PUBLIC FINANCIAL MANAGEMENT REVISION SEMINAR FOR MAY 2022 EXAMS
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The objective is to gather sufficient evidence demonstrating that one has
covered the expected requirements of the syllabus.
The submission will enable the marker to expresses an opinion on one’s
coverage of the syllabus.
The starting point is the understanding of the syllabus from which the
questions will be based.
The purpose of the revision seminar is to summarize what students should
take Into the exam room.
The student should demonstrate clear understanding of the contents of Public
Financial Management.
THE PUBLIC FINANCIAL MANAGEMENT CYCLE AND STAKEHOLDERS.
Sources
Constitution of Zimbabwe Amendment number 20 Act of 2013
Public Finance Management Act (Chapter 22:19) Audit Office Act (Chapter 22:18)
APPROACH TO REVISION
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The focus is to ensure that all areas of the syllabus are covered.
Public Financial Management is about service delivery to the populace who
contribute funding through tax.
If the process is not done professionally, the mandate to provide services will
not be fulfilled.
Any factor which facilitate and hinder this process is at the centre of PFM.
We focus on solutions to poor public service provision to the people.
The student should demonstrate understanding of the dynamics involved in
service provision.
The key areas should be identified first so that appropriate information is
collected.
STATE SOURCES OF FUNDING
KEY TERMS IN GOVERNMENT BORROWING AND DEBT MANAGEMENT
1. Fiscal constraints in government debt
2. Methods of government borrowing –
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Treasury bills;
Government bonds;
National savings and investment products;
Certificates of tax deposit
3. Economic impact of different forms of government borrowing.
4. Government taxation as a source of funding
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Explain the contribution and role of public sector spending within the context
of national finances.
INTERNATIONAL ASSISTANCE
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International development frameworks
International aid
Non – financial aid and direct assistance
Grants, loans and other forms of international development finance
Assessing the impact and effectiveness of aid
Ethical issues related to international aid
Public Expenditure and Financial Accountability framework
PUBLIC SPENDING
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Central government public spending, incorporating formula and specific
grants.
Local Authorities and levies
The gearing effect and its impact on local tax decision making.
Comparisons of local tax raising powers internationally.
Control or influence over local tax levels by central government.
Discuss and evaluate grant funding and other available sources of funding for
public services.
Financial management implications of grant funding.
Other sources of funding
Discuss and evaluate the role of Public Private Partnerships (PPPS) and in
particular the private finance initiative (PFI) in funding large-scale construction
projects, and calculate the public sector comparator
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Role of Public Private Partnerships (PPPs) in financing public service projects
Principles of the Public Finance Initiative (PFI)
Advantages and disadvantages of PFI
Potential investors
Ensuring success - overcoming issues and obstacles
Monitoring performance
Role of the government in PFI projects.
Dealing with changing circumstances and project failure
Cases of privatization
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Discuss and evaluate the issues involved in charging for public services.
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Objectives of charging for public services
Methods of charging for public services
Desirable characteristics of public service charges
Arguments for and against charging including stakeholder expectations.
Charging for specific services provided by public service organisations.
Discuss and analyse the environment in which financial management is
practised within the public services.
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Factors affecting public service financial strategy development.
The role of government and stakeholders.
Issues of consultation, engagement, scrutiny and accountability
Alignment of financial strategy with organisational objectives
The role of auditors, inspectors and regulators
Attitude of risk; risk diagnosis and management
Impact of austerity; organisational and service-level financial resilience
Impact of fraud on financial strategy
Discuss examples of the legal, governance and ethical constraints or
expectations impacting on finance professionals in public service settings
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Impact of governance arrangements and legal requirements and how these
vary across sectors
Ethical considerations in relation to financial strategy
Discuss and analyse the role and structure of the finance function for Public
Service
The importance of leadership and the role of the Chief Finance Officer/
Finance Director
The Leadership role of the CFO in public service
Business partnering and the importance of organisational culture
Affordability and value for money of the finance function.
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Discuss and analyse the specific issues associated with treasury management
in public service organisations
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Financing capital investment, the need to borrow and alternative methods of
borrowing.
Attitudes to risk and return in the public services.
The use of financial instruments in the public services.
Organisational investments powers and other constraints.
Statutory and regulatory frameworks.
Best practice guidance.
Ethical investment strategies
Management of public services pension funds.
Impact of treasury management on strategic financial management.
Discuss and evaluate the complexities of budgeting within a public service
environment
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Medium term expenditure frameworks
Annual budgets and multi – year budgets
Project budgets compared with ‘business as usual’ budgets
Pooled budgets
Fund management and use of virement
Forecasting in a public service environment
Scenario planning – use of contingencies; reactive crisis management;
responding to unexpected events
Discuss and evaluate the implications for public service organisations of
relying on volatile sources of funding and the strategies required
Factors affecting funding levels –
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economic circumstances;
achievement of targets;
decisions by funding organisations;
Demographics
Financial management implications of volatile funding sources
Responses to volatile funding –
long-term agreements;
diversifying sources of income.
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Discuss and evaluate the factors affecting strategy development in public
services including responding to managing demand pressure
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Relevance of competitive advantage strategy frameworks
Strategies to manage demand
Volatility of demand for services and related spending requirements
Practical strategies for managing demand and influencing behaviour.
Invest-to-save and disinvestment strategies .
Media strategy and marketing of services
Explain and apply the stages involved in Developing a business case and
distinguish between the types and content of different business cases
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The role of the business case for both spending plans and service
reductions
The business case development process
Strategic Outline Plan
Strategic Outline Case
Outline Business Case
Full Business Case
Reviewing business cases
Interaction between business cases and Government Gateway reviews
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NOTES FOR REVISION
DEFINITION OF PUBLIC FINANCIAL MANAGEMENT
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Public Financial Management outlines the way nations undertake the
mobilization of revenue, the spending of the revenue, the oversight function of
both the revenue and expenditure and ultimately the reporting of the same.
It details the processes and procedures in which the money is first designated
as public finance (receipt), the reporting of the receipt, the expenditure of the
public finance and the reporting of the expenditure.
Budgeting procedures for revenue and expenditure is also part of the
equation.
The Public Financial Management discipline focuses on the nature and
functions of public institutions that are concerned with the sourcing, collection,
custody, allocation, and control and reporting of public moneys.
It is trite that the owner of an establishment is the one responsible for
providing finance for its operations.
In companies, the owners are the shareholders who provide capital for the
operations of the entities.
The shareholders appoint Directors to run an organisation on their behalf.
The Directors in turn have a duty to find credible way of raising finance within
the confines of the law; i.e. equity, bonds, debentures, loans etc.
The owners of a country are its citizens, who appoint a Government.
This is done through political processes to run the affairs of the state.
The citizens have an obligation to provide funds for the smooth operations of
the state.
The taxation is the primary source of public funds.
Other sources include debt from within and outside the country.
TAXATION AND ITS FUNCTION IN PUBLIC FINANCE
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Taxation is defined as the compulsory contribution by citizens to the state for
purposes of defraying expenses that the state incur in providing public
functions or service without conferring any special benefit to the payer.
The above definition sums up the nature and manner of taxation in that:
1. It is a compulsory contribution (The Basis for payment and Enforcement can
only be found in legal instruments)
2. Section 298 (2) of the Constitution of Zimbabwe Amendment number 20 Act
of 2013 defines the circumstances and parameters for levying taxes;
3. “No taxes may be levied except under the specific authority of the constitution
or an Act of Parliament”
4. Revenue realized is for public expenditure (the provision of public goods and
services are a state responsibility hence the need to raise revenue)
5. This may also be done in the spirit of regulation eg excise duty, sin taxes
6. There is no Conferment of special benefits to the Payer.
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The tax payer has the obligation to extinguish public expenses without
entitlement to any special benefits.
There are moral grounds requiring citizens to finance state operations.
Taxation in public financial management can be equated to equity in
companies.
The taxpayers in a country are equivalent to shareholders in companies
Taxation has important effects on business and the economy despite its role
in revenue generation.
The present functions of taxation are;
1. to finance the activities of the government eg maintenance of the civil service;
2. to redistribute wealth eg providing social benefits
3. to achieve desirable social objectives eg discouraging smoking
4. to achieve certain economic objectives eg increased tax which reduces consumer
spending can help reduce inflation.
5. raising revenue for the government to finance public services.
PRINCIPLES OF PUBLIC FINANCIAL MANAGEMENT: SECTION 298 OF THE
CONSTITUTION OF ZIMBABWE AMENDMENT NUMBER 20 ACT OF 2013)
There are certain fundamental principles which under pin public financial
management.
1. Transparency and Accountability in matters concerning public funds are
critical.
2. Public funds should be directed towards nation building and development.
3. The revenue realized need to be shared equitably between and among the
various tiers of the Government (central, Provincial and local Government),.
4. The expenditure should be directed towards the development of Zimbabwe
with special provision of goods and services to marginalized groups and areas
5. The burdens and benefits of the use of resources must be shared equitably
between present and future generations
6. Expenditure of the funds must be transparent, prudent, economic and
effective’
7. Responsible financial management and clear fiscal reporting
8. Borrowings and transactions involving national debt should be carried out
transparently and in the best interest of Zimbabwe.
EXECUTIVE INSTITUTIONS INVOLVED IN PUBLIC FINANCIAL MANAGEMENT
The following executive institutions are key participants in public financial
management:
1. The President (Section 89 of the Constitution of Zimbabwe
Amendment number 20 Act of 2013)
2. The Cabinet (Section 105 of Constitution of Zimbabwe Amendment number
20 Act of 2013)
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3. The Minister of Finance and Economic Development (Section 104
Constitution of Zimbabwe Amendment number 20 Act of 2013 and section7 of
the PFM Act)
4. The Auditor General (Section 309 of the Constitution of Zimbabwe
Amendment number 20 Act of 2013 and the Audit Office Act Chapter 22:18)
5. Secretary and the Paymaster General (section 8 of the PFM Act Chapter
22:19 of 2009).
6. The Accountant General (Section 9 of the PFM Act Chapter 22:19 of 2009).
7. Accounting Officers and receivers of revenue (Section 10 of the PFM Act
Chapter 22:19 of 2009).
8. The Directors of Finance (section 32, 33, 34 of the PFM Act Chapter 22:19 of
2009).
PUBLIC FINANCIAL MANAGEMENT PERFORMANCE EVALUATION
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The public expenditure and financial accountability framework examines how
public offices and institutions develop and design systems for proper public
finance management
PEFA provide techniques for assessing public financial management
performance.
The framework was conceived in 2001 and has since undergone upgrades to
respond to the obtaining PFM reforms.
It examines systems, processes and institutions of the Government and how
they undertake activities in their pursuit of the following budget outcomes:
1. Aggregate Fiscal Discipline
2. Strategic Allocation of resources
3. Efficiency in service delivery
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PEFA identifies strengths and weaknesses of PFM using 31 performance
indicators.
The performance of each indicator is measured against a four point ordinal
scale from A to D.
1. Budget reliability (realistic and implemented as intended) P1-P3, 6D
2. Transparency of Public finances(comprehensive, consistent and accessible to
users) PI 4-PI9, 12D
3. Management of assets and liabilities (Effective management of Assets and
liabilities, value for money) pi10-pi13, 13D
4. Policy based fiscal strategy and budgeting (Fiscal budget and strategy
prepared anchored on fiscal policies, strategic plans, adequate macroeconomic and fiscal projections) pi14-pi18, 17D
5. Predictability and control in Budget execution (Budget implementation on
effective standards, processes, and internal controls, ensuring effective
resource mobilisation and use) pi19-pi26, 28D
6. Accounting and reporting (Accurate and reliable records maintained and
timely information for decision makers produced) pi27-pi29, 10D
7. External scrutiny and audit (independent review and external follow up on
recommendations) pi30-pi31, 8D
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THE STAKEHOLDERS IN PUBLIC FINANCIAL MANAGEMENT CYCLE.
Sources
Constitution of Zimbabwe Amendment number 20 Act of 2013
Public Finance Management Act (Chapter 22:19) Audit Office Act (Chapter 22:18)
ENVIRONMENT OF PUBLIC FINANCIAL MANAGEMENT
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The Practice of Public Financial Management can be contextualised in the
environment in which it is located.
The environment is external and has a bearing on the success, extent of
practice and manner and quality of Public Financial Management.
The following external variables influence the practice of Public Financial
Management:
1. Public Administration and human Activities
2. Politics
3. Government
4. Laws
5. Public Administration.
6. Administration.
THE PRIVATE SECTOR
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The is generally accepted that the state is responsible for the general welfare
of its people.
The aim of government is to further the contentment and spiritual and material
welfare of all CITIZENS.
Material must be understood to mean economic welfare; hence economic
welfare is one aspect of the general welfare of a country’s inhabitants.
The participation of central government in the economic life of Zimbabwe
refers to the following:
a. Government must put in place measures to promote economic growth.
b. Economic growth is an important aim because of special factors such as rapid
population growth, the depopulation of rural areas and the pursuit of a higher
standard of living for all sections of the community.
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The state promotes economic development in various ways:
1. By establishing strategic industries
2. By providing the infrastructure and distributing it geographically and by
providing basic research services.
3. By providing specific industries with loan funds
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4. By applying fiscal incentives to stimulate growth in specific directions within
the private sector
5. By guiding and coordinating the development of growth points, decentralising
industry in general and planning for the whole country on a regional basis.
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(Adaptation from the Franszen Report, South Africa. Fiscal and Monetary
policy in South Africa, Third report of the Commission of Inquiry into Fiscal
and Monetary policy in South Africa. Pretoria: Government Printer, November
1970 pg. 7).
DUTIES OF THE MINISTER OF FINANCE
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Section 7 of the PFM Act spells out the responsibilities of the Minister who is a
political appointee.
He is charged with the Administration and management of the Treasury.
As political appointee, he or she wears both the political and administrative
hats in the discharge of his or her functions.
The Act prescribes the following duties on the Minister of Finance;
1. Development and implementation of a Macro economic and fiscal policy for
Zimbabwe.
2. Supervising and monitoring finances in Zimbabwe.
3. Coordinating international and inter-governmental financial and fiscal
relations.
4. Advising the Government on the allocation of resources in Government and
other institutions of Government
5. Management of the CRF
6. The Minister, in executing his duties should ensure Parliament is annually
provided with a full transparent set of accounts.
7. This includes projections of the state of Zimbabwean economy and fiscal
policy for Zimbabwe.
8. The Minister is also responsible for the enactment of robust systems in the
planning, allocation and budgeting of the use of public resources.
9. The Minister is responsible to Parliament on the control of public finances.
SECRETARY AND THE PAYMASTER GENERAL
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Section 8 of the PFM Act provides for the Secretary for Finance in the Minister
‘s office.
The Secretary to the Treasury is also the Paymaster General of the country.
He is responsible to the Minister for effective implementation of PFM Act.
The Secretary is consulted by Accounting Officers in the application of the
Act.
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The Secretary to the Treasury has the following duties;
1. Establishment and operation of an effective system of annual budget and
submission to Parliament.
2. The budget is prepared in accordance with general and specific directions
of the Minister and the estimates reflect value for money (effective use of
resources)
3. Accounting Officers to supply information as deemed necessary for proper
public financial management
4. Control the issue of moneys to Ministries and ultimately
5. Access information at all reasonable times of any Ministry or public entity
concerning public finance management
THE ACCOUNTANT GENERAL OFFICE IN PUBLIC FINANCE
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The Accountant General is provided for under Section 9 of the PFM Act
The Accountant General is answerable to the Secretary and is expected to:
1. Specify the basis of accounting systems in public entities or Ministries and
establishment of proper and robust system of accounting
2. Ensure proper charges are brought to the CRF in that regard refusing
defective payment vouchers against it
3. Report in writing on any defect in the control of revenue and expenditure in
any reporting unit including non-observance of statutes and regulations
concerning public finances.
4. Development and institution of systems for safe custody of public
resources
5. Take precautions by maintenance of efficient checks against ills to public
resources such as fraud, negligence and embezzlement
THE ACCOUNTING OFFICERS IN MINISTRIES.
