THE PRC: PERFORMANCE BUDGETING

ASSESSMENT

Abstract
This study was conducted to assess the performance-based budget (PBB) management
since 2004 in People’s Republic of China (PRC). During the last two decades, PRC
has tried many budgeting approaches, including line-item budgeting (LIB), zero-based
budgeting (ZBB), and the departmental/ministerial budgeting (D/M B) launched
recently, to improve the efficiency of expenditure management. While these reforms
have successfully broken the highly centralized fiscal regime, and to a great extent,
solved the problems the government faced, the current fiscal system remains weak in
transparency, accountability, and predictability. Officially Chinese government hasn’t
had performance-based budgeting system ( PBBs) so far, though some pilot projects
are taking officially at the central level and some local levels, and some localities are
trying to set up local PBBs (say Hainan province). The government officials have
realized that the PBBs is necessary for governments to enhance its public finance
governance and the effectiveness of the government funds. The core of the PBBs is to
set up the aims of performance-based budget and evaluate it by efficiency. Though the
PBB and the discussions about PBB have drawn increasing China government
attention and some fiscal reforms have been made by the government, it is still very
hard to introduce PBBs to all levels of government right now because of government:
lacking cost-benefit estimate system; mismatching revenue/expenditure
responsibilities of government agencies; and un-overall budgeting (not including all
public resources); etc.

I INTRODUCTION
The purpose of this research was to assess the performance-based budget (PBB)
management since 2004 in China and draw a reform framework for performance
budget reform.
From 1990s, PRC government has tried many budgeting approaches, including line-
item budgeting, zero-based budgeting, and recently launched departmental/ministerial
budgeting, to improve the efficiency of expenditure management. While these reforms
have successfully broken the highly centralized fiscal regime, and to a great extent,
solved the problems the government faced, the current fiscal system remains weak in
transparency, accountability, and predictability. Officially Chinese government hasn’t
had performance-based budgeting system (PBBs) so far, though those reforms are the
basic conditions for PBBs and some pilot projects are taking officially at the central
and some local levels.

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 The ministry of finance of PRC is positive with the PBB reform and sets this as its
mid- to long-term target. The ministry of finance convened “PBB Management and
Reform International Forum” from 22 to 24 in June of 2004 in Qingdao, Shandong
province, the international representatives from World Bank, OECD and some other
international organizations and some countries such as Canada, Sweden and Australia
were invited to deliver their presentations on the international PBB experiences and
suggestions to the forum, some domestic governmental officials from the ministry of
finance and provincial finance department were involved in the conference.
The pilot projects of PBB taking in local levels are necessary partially because of big
number government unite and size of Chinese population and economy.
 Government tiers
PRC has 34 provincial levels that include 23 provinces, 5 minority autonomous
regions, 4 municipalities and 2 special administrative regions. Under provincial level,
there are 333 sub-provincials unite that include 51 sub-provincial administrative
regions (Or leagues in Inner-Mongolia autonomous region) and 282 city of sub-
province; 2861 county levels unite including 1642 counties, 374 cities on the county
level and 845 districts (governed by city hall of sub-provincial cities) in the city of
sub-province; 44067 township levels unite including 5751 sub-district office (Jiedao
ban shi chu) and 20226 towns. There are about 47262 government units totally now in
PRC (see table 1).

Governmental tiers and Administrative Division in PRC

Table 1 By the end of 2003
Provincial Sub-province County Level Township Level
Level
City of Sub- Unite City District Unite Sub-district
Province on in city office
Unite
County of sub-
level province
All
333 282 2861 374 845 44067 5751 26
Country
Beijing 18 16 381 131 142
Tianjin 18 15 241 101 120
Hebei 11 11 172 22 36 2207 235 937
Shanxi 11 11 119 11 23 1386 188 564
Neimenggu 12 9 101 11 21 1431 195 527
Liaoning 14 14 100 17 56 1532 539 614
Jinlin 9 8 60 20 19 1011 240 456
Heilongjian
13 12 130 19 64 1314 381 475
g
Shanghai 19 18 221 100 118
Jiangsu 13 13 106 27 53 1518 275 1117
Zejiang 11 11 90 22 32 1598 275 783

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 Anhui 17 17 105 5 44 1936 220 997
Fujian 9 9 85 14 26 1111 151 608
Jiangxi 11 11 99 10 19 1548 120 770
Shandong 17 17 139 31 48 1928 395 1237
Henan 17 17 158 21 48 2440 328 866
Hubei 13 12 102 24 38 1234 273 737
Hunan 14 13 122 16 34 2587 225 1098
Guangdong 21 21 122 23 54 1710 380 1318
Guangxi 14 14 109 7 33 1396 72 748
Hainan 2 2 20 6 4 218 17 181
Chongqing 40 4 15 1259 106 648
Sichuan 21 18 181 14 43 5144 202 1934
Guizhou 9 4 88 9 10 1539 86 693
Yunnan 16 8 129 9 12 1574 57 580
Xizang
7 1 73 1 1 692 9 140
(Tibetan)
Shaanxi 10 10 107 3 24 1744 142 919
Gansu 14 11 86 4 16 1569 101 463
Qinghai 8 1 43 2 4 429 31 115
Ningxia 5 5 21 2 8 227 39 92
Xinjiang 14 2 99 20 11 1005 137 229
Source: Ministry of Civil Affair of PRC, China Statistics 2004, National Statistics.
China Statistics Publishing House, 2004, Beijing, China.

 Population
PRC is the largest country for its population with 1292.27 million people in the world
(see table 2). Large size of population at the same time means that government has to
take much more responsibilities than the countries with smaller size of populations in
the world. Take the education of the population as an example. In 2003, about 9.7% of
population among 6 or above 6 years old is illiterate and in which, 6.9% is female,
and 2.8% is male;

Population and its structure in 2003

Table 2 Unite: 10 thousand
Population at the Gender Regions
end of 2003 Men Women Urban Rural
Sum % Sum % Sum % Sum %
129227 66556 51.50 62671 48.50 52376 40.53 76851 59.47
Note: The population of Hong Kong, Macao and Taiwan excluded in the table.
Source: China Statistics 2004, China Statistics Publishing House, 2004, Beijing,
China.

