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Approaches and techniques in budgeting

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Approaches and Tecniques in Budgeting: The Philippine Experience
(Phil. Public Fiscal Administration)

Published in: Government & Nonprofit
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Approaches and techniques in budgeting

  1. 1. APPROACHES ANDAPPROACHES AND TECHNIQUES IN BUDGETING:TECHNIQUES IN BUDGETING: THE PHILIPPINETHE PHILIPPINE EXPERIENCEEXPERIENCE Public FiscalPublic Fiscal administrationadministration JoHnnY a. GErardo, ll.b, mPaJoHnnY a. GErardo, ll.b, mPa
  2. 2.  INTRODUCTIONINTRODUCTION  ORIENTATION IN BUDGETINGORIENTATION IN BUDGETING a. Control Orientationa. Control Orientation b. Management Orientationb. Management Orientation c. Planning Orientationc. Planning Orientation  LINE-ITEM BUDGETINGLINE-ITEM BUDGETING  PERFORMANCE BUDGETINGPERFORMANCE BUDGETING a.a. ComponentsComponents 1.1. Functional and Activity ClassificationsFunctional and Activity Classifications 2. Performance Measurements2. Performance Measurements 3. Performance Reports3. Performance Reports
  3. 3. b.b. Attitude Towards Performance BudgetAttitude Towards Performance Budget c. Philippine Experience in Performancec. Philippine Experience in Performance Budgeting ProblemBudgeting Problem 1. Lack or Absence of Performance Measures1. Lack or Absence of Performance Measures 2. Problems on Personnel2. Problems on Personnel 3. Organization3. Organization 4. Legislative4. Legislative  PLANNING, PROGRAMMING ANDPLANNING, PROGRAMMING AND BUDGETING SYSTEMBUDGETING SYSTEM a History and Developmenta History and Development b. Specific Featuresb. Specific Features c. PPBS: The Philippine. Experiencec. PPBS: The Philippine. Experience d. An Assessment of PPBSd. An Assessment of PPBS
  4. 4.  ZERO-BASE BUDGETINGZERO-BASE BUDGETING a. Introduction and definitiona. Introduction and definition b. Features and Objectivesb. Features and Objectives c. Basic ZBB Termsc. Basic ZBB Terms d. The ZBB Processd. The ZBB Process e. ZBB in the Philippinese. ZBB in the Philippines f. An Appraisal of ZBBf. An Appraisal of ZBB  CONCLUSIONCONCLUSION
  5. 5. INTRODUCTIONINTRODUCTION  American-introduced, American-American-introduced, American- installed, and for a while Americaninstalled, and for a while American supervisedsupervised  American influence in local fiscalAmerican influence in local fiscal administration is most apparent in theadministration is most apparent in the area of budgetingarea of budgeting  American themselves set-up theAmerican themselves set-up the administrative system in the Philippinesadministrative system in the Philippines when the latter was still a colony of thewhen the latter was still a colony of the United States.United States.  This system was largely unchangedThis system was largely unchanged even after the granting of theeven after the granting of the independence and our transition fromindependence and our transition from the various regimes to the presentthe various regimes to the present Republic.Republic. back
  6. 6. ORIENTATION INORIENTATION IN BUDGETINGBUDGETING The stages in the evolution ofThe stages in the evolution of the United States’ federalthe United States’ federal government budget aregovernment budget are characterized, according tocharacterized, according to Allen Schick, by three majorAllen Schick, by three major orientation: control,orientation: control, management and planning.management and planning. back
  7. 7. CONTROLCONTROL ORIENTATIONORIENTATION It is the process of enforcingIt is the process of enforcing limitations and conditions setlimitations and conditions set in the budget and inin the budget and in appropriations, and ofappropriations, and of securing compliance with thesecuring compliance with the spending restrictions imposedspending restrictions imposed by central authorities.by central authorities. back
  8. 8. ManagementManagement OrientationOrientation It involves the use ofIt involves the use of budgetary authority at bothbudgetary authority at both agency and central levels toagency and central levels to ensure the efficient use ofensure the efficient use of staff and other budgeting, thestaff and other budgeting, the focus is on agency activitiesfocus is on agency activities back
  9. 9. PLANNING ORIENTATIONPLANNING ORIENTATION It is the process of determiningIt is the process of determining public objectives and the evaluationpublic objectives and the evaluation of alternative programs. To use theof alternative programs. To use the budget for planning, centralbudget for planning, central authorities must have informationauthorities must have information concerning the purposes andconcerning the purposes and effectiveness of programs. They musteffectiveness of programs. They must also be informed of multi-yearalso be informed of multi-year spending plans and of the linkagespending plans and of the linkage between planning, spending, andbetween planning, spending, and
  10. 10. Three Important developmentsThree Important developments influencedinfluenced the evolution from a management to athe evolution from a management to a planning orientation (Schick)planning orientation (Schick)  Economic analysis- the emergence of macroEconomic analysis- the emergence of macro and micro analysis has had an increasingand micro analysis has had an increasing part in the shaping of fiscal and budgetarypart in the shaping of fiscal and budgetary policy;policy;  The development of new information andThe development of new information and decision technologies has enlarged thedecision technologies has enlarged the applicability of objective analysis toapplicability of objective analysis to policymaking; andpolicymaking; and  There has been a gradual convergence ofThere has been a gradual convergence of planning and budgetary processes.planning and budgetary processes.
