The basics of impact-based budgeting

“Select appropriate performance information, design a relevant resource allocation, combine them with a proper decision-making process…”

That sounds like a recipe for implementing a performance-based budget. But as it does not consist of a specific ingredients aggregation, one might face difficulties attempting to define exact quantities for each ingredient!

In a series of four articles, we aim to give a broad overview of the concept of performance–based budgeting and its impacts through two case studies, i.e in France and in the UK. As a conclusion, we will put forward recommendations to the public administrations who would be tempted to implement such a budgetary approach.

Why should governments implement performance budgeting?

Pressure to reduce public expenditures, financial crises, structural & fundamental changes in political administrations… a large number of catalysts to implement performance-based measures could be mentioned.

To better understand public sector challenges and imperatives supporting the use of performance budgeting, you can explore the “Eight imperatives for public sector reform” accessible from our BE Institute.

More broadly, performance budgeting entails two paradigm shifts in decision making:

• Accountability : from inputs (i.e. HR and money resources consumption) to performance (i.e. impacting the economy and delivering results)
• Timeliness : from annual budgeting to multiannual action planning

Which performance budgeting model to choose?

Despite the absence of a general agreement on the definition of performance budgeting models, the OECD [1] distinguishes three types of use of performance information:

• Presentational: Performance information is used as background information. Its purposes are about accountability for policy makers and giving the opportunity for stakeholders to debate. In this model, no direct linkage can be made between performance information and resource allocation
• Performance-informed budgeting: Performance information is used to support decision making among other priorities depending mostly on the context
• Direct/formula performance budgeting: Allocation of resources based directly on performance information (e.g. Rewards and penalties relating to the activity produced)

What kind of performance information to use?

Among all types of performance information, from simple information on business processes to complex cost-benefit and productivity ratios, two categories can be emphasized:

Indicators

• Indicators could be defined as quantifiable measures used to assess the level of performance of a state regarding its obligations, objectives and citizens‘ expectations
• Indicators have strong advantages but also limits: Even if they are relevant, representative, cost-effective, and comparable and that they minimize perverse effects, they are often insufficient to allow judgments on a program effectiveness since they are commonly influenced by external factors. As a consequence, it is necessary to differentiate between endogenous factors (ie. specifically implemented measures) and exogenous factors (ie. external measures or contextual effects) to analyse the trends in a indicator. For a given indicator, it is therefore necessary to assess the impact rate of each factor (both direct and indirect) previously identified. Subsequently, it will be possible to establish whether these factors create synergies (e.g. synergies obtained between education and cultural policies) or cannibalize each other (e.g. continuous synchronization between economical and employment measures). This analysis is made possible by a strict definition of the scope of assessment of each performance indicator.

Evaluations

• Evaluations aim to analyse precisely future, ongoing or completed activities vis-à-vis defined objectives and expectations. Relevant evaluations are ex-ante and ex-post analyses.
• Evaluations have significant benefits but also limits: Evaluations help decision makers understand the outcomes of decisions; however, even though they conduct ex-ante and ex-post evaluations, governments still face time-lag issues producing misleading results.

What are the objectives of such measures and evaluations?

Three main benefits [2] can be derived from measures and evaluations:

• Sound resource allocation to budgetary priorities (public expenditures control, efficiency improvement, prioritization of expenditures, etc.)
• Empowerment to manage and decide rather than to spend (public service delivery enhancement, agent performance improvement, greater flexibility in the use of resources, etc.)
• Improved accountability to officials and to citizens (increased transparency achieved through the enlargement of information submitted to politicians and citizens)

Examples of managing-for-results measures

Targeted outcomes clarification

• Mix of inputs used to deliver services adjustments (labor input vs. externally sourced inputs)
• Performance-based extrinsic incentives introduction (by initiating rewards and sanctions)
• Customer-oriented measures (by defining clients rights through “client rights charters” – waiting time limits, quality of services, etc.)
• Market-type reforms (by making public service providers operating in a more business-like manner – competitive tendering, market simulation, etc.)

How to implement this strategy?

Below is a non-exhaustive list of benefits and risks due to four main complementary implementation strategies we diagnose in accordance with the OECD reports [3] :

• “Bottom-up” approach brings flexibility, accountability and adaptability
• “Top-down” approach relies on strong pressure, uniformity and coordination
• “Incremental” approach allows better spread of efforts and gradual improvements
• “Big Bang” approach creates dynamism and delivers time-saving but (cannot be combined with a bottom-up approach since it would disprove the afore-mentioned gains)

Authors:
Laetitia Chatain, Senior Consultant
Edouard Chambalu, Analyst
Francois Lanquetot, Partner