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 II EXISTING STUDIES IN THE AREA
What is Performance Budgeting?
Budgeting is increasingly being seen as a tool to promote government accountability
and effectiveness, rather than simply as a vehicle for allocating resources and
controlling expenditures. Faced with fiscal constraints and demands for more and
better public services, governments at every level are discussing, experimenting with,
and implementing new ways of budgeting. Performance-based budgeting,
management, reporting is the latest trend in attempts to improve government
performance. These reforms seek to refocus management and budgeting processes
away from inputs towards results. In essence this involves writing into the formal
management and incentive systems of government organizations and public
employees, goals, targets, indicators and measures relating not to how the service is
provided but to the results achieved.

Performance budgeting is on the basis of previous budget research and experience.

For example:
 The New York Bureau of Municipal Research of 1907, the Hoover Commission
of the 1940s, and systems analysis of the 1950s introduced elements that have
found application in later budgeting systems, including attention to developing
measures of workload and cost effectiveness;
 The Planning-Programming-Budgeting system (PPBS), which was applied
initially at the federal level and became more widely popular in the 1960s,
strengthened and institutionalized program analysis, multi-year planning, and
rolling multi-year budgets;
 Management by objectives (MBO), a technique that requires regular reports on
departmental progress toward achieving agreed-upon objectives, became popular
in the 1970s though primarily as a management, rather than budgeting tool; and
 Zero-based budgeting (ZBB), introduced at the U.S federal level in the 1970s,
emphasized evaluating all programs each year rather than “concentrating on
budgetary changes at the margin.” ZBB attempted to analyze the incremental
change in a program’s output at different levels of funding.

Clearly, performance budgeting is not an entirely new budgeting system. Elements of

earlier systems that are reflected in performance budgeting include:
 The planning emphasis of PPBS is incorporated through strategic planning and
the use of a program structure;
 Common to both MBO and performance budgeting are the setting of objectives
and performance targets; and
 ZBB’s determination of expected levels of performance for each level of
expenditure and setting priorities on spending “packages” are concepts which a
number of governments have incorporated into performance budgeting initiatives.

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Performance based budgeting has been defined as a system wherein managers are
provided with the flexibility to utilize agency resources as required, in return for their
commitment to achieve certain performance results. So it is a system of planning,
budgeting, and evaluation that emphasizes the relationship between money budgeted
and results expected. Characteristics of performance budgeting includes：
 Focuses on results. Departments are held accountable to certain performance
standards. There is a greater awareness of what services taxpayers are receiving
for their tax paid.
 Is flexible. Money is often allocated in lump sums rather than line-item budgets,
giving managers the flexibility to determine how best to achieve results.
 Is inclusive. It involves policymakers, managers, and often citizens in the budget
“discussion” through the development of strategic plans, identification of
spending priorities, and evaluation of performance.
 Has a long-term perspective. By recognizing the relationship between strategic
planning and resource allocation, performance budgeting focuses more attention
on longer time horizons.

A performance budgeting lists what each administrative unit is trying to accomplish,

how much it is planning to do, and with what resources. It reports on how well it did
with the resources it had last year. The performance budgeting process allows for
citizen input, requires planning, places resources in the priority service areas, and
provides for budget accountability on the end result of the process. All of these
features make performance budgeting very attractive to agencies, elected officials, and
the citizens being served. Performance budgeting is an integral part of an ongoing
process that focuses on government accountability and performance improvement, as
showing in Figure 1.

Budgeting is Part of the Performance

Measurement Cycle

Policy

Evaluation
Planning
Programs
&
Activities
Measurement
Budget

Performance

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Why does some countries and China need to take PBBs?
The pressure for budget reform largely arose from the rapid growth in the public
sector in the 1970s and early 1980s, raising questions as to its affordability and
whether it was providing value for money. The growth had been so sharp that there
were doubts as to its sustainability and the need to find reductions in some sectors to
satisfy new emerging demands, as well as general concerns that taxation levels were
too high and the public sector was crowding out the private sector. The consequence
was a substantial fiscal consolidation, reducing budget deficits and stabilizing debt
levels, alongside the introduction of fundamental budget system reforms.

In China, the pressure of public expenditure is one of the most important factors that
are pushing PRC government to reform its fiscal regime in the past two decades. An
appropriate budget approach will increase transparency and cost-efficiency of fiscal
operation. Performance based budgeting has been the latest trends for OECD
countries in attempts to improve government performance. The Government of China
is attempting to improve public sector performance and efficiency in resource
allocation through a national reform program supported by the World Bank.

Over the past two decades, the role of China’s government in the economy has
undergone dramatic change, and pressures are building for increased efficiency and
effectiveness in the public sector. The PRC Country Strategy and Program 2004-2006
(CSP) identified pro-poor fiscal reform as ADB’s important means of promoting
equitable and inclusive growth and sound governance. To support the CSP exercise, a
performance budget reform assessment will be conducted for the PRC.

Literature Review
Researchers use the term performance budgeting in two contexts. It sometimes refers
to the budget reform initiated by the Hoover Commission in the late 1940s ( Mikesell,
1995).The reform was designed to change traditional input-oriented budgeting into
output-oriented budgeting by measuring outputs and unit costs of public services. A
broader definition includes all budget reforms linking budget inputs and budget results
（ GAO, 1997a ） .Besides the Hoover Commission’s effort, this definition also
includes Planning-Programming-Budgeting-System(PPBS),Zero-Based Budgeting
(ZZB), management by objective(MBO), and the performance budgeting initiatives
since the 1980s(GAO,1997a).

In response to the fiscal stress in government and citizen demands for service quality,
there has been a renewed call for the linkage of budget inputs and budget results since
the 1980s. The Government Accounting Standard Board (GASB) called for a
comprehensive evaluation of performance management in government (GASB, 1990).

The theoretical root of performance budgeting can be traced to the 1940s when public

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administrators and scholars searched for “alternative budget procedures” (Lewis,
1952) to replace input-oriented budgeting. Key (1940) asks a fundamental budgeting
question: On what basis should it be decided to allocate x dollars to activity A instead
of activity B? Budgeting theorists present two different answers. To some public
budgeting is a game in which political actors in government maximize their interests.
The self-interests, negotiation, and compromise of these actors determine a program’s
political support, which in turn determine the program’s funding priority and funding
level. In contrast, a prescriptive budgeting theory claims that, since resources are
scarce in relation to demand, economic values should be used to judge a program’s
success. Resource allocation decisions must be made on basis efficiency and
effectiveness of public programs.

