1. PERFORMANCE - BASEDBUDGETINGBy: Sumayya NaseemOptometrist (PICO), C.O.T & C.O.A (JCAHPO U.S.A), MMSPH Student (Abasyn University)

2. Contents of the Presentation Definition of Budget Definition of Budgeting Importance of Budgeting An Overview about types of Budgeting Performance based budgeting: MFRs Definition The basics of PBB Performance Information Fundamentals Performance Measures and the Budget Evaluation and performance budgeting Role of Evaluation Advantages & Disadvantages of PBB References 3. Budget A budget (from old French bougette, purse) is a financial planand a list of all planned expenses and revenues. It is a plan forsaving, borrowing and spending. A budget can be dened as a tool used to relate planned resourceconsumption to a period of time (Mellett et al. 1993). A "budget" is a plan for the accomplishment of programs relatedto objectives and goals within a definite time period, including anestimate of resources required, together with an estimateof resources available, usually compared with one or more pastperiods and showing future requirementsThis denition highlights the three main features of a budget: It is a plan that is developed before an event has occurred;It can include a broad range of resources not just money; It relates to a specific period of time. 4. Budgeting Budgeting is the systemic way to allocateresources, it answers Who gets What question. Budgeting is making sure that youre spending lessthan youre bringing in and planning for both theshort- and long-term. Budgeting is an important component of financialsuccess. Its not difficult to implement, and its notjust for people with limited funds. Budgetingmakes it easier for peoplewith incomes and expenses of all sizes to makeconscious decisions about how theyd prefer toallocate their money 5. Importance of Budgeting:Why Should I Budget? A Process of tracking your expenses A safety valve to prevent over expenditures Financial control of inputs Management of ongoing activities Planning and setting priorities Accountability Ensures that the finances are spent for true purpose of spending.Controlling your financial affairs requires a budget. For manypeople, the word "budget" has a negative connotation. Instead ofthinking of a budget as financial handcuffs, think of it as a meansto achieve financial success. Whether you make thousands of dollars a year or hundreds ofthousands of dollars a year, a budget is the first and mostimportant step you can take towards putting your money to workfor you instead of being controlled by it and forever falling short ofyour financial goals. 6. Importance of Budgeting:Why Should I Budget?(cont) To those of you my Fellows..!! who think you know where yourmoney goes without keeping detailed records, I issue thischallenge: keep track of every cent you spend for one month. Ipromise youll be surprised and perhaps shocked by how muchsome of your "small" expenditures add up to. Budgeting and tracking your expenses gives you a strong sense ofwhere your money goes and can help you reach your financialgoals, whether they are saving for a down payment on ahouse, starting a college fund for your kids, buying a newcar, planning for retirement, paying off the credit cards, or savingfor that trip to Ayubia. 7. Types of Budgeting1. The Traditional Line-Item Budget2. Incremental Budgeting2. Zero Based Budgeting (ZBB)3. Performance based Budgeting (PBB) 8. 1. Line-Item BudgetThe traditional line-item budget, wherein legislators specifyallowable spending on inputs (salaries, supplies, travel) wasfirst developed to guard against the misuse of public funds.Line Item Budgeting is arguably the simplest form ofbudgeting, this approach links the inputs of the system to thesystem. These budgets typically appear in the form ofaccounting documents that express minimal informationregarding purpose within the system. 9. 2. Incremental BudgetingOften used with line-item budget, assumes thatfunding for existing programs will continue atabout the same level as in the past. 10. 3. Zero Based Budgeting (ZBB)Zero-based budgeting, by contrast, assumes the previousyears budget to be quite irrelevant and begins from scratchto identify and cost all of the inputs that will be required toachieve the desired level of activity. Zero-based budgeting is a response to an incrementaldecision making process where the budget of a given fiscalyear (FY) is largely decided upon by the existing budget ofFY-1. In contrast to incrementalism, the allocation of scarceresourcesfundingis determined from a zero-sumaccounting method. 11. 