  11. 11. CharacteristicsCharacteristics ControlControl ManagementsManagements PlanningPlanning Personnel SkillPersonnel Skill Accounting objectsAccounting objects AdministrationAdministration EconomicsEconomics Information focusInformation focus ExecutionExecution ActivitiesActivities PurposesPurposes Key budget stage (central)Key budget stage (central) DiscreteDiscrete Preparation Discrete/Preparation Discrete/ ActivitiesActivities PreparationPreparation Breath of measurementBreath of measurement FiduciaryFiduciary EfficiencyEfficiency ComprehensiveComprehensive Role of Budget agencyRole of Budget agency Upward aggregativeUpward aggregative Upward aggregativeUpward aggregative Policy DownwardPolicy Downward disaggregatedisaggregate Decisional-flowDecisional-flow IncrementalIncremental IncrementalIncremental TeleticTeletic Type of Choice ControlType of Choice Control ResponsibilityResponsibility CentralCentral OperatingOperating OperatingOperating Management ResponsibilityManagement Responsibility DispersedDispersed CentralCentral SupervisorySupervisory Planning ResponsibilityPlanning Responsibility DispersedDispersed DispersedDispersed CentralCentral Budget-AppropriationsBudget-Appropriations classificationsclassifications SameSame SameSame DifferentDifferent Appropriations-organizationalAppropriations-organizational linklink DirectDirect DirectDirect CrosswalkCrosswalk
  12. 12. LINE-ITEM BUDGETLINE-ITEM BUDGET APPROACHAPPROACH  Gives emphasis on listing of objects for itemizedGives emphasis on listing of objects for itemized expenditures-supplies, personnel, equipment-expenditures-supplies, personnel, equipment- without much regard for the purposes ofwithout much regard for the purposes of programs for which such items are proposed.programs for which such items are proposed.  Also called “Item of Expenditure Approach”Also called “Item of Expenditure Approach”  Manifestation of process budgetary, “incremental,Manifestation of process budgetary, “incremental, fragmented, non-programmatic and sequential.fragmented, non-programmatic and sequential.  Little explicit consideration of objectives andLittle explicit consideration of objectives and policies and almost no search for alternatives.policies and almost no search for alternatives.
  13. 13. According to Robert Golembiewski,According to Robert Golembiewski, (Percolate-up characteristics)(Percolate-up characteristics)  It is the chief executive issues a call for estimatesIt is the chief executive issues a call for estimates which are generated from belowwhich are generated from below  Line item is the product of many “factorings”Line item is the product of many “factorings” beginning at low organization levels whose requestsbeginning at low organization levels whose requests were aggregated and perhaps trimmed as they rosewere aggregated and perhaps trimmed as they rose through an hierarchy.through an hierarchy.  Lessens the top executive’s control over planningLessens the top executive’s control over planning and programmingand programming  Fait accompli, by the time it reaches the topFait accompli, by the time it reaches the top executive.executive.  Adopted through the enactment of CommonwealthAdopted through the enactment of Commonwealth Act No. 2546, --Budget Act of 1937.Act No. 2546, --Budget Act of 1937.
  14. 14. Advantages of Line-Item budgetAdvantages of Line-Item budget approach (Schick)approach (Schick)  It enables central authorities to control inputs; that is, toIt enables central authorities to control inputs; that is, to control the cost of inputs before the expenditure is made orcontrol the cost of inputs before the expenditure is made or obligated.obligated.  It provides external control by legislators and centralIt provides external control by legislators and central monitors who are not beholden to a particular agency.monitors who are not beholden to a particular agency.  Line-item control is especially effective for salaries andLine-item control is especially effective for salaries and purchases, which together account for the bulk of statepurchases, which together account for the bulk of state government spending, perhaps 90 percent or more in somegovernment spending, perhaps 90 percent or more in some instances.instances.  Control is uniform.Control is uniform.  Control is comprehensive.Control is comprehensive.  Control is exact.Control is exact.
  15. 15.  There are multiple opportunities toThere are multiple opportunities to control.control.  Both aggregate and detailed controlBoth aggregate and detailed control are promoted.are promoted.  Line-item controls establish the basisLine-item controls establish the basis for budget cutting.for budget cutting.
  16. 16. Why do agencies, despite frequent disclaimers, prefer the line-item budget even with the introduction of the performance budgeting type in the 1950’s?  Line item budgeting gives agencies plenty of opportunities to manipulate the facts to their advantage and considerable leeway in estimating the projected benefits of proposed activities.  Agencies are able to express their subjective interpretation of anticipated benefits without being encumbered by analytical instruments. Nor are they required to weigh in a systematic and uniform manner the cost effectiveness of their proposals.  Budgeting by object obtains “the best care” for the agency.
  17. 17. Philippine Experience of line- item budget  During the legislation or authorization phase of the line-item budget, the legislature wielded so much influence on agencies of their choice.  Through the line-item budget, the lawmakers were able to pinpoint “objects of future choice” especially those referring to new positions. back
  18. 18. PERFORMANCE BUDGETING Known as “activity” or “functional” budgeting, the Hoover Commission succeeded in creating a feeling of novelty and excitement for the post-war generation of public administrators. The objects of expenditures are deemed as significant factors in relation to what they are used for and not in relation to their specific character.
