The most common measure of absorptive capacity is the budget utilization rate (BUR) which may be computed as obligation rate or disbursement rate.
What is Obligation Rate?
Obligation rate is used to measure the ability of the agency to utilize (use/spend) the allotment or obligational authority made available by the Department of Budget and Management (DBM).
Obligation rate is measured as the ratio/percentage of obligation over the allotment issued to the agency (i.e., obligation divided by allotment). This may be computed per allotment class or total obligation over total allotment for all allotment class.
For example, if the total obligation (all allotment class) of the agency is P1 million and the total allotment issued by the DBM is P2 million then its BUR is 50%.
The 50% BUR means that the agency was only able to spend half of its budget for the whole year which may be a result of various reasons such as poor planning, slow decision making, poor implementation of procurement process, etc.
Why a high BUR is important?
All agencies are expected to utilize 100% of their budget. Hence, it is worth noting that a low BUR (or low absorptive capacity) affects the budget level of the agency in the succeeding budget preparation period.
The DBM does not want a low BUR since it is an indication that an agency is incapable of spending its budget which may result to bad public service and delayed implementation of programs and/or projects.
What is Disbursement Rate?
Disbursement rate is used to measure the ability of the agency to pay or settle its obligations. “To pay” means the ability of the agency to spend the cash allocated and released to it by the DBM.
Disbursement rate is measured as the ratio/percentage of disbursement over the obligation incurred by the agency (i.e., disbursement divided by obligation). This may likewise be per disbursement by allotment class or total disbursement over total obligation.
For example, if the agency was able to disburse P800,000 of its P1 million obligation, then its disbursement rate is 80%.
Why a high disbursement rate is important?
Just like obligation rate, a high disbursement rate is very important since the government wants to of course settle its obligations as efficiently as possible since some of the money it is spending come from loans and bonds (borrowed money) which means whether this borrowed money were spent or not, the government still pays interest.
Moreover, the primary source of cash of the government is through the taxes it collected. These taxes are meant to be spent for the right thing for the common good of the Filipino people. Hence, if these taxes were not spent wisely (value for money) then the government is not giving the Filipino people a good public service.
Are we clear on BUR?
Please let us know in the comment section if you need further explanations and examples on what BUR is. Or, if you are knowledgeable on the topic, we would appreciate it so much if you will help us expound this topic further. Thank you.
