GOVERNANCE GOVERNANCE EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT Introducing The New PPB – Pragmatic Program Budgeting Overcoming Design Obstacles to Planning, Management, and Control EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 1 © 2022 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved. This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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The risk of claims resulting from such infringement rests solely with you. If you wish to reuse a component of the work, it is your responsibility to determine whether permission is needed for that reuse and to obtain permission from the copyright owner. Examples of components can include, but are not limited to, tables, figures, or images. All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@worldbank.org. Graphic Designer: Maria Lopez / lopez.ten@gmail.com >>> Contents Acknowledgements iv 1. Introduction 1 2. Benefits and Conventional Operatonalization of Program Budgeting 3 2.1 Specification and Costing of Programs and Subprograms 4 2.2 Budget Execution 5 2.3 Budget Operational Management 7 3. Key Challenges 8 3.1 Avoidable Budget Execution Rigidities 8 3.2 Avoidable Proliferation of Transactions 9 3.3 Inadequate Recording and Reporting Practices 9 3.4 Avoidable Complexity 10 4. Pragmatic Policy Options 11 4.1 Releasing Funds by Program and Subprogram to Allow Flexibility below Subprograms 11 4.2 Recording to Allow For Appropriate Reporting 13 4.3 Harmonizing Budget Programs and Administrative Structures 14 Conclusions 19 References 22 Figures Figure 1. Costing of Program Budgets 5 Figure 2. Allocation of Cash Resources in Program Budgets 6 Figure 3. Budget Program Structure That May Lead To a Proliferation of Transactions 9 Figure 4. Relinquishing Control for Greater Flexibility 12 Figure 5. Alignment of Program Structure with Administrative Structure - South Africa’s Health Sector 15 Figure 6. Administrative Structure Is Adjusted to Align with Program Structure 16 Figure 7. Example of a Hybrid Structure 18 Tables Table 1. Budgeting Systems—Advantages and Disadvantages 20 >>> Acknowledgments This paper on pragmatic program budgeting is a product of the World Bank Governance Global Practice (GGP). It was authored by James Brumby (Senior Advisor), Ali Hashim (former Lead Treasury Systems Specialist), and Moritz Piatti-Fünfkirchen (Senior Economist). Excellent peer review comments were provided by Timothy Williamson (Global Lead, Public Financial Management), Jens Kristensen (Practice Manager), Srinivas Gurazada (Head, Public Expenditure and Financial Accountability Secretariat), Abdoulahi Mfombouot (Senior Economist, International Monetary Fund), and Xavier Rame (Senior Economist, International Monetary Fund). A review meeting was held with the World Bank health finance global solutions group, wherein live feedback was solicited. Adenike Sherifat Oyeyiola (Practice Manager) provided management oversight. Invaluable inputs on an early draft were received from Professor Allen Schick and Peter Brooke. Authors are grateful to the many discussions held with the World Health Organization’s Health Financing Policy Unit where these concepts and their applicability were discussed within the health sector context. This paper builds on the program implementation chapter of the World Health Organization’s book on How to Make Budgets Work for Health (2020). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< iv 1. >>> Introduction Program budgeting is a reform that intends to shift the focus of budgetary processes from control of inputs to producing measurable results. It aspires to enable governments deploy resources to priority areas and assess whether the resources have been translated into intended results. Linking resources with results can support in holding managers accountable for the delivery of specific targets and how the resources are deployed and used. Dating back to the mid-20th century, program budgeting focused on giving planners a way to consider all resources that contribute to an area of results, with implied flexibility about moving resources seamlessly to areas of greatest policy preference. By the 1960s, planning programming budgeting (PPB), as it was called, began to influence the design of budget systems. Back then, a US manager explained, “the idea was the drawing together of all agency efforts to meet particular objectives, so that the validity of each program may be assessed in terms of the overall approach, dimensions and costs and may be compared against other competing programs, potential or existing” (Greenhouse 1966, 273). However, along with the rollout, problems were encountered, many of which linger today. Greenhouse (1966) further emphasized that the defining characteristics of a ‘program’ were not universally understood to mean each and every effort of an agency to meet a particular objective or set of allied objectives, but instead reverted to more traditional usage such as “the procurement program” or “the data management program.” EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 1 PPB implementation has faltered mainly due to the difficulty pursue program budgeting reforms. Rather, for countries of combining the objectives of planning, management, and already implementing program budgeting, it identifies specific control in one budget system (Schick 1966). This tension stumbling blocks that have caused implementation difficulties remains unsatisfactorily resolved in many countries today. especially in budget execution and suggests means to resolve Program budgeting has often been associated with the them. This paper aims to help resolve the tensions between undermining of control, while the pursuit of control has been planning, management, and control in pursuit of higher at the expense of the higher-level goals of program budgeting. performance from governments. In doing so, the focus is not Practical difficulties in resolving the tension between analysis only observing and supporting the efficiency and effectiveness and budgeting were identified from the outset, threatening to goals of program budgeting but also resolving the tensions compromise the essence of program budgeting (Cutt 1974, arising from execution control and designing measures to 110). In some countries, implementation appears to have support analysis and performance. This paper is deemed gone well off-track. Instead of providing more information to more useful for developing countries, where systems are often government to manage its resources, program budgeting, not as robust or well-established compared to those of more as implemented, may have resulted in implementation developed countries. of more, rather than less, controls and a fragmentation of the budget, which is exactly counter to the aspirations of While the intention is to preserve the legacy of the original program budgeting. PPB, reconsideration is necessary to support the core budgetary functions at play during budget execution. For this This paper does not provide a full account of program budgeting, reason, it is proposed that the new PPB should be known as nor does it provide guidance as to whether countries should Pragmatic Program Budgeting. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 2 2. >>> Benefits and Conventional Operatonalization of Program Budgeting Program budgeting aims to shift the focus of the budgeting process from allocation of funding for line items of input categories such as salaries, goods, and services to expected achievements, using measurable indicators. The main advantages of program budgeting are as follows: • • It enables the government to focus on priority needs in the various sectors of the economy (e.g., malaria eradication, primary healthcare, and infant mortality in the health sector), and specify the amount of government (and potentially other) resources that will be allocated to address these priorities. It supports the development of measurable indicators to assess the impact of the deployment of resources. Monitoring the specified indicators at the end of the budgeting period, or in- year, could form a feedback loop to change the deployment of resources as necessary. • Armed with the information on impact of the resources deployed, program managers could be held accountable for the achievement of the desired outcomes for each sector as spelled out by measurable indicators. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 3 The goal of accountability does presuppose that the managers quantity, cost, quality, and timeliness of delivery. Accordingly, have the ability to manage. Without reasonable discretion each constituent of the program classification needs to provide over the application of the resources provided, it would not information which is consistent with this goal. For instance, to be possible to hold managers accountable for their failure derive the cost of the various programs and subprograms, it or success in delivering the planned objectives. In some is necessary to identify the anticipated activities, the required countries, the cry of “let the managers manage” became inputs for these activities, and the expected cost. The “make the managers manage” as the promise of program combination of these activities will estimate the cost of the budgeting began to crumble. It was not possible to hold subprogram and the combination of subprograms will provide managers accountable for what they produced if their hands the anticipated cost of the program. This should inform the were tied to detailed controls over the choice of inputs (if there total budget. is no choice over the amount and type of food you eat, you can’t be expected to manage your weight). Focusing on results while keeping a handle on inputs means that program budgeting often provides a neat fit to fixed term Program budgeting brought into sharp relief the choice and rolling multi-year plans. Depending on the classification between traditional budgeting with its focus on input controls used, this would allow governments to articulate their policy and while allowing flexibility on the output side, versus flexibility delivery objectives, considering the broad level of resources on the input side (albeit within a hard budget constraint) but required to achieve these objectives over the planning period. with firm expectations on the output side. It has often been The tussle between budgeting and planning—a perennial associated with wider reforms targeted on outcomes, as tussle in some countries—appeared to have been resolved. governments have questioned traditional approaches to But as with many apparent resolutions, the degree of the achievement of results. Quite simply, to pay forward the resolution depends on where the various stakeholders may program budgeting promise and support the government’s sit. While the planners’ intent may have been clear, the degree focus on results, program managers will need flexibility to of commitment to the programs could be contested and move allocated resources between categories of inputs within influenced by the vagaries of the annual budgeting process the span of their programs in order to be held to account wherein resources may need to be reallocated to meet for delivery. unforeseen contingencies, and the need at times to make within-year adjustments to prevent a deficit blowout. 2.1 Specification and Costing of Pragmatic program budgeting requires the following: Programs and Subprograms 1. A clear specification of activities that need to be executed to achieve the program’s objectives. For instance, in the health sector, activities would include setting up of clinics Many jurisdictions design programs that span across for specific purposes, training of staff in the required area, agencies, with some being designated as government wide. In mounting a vaccination drive, or establishing facilities to these cases, the design of programs has typically been driven provide specific types of health care. by a concern for performance across sectors, supporting the government’s desire to focus attention to where it would like to 2. Identification of the specific inputs required, organized by fix measurable targets on the output side and manage costs reasonably homogenous groupings. These would include on the input side. salaries and allowances of staff, capital and maintenance costs of specific types of equipment, and the purchase of Consistent with the logic of program budgeting, all programs— goods like drugs and other medical paraphernalia. Inputs whether within or across agencies— require estimation and can be categorized into groupings of similar items. reporting of costs and performance against objectives for each program and subprogram. Performance specification Figure 1 shows a schematic of the flow of information for cost- generally requires details of the outputs produced, including based estimation of a program. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 4 > > > F I G U R E 1 - Costing of Program Budgets Bottom up Costing Program/subprogram costing is done Line Ministry bottom-up from line item to activity. es at Program 1 im st E st Co m ra Program 3 og Subprogram pr ub /S m ra og Pr Activity Program 3, etc. Line Item Source: Authors. 2.2 Budget Execution Once the budget is formulated and authorized via legislative chain (i.e., program, subprogram, activity, and line item). The action, the actual allocation of the resources is done in the corresponding budget release process also follows the same budget execution phase. This phase should support the use sequence (see Figure 2). of resources consistent with the budget presentation passed by the legislature. Therefore, program budgeting involves the following: The budget allocation as passed by the Parliament and 1. A budget execution plan, shared with program managers, recorded in the budget documents specifies the allocations that specifies the intended release of budgetary resources at the program and subprogram level. However, this needs during the year to be supplemented by a budget execution plan that would 2. A release schedule that specifies the amounts to be further detail the availability of resources for program and released to program, subprogram, activity, and line item subprogram managers. 