## _tnm0901

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---

### I. Objectives of the Note
- Primary objective: elaborate a basic model of performance-based budgeting for two country categories:
  - those that wish to introduce a performance-based budgeting system while minimizing the complexities and costs of doing so; and
  - those with limited resources and capacity, including appropriate low-income countries (LICs).
- Emphasis on necessary preconditions: performance-based budgeting, even in its basic form, should not be considered in countries with seriously dysfunctional public financial management (PFM) and governance systems.
- The note describes more complex models and outlines reasons why they may not be appropriate in many countries.
- Main questions addressed:
  - What are the characteristics of a basic model of performance-based budgeting?
  - How should low-income countries approach performance-based budgeting?
  - What preconditions should exist before starting?
  - What forms of performance-based budgeting should low income countries avoid?

### II. What Is Performance-Based Budgeting?
- Definition: aims to improve the efficiency and effectiveness of public expenditure by linking the funding of public sector organizations to the results they deliver, making systematic use of performance information.
- Multiple models exist with varying complexity; more sophisticated models require correspondingly sophisticated public management systems.
- Performance-based budgeting should be part of broader "managing-for-results" reforms, including:
  - civil service reforms to increase motivation and incentives of public employees;
  - organizational restructuring to increase focus on service delivery and improve coordination;
  - institutional and oversight changes to strengthen public accountability for performance.
- Complementary reforms are necessary for substantial improvements in public expenditure efficiency and effectiveness.

### III. The Model (Basic/"Performance-Informed Budgeting")
- Core idea: ensure key decision makers systematically take into account the results to be achieved by expenditure during budget formulation—sometimes called “performance-informed budgeting.”
- Essential requirements:
  - information about objectives and results of government expenditure, in the form of key performance indicators and a simple form of program evaluation; and
  - a budget preparation process designed to facilitate use of this information in budget funding decisions, including simple expenditure review processes and spending ministry budget decisions.
- Program classification of expenditure is highly recommended to group similar services with similar objectives and enable comparison of costs and benefits.
- Potential benefits of systematic consideration of results:
  - improve expenditure prioritization (capacity to allocate limited resources to where they will do the most good);
  - encourage line ministries to spend more efficiently and effectively by making them aware that performance will influence funding and by reducing or streamlining controls that impede good performance.
- Examples of application:
  - non-performing or high-cost programs can be abolished, scaled down, or restructured when decision makers focus on outcomes during budget preparation.
- Fiscal discipline effects:
  - improves capacity to make “fiscal space” for new spending without commensurately increasing aggregate expenditure;
  - facilitates fiscal consolidation by helping target spending cuts at least effective or least socially important programs;
  - if successful in improving efficiency, enables government to do “more with less” and helps contain long-term upward pressure on aggregate public expenditure.
- Relationship with medium-term budget framework:
  - fits naturally with it, but the medium-term framework is not a prerequisite.
  - both approaches aim to improve expenditure prioritization; performance-based budgeting is more focused on managing efficiency and effectiveness.
  - recommended approach: use performance information and consider medium-term cost implications of expenditure choices.

### IV. Information on Objectives and Results
- Systematic information on efficiency and effectiveness of public expenditure is the most fundamental tool.
- Basic model requirement: every spending agency must:
  - explicitly define the outcomes that its services (outputs) aim to deliver to the community; and
  - provide to the ministry of finance and key political decision makers during the budget preparation process key performance indicators to measure effectiveness and efficiency of its services.
- Key challenge: keep performance information simple, affordable, and usable.
  - Newcomers often attempt to build sophisticated systems in short periods (as little as a year or two), which are expensive and require skilled human resources.
  - Similar systems in OECD countries took decades to develop.
- Recommended realistic approach:
  - initially develop only a handful of key performance indicators for each ministry and subsequently for each program.
- Role of evaluation:
  - indicators alone are often insufficient; evaluation is important even in a basic model.
  - avoid allocating excessive resources to a large “monitoring and evaluation” industry using complex methodologies.
  - in a basic model, focus initially on “desk” evaluations (primary elements: analysis of (i) importance of program objective, (ii) what available performance information indicates about effectiveness and efficiency, and (iii) program logic and coordination).

