Performance-based Budgeting

CLEAR Training Materials

Manual
1

PerformanceBudgeting

MarcRobinson
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Contents

TableofAcronyms........................................................................................................................................5
Introduction..................................................................................................................................................7
1.BudgetingandtheBudgetProcess...........................................................................................................8
2.OverviewofPerformanceBudgeting......................................................................................................12
ExpenditurePrioritization.......................................................................................................................12
ManagingforResults..............................................................................................................................13
ModelsofPerformanceBudgeting.........................................................................................................14
3.PerformanceInformationFundamentals...............................................................................................20
PerformanceConcepts:theResultsChain..............................................................................................20
Outcomesvs.ExternalFactors................................................................................................................23
Outputsvs.OutcomesandActivities......................................................................................................24
PerformanceIndicators..........................................................................................................................24
4.PerformanceMeasuresandtheBudget.................................................................................................28
EnsuringthatIndicatorsareUseful........................................................................................................30
LinkingFundingtoOutcomes.................................................................................................................31
LinkingFundingtoOutputs.....................................................................................................................32
5.PerformanceMeasurementSystems......................................................................................................35
EnsuringthatPerformanceInformationisCostEffective......................................................................39
6.EvaluationandPerformanceBudgeting.................................................................................................42
EvaluatingProgramEffectiveness...........................................................................................................43
EfficiencyReview....................................................................................................................................45
MakingEvaluationRelevanttotheBudget............................................................................................45
EvaluationandtheBudget:TheChileanExample..................................................................................46
InternalversusExternalEvaluations.......................................................................................................48
7.PerformanceAuditing.............................................................................................................................50
8.ProgramBudgetingFundamentals.........................................................................................................52
DefiningPrograms...................................................................................................................................53
PerformancePressureandProgramBudgeting.....................................................................................54
ProgramPerformanceInformation........................................................................................................55
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ProgramTitlesandObjectives................................................................................................................56
ProgramStatements...............................................................................................................................58
TheProgramHierarchy...........................................................................................................................58
Numberandsizeofprograms.................................................................................................................59
DevelopingPrograms..............................................................................................................................60
IntegratingStrategicPlanswiththeProgramBudget............................................................................61
9.ProgramAppropriationandExpenditureControl..................................................................................64
10.ProgramAccountingandCosting..........................................................................................................68
BudgetClassificationandChartofAccounts..........................................................................................68
FinancialManagementInformationSystems.........................................................................................69
ProgramCostAllocation.........................................................................................................................72
AdministrationPrograms........................................................................................................................75
SalaryCostsandPrograms......................................................................................................................78
CostAllocationandtheProgramHierarchy...........................................................................................78
ProgramCostEstimationinBudgetPreparation....................................................................................79
11.SpecialTopicsinProgramBudgeting....................................................................................................82
ProgramsandOrganizationalStructure.................................................................................................82
MinistryBoundariesandInternalSupportServices...............................................................................85
BroaderConflictsbetweenProgramandOrganizationalStructure.......................................................87
ProgramStructuresinDevelopingCountries.........................................................................................88
FunctionsandPrograms.........................................................................................................................89
ProgramsandFunctions:aCaseStudy...................................................................................................92
ProgramsandLevelsofGovernment......................................................................................................93
12.FormulaFundingandPurchaserProviderSystems..............................................................................95
LimitstoFormulaFundingandPurchaserProvider................................................................................96
13.TargetsandPerformanceBudgeting....................................................................................................98
GamingandPerverseEffects................................................................................................................100
14.PublicFinancialManagementReformFoundations...........................................................................102
15.ExpenditurePrioritizationandPerformanceBudgeting.....................................................................105
SpendingReview...................................................................................................................................105
ExpenditurePrioritizationProcessesMoreGenerally..........................................................................109
PlanningandPrioritization....................................................................................................................111
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ExpenditurePrioritizationattheSectorandMinistryLevels...............................................................111
16.AccrualAccountingandPerformanceBudgeting...............................................................................114
WhatareAccrualAccountingandAccrualBudgeting?........................................................................114
TheComplexityofAccrualAccountingandBudgeting.........................................................................119
AccrualAccountingandProgramBudgeting........................................................................................120
AccrualAccounting,PurchaserProviderandFormulaFundingSystems.............................................121
17.ParliamentandPerformanceBudgeting.............................................................................................124
ParliamentandPerformanceAccountability........................................................................................124
ParliamentandExpenditurePriorities..................................................................................................126
18.MediumTermBudgetingandPerformanceBudgeting......................................................................127
NatureandBenefitsofMTBudgeting..................................................................................................127
ForwardEstimates................................................................................................................................128
MTCeilings:Fixedvs.Indicative?..........................................................................................................129
MTBudgetingandPerformanceBudgeting..........................................................................................131
TheMediumTermExpenditureFramework(MTEF)............................................................................132
DevelopingCountriesandtheMTEF....................................................................................................134
19.ImplementingGovernmentWidePerformanceBudgeting...............................................................137
20.TheManagingforResultsContext......................................................................................................141
21.ConcludingComments........................................................................................................................143
Glossary.....................................................................................................................................................144
References................................................................................................................................................150

TableofAcronyms

AA Accrualaccounting
ABC Activitybasedcosting
AOB Accrualoutputbudgeting
BC Budgetclassification
COA Chartofaccounts
COFOG ClassificationoftheFunctionsofGovernment
DRG Diagnosticrelatedgroup
FF Formulafunding
FMIS Financialmanagementinformationsystem
GBE Governmentbusinessenterprise
IFMIS Integratedfinancialmanagementinformationsystem
IT Informationtechnology
LOLF Loiorganiquerelativeauxloisdefinances
MFR Managingforresults
MoF Ministryoffinance
MT Mediumterm
MTEF Mediumtermexpenditureframework
MTFF Mediumtermfiscalframework
OECD OrganizationforEconomicCooperationandDevelopment
PB Performancebudgeting
PFM Publicfinancialmanagement
PM Performancemeasurement
PSA PublicServiceAgreement
SAI Supremeauditinstitution
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ZBB Zerobasebudgeting

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Introduction

Thismanualisdesignedtoaccompanythecoursesonperformancebudgetingdeliveredatthe
regionalCentersforLearningonEvaluationandResults(CLEAR).Itpresentssummariesofthe
essentialcontentforeachofthecoretopicscoveredinthosecourses.Thismanualcan
thereforebeusedonastandalonebasis.However,itmaybeusedtobestadvantagein
conjunctionwiththesupportofthekeyreadingslistedattheendofeachsection.
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1.BudgetingandtheBudgetProcess

Governmentbudgetingistheallocationanduseofresources,andassociateddecisionsabout
howtheresourcesusedwillbeacquired,bythatpartofthepublicsectorwhichisfinanced
primarilybycompulsorychargessuchastaxes
1
.Equivalently,governmentbudgeting
budgetingforshortinwhatfollowscanbesaidtobeabouttheallocationofresourcesfor
theprovisionofservicesandtransfersonanonmarketbasis,wherenonmarketmeans
eitherfreeorgreatlybelowcost.
Thegovernmentbudgetisthereforeafinancialplanwhichcoversthosepublicsectoragencies
suchasministriesandthesocialsecuritysystemwhichareprimarilytaxfinanced.Itdoes
nottypicallycoverpubliccorporations,whichnormallymanagetheirfinancesonamore
autonomousbasis.
2

Budgetingisaprocessinvolvingfourstages:
Aggregatefiscalpolicyformulation:thisreferstothedeterminationofthegovernments
overarchingobjectivesforthebudgetdeficit,debtandotherrelevantfiscalaggregates
3
,which
shouldthenbetranslatedintodecisionsaboutthedesiredlevelsofaggregaterevenueand
expenditure.
Budgetpreparationandenactment:inthisstageofthebudgetprocessthegovernmentdecides
howmuchfundingitwillprovidetowhichagenciesandforwhichpurposes.Thisisgivenformal
expressioninthebudgetlawandbudgetregulations,whichareenactedbythelegislatureand
thehighestexecutiveorgansofgovernment(i.e.thepresidentorcabinetofministers).
Budgetexecution:thisreferstothecarryingoutoftheexpenditureplandevelopedinthe
budgetincludingtheenteringofcontractsandexpenditureoffunds.

1
Weusethetermtaxasshorthandtoincludeothercompulsoryrevenuesourcessuchasmandatoryleviesor
fees,andfines.Budgetfinancingviaborrowingmaybeconsideredtobefinancingbydeferredtaxes.
2
Publiccorporationsarefinancedprimarilybythepriceswhichtheychargetheconsumersoftheirservices
priceswhicharevoluntaryinthatconsumersarenotlegallyobligedtopurchasetheservicesconcerned.The
budgetnormallyonlyrelatestopubliccorporationsinsofarastheyeitherreceivetaxpayersubsidiesortheirprofits
areasupplementarysourceofbudgetfunding.
3
Dependingonthepolicyframeworkofthecountryconcerned,theotherfiscalaggregatesintermsofwhichfiscal
policyisframedmightinclude,e.g.,thelevelofnetworth(governmentassetsminusliabilities)orthe
percentageofrevenue/GDP.
9

Accounting,AuditingandReporting:thiscoversthepreparationofaccountingrecordsof
governmentspendingandrevenue,theirauditingbybothinternalandexternalauditors,and
theprovisionofreportsonbudgetexecutiontogovernmentagencies,ministers,parliament
andthepublic.
Budgetinghasthreekeyobjectives
Soundmacrofiscaloutcomes:thisisprimarilytheproductofgoodaggregatefiscalpolicy.
Aggregatefiscalpolicyneedstoensurefiscalsustainabilitywhichmeansessentiallythat
deficitsanddebtdonotgetoutofcontrolbecausethisisimportantforeconomic
confidenceandstability.Ifbudgetingdoesnotkeepdebttosustainablelimits,financial
marketscanpotentiallyloseconfidenceinthesecurityoflendingtogovernment.Theresult
maybeasuddenincreaseintheinterestrateswhichgovernmentisforcedtopayand,in
theextreme,anunwillingnesstolendtogovernment.Inadditiontofiscalsustainability,
aggregatefiscalpolicycanplayanimportantstabilizationpolicyroleinparticular,
throughprovidingsupporttotheeconomythroughadditionalspendingorlowertaxes
duringarecession.

Appropriateprioritizationofexpenditure:thisreferstotheallocationoffundstothesectors
andprogramswhicharemosteffectiveinmeetingsocialneeds.Itmeans,forexample,that
ifacountryisfacingamajornewhealthchallenge,additionalfundswillbeallocatedinthe
budgetforprogramsdesignedtotacklethatchallenge.Thecorollaryofthisisthatfundsare
movedawayfromsectorsandprogramswherespendingislowpriority.

Serviceeffectivenessandefficiency:thismeans,firstly,thatgovernmentservicesare
deliveredefficientlyand,secondly,thattheyaredesignedandmanagedsoastomaximize
theireffectiveness.
Performancebudgeting,aswewillsee,focusesdirectlyonimprovingtheabilityofbudgetingin
todeliveronthesecondandthirdoftheseobjectives.
4
Effectivenessandefficiencyare
thereforekeywordshere.Effectivenessreferstotheextenttowhichaservicedeliversthe
benefitswhichitissupposedtodelivertosociety.Forexample,anHIV/AIDSprevention
campaigniseffectiveifitsucceedsinreducingtherateofnewHIV/AIDSinfections.Aswillbe
explainedlater,effectivenessisabouttheextenttowhichprogramsachievetheirintended
outcomes.Efficiency,ontheotherhand,referstodeliveryofservicesatthelowestpossible

4
However,indoingso,itcanalsoindirectlyimprovemacrofiscaloutcomes.
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cost,withoutsacrificingquality.Expresseddifferently,efficiencyisaboutminimizingwastein
theproductionofgovernmentservices.
Budgetpreparationshouldstartwith,andbecarriedoutwithinthecontextof,goodaggregate
fiscalpolicy.Inotherwords,decisionsabouthowmuchfundingtoprovideagenciesshouldbe
constrainedbyclearpolicyaboutthelevelofaggregateexpenditurewhichis,given
governmentrevenues,consistentwithgovernmentsdeficitanddebtobjectives.Keyaspectsof
budgetpreparationandenactmentinclude:
Thedeterminationofexpenditurepriorities,
Estimatesofspendingrequirementsparticularlyassociatedwithongoingcommitments
suchasthegovernmentwagebill,capitalprojectsunderway,andexpenditureobligations
onmandatoryitemssuchaspensionsandothersocialsecuritypayments,
Theformulationofcurrentandcapitalbudgets,whichrequiredifferentbudgetpreparation
methodsbutwhichshouldatthesametimebelinked.
5

Theformulationofbudgetfundingdecisionsintolegalauthorizations(controltotals)
whichcanbeappropriatedbytheparliamentorpromulgatedbytheexecutive
government.
Thewayinwhichbudgetpreparationisorganizeddifferconsiderablybetweendifferent
countries.Somekeyaspectsofbudgetpreparationwhichhaveaparticularlyclosebearingon
performancebudgetingsuchasexpenditureprioritizationandmediumtermbudgeting
methodsarediscussedinthismanual.
Budgetexecution,ontheotherhand,canbeseenasaclearlydefinedsequenceofstages,as
follows:
Authorizationstage:basedontheparliamentarybudgetappropriations,thefinance
ministrycommunicatestoministriestheirexpenditureentitlements.Thenatureofthese
authorizationsdiffersinternationally.Insomecountries,authorizationsaremadeona
monthbymonthbasisthatis,eachmonthministriesaretoldhowmuchmoneytheywill
havetospendinthecomingmonth.

5
Buildingmajornewcapitalassetssuchasschools,hospitalsandroadshasimportantimplicationsforfuture
currentexpenditure,whetheronstaffandsuppliestorunthefacilitiesconcerned,oronthemaintenanceofthose
assets.

11

Commitmentstage:acommitmentisacontractorsomeotherobligationtomakeafuture
payment.
Verificationstage:ensuringthattheserviceorgoodspreviouslycontractedforhavebeen
delivered,andmeetthespecificationsofthecontract.
Paymentauthorizationstage:inthelightofverification,approvalforthepaymenttobe
madeisgivenbyanofficialindependentofthepersonswhoinitiatedthecommitment.
Paymentstage:thepaymentisactuallymade.
Accountingstage:eachpaymentisenteredintotheaccountingsystemanditsrelevant
characteristicsrecorded.Inawelldevelopedsystem,theaccountingsystemwillalsorecord
thecommitmentsstage.
Auditingstage:theaccountsareauditedfirstlybyinternalauditors(withinthespending
ministryconcerned)andsubsequentlybyexternalauditors(theauditorgeneraloraudit
court).
Performancebudgetingaimstochangebudgetpreparationfundamentally,linkingitmuch
moresystematicallytotheeffectivenessandefficiencyofexpenditure.Indoingso,however,it
alsobringsaboutequivalentlymajorchangesinbudgetexecution.

KeyReadings
Potter,B.andJ.Diamond(1999),GuidelinesforPublicExpenditureManagement(Washington:IMF),
availableathttp://www.imf.org/external/pubs/ft/expend/index.htm.
SchiavoCampo,S.&D.Tommasi(1999),Managinggovernmentexpenditure(Manila:Asian
DevelopmentBank),obtainableathttp://www.adb.org/documents/manuals/govt_expenditure/.

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2.OverviewofPerformanceBudgeting

Performancebudgetingaimstoimprovetheeffectivenessandefficiencyofpublicexpenditure
bylinkingthefundingofpublicsectororganizationstotheresultstheydeliver.Ituses
systematicperformanceinformation(indicators,evaluations,programcostingsetc)tomakethis
link.Theimpactofperformancebudgetingmaybefeltinimprovedprioritizationof
expenditure,andinimprovedserviceeffectivenessand/orefficiency.

PBusuallyalsoemphasizesgivinggovernmentagenciesandtheirmanagersgreaterflexibilityin
theuseofresourcesthantheywouldtypicallyhaveundertraditionaltightlycontrolledpublic
managementsystems.Akeyelementofthisisgreaterflexibilityinthechoiceofthemixof
inputswhicharetobeusedtodeliverservices(e.g.howmuchlaborinputvs.externallysourced
inputs,themixoftypesofexternallysourcesuppliesandservicesused).Animportant
implicationofthisistheneedformoreflexibilityhumanresourcesmanagement,atopic
discussedinalatersection.

Theincreasedinternationalinterestinperformancebudgetinghasbeenpromptedinpartbya
recognitionthatitisalltooeasyinGovernmenttolosesightofthefundamentalobjectiveof
deliveringpositiveoutcomestothecommunity.Publicsectororganizationswhicharefinanced
bytaxesandothercompulsorychargeslackthemarketdisciplineswhichcompelcommercial
enterprises,particularlythoseoperatinginhighlycompetitivemarkets,tobecustomer
oriented.Politicalaccountabilitythroughtheelectoralprocessis,ofcourse,extremely
important,butisnotnecessarilysufficienttoensurethatpublicsectororganizationsarehighly
focusedupontheresultstheydeliver.

ExpenditurePrioritization
Expenditureprioritizationisoftenquiteweakingovernment.Aparticularconcernisthe
tendencyformuchongoingprogramexpendituretoescapeseriousscrutiny,andforbudgetary
decisionstobemainlyfocusedonwhatnewspendinginitiativestoadopt.Theterm
incrementalismiswidelyusedtodescribethistendency.
6

Ifprioritizationprocessesarenotwelldeveloped,governmentstypicallyrely,ifandwhenthey
needtomakespendingcuts,onacrosstheboardcutsthatis,cutsofthesamepercentage

6
Formoreonincrementalism,seeRobinsonandBrumby(2005).
13

toallministries.Acrosstheboardcutsarebydefinitionindiscriminateandinferiortoaselective
approachwhichwouldtargetcutsatlowerpriorityorlesseffectiveprograms.

Improvedexpenditureprioritizationcanhelptoachievemoresustainablepublicfinances.If,for
example,spendingcutsareneededtoachievefiscalconsolidation(i.e.togetdeficitsanddebt
undercontrol),thecapacitytotargetcutsselectivelyatthelowestpriorityprogramswillhelpto
makethosecutsmoresustainable(i.e.thereducethepressurestoreversethem),thus
increasingtheprobabilitythattheimprovementtotheoverallstateofpublicfinanceswillbe
enduring.

ManagingforResults
Performancebudgetingshouldbeviewedinthebroadercontextofasetofrelatedmanaging
forresults(MFR)reforms.MFRcanbedefinedastheuseofformalperformanceinformation
toimprovepublicsectorefficiencyandeffectiveness.Itsfundamentalstartingpointismaximum
clarityabouttheoutcomeswhichgovernmentisattemptingtoachieve,andaboutthe
relationshipofoutputs,activitiesandresourcesusedtothosedesiredoutcomes.Goodstrategic
planningandbusinessplanningareanessentialelementofMFR.MFRalsotendstoemphasize
theexantestipulationofperformanceexpectationsforagencies,workunitsandindividuals
throughtheuseofperformancetargetsandstandards.

AstandardelementofthestrategichumanresourcesmanagementcomponentofMFRisthe
introductionofstrongerperformancebasedextrinsicincentives(rewardsandsanctions)for
publicofficials.Typically,thisisaccompaniedbygreaterflexibilityofemployment,including
greatercapacitytosanctionordismisspoorperformers,andgreatereaseintransferringor
terminateemployeesinprogramswhichthegovernmentiseliminatingorcuttingback.

ExamplesofotherelementsofMFRreformswhichhavebeenintroducedinmanycountries
include:

Customerorientationmeasures:anexampleofsuchameasureisclientrightscharters,
whichdefineclientservicerights(e.g.timelinessofservice,whattypeofserviceetc).

Markettypereforms:thisreferstoarangeofmeasureswherebypublicserviceproviders
aremadetooperateinamorebusinesslikemanner,underthepressureofcertaintypesof
marketforcesormechanismswhichsimulatemarkets.Competitivetenderingwherea
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serviceprovidedbyagovernmentagencyisthrownopentoprivatecompetitionviatender
isoneexample.Purchaserprovidersystemsareaperformancebudgetingmodelwhich
fallsintothecategoryofmarkettypereform.

ModelsofPerformanceBudgeting
Thereisnotjustonemodelofperformancebudgeting,butarangeofdifferentmodels.Alllink
fundingandresults,butindifferentways.

Someperformancebudgetingsystemsprogrambudgetingandzerobasebudgeting,for
examplearegovernmentwidesystems.Ontheotherhand,someareonlyintendedtoapply
toparticularsectorsofexpenditureorcategoriesoforganization(e.g.aformulafundingsystem
applyingtoschools).

Performancebudgetingsystemsdiffertosomeextentintheirobjectives.Someplaceaim
principallytoimproveexpenditureprioritization,whileothersaremainlyfocusedonin
improvingserviceeffectivenessand/orefficiency.Reflectingthedifferentformsoflinkage
betweenresultsandfundingwhichtheyseektobuild,performancebudgetingsystemsalso
differinrespecttothetypeofperformanceinformationuponwhichtheyprimarilyrely.This
appliesbothtothetypeofperformancemeasureswhichtheyuse,andalsotowhetherthey
makeuseofevaluationaswellasindicators.Asdiscussedearlier,allformsofperformance
budgetinghaveincommontheideaofgreatermanagerialfreedom,particularlyinrespectto
thechoiceofinputmix.

Themostbasicformofperformancebudgetingisthatwhichusesperformanceinformation
systematicallyinthepreparationofthegovernmentwidebudget.Acommontoolusedforthis
purposeisprogrambudgeting,inwhichexpenditureisclassifiedinthebudgetbyobjectives
(outcomesandoutputs),ratherthansolelybyeconomiccategories(suchassalaries,supplies
andcommunicationcosts)andorganizationalcategories(e.g.ministryanddepartmentwiththe
ministry).Theprimaryobjectiveofprogrambudgetingisimprovedexpenditureprioritization.
However,byincreasingtheattentionpaidduringbudgetpreparationtospendingministry
15

performance,thistypeofperformancebudgetingalsoaimstoincreasethepressureon
ministriestoimproveefficiencyandeffectiveness.
7

Itshouldbeemphasizedthat,intheterminologyadoptedhere,performancebudgetingisa
genericconceptofwhichprogrambudgetingisoneformofperformancebudgeting.Thisneeds
tobeemphasizedbecausetherearesomewhoattempttodistinguishprogrambudgetingfrom
performancebudgeting.

Zerobasebudgeting(ZBB)isessentiallyavariationofprogrambudgetingwhich,initsoriginal
form,calledforthecomprehensivereviewandprioritizationofallexpenditureonacontinuing
basis.Toachievethis,allprogramsweretobedecomposedforthepurposesofbudget
preparationintodecisionpackages(alsoknownasserviceincrements)whichwouldprovide
choiceabouttheextenttowhicheachprogrammightbecutbackor,alternatively,given
increasedfunding.Ideally,thesedecisionpackageswouldcoverallmajoroptions,eventoa100
percentcutintheprogramconcerned(hencethezerobase).Priorityrankingswouldbe
attachedtothesedecisionpackagesagain,onthebasisofperformanceinformationand
theserankingswouldthenbeusedtoensurethattheavailablelevelofrevenuefundedthose
decisionpackageswhichwereofhighestpriority.Inthisway,ZBBaimedtogoevenfurther
thanprogrambudgetinginimprovingexpenditureprioritization.

ThefundamentalproblemwithZBBwasthepracticalimpossibilityofcomprehensively
reviewingallexpenditureeachyear.Inotherwords,thezerobaseexaminationofeach
programwasnotreallypracticable.Selectiveexpenditureappraisalisallthat,inpractice,canbe
achieved.Inrecognitionofthis,ZBBevolvedintowhatissometimescallalternativebudgeting.
Ratherthanseekingtoexaminealloptionsforeachprogram,extendingeventoaonehundred
percentcut,alternativebudgetingtriedtomakethetaskmanageablebyconfiningtheprocess
totheexaminationeachyearofamuchnarrowerrangeofoptionsforcutsorincreasestoeach
programforexample,theoptionsof15,10and5percentcuts,andperhapsalsoof5or10
percentincreases.

7
Programbudgetinghasthepotentialtocontributesignificantlytoaggregateexpenditurediscipline,andthereby
tofiscaldiscipline.Bygivinggovernmentanimprovedcapacitytoidentifylowpriorityorineffectiveprograms
whichcanbecut,itmakesiteasiertocreatethefiscalspacenecessarytorespondtonewpolicyprioritieswithout
unduegrowthinaggregatespending.Moreover,ifandwhenfiscalconsolidationisnecessary,betterprioritization
makesitpossibletotargetspendingcutssoastominimizetheirsocialcostandincreasetheirsustainability.
16

Underbothprogrambudgetingandzerobasebudgeting,thelinkbetweenresultsandfunding
isaratherloose,ratherthanmechanical,one.Theresultsachievedbyprograms(ordecision
packageswithprograms)isconsideredcloselyinthebudgetpreparationprocess,butthereitis
notthecasethatpoorresultsautomaticallymeanscutsor,conversely,thatgoodresults
automaticallymeansincreasingfunding.

Sincethe1980s,arangeofnewerformsofperformancebudgetinghavebeendevelopedwhich
aimtobuildatighterlinkagebetweenfundingandresults.Thesenewerformsofperformance
budgetingallaimtoincreasethepressureonpublicagenciestoimprovetheeffectiveness
and/orefficiencyoftheserviceswhichtheydelivery.Toachievethese,theyrelyonthree
mechanisms,usedeitherinisolationorincombination.

Thefirstofthesemechanismsislinkingbudgetstoperformancetargets.

Settingperformancetargetswhetherforministries,workunitsorindividualsis,asnoted
above,ageneralMFRtheme.Itiswhenbudgetfundingislinkedinsomemannerto
performancetargetsthatwearetalkingaboutaformofperformancebudgeting.Thebest
exampleofatargetbasedformofperformancebudgetingistheUKPublicServiceAgreement
(PSA)systemasitoperatedbetween1998and2004
8
.Underthissystem,targetsweresetona
triennialbasisaspartofamultiyearbudgetingframework.Inotherwords,highleveltargets
foroutcomesandoutputs(seethenextsectionforexplanationsofthesekeyconcepts)wereset
asanintegralpartoftheprocesswhich,everythreeyears,determinedthecorefundinglevels
whicheachministrywouldreceiveforthecomingthreeyearperiod.Targetsweresetinthe
lightoffunding,andfundinginthelightofperformanceagainsttargets.Themajorquestion
thatthisraisestobediscussedlaterinsection13istheconcretenatureofthislinkbetween
fundingandtargets.

Targetsettingraisesarangeofissues,whichwillalsobediscussedindetaillatersection13.One
oftheseistheproblemofselectingtherightnumericalvalueforthetarget.Inprinciple,of
course,thetargetshouldbeneithertootoughnortooeasy.However,itisoftennoteasyforthe
ministryoffinance(MoF)orothercentraldecisionsmakers,withoutadetailedknowledgeof
theareaofservicedeliveryconcerned,tosetthetargetatanappropriatelevel.Anotherissues
raisesbytargetsettingistheissueofbehavioraldistortions,anexampleofwhichisthedanger
that,instrivingtofulfillatargetsetintermsofonedimensionofperformance,theagencymay

8
SeeP.Smith,PerformanceBudgetinginEnglandinRobinson,PerformanceBudgeting.
17

putlesseffortintoanotherdimensionofperformancewhichisnotfactoredintothe
performancetarget.
9

Thesecondmechanismusedtocreatingatighterlinkbetweenfundingandresultsisformula
funding,whichisthesubjectofsection12.Formulafundingmeansthattheleveloffundingtoa
governmentagencyisdetermined(inpartorwhole)asamathematicalfunctionofsome
explicitvariables.Asimpleexampleisaformulatoestimateschoolfundingrequirementsover
themediumtermasafunctionofthenumberofstudentsandthecostperstudent(basedon
demographicprojections).Thisillustratestheideaofacostbasedformula,thesimplestversion
ofwhichbasesfundingonthequantityofoutputtimestheunit(average)costperoutputas,
forexample,inaschoolfundingsystemwherefundingforeachschoolisdeterminedprimarily
byitsnumberofstudentsmultipliedbyanamountintendedtocoverthecostofoneyears
educationofonestudentattherelevantstageofschooling(e.g.$4000peryearninestudent
peryear)..Inthiscase,theformulaisbeingusedonlyasabudgetestimationtoolthatis,to
estimatehowmuchfundingshouldbeprovidedtoaparticularserviceareaortospecificservice
providerunits(e.g.specificschools).

Notallformulafundingarrangementscanbesaidtobeformsofperformancebudgeting.Itis
onlywhentheformulalinksfundingtoresults(outcomesand/oroutputs),anddoessowiththe
intentionofboostingefficiencyand/oreffectiveness,thatformulafundingbecomesatoolfor
performancebudgeting.Thiswouldbethecase,forexample,iftheformulawasbeingusedin
effecttosetaperformancetargetfortheagency.Asaconcreteexampleofthis,supposea
ministrywasfundedonaformulabasisto,say,vaccinateonemillionpersonsat$20per
vaccinationinthecomingyear,andwasthenheldtoaccountforifitspendallthemoneybut
onlyvaccinated600,000people.

Thethirdmechanismusedbythenewerperformancebudgetingmodelsisperformancefunding
incentivestoagencies.Anexampleofthisisperformancebonusfunding,whichoperatesby
givingagenciesadditionalpaymentsformeasuredgoodperformance(orperhapsalsofunding
reductionsasafunctionofmeasuredpoorperformance).Anexampleisuniversityfunding
systemswhichoperateinmanycountriesinwhichpublicuniversitiesaregivenbonusfunding,
overandabovetheircorefunding,basedonperformanceagainstmeasuressuchasthe
percentageofgraduateswhoareinprofessionalemploymentsixmonthsaftergraduation.As

9
Forexample,ifthetargetissetintermoftheunitcostofservicedelivery,theagencymightsacrificequalityin
ordertocutscosts.
18

thisexampleshows,mostperformancefundingincentivesarealsoformsofformulafunding,
becausethefundingincentiveprovidedisdeterminedbyamathematicalformulalinkedtoa
performanceindicator.
10

Performancefundingincentiveslikeformulafundingarealmostinvariablyusedas
instrumentforsectoralperformancebudgetingsystems(i.e.coveringsomesectorof
government,suchasschools,orhospitals.

Theaboveoutlinesthreekeymechanismsusedbynewerperformancebudgetingsystemsto
createtighterlinksbetweenfundingandresults.Asindicatedabove,thesemechanismsmaybe
usedinisolationorincombination.Animportantexampleofthecombinedapplicationofwhoe
ofthesemechanismsisthepurchaserprovider(PP)model.PPisacombinationoftheprinciples
ofincentivepaymentsandformulafunding(thesecondandthirdofthemechanisms
identified).Inapurchaserprovidersystem,apublicsectoragencyisfundedasifitwerean
armslengthproviderofgoodsorservices.Governmentfundstheagencybypayingaprice
perunitfortheagencysoutputs(andsometimes,butmorerarely,outcomes).Iftheagencys
costofproductionexceedsthepriceitispaid,theagencymakesaloss.Conversely,itretains
anyprofitmadebyproducingatacostbelowtheprice.InaPPsystem,fundingisonlyprovided
forresultsdelivered.Finally,thepricepaidisideallybasedon,partlyorinwhole,onsome
measureofwhatitshouldcostanefficientproducertodelivertheoutputconcerned.Theaim
ofthissystemistomotivatestrongperformanceviastrongfinancialperformanceincentives.

Themostsuccessfulexampleofapurchaserprovidersystemisthediagnosticrelatedgroup
systemofhospitalfunding.Broadlyspeaking,thisisasysteminwhichhospitalarefunded
primarilyforthetreatmentstheydelivertopatients.Servicesarecategorizedintoanumberof
differentoutputtypes(DRGs),andaspecificpriceisattachedtoeachDRGcategory.Sucha
systemprovidesapowerfulincentiveforefficiency.Atthesametime,itraisesconcernsabout
thedangerofcostcuttingwhichunderminesthequalityoftreatmentorhasotherperverse
behavioraleffects.TheexperienceoftheDRGsysteminthisrespectis,however,encouraging.

Accrualoutputbudgeting(AOB)representedan(unsuccessful)attempt,inNewZealandand
Australia,toapplythepurchaserproviderprincipletothegovernmentaswhole,asopposedto
aparticularsectorsuchashospitals.TheideaofAOBwasthatministrieswouldbefundednot

10
Notethatinthiscase,theformulaisnotlinkedtothecostsoftheperformancedelivered(forexample,noone
wouldpretendtoknowtheadditionalcostinvolvedinboostingthegraduateemploymentrateby,say,5percent).
19

bybeinggivenbudgets,butwouldratherbepaidfortheoutputstheydeliver,asiftheywere
externalcontractorstogovernment.Itwasintendedthatgovernmentwouldbeatoughprice
setter,seekingtocreatethetypeofpricingpressurewhichoccursinacompetitivemarket.
Becauseinthismodelministriesweresupposedtoactlikebusinesses,itwasnecessarythat
theyusebusiness(i.e.accrual)accountinghencetheaccrualinaccrualoutputbudgeting
(thelinkwithaccrualaccountingisdiscussedinasection16).Italsobecamenecessaryto
distinguishgovernmentspurchaserrolevisvisitsagenciesfromitsownershiprole.The
AOBexperienceisdiscussedindetailinthesection12.

KeyReadings

Robinson,M(2007),PerformanceBudgetingModelsandMechanismsinM.Robinson(ed.)
PerformanceBudgeting:LinkingFundingandResults.

20

3.PerformanceInformationFundamentals

Outcomesandoutputsplayacentralroleinallmodelsofperformancebudgeting,anditis
essentialforanydiscussionofperformancebudgetingthattheseandrelatedconceptsare
clearlyunderstood.
PerformanceConcepts:theResultsChain
Intheresultschainframework,outputsareproducedusinginputs(resources)viaactivitiesand
processes,andoutputsgenerateoutcomesforthecommunity.

TheResultsChain

Inputs(Resources)
Activities(Processes)
Outputs
IntermediateOutcomes
HighlevelOutcomes

Outputsaregoodsorservicestheproductswhichaministryorothergovernment
organizationdeliverstoexternalparties.Thisusuallymeansservicesdeliveredtoorforthe
directbenefitofthecommunity,althoughsomeoutputsareserviceswhichministriesdeliverto
otherministries.Examplesofoutputsinclude:medicaltreatments;advicereceivedbyfarmers
fromagriculturalextensionofficers;studentstaught;andpolicecriminalinvestigations.Most
21

governmentoutputsareservices,andforthisreasonthetermsoutputandservicewillbeused
interchangeablyinthismanual.

Outcomesaretheintendedimpactsofoutputsmoreprecisely,thechangesbroughtaboutby
publicprogramsuponindividuals,socialstructures,orthephysicalenvironment.Health
inspectionsofrestaurantsareanoutput,theintendedoutcomeofwhichisthatfewerdiners
fallsick.Criminalinvestigationsareapoliceoutput,andreducedcrimetheoutcome.

Manygovernmentservicesaimtoachievemorethanoneoutcome.Forexample,school
educationaimstoincreasethelevelofeducationofthepopulation.Butitalsoaims,amongst
otherthings,toimproveeconomicperformance.Bothahigherlevelofeducationanda
strongereconomyareoutcomes.Becauseitisbymeansofthefirstofthesethatthesecondis
achieved,amoreeducatedpopulationissaidtobeanintermediateoutcome,andastronger
economyahigherleveloutcome.Therelationbetweenproximateandhighleveloutcomesis
oneoflogicalcausality(i.e.theproximateoutcomesinducethehighleveloutcomes).

Theoutcomeselementisthedistinctivelypublicsectorcomponentoftheresultschain.By
contrast,thewayinwhichoutputsareproducedisconceptualizedintheresultschaininexactly
thesamewayasintheprivatesector:outputsareproducedbytheuseofinputsinproduction
activitiesandprocesses.Forexample,thetreatmentwhichseriouslyinjuredpersonreceivesin
hospitalinvolvestheuseofasetofinputs(skilledstaff,operatingequipmentandfacilities,
medicalsupplies,electricityetc)andasetofactivitiesincludinganesthesia,surgeryand
nursing,aswellassupportingactivitiessuchassuppliesandfacilitymanagement.

Inputs,asthisexampleindicates,refertoallinputs,assetsandcapabilitieswhichareormaybe
drawnonintheproductionprocesstodelivertheoutputsandoutcomesdesired.Although
inputsistheconventionalresultschainterm,andthereforewillbeusedhere,theterm
resourcesactuallycapturesbetterthescopeofwhatisreferredto.Thusinputswhich
contributetothecapabilitytodeliverresultsincludenotonlyequipmentandbuildingsby,for
example,organizationalcultureandstaffmorale.
11

11
Weare,inotherwords,talkingaboutmuchmorethanthefactorsofproductionofeconomics101(labor,land
andcapital),andalsotodrawattentionthattheinputsanorganizationcandrawnuponarenotonlypurchased
fromoutside,butcreatedwithintheorganization.

22

Physicalassetsareinputswhicharesometimesmistakenlythoughtofasoutputsasin,for
example,thenumberofroadsorbridgesprovidedbygovernmenttothecommunity.Butitis
nottheroadsandbridgeswhichareoutputs,butrathertheservicewhichcitizensgetfrom
theseroadsandbridges.Thismeans,forexample,thatpassengermilestraveledisanoutput
measurewhilekilometersofroadisaninputmeasure.
12

Thetermactivitiesmayseemselfexplanatory,butconfusionbetweenactivitiesandoutputsis
verycommon.Someexamplescanhelpavoidthisconfusion:

Inahospital,anesthesiaandcleaningareactivitiesratherthanoutputsbecausetheyare
componentsoftheoverallserviceprovidedtothepatient,ratherthanthecomplete
service.Thepatientcantrecoverthroughanesthesiaorcleaninginisolation,anditisonly
viathecombinationofallthenecessaryactivitiesthatthecompleteservice(theoutput)is
delivered.Moregenerally,anoutputmustbecapableofdeliveringtheintendedoutcome.

Busdrivingisanactivity,whereaspassengertripsaretheoutputs.Similarly,teachingisan
activityratherthananoutput,andtheoutputisstudentstaught.Inthesecases,anactivity
producesmultipleoutputs.
13

Asmentionedabove,outputsaredefinedasservicesprovidedbyministriesorother
governmentagenciestoexternalparties.Soifoneministryprovidesservicestoanother
ministryforexample,training,orofficeaccommodationtheseareministryoutputsbecause
theotherministryisaclientexternaltotheministryprovidingtheservice.However,aservice
whichonepartofaministryprovidestoanotherpartofthesameministryforexample,when
theeducationministryshumanresourcesgrouprecruitsteachersfortheprimaryschoolgroup
isnotanoutputbutasupportservice.
14

12
Thisshouldbequalifiedbynotingthat,ifaseparatepublicworksministryisresponsibleforconstructingthe
roadsandbridgesandthendeliveringthemtothetransportministrywhichmanagesthem,thentheroadsand
bridgeswouldindeedconstituteoutputsofthepublicworksministrybecauseitisdeliveringthemtoanexternal
client.Butifthetransportministrymanagestheconstructionitself,theroadsandbridgesarenotoutputs.In
eithercase,theoutputprovidedbythetransportministryistheuseoftheroadbytravelers.
13
Or,potentially,asillustratedbythecaseofbusdriving,nooutputsatall.Thiswouldbethecaseifthebusran
butnopassengersgotonboard.
14
Somewouldarguethatwhatconstitutesanoutput,asopposedtoasupportservice,dependsonyour
organizationalperspective,andthatfromthepointofviewofthehumanresourcesgroup,recruitmentisan
outputwhichtheydeliver.Thisisavalidobservation.However,intheperformancebudgetingcontext,the
perspectivenormallyadoptedisthatoftheministryorotherdistinctgovernmentorganization.Thepointisto
focusentireministriesontheservicestheydelivertoexternalclients,ratherthanoninternalactivities.

23

Theresultschainisaverywellestablishedconceptualframeworkforthepublicsectorwhich
goesunderarangeofnames,includingtheprogramlogicmodelandlogicalmodel.
Althoughitsconceptsarestandardized,andhaveclearmeaningsattachedtothem,thereisone
significantdivergenceofusageworthmentioning:thepracticeadoptedbysomeofdividing
outcomes,asdefinedabove,intooutcomesandimpacts.Thedistinctioniseitheroneof
timelines(impactsbeingmorelongterm),oristhedistinctionbetweenintermediateandhigh
leveloutcomes.Thisterminologyisnotusedhere,becauseinpracticethereisoftennoclear
distinctionatthemarginsbetweenoutcomesandimpacts.

Oneotherminorpointofterminology:intermediateandhighleveloutcomesgobyawide
rangeofothernames(immediateoutcomes,proximateoutcomes,endoutcomes,ultimate
outcomes).Theideais,however,thesame.

Outcomesvs.ExternalFactors
Outcomesarethechangesbroughtaboutbygovernmentintervention.Ifthelevelofmalaria
fallsforreasonswhichhavenothingtodowithgovernmentactionsbecause,forexample,
thereisadroughtwhichreducesmosquitonumberssubstantiallythisfallisnotagovernment
outcome.Neitherisitanoutcomeiftherateofeconomicgrowthincreasessubstantially
because,andonlybecause,theworldeconomyisverybuoyant.Thefallinmalaria,ortheboost
inthegrowthrate,areoutcomesonlytotheextentthattheyaretheresultofgovernment
actions.

Outcomesthereforeneedtobedistinguishedfromtheconsequencesofexternalfactors.
Externalfactorsarefactorsbeyondthecontrolofgovernmentwhichinfluencethe
characteristicsofindividuals,socialstructuresorthephysicalenvironmentwhichthe
governmentistryingtochange.Thelevelofrainisthereforeanexternalfactorimpact
impactingonthemalariarate.Thestateoftheworldeconomyisanexternalfactorimpacting
ontherateofdomesticeconomicgrowth.Inassessingoutcomes,thechallengeistodistinguish
theimpactofexternalfactorsfromthatofthegovernmentintervention.

