Performance-Based Budgeting

One final model will be examined before moving on to other topics. The Performance-Based Budgeting (PBB) approach was popularised in the USA with the passage of the Government Performance and Results Act in 1993. PBB is particularly suited to the public-sector environment where income from user fees will never be sufficient to fully offset expenditure, where budgeting processes involve complex and drawn-out liaison with decision-makers in many bodies and where long-term goals require consistency and continuity of funding over a considerable period.

In contrast to the object class budgets that have traditionally been used by government ministries (where the budget for a department is divided into different budget lines similar to those in Exercise 7.1), PBB attempts to integrate performance indicators with the estimated expenditure required to achieve predetermined targets. For example, instead of listing how much will be spent on office stationery, a Performance-Based Budget presents decision-makers with a concrete and measurable target (for example, 800 students will successfully complete a Basic English course) and the amount needed to accomplish this process.

PBB involves defining three different elements:

• Intended outcomes or long-term goals, which may be difficult to measure (e.g. improving the general level of education among rural women);
• Strategies for achieving this final outcome (e.g. providing an alternative secondary education programme using ODL methods);
• Activities, including the quantity, quality and costs of services to be provided in order to achieve the final outcomes (e.g. 2,400 rural women will pass examinations in six subjects at junior secondary level each year).
  

PBB does not constitute a mechanism for budgeting, but rather a framework for presenting this information in a particular way. Activity-Based Costing or another form of cost analysis is required to prepare detailed estimates of expenditure for specific activities on an annual basis. Key performance indicators are then presented side-by-side with estimated costs. This form of presentation enables decision-makers to understand what public funds are being spent on and facilitates an assessment of whether targets have been achieved. The main drawback of this approach is that it requires a considerable amount of time and effort, in addition to normal budgeting processes, to produce a Performance-Based Budget.

Discussion

Questions for Consideration Ideally, this exercise should be carried out with colleagues in your institution. What budgeting approach is currently used in your institution? In your view, what are the advantages of this budgeting system? What are the disadvantages? If you could choose, which budgeting system would you prefer?

Reading

Other Resources Wikipedia article on Zero Based Budgeting. Electronic document. Mercer, John. 2003. Cascade Performance Budgeting: A guide to an effective system for integrating budget and performance information and for linking long-term goals to day-to-day indicators. Electronic document. Wikipedia article on Performance Based Budgeting. Electronic document.