  19. 19. Hoover Commission Report to US Congress in February 1949 explained the meaning of performance budgeting “We recommended that the whole budgetary concepts of the Federal Government should be refashioned by the adoption of a budget based upon function, activities, and projects, this we designate as a performance budget. “Such an approach would focus attention upon the general character and relative importance of the work to be done, or upon the service to be rendered, rather than upon the things to be acquired such as personal services, supplies, equipment, and so on. The latter objects, are after all, only the means to an end. The all important thing in budgeting is the work or service to be accomplished, and what that work or service will cost.”
  20. 20. The salient features of a performance budget and its basic differences from the traditional line-item budget are depicted in this comprehensive definition of the concept. A performance budget is one which states: The short term and long term goals in the major functional areas for which funds are requested; The programmes in each function and activities or projects in each programme proposed for the accomplishment of the goals in the various functional areas;
  21. 21. The cost of the programs and activities or projects proposed; The qualitative and quantitative data for the program and activities proposed; The organization units responsible for carrying out the programmes; The sources and amount of all money receipts and expenditures; and The units of work measurement which measure the results of programs, projects and activities.
  22. 22. A performance budget is in essence a work-plan of the government which specifies the concrete proposals to be established during the financial year. These systems serve as a continuous check on actual performance in terms of work as well as of expenditure against the approved budget. back
  23. 23. COMPONENTSCOMPONENTS Performance Budget Techniques. LikePerformance Budget Techniques. Like all other budget approaches,all other budget approaches, performance budgeting has itsperformance budgeting has its distinctive methods. While these havedistinctive methods. While these have not been described comprehensively innot been described comprehensively in the literature, the main elements can bethe literature, the main elements can be inferred from the practices ofinferred from the practices of governments and the proposals ofgovernments and the proposals of reformers. The common components ofreformers. The common components of performance budgeting systems are:performance budgeting systems are: activity classifications, performanceactivity classifications, performanceback
  24. 24. FUNCTIONAL andFUNCTIONAL and ACTIVITYACTIVITY CLASSIFICATIONSCLASSIFICATIONS • Performance budgeting places considerablePerformance budgeting places considerable emphasis on redesigning expenditure accountsemphasis on redesigning expenditure accounts and grouping expenses into functional and activityand grouping expenses into functional and activity categories. In performance budgeting technology,categories. In performance budgeting technology, a function refers to a group related activities fora function refers to a group related activities for which a governmental unit is responsible.which a governmental unit is responsible. Functions such as public safety, health, andFunctions such as public safety, health, and transportation, are divisible into specific groupingstransportation, are divisible into specific groupings of work and expenditures. Ex. the health activitiesof work and expenditures. Ex. the health activities of government include food inspection, theof government include food inspection, the licensing of doctors, and the operation of clinics.licensing of doctors, and the operation of clinics. back
  25. 25. PERFORMANCEPERFORMANCE MEASUREMENTSMEASUREMENTS • Measurement is essential to the success ofMeasurement is essential to the success of performance budgeting. Performance measurementsperformance budgeting. Performance measurements generally are derivatives of cost accounting andgenerally are derivatives of cost accounting and scientific management. Adopted from costscientific management. Adopted from cost accounting are methods of measuring the total oraccounting are methods of measuring the total or partial cost of each unit of production or service;partial cost of each unit of production or service; from scientific management, techniques for relatingfrom scientific management, techniques for relating units of input (such as labor) to quantities of output.units of input (such as labor) to quantities of output. In its application to government, cost accounting isIn its application to government, cost accounting is more often used for ascertaining than for controllingmore often used for ascertaining than for controlling costs.costs. Scientific management- measures the effortScientific management- measures the effort Cost accounting- measures the costCost accounting- measures the cost back
  26. 26. PERFORMANCEPERFORMANCE REPORTSREPORTS • Reports are a special type of performanceReports are a special type of performance measurement, a retrospective assessment of whatmeasurement, a retrospective assessment of what as accomplished with budgeted resources. Theas accomplished with budgeted resources. The performance report can either be an interim-auditperformance report can either be an interim-audit or a post-audit of work and costs. It compares theor a post-audit of work and costs. It compares the actual cost and accomplishment with what wasactual cost and accomplishment with what was projected in the project. A performance report mayprojected in the project. A performance report may show deviations thereby prodding managers orshow deviations thereby prodding managers or budgeters to take corrective actions. A report maybudgeters to take corrective actions. A report may lead to a reappraisal of performance.lead to a reappraisal of performance.
  27. 27. Advantages of the newAdvantages of the new budgetary system (Hooverbudgetary system (Hoover Commission)Commission)• It gives more comprehensive and reliableIt gives more comprehensive and reliable information to the chief executive, theinformation to the chief executive, the legislative body and the general public onlegislative body and the general public on the policies of government;the policies of government; • It helps individual legislators to understand whatIt helps individual legislators to understand what the government is doing and what the costs are;the government is doing and what the costs are; • It improves legislative examination ofIt improves legislative examination of budgetary requirements and enables thebudgetary requirements and enables the legislative committees to decide more easilylegislative committees to decide more easily the basic expenditure issues each year;the basic expenditure issues each year;
  28. 28. • It makes possible the submission andIt makes possible the submission and consideration of the budget for a shorterconsideration of the budget for a shorter length of time;length of time; • It enables the administration to placeIt enables the administration to place responsibility upon subordinate officials forresponsibility upon subordinate officials for the clear execution of the provisions madethe clear execution of the provisions made by the legislative;by the legislative; • It permits effective performance in reportingIt permits effective performance in reporting on budgeting and management.on budgeting and management. back
  29. 29. ATTITUDEATTITUDE TOWARDSTOWARDS PERFORMANCE BUDGETPERFORMANCE BUDGET Throughout the performance budget era, thereThroughout the performance budget era, there as persistent confusion over the meaning ofas persistent confusion over the meaning of performance budgeting and program: and othersperformance budgeting and program: and others considered the program budget to be a stepconsidered the program budget to be a step beyond the performance budget.beyond the performance budget. Performance budgeting meant the elevation ofPerformance budgeting meant the elevation of management concerns to central prominence.management concerns to central prominence. Performance budgeting also meant abandoningPerformance budgeting also meant abandoning control traditions which the budget examinerscontrol traditions which the budget examiners had strong interests and over which they servehad strong interests and over which they serve as guardians.as guardians.
