URP-4103: Public and Municipal Finance

Submitted To:
Dr. Md. Akter Mahmud
Professor, Department of Urban and Regional Planning
Jahangirnagar University

Submitted By:
Sabbir Rahman
Roll: 748
 Performance-Based Budgeting (PBB)

Performance-based budgeting (PBB) is a budgeting approach that reviews and monitors an

organization's or department's performance in order to assist it become more efficient and
successful. It takes into account the organization's resource utilization, results accomplished,
objectives met, and goals, and it helps guarantee that money are allocated based on
performance rather than just need.

Concept:
Performance-based budgeting (PBB) is an approach to budget allocation rooted in the achievement of
specific, measurable performance goals and outcomes. This method systematically distributes resources
to programs, projects, or activities based on their products, effectiveness, and efficiency.

In a PBB system, organizations must demonstrate progress towards their objectives to secure funding,
emphasizing the connection between resource allocation and performance results. The primary
objective of PBB is to enhance the effectiveness and efficiency of public expenditure.

For instance, a loan company can utilize PBB to assign funds to customer service initiatives, enabling the
measurement of investment effectiveness and informed resource utilization decisions. Similarly, the
healthcare industry can benefit from PBB by directing focus towards patient outcomes, measuring
performance in areas such as patient satisfaction, health outcomes, and quality of care..

Major Features:
Performance-based budgeting (PBB) is defined by a set of key characteristics and guiding principles
integral to its application:

Results-Focused: PBB places a significant emphasis on achieving specific, measurable outcomes, urging
organizations to actively monitor their progress towards predefined goals.

Linkage to Performance Indicators: Resource allocations under PBB are explicitly connected to
performance measures. This linkage establishes a foundation for evaluating the effectiveness of
programs, projects, or activities.

Transparency and Accountability: The use of PBB establishes a transparent relationship between
funding decisions and performance expectations. This correlation enhances accountability and
transparency within public organizations.

Continuous Improvement: PBB fosters a culture of ongoing evaluation and feedback, prompting
organizations to refine and enhance their performance. This iterative process facilitates the adoption of
best practices and ensures efficient resource utilization.
Flexibility and Adaptability: Supporting innovation, PBB allows organizations to adjust their strategies
and allocate resources in response to changing circumstances or the emergence of new priorities.

Figure: Characteristics of PBB

Measuring Performance, Outputs and Outcomes of PBB

Evaluating the effectiveness of Performance-Based Budgeting (PBB) involves measuring performance,
outputs, and outcomes through a structured approach:

Performance Measurement: PBB requires a systematic assessment of performance against

predetermined benchmarks. This involves tracking key indicators to gauge the efficiency and
effectiveness of programs or activities.

Output Evaluation: Assessing the tangible deliverables or outputs resulting from budget allocations is
crucial. This involves analyzing the direct products or services produced as a result of the funded
initiatives.

Outcome Assessment: PBB emphasizes the measurement of broader outcomes—long-term impacts or

changes brought about by funded programs. This evaluation goes beyond outputs to determine the
actual benefits and consequences for the targeted stakeholders and community.

Metrics Alignment: Ensuring that performance metrics align with the goals and objectives set in the
budget is essential. This alignment establishes a clear connection between resource allocation, expected
outcomes, and actual performance.

Feedback Mechanisms: Establishing feedback loops facilitates continuous improvement. Regularly

gathering and analyzing feedback allows for adjustments in resource allocation and strategy to enhance
overall performance.
In essence, the measurement of performance, outputs, and outcomes in PBB is a dynamic process that
involves continuous monitoring, assessment, and adaptation to ensure the budgeting approach
effectively contributes to organizational goals.

Process of PPB:
The Performance-Based Budgeting (PBB) process involves several key steps to link funding decisions with
performance outcomes:

1. Formulation of Objectives: Define clear and specific objectives that align with the overall goals of the
organization. These objectives serve as the foundation for the budgeting process, providing a framework
for resource allocation and performance evaluation.

2. Identifying Various Processes and Plans: Identify the processes and plans necessary to achieve the
formulated objectives. This involves a comprehensive assessment of the tasks, activities, and projects
required to fulfill the organizational goals.

3. Evaluation & Selection of Processes and Plans: Evaluate the identified processes and plans based on
their alignment with objectives, feasibility, and potential impact. Select the most effective and efficient
options that contribute optimally to the organization's mission.

