Programme Budgeting-Cross Country Experiences

Dr. Pankaj Jha Associate Fellow

Institute For Defence Studies and Analyses(IDSA)

The globalisation and end of cold war has given rise to changed strategic perceptions, which has led to economic evaluation of the increasing defence expenditure. The reframing of priorities and the strengthening of alliances like NATO has in a way prompted countries to reframe their defence budgeting to be more transparent and cost-effective. This has led to the experiments with different forms of budgeting. The Planning, Programming and Budgeting System (PPBS) started in US in 1962 has also evolved with time. Few countries have made their defence budgeting process more market oriented while others have adapted PPBS for cost-effective scrutiny according to their requirements. The question is whether in such a situation India can also take certain steps to upgrade its budgeting system so as to be more synchronised with changing time and be prepared for the future requirements.

In the changed strategic scenario, a general concern is emerging with regard to managing defence resources efficiently involving budgeting, the military production function, incentive systems and performance indicators: Military manpower, namely recruitment, training, retention and the choice of forces, the opportunities for substitution; together with study of internal markets in the armed forces, different forms of organization and their performance. As part of justifying defence budgets and more effective utilization of resources, programme budgeting or functional costing has emerged as a viable solution.

Programme budgeting or functional costing, is a means of identifying the functions of defence forces and the costs of these functions. The functional costing was designed to ‘….. assist in planning and coordinating the defence budget’, so that those who plan the budget and have to decide on new projects for the defence programme ‘……will have much more information than in the past about the relative costs and defence effectiveness of alternative force arrangements and various weapon systems.’ Functional costing provides the framework for undertaking cost effectiveness studies which estimate the cost and defence effectiveness of alternative force arrangements and various weapon systems in relation to some specified objective such as the destruction of an industrial complex, an airfield or a ship. No attempt is made to place a monetary value on the measure of defence effectiveness, the aim being to select the “least cost” method of destroying a target or protecting a city or a military installation1. The Programme Budgeting or Planning, Programming, Budgeting System (PPBS) provides information for answering questions about the efficiency with which the Ministry of Defence uses resources. It seeks answers to four questions. First, what are the objectives of the Ministry of Defence and is it possible to formulate a set of programmes which can be related to these objectives? Second, what are the current and expected life cycle resource costs of each programme? Third, what are the results or outputs of each programme? Finally, are there alternative methods of achieving each programme and

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what are the costs and outputs of each alternative (i.e., cost-effectiveness studies).The scheme simply encourages decision-makers to seek answers to a set of logical questions about the purposes or objectives of defence and the costs of achieving these aims. By encouraging the decision makers to seek answers to such questions, it is hoped that programme budgeting would improve the quality of decisions and the efficient use of resources2.

The paper would analyse the concept of programme budgeting along with a few case studies of countries which have adopted PPBS and their experiences and the basic requirements for shifting to programme budgeting. The last section of the paper discusses the probability of the principles of programme budgeting being applied in the Indian defence budgeting process.

Historical Background

PPBS was introduced to sort out the defects of the line item budgeting system; though it was a system of budgeting and expenditure control by detailed expenditure categories. The line item budgeting system was not able to highlight the accountability of that which is produced both in terms of goods and services for the expenditure incurred.

PPBS was initially introduced in US in 1962 under Secretary of Defense, Robert McNamara. PPBS is a system designed to assist the defence establishment in making choices about the allocation of resources among a number of competing and possible programmes and alternatives to accomplish specific objectives in the national defence apparatus. The PPBS system works on identifying the threat according to which a strategy is developed and then requirements for such a strategy are enlisted and subsequently the programmes which meet those requirements are developed. In the final stage the costs of the approved programmes are budgeted and then funds are sanctioned. The timeline for PPBS is usually one year and the three aspects of PPBS are on a near continuous basis, although not simultaneously in the same fiscal year. So, the process works on definitive program objectives based on specific budget estimates to fund the programmes. The question may be asked that how is PPBS different from the traditional budgeting process. Firstly, PPBS focuses on objectives and purposes, and the long term alternatives to achieve them. Secondly, PPBS combines planning and budgeting by programming which thus gives a cost-effective output3. PPBS was aimed at improving efficiency and better allocation of resources through

Establishing long-term planning objectives. Cost-benefit analysis of alternative programmes which could meet those

objectives. Translating programmes into budget and legislative proposals and long

term strategic projections.4

In fact PPBS was different from the traditional budgeting process that preceded it in two ways:

1. PPBS focused less on the existing base and annual incremental improvements to it, and more on the objectives and long term alternative means for achieving them. Because of the shift in focus, PPBS was recognised as an element of budgetary control.

2. PPBS instilled a process that essentially defines a procedure for distributing available resources equitably among the many competing and possible programmes.5

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As PPBS was initially launched in the US, the paper would discuss functioning of the PPBS in US. PPBS have generally served DoD in US well, because of internal practices and external demands over the past several years. When McNamara initiated PPBS he had other objectives in developing this management tool. Though he has sought to establish output metrices to assess whether or not defence requirements were met but it was difficult to do so. In the early stages only the initial costs of a program were reported, and a bow wave of future costs was masked. To address this problem, he asked for the full life cycle costs of a major program be calculated and displayed.

