CHAPTER 1: CONCEPT AND THEORY OF PUBLIC FINANCIAL MANAGEMENT

1.1 Concept of Public Financial Management

Public financial management deals with the management of the people’s money.

It involves decision-making on the following aspects: What resources are needed to implement government programmes and projects Where to obtain these resources How to collect and utilise these resources How to control all financial processes within given time-frames

It thus involves general governmental fiscal issues such as revenue and expenditure It covers the range of social, economic, technological and political dimensions It can, therefore, be studied through other academic disciplines such as:

Economics; public administration or public management; political science; sociology; and law. As regards fiscal issues, basic needs of people such as food, housing, medical care, water and electricity, as

well as protection are satisfied by various means: These (basic needs of society) comprise the lowest level in the needs hierarchy The next level above constitutes infrastructure such as roads, telecommunications, transport, culture

and sport. Since the market mechanism (demand and supply) cannot deliver services to those with limited or no access

to these services, a gap is created which is filled by government. In other words, the market mechanism functions according to economic considerations i.e. the profit

motive. On the other hand, government intervenes to provide services and functions to those who cannot otherwise

obtain them: Services and functions provided by government are thus morally rather than economically motivated

In short, the state generally assumes responsibility for the welfare, health, and prosperity of its citizens: These services and functions are provided through the various governmental structures developed and

maintained for that purpose The principles and assumptions on which the provision of public services are primarily based include the

following: Government provides services and functions on a collective basis Government is a non-profit organisation Government depends on its taxing powers and authorities for the generation of income The market economy cannot make provision for services that require large capital outlays with limited

long-term dividends Government, and not the market system, assumes final overall responsibility for the country’s economic

well-being, and therefore fulfils an economic regulatory function The country’s resources belong to all inhabitants and not exclusively to the market.

Against this background, public financial management relates to the study of public institutions, systems, and procedures and mechanisms by which government: Receives money; Expends/spends money through the budget; and Exercises control through particular mechanisms (e.g., Office of the Auditor-General).

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1.2 Defining public money

Money can be either:

privately owned, in the hands of private individuals and private institutions, and spent to advance private interests, or

publicly owned, managed and controlled by the State on behalf of the people of the country and spent to advance the public’s interests.

The key focus of public finance is public money (ie publicly owned money).

It is important to stress that ‘public money’ under the control of government is held collectively by the state on behalf of the people, to be used in the public interest.

In democratic countries, the public elects the government, and this government exists (and is remunerated) only to provide the goods and services that the public wants, but for which the public is unable to provide for itself on an individual basis.

Through taxation (as the main instrument used by government to gather revenue), government is supposedly able to gather from the public the necessary funds to provide public goods and services.

Public money must be used to provide public goods and services in the public interest and for public benefit. This is important to note, as it is easy to claim (mistakenly) that only taxpayers should benefit from public money, since taxpayers are the key contributors of that money.This is an invalid claim in any democratic country, as the principles of public interest and public benefit would apply, as discussed below.

1.2.1 Public interest

Public interest is the idea that although communities/countries are made up of individual citizens (taxpayers and non-taxpayers alike) with their own peculiar needs, it is in the interest of the community as a whole that a collective effort (especially through government) be made to provide essential goods and services to all, regardless of their actual contribution to the system or their ability to pay.

1.2.2 Public benefit

In short, public benefit is the idea that government spending of the money entrusted to it by the public must:

take place in the most efficient and cost-effective manner. In other words, government must spend public money in such a way that the public receives and experiences value for money.

1.3 Components of public financial management

Making up public financial management, are various individual components, which collectively form the basis of a financing framework. The following components can be identified:

1.3.1 Budgeting

A budget is a framework that links specific spending objectives with their associated costs: It applies to any situation where spending objectives have to be determined i.e. from household,

multinational company up to the government sector. The budget serves as a basis for government’s financial activities. In other words, all the other components of

financial management are linked to the budget. Four basis dimensions of a public budget worth noting include the following:

A public budget is a political instrument that allocates scarce resources among social and economic needs It is a managerial and administrative tool in the sense that:

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It specifies the ways and means of providing public programmes and services; and It establishes the costs and criteria by which its activities are evaluated for their efficiency and

effectiveness. A budget is an economic instrument that can direct a nation’s, state’s as well as municipality’s economic

growth and development. It is an accounting instrument (or financial management instrument) that holds government officials

responsible for both expenditures and revenues of programmes over which they exercise control. It, therefore, contains all the monetary implications which can be used to determine accountability.

As a mechanism for determining objectives, a budget can be used to facilitate medium- and long-term planning, that is: Each year’s budget forms an element of a medium-term plan, for example, Namibia’s five-year national

development plans.

1.3.2 Expenditure management

Refers to the standard daily operational processes related to the implementation of policy objectives stated in the budget. It, thus, involves issues revolving around the spending of money.

Of importance is the fact that management of government ministries/offices/agencies (M/O/As) should be carried out in a manner that achieves the greatest value.

Another important consideration is that budget allocations to M/O/As (including other institutions funded from the national budget e.g. the Namibia University of Science and Technology and University of Namibia) are not available at the start of the financial year. This is due to the fact that income together with expenditure needs to be generated on a monthly basis.

Hence, it is the National Treasury’s responsibility to balance income generation and expenditure on a daily, monthly, and quarterly basis, meaning that: All consolidated requests from M/O/As must be balanced against revenue received from taxes and loans.

To enhance efficiency and effectiveness, methods and procedures are used through which available resources can be utilised to the maximum benefit of the state, and eventually society at large.

1.3.3 Accounting

Two accounting systems can be identified, namely cash and accruals accounting systems: Cash accounting involves the reporting of revenues when cash is received and reporting of expenses when

cash is paid out i.e. refers to transactions determined on the basis of cash flow. Accruals accounting focuses on transactions and other economic events that have cash

implications/consequences: With regard to expenditure, expenses are recorded when they occur and are deducted from revenue

to determine net income. With accrual accounting, the true financial position of the country is made possible.

1.3.4 Financial management system (FMS)

FMS aims at facilitating expenditure management, as well as providing budgetary information. It provides standard procedures for recording of transactions. For example:

Standardised forms are used for internal charges, receipts, petty cash, general payments, electronic fund transfers, and periodic payments.

FMS serves as an important instrument for fund management. Through the spending pattern FMS provides, the following can be determined:

Spending to date compared to the budget Current expenditure and future commitments compared to the budget

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Deviations from the budget Increased and decreased spending.

1.3.5 Public accountability and control

As custodians of public money, the legislature is held accountable to the electorate in a representative democracy.

Hence, it ensures that mechanisms and procedures are in place to facilitate public accountability. For example: Internal controls must be maintained by all public institutions, both formally and informally Formal records must be kept regarding all transactions for accounting auditing purposes.

In Namibia, audit reports relating to the financial management of public institutions are submitted to the Standing Committee on Public Accounts (SCPA).

Perusal of the audit reports and recommendations by the SCPA concludes the route of control and accountability.

1.3.6 Performance management

Performance determines the relative output of public institutions and should not be viewed only in monetary terms.

It is argued that performance in the public sector cannot be measured as in the private sector (where profit margins serve as indicators of performance).

Hence, financial management practices applicable to the private sector cannot be used in the public sector, because: Public services are of a social and collective nature.

Budget reform processes (e.g. from item to programme budgeting) are put in place to serve a higher degree of service delivery in terms of effectiveness, efficiency, economy, and appropriateness.

Performance mechanisms should, therefore, measure actual outcomes against resources used so as to determine success of public service delivery.

1.3.7 Medium-term expenditure plan (MTEP)

Framework is developed to make provision for lack of long-term objectives not provided for in the design of annual budgets.

MTEP is important in assessing future implications in terms of government policies, as well as associated financial implications.

Benefits of MTEP include the following: Allocation of resources to priority services Greater efficiency in planning and management Framework within which policy proposals can be assessed Reduction in roll-overs Clear demonstration of how fiscal targets will be met

1.3.8 Business plans

Business plans are derived from an institution’s mission statement. They are described and quantified in detailed outputs and required inputs. They also describe operational processes, skills and technology, and other relevant resources required to

achieve predetermined outputs. Furthermore, business plans are closely associated with the budget since they complement each other.

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In other words, a budget can be viewed as a business plan. However, in a business plan more information can be compiled about the institution’s resources, objectives and procedures.

1.3.9 Strategic plans

Strategic plans consist of an institution’s outcomes, which are derived from its mission statement. An institution must convert its reason for existing and its values into actions, flowing from plans that are aimed

at medium- or long-term goals. A time frame of three-to-five years is attached to a strategic plan. Strategic plans set out medium- or long-term goals. In addition, output objectives and performance measures and indicators are linked to the strategic plan.

A well formulated strategic plan will promote the following: Managing the institution Benefits for all citizens from rendering of services Enhanced accountability Greater transparency Value for money for the people

Goals that the strategic plan set out must be: Well defined Measurable (though only indirectly in some cases) Comprehensive Time specific

In the preparation of the strategic plan, the accounting officer must consider the following aspects: Usefulness and appropriateness of the planned outputs in meeting the programme objectives/outcomes

agreed by the executive authority for the ministry Affordability of the plan, having regard to the resources likely to be available and the ministry and the

overall fiscal policy of the government Achievability of the plan, having regard to the resources likely to be available and the vision, level of

capacity and commitment of the people responsible for driving the process of achieving the ministry’s objectives

Accessibility of the plan to those responsible for its execution and those to whom the ministry is accountable for their performance in executing the plan

1.3.10 Provisioning

Provisioning forms part of FMS due to its impact on public expenditure. It constitutes a resource to be used by accounting officers. Provisioning management aims to equip government with its requirements – not only stock, but also any

other specialised services not available within the government. Further to this, the management of assets, which are obtained through the provisioning process, forms an

important part of public financial management.