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Section 10 of the PFM Act provides for the role of Accounting Officers in
public entities.
An Accounting officer is prescribed by the Minister of Finance on the advice
from the Secretary.
The standard practice in Zimbabwe has been that all Permanent Secretaries
in Ministries are designated as Accounting Officers and other selected
Permanent Secretaries for Constitutional Commissions.
The Accounting officer is responsible for the expenditure under the
appropriation Act of his or her reporting Unit.
The Accounting Officer is expected to comply with the PFM Act.
He should observe general guidelines in the management of public finances
issued from time to time by the Accountant General with regards to the
following matters:
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1. Public resources
2. Public stores
3. Investments, Securities and other negotiable instruments
THE FIDUCIARY DUTIES OF ACCOUNTING AUTHORITIES,
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The fiduciary duties of accounting authorities are stipulated in Section 42 of
the Act.
These duties include the following:
1. Ensuring utmost care is taken in safeguarding assets of the entity
2. Act in the best interest of the public entity through honesty, integrity and
fidelity
3. Disclose material facts for decision making by the appropriate Minister
4. Prevent financial prejudice to the interest of the state
5. If the accounting authority is a board, every member is expected to; Act in a
way consistent with duties ascribed by the Act
6. Uphold confidentiality and seek not to abuse his or her position for personal
gain
7. Disclose both direct and indirect personal interests of self, spouse or close
relation
8. Withdraw from proceedings that pose conflict of interest unless the
Accounting authority determines otherwise.
9. Section 43 deals with assignment of powers and duties of accounting
authorities.
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• The powers imposed on the Accounting authority by this act may be
delegated by such Accounting authority.
• This is to employees or officers of the entity.
PROVISIONS REGARDING RAISING OF STATE LOANS.
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Section 54 of the PFM Act looks at the manner of raising State loans
The section prescribes the following antecedent tenets that should guide the
Minister to borrow and these include:
1. The borrowing should be in the public interest to do so
2. It should be consistent with Government economic and fiscal policy
3. The Minister should satisfy himself or herself that the Government has or is
likely to have on current projections the financial ability to meet all the
obligations under the loan, including future loan payments
4. The Minister should consult with the Attorney-General and obtain in writing
from the Attorney General an opinion approving the legal aspects of the loan
agreement.
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The Minister after observing the above tenets, can borrow using the following
ways
1. the issue of bonds or stock
2. the issue of Treasury bills
3. an advance or bank overdraft
THE THREE DISTINCT FUNCTIONS OF PUBLIC FINANCE.
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The functions of public finance include the following:
The allocation function (The government allocates resources to specific areas
like electricity generation, Health, Education, Agriculture etc.,
This is done through the instrument of a budget)
The distribution function (The function is in line with the social justice notion,
the Government is there to support the weak and redistribute resources so as
to create an equitable social condition in the economy.
This is done mainly through instruments such as progressive taxation,
housing for low-income groups, social security insurance and regional
transfers)
Stabilization function (Government is a very significant consumer of goods
and services in the economy and its spending has an effect on the stability of
the economy in terms of employment creation, trade and production in the
country)
CHARACTERISTICS OF A GOOD TAX STRUCTURE.
Taxes should have the following characteristics:
1. The distribution of the tax burden should be equitable so that everyone pays a
fair share
2. Taxes should minimize interference with economic decisions in otherwise
efficient markets. If possible, market inefficiencies should be corrected by
taxes (The efficiency Principle).
3. The tax structure should facilitate the fiscal policy stabilisation function and
support long run growth.
4. The administration of the tax system should be efficient, non- arbitrary,
transparent, and understandable by all taxpayers (Simplicity Principle).
5. The administration and compliance costs should be as low as possible without
hampering efficiency and distorting incentives for the private sector.
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TAXES AND FEES LEVIED BY LOCAL AUTHORITIES (SUBNATIONAL
GOVERNMENTS)
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Taxes levied by local authorities, to a greater extent should satisfy the benefit
principle.
They contain the following properties which are also identifiable above as
principles of a good tax structure.
1. Being buoyant, with revenues roughly changing in proportion to the economic
base;
2. Being horizontally equitable by providing equal treatment to tax payers in
similar circumstances
3. Being relatively efficient, causing low distortions in economic activity
4. Being relatively low in administration and compliance costs
5. Being politically acceptable.
6. Other desirable properties of subnational taxes make them more adaptable to
the benefit principle
OTHER DESIRABLE FEATURES OF TAX
The other desirable features include the following:
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being geographically neutral by :
not distorting the location of economic activity,
not interfering with domestic or international commerce,
and not exportable so that the burden is not borne by residents of other
jurisdictions, unless matched by benefits to non-residents;
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having evenly distributed tax bases across jurisdictions
having relatively immobile bases
having relatively stable tax bases over the business cycle
being highly visible and transparent, to increase accountability
being administratively feasible
TAX EARMARKING
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Tax earmarking is a process of catering for identified expenditure in the public
service through raising of specific revenues.
Tax earmarking increased fiscal discipline though it’s criticised for its rigidity.
In some cases revenues can exceed expenditures leading to wastages.
Tax earmarking can either be strong or weak, in that the link is established
between user fee and the benefit.
The strong benefit-revenue link and the provision of service to well- identified
users, make earmarking desirable to encourage agencies to improve
performance and facilitate cost-recovery.
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The use of earmarked taxes may increase taxpayers’ knowledge about how
the taxes paid are used.
This increases the chances that they will exercise vigilance over the efficiency
of the services provided.
Earmarking arrangements include, for example ( McCleary, 1991):
A specific tax or fee matched to a corresponding end use, e.g. social security
taxes, toll fees.
A specific tax or fee for a broad end use, e.g. lottery proceeds that finance
investment projects that enrich the environment.
General taxes earmarked for a specific end use, e.g. a fixed percentage of
income tax revenue devoted to specific programmes.
USER CHARGES
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The introduction of user charges should be justifiable on two major grounds.
The general rule is that user charges should be based on for both revenue
reasons and technical efficiency reasons.
The government should establish user charges when providing quasi- private
goods.
The collecting agencies are incentivised to collect them through a retention
facility.
They can either keep a percentage of their collection or 100% of the funds
collected (for example a hospital or a university would certainly not have an
incentive to improve its efficiency if it could not use freely some of the revenue
from selling its services.)
It is desirable that an estimate of the revenue and expenditures must be
provided for in the budget.
The benefits arising from setting up user charges need also to be weighed
against the additional “transaction costs” of defining and collecting the
charges.
Systems for setting and implementing user charges must be transparent and
efficient.
The following principles should be adopted (drawn from OECD, 1998):
1. Clear legal authority for an organisation to charge for its services should be
clearly defined. The authority should be a general framework and should allow
for the level of charges to be adjusted without further legislative authority.
2. Consultation with users so as to avoid misunderstandings and facilitate the
design and implementation of the charging system.
3. Determine full costs full cost of providing the service (defined to include both
operational costs and the cost of capital assets, depreciation and interest,
used each year).
These should be determined, regardless of whether the intention is to recover
all or only part of the costs. The information on costs should make transparent
the subsidy granted by the government when providing the service.
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4. Equity considerations may inform that user charges may have to be reduced
or waived for particular categories of user, e.g. pensioners or disabled
persons.
5. Competitive neutrality requires the pricing of services to adopt costing
procedure that are accurate. This should incorporate all items of costs faced
by private sector entities operating in the same (or a related) sector.
6. Effective collection require the collection system for user charges to be
efficient. Non-payment of user charges should be followed up immediately.
7. Audit of the organisation levying and collecting the charges should be done
regularly. Audits incentivise public entities to enforce proper funds
management and act as an appropriate financial reporting appraisal
framework.
8. Performance evaluation require the organisation’s performance to be
monitored regularly to ensure appropriate levels of efficiency and service
quality.
THE LAFFER CURVE
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The Laffer curve illustrates the effect of increasing tax on total tax revenue
realised.
The Laffer curve depicts a relationship between economic activity and the rate
of taxation.
This suggest that there is an optimum tax rate which maximises total tax
revenue.
The increase in tax rate initially has a positive impact on the total tax revenue
where the tax revenue rises to a certain point (maximum threshold).
When the maximum revenue threshold is reached, any further increases in
tax rates result in declining total tax revenue.
It is instructive of human behaviour that further increase in tax rate may result
in resistance from the taxpayers and issues to do with tax evasion and corrupt
tendencies.
THE LAFFER CURVE
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GOVERNMENT BORROWING AND DEBT MANAGEMENT
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Government borrowing serves the same purpose as taxation.
It is driven by the need by the Government to raise funds for defraying
Government expenditure.
The level of borrowing is limited by statutes and is provided for in a budget.
Government envisages its expenditure through the estimates of expenditure
laid before Parliament.
The estimates of expenditures are matched against the relevant estimates of
revenues for a particular year.
The Government considers its tax capacity and funds from non-tax revenues.
If estimates of expenditures for the year exceed estimates of revenues
anticipated in terms of tax and non-tax, the Government looks at other
financing options.
The deficit is financed in terms of borrowing so as to equate expenditures and
revenues (deficit financing).
The borrowings may be internal or external and can be long term or short
term.
Borrowing satisfies budget deficit financing and current account financing.
This is done in the spirit of stimulating growth in the economy.
This will provide funds for production without placing a burden on tax payers
to provide more funds through taxation.
THE ZIMBABWEAN CASE: A BRIEF REVIEW OF THE DEBT AND DEBT
MANAGEMENT
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At independence, Zimbabwe’s debt was estimated at USD700 million.
This was principally contracted in a bid to bust United Nations sanctions by
the white regime in its quest to buy arms of war.
The Government went on to procure loans from the World Bank and IMF for
programmes such as SAP.
From 1980 to 2000, Zimbabwe had a good record of settling its debt.
The external payment arrears increased from USD109 million in 1999 to
USD5.9 billion by end of June 2019.
The Minister of Zimbabwe reported on 01 August 2019 when he presented
the 2019 Mid-term Budget review statement, that Zimbabwe’s total debt stock
was estimated at ZWL$66.8 billion end June 2019.
External Debt which is a sum of public and publicly guaranteed debt was
estimated at ZWL58.1 billion (USD8 billion converted to local currency terms).
Out of the total , an amount of ZWL42.7 (USD5.9) was accumulated arrears.
The composition of the debt was as follows;
Multilateral institutions are owed a total of US$2.5 billion (ZWL$18.5 billion)
World Bank is owed US$1.5 billion (ZWL$10.6 billion),
African Development Bank US$702 million (ZWL$5.1 billion)
European Investment Bank US$309 million (ZWL$2.2 billion)
Other multilaterals US$74 million (ZWL$535 million).
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6. Bilateral debt was US$5.5 billion (ZWL$39.6 billion),
7. Paris Club creditors owed US$3.5 billion (ZWL$25.1 billion)
8. Non-Paris Club US$1.6 billion (ZWL$11.3 billion).
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With a growing external debt resulting from penalties and interest from the
external debt, Zimbabwe turned to domestic borrowing especially in 2018.
On the domestic front, long term borrowing was not so appealing because of
the obtaining inflationary pressures that were starting to build.
The domestic debt was primarily financed by the issuance of Treasury Bills
and Central Bank overdraft to contain budget deficits of over ZWL2 billion.
Treasury managed domestic debt through restructuring overdraft facility with
RBZ (The RBZ Overdraft, and loans of about ZWL$3.995 billion were
restructured in 2019 .
The government rolled over Treasury bills to the tune of ZWL$230 million).
Some TBs were restructured into long term marketable securities and
honouring maturing TBs, cessation of further issuances of TBs to ZAMCO.
The above measures saw domestic debt tumbling from ZWL9.5billion to
ZWL8.8 billion.
RESOLVING THE ZIMBABWEAN DEBT QUESTION
The Minister of Finance -Zimbabwe when he presented the 2019 Mid- term Budget
review statement recommended a two pronged approach to resolving the debt
question in Zimbabwe;
1. Re-engagement with external creditors for purposes of resolving the external
debt overhang (USZWL$8.0 billion as at 30 June 2019).
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This will include arrears clearance, USZWL$5.6 billion.
The USD108 million owed to the IMF was cleared in 2018.
The USD$680 million is still owed to the African Development Bank.
An amount of USDL$1.4 billion is still owed to the World Bank.
There is a further USZWL$308 million which is owed to the European
Investment Bank.
2. Containing the domestic debt (ZWL$8.8 billion as at 30 June 2019) to
sustainable levels through budget deficits containment
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INTERNAL METHODS OF GOVERNMENT BORROWING
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The government may borrow internally from both the capital and money
market.
The money market provides short term loans while the capital market
provides long term funding.
The various instruments may include the following:
1. Government bonds
2. Treasury bills
3. Municipal bonds
ECONOMIC IMPLICATIONS OF GOVERNMENT BORROWING.
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The effect of Government borrowing is best illustrated by the Debt Laffer
Curve.
The Debt Laffer Curve postulates and indicates the positive impact of debt on
a country initially until a point (maximal threshold) is reached where the
accumulation of more debt becomes counterproductive.
The accumulation of debt initially propels economic growth when there are
positive developments because of the extra liquidity in the economy.
During this stage debt repayment together with the consequent interests is
religiously followed.
When a country reaches the maximal threshold, the probability of debt
repayment default increases.
This leads to the advent of difficulties in settling the debt since penalties may
be levied on the debt thereby further constraining the ability of the debtor to
settle the debt.
In the above circumstances, a country slides into debt distress where the
payment of the debt is further compromised.
The ability to generate funds for the payment of the debt dwindles due to a
number of factors.
Some of the them are related to the product life cycle, where the funds
secured are channelled to the production of a certain product or service.
THE DEBT LAFFER CURVE
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When a country defaults in debt repayment and is classified as in debt
distress.
This will lead to refusal by external financiers to advance more debt.
This refusal lead to the contraction of expensive debt from willing financiers
(who in most cases will be few) with stringent conditions.
Expensive debt further worsens the position of the country in debt.
Usually countries in debt turn to domestic debt mechanisms for survival.
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When the state turns to domestic debt mechanisms for funding, it crowds out
private sector lending.
This in turn reduces the productive capacity of the economy leading to the
building in of inflationary pressures.
When a country breaches the international debt indicators, the liquidity and
solvency indicators, the country will require steep fiscal consolidation coupled
with international community support.
RESOLVING THE DEBT QUESTION – THE HIPC INITIATIVE
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The HIPC initiative is an approach to debt reduction for countries classified as
heavily indebted poor countries pursuing IMF and World Bank, supported
adjustment and reform programs.
The initiative was launched in 1996 by the IMF and World Bank, in support of
poor countries to pay back their loans without hampering their economic
growth potential from unsustainable arrears and penalty charges.
Multilateral organizations and governments have worked together to reduce
the external debt burdens of the most heavily indebted poor countries to
sustainable levels.
The Multilateral Debt Relief Initiative (MDRI) allows for 100% relief on eligible
debts by three multilateral institutions.
These are the IMF, the IDA of the World Bank, and the AfDB, for countries
completing the HIPC initiative process.
To date 36 countries have benefited from the initiative, of those 30 are from
Africa.
STRATEGIES FOR DEBT RELIEF
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Debt refinancing
Borrowing against security of domestic assets.
Debt swaps/conversions alter the original valuation or nature of a debt
instrument.
Debt restructuring involves shifting the composition of external debt from
short-term to medium and long-term debt.
Debt rescheduling of the external debt portfolio has the net effect of stabilising
a country’s creditworthiness.
Debt buybacks are repurchase agreements.
The country sells its debt, at a discount, with an undertaking to repurchase the
debt at a future date.
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ETHICAL ISSUES RELATED TO INTERNATIONAL AID
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The concerns about aid emanate from the motives or reasons for granting aid
and the second is its effects.
Aid may be granted for humanitarian or charitable reasons or as global
responsibility.
It may also be for self-interest or politics which may be immoral.
The aid may be intended to reduce poverty of poor people, feeding hungry
children and coping with emergencies.