### V. Budget Processes to Use Performance Information
- Availability of information is necessary but not sufficient—information must be used in the budget process.
- Common failures: countries develop performance information and program-based budgets but fail to use them in budget decisions.
- For performance-based budgeting to work, reconsideration of spending priorities and program performance must be formally integrated into the budget process.
- Common key elements of the budget process:
  - a “strategic phase” early in the budget cycle incorporating a preliminary consideration of the government’s broad expenditure priorities;
  - an expenditure review process—even if very simple—designed to keep under review appropriateness and effectiveness of existing programs and to use performance information to identify programs to cut, eliminate, or expand;
  - a systematic process for scrutinizing all proposed new spending initiatives; and
  - a requirement that all spending ministry budget submissions be supported by information on the effectiveness and efficiency of its expenditure.
- Emphasis on expenditure review: without systematic review, making fiscal space for new priorities is much harder; performance information is most useful in assessing existing programs.
- Planning versus budgeting:
  - performance-based budgeting does not require elaborate national planning processes.
  - medium-term sectoral planning can provide essential performance information.
  - planning must be fully integrated into the budget cycle, remain light and adaptable, and link with the strategic phase.
  - where planning is institutionally separated from budgeting, introducing performance-based budgeting may fail to deliver desired results; bulky long-term plans often do not translate into budget allocations and may create conflict between planning and budgeting objectives.

### VI. A Program Budget
- Definition: classifies expenditure by types of service and objectives rather than by inputs (salaries, supplies, equipment).
- Value: indicates how much money is directed at achieving particular outcomes, enabling assessment of benefits and efficiency relative to costs.
- Recommendation: program budgeting is highly recommended for countries with capacity to introduce it.
- For countries not ready for full program budgets, improvements in performance information and budget processes can still deliver significant benefits.
- Program budget requires public presentation of key performance and cost information for each program, including:
  - the program’s objectives and how these link to national and sectoral priorities;
  - the key services “outputs” the program delivers;
  - how the program is intended to achieve its stated objectives (activities, projects);
  - key performance indicators and evaluation results by program; and
  - program costs.
- Under program budgeting:
  - budget preparation should be program based—agencies present and justify budgets in terms of programs with supporting cost and performance information;
  - program performance information should be presented to the legislature and public as part of budget documentation.
- Program budgeting often involves legal appropriation on a program basis (not always—some countries prepare on a program basis but parliament appropriates on an aggregated basis).
- Program classification considerations:
  - programs should be directly linked, as far as possible, to outcomes and outputs;
  - program classification should comprehensively cover all government expenditure—partial classifications that exclude major elements (civil service employment costs, capital expenditure) make programs questionable for priority setting;
  - a program budget requires the accounting system be enhanced to record expenditure on a continuing basis by program as well as by established economic and administrative classifications.
- Practical notes:
  - a basic model does not require a “perfect” program classification.
  - use of “administration” programs to group support service and overhead costs is acceptable where management accounting systems to allocate indirect costs do not exist.
  - usable estimates of program costs do not require accrual accounting or budgeting:
    - accrual accounting is demanding in staff and financial costs and may not be appropriate in many countries;
    - accrual budgeting is even more demanding;
    - cash budgeting systems generally provide program cost information sufficiently close to support considerable improvements in budget decision making.

### VII. Managerial Freedom
- Introduction of performance-based budgeting ideally requires greater flexibility for spending ministries and program managers, who become more accountable for results.
- Performance-based budgeting requires increased input flexibility: line managers should be given greater flexibility to choose the input mix that can most efficiently deliver services.
- This requires a reduction of the large number of distinct limits imposed upon expenditure by economic-classification (“line item”) in traditional budgeting.