Finally, McNamara intended to link force programming decisions to strategic assessments. The Five Year Defense Program (FYDP), also known as Future Years Defense Program, was established with 10 Major Force Program (MFP) spending categories that cut across service competencies. The aim was to allow the Secretary of Defense and his staff to give strategic guidance to the military services and then have a tool to measure the service responses in programmatic terms. The program review process would table alternative ways of fulfilling requirements. These would be developed, analysed and costed to allow the Secretary of Defence to make high impact choices that cut across individual service programs.6The PPBS has undergone few changes over the past four decades but the basic framework has more or less remained the same.

PPBS was in fact designed to cater to a different security context than the one which is prevalent now. The Cold War environment had created an imperative to avoid mistakes. Maximum priority was placed on a steady, evolutionary improvement in military forces to keep pace with a relatively well understood, steadily evolving adversary. PPBS was crafted to meet those challenges and it in a way forced defence planners in the military services and in the Office of the Secretary of Defense (OSD) to make choices and prioritise programs .Decision makers could get a fair degree of insight into the military capabilities that could be fielded in the near future. The risk of making a grave mistake and suffering its dangerous consequences was minimized. Also; this predictability allowed DoD to provide guidance in arms control negotiations in the 1970s and 1980s that was coupled with relative strengths and weaknesses of US forces vis-à-vis Soviet forces7.

The complete cycle of PPBS consists of three phases:1. Planning Phase

The first phase of PPBS begins with a review of the country’s national security objectives which includes consideration of broad strategies for dealing with threats to national security and development of force structures to support the strategies. Planning elements are compiled under the general direction of Under Secretary of Defense for Policy. The compiled matter represent the views of the senior defense staff offices including the various elements of the OSD, the Joint Chiefs of Staff (JCS), the unified and specified commanders (CINCs) and the respective elements of the military services and defence agencies. The planning perspective that evolves is reviewed by the Defense Resources Board (DRB).When the review gets completed, the Defense Planning Guidance (DPG) is endorsed by the Secretary of Defense to the military departments and agencies, with instructions to prepare and submit their Program Objectives Memoranda (POM) according to the guidelines and ultimately their budgets.

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The signed DPG becomes the final product of the planning phase and the basis for the programming phase.8

2. Programming Phase DPG is translated into a financial plan of effective and executable programs. The programming phase starts with the last four years of the program developed in the previous PPBS cycle. Programming produces a six-year program for each component through the development of a Program Objectives Memoranda (POM) and a DoD database called the Future Years Defense Program (FYDP). Each service develops a six year plan for allocating their financial resources called POM.The office of the Secretary of Defense reviews the POMs and makes necessary amendments.

3. Budgeting Phase The budget allocates the financial resources necessary to support the

approved programs scrutinized and passed during the planning and programming phase. The budgeting phase of PPBS occurs concurrently with the programming phase ;each DoD component submits its proposed budget estimate simultaneously with its POM.The budget converts the programmatic view into the format of the Congressional appropriation structure ,along with associated budget justification documents.Upon submission each budget estimate is reviewed by analysts from the office of the Under Secretary of Defense (Comptroller) and the Office of Management and Budget (OMB).The Program Budget Decision (PBD) proposes financial adjustments to address any issues and problems identified during the associated budget hearing. The PBD are staffed for comment and forwarded to Deputy Secretary of Defense for decisions. These decisions are then reflected in an updated budget submission provided to OMB9. The budgeting phase is completed when the President sends his budget (with DoD input) to congress no later than the first Monday in February.

Apart from these basic phases of PPBS, one more phase has been added which is known as Execution.

4. Execution PhaseThe execution process and review occurs in tandem with the program and budget reviews. The purpose of the execution review is to provide feedback to the senior leadership concerning the effectiveness of current and prior resource allocation. Subsequently, metrics are developed to support the execution review that will measure actual output versus planned performance for defense programs. The execution review may scrutinise the existing program and may lead to recommendations to adjust resources and/or restructure programmes to achieve performance goals.10

Operating Costs of PPBS

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The development of the PPBS along with development and implementation incurs certain inherent costs which include program accounting, multi year costing, detailed description and alternative costing, zero-based budgeting and quantitative evaluation of alternatives. Few of the costs are discussed below: Program accounting expenditures constitute the largest component of the PPBS.

There are inherent costs with regard to the issues of program definition, consultation over cost allocation methods between programs and costs associated with educating personnel on cost accounting and estimation. PPBS operating costs are associated with the transition costs from conventional financial accounting systems to Program accounting. Also there are costs incurred on revision of a program and the program accounting system must also undergo revision as per the changes in organisational objectives, structure and programs.11

There are also costs involved with multi-year costing which require time and effort to make estimates for future environment and requirements. Programs with extended lead times or life cycles require highly skilled cost analysis personnel knowledgeable on the economic environment of the future.

