Public sector financial management deals with how a Government receives its funding and how that funding is used in such a way to serve the public optimally through public services and maintenance. It sets out the procedures, processes, systems, rules and regulations that are designed, implemented and maintained to manage Governments complex finances. It forms an important component to ensure that a Government remains an effective role player in the national economy.
Components of Public Financial Management
There are several components of Public Sector Financial Management that are descriptive of the various functional activities that form part of a Governments financial management. These components were set out to assist managers and decision makers to manage public funds according to specific procedures.
This forms the basis of governmental financial planning through allocation of money on spending objectives and is a method to control funds better and to prove accountability. The budget is linked to all other components of financial management.
Get your grade
or your money back
using our Essay Writing Service!
Public financial management is a process and budgets are a mechanism to be used as a tool in a framework to plan spending of funds. The budget contains all the monetary implications that are used to determine accountability, which is derived from accounting, control measures and auditing. A budget can be used for planning purposes to facilitate in a medium to long term planning system.
This is the daily financial operations of departments. This component deals with the daily and monthly cash flow situation by paying suppliers, salaries and receiving money. The money allocated to various government departments on the budget is not made readily available at the beginning of the financial year as it has to be generated on a monthly basis. Therefore accounting officers should find methods to save money instead of spending the whole budget allocated or even over spending the budget. Expenditure management forms only a part of public financial management and should not be deemed identical.
Accounting serves to record all transactions, provide financial data for various purposes and eventually provides the basis for accountability in the public sector. There are specific accounting frameworks that are used which are:
Generally accepted accounting practice (GAAP)
Generally Recognized Accounting Practice (GRAP)
Internationally Public Sector Accounting Standards (IPSAS)
Generally accepted Municipal Accounting Practices (GAMAP)
Accounts in South Africa have been converted from a cash accounting system to an accruals system to gain greater insight in the country's true financial position. With a cash accounting system revenues are reported when cash is received and expenses reported when cash is paid out. This is based on a cash flow principle.
However with the accruals accounting it focusses on transactions and other economic events that both have cash consequences when they occur. With expenditure the expenses are recorded and get deducted from revenue to determine the net income.
Public Accountability and Control
It is of utmost importance that proper control is maintained over public funds. The ability to control and have accountability is seated in the various control mechanisms and systems maintained for that purpose. The role of the auditor General is of specific importance as well as the Standing Committee on Public Accounts (SCOPA), which serves as the watchdog for Parliament.
The Financial Management System (FMS)
The financial management system aims to facilitate expenditure management and also aspects of public financial management by providing budgetary information. Within the FMS standard procedures are in place to record transactions. The FMS serves as a fund management tool and is a valuable instrument. It provides a distinct pattern of spending and enables the following:
Spending to date compared to the budget
Current expenditures and future commitments compared to the budget
Deviations from the budget
Increased and/ or decreased spending
Performance management is what it says, managing performance and the way public money is being spent. Performance management has been put in to place to monitor ensure that a higher degree of service delivery is achieved in terms of effectiveness, efficiency, economy, and appropriateness. Now performance is measured against actual resources that were used. Performance management fulfills a valuable role in terms of public service delivery.
Always on Time
Marked to Standard
Medium term expenditure plan (MTEP)
This plan was formed to counter for the lack of a long term objective that could not be provided for in the design of annual budgets. In financial management terms however and future implications in terms of government policies and associated financial implications are crucial. Some of the government objectives cannot be achieved within the time constraint of one financial year. Long term objectives are difficult to manage properly if you are dependent on annual budget allocations. The MTEP serves to promote efficiency both in management and financial terms.
Business plans are based on a department's strategic plan and basically contain required inputs and detailed outputs. They are closely linked with the departmental budget since they must complement each other. Operational plans fulfill the same purpose, determining functional outcomes that are linked with financial obligations and other resources required to achieve a set objective.
Strategic plans provide an indication of a department's key outcome in very broad terms, by means of an Aids Awareness program which is attached to the National Department of Health. Usually a medium term period that is three to five years is attached to strategic plans. Within these components there are other sub-components which exist and serve to provide the foundation of such operational processes. Output objectives and performance measures and indicators are linked to the strategic plan.
Provisioning is concerned with the process of acquiring resources through which government achieves its objectives. It aims to equip government with all its requirements, not only stock but also specialized services which are unavailable to the government. The management of assets obtained through the provisioning process forms a vital part of public financial management. The provisioning function is not automatically related to asset management.
