Budgeting and Budgetary Institutions - ISBN: …

1 PUBLIC SECTOR. GOVERNANCE AND. ACCOUNTABILITY SERIES. Budgeting AND. Budgetary . Institutions . Edited by ANWAR SHAH. Budgeting AND. Budgetary . Institutions . Introduction to the Public Sector Governance and Accountability Series Anwar Shah, Series Editor A well-functioning public sector that delivers quality public services consistent with citizen pref- erences and that fosters private market-led growth while managing scal resources prudently is considered critical to the World Bank's mission of poverty alleviation and the achievement of the Millennium Development Goals. This important new series aims to advance those objec- tives by disseminating conceptual guidance and lessons from practices and by facilitating learning from each others' experiences on ideas and practices that promote responsive (by matching public services with citizens' preferences), responsible (through ef ciency and equity in service provision without undue scal and social risk), and accountable (to citizens for all actions) public governance in developing countries.

2 This series represents a response to several independent evaluations in recent years that have argued that development practitioners and policy makers dealing with public sector reforms in developing countries and, indeed, anyone with a concern for effective public gov- ernance could bene t from a synthesis of newer perspectives on public sector reforms. This series distills current wisdom and presents tools of analysis for improving the ef ciency, equity, and ef cacy of the public sector. Leading public policy experts and practitioners have contributed to this series. The rst 14 volumes in this series, listed below, are concerned with public sector accountability for prudent scal management; ef ciency, equity, and integrity in public service provision; safeguards for the protection of the poor, women, minorities, and other dis- advantaged groups; ways of strengthening institutional arrangements for voice, choice, and exit; means of ensuring public nancial accountability for integrity and results; methods of evaluating public sector programs, scal federalism, and local nances; international practices in local governance; and a framework for responsive and accountable governance.

3 Fiscal Management Budgeting and Budgetary Institutions Public Services Delivery Local Budgeting Public Expenditure Analysis Local Public Financial Management Local Governance in Industrial Countries Performance Accountability and Combating Corruption Local Governance in Developing Countries Tools for Public Sector Evaluations Intergovernmental Fiscal Transfers: Macrofederalism and Local Finances Principles and Practice Citizen-Centered Governance Participatory Budgeting PUBLIC SECTOR. GOVERNANCE AND. ACCOUNTABILITY SERIES. Budgeting AND. Budgetary . Institutions . Edited by ANWAR SHAH. THE WORLD BANK. Washington, 2007 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, NW.

4 Washington, DC 20433. Telephone: 202-473-1000. Internet: E-mail: All rights reserved 1 2 3 4 10 09 08 07. This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The ndings, interpretations, and conclusions expressed in this volume do not necessarily re ect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgement on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries.

5 Rights and Permissions The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Bank for Reconstruction and Development / The World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center Inc., 222 Rosewood Drive, Danvers, MA 01923, USA; telephone: 978-750-8400; fax: 978-750-4470; Internet: All other queries on rights and licenses, including subsidiary rights, should be addressed to the Of ce of the Publisher, The World Bank, 1818 H Street, NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: isbn -10: 0-8213-6939-3.

6 isbn -13: 978-0-8213-6939-5. eISBN-10: 0-8213-6940-7. eISBN-13: 978-0-8213-6940-1. DOI: Library of Congress Cataloging-in-Publication Data Budgeting and Budgetary Institutions / edited by Anwar Shah. p. cm. Includes bibliographical references and index. isbn -13: 978-0-8213-6939-5. isbn -10: 0-8213-6939-3. isbn -10: 0-8213-6940-7 (electronic). 1. Budget Developing countries. 2. Finance, Public Developing countries. I. Shah, Anwar. 2007. '4 dc22. 2006102152. Contents Foreword xv Preface xvii Acknowledgments xix Contributors xxi Abbreviations and Acronyms xxv Overview 1. Anwar Shah Part I A Primer on Budgeting and Budgetary Institutions CHAPTER.

7 1 Budgeting Institutions for Better Fiscal Performance 27. J rgen von Hagen Budgeting Institutions 28. Budgeting Institutions and the Principal-Agent Problem 35. Budgeting Institutions and the Common Pool Problem 38. v vi Contents Conclusions 48. Notes 49. References 49. 2 The Budget and Its Coverage 53. Salvatore Schiavo-Campo Good Governance and Public Expenditure Management 54. The Meaning of Fiduciary Risk in Public Finance 55. The Unity of the Budget 55. Coverage, Periodicity, and De nitions 56. Principles of Expenditure Policy Choices and of Budget Coverage 60. Extrabudgetary Funds 61. Beyond Direct Expenditure 72. Basic Budget Legislation 81.

8 Notes 86. References 87. 3 Capital Budgets: Theory and Practice 89. A. Premchand Evolution 90. Current Practices 101. Notes 108. References and Other Sources 108. 4 Budget Methods and Practices 109. Alta F lscher The Nature of the Problem 109. Beyond Incrementalism: Rationality and Incentives in Budget Methods 118. Conclusion 134. Note 134. References 134. Contents vii 5 A Primer on Performance Budgeting 137. Anwar Shah and Chunli Shen Public Budgeting : Motivations for Reform 138. Performance Budgeting : Basic Concepts 143. Considerations in Performance Budgeting Reforms 145. Why Pursue Performance Budgeting ? 151. How to Do Performance Budgeting : International Experiences 153.

9 Critical Conditions for Successful Implementation of Performance Budgeting 171. Concluding Remarks 175. References 176. 6 Accrual Accounting in the Public Sector: Lessons for Developing Countries 179. Paul Boothe Differences between Cash and Accrual Accounting in the Public Sector 181. Accrual Accounting in OECD Countries 182. Accounting Regimes and Incentives for Policy Makers 188. Accrual Accounting in Developing Countries 195. Lessons for Policy Makers 197. Notes 199. References 200. 7 Activity-Based Cost Management in the Public Sector 203. Gary Cokins Activity-Based Cost Management Supports Fact-Based Decision Making 203. Political Pressures to Hold Down Costs 204.

10 An Excessive Focus on Functions 206. A Fixation on Inputs 206. Removing the Blindfold: Outputs, Not Just Resources and Expenditures 208. viii Contents A Simple Way to Understand ABC/M 210. From the Spending View to the Activity and Output View 211. ABC/M Is a Cost Assignment Network 212. How Do Cost Drivers Work? 214. Multiple-Stage ABC/M Approach 216. One City's Bene ts from ABC/M 218. Operational ABC/M for Productivity 220. But Our Department Does Not Have Outputs 221. ABC/M Uses (and Some Pitfalls) 223. Multiple Views of Costs Are Empowering 225. Realizing True Cost Savings or Future Cost Avoidance 226. Why Change Now? 227. Annex 7A: Case Study 228.