The substantial costs are incurred on detailed description and measurement of activities. The lengthy and detailed descriptions associated with PPBS submissions add considerably to administrative time and overheads.

Zero-based budgeting also incurs administrative costs at various organization levels. The process of budgeting and justifying all existing programs on an annual basis versus incremental changes to existing programs is very costly indeed.

An associated cost with performing specialised studies is substantial. These are the costs identified with the quantitative evaluation of alternatives and can occur internally or as a result of an outside contract. The rational movement associated with PPBS increased the commitment of both internal and external resources of government agencies to the very expensive pursuit of the optimum choice among the alternative course of action12.

In the case of the US, the President approves the new National Security Strategy and then the Secretary of Defense, in consultation with the Chairman of the Joint Chiefs of Staff leads the Quadrennial Defence Review (QDR). The QDR is a comprehensive review of all elements of defence policy and strategy needed to support the national security strategy. The QDR forms the basis of the PPBS exercise in the Department of Defense.

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Figure1-PPBS Process in USSource: Col.William G .Braun, Addressing the Resource Requirements Mismatch, USAWC Strategy

Research Project, Pennsylvania, 2004, p.7

In fact, the US was facing problems with regard to its programmes as it was initially only 10 major force programmes in FYDP but 11th programme Special Operations Force was added in 1986 to meet future exigencies. Also, with regard to capital formation the visibility was not there so the programmes were bifurcated into two parts namely war fighting programmes(Programme 1-5) and support programmes (Programme 6-11). Also this gives better justification to planning and dispersal of resources, so that no programme gets neglected and also it adds to the capital budgeting system.

A New FYDP StructureProgram1-Strategic force’s EquipmentProgram2-Major Theater war (MTW) Forces EquipmentProgram3-Intervention and Presence forces EquipmentProgram4-Special Operations Forces EquipmentProgram5-Strategic Mobility ForcesProgram6-Intelligence and C4I Programs Program7-Science and Technology programsProgram8-Medical ProgramsProgram9- Central Supply, Maintenance and Sustainable programsProgram10-Personnel, Training and Development ProgramsProgram11- International Activities.13

Planning

Consultation

Budget Estimate

FYDP

Budget Review

Options Recommendation

Comments

PDM(Program Decision

Memorandum)

Program ReviewDefense Resources

Board(DepSecDef)

Other Issues(Small Issues, Out-of-Court

Settlements, etc...)

PBDAlternatives

OUSD(C) / OMBStaff Review

DepSecDef

Options Recommendations

Guidance

Analysis/Options

Program Review Group

Major IssueTeams

Defense PlanningGuidance

SecDef

OSDStaff

JointStaff

Services

DraftsComments

Major IssuesList

(DepSecDef)

Defense Planning Advisory Group

OSD(PA&E)/ OUSD (Policy)

Program BudgetDecisions

FiscalGuidance

(DepSecDef)

President's Budget& PB FYDP

Front-EndAssessment

Decisions

QDR POM/FYDP

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Within the US, in 2003, the defense department adjusted its planning, programming and budgeting procedures to support a two-year cycle that result in two year budgets. The revised process is called Management Initiative Decision (MID) 913 implemented in May 2003 which is consistent with submission of a biennial DoD budget that is part of the President’s Budget request to Congress for even numbered fiscal years. In this cycle, the even numbered years are called on-years and also programme review years while the odd years known as off years, also known as execution review years.

After it was implemented in US, the PPBS was introduced in UK in 1965 which originally consisted of 14 major programmes, further subdivided into some 700 programmes or functional elements, each of which was costed. In principle, expenditures were allocated to programmes, so it left miscellaneous categories to the minimum. A 10- year planning period was used in the UK. However, the programme budget information presented to the Parliament in the annual defence statement was restricted to a one-year period with the major programmes sub divided into over 50 elements. The details of the programmes are given in Table 1.The UK though has moved to New Management Strategy which is designed to improve internal efficiency through creating clearly defined budget holders with specific defence tasks (e.g. submarines, air defence) and delegated budget responsibility within each task. However problems arise where the budget holders have little choice over most of their inputs and expenditure, and where their employment contracts provide no incentive to improve efficiency14. The shift in the UK from PPBS to other forms of budgeting is discussed later in the paper.

