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 2010 Asiyah Kassim

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Line-Item Budgeting Systems (LIBS)

Performance Based Budgeting Systems (PPBS)

Modified Budgeting Systems (MBS)

Zero-Based Budgeting Systems (ZBS)


To be able to explain the types of budgeting systems practised in
Malaysia since independent

To be able to discuss the elements of LIBS, PPBS, MBS and ZBS

To be able to critically evaluate the usefulness, strengths and


weaknesses of each of the budgeting system
TheTraditional
The TraditionalBudgeting
BudgetingSystem
System(TBS)
(TBS)or
orthe
theLIBS
LIBSwas
wasthethefirst
first
budgetingsystem
budgeting systemused
usedin
inMalaysia.
Malaysia.
Asthe
As therole
roleof
ofgovernment
governmentexpands
expandsand
andthe
thesize
sizeof
ofpublic
publicexpenditure
expenditure
increasestremendously,
increases tremendously,the
theeffectiveness
effectivenessof
ofTBS/LIBS
TBS/LIBSas asaatool
toolfor
for
policyformulations
policy formulationsand
andexecution
executionbecame
becameweaker.
weaker.
Therefore,aanew
Therefore, newbudgeting
budgetingsystem
systemthat
thatwill
willaddress
addressitself
itselfto
tothe
theissues
issues
andthe
and theincorporation
incorporationofofaawider
widerhorizon
horizonisisneeded.
needed.
Thus,Programme
Thus, ProgrammeandandPerformance
PerformanceBudgeting
BudgetingSystem
System(PPBS)
(PPBS)waswas
introducedin
introduced in1969
1969in
inensuring
ensuringananeffective
effectiveallocation
allocationofofscarce
scarce
resources.
resources.
However,PPBS
However, PPBSdid
didnot
notcater
caterfor
forthe
thefull
fullimplementation
implementationof ofthe
thefinal
final
phaseof
phase ofthe
thesystem,
system,that
thatisisthe
theprogramme
programmeevaluation
evaluationphase.
phase.Due
Duethethe
thisweakness
this weaknessamong
amongothers,
others,thethegovernment
governmenthad hadtaken
takenthetheinitiative
initiativeto
to
developaabetter
develop betterbudgeting
budgetingsystem.
system.
In1990,
In 1990,aamodification
modificationtotothe
thesystem
systemknown
knownas asthe
theModified
ModifiedBudgeting
Budgeting
System(MBS)
System (MBS)waswasintroduced
introducedandandused
usedtill
tilltoday.
today.
Line-Item Budgeting Systems (LIBS) /
Traditional Budgeting System (TBS)

The Traditional Budgeting System (TBS) or also known as


Line-Item Budgeting System (LIBS) is the first budgeting
system adopted by Malaysia prior to 1969.

The System is brought from UK – the British

Under LIBS/TBS, detailed budget examination is entirely based


on line item expenditure or objects of expenditure.
Line-Item Budgeting Systems (LIBS)

Characteristics of LIBS:-
• A budget made up of a series of ‘votes’ in which each vote is
a subdivision of budget.
• Focused on items/object of expenditure
• LIBS is more concerned with financial inputs than the output
of its activities.
• LIBS is not concerned with the attainments of policy
objectives and their relationship to costs.
• The presentation of the budget is on organizational basis
(ministry or department) rather than looking at programmes of
expenditures.
• LIBS is more of a control tool.
• LIBS is less concerned with the performance
Advantages
Advantages

•This is a simple budgeting system and can be easily


understood by the users. Hence, facilitate the users in
preparation of the budget.
• Information presented from this budgeting system can easily
be incorporated into the accounting system. This is because
under LIBS/TBS, transactions are categorized based on object
of expenditure that is similar to the government accounting
system.

• Budgeted and actual revenues and expenditure ensures


detailed comparisons to be made.
Drawbacks
Drawbacks

Data provided is useful primarily for short-term planning only.


Information presented in the budget expenditure does not state
clearly the purpose of the current and future utilization of
resources. As a result, the long run goals of the organization
may be jeopardized.

It is oriented more towards providing a framework of financial


information that complies with legal requirements rather than
providing useful management-type information.

•Emphasized “what the government bought and not on what the


government did”.

•It did not give sufficient information to legislators and the


public on why the government bought those particular items.
Drawbacks
Drawbacks

•It did not give the managers freedom/power/authority to adjust


allocation according to the needs or situation.

•Input orientation which leads to ineffective budget allocation.

•Budget document are too bulky and long because they


comprise all detail information of what they have bought for all
categories.

•The performance of the budget is measured only from the


financial aspect that is on actual expenditure incurred. Thus, the
information on the effects, outcomes and benefits of the
programmes and activities undertaken are not emphasized.
Programme and Performance Based
Budgeting Systems (PPBS)

Programme and Performance Based Budgeting System (PPBS) was


used by majority of the developing nations. The adoptions of PPBS
by developing countries was fostered by the United Nations.

