Budgeting for ResultsBudgeting for Results

An idea whose time may be here?An idea whose time may be here?

Anwar Shah, World Bank (ashah@worldbank.org)

Conference on Fiscal Responsibility and Intergovernmental Finance, ASCI Hyderabad, India

June 24, 2005

OutlineOutline

Theme:Theme:Theory and practice of Performance BudgetingTheory and practice of Performance Budgeting

Structure:Structure:

•• PB: What? PB: What? •• PB: Why?PB: Why?•• PB: How? PB: How? ---- International ExperienceInternational Experience•• Some ConclusionsSome Conclusions

Functions of Budgeting SystemsFunctions of Budgeting Systems

Setting PrioritiesSetting PrioritiesPlanningPlanningFinancial control over inputsFinancial control over inputsManagement of operationsManagement of operationsAccountabilityAccountability

History of US Budgeting ReformsHistory of US Budgeting Reforms

Early 1900s LineEarly 1900s Line--item incremental budgeting for item incremental budgeting for financial controlfinancial controlCentral agency for coordination of government Central agency for coordination of government spendingspendingProgram budgeting in 1950s to link with planningProgram budgeting in 1950s to link with planningBlock vote budgeting in 1960s: aggregate allocationsBlock vote budgeting in 1960s: aggregate allocationsZero based budgeting in 1970s to set prioritiesZero based budgeting in 1970s to set prioritiesPerformance budgeting in 1990s to achieve operational Performance budgeting in 1990s to achieve operational efficiency and to improve accountability for results efficiency and to improve accountability for results

A comparative perspective on the A comparative perspective on the two budgeting approachestwo budgeting approaches

Focus on Results

Increased Managerial Discretion and less control

Managers are accountable for what they achieve.

PB

Focus on Control

No Managerial Discretion

Managers are accountable for what and how they spend on inputs.

Line-Item

Performance Performance Budgeting: What?Budgeting: What?

Performance Budgeting: What?Performance Budgeting: What?

A system of budgeting that presents the A system of budgeting that presents the purpose purpose and objectivesand objectives for which funds are required, for which funds are required, the the costs of the programscosts of the programs proposed for proposed for achieving these objectives, and achieving these objectives, and outputs to be outputs to be produced or services to be renderedproduced or services to be rendered under under each program. each program.

Strict DefinitionStrict Definition: A system of budgeting that : A system of budgeting that explicitly links explicitly links each increment in allocated each increment in allocated resourcesresources to an to an increment in outputs.increment in outputs.

Performance Budgeting ParadigmPerformance Budgeting Paradigm

Mission

Strategic Goals

(Medium Term)

Program Objectives & Costs(Annually)

P1 P2 P3

Activities Targets & Costs

P1 P2 P3

A1 A2 A3 A1 A2 A1 A2 A3 A4

Performance Measurement

Impact

Outcomes

OutputsCluster

Outputs

BudgetBottom-up

Performance Budgeting Results Chain Performance Budgeting Results Chain Application in EducationApplication in Education

Program objectives Inputs InterProgram objectives Inputs Intermediate inputsmediate inputs

Improve quantity, Improve quantity, quality, and access to quality, and access to education serviceseducation services

Educational spending by age, Educational spending by age, sex, urban/rural; spending by sex, urban/rural; spending by level; teachers, staff, facilities, level; teachers, staff, facilities, tools, bookstools, books

Enrollments, studentEnrollments, student--teacher ratio, class sizeteacher ratio, class size

Winners and Winners and losers from losers from government government programsprograms

Informed Informed citizenry, civic citizenry, civic engagement, engagement, enhanced enhanced international international competitivenesscompetitiveness

Literacy rates, Literacy rates, supply of skilled supply of skilled professionalsprofessionals

Achievement Achievement scores, graduation scores, graduation rates, droprates, drop--out out ratesrates

Outputs Outcomes Impact Outputs Outcomes Impact ReachReach

Performance Measures Used in Performance Measures Used in Performance BudgetingPerformance Budgeting