3. Implementation of the budget execution plan across the year, based on available resources If costing for the original budget was developed bottom-up by 4. Realistic and attributable targets that reflect the available aggregating inputs, activities, subprograms, and programs, the resources. budget execution plan is often developed following the same EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 5 > > > F I G U R E 2 - Allocation of Cash Resources in Program Budgets Top-Down Allocation Budget allocation and budget releases Line Ministry are done top-down by program to subprogram to activity and line item. Program 1 s se ea el /R ns tio Program 3 ca Subprogram llo A et dg Bu Activity Program 3, etc. Line Item Source: Authors. In practice, the actual deployment of resources to programs Due to uncertainty in the amount of resources actually and subprograms goes through the budget release process available, many jurisdictions adjust the within-year budgetary which is managed by the ministry of finance (MOF) and the releases to hold back some resources for later in the year, line ministry management. In many countries, this release when much of the uncertainty is resolved. This can cause schedule is impacted by the actual availability of resources, delays in execution of programs and underspending for the including the realization of revenue and financing targets and year as a whole, and is generally contrary to the objective of the control of other expenditures, as the fiscal year unfolds. allowing the managers manage within the budget constraints. Although practice differs across jurisdictions, the actual budget releases are normally divided into quarterly or monthly tranches over the course of the budget year. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 6 2.3 Budget Operational Management During the fiscal year, the line ministry management, the releases, and the progress being made against program and MOF, and relevant government decision makers intend to subprogram targets. determine whether the program and subprogram objectives are on target. For this they require information on the amount This note identifies some key challenges that arise during of resources that have been budgeted for various programs implementation when the program budget was designed and subprograms, the amount applied, and the measurable according to the structure shown in Figure 2. Hence mitigation indicators relative to the forecasts. This can help inform strategies to these challenges are proposed. The modified decisions about redeployment of resources. scheme and processes for the budget execution plan could then become the basis of pragmatic program budgeting. Pragmatic program budgeting requires within-year reporting on the actual resources used relative to budget EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 7 3. >>> Key Challenges Introducing a program budget structure allows linking of budgets to objectives, usually captured as outputs or outcomes. However, adopting a program structure can add complexity to formulation, execution, and reporting. This section discusses some frequently occurring structural problems with implementing program budgets, when designed as outlined in section 2.2. The subsequent section proposes pragmatic solutions to these challenges. 3.1 Avoidable Budget Execution Rigidities A central promise of program budgeting is to remove rigidities. In the transition from input-based to program budgeting, activities are used to facilitate costing of programs. If appropriations and controls follow the inputs–activities–subprograms–programs structure, it means that at least one additional layer, and maybe more, to the number of controls have been introduced, leading to increased rigidities. This will make the reallocation of resources more cumbersome, as it will involve gaining additional approvals to permit virement between those lines of control. This is contrary to the value proposition of program budgeting and instead would result in high-cost, low-value interactions between program managers and the ultimate budget controllers. If spending agencies derive resources from multiple programs and subprograms, this can be particularly problematic as virements across programs are challenging. Whereas previously, spending agencies were procuring inputs against a budget provision, this structure is potentially much more constraining. Drawing funds from multiple programs and subprograms and having input and activity level controls leaves very little discretion on fund utilization for actual spending agencies. The fragmentation of the resources can then complicate effective planning at the spending unit level, and thereby undermine public management and service delivery functions. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 8 3.2 Avoidable Proliferation of Transactions The transition to program budgeting has commonly resulted a paper-based system, the workload would likely become in more, not less, controls than those in a traditional input- unmanageable (Hashim and Piatti-Fünfkirchen 2018; World based budgeting system. In addition to increased rigidities, Bank 2016). In Zambia for example, there are about 3,000 it would also increase the transaction workload even with a activities in the Ministry of Health’s budget comprising of more functioning automated financial management information than 15,000 line items requiring execution. This becomes system (FMIS). Various activities in a subprogram would administratively burdensome and has efficiency implications need to be recorded and processed as separate individual as it reduces economies of scale (Farooq and Schaeffer 2017; transactions. The average value of transaction decreases World Bank 2016). but the number of transactions increases (see Figure 3). In > > > F I G U R E 3 - Budget Program Structure That May Lead To a Proliferation of Transactions Line Ministry FLOW OF FUNDS ADMINISTRATIVE HEIRARCHY Budget allocations and budget Spending is done by spending releases are made according Program 2 units in a line ministry which to program, subprogram, and Directorate are organized according to an activity. Program 1 administrative heirarchy Program 3 Subprogram 1 Division Activity 1 Reports from spending unit Activity 2 1 to subprogram 1 by activity and line item Spending Suppliers Unit Cost and other Funding to spending unit 2 Center 1 payees from subprogram 1 by activity and line item Activity n Source: Authors. 3.3 Inadequate Recording and Reporting Practices Program budgeting is not intended to undermine effective “global” budget allocations. But if the spending unit or cost control over the quantum of inputs. In fact, a major aspect center is not explicitly coded into the financial transaction, it of program budgets (although often understated) is to may not be possible to generate information during the year accompany the focus on objectives with tight control over that is commensurate with the accountability. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 9 The implications are straightforward. If the spending unit • Drawing funds from multiple programs invariably or cost center code is not recorded in the FMIS at budget fragments financing and introduces undesired rigidities. allocation, budget release, and expenditure stages, the In such a scenario, program budgeting may increase program manager would have no means to give effect to or flexibility for program managers, but create rigidities for monitor the allocation of resources to the various spending spending unit managers. As these are often at the point of units or cost centers that report to him or her. The misalignment service delivery (e.g., schools or health clinics), this may between the management system and the budget system inhibit the autonomy they require to operate efficiently. could have damaging results, with resources being over- consumed by some spending units and under-consumed by Implementing the program structure is much simpler other units, with consequences for delivery—positive results if there is some congruence between program and would be jeopardized. administrative structure. Congruence between budget classification and executing 3.4 Avoidable Complexity organizations should exist at some level, or accountability may become frayed and the ability to execute can be compromised. Depending on the size and nature of organization, congruence could occur at program or subprogram level. This would allow A program structure that allows one spending unit to draw for the recording of all costs including the total cost of the funding from multiple programs and subprograms complicates program and subprogram. Program and subprogram codes accountability and becomes difficult to manage. Such a “many could be used as a substitute for the department and the to many” relationship faces these challenges: division code. • As the spending units implement multiple programs, it However, the actual delivery of services for particular becomes challenging to track progress of programs. subprograms is not necessarily carried out at the department Attribution of performance of the spending unit to specific or division level, but by spending units within the department financing sources becomes difficult. This therefore or division. For example, in the case of the health ministry, the complicates accountability. actual delivery of services is done by hospitals and clinics; and in the education sector, the service delivery units are • A complex relationship between spending units and the schools, colleges, and universities. In these cases, the subprograms makes costing difficult. The total operational activities related to a particular program or subprogram are cost of the spending unit needs to be carefully apportioned carried out through multiple spending units. The program or to relevant programs. This can be particularly challenging subprogram manager requires information on the amount of if the staff assigned to a spending unit work on multiple resources allocated to various spending units that have been program objectives and resources at the spending unit are contracted to carry out the program or subprogram. shared across purposes. Conflicted in this way, the budget system would fail to • A complex arrangement will complicate reporting effectively control inputs or outputs, and misallocation may structures as spending unit managers will have to report occur. Accountability would be hard to anchor; low value to multiple program managers. transactions would abound, and results would suffer. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 10 4. >>> Pragmatic Policy Options This section discusses implementation challenges and offers guidance to how these can be mitigated with the adoption of pragmatic program budgeting (PPB). The perspective of the health sector is used to ground the new PPB proposal. 4.1 Releasing Funds by Program and Subprogram to Allow Flexibility below Subprograms While the use of the program or subprogram as the fund head has not always been practiced, some have recognized this as an important feature in program budgeting (Ho et al. 2019; OECD 2019). This will adjust the flow of funds and administrative relationships as portrayed in Figure 4. Funds are released from line ministry to program and subprogram. Further lower-level allocation arrangements are occurring within the management structure in the spending agency. The total budget for each subprogram can still be determined by a combination of the top-down and bottom-up exercise. However, at the facility level, funds should not, as far as possible, be allocated by activity or line-item basis; instead facilities should preferably operate on a “global budget” with the flexibility to allocate funds across activities and line items. Spending units would be responsible for executing the budget to programs and subprograms. Spending units would report on the use of funds to the subprograms. Virement at the spending unit level could occur within subprograms, but at higher levels for the agency. Subprogram managers would report upward on program execution and the realization of program goals, associated with their spending units. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 11 Figure 4 shows how aligning subprograms and cost centers can support increased flexibility over the choice of inputs while supporting control within global cash limits, in pursuit of program objectives. > > > F I G U R E 4 - Relinquishing Control for Greater Flexibility Line Ministry FLOW OF FUNDS ADMINISTRATIVE HEIRARCHY Budget allocations and budget releases are made according to program and subprogram. Program 2 Spending is done by spending Directorate units in a line ministry which are organized according to an Program 2 administrative heirarchy Program 3 Division Money is spent on A subprogram line items (e.g., natal such as services and Reports from SU1 to Spending payroll, care) can be subprogram 1 by line item Unit Cost goods, & executed through Subprogram 1 Funding to SU1 from Center 1 services, several spending etc. Suppliers Subprogram 1 by line item units and will get and other reports from each. payees Reports from SU2 to Spending Subprograms 1 & 2 by line item Unit Cost Funding to SU2 from Center 2 Subprogram 2 by line item A spending unit (e.g. a hospital) can receive funds from Subprogram 2 several subprograms and will report baclk to each Source: Authors. This approach would relinquish formal central budget controls line items can be aggregated, such as into running costs at the activity level and the line-item level. Line management and program costs. Such reorientation of the central finance could retain the controls necessary to produce the program agency’s focus has been reflected in the structure and in as efficient way as possible. There is no added benefit to functionality of ministries of finance (Schick 2001). having formal budget allocations and control at the activity level. While the activity level is useful for costing, using it for In countries such as Cambodia, Ghana, and Zambia, the release and formal control processes is counterproductive. inappropriate imposition of controls has meant a proliferation Relinquishing the formal activity level control extends flexibility of controls driven by the number of line ministry activities to program managers and ensures greater accountability for that can run into the hundreds. The total number of these outcomes and targets. It allows for honoring the aspiration of activities for all ministries could be 10,000 or more. Such large program budgeting on the one hand, but leaving in place an number means that it can take the budget controller several effective control system that