The new performance budgeting differs from previous budget reforms in three major
aspects. First, the previous reforms disregarding legislative involvement often resulted
in legislative resistance to new budget formats (GAO, 1997a) .The new performance
budgeting system calls for consistent communication among government stakeholders
about organizational goals, missions, and performance measures. Second, the new
performance budgeting system is associated with empowerment of managers and
decentralization of decision making systems. Empowered managers have more
discretion in budgeting, procurement, and personnel management, with less red tape.
Managers are held accountable for service results, rather than administrative
procedures and rules. Third, most importantly, the traditional performance budgeting
focuses on direct outputs of government, while the new performance budgeting
attempts to measure outcomes of government. An output is the amount of a product
produced, service rendered, or work done without consideration as to the quality or
desirability of what has been done. An outcome, on the other hand, assesses the
desirable achievement or consequences of supplying public services to targeted
recipients. Outcome measures address quality while output measures concern
quantity.

III THE REFORM PROCESS AND EXPERIENCE OF

OTHER COUNTRIES
Introduction
Over the past two decades, performance based budgeting has been the latest trends for
OECD countries in attempts to improve government performance. The fundamental
changes in budget management that have been introduced in the OECD countries
have caught the attention of many middle-income and emerging countries, who now
seek to adopt similar reforms. This section explores, from the perspective of OECD
country experiences, problems when introducing performance-based budget
management reforms.

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Move to Performance Budgeting
Performance-based budgeting was first recommended by the Hoover Commission in
the United States in 1949. In the 1950s and 1960s many OECD countries, including
the United States, started using performance indicators and targets to assess agencies
not on how much they spent but on what they actually produced. But at the time these
systems ultimately failed because they were too rigid to take account of uncertainty
and unpredictability, and because they failed to recognize the limitations of formal
systems in influencing people’s behavior. As a result, performance targeting and
measurement fell from grace in the late 1970s and mid-1980s, but has witnessed a
revival in the past 20 years as budget constraints, changing economic environments,
and demands from citizens for higher quality services put improving the performance
of ministries and public servants back on the political agenda in many OECD
countries.

Different Implementation Methods in Performance Based

Budgeting and Management

The strongest current performance-oriented trend in OECD countries is to use
performance based management, budgeting, and reporting. Australia and New
Zealand were the first to begin the present round of performance management and/or
budgeting in the late 1980s, followed in the early to mid 1990s by Canada, Denmark,
Finland, France, the Netherlands, Sweden, the United Kingdom and the United States.
And in the late 1990s to early 2000s, Austria, Germany and Switzerland in their turn
introduced versions of these reforms.

Countries’ approaches to performance management are constantly evolving. For

example, Australia, the Netherlands, and New Zealand began by concentrating on
outputs and are now moving to an outcomes approach. Australia is also changing its
accounting and budget systems to focus on outcomes. France has passed a law which
requires the production of results as well as inputs in budget documentation for the
majority of programs.

Governments have introduced performance-based management and budgeting for four

main reasons: to improve efficiency; to improve decision making in the budget
process; to improve transparency and accountability; and to achieve savings.

Some countries have focused on only one or two of these objectives, while others
have embraced all four, aiming to introduce performance-based management and
budgeting across central government and to improve performance as well as
accountability to the legislature and the public. Australia, Denmark, the Netherlands,
New Zealand, the United Kingdom and the United States are all following this
approach.

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In some countries, such as Canada and the United States, ministries have developed
strategic and performance plans which include performance targets. Other countries
have adopted performance contracts, for example between a ministry and a
subordinate agency.

Countries have adopted different approaches to implementation. Some – for example

Australia, the Netherlands, New Zealand, and the United Kingdom –have taken a top-
down and total system approach, mandating change across government. Others
including Finland, have taken a more bottom-up and ad hoc approach giving agencies
freedom to develop their own performance-based methods, while with less
involvement from the top.

Current Trends
Despite the differences in approach, there are common trends in OECD countries’
efforts to become more performance-oriented. According to the data survey from the
OECD/World Bank Budget Practices and Procedures Database 20031.In all, 27 out of
30 OECD countries responded to the database survey. Some OECD countries have
actively attempted to integrate performance targets into the overall budget process,
but very few can be said to be carrying out “real” performance budgeting. This means
not just including performance information in budget documentation but linking
expenditure to targeted results, reporting performance against these targets and using
the information to make decisions on future resource allocation.

Using that strict definition, performance budgeting is very rare. Only 18% of
countries, including the Netherlands and New Zealand, link expenditure to all or most
of their outputs targets, while 41% said it was not common for politicians to use
performance results in decision-making. This included countries with long experience
of this area such as Canada and the United States.

Very few countries have formal mechanisms in place to reward or punish individuals
or agencies for reaching or failing to achieve their targets. Almost half of the countries
that responded to the survey (41%) said they had no rewards or sanctions related to
targets, and only 11% said that performance against targets is always linked to pay,
while 26% said it is sometimes linked.

OECD countries have generally made more progress in implementing performance

management than performance budgeting, which is widely perceived as one of the
most difficult aspects of performance and is very much in its infancy.

A system of performance management incorporates the setting and reporting of targets

and their subsequent use in the internal decision making processes of ministries and

1
OECD/World Bank Budget Practices and Procedures Database, available at
www.oecd.org/gov/budget.

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agencies. The relevant minister or head of department is formally responsible for
setting performance targets in 67% of countries. Performance against targets is
continuously monitored in the relevant ministry in 56% of countries and is reported in
systematic annual reports for some or most programs in 63% of countries.

Performance results are used to set program priorities and allocate resources within
agencies and ministries in almost half of countries. However, within a country, the
number of programs and agencies to which performance management is applied
varies.

Australia, the Netherlands, New Zealand, Norway, and the United States have taken a
comprehensive approach and it is applied to nearly all programs. While in Canada,
Belgium and Germany it is only applied in around a quarter.

Creating a performance management system does not in itself improve performance,

although it does provide information that can improve decision making. Many
countries have combined introducing performance management with delegating
responsibilities within ministries and to agencies on the theory that managers need
more freedom to use resources if they are to achieve results. If performance targets are
imposed on top of a traditional system, without delegating responsibility, it raises
concerns that performance indicators will become an additional layer of control in an
already overburdened system and further restrict managerial freedom.

What Can be Learned from International Experience?