CostCost: Inputs/resources used to produce outputs: Inputs/resources used to produce outputsOutputOutput: Quantity and quality of goods and services produces. : Quantity and quality of goods and services produces. OutcomeOutcome: Progress in achieving program objectives: Progress in achieving program objectivesImpactImpact: Program goals: Program goalsReachReach: People who benefit or are hurt by a program: People who benefit or are hurt by a programQualityQuality: Measure of service such as timeliness, accessibility, : Measure of service such as timeliness, accessibility, courtesy, accuracycourtesy, accuracyProductivityProductivity: Output by work hour: Output by work hourEfficiencyEfficiency: Cost per unit of output: Cost per unit of outputSatisfaction:Satisfaction: Rating of services by usersRating of services by users

CitizenCitizen--centered performance centered performance budgetingbudgeting

Budget format to follow closely service delivery format Budget format to follow closely service delivery format and also to include a performance report and net worth and also to include a performance report and net worth assessmentassessmentCitizens charter and sunshine rightsCitizens charter and sunshine rightsCitizen inputs in budget process to be formalized at all Citizen inputs in budget process to be formalized at all stagesstages

Formulation: Town Hall meeting on the previous yearFormulation: Town Hall meeting on the previous year’’s s performance and new proposals. Comments on Porto performance and new proposals. Comments on Porto AllegreAllegreand Belo and Belo HorizonteHorizonte, Bolivia, BoliviaReview and execution: Formal process for complaintsReview and execution: Formal process for complaintsPost: Compliance and feedback reports.Post: Compliance and feedback reports.

Performance Management Framework is Performance Management Framework is a prea pre--requisite for the success of PBrequisite for the success of PB

Letting managers manageLetting managers manage: operational flexibility and : operational flexibility and freedom freedom –– few rules more discretionfew rules more discretionMaking managers manageMaking managers manage. Accountability for . Accountability for results. Contracts/work program agreements based results. Contracts/work program agreements based upon preupon pre--specified output and performance targets and specified output and performance targets and budgetary allocations budgetary allocations new civil service frameworknew civil service frameworkActivity based costing, accrual accounting, capital Activity based costing, accrual accounting, capital chargingchargingSubsidiarity principleSubsidiarity principleASD (Competitive service delivery) and benchmarkingASD (Competitive service delivery) and benchmarkingIncentives for cost efficiency (including capital use)Incentives for cost efficiency (including capital use)

Output Accountability as an instrument for Outcome Output Accountability as an instrument for Outcome AccountabilityAccountability

Results-based accountability relationships inform managerial structures

President/ Prime Minister – Accountable for ‘outcomes cluster’ Minister/ Secretary – Accountable for outcomes Departmental head/ Program managers – Accountable for ‘output clusters’ Project managers – Accountable for outputs

Tools for Performance Tools for Performance ManagementManagement

Performance contracts/agreementsPerformance contracts/agreementsPurchase agreementsPurchase agreementsPerformance targetsPerformance targetsPerformance payPerformance payPerformance reportsPerformance reportsPerformance benchmarksPerformance benchmarksPerformance audits and evaluationsPerformance audits and evaluations

Performance Performance Budgeting: Why?Budgeting: Why?

Public Sector Reform GoalsPublic Sector Reform Goals

Responsive Governance or Doing the Right ThingsResponsive Governance or Doing the Right Things

Matching public services with citizensMatching public services with citizens’’ preferencespreferences

Responsible Governance or Doing it RightResponsible Governance or Doing it Right

Prudent management of fiscal resources.Prudent management of fiscal resources.Earning trustEarning trustWorking better and costing lessWorking better and costing lessManaging fiscal and social risksManaging fiscal and social risks

-- Improving the quality, quantity and access of public Improving the quality, quantity and access of public servicesservices

Public Sector Reform Goals Public Sector Reform Goals ……..

