ADB Grant 0133-CAM: Public Financial Management in Rural Development Ministries (Component 1)

1. ADB Grant 0133-CAM: Public Financial Management in Rural Development Ministries (Component 1) Program Budgeting, April 5 - 8, 2010 Day 1: April 5, 2010 Fundamentals of Program Budgeting

2. Session 1 Fundamental of Program Budgeting Content • Definition of Program Budgeting and Strategic Budget Plan • Advantages of Program Budgeting • Components of the Budget • Budget cycle • Budget policy ADB Grant No.0133-CAM/Component 1: PFMRD

3. What is program budgeting? Definition: “Programs are groupings of government activities in relation to specific government objectives” (IMF Manual for Fiscal Transparency) ADB Grant No.0133-CAM/Component 1: PFMRD 3

4. Program Budgeting • Resource allocation based on priorities • Allocating budgetary resources according to government policy objectives and priorities • Focus on organizational objectives • Focus on outputs/outcomes • Allocate expenditure by program • Assess results based on objectives • Can use cost-benefit analysis: • 1. To justify a proposed program • 2. To assess the success of the program 4

5. Resource allocation based on priorities MEF Discuss priorities Allocate budget resources Line Ministries Line Ministries Line Ministries Line Ministries Prog-rams Prog-rams Prog-rams Prog-rams Prog-rams Prog-rams Prog-rams Prog-rams Prog-rams Prog-rams Prog-rams Prog-rams

6. Elements of Program Budgeting Program Goal (overall objective) PLAN Outcomes Outputs (deliverables or products) ACHIEVE Activities

7. Goal, outcomes, outputs, activities • Goal: The higher order objective to which a program is intended to contribute • Outcomes (or Purposes): The likely or achieved short-term and medium-term effects of a program’s output • Outputs: The products, capital goods, and services which result from a program; may also include changes resulting from the intervention which are relevant to the achievement of outcomes. (also called ‘products’ or ‘deliverables’) • Activities: The actions carried out to create the outputs. Activities use financial, human and material resources, which must be costed to produce the budget. ADB Grant 0133-CAM: Component 1 7

8. Goal, outcomes, outputs, activities • Goal, outcomes, outputs, activities must be monitorable • i.e. they must be measurable, preferably quantitative, and verified by ‘objectively verifiable indicators’ • Outputs must be carefully defined, • with quality standards included. • Activities must be carefully planned • e.g. using Gantt charts ADB Grant 0133-CAM: Component 1 8

9. Strategic Development Plans and Program BudgetsLinkage Tool: Logical Framework ADB Grant 0133-CAM: Component 1 9

10. Strategic Development PlansLinkage Tool: Logical Framework • What is the difference between outcome and outputs? • Example: Goal: Everyone riding a motorbike must wear a helmet! Input: The number of police hours employed Outputs: The number of fines given to motorbikes stopped by the police Outcome: The number of motorbike riders wearing helmets increases The above illustrates that monitoring outcomes is the most definitive way of informing whether an objective is being realized. ADB Grant 0133-CAM: Component 1 10

11. Gantt Chart ADB Grant 0133-CAM: Component 1 11

12. Multi-Year Programs • Most programs will last longer than one year • Therefore they must be planned within the context of longer term plans: • The Sector Development Plan • A ministry’s Strategic Development Plan • The medium term expenditure framework (3-year costed plans) • In Cambodia, the three year costed plan for a ministry is called the Budget Strategic Plan, (or Ministry Strategic Budget Framework, MSBF) 12

13. MSBF now is called SBP (Strategic Budget Plan) • A three year costed plan for a ministry’s operations • Includes vision, purposes, targets of program and priority action plans, linked to policy by sector and national policy developments • (Article 39 of Law on Public Finance System, 2008) 13

14. Framework for Program Budgets Year 1 Year 2 Year 3 Year 4 Year 5 Strategic Development Plans/Policy Programs Year 1 Year 2 Year 3 MSBF or SBP Year 1 Annual Budget Law 14

15. Key Elements of Program Budgeting • Sets programs as the basis for budget appropriations • Focus shifts from line items to programs • Basis for facilitating a cost allocation system • Prompts line ministries to define objectives and match activities and resources to achieving them • Usually tied to their legal mandate • Tool for granting greater autonomy and responsibility • In line with transparency and accountability 15

16. Benefits of Program Budgeting • Basis for supporting enhanced fiscal discipline • Facilitates decision-making for resource allocation • Organizes budget around government policy priorities • Acts as a mechanism for focusing on operational efficiency and performance • Enhances transparency and is user friendly for legislature and general public • Enhances control and accountability for the CBO • Affords greater autonomy and flexibility to spending agencies 16

17. Considerations for Successful Implementation • Changing form andbehaviour • Thinking differently about planning, managing and budget • Effective PB cannot be developed centrally • Sense of ownership on the part of line ministries • Line ministry staff must undertake the work • Creating ownership and changing organisational culture • Be cautious of other countries examples • Unique laws and institutions, policies and objectives • Establish stability in budget classification • Continuity and consistency • Generates demand for information and resources • Creates need for additional or new data collection, IT and data collection systems 17