  30. 30. Performance budgeting was castigated as tooPerformance budgeting was castigated as too radical and too complicated, particularly with itsradical and too complicated, particularly with its over-refinement in details, which could obscureover-refinement in details, which could obscure the prime purpose of an agency’s program tothe prime purpose of an agency’s program to the point that budgeting becomes a merethe point that budgeting becomes a mere exercise in accounting.exercise in accounting. Expressing faith in common sense in contrast toExpressing faith in common sense in contrast to scientific budgeting traditional budgeters,scientific budgeting traditional budgeters, asserted that “budgeting is 90 percent commonasserted that “budgeting is 90 percent common sense and don’t let anybody tell you anythingsense and don’t let anybody tell you anything else.”else.” Never before was the evolution the PhilippineNever before was the evolution the Philippine budgetary system as colorful and memorable asbudgetary system as colorful and memorable as with the country’s experience in performancewith the country’s experience in performance back
  31. 31. The PhilippineThe Philippine Experience inExperience in Performance BudgetingPerformance Budgeting  Cognizant of the lag in the development of publicCognizant of the lag in the development of public fiscal management in the field of budgeting in thefiscal management in the field of budgeting in the early 1950’s.early 1950’s.  The budget, accounting and auditingThe budget, accounting and auditing modernization project was launched in July 1954modernization project was launched in July 1954 in collaboration of US management.in collaboration of US management.  Like other reform projects implemented under theLike other reform projects implemented under the broad US technical assistance program in thebroad US technical assistance program in the Philippines, budgetary improvements representedPhilippines, budgetary improvements represented an attempt to initiate requisite changes in an areaan attempt to initiate requisite changes in an area relatively neglected in the past.relatively neglected in the past.
  32. 32.  However, it differed from other program in that inHowever, it differed from other program in that in involved a technique that was untested in otherinvolved a technique that was untested in other jurisdictions: performance budgeting.jurisdictions: performance budgeting.  The performance budgeting introduced in theThe performance budgeting introduced in the Philippines as part of the package of reformsPhilippines as part of the package of reforms during the incumbency of late Presidentduring the incumbency of late President Magsaysay by the Economic Survey MissionMagsaysay by the Economic Survey Mission headed by Daniel Bell in 1950.headed by Daniel Bell in 1950.  The purpose of the reforms, including theThe purpose of the reforms, including the modernization of fiscal administration, was to helpmodernization of fiscal administration, was to help the government cope with severe social, economic,the government cope with severe social, economic, and political problems.and political problems.
  33. 33.  The passage of R.A. No. 992 or the Revised BudgetThe passage of R.A. No. 992 or the Revised Budget Act on June 4, 1954, formally launched theAct on June 4, 1954, formally launched the establishment of performance budgeting in theestablishment of performance budgeting in the Philippines. This act required that the wholePhilippines. This act required that the whole budgetary concept be based on the triad of functions,budgetary concept be based on the triad of functions, projects, and activities defined in terms of expectedprojects, and activities defined in terms of expected results.results.  For the part of executive agencies, they pointed outFor the part of executive agencies, they pointed out two factors which they believed made performancetwo factors which they believed made performance budgeting unsuccessful: indifference in the executionbudgeting unsuccessful: indifference in the execution of programs, and lack of understanding on the part ofof programs, and lack of understanding on the part of key operating officials.key operating officials. back
  34. 34. LACK or ABSENCE ofLACK or ABSENCE of PERFORMANCEPERFORMANCE MEASUREMENTSMEASUREMENTS  Units of work measurement characterizeUnits of work measurement characterize performance budgeting. While line-itemperformance budgeting. While line-item budgeting merely lists the items ofbudgeting merely lists the items of expenditures, performance budgeting isexpenditures, performance budgeting is based on programs, projects and activities.based on programs, projects and activities. The formulation of precise and accurateThe formulation of precise and accurate units of work measurement is the mostunits of work measurement is the most critical problem.critical problem.