will reinforce the focus on the months into the new financial year to complete the process achievement of objectives. of allocating at this level (sometimes referred to as “loading the budget”). Experience suggests that during the period while There will be fewer control-oriented transactions. This will this work is being done, line managers are either starved of allow the agency and the MOF staff to focus more directly actual funding or operate on unpredictable interim releases. on designing appropriate policies, identifying interventions This can have an adverse effect on program and subprogram to support them, and analyzing the performance of agencies service delivery (World Bank 2016b). in delivering them. To build confidence on this approach, EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 12 Secondly, it is not necessary that the execution of a subprogram not be used for central budgetary control. They would be follow the original regime of activities and sub-activities. In relevant for reporting purposes. The spending unit and keeping with the Pragmatic Program Budgeting approach, cost center code and the line-item code would be required discretion lies with the program or subprogram manager. for each transaction, allowing the program manager to A budgetary envelope is available for each subprogram, assert control at this lower level as circumstances deemed notionally divided by line item. Having a secured funding, fit. The line- item codes would ensure that the prescribed the subprogram manager may redesignate these resources fungibility restrictions would be adhered to. into different activities to assist in meeting or exceeding the objectives of the program and subprogram. They could make 4. Treasury regulations may still need to exist where this decision based on the information at hand; importantly constraints are necessary on the decision rights though, this discretion could occur only within the constraint of of program managers in areas such as personnel the global limits they have. numbers, use of government real estate, and capital expenditure rules. Without doubt, there can be a perceived tension between controlling expenditure on the one hand and letting managers manage on the other. In the end, it is the central finance agency and the finance minister who will bear the responsibility for a 4.2 Recording to Allow For blowout, adding to a sense of hesitancy and perhaps, inducing a fear to let go. But it is important to recognize that program Appropriate Reporting budgeting does not involve a complete letting go. For instance, in countries where personnel-related benefits are not fully costed in programs, it will make sense to continue other forms Transactions cannot be reported accurately to a given level of control over personnel numbers and related cost drivers. unless they are recorded at that level. The FMIS needs Any organization would have to constrain behavior in keeping to record each transaction, specifying the program, the with its objectives; treasury regulations will still exist, and subprogram, the full spending unit code (including the ministry, these can be used to reinforce the focus on performance by department, and division to which it belongs), and the line item concentrating on what matters for performance rather than for the expenditure. The purpose of this is to track the flow what does not. In many cases, these constraints are designed of funds to spending units and the use of those funds by the to address a potential misalignment between the interests service delivery unit. of individuals or program managers and the interests of the greater good. Sometimes, measures such as constraining Recording is easier now than it used to be. Modern financial travel or hiring expensive consultants may appear to contradict management information systems can significantly assist with the raison d’etre of program budgeting. In fact, they indicate the implementation of a well-designed program structure. All that program budgeting does not provide a complete contract spending should be captured in the FMIS with each transaction for performance, and just like a conditional grant, the funder being compliant with the full chart of accounts, detailing retains an interest in the use of resources (Petrie 2002). program, subprogram, spending unit or cost center, and line item. This will make it possible to report by facility, program, Pragmatic Program Budgeting requires the following: and item in various combinations of management accounts. 1. The program level, or in some cases, the subprogram The FMIS could also help store information on the progress in level, can be used as the fund head for budget allocations achieving measurable indicators that have been formulated at and associated controls. the start of the year for a particular program and subprogram. A failure to include spending unit or cost center codes in the 2. The designation of a functioning control protocol for funding record of financial transactions can impede the allocation of at the program or subprogram level, with additional limited personnel-related costs to programs and subprograms and transitional restrictions on the use of funds across broad result in underestimation of program and subprogram costs. line-item categories beneath that. Government service delivery remains an overwhelmingly 3. A similar control regime could be prescribed for the human capital business. Accordingly, personnel-related costs spending unit manager. Activity or sub-activity codes could often constitute the single largest component of a program or still be recorded in the financial transactions but would subprogram cost. The majority of these costs relate to payroll EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 13 and procurement systems (for non-staff HR costs). These a point of contention. Here the PBB approach as specified systems reflect the organization structure of a line ministry, and in this note proposes options to harmonize program and not the program or subprogram classification. Therefore, for administrative structures to resolve these issues. these costs to be allocated to the programs and subprograms, it is necessary that the personnel-related costs of spending Implementing program budgeting is much simpler when there units be mapped out by programs and subprograms. The is a limited number of programs and some congruence or inclusion of spending unit codes in the record of financial at least simple and clear mapping between administrative transactions would make this process easier and streamlined. (organizational) structures and budget programs. To some, Even in the case where a spending unit is receiving money this sounds contrary to the objectives of program budgeting, from various subprograms and staff in the unit are carrying as programs are defined by grouping activities that mutually out tasks related to these programs, the payroll costs of support the achievement of objectives. But since its inception, the unit can be divided in proportion to the money that it this conflict of purpose between analytical underpinnings receives from the different programs and subprograms. The and management control has never been satisfactorily allocation of these costs through the