Externalfactorsarealsosometimesknownascontextualfactorsorconfoundingfactors.
Externalfactormaybepartoftheexternalenvironmentinwhichtheprogramoperates,orthey
maybecharacteristicsoftheclient.Anexampleoftheformeristheimpactofthestateofthe
economyonthesuccessrateofaprogramfortherehabilitationofinjuredworkersingettingits
24

clientsbackintotheworkforce.Anexampleoftheclientcharacteristictypeofexternalfactors
canbeseenineducation,wheretheeducationallevelsattainedbychildrenaredeterminednot
onlybythequalityoftheeducationtheyreceiveatschool,butbyexternalfactorssuchastheir
intelligence,nutritionandlevelofparentalsupport.Expresseddifferently,thesetypesof
externalfactorsimpactuponoutcomevariablessuchastheliteracyandnumeracyrates(see
thenextsectionfortheconceptofanoutcomevariable).Thismakesitdifficulttocomparethe
performanceoftwodifferentschoolsbysimplylookingatlevelsofstudenteducational
attainment,becausedifferencesinthesocioeconomicmixofstudentpopulationscanmake
suchcomparisonscompletelymisleading.

Outputsvs.OutcomesandActivities
Itisusefultoclarifyfurthertherelationshipbetweenoutputsandoutcomes.Tobeconsidered
anoutput,anoutputmustbecapableofachievingitsintendedoutcome,butthisdoesnot
necessarilymeanthateachunitofoutputwillbesuccessfulinactuallyachievingtheoutcome.
Considertheexampleofamedicaltreatmentofanaccidentvictimwhodiesnotwithstanding
receivingexactlythebesttreatmentinatimelymanner.Itwouldnotbereasonabletosay
underthesecircumstancesthatthepatientdidnotreceiveaservice(output).Thesamepoint
applies,say,toeducation,wheredespitereceivingexcellentteaching,certainstudentsmayfail
tolearnmuch,whileothersinthecasewilldoverywell.

Anassociatedpointisthat,tobeanoutput,aservicemustbecomplete.Considertheexample
ofacar,whichisonlyaproduct(i.e.anoutput)onlywhenalltheparts(wheels,engineetc)are
attachedanditcanthereforefunctionasintended.Anothergoodexampleistetanusinjections,
whereitisnecessarytohaveafullcourse(ofthreeinjections)inordertoacquireimmunity.
Thetetanustreatmentoutputsshouldthereforebemeasuredintermsofnumbersofpersons
whoreceivethecompletecourse.Otherwise,onewillendupcountingactivities(e.g.
incompletecourseoftetanustreatments)whichareincapableofyieldinganybenefittothe
client/community.

PerformanceIndicators
Performanceinformationreferstoinformationonresultsachieved,and/orcostsofachieving
thoseresults.Therearetwobasictypesofperformanceinformation:performancemeasures
andevaluation.Inthisandthenextcoupleofsections,wefocusonmeasures.Afterthat,
25

evaluationwillbediscussed.Itshould,however,beemphasizedattheveryoutsetthatitisa
mistaketothinkthatperformancebudgetingisonlyabouttheuseofperformancemeasuresin
thebudgetprocess.

Performanceindicatorsarequantitativemeasureswhichprovideinformationonthe
effectivenessandefficiencyofprogramsandorganizations.Thereisnodifferencebetweena
performanceindicatorandaperformancemeasurebothtermsareusedinterchangeably
inthismanual.Wealsoneedtobecarefulnottoconfuseobjectives,indicatorsandtargets.An
objectiveisastatementofwhatoneistryingtoachieveforexamplereducingdeathfrom
HIV/AIDS.Bycontrast,aperformanceindicatorisquantified(e.g.thepercentageofthe
populationwhichisHIV/AIDSpositive,orthenumberofpersonsdyingannuallyfrom
HIV/AIDS).Atargetgoesonestepfurtherandsetsapreciseaimtobeachievedbyaspecific
date(e.g.reducingthepercentageofHIV/AIDSpositivepersonsinthepopulationbyatleast
onethirdby2020).

Performanceindicatorsshouldbeselectedaccordingtotheextenttowhichtheyare:

Relevant
Representative
Costeffective
Comparable
Minimizeperverseeffects
Anindicatorisrelevantwhentheaspectofperformanceitseekstomeasureisimportanttothe
objectivesofitsusers.Relevancedependsonwhotheuseris.Inselectingindicatorstopresent
toparliamentandthepublic,forexample,indicatorsofinternalprocesses(suchastimetaken
tofilljobvacancies)wouldnotberelevant.
Anindicatorisrepresentativetothedegreetowhichitsucceedsinmeasuringthedimensionof
performancewhichitseekstomeasure.Representativeindicatorsaregoodproxiesforwhat
theyaretryingtomeasure.Ameasureofaveragetimetakentoanswerclientphonecallsis,for
example,apoorproxyforthequalityofclientserviceifwhathappensisthatcallsareanswered
quicklybuttheclientisleftonholdforanextendedperiod.Anindicatorismorerepresentative
thelessitvariesforreasonswhichhavenothingtodowithperformance,suchastheimpactof
uncontrollableexternalfactorsandstatisticaluncertainty.Toberepresentative,anindicator
26

shouldalsobeunambiguous.Thatis,itshouldbeclearwhetherachangeintheindicator
meansthatperformancehasimprovedordeteriorated.
Anindicatoriscosteffectiveifthebenefitsofusingaspecificindicatorexceeditscostof
collection,processingandverification.Performancemeasurementsystemsarenotcostfree.
Likeeverythingelse,theyshouldthereforepassabenefit/costtest.
Acomparableindicatorisonewhichisusedbysimilarserviceproviders,orbythesame
organizationinthepast.If,forexample,thereisaninternationalstandardmeasureforaservice
forexample,aswiththemeasuresprovidedinEuropebythecommonsetofsocialpolicy
indicatorsthenusingthatmeasuremakesitpossibletomakeperformancecomparisonswith
othercountries.Similarly,performancecomparisonsbecomemucheasierifallrelevantentities
e.g.alllocalgovernments,orallhospitalsausethesameindicators.Comparabilityovertime
isusefulbecausecontinuingtousethesameindicatorsthathavebeenusedinthepastmakes
itpossibletoidentifytrendsinbeforewhichmightbeimpossibletodetectiftheperformance
measureshavechanged.
Perverseeffects,whicharediscussedfurtherbelow,areadverseconsequencesofperformance
measures.Examplesare:
Inseekingtoimprovemeasuredliteracyandnumeracy,schoolsmightreducetheirfocuson
otherimportantdimensionsofeducation,suchastheteachingofforeignlanguagesor
socialvalues,
Supposethetimelinessofhospitalaccidentandemergencywardtreatmentismeasuredby
thepercentageofpatientswhoaretreatedwithin4hours.Thiscanpotentiallyproducethe
perverseeffectthatanypatientwhocannotbetreatedwith4hoursmaybekeptwaiting
considerablylonger,withprioritybeinggiventopatientswhohavearrivedlaterbutwho
canstillbetreatedwithin4hours.

Perverseeffectsareinparttheconsequenceofindicatordesign:forexample,theomissionof
somekeyaspectsofperformancewhich,withimproveddesign,couldhavebeencaptured.In
thecaseofhospitalwaitingtimes,theperverseeffectreferredtowouldbeavoidedbyusinga
measureofaveragewaitingtimeinsteadofthemeasureofthosetreatedwithinaparticular
(arbitrary)timeperiod.
Thesefivecriteriaforgoodperformanceindicatorsareideals,andfewgoodindicatorswill
scorehighlyonallofthem.Sometimes,ahighratingononecriterionwillcomeatthepriceofa
27

lowerratingonanother.Outcomemeasuressuchasthecrimerate,forexample,scorevery
highontherelevancecriteriabutlesswellonrepresentativenessbecausetheyaregreatly
influencedbyexternalfactorsbeyondthecontrolofgovernment.
Inthissection,wehavefocusedonperformanceconceptsandperformanceinformationin
general.Inthespecificcontextofperformancebudgeting,however,whatwearereally
interestedinistheperformanceinformationevaluationsaswellasindicatorswhichisuseful
for,andusableby,budgetdecisionmakers.Animportantpointtobearinmindhereisthat
decisionmakerscanonlyabsorbandusealimitedandcarefullyselectedamountof
information.Itisthereforeessentialnotonlytobehighlyselectiveinchoosingahandfulofkey
performanceindicatorsrelevanttobudgetdecisionmakers,butalsotoputtheseindicators
togetherwithanalysiswhichinterpretsandexplainsthem,drawingoverallconclusionsabout
performance.Thisanalysisshoulddrawcloselyontheconclusionsofformalevaluationsand
otherreviewwork.

KeyReadings
Robinson,M(2007),InformingPerformanceBudgetingandResultsInformation,inM.
Robinson(ed.)PerformanceBudgeting:LinkingFundingandResults.

HMTreasuryetal(2001),ChoosingtheRightFabricaFrameworkforPerformance
Information,obtainableathttp://archive.treasury.gov.uk/performance_info/fabric.html.

RoyalStatisticalSociety(2003),PerformanceIndicators:Good,BadandUgly,obtainableat
http://www.rss.org.uk/pdf/PerformanceMonitoringReport.pdf.

28

4.PerformanceMeasuresandtheBudget

Theindicatorsofmostvalueforperformancebudgetingwilltendtodiffersignificantlyfromthe
indicatorsusedforotherpurposes.Whatwillgenerallybeofgreatestvaluetobudgetdecision
makersindeterminingappropriateprogramfundinglevelswillbeindicatorsoftheresults
achievedbyprogramstheoutcomesthattheyachieveandtheoutputswhichtheydeliverto
achievetheseoutcomes.Theywillrepresentonlyasubsetoftheindicatorsusedinternallyfor
managerialpurposesbyministries,whichwillincludenotonlyresultsorientedindicators,but
alsoactivityandinputindicatorsfocusedontheinternalprocesses,capacitiesandresourcesof
theministry.

Therearethreemaintypesofoutputindicators:indicatorsofoutputquantity,indicatorsof
outputquality,andindicatorsofefficiency.

Outputquantityindicatorsmeasurethevolumeofserviceprovided.Examplesofoutput
quantityindicatorsare:

Numberofvaccinationscarriedout,
Numberofmalariapronedistrictssprayed,
Numberstudentstaughtatseventhgrade,
Numberofplanningapplicationsdetermined.

Outputqualityindicatorsprovideinformationontheextenttowhichtheserviceisofatype
whichislikelytoachieveitsintendedoutcome.Twoexamplesofmorereadilymeasurable
qualityindicatorsaretimelinessindicatorsandclientsatisfactionindicators.Examplesof
timelinessindicatorsare:

Averagewaitingtimeofahospitalpatientbetweenarrivalandtreatment,
Averagetimeforaplanningapplicationtobedetermined,
Averageresponsetimeofthefirebrigadetoafire.

Clientsatisfactionmeasurescanbeofvarioustypes,fromsimplemeasuresofthelevelof
satisfactionfeltbytheclient,tomoretargetedmeasuressuchas:

29

Clientratingsofthecourtesyoftheserviceprovider,
Thepercentageofclientswhoconsiderthattheyobtainedtheservicewhichtheywere
seeking.

Efficiencyindicatorsmeasure,ideally,theextenttowhichtheserviceisdeliveredatlowcost
withoutsacrificingquality.Unitoutputcostoneimportanttypeofefficiencyindicator,although
thisisnotaperfectmeasureasitdoesnotnecessarilyholdqualityconstant.Theunitcostis
simplythetotalcostofdeliveringtheoutputdividedbyoutputquantity.Examplesofunitcost
measuresare:

Costpervaccination(includingdelivery),
Costperplanningapplicationdetermined,
Costpervisaapplicationprocessed.

Laborproductivityindicatorsareanotherimportanttypeofefficiencyindicator.Examplesof
laborproductivityindicatorsinclude:

Pensionbenefitapplicationsprocessedperstaffmember,
Averagestafftimetakentoadministerapracticaldrivinglicensetest.

Inrespecttooutcomemeasurement,thebiggestchallengearisesfromthedistinction,
discussedinthelastsection,betweenoutcomesandexternalfactors.Asnoted,outcomesare
thechangeincharacteristicofindividuals,socialstructuresorthephysicalenvironmentbrought
aboutbygovernmentintervention,andthechallengeistoseparateouttheimpactof
governmentinterventionfromthatofotherfactorsbeyondgovernmentcontrol.

Inpractice,manyoutcomeindicatorsareinfactmeasuresofwhatcanbecalledtheoutcome
variablethatis,thecharacteristicsofindividuals,societyorthephysicalenvironmentwhich
publicprogramsseektochange.Measuresoftheoutcomevariabledonotdistinguishthe
impactofthegovernmentsinterventionfromthatofexternalfactors.Agoodexampleofthis
typeofoutcomeindicatorisacrimeratestatistic(e.g.thenumberofrobberiesperthousandof
population).Weknowthatthecrimerateisnotonlyinfluencedbygovernmentinterventions
suchaspolicing,butisalsogreatlyaffectedbysocialandeconomicdevelopmentsbeyond
governmentcontrol(e.g.thelevelofpoverty).Crimeratestatisticsmakenoattemptto
eliminatetheimpactofthelattertypeofexternalfactor.
30

Theperfectoutcomemeasurewouldbeonewhichexcludestheimpactofallexternalfactors
andwhichmeasuresonlythechangeintheoutcomevariablebroughtaboutbygovernment
intervention.Developingsuchmeasuresis,however,exceedinglydifficult.Inafewareas,
modernperformancemeasurementtechniqueshavegonequitealongwayindeveloping
outcomemeasureswhichremove,toatleastsomeextent,theeffectsofexternalfactors.A
goodexampleofthisisthesocalledvalueaddededucationperformancemeasures,which
attempttoadjustforstudentcharacteristics.Forexample,valueaddedschoolleaguetables
presentmeasuresofthecomparativeperformanceofschoolswhichadjustforthesedifferences
instudentpopulation.However,althoughthisandothertechniqueshavebeendevelopedto
obtainbetteroutcomeindicatorswhicharelesseffectedbyexternalfactors,theoverallscope
foreliminatingexternalfactorsfromoutcomemeasuresisquitelimited.Asaresult,thegreat
majorityofoutcomemeasuresareaffected,tovaryingdegrees,byexternalfactors.

EnsuringthatIndicatorsareUseful
Tobeusefultocentraldecisionmakers,whoinvariablyhavegreatdemandsontheirlimited
time,programperformanceinformationneedstobereadilydigestible.Acoupleofkeyprogram
indicatorsmay,forexample,bemoreusefultotopdecisionmakersthanacomprehensive
compendiumofdozensofindicators.Thedetailisofmoreinteresttoprogrammanagersthanto
thecenter.

Anotableinnovationinthiscontexthasbeenthedevelopmentofsummarymeasureswhich
incorporateawiderangeofperformanceinformationintooneormoreoverallperformance
ratingsfortheprogram.Agoodexampleofthisisthemeasuresofprogramperformancewhich
wasdevelopedundertheUSProgramAssessmentRatingTool(PART)whichoperatedunderthe
Bushpresidency.UnderthePARTsystem,theUSfinanceministry(theOfficeofManagement
andBudget)setaboutratingallfederalgovernmentprogramsoveraperiodof5years.Each
programwasratedonascaleof4ratings,rangingfromeffectivetonoteffective(therewasalso
aresultsnotdemonstratedrating,usedwherethereisinsufficientinformationtoforma
judgment).Thesesummaryratingswereintendedtobemuchmoreinformativeandreadily
understoodthanthelargebodyofmoredetailedmeasuresandevaluationswhichunderpinned
them.Theprogramratings,andthereasoningbehindthem,wereallmadepublic(onthe
websiteExpectMore.gov).Moreover,thePARTsystemwasdesignedfromtheoutsetasatool
forperformancebudgeting,becausetheprogramratingswereusedtoinformthepreparation
31

ofthepresidentsbudgetproposaltoCongress(andwerealsointendedtoinfluenceCongress
budgetdecisions).

SummaryperformancemeasuresofwhichPARTisbynomeanstheonlyrecentinternational
examplehavetheenormousadvantageofreadycomprehensibility.Theycanalsobefarmore
effectivethanmoredetailedindicatorsinputtingrealperformancepressureongovernment
agencies.Thisshouldnot,however,blindustotheveryconsiderabletechnicalchallenges
involvedinappropriatelydefiningsummarymeasures.Inappropriateselectionofconstituent
variables,orpoortechnicaldesigninrespecttotheaggregationofthesevariables,canproduce
summarymeasureswhicharequitemisleading.

LinkingFundingtoOutcomes
Inconsideringtheroleofperformancemeasuresinbudgetingandfundingdecisions,itis
importanttoexplicitlyconsidercertainkeychallengeswhichariseinlinkingoutcomeand/or
outputstofunding.Thesehaveanimportantbearingonthechoiceofmodelofperformance
budgeting.Westartbyconsideringtheoutcomes/fundinglink,andafterthatlookatthe
output/fundinglink.

Inrespecttooutcomes,theimpactofexternalfactorsonmeasuredoutcomevariableshas
majorimplicationsforthetypeoflinkagebetweenoutcomesandfundingwhichitmaybe
possibletocreateinaperformancebudgetingsystem.Asnotedabove,mostoutcome
indicatorsdonotseparateorseparateonlytoalimiteddegreetheoutcomesachievedby
governmentinterventionfromtheimpactofuncontrollableexternalfactors.Whenthe
influenceofexternalfactorsisextensive,itmaybedifficultorevenimpossibletopredictthe
outcomewhichanyparticularlyleveloffundingofapublicservicewillproduce.Thisisamajor
obstacletoattempttocreateatightlinkbetweenfundingandoutcomesforexample,by
basingapurchaserprovidersystemonoutcomes.Forthisreason,performancebonusfunding
basedonoutcomestendstobeusedonlytoprovidesmalladditionalfundingrewards(e.g.5
percentadditionalfunding),becauseiftherewastoostrongalinkbetweenfundingand
unpredictableoutcomes,thefinancialstabilityofthegovernmentagencyconcernedwouldbe
adverselyaffected.Atthesametime,outcomemeasuresarecrucialtoprogrambudgeting,and
mustconstituteakeyelementinexpenditureprioritizationdecisions.

Thisraisesthequestionofoutcomestargetsandfunding.TheUKPSAsystemreliedheavilyon
outcomeindicators,overmanyofwhichthegovernmenthadlimitedcontrol.How,andtowhat
32

extent,canonelinkfundingtotargetswhichareonlypartiallycontrollable?Clearlytherehasto
beflexibilityinthefunding/targetrelationshipundersuchcircumstances.Thereare,however,
manywhotaketheviewthatflexibilityisnotenoughandwhodisputethewisdomofseekingto
linkbudgetdecisionstooutcometargets.Intheirview,targetsettingingovernmentshouldbe
confinedmainlytooutputsorothervariablesoverwhichgovernmenthasahighdegreeof
control(e.g.activities).

LinkingFundingtoOutputs

ThemainfocusinPBsystemsuchasformulafundingandpurchaserprovideristhecreationof
linksbetweenthequantityofoutput(i.e.volumeofservicesprovided)andtheleveloffunding.
Formanyoutputsproducedbygovernment,thereisamuchstrongerlinkbetweenfunding
providedandoutputsdelivered(ordeliverable)thanisthecaseforoutcomes.Thisis
particularlytrueforstandardizedoutputs,whichareoutputswhereeveryclientreceivespretty
muchthesamelevelofservice,sothatunitcostshouldthesame.
15

However,quiteafewgovernmentservicesarenotstandardized.Theyare,rather,
heterogeneousoutputs.Thismeansthatthelevelofserviceprovidedtodifferentclients,orin
differentcases,isdeliberatelyvariedsoastoaddressdifferencesinclientconditionsor
circumstances.Policecriminalinvestigationsareaclassicexampletheamountofeffortputin
percase,evenforthesametypesofcase(e.g.murderinvestigations)variesenormously
dependingonthecircumstancesofthecase.Eveninschooleducation,whichisquite
standardizedforthegreatmajorityofstudents,heterogeneityispresentwhenadditional
teachingandcareactivityisdevotedtochildrensufferinganintellectualorphysicaldisability.

Substantialheterogeneityunderminethepredictabilityoftherelationshipbetweenthefunding
levelandtheoutputswhichtheagencycanbeexpectedtoproduce,thusalsoinfluencinghow
tightalinkitispossibletocreatebetweenfundingandoutputs.Thisparticularlyaffectsthe
scopeforapplyingformulafundingandpurchaserprovidersystems,asdiscussedinsection12.
Thismeansthattheseformsofperformancebudgetingcanonlybeappliesselectivelytothe
righttypesofservices.

15
Atleastifweleaveasidecostdifferencearisingfromfactorslikegeography.
33

Thereisoneothertypeofserviceforwhichtightlinksbetweenoutputsandfundingare
problematic.Thisiscontingentcapacityoutputs,ofwhichafiredepartmentisagoodexample.
Thefiredepartmentmaintainscapacitytoprovideatveryshortnoticeanoutput(firefighting)
forwhichthedemandishighlyunpredictable.Itwouldbeunrealistictoseektobuildavery
closelinkbetweenthenumberoffiresattendedbythefireserviceandtheleveloffunding.Fire
servicescannotthereforebefundedonaperoutputbasis,butmustinsteadbefundedinsuch
awayastodeliveracertainlevelofcapacitytofightfires.

Thediscussiontothispointhasfocusedonoutputquantity.Thereisalsothequestionof
potentiallylinkingfundingtooutputquality.Itwouldbehighlydesirabletobeabletoinclude
theoutputqualityaswellasquantitydimensionin,forexample,apurchaserproviderfunding
arrangement.Oneoftheconcernsaboutperverseeffectsraisedbypurchaserprovider
systemsisthat,infundingonlyforoutputquantity,onecreatesincentivesforagenciestocut
costsbyreducingquality.Includingaqualitycomponentinfundingcould,inprinciple,resolve
thisproblem.Inpractice,however,thisisnoteasy,giventhelimitstoourcapacitytomeasure
qualityandtheconsequentlyhighlyimperfectnatureofmostqualitymeasures.Ingeneral,the
besthopeforlinkingfundingtooutputqualityisthroughsomeelementofperformancebonus
fundingbasedonqualitymeasures(similartooutcomebonuses)inotherwords,byaddingon
toasysteminwhichthemainfundingisbasedonoutputquantityasmalladditionalelementof
qualitybasedfunding.

Finally,thereisthequestionoflinkingfundingtoactivitiesassuggestedthosewhoadvocate
activitybasedbudgeting.Thiswillbediscussedfurtherinthesessiononformulafunding.A
keyquestionwhicharisesinbasingfundingonactivities,however,isthatofhowfarthe
activitieswhicharebeingfundingnecessarilyleadtoresults(outputsandoutcomes)whichthe
publiccaresabout.Rememberthatwhileoutputsareservices,activitiesaremerelywork
processes(seesection1).Anorganizationwhichisinternallyfocusedratherthanexternally
focusedonresultsmayputexcessiveemphasisonactivitiesfortheirownsake.Tofundsuchan
organizationpartlyonthebasisofinternalsupportactivitiessuchasmeetingsheldorpolicy
documentsdevelopedcouldworsenthisproblem.

Inconclusion,thetightnessofthelinkwhichcanbecreatedbetweenresultsandfunding
dependsontheextenttowhichtheunderlyingconnectionbetweenfundingprovidedandthe
resultsonecanexpectisclearcut.Iftherelationshipisanuncertainonedueto,forexample,
externalfactorsorheterogeneitythenatightlinkmaybeimpossible.Thisiswhy,forexample,
34

itishardtousethepurchaserprovidermechanismtofundorganizationsforoutcomes.
Conversely,programbudgetingsystemwillworkevenwhenthereisconsiderableuncertaintyin
therelationbetweenresultsandfunding,preciselybecauseprogrambudgetinglinksfundingto
resultsonlyfairlyloosely.Thisiswhyprogrambudgetingiswidelyusedasthebasisforwhole
ofgovernmentperformancebudgetingsystem,whereasmechanismssuchasformulafunding
purchaserprovidercanonlyworkwhenappliedtocertainsectorsortypesofservices(e.g.
hospitalsorschools).

Theissuesdiscussedinthissectionalsohaveanimportantbearingontheroleofindicators
versusevaluation:namely,thattheimperfectionsofperformancemeasuresmeanthatone
cannotrelyuponmeasuresalonefortheperformanceinformationtobeusedforexpenditure
prioritization.

KeyReadings

Robinson,M(2007),ResultsInformationinM.Robinson(ed.)PerformanceBudgeting:Linking
FundingandResults.

35

5.PerformanceMeasurementSystems

Theperformancemeasurement(PM)systemreferstothemechanismsfordatacollection,the
processingofdataintoindicators,thevalidationofthoseindicators(i.e.ensuringthatthe
numbersarereliableandarenoteithermanipulatedorstatisticallyquestionable),andtheir
presentationtousers.APMsystemisasubsetofthebroadermonitoringandevaluation
system.

Indiscussingtheperformanceinformationrequirementsofperformancebudgeting,itneedsto
beborneinmindthatperformancebudgetingisnotorshouldnotbeanisolatedreform.As
emphasizedearlier,itispartofasetofbroaderreforms,oftenreferredtoasmanagingfor
results,whicharedesignedtofocuspublicmanagementmoreonresultsdelivered,andlesson
internalprocesses.Thesebroaderreformsincludecivilservicereformsdesignedtoincreasethe
motivationandincentivesofpublicemployees;organizationalrestructuringtoincreasethe
focusonservicedeliveryandimprovecoordination(e.g.creationofagenciesandreductionof
numbersofministries);andinstitutionalchangetostrengthenpublicaccountabilityfor
performance.Actionontheseandarangeofrelatedfrontsisnecessaryiftheefficiencyand
effectivenessofpublicexpenditureistobetangiblyimproved.Improvedperformance
informationisfundamentaltoeachoftheseelementsofMFRreformbecauseallneedtobe
underpinnedbybetterperformanceinformation.Forexample,acrucialingredientinmaking
thecivilservicemoreperformanceorientedistheimprovementofinformationontheactivities
andoutputsofindividuals,workgroupsandagencies.

Thisimpliesthatgovernmentwideperformanceinformationstrategyshouldbedesignedto
meetnotonlytheneedsofperformancebudgeting,butofMFRprocessesmoregenerally.Itis
notappropriate,forexample,toattempttodevelopasystemofperformancemeasurement
aimedexclusivelyatbudgetingapplications,andentirelyseparatesetsofmeasuresusedforcivil
servicemanagement,accountabilityorotherpurposes.Thegovernmentwideperformance
informationsystemshouldbedevelopedasanintegratedwhole.Forexample,ifdatacollection
reliesonsurveys,itwillingeneralbemuchbettertouseonesurveytocollectarangeof
differentinformationfromaparticulartargetgroupthantoconductanumberofseparate
uncoordinatedsurveys.

36

Efficiencyintheoperationoftheperformancemeasurementsystemisparticularlyimportant
becausetherearesignificantfinancialandhumanresourcecostsintheproductionofpertinent
andreliableperformanceindicators.

Thefirststageintheproductionofperformanceindicatorsisdatacollection.Themostreadily
availablesourceofrawdataforindicatorsisusuallyclientservicerecordssuchashospital
treatmentrecords,schoolenrolmentandattendancedata,anddataonregulatoryapprovals
granted.AgoodPMsystemwillneedtherefore,firstly,toimprovethereliabilityofclientservice
recordsand,secondly,toexpandthetypeofdatacollectedinclientsservicerecordssothatit
providesthebasisforabroadersetofindicators.

Clientrecordsprovidesomeinformationaboutoutcomes.Forexample,inschools,examination
andgraduationsarerecorded,andinhospitalsdeathsarerecorded.However,ingeneral,client
servicerecordsprovideinformationmainlyaboutthevolumeofservices(quantityofoutputs)
deliveredtoclientsandtheactivitieswhichtheseoutputscomprise.AgoodPMsystem
thereforeneedstogobeyondtheconstraintsofclientservicerecordsinordertoconstruct
moreandbetteroutcomeandoutputqualitymeasures.Inthisrespect,theuseofsurveys
(including,butnotconfinedto,clientsatisfactionsurveys)isthekeyelement.Surveydatacan
notonlyprovidegoodmeasuresofoutcomevariables.Itcanalsoprovidemoretimely
measures,bycapturingoutcomevariableswhichwillonlymuchlatermanifestthemselvesin
demandforgovernmentservices.Forexample,surveybaseddataonalcoholandtobacco
consumptionratesprovidesamuchearlierwarningoftheextentoftheproblemwhich
preventativehealthservicesneedtoaddressthandolevelsofalcoholandtobaccorelated
disease,whicharisesonlyafteryearsofabuse.Surveyscanpickupmeasurevariablesrelevant
tooutcomeswhichtaketimetomanifestthemselves.

Thesecondstageintheproductionofindicatorsisdataprocessingi.e.thetransformationof
rawdataintoperformanceindicators.Akeyquestionhereisthechoiceofprocessing
technology.Thereisafullrangeofoptionshere,rangingfromthemosthightechthroughtothe
relativelysimple.Atoneendofthespectrum,performancemeasurementmaybebuiltintoa
largeIntegratedFinancialManagementInformationSystem(seethesectiononprogramcosting
andaccountingformoreonIFMISs).Theadvantageofthisifthesystemworksproperlyis
thattheperformanceindicatorsaredirectlylinkedtotherelevantfinancialdata(e.g.program
performanceindicatorsareautomaticallylinkedtoprogramexpendituredata;outputquantity
measurestooutputcostsetc).
37

Attheotherendofthespectrum,itisperfectlypossibletomanageaperformance
measurementsystembasedonExcelspreadsheetsandanAccessdatabase.Thisisasimpler
andlowercostoption.SomeITexpertswillsuggestthatincorporatingperformancemeasuresin
theIFMISshouldbethepreferredapproach.However,themorecomplexandmultifaceted
IFMISsare,themorechancetheyhaveofneverworking,ornotworkingwell.Thisisparticularly
trueindevelopingcountries.Inmanycountries,thesimpleroptionwillworkbetter.

Thethirdstageintheproductionofindicatorsisindicatorvalidation,whichreferstothe
assuranceofthereliabilityoftheindicators.Thisisimportanttosafeguardagainsterrorsand
manipulation,aswellasagainstmethodologicaldeficiencieswhichmaketheindicators
unreliable.Therearetwoaspectsofindicatorvalidation.Thefirstconcernsthevalidationofthe
capacityofagencysystemstoensureindicatorqualityforexample,theadequacyoftraining
anddataentrychecks.

PerformanceMeasurementProtocols

TheUKRoyalStatisticalSocietyproposedtheideaofaPerformanceMeasurementProtocolinits
excellent2003reportPerformanceIndicators:TheGood,theBadandtheUgly,suggestingthat:Before
introducingperformancemonitoringinanypublicservice,aPMprotocolshouldbewritten.Thisisan
orderlyrecordnotonlyofdecisionsmadebutalsoofthereasoningorcalculationsthatledtothose
decisions.APMprotocolshouldcoverobjectives,designconsiderationsandthedefinitionofPIs,
samplingversuscompleteenumeration,theinformationtobecollectedaboutcontext,thelikely
perversebehaviorsorsideeffectsthatmightbeinducedasareactiontothemonitoringprocess,and
alsothepracticalitiesofimplementation.Proceduresfordatacollection,analysis,presentationof
uncertaintyandadjustmentforcontext,togetherwithdisseminationrules,shouldbeexplicitlydefined
andreflectgoodstatisticalpractice.

Theotheraspectofindicatorvalidationistheauditofindicatorsthatis,theassessmentofthe
reliabilityofindicatorsbypersonsseparatefrom,andindependentof,theunitsresponsiblefor
theirproduction.Auditmaybeinternal(i.e.carriedoutbyanauditunitwithintherelevant
ministry),orexternal.Externalmaymeanthattheauditiscarriedoutbyagovernmentwide
bodyindependentoftheministrywhichproducestheindicators,oritmaymeangoingone
stepfurtherauditbyabodyindependentofexecutivegovernment(thatis,asupremeaudit
institution).

38

Therearetwobroadapproachestotheauditingofperformanceindicators.Thefirstisthe
auditingofspecificindicators.Theotherapproachisasystemsverification,whichfocuseson
auditreviewoftheperformancemeasurementsystems(includingqualityassuranceprocesses)
withineachagencywiththeobjectiveofforminganopinionastowhetherthesesystemsare
suchastobelikelytoproducereliableperformanceindicators.

Aquiteseparateissuenottobeconfusedwiththeauditofperformancemeasures(which
focusesonassessingtheirreliability)isthatofexternalreviewoftheappropriatenessofthe
indicatorschosenbyspendingministries.Thechoiceofmeasuresforperformancebudgeting
purposescannotbelefttospendingministriesalone,becausetheperformanceinformationhas
toservetheneedsofcentralbudgetdecisionmakers.Forexample,ifwhentheenvironment
ministryisaskedtocomeupwithkeyperformanceindicatorsforitsconservationprogram,it
suggeststheuseofameasureofthenumberofpolicieswhichitdevelops,itshouldbefirmly
toldthatanactivityindicatorsuchasthisisnotsatisfactory,andthatitneedstodevelop
outcomemeasures(suchasindependentestimatesoftheremainingpopulationsofendangered
species).TheMoFand/orothercentralagenciesmustthereforeprovideguidancetospending
ministriesaboutthetypesofindicatorstheyneedtodevelop,andmustsubsequentlyreviewing
theappropriatenessofindicatorssuggestedbyministries.

Thequestionofwhetherthesupremeauditinstitutionshouldbecomeinvolvedinquestioning
thechoiceofindicatorismorecontroversial.Insomecountriesthishappens(e.g.theUS,where
theGovernmentAccountabilityOfficefrequentlycritiquesindicators).Bycontrast,inBritishlike
parliamentarysystems,itisfrequentlyassertedthattocritiquethechoiceofindicatorswould
betogotooclosetothecritiqueofgovernmentpolicy,whichissomethingwhichsupreme
auditinstitutionsaretraditionallybarredfromdoinginthosesystems.

ThefinalstageofthePMsystemisthepresentationoftheindicators.Thisneedstobedonein
suchamannerastomaketheindicatorsasreadilyunderstandableandusableaspossible.
Usabilityfirstandforemostdependsontheselectiveofarelativelysmallnumberofindicators
whichareofgreatestrelevancetotheuserconcerned.Thereisnothingwhichreducesthevalue
ofindicatorsmorethanpresentingauserwithhundredsofindicatorsmostofwhichareoflittle
interesttotheuser,butthroughwhichheorsheisobligedtoworkinordertofindwhatisof
interest.

39

Itiscrucialinreportingperformanceindicatorsthattheybeplacedintocontext,ratherthan
presentedsimplyasnumbersinisolation.Themeans,inparticular,theinclusionina
performancereportnotonlyoftheindicatorsthemselves,butofanarrativediscussionofthe
trendswhichtheindicatorsshowand,inassociationwiththat,informationonandan
assessmentofextentoftheimpactofrelevantexternalfactors.Abestpracticeinexternal
performancereportingwhichnotallcountrieswillnecessarilybeabletoimplement,given
financialconsiderationsistocreateamultitieredsysteminwhichuserscanstartatthe
broadestlevelofhigherleveloutcomeindicatorsandthendrilldowntotwoormorelower
levelsofmoredetailedindicators,attheministryandprogramlevel(manyofwhichwillbe
morefocusedonoutputs,activitiesandinput/resources).

NeedforMoreRobustPMSystemsinAfrica
AprobleminAfricancountries,andperhapsinsomeotherRegions,isthatalthoughsectorministries
collectarangeofperformanceinformation,thequalityofdataisoftenpoor.Thisispartlybecausethe
burdenofdatacollectionfallsonoverworkedofficialsatthefacilitylevel,whomustprovidethedatafor
otherofficialsindistrictofficesandthecapitalbutwhorarelyreceiveanyfeedbackonhowthedataare
actuallybeingused,ifatall.
Thisleadstoanotherchickenandeggproblem:Dataarepoorpartlybecausetheyarentbeingused;
andtheyrenotusedpartlybecausetheirqualityispoor.Insuchcountriesthereistoomuchdata,not
enoughinformation.Thus,anotherlessonfortheinstitutionalizationofagovernmentM&Esystemis
theneedtobuildreliableministrydatasystemstohelpprovidetherawdataonwhichM&Esystems
depend.Anauditofdatasystemsandadiagnosisofdatacapacitiescanbehelpfulinthissituation.It
wouldprovidethestartingpointforanynecessaryrationalizationofdatacollectionsorimprovementsin
theirquality.Itwouldgivethedatathecredibilitynecessarytobeused.
KeithMcKay(2007),HowtoBuildM&ESystemstoSupportBetterGovernment,WorldBankIndependent
EvaluationGroup.

EnsuringthatPerformanceInformationisCostEffective
Thedevelopmentofperformanceinformationsystemsisnotsimplyamatterofdevelopingthe
bestandmostcomprehensiveresultsandcostinformationpossible.Rather,itisabouta
benefit/costjudgment.Performanceinformationdoesnotcomefree.Itiscostlyinboth
financialandhumancapacitytermstodesign,buildandthenoperateonacontinuingbasisthe
systemsconcerned.Carefuljudgmentsthereforeneedtobemadeabouthowfartogoin
respecttochoicessuchasthenumberofperformancemeasurestobedeveloped,aswellas
40

relatedquestionssuchasthesophisticationofprogramevaluationmethodologyandcosting
methodologies.

Thesechoicesfaceeventhewealthiestcountries.Buttheyareparticularlypressingfor
countrieswithmorelimitedfinancialandskilledhumanresources.Suchcountriesshouldbe
particularlyselectiveandstrategicinthedevelopmentofperformancemeasures.Asdiscussed
later,theyshouldalso,inmanycases,makeuseofquitesimpleprogramevaluation
methodologies.And,asmentionedabove,theyshouldnotseektodevelopefficiencymeasures
whichrequirerelativelycomplexmanagerialaccounting(e.g.allocationofindirectcoststo
outputs).Thetemptationofadoptingwhatappearatthetimetobecuttingedgepractices
whetheritbeaccrualaccountingandbudgetingatpresent,orpurchaserprovidermodelsten
yearsagoshouldalsobestudiouslyavoided.

Itisalsoaconsiderablechallengetobuildthecapacitynecessarytooperateagood
performanceinformationsystem.Forperformancebudgetingpurposesthisdemands,in
particular,greatchangeintheskillsetandcompetencesoftheMoF.Ratherthanbeingand
exclusivelyeconomic/accountingbody,theMoFmustdevelopcompetenceinpolicyanalysis
andinthedevelopmentofperformanceinformationtosupportthatpolicyanalysis.Onlyinthis
waycanitdevelopthecapacitytoadviseexecutivegovernmentwellaboutexpenditurepriority
choices,inordertomakeeffectiveperformancebudgetingpossible.

ImplementationstrategyincludinginrelationtoPMsystemsisdiscussedinsection19.
However,itisworthnotingherethatmanydevelopingcountriesareunrealisticintheir
expectationsastohowlongitshouldtaketodevelopacomprehensiveperformance
measurementsystem.CountrieswhichareparticularlyadvancedinthisareasuchastheUK
andUSAtookdecadestogetwheretheyaretoday.Itisaseriousmistakefordeveloping
countrieswhicharerelativelynewtoperformancemeasurementtosetouttodevelop
thousandsofprogramindicatorsinveryshorttimeperiods(e.g.23years).Itisfarbetterto
startoffmodestly,focusingonarelativelysmallnumberofthemostrelevantindicators.
Crucially,muchattentionshouldbepaidtoensuringthatcollection,processingandvalidation
systemsareadequateinrespecttothatselectivegroupofindicators.Thisismuchmore
valuablethangeneratingamuchlargergroupofindicatorswhichcannotbereliedupon.

KeyReadings
41

UKNationalAuditOffice(2000),GoodPracticeinPerformanceReportinginExecutiveAgencies
andNonDepartmentalPublicBodies,obtainableat
http://www.nao.org.uk/publications/9900/good_practice_in_performance.aspx.

USGovernmentAccountingStandardsBoards(2005)GovernmentServiceEffortsand
AccomplishmentsPerformanceReports:aGuidetoUnderstanding,obtainableat
http://www.seagov.org/sea_gasb_project/sea_guide.pdf.

42

6.EvaluationandPerformanceBudgeting

Performancebudgetingisoftenrepresentedasbeingonlyabouttheuseofperformance
indicatorsinthebudget.Thisiswrong,becauseitoverlooksthecruciallyimportantroleof
evaluation.Itisforthisreasonthatthroughoutthismanualreferenceismadetothe
performanceinformationbaseofperformancebudgeting,ratherthantoperformance
indicatorsalone.
EvaluationisthesubjectofanotherCLEARcourse,andthegeneralnatureandmethodologies
ofevaluationarethereforediscussedhereonlyverybriefly.Furtherinformationcanalsobe
foundinthereadingslistedattheendofthissection.Ingeneralterms,however,evaluationis
theformalassessmentofprograms,projects,organizations,orpoliciesusingsystematic
methodologies,withtheintentionofformingasobjectiveanassessmentaspossibleoftheir
efficiency,effectiveness,designormanagement.Onecandistinguishbetweenretrospective(ex
post)evaluations,whichareevaluationsofprogramsetcwhicharealreadyoperating,and
prospective(exante)evaluations,whichareappraisalsofpossiblenewprogramsetcbefore
theyareimplemented.
ADefinitionofEvaluation
Thesystematicandobjectiveassessmentofanongoingorcompletedproject,programorpolicy,its
design,implementationandresults.Theaimistodeterminetherelevanceandfulfillmentofobjectives,
developmentefficiency,effectiveness,impactandsustainability.Anevaluationshouldprovide
informationthatiscredibleanduseful,enablingtheincorporationoflessonslearnedintothedecision
makingprocessofbothrecipientsanddonors.Evaluationalsoreferstotheprocessofdeterminingthe
worthorsignificanceofanactivity,policyorprogram.Anassessment,assystematicandobjectiveas
possible,ofaplanned,ongoing,orcompleteddevelopmentintervention.
KeithMcKay(2007),HowtoBuildM&ESystemstoSupportBetterGovernment(WorldBankIndependent
EvaluationGroup).
Evaluationcansupportthebudgetprocessbyhelpingeitherto:
Identifyprogramsorcomponentsofprogramswhichcanpotentiallybecut:thismeans
programswhicharenotcosteffectiveandwhichcannotreadilybemadecosteffective
throughpolicydesignormanagementchanges,
Identifysavingswhichcanbemadebyimprovingtheefficiencyofservicedelivery.