Deficiencies inherent in the market system
In an economic sense a market does not exist. It cannot be seen or touched but its result is apparent in society. When one person trades or sells to another person then a market condition is created. To simplify matters a market exists where trade or selling of goods or services occur. The principle is simple, if no trading or selling happens then no market exists. A market represents the total amount of all economic activities that take place within a society or country. These activities are producing and selling food, manufacturing goods, buying and selling products and services, mining and fisheries. All these activities are based on using resources while the allocation and distribution is done by the market system. Markets fail to provide resources on an equitable basis for various reasons and society lack in their needs being fulfilled. The government has to provide to fill the gaps and deficiencies caused by market failure. These are non-profitable needs such as national defense systems but are required to protect a country that the government has to assume responsibility for, for the sake of the society's safety as well as other needs that need to be fulfilled but which cost will not be covered by a private institution as it is utilised by all and probably non profitable.. There are four common deficiencies inherent to the market system that results in the inequality of the utilization of resources and the allocation function.
Unequal access to the market
This is when access to markets is restricted due to any number of reasons such as lack of capital to restrictive trade regulations.
Unequal access to information
Information availability is a determining factor in business. Information is seen as factual evidence that is required to get access to the economy and maintain it by being profitable as much as market conditions will allow.
The "closed-shop" syndrome
These types of conditions triumph when existing businesses take deliberate steps to prevent new companies from entering the market arena. This is done by lowering the prices to such an extent that the new company cannot compete profitably. These prices are artificially controlled to keep new companies out of the market entirely and they are unable to obtain a share.
Consumers make decisions regarding their own needs in terms of food, clothing, transport, furniture and appliances and these products are supplied by the private sector through the market system function which is the supply and demand and thus a price is determined on these items (production and manufacturing cost). There is however not a need for an individual to fix a price on street lights or a harbor for that matter because of its communal basis. However there is a need to import products via the harbor and therefore the government has to maintain a service such as a harbor for such services.
This Essay is
a Student's Work
This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.Examples of our work
It is clear from the above components that the government has a financial obligation towards the market system and that it is essential to have these services in place. But where does government actually fit in in terms of the places where they function. In the next couple of components we'll discuss where the actual places are in terms of state or government functions behind the scenes as such.
The division of power of government
The Government is elected by the public and the money of the public that is paid to the government is subject to public scrutiny. The public therefore has a right to demand accountability from the government. The government is designed to operate in three distinctive spheres. This is done for the specific reason to maintain democracy and not instigate an autocratic system. To maintain this system of checks and balances government powers are divided into:
These three bodies form the basis for the government and infrastructure.
The Parliament serves as the highest legislative authority in South Africa. They have the power to make laws according to the Constitution of the Republic of South Africa Act 200 of 1993. In terms of government finances these laws transpire into objectives that must be executed by the executive authority. Party politics do not influence government spending directly, however the ruling party, due to majority ruling are in a position to formulate policies in terms of which funds are allocated through the budgetary process. Parliamentary portfolio committees are established to manage the various aspects of the executive functions of government such as Sport, communication, health, education, agriculture, etc. they do not have authority to make laws. The Standing Committee on Public Accounts ( SCOPA) serves as parliament's most important committee on finances. This committee review reports from the Auditor General, investigate any transgressions and make recommendations to Parliament. The Fiscal and Financial Commission make recommendations to Parliament regarding financial matters such as:
National revenue funds
Equitable shares and allocation revenue
National, Provincial and Municipal budgets
Remuneration of persons holding public office
The Executive Authority consist of the President, the Deputy President and the cabinet members who are appointed by the President. The cabinet members serve both in Parliament (Legislative) as well as in the executive as ministers of state departments. This ensures that decisions made in Parliament are transferred to the various state departments structured for this purpose. This ensures coordination between the two authorities.
The Constitution prescribes that all courts interpretation of legislation and judgment be subject to scrutiny by a constitutional court. The Constitutional Court may however declare legislation passed by Parliament unconstitutional if it is found to be a transgression of the constitution itself. The Constitution of the country is the guideline to which all laws must adhere to. In regard to public finance the legislative part of the government infrastructure is primarily concerned with policies and policymaking, control and accountability. Politicians are elected to serve the public and to keep their interests at heart. They should therefore ensure that the most appropriate laws are formed to serve all interests and make sure it is implemented by the executives.
Advantages and Disadvantages of estimates
An estimate is used as a tool to determine the potential financial costs that are linked to a specific objective before it is included into the budget. It enables decision makers to decide on alternative options, or the cost of a new policy objective. The success however of the estimates depends on the dedication of the officials.
There are some advantages and also disadvantages with estimates:
Advantages of estimates
They can give an estimate of the cost at an early stage before the financial year commences. This will point out whether the results justify the expense.
They can measure the instruction against the guideline amount to determine if the funds are adequate.