Accountable GovernanceAccountable Governance: : Accountable for all actions to citizensAccountable for all actions to citizensPublic Integrity, safeguardsPublic Integrity, safeguardsCitizens charterCitizens charter

A Framework for Improving A Framework for Improving Government PerformanceGovernment Performance

Mandate

AuthorizingEnvironment

OperationalCapacity Outputs, Results,

Outcomes

Governing for Results: A Road Map

Program/ project

Inputs

Activities

Outputs

Reach

Outcomes

Impacts (goals)

2. Administration concerned with outputs.

2. Executive concerned with

outcomes

Legislature

1. Citizens

1.Make managers

manage for results

2. Manag. flexibility 3.Subsidia

rity 4. citizen

evaluations

3. E V A L U A T I O N S

2. Outcomecontract

2. Outputcontract

3.Citizen evaluations

3. Internal and external Results and

process Evaluations

DemandDemand--based Results Oriented based Results Oriented Management: Focusing the internal on the Management: Focusing the internal on the

externalexternal

Inputs

Activities

O utputs

Reach

O utcomes

Impacts (goals)

Administration

2.3. Focusing management on results: Performance-based budgets, benchmarking, activity-based and other costing, balanced scorecard

2 .1. Total Quality M anagement and other tools used to develop interaction between administration and citizens

Executive

2.2. Results-based relationship between executive/administration, accountable for outputs

Legislature

Results-O riented

M anagement focuses on:

2.1. Creating social

contracts that link political

representatives and

administrators to citizens,

2.2. Creating results-based

relationships throughout

government, and

2.3. Introducing necessary

tools to focus management

on results.

2.2. Results-based relationship between citizens and the executive, accountable for outcomes.

2.1. Political contracts link political representatives and the administration to Citizens.

Tools for Results Oriented Tools for Results Oriented ManagementManagement——external, citizen focusexternal, citizen focus

Question for results-oriented management Management tool

The entire process driven

by a citizen focus:

Contract information—what is the final product we must produce and what do we receive to produce such product?

Performance-based budget

How do we know how we are doing in terms of the contract, and in terms of other producers from whom we can learn?

Benchmarking

How much does it cost to produce such product (the complete cost)? How can we produce the product better so we can be sure of meeting and exceeding our contract obligation and receiving rewards?

Activity-Based Costing (and others)

How do we report our results? Full reporting using accrual accounting

How do we manage the new reporting, production, and contract obligations we have, as well as run a citizen friendly administration?

Balanced Scorecard

All these tools are connected to Total Quality Management and such devices used to create a results and participation culture, and work effectively where roles emphasize results.

Alternative Service Delivery FrameworkPublic Interest Test

Role of GovernmentTest

JurisdictionalAlignment

Test

BusinessPrinciples

Test

ExternalPartnership

Test

Yes

Yes

Yes

No

NoAffordability Test

AbandonAbandon

RealignRealign

PartnerPartner

RestructureRestructure

ImproveImprove

Service SheddingPrivatization - divestiture -

regulatedEmployee Takeover

Public Partnership -devolution - shared services

Line Organization

Contracting Out - franchising -licensing

Government Owned/ContractorOperated

Private, Not-for-profit Agency -self-help - volunteers

Public/Private Partnership

Crown Corporation -departmental corporation

Special Operating AgencyUtility

No

No

Yes

Yes

An Example: Education grant to Encourage An Example: Education grant to Encourage Competition and InnovationCompetition and Innovation

Allocation basis among local governmentsAllocation basis among local governments: : School age population (ages 5School age population (ages 5--17)17)

Secondary distribution to providersSecondary distribution to providers: Equal per : Equal per pupil to both public and private schoolspupil to both public and private schools

Conditions: Conditions: Universal access to primary and Universal access to primary and secondary education regardless of parentssecondary education regardless of parents’’ income, income, improvement in educational outcomes. No improvement in educational outcomes. No conditions on the use of grant funds.conditions on the use of grant funds.

