Budgeting For Results: Assessing The Potential In A Developing Economy

A. INTRODUCTION

Budgeting in developing countries has been a focus of much attention for many decades and has also been an integral component of public administration initiatives around the world. Public administration reform initiatives in both developed and developing countries have traditionally been strongly focussed on financial management aspects with a strong bias towards budgeting and budgeting reform. Budgeting in developing countries, as so rightly pointed out by Aaron Wildavsky, is strongly characterized by issues of resources uncertainty, dealing with resource constraints, strong competition for limited resources, and the politics associated with budgeting.

In contemporary times, budgeting has continued to retain a major role in the planning and deliberations of all governments around the world. This phenomenon is not unique to the developing countries as can be seen from the continuous focus and deliberations on budgeting and financial management in even countries like the United States. As recently as 1994, the United States was still legislating for improved budgeting among its federal agencies as can be seen from the Government Results & Performance Act, 1993 or GPRA as it is popularly known.

The trend is the same with all international funding bodies and leading financial institutions. All of them have at some point or another are seriously reviewed their own budgeting philosophy, approaches, and methodologies. Practices towards further fine-tuning it to ensure value-for-money and resource optimization.

Developing countries too have not been left behind in this global wave of budget reform initiatives. Developing countries all over the world, whether they are in Eastern Europe, Africa, Asia, or the Americas are all increasingly concerned with the need to review and revamp their budgeting system. Several countries have already carried out extensive budget reforms over the last decade or so while more such countries are now increasingly seeking assistance to improve their own budgeting policies and practices.

B. OVERVIEW OF BUDGETING IN DEVELOPING COUNTRIES

1. Developing country budgeting practices

Budgeting in developing countries has been strongly characterized by the lack of systematic planning over any fixed time frames. This is due mostly to their lack of resources and more especially due to the uncertainties that surround the availability of such resources. There are several problems associated with budgeting in developing countries. While some of them are unique to specific countries, most developing countries may tend to portray such problems in one way or another. These may be classified very broadly under the following:

Lack of adequate resources;
Lack of resources certainty;
Lack of a strategic long-term plan;
Poor or inadequate institutional infrastructure;
Inadequate technical knowledge and skills on budgeting approaches and techniques;
Lack of sufficient human resource capacity
Lack of appropriate modern management techniques and technology;
Lack of political stability;
Lack of a complementary economic and investment climate
Poorly defined resource base;
Inability to strategically integrate the full potential of existing resources.

The above represent the more common reasons affecting the budgeting practices in developing countries. Taken together, the above reasons have traditionally given rise to budgeting practices that may not be the most efficient or effective in resources optimization and program results. It is obvious that the above reasons have collectively or in some combination with one another given rise to the unique budgeting practices in most developing countries.

The more prominent of these budgeting practices and their features may be identified as follows:

Incremental budgeting
Month to month budgets
Yearly budgets but monthly disbursements
Budget padding by agencies
Programs and activities continue almost in perpetuity
Financial compliance focus
Input driven budgeting
Line-item controls or objects-of-expenditure budget control
Ad-hoc budget requests
Ad-hoc supplementary budgets
Excessive spending at year end
Conservative expenditures during beginning of the year
Budget sessions resemble a bargaining table
Unrealistic and unreliable budget targets
Revenue driven expenditures
Cash-driven expenditures

Though the list above is extensive, this does not mean that all developing countries suffer from all of these problems or issues. In most developing countries, it may be a number of the above problems in various combinations.

2. Resource Constraints in Budgeting

Unlike developed countries, most developing countries face severe resource constraints and these tend to directly dictate the budgeting practices. It is also extremely difficult for the governments in these countries to carry out any form of strategic planning. It is equally difficult for these governments to carry out strategic planning spanning anything more than a few months at best.

In many developing countries, the government is not even able to confidently predict their revenue flows or the consistency of any available revenue sources. It thus makes their public expenditures very current and strictly based on available resources in the short term. However, this does not mean that they do not plan their annual budgets – it just means that very often the approved annual budgets are not followed strictly. The development budgets of these countries are particularly prone to the vagaries of their resources though this is not something that they can well afford. However, such resources constraints do not necessarily mean that developing countries cannot carry out strategic multi -year planning or budgeting as discussed later.

3. Trade-offs in Working with Limited Resources

The experiences of many developing countries show that their governments are faced with hard choices between development-oriented and productive public expenditures to having to manage their limited resources to merely meet massive recurrent expenditures. They very often have to make various trade-offs to compensate for the lack of resources or the uncertainties surrounding any available revenue sources.

The traditional budgeting practices in these countries using incremental budgeting often leads to bloated bureaucracies over the years. The recurrent expenditures in these countries often make up about 70-90 percent of the total national budget. Out of this, about 60-80 percent of the operating budgets can be swallowed up by personnel costs for the often-bloated bureaucracies. Even in the emerging economies, the above phenomenon still prevails, though to a lesser extent.

Developing countries, faced with very limited resources or uncertain revenue sources and flows, very often resort to incrementalism in both their operating and development budgets. Though their annual budgets may reflect a twelve-month budget plan for both operating and development budgets, these budget plans are very often not followed. In some cases, the budget plans are changed according to the resource situation. In the case of development or capital expenditures, resource positions will decide whether planned projects will be initiated or whether ongoing projects will be continued. It is common to find development projects being put on hold for months and years due to the lack of funds. These are due to trade-offs that have to be made due to numerous competing priorities and the critical problem of uncertain revenue flows or shortfalls.

4. The Positive Side to Developing Country Budgeting

Despite all the negative aspects of budgeting under resource constraints in developing countries, there may yet be some positive perspectives to developing country budgeting. The budgeting system and practices in developing countries still suffer from the resource problems and characteristics outlined earlier.

However, in an increasingly globalized world, there is increasing awareness among most developing countries of the need for improved public expenditure management and resources management. Surprisingly, there are numerous developing countries that have new found a new sense of urgency and have seriously embarked on an active and often proactive program of resource consolidation, resource optimization, and public expenditure management. Though the improvements in their resource position may not have improved that much, there is a growing awareness and urgency among the governments of these countries for the need to review and revamp their resources management.