Later when the cost was incurred then the original estimate can be backtracked to determine if there was a deviation and how the deviation can be best avoided for future estimates.
Estimates give timely indications of savings or over expenditure and how the cost will affect the objective. Corrective action can then be taken.
Financial estimates that reveal a cost of an initial plan can be reconsidered to find alternatives.
Estimates promote rational decision making. Plans that prove to be too costly are adjusted or scrapped.
An estimate is an instrument by means of which functionaries rationally consider future execution of their directives. Planning is focused on a more future orientated basis and not relied on historical course of action.
Estimates allow orderly financial management of activities as this method ensures adequate funds and timely adjustments.
Estimates provide senior officials such as program managers and the advisory committee managers with the information required for meaningful decision making in respect of allocation of funds to high priority objectives.
Disadvantages of Estimates
Their accuracy reflects the comprehensiveness of the information available
They are dependent on the compilers dedication, as well as their expertise and devotion to process the information accurately.
They require periodic revising and updating ensuring the financial information reflects the status quo.
If amended at will without a proper foundation this may result in a negative perception of their value.
The unrealistic approach of some individuals may result in a wish list instead of a proper estimation that results in cutbacks, and leading to subsequent lack of meaningful attention to estimates.
A budget is plainly a list of objectives with a monetary value attached to each of the objectives or items on the list. The budget points out what money will be spent on and how much money will be needed. A personal budget will reflect items such as food, rent, electricity, school, etc. For government however this budget will indicate objectives that they need to achieve by listing their spending items in a budget. The budget has several so-called characteristics to it.
Source of information:
The budget need to include objectives on which government are planning to spend money so it will definitely have information about:
Governments policy objectives
Financial implications associated with the objectives
Implied taxation measures linked to the financial obligations.
If the budget included the amounts linked to each objective then the total amount will reveal the following:
Taxation measures ( the budget is funded by taxes)
Budget deficit ( where taxation is unable to provide enough funds)
Loans ( to bridge the deficit gap)
This information is especially important to the private sector to provide them information regarding their taxation obligations.
The budget is a working document because it contains all the functions for state departments. This outline is in a broad perspective because it would be impossible to outline each functional activity in the smallest detail.
The objectives in the budget each with their associated cost serves as a basis for control in two ways. It can firstly be established if the objectives had been achieved. Secondly it can be established if departments remained within the limits of their spending.
The regulations of the treasury stipulate which revenue departments and other public institutions may collect funds. Revenue can include different kinds and each is categorized according to its individual source. They are:
Duties on mine leasing and licenses
Licensing for motor vehicles, fishing and betting
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
Board and lodging fees
Tollage (toll roads)
Permits and entrance fees
Recovery of loans
Registration and inspection fees
Fines and forfeitures
Witness fees and pension contribution
Exchange and other profits
No service supplies or any goods of any nature may be provided for reward or free of charge by a department or trading entity without the prior approval by the treasury. All fees or rates that are not fixed by any law and relate to revenue that accrue to the revenue fund must be reviewed annually by the accounting officer and in view of financial planning amendments must be made known to users timeously.
Economic Classification of Expenditure
In the money columns of the budget that get sent to Parliament provision is made for a subdivision of the amounts that are requested to provide an indication of the monetary value in respect of current and capital expenditure. Broad guidelines are followed when the national government's expenditure is allocated. These guidelines are based on the acknowledged statistical and national account classifications. They fall under the following categories:
This expenditure is not classified as a transfer payment and is not used to obtain any capital assets. It is a recurrent expenditure of departments or administrations on goods and services. It deals with the compensation of employees, purchasing of office stationary, rent, fuel and electricity, repair and maintenance, equipment of low value or an average life of one year. Government industries and service centres, such as sawmills and printing press and government garages are also sorted in the current expenditure. Defence expense on machinery, equipment and buildings and structures not intended for residential purposes are also classified as current expenditure. So is expenditure of normal upkeep of existing capital goods and payment of interest included. Normal upkeep is expenditure to maintain the everyday activities which happen on a constant and regular basis.