### Readiness to Introduce Performance-Based Budgeting
- Decision to introduce performance-based budgeting should be based on consideration of:
  - governance conditions;
  - the state of basic public financial management (PFM) systems; and
  - available human and financial resources.
- Performance-based budgeting is unlikely to succeed where governance is very poor (for example, "highly corrupt and rent-seeking" leadership), because political and bureaucratic leadership may have "little interest in improving public sector performance".
- Main PFM prerequisites before considering "second generation" initiatives such as performance-based budgeting:
  - The existence of sound macrofiscal policy management, so that spending ministry budgets do not suffer massive uncertainty about the funding they will receive during the budget year.
  - An ability to enforce the execution of budgets as planned, which requires respect of budgetary rules and procedures and the capacity to apply (and police) them in execution; it also requires good accounting and auditing procedures.
- Institutional prerequisite:
  - Adequate staff capacity to address the informational requirements of performance-based budgeting.
  - The "scaled-down" form of performance-based budgeting described in the note requires a reduced set of performance information but still demands capacity; LICs with serious capacity limitations may need to overcome these constraints before introducing even the simplest form.

### Administrative Process Flexibility and Employment Controls (LIC considerations)
- In LICs, reduction of input controls should generally not proceed as far as in some OECD countries; specific safeguards and controls are often appropriate:
  - Maintain separate spending limits on expenditure items particularly susceptible to corruption and abuse (entertainment, travel, consultancy, etc.).
  - Where civil-service employment regimes are rigid (civil servants cannot be fired), it may be appropriate to:
    - maintain line-item controls over employment costs; and
    - impose quantitative limits on ministry employment levels.
  - Maintain line-item controls over capital expenditure and transfer payments, as is common in developed countries.
- Administrative process flexibility is crucial for expenditure prioritization:
  - Governments need the capacity to reduce civil-service employment in low-priority or ineffective program areas and to redeploy staff as needs arise.
  - Greater civil-service employment flexibility is important to the success of performance-based budgeting and managing-for-results.
  - The appropriate degree and pace of civil-service reform will vary by country and depend on governance quality.
  - In many LICs, civil-service changes will require significant retraining and capacity-building efforts.

### Elements of a Scaled-Down Performance-Based Budgeting Model
- Key elements:
  - A "strategic" priority setting phase early in the budget cycle.
  - An expenditure review process.
  - Systematic scrutiny of new spending proposals.
  - Information on efficiency and effectiveness to support budget submissions.
  - Introduction of a program budget structure.
  - Increased managerial flexibility.
- Purpose: make the budget preparation process more "performance-informed" while requiring a reduced set of performance information.

### "Advanced" Forms of Performance Budgeting — Caution for LICs
- Advanced mechanisms not part of the basic model and treated with caution in LICs include:
  - Budget-linked performance targets:
    - Example cited: U.K. "Public Service Agreement" system.
    - Difficult to apply in LICs because it requires a well-developed performance measurement system and a solid information base on the relationship between funding levels and expected results.
    - Comprehensive target-setting is generally inappropriate for LICs, though selective targets (e.g., vaccination rates or literacy levels) may be desirable.
  - Summary program performance ratings (example: U.S. Program Assessment Rating Tool):
    - Relies on "a mass of established performance indicators and program evaluations".
    - Very few countries can develop a sufficiently strong performance information system in the short or medium terms.
  - Purchaser-provider systems:
    - Treat line ministries like commercial businesses paid "prices" by government for services delivered.
    - Unsuccessful when applied government-wide; successful only when applied selectively to specific sectors or institutions (e.g., hospitals).
    - Extremely demanding of performance and cost information.
  - Use of unit-cost information:
    - Can be useful if applied selectively in certain sectors in LICs (cost per unit of outputs or, more rarely, outcomes) for budget planning or formula funding.
    - Collecting and maintaining unit-cost data requires additional capacity and expertise that may not be justifiable or feasible for many LICs.

### Conclusion and Overall Assessment
- The view that performance budgeting is entirely inappropriate for a wide range of countries, including all or most LICs, is too simplistic.
- A "scaled-down" model of performance-based budgeting can be implemented in some LICs and could provide significant benefits to development.
- Preconditions for attempting the scaled-down model:
  - Sound macrofiscal policy has been established.
  - PFM systems and procedures ensure that budgets are executed as planned.
  - Information systems can provide timely and reliable budgetary data.
  - Enhanced capacities exist to handle the more demanding analysis performance-based budgeting requires.
- Countries with serious governance problems are unlikely to benefit much from performance-based budgeting.