1.4 The Approach to the Study of Public Financial Management

A budget forms the theoretical framework for public financial management in the sense that: It serves as a means to obtain and allocate resources; and It serves as a control measure to ensure effective attainment of government’s set objectives

Management of the operations of an institution, to the extent where certain planned objectives are attained after a period of time, cannot be achieved without the use of a budget

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It is, therefore, argued that financial management would cease to exist without the budget

CHAPTER 2: THE FINANCIAL FUNCTIONS OF GOVERNMENT

2.1 Government and the Economy

Government leads in directing the affairs of societies through formal legislation and other government-initiated measures

Such measures determine the way a country should be managed Degree of effective management depends on the idea of the scarcity principle, that is:

Scarcity of means in terms of economic factors of production. Hence, the availability of means and their utilisation is believed to be a motivating factor for government

intervention with regard to the management of a country As far as the national economy is concerned, the government sector is one of the major role-players:

Private and household sectors are the other two role-players Government intervention into the economy is, therefore, viewed as a matter of choice and necessity due

to the economic problem Scarcity of means is seen as the basis for the economic problem in the sense that:

It determines how to provide for the needs within the parameters of limited resources An important example of a scarce commodity that can directly affect the economy of a country is oil:

As a cartel, the Organisation of Petroleum Exporting Countries (OPEC) controls oil production levels and prices

In other words, oil prices of non-oil producing countries (e.g. Namibia, South Africa etc.) are determined by OPEC

Thus, resources available in any country and the way in which that country provides for its needs are directly determined by the economic problem

Most common resources are minerals, land, water, money (capital), and entrepreneurship Resources need to be effectively utilised and entrepreneurs can play this role since they:

Initiate and develop, thereby speeding up economic development

2.2 Basic Economic Systems

Four main systems have been identified that are intended to solve the scarcity problem: Traditional systems Central (command) systems Capitalism and the free market systems Mixed economy system

2.2.1 Traditional systems

They are regarded as the original approach to the problem of scarcity, as they are developed by the people themselves

Here, methods and practices were carried forward from one generation to the next (either by established practice or by command)

Traditional systems were viewed as authoritative methods of economic control They were applied in Egypt, China as well as ancient Roman times Thus, customs of one generation were considered as sufficient for the next generation System is common in less industrialised nations, for example, those that are agricultural and mining-based

economies They do not provide a positive climate for self-imposed economic growth Hence, practices showed little change over time and little or no reason existed for change.

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2.2.2 Central systems Centralised control of an economic system is recognised as a powerful tool in bringing about change if

done in a consensual democracy They were implemented by 20th century communist states in which:

Controlling decisions of production and distribution were made and enforced by state structures; and

All capital, means of production, and distribution were under state control. Thus, the state or ruler determined what would be produced, for whom, and at what price Due to the state owning all property and production, entrepreneurial spirit was completely non-existent In other words, stimulation of private enterprise was discouraged, because no natural markets existed in a

demand system Central systems can, therefore, be termed as planned economies (e.g. China and Soviet Union) because:

Primary emphasis is placed on the administrative planning of production by government-appointed decision-makers

As mentioned above: The main means of production are in public ownership; and Decisions about what and how goods are produced and to whom they should be allocated are

made through government bureaucracy.

2.2.3 Capitalism and the free market systems

Free market system dominates the approach to the basic economic problem, as well as production and allocation of resources and means

It is based on the principles of capitalism, free interplay between individuals, and demand and supply economics

Existence of the principle of natural tendency of people and societies to grow, expand and develop ability to survive

Further provides opportunities for growth, increased production and wealth. It, however, cannot ensure equitable distribution and allocation of resources

2.2.4 Mixed-economy System

It refers to the existence of a system where the free market system is combined with the involvement of government as part of the economy of a country

Allows for the full functioning of the demand and supply with predetermined intervention from government

Government is regarded as a primary role-player in the modern economic system, enforcing its position by democratic authorisation

It is maintained that a mixed economy exists as: A political compromise; and

An economic halfway house between a market economy and one centrally planned Thus, particular government functions are developed in instances where a free market system fails to

effectively distribute and allocate resources equitably.

2.3 Classification of government services

Classification is based on services that relate to the following categories of government expenditure:

Allocation:

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Government determines what goods and services to produce, and the quantities of these goods to produce, mainly in response to market failure.

Market failure is the need for government intervention when private producers are unable or unwilling to produce publicly demanded goods

Distribution: Government decides who should benefit from government expenditure

Redistribution: Government redistributes resources from the rich to the poor through, for example,

progressive taxation Stabilisation:

Monetary and fiscal policy (government taxing and spending) concerned with making the economy stable and capable of competing globally

Regulation: Government policies and structures put in place to ensure efficiency in private production

Thus, government services can be classified based on the following categories of activities the State performs:

Community services Order and protection Social welfare Economic welfare

2.3.1 Community services

Community services refer to the fact that the provision of goods and services has collective characteristics.

They are pure public goods; are non-excludable; non-rival; for collective consumption, and not to be provided to individuals only.

Examples include street lighting, clean air, roads, law and order, and defence.

2.3.2 Order and protection

Order and protection refers to the provision of goods and services in the public interest that ensure the physical and psychological well-being of the people.

They are for joint consumption, with government having the exclusive right due to the nature of protection.

In addition, the large outlay of required resources makes its non-viable for the private sector. Examples include defence, police, justice, and civil protection.

2.3.3 Social welfare

Social welfare means the provision of goods and services in the public interest that seek to provide access to minimum basic social services for the people.

These are quasi-public goods and they can be provided by private individuals. Government enters to fulfil its distribution role. Examples include health, electricity, water, pensions, education and training, housing, roads, sport and

recreation.

2.3.4 Economic welfare

Economic welfare refers to:

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Regulation of the economy; Stimulation of the economic development; maintenance of economic order; and Provision and maintenance of economic infrastructure to support the private sector.

Private sector may find the provision of certain required goods non-viable. Hence an absence of entrepreneurs compels government to enter the market in the form of public

enterprises (State ownership). Examples include monetary and fiscal policy, telephone services, road services, military equipment,

railway lines and rail transport.

CHAPTER 3: ROLE-PLAYERS IN PUBLIC FINANCIAL MANAGEMENT

3.1 Contribution of Role-players to Effective Public Financial Management

Role-players can contribute to effective public financial management through:

Managing resource scarcityDealing with efficiency, effectiveness, and economyManaging the budgetProviding financial adviceMonitoring and controlling financial activities of public institutions

3.1.1 Managing resource scarcity

Role of government in socio-economic development has increased tremendously over the years. However, this has not been matched by an increase in economic resources. From an economic perspective, it is argued that resources are scarce in the sense that:

They are insufficient to meet all human needs Individuals may want goods and services, but may not have sufficient resources to purchase them

In the same manner, government may wish to involve itself in the provision of a wider range of goods and services to society: However, it is constrained by the scarcity factor Thus, prioritisation and prudence in the management of financial resources becomes necessary

3.1.2 Dealing with efficiency, effectiveness, and economy

Scarcity of resources means that they have to be utilised in a way that: Minimises costs and maximises benefits (efficiency and economy) Make sure that the goals of government are realised (effectiveness):

Essence of financial practice Thus, all public officials and managers should note that:

It is their responsibility to give assurance that: Public monies are spent as planned and/or utilised efficiently, effectively, and

economically. This will enable senior officials (for example, Permanent Secretaries and Ministers) to ensure that:

Approved goals are attained The bases on which the system of financial administration is founded are honoured.

3.1.3 Managing the budget

Managing the budget is a requirement that covers: Budget preparation Budget implementation Budget control.

Public managers play a crucial role in: Preparation of the budget

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Seeing to it that budgetary rules and spending requirements are adhered to in their sections, divisions, directorates or departments.

Failure to manage the budget so often leads to: Over-expenditure Poor service delivery.

3.1.4 Providing financial advice

Public managers, at every level of government, should also play an advisory role in their departments. Politicians rely on financial information from these internal functionaries to enable them to:

Formulate appropriate and implementable policies.

3.1.5 Monitoring and controlling financial activities of public institutions

All government activities need to be monitored and controlled to make sure that: Government resources are used properly Waste is avoided.

Internal and external audits are done to enhance financial control. Internal control may be provided by public managers External control is normally achieved through legislative institutions such as:

Standing Committee on Public Accounts Auditor-General

External control institutions exist to further enhance financial accountability.

3.2 Key Role-players in Public Financial Management

3.2.1 Legislature and public financial management

All democratic governments have legislatures that act as: Supreme institutions of social representation, meaning that:

Legislatures are made up of representatives of the people. Members of the legislature are elected to their positions through an electoral system adopted by the

specific country. Legislatures are in charge of making public finance laws. Legislature at the central (national) sphere of government is referred to as “Parliament” Most modern parliaments have either two houses (bicameral) or one house (unicameral):

Namibia’s two houses are the National Assembly and National Council According to Article 63 of the Namibian Constitution of 1990, the powers and functions of the National

Assembly of Parliament are, among others, to:

Make and repeal laws for peace, order and good government of the country in the interest of the people of Namibia

Approve budgets for the effective government and administration of the country Provide for revenue and taxation Receive reports on the activities of the Executive, including parastatal enterprises, and from time

to time to require any senior official thereof to appear before any of the committees of the National Assembly to account for and explain his or her acts and programmes

Initiate, approve or decide to hold a referendum on matters of national concern Debate and advise the President in regard to any matters which by this Constitution the President

is authorised to deal with

All these general powers also apply to the management and administration of public finance. Power is entrusted to the people’s representatives, the legislature. Thus, this legislature has the power to:

Make decisions on a diversity of government issues, including public financial matters.

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Legislature’s role in financial matters includes: Determining the sources of revenue and their collection Allocation of financial resources Controlling the financial affairs, and accounting to the people who have original authority

A. Determining the sources of revenue and their collection

Legislatures operate in a political environment Thus, decisions that are made reflect the political interests and overtones of the political system. This applies to all the decisions that have to be made by the legislature, for example:

Determining what funds are needed Where and how these can be collected

Namibia’s Constitution sets out specific procedures for “money bills” that: Effectively protect the tax and expenditure legislation by providing that:

Only the Minister of Finance introduces these bills. Taxes can only be imposed through legislation, which:

Protects individuals and businesses from arbitrary imposition of taxation. Legislatures operate on the basis of:

Original authority allocated to it by the people through the vote However, the legislature has the authority to determine the nature of the tax regime.

B. Allocation of financial resources

Legislatures also enact or endorse budgetary laws (budget appropriations) for the resources to be allocated to a variety of public programmes and projects that are implemented by the various government departments.

This is a political process in that politics is about giving effect to social values and priorities. Thus, the allocation of resources reflects political judgements about social, economic and development

priorities. Allocation of these values begins with the legislature’s budgetary process, which includes:

Budget debates and enactment of the annual Budget Act. Legislature’s budgetary process is where:

Expenditure activities are approved Required volume of funds is determined Expected outcomes are specified.

C. Controlling the financial affairs, and accounting to the people who have original authority

Funds are allocated to different programmes and projects of government under the supervision of specific ministries:

It means that these ministries are expected to: Spend the allocated financial resources so as to provide specific services within their

mandates. It is mandatory for the legislature to:

Know whether the various ministries are acting within budgetary prescriptions. Thus, the legislature plays a crucial role of:

Overseeing accountability Enhancing responsibility in the various ministries.

Legislature in Namibia uses its internal standing committee in order to ensure appropriate control over the executive authority:

It is called the Standing Committee on Public Accounts (SCPA) Auditor-General’s office is also used to:

Ensure effective control over the executive authority.