This expenditure comprises land, buildings and structures and equipment. It includes the purchase of land for defence purposes, rights and servitudes. Expenditure on reclamation and improvement of the soil and the development and expansion of forests, plantations, orchards, and mines are included too. Building and structure expense are included in the purchasing or construction of buildings, the structure and engineering works, goods and services in existing capital works with the option to renew, improve or extent the working life or increased performance. Residential buildings including accommodation for the permanent members of the South African National Defence Force (SANDF) are included in the capital expenditure. Other capital expenditure areas are school hostels, old age homes, factories, office buildings, shops, hotels, homes, office buildings, factories, entertainment and recreation. There are additional expenditure allowed for non-military construction works, such as roads, streets, bridges, tunnels, dams, sports ground, and embassies abroad. The purchasing of equipment under capital expenditure specifies that it must be durable machinery, equipment and means of transport with a normal lifetime exceeding one year. Small repeat purchases with a value of less than 1 year are excluded even if their lifespan exceeds 1 year. Some examples of equipment expenditure are expenditure on the improvement or alteration of durable goods to improve its life and performance. Purchasing of boats, ships, aircraft, and oil and gas drills. This also includes transport equipment and the improvement of existing transport equipment. This excludes that used for military purposes.
Transfer payments refer to funds that will not be dispersed to the department on whose vote they appear for goods and services but will be sent to other bodies such as , purchasing of shares, transfers and loans granted to government bodies, private organizations, households and foreign institutions. They are divided into two categories:
Current transfers: these include grants in aid, subsidies, contributions, financial assistance, aid to foreign countries and pension and social benefits.
Capital Transfers: ordinary capital transfers, acquisition of shares, and loans granted.
The budget of each National government department is compiled according to the three classifications, current, capital and transfers. This is included in the budget that gets submitted to parliament for approval. A summary of the total budget of the National government is published in the Draft Estimate (White Book) and the Expenditure Budget (Blue Book).
General Procurement Guidelines
The General Procurement Guidelines are handed out by Government to not prescribe the standards of behaviour, ethics and accountability, but also to serve as a statement of the Government's commitment to a proper procurement system which enables the development of a sustainable small, medium and micro businesses which will contribute to the common wealth and the achievement of an enhanced economic and social wellbeing of all South Africans.
The Government's procurement system guidelines are based on the five pillars that prescribe the minimum set standards.
Value for Money
Prices on goods and services do not necessarily reflect whether value for money will be obtained as an essential outcome. The principle in terms of the procurement guideline is that the best value for money means the best available outcome when all relevant costs and benefits over the procurement cycle are considered such as:
Avoidance of unnecessary costs and delays for themselves or suppliers
Monitor the supply arrangements and reconsider them when they cease to provide the expected benefits.
Continue to improve the efficiency of internal processes and systems.
Open and effective competition
One of the aspects of government legislation is to effect specific objectives in society. There are also some of the deficiencies inherent in the market system which restricts persons from participation within the economy. The second pillar focusses on open and effective competition that requires:
A framework of procurement laws, policies, practices and procedures that are transparent by being available to all parties.
An openness in the procurement process
Encouraging effective competition through procurement methods suited to market circumstances.
Observance of the provisions of the Preferential Procurement Policy Framework Act.
For the best possible outcome to be achieved by departments from the market they have to ensure that:
Potential suppliers have reasonable access to procurement opportunities and that available opportunities are notified at least in the Government Tender Bulletin.
Where market situations limit competition the departments should recognise it and use procurement methods that take account of it.
Adequate and timely information is given to suppliers to enable them to bid.
Bias and favouritism is eliminated
The cost of bidding for opportunities do not discourage competent suppliers
Costs incurred in promoting the competition are at least appropriate with the benefits received.
Ethics and fair dealing
To maintain ethics an fair dealings officials dealing directly with suppliers or potential suppliers are required to:
Recognise and deal with the conflicts of interest or potential for it
Deal with suppliers equally
Ensure the standing of the state is not impaired by accepting gifts or hospitality
Be honourable in their use of public property
Provide assistance in elimination of fraud and corruption
Accountability and Reporting
Openness and transparency in the administration, by external scrutiny through reporting, is one of the primary elements of public sector accountability. Therefore within the procurement framework:
Heads of departments are accountable to their ministers for the overall management of procurement activities.
Heads of procurement and senior procurement directors are accountable to heads of departments for various high level management and coordination activities
Individual procurement officers are accountable to heads of procurement and to their services they provide
All people exercising procurement functions must have regard to these guidelines and are accountable to management.
The Government carries a great responsibility in enhancing its services to the general public and society as a whole in terms of its financial management and its commitment to maintain a corrupt free process. There are various systems in place as discussed and when these systems are utilised as they are intended to through policy and dedication it can be a very rewarding system for not only the governments integrity, but also in terms of service and quality provision to the general public. The economy when practiced in a fair manner can only benefit everyone in the market environment and provide necessary work opportunities. The implementation of the Public Financial Management Act 1 of 1999 (PFMA) marked the end of dispute and change and by implementing it successfully with the elements build into it like performance management, Accrual accounting principles and practices, as well as Risk Management it will enhance the government's ability to become a financially feasible entity.