4. Performance Based Budgeting(PBB) Performance budgeting aims to improve the effectivenessand efficiency of public expenditure, by linking the fundingof public sector organizations to the results they deliver.It uses systematic performance information (indicators,evaluations, program costings etc) to make this link. Theimpact of performance budgeting may be felt in improvedprioritization of expenditure, and in improved serviceeffectiveness and/or efficiency. 12. Performance Based Budgeting attempts to solve decisionmaking problems based on a programs ability to convertinputs to outputs and/or use inputs to affect certainoutcomes. Performance may be judged by a certain programs ability tomeet certain objectives that contribute to a more abstractgoal as calculated by that programs ability to use resources(or inputs) efficientlyby linking inputs to outputsand/oreffectivelyby linking inputs to outcomes. A decisionmakingor allocation of scarce resourcesproblem issolved by determining which project maximizes efficiencyand efficacy. Performance budgets hold agencies accountable for whatthey achieve 13. Managing for Results (MFR) Performance budgeting should be viewed in the broadercontext of a set of related managing forresults (MFR)reforms. MFR can be defined as the use of formal performanceinformation to improve public sector efficiency andeffectiveness. Its fundamental starting point is maximumclarity about the outcomes which government is attempting toachieve, and about the relationship of outputs, activities andresources used to those desired outcomes. Good strategic planning and business planning are anessential element of MFR. 14. The Basics of PBB Objectives.. Organizations should develop strategic plansof what they intend to accomplish. These plans shouldcontain objectives based on outcomes that the public values. Performance Measures Based on their strategicplans, organizations should develop specific, systematicmeasures of the outcome that can be used to determine howwell organizations are meeting their objectives. E.g.mortality rates for health programs. Linkage Objectives and performance measures areintegral parts of budgetary process. Appropriations arelinked to organizations results; how well they are meetingtheir objectives as indicated by performance measures. 15. Performance Information Fundamentals Outcomes and outputs play a central role in all modelsof performance budgeting, and it is essential for anydiscussion of performance budgeting that these and relatedconcepts are clearly understood.Performance Concepts: the Results Chain In the results chain framework, outputs are producedusing inputs (resources) via activities and processes, andoutputs generate outcomes for the community. 16. The Results Chain 17. Outputs Outputs are goods or services the products which aministry or other government organization delivers toexternal parties. This usually means services delivered to or for the directbenefit of the community. Examples of outputs include:medical treatments; advice received by farmers fromagricultural extension officers; students taught; and policecriminal investigations. Most government outputs are services. 18. Outcomes Outcomes are the intended impacts of outputs more precisely,the changes brought about by public programs upon individuals,social structures, or the physical environment. Health inspectionsof restaurants are an output, the intended outcome of which is thatfewer diners fall sick. Criminal investigations are a police output,and reduced crime the outcome. Many government services aim to achieve more than one outcome.For example, school education aims to increase the level ofeducation of the population. But it also aims, amongst otherthings, to improve economic performance. Both a higher level ofeducation and a stronger economy are outcomes. Because it is bymeans of the first of these that the second is achieved, a moreeducated population is said to be an intermediate outcome, and astronger economy a higherlevel outcome. The relation between proximate and highlevel outcomes is one oflogical causality (i.e. the proximate outcomes induce the highleveloutcomes). 19. The way in which outputs are produced is conceptualized in theresults chain in exactly the same way as the use of inputs inproduction activities and processes. For example, the treatment which seriously injured personreceives in hospital involves the use of a set of inputs (skilled staff,operating equipment and facilities, medical supplies, electricityetc) and a set of activities including anesthesia, surgery andnursing, as well as supporting activities such as supplies andfacility management. 20. Inputs Inputs, as this example indicates, refer to all inputs, assetsand capabilities which are or may be drawn on in theproduction process to deliver the outputs and outcomesdesired. Although inputs is the conventional results chain term,and therefore will be used here, the term resourcesactually captures better the scope of what is referred to. Thus inputs which contribute to the capability to deliverresults include not only equipment and buildings by, forexample, organizational culture and staff morale. 