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In Public Sector Financial Management (PFB) it focuses on the processes, systems, rules and regulations that are designed implemented and maintained to successfully manage government's finances. PFB focuses on the role of government in society in regards to financial functions. PFB is made up of a theory and practical component and in this essay I will look at and discuss various key aspects when it comes to government spending, budgeting and also the public interest in the financial growth of the country.
Components of public financial management
Several individual components make up PFB. Each one is unique and they function within the financing function of government. The components however collectively form and complete the framework of financing function and they are as follows.
A budget is essentially a framework linking spending objectives with their associated costs. It is therefore applicable to any situation where spending objectives have to be determined, this can range from a household to a multinational company. Budgets serves as the basis for governments financial activities since all the other component in the public sector is also related to the budget. A public budget has four basic dimensions:
To begin with it is a political tool that allocates rare public resources between the social and economic requirements of a jurisdiction.
Secondly a budget is a managerial and or administrative instrument. It specifies the traditions and means of providing public programs, services and institute the cost and or criteria by which its activities are measured for their efficiency and effectiveness and value.
Third a budget is a tool that can direct a nations, province and municipality's economic growth, development and progress.
And last a budget is an accounting tool that holds governments officials accountable for both the expenditures and revenues of the programs over which members has control
It is important to understand that PFB is a process and budgeting is a mechanism. Budget forms the base of governments financial planning, allocations of money on spending objective and it serves as basis for control and accountability.
Expenditure management (EM)
This facet relates to the daily operations linked to the execution of policy objectives stated in the budget which is the spending of money. If the budget has approved spending it is important that management of government department should be carried out in a way that achieve the greatest value. Expenditure management are concerned with the daily and monthly cash flow situation, paying of suppliers, salaries and receiving of money to name a few. With expenditure management deferent methods and procedures are used in which resources are utilized to achieve maximum benefits.
The financial management system (FMS)
The FMS aims to facilitate EM as well as some others aspects of FMA such as proving budgetary information. The FMS has standard procedures for recording of transactions. The FMS provide regular updated records of spending patterns by which the following can be determined
Spending to date in comparison to the budget
Current expenditures and future commitments compared to the budget
Deviations from the budget and
increase and decrease of the budget
Accounting in SA has been converted from a cash accounting to an accruals system in order to give a better insight into SA's true financial position. Accounting serves as a record for all transactions it also provides financial data and form the basis for accountability in the public sector. There are various accounting frameworks used such as
Generally Accepted Accounting Practice (GAAP)
Generally Recognized Accounting Practice (GRAP)
Internationally Public Sector Accounting Standards (IPSAS) and
Generally Accepted Municipal Accounting Practices (GAMAP)
Public accountability and control
One of the fundamentals of a representative democracy is that legislature be held answerable by the electorate. The legislature should make sure that mechanisms and procedures and measures are in place to assist public accountability. Control over public funds is of great importance. The Auditor-General and the Standing Committee on Public Account (SCOPA) are of great importance as they are known as the Parliaments "watchdogs"
Performance management (PM)
Performance management is new to the FMS in SA. PM can be linked to the levels of service delivery achieved by spending public moneys. It also can be linked to see how effective money is spent. PM introduced the concept of 'profit' to the public sector since performance in this application determines the relative outputs of public entities.
The medium term expenditure plan (MTEP)
The medium term was introduced to make provision for the lack of long-term goals that could not be provided for the annual budget. The MTEP is designed to promote efficiency in both management and terms of finances. Specific benefits includes the following
allocation of resources to priority services
greater efficiency in planning and management
a framework in which policy proposals can be assessed
greater transparency in government
reduction in roll over and
clear demonstration on how fiscal targets will be met (natioanlbufget1998)
The business plan evolves from a departments strategic mission. These are described and quantified in detailed outputs and required inputs. The business plan are closely associated with the department's budget. Operational budget fulfill the same purpose, determining functional outcomes linked with financial obligation and other resources required to achieve a business's set goals and objectives.
Strategic plans contain a departments key outcomes and are a result of the departments set mission statement. Strategic plan have a three to five years time frame. Output objectives and performance measures and indicators are directly linked to the strategic plan.
The provisioning function is incorporated as a part of the FMS due to the impact on public expenditures as it constitutes a resource to be used by an accounting officer. The assets obtained through provisioning forms a vital part of FMS. (Visser & Erasmus, 2002)
Deficiencies Inherent in the Market System
Looking at economics there is technically not a market. You cannot see or touch the markets but in society you can see the effect of markets in society. When sales takes place between two people a market condition is created. If there is no selling or trading it means that there is no market. Market failure can be seen if the allocate resources and the distribution thereof fail for various reason resulting in the need of society not being met. We can identify four common deficiencies inherent to the market system result in the inequality of the utilization of resources and the allocation of function. The four common deficiencies are as follows.