It may help a struggling poor country to make better provision for its citizens.
These may have a strong moral basis and moral justification for this aid.
The aid may help an oppressive and vicious government to maintain control
over citizens through widespread violation of human rights.
Such aid would be clearly immoral or at least non-moral.
The mixed case is where aid is given for humanitarian and good reasons with
an intention to help poor people, but the benefits are leaked away from the
intended purpose.
It then support a bad government or an opulent élite in the recipient country.
Aid may be given for a variety of motives covering self-interest, politics, global
responsibility, charity and humanitarianism.
These are mixed and impossible to disentangle and its effects may be equally
mixed.
The 'trickling down‘ of the aid may benefit poor people directly or indirectly but
some will leak away to the rich or powerful.
According to Singer , H. W (1986) 20 per cent of all aid is morally supportable
and about 20 per cent is clearly not moral.
The other 60 per cent belongs to one or other of the mixed cases.
Aid mixture should tilt towards morally justifiable causes.
The ethical or moral case for aid may also be contrasted with the mutual
benefit case.
The first Brandt Report advocate for the principle of mutuality of interest.
The Brandt Report is not inconsistent, for the ethical-moral case and the
mutual benefit case for aid are in no way incompatible.
If they are both true, they mutually reinforce each other.
The self-interest of individuals or firms or countries should also accommodate
the moral principle of the common good.
The following of moral principles to reduce poverty, feeding the hungry,
sharing wealth and income more equitably may address self interest.
Adam Smith applied the principle to trade, not aid.
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OTHER ALTERNATIVE WAYS OF FUNDING PUBLIC GOODS AND SERVICES
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Public services and goods may also be funded from different types of grants.
Grants can be defined as a transfer of money from either a Government or an
international organisation to another government.
It may extend to transfer from a central government to a local authority to fund
a specific project or programme.
Grants can be further defined as non-compulsory current or capital receipts by
a Government unit from either another Government unit or an international
organisation.
Grants are not loans and are not to be repaid but their spending is guided by
the guidelines provided by the grant issuer on that particular grant.
Grants are classified either on the type of unit paying or by whether the grant
is current or capital.
Grants are earned and getting a grant is a competitive process that may entail
hiring the services of professional to craft convincing proposals.
Sources of grants that are recognisable are;
a. From foreign Governments
b. From international Organisation
c. From other general Government units
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Grants from other Government units are eliminated when consolidating
aggregate public finances for the Government in respect of any given year.
Grants that are categorised as current are for the purposes of defraying
current expenditure and are not for CAPEX.
Capital grants are for the acquisition of assets other than inventories.
TYPES OF GRANTS
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There different types of grants which include the formula grants and the
general grant.
The formula grant is a grant disbursed upon a pre-computed and specific
formula, it’s not competitive.
If the organisation or individual meets the formula or specific laid down criteria
they are able to receive the grant e.g. students grants, grants to sub national
Governments.
The General Grant is -criteria based and is not competed for.
They are created with set qualifying criterion.
If the organisation or individual meets the set criteria, the grant is received
e.g. grants to assist drought stricken areas or flooded areas
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PRIVATE PUBLIC PARTNERSHIPS
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Public–Private Partnerships (PPPs) are gaining momentum in public finance
management.
They are widely recognized as important and effective ways to procure public
works with less public financial input and more private participation.
There are a number of interpretations of the concept of PPP.
Various Governments and industrial institutes developed a number of
definitions in America, Asia, Australia, and Europe.
The U.S. National Council for PPP defines PPP as a contractual arrangement
between public and private sectors, through which public services or facilities
are delivered with the sharing of resources, risks, and rewards.
Under the umbrella of PPP contracts, a consortium which is refered to as a
special purpose vehicle will be formed.
Among various PPP types, the most preferred are:
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5.
Build-Own-Operate (BOO).
Build-Operate-Transfer (BOT).
Build Own Operate Transfer (BOOT).
Design-Build-Operate (DBO).
Design-Building-Financing-Operating (DBFO).
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PRIVATE FINANCE INITIATIVE (PFI)
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Private Finance Initiative (PFI) is a public service delivery type of PPP (PublicPrivate Partnership).
The responsibility for providing public services is transferred from the public to
the private sector for a considerable period of time.
PFI, which is considered as a generic classifier for all types of ‘construction’
PPP, is also a means of using private finance and skills to deliver capital
investment projects traditionally provided by the public sector.
Generally in PFI projects, the private sector develops, finances and maintains
an asset used in the delivery of public services.
In return, the public sector pays a monthly charge that covers both the
repayment of the capital investment and the on-going service costs.
This transforms government departments from being owners and operators of
assets into the purchasers of services from the private sector.
DIAGRAM SHOWING TYPES OF PFI PROJECTS
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PFI PARTIES
PFI projects typically comprise three main parties, as follows:
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The Awarding Authority is the public sector client responsible for procuring the
project.
It may be a Central Government Department, Local Authority, or Government
Agency.
The Special Purpose Vehicle (SPV) structure which is created to realise the
project.
It is a limited company (i.e. the project consortia) that is set up for the sole
purpose of delivering the PFI project.
It is responsible for the project from the start to the end of the contract, which
normally spans more than twenty years.
It acts as the management and operating company for the project, and is the
legal owner of the concession that is granted by the public sector.
Third-party funders: such as equity, bank loans, or bonds may finance the
project.
THE KEY PRINCIPLES OF PFI
The Key Principles of PFI are as follows:
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Purchase services not assets
Value for money to the public sector
Project risk management between public and private sectors
Utilizing and incorporating private sector know-how and expertise; and
Incorporating whole life-cycle costing in infrastructure projects
ADVANTAGES OF PURSUING PFI IN PROJECTS
The advantages of pursuing PFI in projects include the following:
1. Projects are awarded in a competitive environment
2. Economic appraisal techniques, including a proper appreciation of risk, are
applied rigorously
3. Risk is allocated between the public and private sector so that the expected
VfM of the services provided to the public is maximized
4. Comparisons made between publicly and privately financed options are fair,
realistic and comprehensive.
5. Improved risk management ― more rigorous risk evaluation and transfer to
the private sector of those risks it is best able to manage;
6. Ownership and whole-of-life costing efficiency is improved because design
and construction become fully integrated up-front with operations and asset
management. On-going service delivery, operational, maintenance and
refurbishment costs become a single party’s responsibility for the length of the
concession period;
7. Innovation ― wider opportunities and incentives for innovative solutions to
deliver services requirements; and
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8. Asset utilization ― reducing cost to government, as a sole user, through more
efficient design to meet performance specifications and by creating
complementary opportunities to generate revenue from use of the asset by
others.
THE DISADVANTAGES OF ADOPTING PFI IN PROJECTS
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It is axiomatic that PFI contributes to the improvement of public services and
infrastructure projects.
It however, like other procurement systems, has its disadvantages.
There are no empirical comparisons in the statistics to show the percentage of
project failure and the effects of some of the disadvantages associated with
PFI on public projects or the end users.
The following are some of the noticeable disadvantages of pursuing a PFI
initiative.
High costs are used to tender PFI projects;
Agreements are brought about through complex negotiations;
Innovation inputs, in both design and construction, could be inhibited, as
contractors become wary of overruns;
The information of project consortia (SPVs) can be difficult as constituent
members have differing objectives;
There are disparity problems between the private and public sector, in terms
of differing modes of operations, decision making and accountability;
The attitude of government, supportive or otherwise, can ease or complicate
the problems;
The cost of finance is quite high, given that governments can borrow money
more cheaply than private firms.
PRIVATISATION
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Privatisation can be defined as the transfer of assets or shares held by a
public body (statutory body or authority or any government agency) or ministry
or department of the Government to the private sector.
This may be through sale, lease, concession, management contract or any
other modality that transfers significant management control, risk or both, to a
private firm.
In the 1980s, policy-makers had a wave of thinking that focused on the notion
that governments should emphasise a small number of their conventional
core activities which inherently is known to belong to government
(maintenance of public order, defence, market regulation).
They should leave a greater number of decisions concerning resource
allocation to the private sector.
In 1979 the British government embarked on a far-reaching effort that lasted
through the 1980s during which nearly all state-owned enterprises in the
competitive sector were privatised.
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THE REASONS FOR PRIVATISATION
If structured appropriately and sufficiently monitored, privatization may:
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secure greater efficiency in the operations of the enterprises;
reduce the drain on government’s fiscal resources;
secure enhanced access to foreign markets, technologies and capital;
widen the ownership base and direct equity participation in the economy
save taxpayers' money through improved efficiencies
increase flexibility in the delivery of services by reducing public sector
bureaucratic tendencies .
7. improve service quality due to focus on customer care.
8. increase innovation driven by the need to generate a profit.
9. It allows policymakers to steer, rather than row.
10. It streamline and downsize government through shedding off non core
activities.
11. It improves maintenance of infrustructure
BUDGETING AND BUDGETARY PROCESS
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Budgetary planning is the process of setting the budget for the next period.
The process is perpetual from year to year with the results of previous period
providing input to the new budget
Budgetary control uses the budgets to monitor actual results with budgeted
figures.
The responsibility for budgets is given to managers and supervisors who are
the budget holders.
The process of budgeting involves various stakeholders who play different
roles.
The diagram below provides an overview of the actors in the Public Finance
management cycle who participate in budgeting.
These are affected and also affect the provisions in the National budget.
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DEFINITION OF A BUDGET
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The term budget comes from a Middle English term “Budjet” which refers to a
king’s bag containing moneys for public expenditure.
The scope of the budget depends to a degree on the field of activities and
programmes of the government.
It must be in a form which allows government policies to be appropriately
scrutinised by the legislature and the public.
The Budget and Budget process passes through four stages which include:
1. budget planning,
2. Budget Preparation,
3. Budget Approval and
4. Budget execution.
PHASES IN THE FINANCIAL CYCLE
The financial cycle involves various phases which include the following:
1. Preparation phase including the Estimates Circular.
2. The Preparing Phase
3. The Approval phase.
4. The Implementation Phases
5. The Review Phase
BUDGETING METHODS
There are various methods of budgeting which can be adopted in public financial
management. These are dependent on various factors and the budget methods
include:
1. The Incremental Method
2. Activity-based budgeting
3. Zero based budgeting.
4. Value proposition budgeting
SYSTEMS OF BUDGETING
There are different systems of budgeting which can be adopted once a particular
budgeting method has been adopted. Various factors may be taken into account in
deciding the best system for a particular project.
The following are some of the systems which may be applied:
1. Line item budgeting
2. Performance budgeting.
3. Programme based budgeting
4. Entrepreneurial budgeting
5. Pooled Budgets.
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BUSINESS CASE IN THE PUBLIC SECTOR
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The business case is a management tool and is developed over time as a
living document as the proposal develops.
The Business Case keeps together and summarizes the results of all the
necessary research and analysis needed to support decision making in a
transparent way.
In its final form it becomes the key document of record for the proposal.
It is also summarizing objectives, the key features of implementation
management and arrangements for post implementation evaluation.
Business cases can cover a wide range of types and levels of spending.
Each case will be developed to reflect the type of proposal being considered.
The effort departments expend on developing the proposal should be
proportionate to the likely costs and benefits.
IMPORTANCE OF BUSINESS CASE
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Policies, strategies, programmes and projects will only achieve their spending
objectives and deliver benefits if they have been sculptured robustly and
planned realistically from the outset and the associated risks taken into
account.
The business case, both as a product and a process, provides decision
makers, stakeholders and the public with a management tool for evidence
based and transparent decision making.
It provides a framework for the delivery, management and performance
monitoring of the resultant scheme.
The business case in support of a new policy, new strategy, new programme
or new project must evidence business case.
The business case development process is key to public value in spending
decisions.
It informs the scoping, options selection, delivery, monitoring and evaluation.
The business case must never be perceived or used as the vehicle for simply
gaining approval for a proposal.
The objective of delivering public value require all five components to be
planned for with integrity and satisfied.
Business cases should be developed over time.
It is an iterative process and at each key stage further detail is added to each
of the five dimensions.
The level of detail and the completeness of each of the five dimensions of the
Case are built up at different rates during the process.
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THE BUSINESS CASE DEVELOPMENT PROCESS
The business case development process follows chronological steps which are as
follows:
Stage 0 - Determining a strategic Policy or Programme which provides the context
through preparing the Strategic Outline Programme (SOP) A single SOP may result
in multiple sub programmes and/or projects.
Stage 1 - Scoping the scheme and preparing the Strategic Outline Case (SOC)
Stage 2 - Planning the scheme and preparing the Outline Business Case (OBC)
Stage 3 - Procuring the solution and preparing the Full Business Case (FBC)
Stage 4 - Implementation
Stage 5 - Evaluation
BUSINESS CASE STRUCTURE
The Business cases can be broken down into 5 different aspects. These are
interconnected but distinct namely:
1. the strategic,
2. economic,
3. financial,
4. commercial and
5. management aspects of the case.
The business case should enable Treasury and other stakeholders to ascertain that
proposals:
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are supported by a robust Case for Change – the Strategic Case;
optimise Value for Money – the Economic Case;
are commercially viable – the Commercial Case;
are financially affordable – the Financial Case; and,
can be delivered successfully – the Management Case.
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All aspects are important but their size will vary from proposal to proposal
depending upon its nature and complexity.
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The less complex business cases particularly those not involving significant
new procurement, new systems or new building construction may need little
or nothing by way of a commercial case and require a less complex
management case.
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PUBLIC SECTOR PERFORMANCE MEASUREMENTS. TRENDS IN
PERFORMANCE MEASUREMENT IN THE PUBLIC SECTOR IN THE 1990S
There are various, major methods and movements to increase the performance of
organizations. The methods were in yesteryears being practiced in the private
sector. In recent years the same methods were replicated in the public sector.
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Each includes regular recurring activities to establish organizational goals,
monitor progress toward the goals.
Some adjustments are then made to achieve those goals more effectively and
efficiently.
There has been much criticism of traditional performance measurements.
This is on the bases that, they are “narrow and easy quantifiable”, “profitbased, their lack of “neutrality” and their lack of “balance”
Contemporary measurements systems have been introduced in the public
sector. These include the following:
1. The Balance Scorecard,
2. Benchmarking,
3. Continuous Improvement,
4. Total Quality Management (TQM),
5. Management by Objectives (MBO),
6. Quality Control Circle (QCC) and also
7. Key Performance Indicators (KPIs).
MAJOR PUBLIC SECTOR PERFORMANCE MEASUREMENT CONCEPTS
MANAGEMENT, EFFICIENCY EFFECTIVENESS AND ECONOMY
The 3Es in public financial management covers Effectiveness, Efficiency and
Economy. These help managers to evaluate performance and improve areas
lagging behind. The 3Es should facilitate improvement of the management of public
funds.
This will ultimately improve delivery of service to the generality of the
citizens. The 3Es therefore form the basis for performance evaluation in the public
Sector.
RURAL AND URBAN LOCAL AUTHORITIES PUBLIC FINANCIAL MANAGEMENT
Public Financial Management in local authorities focus on how the urban authorities:
1. Mobilize revenue and budget ,
2. Spend the revenue,
3. Ensure the oversight function of both the revenue and expenditure
4. Account for the revenue
5. and ultimately the reporting the revenue to stakeholders.
It should articulate the nature and functions of urban councils institutions. These
should be concerned with the sourcing, collection, custody, allocation, and control
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and reporting of public moneys raised and spend in the areas of jurisdiction of the
authority..
STRATEGIES TO ADDRESS VOLATILITY
The strategies for dealing with unpredictable funding treasurers can:
1. The Council should engage donors and grant givers to obtain certainty and
timing.
2. Reduce the number volatile funded projects.
3. Create a reserve fund for channeling resources in deficit areas.
4. Introduce evaluation process for sources before inclusion in budget.
5. Management stakeholder relationships.
6. Introduce controls on pooled budgets using volatile sources.
7. Agitate for decentralization/devolution of resources from central government
to local levels.