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Table 1: Functional Costing in the UK MoD

Programme Cost(₤million) Output

1.Nuclear Strategic forces

2. Navy combat forces e.g. aircraft and ASW carriers destroyers and frigates submarines3.European theatre ground forces e.g. BAORHome Forces 4.Other Army combat forces

5.air force general purpose forces

e.g. air defence

Strike-attack-reconnaissance

6.Reserve formations7.Research and Development8.Training

9.Repair facilities in UK 10.War and contingency stocks11.other support functions

1,480

2,503(99)(669)(446)3,387(2,319)(1,005)206

3,668

(753)

(691)

4582,4541,407

1,0934764,031

4 Polaris submarines to be replaced by 4 Trident submarines 176 vessels of all types(3 ASW carriers)(44 vessels)(24 vessels)96,800 regular troops(53,400 regular troops)(40,500 regular troops)15,900 regular troops (e.g. Mediterranean, Hong Kong)50 squadrons of aircraft and helicopters(9 squadrons plus missile squadrons)(13 aircraft squadrons)

340,000 reservese.g. EFA,EH101,Trigat,Alarme.g. Service colleges, training units

e.g. Royal Dockyards74 depots for stockholdingse.g. Whitehall organizations; meteorological services

TOTAL 21,223 Total Service Manpower:304,600of which Army Manpower: 151,300Air force manpower: 89,400Navy manpower: 63,900

Source: Keith Hartley, The Economics of Defence Policy, Brassey’s, UK, 1991, p.38

So, in a way in the PPBS there is an analysis of the output procured through the three stages of planning, programming and budgeting .The new concept which is now emerging is the PPBE and this includes the another stage of execution, so as to see the programmes are implemented according to the strategic thinking of the country.

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Other Forms of Defence Budgeting

The defence budgeting has taken a new meaning in the light of the revolution in military affairs and the technological advancement and modernisation of armed forces. Different governments have adhered to different forms of budgeting systems according to their needs. The most prevalent forms of budgeting are the following:

Line Item Budgeting In the traditional form of line item budgeting, the expenditures to be accrued by the

government are enlisted according to the money spent on the line items .Items demarcate the amount of money a particular agency or sub-unit is allowed to spend on salaries, equipment, infrastructure, consumables and other items. Line item budgeting is about limiting aggregate expenditure of agencies by marking the limits of spending on each item in the budget allocation process. Line item budgeting makes no attempt to identify the objectives of government activity or what activities would be undertaken to promote these objectives. Due to this line item budgeting does not give details about the reasons for incurring the expenditure and the efficiency or effectiveness of the programmes.15Owing to the watertight dispersal of resources, line item budgeting cannot accommodate for the changing priorities and circumstances requiring more substantive budgets changes. The allocation or reallocation of funds to the new programmes cannot be envisaged because the existing programs get a priority in the budgeting process.

Performance Budgeting Performance budgeting is the generalised concept used to refer to the infusion of

performance information into the resource allocation processes. First, although the process of budgeting is inherently an exercise of political choice in which performance information can be one of the important factors dictating ultimate decisions, many governments have recognised that systematic presentation of performance information alongside budget amounts will improve budget decision-making. Secondly, no single definition of, or common approach to, performance budgeting can encompass the range of needs or interests of decision makers, or the variety of political institutions and organisational arrangements of modern governments. Thus, performance budgeting is best seen as a process of adaptation rather than as an adoption of a specific process.16In more general terms, performance- oriented Budgeting (PoB) involves two key elements:

The incorporation of information that measures what governments do and their expected policy impacts into various stages of budget cycle

The uses of this information in budget decision-making to better align spending decisions with government priorities and expected performance.17

While management concerns with efficiency continue to be an important influence on budgeting, issues such as the effectiveness of policy in achieving its goals are also fundamental ‘performance’ criteria for assessing government resource allocations. The lack of information for choosing between competing policies on the basis of the effectiveness of expenditures in this early form of performance-oriented budgeting is identified by the World Bank as a significant factor in the shift to programme budgeting.18

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Zero-based Budgeting The term Zero-Based Budgeting (ZBB) came from the requirement that all

programmes were considered to have no funding at the beginning of each budget cycle .Zero Based Budgeting represented a major shift away from the idea of incremental resource allocation changes to evaluating the performance of the entire range of government activities. The process required all departments to identify their programmes, and to rank and justify the existence of each program in order of importance to departmental goals and objectives19. Higher ranked programs stand more chances of getting funds. ZBB was a bottom up process, which required each manger to be responsible for the process of ranking and justifying the value and continued existence of programmes. The process is tedious and difficult because of which ZBB has not emerged as a widely adopted form of budgeting.

Output and Outcome Budgeting Output and outcome budgeting is an approach that focuses budget decision

making and government accountability on three core issues. Outcome: What influence the government wishes to have on the national

security by its actions Output: How the government wishes to achieve that influence Performance indicators: How the government and the armed forces know

whether the influence is being achieved in an efficient and effective manner.

The goals of the output and outcome budgeting are twofold. One is to allocate resources (inputs) in line with government priorities or the objectives governments seek to achieve by implementing their chosen policies. The other is to relate the budget’s resource allocation, or how the funds are planned to be used to expected results or impacts(outputs and outcomes).The terms ‘result-based budgeting’ and performance- based budgeting’ are increasingly being used interchangeably with output and outcomes budgeting. Some commentators’ stress that a results based budget must include outcomes20.The view is that for genuine ‘results-based budgeting’ it is not enough simply to engage in activities that produce outputs and measure their performance. These activities and outputs have to be constantly reconsidered and adjusted in the light of the outcomes that were used to justify the program in the first place. In Table 2, the different forms are budgeting are listed and the differences are shown.

