The role of performance based budgeting in the Indonesian public sector

Performance-Based Budgeting (PBB) has been, and continues to be, implemented within developed and developing countries as part of a wider public sector reform process. The purpose is to embed accurate performance measurement within public sector organisations (see Franklin, 2006, Aristovnik and Seljak, 2009, Schick, 2007) and provide a more efficient and effective approach to resource allocation (Shah and Shen, 2007). PBB adoption and implementation has not been without criticism and there is ongoing debate as to the real use and effectiveness of PBB. The historical context within which PBB developed, and the justification for why countries decide to implement PBB, has been the subject of scant research, which has led to a lack of understanding as to its purpose and effects. This thesis undertook an historical examination of PBB as part of fiscal reform within the public sector. It specifically used a case study regarding the adoption and implementation of PBB within the Indonesian government as its central field of analysis. The study used qualitative research methodology, beginning with a historical review of the evolution of PBB as the new public budgeting system, using the Lüder FMR model (2002) as a conceptual framework. It then utilized new institutional sociology (NIS) theory as a theoretical framework to examine the extent to which isomorphism was evident during PBB implementation within the Indonesian central government. Finally, the Lüder FMR model (2013) was employed as a conceptual framework to investigate the motives that underpinned the development of PBB within Indonesian local government, and the factors influencing its implementation. This study offers three conclusions about the historical context of PBB evolution and the decision by countries to adopt. First, PBB was initially implemented in the United States in 1949 and expanded to developing countries through United States (US) and United Nations (UN) funded projects. Using the Lüder FMR model (2002), this study finds that the primary motive underpinning PBB implementation in the US was public sector demand for more informative and measured budgets. Similar motives were also found in the UK, Australia and Denmark. That the implementation of PBB within the US and UK budgeting systems were largely seen as positive, was the primary stimulus for PBB implementation across the globe. Furthermore, this study found the outcome of budgetary reform varied between countries, from that of a single format that involved traditional budgeting methods, to ‘old PBB’, to a dynamic approach involving multiple stages that culminated in PBB modification. Second, the change to the budgetary system was a consequence of the Indonesian central government‘s institutional environment. Two phases of PBB implementation occurred within the Indonesian central government. In the initial period (1990s), most of the impetus for change originated from Indonesian technocrats (internal governmental officers and academics) who proposed PBB after their participation in an international public sector workshop. During the second period (2003), pressure to implement PBB emanated from the IMF and the World Bank, and the Indonesian central government responded to moderate coercive pressure with an avoidance strategy. This avoidance response, coupled with the occurrence of weak mimetic and strong normative pressure (from Indonesian technocrats) in the institutionalisation of PBB, is evident through the modified form of PBB implemented across the Indonesian central government. This avoidance strategy appears to be the result of the Indonesian government seeking legitimacy from the international community rather than the rational motive of gaining efficiency. Third, the primary motivation for PBB implementation within Indonesian local government was the demand to modernise its financial and reporting system, with support from Indonesian technocrats (government officers and scholars) and foreign donor projects. The harmonisation of planning, budgeting and accounting helped to embed reform. Furthermore, the study found that the Lüder FMR model (2013) is a useful framework to identify the key factors (such as stimuli, reform driver and promoters, and structural features) behind the implementation of PBB within Indonesian local government. However, the weak performance identified after PBB implementation indicated that budgeting reform was at least partly cosmetic. In practical terms, the Indonesian experience of PBB implementation has lessons for other developing countries who are adopting or intend to adopt and implement PBB.