It would be unfair to start comparing developing countries’ budgeting with that of developed countries, particularly in view of their differing resources position. However, it is becoming quite apparent that many developing countries, and especially the new emerging economies, have now made a conscious effort to review their budgeting policies and premises. While these countries are still trying to improve their resources and certainties of their revenue flows, they are also quite positively reviewing their public expenditure management policies and practices.

There is a growing sense among these developing countries that improved budgeting does not merely mean increased revenues or resources alone. There is a reciprocal benefit to budgeting if these countries can harness and control their available resources in a more productive and structured and systematic manner.

This paradigm shift in budgetary thinking could perhaps be attributed to their growing awareness of the potential consequences of the globalization phenomenon, the advent of the information and knowledge economy, and the growing popularity of the new public management movement in many countries.

5. The New Public Management Movement

The New Public Management (NPM) movement of the 1980s has brought about several positive changes to many developing countries. Though the impact of the NPM is not the same in all countries, there has been varying impact in many developing countries over the last decade.

There are several examples of developing or emerging economies, which have made dramatic changes to their public management, including their budgeting policies and systems. These changes are not purely as a result of positive changes to their resource positions or revenue flows, though that too may have contributed somewhat.

The NPM movement has brought with it greater awareness among governments of the need for greater accountability in the public sector, along with its many connotations. Along with the improved concerns on public sector accountability in these countries, there has also been a reciprocal increase in awareness and consciousness of the need to review and revamp the budgeting policies and systems. This is quite apparent in several countries in Asia, Africa, and the Caribbean.

These countries have carried out various initiatives under the NPM as well as with their traditional budgeting systems. Many of them have introduced numerous management improvement reforms to their public sector management, focused on improving and enhancing the effectiveness, efficiency, and appropriateness of their public services. These initiatives are complementary to their overall effort to optimize their scarce resources and to obtain maximum value-for-money from their limited resources. In many ways, these initiatives serve as a sensible and productive strategy to the more traditional strategy of trying to improve revenues and resources alone while ignoring the public expenditure strategies.

6. Budgeting for Results in a Developing Economy

By definition at the initial stages of development the role of the Public Sector in a developing economy is critical. The need for the Public Sector to take the lead in providing the national economic strategic vision and managing the economy is self -evident. Given the financial, human and institutional resource constraints, it is only logical that budgeting for results is of critical importance if the country is to achieve the economic developmental goals.

Budgeting for results is key to ensuring that Public Sector agencies are focused on delivering the goods and services to their respective clientele within the resources allocated. This is important to ensure not only efficiency and effectiveness but also accountability.

Furthermore the government’s Results-based budgeting is vital in providing the right signals to the private sector in terms of priority sectors of the economy that need to be developed. The function of the national budget as a strategic planning tool in a developing economy cannot be over-emphasized.

B. PRACTICAL PUBLIC EXPENDITURE MANAGEMENT AND THE RESULTS-BASED BUDGETING SYSTEM (RBB)

1. The RBB System and Its Utility For P.E.M. With Limited Resources

The RBB System is eminently suited for public expenditure management (PEM) with limited resources, as it necessitates a focused and disciplined approach to overall fiscal management, allocation of scarce resources to strategic developmental priorities and the efficient and effective use of public resources. Importantly, the RBB system is viewed as a prerequisite to ensure the institutionalization of a public accountability system so vital in a developing economy.

2. Why RBB?

Malaysia’s major effort at budget reform took place in 1969 with the introduction of the Program Performance Budgeting System (PPBS) in 1969. The Malaysian version of the PPBS is a variant of the Planning, Programming, and Budgeting System that evolved in the United States earlier.

The Malaysian PPBS budget reform initiative came about due to a combination of factors. The most important of these was the general dissatisfaction of the political leadership with the bureaucracy’s speed and performance in managing social and economic development programs in the post-independence years. The Government felt that the bureaucracy did not have the capacity to meet the demands of the development program of the country. The PPBS in Malaysia was somewhat similar to that of the PPBS in the US in that it focussed on performance and also on its measurement. However, it also gave special emphasis on the identification of broad programs and activities and focussed the measurement of performance on these programs.

The political leadership was also aware of the need to strengthen other aspects of development administration. These were related to several aspects of institutional and administrative capacity and human resource capabilities were deemed critical for ensuring not only the success of the budgetary system but also the development efforts of the government. Several reform measures were introduced to effect institution building and training for development.

3. RBB in the Malaysian Context

The budget reform in Malaysia was the result of the government’s desire to achieve greater accountability and financial discipline among the various agencies. It was also meant to bring about a greater degree of certainty and discipline to the budget process both at the macro level as well as the operational levels. Being based on the objective of increasing public sector accountability and improved performance, the budget system was indirectly linked with a number of other management reform efforts. These include, among others, improved financial compliance, quality management, improved productivity, improved efficiency in government operations, and improved management of national development efforts.

The RBB system in Malaysia was first introduced in 1989 and is popularly known as the Modified Budgeting System (MBS). This RBB system was based on two principles, namely:

Let Managers Manage: Managers who are held accountable for producing mandated outputs are given as much flexibility/authority over resources as practical; and
Accountability for Flexibility: Flexibility and authority were to be matched with improved accountability.

The MBS emphasizes the relationship between inputs, outputs, and the impact of a program or activity. Amongst the elements that are contained in the new system is the use of performance indicators in terms of quality, quantity, timeliness and cost per unit output. These were directly linked to clients’ analysis and detailed needs assessments which mandated the agency to produce specific pre-determined results, which were in turn linked to the overall program performance and national development efforts on a macro level.

Productivity measurement was initially launched in the public service in 1986 and it focussed on efforts to enhance performance in the public sector. These efforts were later complemented through the implementation of the Total Quality Management (TQM) initiatives, which required the identification of mission, goals, objectives and quality services, among others. The use of goals and objectives under the TQM effort should be closely linked to similar efforts under the MBS. However, these aspects were never really developed by the controlling agencies or the operating agencies.