21. Activities The term activities may seem selfexplanatory, butconfusion between activities and outputs is very common.Some examples can help avoid this confusion: In a hospital, anesthesia and cleaning are activities ratherthan outputs because they are components of the overallservice provided to the patient, rather than the completeservice. The patient cant recover through anesthesia or cleaning inisolation, and it is only via the combination of all thenecessary activities that the complete service (the output) isdelivered. 22. Performance Measures and the Budget There are two basic types of performance information:performance measures and evaluation.. Performance Indicators Performance indicators are quantitative measures which provideinformation on the effectiveness and efficiency of programs andorganizations. An indicator is representative to the degree to whichit succeeds in measuring the dimension of performance which itseeks to measure. Performance indicators should be selected according to the extent towhich they are: Relevant Representative Costeffective Comparable 23. Objectives..Indicators..Targets We also need to be careful not to confuse objectives, indicators andtargets. An objective is a statement of what one is trying to achieve forexample reducing death from HIV/AIDS. By contrast, a performance indicator is quantified (e.g. thepercentage of the population which is HIV/AIDS positive, or thenumber of persons dying annually from HIV/AIDS). A target goes one step further and sets a precise aim to beachieved by a specific date (e.g. reducing the percentage ofHIV/AIDSpositive persons in the population by at least onethirdby 2020). 24. Linking Funding to OutputsChallengesIssues!! The main focus in PB system is the creation of links between thequantity of output (i.e. volume of services provided) and the levelof funding.1. Heterogeneous Outputs: For many outputs produced by government, there is a muchstronger link between funding provided and outputs delivered (ordeliverable) than is the case for outcomes. However, quite a few government services are not standardized.They are, rather, heterogeneous outputs. This means that the levelof service provided to different clients, or in different cases, isdeliberately varied so as to address differences in client conditionsor circumstances. 25. Police criminal investigations are a classic example theamount of effort put in per case, even for the same types ofcase (e.g. murder investigations) varies enormouslydepending on the circumstances of the case. Even in school education, which is quite standardized forthe great majority of students heterogeneity is present whenadditional teaching and care activity is devoted to childrensuffering an intellectual or physical disability. This means that these forms of performance budgeting canonly be applies selectively to the right types of services. 26. 2. Contingency There is one other type of service for which tight links between outputs and funding are problematic. This is contingent capacity outputs, (which are subject to chance) of which a fire department is a good example. The fire department maintains capacity to provide at veryshort notice an output (firefighting) for which the demand ishighly unpredictable. It would be unrealistic to seek to builda very close link between the number of fires attended bythe fire service and the level of funding. Fire services cannot therefore be funded on a peroutputbasis, but must instead be funded in such a way as to delivera certain level of capacity to fight fires. 27. 3. Quality with Quantity There is also the question of potentially linking funding to outputquality. In funding only for output quantity, one creates incentives foragencies to cut costs by reducing quality. Including a qualitycomponent in funding could, in principle, resolve this problem. Inpractice, however, this is not easy, given the limits to our capacityto measure quality and the consequently highly imperfect nature ofmost quality measures. In general, the best hope for linking funding to output quality isthrough some element of performance bonus funding based onquality measures (similar to outcome bonuses) in other words,by adding on to a system in which the main funding is based onoutput quantity a small additional element of qualitybasedfunding. 