Budgeting Techniques

1. Budgeting Techniques • Traditional Budgeting System (TBS) • Zero Based Budgeting System (ZBB) • Planning, Programming, Budgeting Systems (PPBS) • Modified Budgeting System (MBS)

2. Development of budgeting techniques in PSO Output-oriented (Performance based budgeting) Input -oriented TBS ZBB PPBS MBS

3. Development of Malaysian Budgeting System 1957 1969 1990 British Budgeting system TBS PPBS MBS

4. Development Of Malaysian Budgeting System • Prior to 1969 TBS was used, • Due to numerous weaknesses of the TBS, a new technique PPBS was introduced in 1969 following the issue of Treasury Circular no. 5 - 1968. • After 20 years of using PPBS, a study was conducted to overcome certain weaknesses of PPBS,

5. Development Of Malaysian Budgeting System • in 1990 Government introduced a new system, a modification of the PPBS, • the new Modified Budget System (MBS) was introduced as pilot project in Ministries of Health, Public Works & Welfare, • Since 1996, the whole government has been using the system.

6. Traditional Budgeting System (TBS) • TBS is an “input oriented technique” or • Also known as “Line Item Budgeting” as it is based on line item expenditure and are expressed in terms of the Objects of Expenditure • Example

7. Allocation of fund in TBS • Allocation of fund is based on: • Extrapolation • Allocation based on past spending levels • Incremental • Adding allocation for inflation, effect of virements, increase in salary, one-off expenditure and new Programs or Projects • Known also as “Incremental budgeting system • It assumed that all activities taken up last year were essential in achieving outgoing objectives, strategies and mission and they must be continued in the coming year and more urgent than newly requested activities

8. Assumptions in TBS • All activities making up last year’s spending: • were essential to achieve the ongoing objectives, • activities must be continued during the coming year & are more urgent than newly created programs,

9. Assumptions in TBS • are now being performed well and in most cost-effective manner, • will continue to be cost-effective and necessary in the coming year, • all increases are due to labour & material inflations.

10. Allocation of fund in TBS INCREMENTAL EXTRAPOLATION

11. Advantages of TBS • The system is simple and easy to prepare. User and Preparer of TBS have good understanding of the budget; • Data and information from TBS is easy to capture into the accounting system; • Make comparison between Budgeted and Actual Expenditure or Revenue data

12. Limitations of TBS • Data and information is only useful in the short term. Strategic goals of organization may not achieved; • TBS focuses on object of expenditure rather than the program/activities or objectives of the organization; • TBS conforms to legal requirement but not management type information; • The performance of the budget is only measured from the financial aspects • i.e .actual expenditure incurred vs budgeted expenditure and no information on the effect, outcome and benefits of prog.

13. Limitations of TBS • TBS has no specific Program/Activities to implement. There is no purpose and objectives of the expenditure; • There is no budget review process, planning and evaluations of programs; • Accounting/financial information indicate the utilization of resources.

14. Zero Based Budgeting (ZBB) • The first application was in the USA in 1962 • Features: • The preparation of budgets start from a zero base i.e. resources are not necessarily allocated according to the previous pattern • thus each item of expenditure has to be annually rejustified and demand assurance concerning the most effective allocation of limited resources

15. Allocation of funds in ZBB Apply the concept of “decision package” • Identification of decision units (responsibility centers) • Units in the organizations hierarchy that prepare the budget and has these characteristics: • Has a specific manager • Has a well defined and measurable impact • Has a well-defined and measurable objectives • Development of decision packages • identifying the alternative ways of performing the functions of decision units and to determine the effort for each alternatives • Review and ranking of decision packages • “bottom up “ approach based on effectiveness, requirement by law or availability of resources

16. Allocation of funds in ZBB

17. Adv and disadv of ZBB • ZBB requires all functions of an organizations be reevaluated annually from a zero base • ZBB encourages the involvement of lower-level management in the budgetary processes • Unexpected events during the year can be adjusted for • However • “Over estimates man ability to calculate” – development of decision packages • Behavioural impact of cut-off system

18. Program & Performance Budgeting System (PPBS) • Why do we need new budgeting system? • increasing complexity of modern life, • demands of public for government services has increased • shortage of funds to meet the demands, • need to determine priorities, design programs & control budgets.

19. PPBS • started in late 1950s in the US by the US Secretary of Defense, Robert McNamara, • have been used by many developed nations, • is a system to help management make better decisions on the allocation of resources among alternative ways to attain government objectives.