In Malaysia, the MBS could perhaps be said to have brought about some degree of linkage between the reforms and policies. The enhanced degree of management autonomy and budgetary flexibility given to the program managers has helped bring them into the forefront of policy-making, often times forcing senior management into strategic planning and making critical policy decisions. It is obvious too that senior management in operating agencies now have greater control and accountability for their respective agencies. They are now compelled into more strategic decision-making and to review and recommend policy modifications to ensure that their agencies are able to produce mandated results. As a matter of fact, the Treasury actually encourages and requires all top management to get involved directly and intimately with critical policymaking in their agencies. These policies are critical to the mission and goals of the respective agencies and are directly linked to the budgets and resources management in these agencies.

The overall purpose of the budgetary reforms under the RBB systems were to:

Bring about greater certainty to the budgeting process;
Improve the interface between the budgeting process and the overall national development efforts through improved allocation of scarce resources;
Bring about increased financial discipline among both the controlling agencies as well as the operating agencies in terms of fiscal control and accountability;
Reduce the incidence of supplementary budgets and ad-hoc budgetary expenditures and to improve strategic planning;
Bring about greater aggregate control for both central and operating agencies;
Bring about greater linkages between the policy framework and resource use in operating agencies;
Bring about a culture of performance measurement among all agencies;
Assist policy makers at all levels to make better-informed decisions.

Given the strong development agenda of the government and the complex strategies adopted to make that happen, there was a strong commitment towards the New Public Management agenda. The Vision 2020 was one critical means of helping the nation achieve the status of a fully industrialized country by the year 2020. The budgeting system is seen as one of the necessary reforms to assist the country in reaching its Vision 2020.

In terms of fiscal discipline, there has been considerable improvement since the introduction of the budget reforms. In the pre budget reform years, there was still some measure of fiscal discipline through the tight detailed control by Treasury and other central controlling agencies. However, such controls were quite ad-hoc in nature, too restrictive, and often times without proper basis, even at the macro level to some extent. However, since the implementation of the budget reforms, there has been greater and more informed fiscal discipline both at the macro level and particularly at the operational levels.

There are a number of ongoing efforts to minimize budgetary variances and to maximize fiscal discipline. These are through:

Introduction of strategic planning and management requirements;
Increasing emphasis and requirements on budgeting for pre-determined results;
The minimization of ad-hoc requests for funds;
Prioritization of new policies according to importance and inevitability;
Close linkage of all new policies with prevailing policies;
Minimization of “one-offs” and their linkage with ongoing policies;
Caps on expenditures through the use of annual expenditure targets;
Strict enforcement of the balanced budget and no-supplementary policy ruling;
Reduction in entitlements and charged expenditures;
Greater emphasis on exceptions reporting (for planned key result areas;
Greater emphasis on costing all government activities and integration into resource efficiency management;
Increased flexibility for resources management and decision-making at operating agency level with commensurate increase in accountability;
Increased flexibility on human resources factors.

What is more important perhaps, is that the government is fully committed to the reforms and towards making them work. They are seen as part of the ongoing national development and reform agenda rather than just a management fad or externally sanctioned reform initiative.

4. Lessons Learnt from the Malaysian RBB System

Malaysia has been at the forefront of public administration (PA) reform among developing countries since the 1960s. This includes reform efforts in public sector financial management with particular emphasis on public sector budgeting and expenditure management. These reform efforts can be traced back to the post-Independence years right through to the present period. The Malaysian examples of PA reform and Budget Reform (BR) could be useful lessons for other developing countries, in their efforts to improve their administrative and management machinery, to build capacity, and to become developed nations.

The reform initiatives and efforts have gone through many phases and have been closely linked with the political leadership and development phases of the country. Nevertheless, the reform initiatives and efforts have been consistently improving and have seen tremendous changes in scope, depth, and coverage since the early 1980s. This dramatic change can be attributed to the foresight, innovativeness, dynamism, and commitment shown by the top political and administrative leadership of the country.

It must be stressed that the reform agenda and initiatives are closely linked with the country’s efforts at nation building and initiatives striving towards global competitiveness. In the case of Malaysia, the reform and development efforts were driven by a clear vision of becoming a fully developed country by the year 2020. This is the popularly referred to Vision 2020.

The nation realized the significance and critical role and contribution of the bureaucracy towards ensuring that the country reached its immediate and long-term aspirations. Public sector reform was seen as a key institutional ingredient to enable economic and social development.

Along with these initiatives came the realization that it was also critical to review and revamp the public finance aspects of the country. The administration realized the importance of ensuring that all aspects of public finance, from macro fiscal policy to micro financial compliance issues, were streamlined and geared towards effectively supporting the development and capacity-building efforts of the government. Instrumental to these initiatives was the public budgeting system and all associated functions such as revenue and expenditure management.

The political leadership in Malaysia drew up several initiatives to help the administrative reform efforts, particularly during the early 1980s. These were more focussed on the administrative aspects as opposed to budget reform per se. However, the government felt that the various administrative and management reforms were both necessary and complementary to the budget reforms. What was lacking perhaps, was a well thought out and structured integrated reform framework to guide operational personnel in the line agencies. However, the government rationalized the series of management reforms as necessary for the development efforts of the country. It regarded the budgetary reforms as an integral part of the overall reform effort to build the capacity and capabilities of the government and bureaucracy to cope with and manage the prescribed economic and related development.

As a strategic reform agenda, it is certainly critical for a developing country to ensure that there is a clear and well thought-out path of development and associated changes in the country. Management and other reform initiatives may prove to be a failure, less than successful, or at best very expensive, if a country ignores the need to ensure the pre-requisite of a proper base and framework to build on.

For example, in the case of budgetary reform, it would be pointless to implement an accrual-based budgeting system without a complementary accounting or good information system. Similarly, it would be difficult to jump into implementing an RBB-type of budgeting system if there isn’t a culture of performance measurement and practice of data capturing in place. Even if such things are in place, it is also important to ensure that there are other appropriate complementary factors that need to be in place, such as human resources, institutional capacities, and even appropriate infra-structural systems.

