B.

Zeroing in on Zero-Based
Budgeting
By the Philippine Public Transparency Reporting Project
Tuesday, 11 January 2011
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Tight budget: Zero-based budgeting system enabled government to increase allocation this year for the conditional cash transfer
progam, a means to ease hunger, put more children to school and address poor women's health. JES AZNAR
Trumpeting an agenda of fighting the country's perennial problem on corruption, the Aquino administration claims it
has laid out several programs to walk the talk. One of these programs is the adoption of the so-called "zero-based
budgeting" (ZBB) system.

It may be recalled that in his first State of the Nation Address (SONA) in July last year, President Benigno Aquino III
vowed to shift from the old "incremental" system of budgeting to the ZBB approach. The latter, he said, would
substantially reduce, if not totally eliminate, money spent on unnecessary projects or programs, as well as money lost
to corruption.

Aquino said that under the ZBB system, public money will be spent only on things that are indeed consistent with the
governments economic and social development objectives.

"[The Aquino administration] will stop the wasteful use of government funds. We will eradicate projects that are
wrong, the President was quoted as saying during the SONA, which was held about a month after his inauguration.

With the new administration bent on initiating its proposed budget reform, the 2011 national budget, which is its first
full-year budget, was prepared using the ZBB system.

But what exactly is the ZBB system and how does it differ from the old one?

Zero-based budgeting system vs. incremental budgeting system

In an interview with the Philippine Public Transparency Reporting Project (PPTRP), Budget Secretary Florencio Abad
said that under the ZBB system, a government agency is required to defend each expenditure item -- may it be a
project or a program -- every time a new national budget is being prepared in order for that item to get funding from
the national government.

To "defend" an expenditure item means to explain why it is necessary and to present an evaluation of how budget
allocations for it in the past were used.

The total budget to be given a government agency in a year, therefore, will depend on how it had defended proposed
expenditure items.

Under the ZBB system, budget allocations enjoyed by government agencies in the past have no bearing on their
respective budgets for the future.

The ZBB is thus contradictory to the previous incremental budgeting system. Under the old approach to budgeting,
most projects and programs of government agencies are assumed to be ongoing, and the DBM would automatically
allot budget for those.

Taking into account inflation, budget allotments for ongoing projects and programs would thus usually increase year
after year.

Abad said the previous system was easier, but was more prone to corruption. This is because under the incremental
system, not sufficient evaluation was being done before expenditure items were funded.

"Under the ZBB approach, on the contrary, we are able to terminate programs that are found unnecessary. Moreover,
some project designs that need reform are changed, and so budget allocations for those are reduced," Abad said.

Moreover, he said, while cuts on budget of unnecessary projects or programs are made, increases on funding of items
that are deemed vital are also done under the new system.

Feeding and conditional cash transfer programs

Abad cited the Department of Education's previous feeding program, an expenditure item that got substantial funding
during the term of President Gloria Macapagal-Arroyo, as one of those terminated following the adoption of the ZBB
system.

In the 2010 budget prepared by the Arroyo administration, the feeding program was allocated a budget of about PhP
225 million (USD 5 million).

But under the 2011 budget and the succeeding budgets of the Aquino administration, Abad said, DepEd is and will no
longer be given allocations for the feeding program.

Abad said DepEd has no expertise in feeding, and so it was prudent to simply merge the feeding program with similar
services of the Department of Social Welfare and Development (DSWD).

A disadvantage of letting the DepEd implement the feeding program is that it results in wastage of government
resources; not all beneficiaries of the feeding program -- students of public schools -- actually needed food/nutrition
support from the government, the budget secretary explains.

"DepEd is supposed to be teaching, not feeding. DSWD is in a better position to do the feeding program as it has the
means, the delivery system to target poor households that are actually in need of the service," Abad said.

Meanwhile, the huge increase in the allocation for the conditional cash transfer (CCT) program in the 2011 budget is
another consequence of the adoption of the ZBB. The CCT is given a PhP 21-billion (USD 477 million) budget for
2011, up from only PhP 12 billion (USD 273 million) last year.

According to Abad, since poverty reduction is high on the rankings of the agenda of the Aquino administration, it is but
proper to substantially raise the budget for the CCT.

Under the CCT, the social welfare department grants monthly allowance of as much as PhP 1,400 (USD 32) to
selected poorest Filipino households. Recipients are required to send children to public schools and to have the
mothers regularly visit health centers.

In a media briefing in September, prior to the passage of the 2011 budget, Social Welfare Secretary Corazon Soliman
said the proposed PhP 21-billion budget for the CCT would benefit 2.3 million families, a leap from an estimated 1
million household-beneficiaries in 2010.

Soliman said CCT does not only address hunger; more importantly, she said, CCT puts more children to school.
Sending more poor children in school increases the chances of reducing poverty incidence, she said.