  35. 35.  The DBM has been in an endless search forThe DBM has been in an endless search for exact work measurement units on which toexact work measurement units on which to base the financial requirements ofbase the financial requirements of governmental agencies. The unit of workgovernmental agencies. The unit of work measurement is the very essence ofmeasurement is the very essence of performance budgeting as it measures theperformance budgeting as it measures the results of agency programs and activities.results of agency programs and activities.  The attainment of accurate workThe attainment of accurate work measurement units depends largely on ameasurement units depends largely on a common understanding and frameworkcommon understanding and framework between the central budget agency and thebetween the central budget agency and the operating agencies.operating agencies. back
  36. 36. PERSONNELPERSONNEL  Performance budgeting is hamperedPerformance budgeting is hampered by the lack or absence of personnelby the lack or absence of personnel processing necessary technical skillsprocessing necessary technical skills and competencies such as managementand competencies such as management and cost accounting. The responsibilityand cost accounting. The responsibility for preparing the budget shifts fromfor preparing the budget shifts from the accountants to the manager whothe accountants to the manager who has to express his agency’s plans inhas to express his agency’s plans in terms of programs and projects.terms of programs and projects. back
  37. 37. ORGANIZATIONORGANIZATION  Performance budgeting demanded no less than aPerformance budgeting demanded no less than a restructuring of the government’s organizationalrestructuring of the government’s organizational system.system.  Out of 50 plans presented in the Congress inOut of 50 plans presented in the Congress in 1955, only one was approved and out of 53 plans1955, only one was approved and out of 53 plans in 1956, 20 were rejected.in 1956, 20 were rejected.  For those plans which were passed into law,For those plans which were passed into law, complicated problems led to an overweight,complicated problems led to an overweight, overstaffed, and sufficient bureaucracy.overstaffed, and sufficient bureaucracy.  Such frustrations in streamlining theSuch frustrations in streamlining the government’s organizational structure impededgovernment’s organizational structure impeded the success of performance budgeting whichthe success of performance budgeting which requires logical, rational, and efficientrequires logical, rational, and efficient organizational structure.organizational structure. back
  38. 38. LEGISLATIVELEGISLATIVE  Lack of congressional support added to theLack of congressional support added to the unsuccessful implementation of performanceunsuccessful implementation of performance budgeting. Initial support leading to R.A. No.budgeting. Initial support leading to R.A. No. 992 eventually changed to downright hostility on992 eventually changed to downright hostility on the part of the Congress.the part of the Congress.  A leading authority on Philippine budgeting,A leading authority on Philippine budgeting, remarked that “the most depressing reason forremarked that “the most depressing reason for the present superficial adoption of performancethe present superficial adoption of performance budgeting in the government is the completebudgeting in the government is the complete reversal of Congress with respect to performancereversal of Congress with respect to performance budgeting.”budgeting.” back
  39. 39. PLANNING,PLANNING, PROGRAMMINGPROGRAMMING andand BUDGETINGBUDGETING SYSTEMSYSTEM back
  40. 40. HISTORY andHISTORY and DEVELOPMENTDEVELOPMENT  It was originally developed by theIt was originally developed by the Rand Corporation in Sta. Monica,Rand Corporation in Sta. Monica, California, for use by the US Air force.California, for use by the US Air force. PPBS was adopted in 1961 by thePPBS was adopted in 1961 by the Defense Secretary MacNamara for hisDefense Secretary MacNamara for his department’s operations.department’s operations.  President Johnson issued an executivePresident Johnson issued an executive order on August 1965 instructing allorder on August 1965 instructing all executive departments to adopt PPBS:executive departments to adopt PPBS: thus making this system the decision-thus making this system the decision-
  41. 41.  PPBS is a result of three distinct but closelyPPBS is a result of three distinct but closely related current thoughts in budget-making:related current thoughts in budget-making: economic planning, efficiency ineconomic planning, efficiency in government, and management of nationalgovernment, and management of national economies to control cyclical fluctuationseconomies to control cyclical fluctuations ..  PPBS also offers an answer to the classicalPPBS also offers an answer to the classical question: how does the government allocatequestion: how does the government allocate resources appropriately and rationallyresources appropriately and rationally without resorting to a hit-and-misswithout resorting to a hit-and-miss procedure? PPBS respond to the question byprocedure? PPBS respond to the question by eclectically corporating in the system threeeclectically corporating in the system three distinct administrative processes, namely:distinct administrative processes, namely: strategic planning, management control, andstrategic planning, management control, and operational control.operational control.
  42. 42. PPBS aims to specify (andPPBS aims to specify (and where possible to quantify) thewhere possible to quantify) the objectives or “output” ofobjectives or “output” of government's spending programsgovernment's spending programs and then to minimize the costs.and then to minimize the costs. To do so requires the systematicTo do so requires the systematic use of analysis in connectionuse of analysis in connection with budget formulation,with budget formulation, planning, program developmentplanning, program development and evaluation.and evaluation.
  43. 43.  Smithies defines the purpose : a. toSmithies defines the purpose : a. to improve the basis for major programimprove the basis for major program decisions; b. to subject decision aboutdecisions; b. to subject decision about resources allocation to systematicresources allocation to systematic analysis, comparing alternative coursesanalysis, comparing alternative courses of action in a framework of rationalof action in a framework of rational objectives clearly and especially stated;objectives clearly and especially stated; c. to use the rule of efficiency inc. to use the rule of efficiency in choosing the alternative that optimizeschoosing the alternative that optimizes the allocation of public resources; andthe allocation of public resources; and d. to help responsible officials maked. to help responsible officials make decisions while taking into accountdecisions while taking into account that PPBS is not a mechanicalthat PPBS is not a mechanicalback
  44. 44. SPECIFIC FEATURESSPECIFIC FEATURES  Specifications of objectives to beSpecifications of objectives to be achieved through government spendingachieved through government spending and expenditures;and expenditures;  Existence of a multi-year planning andExistence of a multi-year planning and programming process whichprogramming process which incorporates and uses an informationincorporates and uses an information system to present data in meaningfulsystem to present data in meaningful categories essential to major executivecategories essential to major executive decisions, thus a budget system whichdecisions, thus a budget system which is future and planning-oriented.is future and planning-oriented.