Other programs introduced into the public sector during the 1980s should have served to further reinforce the government’s efforts in institutionalizing the culture of accountability and responsibility for results. These should have made the budget reforms in the late 1980s a much easier task and produce good performance results.

However, the linkages were never really clearly spelt out by the controlling agencies nor fully understood by the implementing agencies. This in many ways was a major stumbling block to Malaysia achieving a far more impressive budget reform impact. The lack of intentional and well thought out strategic linkages between the budget reform and the other ongoing reforms could be said to have caused a much slower pace in the development, appreciation, and effectiveness of the budget reforms. This inevitably also led program managers to being either totally ignorant or where they were conscious about it, not bothered to take the extra effort to view and implement the budget reform as a strategic component of the overall management reform agenda.

In the absence of an integrated approach and strategic links between the various reform efforts, the success achieved thus far has been somewhat limited. Over the last ten years, there have been good results in terms of financial discipline in the operating agencies, enhanced consciousness on performance measurement and more streamlined budgeting. However, there is still a considerable gap in terms of making the budget more effective and efficient at both the macro and operational levels. There is still a lot of wastage of effort, redundancy of activities, and slack in terms of program performance within the agencies. At the central level, the Treasury is still unable to make full use of the budget and program performance information and to feed that into effectively into the policy decision-making process.

When the Treasury initiated the Modified Budgeting System, it took full recognition of its earlier experiences in implementing the PPBS in 1969 without proper experimentation and sufficient trial periods. Due to the urgency of the exercise, the Treasury rushed through the implementation of the PPBS without assessing and evaluating the outcome of the pilot test. This was a lesson well learnt and should be critical pointer for other developing and transitional countries. The experience shows that it is often better to pilot test a new system in a select number of agencies before extending it across the board to all other agencies. However, there are other experiences in countries like New Zealand certainly and Singapore where such reforms were carried out within a short span of time. These experiences hold important lessons for the future of budgetary reform for other countries embarking on such initiatives.

In Malaysia, the implementation strategy for budget reform was to introduce and implement the MBS on its own without any direct cross-linkage with other management reform efforts. However, as mentioned earlier, the over-riding concerns on public sector accountability, the often-cited need for increased financial discipline, and the desire for higher productivity could be cited as being indirectly linked with the budget reform effort.

The strategies adopted by the Malaysian Government must be said to be deliberate choices and actions. The experience and problems faced with implementing the earlier budget reforms as well as the extensive experience from their varied and intensive development efforts over the years since Independence certainly were very useful in guiding these reforms.

As mentioned above, much of the success of the budget reforms can be attributed to the staggered and pilot approach taken by the country. Without such an approach, it would have been almost impossible for Malaysia to implement these reforms successfully. As a matter of fact, if not for the well-planned and steady implementation program, the success of the budget reform in Malaysia would have been in jeopardy. As it was, there were still a number of implementation and policy issues directly linked with the reforms that have yet to be resolved. These include the integration of the personnel factor, the use of rewards and sanction systems, the limited management flexibility, and the intensive and integrated use of critical performance indicators, performance measurement, and program performance evaluation.

From the above, it would be prudent to note the following points in attempting budget (or other) reforms in developing countries:

Availability and accessibility to proven successful reform models from other countries with a similar background;
Availability of specialized technical advice to adopt and adapt reform models locally;
Readiness of the leadership, bureaucracy, and all beneficiaries to implement changes;
Size, scope, depth, and coverage of the proposed budget reforms in the country concerned;
Developmental level and stage of the country in question, including the level of management and institutional development/maturity;
Ability and capacity of local institutions, systems, and value systems to accept, adopt, adapt, and consciously implement the reforms;
Ability of the country’s political and administrative leadership to draw up strategic and integrated reform action plans. These action plans would determine the sequence, timing, overlaps, and complementary actions that would be needed to ensure faster implementation of the reforms but with less hiccups;
Commitment and ability of local leadership and institutions to sustain the reform effort over a period of time; and
Availability of relevant resources to implement the reforms over a period of time and to sustain it.

5. Avoiding Common Pitfalls

Linking the budget process closely with policy-making could perhaps rank as one of the most difficult tasks under budget reform initiatives. While it is relatively easy to introduce and implement specific budget reforms and systems, it is extremely difficult to link it to the policy-making process.

Other forms of linkages between policy and budgets also exist. For example, at the very start of the budget process, Treasury provides each Ministry with a specific, numeric target for expenditure (called Expenditure Targets) from the operating budget for existing and new policies. New polices can only qualify for allocation of resources if and only if they have been approved by the Cabinet or by the Ministry of Finance prior to their inclusion in the budget. Submissions for current policy proposals cannot exceed the prescribed Expenditure Target. A separate submission is required for any new proposed major policy change. Amongst the benefits derived from the implementation of the Expenditure Target is the explicit and immediate recognition of the government’s fiscal policy position. Increased financial discipline by Ministries is also achieved by forcing them to decide priorities in terms of their programs and activities and their trade off within an overall budget constraint.

In terms of public policy and budget it is important that the link between program performance assessment, program evaluation, and the policy-making process. This is an area that is only now being seriously reviewed and implemented in Malaysia. Strictly speaking, there should be a direct link between these aspects of the budgetary process and policies. Policies should be linked with program performance assessments so that the policies are consistently relevant, appropriate, need-based, and results-oriented.

At the legislative level close linkage between the budget and resource use and policies needs to be established. The legislators as representatives of the people need to play a key role to ensure that the RBB and performance management systems are implemented. This will ensure that the public accountability system is institutionalized.

D. THE RBB SYSTEM FOR DEVELOPING COUNTRIES

1. Basic Pre-requisites for an RBB System

Implementing an RBB system sounds much more easier than actual implementation. Successful implementation of a RBB system requires careful planning, strategic action planning, and a structured and systematic approach covering various timeframes. Like any other integrated system implementation, the RBB system requires a number of basic prerequisites, which mandate careful planning, scrutiny, and implementation.