Table- 2: Forms of Budgeting

Approach DefinitionProgramme Budgeting

Early approach which involved the identification of programmes with operational aims with costs and revenues attached to the programmes

Output Budgeting

Term used to describe the budgetary approach used in UK Central government around 1970.Broadly similar to performance budgeting

Performance Budgeting

Refers to the linking of expected results to budgets. Developed out of programme budgeting with an emphasis on measuring outputs and performance with data analyzed against aims and standards. Normally used as a general term to cover a range of specific processes.

Program, Planning and

Widely adopted under the Johnson administration in the US. Emphasised the analysis of policy options to achieve long term

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Budgeting Systems(PPBS)

objectives which then defined agencies programmes to produce outputs in line with defined long term objectives.

Management by Objectives(MbO)

Successor to PPBS .Linked agencies objectives to budget requests. Introduced management responsibility for achieving outputs and outcomes, introduced the link between spending and the achievement of results in terms of outcomes.

Source: Aidan Jose, Results Orientated Budget Practice in OECD Countries, Working Paper 209, Overseas Development Institute, London, February 2003,p.17

Cross-Country Experiences In the contemporary world few countries have stuck to PPBS but few have shifted to

new forms of budgeting suiting their accounting needs and the future defence requirements. Few of the examples are given below:

United Kingdom (UK)

The British Resource Accounting and Budgeting (RAB), introduced in 2000, is one of the latest efforts which has been advocated by defence economists like Keith Hartley in a series

1 ? Keith Hartley, The Economics of Defence Policy, Brassey’s ,UK,1991,p.34

2 Ibid,p.353 ‘ PPBS-How does it work?’, at http://www.npc.navy.mil/NR/rdonlyres/14F379F8-3330-4FBB-B651-59A6C9F76A74/0/PPBS.doc (Accessed 26.6.2006)4‘OSD Comptroller iCenter:The Historical Context’, at http://www.dod.mil/comptroller/icenter/budget/histcontext.htm (Accessed 5.8.2006)5 Ibid6 Johnson, Stuart E.,A New PPBS Process to Advance Transformation, Defence Horizons, No. 32 ,September 2003,Center for Technology and National Security Policy, National Defense University ,Washington,p.17 Ibid,p.28 ‘OSD Comptroller iCenter:The Historical Context’, at http://www.dod.mil/comptroller/icenter/budget/histcontext.htm (Accessed 28.5.2006)9 ‘Planning, Programming, Budgeting and Execution(PPBE) Process’, at http://akss.dau.mil/dag/Guidebook/IG_c1.2.asp (Accessed on 18.5.2006)10 Ibid11‘Planning. Programming and Budgeting’, at http://www.airpower.maxwell.af.mil/airchronicles/aureview/1976/jan-feb/feltes.html (Accessed 8.5.2006)12 Ibid13 ‘Framing the Problem of PPBS’, at http://www.bens.org/images/PPBS2000.pdf (Accessed 4.7.2006)

14 Todd Sandler and Keith Hartley, The Economics of Defence, Cambridge University Press, 1995, pp.179-18015 World Bank Report 1998 , Washington D.C, p.1216‘Performance Budgeting’, at http://archive.gao.gov/f09026/162387.pdf (Accessed 16.6.2006)17‘Performance Oriented Budgeting Systems’, at http://www.unisanet.unisa.edu.au/Staff/RhondaSharp/budget%20for%20equity%20FINAL2003.pdf (Accessed 16.6.2006)18 World Bank Report 1998,Washington D.C, p.1219 ‘Zero-Base Budgeting:An Overview’, at http://www.swb-inc.com/Zero-Base_Budgeting.htm (Accessed 29.5.200620 ‘Performance oriented budgeting systems’, at http://www.unisanet.unisa.edu.au/Staff/RhondaSharp/budget%20for%20equity%20FINAL2003.pdf (Accessed 16.6.2006)

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of management initiatives in rational defence budgeting. It is necessary to note that the attempt of applying the PPBS in UK failed as it was not able to change the traditional budgetary practice and could not overcome decentralisation in decision-making processes characteristic for the British armed forces.21 RAB appears to be the most economic-oriented concept but owing to the strategic management based on outcome, the British uses complementary techniques like Balanced Scorecard which along with RAB provides new quality of budgetary management. Keith Hartley enumerates the benefits of RAB. Firstly it identifies the full, total cost of resources used by MoD and the Armed forces. It shows that equipment, buildings, land and spares are not free gifts. There will be interest charges on the total value of stocks and fixed assets. Hence RAB should enable MoD to achieve better management of its resources. Secondly, it is believed that it improves the quality of financial information available to Parliament. Thirdly, it brings MoD in line with the best accounting practices of the business world22.