  45. 45.  Selection of a decision from variousSelection of a decision from various alternatives to achieve programalternatives to achieve program objectives where the choice is arrivedobjectives where the choice is arrived at using economic method of analysisat using economic method of analysis such as cost-benefit analysis andsuch as cost-benefit analysis and feasibility studies which leads ofeasibility studies which leads o minimization of costs and comparisonminimization of costs and comparison of costs and benefits, especially whenof costs and benefits, especially when benefits can be quantified.benefits can be quantified.  Existence of analytic capability usedExistence of analytic capability used by the agency’s by permanentby the agency’s by permanent specialized staffs to meet objectives.specialized staffs to meet objectives.
  46. 46.  Existence of a budgeting processExistence of a budgeting process which can take broad programwhich can take broad program decisions, translate them intodecisions, translate them into more refined decisions in a budgetmore refined decisions in a budget context, and present thecontext, and present the appropriate program and financialappropriate program and financial data for presidential anddata for presidential and legislative action; andlegislative action; and  Systematic use of analysisSystematic use of analysis throughout the process, hencethroughout the process, hence holistic and integrative inholistic and integrative inback
  47. 47. PPBS: THE PHILIPPINEPPBS: THE PHILIPPINE EPERIENCEEPERIENCE  The introduction of PPBS brought aThe introduction of PPBS brought a damaging gap between publicity anddamaging gap between publicity and performance. In the US, agencies wentperformance. In the US, agencies went through the motions of preparing PPBSthrough the motions of preparing PPBS documents.documents.  In the Philippines, after the declaration ofIn the Philippines, after the declaration of Martial Law in September 1972, P.D No. 1Martial Law in September 1972, P.D No. 1 called for the reorganization of the entirecalled for the reorganization of the entire government system in accordance with thegovernment system in accordance with the Integrated Reorganization PlanIntegrated Reorganization Plan recommended by the Presidentialrecommended by the Presidential Commission on Reorganization—formulateCommission on Reorganization—formulate
  48. 48.  The same P.D. provided for theThe same P.D. provided for the creation of the NEDA chaired by thecreation of the NEDA chaired by the president himself. The Philippinepresident himself. The Philippine Navy attempted to work out a PPBSNavy attempted to work out a PPBS model for entire Department ofmodel for entire Department of National Defense in 1976.National Defense in 1976.  As a result of PPBS, Filipino scholarsAs a result of PPBS, Filipino scholars and experts read papers in seminars onand experts read papers in seminars on the possible usefulness of PPBS in thethe possible usefulness of PPBS in the Philippine setting.Philippine setting.  Philippine Association of GovernmentPhilippine Association of Government Budget Administration (PAGBA)Budget Administration (PAGBA)
  49. 49.  Even the Career Executive ServiceEven the Career Executive Service Development Program undertakenDevelopment Program undertaken by the Development Academy ofby the Development Academy of the Philippines invariablythe Philippines invariably included an overview of the PPBSincluded an overview of the PPBS in its course modules.in its course modules.  Likewise, course syllabi in fiscalLikewise, course syllabi in fiscal administration, organization andadministration, organization and management, and managementmanagement, and management planning and control courses inplanning and control courses in the NCPAG included assessmentsthe NCPAG included assessments
  50. 50.  Early proponents of PPBS in theEarly proponents of PPBS in the Philippines avoided using thePhilippines avoided using the term to minimize negativeterm to minimize negative reactions to another “importedreactions to another “imported technique”. They preferred to calltechnique”. They preferred to call it the IBS or the Integratedit the IBS or the Integrated Budget System. Despite suchBudget System. Despite such Incognito, it was implied that IBSIncognito, it was implied that IBS or PPBS, like the performanceor PPBS, like the performance budget, was the same animal, onlybudget, was the same animal, only much bigger this timemuch bigger this time
  51. 51.  Local budget officials were veryLocal budget officials were very careful about openly advocating PPBS,careful about openly advocating PPBS, perhaps due to the earlier experiencesperhaps due to the earlier experiences with performance budgeting. However,with performance budgeting. However, they admitted the usefulness of thethey admitted the usefulness of the system in this sense:system in this sense: a. PPBS provides a clear linkagea. PPBS provides a clear linkage between planning and budgeting; andbetween planning and budgeting; and b. PPBS offers techniques whichb. PPBS offers techniques which might help solve the problem ofmight help solve the problem of resource allocation and setting ofresource allocation and setting of positions.positions. back
  52. 52. AN ASESSMENT OFAN ASESSMENT OF PPBSPPBS  Compared to the critics of performanceCompared to the critics of performance budgeting, the critics of PPBS arebudgeting, the critics of PPBS are more outspoken and emphatic in theirmore outspoken and emphatic in their assessment of PPBS implementation.assessment of PPBS implementation.  Topping the list is Aaron WildavskyTopping the list is Aaron Wildavsky whose appraisal of PPBS and politicswhose appraisal of PPBS and politics of the budget process may now beof the budget process may now be considered a classic and from whom aconsidered a classic and from whom a lot of scholars on governmentlot of scholars on government budgeting owe a lot.budgeting owe a lot.