The basic prerequisites for the successful implementation of an RBB system can be categorized as follows:

An integrated performance management framework;
Pre-determined and informed accountability for results;
Links between program performance management and the RBB components;
Links between national development plans and priorities and RBB;
Structured and purposive capacity-building and technical assistance; and Leadership and commitment all round.

a. An Integrated Performance Management Framework
An integrated performance management system is the key to the success of any budgetary reform process. The RBB system must be seen and perceived as an integral part of an overall accountability framework. This necessarily involves the Legislature, the Executive and the Public Service arms of government.

In the case of the Malaysian Government, it embarked on a concerted effort to improve the quality and performance of public services in the early 1980s. It introduced Total Quality Management in the late 1980s and early 1990s, transforming the work and performance management culture in the public sector. In 1989, it introduced the Modified Budgeting System as part of the reforms pertaining to performance management. This brought about a major change in public sector performance, both financial and non-financial. The Government complemented the two reforms with a set of management improvement initiatives – the Civil Service Improvement Circulars, or PKPAs. These were introduced in phases from the late 1980s through the mid-1990s. The PKPAs provide basic guidelines for various aspects of civil service performance with a bias towards improving public service quality and management processes.

All these initiatives were part of a range of public sector reforms under the Government’s New Public Management initiative. The New Public Management philosophy was aimed at building a culture of excellence in the Malaysian public sector. It emphasized accountability, improved performance, service quality, and enhanced service delivery.

An integrated performance management system should address all three major types of public sector accountability. Financial accountability – compliance with financial rules and regulations – is often the focus of legislators, program managers, and auditors. Typically, very little attention is given to management accountability and program accountability, which focus on managing for results and ensuring programs produce mandated results respectively. Compounding this neglect is a typical lack of leadership and seriousness by relevant central agencies. This is vital if results-based management is to be institutionalized successfully.

Most countries that attempt to reform their public sectors typically face the above problems. To address these issues, key central agencies such as the Ministry of Finance, need to carry out a number of initiatives:

Provide strategic direction and guidance to operating agencies on how to incorporate all relevant civil service improvement efforts (such as the PKPA guidelines) into an integrated performance management framework;
Strengthen the links between program performance management and the budget process by requiring the line agencies to prepare strategic plans, annual performance plans and annual performance reports, as well as improve performance monitoring and evaluation across government.

In the Malaysian example, each of the PKPAs on its own is an excellent tool for improving performance and all have helped to varying degrees to enhance public sector services and other outputs. Together, they have the potential to enhance the effectiveness of all government programs and activities. However, what is lacking is their strategic integration into a coherent framework of performance management.

The Modified Budgeting System calls for an integrated approach toward program performance management and is well complemented by initiatives such as the introduction of ISO, Total Quality Management, and other related initiatives such as Micro Accounting (costing). However, both central and operating agencies need to look at the PKPA initiatives with a view to developing a comprehensive, integrated performance management system that links budget allocations and expenditures with program outputs, outcomes, and the policy making process.

Any country that wishes to undertake public sector reform and a RBB budgeting system would do well to pay special attention to the need for an integrated performance framework.

b. Pre-determining Accountability for Results

To be effective, performance management must link inputs, processes, outputs, and outcomes in a cohesive manner. Measures of performance management that look at each of these factors in isolation will provide only a narrow picture of performance. For example, we can assess the effectiveness of a process by looking at cost, timeliness, and similar measures. But even if we find that the process is efficient and effective through these measures, it does not necessarily mean that the program itself is effective or that it will achieve the desired outcomes. Nor does assessing outputs by such performance criteria as quantity, ensure either effectiveness or desired outcomes.

Under the Modified Budgeting System in Malaysia, there is a strategic performance management framework in place. All program managers are required to work out a program performance agreement that identifies most of the key factors in ensuring a program’s effectiveness and essentially forms an integrated performance framework. The performance agreement addresses all four key focus areas of a performance management system – inputs, processes, outputs, and outcomes – and links them with other key factors, including goals and objectives, client identification, needs assessment, and an evaluation.

The above is also well complemented with early identification and determination of relevant accountability lines for all program managers. There are at least three major public sector accountability considerations that need to be addressed in any RBB system. These are:

Financial accountability
Management accountability
Program accountability

Agencies and program managers need to identify the above and also determine accountability levels and lines to facilitate the respective parties understand their respective responsibilities and deliverables in implementing a program or activity. It is extremely critical that specific accountability lines and levels be drawn early in the strategic planning stages and operationalised throughout the life of a program or activity. This helps program managers and other players understand clearly their role, responsibilities, and to be more accountable for results under the RBB system.

c. Links between Program Performance Management and the RBB Components

Like many developing countries, Malaysia uses a macro-level indicative planning approach to development and has done so since the 1960s. But the lack of strategic planning at all levels of the public sector in Malaysia means that there is only a tenuous link between development plans and the annual budget and the tendency to see the development plan exercise as distinct and different from the annual budget exercise. The lack of strategic planning also leads to weak linkages between program performance management and budget formulation.

A range of problems could lead to lack of strategic performance planning:

Problems with needs/problem identification and analysis;
gap between agreed-upon objectives and mandated outcomes;
weak links between resource use, outputs and outcomes;
poor linkages between performance measurement and policy making;
neglect of evaluation and its utility for policy making;
high levels of budget transfers; and
frequent supplementary budgets.

Improving the links between program performance management, budget formulation and the development plan through strategic planning will require a concerted effort by all key institutional players – Parliament, the Cabinet, central agencies, and operating agencies. But the initiative, drive, and leadership must come from the Treasury, which as guardian and principal manager of limited public resources is best positioned to strengthen these links.

A first step is to ensure that each agency clearly understands its role in national development.

Based on the national direction as enunciated by the leadership, each agency needs to:

Develop its own medium-term strategic plan containing its long-term goals and objectives that are linked with macro policy initiatives and priorities;
Break down the strategic plan to annual performance plans for all programs with clear needs assessment and performance objectives under the annual performance plan;
Strategize the use of the budget as a tool for realizing the longer-term and annual strategic performance plan.

Also essential in strengthening the links between performance management and the budget process are monitoring, evaluating, and systematic performance reporting.

