Using Budget Analysis to Scrutinise the Public Enterprises Vote

1. Using Budget Analysis to Scrutinise the Public Enterprises Vote A Presentation by IDASA 7 March 2007

2. 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

3. Basic Uses of Budget Analysis Quantitative information regarding: • Priority • Progress • Equity • Adequacy This presentation emphasis the first two

4. 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)

5. 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

6. 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

7. The budget figures…

8. DPE Budget as a % of Total Voted Funds and % of GDP

9. Share of Total (%) and Trends in Share of Total

10. Visually…

11. Totals and Share of Total (Economic Classification)

12. Share of Total and Trends Excluding Manufacturing Enterprises

13. Technique 2:Real 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

14. 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%

15. Inflation

16. 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)

17. Real Percentage Changes

18. Summarising the Process • Get deflators / price indices • Select base year • Convert nominal allocations to real allocations • Calculate percentage change

19. 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

20. Deflating using DPE figures: Nominal % Change

21. 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

22. Real Percentage Changes

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

24. Comments / Questions based on the ENE information • Clearly the transfers to various SOE’s 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 Department’s key functions

25. 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?

26. 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

27. Travel and Subsistence Allocations to Programmes

28. Thank you