In Malaysia, PPBS was introduced in 1969 under Treasury Circular


5/1968. This system helps management make better decisions on
the allocation of resources among alternative ways to achieve
government objectives through the selection of the best feasible
alternatives. The PPBS is needed because of increasing complexity
of modern life, increase in demands for government services,
shortage of funds to meet the demand and the need to determine
priorities, design programmes and control budgets.
Programme and Performance Based
Budgeting Systems (PPBS)

According to Freeman and Shoulder (1996), programme


budgeting refers to a planning-oriented approach which
emphasizes programmes, functions and activities with much
less emphasis on evaluation or control.

Under PPBS, the term programme and performance were used for
operating expenditure only and it includes various components.
The components of programme are functions, objectives,
activities and responsibility centre while the components of
performance are appropriateness, adequacy, effectiveness and
efficiency of the programmes.
The Hallmarks of PPBS in Malaysia:
1. It focuses on overall agency objectives.
2. Emphasizes programmes/activities to meet the objectives.
3. Emphasizes objectives of spending.
4. The main thrust is to evaluate performance and to ensure various
agency/departments attain the objectives. (Evaluation of success)
5. It is management-oriented. Us the principle ‘let managers manage’.
6. Involved Performance Evaluating as follows:-
It is meant to assess the achievement of objectives of
programme/activity of each agency.
It involves a comparison between the actual output for a given
period and the planned or targeted output for the same period
and identifying the causes for any variance between the two.
Performance indicators must be developed to financial and
physical performance of programmes/activities undertaken.
Development of Performance Indicators refers to the selection of
suitable units of measurement which reflect the output of each
activity/programme in either qualitative or quantitative term.
Modified Budgeting Systems (MBS)

Objectives of MBS:-
(i) To improve programme performance in the utilization of funds
(improve policy)
(ii) To improve on the distribution and allotment of funds according to
priorities set
(iii) To upgrade on accountability especially amongst lower officers.
(Control Officers – Top Government Officials – manage the fund-
distribute to the particular department)
(iv) To improve public sector accountability through Programme
Agreements and Exception Reports – why did we fail to achieve the
target?
(v) Prudent use of resources without waste, fraud and abuse of power.
(vi) Flexibility in management resources – provide freedom /latitude for
the programme manager to adjust the allocation given
(vii) More generalized approach rather than a stricter approach to control
the expenditure.
(viii) Evaluate the performance of programmes and take corrective action
to overcome the problems identified. – remedial action
Elements of MBS
1. Expenditure Limit / Target
- Limit or ceiling imposed on an agency in the implementation of
expenditure. The ceiling will be decided upon by both the Treasury and
Agency
-For example: if the expenditure limit is RM30million for an agency for a
particular financial year, the agency should not exceed the limit without
due cause.
- Comprises:-
a) Existing Policy - Refers to programmes that have already been
approved by Law, the Cabinet, the Ministry, the Treasury or any other
authority and are still being implemented in the current year and would
continue to be implemented in the following year. Expenditure Target /
Limit is set annually for the existing policy on the assumption that the
scope of the programme would not change or increase or decrease from
the previous level.
b) New Policy – refers to programmes planned to be implemented in the
next budget period. They are also extension or enlargement of existing
policy. (Add up to existing policy, introduction of new courses,
establishment of new departments or units)
c) One-Off – refers to the unavoidable extraordinary, non-annual or non-
recurrent expenditure exceeding the threshold. It is considered as one-
time purchase. (E.g. CHOGM, NAM, ASIAN Games,etc)
2. Programme Agreement
-The most vital element of MBS
-An agreement between the Treasury and the agency on the desired
performance on the part of the agency for a particular financial year. Agency /
Programmes should seek to achieve the targets sets in the programme
agreement.
3. Exemption Report
-A report to be submitted by the agency / programme in the event that targets
set in the programme agreement are not achieved. Reasons should be given
as to why targets were not achived. Thus, they must ask for exemption from
having to comply by agreement. (Clarify why unable to achieve the target)
4. Programme Evaluation
-An evaluation of the programmes to determine the extent to which targets
have been achieved.
-A schedule of programme to be evaluated and the issues to be addressed
must be included in the Programme Agreement.
-Each programme should be evaluated once in 5 year.
-Criterion of effectiveness – objective orientation
-Criterion of efficiency – cost optimization – cost effectiveness
5. The Expenditure Limit set by the Federal Treasury for the
existing policy enables the Agency to set priorities among
programmes and encourage prudent management of public funds.
6. The generalized approach to expenditure control adopted in MBS
provide the Manager some leeway or latitude in adjusting the
allocation provided by Parliament according to the needs of
situation.
7. The Exemption Report would be a good feedback mechanism for
ensuring public accountability if the Treasury seriously reviewed
the Reports submitted by the Agencies.
A More Generalised Approach to Expenditure Control
This approach emphasizes on two main element:-
1)Provision of greater flexibility/authority to managers
throughout an organization and particularly to the line
management level. The flexibility/authority usually relates to
decision regarding how a given amount of resources are to be
deployed.
2)Stricter control over aggregate resources whereby
supplementary allocations are rarely provided or even
considered. Breaches of aggregate control are dealt with swiftly
and effectively.
The above elements are based on two principles of MBS namely
“Devolution of Authority’ and ‘Accountability to Match
Authority”.
BENEFITS OF MBS

