2010 Asiyah Kassim

5

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

The Traditional Budgeting System (TBS) or the LIBS was the first budgeting system used in Malaysia.

As the role of government expands and the size of public expenditure increases tremendously, the effectiveness of TBS/LIBS as a tool for policy formulations and execution

became weaker.

Therefore, a new budgeting system that will address itself to the issues and the incorporation of a wider horizon is

needed.

Thus, Programme and Performance Budgeting System (PPBS) was introduced in 1969 in ensuring an effective

allocation of scarce resources.

However, PPBS did not cater for the full implementation of the final phase of the system, that is the programme evaluation phase. Due the this weakness among others,

the government had taken the initiative to develop a better budgeting system.

In 1990, a modification to the system known as the Modified Budgeting System (MBS) was introduced and

used till today.

The Traditional Budgeting System (TBS) or the LIBS was the first budgeting system used in Malaysia.

As the role of government expands and the size of public expenditure increases tremendously, the effectiveness of TBS/LIBS as a tool for policy formulations and execution

became weaker.

Therefore, a new budgeting system that will address itself to the issues and the incorporation of a wider horizon is

needed.

Thus, Programme and Performance Budgeting System (PPBS) was introduced in 1969 in ensuring an effective

allocation of scarce resources.

However, PPBS did not cater for the full implementation of the final phase of the system, that is the programme evaluation phase. Due the this weakness among others,

the government had taken the initiative to develop a better budgeting system.

In 1990, a modification to the system known as the Modified Budgeting System (MBS) was introduced and

used till 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

•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.

AdvantagesAdvantages

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.

DrawbacksDrawbacks

•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.

DrawbacksDrawbacks

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 MBS1. 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 can be identified at three different levels, namely:-

1)Central Budget Level

2)Departmental Headquarters Level

3)Line-Management Level

BENEFITS OF MBS

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.