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Mandatory requirements that government ministries are expected to produce financial statements also ensures control:

Statements should be audited and tabled in Parliament. It is a critical responsibility that is entrusted to the legislature and is carried out by these institutions:

SCPA and Auditor-General’s office are referred to as legislative institutions: They are independent of the executive authority They report directly to the legislature on the performance of the executive.

3.2.2 Executive authority

Executive authority comprises: President Prime minister Members appointed by the president who serve as cabinet members

Cabinet members are appointed as political heads of ministries, that is, they serve as ministers They also serve as members of the legislative authority Legislative authority has, therefore, the power to:

Create executive institutions to achieve specific objectives Executive authority is that part of the government system which is entrusted with:

Execution of the legislature’s policies and decisions as captured in laws at all levels of government

3.2.3 Judiciary

Judiciary consists of various levels of court. In Namibia’s case, we can identify the following courts:

Supreme court of Namibia High court of Namibia Lower courts of Namibia

Judiciary’s functions are:

To ensure that laws are upheld To interpret legislation and judgements

Operates independently and is only subject to the Constitution and the law: Thus, no one should interfere with judges or judicial officers in the exercise of their judicial

functions. Chief Justice of the Supreme Court and additional judges are appointed by the President Judge-President of the High Court and additional judges are also appointed by the President

3.2.4 National treasury

National Treasury monitors financial activities of executive institutions. Functions include the following:

Authorises repayments Authorises payments of state money Grants authorisation for someone to be exempted from paying any money owed to the central

revenue fund Makes recommendations relating to the format and content of the budget of expenditure Determines exactly what expenses may be incurred Issues treasury instructions regarding powers and duties of accounting officers, Accountant

General, as well as financial advisors.

3.2.5 Minister of Finance

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Minister of Finance is responsible for the National Treasury. Carries out four categories of functions, namely:

Regulating the economy through monetary and fiscal policy Preparing and presenting the annual budget to parliament Administering public debt Controlling public finance

A. Regulating the economy through monetary and fiscal policy

To maintain economic stability and stimulate economic growth, requires the Minister of Finance to carry out the following responsibilities:

Manipulating the money supply Controlling of interest rate and determining the bank rate Controlling the international balance of payments Controlling credit and determining the liquidity requirements of commercial banks and other

financial institutions (e.g. the Development Bank of Namibia and Agricultural Bank of Namibia).

B. Preparing and presenting the annual budget

Minister of Finance submits to parliament each year: A budget of revenue and expenditure to be paid from the State Revenue Fund An estimate of expected revenue for that financial year

According to the State Finance Act, 1991 (Act 31 of 1991):

A financial year is a period from 1 April of each year to 31 March of the following year. A ‘budget of expenditure’ is a budget submitted to parliament of expected expenditure from the

State Revenue Fund to finance the services of the state during a financial year A Budget of additional expenditure to finance such services during the financial year The additional budget caters for the financing of services for which no money was initially

allocated in a given financial year.

Tabling of the budget goes hand in hand with the budget speech in which the Minister of Finance:

Provides an overview of the State’s finance Highlights matters pertaining to the economy, for example:

Sustainable social development Medium-term budget framework Economic policy and outlook Public finance such as fiscal policy objectives Medium-term expenditure estimates Revenue aspects and tax proposals.

C. Administering public debt

Minister of Finance is responsible for public debt in the sense that: Has the authority to borrow on behalf of the government in order to:

Finance budget deficit Obtain foreign currency Manipulate the domestic monetary situation to create economic stability

D. Controlling public finance

Minister of Finance is authorised by parliament to exercise extraordinary responsibilities, for example:

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Approve savings on one budget vote to be transferred to pay for a deficit on another budget vote

Approve overspending when circumstances necessitate such approval, for example, natural disasters such as floods.

Impose or change the rate of certain taxes, such as value-added tax, and excise duties Determine the rate of interest and conditions for government loans to individuals and other

borrowers

3.2.6 Auditor- General

The State Finance Act, 1991 (Act 31 of 1991) states that the Auditor-General should ensure that:

All reasonable precautions have been taken to ensure that all moneys to which the investigation, examination and audit relate, are collected

Laws relating to the collection of such moneys have been complied with All reasonable precautions have been taken in connection with the receipts, custody and issue

of, accounting for, stamps, securities, forms having a face or potential value, equipment, stores, and other movable goods

Receipts, payments and other transactions are made in accordance with the applicable laws and instructions and supported by adequate vouchers

Satisfactory management measures have been taken to ensure that resources are procured economically and utilised efficiently and effectively

3.2.7 Accounting officer (Executive Director)

An accounting officer of a ministry is referred to as an Executive Director or permanent secretary (PS). Responsible for, amongst others, the following:

Effective, efficient, economical, and transparent use of the resources of the ministry Taking steps to collect all moneys due to the ministry Preventing unauthorised, irregular, fruitless, and wasteful expenditure and losses resulting from

criminal conduct Managing available working capital effectively and economically Management including the safeguarding and maintenance of assets and for the management of

the liabilities of the ministry Complying with any tax, levy, duty, pension, and audit commitments as may be required by

legislation Settling all contractual obligations and paying all money owing, including inter-governmental

claims within the agreed period.

Responsibilities of accounting officers that relate to aspects of budgetary control are to ensure that:

Expenditure of a particular ministry is in accordance with the vote of the ministry and the main divisions within the vote.

Effective and appropriate steps are taken to prevent any overspending of the vote of the ministry or a main vote division within the vote.

Reports are submitted to the executive authority and the relevant treasury providing details on:

Collection of revenue due Shortfalls in the budgeted revenue Overspending of the ministry’s vote or a main division within the vote.

Any remedial measures imposed by the relevant treasury to prevent overspending of the vote or a main division within the vote are complied with.

Accounting officer has reporting responsibilities to ensure financial accountability and must therefore:

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Keep full and proper records of the financial affairs of the ministry in accordance with any prescribed norms and standards

Prepare financial statements for each financial year in accordance with generally recognised practices

Submit those financial statements within two months after the end of the financial year to the Auditor-General for auditing and to the National Treasury to enable that organ to prepare consolidated financial statements

Submit to the National Treasury, within five months of the end of the financial year, an annual report on the activities of that ministry after statements have been audited. The Auditor-General’s report on this should also be submitted.

To sum up: A PS is appointed for each budget vote (State Finance Act, 1991) S/he is responsible for the receipt, safe-keeping and payment of money handled in a ministry. Duties, as prescribed by the Treasury, thus fall under three broad areas, namely:

Budget affairs Accounting affairs Authorisation of expenditure

3.3 The Central Bank and Public Financial Management

Worldwide, central banks exist to:

Regulate banking and financial systems, and

Maintain sound economic conditions in a country.

Central banks operate mainly through the use of monetary policy in which:

Supply of money in circulation in the economy is controlled in order to influence inflation and interest rates positively.

In the Namibian context, the central bank would refer to the Bank of Namibia.

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CHAPTER 4: BUDGET REFORM AND MANAGEMENT OF MONEY THROUGH BUDGETING

Concept of Budget Traditional Budgeting and Modern Budget Reforms Characteristics of the Budget

1. Concept of Budget

Budget is a document that identifies and states particular objectives with associated expenditures linked to each objective.

It is not only linked to government or business, but is also found within every household. A government budget sets national objectives, while a household budget sets domestic objectives. Striking features that differentiate a household budget from a government budget are:

The majority of households have a monthly budget, because: Salaries are paid monthly (or weekly for wage earners); and Installments have to be paid on a corresponding monthly basis.

On the other hand, government determines its objectives before it collects revenue, and this allows it to manipulate revenue (e.g. increasing taxes).

In short, household budgets are based on a fixed income, meaning that: There is a limit imposed on the spending objectives; while Budgeting from a determination of objectives and the accompanying generation of funds allows

for a greater number of spending objectives(in the case of government) In addition, a government budget can serve two sets of objectives:

Fiscal objectives such as combating inflation or promoting economic growth Policy objectives in terms of service delivery functions such as education (e.g. schools, materials,

salaries, student loans etc.) or health (e.g. hospitals, equipment, salaries, and services).

A further definition of a budget relates to the fact that it comprises two parts:

A revenue budget, and

An expenditure budget.

Revenue budgets indicate the source of funds for planned activities

Expenditure budgets convey information about carefully considered estimated costs of future activities.

A budget can be called a plan because, in effect, it is designed to communicate ‘what it is we plan to do in the future’.

However, although budgets are plans, not all plans are budgets.

A plan is a budget only if quantitative and/or monetary information is provided about the planned activities

2. Traditional Budgeting and Modern Budget Reforms

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Line item budgeting focused less on control and more on lower-level managerial autonomy and decision-making

Thus, the weakness of line-item budgeting was addressed through the subsequent introduction of the following budget reforms:

Performance budgeting Programme budgeting Zero-based budgeting

2.1 Line-item Budgeting

Line item budgeting is the simplest and perhaps oldest way to budget Every good or service that is produced, purchased or sold is specifically accounted for as a single entry on

the budget Good or service itself and its related amount is the only information needed More detailed budgets (e.g., capital budgets, operating budgets, performance budgets, programme

budgets) are presented together with line-item budgets due to: Limited information provided in line-item budgets

Main advantage of line-item budgeting is that: Key management processes of tracking and controlling costs are simplified. Manager would be able to account for all monies received and all monies spent if :

Every item of revenue and every item of expense were to be put on a line-item budget Simplicity of line-item budgets make them quite responsive to:

Incremental analysis ; and Incremental decision making

If line items on the budget are unchanged from year to year, the only thing needed is the amount spent on each item

Incremental budgeting assumes increasing costs due to inflation: Thus, the coming year's budget is normally equal to the current budget adjusted for

inflation Main disadvantages of line-item budgeting relate directly to its incrementalism:

Line-item budgeting raises no questions about the relevance of the items on the budget, as presented year after year.

Reality may be that expenditure items on the budget need to be reviewed on an ongoing basis to:

Determine whether they are still needed Incremental line-item budgeting does not allow for such considerations Line-item budgeting is input-oriented Successful line-item budgeting is considered to have occurred where:

Expenditure/line-item amounts are acquired and spent as budgeted Little consideration is given to the outcome of that spending It is often unimportant in line-item budgeting whether or not objectives were met Emphasis is on overspending, under-spending and spending in line with budgetary appropriations

2.2 Performance budgeting

Performance budgeting was the first real attempt at addressing the key shortcomings of traditional line-item budgeting.

