The Malaysian Budgeting System (Mbs)

A SHORT INTRODUCTION TO THE MALAYSIAN

BUDGETING SYSTEM

Program Performance Budgeting System (PPBS)

1.Malaysia implemented the PPBS in 1969 through to 1990. However there were several weaknesses in the implementation of the PPBS. The focus of the budgetary process was on line items although information on the performance of Program and Activities was available. Budget process was used more as a tool for funds disbursement rather then a strategic management tool. Little if no relationship was established resource management and performance management. Empowerment and delegation of authority to make decisions on resource utilisation was limited. There was a dichotomy in the decision making process on financial matters and matters pertaining to policies and implementation of Programs/Activities and the approach to planning and budget preparation was `bottom-up'.

Introduction of Modified Budgeting System (MBS)

2.The Malaysian Budgeting System (MBS) also known as the Modified Budgeting System was introduced in 1990 and implemented in phases to cover all government ministries and departments by 1995. The MBS is a system of management designed to establish logical linkages on the relationship between inputs, outputs and impacts.

Principles and Objectives of MBS

3. The MBS is based on fundamental management principles of Letting managers manage i.e. managers nearest to where outputs are produced should be given as much flexibility/authority as practicable to manage their resources, however this authority must be matched with requisite accountability at all levels of management.

4.MBS was implemented with the explicit objectives of trying to improve resources allocation by bringing about more efficient management of government programs by way of improved accountability.

Features of MBS

5.The MBS has 4 main features namely:-

(i)Expenditure Target;

(ii)Program Agreements and Exceptions Reports;

(iii)Cycle of Program Evaluations; and

(iv) A More Generalized Approach to Expenditure Control.

Expenditure Target (E.T.)

6.At the very start of the budget process, Treasury provides each Ministry with a single, specific, numerical target for expenditure from the operating budget for existing and minor new policy purposes. Submissions for existing policy proposals cannot exceed the E.T. A separate submission would be required for any proposed major policy changes and one-off expenditures, if any. Excluded from these targets are charged expenditures, one-offs and major new policy charges. Amongst the benefits derived from the implementation of the E.T. are the explicit and immediate recognition of the Government's fiscal policy position at the operating ministry level and increased financial discipline on ministries by forcing them to decide priorities and trade-offs within an overall budget constraint.

Program Agreements and Exceptions Reports

7.Within the context of their E.T., the ministries are required to prepare an Integrated Planning Framework called the Program Agreements consisting of, on the one hand, proposed levels of performance for each Activity and on the other hand, the proposed mix of resources to be used by the Activity. At the end of the financial year, ministries are required to provide Treasury with Exceptions Reports on areas where actual performance was inconsistent with what was agreed upon in the Program Agreements with Treasury. These Exceptions Reports provide the trigger for ministries to take steps to address emerging problems and for the conduct of more in-depth Program Evaluations.

8.The benefits of introducing an approach requiring Program Agreements and Exceptions Reports are :-

(i) it provides for a more explicit role for information on program performance in the budget process and should thereby provide a catalyst for further development of such information;

(ii)it provides a basis on which Treasury can monitor and `control' outputs and so take the opportunity to rationalise some of its controls on detailed inputs. This would in turn provide ministries with greater flexibility and incentives to improve program performance;

(iii)it provides a basis on which ministries can be made more accountable for their performance; and

(iv)it assists in earlier identification of potential problem areas which can then be evaluated in more depth and enable preventive measures to be taken.\

Cycle of Program Evaluations

9.As Program Agreements will often be limited to issues of operational performance, more in-depth evaluations would be required to assist decision-making on the major policy changes or to part of the budget process. Every Activity is to be evaluated at least once in five years unless Exceptions Reports suggested that one was needed more urgently. The decisions flowing from these evaluations would provide the basis for the consideration of new policy proposals. The Integrated Planning Framework will provide the basis and the focus for the conduct of evaluation.

A More Generalized Approach to Expenditure Control

10.A More Generalized Approach to Expenditure Control provides for stricter aggregate controls while detailed controls are rationalized, reduced and even removed if necessary. This approach has resulted in significant saving of time and red tape in the obtaining and giving of specific approvals, and greater incentives and opportunities for managers to seek out and implement a resource mix that will improve program performance.

The Budget Process under MBS

11.The Budget Process under MBS is divided into 2 phases, namely, one for existing policies and another for new policies, one-offs and savings proposals. Existing policies are all functions carried out in the previous year while new polices are defined by exclusion as anything which is not an existing policy or one-off. One-offs are non-recurrent expenditure.

12.An illustration of the budgetary process is as follows:

The total allocation for a Ministry or Department is determined as follows:

Benefits of MBS

13.The benefit of MBS can be seen at various levels. At the Central Agency Level the benefits include:

(i)Improving identification of priority expenditures in budget submissions;

(ii)Shifting the focus of budget examination from one micro management to one of aggregate controls at the central agency level;

(iii)Allowing more time for discussion of new policy proposals and saving proposals;

(iv)Providing Budget Division with better information on program performance and enabling it to more effectively hold departments accountable for program performance; and

(v)Assisting review agencies to carry out their role more effectively.

14.At the Department Headquarters Level the benefits are as follows:-

(i)Increasing the opportunity for departments to use strategic planning as the basis for budget preparation. Enabling a more `top-down' approach to budgeting;

(ii)Enabling controlling officers to play a more active role in budgeting and to use budgets as a management tool;

(iii)Enabling improved communication of top management's priorities to lower level managers and staff; and

(iv)Allowing Finance Divisions in H.Q.s to become more involved in matters of program policy and program evaluation and less in matters of line-item control.

Koshy Thomas

Deputy Undersecretary

Ministry of Finance, Malaysia

For further information kindly contact:

1

Koshy Thomas, MoF, Malaysia