Performance, Programme and Zero Based Budgeting

Performance, Programme and Zero Based Budgeting

Performance budgets are financial plans that use statements of missions, goals and objectives to explain why money is being spent (Philip and Susan, 2000; Young, 2003). It is a way to allocate resources to achieve specific objectives based on programme goals and measured results. The key to understanding performance-based budgeting lies beneath the word “result”. In this method, the entire planning and budgeting framework is result oriented. There are objectives and activities to achieve these objectives and these form the foundation of the overall evaluation. Performance budgeting comprises three elements:  result (final outcome), strategy (different ways to achieve the final outcome), and activity/outputs (what is actually done to achieve the final outcome). Programme budgeting is the budgeting system that, contrary to conventional budgeting, describes and gives the detailed costs of every activity or programme that is to be carried out in a budget (Lienert, 2007).  It gives the budget as a detailed itemization of all the activities or programmes included in the programme.

Results oriented or performance- based budgeting has been gradually adopted as a key public sector reform in developing and developed countries (Shah, 2005). The reform is adopted so as to transform public budgeting systems from an input and output orientation to an output and outcome orientation, including a new results oriented accountability into public organizations. This mode of budgeting constitutes an improvement from the line- item budget in that it allows the broad identification of how governments spend their money over the medium term. This has been shown to work in South Africa, where the large programmes in the budget have sub programmes, which provides the necessary details for any scrutiny (Shah, 2005).

  

Zero-based budgeting is a technique of planning and decision-making which reverses the working process of traditional budgeting. In traditional incremental budgeting, departmental managers justify only increases over the previous year budget and what has been already spent is automatically sanctioned. No reference is made to the previous level of expenditure (Robinson, 2007). By contrast, in zero-based budgeting, every department function is reviewed comprehensively and all expenditures approved. Zero-based budgeting requires the budget request to be justified in complete detail by each division manager starting from the zero-base. The zero-base is indifferent to whether the total budget is increasing or decreasing.

The Budget Process

The Budget Institutions

The first objective of this study was to examine the budgeting process in Kenya with a view of identifying weaknesses that could be contributing to the budget deficits. To attain this objective, it was important that an examination of the role of budget institutions is done. The following is a recap of each institutional role in the budgeting process.

(a)      Parliament

The credibility of the budget is only achieved when it is capable of providing effective and politically anchored mechanisms to mobilize resources. Constitutionally, Parliament is empowered to safeguard expenditures by the exchequer. Hence the executive cannot raise or spend funds without the approval of Parliament (Oyugi, 2005). This obligation gives Parliament prominent and potentially highly effective role to ensure that available resources are used in ways that maximize benefits for all Kenyans. Parliament is therefore, expected to ensure accountability and to provide assurance to Kenyans that the systems employed by the executive to mobilize, allocate and utilize resources are effective and that the executive is not being compromised by any other agents, for instance the ruling party or donors.

Parliament also acts as the citizens representatives, therefore ensuring the Executive operates according to the principle of “no taxation without representation” as well as the principle of separation of powers. Under the Constitution, Parliament is the sole authority on taxation, borrowing and spending of public funds. The Minister of Finance, on behalf of the Executive, presents the budget before parliament in June, every year. Under the Standing Orders, Parliament allocates time to discuss the government’s budgetary proposals as a matter of priority. In this regard, Parliament retains the power to approve or reject revenue and expenditure proposals filed by the Minister. To deal with the budget, Parliament has three key standing committees; the Fiscal Analysis and Appropriations Committee (FACC), the Public Accounts Committee (PAC) and the Public Investment Committee (PIC). The FACC was established in 2006 with the responsibility of scrutinizing policies that drive the budget, tax proposals, resource allocations and budget execution (Masya and Njiraini, 2004).

Both PAC and PIC are long established institutions that deal with overall budget outcomes. That is, whether budgeted expenditures are utilized according to parliamentary authority and approval and whether they are compliant with the law and procedures. In addition, there are currently eight Departmental Committees of Parliament, which play complementary roles by scrutinizing the budgets of specific ministries and sectors that fall within their mandates (Oyugi, 2005). All these Committees are required to report to Parliament and make specific recommendations on their mandates.