### Case Studies (summarized)
- Case 1: Mali
  - National Assembly in 1995 urged adoption of a budgeting system to check consistency with national programs and monitor progress.
  - Ministry of Finance started phased program budgeting in 1997, completing all ministries a few years later; program budgets are sent to parliament in a separate annex.
  - Development followed a classic route but has yet to become the basis of the approved budget, limiting usefulness as a management tool.
- Case 2: Ethiopia
  - Pressure from the prime minister to introduce program structure to evaluate ministry performance amid civil-service reforms.
  - In 2005 the Ministry of Finance initiated pilot program budgeting in three ministries; coverage has been progressively expanded.
  - Design builds on strategic plans; development is still in early days with limited parliamentary involvement.
- Case 3: South Africa
  - Not an LIC, but program budgeting introduced in the late 1990s with an MTEF and moves toward performance audit.
  - Budget presentation fully converted to programs with descriptions, objectives, expected outputs and indicators, and financial estimates; implemented at central and regional levels.
- Case 4: Slovenia
  - Illustrates pros and cons of gradual versus "Big Bang" introduction of program budgeting.
  - "Big Bang" worked due to imminent EU accession, champions in minister and budget director, and IMF resident advisor support; program structure was established government-wide after one year of pilot work.
  - Downside: some aspects not fully entrenched in line ministries, especially where seen as top-down; "Big Bang" circumstances are rare, especially in LICs.

*International Monetary Fund, Fiscal Affairs Department, A Basic Model of Performance-Based Budgeting, Marc Robinson and Duncan Last, Technical Notes and Manuals 09/01 | 2009.*

### Section 1

### A Basic Model of Performance-Based Budgeting

### I. Objectives of the Note
- Primary objective: elaborate a basic model of performance-based budgeting for two country categories:
  - those that wish to introduce a performance-based budgeting system while minimizing the complexities and costs of doing so; and
  - those with limited resources and capacity, including appropriate low-income countries (LICs).
- Emphasis on necessary preconditions: performance-based budgeting, even in its basic form, should not be considered in countries with seriously dysfunctional public financial management (PFM) and governance systems.
- The note describes more complex models and outlines reasons why they may not be appropriate in many countries.
- Main questions addressed:
  - What are the characteristics of a basic model of performance-based budgeting?
  - How should low-income countries approach performance-based budgeting?
  - What preconditions should exist before starting?
  - What forms of performance-based budgeting should low income countries avoid?

### II. What Is Performance-Based Budgeting?
- Definition: aims to improve the efficiency and effectiveness of public expenditure by linking the funding of public sector organizations to the results they deliver, making systematic use of performance information.
- There are multiple models with varying complexity; more sophisticated models require correspondingly sophisticated public management systems.
- Performance-based budgeting should be part of broader "managing-for-results" reforms, including:
  - civil service reforms to increase motivation and incentives of public employees;
  - organizational restructuring to increase focus on service delivery and improve coordination;
  - institutional and oversight changes to strengthen public accountability for performance.
- These complementary reforms are necessary for substantial improvements in public expenditure efficiency and effectiveness.

