Performance based financing (PBF) links funds or payments to service providers to results achieved and gives them considerable autonomy in the use of these funds. The strategic approach is appealing to many individuals and organizations as it motivates them to perform better and channels resources directly to the frontlines. This in turn fosters greater accountability. Using this approach has been popular in different sectors with some promising results emerging. 

But how do PBF schemes compare to traditional Public Financial Management (PFM) systems? Do they have to be fundamentally different between PFM systems? The answer is ‘No’.  

PBF arrangements, if not mainstreamed into the budget, may create ineffective parallel structures and will be difficult to sustain. It is important to identify how PBF principles align with the budget, as is currently explored in the health sector. National PFM systems need to be credible and flexible accommodating innovations to avoid having parallel systems in place. In countries where donor financed PBF systems are not integrated into the national PFM systems, they may produce short-term results, but these are not sustainable. Some lessons are emerging on how to implement PBF within a country’s PFM system in an effective and sustainable way. We share below five such lessons: 

1. Delegate financial power to service providers to enhance their autonomy: Health facilities or schools require a degree of autonomy to make effective decisions especially that weaknesses in the PFM system can have significant consequences on service delivery outcomes. This can be achieved by ensuring that the delegation of financial powers to service delivery units is included in the national PFM system. 

2. Focus on timely availability of funds, not control over bank accounts: PBF implementations often stipulate having dedicated bank accounts at the service delivery units where funds do not lapse at the end of the year. This is understandable in countries where deployment of the treasury single account (TSA) is not yet mature and reliable resources are not available to service delivery units. Strengthening the TSA and having timely budget releases and flow of funds will ensure that funds are available to deliver services. Ministries of finance and sector ministries need to work closely together to align national PFM systems. 

3. Enhance financial accountability and transparency in front-line service delivery units: Limitations in financial management capacity is a key reason for stringent input level controls by treasury. Improving the alignment of internal controls and enhancing the capacity at the sector and service delivery units, will lead to more effective PFM systems and better implementation of PBF. 

4. Provide incentives to front-line service delivery units that can be implemented through national PFM systems: PBF innovations often include incentives to workers. For example, improved performances lead to getting bonuses or some form of monetary compensation. The decision whether to pay incentives, and the scale of it, is not necessarily a PFM matter. Appropriate incentive payments can be incorporated into country PFM systems for implementing PBF, without having a parallel setup in place.  

5. Report donor-funded PBF projects as part of  the government budget: Global experiences indicate that even in examples where PFM systems are strong, development partners sometimes tend to route assistance through parallel systems, which may not be an appropriate practice. PBF innovations allow development partners to work with ministries of finance, health and education, to enable greater use of country PFM systems and include donor funded PBF projects in government budgets. Of significant value to this process, are the FinHealth and the upcoming FinEducation toolkits that include a step-by-step on how to customize solutions. 

PBF offers an opportunity to deliver health and education services to citizens in an effective way. By dovetailing PBF innovations into country PFM systems, governments will be able to ensure aggregate fiscal discipline, strategic allocation of resources and efficiency , the three budgetary outcomes established in PEFA – the gold standard PFM framework. Rooted in approaches to effective and sustainable implementation - PBF and PFM are a winning partnership for post-COVID. 

Source: https://blogs.worldbank.org/governance/performance-based-financing-inspiring-new-approaches-public-financial-management-health