Much of this is provided for in the Modified Budgeting System, in itself a well-planned performance management system. It strategically examines all important aspects of performance management. It recommends the use of program logic and strategic planning as well as an important performance management tool in the form of the annual performance agreement between agency managers and the Treasury. It also has in place a clearly defined requirement for program evaluation at least once every five years for all programs.

d. Links between national development plans and priorities and RBB

Public sector performance agenda must be grounded in and linked with a country’s national development agenda. This is particularly critical in the context of developing countries. The performance agenda in developing countries revolve around bringing about desired changes in priority areas over the period of the national development plan, which typically involve a five-year time frame.

The budgetary process in a developing country must be mandatorily and directly linked with the national development plan and the priorities spelt out under it. National development plans are critical for developing countries in that they help to provide strategic direction and strategies for the systematic achievement of national priorities.

e. Leadership and Commitment

As in any change agenda, the all encompassing role of leadership and the commitment thereof cannot be over stated. It is imperative that the political and administrative leadership demonstrates their commitment to make any RBB type of budgeting system a success. This needs to be done not just in words but through the identification and implementation of a systematic and structured system in a consistent manner. The presence, visibility, and seriousness of the leadership and management at all levels are of utmost importance in ensuring the success of an integrated and comprehensive system such as the RBB system.

Once the seriousness and commitment of the political and administrative leadership to implement RBB is made clear, visible, and put into practice, then agency heads, program managers and all who are entrusted to implement the system will tend to pay attention and to comply with all the special requirements.

As has been proven in so many countries, the lack of leadership or commitment from the political leadership and top management at all levels has had significant negative impact on the success of the RBB system. Most of all, it has serious implications for the long-term sustainability of such a system.

2.Complementary Reforms

It is important that any budgeting system is closely linked and supported by an appropriate accounting system. Budgeting is very much dependent on the presence and efficacy of a performance information system. It is an accepted fact that budget efficiency and effectiveness will suffer if the accounting system is inappropriate or inadequate to support the intensive and complex decision-making process under budgeting.

But it is also a fact that in many countries, the accounting system and appropriate reforms do not fully complement and support the reforms in the budgetary system. Very few countries have implemented accrual accounting in government and this may be regarded as a setback to improved financial information systems and budgetary decision-making. To further compound this, many countries have yet to even think about accrual budgeting though this may hold the key to many of the budgetary and financial decision-making issues. The above remain a prominent problem in many countries and may likely remain for some time due to various reasons.

In Malaysia, the budget reforms in the earlier years (PPBS in 1969) were not accompanied by appropriate accounting reforms. Though there were several modifications and changes to the accounting processes, the system still remained on a cash basis, except in 1974, when the cash system was changed to a modified cash basis. Under this system, the modified cash basis takes into account a thirteen-month period (January) for the financial year for purposes of paying expenses incurred in the previous fiscal year. Several modifications were made to the prevailing accounting system to further improve it. These included several process improvements such as the Data Control System, Central Integrated System, Subsidiary Ledger System, Departmental Reporting System (by responsibility centers), Cash Management System, User Accounting and Financial System (modular accounts), decentralization of the One-Account System, and the computerization of accounting records and vote books at agencies.

As part of the accounting and financial reform program, the Malaysian government introduced costing in government on a trial basis in 1986. Due to several problems encountered during the initial phase, the costing initiative was shelved for a few years until 1992 when it was implemented in all agencies on a staggered basis under the name of then “Micro Accounting System” or MAS.

The MAS was introduced in stages in the public sector in 1992. At this stage, it was geared to fully complement the RBB system introduced earlier through an output-based costing approach that complemented the RBB system quite well. The MAS provided a new dimension in management accounting for planning and controlling of cost at the departmental level – a focus area for performance measurement under the budget reform. The MAS enabled management to obtain information on the actual cost of producing a particular output with greater ease and accuracy. The information obtained was very useful for purposes of budgeting and program planning, as well as the implementation, control and evaluation of government programs.

Implementation of the new costing system addressed the following:

Cost analysis, such as comparison of planned and actual costs of output;
Cost trends in producing outputs;
More effective allocation of resources;
Cost comparisons with other organizations or private companies that produce similar outputs;
Decision to produce, purchase, or lease a particular product or service; and
The selling price of a product or service.

While emphasizing the importance of providing cost information for output performance measurement under the MBS, the MAS also focuses on the comparative cost involved in producing outputs to help improve resource usage. Through this comparison, cost components that exceed or are below the budgeted amount can be identified and corrective measures taken. This was also expected to help improve outputs decision-making under the MBS.

There is a strong link between the accounting and budgeting functions. Of particular significance here is the accounting and financial information generated by an appropriate accounting system that is supportive of policy decision-making. In this respect, it would be crucial for the accounting system to be structured to suit the needs of the budgetary processes and to fully complement it.

In addition to the micro accounting system, there are several other complementary reforms that help enhance the RBB system. Most of these are in the form of the Civil Service Improvement Circulars (or PKPAs). Most important of these in terms of complementing the RBB system are the following:

Total Quality Management (TQM);
Clients’ Charters
ISO standards in the public sector Service Quality improvements
Productivity improvements
Service Recovery Procedures
Development planning
Counter service improvements

Most of these relate to the RBB concerns on processes or outputs either directly or indirectly and tend to be complementary to help enhance the implementation and smooth functioning of the RBB system. For countries aspiring to introduce a RBB system, it would be critical to strategically introduce and implement the above complementary reforms right from the start. Some of these reforms may need to be implemented even as a pre-requisite to the RBB system introduction.

3. Dealing with Common Limitations and Problems

Implementing a RBB system effectively requires much careful planning and preparatory work. There are several pre-requisites as discussed earlier that need to be factored into the implementation strategy and action plan to ensure that each stage of the RBB implementation produces positive results.

Experience from a decade of implementing the RBB in Malaysia shows that there are several limitations and problems that are bound to crop up. It would be prudent to ensure that these potential limitations and problems are carefully reviewed and factored into the strategic implementation plan right from the beginning.