1. THE MEANS TO MANAGE THE REFORM PROCESS

When turning to the means required for reform to succeed, this is typically assumed
adequate for the task but experience suggests this is usually not the case. The
experience of developing countries is one of efforts to improve systems being
overtaken by changing external events. Some generalizations of the experience of
developing Countries can be offered:
 Emphasize objectives
The cultural shift from a compliance-oriented to a performance-oriented budget
management model essentially involves the move from focusing on inputs and how
they are employed to focusing on outputs and how they fulfill the original budget
objectives. This is a move away from traditional administrative procedures to more
modern management orientation focused on meeting clear objectives. Not surprisingly
then, a key to a successful transition from one budget management model to the other
is to focus on objectives. Those involved in the path-breaking public sector reform
processes in New Zealand and Australia stressed this aspect of reform.
 Keeping participants focused on objectives
Publicizing these objectives is one approach to create incentives and put pressure on

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participants to meet these objectives, and enforcing efforts to hold them accountable
for achieving these objectives. In the United States, the National Performance Review
during the Clinton Administration also placed heavy emphasis on measuring and
publicizing results.
 Evaluation of performance as a tool to enforce performance
To be effective in helping meet objectives there must be a feedback mechanism to
continuously improve the means to attain the objectives. At the same time, these
mechanisms must be cost effective, and excessive transactions costs, as well as the
risks in their application, in deriving biased, inaccurate, or non-probative results, must
be avoided.
 Rewarding good performance and sanctioning poor performance
The reform leadership must ensure a clear link between performance and rewards.
Establishing clear performance accountability involves first a threshold level of basic
financial and personnel management systems to be in place to report on performance,
and second a performance-oriented framework linking rewards to performance.
Middle-income countries are typically handicapped in following the above strategy. In
a traditional type of budget system, there is little emphasis placed on performance.
With the budget focused on inputs, with detailed line-item controls on expenditures,
agencies focus on obtaining spending approvals and utilizing them within the year.
There is little attention paid to non-financial performance, and few sanctions on
agencies for poor performance (and little reward for good performance). Management
in line agencies, therefore, have not been used to subjecting new policy proposals to
critical analysis. Nor have they been used to managing expenditure to achieve a
budgeted outcome because this function was tightly controlled by the center.
Consequently, they have not felt the need to develop an information system for this
purpose. There is a need, therefore, not only to develop such evaluation skills in
agency management but to establish a supporting information system based on
indicators of output and performance.
 The need to upgrade basic management tools to provide adequate, relevant, and
timely information
Hear three aspects are worth noting: Restructure the accounting system; Greater
application of IT; Strengthening internal control systems.
2. PROVIDING AN ENABLING ENVIRONMENT
The elements of such an enabling environment includes：
 An adequate level of fiscal stability
In OECD countries, the pressure for budget reform largely arose from the rapid
growth in the public sector in the 1970s and early 1980s, raising questions as to its
affordability and whether it was providing value for money. The growth had been so
sharp that there were doubts as to its sustainability and the need to find reductions in
some sectors to satisfy new emerging demands, as well as general concerns that
taxation levels were too high and the public sector was crowding out the private

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sector. The consequence was a substantial fiscal consolidation, reducing budget
deficits and stabilizing debt levels, alongside the introduction of fundamental budget
system reforms.
Performance-oriented public sector modernization is costly and likely requires
substantial infusion of scarce managerial talent to be effective. Recognizing this,
reform should be designed in a way that phases in the cost increases over a long
enough period of time so the government can meet the increase fiscal costs that does
not jeopardize overall macro fiscal policy stance.
 To be sustainable, reform requires a consistent legal and regulatory framework
There are some advantages in setting the new regulatory framework in the wider
context of a framework fiscal law. As is evident, a number of new fiscal frameworks
are legally based, to force governments to commit credibly and assuage governance
concerns.
The pioneer in this field was New Zealand through the Fiscal Responsibility Act of
1994, which laid down principles of responsible fiscal management, as a framework
for defining necessary fiscal procedures, fiscal targets, and fiscal reporting to ensure
these principles were upheld. The need for greater transparency in fiscal management
was an overarching objective of this legal framework. Not only are governments
required to specify and adopt agreed fiscal targets, but they are required to explain the
policies underlying their attainment and, when deviating from this policy
commitment, they are required to explain not only its rationale but also planned future
corrective action.
 Increased emphasis on fiscal transparency
Transparency in government operations is increasingly regarded as an important
precondition for good governance and sustainable economic growth—but, for the
emerging economies, it is also an essential aspect of sustaining confidence in
government and, through this, support for the democratic system and economic
advancement. The latter has become particularly acute with the exposure of fiscal
policies to international financial markets because of the increasing use of market
financing of deficits. Such exposure has required many governments to modify past
policies and so has assisted in achieving fiscal discipline and improved resource
allocation. It is also an essential ingredient in establishing the new budget
management model.
 Moving performance indicators from quantity to quality
The importance of performance indicators has long been recognized in reforms
associated with performance budgeting, as evidenced by the ever-expanding literature
on the subject. The requirement for performance data and improving performance
measurement as a way to improve resource allocation for government cannot be
doubted. However, one can detect a new trend to obtain different types of
performance data. Typically, performance data has been directed to the following
questions: first, how well are services delivered? (efficiency concerns); and secondly,
are planned objectives being met? (effectiveness). However, increasingly important

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has been a third type of question: are customers satisfied with the results? (a quality
dimension).
In the United States, the Government Performance and Results Act (GPRA) was
enacted in August 1993 to improve the public’s confidence in government by holding
agencies accountable for program results. Promoting a focus on results, improving the
quality of services, and measuring customer/citizen satisfaction with government
services were important elements of the Act. Improving the delivery of services by not
only requiring that managers establish plans for meeting their goals/objectives, but
also providing feedback to managers regarding actual program results and quality.

Experiences form International Comparison to China’s reform

The experience from OECD countries shows while it is not too difficult to design
budget reform measures, and specify detailed implementation plans, the management
skills required by the reform process are often underestimated. This has two
dimensions. First is the substantial management capacity required to operate the new
type of budget management model. Second, and arguably more important, are the
change management skills required to introduce new systems, to sustain efforts to
follow through in implementation and to adapt to contingencies and changes in the
external environment.

