South Africa is facing unprecedented economic, political, social and technological challenges that if not remedied, could brink it past the brink of economic disaster. These challenges are forcing our Government to look at new ways of improving budgeting, reporting and managing as well as undertaking various fiscal reforms in this regard.
ZERO BASED BUDGET
The Minister of Finance, Tito Mboweni, has announced a decision to implement zero based budgeting and is to be commended for making such a progressive and bold move.
In principle, the Minister requires, through National Treasury, every organ of state must justify every Rand they would need and how it will be spent. He says that beginning on 1 July 2020 this will be applied and we anticipate it will only impact on the Medium Term Adjustment budget process.
He is formally moving away from the incremental adjustments to the already existing baselines, which will also have significant impact on the Strategic Plans and Annual Performance Plan from 2020/21 into the future.
Failure of the incremental budget adjustments on already existing baselines was due to the amount of fiscal dumping that was applied by many organs of state in the past where entities did not plan and procure timely. Bulk of the expenditure then would be incurred in Quarter 4 of each year – and at times for services or goods not required – however, the allocations would rather be “used” than lost in future years.
More than ever before it is critical for the South African government to have a real-time insight and be fully appraised of the individual organs of state fiscal situation.
Zero Based Budget processes will only be successful if each organ of states knows and understands its employee costs, commitments and accrual base related to goods and services (including capital projects) – and then determine, whether any other service is still required.
Therefore, every Rand must have a purpose. Every Rand must have a Category / economic classification. As a result, CLEAR choices can be made about CLEAR priorities. Every R1.00 cannot become R1.50 or R2.50. Value for money is critical to the success of Zero Based Budgets.
Zero Based Budgeting will not be possible if reforms are not urgently implemented within supply chain management functions. The new regulations on procurement are being reviewed by National Treasury and need to be e-procurement focused if fiscal efficiency is to be improved.
The decision to implement the Zero Based Budgets system implies that the requirements of the Preferential Procurement Policy Framework Act Regulations of 2017, related to Market research and cost of products and services are TREMENDOUSLY important and MUST be implemented, if not already, with immediate effect.
Directorates will be required to pitch for funding to their leadership for every project they need to implement, and once agreement has been reach, the project will then be presented for approval by Treasury.
It is crucial that the information that will form the basis for budgeting and decision-making is accurate, particularly so if the primary source of information is an organisation’s own data.
South African Government agencies and departments will have to leverage real-time information into the decision-making process to ensure that decisions are based on objective data and insights. Particularly in respect of government, making the correct decisions, with the correct information, can improve the daily lives of its citizens and enable proper implementation of government strategies and interventions.
TWO FOCUS AREAS: COMPENSATION OF EMPLOYEES AND INFRASTRUCTURE
Fifty percent of the budget will be used to compensate employees. Government needs to conclude disciplinary processes related to the R19 million paid to suspended state officials. Salaries of executive managers of State owned enterprises and public entities must be reviewed and cut.
Infrastructure is critical. The role of the National Department of Public Works and Infrastructure as well as of each Provincial Department and Municipality implementing infrastructure projects, will be pivotal to the success of implementation of infrastructure projects. Some construction companies have delisted from the JSE due to the slow-down in investment related to infrastructure. (What about these? _it does not say what this had to do with the gov? he needs to say)
If $7billion of debt will be incurred in relation to the poor economic conditions we are facing, then implementation of infrastructure and the investment into our economy must be taken very seriouslyly.
Real time audits and continuous monitoring on infrastructure projects will be critical to ensure value for money before any project can be signed-off. BDO has developed such audit methodology by partnering with industry leaders and have sound auditing experience at all stages of projects ,including post-project. By auditing a project during implementation, to is possible to mitigate, during construction, issues in terms of the quality of construction, value of construction and the quality of project management.
Spending on infrastructure in terms of the Expanded Works Programmes, if managed and implemented fairly and honestly will stimulate local and community economies as jobs will be created and skills will be transferred, cutting the unemployment rate.
WHAT FUNDAMENTALS ARE NEEDED TO START ZERO BASED BUDGETING
In order to initiate and successfully implement zero based budgeting, the following key steps should be considered:
- Executive buy-in:
- In order to make the leap to a zero based budgeting space, there has to be buy-in from all spheres of government.
- Data analytics has to be part of decision making on executive level as the information will allow clear decisions to be taken on every rand required for projects.
- This process must be driven from each Executive Authority right down to officials of the state. (please check that it is not right up to state officials as earlier it was mention it was a upward process, right up to Treasury)
- Financial capabilities and analytical resources are key to zero based budgeting. Without prudent and financial savvy, CFO’s, appropriate budgeting reforms will be difficult to implement;
- It’s important for each official to commit to zero based budget principles and implement accordingly.
- This will help focus the budgeting efforts into meaningful outcomes and true service delivery.
For South Africa to survive, it is critical that progressive and immediate steps are taken. Minister Mboweni has clearly shown us what needs to be done for this to be successfully achieved. As the private sector, we must use our skills and expertise to do everything we can to help him save our country from financial ruin. We must also ensure our services and goods offer value for money and are sustainable and supportive.
Read More Insights