The most critical of these potential limitations and problems are discussed briefly below:

a. Commitment and Leadership from the Leadership and Top Management

Perhaps, this can be said to be one of the most important factors that can limit the success of the RBB system. Implementation of the RBB system requires both a strong commitment and involvement of the policy-making leadership and top management at all levels. As mentioned earlier, the RBB requires major changes to the system, basic assumptions, and premises of earlier budgeting systems and especially the traditional budgeting system. The mandatory system-wide reforms are bound to meet with varying resistance from all parties including policy-makers themselves as the RBB brings with it the need for greater visibility and accountability on all parties. It is thus critical that the RBB is subscribed to by both policy-makers and top management at the Central controlling agencies and line agencies.

Experience in Malaysia as with other countries shows that much of the RBB system’s effectiveness and efficient implementation can be short-circuited or negated by the absence of direct, visible, and firm involvement and participation by the leadership and top management.

b. Clear understanding of the RBB Principles

This is also an important factor that can easily limit the smooth implementation of the RBB system. Though the RBB is a systematic and structured budgeting system, there are several features of the system that require clear definitions and understanding. Without this, the system and its principles can be easily misinterpreted and result in conflict both within line agencies and with the central controlling agencies. Some possible areas of such conflict are with respect to needs assessment, objective-setting, performance indicators, and impact measurement.

Experience from several countries show that performance indicators are a major source of misinterpretation and often times lead to arguments and disagreements between the various parties.

c. Maturity of the fiscal and financial system of a country

Though it is easy to introduce an RBB system, one of the pre-requisites that is essential is the status of the fiscal and financial system of a country. Where a country does not have the fundamental framework for a reasonably strong fiscal and financial system, it may prove to be difficult to implement the RBB system. This is because the RBB system requires extensive financial and non-financial performance measurement and information and if the existing system is not able to support this, then the system’s effectiveness is compromised.

d. Institutional Capacity & Readiness

An important limitation that can affect the implementation of the RBB system is the institutional capacity and readiness of the various agencies involved in the RBB process. As mentioned in the sections earlier, the RBB requires systematic implementation and careful planning and preparatory work. It also requires the various agencies involved in the process, be they controlling agencies or operating agencies, to have institutional capacity to handle the reforms and subsequent actions under the RBB system.

The Malaysian experience shows that agencies that were not ready with their systems and institutional mechanisms produced poor results in their implementation of the RBB system. For example, absent or ill-defined key personnel and administrative setups to implement the RBB resulted in very shallow and meaningless implementation of the RBB. In such cases, the RBB implemented was in name only and an exercise only in compliance but with poor impact. Such agencies claimed that they were implementing the RBB but in essence they were not following the principles except in name only.

In the initial stages of the RBB, even the controlling agency like the Treasury also faced some of these problems, in particular with regard to the evaluation component of the RBB framework.

e. Human Resources Factor

This is another serious limitation and problem under the RBB system. The human resources (HR) factor poses various problems and limitations during all stages of the RBB implementation and requires careful planning and groundwork from the initial stages.

Some aspects of the HR factor that are critical are:

identifying the appropriate personnel to guide and spearhead the RBB initiatives;
identifying the key personnel at each level to manage the system;
ensuring that these key personnel have been given adequate training, exposure, and skills;
ensuring that the key personnel have adequate support mechanisms, enabling tools and mechanisms;
ensuring that management at all levels are also trained and have the capacity to support and see through the reforms;
ensuring that there are adequate back-up personnel adequately trained in the RBB;
ensuring that job rotation and personnel transfers are kept to a minimum or carried out strategically to avoid any knowledge gaps;
ensuring appropriate recognition and motivation for all personnel involved with the RBB system;
providing training on an ongoing basis for both existing and new personnel coming into the RBB system;
providing appropriate and adequate system support for all personnel involved with the RBB, including an adequate incentive system.

The above are only some of the more critical of the HR factors that need to be taken into consideration. It is important to recognise that the HR factors above are critical to the success of the RBB system and address them at the preliminary stages of any RBB initiative.

f. System and Technical Readiness

The RBB system and its various components should be reviewed carefully to ensure that each component and its technical requirements have been carefully reviewed, structured and put into place. There are many technical aspects of the RBB that need to be defined and spelt out to all parties.

Detailed technical analysis, using the Program Logic and Linkages (ProLL) model, for example ensures that the critical technical aspects of the integrated performance management framework are carefully scrutinized , details worked out, and agreed to before the relevant performance documentation under the RBB are prepared and finalised.

Other technical details such as the performance indicators for all performance components also need to be carefully reviewed and worked out in readiness for the RBB system implementation. Many agencies do not pay sufficient attention to this aspect much to their detriment later.

g. Prioritizing the RBB Initiatives

Despite the high visibility and publicity given to the RBB, one apparent limitation is that very often agency management often times tends to regard the RBB as a financial matter instead of a substantive or core business function. This leads to agency management giving it too little attention or not linking it to the other critical performance assessment initiatives. In fact, in the early stages, most agency management tended not even to get involved with the RBB implementation preferring to leave such matters to their financial managers. This brought about much negative impact, as the RBB requires strategic planning which needs the direct involvement and input of the top management.

h. Lack of integration with other initiatives

The RBB is an integrated performance management system that brings together the budgeting function with a host of other performance improvement initiatives. In the case of Malaysia, the initial stages of the RBB did not see much integration of the RBB effort with other public sector reform initiatives. The PKPAs mentioned above in particular were not linked with the RBB and this reduced the full impact of the RBB system.

i. Integrated Performance Management Framework

Another possible limitation when implementing a RBB system is usually the lack of an integrated performance management framework that brings together all critical performance components in a cohesive manner. The RBB system has to identify critical long-term strategic results and pull together all key performance factors to address them effectively. But very often the strategic planning component and an integrated performance management framework are not worked out systematically. Agencies may often prefer to adopt a more simplistic model and approach as that is much easier to implement but such simplification does not produce the optimum results that a RBB system can produce.

For example, it is relatively easy to focus on outputs alone under the RBB without taking into account the impact or results of a program. Similarly, it is easy to focus on resource use, outputs, and impact aspects but yet ignore the link with the critical policy-making process. This practice results in much effort being expended but which are not being used effectively to address program needs and policy decision-making needs.