The successful experiences and methods in OECD countries are of great reference to
China’s performance-based budgeting reform.
 Performance-based budgeting is an impersonal choice while the government
management pattern develops a new period in Market-oriented economy, to
reinforce the management of public expenditure and increase the efficiency of
public expenditure. Performance-based budgeting is not only an innovation of
budgeting method, but also a revolution of the concept of government
management. Budgeting is increasingly being seen as a tool to promote
government accountability and effectiveness, rather than simply as a vehicle for
allocating resources and controlling expenditures. Performance budgeting
assessment seeks to refocus management and budgeting processes away from
inputs towards results. In essence this involves writing into the formal
management and incentive systems of government organizations and public
employees, goals, targets, indicators and measures relating not to how the service
is provided but to the results achieved. Departments are held accountable to
certain performance standards. There is a greater awareness of what services
taxpayers are receiving for their tax paid. For the department of finance, the
reform of performance budget is helpful to the innovation and renovation of
pattern of public finance management, and is helpful to improve the efficiency of
public finance expenditure.
 The core of performance-based budget is to establish a series of indicators,
standards and methods to reflect the efficiency of government activities. While
assessing the performance of public expenditure, we should take into account the

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 economic benefit and social benefit, the short-term effect and the long-term
effect, the direct effect and the indirect effect. Therefore, we must establish a
system of performance assessment consist of quantitive analysis and qualitative
analysis, universal indicators and professional indicators. Based on a great deal of
effective sample, we work out the standard and use them to access the outcome of
performance budget. While establishing the performance indicators, we should
take into account the suggestions of specialists and the public, avoiding the
converse inspiring effect on the evaluators.
 Advancing the reform of accrual accounting and budgeting process in
government management to reflect the performance of government completely.
There may be limitations in the accounting system, especially if cash based, that
may not be able to record the full costs of capital since depreciation is not
included. The accrual accounting system can reflect the information of some
long-term projects and potential debts in governments, furthermore, it is also
helpful to improve the integrality, reliability and transparency of budget,
reinforcing the cost-benefit analysis and assessment of government performance.
At present, Australia, New Zealand, England, Sweden and America have moving
from cash to accrual accounting in the government accounting. To reflect the real
cost and performance of government activities, we should moving to accrual
accounting gradually in the coming reform of government accounting system.
 Innovating the methods and process of budget, introducing the content of
performance budgeting assessment gradually, and establishing a mechanism in
allocating resources based on the outcome of performance assessment. To
establish this new resources allocation and assessment mechanism, first, we must
establish the system of mid- and long-term budget to reflect the strategic plan of
the department. And enforce the forecast and continuity of budget so as to work
out the annual budget of department and the implement of performance
assessment. Second, we must establish the system of performance budgeting
assessment to reflect the performance of department every year. The annual
budget of department must be restricted to the mid- and long-term budget of the
department. Finally, we use the above performance indicator to assess the
performance of one department, and adjust the budget of next year based on the
outcome of performance assessment.
 Furthermore, Advancing the reform of performance budget needs to upgrade
basic management tools to provide adequate, relevant, and timely information
there must be enough preparation on the consistent legal and regulatory
framework, professional staffs, account basis and technology.

Ⅳ THE PRC: PERFORMANCE BUDGETING

ASSESSMENT
Background

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Since 1978, China took a series of transformation reforms with the fiscal system and
the former highly centralized fiscal system was gradually broken. In 1994 China
launched a large-scale campaign to further the reform whereby a big leap forward of
fiscal system was made. But generally speaking, the reform of the fiscal system in
China in the past years has made achievements mainly in the area of government
revenue. In expenditure, especially in expenditure budgetary drafting and managing
system, however, the reform has remained weak. The budgetary system still adopts
the traditional input-oriented method.

The input-oriented budgetary system exist many problems, the budget drafting
method is unscientific and there are not enough details available, the distribution and
application of the budgetary fund is not transparent enough and the legal restricting
force on the budget is lowered. Such a budget is not only difficult for the legislative
institutions to carry out any budget examination, but it is also harmful to the
standardized implementation and legal supervision of the budget. As a result, the
present governmental expenditure efficiency is in any case not satisfying.
Shortcomings of the current budgetary system includes:
 Cost-benefit estimate system is almost blank;
 Overstaffed offices, financial profusion, even corruption etc. exist more or
less;
 Can not allocate resources according to priorities and objectives.
 Can not identify results from expenditure, etc.

In the mixed economic system, the existence of the government is essential and the
governmental functions are constantly expanding. On one side, low expenditure
efficiency aggravates expenditure expansion and furthers the fiscal deficit. On the
other side, low budget efficiency will add the taxpayer’s burden as well as the public’s
complains. These problems due to budget drafting method and procedure thus unable
to reflect the overall situation of the use of governmental funds and consequently
unable to reflect the situation of the implementation of the governmental functions.
Moreover, it does not conform to international conventions and trends. The further
reform of China's fiscal system will put the emphasis on establishing a framework of
public finance suitable to the market economy. While the current budget system is far
from the demand of the market economy and needs to be reformed as soon as
possible.

During the last two decades, PRC has tried many budgeting approaches, including
line-item budgeting, zero-based budgeting, and recently launched
departmental/ministerial budgeting, to improve the efficiency of expenditure
management. While these reforms have successfully broken the highly centralized
fiscal regime, and to a great extent, solved the problems faced then, the current fiscal
system remains weak in terms of transparency, accountability, and predictability,
particularly compared to international standards. The major problems existed now
include:

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 Lack of cost-benefit estimate system.
 Overstaffed offices and mismatched revenue/expenditure responsibilities of
government agencies.
 Misuse or corruption in the allocation and utilization of public financial
resources.
 Under-financed government priorities.
 Weak monitor/evaluation mechanism over public expenditures.
 Low transparency, accountability, and predictability of budget formulation.
 Difficult negotiations between budgeting authority and implementation
government agencies due to short of solid information/facts.
 Discretionary decisions in budget allocation.
 Loose fiscal discipline in deficit/debt control.

Driven by these problems and learning from other countries’ experiences, many fiscal
experts are discussing the possibility of introducing the Performance Budget to PRC.
These discussions have drawn increasing government attention.

In recent years, more and more countries, especially those developing and transition
ones, have paid much attention to this budget reform. Also, ADB is strengthening the
linkage between country performance and the allocation of scarce ADF resources
among recipient countries. To meet this international trend and to solve the existing
budgetary problems, the PRC’s government has taken performance budgeting reform
into account. Accordingly, a Performance Budgeting Assessment (PBA) should be
conducted for the PRC.