Line-item budgeting operated on the basis of classifying expenditure by type, but: Performance budgeting sought instead to classify expenditure by the activities for which it was

needed. Performance budgeting provided a means with which to measure efficiency by:

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Classifying expenditures according to activities Efficiency is the maximum output attained from a given amount of input (or unit cost). Line-item budgets focus on the things to be acquired (inputs), while performance budgets:

Emphasise the work to be done (activities) Thus, performance budgeting is supported by the concept of management by objectives (MBO), with:

Main idea being that organisational objectives can be met only by: Breaking these objectives down into departmental objectives or sub-objectives

Departmental objectives can be met only when: Work-related objectives (i.e. sub-sub-objectives) of all individuals in the organisation are met

Thus, work of individuals in the organisation represents the activities that must be carried out in order to: Meet organisational objectives

Hence, performance budgets: Specify what the organisation's activities such as water meters to be read or kilometres of road

to be paved Prescribe standards for how much work must be done in the allotted time, that is:

Number of water meters to be read per day/week/month or kilometres of road to be paved per month

Thus, performance budgeting involves: Clarifying and quantifying the different levels of activities that must be completed in order to:

Meet the objectives for which the institution exists Amount of money that is needed to carry out activities provides the basis for budgeting.

Performance budgeting has three distinct steps: Activity classification:

Each activity or function that contributes to the attainment of organisational objectives is assigned its own "mini-budget"

Establishment of a performance indicator/measurement: Performance measures that indicate a benchmark or standard in terms of time and cost

per unit are articulated (e.g., number of meters to read per month as a performance standard)

Feedback A mechanism must be there to provide a useful comparison between planned and

actual performance so that deviations can be identified and corrected (e.g., actual number of meters read can be compared to the standard to find out whether it was met and, if not, why not)

Main advantage of performance budgeting is that: Activities of the organisation are judged on the basis of their efficiency and effectiveness,

because: Activities can be measured and compared to planned results.

Disadvantages to using performance budgeting include the following: Objectives are taken for granted (main disadvantage) in that:

Performance management never questions whether these objectives are still worth pursuing.

Activities differ and therefore some activities are easier to measure/evaluate than others in that it becomes impossible to:

Compare one organisation's performance to another Compare the performance of different sections/departments within the same institution

Performance standards set for performance budgeting are normally based on quantity only and do not consider quality.

It is possible for performance standards to hold managers responsible for outcomes that are beyond their control in that:

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Performance can be affected by external events or circumstances External events are not normally taken into consideration in the standards set for

performance budgeting.

2.3 Programme budgeting and multi-year programme budgeting

Budgeting reforms at this stage focused more on programme budgeting and less on: Performance budgeting's short-sighted focus on activities.

Thus, the focus was entire programmes and their objectives. Programme budgeting also applies the MBO concept In public sector budgeting:

An organisation's mission is synonymous with its goals Goals are broken down into specific objectives Each of these objectives has a budget of its own.

Further to this, objectives are synonymous with programmes and that: Budgets set up to achieve objectives are referred to as "programme budgets”.

Comparison of programme budgeting to line-item and performance budgting, reveals the following: Line-item budgeting is focused on inputs and their costs Performance budgeting is focused on activities and their costs Programme budgeting is focused on outputs (i.e. objectives)

It can thus be concluded that: Programme budgeting is aimed at effectiveness, which refers to:

The extent to which objectives are met.

2.3.1 Advantages of programme budgeting

Main advantage of programme budgeting relates to its link to MBO in that: Achieving of objectives under programme budgeting is more likely than under line-item or

performance budgeting. Programme budgeting can be relatively effective when money is in short supply in that:

Financial resources at the disposal of the State are limited, and hence: Government departments (or ministries) must compete with one another for funds Programmes within each government department (or ministry) must also compete for

funding with other programmes in the same department (or ministry) Programmes that best contribute to the objectives of the organisation will:

Gather financial support away from less effective programmes. It is possible to continuously assess programmes to ensure that:

They are still directed at attaining the objectives for which they exist.

2.3.2 Disadvantages of programme budgeting

Most recent budget reform within the public sector is known as: Multi-year programme budgeting, that is:

Programme budgeting for more than one year at a time, in three-year rolling cycles. Due to multi-year programme budgeting now being introduced, this points to the fact that:

Programme budgeting in itself has no major drawbacks or disadvantages. However, funding choices are complicated under programme budgeting due to the fact:

Parts of certain programmes may be effective with respect to organisational objectives, whereas other parts of the same programme may not be.

When a decision has to be made whether to fund or abandon a programme on the basis of its (or parts of it) failing to contribute significantly to objectives, managers may be forced to:

Reduce funding such that only those activities of the programme that contribute to organisational goals are funded.

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2.4. Zero-based budgeting (ZBB)

As the name may suggest, ZBB justifies from scratch (i.e. zero) all expenditure on the budget in that: It opposes budgeting on the basis of prior approved amounts and incremental adjustments of

such amounts. ZBB is actually not intended to "start from scratch", as its name implies. ZBB instead requires a matching of available budget revenue against all of the proposed expenditure

items of the budget. Since money is scarce:

It is the norm that the monetary amount of proposed expenditures will exceed the amount of money available:

Thus, there must be some competition among anticipated expenditures such that the least important expenditures are excluded from funding.

ZBB allows managers to increase funding for some programmes, whilst simultaneously: Decreasing funding for less effective programmes, given a fixed amount of revenue.

ZBB uses "decision packages" and "decision units" as instruments to allocate funding to programmes.

2.4.1 Decision units

Competition (and thus comparison) takes place not just between programmes, but also: Between the activities that make up the programmes.

Activities within a particular programme are evaluated and ranked against each other in order to: Compete for funding.

Activities in this case are referred to as "decision units". Activities of a given programme must also compete for funding against the activities of other

programmes. Ranking and comparison across programmes are done through the use of "decision packages".

2.4.2 Decision packages

Decision packages can be equated to programmes. Programmes are ranked on the extent to which they contribute to the organisation's objectives Programmes can be positioned on a list of "first", "second", "third", "fourth", etc. In short, a "higher position on the list" implies that:

Such programmes will receive funding ahead of other programmes as: They more closely contribute to the organisation's objectives and success.

Ranking of programmes as set out below and can be related to the Ministry of Education, Arts and Culture (MEAC) as an example:

Decision package 1

Decision package 2

Decision package 3

Unit 1 Unit 3 Unit 5

Unit 2 Unit 4 Unit 6

Objectives of MEAC include the following:

Ensure that all children receive quality education Ensure that all Namibians are functionally literate Enhance learners' potential for beneficial participation in the economy and in society

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Have a workforce with skills and competencies to enable the labour market to operate efficiently

Ensure people have equitable access to knowledge, information and lifelong learning Create an enabling environment for research, science, technology and innovation.

MEAC attempts to achieve its objectives by implementing the following programmes: General Education Information, Adult and Lifelong Learning Vocational Education and Training Knowledge Creation and Innovation Tertiary Education and Training HIV and AIDS

2.4.3 Advantages of ZBB

ZBB the following advantages:

Main advantage is that limited resources can be put to their most effective uses in programmes and activities that best meet the organisation's objectives

Ineffective programmes and activities can be identified and phased out, if necessary Effective programmes can be identified and further supported by increased funding, which is

taken away from ineffective programmes One of the end-results of the ZBB process is the accumulation of a substantial quantity of

operational data about programmes and activities, and such data can be made available for use in other management applications

Not only does ZBB require managers to review programmes and activities regularly, it compels them to consider the relevance of organisational objectives

In general, tax increases could be limited if all government departments were required to budget on the basis of ZBB, as public managers would not apply for ever-increasing amounts of funding each year. Instead, available funds would be more effectively spent by cutting spending on ineffective programmes, whilst increasing spending on more effective ones.

2.4.4 Disadvantages of ZBB

ZBB fails in its use in part due to the following disadvantages:

Some government activities may not be suitable for zero-based budgeting: Impact or effect of mandated and yet unfunded programmes

Ranking decision units and decision packages can prove to be a complicated matter: Availability of data to make a sound decision

Ranking process may also be complicated due to fact that: While some programmes and activities contribute to the same objectives, they may at

times do so in very different ways, making comparison and ranking difficult. Effective execution of ZBB requires an advanced level of expertise and experience, which may

not be available.

2.5 Characteristics of Budgets

2.5.1 Source of information

Budgets provide information on: Policy objectives that are linked to votes Monetary or financial implications associated with the objectives Implied or proposed taxation measures linked to the financial implications

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Detailed information on the operational aspects of any ministry will be contained in that ministry’s documents.

2.5.2 Financial information

Financial implications relating to the political objectives that are stated in the votes will be reflected in a budget. Some aspects of these financial implications include the following:

Taxation Budget deficit Loans

Only ministries would have a detailed breakdown of all costs to each respective activity. In other words, the budget contains limited financial information.

Main purpose of the annual budget is thus to: Provide parliament with a full explanation of all policy objectives and the costs that are required

to fund these objectives. For the purpose of approving the budget in parliament, only the overall objectives and the total costs

are required.

2.5.3 Working document

Budget contains the votes that identify the various programmes that ministries and other constitutional institutions will implement.

Extent to which this is possible depends on who is utilising the budget and for what purpose. Budget contains too little detailed information as a working document for exact financial control and

management purposes, because: All transactions are required to be recorded Funds on expenditures are monitored.

Again, programme information regarding votes contains too little information to be of relevance for: Monitoring progress Determining performance levels Auditing purposes

Information in the budget is a valuable indicator of the financial activities of government for politicians and other role-players.

2.5.4 Control instrument Budget provides the main framework or means against which:

Performance and financial management results are determined. Budget, therefore, serves as a framework of reference for both the legislature and other institutions

(e.g. Auditor-General’s Office). For control purposes, the Auditor-General would not totally depend on the budget:

All other documents from ministries that are necessary to conduct any type of audit (e.g. financial or performance audit) would also be obtained.

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CHAPTER 5: BUDGET PRACTICE

5.1 Functions of the Budget

In the public sector, a manager would find it difficult to find a more useful tool than budgets. Thus, important uses of budgets include the following:

Budgets enforce honesty in financial transactions through accountability Budgets facilitate the maintenance of control Budgets facilitate planning and the management of resources Budgets balance income with expenditures Budgets are a source of information, which inform the public of what government intends to do

(i.e. a plan) Budgets are also reports which convey information on how efficiently and effectively government

has done what it said it intended to do (i.e. performance) Budgets are policy statements informing the public of government priorities

Functions of the budget, which can be viewed collectively, include the following:

Planning Coordination Communication Control

5.1.1 Planning

Planning in government ministries should occur on two levels, namely: Strategic and tactical. Strategic planning refers to the formulation of broad financial objectives for an organisation and

it involves: Decisions with regard to investment of assets and funds required to acquire such assets.

Tactical planning refers to the process of taking the strategic plan and breaking it down into: Specific, short-term actions and plans.