4. Development of Performance Criteria: Establish specific performance criteria and key performance
indicators (KPIs) that will be used to measure the success of each process or plan. These criteria provide
a quantitative and qualitative basis for assessing performance.

5. Financial Planning: Allocate financial resources in accordance with the selected processes and plans.
Develop a budget that outlines the distribution of funds, ensuring that financial resources are directed
towards activities that align with the established objectives.

6. Correcting Deviations: Monitor the execution of processes and plans against the established
performance criteria. Identify any deviations or variances from the planned objectives and take
corrective actions as needed. This step involves maintaining flexibility to adapt to changing
circumstances.

7. Assessing Performance: Regularly assess the performance of each process and plan using the
predetermined criteria. This involves analyzing both quantitative and qualitative data to measure
progress, identify successes, and pinpoint areas that require improvement.

In summary, the performance-based budgeting process begins with the formulation of clear objectives,
followed by the identification, evaluation, and selection of processes and plans. Development of
performance criteria and financial planning ensures alignment and efficient resource allocation.
Continuous monitoring allows for the correction of deviations, and regular assessments provide insights
for ongoing improvement.
 Figure: PPB process

PPB in Public Sector:

Implementing Performance-Based Budgeting in the public sector offers substantial advantages for
government agencies. This method enhances transparency, optimizes resource utilization, and enforces
accountability for agency performance. Key considerations for its adoption include ensuring
comprehensive stakeholder engagement and establishing a robust data infrastructure to facilitate
continuous monitoring and evaluation.

Numerous countries and jurisdictions serve as successful models for the application of Performance-
Based Budgeting in the public sector. For instance, Australia has effectively employed the Outcome
Budget Framework, linking agency budgets directly to specific outcomes. Similarly, the United States
Government Performance and Results Act (GPRA) mandates federal agencies to formulate strategic plans
and report on their performance.

PPB in Private Sector:

Performance-Based Budgeting in the Private Sector emphasizes resource allocation based on achieving
specific, measurable targets, diverging from traditional budgeting methods that solely consider
expenditure amounts. This approach centers on results and aligning financial decisions with a company's
strategic objectives to enhance efficiency and effectiveness in budget utilization.
The primary objectives of Performance-Based Budgeting in the private sector include refining decision-
making processes, enhancing accountability, fostering transparency, and optimizing resource allocation.
These measures collectively aim to yield improved outcomes and heightened profitability by ensuring
funds are utilized effectively.

For example, within the automobile industry, many manufacturers employ this approach to streamline
production processes and maintain quality standards. Budget allocations are linked to employee and
managerial performance, with bonuses tied to specific benchmarks and targets. In another instance, In
the healthcare sector, hospitals and clinics leverage performance-based budgeting to enhance patient
outcomes and reduce costs. By aligning budgets with performance indicators such as decreased wait
times and heightened patient satisfaction, healthcare providers optimize resource allocation.

Advantages of PPB:
Enhanced Operational Efficiency: Linking resources to outcomes encourages organizations to streamline
processes, leading to improved efficiency and effectiveness in achieving objectives.

Transparency and Accountability: Performance-Based Budgeting provides transparency by clearly

outlining allocated resources and expected results, facilitating stakeholder accountability for
organizational performance.

Informed Decision-Making: The approach enables more strategic resource allocation through evidence-
based decision-making, resulting in better budgetary decisions and ultimately improved public
outcomes.

Disadvantages of PPB:

Challenges in Measuring Performance: Some programs may face difficulties in quantifying outcomes,
especially when they involve complex services or outcomes that are not easily attributed to a single
entity.

Resource and Time Intensity: Implementation of Performance-Based Budgeting can be resource-

intensive, demanding frequent data collection, analysis, and evaluations alongside standard budgeting
practices.

Risk of Short-Term Focus: There is a potential risk of prioritizing short-term achievements over long-term
goals, which may adversely impact certain social, economic, or environmental outcomes.
References:
1. https://www.fylehq.com/blog/performance-based-budgeting
2. https://abgt.assembly.ca.gov/sites/abgt.assembly.ca.gov/files/PBB%20%282%29.pdf
3. https://www.linkedin.com/advice/0/what-challenges-benefits-using-performance-based#what-
are-the-benefits-of-pbb?
4. https://www.linkedin.com/pulse/performance-based-budgetspbb-improve-efficiency-
effectiveness-mejcc?trk=article-ssr-frontend-pulse_more-articles_related-content-card
5. https://pubmed.ncbi.nlm.nih.gov/37170408/