There are several challenges associated with the relationship between elected Members of Parliament and voters. The elected members extract taxes from voters for them to be able to provide public goods. However, they use some of the funds provided by the voters to pursue other interests, including the use of public funds for outright corrupt purposes or for goods benefiting only their individual interests (such as their salaries or constituencies), or may simply waste funds out of negligence and ignorance.  Furthermore, poor and partisan politics may lead to subjective voting in Parliament, where passing of the budget estimates may be based on subjective positions rather than well thought out objective positions. For instance, Members of Parliament (MPs) refused to be taxed hence denying the government of Kenya the much needed tax revenues. Moreover, MPs have on certain accounts held the Executive at ransom demanding that certain clauses be deleted from the Finance bill before they could pass the budget, thereby causing unnecessary delays in the implementation of fiscal policies.

(b)      The Executive

The Executive arm of the government implements public policies and proposals as approved by Parliament. The role of the Executive in the budgeting process is therefore to propose fiscal policy, define the budgetary policy in line with the broad national socio-political and economic objectives, priorities and propose implementation measures for Parliament to decide upon.

The Treasury refers to the institution that is identified by the Constitution as having delegated powers to propose measures to raise and allocate resources. Besides being the lead player in the budgeting process, Treasury is the finance manager for public responsible to oversee budget formulation and execution. It is also a collector, custodian of revenues and a manager for government expenditure. It evaluates budget proposals by government agencies before drafting and presenting the Budget to Parliament. On its part, the Ministry of Finance provides support to Treasury function and is responsible for implementing policies, programmes and projects which support all ministries and other government agencies.

The Kenya Revenue Authority (KRA) is the government body charged with the responsibity of collecting the major taxes and most of the other fiscal charges mandated by Parliament. At present, KRA faces the challenge of netting taxes from the economy’s informal sector. A large proportion of agents in the informal sector do not pay taxes such as income tax because it is difficult to establish their income (Manda, et.al, 2007). The CBK is the government banker and advisor on monetary matters. It is also the custodian of all government revenues (Oyugi, 2005).  The CBK is not so much a fiscal agent because its main role is monetary policy.

The executive as an institution lacks commitment to accountability and provides insufficient information about allocations presented in the budget. For instance, who decides the amount of money that is given to District Hospital in a particular fiscal year? The methodology on allocation of funds needs to be presented for possible scrutiny. Moreover, budget deficits are perpetrated by the executive’s unsound fiscal policies formulated on the basis of corruption, ethnicity, nepotism, reluctance to cut expenditures and mismanagement among others.

(c)      Non-State Players

Among the key players in the budget process are the major economic actors who are well organized and informed. They include associations like the Kenya Associations of Manufacturers (KAM), Kenya Private Sector Alliance (KEPSA), Institute of Certified Public Accountants of Kenya (ICPAK), Farmers Association and a host of NGO’s among others (Oyugi, 2005). All these bodies actively lobby the Government and Parliament for more enabling fiscal policies. They make submissions to the Finance Minister on various fiscal issues, and more so on issues that are pertinent to them. However, apart from championing their own interests, they normally have no assurance that their fiscal proposals will be incorporated. Hence there is need to fully incorporate their views in the budgeting process.

(d)      The Citizens

Citizens pay taxes and are the ultimate beneficiaries, or the reason for the budget. Notwithstanding their representation in parliament by their elected representatives, citizens have a direct duty to ensure (oversee) that all the other players in the budget process act in their best interest. More importantly, they should ensure budget implementation is monitored for their benefits. In addition, they should monitor the implementation of the budget through developed funds such as constituency development funds (CDF), education bursaries and HIV/AIDS funds, and the District Roads Fund.

The main problem of the citizens, from a political perspective, is to remain rationally ignorant other than invest their time and other resources in obtaining and sorting out information about public issues in order to make more informed voting decisions (Mburu, 2005). This explains why during the campaign periods, citizens are compromised to vote for politicians whose agenda is to advance their own personal interests rather than the common interest of the citizens.

(e)      Development Partners and Aid Agencies.