43

EvaluatingProgramEffectiveness
Theevaluationofprogrameffectivenesshasaparticularlyimportantroletoplayinthoseforms
ofperformancebudgetingwhichfocusontheallocationofresourcesinthegovernmentwide
budget,ofwhichprogrambudgetingisthemostimportantform.Insuchsystems,theprimary
focusisuponmakingbudgetingasperformanceinformedaspossible.Aswehaveseen,this
meansinparticularthat:
Decisionsaboutexpenditureprioritizationwheretoallocatelimitedtaxresourcesare
informedbygoodinformationonprogrameffectiveness,

Decisionsaboutfundingforspecificministriesandagenciesandinparticulardecisionson
theirrequestsforadditionalresourcesareinformedbyreliableinformationonhow
effectivelytheministryoragencyhasusedfundingithasreceivedinpastbudget.
Evaluationiscrucialinthiscontextbecauseperformanceindicatorsarefrequentlyinsufficient
inisolationtopermitjudgmentsonprogramoragencyeffectiveness.Aswehaveseen,some
programoutcomescannotbemeasured,orcanbemeasuredonlyveryimperfectly,andmany
outcomeindicatorsareheavilycontaminatedbyexternalfactors.Evaluationisveryimportant
asameansofmakingjudgmentsaboutthelikelyimpactofexternalfactorsonoutcome
variable.Itcanenableustomakesomeusefuljudgmentaboutprobableeffectivenessof
programsevenwhenwelackanyoutcomemeasures(e.g.viaprogramlogicevaluationsee
below).Moregenerally,whetherforbudgetaryoranyotherpurpose,performanceindicators
alonerarelysuffice(seebox).
RoleofEvaluationinaBalancedM&ESystem

Themostprevalenttypeofperformanceassessmentpracticeisindicatorbasedmonitoring
Performance[indicator]monitoring,inandofitself,representsarelativelycrudewaytoinform
decisionmaking.Inmanycases,thereisaneedforamuchmorenuanced,indepthunderstandingof
theprocessesinvolvedinparticularprogramsorpolicies,whichevaluationsaremuchbetterequipped
toprovide.Giventhespecificstrengthsandweaknessesofmonitoringandevaluation,whichare
potentiallycomplementarytoeachother,theidealapproachisonethatreliesonanappropriate
balancebetweenthetwotypesofactivity.

ArielZaltsman(2006),ExperiencewithInstitutionalizingMonitoringandEvaluationSystemsInFiveLatinAmerican
Countries,WorldBankIndependentEvaluationGroup.

44

Evaluationofeffectivenessalsoanimportantroletoplayinsystemsofbudgetlinked
performancetargetslikedtheBritishPublicServiceAgreementssystem.Asnotedearlier,in
suchsystemstargetsaresetasanintegralpartofthebudgetprocess,withtheaimofensuring
thatthestringencyofthetargetsisrelatedtotheextentoffundingprovided.Aftertheevent,
scrutinyofactualperformanceagainsttargetisveryimportantinthistypeofsystem,anditis
herethatevaluationcanmakeanimportantcontribution.Forexample,whenthetargetsare
outcometargets,acrucialpartoftheassessmentofperformanceagainsttargetis
considerationofwhether,say,afailuretomeetatargetisthefaultoftheagencyconcerned,
orwhetheritisinsteadduetotheimpactofunanticipatedexternalfactors.Evaluationcanbe
veryusefulforthispurpose.Moregenerally,evaluationhasasignificantroletoplayinany
performancemanagementsystemwhichplacesconsiderableemphasisonthesettingof
performancetargets,irrespectiveofhowcloselytargetsettingislinkedtothebudget.
Therearetwotypesofevaluationwhicharerelevanttotheassessmentofprogram
effectiveness:
Outcomeevaluations(alsooftenreferredtobyevaluationspecialistsasimpact
evaluations):Outcomeevaluationsaimtodirectlymeasuretheeffectivenessofprograms
bytakingoutcomeindicatorsandusingsophisticatedmethodstoassessthelinkbetween
theprograminterventionandthemeasureschangesinoutcomeindicators,intheprocess
explicitlydealingwithproblemssuchasexternalfactors.Themethodsemployedincludeso
calledexperimentaltechniques(whichentailthecomparisonofprogrambeneficiaries
withcontrolorcomparisongroupsattwoormorepointsintime),andtheuseofregression
analysistoseparatetheeffectofexternalfactorsfromothercausalfactorswhichimpacton
outcomeindicators.
Evaluationsofprogramlogic:theseassesswhethertheprogramisdesignedinsuchaway
astomakeitlikelythatitwillachieveitsintendedoutcome.Toevaluateprogramlogic,the
firststepistoclarifyexactlyhowtheprogramissupposedtoachieveitsoutcomes.
Expressedintermoftheresultschain,thekeyquestionsare:Whatintermediate
outcomesistheprogramexpectedtodeliver?Howisitthatthoseintermediateoutcomes
areexpectedtogenerate,orcontributeto,theprogramsintendedhigherleveloutcomes?
Oncetheprogramlogicisclarified,thenextstepistoaskwhetheritisreasonableto
assumethattheprogramwillachieveitsintendedoutcomes.Forexample,givenwhatwe
knowaboutrelevanteconomictheory,isitreasonabletoassumethataspecificindustry
policywilldeliveritsintendedoutcomes?

45

EfficiencyReview
Theuseofevaluationtoidentifysavingsfromimprovedefficiencyofservicedeliveryinrelevant
toanyformofbudgeting.Inthiscontext,theformofevaluationwearetalkingaboutis
efficiencyreview.Totheextentthatefficiencyreviewsgobeyondrecommendingstepsto
improveefficiencytoprovidingquantifiedestimatesofpotentialsavings,theyareofpotentially
greatvaluetoministriesoffinance.
Efficiencyreviewhasaparticularrelevancetoformsofperformancebudgetingsuchasformula
fundingandpurchaserprovidersystems,inwhichfundingisbasedontheunitcostsatwhich
thefundingauthoritybelievetheservicedeliveryagencyshouldbeabletoproduceoutputs.
Specifically,thefindingsofefficiencyreviewcaninformthatfundingauthorityaboutwhatunit
costtouseforfundingpurposes.Forexample,supposethatthegovernmenthasbeenfunding
thehealthministryforvaccinationsattheministryspresentunitcost$20perhead,butthatan
efficiencyreviewindicatesthatthiscurrentunitcostisgreaterthanitshouldbeandcouldbe
reducedby10percentovertwoyears.Underthesecircumstances,itwouldbereasonablefor
thefundingauthoritytoplantograduallyreducetheamountitpaysto$18.
Althoughefficiencyreviewsareusefulforthistypeofperformancebudgeting,evaluationsof
effectivenessclearlyarenot.Thisisbecausethesetypesofperformancebudgetingfocusare
directedtoimprovingefficiencyratherthanimprovingtheallocationofresources.

MakingEvaluationRelevanttotheBudget
Informingthebudgetprocessisnotbyanymeanstheonlyroleofevaluation.Broadlyspending,
onecandistinguishvaluationforbudgetarypurposesfromevaluationforpolicy/management
improvementpurposes.Thelattertypeofevaluationaimstohelpinstitutionsimprovepolicy
designthatis,helpinstitutionstochangethenatureoftheservicestheydelivertothe
communitysoastomakethemmoreeffectiveinachievingtheirintendedoutcomeswithout
focusingonidentifyingprogramswhichcanbecut.Oritcanaimtohelpinstitutionsimprove
processesandmanagementsoastomakethedeliveryofservicesmoreefficient,butwithouta
focusonquantifyingbudgetarysavingswhichcanbemadeasaresultofsuchefficiency
improvements.
Agoodperformancebudgetingsystemthereforerequirestheconductofselectedevaluations
specificallyintendedtoinformthebudgetprocessthatis,designedtogivebudgetdecision
makersbetterinformationuponwhichtobasebudgetdecisions.Expresseddifferently,it
cannotbeassumedthat,simplybecauseagovernmentconductssubstantialevaluationwork,
thatthisevaluationworkwillnecessarymeettheneedsofperformancebudgeting.
46

Thishasimplications,firstly,fortheselectionoftopicstobeevaluation.Ifevaluationisgoingto
makeitsmaximumpotentialcontributiontoresourceallocation,theprograms(orelementsof
programs)andtopicschosenforevaluationshouldbethosewhichappearprimafacielikelyto
yieldbudgetarysavings.
Secondly,budgetlinkedevaluationneedstodeliveritsfindingsquicklyandattherighttimeto
betakenintoaccountinbudgetarydecisions.Itisimportantheretobearinmindthat
evaluationscanbeconductedingreatdepth,ifdesired,makingextensiveuseofsurveys,
interviewandotherdatagatheringtechniques,incombinationwithquitesophisticatedanalytic
techniques.Suchindepthevaluationsmaygeneratemorereliableresults,butittendstotake
considerabletime,whichmaymeanthatitisnotwellgearedtoservingtheneedsofbudget
decisionmakers.
Becauseoftheimportantoftimelyinformation,considerableemphasisisbeingplacedthese
daysonrapidevaluationsforbudgetarypurposes.Rapidevaluationsareevaluationscarriedout
inquiteshorttimeframes(e.g.36months).Rapidevaluationstendtofocusontheevaluation
ofprogramlogicratherthanoutcomeevaluation.Asindicatedabove,evaluationsofprogram
logicaimtoassesshowplausibleitisthattheprogramwouldgenerateitsintendedoutcomes.
Theyareinprincipleinferiortooutcomeevaluations.However,outcomeevaluationstendto
takeconsiderablemoretimetoproduceandtocostconsiderablymore.Thespeedandlowcost
characterofrapidevaluationmakesitveryattractiveinpracticaltimes,particularlybutbyno
meansexclusivelyinlowincomecountries.
Evaluationcanmakeitsgreatestcontributionwhenlinkedtosystematicspendingreview(SR),
whichisdiscussedinSection15.SRreferstothesystematicscrutinyofongoingprogram
expendituretoidentifyoptionsforcuts.TheMoFwillingeneralmanageandconductspending
review,providingadviceonpotentialcutstothepoliticalleadership.Intheprocess,theMoF
canmakebestuseofevaluationbycommissioningrapidevaluationsfocusedonprograms
whichitorthepoliticalleadershipsfeelsmaybeofdoubtfuleffectiveness.

EvaluationandtheBudget:TheChileanExample
Thebestdevelopedexampleofbudgetlinkedevaluationlinkedtospendingreviewisthat
whichhasbeenprogressivelydevelopedinChilefromthelate1990s.InChile,performance
budgetingispartofabroaderperformancemanagementsystem,knownasthe"systemof
evaluationandmanagementcontrol".Thissystemaimstoimprovetheeffectivenessofpolicy
makingandmanagementthroughoutcentralgovernment,tocreateperformanceincentivesfor
civilservants,andtomakethebudgetresultsoriented.ThedegreeofusewhichChilemakesof
systematicevaluationasabasictoolofitsperformancemanagementsystemisquite
47

exceptionalbycontemporaryinternationalstandards,atleastoutsideLatinAmerica.
EvaluationsaremanagedbytheMoF,andthetopicsforevaluationarecentrallydetermined.
TherearethreedifferenttypesofexpostevaluationintheChileansystem:
Outcome(Impact)Evaluations:forexample,anevaluationofwhetheralabormarket
programhadachieveditsstatedobjectiveofbringingthelongtermunemployed
reintegrationbackintotheworkforce,carriedoutmainlyviaalongitudinalanalysisofthe
trackrecordofparticipatinglongtermemployedpersonstoascertaintherateatwhich
theyobtainedandretainedwork,andhowthiscomparedwithotherlongtermemployed
personswhodidnotparticipateintheprogram.
EvaluationsofGovernmentPrograms:themainelementofwhichistheevaluationof
programlogic(seeabove).
InstitutionalEvaluationsgoingunderthepotentiallymisleadingnameofcomprehensive
expenditureevaluations(EvaluacionesComprehensivasdeGasto),theseevaluationslook
atspecificinstitutionsorsectoralgroupsofinstitutions.Theyexaminearangeofissues
includingtheconsistencyofinstitutionalandsectoralobjectives,organizationalstructures,
productionandmanagementprocesses,resourceuseandservicedeliveryperformance.
Thecoverageofexpostevaluationhasprogressivelyincreasedovertime,with33evaluationsin
2009and39in2010.TheprogramsandorganizationstobeevaluatedareselectedbytheMoF
inconsultationwiththeCongress.Evaluationsarethencarriedoutbyexternalevaluators
(consultantsorresearchinstitutions)contractedbytheMoF,whichprovidecleartermsof
referenceandmethodologicalguidelinestotheevaluators.Allfinalevaluationreportsare
madeavailabletotheCongressandpublic,andtheirsummariesareincludedinthebudget
informationpapersintheformofExecutiveMinutes.TheMoFandtherelevantministry
discusstherecommendationsoftheevaluationsandagreeontheactionswhichshouldbe
takeninresponsetoevaluationrecommendations.Thisthenbecomesthesubjectofaformal
agreement,theimplementationofwhichisthemonitoredinsubsequentyearsbyMoF.
Inadditiontoexpostevaluation,Chilehasrecentlyextendeditsevaluationsystemtoexante
analysisofnewspendingproposals.TheMoFrequiresinstitutionstopresentallnewspending
proposalsinastandardformatdesigned,amongstotherthings,tomakeabsolutelyexplicit
theirinterventionlogic."Newspendingproposals"refersnotonlytoproposednewprograms,
butalsotosignificantdiscretionaryexpansionsofexistingprograms.Associatedwiththis,MoF
introducedin2009anewformalmechanismofexanteevaluationofnewspendingproposals.
Morerecently,ithasaddedtothisatechnicalassistanceservicetoentitiesunderwhichMoF
providesadviceonhowtodevelopandpresentgoodqualitynewspendingproposals.
48

InternalversusExternalEvaluations
Evaluationforbudgetarypurposesisonlyonepartofawelldevelopedevaluationsystem.Itis,
inparticular,appropriatethatallministriesandagenciesbeencouragedtocarryoutsystematic
programsofinternalevaluationsasamanagementimprovementtool.Manycountrieshave
developedgovernmentwideevaluationpoliciestoachieveexactlythis.
16
Thefocusofsuch
spendingministryledevaluationswilltend,ingeneral,tobemoreoperationalthanthatof
evaluationsinitiatedbytheMinistryofFinanceorothercentralgovernmentagenciestoinform
budgetdecisions.ItisinappropriatefortheMoFandpoliticalleadershiptorelyonevaluations
ledbyministriesthemselvesastheinformationsourceforbudgetdecisions.Suchevaluations
notonlyhaveamoreoperationalfocus,buttheywillnotnecessarilybefocusedonthe
programswhicharethemostlikelycandidatesforbudgetcuts.Moreover,theknowledgethat
theresultsoftheinternalevaluationswillbeusedbythecentertocutprogramsmaylead
ministriestomanipulateevaluationconclusionstomakesurethattheyarenottoodamaging.
Inawelldevelopedevaluationsystem,theprogramofspecificallybudgetlinkedevaluations
shouldthereforebeonlythetipoftheicebergofamuchbroaderevaluationeffort.
Inconclusion,evaluationsiscriticallyimportantaspartoftheperformanceinformationbasefor
performancebudgeting.However,tobeuseful,evaluationhastobeoftherighttypewhich
meansboththatitistimely,andthatitisgearedtoanswerthequestionsofmostrelevanceto
budgetdecisionmaking.

KeyReadings
Guzmn,Marcela(2007),TheChileanExperienceinM.Robinson(ed)Performance
Budgeting.
HMTreasury(1997),AppraisalandEvaluationinCentralGovernment,London:TheStationary
Office,availableathttp://www.hmtreasury.gov.uk/d/green_book_complete.pdf.
McKay,Keith(2007),HowtoBuildM&ESystemstoSupportBetterGovernment,Washington:
WorldBank,availableathttp://www.worldbank.org/oed/ecd/better_government.html.
OECD(1998),BestPracticeGuidelinesforEvaluation,PUMAPolicyBriefNo.5,Paris:OECD,
availableathttp://www.oecd.org/dataoecd/11/56/1902965.pdf.

16
ForacasestudyoftheMexicansystem,seeManuelFernandoCastroetal(2009),MexicosM&ESystem:Scaling
UpfromtheSectoraltotheNationalLevel,ECDWorkingPaperSeriesNo.20,Washington,WorldBank(obtainable
atwww.worldbank.org/ieg/ecd).

49

WorldBank(2004),MonitoringandEvaluation:SomeTools,MethodsandApproaches,
Washington:TheWorldBank,availableat
http://lnweb90.worldbank.org/oed/oeddoclib.nsf/a7a8a58cc87a6e2885256f1900755ae2/a5ef
bb5d776b67d285256b1e0079c9a3/$FILE/MandE_tools_methods_approaches.pdf.

50

7.PerformanceAuditing

Definingperformanceauditingisnotstraightforward,becauseitisnotpossibletodistinguish
performanceauditingmethodologicallyfromevaluation.Inpractice,thetermisusuallyusedto
refertoevaluationswhicharecarriedoutbysupremeauditinstitutions(SAIs).SAIisthegeneric
termusedinternationallyforbodiessuchastheUKNationalAuditOffice,theUSGovernment
AccountabilityOffice,andtheFrenchCourdesComptes,whichareindependent(tovarying
degrees)ofexecutivegovernmentanddesignedtoholdittoaccount.However,withintheaudit
profession,thetermperformanceauditingissometimesalsousedtorefertoevaluation
carriedoutbyinternalauditorsthatis,byauditorswhoarepartoftheexecutivegovernment
bodieswhichtheyaudit.Itmaythereforebethatthebestdefinitionofperformanceauditis
thatitisperformancerelatedevaluationcarriedoutbyindividualsorinstitutionswithaprimary
professionalbackgroundandresponsibilityforfinancialaudit.
BecauseSAIsarenotpartofexecutivegovernment,performanceauditingcarriedoutbySAIs
arebydefinitionnotintendedtoserve(otherthanincidentally)asinstrumentstoaidexecutive
budgetpreparation.Generallyspeaking,suchSAIperformanceauditsarebetterseenas
instrumentstoassisttheparliamentinmoreeffectivelycarryingoutitsperformance
accountabilityrole.Thisdistinguishesthemfundamentallyfromexecutivegovernment
evaluationssystems,includingthetypeofbudgetlinkedevaluationwhichministriesoffinance
shouldbebuildingaspartoftheperformanceinformationframeworkofperformance
budgeting(asdiscussedintheevaluationsection).However,inthosecountrieswhere
parliamenthassignificantindependentpowerovertheallocationofresourcesinthebudget,
SAIperformanceauditscanalsohaveamoredirectinfluenceonthebudgetandbeseenasan
integralpartoftheperformancebudgetingsystem.Thesectiononparliamentandperformance
budgetingdiscussesthesedifferentparliamentarybudgetroles.
Itisusefultodistinguishtwodifferenttypesofperformanceaudits,thefirstofwhichisthe
substantiveperformanceaudit.Suchauditsaimtoformexplicitjudgmentsontheeffectiveness
and/orefficiencyofprograms,governmentagenciesorfunctions.Theotheristhesystem
performanceaudit,whichfocusesinsteadonassessingtheextenttowhichspecificcategoriesof
managementsystemorpracticeareconduciveofeffectivenessandefficiency.Substantive
performanceaudittendstobemorecommon,andmorewideranging,inpoliticalsystems
characterizedbytheseparationofpowersbetweentheparliamentandexecutive,and
consequentlybeconsiderableparliamentaryindependencevisvisexecutivegovernment.By
contrastinparliamentarysystemswheregovernmentministerstendstocontrolparliament,
thereissometimesatraditionthattheSAIshouldnotchallengegovernmentpolicy,which
51

(dependingonhowpolicyisinterpreted)canhavetheeffectofnarrowingsignificantlythe
scopeofsubstantiveperformanceaudit.
Inanumberofcountries,atypeofexecutiveperformanceauditingcarriedoutbyexecutive
governmentbodieswhichareseparatefromtheministrieswhichtheyaudit.Forexample,the
IndonesianFinancialandDevelopmentSupervisoryBoardabodylikeanSAIbutpartof
externalgovernment(thereisaseparateSAIwhichreportstoparliament)carriesout
performanceaudits.AndinFrance,theintroductionofthenewperformancebudgetingsystem
in2005wasaccompaniedbythedevelopmentofaformofexecutivesystemsauditcarriedout
byanInterministerialCommitteeforProgramAudit,andfocusedonissuescrucialtothe
evolutionofthenewsystems.

KeyReading
Shand,D.(2007),PerformanceAuditingandPerformanceBudgetinginRobinson(ed.)
PerformanceBudgeting.

52

8.ProgramBudgetingFundamentals

Programbudgetingistheplanning,authorizationandexecutionofexpenditureintermsof
programs.Programsgrouptogetherexpenditureonspecificpublicpolicypurposes,suchas
environmentalconservationorhighereducation.Theclassificationofexpenditureintermsof
programsturnsthebudgetintoaninstrumentforexplicitchoicesaboutexpenditurepriorities
suchashowmuchtospendonpreventativehealthvs.treatmenthealth;howmuchontertiary
educationvs.primaryeducation;andhowmuchonstrengtheningthearmyvs.promoting
agriculture.
Improvingexpenditureprioritizationisthereforetheprimaryobjectiveofprogrambudgeting
(although,asdiscussedbelow,programbudgetingalsoactsbyincreasingthepressureon
ministriestoperform).Expenditureprioritizationreferstotheallocationoffundstothesectors
andprogramswhicharemosteffectiveinmeetingsocialneeds(seeSection1).Inthepublic
sector,decisionsabouttheallocationofresourcesaretoalargedegreebemadebyplanning
aprocesswherebyeitherthegovernmentasawhole,orindividualspendingministries,decide
whattypesofgoodsandserviceswillbeprovidedtothecommunity,andtowhom.This
contrastswiththemarketeconomy,wheretheallocationofresourcesbetweencompeting
productsandservicesconsumerislargelydecidedbycustomerdemand,withouttheneedfor
consciousplanning.Programbudgetingisaninstrumentforintegratingplanningandbudgeting.
Programbudgetsareverydifferentfromtraditionalbudgets,inwhichfundsareallocatedto
eachspendingministrynotbyobjectivebutinsteadprimarilybylineitem.Lineitemsare
allocationsoffundstotypesofinputssuchassalaries,suppliesandcapitalexpenditure.The
problemwithabudgetbasedonlineitemsisthatitindicatesnexttonothingaboutthepolicy
objectivesoftheexpenditureconcerned.Alineitembudgetisthereforeessentiallyuselessas
aninstrumentforexpenditureprioritization.Itwaspreciselytoovercomethisweaknessthat
theconceptofprogrambudgetingwasoriginallydeveloped.Programbudgetingalsodiffers
fromtraditionalbudgetinginthatitcallsforthesubstantialreductionoflineitemcontrolsover
howspendingministriesusetheirbudgets.Thisisbecauseprogrambudgetingand
performancebudgetingmoregenerallycallforgreaterfreedomattheministrylevelinthe
choiceoftheinputsusedtodeliverservicesinreturnforgreateraccountabilityfortheresults
whichministriesdelivertothecommunity.Thisdoesnot,however,meanthatbudget
allocationstolineitemsentirelydisappearunderprogrambudgeting(seeSection9).

53

DefiningPrograms
Tofacilitateimprovedexpenditureprioritization,programs(andtheirconstituentsubprograms
seebelow)needtobedefinedinsuchawayastocapturethechoicesaboutspending
prioritieswhicharemadeatthegovernmentwidelevel(i.e.bypresidents,cabinets,ministers
andministriesoffinance),andbythespendingministriesthemselves.
Tocapturesuchchoices,programsare,firstandforemost,categoriesofexpendituredirectedat
achievingacommonoutcome.Forexample,anatureconservationprogramcoversexpenditure
onarangeofinterventionssuchastheenforcementoflawsbanningthehuntingofnative
species,marketingcampaignsdesignedtoraisepublicawarenessoftheimportanceof
protectingthenaturalenvironment,actionstopreventthedestructionofnaturalenvironments
whichendangeredspeciesdependupon,andthecullingofferalspecies(e.g.cats,introduced
fishetc)whichmaythreatennativespecies.Whatalltheseinterventionshaveincommonis
thattheyallaimtopreservenativefaunaandflorawhichisanoutcome.
Whileprogramsaredefinedinlargemeasureintermsofthecommonoutcomewhichtheyaim
toachieve,inmanycasestheyhaveotherdefiningcharacteristicswhichalsorelatetothe
choicesaboutexpenditureprioritieswhichgovernmentsandspendingministrieswishtomake.
Budgetdecisionmakersare,forexample,oftenalsoverymuchconcernedwithwhobenefits
fromexpenditure.Forthisreason,programsaresomecasesdefinedintermsbothoftheir
intendedoutcomeandtheirtargetclientgrouporregion.Forexample,educationministries
typicallyhaveseparateprogramsforprimaryandsecondaryeducation.Theseprogramshave
thesameintendedoutcomeeducatedandsocializedyoungpeoplebuttheytargetdifferent
clientgroups(i.e.youngpeopleindifferentageranges).Similarly,inhealthtreatmentservices,
thegovernmentmaywishtomakeexplicitdecisionsabouttheregionalallocationofhealth
budgetresourcestheresultofwhichmaybeaprogramstructureinwhichthereisahospital
programwhichiscomprisedofregionalsubprograms.
Similarly,programsaresometimesdefinedintermsofboththeirintendedoutcomeandthe
modeofinterventionusedforachievingthisoutcome.Forexample,theintendedoutcomeofa
preventativehealthprogramisreduceddeathanddisabilityfromdiseaseandaccidents,buta
definingcharacteristicofthisprogramisthatitaimstoachievethisoutcomebypreventative
means.
Programsarelinkedtotheresultschainnotonlyviatheoutcomesconcept,butalsoviathe
conceptofoutputs.AsexplainedinSection3,outputsaregoodsorservicestheproducts
whichaministryorothergovernmentorganizationdeliverstoexternalparties.Instatingthata
54

natureconservationprogramiscomprisedofarangeofdifferentinterventionsaimedat
protectingnativefloraandfauna,whatwearesayingisthattheprogramisagroupofdifferent
outputswhichshareacommonintendedoutcome(asperhapsothercommoncharacteristics
suchasacommonclientgroupormodeofintervention).Totakeanotherexample,acrop
industriesprogramgroupstogetherarangeofoutputssuchasextensionservices,fertilizer
subsidiesandmarketingsupportallofwhichhavetheobjectiveofboostingthecropsindustry.
Andapreventativehealthprogrammightincludeoutputssuchassanitationpromotion
publicitycampaigns,theplacementofnoticeswarningpeopleagainstswimmingorwashingin
lakesorriverswithwaterbornediseases,andthepromotionofexerciseandfitnessinthe
community.Listingthemostimportantoutputs(typesofservices)whichfallundereach
programisanimportantpartofdevelopingagoodqualityprogramclassification.
Inthiscontext,itisimportantnottomakethemistakeofconfusingoutputswithactivities,and
ofviewingprogramsasbeingcomprisedofconstituentactivitiesratherthanconstituent
outputs.AsexplainedinSection3,activitiesaretheworkprocesseswhichareusedtoproduce
outputs.Forexample,inhealthtreatment,itisthetreatmentsreceivedbypatientswhichare
theoutputs,andtheactivitiesincludenursing,surgery,cleaningandthemaintenanceof
hospitalrecords.Programsaredefinedintermsofwhatmattersmosttothecommunitythe
services(outputs)receivedbyclients,andtheoutcomeswhichthoseservicesgenerate.They
arenotdefinedintermsofactivitiesandinputs,whicharemoreofrelevanceforinternal
managementpurposeswithinministries.
Insummary,programsarefirstandforemostgroupsofoutputswithsharedoutcomes,
althoughtheymayalsohaveotherdefiningcharacteristics.Onlywhendefinedinthiswayare
programsausefultoolforexpenditureprioritization.Thereare,asdiscussedbelow,limited
exceptionstotheprincipleofoutcome/outputbasedprograms,andtheseexceptionsare
drivenbypurelypragmaticconsiderationswhichhavenothingtodowiththebasicobjectivesof
programbudgeting.

PerformancePressureandProgramBudgeting
Althoughtheprimaryobjectiveofprogrambudgetingisimprovedexpenditureprioritization,
thisisnottheonlywayinwhichprogrambudgetingimprovespublicsectorperformance.A
welldesignedprogrambudgetingsystemalsoimprovestheeffectivenessandefficiencyof
expenditurebyputtingadditionalpressuretoperformonministriesandotherbudget
dependentgovernmentorganizations.Underprogrambudgeting,eachministrysbudget
55

requesttotheMoFhastobeaccompaniedbyinformationontheperformanceoftheministrys
programs(indicatorsandevaluationfindings),aswellaswhereappropriateperformance
targetsforthefuture.Theknowledgethatitsbudgetrequestwillbeconsideredbythe
governmentand,perhaps,theparliamentinthelightofitsperformanceshouldthenput
increasedpressureontheministrytoimproveitsperformance.

ProgramPerformanceInformation
Programbudgetingclearlyrequiresnotonlybudgetingintermsofprograms,butalsothe
systematicuseofprogramperformanceinformation.Onlythroughthedevelopmentofgood
programperformanceinformationdoesitbecomepossibletocomparethebudgetarycostof
eachprogramwiththeresultswhichtheprogramdeliverstothecommunity.
Thismeans,firstly,thatprogrambudgetingrequiresthesystematicdevelopmentof
performanceindicatorsforeachprogram(orsubprogram).Consistentwiththeexpenditure
prioritizationobjective,theseprogramperformanceindicatorsshouldasfaraspossible
measureprogramoutcomesandoutputs.Thefollowingprovidesanexampleofthetypesof
performanceindicatorswhichneedtobedevelopedforaneffectiveprogrambudgetingsystem.

HealthTreatmentProgram
Outcomeindicator Weightedaveragesurvivalrateaftertreatmentforselected
majorlifethreateningconditions
Outputquantityindicator Numberofpatientstreated
Qualityindicator Patientsatisfactionrate,
Readmissionrateaftertreatment,
Weightedaveragewaitingtimeforselectedmajorsurgical
procedures.
Efficiencyindicator Weightedaveragetreatmentcostforselectedbasketof
diagnoses.

Oneofthecommondeficienciesofprogrambudgetingsystemsinmanycountriesisthat
programperformanceindicatorsaredominatedbyindicatorsofactivitiesandinputs,suchas
numbersofpoliciesdeveloped,numbersofmeetingsheldandnumbersofpositionsfilled.
Thesetypesofindicatorsareveryusefulforinternalmanagementpurposes,buttheyarenot
thetypeofindicatorneededtoservetheobjectivesofprogrambudgeting.Thereasonforthe
dominanceofthistypeofindicatorisusuallythattheyarereadilyavailable,whereasgood
indicatorsof,say,outcomesandoutputqualityareoftennoteasytodevelop.Butusingsuch
indicatorssimplybecausetheyareavailableisliketheoldstoryofthemanwho,havinglosthis
56

watchinadarkcornerofastreetatnight,decidedtoconcentratehissearchunderthestreet
lampbecausehecouldseeclearlythere.
Programevaluationisatleastasimportantanelementofprogramperformanceinformationas
areprogramperformanceindicators.Forthepurposesofexpenditureprioritization,themost
importantperformanceconsiderationistheeffectivenessofprogramsandtheirconstituent
outputs.AsnotedinSection6,performanceindicatorsarerarelysufficientinthemselvesto
permiteffectivenessofpublicexpendituretobeassessed.Outcomeindicatorstypicallysuffer
frommanyimperfections,oneofthemostimportantofwhichisthattheyrarelyadjust,or
adjustfully,fortheimpactofexternalfactors.Wherethisisthecase,onlyevaluationcanhelp
todistinguishtheimpactofexternalfactorsfromthatofthegovernmentsownefforts.
Unfortunately,itisalltoocommoninternationallyforgovernmentstoneglecttheperformance
informationsideofprogrambudgetingandtobelievethat,merelybydevelopingaprogram
classificationofexpenditure,theyhaveimplementedprogrambudgeting.However,itcannotbe
emphasizedtoostronglythatmerelyknowinghowmuchprogramscostisoflittleusewithout
informationaboutthebenefitswhichprogramsdeliver.Moreover,performanceindicatorsalone
areinsufficientforthispurposeparticularlyiftheyaremainlyindicatorsofactivitiesand
inputs.

ProgramTitlesandObjectives
Eachprogramisdefinedbyitstitle,overarchingobjectiveandthekeyoutputs
17
whichit
includes.Theprogramtitleshouldbeshortandinformative.Itshouldmakeasclearaspossible
tothepoliticalleadership,parliamentandthepublicwhattheprogramis.Dependingonthe
program,thismightbedonebestbyreferringtothetypeofoutputs,client,orobjectiveofthe
program.Examplesofgoodprogramtitlesare:natureconservation,crimeprevention,
adultliteracy,andcurativehealth.
Clearlydefiningtheoverarchingprogramobjectiveisimportantnotonlyforclarityinprogram
definitions,butalsotoprovideaframeworkforthederivationofprogramperformance
indicatorsandtargets.Programobjectivesshouldmakecleartheoutcomewhichtheprogram
asawholeseekstoachieve,aswellas(ifrelevant)otherdefiningcharacteristicsoftheprogram
suchasthetargetclientgroupormodeofintervention.
18
Theprogramobjectivemustbea

17
Or,exceptionally,supportservicesinthecaseofadministrationprograms(seeSection11).
18
Becausetheoutcomeisthecoreoftheprogramobjective,onemightaskwhetheritwouldmakethingsclearer
ifspendingministriesweretoldtodevelopstatementsofprogramoutcomesratherthanprogramobjectives.
Somecountriesdoexactlythis.Thereis,however,oneverygoodreasonforreferringtoprogramobjectives,
57

statementoftheobjectiveswhicharesharedbyallofthedifferentservicesgroupedtogether
withintheprogram.Subordinate,moreoperationalobjectivesmay
19
alsobedefinedforeach
program,andthesewillingeneralrelatetosomebutnotalloftheservicescoveredbythe
program.Thedisciplineinvolvedinrequiringspendingministriestodefineanoverallobjective
foreachprogramhelpstoensurethatprogramsareotherthaninthecaseofcertaindefined
exceptionsappropriatelydefinedwithreferencetooutputsandtheircommonoutcome.
Programobjectivesshouldbeexplicitlyandbrieflyideallyinasentencedefinedinthe
budgetdocuments.Therearemanycasesinternationallyofprogramobjectiveswhicharenot
welldefined.Itis,forexample,notunusualtofindprogramobjectiveswhichfocusentirelyon
theoutput(service)whichtheprogramdeliverstothepublic,oronprogram
activities/processes,withnoreferencetotheintendedoutcomes(seebelow).Sometimes,
programobjectivesareformulatedinawordyandunclearway,perhapswithexcessiveuseof
bureaucraticlanguage.
Thetestofacommonoutcomewhichcanbeexpressedinanoverallprogramobjectiveisan
importanttestoftheintegrityoftheprogramdefinition.Forexample,ifthearmyhealthservice
hasovertimeexpandeditsrolefromoneofprovidinghealthservicestosoldierstooneof
directhealthservicedeliverytothepublicincompetitionwiththehealthministryitwould
notmakesensetoincludethearmyhealthserviceinanarmyprogram,theoutcomeofwhich
shouldbedefinedintermsofnationalsecurity.

RightandWrongWaysofDefiningProgramObjectives
Examplesofwellformulatedprogramobjectivesare:
Theconservationofbiologicaldiversityinhealthyecosystems(NatureConservationprogram),
Maintenanceofterritorialintegrityandnationalindependence(ArmedForcesprogram),
Increasedforeigninvestmentleadingtotechnologytransferandastrongereconomy(Investment
Facilitationprogram),
Reducedcrimeandgreatersecurityofpersonsandproperty(CrimePreventionprogram).

ratherthantoprogramoutcomes.Thisisthattherearecertainexceptionalprogramswhichdonotdeliverservices
directlytothepublic(seebelow),andwhichdohaveaimtoachievespecificoutcomes,butrathertosupportother
programswhichareoutcomefocused.Suchprogramsstillhaveobjectives,buttheseobjectivesareusuallynot
outcomes.
19
Infact,inafullydevelopedprogrambudgetingsystem,suchmoredetailedobjectivesshoulddefinitelybe
developed.However,thisneednotbedoneattheoutsetintheimplementationofsuchasystem,whereas
overarchingobjectivesshouldbedefinedsimultaneouslywithprogramsthemselves.
58

Examplesofthewrongapproachtodefiningprogramobjectivesare:
Provisionofmedicalassistancetopersonsinanemergencyrefersonlytooutputs.
Managethedevelopment,implementation,evaluationandmaintenanceofnationalpolicy,
programsandsystemsforgeneraleducationandqualityassurancerefersonlytoactivities.

ProgramStatements
Toachieveitsaimofimprovedexpenditureprioritization,aneffectiveprogrambudgeting
systemmustbringinformationontheperformanceofprogramsthatis,ontheirsuccessin
achievingtheirintendedresultstogetherwithinformationontheircost.Beingabletoseethe
resultsachievedbyprogramsalongsidetheircosthelpsbudgetdecisionmakerstomakebetter
judgmentsaboutwhetherprogramsshouldbecut,expanded,ormaintained.
Parliamentandthepublicshouldbekeptinformedviaprogramstatementspresentedwiththe
budgetdocumentswhichaccompanytheannualbudgetlegislation.Programstatementsshould
includethefollowinginformationforeachprogram:
Titleandobjectives,
Listofthemainoutputs(services)whichcomprisetheprogram,
Abriefnarrativeoutlineofprogramstrategy,challengesandkeynewinitiatives,
Keyprogramperformanceindicators,
Programperformancetargets,ifapplicable,
Programexpenditureestimates,preferablywithmediumtermprojections,
Abreakdownofprogramexpenditurebybroadcategoriesofeconomicclassification(staff,
capitaletc),forinformationpurposes.
Thespecificcontentoftheprogramstatementinrespecttoanumberoftheseelementsis
discussedinmoredetailinsubsequentsections.
Onewayofpresentingthismaterialisforeachministrytoprepareadocumentcontainingallof
itsprogramstatementstobemadeavailabletoparliamentasanannextothebudget
documents.TheMoFshoulddetermineastandardizedformatforthesedocuments.

TheProgramHierarchy
Programsaretypicallydecomposedintoconstituentsubprograms,andsometimeseveninto
lowerlevels(subsubprogramsetc)althoughitissuggestedinlatersectionsthatitisbetter
59

tokeepthenumberoflevelslimited.Anexampleofthistypeofprogramhierarchyisshown
intheboxbelow.Notethattheterminologyemployedfortheseelementsoftheprogram
hierarchyvariesgreatlyaroundtheworld(asdoestheterminologyusedforprograms).The
followingisanAustralianexamplefromafewyearsbackshowinghowprograms(inthiscase
calledoutcomes)arebrokenintosubprograms(calledoutputs)whichwerefurther
decomposedintosubsubprograms(calledsuboutputs).
FromProgramtoSubprogram:anAustralianExample
DeptofEnvironment
andHeritage
Outcome(Program)1
EnvironmentalProtectionand
Conservation
Outcome(Program)2
Australiasinterestsin
Antarcticaareadvanced
Output(SubProgram)1.1
InternationalClimateChange
Output(SubProgram)1.2
ConservationofLandandInland
Waters
Output(SubProgram)1.3
ConservationofCoastandOceans
Output(SubProgram)1.4
ConservationofNatural,Indigenous
andHistoricHeritage

Subprogramsandotherlowerlevelelementsoftheprogramhierarchyareusedmainlyfor
internalmanagementwithintheministryoragencyconcerned.Forthemostpart,they
representalevelofdisaggregationofexpenditurewhichistoodetailedforthecentraldecision
makerstoconcernthemselveswithduringthebudgetpreparationprocess.

Numberandsizeofprograms
Programsarethelevelatwhichcentraldecisionsaboutexpenditureprioritieswillgenerallybe
made.Thishastwoimportantimplicationswhenformulatingtheprogramstructuresfor
ministries:
60

Creatingonebigprogramcoveringallormostofaministrysexpenditureisgenerallya
mistake.Forexample,itisbettertohaveanumberofprogramssuchasprimaryeducation,
secondaryeducationandtertiaryeducationinaneducationministrythantohaveasingle
enormouseducationprogram.Andratherthanasingleagricultureprogram,anagriculture
ministryshouldhaveanumberofprograms,perhapsalongindustrylines(i.e.separate
programsforcropindustries,livestockindustries,andfisheries).Aprogramclassification
basedongiantprogramswillbetoocoarsetoservecentraldecisionmakersinmaking
strategicspendingreallocationssuchas,forexample,shiftingmoneyfromtertiary
educationtoprimaryeducationorfromtreatmenthealthtopreventativehealth.Expressed
differently,programsshouldcaptureeachofthedistinctkeyaspectsoftheroleofeach
ministrysoastopermitcentraldecisionsaboutthebroadlinesoftheministrysservice
deliveryfocus.Itisinnowayinconsistentwiththistonotethat,forsmallministrieswith
narrowlyfocusedmissions,astructurewithasingleprogrammaybeappropriate.
Toomanysmallprogramsshouldbeavoided.Becausecentraldecisionmakersneedto
concentrateprimarilyonthebigpictureofexpenditureprioritizationacrossgovernment,
aproliferationofverysmallprogramsrunstheriskofunnecessarilycomplicatingthecentral
budgetpreparationprocess.
Aconsistentapproachtothesizeandnumberofprogramsneedstobeappliedacross
government.Itwould,forexample,beinappropriateifthehealthministrydecideditwould
haveasingleprogram,whilethejusticeministrydecidedtohavetwenty.Guidelinesfromthe
MoFonthisareessential(seefurtherbelowinthissection).Inevitably,suchguidelineswill
needtohaverecoursetoruleswhicharearbitrarybutnecessaryinparticular,alimitonthe
numberofprogramsanyministryhave(perhapssomethingbetween5and8,butthisdepends
onhowmanyministriesthegovernmenthas),andaminimumsizeforprograms(e.g.notless
thanacertainvalue,oralternativelynolessthanacertainpercentageoftheministrybudget).