Benefits of MBS can be identified at three different levels, namely:-


1)Central Budget Level
2)Departmental Headquarters Level
3)Line-Management Level
BENEFITS OF MBS

Central Budget Level:-


•Improve identification of priority expenditure in budget submission
•Eliminate a major cause of the ‘poker game’ attribute of the budget
process by shifting the focus of budget examination from ‘cutting
expenditures’ to identifying the best mix of resources within a constraint
of past and targeted programme performance
•Reduce paperwork in the preparation of budget submissions and in the
conduct of budget examination
•Allow more time to discuss new policy proposal and its modification
•To provide the Budget Management Division with better information on
programme performance and enable it to more effectively hold
deparments accountable for programme performance
•Assist review agencies such as Malaysian Administrative and
Modernization Planning Unit (MAMPU) and Accountant General
Department to carry out their role more effectively
BENEFITS OF MBS

Departmental Headquarters Level:-


•Increase the department’s opportunity to use strategic planning as the
basis for budget preparation
•Enable more top-down approach to budgeting
•Enable controlling officer to play a more active role in budgeting and to
use it as a management device
•Improve communications of top management priorities to lower level
managers and staff
•Allow finance divisions in headquarters to become more involved in
matters of programme policy and programme evaluation and less in
matters of line-item control
BENEFITS OF MBS

Line-Management Level:-
•To improve motivation among line managers through increasing
awareness and understanding of top management priorities through
programme agreement
•Greater flexibility in the deployment of resources within aggregate
constraints
•To enable budget preparation at the line-management level to take place
at the same time as the preparation of work plans, that is two or three
months before the beginning of the year and thereby make budgeting at
this level a more meaningful exercise
•To enable the financial plans regarding input, output and impact to be
used as a management tool
•To enable better integration of decision-making of financial and
programme policy
BENEFITS OF MBS

Others:-
1.Rational allocation of resources to government programmes – it will be
achieved by imposing fiscal limits upon agencies and by forging a link between
inputs and outputs. Here, discipline and rationality are to be imported into the
budget process by explicitly quantifying a binding expenditure limit for each
agency.

2. Better and accountable programme management – through adoption of


better management practices – encouraging greater flexibility in the use of
resources from the Treasury to agencies and then on to line managers. The
control on the proper use of this budget flexibility was to be through
performance targeting.

3.Budget flexibility is to enable line management to redeploy its resources


according to changed priorities. An overall aggregate spending limit with no
supplementary allocations would circumscribe this freedom. The Treasury and
departmental management commitment to a set of predetermined
performance targets should motivate managers to higher levels of
performance.
BENEFITS OF MBS

Others:-
4.MBS seeks to reorientate the focus of accountability on issues of programme
efficiency and effectiveness – MBS seeks to measure performance against pre
determined output targets.

5.It is an attempt to modify managerial behaviour. Deciding the expenditure


target by the previous year’s allocation rather than the previous year’s
expenditure, should relieve the pressure upon managers to exhaust their
allocations.

6. It will bring some certainty to the final allocation in the hope of drawing top
management into the budget process. Expenditure target seeks to make more
certain what a departmental budget would be and should draw top
management back to the budget arena.
CRITICAL EVALUATION OF MBS

1. The term MBS itself is unclear or unsuitable. Normally the name of a


budget system should reflect the concept on which it is based e.g.
PPBS, LIBS – one is tempted to ask: Modification of what? –we don’t get
the answer.
2. MBS is only a ‘package of modification to the budget process’- as the
Consultant, Rizui an Australian himself had suggested. Note that,
during the budget examination, the existing policy is considered first
and the new policy and one-off proposal are considered next.
3. MBS has all the elements of PPBS, objectives, programmes, structure
and performance evaluation, Hence, it cannot be considered as a
Separate or new Budget Systems.
4. The Programme Agreement prepared under MBS helps the operating
agencies concentrate on the target or output or impact agreed to be
achieved in a given year. This a positive thing about the modification to
the budget process.
Zero-Based Budgeting Systems (ZBS)

(Alternative Budgetary Model)

-ZBBS was developed by Peter Phyer from Texas Instruments Company.


Its first application in US government was in the state of Georgia where
it was adopted in 1971 by the new Governor Jimmy Carter.

-ZBBS later spread to many states and local jurisdictions and was
adopted by the Federal Government when Carter become the President
in 1977.

-It continues in many states and local government in the US but has
been largely discarded in the Federal Services. Nevertheless, the
requirement of report submission by various agencies must still use
ZBB format.
The Format of ZBBS

1. Development of decision packages for each agency. Bach package


will contain a summary analysis of each program within the agency.
These packages are ranked by the agency head in accordance with
his/her perception of overall agency priorities.
2. Requires each decision package to be evaluated by top management
to determine whether it is justified for further funding. Programs that
are considered ineffective are either discarded, modified or combined
with other agencies for cost efficiencies.

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