Unequal Access to the Market
The access to the market systems has become increasingly more difficult to individuals. One is the reasons is that not all individuals who are seeking to use the opportunity have capital available. The market becomes increasingly more exclusive due to the limited availability of funds. In some case legislation and regulations may restrict or limit some aspects of the market. Factors such as high prices, restrictive trading hours and zoning regulations can lead to this aspect. The massive increase in street venders are an example of some of the previous restrictive policing being relaxed.
Unequal access to information
The information concerning factors of production, availability of resources and a wide selection of other important information are becoming more unattainable. This is not necessarily due to predetermined action. Having more valid and substantive information leads to better informed decision making which then reduces the risk which then leads to an increasing change for success.
The "closed shop" syndrome
Some action are predetermined to deliberately keep new comers out of a certain industry. This basically mean that existing market participants choose to exclude other individuals to participate in the same industry. This action can be achieved by a variety of methods for example, deciding to lower commodity prices for a time period until the newcomer are basically forced out of the market.
The individual consumer makes decisions regarding their needs in terms of food, clothing, care etc and the private sector these products through the function of market systems (supply and demand) an a price can be fixed on such items. (Visser & Erasmus, 2002)
The Division of Power of Government
In order for government to maintain a system of 'checks and balance' they function within three separate spheres. The reason for this is that if for instance the legislation makes law, decide on the law interpretation and also control the execution of the law, the whole principle of democracy would be negated and secondly a autocratic regime would be the result, The power of government are divided into the following three spheres. The legislative, the executive and the judiciary.
The Legislative Authority: The Parliament serves as the highest legislative authority in South Africa (SA). Incidentally, the Constitution of the Republic of South Africa Act 200 of 1993, states: ââ‚¬Å“The legislative authority of the Republic shall, subject to this Constitution, vest in parliament, which shall have the power to make laws in the Republic in accordance with this Constitutionââ‚¬Â (Government Gazette, 1994). In terms of government finances, these laws emerge into objectives that must be executed by the executive authority. Political processes and party politics are not associated to public financial management since party politics do not pressure government
spending directly. The ruling party are in a position to formulate policies in terms of which funds are assigned through the budgetary processes. Parliamentary portfolio committees are created to deal with the various aspects of the executive functions of government, such as sport, communication, health, education, agriculture etc. They serve mainly in an investigative and advisory capacity with no power to make laws. The Standing Committee on Public Accounts, (SCOPA) however, serves as Parliamentââ‚¬â„¢s most significant agency on
finances. This agency review reports from the Auditor-General, investigate any transgressions, and make recommendations to Parliament. Finally, the Fiscal and Financial Commission (established in terms of Chapter 13 in the Constitution) (Government Gazette, 1994) makes recommendations to Parliament in respect of financial matters, such as:
National revenue funds
Equitable shares and allocation of revenue
National, provincial and municipal budget
Remuneration of persons holding public office.
Executive Authority: The executive authority is made up of the president of the country, the deputy president and selected members appointed by the president, serving as cabinet members. Cabinet members are appointed and serve as ministers of state departments. The same executive members also serves as members of the legislative authority. This result in coordination between the legislative and the executive authority and the state department.
The Judiciary: The judiciary comprises various levels of court from High Court, Magistrate Courts and Children Courts. The constitution prescribes that the interpretation of legislation and judgment in all these courts be subject to scrutiny by a Constitutional Court. The Constitutional Court may also declare legislation passed by Parliament unconstitutional if it is found to be a contravention of the Constitution itself. It must be considered that the Constitution of the Country is the ultimate guideline to which all laws must adhere. With regard to public finance, you should be reminded that the legislative part of the government infrastructure is primarily concerned with policies and policymaking, control and accountability. Keep in mind that politicians are chosen to serve the welfare of the people of the nation and to make sure that they make correct laws to serve those interests and make sure they are implemented out by the executive.
Advantages and Disadvantages of Estimates
An estimate of expenditure indicates a rational progression to decide the financial value of resource requirements, needed by an organizational institution to realize a preset objective successfully and professionally. A countries economy cannot indefinite expand of its existing state services. It is imperative that authorities frequently deliberate on its services rendered and by monitoring this the authorities can plan carefully to ensure the total expenditure doesn't exceed the financial capacity of the state. An important part of planning is the financial estimates of a proposed course of action. Without this it will be very difficult for the authorities to establish the short- or long-term economical validation and financial affordability of the intended action. There is a relationship between the estimates and the budget and with any type of relationship you will have some advantages and some disadvantages of estimates.
