by Performance budgeting is a process of allocating resources to public enterprises based on their expected performance outcomes. The objective of performance budgeting is to link the budget allocation process with the performance of public enterprises, so that resources are allocated in a way that maximizes efficiency and effectiveness.
In India, performance budgeting has been adopted for public sector enterprises through the introduction of the Memorandum of Understanding (MoU) system. Under this system, public sector enterprises are required to sign MoUs with the government every year, which set out performance targets for the enterprise and provide a basis for budget allocation.
The MoUs typically include performance indicators related to financial performance, operational efficiency, and social responsibility. For example, an MoU for a public sector enterprise in the power sector may include targets for reducing transmission and distribution losses, increasing the share of renewable energy in the generation mix, and improving customer satisfaction.
The government allocates resources to public sector enterprises based on their performance targets, with better-performing enterprises receiving a larger share of resources. This provides an incentive for enterprises to improve their performance and meet their targets, as it directly affects their budget allocation.
In addition to the MoU system, public sector enterprises in India are also subject to performance evaluation through the Department of Public Enterprises (DPE). The DPE evaluates the performance of public sector enterprises based on financial, operational, and social parameters, and provides recommendations for improvement.
The performance evaluation and budget allocation process has helped to improve the efficiency and effectiveness of public sector enterprises in India. For example, the DPE’s evaluation of the performance of public sector enterprises for the year 2019-20 found that the average Return on Equity (ROE) for these enterprises had increased from 9.68% in the previous year to 10.69%, indicating an improvement in financial performance. The evaluation also found that 49 out of 257 public sector enterprises had achieved “excellent” performance ratings, while 44 had achieved “very good” ratings.
Performance budgeting:
- Linking budget allocation with performance outcomes: The MoU system links budget allocation to performance outcomes, which ensures that public sector enterprises focus on achieving their targets and improving their performance. The system incentivizes enterprises to improve their performance, as a better performance rating can lead to a higher budget allocation.
- Aligning resources with strategic objectives: The MoU system aligns resources with the strategic objectives of public sector enterprises, ensuring that they have the necessary resources to achieve their targets. By focusing on outcomes rather than inputs, performance budgeting helps to ensure that resources are allocated in a way that maximizes efficiency and effectiveness.
- Encouraging accountability and transparency: Performance budgeting encourages accountability and transparency by requiring public sector enterprises to report on their performance outcomes. This helps to ensure that enterprises are accountable to their stakeholders, including the government, shareholders, and the public.
Performance evaluation:
- Providing a basis for improvement: Performance evaluation provides a basis for improvement by identifying areas where public sector enterprises can improve their performance. The DPE’s evaluation provides recommendations for improvement, which helps enterprises to identify areas where they can make changes to improve their performance.
- Identifying best practices: Performance evaluation helps to identify best practices that can be shared across public sector enterprises. By highlighting enterprises that have achieved excellent performance ratings, the evaluation process provides a benchmark for other enterprises to follow.
- Encouraging transparency and accountability: Performance evaluation encourages transparency and accountability by requiring public sector enterprises to report on their performance outcomes. The evaluation process ensures that enterprises are accountable to their stakeholders, including the government, shareholders, and the public.