8. Improve local capacity to finance own budget.
9. Familiarize with the political dynamics of funding agents.
10. Apply sensitivity analysis before inclusion of a grant in the budget.
11. Familiarize with reporting conditions or spending restrictions.
12. Apply for grants with flexible terms which allow for virement.
13. Accommodate contingency planning in the budgeting process.
14. Improve monitoring and evaluation mechanisms for donor funded projects to
enhance compliance reporting.
15. Predict volatile sources of funding and assess the impact financially and
operationally ahead of any issues.
16. Identify the risky sources and develop early warning signals to stakeholders.
THE USE OF RESERVES TO AMELIORATE VOLATILE FUNDING CHALLENGES
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Reserves are funds put aside (preserved) for future use/purpose by the Local
Authority.
The Councils should ear-mark reserves and ring-fence them for specific
projects.
Capital receipts should be invested into reserves to generate income from
interest.
Capital expenditure should be financed directly from a capital reserve.
Local authorities can ‘earmark’ specific parts of the general reserve for
specific projects.
In public service organisations capital income and capital reserves can only
be used for capital projects; they cannot be used to plug gaps in the revenue
budgets.
The chairman of Council should identify projects threatened by funding.
The interests from capital reserves should be ring fenced for volatile projects.
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CORRUPTION AND ITS IMPLICATIONS ON PUBLIC FINANCE MANAGEMENT
DISCUSSION
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Corruption affects adversely the efficiency and effectiveness of delivering
public goods and services.
It diverts resources, weakens planning of public goods and services and
undermines the confidence in the public sector.
It leads to a sub-optimal allocation of resources and a lower level of social
welfare.
A weak public financial management (PFM) system leaves the door open for
corruption.
This will damage public finances, public confidence in the government, the
delivery of services, and the provision of public goods.
It diverts public funds to unlawful ends, and reduces political competition,
democratic and economic development, social equality, and the rule of law.
PFM encompasses everything about public finances and government
spending covering the following:
Revenue mobilization and collection (e.g. taxation and customs)
Budget preparation and resource allocation
Budget execution and spending (e.g. procurement and payroll)
Accounting and auditing of government expenditures (e.g. internal and
external controls)
Government spending or expenditure includes all government consumption,
investment, and transfer payments.
It can be substantial both in terms of government spending per person and in
terms of percentage of the country’s overall economy (GDP).
Every country has a public financial management system whether
rudimentary or sophisticated.
It ranges from simple money-in, money-out cash-based systems to
sophisticated, digital, all-encompassing systems that cover every transaction
from tax to service.
In terms of the simple systems, a few individuals at the top of the state may
control it all.
POLITICAL WILL IN CORRUPTION ERADICATION
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The technical measures and institutional reforms have a limited effect on
public sector corruption.
These reduce bureaucratic and petty corruption but they will not reduce
political corruption.
The PFM reforms require political support to have any significant impact on
corruption.
This requires government players to reduce their own extraction possibilities.
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Corruption in PFM is a political corruption problem as it includes extractive
and high-level corruption, rent-seeking, and illegal extraction.
Corruption is driven by regime survival by re-investing in prolonging powerpositions.
Corruption in PFM is a problem of politics and governance.
Corruption by procurement officials may not only be driven by greed and
principal-agent problem.
Public finances are IMPORTANT source for political patronage.
The corruption perpetuate the clientelist and neo- patrimonial system.
These intertwined dynamics sustain the power of particular governments or
ruling parties.
The democratic principles of checks and balances, separation of powers,
transparency and accountability are possible mitigation strategies.
Participatory anti-corruption approaches that include public service users are
also important.
Controls by civil society, media, and independent oversight and control bodies
may play a crucial role.
COSTS, PITFALLS AND TRADE-OFFS
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Public sector reforms for anti-corruption effect may be counter- productive.
Fiscal decentralization may lead to decentralized corruption which is harder to
contain than centralized.
Privatizations and indigenization may lead to rent-seeking, graft, clientelism
and favoritism.
The anti-corruption reforms may inadvertently strengthen the control and
legitimacy of a corrupt government.
The government may have no intentions to change the system of extractive,
political corruption.
CORRUPTION IN PROCUREMENT
Ware, et. al. (2007) classified corruption within the procurement system.
1. Kickback Brokers manage the payment of fees in large public procurements
and ensure payments to facilitate the winning bid.
2. Bid Rigging involves the manipulation of public procurement to secure a
favorable outcome for one supplier. This involves Bid-suppression, collusion
or coercion amongst bidders to ensure there is only one competitive bid.
3. Complementary bidding is collusions amongst bidders and officials to submit
token bids intentionally higher than the winning bid
4. Bid rotation involves agreement amongst bidders to cycle bids amongst
regular contracts to win.
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Market allocation involves dividing up areas amongst suppliers to limit
competition.
Low-balling is collusion with public official to establish a low contract price
which is revised upwards after winning.
Front or Shell Companies allows officials to participate in the process of
bidding.
The winning company is connected to the official concerned.
Other fraud types include misrepresentation of facts where public officials
collude with bidders.
They misrepresent the facts of the actual tendering process and favour one
supplier.
The splitting of bids to keep the contracts small excluding larger suppliers
from bidding and enable smaller suppliers to bid for multiple contracts
PEFA scores may influence corruption levels
FINANCIAL INDICATORS FOR SEPS
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Financial indicators are the standard measures of entity performance.
They are derived from financial statements and depend on the quality of those
statements.
The indicators used may include:
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The revenues generated and its growth rate.
The profits generated and and return on equity.
Comparison of the various indicators against benchmark institutions.
Economic value added taking cost of capital into account.
Liquidity, solvency and gearing ratios and their changes.
The capital adequacy ratio and interest cover.
The amount of non performing loans
Changes in borrowings etc
LIMITATIONS OF FINANCIAL INDICATORS
Some limitations are as follows:
1. Financial indicators are useful only when comparison is made between two
entities in the same area of operation.
2. Different state entities apply different financial reporting frameworks for
identical transactions.
3. The indicators may need to be adjusted to accommodate the differences.
4. The management's ability to change assumptions potentially allows them to
manage their indicators by changing accounting assumptions. This may
impairs the comparability of financial ratios.
5. The financial indicators explains relationships between past information but
users are concerned about current and future information. The calculation
methodology is not standardized.
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NON-FINANCIAL INDICATORS
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Non-financial indicators may be linked to the mandate and strategic goals.
The public sector enterprises are mostly concerned about the service delivery
which can be better evaluated by non-financial indicators.
The non-financial indicators may include the following:
1. Compliance with environment standards and ISO
2. Indices for labour turnover, number of accidents, absenteeism and union
relationships.
3. Board composition, compliance issues and internal controls.
4. The non-financial evaluation communicate to the mandate and are more
appropriate for the public sector. This is more relevant to SEPs as their
operations have certain considerations.
PRACTICE REVISION QUESTIONS
The questions assist in presenting evidence on our understanding of Public Financial
Management.
QUESTION NUMBER ONE ON BUDGETS.
A government department has prepared its annual revenue budget on an
incremental basis for many years but is now exploring whether alternative methods
may be more appropriate. The government has strong taxation and social benefit
regimes in place, including income tax payable on earnings and benefits paid for
those looking for employment.
Unemployment has increased to the highest level in a decade. The country is
currently experiencing inflation at 16%, which is higher than expected. Services
provided by the government department are typical for the public sector, with many
being statutory and qualitative objectives being set, such as public satisfaction.
The majority of staff within the government department have worked there for many
years, with little experience outside the department.
The department tends to be rather cautious and takes its time over matters. The
current information system has been in place for many years and is rather simplistic
but meets current requirements.Central government tends to have a hands-off
approach, leaving the department to run itself.
Required
a) Identify and explain the influences or constraints that have adversely affected
the budgeted funds available for the forthcoming year. (4 marks)
b) Discuss the advantages and disadvantages of the government department
adopting zero-based budgeting. (8 marks)
c) Explain how the government department could apply performance-based
budgeting. (8 marks)
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ANSWER
a) Identify and explain the influences or constraints that have adversely
affected the budgeted funds available for the forthcoming year. (4
marks)
(a) The government will be restricted to set the revenue budget within affordable
limits. Inflation being higher than expected will mean that the cost of items within the
revenue budget is likely to be higher than expected and higher than the previous
year.
Increased unemployment levels will also impact on the revenue the government is
likely to receive and increase their expenditure. Revenue from income taxes will be
reduced as the number of workers who are now unemployed so will not be paying
income on their earnings has increased.
Additionally, many of these unemployed individuals will consequently claim benefits
which will then increase the government’s expenditure.
b) Discuss the advantages and disadvantages of the government
department adopting zero-based budgeting. (8 marks)
(b) Zero-based budgeting (ZBB) is a method of budgeting that requires each cost
element to be specifically justified as though the activities to which the budget relates
were being undertaken for the first time.
One advantage of ZBB is that it would enable the government department to identify
and remove inefficient or obsolete operations that may be simply carried forward with
incremental budgeting.
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ZBB would also force employees to avoid wasteful expenditure, as well as
increasing motivation.
ZBB responds to changes in the business environment, so would help the
government department respond to the implications of high inflation and
increased unemployment, such as reduced income from taxes and increased
costs or social benefit payments.
Overall, the ZBB documentation provides an in-depth appraisal of an organisation's
operations, enabling the government department to challenge the status quo and
enable more efficient allocation of resources.
The major disadvantage of ZBB is the volume of extra paperwork created,
particularly in comparison to the government department’s existing incremental
approach.
The government department would need to continually assess and update the
assumptions about costs and benefits for all activities, as well as for any new
activities that emerge.
Managers within the government department may then feel under pressure to
respond to unforeseen opportunities and threats that arise that were not included
within the original ZBB ranking assessment.
Implementing ZBB is also very complex, particularly compared to the department’s
incremental approach, and the existing staff are unlikely to have such skills having
worked in the public sector for many years.
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The department may, therefore, need to invest in managers being trained in ZBB
techniques which will be costly both financially and time wise. Even with training,
ZBB can be difficult to undertake particularly due to the nature of the public sector.
The government department is required to provide statutory services meaning that
managers will need to rank activities based on qualitative rather than quantitative
benefits.
The government department’s information system is old and simple. This means it
may not be capable of providing suitable information and may need investment to
upgrade and make it suitable.
c) Explain how the government department could apply performancebased budgeting. (8 marks)
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Define performance-based budgeting (PBB)
Identify three types of PBB
Explain application of different PBB types
Identify and explain implementation of PBB (eg top down, incremental)
Performance-based budgeting is an approach to budgeting that links allocated
funds to measurable results.
There are different ways of applying performance based budgeting, such as
presentational performance budgeting, performance informed budgeting or
direct performance budgeting.
To apply presentational performance budgeting, the government department
would need to present performance information in budget documents or other
government documents.
Performance-informed budgeting is where resources are indirectly related to
proposed future performance or to past performance.
So, when setting the budget, the government department would need to
review past or targeted future performance and use this as a base on which to
allocate resources.
Direct performance budgeting is where resources are allocated based on
results achieved, so the government department would assess past
performance and use this as a base to allocate resources.
To measure performance, the government department could use outputs of
the services being delivered, or outcomes which are the expected results from
delivering these services.
Implementation of performance-based budgeting could be led by central
government as a top down approach.
It may also be developed, implemented and reviewed by the
government department itself which would be a bottom-up approach.
The bottom-up approach would appear to fit more closely with current
arrangements.
Additionally, the government department could choose to fully move from
incremental to performance-based budgeting completely from a set date and
across the full department or even government.
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Alternatively, performance-based budgeting could be implemented gradually
over several years, perhaps for certain activities or sections of the
department.
QUESTION NUMBER TWO -- ON AUDITING
The Auditor General is preparing for a forthcoming audit of the government's
consolidated financial statements, comprising central and local government entities.
The audit will include visits to individual public sector entities to audit their separate
financial statements as well as the government’s consolidated financial statements.
The government entities expect their policies and procedures to be reviewed, as well
as an assessment of whether their expenditure is within the law. At the end of the
audit, the government expects to be provided with an opinion on their adherence to
relevant laws, regulations and procedures, as well as a view on the information
included within the consolidated financial statements.
Required
a) Identify and explain the different types of external audit that may be applied to
the above scenario. (4 marks)
ANSWER
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There are three main types of external audit; financial, compliance and
performance.
A financial external audit involves the external auditor examining an
organisation's financial statements and providing a view on the fairness of the
information presented.
The audit of the government's consolidated financial statements comprising
central and local government entities would be a financial external audit.
A compliance audit is concerned with whether the audited body has complied
with relevant regulations and standards.
The review of policies and procedures expected by the government entities,
and whether their expenditure is lawful, would be part of a compliance audit,
along with the opinion provided on adherence to laws, regulations and
procedures.
Performance audits or value for money (VFM) audits involve external audit
providing an independent review on whether a particular service is
economical, efficient and effective.
Such an audit would be applicable to services provided by the central and
local government entities, but there is no suggestion the forthcoming audit will
involve a VFM element.
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QUESTION NUMBER FOUR --- ON ECONOMIC CRISIS AND MARKET FAILURE.
A country is currently experiencing an economic crisis, with an ongoing recession
and increasingly high inflation, and the government is under pressure to take action
to stabilize the economy.
Of particular concern is the lack of cash that members of the public, including
workers and those on social benefits, have resulting in a generalized reluctance or
inability to spend which is adversely affecting the economy further. The country has
an established social benefits programme but historically it has been extremely
difficult for even eligible people to be awarded benefits due to complex and stringent
application and assessment processes. Employers are permitted to pay workers any
wage, with no national minimum wages set.
There is varied employment across the country, with some areas experiencing low
unemployment while other areas have very high unemployment. Unemployment in
some areas is linked to the reduction in mining, with the last mine due to close in the
next six months.
This will result in the loss of employment for 1,000 members of a rural, close knit
community who have few, if any, skills appropriate for other industries. Over recent
years, there has been a significant rise of unhealthy eating, particularly sugary foods.
This is thought to be partly linked to the low cost of sugary snacks and financial
pressures many members of the public are under. The resulting increase in obesity
and associated health problems has reached the point where the government has
decided they must act.
Required
a) Explain the measures that the government could adopt to help stabilise the
economy. (6 marks)
b) Discuss the market failures apparent in the above scenario and suggest methods
the government could adopt to address them. (14 marks)
POSSIBLE RESPONSE FOR THE QUESTIONS.
Explain and apply example direct control measures
Explain and apply example indirect control measures
Explain market failure and identify market failure examples
Explain demerit goods and apply to sugary food
Methods to address sugary food market failure
Explain geographical and occupational factor immobility and
mine workers apply to
Methods to address factor immobility
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DETAILED SOLUTION
a) The government could apply direct or indirect control measures to help
stabilise the economy.
Answer - (a) explain the measures that the government could adopt to help
stabilise the economy. (6 marks)
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Direct control measures the government could adopt include freezing salaries
and prices, setting minimum wage legislation or rationing certain goods.
In this scenario, with the government keen to encourage the public to spend,
freezing prices of goods and establishing a minimum wage legislation may be
useful.
The government could alternatively apply indirect control measures, such as
through taxation.
For example, tax rates could be amended and social benefits programmes
extended to increase the ability of taxpayers and benefit recipients to spend
through having more cash available.
This in turn would stimulate the economy.
Answer - (b) discuss the market failures apparent in the above scenario and
suggest methods the government could adopt to address them. (14 marks)
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Market failure is where the operation of the markets distorts the economic
outcome, thereby justifying government intervention to improve the situation.
There are different types of market failure, where government intervention can
improve efficiency.
Examples of market failure include demerit goods, such as low-cost sugary
food; merit goods, such as healthy food alternatives; and factor immobility,
such as geographical and occupational due the mine closure.
One type of market failure is the availability of low-cost sugary foods which
may be deemed demerit goods, as they are thought to be bad for the
consumer.
There is widespread obesity and associated health problems in the country,
resulting from excessive consumption of low-cost sugary foods.
Consumers of demerit goods, such as sugary foods, may underestimate the
disbenefits to themselves due to lack of information.