DevelopingPrograms
Theproperdefinitionofprogramsandtheprogramhierarchyisataskwhichmustbegotright
ifprogrambudgetingistoworkproperly.ThismeansthattheMoFcannotsimplyleaveitto
ministriestodeterminewhattheirprogramswillbe.TheMoFmust,rather,issueclear
guidelinescoveringissuessuchastheformulationofprogramobjectives,programsizeand
number,andwhethertherewillbeasingleadministrationprogramineachministry(seelater
61

sections).Onlyinthiswaywilltheinterestsofcentralbudgetdecisionmakersinhaving
programswhichhelpthemtranslategovernmentprioritiesintobudgetnumbersberespected.
Ontheotherhand,itwouldbewrongfortheMoFtodictatetoeachministry,without
consultation,whatitsprogramswillbe.Spendingministriesknowtheirbusinessbetterthanthe
MoFdoes,anditwouldbeamistakenottobenefitfromspendingministryexpertise.
Moreover,theprogramstructureparticularlyatthelowerlevelsoftheprogramhierarchyis
intendedtoserveasaninternalbudgetingandmanagementtoolforthespendingministries
themselves.Thiswillnothappenifthespendingministriesfeelnosenseofownershipofthe
programstructure.
Insummary,thedevelopmentoftheprogramstructuremustbeacollaborativeendeavour
basedonapartnershipbetweentherelevantspendingministriesandtheMoF.

IntegratingStrategicPlanswiththeProgramBudget
Programobjectivesneedtobeexplicitlylinkedtotheobjectivesformulatedinthe
organizationsstrategicplanandinanygovernmentwidestrategicornationalplans.More
generally,planningandprogrammingshouldbeseenaspartofanintegratedcycle.
Awellformulatedgovernmentwidestrategywilldefineasmallnumberofhighleveloutcomes
uponwhichthegovernmentisfocused.Theclearspecificationofprogramobjectivesthen
providesthenaturalmeansoflinkingprogramstothegovernmentwidestrategy.Thisis
becauseprogramobjectivesaregenerallyintermediateoutcomesthroughwhichthehigh
levelwholeofgovernmentoutcomesareachieved.Forexample,theoutcomeofaCriminal
Policingprogram(reducedcrime)wouldlinkitdirectlytoawholeofgovernmentoutcome
suchasasafeandsecuresociety.Similarly,theoutcomeoftheHighSchoolEducation
Program(youngpeopleeducatedandsocializedtotaketheirplaceintheworkforceorhigher
education)wouldlinkitdirectlytowholeofgovernmentoutcomessuchasrapidand
sustainablegrowthofGDP.
Thistypeoflinkbetweentheprogramsandnationalstrategicoutcomecanberepresented
graphicallyasillustratedthefigurebelow.

62

LinkingProgramsandNationalStrategicOutcomes
WHOLEOF
GOVERNMENT
OUTCOME1
WHOLEOF
GOVERNMENT
OUTCOME2
WHOLEOF
GOVERNMENT
OUTCOME3
PROGRAMA
INTERMEDIATE
OUTCOME
PROGRAMB
INTERMEDIATE
OUTCOME
PROGRAMC
INTERMEDIATE
OUTCOME
PROGRAMD
INTERMEDIATE
OUTCOME

Strategyshouldalsobelinkedwiththeprogrambudgetattheentitylevel.Canada,Franceand
theUnitedStatesareamongsttheleadingcountrieswhichhavefullyintegratedentitystrategic
planswiththebudgetbyincludingwithinthebudgetdocumentsentityperformanceplans
whichare:
Basedontheprogramstructureofthebudget:inotherwords,performanceobjectives,
plansandtargetsareoutlinedforeachoftheentitiesprograms,
Coversallentityspending,notjustnewspending,
Includeonlyentityspendinginitiativesforwhichthegovernmenthasapprovedfundingin
thebudget.
Thesethreecountriesalsorequirethatentitiespresentannualperformancereportswhich
reportonsuccessinachievingtheobjectivessetoutintheperformanceplans.
IntheUS,thisapproachhasbeenmandatorysinceCongresspassedin1993theGovernment
PerformanceandResultsAct(GPRA).ThePerformancePlanswhichGPRArequiresarenotfull
entitystrategicplans,butGPRAstipulatesthattheymustbeconsistentwiththeentitystrategic
plan.
63

ThestructureoftheFrenchProjetsAnnuelsdePerformance(annualperformanceplans)is
slightlydifferentinthatitisbasednotonentitiesbutonmissions,whicharegroupsof
programswhichinsomecasesspreadovermorethanoneentity.Apartfromthat,theFrench
performanceplanstructureisverysimilartoothercountries.Itisbrokenintosectionsforeach
budgetaryprogram,withpresentationsofprogramobjectives,strategy,indicators,and
expenditure.
Elementsofthisbroadapproachtointegratingentitystrategicplanswiththebudgetaretobe
foundinmanyothercountries.InNewZealand,forexample,thegovernmentsbudget
documentsincludeentityStatementsofIntentwhichareessentiallystrategicplansstructured
aroundentityspecificoutcomes(equivalenttoprograms).InSouthAfricaoneofthemany
developingcountrieswhichhaveadoptedasimilarapproachregulationsalsostipulatethat
eachentitysstrategicplanmustbeconsistentwiththeinstitutionspublishedmediumterm
expenditureestimates.

KeyReadings
Robinson,M.andH.vanEden(2007),ProgramClassification,inRobinson(ed.)Performance
Budgeting.
Kraan,D.J.(2008),ProgrammeBudgetinginOECDCountries,obtainableat
http://siteresources.worldbank.org/INTPRS1/Resources/383606
1201883571938/ProgrammeBudgeting_OECD.pdf.

64

9.ProgramAppropriationandExpenditureControl

Programbudgetinginvolvesnotonlyplanning,butalsoapprovingandexecutingthebudgetin
programmaticterms.Inthissectionwefocusonthenatureofthebudgetauthorizationunder
programbudgetingandthedegreeofflexibilityinrespecttothatauthorizationduringbudget
execution.
Undermostprogrambudgetingsystems,theparliamentvotesthebudgetallocationsin
programmaticterms,andthisprogrammaticallocationconstrainsexecutivegovernmentinthe
executionofthebudget.Theparliamentaryauthorizationisinmostcountriesonlyatthe
programlevel.Onlyinaminorityofcountriesdoesparliamentaryappropriationofthebudget
takeplaceatsubprogramlevel,whichtendsgenerallytobethoughtofasareasofexecutive
governmentdiscretion.
20

Inconsideringthenatureoftheenactedbudget,however,weshouldhaveregardnotonlyto
theforminwhichparliamentapprovesthebudget,butalsotheadditionalcontroltotals
whichtheministeroffinanceorotherexecutivebodiesmightimpose.Forexample,inafew
countries,eventhoughtheparliamentonlyapprovesthebudgetattheprogramlevel,the
ministeroffinanceapprovesandcontrolstheallocationofprogramsbetweensubprograms.
Akeyquestionunderanyprogrambudgetingsystemisthereforethatofhowdetailedacontrol
toexertatthecenter(whetherbyparliamentorcentralexecutivebodies).Oneapproachto
thisquestionistorecognizethattheinformationavailabletocentraldecisionmakersisnever
goingtobesufficientlystrongtopermitthemtodetermineallofthedetailofresource
allocationacrossthewholeofgovernment.Broadlyspeaking,thecenterisbetterof
concentratingonthebigpictureofresourceallocation,whileleavingconsiderablediscretion
tospendingministriesonthedetail.Fromthisperspective,allocationatthesubprogramlevel
maybebetterlefttoministriesthemselvestodetermine.
Centralapprovalofthebudgetintermsofprogramsraisesthequestionoftransfers
(sometimesknownasvirements)ofexpenditurebetweenprograms.Thisreferstotransfersof
moneybetweencategoriesoffundingapprovalinthiscase,betweenprograms.Inmany
programbudgetingsystems,parliamentauthorizesexecutivegovernmenttomakelimited

20
Thereareexceptionstothesegeneralizations.Oneistheglobalappropriationssystemofcountrieslike
AustraliaandCanada,underwhichtheprogrammaticallocationismerelyindicativeandcanbechangedby
executivegovernmentatitsdiscretion.
65

modificationstotheapprovedprogramallocationoffundsforexample,tomoveupto5
percentofthefundingofanyprogramtootherprogramswithouthavingtocomebackto
parliamenttomodifythebudget.Thistypeoftransferarrangementisintendedtocreatealittle
flexibilitytorespondtounanticipateddevelopmentswhichmightoccurduringtheyear.
Theotherkeyissuewhicharisesunderprogrambudgetingisthereformofthetraditional
budgetappropriationframework.Asmentionedearlier,traditionalbudgetingisbasedprimarily
onlineitemapprovals.Thismeanslegalallocationsoffundstoinputsknownformallyas
economicclassificationsofexpendituresuchassalaries,suppliesandcapitalexpenditure.In
traditionalsystems,thelineitemallocationissometimesverydetailed.Forexample,theremay
beseparatefundallocationstoitemssuchasofficestationarysupplies,books,internaltraining,
externaltrainingetc.Thismeansthatspendingministriesarethenunableatleastwithout
centralapprovaltoshiftmoneybetweenthesecategoriesduringtheyear.Inpractice,some
flexibilityiscreatedbysystemswhichpermitsometransfersbetweenlineitemcategories.
However,notonlyisthescaleofsuchtransferstypicallygreatlylimited,buttheprocessof
reviewinganddeterminingtransferapplicationscaninvolveagreatdealofunproductivework
fortheMoF.
Performancebudgetingisopposedtohistypeofdetailedcontroloverthelineitem
compositionofexpenditure.Theperformancebudgetingfocusisontheresultsdeliveredby
agencies,notonthewayonwhichtheydeliverthoseresults.Performancebudgetingcallsfor
ministries,andmanagerswithinthoseministries,tobegivengreaterfreedomtochoosethe
bestmixofinputswithwhichtoefficientlyandeffectivelydeliverservices.Thecorollaryofthis
isincreasedaccountabilityfortheresultsdelivered.
21

Forthisreason,performancebudgetinghastypicallybeenaccompaniedbyextensivereduction
oflineitembudgetcontrols.Forexample,undertheFrenchsystem,controlsonthelineitem
compositionofprogramexpenditurehavebeentotallyabolishedwithone(important)
exceptionpersonnelexpenses.Itisnotpermittedtoshiftmoneyfromotherinputcategories
topersonnelexpenses(althoughministriescanshiftmoneyfrompersonnelexpensestoother
inputcategories.

21
Verydetailedinputcontrolshave,moreover,adownsideunrelatedtoperformancebudgetingissuesnamely,
thattheytendtoaggravateconsiderablytheproblemofunderexecutionofbudgetswhichcanbeseeninmany
countries.Underexecutionmeansthatactualexpenditurefallswellshortofthelevelofexpenditureapprovedin
thebudget.Detailedlineitemcontrolscontributetothisbecause,whenthereisunderspendinginonelineitem
category(e.g.internaltraining),itisnotpossibletousethefundsapprovedforotherpurposes.
66

Thekeypracticalquestionisthenhowmuchlineitemderegulation,andhowfast.Itshouldnot
bethoughtthatprogrambudgetingdemandsthecompleteabolitionofcentralcontrolsonthe
inputallocationofprogramexpenditure.IntheFrenchsystem,forexample,controloverthe
allocationtopersonnelexpensesiscontrolledfortheverygoodreasonthatFranceisa
traditionalcivilservicesystemwhere,oncesomeoneishired,itisveryhardtoterminatetheir
employment.Soifaministrywastohiremorepeoplebyshiftingfundswithinitsbudget,it
wouldbecreatingcommitmentstofutureexpenditurewhichcouldpotentiallygreatlyreduce
thebudgetaryflexibilityofthegovernmentinthefuture.
Innearlyallprogrambudgetingsystems,capitalexpenditureisprotectedthatis,spending
ministriescannotshiftmoneyfromcapitaltocurrentexpenditurewithinprograms.The
rationaleforthisisaconcernaboutthetemptationministrieswouldotherwisefacetomake
shortsightedcutstocapitalspendingtoeasetheircurrentbudgetconstraints.
Particularlyindevelopingcountries,thereareothertypesoflineitemcontrolswhichitmay
makesensetoretain,suchas:
Lineitemsforutilitybillsandotheressentialpayments:thiswouldberelevantiftherewas
aconcernthat,withoutsuchcontrols,ministrieswouldspendtheirbudgetsonotheritems,
leavinginsufficienttopaytheirelectricityandphonebills,andwouldthendemand
supplementaryfundingfromtheMoFtopaythesebills.
Controlsovertravel,consultancyandotheritemsparticularlysusceptibletoabuse.
Theseexampleshighlightthemoregeneralpointthatthepracticalscopeforlineitem
deregulationinanycountrydependssignificantlyonthequalityofgovernanceandonthe
degreeofcivilservicediscipline.RatherthansimplyfollowingtheextremeexamplesofFrance
orothercountrieswhichhavereducedtheirlineitemcontrolstoaminimum,eachcountry
needstomakeitsowncasebycasedecisionsaboutwhatlineitemcontrolstoretain.Itwill
alsotypicallymakesensetoadoptagradualapproachtolineitemderegulation.
Thisbeingsaid,itmakesnosenseatallforanycountryadoptingprogrambudgetingtoretain
thehighlydetailedtraditionallineitemcontrolsreferredtoabove.Mostsuchdetailedcontrols
servenousefulfunctionwhatsoever.Thebestapproachwillbetoaccompanythemoveto
programbudgetingwithareviewoflineitemcontrolswhichaimstoabolishmostdetailed
controls,andtoretainonlythoseforwhichaclearrationalecanbeputforward.

67

KeyReadings
Robinson,M.andH.vanEden(2007),ProgramClassification,inRobinson(ed.)Performance
Budgeting.

68

10.ProgramAccountingandCosting
22

Thissectionexaminestheaccounting,informationtechnology(IT)andbudgetclassification
requirementsofprogrambudgeting.Theprincipalpointisthatifprogrambudgetingistowork,
programsmustbeintegratedintotheaccountingsystem,thewayinwhichthebudgetis
structured,andtheITsystemswhichsupportthebudgetingprocess.
Ifagovernmentisgoingtobudgetbyprograms,thebudgetdocumentsandtheaccounting
systemmustbeprogramfriendly.Inparticular,itmustbepossibletofollowbudgetexecutionin
programmatictermsthatis,tomonitorexpenditureprogrambyprogramduringtheyearsoas
tomakesurethatprogramexpenditureauthorizationsarenotexceeded.Insofaraslineitem
authorizations(forspendingbyeconomicclassificationseefurtherbelow)areexpressedin
programterms,itmustbealsopossibletomonitorthese.Forexample,iflimitsaresetonsalary
expenditureforeachprogram,thentheaccountingsystemmustcontinuouslymonitorsalary
expenditurebyprogram.Itisnotsufficient,forexample,tomakeanestimateofprogram
expenditureattheendoftheyearbysomeapproximatemeans(whichwouldbeenoughif
programswereintendedonlyforreportingandnotbudgetexecutionpurposesthatis,to
provideinformationonthelevelofexpenditurebypolicyobjective).

BudgetClassificationandChartofAccounts
Foraprogrambudgetingsystemtowork,theBudgetClassification(BC)andChartof
Accounts(COA)mustincorporateprograms.TheBCandCOAareclassificationsystems,in
whichthereisacodenumberforeachtransactionwhichsummarizesallofitscharacteristics
accordingtotheclassificationsystem.Thesesystemscovernotonlyexpenditure,butother
transactionssuchasrevenue.Butourfocushereisexclusivelyontheclassificationof
expenditure.Expenditureonaparticularitem(sayasalarypayment,orapurchaseofspecific
supplies)willinthesesystemsbecodedwithasequenceofnumberssuchas13213252573,
where13standsfortheministry,2forthedepartmentwithintheministry,1fortheunit
withinthedepartment,325thethreelevelsoftheeconomicclassification(i.e.thetypeof
inputwhether,forexample,salary,capitalexpenditureetc),257symbolizesthethreelevels
ofthefunctionalclassification(moreonthislater)andthe2thefundsource(e.g.donor
funded).Theclassificationcategoriesusedarenotsetinconcrete,butmayvarybetween
countries.Somecountriesmighthaveadditionalones,suchasageographicclassification,in

22
Thissectionrelatestosession2.4inthegeneralistcourse,andsession1.5.4inthespecialistcourse.
69

whichcasetherewouldbeanadditionalcoderepresentingtheregioninwhichtheexpenditure
tookplace.
TheCOAisacodingsystemusedwhenrecordingtransactionsintheaccountingsystem.This
meansthatforeverypaymentmade(orcommitmentmade),ministryaccountingstaffwould
entertheappropriatecodewhenrecordingthetransactionintheaccounts(concretely,inthe
computerizedaccountingsystem).TheBCistheclassificationusedinthebudgetitselfthatis,
indescribinginthebudgetdocumentstheexpenditurewhichistotakeplaceinthecoming
year.
23
TheCOAandBCshouldbeintegratedinthesensethattheformershouldsubsumethe
latter.Inotherwords,theaccountingsystemshouldrecordalltheexpendituretransaction
categoriesthatarethebasisofbudgetaryapprovalsorinformation,soastoenableexpenditure
controlandreportingintermsofthosecategories.
Underprogrambudgeting,programsmustbeincorporatedintotheCOAandBC.Notonlythe
program,butthesubordinateelementsoftheprogramhierarchy(subprogramsetc),shouldbe
codedfor.Soifthereisathreelevelprogramhierarchy,threedigitswillberequiredforcoding
purposes.Itwillalsobenecessarythattrainingandvalidationprocessesareputinplaceto
ensurethataccountingstaffrecordtheprogramproperlywhenenteringexpenditure
transactionsintotheaccountingsystem.

FinancialManagementInformationSystems
Financialmanagementinformationsystems(FMIS)refertocomputerizedsystemsformanaging
budgetingandassociatedprocesses.Computerizedaccountingsystemsarethemostbasictype
ofFMIS.However,manyotherprocessesarealsocomputerized.Automatedexpenditurecontrol
isanexampleofsuchaprocess,andreferstocomputerizedsystemswhichareusedto
authorizecommitmentsand/orpaymentsbyverifyingthattheyareconsistentwiththe
expenditurelimitssetinthebudget.Othercomputerizedsystemwillcoverotherbudget
executionfunctionssuchascashmanagement,debtmanagementetc.Therearealsosystems
whichcovervariousaspectsofbudgetexecution.

Notonlymusttheaccountingsystembeprogramfriendly,butothersystemswithintheFMIS
mustalsobeadjustedtoworkwithprogramsifprogrambudgetingistosucceed.The

23
Whetherforthepurposeofdescribingcontroltotals(seetheprogramaccountingsection)orproviding
supplementaryinformationontheexpectedcompositionofexpenditure(e.g.detailsoftheexpectedbreakdown
ofprogramexpenditurebylineitem,evenwhenthisisindicativeratherthanbinding)
70

expenditurecontrolsystemisanobviousexampleifthebudgetsetslimitsforexpenditureby
program,itwillbenecessarythattheexpenditurecontrolsystemaswellastheaccounting
systemoperatesonaprogrambasis.Concretely,thismeansthattheexpenditurecontrolsystem
wouldpreventcommitmentsbeingmadeforspendingonprogramXinexcessoftheamount
votedbyparliamentforprogramX.Ifthereareprogramtransferprovisions,theexpenditure
controlsystemwillalsoneedtomanagethisitshouldpermit(subjecttoappropriate
authorization)transfersbetweenprogramsuptotheestablishedlimit(e.g.fivepercent),but
notinexcessofthis.Ifthereisacomputerizedbudgetpreparationsystem,thisalsowillneedto
changetorecognizethefactthatministrieswillnowbeputtingforwardspendingproposals
linkedtospecificprograms.

TheacronymIFMISreferstoanintegratedfinancialmanagementinformationsystem.This
meansasinglesystemwhichtoagreaterorlesserdegreeintegratesmultiplefunctions.Withan
IFMIS,accounting,expenditurecontrol,payments,budgetpreparationandarangeofother
functionswillbebuiltintothesamelargecomputerizedsystem.AnIFMISdiffersfromasystem
whichisbasedonaseriesofseparatesystemswhichdrawdatafromoneanotherbutarenot
otherwiseintegratedinthesensethattheydonotautomaticallytalktooneanother,sothat
dataenteredintoonesystemdoesnotautomaticallymodifyrelevantvariablesinother
systems.
24

ThescopeofanIFMISthatis,thenumberofdifferentbudgetingandrelatedfunctionswhich
itincorporatesisnotfixed,butvariesconsiderablyinternationally.TobeconsideredanIFMIS,
asystemmustintegrateatleastaminimumsetofcorefunctions(typicallyincluding
accountingandreports,expenditurecontrol,payments).Itmayalsoincludecertainnoncore
functions,suchasbudgetpreparation,cashmanagement,debtmanagementandeven
performancemanagement(i.e.recordingofprogramobjectives,indicators,monitoringagainst
targets).

Thekeyissueforprogrambudgetingishowtoensurethatthefinancialmanagement
informationsystemsareprogramfriendly.Someassumethatthisrequirestheintroductionof
anIFMISwhichincorporatesallofthefunctionsrelevanttoprogrambudgeting,includingfor
examplebudgetpreparationonaprogrambasisandperformancemanagement.

24
Forexample,theremaybeadistinctpaymentssystemwhichwillbeseparatefromtheaccountingsystembut
whichwillusedatafromtheexpenditurecontrolsystemtodeterminewhetheraspecificpaymentisbasedona
commitmentwhichwaspreviouslyauthorizedbytheexpenditurecontrolsystemascompatiblewithbudgetary
limits.
71

Thismaybeaninappropriateassumptionforanumberofreasons.Firstly,ifprogrambudgeting
istobeintroducedinacountrywhichlacksafunctioningIFMISthatis,acountrywhichhasa
financialmanagementinformationsystembasedonasetofseparateinterfacedsystemsit
needstoberecognizedthatthereplacementofsuchlegacysystems(astheyareoftencalled)
withanIFMISisnotsomethingwhichcanbedoneovernight.IFMISimplementationtakes,asa
roughgeneralization,aminimumoffiveyears.Manycountries,whenintroducingprogram
budgetingsystems,wishtomovemorequicklythanthis.Iftheydo,thiswillrequirethemto
modifythelegacysystemstomakethemprogramcompatible,evenifinthemediumoflonger
termtheyareplanningtointroduceanIFMIS.InFrance,theprogrambudgetingreformswhich
cameintofulloperationin2006wereintheirearlyyearsmadetoworkwiththepreexisting
financialmanagementinformationsystem,modifiedinthemostessentialways.Thiswas
despitethefactthatevenatthattimeamassiveprojectwasalreadyunderwayforthe
introductionofthehighlyintegratedChorusIFMISsystem.ThisisbecausetheChoruswas
suchamajorprojectthatitrequiredmanyyearspreparationandimplementation,andtowait
untilthiswascompletedwouldhaveinappropriatelydelayedtheintroductionofthe
performancebudgetingsystem.

Secondly,thereisacloseassociationbetweenthecomprehensivenessoftheplannedsystem
andthescaleoftheimplementationdifficultiesanddelays.AsDFID(2001:61)note,
internationalexpendituresuggeststhatthereisarealriskoffailureintheintroductionoflarge
managementinformationsystems.ItisthereforeabigmistaketoassumethatanIFMISshould
necessarilytrytointegrateeverythingintoonegiganticsystem.DiamondandKhemani(2005:3
4)alsowarn:

thetermintegratedfinancialmanagementinformationsystemcansometimesbe
erroneouslyinterpretedasdescribingasystemthatcancaptureallthefunctional
processes,andtherelevantfinancialflows,withinpublicexpendituremanagement.
However,thecomplexityofinformationsystemswithinthegovernmentsectoris,toa
largeextent,duetothemultiplicityoffunctionsandpolicyareas.Inmanyfunctionalareas
specializedinformationsystemsareinplaceandwillstillberequiredevenwiththe
implementationofanFMIS.

Frenchexperienceonceagainhighlightstheproblem.Itwasjustaswellthatperformance
budgetingwasnotdelayedtoawaitChorus,becauseChorusimplementationsubsequently
72

experiencedmassiveproblems,totheextentthatforaperiodin2010paymentstosuppliers
largelystoppedandmajorpaymentarrearsaccumulated.

Asnotedinthesectionofperformanceinformationsystems,itisalsowrongtoassumethat
programbudgetingrequiresthataperformancemanagementmodulebeintegratedintothe
IFMIS.Programobjectives,indicatorsandtargetscanbeperfectlywellmanagedviaamuch
simplerseparateplatformwhichmightevenbebasedonExcelspreadsheets.Moregenerally,a
movetoprogrambudgetingshouldnotbeseenasrequiringthatoneovercomplicatethe
computerizedfinancialmanagementsysteminawaywhichisonlylikelytocausemajor
implementationdifficulties.

ProgramCostAllocation
Wenowturntoaquitedifferentissue:themethodologyguidingtheallocationofexpenditure
betweenprograms.Expenditureiscarriedoutlargelybythepurchaseofinputs
25
,sothe
accountingforexpenditurebyprogramrequiresthataccountingstaffbeabletodeterminethe
programunderwhichtheexpenditureonanygiveninputshouldberecordedintheaccounts.
Therearetwodistinctlydifferentaspectsofthisissue,concerningrespectivelydirectand
indirectcosts.

Incostingprograms,adirectcostisexpenditureonaninputwhichcontributestothatprogram
andthatprogramalone.Thesameistrueinrespecttosubprogramsadirectcostisacost
associatedwithonlythesubprogramconcerned.Assume,forexample,thatthereisan
agriculturalextensionservice(i.e.aserviceprovidingtechnicaladvicetofarmers)andthat
thisserviceconstitutesasubprogramwithin,say,acropindustriesprogram.Thewagesand
otheremploymentcostsoffieldadvisorystaffthatspend100percentoftheirtimeproviding
advicetofarmerswouldbeadirectcostofthatsubprogram.Sowouldtheoperatingcostsof
anymotorvehiclesdedicatedexclusivelytothatservice.Ontheotherhand,anindirectcost
wouldinthiscontextbeanyitemofexpenditurewhichcontributespartlytothatsubprogram,
butalsotoothersubprograms.Forexample,ifamotorvehicleweresometimesusedto
supportagriculturalextensionservice,andsometimestosupportstaffdeliveringothertypesof
serviceswithinthecropindustriesprogram(orevenotherprograms),itwouldbeanindirect
cost.

25
Ofcourse,therearealsotransferpayments,suchasincomesupportbenefits.
73

Considerthisissuefromtheperspectiveofaccountingforexpenditurebetweenprograms
withinaspecificministry.Therearewithinanyministryarangeofoverheadsexpenditures
onserviceswhichsupporttheministryasawhole.Suchoverheadsinclude,forexample,the
employmentcostsoftopministrymanagement,thefunctionofwhichistomanageacrossthe
ministryasawhole.Theyalsoincludethevitalservicefunctionswithinthedepartmentsuchas
financeandhumanresources.Ifweassumeforthemomentthatthereisnoseparate
administrationprogramcoveringtheseoverheads,thentheyarebydefinitionindirectcosts
whichwouldhavetobeallocatedtotheministrysprograms.Forexample,inthecaseofthe
educationministry,itwouldbenecessarytodeterminehowmuchoftheministrysfinance,
humanresources,topmanagementetcexpenditurecontributedtotheprimaryschool
educationprogram,howmuchtothesecondaryeducationprogram,andsoon.

Directcostsare,inprinciple,theeasypartofprogramcosting.Becausetheyarecostswhich
contributetoonlyoneprogram(orsubprogram),allthathastobedoneistoensurethatthey
arerecordedagainstthecorrectprogramorsubprogram.(Asnotedbelow,however,eventhis
canbeasignificantchallengeinsomedevelopingcountries.)

Theallocationofindirectcostsislessstraightforward.Taketheexampleoftheregionaloffice
staffofanenvironmentalagency,manyofwhommightbeinvolvedinawidevarietyofdifferent
services,rangingperhapsfromnatureprotectiontoenvironmentalpollutionmanagement.
Whatmethodsmightbeusedtoallocatetheiremploymentcoststospecificoutputs?

Onemethodwouldbetorequirethestaffconcernedtofillintimesheetsrecordinghowtheir
timeisallocated,inthemannerthatlawfirmstypicallyuseforbillingpurposes.Government
departmentsinsomecountrieshaveimplementedsuchtimerecordingsystems.Thismaybe,
however,acostlyprocess,particularlyifthetimesheetsaretobereasonablyaccurate(which
willrequirecarefulmonitoringbymanagementtomakesurethatstafffillintheirtimesheets
accurately).Thispointstoakeyissuewhicharisesinallocatingsomeindirectcosts:theexpense
ofthecostallocationprocessitself.Becauseoftheexpenseofacquiringtrulyaccuratecost
allocations,itiscommonplaceforshortcutstobeadopted,asaconsciouscompromisebetween
accuracyandexpense.Inthecaseofstafftimeallocations,forexample,thecompromisemight
betorequirestafftofillintimesheetsforaspecificperiodduringtheyear(sayonemonth)and
thenassumethatthissampledatawasrepresentativeofthewholeyear.

74

Informationtechnologyhasinsomecasesgreatlyreducedthecostsofobtainingaccurate
allocationsofindirectcosts.Taketheexamplesoftelephonecostsorelectricityusage.Itisa
relativelystraightforwardandcheapmatterthesedaystogenerateaccurateinformation
apportioninganorganization'stotalphonebilltoindividualphonelines,orelectricityusage
amongstdifferentorganizationalunits.Inthepast,however,thiswasimpossibleorvery
difficult.Note,however,thatinsomedevelopingcountries,technologytorecordtheuseof
suchservicesmaynotbeaffordable,andasaconsequencesuchutilitiesremainineffect
indirectservices.

Indirectcostallocationisataskofmanagementaccountingwhich,whilewidelyemployedin
theprivatesector,isnottypicallypartofthearsenalofaccountingtoolsofgovernment.It
involvesthedefinitionandapplicationofcostdriverstoallocateexpenditure.Acostdriverisa
formulaorprinciplewhichisusedtodeterminetheproportionsinwhichanindirectcostissplit
betweentwoormoreprograms(orsubprograms)towhichitcontributes.Intheexample
above,boththeapportionmentoftelephonecostsofaproratedbasisreflectingdirectservice
staff,andtheapportionmentisaccordancewithcomputerizedusagerecords,represent
(different)costdrivers.Onemaybearbitraryandtheotheraccurate,buttheyarebothcost
drivers.Becausecostdriversprovidethebasisfordeterminingtheproportionsinwhichindirect
costsareallocated,thetermallocationbasisissometimesusedtomeanthesamethingasa
costdriver.

Tokeepthingssimple,accountantsoftenallocateindirectcostsusingverysimplecostdrivers.
Forexample,thecostallocationformulamightassumethatallthesupportservicesinthe
ministrycontributetoprogramsinamannerproportionatetothestaffnumberswithinthe
majororganizationalunitsintheministry.Forexample,ifthirtypercentofthestaffofthe
ministryofeducationworkdirectlyontheprimaryeducationprogram,itmightbeassumedthat
thirtypercentofthecostoftheministryssupportservicesisattributabletotheprimary
educationprogram.However,thiswouldbeaverycrudeapproximationwhichmightbevery
inaccurate.

Toallocateindirectcostsinareasonablyaccurate(asopposedtohighlyarbitrary)wayisa
complexbusiness,requiringnotonlyadditionalhighlyskilledaccountants,butmore
sophisticatedITsystems.Amongstthesophisticatedindirectcostallocationmethodsavailableis
activitybasedcosting(ABC).TherearetwodefiningfeaturesofABC.Thefirstisthatitisatwo
stagecostingprocessasappliedtoprogramcosting,inwhichinputsareallocatedfirstlyto
75

activities(includingsupportactivitiessuchasHRservicesorITservices)andactivitycostsare
thenallocatedbetweenprograms.TheseconddefiningfeatureofABCisaninsistenceuponthe
useofcostdriverswhicharenotarbitrarybutwhichprovideanaccuratereflectionofthe
contributionwhichinputsandactivitiesactuallymaketooutputs.AdvocatesofAOBviewitas
requiringtheuseofcostdriverswhichconstitute'amodeloforganizationalresource
consumption'.TheABCemphasisuponaccuratecostdriversislaudable.However,thepriceof
accuracycaninmanyinstancesbeunacceptablyhigh.Evenindevelopedcountriesitisnot
clearthatABChasbeenasuccessinthepublicsector.Indevelopingcountries,itisgenerally
speakingfartoodemandingofskilledhumanresourcesandsophisticatedITsystemstobe
feasibleorjustifiableincostterms.

AdministrationPrograms

Thedifficultyofaccurateindirectcostallocationhasled,formostgovernment,toapragmatic
modificationoftheprogrambudgetingprinciple.Thisistheuseofdistinctadministration
programstocovertheoverhead(supportservice)ofeachministry.Administrationprograms
are,clearly,inconsistentwiththepureprogrambudgetingprincipleofoutcome/outputbased
programs,asoutlinedinSection8.Internalsupportservicesdonotprovideservicestoexternal
clients,andarethereforebydefinitionnotoutputs(seeSection3).Moreover,preciselybecause
theydonotdeliverservicestothepublic,supportservicesarenotcapableinisolationof
achievingoutcomesforthecommunity.Rather,theysupportthosepartsoftheministrywhich
doprovideservicesdirectlytothepublic,andwhichthroughthoseservicesachieveoutcomes.
Therefore,ifallprogramsweredefinedintermsofoutputsandoutcomes,therewouldbeno
administrationprogramsandallministrywideoverheadswouldbeindirectcostswhichwill
needtobeallocatedbetweenprograms.

However,preciselybecausetheallocationofindirectcostswithanacceptablelevelofaccuracy
isademandingandtechnicallycomplexundertakingwhichisnotcheap,themajorityof
countrieschoosetolargelyavoiditthroughtheuseofadministrationprograms(alsoknownas
management,supportorcorporateservicesprograms)
26
.Administrationprogramscover
thecostsofministrysupportserviceswhichwouldotherwisebedifficulttoallocate.Countries
whichmakeuseofadministrationprogramstaketheview,however,thatitisbetterto
compromiseontheprogrambudgetingprincipleinthiswaythantouseofanarbitrarycost

26
And,analogously,theycommonlymakeuseofadministrationsubprogramswithineachprogram,covering
programwideoverheads.
76

allocationapproachwhichwouldyieldfullcostprogramexpendituremeasureswhichmight
behighlyinaccurate.

Iftheonlyjustificationforadministrationprogramswasthedifficultyofaccurateindirectcost
allocation,itmightbeappropriatetoviewadministrationprogramsasatemporarymeasure.In
otherwords,administrationprogramscouldbeviewedasnomorethanapracticalmechanism
tobeusedintheearlydaysofaprogrambudgetingsystemincountrieswherethecapacityand
systemsforaccurateallocationofindirectcostsdonotyetexists.Inthelongerterm,the
aspirationwouldbephaseoutmanagementprogramsasandwhenthecapacitytoallocate
indirectcostsisdeveloped.Thisisaviewwhichmanypeopletake.

Itis,however,possibletoarguetheuseofmanagementprogramstocoverministrysupport
servicescanbejustifiedasamatterofprincipleevenincountrieswhichhavethetechnical
capacitytoallocateexpenditurebeenprograms.

Toseewhy,keepinmindthatprogrambudgetsareinmostcountriesexpenditurelimits
(controltotals),andnotsimplyaccountingmeasuresofthecostofproducingspecific
productlines.Inotherwords,asdiscussedinSection9,whentheparliamentapprovesa
programbudget,itistellingministriesthattheyaretospendnomorethan$xonprogramA,$y
onprogramB,etc.Thismeansthatiftheexpenditureoftheministryssupportservicesis
includedinitsoutcome/outputbasedprograms,thegovernmentisineffectinstructingthe
ministryabouttheextentofthesupporttheministryssupportservicesshouldprovidetoeach
oftheministrysoutputbasedprograms.

Suppose,forexample,theeducationministryhasonlytwoprogramsprimaryandsecondary
educationandnomanagementprogram.Imagine,moreover,thattheministrys
organizationalstructureconsistsofaprimaryschooldepartmentandasecondaryschool
departmenteachofwhichisbudgetedinternallybytheministrytoreceive40%ofthe
ministrysoverallbudgetandasupportservicesdepartmentwhichisbudgetedinternallyto
receive20%oftheministrysbudget.Supposedfurtherthatitisexpectedatthetimethe
budgetispreparedthatthesupportservicesdepartmentwillprovideequallevelsofsupportto
eachofthetwomaindepartments.Reflectingthis,theprogrambudgetapprovedbyparliament
willallocatedonehalfoftheministrysbudgettoeachoftheprimaryandsecondaryeducation
programs,ineachcaseincludingthatprogramsshareofexpenditureonsupportservices.
77

Toensurethatneitherprogrambreechesitexpenditureauthorization,theeducationministry
willthenneedtomakesurethatthesupportservicesdepartmentdoesnotdevotesubstantially
morethanonehalfofitsexpendituretosupportingeitherofthetwoministryprograms.More
generally,becausesupportservicesexpenditureisincludedintheoutputbasedprograms,it
becomesnecessaryinbudgetexecutionforthesupportservicesdepartmenttorigorously
managethebalanceofsupportitprovidedtotheotherministrydepartments.

Hereinliestheproblem.WhywouldthepoliticalleadershiportheMoFwishtodictatetheway
inwhicheducationministrysupportservicesallocatetheireffortsbetweensupportingprimary
andsecondaryeducationduringtheyear?If,forexample,unexpectedeventsmeanthatthe
primaryschoolprogramhasagreaterthananticipatedrequirementforthesupportoftheHR
groupinstaffrecruitmentduringtheyear,shouldnttheministrybeleftwiththeflexibilityto
shiftthedispositionofitssupportservicesaccordingly?

Ifonebelievesthatministriesshouldretaintheflexibilitytoallocatesupportservicestowhere
theyareneededduringtheyear,thenitmakessenseinprincipletohaveamanagement
program.Thatmanagementprogramshouldincludedallthoseministrysupportserviceswhich
aregenericandwhichcanbeflexiblyreallocatedduringtheyearfromsupportingoneoutput
basedprogramtoanothertomeetshiftingsupportrequirements
27
.

Ofcourse,itisstillusefultoknowexpostwherethesupportservicesareallocatedinorder,
ideally,tohavethebestpossibleaccountingmeasuresofthefullcostsofdeliveringeach
productline.Forthispurpose,additionalcostanalysiscanbecarriedouttoallocatethe
managementprogramexpenditurebetweentheoutputbasedprograms.

Thisis,incidentally,exactlywhattheFrenchdoeventhoughFranceisperfectlycapableof
carryingouttheaccountingallocationofsupportserviceexpenditurebetweenoutputbased
programs,itneverthelessmakesusofmanagement(support)programsandsupplementsthis
withadditionalcostanalysis.

27
ItisrelevantinthiscontextthatinAustralia,wheretherearenoadministrationprograms,programsarenot
usedbyparliamentascontroltotals(legalappropriationcategories).Thismeansthattheallocationoffundstothe
budgetispurelyindicative,andthereforedoesnotinanywayconstraintheactualallocationofsupportservices
betweenthemainprogramareasofministries.
78

SalaryCostsandPrograms
Itwassuggestedabovethattheallocationofdirectcostisarelativelyeasytask.Inmany
developingcountries,evendirectcostallocationbetweenprogramscanpresentsignificant
challenges.Itisnotuncommon,forexample,forministryaccountingsystemsinsuchcountries
nottodifferentiatepersonnelexpendituresbyministryorganizationalunit.Thisproblemis
oftencompoundedbysystemsinwhich,whenstafffromoneministryarepostedtoanother
ministry,theycontinuetobepaidbytheiroriginalministry,asaresultofwhichtheirsalariesare
notrecordedasexpenditureoftheministryinwhichtheyareactuallyworking.Thismeansthat
theaccountingsystemin,say,theeducationministrymightgivenoindicationofthetotalwage
costsofstaffworkingonprimaryeducation,makingitessentiallyimpossibletocostaprimary
educationprogram.

Forthesereasons,developingcountriesareoftentemptedtorecordallministrypersonnel
expenditureundertheadministrationprogram.Whileonecansympathizewiththepractical
reasonsfordoingthis,suchacourseofactionfundamentallyunderminesthelogicofprogram
budgeting.Giventhatpersonnelcostsrepresentalargeportionofgovernmentexpenditurein
mostcountries,theresultsofexcludingsuchexpenditure(atleastonthecurrentexpenditure
side)isprogramswhichonlyrecordminorexpenditure(e.g.furniture,supplies)andwhichare
thereforeofverylittleuseasatoolofexpenditureprioritization.

