TABLE OF CONTENT No. | Content | Page | 1. | Introduction | 2 | 2. | Main findings and discussions: * Outcome-Based Budgeting * Objectives of OBB * Importance of OBB * Fundamentals of OBB * Components of OBB * Potential benefits of implementing OBB * Implementation of OBB in other countries | 356671011 | 3. | Conclusions | 12 | 4. | Recommendation | 14 | 5. | References | 15 | 6. | Appendices | |

INTRODUCTION
Budgeting in the public sector has evolved over the years. After Independence, we started with line-item budgeting that focused on expenditure. Under this approach, ministries and agencies were assessed on their ability to spend the approved allocation within a given year. Moreover, it lacked coordinated planning, performance measurements and systematic evaluation. Subsequently, a more results oriented Programme and Performance Budgeting System (PPBS) was adopted in 1969, where the focus shifted to outputs, with resources allocated for specific programmes and activities based on priorities. Systemic problems, however, continued to persist. There was lack of accountability, while decision making was highly centralized. To address these problems, the PPBS was improved and introduced as the Modified Budgeting System (MBS) in 1990. The system expounded the concept of “let managers manage” and held them accountable for their performance. However, even under this system, the emphasis was still on output, with each ministry and agency focusing on delivering its programmes and projects. This gave rise to duplication of efforts and resources across ministries. It soon became apparent that there were weak linkages between policy formulation, budgeting process as well as project implementation and evaluation. There was also little or no integration between operating and development budget. More importantly, the system could not meet the dynamics of a rapidly changing economic environment. Thus, policies and resource allocation would have to be better coordinated to achieve broad macroeconomic goals.
There is even greater urgency now to adopt a budgeting system that better reflects costs and linkages with emphasis on shared outcomes, in line with the objective of becoming a competitive and high income nation. Hence, the OBB will be introduced to integrate both development and operating expenditure towards achieving efficient allocation of resources and effective implementation of programmes. This paves the way to link budget allocations with programme outcomes in an integrated manner. In addition, programmes that involve more than one ministry or agency can now be strategically linked through the OBB process. Shared outcomes are common in public sector programmes. These outcomes will now be clearly identified through the alignment of a series of national key result areas (NKRAs), in line with the five thrusts of the National Mission. The key result areas include crime prevention, reducing corruption, improving quality of education, upgrading low income households, expanding rural infrastructure and providing efficient public transportation. Apart from these key result areas, emphasis will continue to be given to enhancing private investment, promoting niche growth areas, improving the business environment and public service delivery to achieve sustainable growth. Outcomes will be measured against key performance indicators to evaluate the effectiveness of programmes and projects implemented by ministries and agencies. Hence, the OBB approach will eliminate redundancies and ensure value-for-money, while providing flexibility to review programmes and projects that do not contribute to expected outcomes. The emphasis, therefore, is on “doing the right thing and doing the thing right” to meet the expectations of the citizen.
Outcome Based Budgeting System (OBB), also known as Performance Based Budgeting (PBB), in Malaysia is implemented in 2012 in line with the Government’s emphasis on outcome rather than output. It is an integrated process incorporating three main components which are Results Based Budgeting (RBB), Results Based Performance Monitoring & Evaluation (M&E) and Results Based Management Information System (MIS). By integrating these components, OBB seeks to enhance Public Sector Management effectiveness and efficiency. Areas of improvement include focusing planning on Outcomes, getting a single view of the budget incorporating Development and Operating Budgets under a Programme, establishing vertical and horizontal linkages between National Priorities and Ministry Activities and improving the accountability framework to drive performance across a more structured strategic framework.
This will ensure maximum benefit to the citizen as well as fulfill their rising expectations. For instance, the focus on output will generally be on the number of graduates produced by universities or training institutes. However, in the more holistic outcome-based approach, the emphasis is on quality and employability of the graduates, and ultimately, their contribution to nation building. The implementation of OBB will help to realize the deliverables within set time frames and measurable performance targets announced by the Prime Minister to track progress in each of the key result areas. Thus, the move towards OBB is timely and crucial to ensure optimal use of scarce resources to achieve national priorities and goals.

