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Wednesday, December 2, 2009

Lessons Learned from Performance Based Budgeting in Latin America

From the Culture of Control to Culture of Performance
Mario Saginés, Senior Advisor, Institutional Capacity and Finance Sector, Inter-American Development Bank described Performance Based Budgeting for government. Mr. Saginés provided insight from experience in Latin America.

PBB does not mean that countries always allocate based exclusively on results. He described four necessary components are: performance information, the use of information in budgetary exercises, incentives for managers to reach goals, and increasing management skills. Management in government can be restricted by rules from making decision. That way, managers can be held accountability.

The benefits of PBB include improved accountability, government services, and efficiencies. PBB brings budgeting in line with government objectives. Mr. Saginés showed graphs that showed how countries with a lower income tend to collect revenues at a lower ratio to GDP. Many Latin American countries spend more than many countries yet achieve poorer results.

Mr. Saginés pointed out that many PBB initiatives are started by bad reasons. For example, PBB should not be used to increase controls because it limits the ability to manage based on performance frameworks. Excessive detailed management is often legally required. This reduces flexibility. He recommends a more macro approach. PBB has become fashionable in the donor community. Mr. Saginés suggests that this should the only reason to implement PBB. He questioned whether accrual budgeting is required to have effective performance based budgeting.

There is a broad menu of PBB framework options. Some countries use more performance measurements to set budgets than others. There is no established model. Mr. Saginés suggested that a practical middle ground is appropriate for most countries. He recommended against using allocation formulas based on performance results.

Many countries use program-based performance budgeting. He cautioned that the concept of “program” is not universally understood. Program budgeting can be complex to manage.

Budget execution for PBB requires culture change. It can be a long and painful process. Mr. Saginés presented details from PBB experiences in Latin America.

Many countries focus on indicators but not on using these to determine resource allocation. A radar graph showing 5 measurements for results-based management was shown. Performance based budgeting and monitoring in Latin America is not as advanced as general financial management.

Monitoring and evaluation is required for effective PBB. Mr. Saginés recommends the use of performance results during budget deliberations. This does not mean that allocations should be directly related to performance. Performance is one of the characteristics that must be used during budget preparation.

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