Incountrieswhichfacethisproblem,theproperallocationofsalarycoststorelevantprograms
shouldbethefirstpriorityontheaccountingsideinpreparingfortheintroductionofaprogram
budgetingsystem.Allpersonnelchargesofstaffmembersworkingexclusivelyonspecific
programs(whichwillaccountformostpersonnelexpenses)shouldbeallocatedtoprograms,
withonlythesalariesofstaffinsupportservicesincludedintheadministrationprogram.

CostAllocationandtheProgramHierarchy
Thecostattributionissueinrespectnotonlyofindirectbutalsoofdirectcostsisrelevantto
thedecisionofhowmanylevelstohaveintheprogramhierarchy.Theaccountingsystemmust
becapableofrecordingexpenditureagainsteachelementintheprogramhierarchy.Thismeans
thatforeachadditionalleveladdedtotheprogramhierarchy,thecostattributionissue
becomespotentiallymorechallenging.If,forexample,youhaveaprogramstructurecomprised
offourlevels,itisnecessarytobeabletofollowbudgetexecutionthatis,tomonitor
expenditureviatheaccountingsystemduringtheyearrightdowntothelowestofthosefour
levels.Supposethateachprogramiscomprisedoffoursubprograms,eachsubprogramoffour
79

subsubprogramsand,finally,eachsubsubprogramorfoursubsubsubprograms.Ifthisis
thecase,thenafourlevelprogramstructureinvolvesclassifyingandmonitoringexpenditurein
sixteentimesasmanycategoriesasdoesatwolevelstructure.Thismightgreatlyincreasethe
challengeofcorrectlyrecordingexpenditureaswellasthatofallocatingindirectcosts.Given
themagnitudeofthedifficultiesmanydevelopingcountriesfacewiththeiraccountingsystems,
itwillhardlycomeasasurprisetosaythatfewsucceedinsuccessfullyimplementingprogram
hierarchieswiththreeorfourlevels.

Thesimplestoptiononewhichmaybeappropriateformanydevelopingcountries,for
exampleistohaveaprogramhierarchywithonlyoneortwolevels(programs,orprograms
andsubprograms).Theappropriateapproachtothisissuewillalsoneedtotakeintoaccount
therelationshipbetweenorganizationalunitsandprogramelements,whichisdiscussedbelow.

ProgramCostEstimationinBudgetPreparation
Thethirdandfinalissueaddressedinthissectionconcernstheestimationofprogramcostsin
budgetpreparation.Inotherwords,duringthepreparationofthebudget,itwillbenecessaryto
putafigureoneachprogramsexpenditureforthecomingyear.
28
Eachministrywilltherefore
needsomemethodtomaketheestimateofplannedexpenditureoneachprogramwhichit
includesinitsbudgetbidpresentedtotheMoF.

Thesimplestandmostcommonapproachtoestimatingprogramcostsinbudgetpreparationis
totakethepreviousyearsexpenditureontheprogramandadjustitfor(1)inputcostchanges
ordemandchanges;and(2)policychangessuchasanexpansionoftheprogramorachangein
programdesign.

Itissometimessuggested,bycontrast,thatunderaprogrambudgetingsystemorundera
versionofitwhichsomecalloutputbudgetingitisessentialthattheexpenditureestimate
foreachprogrambecalculatedbytakingtheplannedoutputstobeproducedbytheprogram
andmultiplyingthembytheunitcostoftheoutputsconcerned.
29
Inotherwords,unitcostsare
supposedtobeusedinbudgetpreparationtocalculateprogramexpenditurerequirementsasa
functionofthequantityofservicestobedeliveredtothepublic.Underthisapproach,the
programclassificationofexpenditurewouldextendbeyondprogramsandsubprogramstothe

28
Aswell,ideally,asthefollowingthreeorsoyears,inamediumtermbudgetingframeworkseeSection18.
29
Or,asavariationonthatidea,asacalculationbasedonthenumberofplannedprogramactivitiestimesthecost
ofthoseactivities(whatissometimescalledactivitybasedbudgeting).
80

levelofthespecificindividualtypesofoutputswhichcompriseeachsubprogram,andbudget
estimationwouldproceedinabottomupprocessbasedonunitcostsandplannedquantities
ofeachoutput.

Thisisessentiallytheapplicationtoprogramcostingoftheideaofformulafunding,whether
basedonoutputsoractivities.Asdiscussedinsubsequentsectionsonformulafundingand
purchaserprovidersystems,unitcostsareapowerfultoolwhenselectivelyappliedtotheright
typesofpublicservices.Themostoutstandinginternationalexampleofasectoralperformance
budgetingsystembasedonunitcostsinthediagnosticrelatedgroup(DRG)hospitalfunding
system.Ineducation,wherecostsperstudentatparticularlevelsofschoolingtendtobe
relativelystandard,unitcostsarealsoausefulbudgetingandperformancemanagementtool.

However,unitcostscanneverbeanacrosstheboardbudgetinginstrument,becausethereare
manypublicserviceswhichdonothaveastableunitcost.Thisisbecauseofheterogeneity
averagecostsvarybecauseofdifferencesintheeffortrequiredbecauseofthecircumstancesof
particularcasesandalsobecauseofwhatweinSection12ascontingentcapacityservices.
Becausemanygovernmentoutputsdonothavestableunitcosts,itisquiteinappropriateto
seektouseunitcostsasthemethodforestimatingtherequiredbudgetsorallprogramsacross
governmentinaprogrambudgetingsystem.

Moreover,theoutputbudgetingversionofprogrambudgetingfailstorecognizethe
enormouscomplexityofcalculatingtheunitcostseachofthelargenumberoftypesofservices
deliveredbygovernment.

Atitsworst,theapplicationoftheunitcostapproachtoprogramcostingcandegenerateintoa
justificationofprogramexpenditureintermsofplannedquantitiesandunitcostsofinternal
activitiessuchasmeetings,internaltrainingseminars,andtheproductionofministryreports.
Suchanapproachconfusesactivitieswithoutputs,andactivitybasedbudgetingwithoutput
basedbudgeting.Afocusonactivities(workprocesses)isfarremovedfromtheperformance
budgetingemphasisonoutputs(servicesdeliveredtothepublic)andoutcomes(benefits
realizedbythecommunity).

81

KeyReadings
Robinson,M.(2007),CostInformationinM.Robinson(ed.)PerformanceBudgeting:Linking
FundingandResults.

Diamond,J.andP.Khemani(2005),IntroducingFinancialManagementInformationSystemsin
DevelopingCountries,IMFWorkingPaper,obtainableathttp://blog
pfm.imf.org/pfmblog/2008/01/introducingfin.html.

Khan,A.andM.Pessoa(2009),ConceptualDesign:ACriticalElementofaSuccessful
GovernmentFinancialManagementInformationSystemProject,IMF,PFMTechnicalManual,
obtainableathttp://blogpfm.imf.org/pfmblog/fadtechnicalnotesandmanualsonpublic
financialmanagement.html.

Peterson,S.(2006),AutomatingPublicFinancialManagementinDevelopingCountries,JohnF.
KennedySchoolofGovernment,HarvardUniversity,obtainableat
http://web.hks.harvard.edu/publications/workingpapers/Faculty_Name.aspx?PersonId=213

Robinson,M.andD.Last(2009),ABasicModelofPerformanceBasedBudgeting,IMFTechnical
Manual1,obtainableathttp://blogpfm.imf.org/pfmblog/fadtechnicalnotesandmanualson
publicfinancialmanagement.html.

Wynne,A.(2005),PublicFinancialManagementReformsinDevelopingCountries:Lessonsof
ExperiencefromGhana,TanzaniaandUganda,AfricanCapacityBuildingFoundationWorking
Paperno.7,obtainableathttp://www.acbf
pact.org/knowledge/documents/Working%20Paper%207%20on%20Financial%20Management
Final.pdf.

82

11.SpecialTopicsinProgramBudgeting

Thissectionstartswithadiscussionoftherelationshipbetweenprogramstructureand
organizationalstructure,followedbyanexaminationofthecloselyrelatedquestionofthe
distinctivedesignfeaturesofprogramstructuresindevelopingcountries.Therelationshipof
programstothefunctionalclassificationofthebudgetisthenconsidered.Thefinaltopicisthe
relationshipofprogramstructuresofdifferentlevelsofgovernment(inparticular,nationaland
subnationalgovernment).

ProgramsandOrganizationalStructure
Asdiscussedinprevioussections,theprogrambudgetingidealisthatprogramsshouldbe
resultsbased.Thatis,programsshouldbebasedongroupsofservicesdeliveredtoexternal
parties(outputs)whichhavecommonoutcomesproductlinesintheshorthand
terminologyofthesectiononprogrambudgetingfundamentals.Itisbybasingprogramson
resultsinthismannerthatprogramscanserveasausefultoolforexpenditureprioritizationand
increasingpressureuponministriestoperform.

However,organizationalstructuresarenotalwaysresultsbased.Inmostgovernment
structures,someorganizationalunitsexistwhicharenotdefinedonthebasisofaproduct
line.Differencesbetweenprogramstructureandorganizationalstructurescanbeaproblem
becauseprogrambudgetingwillbemosteffectivewhenthereisclearorganizational
responsibilityforprogrammanagementthatis,whenasingleorganizationalunitcanbeheld
responsiblefortheresultsdeliveredbyaprogram,andexercisesthebudgetaryflexibilities
whichprogrambudgetingprovides.

Thequestionthereforearisesastowhether,towhatdegree,andinwhatmanner,program
structureandorganizationalstructurecanbebroughttogether.

Anorganizationalstructurebasedonproductlineswouldmeanthatallormost
organizationalunitswouldbedefinedintermsofdistinctivecategoriesofservicedeliveredto
thepublic,withallservicesofthattypedeliveredbythesameorganizationalunit.Actual
governmentorganizationalstructuresdifferfromthisinavarietyofways,including:

83

Organizationalstructureswhicharedefinedintermsofaspecificclientgroup(specific
industries,regions,typesofindividuals)andnotintermsofaspecificcategoryofoutputs,
andwhichmightthereforeprovideaquitedivergentrangeofoutputstotheirtargetclient
groupratherthanthecommonproductline.Forexample,agricultureministriesincertain
countrieshavetakenonresponsibilityforHIV/AIDSpreventionactivitiestargetedatfarmers,
onthetheorythattheagricultureministrysnetworkofcontactswiththefarming
communityplacestheminagoodpositiontomanagethisservice.
Organizationalstructuresbasedonfunctionallinesforexample,basedonspecific
professionalcompetencesandtypesofactivity(e.g.anorganizationalstructureforthe
ministryofpublicworksbasedonseparateengineering,planningetcdepartment,as
opposedtoastructurebasedonthedifferenttypesofinfrastructurewhichtheministry
builds).
Asaspecialcaseoftheformercategory,supportserviceunitswithinministriesoragencies
extendingtheirroletotheprovisionofservicestothepublic,andindoingsoduplicatethe
roleofotherministriesoragencies.Aclassicexampleofthisisthearmymedicalcorpsthe
originalroleofwhichistoprovidemedicalservicestothearmyitselfbecominga
significantproviderofhealthtreatmentservicestothepublic,incompetitionwiththe
healthministry.
Supportserviceorganizationalunits:organizationalunitswithinministrieswhichare
definedintermsoftheprovisionofspecifictypesofsupportservices(e.g.humanresources
management,IT,finance).Thesewerediscussedintheprevioussectionofthismanual.

Organizationalunitswhichcontributetoseveralquitedifferentproductlinesareparticularly
problematicfromaprogrambudgetingpointofview.Lessdifficulttoresolveisthealternative
situationwheremultipleorganizationalunitscontributetoaspecificproductline,withoutthere
beingapersoninhierarchicalauthorityoverallofthoseorganizationalunitswhoisableto
providetheintegratedmanagementwhichaprogramcomprisingallofthoseunitswould
require.

Inabroadermanagingforresults(MFR)approachtopublicsectorreform,itoftenmakes
sensetoundertakerestructuringtoplaceorganizationalstructuresonmoreofaproductline
basisthanonetendstoseeintraditionalcivilservices.Forexample,itcouldbeappropriateto
phaseouttheroleofthearmyinhealthservicestothepublic,withthehealthministrytaking
fullresponsibilityforthis.Andiftherearetwoormoreorganizationalunitswithasingle
ministrywhichareinvolvedindeliveringthesameproductline,theunitsmayeitherbe
84

mergedorsomeonecanbeappointedwhohashierarchicalauthorityoveralloftheunits
concerned.Functionalstructuresshouldbe,inmanycases,replacedwithproductline
structures.Suchreorganizationcanbeexpectedtoconsiderablyreinforcetheresultsfocus
whichprogrambudgetingaimstoencourage.

Possibleorganizationalrestructuringalonecannotbeexpectedtototallyresolvetheissueof
conflictsbetweenorganizationalandprogramstructure,fortworeasons.

Thefirstreasonisthat,evenifamoreresultsorientedorganizationalstructureishighly
desirable,itmaynotbefeasibleorevendesirabletoextensivelymodifyorganizational
structuresatthesametimeasmovingtoprogrambudgeting.Themagnitudeofsucha
restructuringtaskmaybetoogreat,oritmaysimplybeimpossibletoobtainadequatesupport
fororganizationalrestructuringatthattime.Anexplicitdecisionmayundersuchcircumstances
bemadetoleaveorganizationalrestructuringtoalaterstageintheoverallpublicsectorreform
effort.

Thesecondreasonisthatapurelyproductlineorganizationalstructureisnotdesirable.
UnderathoroughgoingMFRreform,itmaywellbethatsomeministrywidesupportand
coordinationservicefunctionsaretakenoverbytheservicedeliveryunitsoftheministry.For
example,MFRarguesforgreatermanagerialflexibilityoverhumanresources(hiring,
remunerationetc),andinsofarasthisoccursthepowerofministryhumanresources
directorates(andcivilserviceministries)willbesignificantlyreduced,withsomeoftheir
functionstransferredtofrontlineorganizationalunits.Nevertheless,inanyrational
organizationalstructureitwillalwaysmakesenseforacoreofsupportservicestobeprovided
centrallybyfunctionalunits,ratherthancompletelysplitbetweentheservicedeliveryunitsof
theministry.Therewillalwaysbeaministryfinanceunit,andusuallysometypeofITunit,HR
unitetc.Someministrieswillalsoneedtomaintainregionalofficeswhich,forsizereasons,
delivermultipleproductsratherthanspecializinginsingleproductlines.Soevenifonewishes
toapplytheproductlineorganizationalprincipletothemaximumdegreetoalignprograms
andstructures,onecannotexpecttoachievefullalignmentbythismeans.

Thismeansthatwhenintroducingprogrambudgeting,someconflictsbetweenorganizational
structureandapureprogramstructurebasedentirelyonresultsareinevitable.Someofthese
conflictsmaybetemporary,inthesensethattheyarecapableoffutureresolutionvia
organizationalrestructuring.Some,however,willbepermanent.
85

Therearetwoapproacheswhichcanbetakentothisconflictbetweenorganizationalstructure
andprograms.Thefirstistodefineprogramsaroundorganizationalstructures,evenwhenthis
involvessignificantdeparturesfromtheprincipleofresultsbasedprograms.Thesecondisto
maintaintheprincipleofresultsbasedprogramsandtoacceptthattherewillthereforebe
differencebetweenorganizationalstructureandprogramstructuresomeofwhichmaybe
temporary,butothersofwhichwillbepermanent.Managementstrategieswillbeputinto
placetoaddresstheconflictbetweenprogramandorganizationstructure.

Inpractice,somemixofthesetwoapproachesisnotonlyusual,buttosomedegreeinevitable.

MinistryBoundariesandInternalSupportServices
Therearetwobroadareaswherethereiswideagreementthatitisappropriatethattherebe
somecompromiseoftheprogrambudgetingprinciplebyadaptingprogramstoorganizational
structure.

Thefirstoftheseisinrespecttoministryorganizationalboundaries.Thegreatmajorityof
countriesobservetheprinciplethatprogramsshouldnotcrossministryboundaries.Itmight
appearattractivetosaythatiftwodifferentministriesarecontributingtothesameproduct
line,thenacrossministryprogramshouldbeestablishedbasedonthatproductline.For
example,theideaofasingleAIDSprogramgroupingtogetheralloftheHIV/AIDSprevention
andtreatmentactivitiesofmultipleministriessoundsveryappealing.Againstthis,however,is
thefactthatitisessentialthateachministryhasitsownclearbudget.Itwouldbecompletely
unworkableforthebudgettosimplyallocatefundstoprogramssharedbetweentwoormore
ministriesandthenleavethoseministriestodeterminehowthosefundsweretobesplit
betweenthem.Ifthereweretobemultiministryprograms,itwouldthereforebeessentialfor
thebudgettoclearlyindicatehowmuchoftheprogramsallocationwouldbedirectedtoeach
oftheministriesinvolved.Essentially,thiswouldinvolvehavingsubprogramswhichwere
limitedtosingleministries,whichwouldessentiallytakeusbacktotheprinciplethatprograms
(orinthiscasesubprogram)shouldnotcrossministryboundaries.
30

30
Theallocationofmultiministryprogramsbetweenministriesatthesubprogramlevelcaninprinciplework.But
itwouldhavetheundesirableconsequenceofforcingtheparliamenttoapprovetheallocationofthebudgetat
therelativelydetailedsubprogramlevelratherthan,asistheusualinternationalpractice,atthebroadprogram
level.
86

Somecountriesattempttobringgreatercoordinationtoareasofrelatedservicedeliveryby
designatingsupergroupingsofprograms.ThebestexampleofthisisFrance,whereprograms
aregroupedtogetherintolargemissions,someofwhichcrossministerialboundaries.The
principlethatprogramsremainwithinministryboundariesneverthelesscontinuestobe
respected.

CrossMinistryProgramsinAfrica
IncertainAfricancountrieswhichhaveintroducedprogramclassificationsintheirbudgets,therehas
beenadeliberatedecisiontointroduceprogramswhicharesharedbytwoormoreministriesbelonging
tothesamesector.Tomakethiswork,thelegalappropriationsinthebudgetspecifyingtheshareseach
oftheministriesconcernedhasoftheoverallbudgetoftheprogram.Thecontextofthisapproachis
governmentstructurescharacterizedbyafarlargernumberofministriesthanexistinmostcountries
aroundtheworldforexample,asmanyas50ministries.Underthesecircumstances,itisoftenthe
casethatmultipleministriesareinvolvedinpursuingthesameoutcomes.Toensurecoordination,
thesecountriesnotonlyemploysectorbasedprograms,butplacemuchemphasisonsectorwidepolicy
coordination.Thisisunderstandable,butafirstbestsolutiontotheprogramsoffragmentationofthe
policyeffortbetweentoomanysmallministrieswouldbetoradicallyreducethenumberofministries.
Inmanycases,thereasonforthemultiplicationofministriesisthedesiretocreatealargernumberof
ministerialpositionsforpoliticians.

Ifprogramsaretobekeptwithinministryboundaries,onethingwhichimmediatelyfollowsis
therewillneedtobeprogramswhichareexclusivetocoordinatingministries,andthatthese
programswillforthemostpartnotbedefinedintermsofoutputsandoutcomesdeliveredto
thepublic,butintermsofthetypeofsupportserviceprovidedtothegovernmentasawhole.
Forexample,acivilserviceministryorcommissionmighthaveaCivilServiceprogramwithan
overarchingprogramobjectivedefinedalongthelinesofaqualitycivilserviceabletoprovide
excellentpolicyadviceandservicedelivery.Clearlythisobjectiveisnotanoutcome,butitisan
importantmeanstowardsdeliveringoutcomestothecommunity.

Thesecondareawherethemajorityofcountrieswithprogrambudgetingsystemscompromise
thepureprogrambudgetingprincipleisinestablishinganadministrationprogramwithineach
ministry,whichasdiscussedinSection10andelsewhereabovegroupstogetherallofthe
supportservicesandotheroverheadcostsoftheministry.Theydothisinordertoavoidthe
complexitiesofthealternativeapproach,whichrequiresthatthecostsofallsupportservicesbe
attributedtotheresultsbasedprogramswhichtheysupport.Asdiscussedinthesectionon
programaccountingandcosting,thisalternativeapproachnecessaryinvolvesquitecomplex
87

indirectcostallocation,whichformanycountriesiseitherbeyondtheirtechnicalcapacityor
whichtheycannotreasonablyaffordtoundertake.OnlyaminorityofOECDcountries
Australiabeingoneexamplehavetakenthislatterapproach.

Administrationprogramswillingeneralhaveprogramobjectiveswhichdonotreferto
outcomes.Forexample,supposethereisagovernmentagencywhichhasaprogramwhich
managestheprovisionofofficeaccommodationtogovernmentministries.Theobjectiveof
suchaprogramwouldbesomethinglikeensuringthattheneedsofgovernmentministries
agenciesforappropriatepremisesaremetinatimelyfashion.Inotherwords,theobjective
wouldreferonlytotheoutputbeingprovided.Thisisbecausetheserviceinvolvedisnot
directlyresponsiblefordeliveringoutcomes.

BroaderConflictsbetweenProgramandOrganizationalStructure
Whataboutconflictsbetweenorganizationalandprogramstructurewhichgobeyondthese
obviousareasforcompromisejustdiscussed?Here,thedangersoffurthercompromiseofthe
programbudgetingprinciplearemuchgreater.Ifonesimplymodifiestheprogramstructure
whereveritconflictswithorganizationalstructure,oneendsupnotwithaprogrambudgetbut
anorganizationalunitbudget.Thetraditionalbudgetingmodelinquiteafewcountries
(includingmostoftheLatincountries,SouthAmerica,nonAnglophoneAfrica,andmuchof
easternEurope)wasoneinwhichbudgetappropriationsweremadenotonlybylineitem
(economicclassification)butalsotointernalministryorganizationalunits.Iftheprogram
principleistobesimplymadetofittheorganizationalstructure,theresultwillbesomething
justlikethistypeoftraditionalstructure.Andinsofarasorganizationalstructureisnotresult
based,thefundamentalobjectiveofmakingbudgetingmoreresultsfocusedwillbe
undermined.

Iftheprogrambudgetingprincipleisnottobefurtherundermined,thequestionarisesofhow
tomanageconflictsbetweenorganizationalandprogramstructure.Acommonapproachtothis
problemwhichFranceexemplifiesistoappointprogrammanagers.Whentheorganizational
unitcorrespondstoaprogram,theorganizationalunitandprogrammanagerswouldbethe
sameperson.Butwhereorganizationandprogramsdiverge,theywouldbedifferentpeople.
Theprogrammanagersrolewouldthenbetomaintaintheproductlinefocusandoffsetthe
threattothatfocusarisingfromafunctional,sectororotherorganizationalprinciple.
Specifically,theprogrammanagerwouldworkwithorganizationalunitmanagerstomaintain
88

thefocusonoverarchingprogramobjectivesandtopromotecoordinationbetweenthevarious
organizationalunitsinvolvedindeliveringtheprogram.Ifthisapproachworkswell,onewould
notneedtoworryaboutdivergencesbetweenprogramandorganizationalstructure.

Thisapproachhasconsiderableattractions.However,ithastoberecognizedthatitalsoraises
potentiallyimportantdifficultiesinparticular,thattheexistenceoftwocrosscuttinglayersof
managementcanleadalltooeasilyeithertocontinualconflictbetweenmanagers(which
underminesperformance)ortothemarginalizationofoneofthetwomanagers(usuallythe
programmanager).Conflictbetweenprogramandorganizationalunitmanagershasapparently
beenexperiencedinFrance.

France:RoleoftheResponsabledeProgramme(programmanager)
31

Theresponsabledeprogrammeisdesignatedbytherelevantministertoassurethedirectionofthe
program.Hecollaboratesintheformulationofthestrategicobjectivesoftheprogram,underthe
authorityoftheminister.Heisresponsiblefortheputtingintoeffectoftheseobjectivesandtheir
realization.Tothisend,hetranslatesthestrategicobjectiveoftheprogramintooperationalobjectives
relevanttoeachoftheorganizationalunitswhichhasaroleintheprogram,bymeansofdialoguewith
themanagersofthoseorganizationalunits.

ProgramStructuresinDevelopingCountries
Inthelightoftheabovediscussion,itmakessensefordevelopingcountriestoavoid
unnecessarycomplicationsintheirprogramstructuresby:

Avoidingmultiministryprograms.Ifitisdesiredtorecognizeintheprogramstructurethe
needforcrossministrycollaborationinoverlappingareasofresponsibility,itwillbebetter
tousetheFrenchapproachofmultiprogrammissionsthantohavesharedprograms.
Optingforadministrationprogramsratherthanattemptingtheoneroustaskofindirectcost
allocation.
Keepingtheirprogramhierarchiessimpleingeneral,limitedtojustoneortwolevels
(programs,orprogramsandsubprograms).

Insomedevelopingcountries,organizationalrestructuringmaybeevenmoreimportantinthe
mediumterm.Thisisparticularlythecaseincountrieswhere,forexample,therearefartoo

31
Source:France(2004),p.13.
89

manyministries(sometimesfortyormore).Wherethisisthecase,adheringtotheprinciple
thatprogramsshouldnotcrossministryboundariesdoesmoredamagetotheprogram
budgetingprinciplethanincountrieswithasmallernumberoflargerministries.Insome
developingcountries,duplicationoffunctionsbetweenministriescanalsobeaparticularly
seriousproblem.

FunctionsandPrograms
Aquestionwhichtendstocauseconsiderableconfusionistherelationshipbetweenprogram
structureandthefunctionalclassificationofgovernmentexpenditure.Thestandard
internationalfunctionalclassificationofthebudgetisthatoftheUnitedNationsCOFOG
(ClassificationoftheFunctionsofGovernment)system.TheCOFOGclassificationwasdesigned
inordertopermit,viaastandardizedclassificationofgovernmentexpenditure,international
comparisonsoftheallocationofresourcesbetweenpolicyareas.Note,however,thatanumber
ofcountrieshaveforhistoricalreasonsfunctionalclassificationswhichdiffersomewhatfrom
COFOG.

TheCOFOGFunctionalClassification

TheCOFOGfunctionalclassificationconsistsisahierarchicalstructureofthreelevels.Thetoplevel
(divisions)consistsoffourbroadcategoriessuchasdefense,publicorderandsafety,healthand
education.Therearetensuchdivisions.Belowthisaretwolowerlevels:groupsandclasses.Thus
intheeducationdivision,thegroupsinclude:preprimaryandprimaryeducation,secondary
education,tertiaryeducationandsubsidiaryservicestoeducation.Andwithin,say,thepre
primaryandprimaryeducationgroup,theretwoclasses:preprimaryandprimary.Graphically,this
hierarchicalstructurecanberepresentedasfollows,takentheexampleofhealth(Division7).(The
exampleshowsonlysomeofthegroupsunderthehealthdivision,andjustoneexampleofthe
decompositionofgroupsintoclasses).

90

Division7.
Health
Group71.
Medical
Productsetc
Other
groupsof
Division7.
Group73.
Hospital
Services
Otherclasses
of
Group73.
Class734.
Nursing&
Convalescent
Homes

Thekeyreasonwhythereisconfusionabouttherelationshipbetweenfunctionsandprograms
isthatthetermfunctionissomewhatmisleadingandthemajorityofthefunctional
categoriesarereallycategoriesofoutputsproductlines,sotospeak.Thefunctional
classificationisnotapureresultsbasedclassification.Nevertheless,thefunctionalclassification
ofexpenditurelookssomuchlikeaprogramclassificationparticularlyonewith
administrationprogramsthatitisnaturaltowonderwhybothareneededandwhetherthe
twostructuresshouldbefusedinsomeway.Themostcommonwayoflinkingtheprogramand
functionalstructuresistoinsistthatprogramsshouldallfitwithinoneorotherofthetenbroad
COFOGdivisionswithnoprogramspermittedtocrossthedivisionalboundaries.Thisis
illustratedinthegraphicbelow.

91

COFOG
Division
ProgramA ProgramC ProgramB
Subprogram
A
Subprogram
B

Thealternativeviewisthatthefunctionalclassificationshouldnotconstraintheprogram
structureandshouldnotbeformallyincorporatedintoit.Thispointofviewisbasedonthe
recognitionthatthefunctionalclassificationisonlyintendedtobeastatisticaltoolfor
internationalcomparisonsofresourceallocationandnotabudgetclassificationintermsof
whichthebudgetshouldallocateresources.

Thepotentialproblemwithmakingtheprogramstructurefitthefunctionalstructureisthatthe
choiceofprogramsinanycountryshouldtoreflectthespecificpolicychallengesofthat
country.Thusinacountrywherethefightagainstdesertificationisofcrucialimportance,itmay
makesensetohaveadesertificationprogram,whereasinmanyothercountriesnosuch
programwillberequired.Torestricttheprogramstructuretomakeitfitwithagivenfunctional
classificationreducingflexibilityinthedefinitionofprograms.Thisproblemisnotreallya
significantoneifallthatisproposedistokeepprogramswithouttheboundariesoftheCOFOG
divisions(thetopleveloftheCOFOGhierarchy),althougheventhereitisnotclearwhyitis
appropriatetobanprogramswhichcrossdivisionalboundaries.However,itisamuchgreater
problemiftheprogramstructureistobemadetoconformtoamoredetailedfunctional
categorization,asillustratedbythefollowingcasestudy.

92

ProgramsandFunctions:aCaseStudy
OneAfricancountrywhichdecidedtointegrateitsfunctionalandprogramclassification
encounteredmajorproblemsasaresultofthemannerinwhichitchosetodoso.Thecountry
concernedhadinplaceapreCOFOGfunctionalclassification,whichlikeCOFOGwasathree
levelhierarchy,asfollows:

Sector
Primary
function
Primary
function
Secondary
function
Secondary
function

Inthiscountrysstructure,sectors(ofwhichthereare10)weresimilartoCOFOGdivisions,
primaryfunctionstoCOFOGgroups;andsecondaryfunctionstoCOFOGclasses.Thefact
thatthefunctionalclassificationwassomewhatdifferentfromCOFOGwasnot,however,the
problem.Theproblemwasthatitwasdecidedtomakeprogramssubordinatedtothesecond
levelofthefunctionalclassification,ratherthanthetoplevel.Thisproducedthefollowing
integratedfunctionalandprogramstructure:

Primary
function
ProgramA ProgramC ProgramB
Subprogram
A
Subprogram
B
Sector

93

Theeffectofthiswastorequirethatnoprogramshouldcrosstheboundariestheprimary
(secondlevel)functions.

Theproblemwiththiswasthatthattheprimaryfunctions,ofwhichtherewereapproximately
seventy,werefartoodetailedforthispurposeandmuchmoredetailedthan,say,theten
divisionsofthetopleveloftheCOFOGclassification.Bearinmindthatinmostcountries,the
totalnumberofprogramsacrossgovernmentisoftheorderof150200.Insistingthatno
programshouldcrosstheboundariesoftheprimaryfunctionsprovedtobeextremely
constraining,andmadeitimpossibletocreatecertainprogramswhichappearedimportantto
thegovernment.Followingadvice,itchangeditsposition,andchosetodefinethetop
functionleveloftheprogramstructureintermsofthetenCOFOGdivisions.

ProgramsandLevelsofGovernment
Onequestionwhicharisesindefiningprogramstructuresistherelationshipbetweenthe
programstructuresofdifferentlevelsofgovernmentinacountry.Shouldthenationaland
subnationalgovernmentsadoptthesameprogramstructure?Orshouldthedifferentlevelsof
governmentgotheirownwaysindevelopingtheirownstructureswithoutanyregardtowhat
otherlevelsofgovernmentaredoing?

Thisisanareawheredifferentcountriestakedifferentapproaches.Inmanyfederalcountries,
wheresubnationalgovernmentisconstitutionallyautonomousandisprotectiveofthis
autonomy,eachlevelofgovernmentdevelopsitsownstructurewithoutpayingattentionto
whatotherlevelsofgovernmentaredoing(thisistrue,forexample,inAustraliaandCanada).

Inmanyothercountries,however,thereisabeliefthatprogramstructuresshouldbeinsome
waystandardizedorharmonized.Thisisparticularlytrueindevelopingcountrieswherethere
aresinglenationalplanswhichareintendedtoguidetheentirepublicsector.

Evenifoneaimsforthemaximumdegreeofharmonization,onecannothaveexactlythesame
programsatnationalandsubnationallevels.Insofarasthelevelsofgovernmenthavedifferent
functions,theyrequiredifferentprograms.Eveninthesameservicearea,theirfunctionsmay
differ,anditmightbethoughtbesttoreflectthisinprogramtitles.Forexample,itmaybethat
inschooleducation,thenationalgovernmentisresponsibleforthedevelopmentofnational
standards(e.g.acommoncorecurriculum),whilesubnationalgovernmentactuallydeliversthe
94

service.Thismayleadtothenationalprogrambeingtitled,say,educationpolicy,whilethe
subnationalprogramsaresimplylabelededucation.

KeyReadings
Robinson,MandH.VanEden(2007),ProgramClassification,inM.Robinson(ed.)
PerformanceBudgeting:LinkingFundingandResults.

Diamond,J(2003)FromProgramtoPerformanceBudgeting:TheChallengeforEmerging
MarketEconomies,IMFWorkingPaper,obtainableat
http://www.imf.org/external/pubs/ft/wp/2003/wp03169.pdf.

IMF(2001),GovernmentFinancialStatisticsManual2001,Washington:IMF(fordetailed
informationontheCOFOGfunctionalclassification),obtainableat
http://www.imf.org/external/pubs/ft/gfs/manual/

95

12.FormulaFundingandPurchaserProviderSystems

Formulafundingofwhichthepurchaserprovidermechanismisonetyperepresentsan
attempttocreateamuchtighterlinkagebetweenfundingandresultsthancharacterizes
programbudgeting.Underprogrambudgeting,performanceinformationistakenintoaccount
indeterminingfunding,butthereisnoautomaticlinkage.Underformulafunding,thelinkage
betweenfundingandresultsisaverydirectone.
Whenusedasaformofperformancebudgeting,formulafundingmeansthatthefunding
providedtoagovernmentministryoragencyisdeterminedinwholeorpartasonthebasisof
anexplicitalgebraicformulabasedonoutputsoroutcomes(resultsforshort).Theformula
mightlinkfundingtoexpected(i.e.future)resultsas,forexample,whenschoolfundingis
basedonthenumberofstudentswhoenrollinaschoolatthebeginningoftheyear.Oritcould
bebasedontheactualresultswhichtheagencyhasdeliveredwhichwouldbethecaseif
schoolfundingwasbasedonthenumberofstudentswhoactuallyattendtheschoolduringthe
year(i.e.ifastudentenrollsatthebeginningoftheyear,butthendropsout,nofundingwould
bereceived).Thelattertypeofformulafunding,inwhichfundingdependsonresultsactually
delivered,iswhatisreferredtoasapurchaserprovidersystem.
Manyformulafundingsystemsarecostbased.Forexample,ifschoolsarebeinglargelyfunded
byformulabasedonthenumberoftheirstudents,thenitisobviouslynecessarythatthe
amountoffundingperstudentisbasedonanestimateofwhatitshouldcosttoteachone
student.However,formulasarealsousedtoprovideperformancebonusfundingwhicharenot
based(andcouldnotconceivablybebased)oncostestimates.Forexample,insomepublic
universitysystems,corefundingbasedonperstudentamountsisaccompaniedby
supplementarybonuseslinkedtooutcomemeasuressuchaspercentagesofgraduateswho
findemployment.Nobodyknowswhatthecostisofincreasingthegraduateemploymentrate
by,say,5percent,sothelevelofthebonuswhichispaidisinasensearbitrary.Thisdoesnot,
however,undermineitsfunctionareprovidinganincentivetoimprovequalityandachieve
betteroutcomes.
Thepurchaserprovidermechanismhasbeenusedwithconsiderablesuccessincertainsectors
ofgovernment,mostnotablyhospitalserviceswhereistooktheformofsocalleddiagnostic
relatedgroupbasedfunding.
32
Broadly,theideaisthathospitalsarepaidbythegovernment
fortheoutputstheydeliver,andonlyfortheoutputstheydeliver.Eachdifferenttreatment
(e.g.treatmentofahipfracturepatient)hasastandardprice.Ifitcoststhehospitalmoreto
providethattreatmentthanitispaid,itmakesaloss.If,ontheotherhand,itsucceedsin

32
Foradetaileddescriptionofthissystem,seeRobinsonandBrumby(2005),sectionV.
96

deliveringtheserviceforlessthanthepricepaid,thehospitalmakesaprofit.Inthisway,a
powerfulincentiveinintroducedfortheenhancementofhospitalefficiency(cost
containment).Whenthissystemwasoriginallyintroduced(intheUSA),therewereenormous
concernsthatitwouldleadtoseriousadverseconsequencessuchastheerosionofthequality
ofservicesandtherefusaltotreathighercostpatients.Inpractice,thesefearsturnedouttobe
greatlyexaggerated,inpartbecauseofothercomplementaryqualitycontrolsystemsandin
partbecauseoftheconsiderableprofessionalpressuresforthemaintenanceofpatientservice.
Overall,experiencehasdemonstratedtheDRGfundingsystemtobeagreatsuccessinkeeping
costsdownwithoutunacceptableadverseconsequences.Forthisreason,anincreasing
numberofcountrieshaveadopteditasthefundingmodelfortheirpublichospitals.
Thepurchaserprovidersystemisnot,however,somethingwhichissuitableforallormost
publicservices.ThiswasdemonstratedclearlywhenAustraliaandNewZealandattempted
duringthe1990sandearly2000storeformtheirentirebudgetingsystemstoplacethemona
purchaserproviderbasis,underwhatwasknownasaccrualoutputbudgeting.The
experimentfailedbadly.
33

LimitstoFormulaFundingandPurchaserProvider
Formulafundingandpurchaserproviderarrangementsrequireastablerelationshipbetween
outputquantityandcostexpresseddifferently,astableoutputunitcost.Thesetypesof
fundingarrangementsthereforesuitwhathavesometimebeencalledproductiontype
agencies:thatis,agencieswhichproducelargevolumesofalimitednumberoffairlystandard
services.Motorlicensetestingisagoodexample.Theoutputdeliveredbytheagencywhich
issuesmotorlicensestodriversisstandardinthesensethateveryapplicantforalicensehasto
undertakethesametest.Thecostperlicenseissuedisthereforestable,andtherewouldbeno
difficultyinprincipleinbasingfundingonnumbersoflicensesissued.
Thereare,however,manyservicesproducedbygovernmentwhicharenotatalllikethis,and
whichareunsuitedtofundingonthistypeofbasis.Heterogeneousandcontingentcapacity
servicesrequireparticularmentionhere.
Asdiscussedearlierinthismanual,outputheterogeneityariseswhentheactivitiesrequiredin
theproductionofoneunitofanoutputmaydiffersignificantlyfromthoseinvolvedinthe
productionofanotherunitofthesametypeofoutputbecauseofdifferencesincaseorclient

33
SeePurchaserProviderSystemsinRobinson,PerformanceBudgeting,fordetailsonthefailureofthese
systems.
97

characteristics.Outputheterogeneitymeansthatthecostofoneunitofanoutputwilldiffer
fromthecostofanotherunitofthesameoutputforreasonswhichhavenothingtodowith
efficiency.Otherthaninthequitespecialcircumstancewherethecosteffectsofheterogeneity
averageoutoverlargevolumesofproductionoftheoutputconcerned
34
,significantoutput
heterogeneitycanunderminethefoundationsofanoutputdrivenfundingmodel.Whena
serviceischaracterizedbyseriousheterogeneity,itsunitcostwillbeunpredictablyvariable,
anditwillthereforenotbepossibletobasefundingonunitcost.Forexample,thecostsof
treatingaccidentvictimsinhospitalemergencycentersaretoovariabletopermitthemtobe
includedwithintheDRGfundingsystemsreferredtoabove.
Thefirebrigadeisagoodexampleofacontingentcapacityservice.Theoutputdeliveredbythe
brigadeisputtingoutfires.Butitwouldbeimpossibletofundthefirebrigadeonthebasisof
thenumbersoffiresitputsout.Thefirebrigadeislikeaninsurancepolicygovernmentisnot
somuchfundingtheoutputasthereadinessofthebrigadetoprovidetheoutputquicklywhen
andifitisneeded.Deliberatesparecapacityisbuiltintosuchaservice.
Oneofthereasonswhyattemptstoapplythepurchaserprovidersystemtothewholeof
governmentfailedwasthatsomanyservicesprovidedbygovernmentministrieswereunsuited
tothismethodoffunding.Forthesereasons,formulafundingandpurchaserprovidersystems
shouldbeseennotasthebasisforgovernmentwideperformancebudgetingmodels,but
ratherassystemswhichcanbeselectivelyappliedtoselectedgovernmentservicesthose
whicharerelativelystandardized,andproducedinlargevolumes.

KeyReadings
Robinson,M.(2007),PurchaserProviderSystems,inRobinson(ed)PerformanceBudgeting.
Smith,P.(2007),FormulaFundingandPerformanceBudgeting,inRobinson(ed)Performance
Budgeting.

