Finance Minister Ravi Karunanayake has declared that the 2016 fiscal program will be presented under the ‘Zero-Based Budgeting’, claiming that past practices had been imprudent. The following is an extract from the National Budget Circular No: 3/ 2015 issued by Department of National Budget on July 29, 2015 by Secretary to the Treasury, R.H.S. Samaratunga explaining the new proposal.
2016 – Budget Call Guidelines and Directions for Preparation of Annual Budget Estimates – 2016
National budget for 2016 will be prepared within the Medium Term Budgetary Framework for 2016-2018 based on Government policy aimed at accelerating economic growth of the country.
It is expected to improve the modified program budgeting currently being used to ensure that the scarce public resources are efficiently and effectively utilized. Hence, it has been decided to introduce zero based budgeting approach through a comprehensive review of public expenditure.
Zero Based Budgeting is a technique which links existing planning, budgeting and review processes. It identifies alternative and efficient methods of utilizing limited resources. It is a flexible management approach which provides a credible rationale for reallocation of resources by focusing on a systematic review and justification for funding and performance levels of current programs.
In order to achieve an economic growth beyond 8 percent, the total investment level in the economy is expected to be around 30 percent of GDP. As private investment is expected to be around 23-24 percent of GDP and the public investment is required to be increased at least to 6-7 percent of GDP in the medium term.
Similarly, it is required to take necessary measures targeted at achieving the government revenue of 17 percent of GDP by 2018 to reach the expected economic growth. Therefore, it is essential to introduce institutional and revenue sector reforms and restructuring, for reaching the said macroeconomic targets.
A better combination of government revenue and expenditure in the budgetary framework would ensure sustainable growth of the economy. Hence, in line with the macro-economic targets and national development priorities, expenditure ceilings are determined.
Sectoral grouping for expenditure ceilings may include several ministries which engage in similar types of activities. In order to avoid duplications, overlapping and carrying out efficient distribution of scarce resources, the approach of zero based budgeting is to be linked to the budgetary process from 2016 onwards.
Based on the tentative sectoral ceilings, relevant Secretaries to the Ministries will be invited for budget discussions to identify the limits for each ministry as follows. The Secretaries to the Ministries are requested to ensure achieving final output/ outcome associated with the key functions and activities of the ministries/ departments/ institutions when estimating the expenditure.
Step 1- Discussions on recurrent expenditure will be held with operational teams of the ministries and the staff of the Department of National Budget.
Step 2 – Discussions on Ministry-wise capital expenditure estimates will be chaired by the Secretary to the Treasury.
4.Preparation of Estimates
All spending agencies are requested to prepare expenditure estimates for 2016 under the medium term budgetary framework (2016-2018) having adhered to the zero based budgeting method in the following manner.
(i) Review missions, objectives and functions of ministries/ departments/ institutions to assess their relevance in the current context and to identify irrelevant activities, duplications, wastes and gaps. (ii) Review all programs/ projects/ sub projects in relation to objectives (iii) Prioritize all programs/ projects/ sub projects in accordance with the national priorities/ goals and identify low priority and irrelevant activities that can he eliminated (iv) Link all activities to the sectoral targets in line with desired results (v) Estimate costs of projects/ sub projects based on cost unit.
An Annual Budget is prepared with a starting point of “0” and the expenditure items to he limited to approved provisions for a particular year. Therefore, any issues associated with carry forward expenditure should not arise.
The steps on each activity may be performed in accordance with the guidelines set out in annexure 1 to this circular.
4.1. Expenditure Projections: The following should be considered in the preparation of expenditure projections and estimating performance targets; (i) Inflation: Inflation should not be considered by the line ministries as the Treasury will make inflation adjustments to the estimates for 2016. (ii) Variations in number of beneficiaries: Spending Agencies should adjust expenditure for entitlement programmes (such as pensions, social security schemes and school uniforms) in line with the estimated increases or decreases of the number of individuals entitled for the benefits.
Each of such development should be reflected in the actual number of beneficiaries to justify the budget requirement. (iii) Adjustments on salaries and allowances: Spending Agencies should not include provision for salary adjustments in their projections (or the medium term, as the Treasury will provide them separately. (iv) Procurement Plans: All estimates on procurement of goods and series should be supported by well thought-out procurement plan prepared in terms of procurement guidelines.
No provisions should be included unless procurements plans have been finalized. Costing of expenditure (or the Budget should be based on well thought-out pmcurement plans.
