Performance Based Financing: Inspiring new approaches to Public Financial Management in Health and Education

PBF is a method of financing that links payments or funds to the results achieved by service providers. It also gives them considerable freedom in how they use these funds. Many individuals and organizations are attracted to the strategic approach because it encourages them to improve their performance and directs resources to frontline workers. It also encourages greater accountability. This approach is widespread across different sectors, with promising results.

How do PBF systems compare with traditional Public Financial Management Systems (PFMs)? Does it have to be different in a fundamental way between PFM systems? No.

If PBF arrangements are not integrated into the budget, they may lead to ineffective parallel structures that will be hard to maintain. It is currently exploring how PBF principles are aligned with budgets. To avoid similar systems, national PFM systems must be flexible and credible. Donor-financed PBF systems not integrated with national PFM systems may have short-term effects but must be more sustainable. How to integrate PBF into a country’s PFM sustainably and effectively is becoming more apparent. Below we share five of these lessons.

1. Delegate financial powers to service providers to increase their autonomy. Schools or health facilities require freedom to make effective decisions, especially when the PFM system has weaknesses that can significantly impact service delivery outcomes. It can be achieved by delegating financial power to service delivery units in the national PFM systems.

2. The focus should be on the timely availability of funds and not the control of bank accounts. Many PBF implementations stipulate that funds are held in dedicated bank accounts within the service delivery unit so they do not expire at the end of the year. Understandably, this is the case in countries where the Treasury Single Account (TSA), a centralized account for all government funds, is still in its early stages. There are no reliable resources available to service units. The TSA will be strengthened by ensuring timely budget releases and a flow of funds. To align PFM systems across the country, ministries of finance and sectors must work together.

3. Improve financial accountability and transparency for frontline service units: Limited financial management capability is why the treasury has strict input level controls. Improved alignment of internal control and enhanced capacity in the service delivery unit and sector will lead to better PFM systems.

4. Offer incentives to frontline service delivery units, which can be implemented via national PFM systems. PBF innovations include incentives for workers. For example, better performance can lead to bonuses or other forms of compensation. It is only sometimes a PFM issue to decide whether or not to pay incentives and what the amount should be. PBF can be implemented by incorporating appropriate incentive payments into the country’s PFM system without a separate setup.

5. Report donor-funded PBF projects as part of the government budget: Global experiences indicate PEFA, the gold standard PFM Framework. PBF and PFM have a strong foundation in effective and sustainable implementation.

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