Development partners do have a significant influence on the budget process. This is particularly true of the IMF and World Bank. Given their influence, these two multilateral bodies have become major stakeholders in national budgets and affect, the structure, content and sometimes the timing of the budget activities. Some of the major reforms such as those associated with structural adjustments, cost sharing and liberalization, originated from these two institutions. However, development partners have their own interests, hence fund particular programmes only. They therefore really don’t involve themselves in the budgeting process as much as they should. For instance, a former finance minister is on record saying that donors fund an insignificant proportion of the budget while the government funds 95 percent of it.

4.3     The Budget Process

The budget process reform in Kenya started in 2000 with the introduction of the Medium Term Expenditure Framework (MTEF) approach, which aimed at linking policy objectives and resource planning and allocation. This was in response to a review of the public expenditure in 1997, which concluded that public expenditure trends in Kenya were not consistent with the objectives of achieving sustained economic growth and poverty reduction. Consequently, and as a reform measure, the MTEF approach was adopted to achieve the following specific objectives: link policy making to planning and budgeting; maintain fiscal discipline by establishing solid budget constraints; facilitate expenditure prioritization across policies; programmes and projects; encourage better use of resources to achieve desired outcomes at lowest cost.

In 2003-2004, three years into its implementation, the MTEF process was reviewed and was found to be less effective in addressing the mismatch between policy objectives and resource planning and allocation, and therefore did not meet the expectations of the policy makers. Additional recommendations were made to enhance its effectiveness, one being the introduction of budget ceilings. The key features of the MTEF budget process are described as follows:

(a)            Budget Outlook Papers (BOPA)

The MTEF budget process starts in October with the preparation of the Budget Outlook

Paper (BOPA). The main objective of the BOPA is to provide an overall medium–term fiscal framework for the MTEF budget. At this point, the MTEF is based on a consistent and sustainable macro-economic framework, which is used to determine the overall resource envelope, comprising revenue, external resources and domestic borrowing. On the basis of this resource envelope, the BOPA provides medium term sectoral ceilings, in line with the strategic objectives (Republic of Kenya, 2008). Currently, the Medium Term Plan 2008 is used because the ERS lapsed in 2007. These ceilings are then used by Sector Working Groups (SWGs) in allocating resources within the sector in the medium term.

The BOPA is prepared by the Macro-economic Working Group (MWG), comprising of the following: Central Bank (CBK), the Ministry of Finance (MoF), the Ministry of Planning and National Development (MPND), the Kenya Revenue Authority (KRA) and the Kenya Institute for Public Policy Research and Analysis (KIPPRA).

The main challenge posed by BOPA is the exclusion of stakeholders in the budgeting process that may have a different opinion on the macroeconomic framework. For instance, all the institutions involved in the preparation of BOPA are quasi government. Other institutions that could add value and have equally competent analysts are commercial banks, universities and private economic research institutes. These institutions need to be incorporated fully in the BOPA preparation.

(b)            Ministerial Public Expenditure Report (MPER)

Each ministry is required to start the MTEF process by preparing the Ministerial Public

Expenditure Report (MPER) by December of each year. The MPER is basically an evaluation of the performance of the previous year’s budget and provides a regular analysis of ministerial expenditures, commenting on the composition, efficiency and effectiveness of spending in meeting service delivery targets and other performance indicators. The MPER also shows the costing and resource requirements of the ministry, based on the programmes and priority activities during the medium term. Expenditure analysis enables policy makers to ask the right questions, while making decisions on public spending, and at the same time providing the ministries’ input to the preparation of the medium term Budget Strategy Paper (BSP). The MPER also promotes broader participation in the policy-making process by opening up the budget system to public scrutiny by publishing information on budget, budget execution and public accounts.

The major setback with the MPER is when officials of a particular ministry replicate the previous year’s estimates and do only cosmetic adjustments without any solid basis. This happens in several ministries in Kenya.

(c)             District inputs

Departments at the district level are expected to submit their input to the budget process to their respective headquarters by December of each year. The treasury circular issued by the Permanent Secretary to guide ministries/departments on the MTEF budget process requires that accounting officers ensure that the District departmental heads are involved at every stage of the budget process. This is achieved by the following: formation of District Budget Committees (DBCs); a thorough review of District level activities and their performance in terms of allocations, status of project and disbursement of funds; prioritization of activities and linkages to the district plans and other policy documents; and costing of district level activities for the medium term.

