Implementing
Results-Based Budgeting
Allen Schick
Special Course on Impact Evaluation and Results-Based
Planning and Budgeting
Kunming, China
18-21 June 2012
Implementing the Budget: Spending Money
Implementing the budget entails two distinct but connected
activities: incurring expenditures and delivering services
SPENDING MONEY

Implementation is not simply a matter of executing the approved budget.
In every country, the implemented budget varies from the one adopted

The variance between the approved and actual budgets depends on a
country’s financial condition, the volatility of public revenues, the role of
central institutions (president, cabinet, finance ministry) and the type of
budget adopted

A highly itemized budget may experience greater variance because every
change in a line item deviates from the budget

The contemporary trend in public management is to give service
providers flexibility in implementing their budgets. But this trend may be
more appropriate for highly developed countries than for developing
countries
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Implementing the Budget: Getting Results
GETTING RESULTS

Implementing the budget also entails carrying out the activities and
delivering the services financed by government

The more explicit the budget is in specifying activities and services,
the greater the capacity to monitor implementation

Some variance, due to changing circumstances, may be
appropriate, but not purposeful disregard of the government’s
intentions

Robust monitoring is essential because service providers generally
know more than central agencies about what they are doing
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Monitoring the Actual Expenditure of Funds

Many developing countries have significant variances
between authorized and actual expenditures

Even when funds are spent on authorized purposes, they
often do not reach intended users

For example, funds budgeted for rural schools may be spent
on headquarter staff instead

These practices undermine budgeting and make it difficult (or
impossible) to link resources and results

To counter these problems, governments can implement
monitoring procedures that trace the flow of money from the
budget to end users
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Variance of Expenditures from Budget
1. Virement
The shift of funds within or between votes, as
authorized by law or with the approval of the legislature
2. Impoundment
The withholding of funds from obligation or expenditure
by the finance ministry or the spending department
3. Reprogramming
The shift of money from one activity to another, usually
within the same vote, account, or fund
4. Re-budgeting
Formal or informal revision to the budget by the
government during the fiscal year, usually in response
to a change in budget conditions or because the
adopted budget was unrealistic
Obligation of funds in excess of the amount authorized
5. Over-Obligation or available. In poorly managed countries, overobligation may be unreported until payment is made
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Types of Expenditure Control
Type of Control
Exercised
By
What is
Controlled
Mode of Accountability
EXTERNAL
CONTROL
Finance
Ministry and
other central
agencies
Specific inputs
(individual items of
expenditures, such
as each position or
purchase)
Compliance with line
budget, civil service rules
and other rules
INTERNAL
CONTROL
Spending
departments
Major expenditure
items (total
salaries, all
equipment, or
supplies, etc.)
Audit of systems to assure
that internal controls meet
government standards
MANAGERIAL
ACCOUNTABILITY
Spending or
Global operating
responsibility
budget and outputs
units
Reports and audits on
outputs, costs, quality and
other results
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The Shift from External Control to Internal Control
FROM
TO
Expenditures itemized in the budget
Classes of expenditures specified in
the budget
Spending controlled by central
agencies
Spending controlled by line
departments
Pre-audit (before spending occurs)
Post-audit (after spending has
occurred)
Audit of individual transactions
Audit of internal control systems
Audit of all transactions
Sample transactions to test the
system
Managers cannot be given flexibility
Managers must have opportunity to
improve performance
Rules enforced by outside monitors
Rules are internalized and accepted
as legitimate
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Internal Control is a Key
to Managing for Results - 1

Internal control is a broad term that covers multiple facets of
an entity’s operation, such as rules and procedures for
spending money, hiring staff, acquiring or selling assets, and
maintaining records and data systems. It also covers
management of risk and the role of internal auditors

Internal control is in contrast to external control, in which an
agency must receive approval from a central agency before
taking various actions that entail expenditure of funds

Internal controls are the main instruments for assuring that
government entities are capable of self management
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Internal Control is a Key
to Managing for Results - 2

An entity is capable of self management when auditors find
few material weaknesses in internal control. A material
weakness is a practice or procedure that exposes the entity
to substantial risk or loss

In most advanced countries, auditors no longer audit specific
transactions; instead they audit the internal control system,
and “test” the system by reviewing a sample of transactions

The quality of internal control may be the most important
guide in determining whether an agency can be prudently
entrusted with broad discretion in running operations
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Using Performance Information to
Improve Public Services
Activity
Purpose
Performance Measurement
Provides information on expected performance; used to assess
results
Performance Targets
Notifies managers and citizens of the specific outputs
government entities are expected to produce
Performance Reports
Compares actual and targeted performance, and analyzes
significant variances
Performance Audits
Independent assessment of the reliability and relevance of
performance reports
Performance Benchmarks
Provides basis for comparing performance to results achieved by
most efficient producers
Performance Contracts
Agreement between government and internal or external
producers on cost and outputs
Performance Pay
Links all or a portion of managers’ pay to results
Performance Budgeting
Allocates resources on the basis of expected performance, with
each increment of resources linked to an increment of output
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Implementing Performance-Based Budgeting (PBB)
to Improve Public Services

PBB allocates funds on the basis of actual or expected results

There is no standard definition of PBB: countries differ significantly in
the way they define and implement it

Many countries define PBB as a system of budgeting that displays the
outputs or services provided by each spending unit

This form of PBB does not require significant changes in budget
practices or in public management

A few countries have PBB systems that link each increment in budget
resources to an increment in output or to changes in outcomes