Desirability of Performance Budgeting Reform

The reform is of great and profound political, economic and social significance, which
includes:
 Government performance evaluation is an integral part of China’s reform on
political system. A democratic political system requires evaluating both
efficiency and effectiveness of government’s investment and activities.
Government performance evaluation plays an important role in China’s
democratic political system development and reform.
 It’s an important effort to establish a proper framework for public finance, also a
major measure to rectify and standardize financial and economic order and
constitutes the key to on-going fiscal reform.
 It has profound implication for budget management: 1.performance needs to be
specified and reported in a way which is operational for budget managers;
2.government agencies need greater managerial autonomy and freedom from tight
input controls, so they can determine their most efficient delivery of results;
3.changes are required for the range of incentives and sanctions facing
departmental managers.
 Performance budgeting helps to improve Government’s performance. The core of

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 modern government management is the improvement of performance.
Government performance evaluation helps promote strong performance
awareness among the public. Therefore the efforts on improving the performance
will go all the way through the government management.
 Performance evaluation helps government to build up a philosophy of servicing
the society as a whole, and build a clean and honest government, thus works to
enhance government’s image and reputation.

Apart from above, the performance budgeting reform is not only conform to the
international convention but also accord with ADB’s policies. An appropriate budget
approach will increase transparency and cost-efficiency of fiscal operation, better
emphasize on government’s priorities such as education, health care, poverty
reduction, and social relief. The PRC Country Strategy and Program 2004-2006 (CSP)
identified pro-poor fiscal reform as ADB’s important means of promoting equitable
and inclusive growth and sound governance. To support the CSP exercise, a
performance budget reform assessment will be conducted for the PRC.

Feasibilities of Performance Budgeting Reform

Significant achievements have been attained in building a democratic government.
The ongoing government reform provides a favorable ambience for government
performance evaluation.

With the government reform moving forward, the public will become more and more
performance consciously, which will lead to an enabling social environment for the
government performance evaluation.

Capitalizing on mature theories and practices regarding government performance

evaluation. Some countries have already experienced performance budgeting for 20
years, many countries even stipulated the government performance evaluation system
in the law.

Modern information, analytical and forecasting technology provides technical support

for government performance evaluation. Modern computer technology can meet the
demands of government performance evaluation for storing analyzing and querying
substantial amount of data within short period of time. IT-based performance
evaluation makes the relevant information available for the public and helps various
parties to share the information.

Currently, governments of all levels, from central government to local government,

attach great importance to performance evaluation. Achievements have been made in
the development of theory and practice in regard of performance evaluation.
Performance evaluation has been implemented in certain areas and departments.
Experiences have been accumulated along the way.

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During the past years, some projects are selected as pilot performance budgeting
projects in cost estimate and result evaluation. Some local governments have partly
introduced Performance Budgeting approach. The Ministry of Finance is also positive
with the Performance Budgeting reform and sets this reform as its mid- and long-term
target. The Ministry of Finance encourages studies on this subject.

Domestic Experimenting Places

 Central government
To strengthen the budget management, Ministry of Finance has carried out some
experiment unit work of project expenditures along with the reform of departmental
budgeting. Some project expenditures of government in 2003 are required to be
assessed its performance, and the results of performance assessment will be referred
in the resources allocation in 2004. At the same time, some inner bureaus of ministry
of finance, such as bureau of education, technology and culture, have enacted some
management rules for project performance assessment.

 Fujian
Government performance evaluation has been systematically carried out in Fujian
Province. What Fujian government has been done is comprehensive and instructive.
Fujian government has issued two government instructions to carry out performance
evaluation in 2004 and 2005. Fujian government’s performance evaluation is to base
the promotion, salary and other motivational measures on the outcome of performance
evaluation. Putian municipal government and Xiamen municipal government serve as
the demonstration sites.

 Gansu
Gansu is the place where the first government performance evaluation has been
carried out. The third party evaluation of government performance is so called
“Lanzhou experiment”, which is instructive for China’s government performance
evaluation as a whole.

Gansu provincial government entrusted the third party—Chinese Local government

performance evaluation center of Lanzhou University to evaluate its performance. The
performance evaluation center is a non-government institution. The center came up
with a report entitled “Gansu non public-owned enterprises’ evaluation of government
performance.

 Xuhui District, Shanghai

Xuhui district has put in place evaluation measures for government financial projects
in 2003. The first government performance evaluation system has been built up and
implemented in some government departments. But no significant results have been
achieved.

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 Shenzhen
Shenzhen government’s performance evaluation is effective and comprehensive. It
can serve as the role model for government performance auditing.

Shenzhen government has put in place Shenzhen Special Economic District Auditing
Regulations as early as 2001. in 2004, it expanded the scope of performance
evaluation and issued regulations on auditing government investment projects. In
recent years, annual reports of government performance evaluation have been made to
the public.

 Qingdao
Qingdao municipal government introduced corporate management methodologies and
third party evaluation. For the first time in China, object evaluation personnel have
been trained in Qingdao.

In addition, government performance evaluation has also been carried out in Beijing
in recent years.

Issues to Consider Regarding China’s Government Performance

Evaluation
In the PRC, it’s not easy to set up performance budgeting system in short term
because:
 There is no mature and systematic experience previously, also, there are no
systematic theories to guide the evaluation;
 Correlativ e reforms such as accrual accounting haven’t been established;
 Relevant skills and human resources are often in short supply.
 Government is pursuing diverse goals, which are conflicting to each other, so
government has to trade off among conflicting interests and values;
 Most evaluations are self-motivated and regulated, there are no regulation or law
in place to support and guide the evaluation;
 Most of evaluations are sponsored by government. In most cases a certain level of
government evaluates its subordinate’s performance. It’s rarely seen that the
public evaluate the government or government’s internal evaluation.

Although the prerequisites mentioned above are not ready yet. However, The Ministry
of Finance of the PRC has promoted to implement some kind of performance budget
in 2005. Therefore, it’s time for making a further research on the feasibility and the
prospect of performance budgeting in the PRC nowadays.

Ⅴ THE REFORM FRAMEWORK FOR CHINA’S

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 GOVERNMENT TO PERFORMANCE BUDGET REFORM

Defining a Framework for Performance Measurement

Performance budgeting assessment is a necessary step to deepen the reform
department budget. The essence of department budgeting reform is to establish a
perfect performance budgeting management system to improve the performance of
government management and the efficiency of public finance expenditure. The reform
of performance budgeting is not accomplished in an action. In the reform of
performance budgeting assessment, we must definitude the principles of reform and
the steps of reform according to the process of China’s department budget reform,
introducing the concept of performance budgeting to China’s public finance
expenditure management gradually.