Penalties: Penalties: Public censure, reduction of grants Public censure, reduction of grants fundsfunds

Incentives: Incentives: Retention of savingsRetention of savings

A Governing for Results Framework for A Governing for Results Framework for Civil Service Civil Service

Current cultureCurrent cultureRigid rulesRigid rulesInput controlsInput controlsTopTop--down accountabilitydown accountabilityLow wages and high Low wages and high perksperksLifeLife--long and rotating long and rotating appointmentsappointmentsIntolerance for Intolerance for risk/innovationrisk/innovation

CCCSCCCSManagerial flexibilityManagerial flexibilityResults matterResults matterBottomBottom--up up accountabilityaccountabilityCompetitive wages but Competitive wages but little elselittle elseContractual and task Contractual and task specializationspecializationFreedom to fail/succeedFreedom to fail/succeed

Performance Performance Budgeting: How?Budgeting: How?

International ExperiencesInternational Experiences

Theory to Reality

Diversification in Implementation

Alternate approachesAlternate approaches

PB with Fuzzy New Public ManagementPB with Fuzzy New Public Management (Letting (Letting Managers Manage, competition, voice and choice, Managers Manage, competition, voice and choice, informal agreements): USA, Netherlands, Australia, informal agreements): USA, Netherlands, Australia, Uganda, Mongolia, South Africa (small steps towards Uganda, Mongolia, South Africa (small steps towards PB). PB).

PB with New Public ManagementPB with New Public Management (Making (Making Managers Manage, stronger competition, voice and Managers Manage, stronger competition, voice and choice, formal contracts or agreements ): New choice, formal contracts or agreements ): New Zealand, Malaysia (?), Singapore (?).Zealand, Malaysia (?), Singapore (?).

The State Under Contract The State Under Contract -- The The New Zealand ModelNew Zealand Model

Core public sector: culture shift from input Core public sector: culture shift from input controls to output accountabilitycontrols to output accountabilityThe new contractualism: examples The new contractualism: examples -- central central bank governor, minister of financebank governor, minister of financeSeparation of policy and implementation; Separation of policy and implementation; separation of financing/purchasing/provision separation of financing/purchasing/provision Decentralized management with budgetary Decentralized management with budgetary flexibility and autonomyflexibility and autonomyCommercialization or privatizationCommercialization or privatizationResponsible fiscal management Responsible fiscal management

The Kiwi Experience To DateThe Kiwi Experience To Date

Remarkable results in performance improvement: Remarkable results in performance improvement: Deficit, Debt, Net worthDeficit, Debt, Net worthThe New Contractualism at Local level: Astonishing The New Contractualism at Local level: Astonishing turnaround in Papakuraturnaround in PapakuraSome difficulties in social servicesSome difficulties in social servicesPolitical responsibility for bureaucratic incompetence: Political responsibility for bureaucratic incompetence: The Tragedy at Cave CreekThe Tragedy at Cave Creek

Accountability for Results Accountability for Results --Malaysian ApproachMalaysian Approach

Customer orientation through ClientCustomer orientation through Client’’s Charter (1993): s Charter (1993): transparency, service standards, measurement, feedback, redresstransparency, service standards, measurement, feedback, redressManagerial flexibility with output accountability (1990)Managerial flexibility with output accountability (1990)Decentralized managementDecentralized managementPartnership approach to service delivery; contestable policy Partnership approach to service delivery; contestable policy adviceadvicecomparative evaluation of service providerscomparative evaluation of service providersDeregulation, commercialization, privatization and partnershipDeregulation, commercialization, privatization and partnership

Output Orientation under the Output Orientation under the Malaysian and NZ ModelsMalaysian and NZ Models

Program agreements monitored for achievement Program agreements monitored for achievement in outputs and impactsin outputs and impactsOutput budgetingOutput budgetingActivity based costing Activity based costing capital chargingcapital chargingAccrual accountingAccrual accountingMonitoring governmentMonitoring government’’s net worths net worth

Singapore: Milestones to PBSingapore: Milestones to PB

Pre 1978 Pre 1978 –– Line Item Budgeting:Line Item Budgeting: The emphasis was on The emphasis was on inputs and input control.inputs and input control.1978 to 1989 1978 to 1989 –– Program Budgeting:Program Budgeting: The emphasis changed The emphasis changed to what had to be done and managers had more managerial to what had to be done and managers had more managerial flexibility.flexibility.1989 to 1996 1989 to 1996 –– Block Vote Budgeting:Block Vote Budgeting: More managerial More managerial flexibility. Line agencies were given larger blocks of flexibility. Line agencies were given larger blocks of appropriations within which they had the flexibility to appropriations within which they had the flexibility to reallocate without seeking central approval.reallocate without seeking central approval.1996 Onwards 1996 Onwards –– PB:PB: The emphasis now is on outputs. The emphasis now is on outputs. Public sector managers are given more authority to improve Public sector managers are given more authority to improve performance in exchange for increased accountability. performance in exchange for increased accountability.