The RBB system has brought about various benefits while at the same time posing some negative features and unintended consequences. These are briefly discussed in the attached table at the end of this chapter.

4. Top-Down versus Bottom-Up Approach

The RBB system adopts both a bottom-up and top-down approach to ensure maximum effectiveness. This is also the strength of the RBB system.

Given the accountability for flexibility approach of the RBB system, the operating agencies are given full flexibility to determine their long-term strategic plans and to manage their resources towards meeting their plans, within the ambit of a bigger strategic direction from the government. The same modality is then also applied to all levels of management in the operating agency with program head being given the same flexibility and then being held accountable for results.

The building of the agency strategies and plans are undertaken by the agency’s top management but with the direct and close input of all program managers. Program managers are given the flexibility to plan and put forth their long-term plans and how they would help achieve the agency’s long-term strategic plans and results. These are then reviewed by the agency’s top management and consensus reached before the entire agency’s plans and performance plans are finalised and presented to the Treasury as an integrated document.

The above process sees the leadership and central agencies giving broad strategic directions of the government which are then further detailed out by the agencies and shared with all program managers. The program managers then work on their program performance plan which itself is in the form of a complete performance agreement containing all relevant performance components.

The above process ensures that the RBB system adopts both a top-down and bottom-up modality, which in turn helps produce a strategic and comprehensive budget document at the sector, agency, and program levels.

Accountability levels are established at all levels to ensure that each level is held accountable for pre-determined performance and results.

5. Technical Assistance

Successful implementation of the RBB system requires a fair amount of details, strategic planning and preparatory work. In most developing countries, it may be difficult to carry out the above without some degree of technical assistance from either internal or external expertise. Though developing countries are already familiar with strategic planning and multi-year development plans and initiatives, it is relatively difficult to put them all together in a cohesive framework as envisaged by the RBB system.

It would be prudent for developing countries intending to embark on a RBB system, to seek appropriate technical assistance to assist them to ensure the optimum success of the systems and to avoid making the same kinds of mistakes that other countries have made.

In particular, it would be extremely useful to seek out experiences and models from countries with a similar socio-economic and political background for purposes of adaptation. Working examples from other countries can be very useful in helping to focus new initiatives and to avoid past mistakes. It also helps save much resources and reduces start-up frustrations that may affect the success of the RBB system in the critical early stages.

As part of the RBB implementation strategy, it would be strongly advisable to identify areas of technical assistance that may be needed and to work out a strategic plan for such assistance. This should form an integral component of any RBB effort.

E. RBB IN A LIMITED RESOURCE ENVIRONMENT & FUTURE PROSPECTS

The potential utility of a RBB-type system in a developing economy is self-evident from the experiences of various developing countries. Granted that there have been various problems with the concepts, implementation, and results achieved in various countries. However, in reviewing the RBB system for a developing country, one would also need to look at the positive impact of such as system instead of merely focusing on the negative aspects alone.

One issue that is typically raised in all budgeting sources is that it developing countries cannot get out of their traditional budgeting framework due to the problem of limited resources and the uncertainties associated with that. Many countries have perhaps even been discouraged from trying to initiate any reforms in this direction. Experience in several developing countries1 shows that the initial reluctance to venture into any RBB form of budgeting could be due more in part to the fear of limited and uncertain resources rather than anything else. However, the successful implementation of the RBB type of budgeting system in several developing countries has proven that the RBB system can be made to work even in developing countries, albeit with some careful preparatory planning and groundwork.

The strength of the RBB system lies in the fact that it recognizes the resources constraints of a country and builds the budget from such premises. It is also a fact that the RBB system actually is geared to address such resources constraints while at the same time bringing with it greater accountability for managing resources and enhanced value-for-money from limited resources.

A good example of this is the setting of budget ceilings under the RBB system – this ceiling setting recognises that there are resource constraints in the country and that additional resources may not be available at any time during the fiscal year. However, at the same time, it also encourages program managers and policy-makers to carry out strategic planning and focus their limited resources into meaningful and productive activities through the prudent use of an integrated performance management framework. This also includes the introduction of a systematic program evaluation framework that is built into the performance management system right from the planning stages.

A developing country certainly faces severe resource constraints and there is great uncertainty regarding the steady flow of resources during the fiscal year. Some countries in fact structure their budget and expenditures around the flow of revenues – resulting in a very ad-hoc and immediate short-term expenditure pattern, focused more on input performance and perhaps to some extent on outputs.2 Under such circumstances, it is easy to fall into the fatalistic trap that there is nothing that a developing country can do to get out of this vicious “resources” circle.

Careful scrutiny of the RBB system and its dynamic principles will show that in fact introducing the RBB system will serve to bring about greater fiscal discipline and focused public expenditure that has the potential to provide substantial annual savings. The traditional fear that it is impossible to carry out strategic multi-year planning and budgeting in a developing country should be regarded with respect but not as a finite end in itself. A cursory scrutiny of developing countries’ budgets will show that there have been various forms of consistency in resources flow and expenditure patterns over a period of years.

It would be foolish to assume that there are no resource flow problems in developing countries, which need to be factored in and contingency plans drawn up. However, there is nothing to prevent a developing country from embarking on a more systematic and integrated budgeting approach such as the Results-Based Budgeting System as proven in several countries.

The RBB system, if carefully planned and structured, with all the necessary groundwork and pre-requisites, can prove to be the answer for developing countries who have only a slim chance of achieving substantial revenue and resources flows in the short-term. In the face of such a bleak prospect, it is extremely critical that such developing countries urgently review their public expenditure patterns and budgeting practices.

The RBB system has been proven to work for several developing countries. These countries have shown increased levels of all three types of public sector accountability discussed earlier over the last decade. They have also attained credible achievements in both public sector expenditure effectiveness as well as meaningful public sector performance.

Though there are still several issues that need to be addressed to further explore and fine-tune the RBB system, it holds much promise in the absence of any other immediate solution to the limited resources problem faced by developing countries.

Budgeting For Results: Assessing The Potential In A Developing Economy

Budgeting For Results: Assessing The Potential In A Developing Economy

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