4.2. Recurrent Expenditure: Provisions for personal emoluments are provided on the basis of actual number of employees within the approved cadre as at 300* June 2015. Therefore, all the salaries and allowances should be calculated accordingly. Other recurrent expenditure needs to be maintained at 2015 level However, the Ministries are requested to ascertain any arrears to be paid or any commitments before deciding on the expenditure on recurrent expenditure for 2016.
4.3. Capital Expenditure: Capital expenditure is to be specified separately (or; a) foreign funded projects and associated domestic fund requirements b) other capital expenditure tube met from the domestic sources In allocating resources for other capital expenditure, priority has to be decided in the following manner; Completion of continuation works (Domestic and Foreign financing) (ii) Rehabilitation and Improvement of capital assets (iii) New projects that can be accommodated after setting apart of funds for (i) and (ii) above within the ceiling
The Spending Agencies have the freedom to allocate resources within the expenditure ceiling after setting aside funds required for items (i) and (ii) above based on the government priorities. However, if the Treasury observes that provision has not been allocated adequately to a high priority activity, the Treasury will re-arrange the provision within the ceiling in consultation with the Secretary of the Ministry concerned.
5. Key Performance Indicators (KPI)
An effort will he made in the budget for 2016 to specify performance indicators in respect of each project. Hence, spending agencies are requested to specify at least two indicators relating to the specific project by using the specimen form given in annexure 2. If any spending agency does not achieve the expected results based on the KPI, it will negatively affect the resource allocation in the following year.
All spending agencies are requested to furnish detailed cadre information as at 30.06.2015 using the specimen format given at annexure 3.
Information on Vehicles: All spending agencies are requested to provide an updated information on vehicles as at 30.06.2015 according to the specimen format given at annexure 4.
It is observed that there are large numbers of requests for construction of new buildings for government agencies. To ensure efficient delivery of services and maximum utilization of resources, it is expected to construct a multi storied office complex to relocate many government agencies under one roof. Therefore, requirement for a new office space for the ministries/ departments/institutions should be submitted along with necessary information for consideration.
Statutory Boards and Institutions Statutory Boards and Institutions should prepare their annual budget estimates based on existing object codes. Heads of line Ministries of respective Statutory Boards and Institutions should review the profitability, functions in relation to the stipulated mandate of each institution, etc. and should submit a time bound target, if there is any requirement for restructuring.
Implementing Integrated Treasury Management Information System (ITMIS)
Arrangements have been made to obtain budgetary information from the spending agencies through an online system. Accordingly, an Integrated Treasury Management Information System is being implemented by the Treasury to facilitate the preparation of 2016 budget.
Submission of Draft Expenditure Estimates: In order to expedite preparation of estimates, the required information is provided as Microsoft Word/Excel worksheets in the Website www.treasury.gov.lk- titled “National Budget – 2016” Annexes to National Budget Circular No. 3/2015. These Annexes can be downloaded as Word/ Excel worksheets and can be printed.
All spending agencies are requested to complete the relevant formats and forward the 2016 draft Budget Estimates to the Department of National Budget, on or before 10th August 2015.
Agencies are also requested to submit a copy of the institutional budget to the Director General, Department of Public Enterprises. Consultative cluster meetings will take place during 10th August to 28th August, 2015 in order to review the estimates and budget requests.
To ensure a rational allocation of scarce resources to areas where funds are most needed and to enhance the efficiency and effectiveness of public spending through prudent financial management, personal involvement of all heads of spending units in the preparation of estimates pertaining to their organizations is solicited.
Aims, Pros & Cons of ZBB
Aims of ZBB:
All budgetary requirements need to be comprehensive, justified and complete.
To question the previously-set assumptions, assessing them and judging their relevance.
To help as a tool for systematic analysis, review and allotment of resources to any area that needs attention.
Channelizing funds to prioritized areas.
To measure the performance, accountability for every budget request.
Justify the costs and purpose in every budget cycle.
Relate costs to the missions/goals of the department.
Choosing the best from among the many developed ‘Decision Packages’ for every target.
Identify alternatives like directly doing a project or outsourcing it; whether the operation will be centralized or decentralized etc.
Allotting the responsibility of each project to the manager and the team.
Opportunity for in-depth operation review and making recommendations and changes for optimal completion of every project.
Increase staff motivation.
Advantages of ZBB:
Assured efficient allocation of funds since it is based on needs and benefits and so avoids unnecessary expense.