Therefore, the government could act to discourage the consumption of sugary
foods such as through a health campaign to warn people of the harmful
effects of sugary foods and resulting obesity.
Alternatively, the government could introduce an additional tax charge on
sugary foods, which would deter people purchasing them by making them
more expensive.
Factor immobility relates to the occupational or geographical immobility factor
of production and is another market failure example that is evident in this
country.
The closure of the last mine is likely to result in factor immobility, particularly
occupational immobility as the mine’s employees are not trained for any other
type of employment.
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With so many people losing their jobs, there is likely to be high unemployment
in the region.
As this last mine is based within a close knit community, there may also be
geographical immobility as workers may not want to move away to other
areas to find work.
To address factor immobility market failure, the government could provide
funds and support initiatives, such as to provide retraining opportunities or
subsidise relocations to other areas of the country where additional labour is
required.
QUESTION NUMBER FIVE --- ON TAX STRUCTURE AND BASE.
A country has an established tax regime in place but is under calls for this to be
reviewed and updated. All workers within the country are required to pay 25% of
their earnings in tax, irrespective of the amount they earn and whether they work
part-time or are self employed.
There are calls for this tax to be changed to where the rate paid increases in line with
earnings, such as high earners paying 30% and lower earners paying 20% tax.
However, the government is reluctant to change the existing tax regime. Another tax
of 15% is applied to any point in a supply chain, when value is added to any goods
or services.
Individuals purchasing any goods or services, other than medical or educationrelated, will have the 15% value added tax included in the cost of the goods or
services purchased.
Required
Explain which tax bases and tax structures the government has adopted in the
above scenario.
RESPONSE TO THE QUESTION.
Suggested answer
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A tax base is the value of assets, property or equivalent which are subject to a
specific tax.
An income tax base is where tax is levied on earnings, such as salaries and
wages. For example, all workers are charged a flat rate of 25% of their
earnings irrespective of the amount they earn or how they work.
An expenditure base is where taxes are paid on what somebody spends. For
example, value added tax is a tax added to all goods and services at each
point in the supply chain where value is added to a good or service.
Certain goods and services, such as medical supplies are exempt.
Tax bases and rates set may be linked to the type of tax structure adopted.
Tax structure may be progressive, regressive or proportionate.
Progressive taxes represent a larger proportion of an individual's income as
that individual's income rises.
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They are seen as fairer as they are based on an individual's ability to pay.
The calls for the tax payable on earnings to move to 30% for high earners and
20% for low earners would be a progressive tax.
Regressive taxes are where the taxes paid is a larger proportion of poorer
individual's income than a richer person.
The value added tax of 15% added to all goods and services is an example of
a regressive tax.
The amount of tax payable does not depend on the level of income or ability
to pay of the consumer.
A proportionate tax (or flat rate tax) is where a single tax rate applies.
The tax of 25% payable on all earnings by every worker, irrespective of how
much they earn or what type of work, is an example of proportionate tax.
There are arguments both for and against the fairness of proportionate taxes
QUESTION NUMBER SIX --- ON SUPPLY CHAIN
The Ministry of Education, a department of central government, is planning to
replace their office furniture, specifically desks and office chairs. This replacement is
part of the ministry’s non-current asset strategy which requires such assets to be
replaced every 15 years.
All of the ministry’s office chairs and desks are due to be replaced within the next six
months with the old furniture being scrapped. There are 260 members of office staff
employed by the ministry of education, located at four different regional offices
across the country.
Each member of staff is required to have their own office chair and individual desk.
The human resources department undertakes periodic health and safety checks to
ensure that all the equipment that staff use meets national health and safety
standards.
The ministry of education uses a central procurement facility that holds
a list of approved suppliers. The majority of the ministry of education’s purchases are
obtained through suppliers on this approved list.
At each of the ministry’s four locations, there are members of the facilities
management team who are responsible for moving furniture, receiving deliveries and
arranging for the removal of waste.
Required.
Explain how the components of the supply chain would apply to the above scenario.
Total (10 Marks)
RESPONSE TO QUESTION ON SUPPLY CHAIN.
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Define the supply chain 1
Identify components of the supply chain 1
Explain planning component of the supply chain and relate it to the scenario 2
Explain sourcing component of the supply chain and relate it to the scenario 2
Explain logistics component of the supply chain and relate it to the scenario 2
Explain return component of the supply chain and relate it to the scenario 2
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SUGGESTED ANSWER.
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The supply chain is the sequence of processes involved in the production and
distribution of goods or services.
The supply chain comprises the four key elements of planning, sourcing,
logistics and return.
The first stage of the supply chain is planning, which relates to the overall
strategy.
The Ministry of Education should have this in place in relation to meeting
requirements and needs.
This stage may also include specifying desired or acceptable quality
standards for resources.
This should address he Ministry’s requirements for the office chairs to meet
health and safety requirements.
There is also the need for each employee to have their own individual office
chair and desk space.
The second stage of the supply chain is sourcing which involves choosing the
supplier from which the office desks and chairs will be obtained.
The Ministry of education has already made decisions on when the
replacement office furniture is needed (within the next six months) and that
260 office chairs and 260 desks are required
This information can be used by the ministry of education to obtain quotes
from suppliers in order to select a supplier offering best price.
This should also meet the requirements previously specified.
The ministry’s central procurement facility should oversee this process, which
is likely to be based around the existing list of approved suppliers.
The third stage of the supply chain is logistics, which involves the suppliers
receiving the orders placed by the ministry of education and then the ministry
receiving the office furniture.
Due to the number of office chairs and desks being ordered the ministry will
need to carefully plan how, where and when the chairs and desks are to be
delivered (eg how many to each location).
This should cover the practicalities of removing the old office furniture to make
room for the new furniture.
Timing will be critical as the ministry of education will want to avoid staff being
left without chairs and desks for any significant length of time.
The facilities staff will undertake the physical movement of furniture and
disposal of old furniture.
The final stage of sourcing is the return stage. On receipt of the office
furniture, the ministry of education should thoroughly check that all the chairs
and desks are not damaged and that the adjustment functions of the chairs
work correctly.
Any damaged or faulty furniture should be returned to the supplier. The
ministry should ensure that any returns are either appropriately refunded or
replaced and should ensure that such arrangements are permitted prior to
ordering with any individual supplier.
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QUESTION NUMBER SEVEN .
Public Sector Accounting is governed by laws, regulations and financial reporting
standards that provide a basis for preparation of Public Sector financial reports. The
Government expenditure involves the spending of money on roads, education,
health, and salaries and loans to public sector employees among others.
Required:
Explain the main objectives of the International Public Sector Accounting Standards
Board (IPSASB)and distinguish between direct expenditure and recoverable
advances giving an example of each. (10 marks.)
Objectives of IPSASB
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Develops accrual-based standards used for the preparation of general
purpose financial statements by governments and other public entities.
Enhance the quality, consistency and transparency of public sector financial
reporting worldwide.
Promoting the adoption and international convergence to IPSASs
Strengthening public financial management and knowledge globally through
increasing adoption of accrual based IPSASs.
Developing other publications for improvement of public sector financial
management and decision making.
Publications are meant to increase awareness and transparency in the way
public resources are to be managed and to ensure governments are able to
meet their future commitments.
Providing guidance on issues and experiences in financial reporting in the
public sector.
Direct expenditure
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This is a type of expenditure charged to a particular Head as approved by
parliament and reflected in the Estimates of Revenue and Expenditure for that
financial year.
This includes personal emoluments, recurrent departmental charges, grants
and capital expenditure.
Recoverable advances
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This refers to payments which cannot presently be charged to any direct
expenditure code allocation.
This includes loans, advances, interest.
These are amounts owed to government by individuals or institutions which
are repayable over a period of time as outlined by the terms and conditions of
service and other circulars issued by government.
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QUESTION NUMBER EIGHT – FINANCIAL SYSTEM OF GOVERNMENT
You have been working as senior accountant at the Ministry of Finance and four new
accounts officers have just been recruited to the Ministry. As a graduate holder of
Diploma in Public Sector Financial Management, you have been requested to brief
the new recruits over the following matters as the ministry is preparing for the 2021
budget presentation to Parliament:
a) The main functions of a government Financial Management System. (10
marks)
b) The role of the legislative framework in the Financial Management System of
the government. (4 marks)
c) The main processes of the Financial Management System. (6 marks)
a) Functions of government financial management system include:
1. Macro-fiscal planning which involves the establishment of policy objectives,
needs for financial resources and a forward-looking strategy for revenue and
expenditure. The fiscal plan would comprise statements of government
objectives; a resource framework for the plan period and implementation
program during the period.
2. Budget preparation involves allocating resources to various wings of the
government in order to achieve objectives of the government. It is a tool for
managing national economy, and fiscal planning and controlling the use of
funds to ensure government objectives are met.
3. Budget implementation follows budget approval by the legislature. It involves
allocation of funds to specific areas and execution of budget in those areas.
4. Budget monitoring and evaluation provides feedback to the fiscal planning
and policy area. The feedback helps financial managers to adjust planned
activities for the forthcoming periods.
5. Cash management involves provision of an up to date picture of the amount
of cash in government accounts and amount of cash needed. Cash
management compares data from cash flow forecasts and fiscal reports to
data on cash balances, government bonds, treasury bills and cash deposit
maturities.
6. Debt management involves managing all transactions relating to external
loans. It serves as the mechanism for calculating the future cost of servicing
the debt.
7. Foreign aid management Financial Management Systems matches aid
agencies to projects and oversees the process of project negotiations and
implementation.
8. Revenue administration Financial Management Systems are government’s
tool for execution of tax policies through the levy and collection.
9. Accounts administration involves government assembling and analyzing
accounting information to help it to control business, safeguard assets and
prepare financial statements that comply with legislation.
10. Auditing involves the reviewing of the accuracy and reliability of financial
information produced by financial management functions.
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b) The role of the legislative framework .
• Financial management functions and processes are derived from and must
adhere to a legislative and regulatory framework or control structure as
follows:
• Legislation and financial instructions help to define the functional areas that
govern financial management.
• Instructions detail controls needed to ensure that transactions are properly
authorized and documented.
• They should not exceed the amount of money assigned for the purpose.
• Legislation also requires that revenue received by the government is first paid
into a Consolidated Revenue Fund, and any expenditure from the fund is
formally authorized and appropriated.
• Regulation specify the standards and procedures to be followed when
carrying out functional processes.
• Some controls specific to this role are:
i.
Controls at document and transaction level.
ii.
Controls on access to ensure that only authorized personnel can record,
change and report information.
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Controls over the entire system to ensure that it embodies the established
processing standards.
• It is therefore very important for an accounting officer to thoroughly
understand laws, regulation and controls they need to apply when analyzing
financial management system.
c) The main processes of the financial management systems include:
i)
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budget preparation process involves:
making initial budget allocation to agencies and programmes
issuing budget call circular containing budget ceilings and guidelines
receiving and analyzing annual budget submissions.
preparing draft budgets.
finalizing budget
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budget implementation and cash management process involves:
preparing expenditure plans
preparing cash flow forecasts
release funds to agencies
receive budget authorization and execute programmes and projects.
process payroll and pensions .
procure goods and services
This will involve sub-processes of requesting goods and services, authorizing
expenditure, committing funds, issuing purchase orders, verifying receipt of
goods and services, receiving bills/invoices, authorizing payment.
Monitor cash flows and expected cash requirements.
This will include receiving expenditure plans, receiving revenue forecasts,
preparing overall cashflow forecasts, monitor revenue inflows and monitor
maturities.
Issue and redeem government securities etc.
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iii)
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accounts administration and auditing process involves:
administration of payment and receipt system.
administration of general and budget ledger
carrying out account reconciliation
develop costs for programmes and projects
audit government accounts
QUESTION NUMBER NINE – STAGES OF BUDGET EXECUTION.
(A) budget execution is a critical activity in the budget cycle conducted to ensure that
government plans and objectives are achieved in accordance with the
macroeconomic policy framework.
Required:
Describe the different stages of budget execution stating who is responsible for
budget execution and how the budget appropriations may be revised during the
year? (20 marks)
The Stages of Budget Execution include:
a) Authorization stage involves budget approval by parliament and Ministries are
authorized to spend money consistent with the legal appropriation.
b) Release of funds consistent with approved warrants
c) Commitment of funds for future obligation to pay costs incurred, reservation
made to put aside an allotment for future expenditure.
d) Verification of goods delivered/services rendered in accordance with contract.
The Ministries have the responsibility to verify that supply was made.
e) Payment is processed through cash, Cheque or electronic transfer.
f) Accounting facilitate the recording of transactions in the books after
reconciliations have been done.
Responsibility for budget execution
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Controlling officers in Ministries ensure spending is within regulatory control
set by the Ministry of Finance
Budget revisions
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During the year reviews are done as follows:
This may be done through virement or variations by declaring savings in one
line to supplement another line.
Authority to vary funds is authorized by the office of the Secretary to the
Treasury.
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QUESTION NUMBER TEN – BUDGET DEFICITS (15 MARKS)
In government, a budget is an authorized financial plan of the anticipated revenue
and expenditure of a Government. It is a document that is developed for the financial
operations of a nation.
Budgeting is the process of putting together the financial information that will enable
the nation to plan and execute its set goals and objectives. It is the process of putting
together the financial demands of Government institutions.
Required
a) Why does the Zimbabwean government operate persistent budget deficits (5
marks)
b) When does a deficit become unsustainable? (5 marks)
c) When would a public entity best use a line item budget and when would a
programme Budget is best? (5 marks)
QUESTION NUMBER LEVEN -- THE BUDGET CYCLE
The budget cycle has four distinct stages.
Required
a) Identify the four stages
(4marks)
b) Distinguish between local authorities and central government budget cycle
processes (6 marks)
c) Identify and discuss the stakeholders involved in the budget cycle for the
central government and local government
(5 marks)
QUESTION TWELVE – PUBLIC DEBT MANAGEMENT (15 marks)
Public Debt Management Act (Chapter 22:21) main objectives is to provide for the
management of public debt in Zimbabwe; to establish the Public Debt Management
Office on a statutory basis and provide for its functions and administration; to provide
for the raising, administration and repayment of loans by the State and for the giving
of guarantees in respect of certain loans …..
Required
a. Define public debt
(5 marks)
b. Discuss the functions of the debt management office
(10 marks
•
According to Section 5 (1) of the PDM Act the Office shall be responsible for
debt management operations relating to the public debt.
• The functions of the Office shall be toa) prepare and publish a Medium Term Debt Management Strategy.
b) prepare and publish an annual borrowing plan which includes a borrowing
limit.
c) advise the Minister on all Government borrowings, and participate in all
negotiations with creditors on Government borrowings and guaranteed loans;
d) undertake annual debt sustainability analyses;
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e) assess the risks in issuing any guarantees, including assessing the capacity
of the beneficiary of a guarantee to repay the loan.
f) prepare annual reports on outstanding guarantees. Facilitate the recovery of
any payments including interest and any other costs incurred by Government
due to the honouring of outstanding guarantees;
g) assess the credit risk in any lending, and prepare reports on the method used
for each assessment and the results thereof for the attention of the Minister;
h) prepare reports on the debt of local authorities and public entities. Monitor and
keep track of debt levels of all local authorities and public entities;
i) store all original loan agreements and debt administration records in relation
to the public debt;
j) compile, verify and report on all public debt arrears, especially Government
public debt arrears.
•
•
•
•
•
k)
l)
m)
n)
o)
p)
q)
r)
s)
•
•
Design a strategy for the settlement of debt arrears.
Maintain and keep timely, comprehensive and accurate records of
outstanding public debt, guarantees and on-lending.
compile data on all debt servicing obligations of the Government, local
authorities and public entities.