20. PPBS in Malaysia • Introduced by Treasury Circular No. 5 1968 and implemented in • Objectives: • to help management make better decisions on the allocation of resources (financial and non financial) – linkage between objectives and goals, programs and activities; • Provides a common framework for the participants in the budgeting process – to ensure that limited public resources are allocated to produce the greatest beneficial impact on the overall objectives

21. Critical Features of PPBS • Definition of government objectives - as specific as possible, • Determination of programs, alternatives to achieve objectives, • Identification of major issues in the government. • Consideration of full system costs (capital, current, & future costs) • Measurement of benefits or effectiveness • Comprehensive presentation.

22. Allocation of Funds in PPBS Identify objectives Planning Identify programs/ activities Programming Appraise programs/ activities Program evaluation Budget preparation

23. Planning Stage • Identifying objectives • setting out in clear terms the objectives/ purposes of programs/activities of government depts. • Importance of the objectives: • Provides a framework for better planning processes • To avoid duplication of function of the various dept Example: “One of the objectives of the MoE is to improve the quality and improvement in the rural school education system…”

24. Planning Stage • Identifying programs/activities • Involves the selection of best feasible alternatives for the purpose of achieving predetermined objectives and reflecting it in programs. • A Program is a combination of resources and formulated to realize objectives and outputs. • Example: courses and trainings to rural school teachers or the introduction of tuition voucher scheme • Program structure: • The process of breaking up program into its distinct activities and sub-activities which contribute to the achievement of objectives.

25. Programming Stage • Assessment of the relevance, results and impact of programs/activities for each public sector organizations. • Evaluation of the financial & physical performance of the programs. • Example: • How much of allocation required for the voucher scheme • How many teachers affected • How many students involved • What would be the expected results • It involves the selection of suitable units of measurement (performance indicator) which reflects the output of each program and activity in either qualitative or quantitative terms.

26. Developing Performance Indicator • The purpose of developing performance indicator is to evaluate financial & physical performance, • It involves identification & selection of suitable units of measurement which reflects the output of each activity & program in either qualitative or quantitative terms.

27. Developing Performance Indicator • It also involves making comparisons between actual output for a given period with the planned or targeted output, & identifying the causes for any variance between the two. • The results will provide information as to whether programs have been realistically planned & properly managed.

28. Developing Performance Indicator • the results provide information as to whether programs have been realistically planned & properly managed.

29. Performance Evaluation • The process of assessing the relevance, results & impact of programs of the agencies. • It is an important element for the purpose of revising or modifying plans. • It involves asking several questions such as: • are the objectives of the programs realistic & reasonable?

30. Performance Evaluation • has the programs been properly selected, Is it the best alternative for achieving the objectives? • Is it adequate in scope to solve the problems identified? • Has the programs been properly planned in term of time & adequately provided with the necessary resources?

31. Performance Evaluation • Has it been efficiently managed & executed? • Has the program been effective inrelation to the objectives?

32. Illustration (Ministry of Agriculture) • Setting Objectives • Uplift the socio economic status of farmers and fishermen • Programs • Agricultural, fishery, drainage and irrigation • Activities • Supply of fertiliser, soil analysis, irrigation scheme, marketing • Performance • Outputs – ton of fertiliser distributed, yield of paddy per hectare of paddy field

33. Advantages of PPBS • Enables the budget as an instrument of expressing government/public sector organization policies through each of its programs and activities. • Provides better information to Legislatives (Parliament) on effectiveness of the management of each Ministry and Department. • Encourages public sector managers to think and plan program objectives in the most efficient and economical way of achieving the output.

34. Advantages PPBS • Provides a systematic and ongoing method of performance evaluations – furnishes a management tool to public sector agencies, government and managers the. • Assists public sector organizations in setting budget priorities between competing programs/activities. • introduces the valuable element of long range planning on operating & development expenditures. • improve coordination between economic planning & financial planning.

35. Shortcomings of PPBS • Budget is used as an allocation tool rather than as a management tool • Goals and objectives of individual programs and activities are not cleared and well defined. • Problems in developing the performance indicator and as a result the performance evaluation may not be effective and useful. • PPBS is only successful in implementing the first component “Program” but failed to implement the “ Performance”.

36. MODIFIED BUDGETING SYSTEM(MBS) • MBS is a modification of PPBS • In Malaysia: • Introduced through Treasury Circular No.11/1988. • 3 Ministries (MoH, MoPWU & MoW) were selected as a Pilot Project. • Implemented in 1990 through Treasury Circular No.8/1990 (implementation was in stages and completed in 1995) • It focuses the relationship between INPUT, OUTPUT and IMPACT of the Program.