year may require a time resolved in program budgeting. As the focus here is on allocation system. devising a pragmatic approach, this paper takes the view that some compromise may be necessary to implement In some jurisdictions, personnel-related costs are lumped program budgeting. together against a separate program called overhead and or management. However, this approach is not recommended. It Any of the three approaches below can help resolve the issue: directly contradicts the aspiration of program budgeting. While some staff may spend most of their time on management- 1. Programs can be aligned with existing government related activities across different programs, the actual delivery administrative structures of services depends on doctors, teachers, nurses, and other 2. Administrative structures can be adjusted to align health workers performing the tasks that are directly related with programs to specific programs and subprograms. An exclusion of these 3. A combination of the two, depending on how they fit in a costs from the cost of the subprogram would on the one hand particular agency. under-represent the actual costs of service delivery while on the other hand over-represent the costs associated with Organization change can be costly. While changing the corporate functions. organizational structure to fit with program designs may seem to be more consistent with the aspirations of program Pragmatic Program Budgeting requires the following: budgeting, it is important to consider the overarching objectives of efficiency and effectiveness. Program budgeting aims to 1. Alignment of the budget classification and the chart of support the achievement of a better performing government, accounts to support differentiated control and reporting thus if an organizational restructuring would be costly, it may aspects of public financial management. make sense to avoid that. 2. Spreading human resource costs across programs and The derivation of program objectives may need to balance the subprograms based on the personnel’s efforts associated gains from grouping activities together that support common with achieving the target results of programs and objectives on the one hand with the realities of government subprograms. organization on the other. Standardized presentations of COFOG functions (UN system of Classification of the Functions of Government) and subfunctions are not likely to 4.3 Harmonizing Budget Programs be that helpful to a realistic consideration of what might fit best for any particular jurisdiction. Hence there should be a balance and Administrative Structures between organizing program budgets purely around ideal objectives and recognizing the need for stable administrative structures to implement the agency budget each year. In The design of the program structure is often a challenge to areas of critical delivery such as health, any dislocations implementation at both the central and decentralized levels of caused by reorganization struggles can be costly in human ministries. The devolution of budget authority from the MOF and financial terms. to sectoral ministries and down to program managers is often EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 14 (i) Align Programs to Existing Administrative Structures Figure 5 shows how programs are serviced by multiple units in the South African health system. Here the district health A perfect program budget system is probably an ideal that may services department serves multiple purposes and finances not be achieved; however, the concern is whether it offers an spending units such as district hospitals, health centers and improvement over the pre-existing system. In early stages of clinics, and primary care facilities. As the nature of these types reform, the full alignment between programs and organizational of facilities varies quite significantly, meaningful indicators and structure can contribute to securing accountability and building targets would be difficult to establish. acceptance of the program logic. As accountability grows, the program system should help in exposing institutional inefficiencies and reinforce good connections between the budget and the achievement of results. > > > F I G U R E 5 - Alignment of Program Structure with Administrative Structure - South Africa’s Health Sector Progams and Organizational Entities Department of Health Subprograms Executing Subprograms Vertical Programs Units providing facilities management Department of Health HIV/AIDs/TB etc. for: Community health service centers; Global Fund Emergency and other transport services; Hospitals and other facilities Centrally managed programs: Provincial DOH Units providing support services • Facilities management management Laundry services; Engineering services; • Support services management Forensic services; Orthotic and prosthetic services; Cape medical depot Directorate for provision Central hospital services: of central health • Provincial tertiary Central healthcare services facilities services • Hospital services Tertiary healthcare service facilities Suppliers General hospitals and Directorate for provision Tuberculosis hospitals; Psych hospitals; payees of provincial health Provincial health services Dental training hospitals services Step-down. Sub acute and chronic medical hospitals Directorate for provision District hopitals of district health District health services Health centers and clinics primary care services facilitites Units providing: Directorate for provision Emergency transport of emergency transport Medical transport services Planned patient transport services Unites providing training Nurse training college Emergency medical services; Training college Health sciences Health sciences Bursaries; Primary healthcare training and training directorate and training Other training facilities Source: Authors. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 15 (ii) Align Administrative Structures to Output-Oriented program structure), each of which is responsible for executing Program Structure one program. Spending units within these directorates, such as general hospitals or health clinics, are mapped to the Form should follow function. Consideration of programs respective directorate. encourages consideration of the core functions of the ministry, thus aligning administrative structures with the For the most part, the spending units are responsible for program structure would be a logical move. This will require executing one subprogram and would access funds from only organizational and administrative reform in the ministry—a one subprogram. Zimbabwe has implemented a good working complex and usually a high-risk task. For example, output- program budget along those lines where a primary care oriented health programs may comprise primary, secondary, program caters to financing primary care facilities and clinics, tertiary, or public health and preventive care, which would and a secondary care program finances district hospitals mean that budgets are explicitly allocated to these programs. among others. This allows allocation of funds by level of care Such programs would usually be executed by separate and allows program managers to outsource specific providers directorates (new administrative structures aligned with in that level of care on an output basis (Figure 6). > > > F I G U R E 6 - Administrative Structure Is Adjusted to Align with Program Structure Progams and Organizational Entities Department of Health Subprograms Executing Subprograms Personnel Ministry Head Office Central procurement; Centrally managed programs Management Capital projects Facilities maintenance; Other support services Primary health care facilities Directorate for District hospital Provision of Primary care Health centers and clinics Primary Care Primary care facilities Directorate for Suppliers General hospitals at central, provincial, Provision of Secondary care and and district levels Secondary Care payees Directorate for Cancer, tuberculosis, psychiatric, Provision of Tertiary care and dental training hospitals Tertiary Care Directorate of Implementation teams for delivery Public health Public Health and of public health and prevention care and preventive care Preventive Care (mainly at the district level) Source: Authors. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 16 This approach addresses many of the problems associated executing units where they are spent. It becomes a necessary with implementing program budgeting. For example, it but not a sufficient condition to require recording the spending provides clear flexibility for program managers and clear unit. In general, it is best to capture key item inputs, such as accountability. Health services can be purchased directly at personnel and medicines, within the service programs, since subprogram or directorate level, from provider or spending they reflect the most important management inputs and costs unit. There is flexibility at the spending unit level on how to use of the program and are essential in managing these programs funds. Spending units then report to program and directorates and assessing value for money. that are congruent. The outcome orientation allows for a budget allocation by purpose. For example, primary care or This scenario can be managed by establishing several cost a response to COVID-19 could be explicitly prioritized and centers in the spending unit, each with a different charge code. implemented or used as basis for strategic purchasing. Such For instance, the second program could be a capital budget clear delineation of function will however complicate the project managed by the central Ministry of Health; or it could delivery of integrated care. also be a program financed by external donors to combat HIV/AIDS or COVID-19. In this case, spending unit mangers While the majority of relationships can be mapped from would need to report to administrative managers and program spending unit to subprogram, some challenges remain. For managers. Reporting to program managers would be done by example, the primary care program and the preventive care charge code assigned to each cost center and reporting to and public health program may have overlaps, as some administrative managers by spending unit for all charge codes services will be delivered at the same spending unit (health from which the spending unit draws money. clinic). Development partners may also wish to finance a specific disease (e.g., HIV/AIDS or malaria). Specific work Accordingly, expenditure transactions need to specify on the detection and prevention of disease may happen program, subprogram, cost center, and line item to enable at primary care facilities while the treatment of patients at complete accounting. Where cost centers and charge codes higher level care facilities can be mapped to other programs. share staff, then the staff costs will need to be allocated to the Therefore, the introduction of vertical disease specific respective charge codes based on the time spent by staff on programs complicates and fragments the program structure. the corresponding programs. How such challenges can be addressed with a hybrid structure is discussed subsequently. Examples of such a hybrid structure for the health sector are shown in Figure 7. While the administrative structure (iii) Adopt a Hybrid Structure is generally well-aligned to the program logic, there are some cases where units will receive a flow of funds and/or Adopting both approaches entails spending undertaken intermediate services from programs managed by other units, by spending units in a line ministry organized according to hence the characterization is a “hybrid.” Such structures programs and subprograms. The spending unit or cost center require additional information and control support and are may receive funds from multiple programs. more complex to implement. Determining the full cost of a health program requires the apportionment of the cost of centrally managed costs to the EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 17 > > > F I G U R E 7 - Example of a Hybrid Structure Organizational Entities Example of Organizational Entities Ministry Progams and (Spending Units) and Cost Centers (Spending Units) within Spending Units Executing of Health Subprograms Executing Subprograms Separate Subprograms Personnel Ministry Head General hospitals at central, Cantrally Managed Central procurement Office provincial, and district levels Programs Capital projects (spending units) Facilities maintenance Other supportive services Cost center for facilities management and support Primary Care Primary health care facilities services (managed centrally) Directorate Primary Care District hospital Health centers and clinics Primary care facilities Cost center for capital projects (managed centrally) Secondary Care Secondary Care FUNDS FLOW Cost center for secondary care services Tertiary Care Cancer, tuberculosis, psychiatric, Tertiary Care and dental training hospitals Urgent Care Emergency transport services; Urgent Care Urgent care facilitites; Trauma center Separate cost center for COVID-19 Public Health and Public health facilities Preventive Care Public Health and Malaria eradication facilities Preventive Care HIV/Aids prevention clinics Separate cost center COVID-19 for HIV/Aids Source: Authors. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 18 >>> Conclusions Program budgeting holds a lot of promise. While many countries have pursued such reforms, implementation challenges abound and have often led to slow progress and discouraging results. This paper systematically identifies implementation challenges to a common approach to program budgeting and offers concrete and pragmatic solutions. The proposed actions in this paper aim to help reap the benefits of program budgeting, without having to deal with the associated implementation pitfalls. This paper proposes reforms that foster more efficient service delivery without compromising accountability. Table 1 summarizes chief characteristics by budgeting system, standard reasons for preferring the approach, and common barriers to success. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 19 > > > T A B L E 1 - Budgeting Systems—Advantages and Disadvantages Budget system Chief characteristic Why prefer this approach Common barriers to success Traditional, Appropriations fund Strong orientation to Lack of flexibility when relative prices administrative units and provide control control and alignment of or requirements for resources change, unit and line points related to items accountability between compromising production efficiency. item of expenditure usually administrative unit and use by spending unit and of funds. Budgeting becomes separated from economic type categories policy performance, which leads to at varying levels of detail. Performance orientation budgeting being a marginal game can be generated outside with undue focus on feeding the the appropriation system. administrative units’ cost structure. Compromised Appropriations fund Strong orientation to the Separation of steering (through program programs that are public purpose, rather programs) and rowing (through budgeting organized based on than the control purpose, administrative units) dissipates objectives, which may or with accountability related accountability and creates conflict over may not relate directly to to programs rather than appropriate control environment. This spending units. administrative units. often leads to complexities and rigidities in execution that compromise the Program and administrative original intention of program budgeting accountability can co-exist. and arguably results in the worst of both worlds—excessive controls but compromised performance orientation. To mitigate the problems described in Table 1, three Following these three points would allow an outcome approaches are recommended: orientation through retention of a program structure that does not introduce excessive budget fragmentation, rigidities, 1. Estimate costs and develop the budget bottom-up using or unnecessary complexities. It also allows for improved inputs and activities. However, the budget should only accountability and reporting. be approved, allocated, and released at the program, subprogram, and broad input category level. This will In addition to these three points, below are some of the address problems of rigidities and a potential proliferation pragmatic actions worth highlighting that will allow for adequate of transactions during implementation. implementation of program budgets: 2. While the budget is approved at the program and • Specify clearly the activities that need to be executed to subprogram level, spending against the full set of accounts achieve the objectives of the program. should still be recorded. This should include detailed • Identify the specific inputs required, organized by information on inputs, activities, spending units, and cost reasonably homogenous groupings. centers to facilitate accountability, costing, and tracking of • Generate a budget execution plan, shared with program program progress. managers, that specifies the intended release of budgetary resources during the year. 3. Minimize complexity by pursuing congruence of program • Release a schedule that specifies the amounts to be and administrative structure. To the extent possible, released to at least the level of the aggregation that is one spending unit should draw from a limited number of contained within an agency. programs and subprograms. • Implement the budget plan within a year to the extent possible, as allowed by the availability of resources. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 20 • Report within-year on the actual resources used relative without dealing with the risks that program budgeting entails. to budget releases, and the progress toward achieving the Whether or not program budgeting should be pursued in a program and subprogram objectives. low-capacity environment remains an open question that this • Use the program level, or in some cases, the subprogram paper does not address. The response would most likely need level, as the fund head for budget allocations and to be context-specific, and empirical research on this question associated controls. would be valuable. • Designate a functioning control protocol for funding at the program or subprogram level, with additional limited For countries that are already engaged in a program budgeting transitional restrictions on the use of funds across broad reform, taking a pragmatic approach to implementation line-item categories. challenges is desirable. This requires time and an iterative • Prescribe a similar control regime for the spending unit process to allow learning from past and emerging experiences. manager. Activity or sub-activity codes could still be A program budgeting design also needs to be sensitive to recorded in the financial transactions but would not be contextual realities and political economy considerations. used for central budgetary control. They would be relevant Performance and behavior across public sector institutions are for reporting purposes. The spending unit and cost center far from uniform. Different agencies face different complexities, code and the line-item code would be required for each some have large delivery programs while others may be small transaction, allowing the program manager to assert policy units. Differentiated approaches are quite common in control at this lower level as circumstances deemed fit. public sector performance contracting, with differing levels of The line-item codes would ensure that the prescribed autonomy provided to different agencies. Pragmatic program fungibility restrictions would be adhered to. budgeting may provide an element in a contract that can exist • Align the budget classification and the chart of accounts in different forms across the bureaucracy. to support differentiated control and reporting aspects of public financial management. This paper identifies implementation challenges than can be • Spread human resource costs across program and anticipated and addressed. For example, merely adding a subprograms based on the personnel’s efforts associated program segment to the chart of accounts will likely increase with the achievement of the objectives of programs and rigidities that may make the system more onerous and less subprograms. flexible than the legacy input-based line-item budget. In anticipation of this challenge, a dialogue can be held on what Country context always matters. These actions are a useful associated changes with the budget allocation process and checklist for managing some of the trade-offs associated with control protocols are required. Similarly, countries can avoid program budgeting. Benefits from program budgeting may flow the temptation of controlling at the activity level and ensure with these pragmatic actions; benefits will be compromised in that spending is accounted for and reported against the their absence. necessary level of detail. Finally, programs can be designed with consideration of simplicity, especially during the early Program budgeting, if designed well and with simplicity such stages of the reform process. Such measures will give that it can be implemented in low-capacity environments, confidence that the system can be operationalized and yield can yield tangible results. However, some of these results tangible results. may be achieved through alternative means of budgeting, EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 21 >>> References Cutt, James. 1974. A Planning, Programming, and Budgeting Manual. New York: Praeger Publishers. 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