Prepare and publish debt statistical bulletins in relation globally or on a
selective basis as required.
validate and reconcile debt data concerning creditors of the Government of
Zimbabwe;
prepare forecasts on Government debt servicing and disbursements as part of
the yearly budget preparations;
prepare balance of payments projections;
monitor and evaluate projects funded or partly funded by public debt to ensure
that borrowed funds are used for their intended purposes;
prepare annual report on Government debt management activities.
operate as the Secretariat to the External and Domestic Debt Management
Committee.
act as the principal adviser in the development of domestic capital markets
and issuance of domestic and external debt securities on behalf of the
Government of Zimbabwe;
assess, monitor and report on any other implicit and explicit public sector
contingent liabilities and advise on their management;
maintain and administer a secure computerized debt management information
system;
initiate, facilitate and monitor disbursements on borrowings and on lending;
and analyse requests from local authorities and public entities for borrowings.
Advising on a debt and borrowing strategy and implement it.
Recording debt information and preparing reports.
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QUESTION THIRTEEN – IMPLEMENTATION OF IPSAS (15 MARKS)
The ongoing sovereign debt crisis in several countries around the world has
demonstrated the challenges of maintaining financial stability for these governments.
Many governments are exploring the adoption of accrual-based accounting
frameworks in order to improve their decision- making ability to prevent and respond
to these issues.
International Public Sector Accountancy Standards (IPSAS) is considered the
definitive set of accrual-based international accounting standards for the public
sector.
Required
a. What are the practical steps the Zimbabwean government needs to take to
fully implement International Public Sector Accounting Standards? (7 marks)
b. What are the possible impediments likely to arise in the process and how
should they be addressed. (8 marks)
QUESTION THIRTEEN
The next assignment as the accountant in charge of the Expenditure Unit is to assist
the Director of Finance in the ministry set up a budget committee. You have also
been asked to review the recently issued 2019 -2021 Budget Call Circular.
As the secretary to the Budget Committee, you have been asked to make a
presentation to the members of the committee covering the following issues:
Required
i)
ii)
iii)
Briefly explain the Medium-Term Expenditure Framework (MTEF). (5
marks)
Briefly explain the Budget Call Circular and explain the difference between
Call Circular and the MTEF. (3 marks)
Briefly describe two (2) methods of Budgeting that government can use in
preparing the annual budgets. (2 marks)
ANSWER - RESPONSE TO QUESTION ON MTEF
•
•
•
•
•
•
The Medium Term Expenditure Framework is also known as the Green
Paper.
It is a consultative document based on the long term Vision and National
Development Plan of the country.
It outlines governments fiscal and macroeconomic targets including total
revenues and expenditure projections for the next 3 years .
It sets out priority areas of expenditure and resource mobilization and
allocations.
It includes strategies in growing the economy, mobilization of resources and
spending areas.
It links policy making, planning and budgets
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RESPONSE ON BUDGET CALL CIRCULAR
•
•
•
•
The Call Circular is also known as the Budget Circular .
The Call Circular is a budget manual aimed at providing guidance to
Ministries, Provinces and Spending Agencies.
This is in respect of preparing the Medium Term Expenditure Framework
(MTEF) and 2019 Annual Budget estimates of revenue and expenditure.
The difference is that the MTEF is a 3 year projection whilst the Call Circular
is an annual estimation which forms part of the MTEF.
RESPONSE ON BUDGET METHODS.
•
Incremental Budgeting is a budgeting system where a budget is prepared
using a previous period’s budget or actual performance as a basis with
incremental amounts added for new budget period.
• Only incremental amounts are added to arrive at the new amounts so as to
allow for small increases in amounts.
• Program Budgeting s a budgeting system that describes and gives the
detailed costs of every program that is to be carried out with a given budget.
• The budget only includes revenue and expenses for a specific program.
Zero-based Budgeting is a method of budgeting in which all expenses must
be justified for each new period.
• Every function within an organization is analyzed for its needs and costs, so
budget starts from a zero base.
• Activity Based Budgeting is a method of budgeting designed to provide
greater transparency into the budgeting process.
• In its most basic form, it’s a method of budgeting based on activity framework,
using cost driver data in the budget setting.
• It follows the following steps:
i.
Identify activities and their cost drivers
ii.
Forecast the number of units of cost driver for the required activity level.
iii.
Calculate cost driver rate.
•
•
•
•
Output Based Budgeting is a wide-ranging management technique that is
used to measure performance through budget.
It is like a progress card on what various ministries and departments have
done with outlays announced in the annual budget.
Performance Based Budgeting is an approach to budgeting that reflects the
input resources and the output of services for each unit of an organization.
It is commonly used by the government to show the link between tax payer’s
money and outcome of services provided by government from same funds.
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QUESTION NUMBER FOURTEEN ON TOTAL DEBT
Debt Management is a key component of Public Finance Management that enables
the Government meets its financing needs at minimum costs and within acceptable
levels of risk.
One of the diagnostic tools that Government uses in managing its debt portfolio is to
annually conduct a Debt Sustainability Analysis (DSA).
Required
a) Explain what constitutes “Total Public Debt?” (2 marks)
•
Total Public Debt External debt, Domestic Debt, Guarantees, Contingent
Liabilities including debt owed by central and local government and by public
(state-owned) corporations. External debt is debt owed to lenders outside the
country, e.g. Euro bond while internal debt is the government’s obligations to
domestic lenders.
b) define the term debt sustainability and state the main objective of
conducting a debt sustainability exercise. (5 marks)
•
•
•
•
•
•
When government is able to service all its debts without undue stress or
adjustments to its income and expenditure balance in the medium to long
term.
Debt is sustainable when government’s current and future streams of income
covers expenditure.
The objectives of DSA:
To evaluate government’s ability to finance its programs and at the same time
service the ensuing debt without undue pressure on its income stream
compromising the macroeconomic stability of the country.
To reduce chances of excessive build-up of debt To recommend for a
borrowing that limits risk of debt distress.
To help guide countries and donors in mobilizing critical financing for lowincome countries.
c) Explain the benefits of conducting an annual DSA. (10 marks)
The benefits of DSA include:
i.
ii.
iii.
iv.
v.
To evaluate the solvency and liquidity status of the country’s total public
debt portfolio, taking into account current and future debt obligations;
To determine the fiscal space available to the government with a view to
determining the borrowing limit, given the current debt level;
To guide the government on optimal funding options for its projects and
programs;
To detect current and potential future fiscal stress that might be caused by
external shocks with a view to preventing and resolving the crises;
To evaluate the risks inherent with the current total debt portfolio and
proffer mitigating measures; and,
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vi.
To examine the impact of on-going fiscal policy reforms of the government
and monetary policy objectives on public debt management strategies and
provide policy advice.
d) Explain the actions which can be taken to reduce accumulation of debt.
(3 marks)
i.
ii.
iii.
iv.
v.
vi.
Prioritize expenditure
Convert debt into equity or assets
Stop contraction of new debt
Limit debt service payments
Consolidate debt and refinance existing debt
Reschedule debt payments
QUESTION FIFTEEN - OUTLINE THE ROLE PLAYED IN PFM BY THE PUBLIC
ACCOUNTS COMMITTEE, AUDITOR GENERAL AND THE GOVERNMENT
MINISTRIES ACCOUNTING OFFICERS.
•
•
•
•
•
•
•
•
•
•
Accounting has been described as a process whereby transactions of an
operating entity are documented, classified and recorded for the purposes of
accumulating and providing financial information essential to the conduct of
designated activities.
Government accounting is an essential element of the financial management
function of government.
In the main government accounting is directed towards satisfying the
accountability and management requirements of officials responsible for the
conduct of government activities and operations.
It is therefore concerned with the proper recording of all receipts of
government, with the maintenance of records that reflect the propriety of
transactions and give evidence of accountability for assets and other
resources available for use and with the classification of data in a way that
provides useful information for control and effective and efficient management
of government programme operations
Amongst the features of government accounting, are the specific roles played
by the Public Accounts committee, the Controller and Auditor-General and the
Ministries Accounting Officers to which we turn.
The Public Accounts Committee is a standing committee of a few selected
members of Parliament.
It is charged with reviewing financial matters of government.
This is in line with the constitutional requirement that all financial matters in
government are subject to consideration, approval and review by the
legislature.
The deliberations and recommendations of the Public Accounts Committee
are based on the report on funds and accounts by the Auditor-General.
The proceedings at the meeting are recorded verbatim, the Auditor- General’s
staff and those of accounting unit responsible for the deliberations reacting to
the points raised in the report.
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•
•
•
•
•
•
•
•
Matters deliberated upon include serious ones concerning losses on a large
scale, cases of thefts and Misappropriation.
There is also failure to observe regulations and ensure propriety of
expenditure, cases of waste and other administrative inefficiencies which
have led to wastage of funds and failure to obtain value for money.
These serious matters require proper explanation on the part of the
Accounting Officer and the reaction of the Public Accounts Committee in
recommending surcharge of the principle of personal accountability of
government officers handling public funds.
The Public Accounts Committee’s recommendations are then debated in
Parliament which often insists that the government takes necessary corrective
action which often is done.
The role played by the Public Accounts Committee ensures that the
government be made accountable for financial matters to the legislature.
It is a control measure ensuring that public funds are protected and used only
for purposes intended by Parliament.
It curbs any tendency by public officers to be lax and wasteful in their handling
and management of public funds.
It ensures that proper accounting methods and procedures and controls are
instituted to safeguard public funds.
THE AUDITOR GENERAL
•
•
•
•
•
•
•
•
•
•
The Auditor General is appointed by the President and reports to Parliament.
He functions independently of executive council.
He controls issues of funds from exchequer that is funds voted for use by
Parliament and intended for by spending units to be withdrawn from the
exchequer, must be sanctioned for by the controller who satisfies himself that
there are adequate funds and that they will be used for the purpose intended
by Parliament.
He carries out both statutory and non-statutory audit.
The more serious audit queries known reference sheets are compiled in an
audit report which is presented to Parliament for reviewing the government’s
financial management.
The institution of the office of the Controller and Auditor-General plays a very
effective role in the management of public funds.
The Controller and Auditor-General plays the role of a watchdog and the fact
that he reports to Parliament ensures that spending units are not lax in
handling public funds.
His independence in performance of his duties ensures that he is not
subjected to undue influence by the executive.
He carries out his duties without fear or favour, he expresses his opinion,
qualifies his report and on the whole the powers conferred upon him by the
exchequer and Audit Act, ensures the accountability of the executive to the
legislature.
Without any doubt, the role of the Controller and Auditor-General is very
essential in ensuring proper financial management.
54
•
The officers carry out continuous audit inspection on the records of
accounting units of the government, this minimises incidents of fraud, thefts
and other misappropriations.
THE MINISTRY
•
•
•
•
•
•
•
•
•
•
•
The voted funds or the grants given by Parliament for use by the accounting
officer should be properly handled to ensure regularity and propriety of
expenditure.
The accounting officer is appointed by the Permanent Secretary Treasury
personally and under the principle of personal accountability.
The letter of appointment spells out his duties and functions, emphasising the
fact he is answerable to the Public Accounts Committee on serious matters
raised by the controller and Auditor-General.
His responsibilities in management of public funds, safeguarding public
property and running his accounting unit must be carried out with diligence,
dedication, with due regard for efficiency and effectiveness.
He organise his accounting unit to ensure that functions are carried out
properly, to ensure that public property are safeguarded, to ensure that staff
under him have the necessary technical skills for the proper performance of
their duties.
They should plan and budget for the financial requirements of his unit as
directed by Treasury, to instil cost- consciousness in the at all levels of
management, to answer audit queries, to sign the appropriation accounts and
so on.
The accounting officer is personally held responsible for any undue
happenings affecting public funds in his control.
For example, should he differ with the Minister, his political head, on how to
spend certain funds he has to obey the Minister’s directives but should write
to Treasury, giving details of the dispute.
This will absolve him of blame should a query arise.
Public servants handling public funds should be held wholly responsible.
He is head of his accounting unit and ensures that funds are not handled with
laxity, that services are provided efficiently and effectively, that evidence is
produced on how the funds were spent and last but not least, the taxpayers
have got value for money with regard to the taxes they pay.
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QUESTION NUMBER SIXTEEN - CASE STUDY
Short and long term strategic planning is affected by relying on volatile funding
streams in the public sector. Given the current budget deficit reduction initiatives by
the government of Zimbabwe, and other related austerity measures being pursued
by the Treasury office, most public sector organisations will feel the financial
squeeze over the next 2 years or more.
Central government grants can no longer be relied upon by many beneficiaries as
‘certain’. This is also the case for many charities and public sector organisations that
traditionally rely on grants from government.
Already the recent Local Government Association conference at Victoria Falls noted
that government grants under the Public Sector Investment Programme (PSIP) had
dried in 2019. Recently, the Parliament of Zimbabwe was also up in arms with the
Minister for the failure to disburse budgeted funds to local authorities.
The 2019 ICSAZ Winter School workshop on Public Finance held in Kariba noted
that Finance Managers need to be: •
•
•
Aware of conditions and performance targets attached to funding;
confident that the risks are being managed around this;
and informed if disbursements are not likely to be done.
The ability to appropriately plan effectively in the short and long term will rely on
innovative financial leaders, capable of supporting the service delivery activities in
their organisations in the face of austerity measures.
To have any chance of managing volatile funding, it is key to have good financial
governance arrangements. The ICSAZ workshop concluded that risks around
volatile funding needed to be mitigated if service delivery was not going to be
hindered.
•
•
•
It is against this background that Chingwa Rural District Council finds itself in
as the Council strategizes for the 2020 annual budget. The Council’s social
services activities relating to child feeding schemes, schools infrastructure in
farms and the small enterprises factory shells development programme were
funded by government grants. Given the targeted beneficiaries in poor rural
communities, the Council traditionally relied on social and development grants
from government to continue funding these services.
The Council Treasurer now regards the grants funding as volatile and no
longer guaranteed. However, the councilors and beneficiaries see receiving
these services as their legitimate right and do not believe that government
could fail to fund.
Transparency and accountability is important on both sides of the grant
system, those organisations that are giving grants, and those that receive
grants. Grant funding is a volatile source, because the organisation in receipt
of the grant has very limited, if any, control over whether the grant application
is successful.
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•
•
•
•
•
•
•
•
•
The Treasurer prepared a paper for submission at the next Finance and Audit
Committee Meeting to be held in October 2019.
In that paper he highlighted that there are a number of factors that make grant
funding a particularly difficult source of funding, more so given the fiscal
pressure faced by the Government of Zimbabwe during the current austerity
measures.
To minimize the risk of failed access to funds, Councils must:
gain an understanding of how funding decisions are made by grant awarding
bodies,
identify the grant qualifying factors,
meet the criteria to gain funding,
be agile enough to respond to changes in funding criteria,
be aware of any time constraints to obtain funds, and
be mindful that grants can be withdrawn at short notice.
All these factors can affect strategic financial planning. The Treasury office must
ensure they are aware of the likelihood of obtaining a grant, before relying on it for
planning budgets.
Required
a) As Treasurer, identify and discuss the risks associated with volatile sources of
funding to service delivery in rural local authority (15 marks)
b) Suggest appropriate strategies to deal with volatile funding in view of the need
to meet beneficiaries’ expectations. (10 marks)
c) As Chairman of Council discuss how you could use reserves to ameliorate the
challenges faced by cases of volatile funding. (5 MARKS)
RISKS ASSOCIATED WITH VOLATILE FUNDING
•
•
•
•
•
•
•
•
•
•
Risks are any uncertainties interacting with provision of services.
Public goods and services are funded from revenues, taxes, credit, donations,
grants, and levies.
The major source is taxation which is collected from citizens on a compulsory
basis.
The taxation is supplemented by other sources like donations, loans , grants
and state subsidies.
Some sources are stable making them predictable while others are volatile.
Volatile funding sources are unpredictable and beyond control of government
and the public financial system.
The dynamic environment may significantly affect availability of the funding
during the planning period.
The supplementary funding from donations, subsidies, and grants and aid
may be classified as volatile.
The rates and user fees may be generally stable though the economic outlook
may also influence their availability.
The rural local authorities operate in a constrained environment negatively
affected by economic conditions and possible donor fatigue.
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•
The funding for public services may fluctuate while the demand will remain
stable.
• The traditional sources of funding for housing, roads and water infrastructure
is the statutory government development grants.