Principles of Performance Budgeting Reform in PRC

While it is undeniable that performance measurement is a key tool in the process of
improving the delivery of public services, this should not be viewed as an end in
itself, but part of a wider reform process. Performance is a deceptively simple idea:
simple because it is easy to express key concepts and objectives; deceptive because it
is hard to apply these ideas in government.2 We must stick to some basic principles to
guarantee the process of reform.

 Aim for clarity in purpose

First, it is necessary to be sure about who will use the performance information, how
they will use it, and why they will use it. There are many potential users of
performance information, ranging from the program manager, the central evaluator in
the ministry of finance, the member of a legislative watchdog committee, and the final
consumer of the government service. Each of these potential users has different
objectives: for example, making better resource allocation decisions, improving
services, increasing accountability, etc. Measures should only be chosen when users
are identified and their objectives properly defined. The ultimate aim should be to
help the user reach more informed conclusions and to make better decisions about
service performance.

 Focus on core information

Second, once the purpose has been clarified there should be a conscious effort to
prioritize between different performance measures to avoid information overload. It is
usually recommended that in the first instance the focus should be on the priorities of
the entity, i.e., its core objectives and service areas. Often it takes sufficient time and
effort to establish success criteria for these priorities and objectives without widening
the scope of performance measurement.

2
Jón R. Blöndal, Deputy Head of Division, Budgeting and Management Division.Performance Management in
OECD Member countries.

Page 20 of 26 20
 Align with practical needs of the agency
Third, it is necessary to make performance information as relevant as possible to the
agency. To do so requires performance measurement to be aligned with the objective,
setting procedures and the performance review process of the agency. In this way,
those collecting and processing the data can appreciate what these are being used for
and relate their use to the agency’s procedures. Of course, this does not mean ignoring
the multiple uses of performance information. There should be links between the
performance measures used at an operational level, those used by agency’s
management, and those used by higher level government officials, say in the ministry
of finance.

 Balance the perspective on performance.

Fourth, it is necessary to recognize that different activities create different needs for
performance measurement. Narrow program activities perhaps can be covered by very
few measures, but complex program activities may need a wide range of performance
measures balanced over the different aspects of the services. Often it is felt desirable
to have an appropriate mix of internally generated and external measures. Obviously,
meeting this need may involve trade-offs with other criteria such as focus and
alignment.

 Review the performance measures

Fifth, there should be a consistent effort to upgrade performance measurement. This
reflects the fact that the previously chosen criteria are subject to change over time.
Agency objectives change, priorities between objectives change, different users
emerge, and hence the required balance of performance information is necessarily
changed. Selected performance measures, therefore, should be regularly reviewed and
updated to reflect such changes in priorities and shifts in the focus of public policy. A
performance measurement system that is static is not likely to be fulfilling its function
as part of a performance management system.

 Ensure robustness of basic information

Lastly, but perhaps more importantly, performance measures should be based on
reliable and timely data. The basic raw data should be robust, in the sense of being
derived in a way that is verifiable, free from bias, and preferably comparable over
time and between different organizations. Data should also be capable of being
derived in a time frame compatible with the needs of decision-makers.

Concrete Steps and Measures to Performance Budgeting

Performance budget is an innovation of concept rather than only a technique tool in
the government performance management. it will renovate the patterns of government
management thoroughly. Therefore, we must make concrete steps and measures
towards performance budgeting.

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 Establish a uniform and normative performance budgeting assessment law
to define the scope, target and content of performance assessment
To assure the normal development of performance assessment, we should establish a
uniform and normative performance budgeting assessment law to solve the problem
of system limitation and guarantee the advance of performance assessment. We should
not only assess the performance of single public expenditure item, but also widen the
scope of performance including all the expenditures of government such as constant
expenditure and public engineering expenditure. The content of performance should
include the operational assessment and the financial assessment. We should not only
assess the process of budget and the management of funds, but also assess the
rationality of performance target and the outcome of project target.

Performance measurement is not to be more than simply an add-on to the traditional

budget process, it is an essential part of the process of performance budgeting. In turn,
performance budgeting must be viewed as an integrated method of allocating
resources. The central idea is to link resource allocation explicitly to outputs or
outcome—performance— and this should be recognized as involving more than just
budgeting. Rather it encompasses the entire budget management process in supporting
and demanding better performance: budget planning, budget execution, reporting, and
auditing. In this way, performance measurement requires to be fully integrated into a
performance management system. To support the latter, in turn, entails establishing a
performance information system.

 Establish a basic information data-base concerning the performance

indicators
First of all, performance assessment should establish an integrated performance
indicators and basic information data-base, so that we can measure the performance
target of project. Therefore, on the principle of combining qualitative analysis with
quantitative analysis, uniform indicator and professional indicator, we should
establish a system of performance assessment indicators and a basic information data-
base gradually.

Second, we must definitude the content of performance budgeting assessment of

public finance expenditure. According to the basic condition and the requirement of
reform target, we may differentiate constant expenditure performance assessment and
project expenditure performance assessment. The objective of constant expenditure
performance assessment is to assess the total performance of one department. The
basic start of designing constant expenditures performance assessment is according to
the function of government, which regulates the basic services what the department
should provide. At the same time, the objective of project expenditure performance
assessment is to assess the performance of concrete performance of one project.
Through project performance assessment, we can not only assess the security, validity
and normality of project, but also allocate financial resources efficiently by comparing
similar projects in one field.

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 Establish the quality dimension of outcome in the system of performance
indicators
Output is the products and services that departments provide, while outcome is the
social effect of government project. Output puts more emphasis on efficiency and is
based on short- and medium-term time horizon, while outcome put almost equal
emphasis on social effect and efficiency and is based on very long-term time horizon.
There is no doubt that outcome is better than output on the performance assessment of
government. But it is more difficult to use the concept of outcome to assess the social
effect of government project. Thus there need a process to divert output to outcome
gradually.

Furthermore, there is an important consideration for the efficiency of service

provision, where efficiency as measured by the ratio of outputs to inputs can be
improved by reducing quality of the output. Thus we must establish the quality
dimension of outcome to avoid above problems. Furthermore, different service of
government perhaps needs different qualitative characteristics. Since there are many
dimensions to quality, who decides what qualitative characteristics are important for a
particular service.

