Using Budget Analysis to Scrutinise the Public Enterprises Vote

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Using Budget Analysis to Scrutinise the Public
Enterprises Vote

• A Presentation by IDASA
• 7 March 2007

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Purpose of the Presentation

• To clarify some basic budget analysis techniques
• To show how these techniques can facilitate
  analysis of the DPE budget by making budget
  figures more revealing

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Basic Uses of Budget Analysis

• Quantitative information regarding
• Priority
• Progress
• Equity
• Adequacy
• This presentation emphasis the first two

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Manner in which Figures are Organised in the ENE

• Allocations by Programme
• Allocations by Economic Classification
• Current Payments (Salaries and Goods/Services)
• Transfers and Subsidies
• Payments for Capital Assets
• (Each Programme Allocation is further broken down
  by economic classification)

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ENE Allocations Continued

• Thus a large/interesting programme allocation can
  be analysed further by looking at
• The economic classification of functions in the
  programme
• The descriptive information provided for each
  programme

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Technique 1 Share of Total (Priority)

• Purpose 1 Relative Priority of Functions /
  Programmes at a Point in Time
• Purpose 2 Trends in relative priority over time
• Purpose 3 Priority (and trends) of Departmental
  allocations as share of total public spending and
  as share of GDP
• Calculation (Share / Total) 100

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The budget figures
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DPE Budget as a of Total Voted Funds and of
GDP
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Share of Total () and Trends in Share of Total
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Visually
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Totals and Share of Total (Economic
Classification)
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Share of Total and Trends Excluding Manufacturing
Enterprises
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Technique 2Real Percentage Growth Rates
(Progress)

• Important to calculate trends in allocations to
  particular programmes/functions over time
  progress if you think the trend is the right
  one
• Problem that budget allocations present nominal
  allocations
• Simple example 1999 R 2 000 000
• 2000 R 2 500 000
• 2001 R 2 600 000
• It is tempting to argue that the 2000
  calculation was 25 more than the 1999
  allocation, but is this true? Nominally yes, but
  in real terms maybe, maybe not. It is not
  necessarily the case that 25 purchasing power
  was allocated to the function
• Real means adjusted to reflect actual purchasing
  power this is determined by the interaction of
  allocation changes and inflation changes

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Nominal Change Calculation

• (New Value Old Value) / Old Value 100
• Thus (2 500 000 2 000 000) / 2 000 000
• 100
• (500 000 / 2 000 000) 100
• 25

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Inflation
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But

• To get the real change, that is whether the
  purchasing power of the allocation has increased
  or decreased, we need to first deflate the
  allocations and then do the same calculation
• We use a deflator to express the values in terms
  of the value of the Rand in a particular year
  (also called constant Rands)

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Real Percentage Changes

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Summarising the Process

• Get deflators / price indices
• Select base year
• Convert nominal allocations to real allocations
• Calculate percentage change

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Formula

• Nominal Allocation (Base Year Index/Current
  Year Index)
• Ie the nominal allocation is multiplied by the
  ratio of base year price to price in the year of
  the allocation
• Thus R 2 500 000 was multiplied by 100 / 119 to
  get the real allocation of R 2 100 840 in real
  terms, as expected, the allocation is less than
  the nominal R 2 500 000

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Deflating using DPE figures Nominal Change
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Real Change

• Given the following price indices, 1) calculate
  the real percentage change in the total
  allocation to administration from 08/09 to 09/10
• 2) What is the estimated inflation rate over this
  period?
• 03/04 - 84
• 04/05 - 87
• 05/06 - 91
• 06/07 - 95
• 07/08 - 100
• 08/09 - 105
• 09/10 - 109

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Real Percentage Changes
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Application

• The same techniques can be used with individual
  programme budgets to determine priorities and
  trends and generate questions to the Department

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Comments / Questions based on the ENE information

• Clearly the transfers to various SOEs have made
  the budget figures a roller coaster ride it is
  worth conducting the analysis with these
  transfers removed to focus on longer-term funding
  for the Departments key functions

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Comments / Questions Continued

• Nominal allocations for Consultants, contractors
  and special services go from R 21 331 000 to R
  34 670 000 from 06/07 to 07/08 a nominal
  percentage increase of 62.5. Compensation of
  employees goes up by a significant but
  comparatively small nominal percent of 19.2. The
  increased allocations for this function is not
  limited to a specific programme, but reflects
  increased allocations in all the programmes to
  this function. The increase is, in other words,
  significantly in excess of the departmental
  budget increase as a whole.
• Two questions
• 1) Is it not possible to retain greater
  expertise in the Department, that is rely more on
  employees and less on consultants and similar
  services?
• 2) How does the Department ensure that it is
  getting value for money in contracting these and
  related services?

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Comments / Questions

• Allocations to capital assets for the department
  itself decline rapidly over the MTEF, from R 1
  809 000 in 2006/2007, to R 925 000 in 2007/2008,
  and down to R 75 000 in 2009/2010. Is this
  adequate for future departmental capital needs?
• Can the DPE explain the basis on which the travel
  and subsistence allocations are calculated?
  Recent trends appear somewhat random as well as
  including huge percentage changes

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Travel and Subsistence Allocations to Programmes
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• Thank you