28. Evaluation and Performance Budgeting Performance budgeting is often represented as being only about the use ofperformance indicators in the budget. This is wrong, because it overlooks thecrucially important role of evaluation.A Definition of Evaluation The systematic and objective assessment of an ongoing or completed project,program or policy, its design, implementation and results. The aim is todetermine the relevance and fulfillment of objectives, development efficiency,effectiveness, impact and sustainability. An evaluation should provideinformation that is credible and useful, enabling the incorporation of lessonslearned into the decision making process of both recipients and donors. Evaluation also refers to the process of determining the worth or significanceof an activity, policy or program. An assessment, as systematic and objectiveas possible, of a planned, ongoing, or completed development intervention.Keith McKay (2007), How to Build M&E Systems to Support BetterGovernment (World Bank Independent Evaluation Group). 29. Role of Evaluation in PBB Identify components of programs which can potentially be cut: this meansprograms which are not costeffective and which cannot readily be madecosteffective through policy design or management changes. Identify savings which can be made by improving the efficiency of servicedelivery.Evaluating Program Effectiveness The evaluation of program effectiveness has a particularly important role toplay in those forms of performance budgeting which focus on the allocation ofresources in the governmentwide budget, of which program budgeting is themost important form. As we have seen, this means in particular that: Decisions about expenditure prioritization where to allocate limitedresources are informed by good information on program effectiveness, Decisions about funding for specific ministries and agencies and inparticular decisions on their requests for additional resources are informedby reliable information on how effectively the ministry or agency has usedfunding it has received in past budget. Evaluation is crucial in this context because performance indicators arefrequently insufficient in isolation to permit judgments on program or agencyeffectiveness. 30. Pros and cons of PBB Limit vs. TargetPBB works with targets and goals. It may set a goal to put computers in 100hospitals, for instance, instead of setting a limit on how much money can bespent on computers. While this has its advantages, it also creates difficulties.For instance, how much money should be spent on computers? What types ofcomputers are best suited for the hospitals in question? A budget with limitshelps answer these questions. A budget with only targets can be too nebulous,leading to inaccurate forecasts and over-expenditure.Measurement IssuesAnother problem with the target system that PBB uses is measurement. Evenif an organized budget can be developed and the project is carried through tocompletion, defining completion can pose problems. Some goals can be vaguee.g.-- improving technology in a district hospital. An organization may haveconflicting views on when that goal has been reached, which makes it difficultto spot an end for the project and a turning point for the budget. 31. Cost AnalysisBecause PBB is so vague, it does not present a clear cost framework fororganizations to follow. In other words, PBB can create a lot of extra workfor analysts. They have to focus on a target, but also perform separate costanalysis to set individual prices on the steps involved. This extra costanalysis is a drain on funds and adds confusion to the budget.Flexibility ProblemsFlexibility is one of the primary advantages of PBB. But it also opens thedoor for broad changes that can make previous cost analyses and budgetsobsolete. PBB places a great deal of strategic power in the hands of publicleaders and programs, but these have a habit of changing. A new directormay be appointed and switch the target to 500 computers in hospitals,which requires a complete reworking of the budget. 32. References: CLEAR Manual Performance Budgeting by Marc Robinson Potter, B. and J. Diamond (1999), Guidelines for Public ExpenditureManagement (Washington: IMF),. SchiavoCampo, S. & D. Tommasi (1999), Managing governmentexpenditure (Manila : Asian Development Bank), obtainable athttp://www.adb.org/documents/manuals/govt_expenditure/ Robinson, M (2007), Performance Budgeting Models and Mechanisms inM. Robinson (ed.) Performance Budgeting: Linking Funding and Results. WikiPedia Investopedia Robinson, M (2007), Informing Performance Budgeting and ResultsInformation, in M. Robinson (ed.) Performance Budgeting: LinkingFunding and Results. HM Treasury et al (2001), Choosing the Right Fabric a Framework forPerformance Information, obtainable athttp://archive.treasury.gov.uk/performance_info/fabric.html. Royal Statistical Society (2003), Performance Indicators: Good, Bad andUgly, obtainable at http://www.rss.org.uk/pdf/PerformanceMonitoringReport.pdf.eHow.com http://www.ehow.com/info_8630771_disadvantages-performancebased-budgeting And Many other websites