34
Whichisthecaseformanytypesofhealthtreatments.
98

13.TargetsandPerformanceBudgeting

Performancetargetsareanimportantmanagingforresultstool.Whentargetsare
systematicallylinkedinsomewaytobudgetfunding,wecantalkaboutaspecificmodelof
performancebudgeting.TheUKPublicServiceAgreement(PSA)system,intheforminwhichit
operatedbetween1998and2007undertheLabourGovernment,isthemostimportant
exampleofthismodelofperformance.UnderthePSAsystem,severalhundredhighlevel
targetswereseteverythreeyearsaspartofaspendingreviewprocessinwhichmultiyear
ministrybudgetsareset.Thespendingreviewinfactconstitutedthecoreofthebudgetprocess
itwasthecontextinwhichmostministryfundingwasdecided.SothePSAsystemwasonein
whichbudgetingandtargetsettingwerepartandparcelofthesameprocess.
Beforeconsideringthenatureoftherelationshipbetweenfundingandtargets,itisusefulfirst
toconsiderperformancetargetsandsomeofthekeyissueswhichtheyraise.
Aperformancetargetisaquantitativegoalwithatimeline(usuallyexplicit,butsometimes
implicit)fortheachievementofthatgoal.Targetsmaybesetforoutcomes,output(quantity,
qualityorefficiency),orevenforactivitiesorinputs.Thedistinctionbetweenindicatorsand
targetsisanimportantone.Targetsarealwaysbasedonspecificperformanceindicators,which
providetheyardstickformeasuringtargetaccomplishment.Butindicatorsdonotinclude
quantitativeobjectives,nortimelines.ThusthepercentageofHIV/AIDSinfectedpersonsinthe
populationisaperformanceindicator.CuttingtherateofHIV/AIDSinfectionby10%over5
yearsis,bycontrast,aperformancetarget.
Itisalsoimportantnottoconfusetargetsandobjectives.Anobjectivestatesthetypeof
improvementsoughtwithoutnecessarilyindicatingthemeasuretobeused,quantitative
objectivesortimelines.DrasticallyreducingHIV/AIDSinfectionratesis,forexample,an
objectiveratherthanatarget.

PerformanceTarget:SomeExamples
Increaseadultliteracyfrom60%to70%by2015(anoutcometarget),
Vaccinatethewholepopulationagainstpolioby2012(anoutputtarget),
Ensurethatallmonthlyaccountingreportsarecompletedwithin15daysoftheendofthefinancial
year(anactivitytarget,withimplicittimelineofimmediately/thisyear),
Fillallvacantagriculturalextensionofficerpositionswithsuitablyqualifiedpersonsduringthis
financialyear(aninputtarget).

99

Thereisawidespreadassumptionthatperformancetargetsshouldbesetforallprogramsand
perhapsevenforallperformanceindicators.However,itcanbearguedthatselectivenessand
gradualisminthesettingofperformancetargetsispreferable.
Inthefirstplace,targetsettingrequiresafirmbasisofgood,timelyandverifiedperformance
indicators.InleadingOECDcountriessuchastheUK,goodperformanceindicatorsystemstook
decadestodevelop.Mostcountriesandinparticularmostlowandmiddleincomecountries
donothavesuchsystems.Fromthisperspective,itseemstomakesenseindeveloping
countriestofocusinitiallyonbuildingasolidbaseofcoreperformanceindicators,andonlyata
laterstageengageinextensivetargetsetting.
Secondly,settingappropriateandcredibleperformancetargetsisquitedifficult.Selecting
whichmeasurestoturnintotargetsisnotnecessarilyastraightforwardmatter,andthe
challengeofsettingthequantitativetargetswhichareneithertoodifficultnortooeasyisquite
considerable.
Thirdly,therearemanywhotaketheviewthattargetsshouldonlybesetforperformance
indicatorswhicharerelativelycontrollable.Theconcernunderlyingthisviewisthatsetting
targetsforhighlyuncontrollablevariablesismorelikelytodemotivatethantomotivate
agenciesandtheirstaff.Ifonetakesthisview,themostobviousimplicationisthattargets
shouldgenerallynotbesetforoutcomes,andparticularlynotforhighleveloutcomes,because
thesetendtobegreatlyinfluencedbyuncontrollableexternalfactors.Fromthisperspective,
settingtargetsforoutputswillgenerallymakemoresense.
35
Atthesametime,however,
outcomesarewhatmattersmost,andhighleveloutcomesaretheoutcomeswhichmatter
mostofall.Somanygovernmentsdoinfactroutinelysettargetsforoutcomesoverwhichthey
havequitelimitedcontrol:e.g.ratesofeconomicgrowthandunemployment,orratesof
growthoftouristnumbers.
Afourthandfinalpointisthatthereisnopointsettingmoretargetsthatgovernmentcan
monitorandacton.Inmanycountries,thereislittlefollowupofagencyperformanceagainst
targetand,asaconsequence,thetargetsseemnottohavebeentakenveryseriously.TheUK
experienceunderthePSAsystemwasamajorexceptiontothis.Therethegovernmentwas
veryseriousinmonitoringandactingonperformancerelativetothePSAtargets.Special
attentionwasgiventomonitoringandfollowinguponincludingbymeansofmanagerial
interventionwhennecessaryperformanceonthefiftymostimportantPSAtargets,viaa
servicedeliveryunitreportingdirectlytothePrimeMinister.TheBritishexperiencealso
underlinesthat,iftargetsaretobetakenseriously,itiscrucialthattheyaretargetfor

35
Withthequalificationthattargetsmaynotbeappropriateforoutputswhicharehighlyaffectedby
heterogeneity.
100

indicatorswhichreallymattertothepublicandpoliticiansandnot,forexample,targetsrelating
topurelyinternalactivitieswithinministries.
Becauseitmakeslittlesensetosetperformancetargetsifonedoesnotfollowupon
performanceagainstthem,themorelimitedthecapacityofcentralgovernmenttomonitorand
followuponperformance,themoreselectivecentraltargetsettingshouldbe.
GamingandPerverseEffects
Thewisdomofatargetsettingapproachtoimprovingpublicsectorperformanceincontested
byaschoolofopinionwhichregardstargetsasmorelikelytodamagethanimprove
performance.Thisschoolofopinionfocusesonthedangerthat,totheextentthatagenciesand
individualswithinthemaremotivatedtoachievetargets,thetargetsmaybemetwithoutareal
improvementinperformancebecauseof:
Gaming(manipulationorfalsificationofperformanceindicators,inthiscaseofthe
indicatorsuponwhichtargetsarebased)forexample,whenahospitalfalsifiesitswaiting
timedatainordertoappeartohavemetatimelinesstargetwhichithasinfactfailedto
meet,and/or
Perverseeffects(deterioratingperformance)arisingfromtheuseoftargetsbasedupon
imperfectperformancemeasures.
Theproblemofgamingrequirescarefulverificationandauditingofindicators,andsanctionsfor
falsification.Theproblemofperverseeffects,ontheotherhand,shouldinsignificantmeasure
beminimizedbycarefuldesignof,andtheuseoftherightcombinationof,targetmeasures.
However,allperformancemeasuresareimperfecttoagreaterorlesserdegree,sothateven
themostcarefuldesignofthesetoftargetscannoteliminatethepotentialforbehavioral
distortion.
Concernsaboutperverseeffectsarebasedinsignificantmeasureontheory.Themostfamiliar
theoreticalpointistherearesomekeydimensionsofperformancesuchasqualitywhichare
notoriouslyhardtomeasure,andtendthereforenottobecapturedintargets.Thefearthenis
thatwhatisnotmeasuredwillbesacrificedtowhatismeasure.Inaddition,theorypointsto
thepossibilitythatagentsmightpursuetheeasiestmeansoffulfillingtheirtargets,with
undesirableconsequences.Theoryisallverywell,butempiricalevidenceonthesequestionsis
arguablymoreimportant.Itisstrikingherethattheempiricalevidenceofseriousperverse
effectsundertheUKPSAsystemwherethepressuretoachievetargetswasveryconsiderable
101

isverylimitedandtheoverallimpressionisthatthecriticshavegreatlyexaggeratedthe
problem.
36

Judgingonthebasisofreportedperformanceagainsttargets,theUKPSAappearstohave
workedverywellasaninstrumentforimprovingpublicsectorperformance,althoughthe
researchonthesubjecthasnotbeenasindepthasonemighthavewishedfor.Thefactthat
targetsweresetinthebudgetprocessgavethemrealweight,asdidthefactthatperformance
againsttargetwasfollowedupbythePrimeMinisterandthefinanceminister,andwasan
importantfocusonthebudgetdecisionmakingprocess.Atthesametime,itisclearthatthe
connectionbetweenfundingandtargetswasaverylooseone.Thisisparticularlythecase
becausesomanyofthePSAtargetswereoutcometargets,includingsomequitehighlevel
outcometargetsatthat(e.g.targetsforreductionsincancerratesandchildhoodobesity,over
whichthegovernmentclearlyhasquitelimitedcontrol).

KeyReadings
AuditCommission(UK)(2005),TargetSettingAPracticalGuide,obtainableat
http://www.idea.gov.uk/idk/aio/985665.
Smith,P.(2007),PerformanceBudgetinginEngland:thePublicServiceAgreements,in
Robinson(ed)PerformanceBudgeting.
SocialMarketFoundation(2005),TothePoint:aBlueprintforGoodTargets,London:SMF,
obtainableathttp://www.smf.co.uk/tothepointablueprintforgoodtargets.html.
HouseofCommonsSelectCommitteeofPublicAdministration(2003),OnTarget?Government
byMeasurement,obtainableathttp://www.bercy.gouv.fr/lolf/downloads/1400_target.pdf.
Gay,O.(2005)PublicServiceAgreements,HouseofCommonsLibrary,obtainableat
http://main.hop.lbi.co.uk/documents/commons/lib/research/briefings/snpc03826.pdf.

36
ApaperbyKelmanandFriedman(2007)ontheresponsestoa4hourtargetfortreatingpatientsinUKhospital
accidentandemergencyroomsprovidesanantidotetofearsabouttargets.KelmanandFriedmanconcludethat
thatwaitingtimeperformanceimprovementwasdramaticandthatdysfunctionalresponses,asfaraswecantell,
entirelyabsent.Theyaddthatnoneofthehypothesespredictingeffortsubstitutionorgaminginconnection
withattainingthistargethasbeenconfirmed,andthatinfactdimensionsofperformancenotcapturedinthe
targetsappeartohaveimproved.BevanandHood(2006)andHood(2006)haveundertakenimportantresearch
whichprovidessomelimitedexamplesofperverseeffects,butwhichatthesametimesuggestthattargetshave
workedwellinraisingperformance(inHoodswords,theevidencestronglysuggeststhattargetsmadeamarked
differenceinreportedperformance).
102

14.PublicFinancialManagementReformFoundations

Performancebudgetingmustbeseeninthecontextofbroaderreformofpublicfinancial
management(PFM)systems.Priortoanyconsiderationoftheadoptionofperformance
budgetingisit,inparticular,essentialthatthePFMsystemisabletodeliverontwobasic
requirements.Thefirstisthatitiscapableofsupportingsoundmacrofiscaloutcomes.The
secondisthatitbroadlyassuresprobitythatis,thatmoneyisspentonlyonpublicpurposes
dulyauthorized,andnotwidelydivertedtoprivatepurposesbycorruptpoliticiansandcivil
servants.IfthePFMsystemandbroadergovernanceframeworkdonotdeliverthesebasic
requirements,theinitialfocusshouldbeonreformsintheseareas,andperformancebudgeting
shouldbedeferredtothefuture.
Inrespecttosoundmacrofiscaloutcomes,fiscalsustainabilityisparticularlyimportant,
becauseifbudgetarypoliciesarenotsustainableitislikelythattherewillsoonerorlaterbea
majorcrisisinwhichpublicexpenditurewillhavetobecutseverely.Undertheunstable
circumstanceswhichthenarise,efficientandeffectivenessmanagementofexpenditure
inevitablysuffers.Itisonlythroughthepursuitofsustainablefiscalpoliciesthatasufficiently
stableenvironmentcanbecreatedinwhichpublicmanagerscansuccessfullyfocusonresults.
Althoughtheprinciplecausesofunsustainablefiscalpoliciesareusuallypolitical,weaknessesin
thePFMsystemcancontributesignificantlytotheproblem.AreasofPFMreformwhichcan
helpgreatlyinpromotingfiscalsustainabilityinclude:
Expandingbudgetcoveragesoastoensurethatthebudgetiscomprehensivei.e.thatit
coversallexpenditure(andrevenue)whichimpactondeficitsanddebt.
Ensuringinbudgetpreparationthatanaggregateexpenditurelimitcompatiblewithfiscal
sustainabilityisestablishedandthenrespected.
37

Ensuringinbudgetexecutionthatministersandministriesrespecttheexpenditurelimits
imposeduponthem,anddonoteitheroverspendoraccumulatepaymentarrearswhich
willleadtofutureoverspending.

37
Therehasinthiscontextbeengreatinterestinrecenttimesinthedevelopmentofmoretopdownbudget
processes.Thereasonforthisisconcernaboutthetendencyofcompletelybottomupbudgetprocessesthat
is,processesinwhichspendingministriesmakeunconstrainedbidsforextraresourcesduringeachannualbudget
processtounderminerespectforaggregateexpenditurelimits.Initsextremeform,topdownbudgeting
countersthisviaunilateralcentraldeterminationofthebudgetaryspendingauthorizationofeachspending
ministry.Inpractice,acompletelytopdownprocessisneitherfeasible(otherthanintheveryshortterm)nor
desirable.However,fiscalsustainabilitymaybestrengthenedbymakingthebudgetprocessmoretopdownin
importantways,includingwhenmediumtermbudgetingiswelldevelopedtheentirelytopdownsettingof
envelopesforexistingprograms(asdistinctfromnewexpenditureinitiatives).
103

Assuringprobityis,ofcourse,amatterofdegree.Nocountryisentirelyfreeofcorruptionin
theuseofpublicmonies.Thequestionisthereforewhetherthesystemiscapableofensuring
anacceptableminimumlevelofprobity.Particularlyimportanthereisthequalityofthe
parliamentaryandothercontrolswhicharelimitexecutivediscretioninchoosingthepurposes
forwhichpublicmoniesmaybespentthatis,whicharedesignedtoensurethatmoniescan
onlybeauthorizedforpublicpurposes.Thelegalframeworkofbudgetapprovaliscrucialhere.
Theotheraspectissafeguardsduringbudgetexecutiontoensurethatmoneyisspentinthe
mannerintended.Thisrequiressoundexpenditurecontrolprocesses,aswellasgoodinternal
andexternalaudit.
Forbothsustainabilityandprobity,astrongsystemofcommitmentcontrolisimportant.
Commitmentisthestagewhereanobligationtomakeafuturepaymentisenteredinto,suchas
whenacontracttopurchaseagoodorserviceissignedwithasupplier.Onceacommitmentis
legallyenteredinto,itbecomesessentiallyimpossibletoavoidthesubsequentpayment.A
weaknessinthePFMsystemsofmanycountriesistheabsenceofsufficientlystrongdiscipline
atthecommitmentstage,withtheresultthatcommitmentsareenteredintowhichareeither
orbothexcessiveandforpurposesinconsistentwiththebudgetauthorization.Sound
commitmentcontrolshouldthereforeberegardedasoneofthefoundationalelementsofgood
PFM.However,approachestocommitmentcontrolvarygreatly.Incountrieswherecivilservice
disciplineinweakest,theMoFwillneedtodirectlycontrolcommitmentsitselfthatis,to
requirethatnocommitmentsbeenteredintowithoutitsapproval.Inmoreadvancedsystems,
commitmentcontrolisdecentralizedtoministriesandmanagerswithinthoseministries,
backedbysanctionswhichareappliedifexcessiveorinappropriatecommitmentsareentered
into.
Itisthereforeimportant,beforedecidingtoadoptaperformancebudgetingsystem,totake
stockoftheoverallPFMframeworkandtodeterminewhetherthereareweaknessesinthese
fundamentalareaswhichshouldbeaddressedfirst.Particularlyusefulinthiscontextisthe
PEFAframeworkastandardizedinternationaldiagnosticframeworkforpublicfinancial
managementsystems.
38

ThereareanumberofareasofPFMandrelatedsystemswhicharecorequisites(ratherthan
prerequisites)ofperformancebudgeting.Thismeansthatwhileitisnotessentialthatreforms
intheseareasareinplacepriortothestartoftheperformancebudgetingimplementation
process,thesereformsmustaccompanyperformancebudgetingifitistosucceed.The
importanceofsuchaccompanyingreformsisdemonstratedbytheunfortunateexamplesof
manycountrieswhichhaveimplementedkeyelementsofperformancebudgeting(inparticular,
programclassificationofthebudgetandthedevelopmentofprogramperformance

38
SeethePEFAwebsite(www.pefa.org)formoredetails.
104

information)butfoundthatthisinitselfdidnotchangebudgetoutcomes:inotherwords,
expenditureprioritizationdidnotimproveandtherewaslittlediscernableimpactonefficiency
andeffectiveness.
Othersectionsofthismanualdiscusstwocriticalcorequisites:namely,improvedexpenditure
prioritizationprocessesinbudgetpreparation,andcivilserviceperformancemanagement
reformtogivecivilservantstheincentivesandfreedomtofocusmoreonresults.
TheotherareaofPFMreformwhichiscriticalisthereductionofexpenditureinflexibilities.
Expenditureinflexibilitiesareobstaclestothereallocationofresources.Becausegovernment
wideperformancebudgetingiscriticallyconcernedwiththereallocationofresourcesfromlow
priorityandineffectiveprogramstohighpriorityones,itwillneversucceedifexpenditure
inflexibilitiesmakesuchreallocationimpossibleorveryslowanddifficult.Amongstthe
inflexibilitieswhichcanbeofparticularconcernare:
Extrabudgetaryfundarrangementswhichbindcertainrevenuestobeusedonlyin
designatedprogramareas.
Civilserviceemploymentinflexibilitieswhich,insomecountries,makeitimpossibletoshift
orterminatetheemploymentofcivilservantswhoworkonprogramswhichthe
governmentwishestoeliminateorcutback.
Creatingmoreflexiblecivilserviceemploymentconditionsisataskwhichmustbeapproached
indifferentwaysindifferentcountries,dependingupontheirgovernancearrangementsand
traditions.IncertainOECDcountries,traditionalcivilserviceguaranteesofjobsecurityhave
beenlargelyabolishedandthecivilservicemadetooperateundergenerallaborlaw.Sucha
radicalapproachmaynot,however,beappropriateforcountrieswherethereisgreatconcern
aboutthescopeforabuseofcivilserviceemploymentflexibilityforpoliticalornepotistic
reasons.However,evenifmuchmorelimitedreformisadopted,itisessentialatleasttomake
itpossibletoreassignworkersandtomakeuseofstrategiessuchasvoluntarydeparture
packagestodownsizewhennecessary.

KeyReadings
Diamond,J.(2007),ChallengestoImplementationinRobinson(ed.),PerformanceBudgeting.

105

15.ExpenditurePrioritizationandPerformanceBudgeting

Improvedexpenditureprioritizationandincreasedperformancepressureonministriesand
agenciesarethetwochannelsbywhichgovernmentwideperformancebudgetingaimsto
improvepublicsectorperformance.However,asnotedpreviously,merelyproducing
informationonthebenefitsandcostsofprogramsdoesnotensurethatthisinformationwillbe
usedtoimproveprioritizationandholdministriestoaccountforperformance.Thereneedalso
tobeformalroutinesforthereconsiderationofspendingprioritiesintegratedintothebudget
process,andtheseroutinesneedtobedesignedsoastomakemaximumuseofavailable
informationonprogramperformance.

SpendingReview
Thekeypointofcontactbetweenperformancebudgetingandexpenditureprioritization
processesduringbudgetpreparationisspendingreview.Spendingreviewreferstothe
systematicscrutinyofexistingexpendituretoidentify,inparticular,optionsforcuts.Spending
reviewdrawsonevaluation(seeSection6).Morespecifically,itdrawsonbothprogram
evaluations(thereviewofspecificservicesprovidedbygovernment)andefficiencyreviews
(whichfocusonreducingthecostofdeliveringservices).However,spendingreviewalsogoes
beyondevaluationtoincludesystematicpriorityanalysisinotherwords,thesystematic
identificationofprogramsorelementsofprogramswhichcouldbecutbecausetheyarelow
priority.Thisisacompletelydifferentmatterfromtheevaluationofineffectivenessor
inefficiency.Aprogrammightbehighlyeffectiveandefficient,butstillbeverylowpriority
becausetheoutcomeswhichitaimstoachievearenotveryimportanttothecommunity,or
arenotratedassuchbythegovernmentoftheday.
Withoutspendingreview,theriskisthatprogramswhichareineffective,lowpriorityorwhich
haveoutlivedtheirusefulnesswillcontinuetocommandpublicresources.Itisintheprocessof
spendingreviewthatperformanceindicatorsandevaluationscanbesystematicallyemployed,
inconjunctionwiththemeasureofprogramcostswhichaprogrambudgetingsystem
generates.
Spendingreviewisanareawherethebudgetingsystemsofmanycountriesareweak.Insuch
countries,thebudgetprocessisoverwhelminglyaboutnewspending,andongoingexpenditure
isnotgenerallyspeakingseriouslyscrutinized.Incrementalismisatermcoinedbybudgeting
106

writersinthe1970stodescribethistendencyofbudgetingtotakespendingonexisting
programsforgranted.

Spendingreviewiscriticaltogoodaggregatefiscaloutcomesandtothecapacityofthe
governmenttorespondtonewspendingneeds.Ifsubstantialroomistobecreatedfor
importantnewspendinginitiatives,itwillalmostalwaysbenecessarytocutexistingspending.
Thisisimportantalsoforaggregatefiscaldiscipline,becauseifsuchcutsarenotidentified,the
dangeristhatnewspendingwillsimplybeaddedontothebudget,pushingupaggregate
spendingatahigherratethanisconsistentwithkeepingthebudgetdeficitatsustainablelevels.

Goodspendingreviewalsoputsincreasedpressuretoperformonspendingministries,because
itgreatlyincreasestheprobabilitythatpoorlyperformingprogramsorareasofinefficiencywill
beidentifiedbythecenterandresultineitherbudgetcutsorsanctionsbeingappliedto
ministrymanagement.Ministrieswhichwishtoprotecttheirbudgetswillasaresultbe
motivatedtolifttheirperformance.Inthiscontext,spendingreviewshouldalsobelinkedwith
processesformanagementimprovementandprogramredesign.Thisisbecause,ifaprogramis
identifiedasineffective,itwillnotnecessarilyfollowthatitsfundingshouldbecut:achangein
programdesignormanagementmaybemoreappropriate.

Spendingreviewshouldbeintegratedwiththebudgetprocess.Inmostcountries,thiswill
meanthatsomespendingreviewisundertakeneveryyearaspartoftheannualbudget
process.Incountries(suchastheUK)wherefixedmediumtermexpenditureceilingsaresetfor
spendingministries,spendingreviewisaprocesswhichiscarriedoutonlyeverythreeorfour
years(seeSection18).Inmostofthefollowingdiscussion,itisassumedthatspendingreviewis
anannualprocess.
Advocatesofzerobasebudgetingfavorthecomprehensivereviewofallexpenditureevery
year,oratleastatregularintervals.Experienceshows,however,thatthisisnotpracticable
theanalytictaskissimplytoogreat.Spendingreviewneedsinsteadtobeselectiveandstrategic
initsfocus.Thequestionthenarisesastowhatapproachshouldbetakentoselecting
programsforreview.Oneapproachisthediscretionarytargetingapproach,inwhichspending
reviewisfocusedonprogramswhichofficialsandministersbelievetobemostlikelytoyield
savings.Thealternativeisaregularprogramreviewcycleinwhichallprogramsarereviewed
overaregularmultiyearcycleof,say,fiveyears.Canadaisoneexampleofacountrywithsuch
asystem(seeBox),andtheU.S.ProgramAssessmentRatingTooluntilrecentlyinvolveda
107

similarfiveyearcycleinwhich20percentofUSfederalprogramsweresubjecttorevieweach
year.
SpendingReviewCycle:TheCanadianExample
39

TheGovernmentofCanadaintroducedanewexpendituremanagementsystemin2007aspartofan
ongoingcommitmenttobettermanagegovernmentspending.Thissystemaimstoensurevaluefor
moneyforallgovernmentspending.Akeypillarofthissystemistheongoingassessmentofalldirect
programspending,orstrategicreviews.ThroughtheStrategicReviewprocess,theGovernment
systematicallyassessestherelevanceandperformanceofeveryprogramonacyclicalbasis.The
StrategicReviewprocessrequiresgovernmentorganizationstoreview100percentoftheirdirect
programspendingandtheoperatingcostsoftheirmajorstatutoryprogramsonacyclicalbasis.From
thisreview,theorganizationidentifiesfivepercentofspendingforreallocationfromitslower
performing,lowerpriorityprograms.Thissystemiscombinedwithasystemoftargetedstrategic
reviewsbasedontheselectionbyministersandtheTreasuryBoardSecretariatofselectedprogramsfor
review.

Thescopeofexpenditurecoveredbythespendingreviewshouldbethewholeofgeneral
government,andshouldcertainlynotbelimitedtodiscretionaryexpenditure.Itis,in
particular,cruciallyimportanttoincludesocialentitlementsandothermandatoryspending.
Spendingreviewinvolvesthreelevelsofactivity.Atthelowestlevelarereviewsofindividual
program,efficiencyandothertopics.Thenextlevelisthepreparation,onthebasisofthese
reviewsandotheranalyses,ofcoordinatedadvicetothepoliticalleadershipidentifyingthe
bestoptionsforexpenditurecuts.Thefinallevelisdecisionmakingaboutwhichcutstomake,
whichistheroleofthepoliticalleadership.
Processesforthepoliticalleadershiptomakeprioritizationdecisionsshouldthereforebewell
integratedintothebudgetprocess.Thenatureofthemostappropriatemechanismsforpolitical
decisionsaboutprioritieswillvarygreatlybetweencountries.Insomecountries,aprocess
involvingaCabinetcommitteemaybethebestapproach.Inothercountries,thepolitical
systemmaydictateamorecentralizedapproach,focusedonthepresidentand/orprime
ministerinconjunctionwiththefinanceminister.Theroleoftheparliamentisdiscussedin
Section17,reflectingthefactthatthereisgreatvariationinternationallyintheextentofthe
powerwhichparliamentexercisesovertheallocationofresourcesinthebudget.

39
Source:TreasuryBoardSecretariat,http://www.tbssct.gc.ca/sres/faqeng.asp#q1
108

CabinetCommitteesandExpenditureReallocation:TheAustralianExample
Theuseofacabinetcommitteeastheinstrumentforkeydecisionsaboutexpenditurereallocationshas
beenadistinctivefeatureofthebudgetprocessoftheAustraliannationalgovernmentsincethe1980s.
Throughoutthisentireperiod,therehasbeenacabinetExpenditureReviewCommittee(ERC)charged
withexaminingmajornewspendingproposalsputforwardbyspendingministries,andalsowith
discussingmajorcutswhichcouldbemadetofinancenewspendingorreducethedeficit.TheERCis
comprisedoftheFinanceMinisterandtheTreasurer(whoshareresponsibilityforthebudgetinthe
Australiansystem),togetherwiththePrimeMinisterandoneortwopowerfulspendingministers.Akey
functionoftheERCistostrengthenthehandoftheguardiansofspendingdisciplinewithintheCabinet,
thuscounteringthetendencyofspendingministerstoformcoalitionstopushspendingup.Theanalytic
supportoffinanceministrystaffhasbeencrucialtothesuccessofthismechanism.MoFofficialsprovide
ERCmemberswithsocalledGreenbriefsforeachspendingministry,whichnotonlycriticallyevaluate
theministrysnewspendingproposals,butidentifysavingsoptionsandalternativestrategies.Theyare
alsopresentatmeetingsoftheERCtobeabletoadviseministersonthespot,andtoactasa
counterweighttospendingministries.TheLaborGovernmentelectedin2007modifiedtheERCprocess
tosomeextentbyinstitutingaStrategicBudgetCommittee(SBC),comprisedofthePrimeMinister,the
DeputyPrimeMinister,theTreasurerandtheMinisterforFinance,whichmetattheverybeginningof
thebudgetprocessandassumedthefunctionofoverviewingspendingministersnewspending
proposals.TheERCwas,however,retained,andpursuesitsworkinthelightoftheparameters
establishedbytheSBC.TheGovernmentalsorevertedin2007topracticepreviouslyemployedintimes
ofsignificantfiscalconsolidationnamely,ofholdingmeetingsoftheERCthroughouttheyear,rather
thanonlyduringspecificstagesofthebudgetprocess.

Theprovisionofadvicetothepoliticalleadershiponoptionsforspendingcuts,arisingfrom
spendingreview,shoulddependingontheinstitutionalstructureofthecountrybethe
functionoftheMoF,potentiallyincollaborationwiththepresidentsorprimeministersoffice.
Thisadviceneedstobebasedonpolicyanalysisaswellasfinancialconsiderations.Onlycivil
servantscancarryoutthisfunctiononanongoingbasisexternaladvisersdonot,ingeneral,
haveasufficientlyindepthknowledgeofgovernment,andarenotabletoprovidethe
continuityrequired.Nevertheless,externaladvicehasitsplace,andincarryingoutthe
spendingreviewfunction,theMoFmaydrawinpartonprogramandefficiencyreviewscarried
outbyexternalconsultantsorcommissions.
Spendingreviewshouldalsoinpartbecarriedoutbythespendingministriesthemselves,
whichshouldbeencouragedtodeveloptheirowninternalprogramevaluation.Butspending
reviewcannotbelefttothespendingministriesalone.TheMoFmustleadit,andindoingso
shouldnotallowitselftobecomedependentonprogramevaluationscarriedoutunderthe
exclusivecontrolofspendingministries.
109

ExpenditurePrioritizationProcessesMoreGenerally
Asnotedabove,spendingreviewisthecrucialpointwhereperformancebudgetinginteracts
withexpenditureprioritizationprocesses.Toworkwell,however,theexpenditureprioritization
processrequiresotherkeyelements.
Goodprocessesfordeterminingprioritiesfornewspendingarecrucial.Twoelementsare
particularlyimportanthere.Thefirstistheexistenceofaneffectivestrategicphaseinthe
budgetpreparationprocessthatis,ofastageearlyinthebudgetpreparationprocesswhere
thepoliticalleadershipsetstheprioritieswhichwillguidetheprocess.Abudgetstrategypaper,
presentedtocabinetofministersforconsiderationatthestartofthebudgetpreparation
process,canbeonegoodvehicletofacilitatethedeterminationofgovernmentprioritiesduring
thestrategicphase.
Thesecondkeyelementofimportanceinrelationtotheprioritizationofnewspendingis
rigorousprocessesforcentralreviewoftheseproposals.Particularlyusefulinthiscontextcan
be:
Strictrequirementsaboutthemannerinwhichproposednewspendinginitiativesare
presented:whattypeofinformationistobeprovidedabouttheproposal(e.g.aclear
statementoftheobjective),arequirementformediumtermestimatesofthecostofthe
initiative,minimumamountsofnoticetobegiven,arequirementofcirculationofthe
proposaltoaspecifiedlistofcentralagencieswhowillanalyzeandcommentuponthe
proposal.
ArequirementthatthecostestimatesforeachnewinitiativebeagreedbytheMoF,soas
topreventspendingministriesdeliberatelyunderestimatingthecostsoftheirproposals.
Proposalsfornewspendingshouldtothemaximumdegreebeintegratedwiththebudget
process.Insomecountries,alargeportionofproposalsfornewspendingbyspending
ministriesareputforwardanddecidedbythegovernmentoutsidethebudgetpreparation
process.Asaconsequence,duringbudgetpreparation,thefocusisnotsomuchonmaking
decisionsaboutnewspendingoptionsasontryingtofitwithinthebudgetaryresourcelimits
thespendingrequiredbynewlawspassedpriortothebudget.Anobviousdangerundersuch
circumstancesinthatthenewspendinginitiativesadoptedoutsidethebudgetprocesswillcost
morethanthegovernmentcanafford.Theotheradverseconsequenceisweakerexpenditure
prioritization.Thisisbecause,withnewspendingproposalsbeingputforwardatanytime
110

duringtheyear,theytendtobeconsideredinisolationratherthanbeingcomparedwithother
possiblenewspendingoptionsinthewaythatwouldhappenifnewspendingproposalswerein
generalconsideredjointlyduringthebudgetpreparationprocess.
Countriesaresometimesadvisedtosetfirmministry(orsectoral)budgetceilingsrightatthe
startofthebudgetpreparationprocess,inanentirelytopdownprocesspriortoanybudget
bidsorotherbottomupinputfromspendingministries.Thisadviceisbasedontheproposition
thatacompletelybottomupbudgetprocess,inwhichministriesareabletobidforwhatever
theylikewithnoindicationofresourceconstraints,givesministriesnoincentivestoidentify
savings,andinevitablyresultsinbidssofarinexcessofavailableresourcesthattheyare
impossiblydifficultfortheMoFtohandle.
40

Theconcernaboutpurelybottomupbudgetprocessesisavalidone.Thereis,however,areal
dangerthat,unlesstheceilingsareformulatedverycarefully,settingearlyandfirmministry
ceilingswillaggravateallocativerigidity,greatlylimitingthepossibilitiesforimproved
expenditureprioritization.NeitherministersnorcentralagenciessuchastheMoFhavethe
detailedknowledgeoftheprogramareastounilaterallydeterminewherenewspendingshould
befocused.Moreover,theamountsofnewmoneywhichministriesorsectorshouldbegiven
fornewspendingcanonlyproperlybedecidedaftertheexaminationofconcreteprogram
proposals.Itmakesnosensetosaysomethinglikehealthisatopprioritysector,sowell
increaseitsfundingby15percentwithoutconsideringwhatconcretelythehealthministrywill
spendtheextramoneyon.
FewOECDcountriesinfactsetministryceilingsbeforeconsideringbottomupproposalsfor
newpolicy.CountrieslikeCanadaandAustraliamanagetoavoidthedangersofapurely
bottomupbudgetprocesswhileneverthelessretainingconsiderablescopeforbottomup
ministryproposalsfornewspendinginitiatives.Theydothisbyrequiringspendingministriesto
submitmajornewpolicyproposalsseparatelyfromtheircorebudgetproposals,withthelatter
basedonthecontinuationofpreexistingpoliciesandprograms.Theythensubjectthenew
spendingproposalstoveryrigorousandsystematiccentralscrutiny.Chiledidthesamething
someyearsagowithitswellknownBiddingFund.
Swedenissometimesseenasamodelforpurelytopdownministryceilingsetting.Intheory
theministryceilingsareallsetatacabinetretreatonemonthintothebudgetpreparation
process,priortoanybottomupinput.However,inreality,discussionsonnewpolicyinitiatives
whichimpactontheceilingscontinueformonthsafterwards.

40
SeeSchiavoCampo&Tommasi(1999)andPotter&Diamond(1999).
111

Goodprioritizationrequirestherightblendoftopdownandbottomupelementsinthebudget
preparationprocess.Itcertainlywillnotbefacilitatedbyanentirelybottomupprocess.
Equally,however,atotallytopdownprocessisneitherdesirablenorworkable,otherthan
temporarilyunderextremecircumstances(e.g.anacutefiscalcrisisrequiringquickanddrastic
expenditurecuts).Definingpreciselytherightbalancebetweentopdownandbottomup
processesduringbudgetpreparationarguablydependsverymuchoncountrycircumstances.

PlanningandPrioritization
Theprioritizationofexpenditureis,ofcourse,isthekeyfunctionofplanning.Planningsystems
are,nevertheless,oftenweakatprioritization.Thisisbecausetheyareoftenbetterat
identifyingpurposesforwhichthegovernmentshouldspendmore,thanatidentifyingwhere
spendingcouldbecutbacktomakeroomforthesenewspendingpriorities.
Moreover,wheretheplanningprocessisinstitutionallyseparatedfromthebudgetprocess,
budgetdecisionmakersmaynottaketheprioritiesidentifiedintheplanseriously.Theproblem
tendstobeparticularlyseriousincountrieswhichthinkofplanningandbudgetingassequential
processes.Thatis,theplanispreparedfirstandiswherealltheprioritiesareformulated.The
budgetisthensupposedtomerelygivefinancialexpressiontotheplanspriorities.Often,this
leadstotheplanbeingformulatedoutofthecontextofbudgetaryconstraints,withtheresult
thattheplandoesntreallyprioritizeinthesenseofmakingthehardresourceallocation
choices.
Therearetwokeylessonstobelearntfromthis:firstly,thatplanningandbudgetingmustbe
fullyintegrated.Expresseddifferently,planningshouldtakeplaceasanintegralpartofthe
budgetprocess,ratherthanbeingsomethingwhichisundertakenonlypriortothepreparation
ofthebudget.Secondly,goodplanninghastobeasmuchaboutidentifyingcutsasabout
selectingareasfornewspendingthatis,ithastobedesignedtoprioritizeexpenditure,not
justtodreamupblueskiesideasfornewspending.

ExpenditurePrioritizationattheSectorandMinistryLevels
Oneinfluentialapproachtotheprioritizationofexpenditurehasbeenthesocalledsector
wideapproach.Inthisapproach,muchofthetaskofexpenditureprioritizationisdelegatedto
sectorgroupsofministries.Thecentreofgovernmentwouldinitiallydetermineceilingsfor
sectorssuchas,say,agriculture,andthenalloftheministrieswitharoleinthatsectorwould
112

gettogethertodecidetheoptimalallocationofthatceilingbetweensectorprograms(aftera
discussionofsectorobjectivesandpriorities).
41
Thissystemappearstohavebeeninspiredby
theCanadianPolicyandExpenditureManagementsystem(PEMS)whichattractedconsiderable
favorableattentionintheearly1980s.
42

Thissystemhascertainadvantages.However,Canadianexperiencesuggeststhatmultiministry
committeesarenotnecessarilyagoodforumforspendingreview.Moreover,itcanalsobe
arguedthatthesectorwideapproachdelegatestoomuchoftheprioritizationtask.Thecenter
issupposedtodecidethesectoralallocation,butitishardtodecidehowmuchmoneysectors
shouldgetexceptinthecontextofspecificmajormeasuresorsavingswhichareproposed.
Thesectorwideapproachiscorrectatleastinitsrecognitionoftheneedforsignificant
decentralizationofprioritizationdecisions.However,somewouldsuggestthatthismaybemore
appropriatelydoneataministryratherthansectorallevel.

Giventhatitisneitherdesirablenorfeasibletocentralizeallprioritizationdecision,akey
questionishowtocreateincentivesandpressuresforspendingministriestoallocatethe
resourcesattheirdiscretioninthemosteffectivemanner.Twoimportantmechanismscanbe
mentioned:(1)asystemwherebyministriesareexpectedtofundminornewspending
initiativesthroughinternallyidentifiedsavings,andarethereforegivenanincentivetofindsuch
savings,and(2)thepressureimposedbygoodcentralspendingreview(asdiscussedearlier).

Agoodexpenditureprioritizationprocess,integratedfullyinbudgetpreparation,iscriticalto
thesuccessofagovernmentwideperformancebudgetingsystem.Withoutgoodprioritization
processes,performanceinformationmaynotbeactuallyusedinbudgetdecisionmaking,and
theresultsmaybethatalltheeffortofdevelopingindicators,evaluationsandprogramcostings
mayenduphavinglittleimpactontheallocationofresources.

KeyReadings

41
AnoutlineofthisapproachintheMTEFcontextcanbefoundintheWorldBank(1998)PublicExpenditure
ManagementHandbook,pp.478.Inthisversion,thesectorsalsoundertakearangeofotherrelatedperformance
planningandmanagementroles,includingtheexplicitdefinitionofsectorobjectives,performanceindicatorsand
targets.
42
SeeD.Good(2008)ThePoliticsofPublicMoney(UniversityofTorontoPress).
113

Kim,J.M.andCK.Park(2006),TopdownBudgetingasaToolforCentralResource
Management,OECDJournalonBudgeting,6(1):9394.
Ljungman,G.(2009),TopDownBudgetingAnInstrumenttoStrengthenBudgetManagement,
IMFWorkingPaper,obtainableat
http://www.imf.org/external/pubs/ft/wp/2009/wp09243.pdf.
OECD(2005),Reallocation:theRoleofBudgetInstitutions,OECD:Paris,canbeorderedat
http://www.oecd.org/document/38/0,3343,en_2649_34119_33701862_1_1_1_1,00.html.
Robinson,M.(2011),KeepingtheLidonAggregateExpenditureduringBudgetPreparation:
EnforcingAggregateExpenditureCeilingswhilePreservingAllocativeFlexibility,inproceedings
ofBancadItaliaFiscalPolicyWorkshop2001,availableat
http://www.bancaditalia.it/studiricerche/convegni/atti.
Robinson,M.(2010),MinistryCeilingsunderTopDownBudgeting,at
http://blog.pfmresults.com/wordpress/?p=10.
Robinson,M.(2010),KeepingtheLidonAggregateSpending,at
http://blog.pfmresults.com/wordpress/?p=93.

114

16.AccrualAccountingandPerformanceBudgeting

Thissectionfocusesontherelationshipbetweenaccrualaccountingandperformance
budgeting.Therearesomewhosaythataccrualaccounting,andperhapsalsoaccrual
budgeting,isessentialforperformancebudgeting.Weconsiderinthissectionwhetherthisis
correct.Theconclusionisthatitdependsontheformofperformancebudgeting.Thereare
certainformsofperformancebudgetingforwhichaccrualaccountingisindeedessential.But
thisisnottrueofmostformsofperformancebudgeting.Itis,inparticular,nottrueforprogram
budgeting.Althoughprogrambudgetingmayarguablybemoreeffectiveinanaccrual
environment,itwillworkperfectlywellundertraditionalcash(orcommitment)budgeting
andaccounting.

Thesectionstartswithanexplanationofaccrualaccounting(AA)andaccrualbudgeting,before
movingontoconsidertheirrelevanceforperformancebudgeting.

WhatareAccrualAccountingandAccrualBudgeting?
AAisafinancialreportingsystem.Inotherwords,itisaspecificmethodologybywhich
organizationsreporttheirfinancialtransactionsandposition.AAisthestandardaccounting
methodologyoftheprivatesector,whereitaroseprimarilyasamethodforproperlymeasuring
enterpriseprofit.AAmaybedefinedasamethodologybywhichentitiesmayproperlymeasure
theircostsofproductionand,whererelevant,revenueearned.