MAIN FINDINGS AND DICUSSIONS

Outcome-Based Budgeting (OBB)

Outcome-Based Budgeting (OBB) is a government wide initiative. In view of the country's agenda of making Malaysia a high income nation by 2020, the government has introduced the OBB for all government departments at the federal, state, local authority and agency levels. It will cascade the whole planning, budgeting, implementation, monitoring and evaluation cycle. Therefore both national and ministry level will be involved. All the ministries and agencies under the Federal Government will be involved in this project.

OBB is focused on: * RMK10 submissions and budget based on Programs * Integration of Budget (Development Expenditure/Operating Expenditure) into Program Budget * Budget examination based on Program Approach * Budget Performance linked with Substantive Program Performance under Ministry of Finance oversight * Interfacing with the Program-Activity Structures under current MBS * Strengthening Program Monitoring and Evaluation System and Capacity Building for all Levels * Structured Performance Monitoring/Reporting System OBB

In the absence of an integrated national strategy for economic growth, Malaysia’s rapid development led to inconsistent results. While many of these developments were notable for their vision, architectural ambition and execution, the collective return to the state was often lacking. For instance, despite investing in a superb, state-of-the-art airport and a large financial center, Malaysia is not the leading aviation and financial hub for the region. One consequence of the misalignment between investment and economic goals has been a pattern of economic imbalances. The country’s economy remains heavily dependent on oil exports, with petroleum accounting for 40 percent of GDP. Although oil revenues have been an important source of the nation’s wealth, crude prices have been subject to unusual volatility over the last several years. As a result, the government is keen to diversify its industry mix to manage risk.

Malaysia’s goal for 2020 is to bring the average annual income for its citizens up to US$17,000 from its current level of US$7,000. It plans to achieve this by supporting private sector initiatives in 12 key industries, designed to boost research and development and high-value service sector jobs. Although the private sector will fund 90 percent of the program, the government intends to act as a partner, directing resources to facilitate the build-out on a national level. Officials hope it will also help stem the ‘brain drain’ of Malaysia’s young, educated population. The Malaysian framework has four objectives: * Ensure greater budgetary alignment with the country’s strategic agenda * Integrate operational and developmental expenditure * Empower officials to monitor and enforce the changes * Improve operational efficiency.4
The program is intended to build stronger connections between national and ministerial priorities and programming, foster clear and unified lines of responsibility and create better audit oversight and reporting.

In planning the scope of their OBB framework, Malaysia’s Ministry of Finance consulted with officials in New Zealand, Brazil and Korea and documented the approach taken by a range of other countries, including The Netherlands, Sweden, Canada, the United States and the United Kingdom. That research allowed them to compare different implementation models and helped them weigh how quickly to push through needed changes. Where some countries pursued an incremental approach to OBB, phasing reforms in over time, others chose a more rapid, revolutionary approach where a series of reforms were pushed through all at once. While both approaches had their benefits, the Malaysian government determined that an incremental, evolutionary approach would be more effective.
Phasing in the changes gives officials the opportunity to spread the cost, build capacity, trail and refine solutions as the go along. The program is expected to unfold over the next several years, with full implementation to be completed by 2016.

Objectives of Implementing OBB
The objectives of implementing OBB are: * Increase efficiencies and effectiveness of budgeting and program deliverables. * Alignment of budgets with the country’s strategies and priorities. * Provide real-time information and reconciliation reports for management to make informed. * Flexible to adapt with growth and change. * Effective Fiscal Management through well-disciplined management.
Importance of OBB
OBB is important to governments for a number of reasons including: * Provides accountability to the public. * Drives redesign of programs (focuses on improvements). * Helps rationalize budget allocation (uses performance information as a basis of evidence to improve understanding of crosscutting programs in government). * Helps agencies link their daily activities to overall government outcomes and similar activities of other agencies. * Compares cost effectiveness between programs. * Helps align government spending with overall goals.
States governments can use performance measurement as a guide for decisions to fund or cut programs, for budget presentation and justification, to assess efficiency of programs, to determine service costs, to streamline program and budget structure, to curb departmental flexibility regarding fund transfers and to eliminate or sunset programs illustrated by the measures as poorly performing.

