2. PERFORMANCE - BASED
BUDGETING
By: Sumayya Naseem
Optometrist (PICO), C.O.T & C.O.A (JCAHPO U.S.A), MMSPH Student (Abasyn University)

3. 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

4. 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.

5. Budgeting
• Budgeting is the systemic way to allocate
resources, it answers ‗Who gets What‘ question.
• Budgeting is making sure that you're spending less
than you're bringing in and planning for both the
short- and long-term.
• Budgeting is an important component of financial
success. It's not difficult to implement, and it's 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 they'd prefer to
allocate their money

6. 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.

7. 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 you'll 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.

8. Types of Budgeting
1. The Traditional Line-Item Budget
2. Incremental Budgeting
2. Zero Based Budgeting (ZBB)
3. Performance based Budgeting (PBB)

9. 1. Line-Item Budget
The traditional line-item budget, wherein legislators specify
allowable spending on inputs (salaries, supplies, travel) was
first developed to guard against the misuse of public funds.
Line Item Budgeting is arguably the simplest form of
budgeting, this approach links the inputs of the system to the
system. These budgets typically appear in the form of
accounting documents that express minimal information
regarding purpose within the system.

10. 2. Incremental Budgeting
Often used with line-item budget, assumes that
funding for existing programs will continue at
about the same level as in the past.

11. 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.

12. 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.

13. • 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 program's ability to
meet certain objectives that contribute to a more abstract
goal as calculated by that program's 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

14. 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.

15. 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.

16. 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.

17. The Results Chain

18. 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.

19. 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).

20. • 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.

21. 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.

22. 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.

23. 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

24. 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‖).

25. 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.

26. • 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.

27. 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.

28. 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.

29. 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).

30. 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.

31. 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.

32. • 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.

33. 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