Zeroing in on Zero-Based Budgeting By the Philippine Public Transparency Reporting Project Tuesday, 11 January 2011 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 lastyear, 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 nationalbudget 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 nobearing 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 thususually 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 abudget of about PhP 225 million (USD 5 million). But under the 2011 budget and the succeeding budgets of the Aquino administration, Abadsaid, 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 thefeeding 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 wastageof government resources; not all beneficiaries of the feeding program -- students of publicschools -- actually needed food/nutrition support from the government, the budget secretaryexplains. "DepEd is supposed to be teaching, not feeding. DSWD is in a better position to do the feedingprogram as it has the means, the delivery system to target poor households that are actually inneed of the service," Abad said.

Meanwhile, the huge increase in the allocation for the conditional cash transfer (CCT) programin the 2011 budget is another consequence of the adoption of the ZBB. The CCT is given a PhP21-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 Aquinoadministration, 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 PhP1,400 (USD 32) to selected poorest Filipino households. Recipients are required to sendchildren 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 WelfareSecretary Corazon Soliman said the proposed PhP 21-billion budget for the CCT would benefit2.3 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 morechildren to school. Sending more poor children in school increases the chances of reducingpoverty incidence, she said. Moreover, Soliman said, the CCT helps address the problem of poor maternal health seenespecially in poor communities. Advantages of the ZBB Abad expressed confidence that the ZBB is an effective tool to curb corruption. "With the ZBB inplace, 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 ZBBapproach. One is that it requires thorough evaluation of expenditure items, and so unnecessaryones are terminated. With this, Abad said, not only corruption is reduced but budget efficiency islikewise achieved. Another advantage is that projects and programs that deserve higher allocations are thus givenmore funds. Therefore, Abad said, ZBB is more complementary than the old system inachieving 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 theend goals of economic growth and poverty reduction. Dr. Victor Abola, economics professor from the University of Asia and the Pacific, said in aseparate interview with PPTRP that adoption of the ZBB is indeed a move in the right directiontoward the goal of curbing corruption. "Since projects and programs will be strictly evaluated before these are given allocations, thebudget 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 approachhas just been implemented. Nonetheless, he said, his hopes are high that the new system ofbudgeting would indeed result in reduced cases of corruption, better efficiency in the utilizationof 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 expenditureitems 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 ithas to be done only once. Doing it annually doesn't make sense. It is going to be tediouswithout large benefits," Diokno said. Diokno said doing the ZBB annually may cause delays in the implementation of vital projectsand programs because of its tedious process. Moreover, the new budget system requires a larger number of people in preparing the nationalbudget. This is because people concerned in the implementation of a certain expenditure itemwill 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 onconcerned parties, including representatives from concerned agencies, beneficiaries, concernedlocal governments, etc., to hear their inputs. The adoption of the ZBB likewise requires training of executives of government agencies onthorough 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 budgetpreparation is more advisable and prudent. A major evaluation is preferably done at the start of an administration, he said, while minor andperiodic reviews may be done to see which projects and programs may be eliminated or givenmore 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 projectimplementation are avoided," the economist added. Diokno also said that under a multi-year budget preparation, the focus of discussion is onperformance of past projects and programs, and whether these were consistent or had deviatedfrom 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 issueon the bloated bureaucracy. "The government must do more if it intends to use public money more efficiently; it mustrationalize bureaucracy and trim the workforce," Abola said. Based on the latest survey by the Civil Service Commission, there are about 1.3 milliongovernment 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 4.1billion) in salaries of permanent government workers, PhP 51.5 billion (USD 1.1 billion) insalaries of military and uniformed personnel, and another PhP 4.7 billion (USD 107 million) insalaries of non-permanent employees.Abola said the DBM should pursue and complete an old effort to evaluate the positions in thedifferent government agencies -- whether they are still vital or may be dissolved -- so that thegovernment 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