Singapore: PB FrameworkSingapore: PB Framework

Government departments managed as Autonomous Government departments managed as Autonomous AgenciesAgenciesMacro Incremental FactorMacro Incremental FactorTargets and output plansTargets and output plansFunding linked to output levelsFunding linked to output levelsOperational and financial autonomyOperational and financial autonomyCapital charging including office use, interdepartmental Capital charging including office use, interdepartmental chargingcharging33--year development block voteyear development block voteNew Civil Service FrameworkNew Civil Service Framework

US President US President --Office of Management and Office of Management and Budget: Scorecard Standards for SuccessBudget: Scorecard Standards for Success

Green:Green:Integrated plan/budgetIntegrated plan/budgetOutput budgetingOutput budgetingStaffing, budget and program targets in alignmentStaffing, budget and program targets in alignmentFull cost in accountsFull cost in accountsLinking budget to desired outcomesLinking budget to desired outcomes

Yellow: Some achieved but no red alertsYellow: Some achieved but no red alertsRed: Inverse of green criteriaRed: Inverse of green criteria

U.S. Experience with PB U.S. Experience with PB State GovernmentsState Governments

lineline--item budgetitem budget 27 states27 statesprogram budgetprogram budget 10 states10 statesHalfHalf--way to PBway to PB 10 states10 statesPBPB Michigan & TexasMichigan & Texas

Source: Hager, G. & Hobson, A. June 2001. Performance-Based Budgeting.

U.S. Experience with PB U.S. Experience with PB ---- Texas StateTexas State

Source: Hager, G. & Hobson, A. June 2001. Performance-Based Budgeting.

U.S. Experience with PBU.S. Experience with PB –– Montgomery Country, MarylandMontgomery Country, Maryland

Public Works and Transportation Highway Services

Programs: Resurfacing Program Mission: To resurface the Country’s roads on a seven year cycle to assure an aesthetically pleasing, adequately maintained, functional roadway surface

Program Measures FY99 Actual

FY00 Actual

FY01 Actual

FY02 Budget

FY02 Actual

FY03 Approved

Outcomes: Lower maintenance cost and better safety

Outputs: Percentage of roads needing resurfacing that were resurfaced (assuming a 7-year cycle) Lane miles resurfaced

77

300

79

309

76

296

64

248

39

152

42

162Service Quality: Effective resurfacing cycle (years)

9.1

8.8

9.2

11.0

18.0 16.9

Efficiency: Average cost per lane-mile resurfaced ($)

4,483

5,706

5,115

5,109

5,099 5,230

Inputs: Expenditure ($000) Workyears

1,345

1,763

1,514

1,267

775 847

Source: Office of Management and Budget, Montgomery Country. Montgomery Measures Up! For the Year 2002

ConclusionsConclusions

Performance budgeting must be an integral element of Performance budgeting must be an integral element of a broader reform package to bring about performance a broader reform package to bring about performance culture. In the absence of an incentive environment for culture. In the absence of an incentive environment for better performance and accountability for results, the better performance and accountability for results, the introduction of performance budgeting will not lead to introduction of performance budgeting will not lead to better performance.better performance.Managerial accountability must be on outputs and not Managerial accountability must be on outputs and not on outcomes as the latter are influenced by external on outcomes as the latter are influenced by external factors. Outcomes however should be monitored.factors. Outcomes however should be monitored.Transparency of the budget and citizensTransparency of the budget and citizens’’ evaluation of evaluation of outputs helpful in improving budgetary outcomes. outputs helpful in improving budgetary outcomes.