• A risk is the effect of an uncertainty on achievement of a service delivery
objective.
• The risks associated with volatile funding that are likely to affect service
delivery are: i.
Non commissioning of planned projects.
ii.
Delayed completion of projects in progress.
iii.
Cost escalation due to inflation.
iv.
Poor quality of services to beneficiaries.
v.
Suspension of budgeted projects due to failure to receive promised funds.
vi.
Withdrawal of grants thereby creating funding gaps.
vii.
Special levies may be introduced to bridge deficit affecting the rate payers,
viii.
Volatile sources distort the timing of disbursements and funding conditions
may be altered.
• The local authority budget is development oriented focusing on capital
expenditure.
• The major sources are generally external which brings about volatility.
• The funding of social services is from donations, grants and subsidies.
• The beneficiaries are not conversant with volatility risk and this may cause
confrontation.
STRATEGIES TO ADDRESS VOLATILITY
The strategies for dealing with unpredictable funding treasurers can:
1. The Council should engage donors and grant givers to obtain certainty and
timing.
2. Reduce the number volatile funded projects.
3. Create a reserve fund for channeling resources in deficit areas.
4. Introduce evaluation process for sources before inclusion in budget.
5. Management stakeholder relationships.
6. Introduce controls on pooled budgets using volatile sources.
7. Agitate for decentralization/devolution of resources from central government
to local levels.
8. Improve local capacity to finance own budget.
9. Familiarize with the political dynamics of funding agents.
10. Apply sensitivity analysis before inclusion of a grant in the budget.
11. Familiarize with reporting conditions or spending restrictions.
12. Apply for grants with flexible terms which allow for virement.
13. Accommodate contingency planning in the budgeting process.
14. Improve monitoring and evaluation mechanisms for donor funded projects to
enhance compliance reporting.
15. Predict volatile sources of funding and assess the impact financially and
operationally ahead of any issues.
16. Identify the risky sources and develop early warning signals to stakeholders.
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As chairman of council discuss how you could use reserves to ameliorate the
challenges faced by cases of volatile funding. (5 marks)
•
•
•
•
•
•
•
•
•
Reserves are funds put aside (preserved) for future use/purpose.
Councils should ear-mark reserves and ring-fence them for specific projects.
Invest reserves to generate income from interest.
A capital reserve receives contributions from consolidated revenue account.
Capital expenditure should be financed directly from a capital reserve.
Local authorities can ‘earmark’ specific parts of the general reserve for
specific projects.
In public service organisations capital income and capital reserves can only
be used for capital projects; they cannot be used to plug gaps in the revenue
budgets.
The chairman of Council should identify projects threatened by funding.
The interests from capital reserves should be ring fenced for volatile projects.
QUESTION NUMBER SEVENTEEN - CASE STUDY NUMBER 2
Zimboland is a large industrialised country. In common with many developed
countries, as Zimboland’s economy has strengthened over time, life expectancy for
its population has increased. At the same time, the birth rate in Zimboland has
reduced.
Zimboland has a universal state pension system. In addition, Zimboland has a
centrally funded health care system which is free to its citizens at the point of use.
The following table shows information about the expenditure on certain public
services in Zimboland. All figures have been adjusted for inflation and are shown in
millions of $ (the currency of Zimboland).
Year
1985 2000 2015
Expenditure on social security transfers 105M 116M 128M
Expenditure on health and social care 186M 199M 214M
QUESTIONS
a) Explain the following theories which consider the growth of public expenditure
over time:
i)
Weak public sector incentives. (5 marks)
ii)
Public sector supply of luxury goods. (5 marks)
b) Calculate trends in each category of Zimboland’s expenditure over time and,
using the expenditure information provided in the case study, comment on the
trends. (10 marks)
c) Zimboland’s government is considering charging for some healthcare services
which are currently provided free at the point of use.
d) Discuss in detail the reasons why a government may choose to charge for
services rather than fund them through general taxation. Include the possible
charging methods that the government could adopt. (10 marks)
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Weak public sector incentives. (5 marks)
•
•
•
•
•
•
•
•
•
•
•
•
•
Economic development is tied to availability and quality of factors of
production.
This include land, labour, and capital.
These factors are linked to existence of key infrastructure such as roads,
power, irrigation etc.
These investments are decided by government through Public Sector
Investments Programmes.
These are implemented by central government, local government or private
sector players.
Growth of public expenditure is a function of the budgeted programs.
There may be unbudgeted activities arising from emergencies that require
funding.
Governments put in incentives in various forms to promote economic
development.
Incentives can be tax exemptions for designated capital expenditures.
Concessional terms may be granted for loans to private developers,
development grants, property transfers at below market rates and others.
The incentives are expected to attract private players in the economic
development programs.
Weak public sector incentives lead to growth in public sector expenditures.
The private players is not attracted to providing development leading to
government solely funding the gap.
Public sector supply of luxury goods
•
•
•
•
•
•
•
•
•
Luxury goods (or upmarket good) demand increases more than proportionally
as income rises.
The expenditures on the good become a greater proportion of overall
spending.
Luxury goods are in contrast to necessity goods, where demand increases
proportionally less than income.
For example, sports cars are a luxury good.
A country is said to grow when its GDP (Gross Domestic Product – the total
value of goods produced in one year) is increasing.
When GDP is rising, unemployment is falling, and the country has higher
standards of living.
Businesses tend to do well in this period.
Fiscal Policy (taxes and public spending) tend to focus on provision of luxury
goods as consumers prefer to enjoy such goods, leading to growth in public
expenditures during times of high GDP.
Performance measures can also form the basis for the discharge of
accountability by a Public Sector Organisation. In Zimbabwe the Ministry
Integrated Performance Agreement (MIPA) and Departmental Integrated
Performance Agreement (DIPA) in line ministries as well as audited financial
reports provide performance measurement tools for central government and
state enterprises.
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Required:
Evaluate five (5) reasons why performance is measured and comment on how
performance measurement promotes accountability in the Public Sector. (10
marks)
Answer
•
•
•
•
•
•
•
•
•
•
•
•
•
•
The public sector is non-profit making organizations.
The objective of public sector’s organizations is to provide accessible and
qualitative services.
This should satisfy public needs and to use the available resources effectively
and efficiently.
The public sector’s organizations should measure their performance
systematically and consistently to improve the organization’s management.
This also increase the satisfaction of society with provided services and their
accessibility.
The performance measurement models are not easy to adjust for the
organizations of public sector.
The organizations are oriented to the processes and not to the results.
The public sector should apply complex combination of performance
measurement methods to help focus on the core decisions of the organization
in public sector.
This facilitate the development of internal processes and increase
the employees’ motivation for improvement
This serve as a tool to define the entity’s improvement and work effectively
and objectively due to measuring its performance.
Performance results determine the future results of the organization.
Performance measurement determines management decisions of
organizations in public sector.
There is practical application of the measurement results in in financial
management.
This include decision making, accountability, transparency, publicity, social
responsibility, information and education with regard to all the interested
parties, (Segalovičienė, 2011, p. 439).
WHAT DO WE MEASURE IN PUBLIC SECTOR PERFORMANCE
1. Achievement of objectives
2. Economic factors
3.Efficiency
4. Effectiveness
5. Improvement in living standards
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Question number nineteen the zimbabwean government has started charging
for some healthcare services which were currently provided free at the point of
use. Discuss the reasons why the government may choose to charge for
services rather than fund them through general taxation. Include the possible
charging methods that the government could adopt.
Government may choose to charge for services for various reasons such as any of
the following:
1. The nature of the services or goods provided by government. Goods may
either be commercial, luxury or basic services in nature. Commercial and
luxury goods are normally provided on chargeable basis because they are not
associated with basic needs.
2. The cost of availing the goods or services as incurred by the public entity in
producing that good or services may need to be recovered. Government may
charge for services and goods to recover the cost of the provision of such
goods or services.
3. To maintain sustainable supply in the face of austerity measures/budget
limitations. In view of budget constraints government may charge to fund
sustainable provisions of goods and services.
4. To close budget deficits which constraint the funding of certain goods
government may charge for some services and goods in order to fund the
deficit.
5. To deter consumption in line with demand management. Government may
impose charge for some goods and services to discourage demand.
The different methods that government could adopt in charging for goods and
services include any of the following: i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
Variable costing -Charging clients with the variable/incremental costs of
the services or goods rendered.
Partial overhead charging – Recovering incremental costs and only a
proportion of fixed costs.
Full cost charging- All costs incurred in the provision of a service are
charged.
Full cost plus a profit margin -A charge is set in order to create a surplus
that will subsidize other services.
Going rate charges - This rate reflect that set by other public sector service
providers.
Demand - orientated charging- The charges are linked to levels of
demand.
Differential pricing- Different prices are set for different customers.
Penalty pricing –Prices may be set in order to reduce the number of
people using a facility.
Subsidized pricing -To promote a service and encourage users of the
service.
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Question number twenty - Outline the steps the government undertakes in
executing a national budgeting process that satisfies the provisions of the law
in Zimbabwe.
1. Budget preparation
2. Budget authorization.
3. Budget execution
4. Budget Accountability.
Chronology
1. Cabinet determine budget ceilings
2. Budget circular is dispatched to line ministry
3.The line Ministry Submit Bid
4. Budget hearings are carried out for Ministries to justify their figures.
5. Budget submitted to Parliament for Appropriations after approval by the Cabinet
and President
Question number twenty-one - Identify the stages and briefly discuss the
significance of each stage in the national budgeting process for central
government In Zimbabwe. (10 Marks)
•
•
•
i)
ii)
iii)
iv)
The national budget is a political, economic, management tool and control
instrument.
Budgeting process for the national government involves four (4) distinct
processes namely budget preparation, budget authorization, budget execution
and accountability.
These are stages are briefly discussed below: Budget preparation is the process of converting strategic plans into public
spending framework. The preparation of the annual budget involves a
series of steps that begins with the determination of the overall economic
targets, expenditure levels, revenue projection and the financing plan by
the Treasury.
Authorization - According to section 305 of the Constitution every year the
Minister responsible for finance must present to the National Assembly a
statement of the estimated revenues and expenditures of the Government
in the next financial year not later than thirty days after the start of each
financial year for consideration and approval by Parliament. This leads to
an Appropriation Bill which provides for estimates of revenues and
estimates. The Appropriations Act is the legislative authorization for
budgetary provisions for the ensuing year.
Budget Execution - Budget implementation starts with the release of funds
to the line ministries and departments. The line ministries implement
government programs and projects using the budgeted government funds
to meet service delivery.
Budget Accountability - Budget accountability takes the form of
management's review of actual performance or work accomplishment in
relation to the work targets of the ministry vis-à-vis the financial resources
made available.
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Question number twenty-two - Using practical examples assess how the
following issues in a local authority in Zimbabwe affect efficient use of public
resources.
i)
ii)
iii)
iv)
v)
Corruption- Public sector corruption refers to the misuse of public power or
position with an expectation of undue private gain or advantage (for self or
others). It may include bribery. embezzlement. It is the misuse of public
power by elected politician or appointed civil servant for private gain. The
entrusted power is utilized for private gain. It is the misuse of entrusted
power for private benefit and includes bribes, cronyism and nepotism,
political donations, kickbacks and artificial pricing and fraud of all kinds.
Abuse – The exploitation of corporate procedures and policies for personal
gain by misusing authority. It entails improper use against normal practice
covering misapplication, diversion, maltreatment, etc.
Waste is intentional and unintentional careless expenditure, consumption,
and mismanagement of public resources. It short changes the tax payer
due to inappropriate behaviour by controllers of public resources. E;g
inefficiency, ineffectiveness, non-completion, etc
Fraud is wrongful or criminal deception intended to result in financial or
personal gain. An instruments lies about itself.
Misappropriation is an intentional misuse of money. The appropriation of
money and other assets meant for a specific purpose for either personal
use or for what it is not meant for. It is an unauthorized disbursement of
money or other assets for personal gain.
Question number twenty-three - Identify and analyse five (5) methods of
funding government expenditures. (10 marks)
1. Taxes - by far this is the most important of all revenues that government
collects. Governments impose various types of taxes such as PAYE,
corporate, excise duty and VAT.
2. Non-tax revenue - Revenue from government-owned corporations, sovereign
wealth funds, sales of assets, etc. This includes receipts from charges and
fees for government provided goods and dividends earned from state
investments.
3. Seignorage - printing of money. Government can resort to printing notes and
minting of coins to fund deficits. This is often done to avoid borrowing.
4. Government borrowing - Borrowing can either be internal (Domestic Debt)
and external (Foreign Debt). Treasury bills, Treasury notes, and Treasury
bonds are the forms of securities issued by government to fund debt.
5. Money creation - The government can finance its expenditures by money
creation, where it issues bonds and asks the central bank to buy them. This is
called monetary financing.
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Question number twenty-four--- Zimbabwe still has challenges pertaining to
corruption, waste and abuse of state resources. Discuss the causes, effects of
and strategies to address these vices. (20 marks)
1. Poor service delivery due to reduced capacity.
2. Tainted reputation of government leading to withdrawal of financial assistance
3. Instability in the system due to competition for resources and interest rates
volatility
4. Budget deficits which have led to crowding out of productive sectors.
5. Mistrust between the state and the electorate
6. Politicization of service delivery
7. Total collapse of service delivery resulting in shortage of electricity, water and
infrastructure
8. Resource wastage through acquisition of inappropriate goods and services.
The man causes of the challenges include the following:
1. Culture of poor financial management is now entrenched.
2. Political polarization enable administrators to take advantage by camouflaging
their inefficiency through politics
3. Internal control deficiencies leaves no back stop
4. Dispersed sites resulting in poor supervision
5. Lack of computerization within the system lead to exploitation of manual
system.
6. Poor supervision of employees and lack of accountability.
7. Wrong precedent on previous offenders which influences players to repeat
offences.
8. Poor selection and motivation of the financial specialists.
9. Poor corporate governance structures within the public sector.
STRATEGIES FOR DEALING WITH CORRUPTION
The corruption and abuse in the public sector may be addressed through
implementation of the following measures:
1. Tone at the top
2.Whistleblowing process.
3. Close opportunities
4. Introduce robust internal controls
5. Code of conduct
6. Audits covering ethics, management and internal audit.
7.Close supervision
8. Risk Management framework
9. Training of stakeholders.
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Question twenty five - Discuss the importance of budget consultation when
coming up with a budget for a city council ? (10 marks)
Consultation is the process of engaging stakeholders for their views on
the content of the budget. City Councils provide services and goods to the rate
payers who should fund the goods.
The purpose of consultation includes the following:
1. Identify the actual needs of the rate payers.
2. Create buy in for the stakeholders.
3. Receive appropriate input from those affected.
4. The legal provisions require involvement of the rate payers.
5.The process provide feedback for the organization.
6. Transparency and accountability.
Question twenty-six - Strategic financial management in the public sector
depends on the personality of the public CFO. Discuss the personality and
leadership requirements for a good CFO in the public sector. (20)
The qualities for a public CFO influence the effectiveness of the financial
management. The personality expected of the CFO include the following:
1. Flexibility to accommodate competing professional and political interests.
2. Networking capacity with a variety of stakeholders.
3. Political awareness to ensure infusion of political dimension of PFM.
4. Professional approach to the management of the public system
5. Change oriented so as to move with the time.
6. Innovative to ensure new ways of doing things are introduced.
7. Good stakeholder management.
8. Ability to comply with DRIFTAS.
9. Entrepreneurial and ambidexterity
10. Team player
Question twenty-seven - The public financial management is characterised by
various frauds which have affected the effectiveness of the state response to
the covid 19 pandemic. Identify possible public sector frauds associated with
the covid 19 programmes. (20)
There is widespread controversy towards the management of Covid 19 pandemic
response exercise. The public has alleged the following frauds and malpractices
which affect resource utilization.
1. Asset abuse for personal gain
2. Procedural irregularities
3. Fraudulent reporting
4. Collusive dealing with contractors
5. Invoice inflating
6. Expenses inflation.
7. Budget misrepresentation.
8.Procurement malpractices.