Profit is the primary objective of any organisation. Thus, profit planning is part of strategic planning. Profit should not be measured in terms of money only, but it may represent a benefit (common for

government ministries).

5.1.2 Coordination

Budget is an instrument that can be used to: Bring together the various parts of the organisation in that:

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Various parts of the organisation can function as a harmonious unit in realising a common set of objectives.

5.1.3 Communication

Maintenance of channels of communication is critical in compiling a budget. Budget itself serves to complement budgeting.

5.1.4 Control

Budget should not be seen as a final blue-print but: It should serve as a control instrument in assisting staff to achieve the objectives.

Three phases in the control process can be identified, namely: Standard Evaluation Corrective action

1. Standard An input or output that is to be controlled should have a yardstick against which it may be measured. A norm is determined through:

Historical information, mathematical or statistical methods, management experience, and skills. Function would be vital for performance management purposes.

2. Evaluation Continuous evaluation of results that were achieved against a preconceived yardstick is essential. It is a basic requirement for performance management.

3. Corrective action After real and budgeted results have been compared:

Efforts should be made to quantify and remedy deviations.

5.2 Estimates

An estimate is a rational process to determine: Monetary value of resource requirements needed by an organisational institution to:

Realise a predetermined objective effectively and efficiently

5.2.1 Relationship between estimates and budgets

Estimates and budgets address the same objectives and expenditure items in that: Both contain the same planning particulars.

Differences between an estimate and a budget are: An estimate is compiled timeously, updated regularly, and eventually forms the basis from which

the budget is compiled. A ministry’s budget is approved by parliament and assimilated into an Appropriation Act.

On the other hand, the estimates of a ministry’s organisational units are used for planning purposes within the relevant ministry only, and are not submitted to parliament.

An estimate can be amended as required, while budget figures cannot be changed after legislative approval.

A ministry’s budget activities (e.g. over-expenditure) are subject to auditing, whilst estimates are not, as no expenditure may be incurred against estimates.

Submission of an annual budget to parliament is mandatory, while the compilation of estimates is optional.

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Funds allocated in a budget are utilised in the relevant financial year, that is, the execution of the plans occurs immediately. However, an estimate always remains only a financial reflection of future actions.

An estimate is always directed at future action, whilst the budget converts planning into action.

5.2.2 Advantages of estimates

Estimates have the following advantages:

Estimates can be a sound indication of the financial cost of the planned activities at an early stage, long before the financial year starts.

They, therefore, allow senior management and decision-makers to determine whether the expected results justify the costs.

They serve as instruments for measuring the instruction against the guideline amount to determine whether adequate funds are available.

After the actual expenditure has been incurred, the original estimate may be examined to ascertain whether there has been a substantial deviation, and if so, why.

This will ensure accuracy and reliability of future estimates. Estimates and revised estimates give timely indications of savings and over-expenditure in the

various standard items and their influence on the total cost of the objective. Timely warning, therefore, allows the responsible functionary to take corrective action.

Financial estimates that reveal a high cost of an initial plan often result in the consideration of alternatives. For example, less expensive equipment may be used.

Estimates clearly promote rational decision-making in the sense that: Costs of the planned action may result in the original decision being adjusted, amended,

or even scrapped. An estimate is an important instrument by means of which functionaries rationally consider the

future execution of their directives. Thus, reliance is not on the historical course of their functions alone, but directs their

thoughts constructively towards the future. Estimates allow the orderly financial management activities because:

They represent almost the only method of ensuring adequate funds and timely adjustments to activities aimed at accommodating current circumstances.

Estimates contribute to efficient and effective action when faced with changing circumstances. Estimates provide senior officials in the hierarchy (e.g. programme managers) with information

that is required for: Meaningful decision-making in terms of the allocation of funds to those objectives with

the highest priority.

5.2.3 Disadvantages of estimates

Estimates have the following disadvantages:

Their accuracy reflects the comprehensiveness of the available information They depend on the compiler’s dedication, as well as expertise and devotion to accurately process

the financial information reflected Estimates require periodic revision and updating so as to ensure that financial information reflects

the current situation or status quo Amending estimates at will without a proper foundation or acceptable reason may result in a

negative perception of their value The unrealistic approach of some individuals may result in a ‘wish list’ instead of a properly

determined estimation. This could result in cutbacks and lead to subsequent lack of meaningful attention to

estimates.

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5.3 Components of the Budget

Two main categories, namely an operating budget and a capital budget are used to classify the principal (main) budget, which can also be referred to as the ‘master budget’.

5.3.1 Operating budget The operating budget is compiled for the short-term and usually for a period of one year. It deals with the revenue and expenditure of a department’s or a ministry’s daily activities. An important item of this budget is stock control:

Adequate stock ensures an uninterrupted flow of the production process (or service delivery). In addition, personnel form a crucial element of the operating budget:

If not catered for, it may constitute a limiting factor in carrying out a department’s plans. Personnel budget is divided into direct and indirect labour costs.

5.3.2 Capital budget The capital budget forms part of the long-term budget of an enterprise. It deals with the acquisition of fixed assets for the enterprise as well as financing of these assets. Three basic functions of the capital budget are:

Continued existence of the organisation Expansion of the organisation Provision of long-term assets1. Continued existence of the organisation

Before the capital budget is compiled, it should be determined whether or not the enterprise will continue to exist.

In other words, no logical planning should be done if the enterprise will not exist since capital budgets are compiled for the long-term.

2. Expansion of the organisation

Possibilities for expansion can be considered in advance. Capital budget can be compiled with planning for this expansion as a constant.

3. Provision of long-term assets Provision is made for selecting long-term assets. Assets acquired include plant, machinery, equipment, and other major expenses. Above-mentioned assets involve huge investments, and hence wrong decisions could

result in loss of large sums of money invested. Capital budgets should, therefore, provide for the following:

1. Replacement of assets Existing assets should be thoroughly examined in terms of their usefulness before

budgeting for capital investments can be done. For example, whether assets are technologically outdated or still fulfil the required

production capacity.

2. Expansion of the organisation Capital budgets should provide for the possibilities of expansion. Thus, management should decide whether or not the organisation should be enlarged.

3. Diversification of product

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If management decides to manufacture more than the existing product, provision must be made for additional machinery and equipment to realise the planned product diversification.

4. Research into technology Rapid technological progress requires enterprises to set aside capital for research

projects, that is, if they are to keep up with developments Hence, research is viewed as an investment in the future

5. Other relevant factors Capital budgets provide for matters such as: Safeguarding of workers in the production area Fire-fighting equipment

5.4 Budget Cycle

Four phases have been identified, namely:

Preparation Approval Execution Control

5.4.1 Preparation phase Executive, both officials and members of the political executive, play a role. Usually, treasuries dominate this phase:

People are also supposed to play a part.5.4.2 Approval phase

This phase takes place in the legislature: Various committees are involved.

Legislature must approve by discussing separately: Main divisions of the votes of the budget Bill.

Theoretically, the legislature is the role-player that should allocate funds: Possible for some parliaments to act as rubber stamps in this phase.

5.4.3 Execution phase

Officials that are entrusted with the money, under the leadership of an accounting officer, dominate this phase.

Though the executive authority (minister) of the ministry directs the policies of the ministry: He or she is not in a position to go against the wishes of the legislature.

5.4.4 Control phase

This phase partially runs concurrently with the execution phase, but: It is concluded some time after the end of the execution phase. It is completed once the legislature has accepted the reports of the Auditor-General.

Control runs concurrently with all phases, because: Budget serves as an ex ante control measure, meaning that:

It is a control measure before the fact.

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5.5 Namibian Budget Cycle

Preparation phase of the budget include the follwing highlights:

1. Prepare macroeconomic framework (Time-frame: ±2 months)

Obtain comments from Bank of Namibia, National Planning Commission and the Presidential Economic Advisory Council

Present macroeconomic framework to Cabinet Request endorsements of fiscal targets Submit draft to the Department of State Accounts

2. Determine resource envelope/obtain budget information (Time-frame: ±1 month)

Issue circular to Offices/Ministries/Agencies (O/M/A) requesting estimates of tax and non-tax revenue, as well as grants/donations in cash, for both the medium term and the current financial year

O/M/A provide the Ministry of Finance with forms for Year 1 (next financial year); any additional requests should also be submitted

Budget information for Year 2 Budget proposals for Year 3

3. Determine budget ceilings (Time-frame: ±2 months)

Review all budget requests and prepare for the National Budget hearing Analyse, review and compile additional requests from O/M/A (National Planning Commission) Issue invitations to O/M/A for National Budget hearings (National Planning Commission, for Development

Budget) Budget hearings Compile final budget scenario based on information from the following sources:

Macroeconomic framework Fiscal targets Resource envelope National debt/statutory payments National Budget hearings

Arrange Treasury Cabinet Committee meeting in consultation with Minister of Finance Submit summarised Budgetary Framework and Medium-term Expenditure Framework to Minister for

presentation to the Treasury Cabinet Committee Submit summarised Budgetary Framework as revised by the Treasury Cabinet Committee, as well as the

Medium-term Expenditure Framework to the Minister of Finance for presentation to Cabinet Issue Treasury Circular to O/M/A with final medium-term ceilings request adjusted documents

4. Finalise budget documents (Time-frame: ±3 months)

Issue letter to National Planning Commission requesting breakdown for Development Budget Compile National Budget, Medium-term Expenditure Framework and budget speech Submit National Budget, Medium-term Expenditure Framework and budget speech to the Bank of

Namibia and the National Planning Commission for comment Finalise budget book Finalise MTEF Finalise National Budget speech Print documents Tabling of National Budget

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CHAPTER 6: PROJECT MANAGEMENT

6.1 Concept of Project Management

A ‘project’ could involve or include any work that needs to be done within any environment: Work of a construction company could involve:

Construction of a dam, a bridge, roads, or any other buildings. Thus, certain common features of a project include the following:

Each project contains a singular objective In terms of its objective, each project has an identifiable beginning and logical end Each project is associated with procedures or processes enabling completion.

Based on the above, the following are certain assumptions of a project’s intrinsic propensities: Although having a singular intended objective, a project may be part of a macro plan, and

therefore form a component of a broader plan or objective Existing as it does for a singular purpose, and with an identifiable end point, a project is not

necessarily repeated and, therefore, is not intended for maintenance purposes A project, even if repeated or followed by another with similar objectives, will differ slightly from

any preceding project, because of differences in time spans, costing, personnel, and support systems.