There are several bottlenecks associated with District inputs. The competence of the members of the district budget committees determines the kind of proposals they forward. In many instances there may be motivation to replicate figures which are available. There is also an absence of costing monitoring and evaluation staff at the district levels hence a thorough costing and review of district level activities may not be done.

(d)              Budget Strategy Paper (BSP)

The BSP provides an update of the available resources and sets firm ministerial ceilings.

Based on the decision reached by the Sector Working Groups (SWGs) using the sector ceilings provided in the BOPA, the BSP elaborates a strategy for restructuring the government spending pattern over the medium term with a view to achieving the government’s medium-term strategy objectives. The BSP therefore provides specific and detailed guidance for ministries on aligning public spending patterns within the stated national priorities, which improves the efficiency of public spending in the forthcoming budget and over the following two years.

(e)              Public Sector Hearings

One major improvement in the MTEF process is the introduction of public sector hearings, which are held soon after the preparation of the BSP. The purpose of the public sector hearings is to provide a forum where all stakeholders engage in a debate of the BSP and propose amendments they deem necessary before it is presented to the cabinet for approval. The BSP is disseminated to stakeholders and civil society in February each year through public sector hearings organized by the Ministry of Finance (Masya and Njiraini, 2004).

The public hearings are advertised in the daily newspapers ten days to two weeks in advance, so that all stakeholders can attend. During the public hearings, the SWGs present their budgets and comments are invited from the participants. The suggestions are then used to improve the budget. After the public hearings, views are consolidated, and the BSP is printed and submitted to the Cabinet for discussion and approval. Based on the approved BSP, the Permanent Secretary, Ministry of Finance issues the Treasury Circular to ministries/departments to prepare detailed and itemised budgets based on the ceilings set in the BSP. However, the public sector hearings are normally marred by poor attendance and their comments are in most cases not taken on board.

(f)              Ministerial budgets

The process for preparing ministerial budgets is iterative, as can be noticed in appendix II (Figure A.2). It starts in October to December each year, when ministries are engaged in the preparation of the MPER. Between December and February, Ministries/Departments are involved in consultations with the SWGs. The Treasury and other stakeholders are involved in negotiations that lead to a level of resource requirements that satisfy the BSP ceilings. In March, the Treasury Circular, together with the BSP and ceilings, are issued to all ministries, which are in turn expected to prepare detailed annual and medium term estimates consistent with the BSP and submit the itemized budgets to the Treasury by mid-April (Masya and Njiraini, 2004).

The responsibility for preparing the ministerial budget lies with the Ministerial MTEF Budget Committee. The ministry receives the budget circular from the Treasury, which sets the budget ceiling for each sector and ministry, and the calendar for preparing the budget. Based on the ceilings, the ministerial budgets are prepared by departments and consolidated by the Ministerial Budget Committee, approved by the Permanent Secretary before being submitted to the Treasury.

(g)             Final estimates

The Treasury receives detailed ministerial budgets, consolidates them in April and submits the national budget to the Cabinet for approval in May each year. The annual estimates are then printed and presented to Parliament for debate in mid-June. Once the Minister of Finance has presented the budget to Parliament, it becomes Parliament business. The debate on the budget starts one week later and continues for the next six months. During this period, ministers table their respective ministries’ budgets before the house for debate. Members of Parliament may question any issue they want clarified. If Parliament passes the budget, the ministry proceeds to implement it. There are no reported cases where Parliament has made significant amendments to budgets presented to it. However, there are several shortcomings at this level including delays in debates due to Parliament’s recess, political bickering, sabotage due to personal interests and party positions (such as delay debate for salaries of Members of Parliament to be increased).

(h)            Supplementary estimates

Government financial regulations and procedures on the budgetary process provide for presentation of supplementary estimates by ministries to Parliament for approval at a date to be notified to all accounting officers. Supplementary estimates allow ministries to obtain additional funds, for a new service, to cover under-provisions or to apply any realised savings on other services within the mandate of a particular ministry. In practice, the supplementary estimates are usually tabled in Parliament during the month of May and Parliament usually approves them.

The challenges that accost the supplementary budget are that at times it may be difficult to obtain resources and also to get approval from Parliament. Supplementary budgets may also be prone to abuse since they may lead to payment for items that were not given the scrutiny accorded to the other items in the original budget.