PERFORMANCE

BASED BUDGETING

IN LATIN AMERICA

Mario F. Sanginés

Inter-American Development Bank

Winter Conference

International Consortium on Government Financial Management

Washington DC, 2 December 2009

WHAT IS PERFORMANCE-BASED

BUDGETING?

Budgeting system and processes capable of including considerations on performance to the decision-making process

PERFORMANCE is not understood only as the final impact of programs, but also contributions all along the public value engineering chain

PERFORMANCE-BASED budgeting does not mean routinely determining resource allocations; suffice it to have a budgeting discussion which includes performance information

COMPONENTS OF PERFORMANCE-

BUDGETING

1. performance information

– Precondition for PBB

– Organized into monitoring and assessment

2. Use in the budgetary process

– Budgetary process as decision-making process

– Decisions informed according to available information

– Key stages: planning, formulation, execution

3. Incentives to managers

– Management is done by institutions

– Budget as repetitive game, generates incentives, learning

4. Assigning duties to managers

– Budget as financial restriction and operational constraint

– Key areas: cash flow, redeployments, transfers

– Accountability and trust

Some good reasons:

• To bring the budget in line with strategic planning, to harmonize the short-term with the mid-term

• To increase ? the and focus of public expenditure

• To facilitate accountability to society for performance

• To improve the quality of public sector services• To be MORE EFFICIENT

WHY IMPLEMENT PBB?

4

Source: Perry Guillermo, Arias Omar, et al. Poverty Reduction and Growth: Virtuous and Vicious

Circles, p. 31 of Spanish version. World Bank, 2006

NEEDS VS RESOURCES

Total tax revenue over per capita income

Total tax revenue (%of GDP)

LAC Selected countries

GDP per capita log

United States

Italy France

Spain

Dominican Republic

Brazil

Índice de Desarrollo Humano y Gasto Público

como % del PIB (salud y educación)

Fuente: Elaboración propia en base a los datos del Informe de Desarrollo

Humano, 2005, PNUD

Gasto Público como % del PIB -salud y educación-

181614121086420

Índi

ce d

e D

esar

rollo

Hum

ano

(200

4)

1.00

.90

.80

.70

.60

.50

.40

América Latina

PIB per cápita >

a 23413 US PPP

PIB per cápita <

a 23413 US PPP

Total países

seleccionados

R² = 0.3784

RESOURCES VS PERFORMANCE

Human Development Index and Public Expenditure

as % of GDP (health and education)

Public Expenditure as % of GDP -health and education-

Source: Own compilation based on data from the Human Development Report, 2005, UNDP

Hu

man

Develo

pm

ent In

dex (2

00

4)

Latin America

GDP per capita >

GDP per capita <

Total selected countries

Some bad reasons:

• To achieve tax savings in the short-term

• To increase control on expenditure

• Just because an international body suggests it

• Because it is fashionable

7

WHY IMPLEMENT PBB?

Who in the country are interested in promoting PBB and what motivates them?

8

Stakeholder Motivation

Finance Ministry efficiency, accountability, macro

management

Ministerio de Economía investment-expenditure alignment, value

engineering

Ministry of Planning plan-budget link

Presidency/Prime Minister following up sector, institutional or

political commitments

Line Ministries improved internal management, sectoral

monitoring

Congress accountability of the executive

General Controller “value-for-money”

Society/NGOs transparency, social control

Budget Director efficiency, macro management

STAKEHOLDERS IN PBB

9

Influenced by

performance

China

Bolivia

Thailand

MexicoGermany

United

States

Colombia

Peru

Australia

South

Africa

Chile

Korea

Sweden

Uruguay

New

Zealand

Norway

Great

Britain

Brasil

Canada Holland

HOW MUCH CAN

PERFORMANCE INFLUENCE

THE BUDGET?