37. MBS Management System Emoluments, supplies, services etc Products or services Achievement level of actual objective INPUT OUTPUT IMPACT Efficiency Effectiveness

38. Weaknesses in Implementing PPBS • goals & objectives not clear, • budget as an allocation tool not as management tool • performance achievement is not significant, • lack of planning

39. Objectives of MBS • To improve allocation of resources to government dept. or programs/activities based on their performance • To improve the effectiveness and efficiency of government programs/activities • To strengthen mechanisms for accountability of controlling officers and program managers not only in terms of compliance with rules and regulations but particularly in terms of efficiency and cost effectiveness of program delivery to the users and clients.

40. PRINCIPLE OF MBS • “Let Managers Manage”: • Devolution of Authority • Greater flexibility/authority to managers throughout organizations in terms of deploying the allocated resources • Stricter control on the aggregate resources • E.g. virements of funds • Accountability to Match Authority • Accountability not only to comply with rules and regulations but also efficiency and effectiveness in managing the limited allocation

41. Elements of MBS(Modification packages) MBS • Expenditure Target • Program Agreement and Exception Report • Cycle Performance Evaluation • A More Generalised Approach to Expenditure Control PPBS • Identifying Objectives • Program planning and structuring • Program Appraisal • Performance Evaluation

42. Expenditure Target • Expenditure Target (ET) is the base amount set by the Treasury for each Ministry/ Department/ Agency to conduct the existing programs and policy as in the last financial year.

43. Expenditure Target • The ET: • fixed by Treasury at the beginning of the budgetary process; • cannot be exceeded when preparing for the proposed expenditure for the existing programmes/ policy; and • can be revised if there is new policy/programme to be implemented before the total allocation for each agency is finalized.

44. Formula of Expenditure Target ET = Existing Policy + (New Policy -Allocations for Assets/One-Off) + 3% Increment *– 1% Efficiency Dividend* * subject to review Example: Setting ET for 2005 ET (2005) = Existing Policy (2004) + [New Policy (2005) - Allocations for Assets/One-Off (2004)] + 3 % increment - 1% Efficiency Dividend

45. Expenditure Target • New Policy • new programs or activities to be implemented by agencies. • eg.development of new posts, training for new activities etc. • One-Off • non-recurring (non-repeating) activities and unavoidable and should not be included in the following year’s budget. • eg General Elections, moving to new office, office renovation etc • Threshold amount (Limit) • Amount that is fixed by the Treasury to determine the allocation for New Policy and One-Off expenditure. • Efficiency Dividend (ED) • deduction for expected efficiency improvements associated with the learning effect and with implementation of improved methods of program delivery. ED =1% (Existing Policy + New Policy -Allocation of Assets)

46. Total Allocation in MBS Total Allocation = Expenditure Target for Existing policy/programs + Adjustments for salary increments, inflation and exchange rate + Allocations for approved new policies/programs + One - Off - Efficiency Dividend.

47. Program Agreement & Exception Reports (PA & ER) • PA is an agreement (contract) that specifies the level of achievement (performance) of funds allocated for a particular program/activity. • It illustrates a devolution of authority and matching accountability with authority between different levels of management • The manager requires the subordinate to be accountable through submission of progress periodic reports.

48. PA • A PA can exist between any two levels of management • IT provides information on agreed target for the inputs, outputs & impacts.

49. Items in PA 1.Purpose: To improve the English proficiency of IPTA graduates 2.Agency: UPM 3.Program: English Strengthening Program for Graduates 4.Activities: Teaching 5.Code: 12345 6.Source of Authority: Approval by cabinet, ref, date etc 7.Objectives: To strengthen the English proficiency of graduates 8.Customer: Graduate of UPM 9. Requirement Analysis: 10.Functions: 11.Resources: English Lecturers, latest teaching technology 12.Output Specification: UPM graduates with 99% proficiency in English 13.Impact Indicator: Employability of UPM graduates within 3 months of graduation 14.Program Evaluation:

50. ER • Exception Report (ER) is to identify performance indicators that are inconsistent with the target output/result, the extent and reasons for the inconsistent performance and remedial actions to be taken. • ER identify indicators for which performance is inconsistent with the agreement target, the reasons of inconsistency and action that are to be taken to remedy the situation; • These reports are prepared on an exceptional basis.