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Question twenty-eight - Identify any five key stakeholders in the in public
financial management cycle clearly highlighting whether their interests have
been addressed in Zimbabwe during the past 10 years. (20 marks).
Sources
Constitution of Zimbabwe Amendment number 20 Act of 2013
Public Finance Management Act (Chapter 22:19) Audit Office Act (Chapter 22:18)
Question twenty nine - The PFM of Zimbabwe has been accused of being
inefficient. Identify areas which should be examined in evaluating a country ‘s
public financial management performance. What are the objectives of the
evaluation process. (20 marks)
•
•
•
•
1.
2.
3.
4.
•
•
•
The public expenditure and financial accountability framework examines how
public offices and institutions develop and design systems for proper public
finance management
PEFA provide techniques for assessing public financial management
performance.
The framework was conceived in 2001 and has since undergone upgrades to
respond to the obtaining PFM reforms.
It examines systems, processes and institutions of the Government and how
they undertake activities in their pursuit of the following budget outcomes:
Aggregate Fiscal Discipline
Strategic Allocation of resources
Efficiency in service delivery
PEFA identifies strengths and weaknesses of PFM using 31 performance
indicators.
The performance of each indicator is measured against a four point ordinal
scale from A to D.
The focus areas of evaluation include the following:
1. Budget reliability (realistic and implemented as intended) P1-P3, 6D
2. Transparency of Public finances (comprehensive, consistent and accessible
to users) PI 4-PI9, 12D
3. Management of assets and liabilities (Effective management of Assets and
liabilities, value for money) pi10-pi13, 13D
4. Policy based fiscal strategy and budgeting (Fiscal budget and strategy
prepared anchored on fiscal policies, strategic plans, adequate macroeconomic and fiscal projections) pi14-pi18, 17D
5. Predictability and control in Budget execution (Budget implementation on
effective standards, processes, and internal controls, ensuring effective
resource mobilisation and use) pi19-pi26, 28D
6. Accounting and reporting (Accurate and reliable records maintained and
timely information for decision makers produced) pi27-pi29, 10D
7. External scrutiny and audit (independent review and external follow up on
recommendations) pi30-pi31, 8D
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Question number thirty - Identify and explain the detailed sections of a
business case in the public financial management process.
•
•
•
•
•
•
•
Executive summary
Strategic case
Economic case including cost benefit analysis and weighted benefit scoring
Commercial case
Management case
Skills and resources
Risk assessments
Question thirty-one - Discuss the austerity measures the Zimbabwean
government should embrace to address its public financial management
challenges. (20 marks)
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Austerity is defined as a set of economic policies a government implements to
control public sector debt.
They are a response to large public debt with potential risk of default or the
inability to service the required payments on its debt obligations.
The austerity measures are aimed at the control of public debt through
spending cuts, tax increases and reduction of government role in welfare
payments.
The public financial strategic planning process is about deciding how to raise
revenues and allocate to expenditures.
This an integral part of the annual budgeting for central government.
The service delivery mandate of each ministry, departments or other
institutions should be accommodated in financial budgeting.
It should consider the legislative framework which provides for how financing
will be met.
It embraces taxation, borrowing or charges as well as the expenditure
budgeting processes.
The political thinking in terms of austerity measures should focus on removal
of fuel and electricity subsidies, tax increases and containment of government
wage bill.
The privatization and cutting of expenditures to state enterprises and making
them more efficient is a major aspect of the process.
There is need for alternative budget deficit funding options besides borrowing
in order to tame the public debt.
Zimbabwe annual budgeting should use austerity measures to reduce
expenditures allocated to areas such as capital investment.
All discretionary expenditures should be suspended and cost containment
strategies adopted.
There should be removal of subsidies and introduction of full charge for goods
and services originally subsidized.
The public procurement system need to be professionalize and reduce
leakages caused by corruption and greedy.
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Question thirty-two - Discuss and evaluate suitable business models and
vehicles for collaboration between organisations to achieve objectives.
•
•
•
•
•
•
•
•
•
•
Objectives of collaboration and potential risks
Governance arrangements and other practical implications of collaboration.
Strategic alliances
Shared service
Shared management teams
Pooled budget arrangements
Outsourcing and insourcing
Joint ventures
Mergers
Role of mutual organisations and social enterprise organisations and options
for collaboration in service provision
Question thirty-three - Discuss, evaluate and apply the tools and techniques
used to measure performance in a public service environment.
•
•
•
•
•
•
•
•
•
•
Performance measures and performance indicators
Behavioural aspects of setting budgets and measuring performance
Leading and lagging indicators
The 3 Es
Sustainability measures
Benchmarking as a means of driving organisational improvement
The balanced scorecard; the public service version
Outputs versus outcomes - delivering and measuring public benefit, social
outcomes and public value
The use, and potential misuse, of performance measures in public service
organisations; linkage to levels of funding
The use of variance analysis in public service performance management
Question thirty-four - Discuss whether you will use financial or non-financial
indicators in evaluating a SEP involved in the delivery of public services. (20)
•
•
•
•
•
•
Non-financial are non-monetary value measures not directly associated with
dollar signs.
They are forward looking measures in contract to financial which are lagging
measures.
The measures can be either quantitative or qualitative emanating from
employees’ “soft skills”.
The non-financial explain and provide context for financial indicators.
The financial are lagging indicators and report historical performance. These
include profitability, liquidity and gearing all based on monetary performance.
The measures may not be linked to strategy of the business unlike the nonfinancial KPIs which are linked to overall strategy.
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•
•
•
•
•
•
•
•
•
•
•
•
•
•
The non-financial metrics important for corporate performance include
company reputation and innovation.
Public sector institutions have aims which are articulated and acknowledged
as valid by the various stakeholders.
Difficulties may be experienced as societies are heterogeneous.
The claims of other stakeholders may conflict with the claims of those usually
regarded as the primary stakeholders.
The notion of customer is difficult to carry over from the private sector where
the person receiving and paying for the service are usually the same.
The financial measures on the BSC are at the top with other non-financial
supporting.
The non-financial may include customer conversion Rate representing the
percentage of interactions that result in a sale.
The customer retention Rate covers the portion of consumers who remain
customers for an entire reporting period.
The customer Satisfaction Index can measure or gauge a company’s success
at meeting customers’ needs.
The overdue Project Percentage may measure the number of projects that
are late or behind schedule.
This can be extracted from the project status dashboard.
The employee Productivity Rate can compare workforce efficiency measured
over time.
Formula: (Total Company Revenue) / (Total Number of Employees) =
(Employee Productivity Rate).
The turnover Rate for Highest Performers may measure success of retention
efforts for top performers and plans for talent replacement.
Combining financial and non-financial measures
•
•
The public sector require application of both financial and non financial ratios
to evaluate performance.
The BSC approach will be the best method to adopt.
Question thirty-five - Identify the various challenges faced by local authorities
in their public financial management process. (20 marks)
•
•
•
•
•
The public financial management process of local authorities commences with
policy formulation through consultation.
This is followed by resources mobilization, accounting for the resources, their
safe custody, application of the resources and auditing of the process.
Various challenges may be experienced at each stage which will negatively
affect the process.
The resources base of councils are constrained due to economic challenges
which incapacitate most of the rate payers.
The culture of non-payment amongst the rate payers create resistance when
it comes to recovery.
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•
•
•
•
•
•
•
•
Councils have poor accounting systems which fail to enhance recoveries and
documentation.
The accounting systems of local authorities are manual and this affects the
recording and tracking of financial resources.
The use of public resources especially in the procurement sections is a major
challenges for local authorities.
There are tender malpractices and inflating of tender prices, connivance
between officials and bidders.
High level corruption is also rampant thereby affecting the local authorities.
The financial statements prepared are generally not in compliance with
accounting principles resulting in misleading statements.
The internal audit functions are poorly staffed and sometimes with not
independent.
This also extend to the external auditors who may be compromised.
Question thirty-six - Most developing countries rely on foreign aid to fund
budget deficits. Discuss the pitfalls of relying on foreign aid as a source of
funding development programs in Zimbabwe.
•
•
•
•
Aid is financial assistance provided to a country to finance various goods and
services.
It may come as bilateral aid, multilateral aid, tied aid , project aid , military aid
and voluntary aid.
The funding of budget deficits from foreign aid has both advantages and
disadvantages.
The pitfalls associated with aid financing include the following:
1. Foreign negatively undermine domestic capacity to finance development as
citizens are exempted from development funding.
2. Foreign aid may have strings attached resulting in interference by donors.
3. Foreign aid may finance areas which are not the priority for the country.
4. The foreign donor may involve himself in activities which compromise the
country ‘s sovereignty through political interference.
5. The aid may create a donor culture which may adversely affect citizen
motivation to work for themselves.
6. The aid may perpetuate gaps in living standards if it fails to get to the targeted
beneficiaries due to corruption.
7. Aid may negatively affect macro and fiscal stability as it increases demand
without corresponding supply.
8. Aid may finance areas not within the country ‘s priorities.
•
•
Despite all the negatives, aid facilitate interaction amongst nations, increase
economic development and improve technological absorption within
developing countries.
It exposes citizens of developing countries to technology.
71
Question thirty-seven - The funding of any country ‘s budget has to be
sustainable. Using the major sources of the Zimbabwean government budget
funding sources, advise how sustainability can be built into the public
financial management process.
•
•
•
The funding of the Zimbabwean budge is from various sources with taxation,
user charges , aid and borrowing playing the major role.
Ideally the budget should be financed outside debt funding but the historical
experience has demonstrated persistent budget deficits which have been
financed from borrowings.
The sustainability of these sources require the following measures to be
adopted:
1. Expanding the tax base so that the majority of the citizens contribute.
2. This requires improving economic development so that
the economic
boom will capture additional taxpayers.
3. Creating profitable state enterprises which are professionally run and
generate profits
Question thirty-eight - Discuss the challenges that are experienced in
measuring performance in the public sector.
•
The measurement of performance in the public sector is faced with the
following challenges:
1. The existence of conflicting objectives and missions with complex visions
driven from different Ministries make evaluation complex. The multiple and
conflicting objectives need to be harmonized.
2. The lack of relevant and measurable objectives in terms of final product, of
quality and efficacy.
3. The absence of a correlation between the overall objectives with specific
targets and objectives.
4. The relative inexperience of officials regarding the development and use of
performance measures.
5. The lack of competence in the accountant staff who received traditional
training.
6. The absence of interest of the politic users and of policies and of senior
officials.
7. The lack of resources for building the necessary information systems.
8. The resistance of the staff and unions in accounting work time.
9. The cost of measuring performance.
10. The complexity of work consisting of fast and efficient integrating and
synthesizing numerous data sources.
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Question thirty-nine ----- Zimbabwe is experiencing a debt crisis which need to
be resolved if economic development is to be realized. Discuss the various
methods which can be implemented to address the current debt crisis. (20
marks)
There are various strategies which may be explored to address the debt situation for
Zimbabwe. Some of the measures include the following:
1. Participating in the High Indebted Poor Countries initiatives.
2. Debt rescheduling
3. Borrowing against security of domestic assets.
4. Debt swaps and conversion.
5. Debt restructuring
6. Debt buy back
Question number forty - Discuss why would you recommend the preparation
of a business case for public sector projects
The business case provides information on the justification of a public project. This
ensures that it has been evaluated from different angles covering the sub cases.
These will include;
1. the strategic,
2. economic,
3. financial,
4. commercial and
5. management aspects of the case.
The business case should enable Treasury and other stakeholders to ascertain that
proposals:
Question 1. Discuss whether you will use financial or non-financial indicators
in evaluating a SEP involved in the delivery of public services. (20)
•
•
The objectives of SEPS combine financial and non-financial objectives
The evaluation should be balanced by accommodating financial and nonfinancial measures.
QUESTION 2. CASE STUDY PRACTICE
The Chitungwiza General Hospital is struggling to provide descent services and
manage its budget. The poor budgetary control and credit management is adversely
affecting revenue collection due to high bad debts.
The hospital has outdated equipment compared to competitors in the market. The
Managing Board for the hospital is considering closure of the hospital as there are
other health providers in the area.
73
These should be able to absorb the needs of the community and others may use
private institutions which are in the area though they charge more.The other public
institutions will be capacitated if money saved through closure is diverted to
delivering care in different ways such as through community health centres and
home care for the elderly and those with chronic conditions.
Question 3: You have been engaged as a consultant by the managing board to
provide the following issues so that the board can make informed decisions.
1. Identify the key stakeholders in the scenario and map them into four groups
and discuss how their expectations can be managed.
2. State how they can be engaged in the underlying financial decision making
and ultimately, the decisions over future service provision.
3. Include reference to the tools you might use to engage the stakeholders.
STAKEHOLDER MAPPING
Stakeholders may gain or lose from a proposed change.
1. Promoters are stakeholders who attach a high priority to the project and their
actions impact on the implementation.
2. Defenders are stakeholders who attach high priority but don’t have impact
on the implementation of the policy
3. Latents stakeholders’ actions can affect the implementation but attach low
priority to this policy
4. Apathetics are stakeholders whose actions cannot affect the implementation
and attach a low priority to this policy.
•
This facilitate scenario-building and determine appropriate responsive
strategies .
Question 4. What strategies may the managing board formulate and implement
to ensure the hospital remain operational in the short and long term?
The strategies should include either growth, decline or combination.
•
Identify which one will be the best to guarantee survival.
1. Implement a turn around
2. Outsource some services
3. Joint venture through PPPs
4. Divest in certain service and focus on key ones with core competencies
5. Privatise some of the services or all of them
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Question 5 - Recommend appropriate solutions to the funding challenges of
the hospital to enable it to finance its budget deficit.
Identify different sources of funding for a public sector organization.
1. Special grants
2. Loans
3. PPPs
4. Increase in user fees.
Question 6. Identify the various challenges faced by local authorities in their
public financial management process. (20 marks)
•
•
•
The public financial management process of local authorities commences with
policy formulation through consultation.
This is followed by resources mobilization, accounting for the resources, their
safe custody, application of the resources and auditing of the process.
Various challenges may be experienced at each stage which will negatively
affect the process.
1. Stakeholder apathy
2. Resource mobilization challenges due to low development and economic
challenges.
3. A depleted revenue source.
4. Political interference due to political polarization.
5. Low capacity
Question 7. Most developing countries rely on foreign aid to fund budget
deficits. Discuss the pitfalls of relying on foreign aid as a source of funding
development programs in Zimbabwe.
•
•
•
•
Aid is financial assistance provided to a country to finance various goods and
services.
It may come as bilateral aid, multilateral aid, tied aid, project aid, military aid
and voluntary aid.
The funding of budget deficits from foreign aid has both advantages and
disadvantages.
The pitfalls associated with aid financing include the following:
1. Foreign negatively undermine domestic capacity to finance development as
citizens are exempted from development funding.
2. Foreign aid may have strings attached resulting in interference by donors.
3. Foreign aid may finance areas which are not the priority for the country.
4. The foreign donor may involve himself in activities which compromise the
country ‘s sovereignty through political interference.
5. The aid may create a donor culture which may adversely affect citizen
motivation to work for themselves.
6. The aid may perpetuate gaps in living standards if it fails to get to the targeted
beneficiaries due to corruption.
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7. Aid may negatively affect macro and fiscal stability as it increases demand
without corresponding supply.
8. Aid may finance areas not within the country ‘s priorities.
•
•
Despite all the negatives, aid facilitate interaction amongst nations, increase
economic development and improve technological absorption within
developing countries.
It exposes citizens of developing countries to technology
Question 8. The funding of any country ‘s budget has to be sustainable. Using
the major sources of the Zimbabwean government budget funding sources,
advise how sustainability can be built into the public financial management
process.
•
•
•
The funding of the Zimbabwean budge is from various sources with taxation,
user charges, aid and borrowing playing the major role.
Ideally the budget should be financed outside debt funding but the historical
experience has demonstrated persistent budget deficits which have been
financed from borrowings.
The sustainability of these sources require the following measures to be
adopted:
1. Expanding the tax base so that the majority of the citizens contribute
76