18. Program Budget Design Process • Programs need to be within ministries • Clearer linking of activities, funds, and objectives for increased managerial accountability • A program classification doesn’t remove the need for other classifications • Classifications are added to meet new demands for new information and new roles for the budget process • Full costs need to be allocated to programs • Incomplete cost information impedes management and budget decision-making • Program concept should integrate recurrent and capital budgets • Account for all inputs leading to outputs or outcomes 18

19. Program budgeting – general considerations • Don’t undertake as a budget cutting measure • prompts resistance from line ministries • Annual budget ceilings can help motivate ministries • impetus to rationalise and relate activities to objectives • Provide ample support to ministries • tools for developing program structure and to review spending priorities • e.g. “Logframe” – logical framework 19

20. Program budgeting – general considerations - 2 • Program budget implementation will be an iterative process over several years • Trend lines or multiple data points allowing for questions of efficiency and effectiveness • Selling program budgeting • Matching expectations to reality of what can be achieved in the time given • High-level commitment over time • Utilisation of program structure by the central budget authority for decision-making 20

21. 2. Components of the budget “Economic classification” of receipts and expenditure “Program classification” of receipts and expenditure ADB Grant No.0133-CAM/Component 1: PFMRD 21

22. “Economic classification” of the budget • Economic classification of the budget shows categories of revenue and expenditure • e.g. - taxes, rent, grants received …. - salaries, services, fixed assets purchased 22

23. Economic classification

24. “Program classification” of the budget • Program classification shows the same costs grouped by programs, sub-programs and activities…. 24

25. Example on economic and program classifications Salary 100 Purchases 50 Rent 50 Purchase of vehicles 100 Purchases 100 Salary 200 Services 100 Purchases 150 Services 150 Prog 1 Prog 2 Prog 3 25

26. Example on economic and program classifications Salary 100 Purchases 50 Rent 50 Purchase of vehicles 100 Purchases 100 Salary 200 Services 100 Purchases 150 Services 150 Prog 1 Prog 2 Prog 3 26

27. Example on economic and program classifications The program classification shows the same costs, grouped by program Prog 1 Prog 2 Prog 3 Purchases 100 Purchases 50 Salary 200 Services 100 Purchases 150 Salary 100 Services 150 Purchase of vehicles 100 Rent 50 27

28. Priority Programs requested byMEF • During budget presentation each line ministry must present its priority programs to MEF • Maximum of 5 programs per ministry • Sometimes MEF will consider sub-programs or activities, but normally these are reviewed by the line ministry • Example: Duplicate sub-programs or activities by MAFF, MRD, MOWRAM – e.g. capacity building 28

29. Program Budgets - Analysis Ministry Program Program Sub-program Sub-program Sub-program Sub-program Sub-program -------------------- Activities -------------------------- --------------------------------------- Economicitems ------------------------------

30. Direct and indirect costs • ‘Direct costs’ can be assigned to a cost unit without apportionment • e.g. purchases of materials for Program A: this is a direct cost of Program A • ‘Indirect costs’ cannot be assigned to a cost unit. But they can be apportioned between cost units. • e.g. The salary of a person can be apportioned between the programs on which he works, on the basis of time spent. 30

31. Apportionment of indirect costs Example: Employee X is budgeted to use his time as follows: • 30% of time on Program 1, • 45% of time on Program 2, and • 25% on general administration (non-program) • His salary and allowances can be apportioned between the programs using these percentages. 31

32. 3. Budget cycle - 1 Strategic Plans of Government, sectors and ministries Medium Term Macro-economic Framework and Public Finance Policy Endorsed by Prime Minister Circular to prepare MSBF issued by MEF (includes ceilings for allocation of resources to sectors for 3 years Preparation of MSBF (costed plans of ministries / sectors for the medium term 3 years) 32 To annual budget

33. Budget cycle - 2 From MSBF Showing cash ceilings, budget assumptions, policies, instructions, forms MEF prepares call circular for annual budget Endorsed by Prime Minister Send to Ministries Prepared within budget ceilings on official forms Ministry annual budget Negotiation and agreement of ministry annual budgets Consolidated annual budget 33

34. Budget cycle - 3 From annual budget MEF presents Budget to Council of Ministers Endorsement by Council of Ministers Endorsement by Parliament Submit to Parliament Submit to Senate Endorsement by Senate Signed by King Submit to King 34

35. 4. Budget policy Government policy for the budget will cover: 1. Sources of finance: • Revenue • Taxes, duties • Non-tax revenue (fees, rent etc) • Sales of assets • Proprietary revenue • Grants • Debt policy: debt sustainability • Public & private sector partnerships 35

36. Budget policy Government policy for the budget will cover: 1. Expenditure: • Priority sectors (e.g. education, health, agriculture) • Shares of expenditure to sectors • Outcome targets for sectors 36

37. Thank You for Day 1