Improves the services as well utilizes cost-effective methods.
Imposes a restraining influence during allocation of funds; contains any inflation.
Controls the entitlement mentality by demanding justification for allotments.
Budgetary allocations and discussions are meaningful and purposeful.
Weeds out stale, ineffective and counterproductive activities.
Disadvantages of ZBB:
Preparation time and expense of the budget are increased.
Sometimes ZBB sounds too radical and so consensus is difficult to obtain.
Too many decision packages may be needed
Needs commitment and professional attitude to ensure proper implementation.
Justifying every expense may not be feasible or practical.
Departments like Research & Development may find cash-crunch.
All managers and staff should be educated and trained about concepts of application of ZBB.
Should not be used indiscriminately or too frequently. A healthy time-gap is needed for realizing full potential of ZBB.
If applied intelligently, ZBB offers a lot of advantages and is a useful tool to curb inflation and unnecessary expenditure.
UAE’s case for ZBB
The United Arab Emirates government implemented the concepts of three-year, Zero-Based and Program Budgeting for the budget cycle 2011-2013. Here are a list of Q&A listed out on the Finance Ministry’s website of the UAE prior to the implementation.
1. What are the reasons that necessitated the use of ZBB?
Answer: In line with its constant endeavor to bring global best practice to the region, the Ministry of Finance is moving away from its currently used incremental budgeting practice. There are other very good reasons for this shift. Incremental budgeting assumes a stable environment where current activities persist at roughly the same cost in future years. It also assumes that current budget levels are well understood and therefore do not require bottom-up justification making budgeting a routine process. As the pace of change in UAE’s financial and economic environment has accelerated over the years, these assumptions do not hold true anymore.
The practice of Zero-Based Budgeting is most recommended under the circumstances resulting from the pace of our economic development, our rapidly growing GDP and the need for large-scale infrastructure development. It addresses the historic issues of low transparency of budgets, and clear differences between original budget requests from other UAE Ministries and their ultimately approved budgets.
2. What is Zero Based Budget & what is the benefit of using such concept?
Answer: Zero-Based Budgeting means starting from a blank sheet of paper and building the budget bottom-up. Initially, budgeting teams in various Ministries will be tasked with defining activities that contribute to agreed objectives that will exist over the budgeting time horizon (in our case three years). They will then justify activities and their associated costs providing a detailed cost analysis. Lastly, they will prioritize the activities based on a cost-benefit analysis and rank them relative to their contribution to agreed objectives.
The benefits of this Federal budget reform are significant for all parties. Zero-Based Budgeting is the best tool to deliver our objectives of maximizing social impact of public spending, making better use of our resources and increasing budgetary process transparency. It links in seamlessly to the UAE’s longer-term strategy cycle for 2011-2013. It will also develop our international reputation in budgeting.
The Federal Ministries and Agencies will benefit as they can link long-term objectives seamlessly to budgeting and provide transparent processes and tools for financial management and prioritization of activities.
The Ministry of Finance will be able to have a clear understanding of budget requests from Federal entities and strengthen its partnership with them in achieving strategic, operational and financial objectives.
3. Is there any of GCC country applying the same concept other than UAE?
Answer: No other GCC country except the UAE is applying this concept. The UAE will be the first to implement this in the region. It will be a step change from the current budgeting process. When successfully implemented, it will move the UAE to the group of internationally acknowledged best practice countries in budgeting and financial management of federal resources. The concepts of three-year budgeting, Zero-Based Budgeting, and Program budgeting are widely implemented in other leading OECD countries, e.g., the UK, Singapore, New Zealand as well as in several US states and private companies around the world.
4. What preparation is required by the ministry to implement this concept?
Answer: The preparation for the Federal budget reform has been ongoing since March 2009 with all Ministries and agencies receiving comprehensive training in its concepts, processes and tools. All Federal entities have also conducted an exercise in preparing their own comprehensive draft Zero-Based, three-year program budgets with the assistance of the Boston Consulting Group. Federal agencies need to continue with the preparation for the next few months and will receive significant support from The Ministry of Finance in this exercise. The Ministry of Finance is confident that all Government entities will be well prepared for its actual implementation in the first quarter of 2010.
5. Does ZBB contribute in Government Spending Processes?
Answer: As stated earlier, Zero-Based Budgeting will contribute immensely to maximize the social impact of public spending, making better use of our resources and increasing budgetary process transparency.
(Source: UAE Ministry of Finance)2. What is Zero Based Budget