Performance Budgeting Course,

Guatemala, May 2014

Prepared by Marc Robinson

Objective
Skills in PB design and implementation

Content
Core topical presentations
Case studies
Interactive Exercises

Emphasis on discussion & interaction

Including during presentations
Comments and questions encouraged

Introduction to performance budgeting (PB)

What it is
Different forms of performance budgeting

Before that, overview of budgeting

Objectives
Stages
Enables us to see PB in broader context

Allocation & use of resources by government

Plus decisions on financing
Mainly taxes & other compulsory transfers

Doesnt cover public corporations

Financed mainly by voluntary payments
Budget only includes subsidies & transfers

Public sector

Financial
institutions

Central
bank

Non financial
public sector

Public sector
commercial
banks

Public
Corporations

The Budget Sector

Government

Aggregate
Fiscal Policy

Accounting,
Audit and
Reporting

Budget
Preparation &
Enactment

Budget
Execution

1. Sound macro-fiscal outcomes

Deficits and debt dont get out of control
Fiscal sustainability first and foremost

2. Appropriate allocation of funds (prioritization)

To most socially useful sectors & programs

3. Service effectiveness and efficiency

Effectiveness through design & management
Services delivered at lowest cost

PB directly targets objectives 2 & 3

Although helps with objective 1

Macro-fiscal framework
Deficit/debt etc objectives
Revenue policies
Aggregate spending consistent

Expenditure priorities
Estimates of spending requirements
Capital and current expenditure

Legislative debate and approval

7. Auditing Stage:
Reliability of accounts checked

6. Accounting Stage:
Transaction recorded in the
books as complete

5. Payment Stage:
paying the actual bill

1. Authorization Stage:
Allotment process for money
to be spent consistent with
legal appropriations

2. Commitment Stage:
when a purchase order
is made or a
contract is signed

3. Verification Stage:
ensuring that goods
or service has been
delivered as per
the contract

4. Payment Authorization Stage:

Ordering person is different from the
authorizing person

Objective of Performance Budgeting

Efficient and effective expenditure
Including better prioritization

Means of achieving this objective

Linkage of funding and results
Using Performance Information (PI)

Increased flexibility: especially inputs

Government-wide and sectoral systems

Compensate for weaknesses of other performance

pressures
Absence of market pressure
Political accountability insufficient

PB seeks to drive improvements in

Program effectiveness
Deliver intended benefits to community

Productive efficiency
Minimum cost while maintaining quality

Funds go to where benefits greatest

Allocative efficiency

Prioritization often weak

Incrementalism
Budget process focused on new initiatives
Budgetary base not scrutinized
Reliance on across-the-board cuts

More sustainable public finances

As a result of better prioritization

Broader set of performance reforms

PB as one element
Close links between PB and other elements

Results-oriented HR management
Customer orientation measures
Market-type reforms
Many MFR reforms use performance indicators and
targets

Differing objectives
Emphasis on prioritization vs. efficiency

Different funding/results link

Differing PI requirements
Performance measures
Evaluation etc

Common theme of budgetary de-control

Input choice freedom

Key goal is better expenditure prioritization

Spending classified by objective: programs
Instead of classification by input type

Budget process uses these programs for expenditure

priority decisions
PI to assess costs and benefits of programs
Budget planning, including budget bids
Program appropriations, or budget documents

Police
Force

Program 1
Public
Order

Program 2
Crime
Prevention

Sub-Program 1.1

Sub-Program 1.2

Community Police
Response Services

Event
Management

Program 3
Road
Safety

Program 4
Emergency
Response &
Management

Program 4
Criminal
Justice
Services

How much to vary program spending?

Requires info about impact of changes

ZBB:
Decision packages/ service increments
Comparing impacts of changes with their cost

ZBB proper requires evaluation of changes right up to

total elimination
Alternative budgeting
Couple of expansion/reduction options

Go beyond program budgeting

Aim for tighter results/funding link

Very much part of overall MFR package
Three mechanisms

Budget-linked performance targets

Formula funding
Funding incentives for performance

Agency level performance targets

For outcomes and/or outputs
But this is a general MFR theme

Requires also that level of funding be linked to targets

E.g. more funding brings tougher targets

Issues:
Knowing what targets are appropriate for a given level of
funding
Danger of behavioral distortion

Targets set in the multi-year budget process

Link between funding and targets
Examples of PSA Targets

Health:

Reduce health inequalities by 10% by 2010 as

measured by infant mortality and life
expectancy at birth.
Crime
Reduce crime by 15% and further in high crime
areas by 2007-09.
Environment: Eliminate fuel poverty in vulnerable households
in England by 2010 in line with the Govts Fuel
Poverty Strategy objective.

Example: project school budget requirements using:

Cost per student
Demographic projections of student numbers

Output unit cost times expected quantity

Can be a mere estimation tool
Or can set implicit performance target
In which case, its performance budgeting

Like performance pay for agencies:

Extra funding if good performance
Maybe cuts if bad performance

Sectoral bonus funding

University funding scheme with extra money on graduate
employment rates

How does it impact motivation?

How does it impact on individuals?

Hybrid of formula funding & incentives

A simple market transaction model
Elements:
Payment of price for outputs
Payment-for-results
Price ideally based on cost of efficient production

Result: profit if efficient, loss if inefficient

Strong financial incentives for performance

Payment for output types

$x for treatment of a hip fracture patient
$y for treatment of heart attack
Based on cost estimates

Powerful incentive for efficiency

Helps to attack cost blow-out problem

Challenges:
Maintaining quality
Preventing abuse

Loose link ..Tight link

Program
Budgeting

Zero Base
Budgeting

Targets
linked to
budget

Formula
funding

Purchaser
Provider

PB has proven potential to improve

Expenditure prioritization
Efficiency and effectiveness of spending

But success not guaranteed

Major reform requiring big effort

Coupled with broader public sector reforms