 Definitude the executor of performance budgeting assessment

Which department should be the executor of performance budgeting assessment is an
arguing question since performance budgeting assessment is introduced to China. One
point is that Ministry of finance should be responsible for performance assessment of
government. The other point is that Ministry of audit is the executor of performance
assessment. As far as this report is concerned, we think ministry of finance is the
executor of performance budgeting assessment because it is the department of public
finance expenditure management. Ministry of finance is responsible for the
establishment of performance assessment system and the correlative policy
constituting. Furthermore, ministry of finance is also the organizer of performance
budgeting assessment.

 Advancing the reform of accrual accounting and budgeting process in

government management to reflect the performance of government
completely
There may be limitations in the accounting system, especially if cash based, that may
not be able to record the full costs of capital since depreciation is not included. The
accrual accounting system can reflect the information of some long-term projects and
potential debts in government. Furthermore, it is also helpful to improve the
integrality, reliability and transparency of budget, reinforcing the cost-benefit analysis
and assessment of government performance. At present, Australia, New Zealand,
England, Sweden and America have moving from cash to accrual accounting in the
government accounting. To reflect the real cost and performance of government
activities, we should moving to accrual accounting gradually in the coming reform of
government accounting system.

Page 23 of 26 23
 Developing a performance management system
It is as well to recognize that it will take time to introduce a comprehensive system of
performance management. The ultimate objective is to put in place a system to match
costs with activities, to measure performance of these activities, to develop standards
of performance, and compare costs and performance levels with agreed standards. The
challenge of this approach is to link performance information to the budget process
and the allocation of resources. International experience has shown that until this
connection occurs performance, is seen merely as a regular reporting requirement, but
not directly relevant to day-to-day management and budgeting. Therefore, it is of
great importance to development a performance management system in the coming
years.

 Assessing the performance of the budget system

These steps toward a performance management system are directed to setting up a
clear accountability framework for budget managers that lies at the heart of the new
performance budgeting model. This reformulated accountability arrangement
represents a fundamental change toward a more devolved system of budget
management whose effects are quite far reaching. How to judge whether a PEM
system is robust enough to accommodate the previously discussed changes required
by performance-oriented budget management is a new question. In turn this requires
an assessment of the overall performance of the PEM system.

Ⅵ WORKING PLAN FOR ADB TO BE INVOLVED IN

THIS AREA IN THE COMING 5 YEARS
ADB is a multilateral development finance institution dedicated to reducing poverty
in Asia and the Pacific. Over the years, ADB have played a significant role in
economic and social transformation in Asia and the Pacific-- boosting economic
growth, fostering social development, and helping improve the quality of life for
millions of people. ADB maintain close working relationships with government
through project co-financing, consultations, and regular exchanges of information
about work in the country. In the reform of performance budgeting assessment in
China, ADB can be involved through the implement of a series of working plan.

Constituting a working plan 2006-2010 fit for the function of ADB. The main goal of
ADB’s policies is to reducing the poverty of one country. An appropriate budget
approach will increase transparency and cost-efficiency of fiscal operation, better
emphasize on government’s priorities such as education, health care, poverty
reduction, and social relief. The PRC Country Strategy and Program 2004-2006 (CSP)
identified pro-poor fiscal reform as ADB’s important means of promoting equitable
and inclusive growth and sound governance. To support the CSP exercise, a
performance budget reform assessment will be conducted for the PRC. Therefore, the
performance budgeting reform in China is accord with ADB’s policies. It is ADB’s

Page 24 of 26 24
duty to involve the reform of performance budgeting assessment in PRC. To ensure
the process of reform, it is necessary to constitute a medium-term working plan.

Assisting university or research institute to study the reform of performance budgeting

assessment more deeply. Invite the experts of IMF, OECD and WB to introduce the
successful experiences and lessons to avoid. Through conducting international forum
on this topic, ADB may renovate the concept of government management gradually to
develop the reform of performance budgeting more easily.

ADB may try to involve the reform of China’s government budget through some
cooperative projects, such as the establishment of mid- and long-term finance plan in
China, the project performance assessment of ADB’s poverty-reducing project. As a
multilateral development finance institution, ADB have the obligation to improve the
performance of government management, reduce poverty of one country.

Keep in close touch with the ministry of finance in China. There is no doubt that the
ministry of finance is the executor of performance budgeting assessment. Therefore,
ADB may keep in close touch with the operational bureaus, ministry of finance to
implement the reform of performance budgeting assessment. ADB may set up a fund
to encourage the research of performance budgeting, inviting the experts of IMF,
OECD to participate in the reform. At the same time, ADB may put forward its reform
plan as a reference to the ministry of finance through detailed investigation and
research.

Page 25 of 26 25
REFERANCE:

Bowsher ， C.(1985), “Governmental Financial Management at the Crossroads: The Choice is

Between Reactive and Proactive Financial Management,” Public Budgeting and Finance, 5(I): 9-
22.

General Accounting Office (1997a), Performance Budgeting: Past Initiatives Offer Insights for
GPRA Implementation, Washington, DC: Author.

Governmental Accounting Standards Board (1990), Service Efforts and Accomplishments

Reporting: Its Time Has Come: An Overview: Norwalk, CT: Authou.

Jack Diamond (2001),PERFORMANCE BUDGETING: MANAGING THE REFORM

PROCESS, available at www.imf.org

Jack Diamond (2002) , Performance Budgeting: Is accrual accounting required? IMF

Working Paper

Jack Diamond (2003) , From program to Performance Budgeting: The Challenge for
Emerging Market Economics. IMF Working Paper

Jack Diamond (2005) , Establishing a Performance Management Framework for

Government.

IMF Working Paper

Marc Robinson and Jim Brumby(2005), Does Performance Budgeting Work?: An
Analytical Review of the Empirical Literature. IMF Working paper

Key, V.(1940, December), “The Lack of a Budgetary Theory”, The American Political Science
Review, 34: 1137-1144.

Lewis, V.(1952).”Toward a Theory of Budgeting,” Public Administration Review, 12(I): 42-52.

Mikesell, J.L. (1995), Fiscal Administration: Analysis and Application for the Public Sector, 4th
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OECD/World Bank Budget Practices and Procedures Database, available at

www.oecd.org/gov/budget.

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