Word ‘management’ used in connection with ‘project’ relates to: Management of the execution of the programme – from the planning and inception stage,

throughout its life span and it includes: Determining the objective (what is the end result of the project?) Determining the parameters of the project (what aspects would be considered when

identifying the constituent elements of the project?) Appointing a manager who will exercise full control over all of the activities within the

project and for its full duration Organising and allocating functions and responsibilities of separated functions within

the project to suitably qualified persons Identifying and determining certain due dates within the time span of the project,

when identifiable sub-objectives should be achieved, for controlling and monitoring the relative success of the project, particularly in terms of progress and costs.

It should be noted that: Functions of government, as derived from its objectives, are not organised according to a project

approach. The mere size and extent of government operations precludes this approach.

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Each project differs from each another and this would severely constrain the continuity of services such as health and education.

Hence, the purpose of project management is to: Foresee or predict as many of the dangers and problems as possible and to:

Plan, organise, and control activities so that the project is completed as successfully as possible in the circumstances.

Project management implies the following: Planning, organising, and controlling activities:

Relate to basic planning and identifying of all necessary elements required to execute a project and control such activities

Foreseeing or predicting possible dangers and possibly imposing or inserting safety or preventative measures:

Relates to the basic premises of risk management processes and procedures Successfully completing the project:

Relates to all the required management procedures and processes utilised to complete a project, such as cash-flow management and control

A project is an activity which may be complex or relatively straightforward, but typically it has all or most of the following characteristics:

A clearly defined output or objective to be achieved Quality, quantity and time-frame for delivery are defined, with limited tolerance for under-

performance Budget is tightly defined, again with limited tolerance for under-performance A dedicated team with specific skills and expertise is essential for the achievement of the output

or objective It is managed by a person, the project manager, selected specifically for his or her project

management skills and experience, including: A high degree of knowledge of the blend of skills and experience necessary for the

success of the project An affinity for and inter-relationships with other programmes, sub-programmes or projects

within the sphere of responsibility of the institution responsible for the project.

6.2 Components of Projects

The following major components of a ‘typical’ project have been identified: Project initiation, selection, and definition, which include such functions as:

Identification of needs Development of (technological) alternatives Evaluation of alternatives Selection of the ‘most promising’ alternatives Assessment of risk Developing a configuration baseline ‘Selling’ the configuration and getting approval.

Project organisation, including: Selection of participating organisations Structuring the content of the project into a work breakdown structure (WBS) Development of the project organisational structure and associated communication and

reporting facilities Allocation of WBS elements to participating organisations.

Analysis of activities, including: Definition of the project’s major tasks Development of a list of activities that are required to complete the project’s tasks Development of precedence relations among activities Development of higher-level network elements (hammock activities, sub-networks)

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Development of milestones Updating the network and its elements.

Project schedule, including: Development of a calendar Estimation of activity durations Estimation of activity performance dates Monitoring actual progress and milestones Updating the schedule.

Resource management, including: Definition of resource requirements Acquisition of resources Allocation of resources among projects/activities Monitoring of actual resource use and cost.

Technological management, including: Development of a configuration management plan Identification of technological risks Configuration control Risk management and control Total quality management.

Project budgeting, comprising: Estimation of direct and indirect costs Development of a cash-flow forecast Development of a budget Monitoring actual costs.

Project execution and control, including: Development of data analysis systems Execution of activities Data collection and analysis Detection of deviations in cost, configuration, schedule, and quality Development of corrective plans Forecasting of project cost at completion.

Project termination, including: Evaluation of the project’s success Recommendation for improvements in project management practices, and analysis and

storage of information on actual cost, actual duration, actual performance, and configuration.

6.3 Project Management in the Public Sector

It is maintained that project management comprises: Planning, overseeing, monitoring, and control of a project from its inception to its post-

implementation evaluation, and ensuring that: Project outputs and objectives are achieved in accordance with the quality, quantity,

and time-frame specified, more importantly – within budget.

Project management may involve: Application of specialised tools and techniques such as:

Software-based scheduling tools, in combination with managerial control methods, for the successful implementation of the project.

A project is viewed as being part of a programme, as such: Accounting officers are responsible and accountable for all programmes within their ministries

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Programme and responsibility managers, as per delegated powers, exercise control over projects.

A project manager is appointed for a specific project.

6.3.1 Responsibility for project management

Project manager is responsible to the accounting officer for: Efficient, effective, and economical execution of the project.

He or she must prepare a comprehensive project plan for the approval of the accounting officer. He or she must keep the accounting officer informed of the progress in the execution of the project

against agreed milestones. Project plan must meet the following aspects:

Be consistent with the institution’s strategic plan Convey a clear definition of the project, including its objectives, quality and quantitative

requirements Define the link to broader ministerial programmes and policies Identify key risks to the project’s success Define the manner in which project resources are to be managed Define the milestones against which the project will be monitored and reported over the life of

the project Define the reporting schedule

Accounting officer may refer the project plan and any progress report to the Audit Committee: Purpose is to seek advice on any matter related to the project, including:

Manner in which its exposure to risk is being managed.

6.3.2 Guidance to accounting officers

National Treasury Instructions are intended to: Guide accounting officers in their choice and use of project management techniques.

Instructions identify a number of characteristics that are typically attributable to: Activities that lend themselves to project management techniques.

Thus, the accounting officer should ascertain as to whether: Specific application of such techniques is appropriate to the circumstances of a particular activity

for which his or her institution is responsible. Principles that underlie good project management are equally applicable to the management of any

activity and these include such things as: Need for an activity to be integral to the strategic planning process and thus to be consistent

with the objectives of the institution Need to prioritise the activity relative to competing calls on the institution’s limited funds Need for sound management structures for the evaluation and approval of new activities and

for the review of priorities that are accorded to current activities Role of the Audit Committee in monitoring exposures to significant risk factors, internal controls

applicable to activities, and resourcing financial reporting Need for management to be informed about funding and resource issues and the performance

(efficiency, effectiveness, and economy) of the institution in delivering all of its outputs and achieving its objectives.

6.3.3 Elements of initial project approval

Some important elements of initial project approval and subsequent monitoring include the following: Project’s relevance to government policies Soundness of information Soundness of technology

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Management of recurrent costs Monitoring and long-term impact Management of assets Identification and management of risks Decisions on the continuation of projects

For monitoring purposes, project performance must be constantly measured and managed as per the approval condition based on:

A time base plan Work breakdown structure An accurate costing system An objective method of assessing progress

Progress of each project must be reported in accordance with the approval conditions.

CHAPTER 7: CASH MANAGEMENT

7.1 Concept of Cash Management

‘Revenue collection administration’ is one of many terms used to: Describe cash management procedures and practices within the public sector environment.

Hence, benefits of an efficiently run revenue collection operation include the following: An improved revenue flow Improved cash management and more accurate cash forecasting ability Greater interest earnings on investments Consistent and equal treatment of tax payers Greater budgetary control and the ability to complete projects timeously Improved credit worthiness and reduction in borrowing costs Increased compliance with local tax and revenue laws

Basic aim of cash management is to: Ensure that the ‘cash in exceeds the cash out’:

Applicable to the private sector Ensure that the ‘cash in equals the cash out’:

Applicable to the public sector

7.2 Public Sector Revenue

During the process of planning and budgeting: Ministries spend most of their efforts to determine the objectives according to:

Programme structure and from each respective activity level. Costing is done according to:

Needs of each activity levels, with the result that: Total required expenditure is expressed in monetary terms.

At the costing stage, line ministries are not concerned with: Revenue aspect of the budget that will be presented to parliament.

When budget compilation takes place: National Treasury acts in an intermediary role between:

Financial needs of ministries and the future availability of funding resources. Thus, Treasury will try to:

Prevent over-elaborate budgetary practices by: Cautioning ministries not to exceed budget allocations.

Reasons for this caution are that:

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Treasury is aware of the total funding requirements that will have to be met to pay the relevant budget expenses

Treasury has to consider other obligations, such as debt repayments. Ministerial cash management involves two important aspects:

Arrangements must be made to ensure that government receives all the money due Ministries should have funding available during the financial year to pay their expenses and meet

all obligations. Availability of funding is an aspect of the fund management process in ministries in that:

Ministries make monthly fund requests to the Treasury Commitments and obligations are spaced over a 12-month period.

Hence, cash management, or revenue collection, forms the basis of: Government’s funding operations providing for all expenditures.

It should be noted that: It is not the sole responsibility of the Receiver of Revenue to receive income for the state.

Many ministries participate in the collection of revenue for the state. Income ministries receive can be in the form of the following:

Loan and bursary repayments Fines Fees Services provided Products sold.

Revenues collected are paid into the State Revenue Fund from which: Expenses of ministries are funded.

7.3 Cash and Fund Management

Both cash and fund management processes and functions apply to ministries. Main difference between the two is that:

Fund management relates to all aspects that concern expenditures of ministries on a daily and monthly basis, which include the following:

Monthly requests for funding Monitoring of expenditure levels against budgets Management of budget deviations Detection and prevention of possible overspending Prior determination and prevention of fruitless expenditures Adherence to all accounting and reporting systems.

Cash management refers to: Relevant procedures that ensure all revenue is collected:

Whether by taxation or by ministerial revenues. Fund management procedures start with the monthly fund requests by ministries. It should be noted that:

A ministry’s income is not increased through its revenue collection functions.

7.4 Official Prescriptions and Regulations

It is noted that cash management represents: Revenue collection functions and is used to defray government expenditure.

It is further noted that there is a difference between: Tax revenue collected by the Receiver of Revenue; and Revenue collected by ministries.

Thus, revenue collected by the Receiver of Revenue does not: Include revenue collected by ministries as part of their normal operational functions.

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Revenue received by ministries differs from taxes in that: It is not based on income or economic activity.

Constitution of the Republic of Namibia of 1990, and the State Finance Act (Act 31 of 1991) as the official prescriptions and regulations in cash management.

7.4.1 Constitution of the Republic of Namibia of 1990

Article 125 of Chapter 16 (1990: 60) makes provision for the Central Revenue Fund as follows: (1) Section 31(1) of the Proclamation R 101 of 1985 shall continue as the State Revenue Fund of the Republic of Namibia.(2) All income accruing to the central Government shall be deposited in the State Revenue Fund and the authority to dispose thereof shall vest in the Government of Namibia.(3) Nothing contained in Sub-Article (2) hereof shall preclude the enactment of any law or the application of any law which provides that:

(a) the Government shall pay any particular monies accruing to it into a fund designated for a special purpose; or(b) any body or institution to which any monies accruing to the State have been paid, may retain such monies or portions thereof for the purpose of defraying the expenses of such body or institution; or(c) where necessary, subsidies shall be allocated to Regional and Local Authorities.

(4) No money shall be withdrawn from the State Revenue Fund except in accordance with an Act of Parliament.(5) No body or person other than the Government shall have the power to withdraw monies from the State Revenue Fund.

Thus, cash management functions are handled by the Treasury.