### III. The Model (Basic/"Performance-Informed Budgeting")
- The most basic form: ensure that key decision makers systematically take into account the results to be achieved by expenditure during budget formulation—sometimes called “performance-informed budgeting.”
- Essential requirements:
  - information about objectives and results of government expenditure, in the form of key performance indicators and a simple form of program evaluation; and
  - a budget preparation process designed to facilitate use of this information in budget funding decisions, including simple expenditure review processes and spending ministry budget decisions.
- Program classification of expenditure in the budget is highly recommended to group similar services with similar objectives and enable comparison of costs and benefits.
- Potential benefits of systematic consideration of results:
  - improve expenditure prioritization (capacity to allocate limited resources to where they will do the most good); and
  - encourage line ministries to spend more efficiently and effectively by making them aware that performance will influence funding and by reducing or streamlining controls that impede good performance.
- Examples of application:
  - If programs are not delivering intended outcomes or do so at unreasonably high cost, focusing decision makers on this during budget preparation can lead to abolition, scale-down, or restructuring of such programs.
- Fiscal discipline effects:
  - improves capacity to make “fiscal space” for new spending without commensurately increasing aggregate expenditure;
  - facilitates fiscal consolidation by helping target spending cuts at least effective or least socially important programs;
  - if successful in improving efficiency, enables government to do “more with less” and helps contain long-term upward pressure on aggregate public expenditure.
- Relationship with medium-term budget framework:
  - fits naturally with it, but the medium-term framework is not a prerequisite.
  - both approaches aim to improve expenditure prioritization; performance-based budgeting is more focused on managing efficiency and effectiveness.
  - recommended approach: use performance information and consider medium-term cost implications of expenditure choices.

### IV. Information on Objectives and Results
- Systematic information on efficiency and effectiveness of public expenditure is the most fundamental tool.
- Basic model requirement: every spending agency must
  - explicitly define the outcomes that its services (outputs) aim to deliver to the community; and
  - provide to the ministry of finance and key political decision makers during the budget preparation process key performance indicators to measure effectiveness and efficiency of its services.
- Key challenge: keep performance information simple, affordable, and usable.
  - Newcomers often attempt to build sophisticated systems in short periods (as little as a year or two), which are expensive and require skilled human resources.
  - Similar systems in OECD countries took decades to develop.
- Recommended realistic approach:
  - initially develop only a handful of key performance indicators for each ministry and subsequently for each program.
- Role of evaluation:
  - indicators alone are often insufficient; evaluation is important even in a basic model.
  - avoid allocating excessive resources to a large “monitoring and evaluation” industry using complex methodologies.
  - in a basic model, focus initially on “desk” evaluations (primary elements: analysis of (i) importance of program objective, (ii) what available performance information indicates about effectiveness and efficiency, and (iii) program logic and coordination).

### V. Budget Processes to Use Performance Information
- Availability of information is necessary but not sufficient—information must be used in the budget process.
- Countries have developed performance information and program-based budgets but failed to use them in budget decisions.
- For performance-based budgeting to work, reconsideration of spending priorities and program performance must be formally integrated into the budget process.
- Common key elements of the budget process:
  - a “strategic phase” early in the budget cycle incorporating a preliminary consideration of the government’s broad expenditure priorities;
  - an expenditure review process—even if very simple—designed to keep under review appropriateness and effectiveness of existing programs and to use performance information to identify programs to cut, eliminate, or expand;
  - a systematic process for scrutinizing all proposed new spending initiatives; and
  - a requirement that all spending ministry budget submissions be supported by information on the effectiveness and efficiency of its expenditure.
- Emphasis on expenditure review: without systematic review, making fiscal space for new priorities is much harder; performance information is most useful in assessing existing programs.
- Planning versus budgeting:
  - performance-based budgeting does not require elaborate national planning processes.
  - medium-term sectoral planning (health, education, infrastructure, economic activities) can provide essential performance information.
  - to ensure synergy, planning must be fully integrated into the budget cycle, remain light and adaptable, and link with the strategic phase.
  - where planning is institutionally separated from budgeting, introducing performance-based budgeting may fail to deliver desired results; bulky long-term plans often do not translate into budget allocations and may create conflict between planning and budgeting objectives.