The main difference arising from the adoption of RAB is that costs are accounted for as they are incurred, rather than when the payment is made (the principle of Accruals). This gives rise to timing differences in accounting between cash and RAB systems and also to the recognition of depreciation. Under RAB, department is required to account for a cost of capital charge, equivalent to an interest charge on the capital (in the form of net assets) held on the balance sheet23. So, UK had made its shift from PPBS to more market and economic oriented form of budgeting owing to the structural problems and also adhering to changed dynamics of budgeting in the new global scenario.

New Zealand

New Zealand uses a unique accounting system to record and control public spending. The accrual financial management system, while widely used in the private sector, has not been adopted by other countries for use in the government sector.It is a system of accounting and management where items are brought to account and included in the financial statements as they are earned or incurred rather than as they are received and paid.The New Zealand method does provide perhaps the compact record of true public sector spending on defence of any country. New Zealand has shifted from PPBS form of budgeting to output-intensive budgeting in early 1990s.It is one of the means of shifting the emphasis of the budgetary process away from cash inputs. One feature of the accrual accounting regime is capital charge. Capital charge is a levy set at the rate by the Treasury on the value of all assets held by a department, currently pegged at 11%.Capital charge is recorded as expenditure and is not available to the department top spend, for instance on new equipment, such as armoured vehicles, or to fund operating expenses, such as peacekeeping. Another unique feature of New Zealand’s accrual accounting regime is the funding of capital acquisition from depreciation24.The unique approach to recording and reporting government spending makes the comparison of defence spending between countries difficult.

21 Miller,Davina, “Planning, Programming Budgeting System and the case of rational decision-making in Britain’s Ministry of Defence” ,Defence Analysis,No.2,pp.131-14522 Hartley, Keith, “Long-term policy implications of Resource Accounting and Budgeting: An Economist View”, RUSI Journal, No.8, 2001, pp.33-3723 ‘Resource Accounting & Budgeting’, at http://www.dasa.mod.uk/natstats/ukds/2005/pdf/CI/Chap1RABIntro.pdf (Accessed 25.6.2006)24 New Zealand Defence Spending, Centre for Strategic Studies Briefing Papers,Vol.1(1) December 1999, at http://www.vuw.ac.nz/css/docs/Strategic_Briefing_Papers/Vol.1%20Dec%201999/NZDS.pdf (Accessed 18.5.2006)

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It is not that the form of budgeting that was adopted by New Zealand is without flaws. There has been lack of rigour in the definition and measurement of outputs, a lack of clarity and measurability in the choice of outcomes and an almost total lack of reflexive feedback performance measurement system25 to provide vital feedback as to the impact of purchased outputs on policy driven outcomes.

So at the global level there should be single form of defence budgeting to bring transparency and also would ensure its item classification as used in international trade. In this context it is important to note that even a new country like Bosnia-Herzegovina adopted PPBS and so Bosnia- Herzegovina is discussed.

Bosnia-Herzegovina

The Bosnia-Herzegovina defence system is funded from a budget comprised of three parts: the state budget and two entity budgets. The development and proposal of defence budgets is coordinated by the minister of defence. The method and procedures for governing this process make up the Bosnia and Herzegovina common Defence Resource Management System, the major operating component of which is the PPBE .The ultimate goal of the common defence resource management system is to achieve the greatest of security at the least cost, while applying scarce defence resources in an efficient and cost- effective manner to address those military tasks most critical to the security of the state26.

25 ‘A Review of Australian and New Zealand Experiences with Accrual Based Budgeting’, at http://www.inpuma.net/research/papers/sydney/carlinguthrie.html (Accessed 14.7.2006)26 ‘Defence White Paper of Bosnia- Herzegovina ,June 2005’, at http://www.afsouth.nato.int/NHQSA/WhitePaper/web-eng.pdf (Accessed 28.6.2006)

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Figure 2-BiH Defence Planning, Programming and Budgeting System

Source: Defence White Paper of Bosnia-Herzegovina, June2005 at http://www.afsouth.nato.int/NHQSA/WhitePaper/web-eng.pdf (Accessed 12.6.2006)

Bulgaria

In the case of Bulgaria, PPBS was implemented but with few changes. In Bulgaria many steps were taken in the last decade, in particular in the last five-six years for reform in security sector but the reforms are far from being complete. Effective finalisation of the reform of the different elements of the security sector is only possible by remembering that an integrated security sector must be the ultimate goal for “integral”security.The long-term vision is to have a new type of armed forces; modernized, professional and an integrated security sector including the former concept of the armed forces, but with a new type of security organisation. In this sense, introduction of PPBS across the whole security sector is a very important task concerning priorities, resources and good governance. The strategic defence review in Bulgaria started on March 1, 2003 and concluded on April 2004. In fact when defence reforms were started in 199927, it was very effective and fast, based on military doctrine, reform plans, PPBS and was placed under serious civilian control with significant

international participation. Bulgarian PPBS does not copy or imitate the US model28.It

incorporates the principles of the effective defence resource management in a way suitable for the organisation and the requirements of the Bulgarian defence establishment.