Fundamentals of OBB
The fundamentals of Outcome Based Budgeting (OBB) are: * Zero-Based means that no program, and no expense, is to be taken for granted. Starting at “zero”, each is carefully scrutinized against the program goals the Board of County Commissioners has established as key priorities. Is the program a goal of the Commission? How much funding should be allocated, if any? Do the benefits and results justify the cost? Could expenditures be reduced while still achieving a desired level of service? Are users of programs paying an appropriate proportion of the cost of providing this service or should fees be increased? * Performance Based means that each program is evaluated based on the performance it delivers, not the activities it conducts. * Outcome Driven means that budget decisions are based on data showing the end result of the service provided. Is it the intended outcome? How efficient is the process or program that produces the outcome? Do the results justify continuing the program and the amount of funds to be budgeted, or is there a better way? Are there duplicative services being provided by County or outside organizations public and private?
Components of OBB
Result Based Budgeting (RBB)

Results-based Budgeting (RBB) is a strategic management tool that assists in improving resource management and public sector accountability. It is about formulating programme budgets that are driven by a number of desired results which are articulated at the outset of the budgetary process, and against which actual performance is measured at the end of a biennium.
RBB revolves around the concept of aligning resources behind results. RBB is a results-driven budgeting process in which: * Programme formulation and resources justification involve a set of predefined objectives, expected results, outputs, inputs and performance indicators which constitute a ‘logical framework’. * Expected results justify resource requirements, which are derived from — and linked to — outputs to be delivered, with a view to achieving such result. * Actual performance in achieving results is measured by predefined performance indicators.
This definition captures the main features of RBB, namely: objectives, expected results, outputs, and performance indicators.
RBB is about formulating programme budgets that are driven by a number of desired results which are articulated at the outset of the budgetary process, and against which actual performance is measured at the end of a biennium.
For the time being, RBB is a third type of budgeting emerging. The results-based budget is in large measure an evolutionary improvement on the programme budget. Both types of budget provide for resource allocations by specific programmes, with work plans and an indication of priorities. Programme budgets usually have included elements related to expected results and strategic planning. The result based budgeting differs in terms of its primary focus which is on expected results and the use of performance indicators to measure achievement of those results. It has a strong focus on the results from operations of programs and activities undertaken by government agencies using public monies.
The results under RBB are classified under the various performance components of inputs, processes, outputs, and impact. Though traditionally there is overwhelming emphasis on outputs and impact measurement, RBB will also give appropriate focus and emphasis on input application and activity completion (Neelam S Kumar).
RBB requires agencies to bring goals, strategies, programs and budgets into alignment to shift resources from past patterns to future priorities.
Operationalizing RBB requires answering the following four questions (Prithvi raj Ligal, 2012): * Where are we now? * Where do we want to be? * How do we get there? * How do we measure our progress?

Results Based Performance Monitoring and Evaluation (M&E)

M & E is the complementary component of RBM. It is used for systematic and focused program planning, performance monitoring, performance evaluation, performance reporting and information utilization for program improvements and policy decision-making. This factor helps to ensure systematic and structured performance planning, management, and measurement under the RBM and helps to forge tighter linkages between resource use and policy implementation (Koshy Thomas, Deputy Undersecretary, Tax Division, Ministry of Finance).

Improvement can be made to the way government and organizations achieve results by using monitoring and evaluation (M&E). It is a powerful public management tool. Besides financial, human resources and audit system, government also needs reliable performance feedback system.

