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

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

Basic Uses of Budget Analysis Quantitative information regarding: 1) Priority 2) Progress 3) Equity 4) Adequacy This presentation emphasis the first two

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)

ENE Allocations Continued ► Thus a large/interesting programme allocation can be analysed further by looking at: 1) The economic classification of functions in the programme 2) The descriptive information provided for each programme

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

The budget figures… (R Thousand)2003/ / / / / / /2010 Administration Energy, Broadband Infrastructure and Mining Enterprises Legal, Governance and Risk Manufacturing Enterprises Transport Enterprises Joint Project Facility TOTAL

DPE Budget as a % of Total Voted Funds and % of GDP (R Thousand)2003/ / / / / / /2010 DPE Total GDP Total Expenditure DPE Budget as % of GDP DPE Budget as % of Total Expenditure

Share of Total (%) and Trends in Share of Total (R Thousand)2003/ / / / / / /2010 Administration Energy, Broadband Infrastructure And Mining Enterprises Legal, Governance and Risk Manufacturing Enterprises Transport Enterprises Joint Project Facility TOTAL100.0

Visually…

Totals and Share of Total (Economic Classification) 2003/ / / / / / /2010 Current Payments Transfers and Subsidies Payments for Capital Assets / / / / / / /2010 Current Payments Transfers and Subsidies Payments for Capital Assets

Share of Total and Trends Excluding Manufacturing Enterprises (R Thousand)2003/ / / / / / /2010 Administration Energy, Broadband Infrastructure And Mining Enterprises Legal, Governance and Risk Transport Enterprises Joint Project Facility TOTAL100.0

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:1999R R R R R 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

Nominal % Change Calculation ► (New Value – Old Value) / Old Value * 100 ► Thus: ( – ) / * 100 = ( / ) * 100 =25%

Inflation Allocation Nominal % Change /25%4%

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)

Real Percentage Changes ► Nominal Change (%)254 Inflation Rate19%11% Index value (e.g. CPII) Real Value (1999 Rand) Real Percentage Change

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

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 was multiplied by 100 / 119 to get the real allocation of R : in real terms, as expected, the allocation is less than the nominal R

Deflating using DPE figures: Nominal % Change Nominal Percentage Change2003/ / / / / / /2010 (R Thousand) Administration Energy, Broadband Infrastructure And Mining Enterprises Legal, Governance and Risk Manufacturing Enterprises Transport Enterprises Joint Project Facility TOTAL

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/ ► 09/10-109

Real Percentage Changes Real Percentage Change2003/ / / / / / /2010 Administration Energy, Bband, Mining Legal, Governance and Risk Manufacturing Enterprises Transport Enterprises Joint Project Facility TOTAL

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

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

Comments / Questions Continued ► Nominal allocations for ‘Consultants, contractors and special services’ go from R to R 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?

Comments / Questions ► Allocations to capital assets for the department itself decline rapidly over the MTEF, from R in 2006/2007, to R in 2007/2008, and down to R 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

Travel and Subsistence Allocations to Programmes Programme ( R ‘000)2006/ /2008Nominal % Change Administration Energy, Broadband and Mining Enterprises Legal, Governance and Risk Manufacturing Enterprises Transport Enterprises Joint Project Facility

► Thank you