BiH Security Policy

BiH Defence Policy

Defence Planning Guidance

BiH Military and Defence Requirement Documents

Defence Capabilities

RequirementsDetermination ProcessDoctrine Organisation TrainingLeadership &EducationPersonnelMaterial facilities

Defence Program

Future Force

Defence Budget

Current Force

Unfunded Requirements

BiHDefence White Paper

Programming and Budgeting

Multiple year Funding (Constrained)

Current Year Funding (Constrained)

Advice from BiH Staff to Civilian Authorities

Details Joint Staff to Civilian Authorities

Direction from Civilian Authorities

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In fact Bulgaria has sought the participation of Non –Governmental Organizations (NGOs) and academic and business sectors, as well as foreign partners for the process. Special education and training for the civilians is provided for PPBS and incentives for the bureaucrats are given. The evolution of coordination between departments in a network centric environment has been another achievement. In the whole process of adhering to PPBS the major actors are the Parliament, Security Council ,Prime Minister, National security advisor, Consultative council on National Security, Civil Society, NATO representative teams, Strategic partners (US-Reform Implementation Working group, Political military groups within UK and Spain).Within MoD Bulgaria has appointed Consultants from UK(defence planning),Germany (Training),France (logistics),Italy(Navy),Greece as well as military liaison teams from the US for evaluation and assistance in the implementation of programmes.The format of PPBS in Bulgaria is given below.

Planning Programming Budgeting

Figure-3: PPBS in Bulgarian Ministry of Defence

27 ‘Bulgaria: Analysis of the Stability Pact Self Assessment Studies’, at http://www.dcaf.ch/_docs/SSG_regional/ch2_Bulgaria.pdf (Accessed 12.6.2006)28‘Defence Budgeting in Bulgaria’, http://pfroum.isn.ethz.ch/docs/19BA39C2-3C52-42C6-BBD2AF81B06AC2DC.ppt (Accessed 16.6.2006)

National Security Concept

White Paper, Military Doctrine, Financial Macro indicators

Programming Guidance

National Military Strategy

Doctrine, Force &Capabilities Plans

Detailed development of the programmes

Programme Review

Risk Assessment

Programme Decision

Government

Programme Budget Decisions

Budget

MoD

GS

Budget estimate Submissions

President Parliament&Govt.Govt.

Services

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Source: Todor Tagarev, Transparent Defence Planning for Effective Democratic Control, PFP Planning Symposium, Oberammergau, January18-19, 2001

Another interesting example of modern rational defence budgeting can be found

in the Australian Department of Defence, where accruals accounting was adjusted for the valuation and reporting of strategic capabilities. Australia, Canada and Netherlands implemented the outcome based budgeting in their defence sectors in the course of the New Public management reform circa 2000.Prior to that PPBS form of defence budgeting was used in these countries. The question arises that whether the PPBS should be kept as a bench mark for the comparative study of the different countries budgets, then the priorities of the countries and their financial standing should be taken into account as PPBS has shown few drawbacks but taking an instance from the new NATO countries which have tried to stick to PPBS system with few changes has in way made them utilise their resources in a cost- effective manner after taking cognizance of the economies of scale in the NATO alliance and so have planned their future acquisitions accordingly.

Drawbacks of PPBS

Though PPBS is stated to be having a number of strengths and the most important of them is that it keeps track of a very large programme and budget, the decision making with regard to such large sums of money is also relatively transparent but even in the US the need for reform in PPBS is being sought .The major reason that is cited for the reform in PPBS is that it was designed in a very different security context than that which faces the contemporary world. It is stated that DoD and US Congress have made reporting mandatory on participants. For a few cases it is important but for others the process cannot run without them. In certain cases, the reports become redundant and non-synchronous with other activities in the PPBS cycle. This leads to time gap and so it gets more bureaucratic in nature. Preparation and tracking of reports and meeting deadlines become confused with analysis and diminish the contribution the staff can make to the important work of developing new options and strategic changes in direction.29 The cumulative effect of such a problem is that with the passage of time more attention is paid to the budgeting phase of the PPBS and the planning and programming phase gets relegated to a secondary role. One of the most vehement critic of PPBS is Professor Mintzberg who stated forcefully that PPBS was one of the “greatest planning efforts (and failures) of all times….”30 Mintzberg in his book confuses PPBS with systems analysis and Vietnam War and the legacy of Robert McNamara but systems analysis-looking at costs, benefits and related expenses of particular systems or programs–is merely a tool for the implementation of the PPBS rather than the actual process itself.31One can assert that in the long run. PPBS to a large extent is an “over-constrained problem”. In spite of all these shortcomings PPBS has been adapted by different countries to suit their needs. Even those which have shifted from PPBS have initially adopted PPBS to sychronise their planning and budgeting.