Inaprivatesectorcontext,itisonlythroughthepropermeasurementofcostsofproduction
andrevenuethatprofitmaybecorrectlymeasured.Thecorrectmeasurementofrevenue
earnedandprofitorlessisalsorelevanttogovernmentbusinessenterprises(GBEs),because
theyalsoearnrevenuefromsellingproductstoconsumers,andmakeaprofitorlossontheir
operationswhichneedstobemeasured.ItispreciselyforthisreasonthatGBEsinmost
countrieshavethereforelongemployedAA.

Bycontrast,theconceptsofrevenueearnedandprofitarelargelyirrelevanttogovernment
bodiesthatis,toministriesandotherorganizationswhichareprimarilydependentontax
revenuesfortheirfinancing.Forthem,thepotentialbenefitsofAAariselargelyfromitsuseto
measuretheircostsofproductionthatis,thecostsoftheoutputswhichtheydeliver.Forthis
115

reason,inexplainingAA,wefocusfirstlyinontheaccrualtreatmentofcosts,ratherthanof
revenues.

Traditionally,governmentsaroundtheworldhaveusedsocalledcashaccountingand
budgeting(coupled,insomecountries,withsocalledcommitmentaccountingand
budgeting)intheirbudgetsectors.Onlyrelativelyrecentlyhavesomegovernmentsmovedto
replacecashaccountingwithAA.Undercashaccounting,theprincipalfocusoffinancial
reportingisuponpaymentsandreceiptsofmoneyduringthefinancialyear.Attheministry
level,themainformoffinancialreportingisthereportingofministryexpenditure,with
expendituredefinedaspaymentstoexternalparties
43
.Undercashbudgeting,thespending
budgetsgiventoeachgovernmentministryarealsoexpressedincashexpenditureterms.In
otherwords,eachministryisgivenanannualbudgetformulatedasalimitonthepaymentsitis
permittedtomakeduringtheyear.
44

TheeasiestwayofunderstandingAAistocontrastitwithcashaccounting.Inotherwords,we
canbestunderstandthenatureofaccrualaccountingbyexplainingwhyitisthatcash
accountingisinappropriateasabasisformeasuringthecostsofproduction,andhowitisthat
AAovercomestheweaknessesofcashaccountinginthisrespect.

Ifaministrywishestoworkoutthecostsofproductionoftheservicesithasdeliveredto
externalclientsthisyear(i.e.ofitsoutputs),itwillneedtotakeintoaccountthecostsofall
resourcesusedtoproducethoseservices.Ifittriestodothisbylookingatthisyearscash
expenditurethatis,onthebasisofitscashaccountingitwillfaceanumberofdifficulties.
Oneisthatsomeoftheresourcesusedtoproduceoutputsthisyearwillhavebeenpaidforin
previousyears(e.g.buildings,equipmentandsuppliespurchasedinthepast).Equally,some
resourcesusedthisyearmaynotbepaidforuntilsometimeinthefuture(e.g.billsforsupplies
deliveredandusedattheendofthisfinancialyear,whicharenotpayableuntilthebeginningof

43
Moreprecisely,nonrepayablepayments:inotherwords,paymentsotherthanrepaymentsofpublicdebtand
loansmadebygovernmenttoexternalparties.
44
Incountrieswithcommitmentbudgeting,therewouldalsobealimitonthevalueofcommitmentstomake
futurepaymentswhichtheministrycouldmakeduringtheyear.Acommitmentreferstoalegalcommitmentto
makeapayment,whetheratthetimethecommitmentismadeoratsomesubsequentpointoftime(potentially
evensomeyearsinthefuture,inthecaseforexampleofmultiyearcontractswith,say,constructioncompanies
formajorpublicworks).Inacommitmentsbudget,quantitativelimitsareimposedonthequantumofnew
commitmentswhichmaybeenteredintoduringthefinancialyearinquestion.

116

thenextfinancialyear).Afocusoncashexpenditurewilloverlookthesenoncashcosts,and
tothatextentwillunderstatethecostsofproduction.

Theproblem,moreover,cutstheotherwayaswell.Ameasureofthisyearscashexpenditure
willincludeallcapitalexpenditureundertakenduringtheyear.Totreatthisyearsexpenditure
asameasureofthisyearscostsofproductionthereforeinvolvesanimplicitassumptionthatall
capitalexpenditurewhichtakesplacethisyearcontributestoproductioninthisyearandthis
yearalone.Bydefinition,however,capitalexpenditureisexpenditureonassetswhich
contributetoproductionoveranumberofyears.Thismeansthattocountallofthisyears
capitalexpenditureaspartofthisyearscostsofproductionistooverstatecosts.

AAsolvestheaboveproblemsbyreplacingthecashexpendituremeasurewithameasureof
thecostoftheresourcesusedinproduction,knownasexpenses.Theexpensesofanentityina
givenfinancialyearmeasurethecostsofalloftheresourcestheentityusestoproduceoutputs
inthatfinancialyear,irrespectiveofwhenthoseresourceswhereactuallypaidfor.The
differencebetweentheexpensesconceptandtheexpenditureconceptthereforeconcernsthe
financialyearinwhichpaymentsforinputsusedintheproductionprocessarerecorded.
Expendituremeasureswhentheinputsarepaidfor,whereasexpensesmeasureswhentheyare
usedintheproductionprocess.

Taketheexampleofcapitalexpenditure.Ratherthanrecordingallcapitalexpenditureasacost
ofproductionintheyeartheexpendituretakesplace,AAtreatsaportionofthecapital
expenditureasacostofoperation(anexpense,inaccruallanguage)ineachoftheyearsin
whichtheassetsconcernedcontributetoproduction.Roughlyspeaking,ifanassetslifeis,say,
tenyears,AAmightcountonetenthofthepricepaidfortheassetasacostofproductionin
eachofthetenyearsofitslife.
45
Thisiswhatisknownasdepreciation.

ThedifferencebetweenthecashaccountingconceptofexpenditureandtheAAconceptof
expensesdoesnotariseonlyinrelationtothetreatmentofcapital.Anotherexamplerelatesto
bills(accounts)presentedtoadepartmentbyitssuppliers.Undercashaccounting,suchbills
arerecognizedinthedepartmentsfinancialreportsonlyinthefinancialyearwhenthe

45
Thissimplifiestheconceptofdepreciationgreatly.Inpractice,theaccrualtreatmentofcapitalexpenditureis
considerablymorecomplicated,whenonetakesintoaccountthingssuchasinflationandthepossibilitythatthe
assethassomescrapvalueattheendofitslife,letalonethemorecomplicatedassetvaluationanddepreciation
methodologiesaccountantshavedeveloped.However,theideaoftheaccrualtreatmentofcapitalascost
allocationovertimeillustratestheessenceoftheaccrualconceptofexpensesasappliedtocapitalassets.
117

expenditureactuallytakesplace(i.e.whenthebillispaid).Bycontrast,underAAbillsare
recognizedasanexpenseinthefinancialyearwhentherelevantsuppliesaredeliveredandthe
billthereforebecomepayable(i.e.whenthedepartmentincurstheliabilitytopaythe
suppliers).Thisdistinctioncanmakeadifferencebecause,asnotedabove,paymentforsome
suppliesmaynottakeplaceuntilthefinancialyearaftertherelevanttheyhavebeenreceived
andusedinproduction.

Civilservicesuperannuationpensioncostsoffersanotherexampleoftheaccrualtreatment
ofcosts.Mostgovernmentsoperatetheirownsuperannuationschemes.Inotherwords,they
promiseretirementbenefitstotheircivilservants.Thismakestheretirementbenefits
entitlementswhichcivilservantsbuildupduringtheircareersobligationswhichthe
Governmentitselfmustmeet.Consequently,fromtheGovernmentspointofview,these
entitlementsrepresentamajorfinancialliability.Moreover,theyareanimportantpartofthe
costofdeliveryofgovernmentservices,becauseduringeachyearacivilservantisemployed
theybuildupadditionalsuperannuationentitlements.Thequestionthereforearisesastohow
shouldonemeasurethesuperannuationcomponentoftheGovernmentscostsofproduction
inanyparticularyear.Cashaccountingisnogoodforthistask,becauseitisnotpossibleto
measuretheannualcostofsuperannuationbylookingatannualsuperannuationexpenditure.
Toseewhynot,considerthepositionofanindividualpublicservant,Jim.Eachyearduring
Jimscareer,hebuildsupagrowingentitlementtosuperannuationbenefits.However,the
actualpaymentofthosebenefits(i.e.theexpenditure)takesplaceonlyaftertheconclusionof
Jimscareer.Ifoneemployedcashaccounting,wewouldhavethenonsenseresultthat:

NosuperannuationcostwouldberecordedforJimduringtheyearswhenhewasworking
andprovidingservicestothepublic,
There would be a substantial cost recorded only when Jim was retired and manifestly
makingnocontributionatalltoproduction.

WhatAAdoesistorecognizethefactthatduringeachyearofJimscareer,thereisa
superannuationcostattachedtohisemployment.Thiscostis,ofcourse,anoncashexpense
(i.e.itinvolvesnopaymentatthattime),butthismakesitnolessreal.Howisthe
superannuationcostofpublicserviceemploymentmeasuredunderAA?Essentially,theideais
thatinsteadofmeasuringtheexpenditureonsuperannuationbenefits,thegovernmentasa
118

wholemeasuresitsannualsuperannuationcostsbycountingthegrossincreaseinthetotal
amountofsuperannuationentitlementswhichgovernmentowesitsemployees.
46

ItwillthusbeclearthatonlybyusingAAcanpublicsectoragenciesaccuratelymeasurethecost
ofproducingtheoutputswhichtheydelivertothepublic.Ofcourse,whatAAgeneratesisa
totalfigurewhichmeasurestheaggregatecostofalloftheoutputsproducedbyan
organizationinaparticularfinancialyear.AApersedoesnotprovideinformationonthecost
ofproducingaspecificoutputorgroupofoutputs,nordoesitprovideinformationontheunit
costofoutputs.Toobtainsuchinformationrequiresaccrualaccountingmeasuresofexpenses
tobebroughttogetherwithoutputinformation.Itisafunctionofsocalledmanagement
accountingtosplitthetotalaccrualexpensesofanagencybetweenitsvariousprograms(or,at
amoredetailedlevel,betweenspecifictypesofservices).

Thediscussiontothispointhasfocusedonaccrualaccounting.Accrualbudgetingistheuseof
accrualaccountingasthebasisforbudgetallocationsmoreprecisely,theuseofaccrual
conceptstospecifybudgetarycontroltotals.
47
Asdiscussedinthesectiononprogram
appropriations,controltotalsarethequantitativespendinglimitsimposedonspending
ministries,whetherasappropriationsintheannualbudgetlaworbyadministrativedirective
(e.g.fromtheminister/MoF).Accrualbudgetingmustthereforenotbeconfusedwithaccrual
accounting,whichrefersonlytotherecordingandreportingoffinancialoperationsof
governmentinaccrualterms.Governmentsmaybudgetincashtermswhileaccountingand
reportinginaccrualterms
48
.

Whatdoesusingaccrualconceptstospecifybudgetarycontroltotalsmean?Themostbasic
typeofaccrualcontroltotalisanexpensescontroltotalthatis,acentrallyimposed
quantitativelimitontheexpenseseachspendingministryispermittedtoincurwithinthe
budgetyear.
49
Anexpensescontroltotalmeansthatcurrentyearexpensesarecountedasthe

46
Grossmeansheretheincreaseinsuperannuationentitlementsignoringthequantumoftheentitlementsof
alreadyretiredcivilservantswhichthegovernmentpaysoffduringtheyear.
47
Moreformally,accrualbudgetinghasbeendefined(Robinson,2009)asthespecificationofbudgetary
expenditureauthorizationsandrevenueestimatesintermsofaccrualaccountingmeasures.
48
Noteherethataccrualaccountingreportsnotonlyonexpensesetc,butalsooncashflows,andmaytherefore
besaidtoincorporatecashaccounting.
49
Asexplainedlater,itisnotessentialthatanexpensescontroltotalcoverallcategoriesoftheministrys
expenses.Theimpositionofanexpensescontroltotalcoveringmostcategoriesofeachspendingministrys
expensesshould,nevertheless,beregardedasacorefeatureofanyaccrualbudgetingsystem.
119

useofthebudgetaryfunding,irrespectiveofthetimingofanyassociatedcashpayment.For
example,thefollowingwouldbecountedagainsttheexpensescontroltotal:
Billspayable:amountswhichareowedforgoodsandservicedeliveredandusedduringthe
financialyear,eventhoughpaymentmaynotbemadeuntilthenextfinancialyear.
Theadditionalentitlementsforfuturepensionpaymentswhichcivilservantsaccumulate
duringthefinancialyear.
Stocks(ofsuppliesetc)actuallyusedintheproductionprocessduringtheyear,irrespective
ofwhenthosestockswerepurchased.
Depreciationoftheministrysfixedassets.

TheComplexityofAccrualAccountingandBudgeting
ThecorecaseforAAinrespecttoperformancebudgetingrestsonthepropositionthat,the
betterthemeasureofthecostofoutputs,themoreusefulthiswillbeforperformance
budgeting.Asdiscussedbelow,thisisbroadlyspeakingtrue.However,ajudgmentabout
whetherAAshouldaccompanyperformancebudgetingcannotbemadewithoutconsideringits
costsaswellasbenefits.Inthiscontext,itisimportanttorecognizethatAAhassignificant
downsides,themostimportantofwhichisthatitismorecomplexand,asaresult,costsmore
inskilledlaborandaccountingsystemtermstooperate.Thesecostsandskilledlabordemands
maketheintroductionofAAparticularlychallenginginlowincome(andevenmiddleincome)
countries.Thequestionwhicheachcountrymustthereforeaskiswhetherthebenefitsof
introducingAAintogovernmentoutweighthecosts.Inrespecttoperformancebudgeting,itis
notsufficientmerelytodemonstratethatprogrambudgetingorsomeotherperformance
budgetingsystemcanintheoryworkbetterinthepresenceofAA.Whatneedstobe
demonstratedisthattheimprovementissufficientlygreat(takeninconjunctionwithother
benefitsofAA)tojustifythecostsandcomplexitiesofthemovetoaccruals.Italsoneedstobe
borneinmindthatbothperformancebudgetingandAAanddemandingreformsintheirown
right.Itmaynotnecessarilymakesensetoattempttointroducethembothatthesametime.

Thisiseventruerofaccrualbudgeting,whichisconsiderablymorecomplexthatAAalone.The
additionalcomplexitynotonlymeansthatanaccrualbudgetingsystemishighlydemandingof
skilledhumanresources(accountantsandothers)andsupportingITsystems,butthatitmay
weakenexpenditurecontrolincountrieswhereaccrualconceptsarenotwellunderstoodby
managers(seeRobinson,2009).

120

AccrualAccountingandProgramBudgeting
Asrepeatedlyemphasized,theprimaryobjectiveofprogrambudgetingisimprovedexpenditure
prioritization.Programbudgetingimprovesexpenditureprioritizationbymakingitpossiblefor
budgetdecisionmakerstocompare(usuallyinaninformalway)thecostsandbenefitsof
alternativeprograms.

Thediscussionabovemakesitclearthatcashaccountingisimperfectforthistask.Becausecash
accountingdoesnotproperlymeasurethecostsofservicedelivery,itcandistortprogramcost
comparisonsbymakingsomeprogramslooklesscostlythantheyreallyareandlesscostly
relativetootherprogramsthantheyreallyare.Suppose,forexample,budgetdecisionmakers
wishtocompareahealthtreatmentprogramandapreventativehealthprogram.Health
treatmentisverycapitalintensivebecauseagreatdealofexpensiveequipmentandbuildings
areused.Healthpreventionreliesoninformationcampaigns,andmakeslittleusedofcostly
infrastructure.Ifonecomparesthesetwoprogramsonacashaccountingbasisthatis,by
lookingatthecashexpenditurewhicheachundertakesduringaperiodwhenthereisnot
muchnewinvestmentinhealthtreatmentfacilitiesunderway(i.e.notmanynewhospitalbeing
builtetc),thenthecomparisonwillbedistorted.Thehealthtreatmentprogramscostswilllook
artificiallylow,whilethiswillnotbethecaseforthepreventativehealthprogram.

Otherdistortionscanarisewhenmakingcomparisonsbetweenprogramsasaconsequenceof
usingcashaccounting.Forexample,ifwearecomparingaprogramwhichisdeliveredprimarily
bycivilservicestafftoanotherwhichrelieslargelyoncontractedprivatesectorcompaniesand
theiremployees,theconsiderabledeferredemploymentcostcomponentofcivilservice
employmentmaymaketheformerprogramlookrelativelycheaperthanitactuallyis.

Itisclear,then,thatitisinprinciplebettertobaseaprogrambudgetingsystemonAA.AA
measuresofprogramcostsfacilitatemuchfairercomparisonsofthecostsofalternative
programs.Accrualbudgetingwouldbeevenbetter,becausethenthefullcostofprograms
wouldbechargedtoministryprograms,givingthemapowerfulincentivetobasetheir
prioritizationdecisionsontherealcostofprograms,andnotjustonthelevelofcash
expenditurethattheyrequireinanygivenyear.

121

TheLinkbetweenAccrualsandPerformanceBudgeting

Oneofthekeyelementsofthenewresourcebased[i.e.accruals]approachisthatitrequiresministries
toundertakemoreaccuratecostingofactivities,withexpensesandincomeallocatedtoeachofa
ministrysobjectives.ThiswillassisttheGovernmentinensuringthatresourcesareallocatedtopriority
servicesinlinewiththeGovernmentsobjectives.(HMTreasury,2002)

Theintroductionofcost[i.e.accruals]principlesintogovernmentbudgetplanningandaccountinghas
todowithimprovinggovernmenteffectivenessthroughvisibility,transparency,andcostconscious
behavior.Transparencyofcostsprovidespoliticiansandadministrativeleadershipabetterbasisfor
prioritizinguseofresources.(DanishMinistryofFinance,2006)

However,eventhoughcashaccountingcreatessomedistortioninmeasuresofcomparative
programcosts,itcannotbesaidthatthesedistortionsareonthewholesoseriousastoprevent
programbudgetingfromachievingitsbasicobjectiveofimprovedexpenditureprioritization.
Programbudgetinghasworkedwellinsomecountrieswithcash(orcashandcommitment)
accountingandbudgetingsystems.Moreover,amongstthefactorswhichdeterminewhether
programbudgetingworksornot,theprecisionoftheaccountingsysteminmeasuringprogram
costsisinmostcountriesamuchlessimportantconsiderationthatwhetherthebudgetprocess
isdesignedtofacilitategoodprioritizationdecisions(seetheSection15).Sointermsofmaking
programbudgetingworkwell,theintroductionofAAisusuallynotthemostimportantpriority.

Fordevelopingcountriesinparticularthisisgoodnews.Theyshouldnotfeelthattheymust
combinetheintroductionofperformancebudgetingwithamovetoAA,letaloneaccrual
budgeting.Theyshouldbearinmindthatmostprogrambudgetingsystemsincludingmost
recentlythewelldesignedsystemintroducedinFrancein20012006haveoperatedina
traditionalcashorcash/commitmentsaccountingandbudgetingframework.

AccrualAccounting,PurchaserProviderandFormulaFundingSystems

Bycontrasttoprogrambudgeting,apurchaserprovider(PP)systemabsolutelyrequiresAA.As
discussedSection12,PPrequiresthatgovernmentagenciesoperatelikebusinesses,witha
focusontheirfinancialbottomline(profitorloss).Thereisonlyonewayofmeasuringprofit
andlossthroughtheuseofAA.TheuseofAAisessentialforthispurposenotonlybecauseit
122

isnecessarytomeasureproductioncostsaccurately,butalsobecausetheaccuratemeasureof
revenueearnedisabsolutelyimperative.

TheAAapproachtothemeasurementofrevenueappliesexactlythesameprincipleasis
appliedinthemeasurementofexpenses.Thatis,accrualrevenueisrecordedintheyearitis
actuallyearned,asopposedtotheyearwhenthecashhappenstobereceived.Thedifference
betweencashrevenueandaccrualrevenueisthen,onceagain,aboutthefinancialyearin
whichtherevenueisrecorded.Suppose,forexample,thatabusinessreceivedalargepayment
thisyearfordeliveryofservicestobemadeoverthefollowing,say,threeyears.Cash
accountingwouldrecordthisallasrevenuethisyear.Butthiswouldbeabsurd,astherevenue
concernedwillinrealityonlybeearnedprogressivelyoverthenextthreeyearsasandwhenthe
productisdelivered.Reflectingthis,AAwouldrecognizetherevenueinstagesoverthosethree
years.

Similarly,ifanenterprisesellsanasset,cashaccountingwouldtreatthisasrevenue.By
contrast,accrualaccountingwouldseethatthecashreceivedisnotreallyrevenueearned,
becauseitwasreceivedonlybysacrificingtheassetconcerned.Fromtheaccrualperspective,
totreatsuchreceiptsasrevenuewouldberatherlikesomeonewhosellstheircartreatingthe
paymenttheyreceiveasifitwereequivalenttosalary.

HencethemostimportantofthesuiteoffinancialstatementsgeneratedinanAAcontext:the
operatingstatement,commonlyreferredtointheprivatesectorastheProfitandLoss
Statement(P&L).Theoperatingstatementreportstotalrevenueandtotalexpensesinthe
financialyearconcerned(identifyingthekeyelementsofboth).The'bottomline'ofthe
operatingstatementistheoperatingresult,whichistotalrevenueminustotalexpenses.The
operatingresultis,ofcourse,ameasureofaccountingprofits.

AnyhospitalorotheragencywhichisfundedviaaPPmechanismratherthantraditionalbudget
fundingneedstomeasureitsoperatingresult,justlikeaprivatebusiness.UnderthePPsystem,
theagencyconcernedneedstobesurethatitisnotmakingaloss,andAAprovidestheonly
meansofassessingthis.ItispreciselyforthisreasonthatwhenAustraliaandNewZealand
attempted(unsuccessfully)toapplythePPprincipletothewholeofthegovernmentbudget,
theycoupleditwithamovetoaccrualbudgetinghencethetermaccrualoutputbudgeting.

123

Inrespecttoformulafunding(FF),thestoryisalittlemorecomplex.Asexplainedinthe
relevantsection,someFFsystemsarebasedoncosts,anditisinrelationtothesethatAAhasa
potentialcontributiontomake.CostbasedFFisgenerallybasedonanoutput(ratherthan
outcome)fundingformulas,ofwhichthesimplestversionisfunding=quantityxoutputunit
cost.Becauseaccrualsmeasuresoutputcostsbetter,itwillimmediatelybeobviousthatFFwill
operatebetterwithAA.However,thisdoesnotmeanthatallformsofcostbasedFFnecessarily
requireAA.Particularlyifthefundingformulafundsvariablecosts(i.e.doesnotcovercapital
costs),somefundingformulasmaypotentiallyworkfineinacashaccountingandbudgeting
context.Asageneralization,however,itmaybesaidthatcostbasedfundingformulasarelikely
torequireaccruals.

KeyReadings
Robinson,M(2007),CostInformationinM.Robinson(ed.)PerformanceBudgeting.

Robinson,M(2009),AccrualBudgetingandFiscalPolicy,IMFWorkingPaper,obtainableat
http://ideas.repec.org/p/imf/imfwpa/0984.html.

Diamond,J(2002)PerformanceBudgetingIsAccrualAccountingRequired?IMFWorking
Paper,obtainableathttp://www.imf.org/external/pubs/ft/wp/2002/wp02240.pdf.

124

17.ParliamentandPerformanceBudgeting

Theroleofparliamentinagovernmentwideperformancebudgetingsystemvariesgreatly
dependingonthepoliticalsystem,andinparticularupontheroleoftheparliamentvisvis
executivegovernmentintheformulationofthebudget.Thisisthereforeanareainrespectto
whichweneedtobeverycautiousinmakinggeneralizations.Broadlyspeaking,however,we
candistinguishbetweentwoextremes.Atoneendofthespectrumareparliamentswhichhave
amajordirectinfluenceontheallocationofresourcesinthebudget.Attheotherendofthe
spectrumareparliamentswhich,althoughtheymustlegallyapprovethebudget,haveinreality
littleinfluenceoveritscontent,whichisessentiallydeterminedbyexecutivegovernment.
TheUSCongressisanotableexampleofthefirsttypeofsystem.AlthoughtheAmerican
presidentpresentsabudgettoCongressforconsideration,therearefewlimitsonthechanges
whichCongresscan(anddoes)makebeforevotingitsownfinalbudget.Inrespecttothe
secondtypeofsystem,theBritishparliamentisthemoststrikingexample.InBritain,notonlyis
theparliamentusuallytightlycontrolledbythecabinetviathepartysystem,butany
amendmentbytheparliamenttothebudgetpresentedbytheexecutiveisconsideredtobea
motionofnoconfidence,thepassageofwhichwouldleadtothegovernmentsresignation.
Parliamentthereforeessentiallyacceptsthebudgetorsacksthegovernment.The
parliamentarysystemsofmanycountrieslieinbetweentheseextremes,withtheparliament
exercisingsomedegreeofdirectinfluenceovertheallocationofresourcesinthebudget.
Totheextentthattheparliamenthassubstantialindependentbudgetarypower,a
governmentwideperformancebudgetingsystemwillonlyworktoinsofarastheparliament
linksitsfundingdecisionstoresults.If,however,theparliamenthaslittleornoindependent
budgetarypower,thisisessentiallyirrelevant.Ineithercase,however,theperformance
accountability(asopposedtobudgetarycontrol)roleofparliamentisapotentiallyimportant
partofasuccessfulperformancebudgetingsystem.Wethereforestartbyconsideringaspects
ofthisaccountabilityrole.

ParliamentandPerformanceAccountability
Insuccessfulgovernmentwideperformancebudgetingsystem,performancereportingthatis,
reportingtoparliamentontheobjectivesandresultsachievedbygovernmentagenciesisa
keyelementofthesystem.Agrowingnumberofcountrieshaveadoptedanapproachoriginally
adoptedintheUSunderthe1993GovernmentPerformanceandResultsAct,underwhich
125

parliamentispresentedwithannualperformanceplansandannualperformancereportsfor
eachministryorsectorwithingovernment.
Attemptstoencourageparliamenttofocusonanddebateperformanceinplenarysession(i.e.
whentheparliamentmeetsasawhole)havegenerallymetwithlimitedsuccess(seeboxfor
example).

DisappointingDutchExperienceinParliamentaryPlenaryPerformanceReview
Inordertoincreasethepoliticalrelevanceof[thedebateonannualperformancereports],[the
government]proposedin2004toholdaplenarydebateontheannualreportsonthethirdWednesday
ofMayinthepresenceoftheentirecabinet(BlokResolution2004).DuringtheMay2005debate,the
entireCabinetwaspresent.However,thefloorleadersofdifferentlargepartieswerenotpresentatthe
debate.ThenumberofMPspresentatthedebatefluctuatedbetween35and60(of150)despitethe
factthattherewerenoparallelcommitteemeetings.TheBlokResolutionhasledtoanincreased
politicalattentionfortheannualreportsandincreasedmediacoverage.Theattentionfortheplenary
debateunfortunatelywenthandinhandwithadiminishingattentionforthecommissiondebates.The
attentionofmembersofparliamentfortheannualreportremainsratherlow.Interesttendstobe
confinedtotheparliamentaryfinancecommission.
50

Itisparliamentarycommitteeswhichtendtobethemainforumforeffectiveparliamentary
performanceaccountability.Approachestoenhancingtheroleofparliamentarycommitteesin
thisareavarygreatlyinternationally.Oneapproachistoexpandtheroleofthefinance/budget
committeetocoverperformanceaswellasfinancialissues.Buildinguptheroleofsector
committees(i.e.committeescoveringspecificsectorsofgovernmentsuchashealth)can,
however,beveryuseful.Asistrueinotherareasofparliamentarycommitteework,thedegree
ofsuccessofparliamentarycommitteesinbuildingtheirroleinperformanceaccountability
tendstobecloselylinkedtothesupportresourcesattheirdispositionparticularlyinrespect
toprofessionalresearchsupportstaff.Particularlyusefulinthiscontextisthecreationof
professionalanalyticserviceswhichsupporttheparliamentasawhole,ofwhichtheUS
CongressionalBudgetOfficeisoneofthebestdevelopedexamples.
Thesupremeauditinstitution(e.g.nationalauditoffice,courtofaccounts)isinmanypolitical
systemsintendedtoserveasanaccountabilityinstrumentoftheparliament,independentof

50
Source:Sterck&Bouckaert(2006),p.14.

126

executivegovernment.Inthiscontext,theextensionoftheroleoftheSAIfrompurelyfinancial
audittoperformanceaudit(asdiscussedinthesectionofperformanceauditing)ispotentiallya
usefulmeansofreinforcingtheperformanceaccountabilityroleoftheparliament.With
performanceauditsbeingpresentedtoitbytheSAI,theparliamentisprovidedwithastronger
informationbasewithwhichtoholdexecutivegovernmenttoaccountfortheresultsachieved
withtaxpayerresources.

ParliamentandExpenditurePriorities
Whenparliamentexercisessubstantialindependentbudgetarypower,itbecomesessentialto
thesuccessofgovernmentwideperformancebudgetingtoencourageandfacilitateittouse
resultsinformationwhenconsideringthebudget.PhilipJoyce(2007)identifiescertain
importantstepswhichcanbetakentothisend,includingthepresentationofperformance
informationinaformmeaningfulandreadilyusablebyparliamentariansandtheestablishment
ofaregularroutineforprogramreviewandreauthorization.Beyondthis,thescopefor
generalizationsabouthowtopromoteperformancebudgetinginparliamentisamatterwhich
needstobeexaminedinacountrybycountrycontext,withregardtokeyconstitutional
variable(e.g.doestheconstitutionpreventtheparliamentfromincreasingaggregate
expenditureifso,thistendstoforceittobemorefocusedonprioritization)andpolitical
variables(e.g.howstrongisthepartydisciplinetotheextentitisweak,itbecomesveryhard
topreventbudgetingfragmentingintounprioritizedexpendituresfavoringparticular
parliamentariansconstituencies).Experiencecertainlysuggeststhat,thegreaterthe
fragmentationofbudgetarypowerinthepoliticalsystembothbetweenexecutive
governmentandthelegislature,andwithinthelegislaturethemorechallengingitcan
becometoimplementaneffectiveperformancebudgetingsystem.

KeyReadings
Joyce,P.(2007),PerformanceBudgetingundertheseparationofpowers,inRobinson(ed),
PerformanceBudgeting.
Lienert,I.andM.K.Jung(2004),TheLegalFrameworkofBudgetSystems,Paris,OECD,
obtainableathttp://www.oecd.org/dataoecd/3/28/43487903.pdf.
Mordacq,F.(2008),BudgetaryReformandParliament:TheFrenchExperience,paper
deliveredatInternationalSymposiumonTheChangingRoleofParliamentintheBudget
Process,Afyonkarahisar,Turkey,89October2008,obtainableat
http://www.sigmaweb.org/dataoecd/63/4/41831999.pdf.
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18.MediumTermBudgetingandPerformanceBudgeting

Performancebudgetinghasusuallyseenasbeingcloselylinkedtomediumtermbudgeting.In
thissectionweconsiderwhythisisthecase.Thestartingpointisadiscussionofthenatureand
differentversionsofMTbudgeting,thekeytechnicalchallengesitinvolves,andtheexperience
withMTbudgetingindevelopingcountries.

NatureandBenefitsofMTBudgeting
ThecoreelementsofaMTbudgetingare:

AclearlystatedaggregateMTfiscalframework(MTFF),includingastatementofdesired
mediumtermoutcomesforkeyfiscalaggregates(especiallydeficitsanddebt)thatis,
mediumtermfiscaltargetsandoftheaggregateexpenditureceilingandaggregate
revenuelevelsconsistentwiththatfiscalpolicy.

Atopdown/bottomupreconciliationprocesstoensurethatexpenditureandrevenue
policyareconsistentwiththeMTFFthatis,tomaximizetheprobabilitythatthe
governmentsexpenditureandrevenuepolicieswill,overthemediumterm,resultislevels
ofaggregateexpenditureandrevenueconsistentwiththefiscaltargetssetintheMTFF.

Resultingfromthisprocess,asetofmediumtermsectoralorministryexpenditure
projectionsorceilingswhichbothembodygovernmentexpenditurepoliciesandare
consistentwithitsMTfiscalpolicy.Inmostcountries,theseareindicative(i.e.the
governmentmakesnoadvancecommitmenttomaintainingsectoral/ministryexpenditure
attheprojectedlevels),butinsomecountriesthegovernmentcommitsitselftofunding
sectorsorministriesattheseprojectedMTlevels.

ThekeybenefitsofaneffectiveMTbudgetingare:

Improvedaggregatefiscaldiscipline:MTbudgetingsignificantlyreducesthechancesof
soundfiscalpolicybeingunderminedbyhigherthanexpectedexpenditurearisingfrom
expenditurepoliciesandcommitmentswhichthegovernmentmadeinthepastwithout
fullyconsideringtheirfutureimplications.

128

Reducedspendingministryuncertaintyabouttheirfuturelevelsoffunding,leadingto
betterplanningandmanagement.Thisreduceduncertaintyisgreatestwhengovernment
makescommitmentsaboutfundingovertheMTtimehorizon.However,evenwheretheMT
sectoral/ministryexpenditureprojectionsareonlyindicative,effectiveMTbudgetingcan
significantlyreduceuncertainty.Thisisbecause,totheextentthattheMTbudgeting
processensuresthatallexpenditurepolicydecisionsarefullyconsistentwithaggregate
fiscalpolicyoverthemediumterm,itwillsubstantiallyreducetheneedforgovernmentto
makeadhocspendingcutsbecauseofunexpectedfiscaldevelopments.

Improvedexpenditureprioritization:theprocessofreconcilingexpenditurepolicywithtop
downaggregateexpenditureceilingsencouragesamoresystematicconsiderationof
expenditurepriorities.Forthisreason,effectiveMTbudgetingiscloselylinkedwith
improvedexpenditurereviewandprioritizationprocesses,ofthetypewhicharediscussed
inthesectiononexpenditureprioritization.Theseprocessesprovideanexcellentmeansby
whichtofeedperformanceinformationmoresystematicallyintobudgetpreparation,
providinganimportantlinkbetweentheMTbudgetframeworkandperformance
budgeting.

ForwardEstimates
AfundamentaltoolofMTbudgetingiswhatisoftenreferredtoasforwardestimates.
51
These
areMTestimatesofexpenditureandrevenueonacurrentpolicybasisthatis,projections
whichindicatewhatexpenditureandrevenuewillbeineachofthenextthreeorfouryearsif
therearenonewspendinginitiatives,nochangestotaxlaws,andallexplicitandclear
commitmentsmadetofutureexpenditure(includingpoliticalpromises)aretakenintoaccount.
Armedwithgoodforwardestimates,ensuringtheconsistencyofbottomupexpenditureand
taxpolicywithtopdownaggregateexpenditureceilingsdrivenbyfiscalpolicyisatwostage
process,involving:

Firstly,anassessmentviatheforwardestimatesofwhetherunchangedexpenditurepolicyis
consistentwithdesiredlevelsofaggregateexpenditure.Iftheforwardestimatesindicate
thatexistingexpenditurepolicywillresultinanexcessivelevelofaggregateexpenditure
overthemediumtermhorizon,thenadjustmentsaremadetocurrentspendingpolicy(or,

51
Alsoknownbyarangeofothernames,suchasannualreferencelevelupdateinCanada.
129

potentially,totaxpolicy).If,ontheotherhand,currentexpenditurepolicyimplies
expenditurebelowtheaggregateenvelopes,thenthereisroomfornewspendinginitiatives
(ortaxcuts).

Secondly,asimilarassessmentoftheimpactofpotentialnewspendinginitiatives,using
estimatesoftheirMTcoststodeterminewhethertheycanbeaccommodatedwithout
breachingtheaggregateexpenditureenvelopeorwhethertheymusteitherbescaledback
orroomfoundforthembycuttingelsewhere.

SuccessinreconcilingexpenditureandrevenuepolicywithsoundfiscalpolicyovertheMT
dependscriticallyonthequalityoftheforwardestimatesthatis,ontheextenttowhichthe
forwardestimatesprovideanaccurateforecastofthelevelsofaggregateexpenditureand
revenuewhichwillresultoverthemediumtermfromcurrentexpenditureandrevenue
policies.Onlytotheextentthattheforwardestimatesareaccuratewilltheyprovideadvance
warningthatchangesinexpenditurepolicyareneededtomeetaggregatefiscalconstraints.

PoorqualityforwardestimateswilltendtounderminetheentireMTbudgetingprocess.
CountrieswhichhaveattemptedtointroduceMTbudgetingwithoutinvestingsignificanteffort
intheforwardestimatesprocesstend,unsurprisingly,tohavebeendisappointedwiththe
results.Intheabsenceofasystemandcapacitytoproducequalityforwardestimates,
projectionsofmediumtermaggregatespendingandrevenuetendtobepreparedonthebasis
ofthecrudesttechniques(e.g.updatingbasedonlyontheapplicationofageneralinflation
factor)whichfailtocapturethedynamicsofcurrentpolicy.Thismakesthetopdown/bottom
upreconciliationprocesspointless,anditisthereforenotsurprisingthatsuchcountrieshave
alsotendednottoinvestmucheffortintheenhancementofthisprocess.

MTCeilings:Fixedvs.Indicative?
MTbudgetingproducesasetofMTexpenditureprojections,oftenreferredtoasceilings.As
notedabove,however,thestatusoftheseceilingsdifferssignificantlybetweencountries.

AtoneendofthespectrumarecountrieswhichsetfixedMTceilingsforministries.Thatis,the
governmentmakescommitmentstoministriesabouttheleveloffundingtheycanexpectto
receiveoverthecoming,say,threeyears.Oneofthemostwelldevelopedexamplesofthisis
theUK,whichsincethelate1990shasoperatedasystembasedonfixedthreeyearbudgetsfor
130

spendingministries(recentlyextendedtofixedcommitmentslastingthelifeofthefiveyear
parliament).AnumberofotherOECDcountriesincludingFrancehavemorerecently
followedtheBritishexample.

AttheotherendofthespectrumarecountrieswheretheMTexpenditureprojectionsare
indicativeandimplynocommitmenttoministriesinrespecttotheMTfundingtheywill
receive.Insuchcountries,governmentretainsandexercisestherighttochangeministryand
sectoralallocationseachyear,inordertoprogressivelyimproveitsexpenditureprioritization.
Australiaisanexampleofthisapproach.

TheAustralianApproachtoMTBudgeting

IntheAustraliansystem,thebudgetwhicheachspendingministryreceivesisbasedessentiallyonthe
expenditureforwardestimateswithmodificationsonlyforsuchnewpolicyproposalsasthe
governmentaccepts(or,conversely,forcutsarisingfromexplicitdecisionstoeliminatesomeprograms
inheritedfromthepast).Inpreparingthebudgetfor,say,2011,thefinanceministryfirsttakesthe
estimatesof2011expenditurewhichwerepreparedin2009.Itupdatesthoseestimatesforanychanges
whichhaveimpactedonthecostsofdeliveringexistingpolicy,aswellasanypolicychangeswhichmight
havehappenedduring2010,andthenusesthisasthestartingpointofthebudgetpreparationprocess.
Spendingministriesare,approximatelyspeaking,toldnottobotherdebatingthebudgettheyneedto
deliverongoingprogramsinthecomingyearthesearegivenbytheupdatedforwardestimates.Any
requestsforadditionalfundingwhichthespendingministriesmakemust,instead,bebasedon
proposalsfornewpolicyinitiatives.Thusthebudgetbidslodgedbyspendingministriesearlyinthe
budgetprocessthesocalledPortfolioBudgetSubmissionsareentirelyfocusedonproposed
expenditurepolicychanges.Usingtheexpenditureforwardestimatesinthiswaycreatesapowerful
incentiveforthespendingministriestocollaboratewiththeMoFindevelopingreliableforward
estimatesmethodologies,becausegettingtheestimateswrongcouldadverselyaffectthespending
ministriesbudgetposition.InAustralia,forwardestimatesweredevelopedsomeyearsbeforethey
startedtobeusedforbudgetpreparationinthemannerdescribedabove.Itwasonlyaftertheystarted,
intheearly1980s,tobeusedasthebasisfordeterminingministrybudgets,thatitbecameessentialto
substantiallyupgradethequalityoftheestimates.Thisunderlinesthefactthatthissystemcanonly
workwelloncethequalityofforwardestimateshasbecomesufficientlygoodthattheestimatesprovide
abroadlyadequateassessmentofthefuturecostsofexpenditureonanunchangedpolicybasis.

BothoftheseapproachesrepresentlegitimatemodelsofMTbudgeting.Asnotedabove,even
whenceilingsareindicativeonly,spendingministryuncertaintyaboutthelevelsofMTfunding
theywillreceiveisreduced,becausethecompatibilityoftheindicativeceilingswithaggregate
fiscalpolicywill(unexpectedshocksaside)havebeenverifiedviatheMTbudgetingprocess.
ThetechnicalrequirementsforsettingfixedMTceilingsareconsiderablygreaterthanfor
indicativeceilings.Theyinclude:
131

Excellentmacroeconomicforecasting,
Excellentforwardestimatesofbothrevenueandexpenditure,
Reasonablemacroeconomicstability,
Astrongexpenditurereviewandprioritizationmechanism,
Sustainableaggregatefiscalpolicysettings.

Withoutacapacitytomakegoodmediumtermrevenueforecasts,thereisthedangerthat
unrealisticallyhighmultiyearexpenditureceilingswillbeset.Downthetrack,whenrevenue
turnsouttobebelowforecast,thegovernmentwillbefacedwiththedifficultchoicebetween
withdrawingitsbudgetcommitmentstospendingministriesorfindingadditionalrevenue.