  53. 53.  A positive view of PPBS isA positive view of PPBS is noteworthy. Although presentingnoteworthy. Although presenting no panacea, PPBS offers a logical,no panacea, PPBS offers a logical, objective approach to planningobjective approach to planning and budgeting. Potentiality, PPBSand budgeting. Potentiality, PPBS allows administrators to evaluateallows administrators to evaluate the anticipated results of proposedthe anticipated results of proposed programs and systems alternatives,programs and systems alternatives, and to compare results fromand to compare results from different proposals in search of adifferent proposals in search of a “best” or “satisfying” alternative.“best” or “satisfying” alternative.
  54. 54. With that, one shouldWith that, one should recognize the fact that PPBSrecognize the fact that PPBS is only a tool for budgetaryis only a tool for budgetary forecasting, planning andforecasting, planning and programming. The tool neverprogramming. The tool never makes decision; decision-makes decision; decision- makers who use the datamakers who use the data derived from the tool make thederived from the tool make the choice.choice. back
  55. 55. ZERO-BASEZERO-BASE BUDGETING (BUDGETING (ZBBZBB)) APPROACHAPPROACH back
  56. 56. INTRODUCTION ANDINTRODUCTION AND DEFINITION of theDEFINITION of the CONCEPTCONCEPT  The zero-base approachThe zero-base approach ”revolutionized" the budgetary”revolutionized" the budgetary systems in both developed andsystems in both developed and developing countries. As usual,developing countries. As usual, the trend-setter was the US,the trend-setter was the US, and its gospel was echoed andand its gospel was echoed and adopted by many developingadopted by many developing
  57. 57. According to Phyrr,According to Phyrr, zero-zero- base budgetingbase budgeting is anis an operating, planning andoperating, planning and budgeting process whichbudgeting process which requires each manager torequires each manager to justify his entire budgetjustify his entire budget request in detail, and shiftsrequest in detail, and shifts the burden of proof to eachthe burden of proof to each manager to justify why hemanager to justify why he
  58. 58.  ZBBZBB is a management andis a management and budgeting process whichbudgeting process which necessitates each managernecessitates each manager responsible for a majorresponsible for a major activity, cost center oractivity, cost center or function to justify fully hisfunction to justify fully his budget proposal following abudget proposal following a systematic method ofsystematic method of identifying, analyzing,identifying, analyzing, evaluating, and rankingevaluating, and ranking present and new projects.present and new projects.
  59. 59.  The term “The term “zero-basezero-base” refers to the” refers to the yearly analysis, evaluation, andyearly analysis, evaluation, and justification of each activity,justification of each activity, program or project starting from aprogram or project starting from a “zero” performance level.“zero” performance level.  For the uninitiated, the termFor the uninitiated, the term “zero” in budgeting connotes a“zero” in budgeting connotes a negative impression.negative impression.  However, “However, “zero-basezero-base” really means” really means the analysis of the entire budgetthe analysis of the entire budget back
  60. 60. FEATURES andFEATURES and OBJECTIVES of ZBBOBJECTIVES of ZBB • It is a total budget approach. • It is a budget based on need, not want. • It reallocates resources. • It identifies alternative ways and levels of
  61. 61. In effect, ZBB systemIn effect, ZBB system hopes to achieve thehopes to achieve the following objectivesfollowing objectives :: Strengthen the presentStrengthen the present performance budgetingperformance budgeting systemsystem Eliminate or reduce theEliminate or reduce the funding of low-priorityfunding of low-priority activitiesactivities
  62. 62. Improve the quality of Management and Budget information Encourage the application of improved or new performance measurements back
  63. 63. BASIC ZBB TERMS  Decision Unit is a major activity, group of related activities, cost center or organizational unit which requires significant managerial decisions on performance and funding levels.  Decision Level is the level of the organization responsible for analyzing, reviewing, ranking, and grouping activity justification document. Each division, regional
  64. 64. Three parts of Levels of Performance and Funding Current Level (CL)- level of performance and funding that is required to carry on the year’s service or output level without major policy changed, also referred to as “BUSINESS AS USUAL” level.
  65. 65. ACVITY JUSTIFICATION and DOCUMENT (AJD) DECISION PACKAGE is a document that identifies and describes a specific operation in a manner that enables management to evaluate and rank it against other operations competing for limited resources and to decide whether to approve or disapproved it.
  66. 66. Minimum Level (ML)- level of performance and funding below which an activity is not feasible to operate because it cannot make a constructive contribution towards fulfilling an objective.
  67. 67. ENHANCEMENT LEVEL (EL)- level performance and funding above the current level wherein increased output and service will warrant the service review of higher management; the enhancement level may be divided into EL(1) and EL(2) is higher than EL (1) and is closer to attaining completely the objective of an Activity.
  68. 68. Levels of Performance and Funding besides the following information Objectives Description of activity Alternative methods considered Output performance measurement
  69. 69. RANKING is the process by which higher level managers evaluate an array activity levels (as shown in the decision packages) in descending order of priority. back
  70. 70. THE ZBB PROCESS 8 steps necessary to establish in agency  Development and issuance of agency planning assumption and policy guidelines;  Identification of decision units;  Identification of objectives for each decision unit;  Identification and evaluation of alternative methods of accomplishing objectives;
  71. 71.  Analysis of different levels of performance and funding;  Preparation of justification documents or decision packages;  Ranking of activities at various performance and funding levels; and  Consolidation of activity justification documents and accomplishment of standard budget preparation forms.