Moreover, Soliman said, the CCT helps address the problem of poor maternal health seen especially in poor
communities.

Advantages of the ZBB

Abad expressed confidence that the ZBB is an effective tool to curb corruption. "With the ZBB in place, one is able to
see where the leakages are and thus begin to mitigate corruption," he said.

The Department of Budget and Management cited in its website the advantages of the ZBB approach. One is that it
requires thorough evaluation of expenditure items, and so unnecessary ones are terminated. With this, Abad said, not
only corruption is reduced but budget efficiency is likewise achieved.

Another advantage is that projects and programs that deserve higher allocations are thus given more funds.
Therefore, Abad said, ZBB is more complementary than the old system in achieving the developmental goals of the
government.

A budget that is prepared using the ZBB, he claims, is one that is more able to help achieve the end goals of
economic growth and poverty reduction.

Dr. Victor Abola, economics professor from the University of Asia and the Pacific, said in a separate interview with
PPTRP that adoption of the ZBB is indeed a move in the right direction toward the goal of curbing corruption.

"Since projects and programs will be strictly evaluated before these are given allocations, the budget process is
expected to become more efficient," Abola said.

Abola said actual effectiveness of the ZBB has yet to be seen given that the budget approach has just been
implemented. Nonetheless, he said, his hopes are high that the new system of budgeting would indeed result in
reduced cases of corruption, better efficiency in the utilization of budget, and more effectively aid in economic and
social development.

Disadvantages of the ZBB

However, the ZBB system is not without flaws. Since it requires defense of key expenditure items proposed by a
government agency, ZBB system is tedious and time-consuming.

According to UP economics professor Benjamin Diokno, a former budget secretary, doing the ZBB system annually
could waste time that could be used for other worthwhile activities.
"It's a useful technique for establishing the baseline at the start of every administration. But it has to be done only
once. Doing it annually doesn't make sense. It is going to be tedious without large benefits," Diokno said.

Diokno said doing the ZBB annually may cause delays in the implementation of vital projects and programs because
of its tedious process.

Moreover, the new budget system requires a larger number of people in preparing the national budget. This is
because people concerned in the implementation of a certain expenditure item will have to give their inputs so that
evaluations of it are holistic.

Abad said that in evaluating a proposed key expenditure program or project, the DBM calls on concerned parties,
including representatives from concerned agencies, beneficiaries, concerned local governments, etc., to hear their
inputs.

The adoption of the ZBB likewise requires training of executives of government agencies on thorough project/program
evaluation before its benefits of efficiency is maximized.

Recommendations

Diokno said that instead of carrying out the ZBB system annually, adopting a multi-year budget preparation is more
advisable and prudent.

A major evaluation is preferably done at the start of an administration, he said, while minor and periodic reviews may
be done to see which projects and programs may be eliminated or given more budget allocations.

"A medium-term expenditure framework is preferable," Diokno said.

"A multi-year, output/outcome based budgeting is better than annual budgeting. The process [involved in a multi-year
budget system] is less cumbersome, so delays in program and project implementation are avoided," the economist
added.

Diokno also said that under a multi-year budget preparation, the focus of discussion is on performance of past projects
and programs, and whether these were consistent or had deviated from the medium-term economic targets.

For his part, Abola said that while the ZBB was promising, it is not enough to achieve efficiency in the utilization of
budget.

Abola said that the ZBB system must be done together with efforts to address the serious issue on the bloated
bureaucracy.

"The government must do more if it intends to use public money more efficiently; it must rationalize bureaucracy and
trim the workforce," Abola said.

Based on the latest survey by the Civil Service Commission, there are about 1.3 million government employees,
including those from government agencies, state-owned companies, and local government units.

According to the 2011 national budget, the government shall spend PhP 184.6 billion (USD 4.1 billion) in salaries of
permanent government workers, PhP 51.5 billion (USD 1.1 billion) in salaries of military and uniformed personnel, and
another PhP 4.7 billion (USD 107 million) in salaries of non-permanent employees.

Abola said the DBM should pursue and complete an old effort to evaluate the positions in the different government
agencies -- whether they are still vital or may be dissolved -- so that the government may save on cost of personnel
services.
The budget system moving forward

Meanwhile, despite some criticisms of the new budget approach, Abad said the Aquino administration is bent in
observing it all throughout its term.

"We will continue implementing the ZBB system; it pays to allocate funds only to the most vital projects and programs,
and to no longer fund those that are not important," Abad said.

The budget chief said the adoption of the ZBB system is one of the key achievements of the Aquino administration as
far as the national budget is concerned.

The other achievement, he said, is the early passage of the 2011 national budget, which is now being implemented. It
is the first time in a decade that an administration is using a budget passed on time, he said.

Abad said the prompt passage of the 2011 national budget, which already used the ZBB system, shows that even if
the ZBB system is tedious, its timely implementation is feasible. Philippine Public Transparency Reporting Project