29 Johnson, Stuart E.,A New PPBS Process to Advance Transformation, Defence Horizons, No. 32, September 2003, Center for Technology and National Security Policy, National Defense University, Washington, p.3 30 Henry Mintzberg, The Rise and Fall of Strategic Planning ,The Free Press ,New York,1994,p.1931Framing the Problem of PPBS at http://www.bens.org/images/PPBS2000-Framing.pdf (Accessed 26.6.2006)

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PPBS–Can it be Implemented in India?

In the Indian context, the existing system though is a time tested mechanism still needs reforms as the current line item budgeting is indicative of the input expenditure under various heads and sub-heads. There is no check mechanism to ascertain whether the expenditure incurred has met the required objectives. The indicative costs of various systems can help in comparing the alternative choices with regard to reaching the goals. There is a need for a more pragmatic assessment of preparedness levels, optimal allocation of resources and best combination of force and weapons to meet the defence requirements of the country. In order to initiate such an exercise there is need for an organisational setup and a defence planning group to look into the matters of budgeting and planning. The staff has to be specialised and committed for the budgeting purpose. Few other required changes in this field could be: Budgetary heads of revenue and capital need to be widened in scope and expenditure

can be earmarked under the broad categories of operations, acquisitions, maintenance and training to facilitate long-term analysis, identification of weaknesses and funding options.

Capital budget should be allocated service-wise and capital budgeting32should be adopted in a comprehensive manner.

Indicative budgetary outlays should be stipulated under two/three year time-frames to facilitate short term planning.

Expenditure ceiling for the end of the financial year and the surrendered funds should be accumulated in the form of a corpus fund.

Planned acquisitions should be arrived at after due inter services planning and analysis of operational requirements33.

Central registry to monitor the movement of files in a proper manner and also the reports are provided within deadlines.

There should be a provision for accountability and responsibility for revenue expenditure.

Strategic planning group to formulate the strategic threats in the future and also make suggestions with regard to the procurement of weapons.

Programming process should have the micro evaluation along with timely feedback and revision with sustained reporting from field commanders.

32 Capital budgeting is an approach intended to take through account of spending levels of capital goods, generally identified as those goods with 10 year long service lives, so as to capture the effects of depreciation as capital stocks wear out and require replacement. Depreciation rates and nominal replacement rates are to be clearly cited .For definition see at http://www.defence.gov.au/budget/03-04/dar/07_18_glossary.htm (Accessed 14.7.2006)33‘Three Parts to a whole’, at http://www.indianexpress.com/res/web/ple/full_story.php?content_id=32668 (Accessed 16.6.2006)

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The PPBS has been criticised in India by few because it is thought to be a cumbersome process and the subjectivity of the analysis would be marred by errors and thus the results would not be accepted with confidence but PPBS as a concept could be tailored to meet our needs because as a concept it is of help in making value judgments on how best to upgrade desired capability. The changes has to be made in the budgeting process so as to have efficient and optimal allocation of resources through envisioning the future rather than doing the stop gap arrangements which would leave us with only the refurbished and upgraded weapon systems and force mix.

Conclusion

The PPBS was initially designed to involve many players in the formation of major strategic thinking and highlighting the objectives for the long term planning. The virtue of the system is that it aims at evolutionary improvement in the force composition and the multitude of participants optimises continuity and reduces risk. The problem of the system is it cannot respond to the dynamic changes in the strategic environment in a short span. The length of the cycle from concept to capability is too long. Quite a many countries have adapted PPBS according to their requirements and budgetary planning, like Bulgaria, Bosnia-Herzegovina etc.

So in the Indian context there is need for reforms at this juncture to arrive at more pragmatic approach to the defence requirements in the next decade or so. In that context few changes have already taken place like the National Security Council and the creation of National Security Council Secretariat. The fast computing capability and the use of communication infrastructure could also be used in arriving at analytical decisions in a short span of time. The change could be administered in phases as part of functional costing. Firstly, accounting methods should be reformed and should be based more on programmes. Secondly, the presentation of the budget should on a five-year time-frame along with demarcation of various programmes and sub-programmes .Thirdly, the budget based on programmes would bring in transparency as well as provide a logical reason to the adaptation to various programmes and the approval should be sought in principle. Finally, the interlinking of the forces in decision making would reduce the friction between forces with regard to budget allocation and thus would evolve a greater integrated strategy based on optimal resource allocation and modernised force structure. But prior to embarking on such a huge exercise there is a need to initiate greater compilation of knowledge and strategic thinking to make a meaningful contribution to resource management and cost-effective solutions to meet the needs of the defence of the country without compromising on the quality and quantity.

Though PPBS is not the panacea for all the problems in the budgeting process but it, however leads to an improvement in the data compilation and the reasons which are submitted in the support of the budget are more pronounced and logical. PPBS in fact, deciphers the hard choices to be made. The proponents of PPBS have endorsed that with better information along with alternative programmes or goals enlisted, and with alternative means of meeting these goals, some of the decisions in the future would be more pragmatic due to integrated planning and thinking.

Notes

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