treasury.gov.uk/performance_info/fabric.html.• Royal Statistical Society (2003), Performance Indicators: Good, Bad and Ugly, obtainable at• http://www.rss.org.uk/pdf/PerformanceMonitoringReport.pdf.• eHow.com http://www.ehow.com/info_8630771_disadvantages- performancebased-budgeting• And Many other websites