Withoutgoodprocessestoscrutinizeandreprioritizeexpenditure,makingmediumterm
budgetcommitmentstospendingministrieswillsimplyincreaseexpenditureinflexibility,and
makeithardertoreallocatespendingovertimetotheareaswhereitislikelytodeliverthe
greatestbenefits.Withonlylimitedcapacitytoreviewexpenditure,theMoFmayfinditself
forcedtorecommendtothegovernmentmultiyearceilingslargelybasedonthestatusquo
ratherthanoncriticalanalysisofthestatusquo.Undersuchcircumstances,ministrieswhich
shouldhavethebudgetsreducedcouldeasilyfindthemselvesprotectedfromscrutinyfora
numberofyearsatatime.ItishighlyrelevantthatintheUKscase,theseexpenditureceilings
aresetonlyafterthoroughspendingreviews(discussedinthesectiononexpenditure
prioritization).

MTBudgetingandPerformanceBudgeting
AMTbudgetingperspectivecangreatlyreinforcetheeffectivenessofagovernmentwide
performancebudgetingsystem.Thisisfirstandforemostbecauseexpenditureprioritization
thecentralobjectiveofprogrambudgetingsystemsworksbestwhencarriedoutfromaMT
perspective.Inotherwords,whendecidinghowbesttoallocatebudgetresourcesbetween
programs,itishighlyadvantageoustoknowthecostofthoseprogramsnotjustforthenext
financialyearbutalsoforthefollowingyears.Programcostingonanannualbasismaybe
misleading.Thisisparticularlytruefornewprograms,forwhichthefirstyearcostsareoften
significantlydifferentfromtheongoingcosts(due,e.g.,tosubstantialprogramsetupcost,orto
thefactthattheprogrammaynotbefullyoperationaluntilpartwaythroughthefinancial
132

year).ItisthereforeessentialthatnewprogramproposalsbeaccompaniedwithMTcost
estimates.ThereduceduncertaintyaboutfuturefundinglevelswhichMTbudgetingprovides
helpssupportperformancebudgetingbecausedecisionsaboutprogramallocationscanbe
madewithgreaterconfidencethattheywillbesustainableinotherwords,thatitwontbe
necessarytorevisitthemtwoorthreeyearsdownthetrackbecausetheycantbeafforded.

Conversely,performancebudgetinghelpsMTbudgeting.Mostfundamentally,program
budgetingwillenablethebestqualityexpenditureforwardestimatestobedeveloped,because
itwillfacilitatethemodelingofprogramspecificcostdrivers(thatis,demandorcostfactors
whichaffecttheevolutionoftheongoingcostsofspecificprograms).InasystemoffixedMT
ministryceilings,performancebudgetingisvirtuallyanecessitybecause,asoutlinedearlier,
excellentexpenditureprioritizationmechanismarecritical.ThusintheUKsystem,good
performanceinformation(especially,butnotonly,excellentperformancemeasures)hasbeen
anessentialtoolofthetriennialspendingreviews.

TheMediumTermExpenditureFramework(MTEF)
Tothispoint,thediscussionhasbeenaboutMTbudgetingingeneral,withnomentionofthe
familiarconceptofthemediumtermexpenditureframework(MTEF).TheMTEFconcepthas
beenthecornerstoneoftheapproachtoMTbudgetingadvocatedbyinternational
organizationsincludingtheWorldBankandtheInternationalMonetaryFund.Theproblem,
however,isthatthetermMTEFhasbeenusedinsomanydifferentwaysbydifferentauthors
thatitcannolongerbesaidtohaveaclear,widelyagreeddefinition.Inparticular,thetermis
veryoftenusedinasensemuchwiderthanmultiannualbudgetingforexample,torefertoa
wholesystemofbudgetpreparation,oftenincorporatingalsopolicyformulationandplanning.
52

ThisextremelybroaddefinitionwaspromotedintheWorldBanks1998PublicExpenditure
Handbook,inwhichtheMTEFwasdefinedasawholeofgovernmentstrategicpolicyand
expenditureframeworkTheMTEFconsistsofatopdownresourceenvelope,abottomup
estimationofthecurrentandmediumtermcostsofexistingpolicyand,ultimately,the
matchingofthesecostswithavailableresources.Whilethesecondpartofthisdefinitionis
essentiallythesameastheconceptofMTbudgetingpresentedabove,theitalicizedwords

52
Indeed,thePublicExpenditureHandbookcoulditselfbeseenashavingcontributedtothismuchbroader
interpretation.NotwithstandingthecrispdefinitionofanMTEFquotedabove,thereareanumberofcomments
elsewhereinthemanualwhichsuggestamuchmoreexpansivenotionoftheMTEF.
133

couldbereadtoimplyadefinitionwhichcoversnotonlythewholeofthebudgetpreparation
process,buttheplanningprocessaswell.Ontheotherhand,onecanfindsomeauthorswho
usethetermMTEFinamuchnarrowersenseforexample,referonlytodetailedforward
expenditureestimates.
53
ThetermMTEFisnotonewhichisusedmuchbyOECDcountries,
wherethetermsmultiannualormediumtermbudgetingaremuchmorecommon.

ThebroadconceptionofanMTEFasatotalbudgeting,planningandpolicysystemmeansthat
theMTEFconcepthasoftenbeenseenasincludingwithinit,amongstotherthings,
performancebudgetingandtheexpenditureprioritizationmechanisms.Theproblemwiththis
isthatitisreallynotpossibleordesirabletospecifyaspartofthedefinitionofanMTEFspecific
formsofperformancebudgetingandspecifictypesofexpenditureprioritizationmechanism
whichareappropriatetoallcountriesandwhichwillbeagreedforalltimetobethebest
approaches.Thus,forexample,many(includingtheHandbook)saythatasectorwideapproach
toplanningisanessentialelementoftheexpenditureprioritizationmechanismunderanMTEF.
However,asdiscussedintheexpenditureprioritizationsession,therearegoodgroundsto
disputetheeffectivenessofthisapproachtoprioritization.

Thesamepointappliestoperformancebudgeting.SomeproponentsofMTEFshaveseenitas
necessarilyincorporatingprogrambudgeting.Othershavetakentheviewthatsomeformof
outputbudgetingoractivitybasedbudgetingbywhichtheymeanaformulafunding
approachtoestimatingbudgetrequirementsasafunctionofoutputsoractivitiestobe
deliveredisanecessarypartofanMTEF.Thistypeofoutputbudgeting(whichiscritiquedin
thesectiononprogramcostingandaccounting)wasfashionableinthelate1990sandearly
2000s,butismuchlesssotoday.Again,itisnotclearthatitmakessensetoincorporatesuch
specificsintothedefinitionofanMTEF.

WhilediscussingtheMTEFconcept,twootherwidelyusedacronymsMediumTermFiscal
Framework(MTFF)andMediumTermBudgetingFramework(MTBF)shouldbementioned.
ThetermMTFF,towhichreferencewasmadeattheoutsetofthissection,hasaclearmeaning.
ItiswidelyunderstoodtorefertotheaggregatefiscalpolicyelementofanMTEFclear
mediumtermfiscalobjectives,andasetoffiscalprojectionsconsistentwiththem.Theterm

53
ThisappearstobetheversionoftheconceptusedbyAllen&Tommasi(2001),p.180.ForAllenandTommasi,
anMTEFsodefinedismerelyacomponentofabroadermediumtermbudgetframework.
134

MTBFhas,bycontrast,beenusedinsomanyradicallydifferentwaysthatitispointlessto
attemptdefineit.
54

Overall,itseemstomakelittlesensetoapproachMTbudgetingbasedondefinitionsinother
words,tostartwithadefinitionofwhatanMTEFissupposedtobe,andthenworkon
introducinganMTEFbasedonthatdefinition.Itismuchmoreimportanttofocusonthecore
elementsofMTbudgeting,andtheoptionalextras(e.g.fixedMTministryceilings)andwork
outonacountrybycountrybasiswhatelementswillworkbest.

Atthetimeofwriting,considerableeffortwasunderwayininternationalorganizationstore
thinkthewholeissueofMTbudgeting,andtheMTEFinparticular,anditappearedlikelythata
newparadigmwouldemergewithinthesubsequentyears.

DevelopingCountriesandtheMTEF
TheMTEFsintroducedindevelopingcountrieshavedifferedgreatly,particularlyintermsofthe
addonelementsofprioritizationmechanismsandperformancebudgeting.Thecoreelement
hasbeenthedevelopmentofMTministryexpenditureceilings.Whiletherehavebeen
differentapproachesonthequestionofwhethertheseshouldberegardedasfixedorindicative
andwhethertheywouldberollingorfixedithasbeenuniversallyassumedthattheMT
ceilingsshouldattheveryleastguideannualbudgetpreparation.

Inpractice,theexperiencewithMTEFhasoftenbeenquitedisappointing.Thebiggestproblem
hasbeenthatthefundingallocationsintheannualbudgethaveoftenhadlittleornorelationto
theMTceilings.Expresseddifferently,theMTEFhasbeenadocumentwithlittleimpactonthe
realbudget.ThishasparticularlytendedtobethecaseincountrieswheretheMTEFwas
essentiallypreparedbyconsultants,withlimitedownershipbytheauthorities,sothatthe
expenditureprioritiesexpressedtheMTEFwerenotnecessarilyprioritiestowhichthe
authoritiesarereallycommitted.

Poorqualityforwardestimateshavebeenperhapsthemostwidespreadobstacletothe
developmentofeffectiveMTbudgetingindevelopingcountries.AsaSouthAfrican
commentator(Flscher,2007)notedinrespecttotheexperiencewithMTbudgetinginAfrican
countries:

54
See,forexample,thedifferentconceptsofanMTBFintheIMFsFiscalTransparencyManual(2007:129)andin
AllenandTommasi(2001),p.180.
135

thequalityofforwardestimatesispoor.Theyconsistfartoofrequentlyoftheproposed
budgetforthefirstyearofamultiyearframework,followedbyinflationadjusted
projectionsofcostfortheouteryear...theypaylittleattentionto,forexample,thelikely
phasingofpolicyimplementation,changesindemandthatwilleffectspendingunevenly
ortheimpactofonceoffcapitalspendingonthebaseyearestimates....Akeyaspectof
embeddingamediumtermperspectivethereforeisdecidingwhattherulesareforrolling
overandadjustinganddeterminingtheforwardestimates.
Akeyreasonforthisisthatthepreparationofforwardestimatesis,atthetechnicallevel,a
moredifficulttaskthanisoftenassumed.

WithallthefocusonMTbudgeting,itseemssometimestobeforgottenthatmanydeveloping
countrieshavemajordifficultieswiththequalityoftheirannualbudgeting.Manyarenotable
topreparegoodqualityannualprojectionsofthefundingrequirementsofongoingservices.
Somequestion,inthiscontext,whetheritmakessensetobepushingcountriestointroduce
MTEFswhenthequalityoftheirannualbudgetingneedssuchconsiderableimprovement.In
thiscontext,thefindingsofarecentreviewbytheWorldBanksIndependentEvaluationGroup
(IEG)arehighlyrelevant.TheIEG(2008:xv)notedtheimportanceofdealingwiththebasics
first,suchasensuringthatthegovernmentisexecutingaoneyearbudgetreasonablywell
beforelaunchingsophisticatedmultiyearbudgeting.

Itmaythereforemakemoresensefordevelopingcountriestothinkofthetasknotsomuchas
oneofintroducinganMTEF,butratherasoneofgraduallyintroducingmoreofaMT
perspectiveintothebudget,startinginitiallywitheffortstodefineclearermediumtermfiscal
objectivesandgraduallyimprovethequalityofexpenditureandrevenueforecasts.

IfitisthecasethattheintroductionoffullblownMTbudgetingisadifficulttaskwhichnotall
developingcountriescanaspiretointheshortterm,whatdoesthismeanforperformance
budgetingindevelopingcountries?ItwouldbedifficulttoarguethatafullblownMTbudgeting
systemisanessentialprerequisiteforperformancebudgeting.Eveninthecontextofastrictly
annualbudgetingsystem,introducingthesystematicuseofperformanceinformationcanhelp
tosignificantlyimproveexpenditureprioritizationandtoputmorepressureonministriesto
improvetheeffectivenessandefficiencyoftheirspending.Fromthisperspective,onecanthink
ofperformancebudgetingandmediumtermbudgetingastwodimensionsofPFMreformin
136

developingcountrieswhichhaveimportantsynergies,butwhichshouldnotbethoughtofas
absolutelyessentialtooneanother.

Inconclusion,introducingaMTperspectiveintobudgetingcanoffergreatbenefitsintermsof
improvedfiscalpolicyimplementationandreducedfundinguncertaintyandconsequently
bettermanagementattheministrylevel.MTbudgetinghasconsiderablesynergieswith
performancebudgeting:eachreinforcestheotherinmajorways.Thereisnosinglecorrect
modelofMTbudgeting,norevenasinglemodeloftheMTEF.Theform,anddegree,ofMT
budgetingshouldbetailoredtothecircumstancesofeachcountry.

KeyReadings
WorldBank(1998)PublicExpenditureHandbook,obtainableat
http://www1.worldbank.org/publicsector/pe/handbook/pem98.pdf.
Kasek,L.andD.Webber(2009),PerformanceBasedBudgetingandMediumTermExpenditure
FrameworksinEmergingEurope,Warsaw:WorldBank,obtainableat
http://siteresources.worldbank.org/INTECA/Resources/WBperformanceBudgetingTEF.pdf.
LeHourerou,P.andR.Taliercio(2002),MediumTermExpenditureFrameworks:FromConcept
toPractice:SomePreliminaryLessonsfromAfrica,WorldBank,AfricaRegionWorkingPaper
Series,No.28,obtainableat
http://unpan1.un.org/intradoc/groups/public/documents/UNPAN/UNPAN002860.pdf.
Wynne,A.(2005),PublicFinancialManagementReformsinDevelopingCountries:Lessonsof
ExperiencefromGhana,TanzaniaandUganda,AfricanCapacityBuildingFoundationWorking
Paperno.7,obtainableat
http://unpan1.un.org/intradoc/groups/public/documents/UNPAN/UNPAN002860.pdf.

137

19.ImplementingGovernmentWidePerformanceBudgeting

Thissectionsummarizeskeyimplementationissueswhichariseinimplementingagovernment
widesystemofperformanceinformedbudgeting.Inotherwords,thefocusisonthe
implementationrequirementsofaprogrambudgetingsystemwhichaimstomakesystematic
useofperformanceinformationinbudgetdecisionstoimproveexpenditureprioritizationand
increasepressureforperformance.Thespecialimplementationrequirementsofmorecomplex
systemsofperformance,suchaspurchaserprovider,arediscussedelsewhereinthismanual.

Thedevelopmentofaperformanceinformationbaseis,obviously,oneofthefirststepsinthe
developmentofabasicsystemofperformanceinformedbudgeting.Thedevelopmentof
programperformanceindicatorsshouldnotbethoughtofasasinglestepreformwhichcanbe
accomplishedinashorttimeframesuchasacoupleofyears.Rather,itisagradualprocess
whichasexperienceinleadingOECDcountriesshowswillproceedoverdecades.Thisdoes
not,however,meanthatitisnecessarytowaitdecadesbeforeaworkableperformance
budgetingsystemcanbeintroduced.Evenahighlyselectivesetofprogramindicatorscan
enormouslyimprovetheexpenditureprioritizationdecisionsmadebythegovernmentwiththe
supportofthefinanceministry.Theinitialaimshouldthereforebetodeveloparelativelysmall
setofusefulprogramindicators,alongwithrelativelysimpleprogramevaluationwhichis
designedtobeusableinthebudgetprocess.

Itisveryimportantnottoneglectevaluationinasinglemindedefforttodevelopindicators.
Indicatorsinisolationaresometimesoflimitedvalue,andevaluationcanbecrucialto
interpretingindicators.Intheearlystagesofthedevelopingofagovernmentwide
performancebudgetingsystem,thefocuswilltendtobeonthedevelopmentofsimplein
manycasesdeskbasedreviewsofasmallsetofkeyprogramsduringeachbudgetcycle.

Thedevelopmentofaprogramstructureforthebudgetisareformwhichtakessomeyears.
Thefirststepisthedefinitionofappropriateprogramsinspendingministrieswhichmeans
programswhicharedefinedintermsofoutcomesandoutputs(withlimitedexceptionssuchas
administrationprograms).Thiscanusuallybeexpectedtotakeanabsoluteminimumoftwo
years(andusuallylongerthanthat).Inthisprocess,spendingministriesneedextensivesupport
fromtheMoF,intheformoftechnicalinstructionsandguidesandamajortrainingprogram.
Theactualdevelopmentoftheprogramsneeds,moreover,tobeaninteractiveprocessin
whichthespendingministriespreparedraftsandthesearethenreviewedandapprovedbythe
138

financeministry.Itis,ontheonehand,undesirablethattheMoFsimplyimposeitschoiceof
programsuponspendingministriesnotonlydoesitnothavesufficientknowledgetodothis
properly,butthelackofownershipoftheresultantprogramstructurebythespending
ministrywilltendtounderminethereform.Ontheotherhand,becausetheprogramsare
intendedtobeaninstrumentofcentralexpenditureprioritization,spendingministriescannot
belefttojustdefineprogramsinanywaytheywish.
Themodificationoftheaccountingsystemandthefinancialmanagementinformationsystem
(FMIS)tomakethemprogramfriendlyisaquitemajorimplementationstep.Although
changingthechartofaccountsisthefirststep,modifyingtheFMISisusuallythebiggesttask
here.ItmaynotmakesensetowaittilltheintroductionofacompletelynewIFMIStointroduce
aprogramstructuretothebudget,somodificationstoexistingsystemsareoftenwhatis
needed.Extensivetraininginnewaccountingproceduresandrelatedsystemschangeswillbe
required.
OnceaprogramstructurehasbeendevelopedandtheaccountingsystemandFMIShavebeen
madeprogramfriendly,itispossibletostartapprovingthebudgetonaprogrammaticbasis.In
therunuptothis,mostcountriesfirstdevelopindicativeprogrambudgetswhicharepresented
totheparliamentasanannextothetraditionalbudget.Suchanindicativeprogrambudget
showstheparliamentandpublicwhatthebudgetappropriationswouldlooklikeiftheywere
approvedinprogrammaticterms.
Inmovingtoprogramappropriations,itiscrucialtomakeacleardecisionaboutthemanner
andextenttowhichtraditionalbudgetcontrolswillbereduced.Mostimportanthereisthe
questionofthedegreeoflineitemcontrolsimplification.Itisaseriousmistaketosimply
imposeprogramappropriationsontopofahighlydetailedtraditionalbudgetthiswillnotonly
depriveagenciesandmanagersoftheincreasedmanagerialfreedomwhichisanessentialpart
ofperformancebudgeting,butwillinfacttietheirhandsevenmorethanwaspreviouslythe
case.Inreducinglineitemcontrols,mostcountrieswillnotwishinitiallytogoasfarasOECD
countrieslikeFrance,AustraliaandtheUK.Buttheywillusuallyneedtosignificantlyreducethe
lineitemcontrolswhichtheyhavepreviouslyenforced.
AsdiscussedinthesectionsonPFMreformandexpenditureprioritization,animportantpartof
theimplementationofasuccessfulgovernmentwideperformancebudgetingsystemisthe
reformofthebudgetprocessandthereductionofexpenditurerigiditiessoastomakeit
possibletomorereadilyreallocatelimitedpublicresourcestothesectorsandprogramswhere
itcandelivergreatestsocialbenefit.
139

TheMoFwillnecessarilyplayapivotalroleintheimplementationandongoingoperationofthe
performancebudgetingsystem.ChangesinthemodusoperandiandskillsetoftheMoFare
thereforeessentialifperformancebudgetingistobeasuccess.TheMoFcannolongerbe
simplyacontrollerofexpenditure.Itmustplayacentralroleasanexpenditurepolicyadviserto
thegovernment.Inparticular,itmustdevelopitscapacitytoadvisegovernmentonwhere
expenditurecanbecute.g.viacutstounsuccessfulorlowpriorityprogramsorefficiency
improvementsinordertomakeroomfornewprioritiesortoassistfiscalconsolidation.Sucha
rolewillinmostcountriesrequiresabroadeningoftheskillbaseoftheministry,withthe
reinforcementofpolicyanalysisskillsalongsideaccountingandeconomicanalysiscapacity.This
willnormallyrequireacombinationofretrainingandnewrecruiting.Theincreasedexpenditure
policyroleoftheMoFwillrequireadditionalresources,whichraisesthequestionofoverall
staffinglevels.However,partoftheanswertothiscanbefoundinthesystematiceliminationof
unnecessarytraditionalcontrolfunctions,suchasthereviewandapprovaloflargenumbersof
transferrequestsarisingfromexcessivelydetailedlineitemcontrols.
IndiscussingheretheroleoftheMoF,itshouldberecognizedthatinsomecountriesthe
expenditurepolicyroledescribedabovewillappropriatelybesharedwithothercentral
agencies(e.g.theprimeministersorpresidentsoffice).
Broadlyspeaking,countriesmaychoosebetweenabigbangandamoregradualapproachto
theimplementationofperformancebudgeting.ThebigbangapproachofwhichRussia
providesoneexamplemeansimplementationwithinacoupleofyears.Generallyspeaking,it
willrequirethatthecountryconcernedalreadyhasnotonlythemajorPFMprerequisitein
place,butthattheFMISworkswellandcanberelativelyeasilyadaptedtoprograms.Thegreat
advantageofthebigbangapproachismomentum.Bycontrast,agradualapproachmaybe
morerealisticinmanycountries.Equally,however,thegreatdangeroftoogradualan
approachisthelossofmomentum,asaresultofwhichthereformmayneverbecompleted.
TheexampleofFranceisagoodonetohaveinmindwhendeterminingtheimplementation
timetable.Afterhavingspentsomeyearsdeterminingthebroadparametersofitsnew
performancebudgetingsystem,Francedeliberatelychoseafiveyearimplementationperiod
betweenthe2001passageofthelawmandatingthenewsystemanditscomingintofullforce
in2006.Thisfiveyearperiodprovedtobeanextremelybusyone,givethescaleofchange
whichthenewsysteminvolved,andonecouldnotsayinretrospectthatthereformcouldhave
easilybeenimplementedinashorterperiodoftime.
Themanagementoftheimplementationprocessiscriticaltosuccess.Performancebudgeting
cannot,firstly,beimplementedsuccessfullywithoutstrongsupportfromthepolitical
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leadership.ItwillusuallymakesensefortheMoFperhapsinconjunctionwithothercentral
agenciestocreateanimplementationtaskforce.Spendingministriesneedtobeclosely
involvedintheprocessataseniorlevel,perhapsviaaconsultativecommitteecomprisedof
seniorministryrepresentatives.Throughout,theMoFwillneedtoprovidestrongtechnical
guidancetospendingministriestoassisttheminproperlydevelopingthenewsystems(e.g.
properlydefiningprogramsandselectingtherighttypesofprogramperformanceindicators).
Developingcountriesoftenfacemoreseriousimplementationchallengesarising,forexample,
fromgreatercapacityconstraints,weaknessesintheiroverallPFMsystemsand,sometimes,
fromgovernanceproblemswhichincreaseexpenditurerigidities.Thesehavetobetakeninto
accountwhendeterminingthetargettimeframeforimplementation.Theresourceandcapacity
constraintswhichfacedevelopingcountryMoFsmakeitparticularlyimportanttosimplify
unnecessarytraditionalcontrols,inordertofreestafftimefornewresponsibilities.Aboveall,
however,developingcountriescaneasetheimplementationburdenbykeepingtheir
performancebudgetingsystemssimple.Inthiscontextofprogrambudgeting,thismeans,for
example,avoidingoverlycomplexprogramstructuresandunnecessaryaddonssuchas
activitybasedcosting.Moregenerally,itusuallymeansdeferringtothefuturethepossible
applicationthemoresophisticatedperformancebudgetingmechanismssuchasformula
fundingandpurchaserprovider.Performancetargetingshouldalsobeapproachedinagradual
andhighlyselectivemanner.Overall,theinitialfocusshouldbesimplyonmakingthebudget
moreperformanceinformed:thatis,onintroducingasystematicconsiderationofprogram
resultswhendeterminingtheallocationofresourcesinthebudget.
Inconclusion,performancebudgetingshouldnotbeseenasasimplereformtobeintroduced
overnight.Eveninitsleastcomplexform,itisademandingmultifacetedreformwhichtakes
yearstoputinplace.

KeyReadings
Diamond,J.(2007),ChallengestoImplementation,inRobinson(ed.),PerformanceBudgeting.

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20.TheManagingforResultsContext

Performancebudgetingusesthebudgetasatoolformakingpublicmanagementmoreresults
focused.Itis,however,onlyoneofarangeofmanagingforresultsinstrumentswhichshare
thisbroadobjective.InthisfinalsectionwelookatsomekeyareasofMFRreformwhichneed
tobepursuedtogetherwithperformancebudgetingifthefullbenefitsofthelatteraretobe
realized.
Civilservicereformisoneofthemostcrucialaccompanyingreformsinmanycountries.There
arearangeofreasonswhy,tovaryingdegreesinvariouscountries,thecivilservicemaynotbe
sufficientlyclientandresultsfocused.MFRseekstochangethisbyfocusingemployment
arrangementshiring,pay,promotionandterminationmoreonresults.Formalperformance
planningandmonitoringisakeypartofthis,andmakesincreasinguseoftoolssuchasformal
performancecontractsoragreements.
Itisinrespecttothesettingofclearobjectivesfororganizationalunitsandindividualswithin
them,andthedevelopmentofperformancemeasurestoassessthedegreeofachievementof
theseobjectives,thatcivilserviceperformancemanagementneedstobelinkedtothebroader
strategicplanningandperformancebudgetingsystems.Inparticular,theobjectivesand
indicatorsestablishedforworkunitandindividualsshouldbelinkedtoprogramandministry
objectivesandindicators.Generallyspeaking,objectivesandindicatorsshouldcascade
throughorganizations,linkingthosefortheorganizationasawholetothosesetforindividuals
andworkunits.
Thequestionofperformanceincentivesisanimportantoneforperformancebudgeting.In
traditionalcivilservices,thematerialincentivesforgoodperformanceareoftenweak,andit
followsthatstrengtheningtheseforexample,throughperformancepayarrangementscan
beanimportantelementofMFR.However,weneedtobeawareofthepotentiallyperverse
effectswhichtoolargeacomponentofperformancepaymaycreateasaresultsofthe
inevitablyimperfectmeasurementofindividualorworkunitperformance.Itisalsoamajor
mistaketoviewperformancemotivationasexclusivelyaquestionofmaterialincentives.
Publicservicemotivationthealtruisticcommitmentofpublicworkerstoclientservice(e.g.
doctorsandnursestopatients)ortoacause(e.g.thedesireofenvironmentministrystaffto
savetheenvironment)isveryimportant.Animportantpartofgoodperformance
managementisthereinforcementandharnessingofpublicservicemotivation.
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ManagerialflexibilityinhumanresourcemanagementisaveryimportantpartofMFR.
Traditionalcivilservicearrangementstendtogivemanagerslittlescopetorewardgoodstaff,
ortosanctionorterminateineffectivestaff.Incountrieswhichhavegonefurthestalongthe
MFRpath,managershaveacquiredmuchgreaterresponsibilityandauthorityintheseareas.
However,thescopeformovementinthisdirectionhastobeviewedinacountryspecific
context,takingintoaccounttheoverallstatusofgovernanceforthesamereasonsaswere
discussedinrespecttoemploymentflexibilityinthesectiononPFMreform.
Finally,thesuccessofMFRdependscompletelyonthepoliticalcircumstancesofthecountry
and,morespecifically,onthedegreetowhichthepoliticiansandtheelectoratearethemselves
performancefocused.If,forexample,thepoliticalsystemisonewherecontinuingelectoral
supportforgovernmenthaslittlerelationshiptotheircapacitytodeliverefficientandeffective
expenditurebutismorerelatedto,say,grouployaltiesorrentseekingbehavior
performancebudgeting,andMFRmoregenerally,arenotlikelytomakemuchheadway.

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21.ConcludingComments

Performancebudgetingisachallengingbutpotentiallyimportantreformintheongoing
struggletomakegovernmentmoreresultsoriented.Coupledwithothermanagingforresults
reforms,itcanhelpsubstantiallyimprovetheeffectivenessandefficiencyofpublic
expenditure.Theobjectiveofthismanualhasbeentoprovideanoutlineofkeyformsof
performancebudgeting,theirdifferingperformanceinformationrequirements,thekeydesign
andimplementationissueswhichtheyraise,andtheirprerequisitesandcorequisites.The
diversityofperformancebudgetingmodelshasbeenemphasized.Itisimportantforeach
countrytomakeacleardecisionaboutwhattypeofperformancebudgetingwhichis
appropriatetoitsowncircumstances.Thisdecisionshouldexplicitlytakeintoaccountthe
specificcapacityandothercharacteristicsofthecountryconcerned.Anotherkeypoint
emphasizedhasbeentheimportanceofarealisticapproachtoimplementationstrategyand
timetable.Successfulperformancebudgetingisnotsomethingtobeintroducedinarush.Itis,
rather,areformwhichcanbeexpectedtotakeatveryminimumseveralyearstoimplementin
apreliminaryway,toreachthepointwherebudgetingstartstobecomemoresystematically
performanceinformed.

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Glossary

Accrualaccounting Systemofaccountinginwhichakeyroleisplayedbytherecordingof
expenses,assetsandliabilities.

Accrualbudgeting Budgetingsysteminwhichbudgetapprovalstaketheformprincipally
ofauthorizationstoministriestoincurexpenses.

Accrualoutputbudgeting Purchaserproviderbudgetingmodelappliedtothewhole
governmentbudget,asintroducedinNewZealandandAustraliainthe
1990s.

Activities Typesorcategoriesofworkundertakenintheproductionanddelivery
ofoutputs

Activitybasedcosting Acostingmethodologyinwhichinputcostsareallocatedtocategories
ofactivity,usinganallocationbasiswhichreflects,ascloselyas
possible,therealconsumptionofresourcesbythoseactivity
categories.Whenusedforprogramcosting,theactivitycostsare
allocatedbetweenprogramsinasecondstage.

Aggregatefiscalpolicy Thegovernmentsoverarchingobjectivesforthebudgetdeficit,debt
andotherrelevantfiscalaggregates.

Appropriation Amountofexpenditurelegallyauthorizedbytheparliamenttobe
undertaken.

Administrationprogram Programswhichcoveroverheadcostsofaministryoragency,suchas
centralmanagementandpersonnelservices.Alsoknownas,e.g.,
administrationprogramsorsupportprograms.

Allocationbasis Formulaorprincipleusedtoallocatespecificexpenditureitem
betweentwoormorecostobjectsinthecontextofprogram
costing,betweentwoormoreprograms.

Alternativebudgeting Avariationofzerobasebudgetinginwhichdecisionsarefocusednot
onazerobasebutonthemarginsnearthecurrentbudgetbase.
Usuallythreeormorealternativebudgetshavetobesubmittedfor
eachprogram.Generally,atleastoneofthealternativeshastobeless
thanthecurrentbudget.Oftenaspecificpercentagereductionis
mandated.

Bottomupbudgeting Budgetpreparationprocesswhichisbasedprimarilyonspending
ministriesmakingbidsforresources,withcentralconsiderationof
thosebidsthendeterminingtheoverallshapeofthebudget.

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Budgetclassification Categoriesofexpenditureusedinthebudget,particularlyforthe
approvalofexpenditure.
Budgetpreparation Stageofthebudgetprocessthegovernmentdecideshowmuch
fundingitwillprovidetowhichagenciesandforwhichpurposes,and
preparesthebudgetlawwhichwillbepresentedtoparliamentforits
approval.

Budgetexecution Implementationoftheexpenditureplandevelopedinthebudget
includingtheenteringofcontractsandexpenditureoffunds.

Cashaccounting Asystemoffinancialaccountinginwhichthefocusisuponmoney
actuallypaidout(expendituresoroutlays)andmoneyactually
receivedinthefinancialyear.

ChartofAccounts Systemofclassificationoftransactionsrevenue,expenditure,
financingetcusedforaccountingpurposes.

Classificationofthe
FunctionsofGovernment
(COFOG)
FunctionalclassificationofexpendituredevelopedbytheUnited
NationsandincorporatedintotheInternationalMonetaryFunds
GovernmentFinancialStatisticsmethodology.

Commitment Contractualobligationtomakeafuturepayment.

Controltotal Acentrallyimposedquantitativelimitonsomecategoryof
expenditurewhichcanbeundertakenbythespendingministryduring
thebudgetyear.Maybeimposedbytheparliamentorbyacentral
executivebodysuchasthecabinetofministersorthefinanceministry.

Costeffectiveness Theachievementofintendedoutcomesatlowestpossiblecost.

Costdriver Inthecontextofprogrambudgeting,aformulaorprinciplewhichis
usedtodeterminetheproportionsinwhichanindirectcostissplit
betweentwoormoreprograms(orsubprograms)towhichit
contributes.

Directcost Inthecontextofcostingprograms,expenditureoninputswhich
contributestoonlyoneprogram.

Effectiveness Thedegreeofsuccessofanoutputindeliveringitsintendedoutcomes.

Efficiency Productionofanoutputatminimumcostwhileholdingquality
constant,givenprevailinginputprices.

Evaluation Analyticassessmentstypicallyaddressingthecosteffectivenessor
appropriatenessofpublicpolicies,organizationsorprograms.

Expense Costsattributabletothepresentfinancialyearintheaccrual
accountingframework.Representsaconsumptionofresources,
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regardlessofwhetheritispaidforimmediatelyorresultsinsteadina
liabilityorareductioninassets.

Externalfactors Factorsoutsidethecontrolofgovernmentwhichinfluencethe
outcomesachievedbypublicprograms.Externalfactorsmaybeeither
client/casecharacteristicsoraspectsofthecontextinwhichthe
programisdelivered.Sometimesalsoreferredtoascontextual
factors.

Financialmanagement
informationsystem(FMIS)
Computerizedsystemsformanagingbudgetingandassociated
processes.SeealsoIFMIS.

Formulafunding Whenusedasaperformancebudgetingtool,formulafundingisa
systeminwhichfundingprovidedbygovernmenttoapublicsector
agencyisanexplicit(thatis,algebraic)functionofmeasuresof
expectedand/oractualresultsthatis,ofmeasuresofoutputsand/or
outcomes.

Forwardestimates Projectionsbyacentralbudgetagencyofaggregateexpendituresover
afixedterm(usuallybudgetplusthreeyears)onanopolicychange
basis.Forwardestimatesarethebasisformediumtermfiscalplanning
andmayalsobeusedasthebasisforimposingexpenditurelimits.

Functionalclassification Classificationofexpenditurebyfunctions,asomewhatimprecise
termwhichrepresentamixofoutputtypesandactivitytypes.

Heterogeneity Thedeliberatevariationintheamountand/ortypesofactivities
deliveredtodifferentclients/casesreceivingthesameservice,
particularlyinresponsetodifferenceinclient/casecharacteristics.For
example,moreintensiveteachingactivitydirectedtostudentswith
disabilities.

Highleveloutcomes Themoreindirectoutcomesofoutputs,whichariseasaconsequence
oftheachievementofproximateoutcomes.Forexample,ineducation,
theproximateoutcomeofhighernumeracyandliteracycontributesto
thehigherleveloutcomeofbettereconomicperformance.Also
sometimesknownasendorultimateoutcomes.

Integratedfinancial
managementinformation
system(IFMIS)
Acomputerizedsystemwhichtoagreaterorlesserdegreeintegrates
multiplefunctionsintothesamesystem,sothataccounting,
expenditurecontrol,payments,budgetpreparationandarangeof
otherfunctionswillbebuiltintothesamebigcomputerizedsystem.

Impacts Termusedbysometorefertolongertermorhigherleveloutcomes.

Incrementalism Budgetingischaracterizedbyinattentivenesstothe(budgetary)
baseinotherwords,thatbudgetarydecisionmakerstakethe
budgetarybasemoreorlessforgrantedasthestartingpointinbudget
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formulation,andfocustheirattentionprimarilyonthesizeofthe
increment(or,occasionally,decrement)inagencyorprogrambudgets,
mainlybyaprocessofadjustingbudgetsforcostchanges.

Indirectcost Inthecontextofcostingprograms,costsofinputsoractivitieswhich
contributetomorethanoneprogram.Moregenerally,sharedcosts
whichneedtobeallocatedbetweenanumberofcostobjects.

Inputs Resourcesusedinthecarryingoutofactivitiestoproduceoutputs(for
example.labor,equipment,buildings).

Intermediateoutcome Themoredirectorimmediateimpactsofoutputs.Forexample,in
education,thestudentknowledge(forexample,highernumeracyand
literacy)isakeyproximateoutcome.

Lineitembudgeting Budgetinginwhichagenciesareprovidedwithbudgetappropriations
specifiedintermsofinputcategories(thatis,byeconomic
classification).

Managingforresults Theuseofformalperformanceinformationtoimprovepublicsector
performanceacrosstheboard,includinginhumanresources
management,instrategicplanningandbudgeting.

MediumTerm
ExpenditureFramework
(MTEF)
Notaconceptwithacleargenerallyaccepteddefinition.However,
definedinWorldBankPublicExpenditureHandbook(1998)asa
wholeofgovernmentstrategicpolicyandexpenditureframework
TheMTEFconsistsofatopdownresourceenvelope,abottomup
estimationofthecurrentandmediumtermcostsofexistingpolicy
and,ultimately,thematchingofthesecostswithavailableresources.

MediumtermFiscal
Framework(MTFF)
Explicitpolicyondesiredmediumtermoutcomesforkeyfiscal
aggregates(especiallydeficitsanddebt)thatis,mediumtermfiscal
targetspossiblysupportedbyapproximatemediumtermforecastsof
aggregateexpenditureandrevenue.

Outcome Changesbroughtaboutbypublicinterventionsuponindividuals,social
structures,orthephysicalenvironment.

Outcomevariable Thecharacteristicsofindividuals,societyorthephysicalenvironment
whichpublicprogramsseektochange.

Output Agoodorserviceprovidedbyanagencytoorforanexternalparty.

Performanceaudit Evaluationoftheefficiencyandeffectivenessofpublicexpenditure
carriedoutbyasupremeauditauthorityorothergroupofauditors.

Performanceindicator Seeperformancemeasure.

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Performancemeasure Ratingsorquantitativemeasureswhichprovideinformationonthe
effectivenessandefficiencyofpublicprograms.

Performancetarget Levelofmeasuredperformancetobeachievedbyaspecificdate.

Perverseeffects Behavioraldistortionsorotheradverseconsequencesofperformance
measures.

Processes Theprocessesbywhichinputsaretransformedintooutputs.Sameas
activities.

ProgramAssessment
RatingTool(PART)
TechniquedevelopedbytheUSundertheBushpresidencyinorderto
rateprogramperformanceforTooluseinthebudgetprocess.
Programsratedinfivecategoriesrangingfromeffectivedownto
ineffectiveandresultsnotdemonstrated.

Programbudgeting Thesystematicuseofperformanceinformationtoinformdecisions
aboutbudgetaryprioritiesbetweencompetingprograms,basedonthe
programclassificationofexpenditure(seeprograms).

Programhierarchy Multilevelprogrambasedclassificationofexpenditure,inwhich
programsarebrokenintooneormorelowerlevelcategories(sub
programsetc).

Programs Categoriesofexpenditurebasedongroupsofoutputs(orsupport
services)withacommonobjective,whichisusuallyanoutcome.

PublicServiceAgreements
(PSA)
SystemdevelopedintheUnitedKingdomfromthelate1990suntil
2004underwhichhighlevelperformancetargetsaresetforeach
ministryaspartofabiennialspendingreviewprocesswhichdefines
multiyearagencybudgets.Targetshaveevolvedovertimefrombeing
primarilyoutputfocusedtoprimarilyoutcomefocused.

Purchaserprovider Fundingsystemsunderwhichagenciesarepaidpricesforsystems
theresults(usuallyoutputs)whichtheydeliver.

Quality Theextenttowhichthecharacteristicsofanoutputinthecaseofa
serviceoutput,theactivitiesdeliveredandtheirtimelinessaresuch
astoincreaseitspotentialcapacitytoachieveitsintendedoutcome.
Nottobeconfusedwiththeoutcomeitself.

Spendingreview Thesystematicscrutinyofexistingexpendituretoidentify,in
particular,optionsforcuts.Itinvolvesbothprogramreviews(the
reviewofspecificservicesprovidedbygovernment)andefficiency
reviews(whichfocusonreducingthecostofdeliveringservices).

Standardizedoutputs Outputswhereeveryclientreceivesessentiallythesamelevelof
servicethatis,outputswhicharenotcharacterizedbyheterogeneity.
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Strategicphase(ofthe
budgetpreparation
process)

Stageearlyinawelldesignedbudgetpreparationprocesswherethe
politicalleadershipsetstheprioritieswhichwillguidetheprocess.
Supremeauditinstitution GenerictermusedinternationallyforbodiessuchastheUKNational
AuditOffice,theUSGovernmentAccountabilityOffice,andtheFrench
CourdesComptes,whichareindependent(tovaryingdegrees)of
executivegovernmentanddesignedtoholdittoaccount.

Transfers Shiftingoffundsbetweenappropriationcategories.

Topdownbudgeting Theunilateralsettingofexpenditureceilingsbythecenter(president,
cabinet,financeministryetc)withoutbidsbythespendingministry.

Virement

Seetransfers.
Zerobasebudgeting

Asystemofperformancebudgetinginwhichexpenditureisbroken
downinto,andanalyzedintermsof,decisionpackages(alsoknown
asserviceincrements)whichconstituteaseriesofoptionalfunding
levelsfromthepresumedbaseofzerotoandbeyondthecurrentlevel
ofservice.Priorityrankingsareattachedtothesedecisionpackages,
andtheserankingsareusedtoensurethattheavailablelevelof
revenuefundedthosedecisionpackageswhichareofhighestpriority.

150

References
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