EMERGENCE OF PBB IN DEVELOPED

COUNTRIES

Linked to New Public Management:– Delegating powers to managers

– Citizens as users, customers

– Separation of executive roles

– Monitoring management and accountability

PBB may be considered part of a wider performance-oriented management current

PBB is designed as a necessary piece for completing the autonomy-accountability-resource allocation chain

LESSONS LEARNT IN DEVELOPED

COUNTRIES

PBB has developed its own tools and intervened in basic planning processes, budgeting and execution

PBB involves linking to decision-making

There is no single PBB model, specific models tend to adapt to the institutionality and organizational culture of each country

Implementing PBB implies changes to organizational behavior and culture

In all cases, PBB has required an extensive implementation process

PBB IN LATIN AMERICA

Moved by a search for greater efficiency in allocating and using limited public resources

Structured processes, incorporated into legislation (changes to financial management, laws on fiscal responsibility)

Practical experience concentrated in generating indexes

Has not generally been backed by adjustments to staff and roles, changes to management practice

Promoted by international bodies, it is associated with “development effectiveness”, facilitated by technical developments in information systems

Development still embryonic, little evidence of results; parallel development of monitoring and assessment linked to planning

REFORMING BUDGET PROCESSES IN

LATIN AMERICA

PUBLIC MANAGEMENT INDEX BY PERFORMANCE IN

LATIN AMERICA

Source: PRODEV

2.3

1.5

2.6

2.0

1.7

0

1

2

3

4

5

Gestión Financiera, Auditoría y

Adquisiciones

Financial Management,

Audit and

Acquisitions

Program and Project

Management

Strategic Planning

CONTRASTING USES OF

performance information

CENTRAL

LEVEL

MINISTRIES

SERVICES

DEVELOPED

COUNTRIESLATIN

AMERICA

Taking responsibility

Negotiation,

agreements

Avoiding

responsibility

Audit, penalti

es

MistrustPerformance

TOWARDS A PBB CONCEPT THAT IS

RELEVANT FOR LATIN AMERICA

1. performance information– The significance of programs and investments makes it

necessary to balance the importance of indicators and assessments in structuring a SME

– The existence of significant budgetary rigidities and the weight of expenses established by permanent legislation makes it necessary for SME to extend to policies, tax coverage, tax expenditures

– Distinguish between strategic and management indicators

– Diversify assessment methods to ensure timeliness and relevance

2. Incorporating performance information to the budgetary process

– Essential to create space for agent-principal discussion

– May be done in budget by programs or not

– It’s not necessary to seek a direct link between performance and resources, an effective discussion with an outcome is sufficient

– In many countries budget volatility may be a cause of weakness in institutional management. Importance of a good tax management macro

TOWARDS A PBB CONCEPT THAT IS

RELEVANT FOR LATIN AMERICA

3. Incentives to managers

– Economic incentives not just one component (possibly the most complex) of the structure of incentives operating in the public sector. Other forms of motivation must be considered prior to economic incentives, such as recognition

– Public performance information can be a powerful source of incentives in states that are traditionally closed to the citizenry

– Individual economic incentives are complex to design and of complex effectiveness. Group incentives can be more functional to Latin American public institutions

– There is a tendency to assign supervisory roles to SMEs. A constructive approach must be given priority and be used to generate trust

TOWARDS A PBB CONCEPT THAT IS

RELEVANT FOR LATIN AMERICA

4. Flexible management

– It is hard to demand performance if managers’ hands are tied by

excessive administrative demands

– The need to build trust suggests replacing broad power-

assigning policies with selective mechanisms, in which flexibility

forms a part of recognition for good management

– A large portion of controls comes from decisions taken by the

legislature. The latter must be incorporated to PBB processes in

the early stages of the system’s development

TOWARDS A PBB CONCEPT THAT IS

RELEVANT FOR LATIN AMERICA

BUDGET BY PROGRAMS

Is this indispensable, desirable, or contrary to PBB?

PBB, as a method for classifying expenses, is very

useful

Nevertheless, applying the full method on every level

can be too demanding

The main thing is to generate space for discussion

for programs identified as priorities, not necessarily

for all

It is possible to have a hybrid model (e.g.: Chile)

2

0

THE PBB CHALLENGE TO ACCOUNTING

Is accounting by accrual necessary for implementing PBB?

• Understanding the difference between accounting by accrual vsbudget by accrual

• Depends on the model, but generally not necessary

• The purchaser-provider model requires a budget by accrual because it requires a precise identification of unit costs (depreciation + annual expenditure + future expenditure)

• Other models do not, as adjustments by performance are done regardless

CONSIDERATIONS ON

IMPLEMENTATION

– Internal consistency and sustainability

– “Big bang” or gradualness

– Importance of investing in spreading

concepts, involving players

– Need for flexibility, capacity for

feedback, persistence

– Get ready for a long voyage