  72. 72. 2 major steps (simplified ZBB PROCESS)  Development of decision packages  Ranking back
  73. 73. Development of decision packages For decision units, take activities that are not so low or detailed as to focus too limited options for decision- making, and not so high or broad as to hide major activities and commitments. Consider the time required for analysis and amount of paper work needed.
  74. 74. Set objectives for each activity. They must be operational, measurable and related to the agency’s “what” (response to issue or problems), “how much” (rate of response) and “when”. back
  75. 75. RANKING This is done at levels in the organization. Phyrr stresses that the ranking process has to be started by the manager who directly supervises the operation. Then the manager above him reviews the ranking and consolidates the ranking and consolidates the ranking of all the packages of managers below him.
  76. 76. The ranking is repeated upward until a final ranking is produced at some appropriate organizational level. TWO routes are suggested for this ranking process: 1. Based on the organizational structure and 2. By functional groupings of activities even if such activities cut across present organizational boundaries
  77. 77. Fundamental questions associated with the ranking processes Who will do the ranking?  How will it be done?  What will be the basis for ranking?  What ranking methods will be used?  How will the results be presented? -Well defined and objective answers to these questions will rationally lead to a meaningful ranking process
  78. 78. The heart of ZBB is the ranking process All decisions are listed in the order of decreasing benefit by the managers in charge of them. Package has a price tag attached, there is a cumulative cost as the list proceeds in descending order. back
  79. 79. ZBB in the PHILIPPINES Introduced in the Philippines in 1977 during the preparation of the Calendar year 1978 national budget. The legal basis of adopting ZBB is found in Section 8 of PD 1177 (Budget Reform Decree).
  80. 80. Establish “bench marks” for outlays category: Personal services Maintenance and operating expenses, and Equipment
  81. 81. It is better that a ‘bench mark be established for each category rather than proceed to evaluate requests equal to or in excess of previous limits.
  82. 82. Justifications for adopting ZBB in the Philippine Budget system: reasons advanced by the Office of Budget and Management Lack of managerial involvement in budgeting Limited priority setting of projects and activities Lack of performance measurements and cost benefit analysis Unnecessary spending
  83. 83. Weak planning and budgeting linkage Inadequate probing organization and methods of operation Ineffective allocation resources back
  84. 84. An Appraisal of ZBB Benefits claimed after the implementation of ZBB: (Texas) No. of budget forms were reduced ZBB provided a procedure for focusing evaluation of resources only for those activities with the highest contribution to profit.
  85. 85. In Georgia: The establishment of a financial planning phase before the budget was prepared Greater involvement in the budgetary process by personal in the lower organizational levels of state government.
  86. 86. Negative side in New Jersey: Problems were encountered in different areas: Resistance to the system Lack of understanding of the basic concepts of ZBB Poor quality of information submitted
  87. 87. Weakness or constraints in full implementation of ZBB in the Philippine system • Support from top management • Translation of concepts • Management of system •Claudio has added certain requirements: •Clear-cut organizational structure which defines duties and responsibilities of each manager •Clearly stated functions and objectives of the department or bureau •Competent managers •Well defined outlines and planning assumptions
  88. 88. Defects or weaknesses in the execution of ZBB Insufficient training of agency personnel on the intricacies of implementing ZBB. Lack of guidance in implementing ZBB, especially in the ranking system; Lack of central staff fully trained in ZBB so as to guarantee an effective reecho or orientation to agency budget and planning personnel;
  89. 89. Lack of appreciation and real support from dept heads and officials Emphasis on forms or too much paperwork Difficulty of translating the ZBB concepts to more comprehensible, concrete terms which are socially digestible and palatable to end-users back
  90. 90. Conclusion:Conclusion:  The Philippine experience in applyingThe Philippine experience in applying various approaches to budgeting hasvarious approaches to budgeting has been described.been described.  These were adopted from approachesThese were adopted from approaches developed in the united states- startingdeveloped in the united states- starting with the line item budget, then thewith the line item budget, then the performance budget, on to the PPBS andperformance budget, on to the PPBS and ZBBZBB
  91. 91.  What budget approach are we actuallyWhat budget approach are we actually using in the Philippine budgeting atusing in the Philippine budgeting at present:present: The chief of the financial managementThe chief of the financial management office of a leading agency, whenoffice of a leading agency, when confronted with this question, answered:confronted with this question, answered: “at the agency level, we are actually“at the agency level, we are actually subjected to all these approaches. Insubjected to all these approaches. In budget preparation, we are enjoined to usebudget preparation, we are enjoined to use ZBB; in budget authorization andZBB; in budget authorization and accountability, it is performance budgetingaccountability, it is performance budgeting which sets the standards.which sets the standards.
  92. 92. Few Observations onFew Observations on budgetingbudgeting Approaches used inApproaches used in the Philippinesthe Philippines  These are from the United States.These are from the United States.  It cannot be claimed with great confidenceIt cannot be claimed with great confidence that these approaches have beenthat these approaches have been completely successful in making thecompletely successful in making the budget an effective instrument of fiscalbudget an effective instrument of fiscal policy.policy.  These approaches are premised onThese approaches are premised on rationality.rationality.
  93. 93.  Reference:Reference: Briones, L. Public Fiscal Administration. UP-Briones, L. Public Fiscal Administration. UP- NCPAGNCPAG

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