Implementing this type of PBB does require fundamental changes in
budgeting and management

However, the closer PBB links resources and results, the greater the
likelihood that it focuses on outputs rather than outcomes
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Managerial Conditions for
Performance-Based Budgeting

Old View
Budgeting “drives” management. If the budget is based on
results, managers will drive their organization to improve
performance

Contemporary View
Budgeting is shaped by the managerial culture and context
within which resources are allocated and services provided. If
managerial conditions discourage performance, efforts to base
budgets on results will fail

Implication
To succeed, performance-based budgeting must be part of a
larger effort to restructure public management and to promote
performance-based behavior in government organizations
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Behavioral Conditions for
Performance-Based Budgeting

Old View
Changing the content and classification of information (by measuring
outputs/outcomes and implementing a performance or program structure
in budgeting) orients budgeting and management to a performance basis

Contemporary View
It is necessary to change the incentives/behavior of budget-makers and
spenders. If these are not changed, adding information on outputs and
results will not significantly change budget allocations

Two Approaches to Change Incentives/Behavior
Managerialism: Shift budgeting and management from control and
compliance to performance and results by enabling managers to use
judgment and flexibility within fixed budget constraints
Market: Establish internal markets within government to force managers
to efficiently use resources and accomplish preset objectives
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Measuring Outputs and Outcomes

Producing results is dependent on reliable and timely information on the
volume and cost of the outputs or outcomes resulting from public
expenditure

Output and outcome measures depend on different sources and types of
information

Outputs depend on information that is internal to the spending entity: a
well-run organization routinely compiles output-information in the course
of operating its programs

Outcomes depend on information that is wholly or partly external to the
spending entity. To obtain information on outcomes, an organization must
measure what is happening outside its boundaries

Organizations have strong control of outputs they produce: They
generally have weak control of the outcomes that result from their
activities
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The Human Factor in Delivering Public Service

The performance of government depends on the
performance of public employees which depends on
recognizing that they serve the public

The public service ethic tends to be weak when public
employees are low-paid, get their posts through political
connections, and regard their job as a right rather than an
obligation

A weak public service ethic opens the door to corruption,
“ghost workers” who often are absent (except on paydays),
indifference to the quality of services, uncaring treatment of
recipients, and other deficiencies that retard performance
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The Human Factor in Delivering Public Service, continued

Instruments of modern public management, such as
performance measurement, performance pay, contracts and
outsourcing, do not compensate for a weak service ethic

Motivating public employees who deal directly with the public
(such as teachers, health professionals and tax officials) may
be exceedingly difficult, but is essential to improving public
service

Enclaves (such as for taxes and customs) have been used in
some countries to boost morale and performance but their
long-term impact is questionable
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Accountability for Results

Performance-based management and budgeting are based on the
principle that managers should be accountable for the results they
produce – the volume and quality of services, the efficiency with which
they are provided, and other dimensions of performance; as well as the
impact on social and economic conditions

This expanded concept of accountability is often accompanied by
administrative reforms that give managers greater discretion in managing
their agencies and shift the focus of budgeting from inputs to outputs and
outcomes

Governments generally have made greater progress in eliminating
administrative controls than in holding managers accountable for results

One widely used method to strengthen accountability is to specify
performance targets in advance, and to compare results against these
targets. Another method is to give public employees bonuses for superior
performance
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Accountability for Results, continued

Targets work best when they are realistic but challenging, provide
for continuing improvement in performance, are transparent, and
results are measured against them

Performance pay schemes rarely are effective when the bonuses
are granted for individual performance; but more effective when
group performance is rewarded

Some governments employ senior managers under term contracts
that specify performance targets and expectations

In a few countries, auditors have assumed responsibility for
reviewing statements of results issued by government agencies.
But the principles for auditing results have not been standardized
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Accountability for Costs

Costs are a measure of resources used and liabilities
incurred, in contrast to expenditures which measure
payments

The accrual basis account for costs, the cash basis accounts
for payments

Holding managers accountable for costs is a key feature of
modern management systems

Accountability for costs often is impaired by the
failure/inability of government to allocate various costs to the
activities that incur them
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Accountability for Costs, continued

In many countries spending units are not charged for the
pensions of civil servants or for use of IT systems

Simple allocation schemes, such as pro-rating building
maintenance costs on the basis of the proportion of space
occupied, provides a fuller account of resources used in
government

Few governments have cost accounting systems that enable
them to compute the unit costs of services. This inadequacy
impedes governments from linking resources and results
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Cash Versus Accrual Accounting
Expenditure and Payment

In cash accounting, expenditure is recorded when payment is
made: in accrual accounting, it is recorded when liability in incurred

Many countries report finances on the accrual basis, but most still
use the cash basis for budgeting

The accrual basis provides a more accurate account of financial
condition, especially in countries that have significant arrears
(unpaid bills) or long-term obligations for pensions and other
benefits

The accrual basis may also provide stronger incentives for
managers to control the costs they incur, for example, the cost of
using government-provided offices
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Cash Versus Accrual Accounting, continued
Expenditure and Payment, continued

The accrual basis facilitates full costing of government services
and operations by charging managers for payments made in a
later fiscal period or by other administrative units

However, a country can reliably adopt the accrual basis only when
it has a sound cash accounting system

“Cashbox” budgeting (the government pays bills based on the
amount of cash on hand) is common in countries with
fragile/volatile economies. It is not efficient, but enables the
government to finance activities from one fiscal period or month to
the next
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