### VI. A Program Budget
- Definition: classifies expenditure by types of service and objectives rather than by inputs (salaries, supplies, equipment).
- Value: indicates how much money is directed at achieving particular outcomes, enabling assessment of benefits and efficiency relative to costs.
- Recommendation: program budgeting is highly recommended for countries with capacity to introduce it.
- For countries not ready for full program budgets, improvements in performance information and budget processes can still deliver significant benefits.
- Program budget requires public presentation of key performance and cost information for each program, including:
  - the program’s objectives and how these link to national and sectoral priorities;
  - the key services “outputs” the program delivers;
  - how the program is intended to achieve its stated objectives (activities, projects);
  - key performance indicators and evaluation results by program; and
  - program costs.
- Under program budgeting:
  - budget preparation should be program based—agencies present and justify budgets in terms of programs with supporting cost and performance information;
  - program performance information should be presented to the legislature and public as part of budget documentation.
- Program budgeting often involves legal appropriation on a program basis (not always—some countries prepare on a program basis but parliament appropriates on an aggregated basis).
- Program classification considerations:
  - programs should be directly linked, as far as possible, to outcomes and outputs;
  - program classification should comprehensively cover all government expenditure—partial classifications that exclude major elements (civil service employment costs, capital expenditure) make programs questionable for priority setting;
  - a program budget requires the accounting system be enhanced to record expenditure on a continuing basis by program as well as by established economic and administrative classifications.
- Practical notes:
  - a basic model does not require a “perfect” program classification.
  - use of “administration” programs to group support service and overhead costs is acceptable where management accounting systems to allocate indirect costs do not exist.
  - usable estimates of program costs do not require accrual accounting or budgeting:
    - accrual accounting is demanding in staff and financial costs and may not be appropriate in many countries;
    - accrual budgeting is even more demanding;
    - cash budgeting systems generally provide program cost information sufficiently close to support considerable improvements in budget decision making.

### VII. Managerial Freedom
- Introduction of performance-based budgeting ideally requires greater flexibility for spending ministries and program managers, who become more accountable for results.
- In particular, performance-based budgeting requires:
  - Increased input flexibility: line managers should be given greater flexibility to choose the input mix that can most efficiently deliver services. This requires a reduction of the large number of distinct limits imposed upon expenditure by economic-classification (“line item”) in traditional budgeting.

*International Monetary Fund, Fiscal Affairs Department. A Basic Model of Performance-Based Budgeting, Marc Robinson and Duncan Last, Technical Notes and Manuals 09/01 | 2009.*

### Section 2

### _tnm0901 - Section 2

### Readiness to Introduce Performance-Based Budgeting
- Decision to introduce performance-based budgeting should be based on consideration of:
  - governance conditions;
  - the state of basic public financial management (PFM) systems; and
  - available human and financial resources.
- Performance-based budgeting is unlikely to succeed where governance is very poor (for example, "highly corrupt and rent-seeking" leadership), because political and bureaucratic leadership may have "little interest in improving public sector performance".
- Main PFM prerequisites before considering "second generation" initiatives such as performance-based budgeting:
  - The existence of sound macrofiscal policy management, so that spending ministry budgets do not suffer massive uncertainty about the funding they will receive during the budget year.
  - An ability to enforce the execution of budgets as planned, which requires respect of budgetary rules and procedures and the capacity to apply (and police) them in execution; it also requires good accounting and auditing procedures.
- Institutional prerequisite:
  - Adequate staff capacity to address the informational requirements of performance-based budgeting.
  - The "scaled-down" form of performance-based budgeting described in the note requires a reduced set of performance information but still demands capacity; LICs with serious capacity limitations may need to overcome these constraints before introducing even the simplest form.

### Administrative Process Flexibility and Employment Controls
- In LICs, reduction of input controls should generally not proceed as far as in some OECD countries; specific safeguards and controls are often appropriate:
  - Maintain separate spending limits on expenditure items particularly susceptible to corruption and abuse (entertainment, travel, consultancy, etc.).
  - Where civil-service employment regimes are rigid (civil servants cannot be fired), it may be appropriate to:
    - maintain line-item controls over employment costs; and
    - impose quantitative limits on ministry employment levels.
  - Maintain line-item controls over capital expenditure and transfer payments, as is common in developed countries.
- Administrative process flexibility is crucial for expenditure prioritization:
  - Governments need the capacity to reduce civil-service employment in low-priority or ineffective program areas and to redeploy staff as needs arise.
  - Greater civil-service employment flexibility is important to the success of performance-based budgeting and managing-for-results.
  - The appropriate degree and pace of civil-service reform will vary by country and depend on governance quality.
  - In many LICs, civil-service changes will require significant retraining and capacity-building efforts.