7.4.2 State Finance Act (Act 31 of 1991)

Sections of this Act make specific provision for the following aspects that relate to revenue and cash management:

Establishment of the Treasury General powers of the Treasury, which state that:

Notwithstanding the provisions of Section 6, authorise that a saving on: (i) a Column 2 amount of a vote or on an amount mentioned in a main division of a vote, be utilised towards the defrayal of anticipated expenditure which may result in an excess of an amount mentioned in any main division of the vote concerned, including a main division established under Section 9 (1) (c); or (ii) an amount mentioned in a subdivision of a main division of a vote, be utilised towards the defrayal of anticipated expenditure which may result in an excess of an amount mentioned in any other subdivision of the main division concerned, including any new subdivision which may be established with the authorisation of the Treasury (a) notwithstanding anything to the contrary in this Act or any other law contained, in its discretion, from time to time withhold or suspend the disbursement of any amount of money mentioned in an estimate of expenditure or in respect of which the withdrawal has been authorised under Section 9 or which has been appropriated by or under any law, including a law whereby money has been appropriated for a statutory institution; (b) subject to the provisions of this Act or any other law- (i) waive any claim in terms of section 11 of this Act or in terms of any other law resulting from any loss or damage or unjust enrichment contemplated in the said section(ii) authorise any refund of revenue by way of grace(iii) authorise any payment by way of grace from State moneys

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(iv) authorise any person to be discharged from liability by way of grace in respect of any money due to the State Revenue Fund by such person(v) authorise that any loss of or damage to State moneys for which no person is liable or any other amount due to the State, except fines imposed by courts of justice, be written off(vi) make recommendations to the Minister in relation to the form and contents of an estimate of expenditure(vii) determine the vote or main division of a vote to be charged with any particular expenditure.

7.5 Revenue Assessment

Revenue types at national and regional levels have no bearing on municipal income. Municipal income is based on:

Property taxation and levies and charges for services delivered such as: Electricity and water provision.

7.5.1 Types of revenue

Besides income and company taxes, revenue received by the state can include the following various types:

5. Levies Consist of revenue received from:

Duties on mine leasing and licences Auction dues Licences for:

Motor vehicles, dogs, fishing, game, flora, and betting

6. User levies These levies comprise:

Sale of produce, stores, livestock, or equipment Receipts from the control and disposal of state property, such as letting and proprietary duties Laboratory and analysing services Hospital fees School (hostel) fees Board and lodging fees Tollage Permits

7. Sundry revenue Consist of the following types of revenue:

Dividends Recovery of loans Registrations and inspection fees Fines and forfeitures Witness fees and pension contributions Commissions Gifts Exchange and other profits

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CHAPTER 8: DEBT MANAGEMENT

8.1 Concept of Debt Management

Concept of ‘debt’ is wider than the mere obtaining of loans and their repayment over varied time spans. Repayment of debt influences the future financial planning and budgeting of government in that:

A percentage of the national budget is allocated to interest repayments, meaning that: Future taxpayers are pre-committed to future debt repayments.

Further to this, another consideration is debt that is owed to the state. This debt forms part of the financial management processes within ministries and other constitutional

institutions. Debt that is owed to the state can, for example, relate to:

Repayment of bursaries, or loans and tax. Thus, debt repayment constitutes revenue and, therefore, influences cash-flow management. Debt management is crucial to senior officials and management because:

Long-term debt proceeds are the primary source of funds that are required to meet the demands caused by growth.

Hence, it is important to first establish the distinction between debt management and loans administration:

Public loans refer to the floatation and repayment of loans; while Public debt is the result of government borrowing from private individuals and financial

institutions with the promise of paying back the money borrowed plus interest. Public debt management, therefore, concerns:

Decisions and their implementation in connection with change and the timing thereof and includes:

Extent and composition of the security provided Maturity structure Ownership of debt of the public sector outstanding, that is, the outstanding debt of

government. The Asset, Cash & Debt Management (ACDM) Directorate within the Ministry of Finance (MOF) is

responsible for: Management of government assets and debt stock.

Effective management of national assets and the debt stock is critical to: Ensure that government is not exposed to excessive fiscal risks.

Directorate has two divisions, namely: Cash and Debt Management Asset Management.

Cash and Debt Management division deals with the following aspects: Has a responsibility to structure government domestic and foreign borrowing

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Negotiations of terms and conditions for financing and on-lending agreements Assessment of government guarantee applications Minimises the long-term cost of government borrowing, consistent with an acceptable degree of

risk Division consists of four sub-divisions, namely;

Domestic Debt Foreign Debt Parastatal Control

Government Guarantees Division is assigned with the responsibility to:

Coordinate and manage the country’s largest fiscal portfolio (national debt), which currently stands at N$12 billion.

There are large potential costs to the economy that are associated with: A weak institutional structure or; Inadequate numbers of qualified personnel that could:

Result in a higher risk of a serious national debt crisis. Ineffective asset and debt management practices have to date led to:

Serious high indebtedness in many developing countries, referred to as: Heavily indebted poor countries “HIPC”

8.2 Relationship of Debt Management to Monetary and Exchange Rate Policy

8.2.1 Monetary policy and public debt management

The relationship between public debt management and monetary policy is concerned with the money supply:

If the Central Bank buys securities directly from the National Treasury, the treasury’s account is credited with the amount of the purchase. In this transaction, there is no change in the money supply.

On the other hand, if the treasury decides to spend the newly acquired funds, there will be a decline in government deposits. The supply of money will, therefore, increase by a similar amount.

Other factors that have a considerable effect on monetary aggregates are: Government’s net borrowing requirements Ownership distribution of marketable government debt.

Hence, it is necessary that the management of public debt should not be in conflict with the monetary policy of the Central Bank.

8.2.2 Exchange rate policy and public debt management

An expansionary influence on the money supply and the economy as a whole may result from: Government’s net borrowing requirements; and Way in which net borrowing requirements are financed.

An expansionary fiscal policy leads to the following: Increase in economic activities Increase in imports:

They adversely affect the balance on the current account of the balance of payments, as well as net gold and foreign exchange reserves.

Effect of an expansionary fiscal policy on a floating exchange rate (system that operates on the basis of demand for and supply of currencies on the money market) is that:

Currency will have a lower exchange rate. However, contradictory economic policy measures will lead to the following:

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Drop in imports; Rise in foreign exchange reserves; and Stronger exchange rate.

Thus, public debt management exerts a macroeconomic effect. For example, its effect on interest rates can be felt by the household and private sectors.

8.3 Constraints that relate to debt management

Central Bank and National Treasury, as monetary authorities, need to take into account various economic constraints in their daily operations.

Thus, public debt management necessitates the consideration of the various constraints.8.3.1 Constraints on expenditure policy

Various problems have to be considered whenever government decides to cut its expenditure so as to reduce its borrowing requirements.

1. Problems caused by political pressure

Expenditure policy is usually not very flexible due to: Political pressure in parliament Informal pressure groups.

In the absence of a social safety net to address the impact of high unemployment, government is usually reluctant to reduce state expenditure.

This is normally evident during recession times when the private sector would not be willing to take up the idle production capacity.

2. Current expenditure problems

Current expenditure items, such as salaries and wages, pensions, and other transfers (e.g. subsidies), interest payments, and military expenditure, are difficult to reduce due to the fact that:

Interest payments are a legal obligation Salaries and wages, social benefits, and pensions cannot be adjusted downwards Military expenditure is mainly determined by outside forces.

Government, therefore, always finds it impossible to reduce its budget deficit by cutting its current expenditure.

3. Capital expenditure problems

The economic infrastructure of a country such as roads, harbours, schools and hospitals is dependent on capital expenditure.

Though slight adjustments are possible under capital expenditure, a few structural constraints need to be considered since they affect short-term adjustments.

Hence, three major concerns can be identified: Effect of a downward manipulation of economic development Social considerations relating to the construction of schools and hospitals Time span involved with long-term projects in the sense that it is costly to delay or stop such

projects once undertaken.

8.3.2 Revenue policy constraints

In an attempt to reduce budget deficit, taxes could be increased instead of reductions in state expenditure being implemented.

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There are, however, constraints that should be taken into account with regard to direct and indirect taxation.

1. Direct taxation

Like other countries (e.g. South Africa), Namibia also experiences an unequal distribution of income. This leads to a corresponding unequal distribution of the tax burden.

In other words, a situation is created in which a small per cent of the total tax paying population pays more than half of all personal income tax.

Thus, a tax burden which is too heavy may result in the following effects: Reduced productivity due to increased taxation being at the expense of earnings; Direct

influence on the investment policy; and indirectly affecting employment.

2. Indirect taxation

Indirect taxations constraints are experienced in the case where a large portion of the population earn their income outside the market economy structure, that is:

They exist in a type of subsistence economy (i.e. it is difficult to collect taxes in this case). Imposition of increased taxation measures on lower income groups, especially if they make up the

largest number of the unemployed or those earning a meagre income, is morally wrong or difficult.

8.4 Debtor and Financial Management

Debt reflects moneys that are owned to the state. Thus, recovery of this debt forms part of financial management Two aspects that relate to debtor management include:

Nature of debts Practical arrangements for debtor management.

8.4.1 Nature of debts

National Treasury Regulations contain instructions regarding the nature of debts:

Overpayment of salaries and allowances, where the person concerned remains employed by the state and where no monetary advantage resulted to that person from his or her own actions. Overpayment can be as a result of: resignations; leave without pay; where a person was

on a wrong salary scale, or absconded Losses or damages where no mala fides (not done in bad faith) were present, and where the

person is still in the employment of the state Losses and damages in the first two occurrences where the person concerned has left the

employment of the state Losses and damages where mala fides were present in the cause of loss or damage Breach of contract, including bursary contract (these are not regarded as loans or advances). The

person does not undertake to repay the bursary, but rather, in terms of the contractual arrangement, work for the state for a period of time to honour his or her bursary obligations. This can occur either when a person discontinues their studies or does not honour the bursary agreement.

State guarantees occur when a person resigns before the state guarantee is released by the financial institution (as in housing subsidies), the bank repossesses the property in the case of

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default of payment, garnishee occurs when a person resigns and the garnishee amount has already been paid in advance to the attorney, ordered by the court, and cannot be paid back

Tax debt in cases where a person has resigned and had already received a bonus

Implement and/or tool shortages applies when a person resigns, and discrepancies occur when his or her toolkit or equipment is checked

Other types of debt comprise: telephone debt, subsistence and travelling, advances, subsidised transport claims, and housing allowances

8.4.2 Practical arrangements for debtor management

Application of debtor management relates to all debts accruing to the institution. These include any amount owing to or receivable by the institution such as:

Accounts receivable as a result of charges for goods and services Fees or fines outstanding, and Overpayments recoverable by the institution.