Advantages of estimates:
Estimates can give a clear indication of the financial costs of a preplanned activity at a early stage, way before the commencement of the financial year. This early assessment help role players determined if the cost involve justifies the expected results.
Estimates acts as a measurement tool to determine the instruction against the guideline amount to determine whether adequate funds are available.
At a later stage the after actual expenditure has incurred one can examine the original estimates to see if any deviation has taken place and why. This will help to ensure that future estimates are more accurate and reliable
Estimates and revised estimates give timely indication of saving or over expenditures in various standard items and their influence on the total cost of the objective. The timely warning allows authorities to take corrective action.
Financial estimate that shows the high cost of an pre determined plan can help authorities to look for alternatives before pushing money into an expensive plan. Alternatives include using less expensive equipments or hiring equipment instead of buying it.
Estimates promote rational decision making. The estimation of costs my lead to the original plan being adjusted, amended or even scratched
An estimate is an instrument by means of which functionaries rationally consider the future execution of their directives. They don't just rely on the history of their functions, but they do concentrate on the future .
Estimates allows the orderly financial management of activities, as the instrument represents the only method of ensuring adequate funds and timely adjustments to activities aimed at accommodating current circumstances.
Lastly estimates provide top officials, such as program managers and the management advisory committee with the information required to for significant decision-making in respect of allocation of funds o those objectives with the highest priority.
Disadvantages of estimates:
Their accuracy reflects the comprehensiveness of the available information.
Estimates are dependent on the compiler's dedication, as well their expertise and devotion to accurately process the financial information reflected.
They require periodic revising and updating to ensure the financial information reflects the current status quo
If they are amended at will, without a proper foundation, this may result in a negative perception of their value
The unrealistic approaches of some people may result in a 'wish list' instead of a proper estimation, resulting in cutback and thus leading to lack off meaningful attention to estimates. (Visser & Erasmus, 2002)
A budget is a list of objectives with a money value attached to it. The budget will identify what objects you are going to spend your money on. A personal budget can include rent, fuel, food, and electricity to name a few. In terms of government a budget will indicate what objective need to be achieved by listing their items in a budget. As a result a budget has so called characteristics and they are as follows.
Source of information: Since the government budget includes the objectives in which they are planning to spend money on, the budget will include the following. Governments policy objectives, Financial implications associated with the objectives and implied taxation measures linked to financial obligations
Secondly financial information: If a budget reveals all the amounts linked to each objective, the total amount will reveal the following information. Taxation measures, Budget deficits and loans which are used to bridge the deficit gap. This information is very important to the private sector because this information will provides them with the plan taxation obligations they will face.
Third working documents: The budget functions as a working document because it contains all of the functions of the state departments. This provides basically just a broad outline of the budget detail.
Lastly control instrument: The listed objectives in the budget, each with all their associated costs serves as a basis for control in two ways. First control can be exercised whether those objectives have been achieved and secondly whether department stays in the constrains of approved amounts.
The Treasury Regulations are used as a position of departure in assessing which types of revenue departments and other public institutions may collect. The revenue received by the state can comprise of various types, each grouped according to its individual source. They are:
Duties on mine leasing and licenses
Auction dues and
Licenses for motor vehicles, fishing, betting, etc.
Sale of produce, stores, livestock or equipment
Receipts from the control and disposal of state property such as letting and proprietary duties
Laboratory and analyzing services
Board and lodging fees
Tollage (toll roads) and
Permits and entrance fees.
Recovery of loans
Registration and inspection fees
Fines and forfeitures
Witness fees and pension contributions
Exchange and other profits. (Erasmus, 2012)
Economic Classification of Expenditure:
In a budget document that gets send to parliament there are provision made for allocated columns in the money columns for a subdivision of the requested amount. This is to offer an indication of the economic and financial value in respect to existing and capital expenditures. The guidelines used by the government are based on the acknowledged statistical and national account classifications. The economic classifications of expenditure are classified into the following categories:
Current Expenditure: This is the recurrent expenditure of the departments, administration on supplies and services not classified as transfer payments and not intended for the establishment or acquisition of capital assets as referred to below. It includes remuneration of employees, acquisition of office requirements, rental, fuel and electricity, repairs and maintenance, printed matter, equipment of low value or an average life of less than one year. Some other current expenditures includes state sawmills, government printing presses, government garages. Defense expenditures includes machinery, equipment and structures which are not intended for housing of residential purposes. (Visser & Erasmus, 2002)
Capital Expenditure: This expenditure include Land, Buildings and Equipment. Land that was purchased including that for defense purposes rights and servitudes. Added to this are expenses on repossession improvement and development of the soil and the development and expansion of forest, plantations, orchards and mines. Buildings and Structures includes expenditure in respect of the acquisition or erection of buildings, structures and engineering works. Residential areas including the accommodation for permanent force members of the South African Defense Force (SANDF) are also under this expenditure. Some other examples includes School hostels, old age homes, hotels and factories to name a few. Equipments expenditure includes in link with the purchase of durable long lasting machinery, equipment and means of transport with a life time exceeding one year. Some examples are Expenditure in the improvement of durable goods, the purchasing of boats, ships, aircrafts, tanks oil and gas drills. Purchasing of tools and machinery with life cycle more than one year. Vehicles and rebuilding and improvement of existing transport equipment.