A results-based M&E system can help to determine whether the desired outcome is carried out and achieved. For example, if governments are promising to achieve improvements in policy areas such as in health care or education, there needs to be some means of demonstrating that such improvements occurs or not. In short, we need performance measurement. There is a general need both, to document and demonstrate government’s own performance to its stakeholders as well as use the performance information to continuously improve.

For a more efficient implementation, there are 10 steps proposed to be taken (Kusek and Rist, 2004): * Step One: Conducting a Readiness Assessment * Step Two: Agreeing on Outcomes to Monitor and Evaluate * Step Three: Developing Key Indicators to Monitor * Step Four: Gathering Baseline Data on Indicators * Step Five: Planning for Improvements—Setting Realistic Targets * Step Six: Monitoring for Results * Step Seven: Evaluative Information to Support Decision-making * Step Eight: Analyzing and Reporting Findings * Step Nine: Using the Findings * Step Ten: Sustaining the M&E System Within Government
Results Based Management Information System (MIS)

For RBB to function effectively, it needs to be closely monitored to ensure it is being implemented as planned within the agreed parameters. To do this, the planning framework has to provide sufficient details that can provide the necessary information. The Management Information System will identify information needs at the different levels. The information needs will be user defined in most circumstances, as they would be involved in the planning process at an earlier stage and as such have privy to their information needs. The importance of management’s involvement in the planning process will be clear at this stage as they will be stakeholder in the kind of information that need to generated for effective planning and decision making. The timing of the different kinds of information will also have to be defined.

The MIS can also be planned and designed for use manually or using computerized systems. The dynamics of the RBM can only be realized when linkages within the performance framework are driven by the Management Information System (MIS) and the Monitoring and Evaluation (M&E) framework. These two components will provide the performance measurement dimension to the strategic planning framework by way of accurate, reliable and timely information targeted for decision-making. The role of MIS and M&E are closely knit, drawing on each other constantly to ensure that it produces the right information for the right people at the right time. Monitoring within the context of Program Monitoring refers to the on-going process of tracking key performance indicators at different program levels so that timely and appropriate steps can be taken to keep a program on track and to ensure that its objectives or goals are met in the most efficient and effective manner. What brings to mind is the term “indicators” which can be both operational as well as results based. These indicators are important to the extent that a program has brought about the desired change whether negative or positive, intended or unintended to clients and stakeholders whose problems/needs it is designed to address and overcome (Koshy Thomas, Deputy Undersecretary, Tax Division, Ministry of Finance).

Potential Benefits of Implementing OBB
There are many potential benefits from implementing OBB. * Efficient Resource Allocation * Effective Program Delivery * Value for Money Proposition * More focused information Flow * Informed Decision Making * Better Accountability for Results * Effective fiscal management * Facilitates strategic process between Policy and resource allocation

Implementation of OBB in others countries
There are many countries that have implemented Outcome-Based Budgeting (OBB). Three of them are: 1. New Zealand
The introductions of the State Sector Act 1988 and the Public Finance Act 1989 have brought many changes in the way that departments operate. With the passing of the Public Finance Act 1989, the focus of government budgeting has shifted from inputs to outputs that mean New Zealand adopted Output-based Budgeting initially. However in 2004, they change their budgeting system into Outcome-Based Budgeting (OBB).

2. Korea
Performance-based budgeting was introduced in Korea in three phases. The first was an experimental pilot project carried out during 2000 until 2002. The full implementation had been carried out in the year 2003. However, the conversion to accrual accounting planned for 2009, as we know, OBB is based on accrual basis.

3. Australia
Initial financial reform started in 1980’s. Then, early 1990s, Australia moved their budgeting system to OBB. However, the reforms and refinements are still going on until now.