### Elements of a Scaled-Down Performance-Based Budgeting Model
- Key elements (as reflected in the note's table of elements):
  - A "strategic" priority setting phase early in the budget cycle.
  - An expenditure review process.
  - Systematic scrutiny of new spending proposals.
  - Information on efficiency and effectiveness to support budget submissions.
  - Introduction of a program budget structure.
  - Increased managerial flexibility.
- The scaled-down model aims to make the budget preparation process more "performance-informed" and requires a reduced set of performance information.

### "Advanced" Forms of Performance Budgeting — Caution for LICs
- Several "cutting edge" mechanisms used by some OECD countries are not part of the basic model and should be treated with great caution by LICs and many other countries. These include:
  - Budget-linked performance targets:
    - Example cited: U.K. "Public Service Agreement" system.
    - Difficult to apply in LICs because it requires:
      - a well-developed performance measurement system; and
      - a solid information base on the relationship between funding levels and expected results.
    - While comprehensive target-setting is generally inappropriate for LICs, selective targets (e.g., vaccination rates or literacy levels) may be desirable.
  - Production of summary program performance ratings for all programs (example: U.S. Program Assessment Rating Tool):
    - Relies on "a mass of established performance indicators and program evaluations".
    - Very few countries have, or could develop in the short or medium terms, a sufficiently strong performance information system to make this approach work.
  - Purchaser-provider systems:
    - Treat line ministries like commercial businesses paid "prices" by government for services delivered.
    - Problems:
      - Has been unsuccessful when applied on a government-wide basis and successful only when applied selectively to specific sectors or institutions (e.g., hospitals).
      - Extremely demanding of performance and cost information.
  - Use of unit-cost information:
    - Can be useful if applied selectively in certain sectors in LICs (cost per unit of outputs or, more rarely, outcomes) for budget planning or formula funding.
    - Collecting and maintaining unit-cost data requires additional capacity and expertise that may not be justifiable or feasible for many LICs.

### Conclusion and Overall Assessment
- The view that performance budgeting is entirely inappropriate for a wide range of countries, including all or most LICs, is too simplistic.
- A "scaled-down" model of performance-based budgeting can be implemented in some LICs and could provide significant benefits to development.
- Preconditions for attempting the scaled-down model:
  - Sound macrofiscal policy has been established.
  - PFM systems and procedures ensure that budgets are executed as planned.
  - Information systems can provide timely and reliable budgetary data.
  - Enhanced capacities exist to handle the more demanding analysis performance-based budgeting requires.
- Countries with serious governance problems are unlikely to benefit much from performance-based budgeting.

### Case Studies (summarized)
- Case 1: Mali
  - National Assembly in 1995 urged adoption of a budgeting system to check consistency with national programs and monitor progress.
  - Ministry of Finance started phased program budgeting in 1997, completing all ministries a few years later; program budgets are sent to parliament in a separate annex.
  - Development followed a classic route but has yet to become the basis of the approved budget, limiting usefulness as a management tool.
- Case 2: Ethiopia
  - Pressure from the prime minister to introduce program structure to evaluate ministry performance amid civil-service reforms.
  - In 2005 the Ministry of Finance initiated pilot program budgeting in three ministries; coverage has been progressively expanded.
  - Design builds on strategic plans; development is still in early days with limited parliamentary involvement.
- Case 3: South Africa
  - Not an LIC, but program budgeting introduced in the late 1990s with an MTEF and moves toward performance audit.
  - Budget presentation fully converted to programs with descriptions, objectives, expected outputs and indicators, and financial estimates; implemented at central and regional levels.
- Case 4: Slovenia
  - Illustrates pros and cons of gradual versus "Big Bang" introduction of program budgeting.
  - "Big Bang" worked due to imminent EU accession, champions in minister and budget director, and IMF resident advisor support; program structure was established government-wide after one year of pilot work.
  - Downside: some aspects not fully entrenched in line ministries, especially where seen as top-down; "Big Bang" circumstances are rare, especially in LICs.

*INTerNATIoNAl MoNeTAry FUND — Fiscal Affairs Department, A Basic Model of Performance-Based Budgeting, TNM/09/01*

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