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Program Budgeting: The Role of Management Programs

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(Originally published 27 September 2010)

What is the role, and appropriate scope, of “management” programs – that is, programs which group together ministry support services such as HR, IT and finance/accounting? There is wide agreement that management programs can be justified on the pragmatic ground that they avoid the need to allocate support service expenditure to output-based programs. This consideration is particularly important in developing countries where capacity constraints argue for keeping accounting processes relatively simple. This helps deal with the problems arising from conflicts between organizational and program structures which I discussed in an earlier piece.

Conversely, however, it is equally widely considered that management programs have no justification in principle, and that the ultimate aim should be to do away with them and allocate all support expenditure to output-based (“product line”) programs.

I have come to believe, to the contrary, that the use of management programs to cover ministry support services can be justified as a matter of principle even in countries which have the technical capacity to allocate expenditure been programs.

To see why, keep in mind that program budgets are expenditure limits (“control totals”), and not simply accounting measures of the cost of producing specific “product lines”. In other words, when the parliament approves a program budget, it is telling ministries that they are to spend no more than $x on program A, $y on program B, etc. This means that if the expenditure of the ministry’s support services is included in its output-based programs, the government is in effect instructing the ministry about the extent of the support the ministry’s support services should provide to each of the ministry’s output-based programs.

Suppose, for example, the education ministry has only two programs – primary and secondary education – and no management program. Imagine, moreover, that the ministry’s organizational structure consists of a primary school department and a secondary school department – each of which is budgeted internally by the ministry to receive 40% of the ministry’s overall budget – and a support services department which is budgeted internally to receive 20% of the ministry’s budget. Supposed further that it is expected at the time the budget is prepared that the support services department will provide equal levels of support to each of the two main departments. Reflecting this, the program budget approved by parliament will allocated one-half of the ministry’s budget to each of the primary and secondary education programs, in each case including that program’s share of expenditure on support services.

To ensure that neither program breeches it expenditure authorization, the education ministry will then need to make sure that the support services department does not devote substantially more than one-half of its expenditure to supporting either of the two ministry programs. More generally, because support services expenditure is included in the output based programs, it becomes necessary in budget execution for the support services department to rigorously manage the balance of support it provided to the other ministry departments.

Herein lies the problem. Why would the political leadership or the ministry of finance wish to dictate the way in which education ministry support services allocate their efforts between supporting primary and secondary education during the year? If, for example, unexpected events mean that the primary school program has a greater-than-anticipated requirement for the support of the HR group in staff recruitment during the year, shouldn’t the ministry be left with the flexibility to shift the disposition of its support services accordingly?

If one believes that ministries should retain the flexibility to allocate support services to where they are needed during the year, then it makes sense in principle to have a management program. That management program should included all those ministry support services which are generic and which can be flexibly reallocated during the year from supporting one output-based program to another to meet shifting support requirements.

Of course, it is still useful to know ex post where the support services are allocated – in order, ideally, to have the best possible accounting measures of the full costs of delivering each “product line”. For this purpose, additional cost analysis can be carried out to allocate the management program expenditure between the output-based programs.

This is, incidentally, exactly what the French do – even though France is perfectly capable of carrying out the accounting allocation of support service expenditure between output-based programs, it nevertheless makes us of management (“support”) programs and supplements this with additional cost analysis.

Another important advantage of management programs is that they make quite transparent the magnitude of “back-office” expenditure relatively to direct service delivery expenditure. Such transparency supports efforts to improve efficiency by streamlining support services.
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