Of particular interest is the following question: At what stage does payment for goods and services constitute debt?

Phrase ‘fees or fines outstanding’ indicates that: An amount payable is transformed into debt on failure of payment on the due date, implying

that: Maintenance of records would be crucial with regard to debtor management.

To ensure that debt repayment is managed effectively: National Treasury Regulations provide particular and specific guidance on this matter.

Thus, elements that constitute the matters which debtor management must provide for include the follwing:

Collection and recording of all debt owing to the state Maintenance of debtor’s ledger controls and maintenance Accounting for debtor receipts Separation of duties between debt issue and debt repayment Accounting for over- and underpayment of outstanding debts Preparation of monthly age analysis reports and follow-up action on aged debtors Terms of trade for debtors and issuing of reminder notices Set-off arrangements for overpaid benefits Recovery of salary overpayments Recovery of debts from service benefits Referral of debts to the State Attorney for collection

Recording and reporting of debt must be maintained in order to determine: Exact amount of total debt owed to the state Amount repaid Amounts outstanding Bad debt being written off.

Recording and reprting on debt must also be maintained, because: Debt represents revenues and these debts influence the cash-flow. Debt represents recovery of existing funds and resources that are being indebted through

particular actions. Hence, debt cannot be viewed as ‘new’ revenue, because:

It is gained over and above income derived from taxation and loans. Objective in recording and reporting on debt is, therefore, to:

Maintain debt accounts in the name of the debtors so that they can easily determine and analyse the debtor’s ‘total debt’

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Maintain separate records of the portion of debts and advances that have matured or become due

Be able to provide a summary of all individual debts to ensure the integrity and reliability of individual accounts

Separate duties between functions related to maintaining accounts and handling and reconciling of receipts

Ensure that employees do not have continuous control of any one function for an extended period of time and must, therefore, use annual leave and job rotation

8.5 Simple and multiple debts

FMS may form the basis for distinguishing simple from multiple debts.

8.5.1 Simple debts

Simple debts are characterised by the following: Simple debts are of limited extent They can be repaid over a relatively short period of time (usually a year) Acceptance of debt is not interest-bearing Information is limited, leading to the computer being unable to produce monthly statements Simple debts are usually limited to serving officials.

Types of simple debts can include the following: Salary overpayments Arrear pension contributions Resulting from actions of officials (e.g. misuse of government vehicles, and subsistence and

travelling (S&T) allowances).

Each debt account can be identified by a number (e.g. pension or S&T number).

8.5.2 Multiple debts

Multiple debts are characterised by the following: Interest is added to the debt payable Periodic reports or statements must be provided to debtors Acceptance of a debt transaction leads to the creation of a minor account, which consists of:

Personal particulars of the ledger accounts (e.g. name and address); and Particulars of the ledger to be credited or debited.

Like a simple debt, a minor account is identified by a unique number: All transactions relating to the debt must be posted against that number; and Computer will accept such information.

Relevant to the minor account, are the following transactions:

Debt acceptance and amendment Debt increase, decrease, and deletion Receipt allocation Receipt adjustment

Form codes are also used for the following purposes: Accept new debts Amend debt account information Increase or decrease debt amount Delete transaction

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CHAPTER 9: PROCUREMENT, RISK AND SUPPLY CHAIN MANAGEMENT

9.1 General Issues in Procurement Management

Procurement relates to the acquisition of goods and services, other than the services of officials, for the people and their administration by means of commercial transactions

Hence, general issues in procurement management have been identified, which include the following: Spending in accordance with the budget Value-for-money Control principles

9.1.1 Spending in accordance with the budget

Minister of Finance makes clear in his or her budget presentation to parliament the expenses to be incurred from an Appropriation Act for a specific financial year.

This implies that all the expenditure of public institutions should be within this law. This law:

Stipulates the exact sums of money to be appropriated to each individual vote and each main division within those votes

Establishes the numerous transfer payments which are to flow from the individual votes to a wide variety of public entities

In addition, all activities planned for an institution’s budget are linked to predetermined outputs and the cost.

If an institution is to achieve the performance objectives of its budget: Its managers should not disregard the expenditure plans upon which its budget is based. Goods and services the institution buys must contribute to efficiency and effectiveness.

9.1.2 Value-for-money

Principle of value-for-money operates in terms of: Achieving or improving predetermined economies and efficiencies.

Line managers must constantly be seeking ways of: Achieving more than what the budget and its underlying costing called for.

Thus, each purchase transaction becomes more than a simple mechanical activity of issuing an order to regular suppliers.

It challenges line managers to achieve the budgeted number of outputs using the budgeted amount of money – or less, that is:

Achieving either more output or less cost than was budgeted for.

9.1.3 Control principles

Risk and possibilities of incurring losses can be greatly reduced by: Adhering to established control principles Incorporating control principles into the entity’s internal control regime when putting

procurement processes into practice. Furthermore, these principles must be built into the procurement practice. The most important control principles are the following:

Goods received must meet the required standard Make payment only for goods actually needed Make payment only for goods actually received Record all purchases correctly, both in the accounting and stock records

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9.2 Tendering as a process in procurement management

Diverse and plentiful inputs are needed by government before the provision of goods and services to the people can take place.

These inputs include, among other things: Office space, office furniture, office equipment, stationery and the salaries of government

workers. All of these, with the exception of salaries, may be acquired through procurement. Two management decisions must be made prior to the decision to purchase (procure) goods and

services: First, management must attach a ‘weight’ to the benefits and costs of producing the desired

goods in-house and compare this to the (also weighted) benefits and costs of procuring the desired goods through private commercial vendors.

Lastly, as the tendering process is a lengthy and complex one, it is not feasible to purchase everything needed by government through tendering.

The tender process includes: Calling for tenders Opening and assessing Awarding tenders

9.2.1 Calling for tenders First and foremost, in calling for tenders, a manager must ensure that the funds needed to conclude a

tender contract are available. Budgeting is therefore central to public procurement in the sense that all procurement decisions must be

made as approved on the public budget. Regardless of where or how the invitation to tender is publicised, further standard requirements are that

the:

Nature and specifications of the desired good or service must be clearly communicated, Information about the required attributes of potential suppliers must be communicated, Closing date and time of the tender must be made clear, and Fact that no late tenders will be accepted must be communicated.

9.2.2 Opening and assessingTo avoid the unfair selection of a tender bid, all tenders received in good time must be opened in public. Particulars of each tender must be made public and this information should be entered into an official tender register to be kept for auditing purposes.

9.2.3 Awarding tenders A well-qualified internal tender selection committee (or tender board) should compare the tenders

against one another as well as against a set of predetermined criteria. The tender committee should then make its selection and prepare a contract for the successful bidder. All bidders should be invited to attend the opening and awarding of tenders, as this goes a long way

towards mitigating claims by bidders and other interested parties of tenders having been unfairly awarded.

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9.3 Risk Management

Risk can refer to: The potential for unwanted negative consequences of an event or activity A measure of the probability and severity of adverse effects The chancing of a negative outcome.

Thus, risk involves some possibility of loss or unpleasant effects on any undertaking.

9.3.1 Concept of risk management

Risk management refers to a comprehensive and systematic approach aimed at: Identifying, measuring, and controlling an entity’s exposure to:

Accidental loss, theft, and liability involving human, financial, physical, and natural resources

It also refers to the identification, analysis, and economic control of those risks threatening the assets or earning capacity of an organisation.

Namibia’s Ministry of Finance has a division referred to as Cash and Debt Management. Division is responsible for the coordination and management of the country’s largest fiscal portfolio

(national debt) Thus, Namibia needs a strong and effective debt office structure to manage the costs and risks associated

with the national debt stock. Inadequate numbers of qualified personnel could result in a higher risk of a serious national debt crisis for

the country.

9.3.2 Components of risk management Three critical components of a well-established risk management programme include the following:

Unit with trained staff Formal management policies Good record-keeping system

1. Units Government departments establishing risk management programmes first have to establish management

units. Departments should then centralise all managerial duties under a qualified and competent risk manager,

who can be either: Governmental accountant, financial manager, or at a lower level, the financial officer, depending

on the size of the department. Managers and staff should be:

Trained to adequately handle the technicalities of risk management Knowledgeable about insurance coverage and methods of loss reduction

More importantly, they should possess good interpersonal communication skills, because: An effective programme requires the close cooperation and involvement of all departmental

managers, supervisors, and staff. Manager acts as a direct channel of communication through which:

Risk-related information and reports are disseminated.2. Policies Clear management policies should be developed for specific government ministries according to their

functions. These policies include the following aspects:

Goals and philosophy Types of risks to insure Criteria for selecting insurers Safety programme directives

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Risk manager’s duties should also be specified in the management policies. Detailed procedures should be outlined in a procedures manual once these policies have been

established.

3. Record keeping Comprehensive record keeping is critical in risk management. Accurate records are necessary to:

Identify, measure, and control risks, and evaluate the effectiveness of the programme. Such records include the following examples:

Schedule of the insurable values of all buildings and their content Details of the make, year, and value of all mobile equipment Insurance policies in use along with their expiry dates Claims and loss records Premium-to-loss comparisons

9.4 Supply Chain Management

A supply chain refers to the sequence of identifiable parts and their activities from the point of origin of a decision to meet a government objective, right through to the end point of consumption, or possibly disposal of the good or service.

It is thus a comprehensive and systematic set of linkages between the initial demand for, and the final supply of goods or service which provide a conduit for the full flow of financial information from the beginning to the end of the process.

A supply chain is a network of actors: Exploiters, manufacturers, transporters, ‘warehousers’, wholesalers, retailers, and end-users

Hence, supply chain management is concerned with: Maximising affordability and value-for-money in the process of procurement and disposal of the

assets of institutions Supply chain management works within a systems framework that integrates the following management

stages: Demand management:

Determining future needs and critical delivery dates and matching these to the institution’s

Acquisition management: Taking account of preferential policy objectives in procurement, and bid and contract

processes and documents finalised Logistics management:

Receiving, coding, and distribution of goods purchased Disposal management:

Planning for the sale of obsolete assets at fair market value Supply chain performance evaluation and control:

Assessing cost variances, compliance with Treasury norms and standards, and the achievement of institutional goals.

In addition, supply chain management can be described from a number of related perspectives, in that: supply chain management:

Supply chain management is concerned with the coordination of all parties involved in delivering the combination of inputs that will meet a specific public sector requirement.

It is the process of planning, implementing, and controlling the operations of the supply chain – with the purpose of satisfying customer requirements as efficiently as possible.

It spans all movement and storage of raw materials, work-in-progress, inventory and finished goods from point-of-origin to point-of-consumption.

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It encompasses the planning and management of all activities involved in the sourcing, procurement, conversion, and logistics management activities.

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