Transfer payments: This payment refers to the amounts that will not be disabused on goods and services by the departments whose vote they appear on, but will be paid over to other bodies. They are derived into two categories namely, Current transfers which include grant-in-aid subsidies, contributions, financial assistance, aid to foreign countries pension and social benefits. Secondly Capital transfers which includes ordinary capital transfers, acquisition of shares and loans granted. Ordinary grants includes the following, payments by the state, payments for goods and services included in existing fixed capital goods. Compensation to recipients for damages of capital assets. Whenever the donor or recipients regards the transfer as capital transfer. Capital transfers also consist of payments for redemption of capital debt incurred by other as long as the doesn't accepts the debt or obtain a corresponding claim against the debtor. Procurement of shares, loans granted
The budget for all national government department are submitted to parliament for approval. The budgets are compiled according to these above mentioned classifications Current, Capital and transfer. (Erasmus, 2012)
General Procurement Guidelines (GPG's)
The GPG's are guidelines given to us by Government not only as a instruction of standards of behavior, ethics and accountability, But it can also be used as a statement by Governmentââ‚¬â„¢s to demonstrate their pledge and dedication to a procurement system which enables the emergence of sustainable small, medium and micro businesses which will add to the
common wealth and the achievement of enhanced economic and social well-being of all South Africans. The guidelines can by summarized under five so-called pillars that are used to provide the minimum set of standards. The five pillars are:
Value for money
Prices does not always reflect whether value for money will be achieved as an crucial outcome. Looking at the procurement guidelines , a principle is adhered to that best value for money shows the best available outcome when all relevant costs and benefits over the procurement cycle are carefully taken into consideration, to do this certain aspects need to be taken into consideration to be exact.
Avoid any and all unnecessary cost and delays for themselves and or their suppliers
Monitor the supply arrangement and reconsider them if the expected results are not met.
Focus on continuous improvement in the efficiency of internal processes and systems
Open and effective competition.
One of the aspects related to government legislation is to achieve particular objectives in society. Several of the deficiencies inherent in the market system restricts a persons from participation in the economy. Open and Effective Competition are the second pillar in the GPG's and considerations that need to be taken into consideration are:
A framework of transparent procurement laws, policies and practices. This documents must be available to all parties
Openness in the procurement process
They must support effective rivalry through procurement methods appropriate to market conditions and
Follow the provisions of the Preferential Procurement Policy Framework Act.
For departments to ensure the best possible outcomes from the markets they need to ensure that:
Prospective suppliers have access to procurement opportunities and that available opportunities are published in the Government Tender Bulletin.
Where market circumstances limit competition, departments recognize that fact and use procurement methods that take account of it
Sufficient and appropriate information is provided to suppliers to enable them to bid
No unfairness and favoritism
The costs of bidding for opportunities are not so high that it scares off competent suppliers
Costs incurred in promoting competition are at least commensurate with the benefits received.
Ethics and fair dealing
The third pillar of GPG's are:
Recognizing and dealing with conflicts of interest or the potential there for
To deal with suppliers without prejudice
To ensure they do not compromise the standing of the state through acceptance of gifts or hospitality
To be conscientious in their use of public property
To provide all assistance in the elimination of fraud and corruption.
Accountability and reporting.
Lastly one of the primary elements of the public sector accountabilities are openness and transparency in administration.
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 co-ordination activities;
Individual procurement officers are accountable to heads of procurement, and to their clients, for the services they provide; and
All people exercising procurement functions must have regard to these guidelines and are accountable to management. (Erasmus, 2012)
Proper Financial management is essential to the well being of the Country and it citizens. Government budget and expenses is important for all the citizens in the country. The tax payer needs to know where their money is going, who is spending it and who is wasting it. The government has to realize that there are both Public and Private sectors at play in the economy and fair and equal chances should be provided for both sectors to get fair entry into the market systems. The government should ensure economic stability, proper economic growth and price stability. The Constitution plays a huge role in the success of the PFB, rules and regulation should be properly assessed and correctly managed to make sure all role player understand the interpretation and the function of the legislation.