CONCLUSIONS
Budgeting is the key instrument to realize national policy objectives in the public sector. In line with the Government’s emphasis on outcomes rather than output, outcome-based budgeting (OBB) is implemented to ensure effective and efficient spending. This will ensure maximum benefit to the citizens as well as fulfill their rising expectations.
Budgeting in the public sector has evolved over the years. After Independence, we started with line-item budgeting that focused on expenditure. Under this approach, ministries and agencies were assessed on their ability to spend the approved allocation within a given year. Moreover, it lacked coordinated planning, performance measurements and systematic evaluation.
Systemic problems continued to persist. There was lack of accountability, while decision making was highly centralized. It soon became apparent that there were weak linkages between policy formulation, budgeting process as well as project implementation and evaluation. More importantly, the system could not meet the dynamics of a rapidly changing economic environment.
Hence, the OBB will be introduced to integrate both development and operating expenditure towards achieving efficient allocation of resources and effective implementation of programmes. This paves the way to link budget allocations with programme outcomes in an integrated manner.
In addition, programmes that involve more than one ministry or agency can now be strategically linked through the OBB process. Shared outcomes are common in public sector programmes. These outcomes will now be clearly identified through the alignment of a series of national key result areas (NKRAs), in line with the five thrusts of the National Mission.
The key result areas include crime prevention, reducing corruption, improving quality of education, upgrading low income households, expanding rural infrastructure and providing efficient public transportation.
Apart from these key result areas, emphasis will continue to be given to enhancing private investment, promoting niche growth areas, improving the business environment and public service delivery to achieve sustainable growth.
Outcomes will be measured against key performance indicators to evaluate the effectiveness of programmes and projects implemented by ministries and agencies. Hence, the OBB approach will eliminate redundancies and ensure value-for-money, while providing flexibility to review programmes and projects that do not contribute to expected outcomes.
The emphasis, therefore, is on “doing the right thing and doing the thing right” to meet the expectations of the citizens. The implementation of OBB will help to realise the deliverables within set time frames and measurable performance targets announced by the Prime Minister to track progress in each of the key result areas.
Thus, the move towards OBB is timely and crucial to ensure optimal use of scarce resources to achieve national priorities and goals.

RECOMMENDATION i- Link resources to performance measures using activity-based costing.
Joyce and Sieg suggest that “connecting resources with results implies knowing how much it costs to deliver a given level of outcome. Most public agencies cannot even tell you how much it costs to deliver an output, in particular because of the problems with allocating indirect costs.” They go on to point out that, while activity-based costing “is a more sophisticated mechanism that attempts to measure the full cost of resources consumed in the delivery of a particular service, including allocations for fringe benefits and overhead costs as well as allocations for other indirect costs,” no state has implemented activity-based costing statewide. Furthermore, Lee indicates that states have not developed accounting systems that track the costs of providing services or performing work, noting that states have identified few incentives to devise such systems.

ii- Communicate results to participating agencies, the Legislature, and the public.
Communicating the results of any OBB initiative to legislators, state agencies, and the public is extremely important, particularly if it is implemented via executive order. Prospective readers of budget information indicated in focus groups that they prefer a wide range of information (some financial and some not). They wanted to see outcome measures, customer preferences and cost-related information (including efficiency and tax burden). In addition, they wanted the information placed into context with comparisons among governmental units.

iii- Expand the PBB implementation time frame.
Joyce and Sieg suggest that, in many cases, “reforms are not permitted to germinate and bear fruit before they are prematurely declared to be failures. Seen in this context, we would argue that it is crucial to view performance-based budgeting reforms through a wide, rather than a narrow lens. If we focus only on centralized institutions – such as the central budget office and legislative bodies – as our barometers of success, we may miss a lot of potentially encouraging developments.” The LAO also emphasized the importance of a much longer OBB implementation window, suggesting that “the Legislature must be willing to accept a longer-term view of implementation and results.” Of course, it will be quite difficult to convince term-limited legislators that they should support OBB if they will not be in office to realize the benefits associated with its implementation.