1. ADB Grant 0133-CAM: Public Financial Management in Rural Development Ministries (Component 1) Analysing Budgets March 22 - 25, 2010 1

2. Session 2: Dimensions of budget expenditure Using the budget classification Linking funds to expenditure Relationship between capital and recurrent expenditure Linking the budget to the strategic budget plan 2 Analysing Budgets Description of Course

3. Budget Classification Analysis of budget and actual financial results can be done in many ways. The most important are: Economic Salaries, purchases, interest, etc Classification typeExamples Administration Ministry, department, location, etc Function Health, agriculture, education, etc Program Capacity building, rural infrastructure, etc Funding Government, ADB, WB, etc 3

4. Budget Classification available in Cambodia Economic Items – well established: Revenue and Expenditure Administrative classification – Ministry – Departments Function (within department) Programs (within departments) --- Program budget 4

5. Non-program and program budgets Program budgets are analysed by Activity and Economic Item – Economic Items Chapters 60, 61, 62 Non-Program budgets are analysed by Economic Item – Economic items chapters 20 - 27, 60 - 64 5

6. Program Budgets - Analysis Program Sub- program Department Program Sub- program --------------------------------------- Economic items ------------------------------ -------------------- Activities -------------------------- 6

7. Example – Analysis of sub-program budget Sub-Program 1: Capacity BuildingTotalAct 1Act 2Act 3Act 4Act 5 Total expenditure5621801021543888 60Purchases1762652423818 6015 Oil and the lubricants 5015 20 15 6021Foods609 10383 6022For animal consumption42 2 6051Material and equipments44 3410 6052Furniture18 61External services50 6152 Maintenance of buildings 50 62Other external services336154 112 70 6223Meetings seminars conference180100 70 10 6242Missions269 7 10 6243Perdiem13045 35 50 7

8. Example – Analysis of sub-program budget Sub program 1 Major items of expenditure: – 55% of budget is seminars and per diems – (realistic for a capacity building program) 8

9. Program budgets Program budgets do not yet contain their share of salaries, or capital expenditure Why? 9

10. Inclusion of donor funded projects in the budget At present all donor funded projects are outside the government budget They are separate entities reporting to donors Technically they can easily be included in the budget – Funding from donors is drawn down as expenditure is made – Therefore receipt of grants / loans is equal and opposite to project expenditure – Analysis is better if there is a funding dimension in the budget classification 10

11. Example: Inclusion of donor funded project National consultants 50,000 Office equipment 40,000 Materials 10,000 Rent 10,000 Fuel 5,000 A project funded by an ADB grant includes the following budgeted expenditure in US dollars. Show how it can be included in the Department’s budget. (Assume exchange rate is Riel 4000 = $1) 11

12. Solution National consultants 50,000 Office equipment 40,000 Materials 10,000 Rent 10,000 Fuel 5,000 X 4000 convert to Riels Total $ 115,000 R 460,000,000 12

13. Solution CodeReceiptsRiel 1322ADB grant 460,000,000 Payments 2182Office equipment 160,000,000 6015Fuel 20,000,000 6051Materials 40,000,000 613Rent 40,000,000 6211National consultants 200,000,000 460,000,000 13

14. How should this project be included within the Ministry Budget? As a program or sub-program? Part of a sub-program? 14

15. How should this project be included within the Ministry Budget? If the project uses funds from more than one source (e.g. ADB Funds and Government Counterpart Funds), a Funding Code needs to be added to the budget classification e.g. Government Funds 01 ADB Funds 12 Therefore, the budget analysis for the project will show Program, Funding and Economic Classifications. 15

16. Example In addition to the ADB Grant Expenditure, the project contains the following expenditure from Government Counterpart Funds... 2182Office equipment 20,000,000 6051Materials 25,000,000 608Other supplies 10,000,000 6421Salaries 50,000,000 Show how the total project budget can be analyzed.... 16

17. Solution EconFundDescriptionRiel Receipts 132212ADB grant 460,000,000 Payments 218201Office equipment 20,000,000 218212Office equipment 160,000,000 601512Fuel 20,000,000 605101Materials 25,000,000 605112Materials 40,000,000 60801Other supplies 10,000,000 61312Rent 40,000,000 621112National consultants 200,000,000 642101Salaries 50,000,000 565,000,000 17

18. Solution EconDescription01: Govt12: ADBTotal Receipts 1322ADB grant460 Payments 2182Office equipment20160 180 6015Fuel20 6051Materials2540 65 608Other supplies10 613Rent40 6211National consultants200 6421Salaries50 105 460 565 18

19. How the multi-year budget process should work Top Down (MEF) Cash Ceilings allocated to Ministries, based on priorities Yr 1Yr 3Yr 2 Bottom Up (Ministries) Estimated costs of priority activities 19

20. How the multi-year budget process should work Therefore, Ministry Budgets should be prepared in a way which allows adjustment to be made if cash ceilings are increased or decreased This includes the possibilities of: – Increasing or decreasing the size of activities – Postponing projects to later years, or bringing them forward 20

21. How the multi-year budget process should work Therefore, Ministry Budgets should be prepared in a way which allows adjustment to be made if cash ceilings are increased or decreased This includes: – Increasing or decreasing the size of activities – Postponing projects to later years, or bringing them forward This technique is called ‘flexible budgeting’ 21

22. Making flexible budget estimates To make flexible budget estimates, we need to understand what factors cause costs to increase or decrease These factors are called ‘Cost Drivers’ 22

23. Cost drivers A cost driver is something that causes a cost to change (increase or decrease) Examples: – Physical activity – Economic activity – Interest rate – Inflation rate... general or specific – Exchange rate – Central government decision – Ministry decision 23

24. Example: Cost drivers What factors affect the budget cost of ‘fuel’ in a subprogram on capacity building: FactorYes / No ? Predicted oil price / petrol prices Fuel efficiency of vehicles used Distance to be travelled No. of training courses run No. of participants on training courses Predicted consumer price index Exchange rate Riel / Dollar Interest rate Quality of roads.......... 24

25. Example: Cost model for fuel Dollar estimate of fuel cost Exchange rate Riel estimate of fuel cost Fuel consumed Predicted Fuel Cost per litre Distance Fuel Efficiency No of courses Locations Type of car Quality of roads 25

26. Example: Cost model for fuel Which of these factors are controllable by the Ministry? – No. of courses? – Locations? – Type of vehicles used? – Quality of roads? – Fuel cost per litre in $? – Riel / $ exchange rate? 26

27. Effect of capital expenditure on recurrent expenditure Capital investment will cause: – increases in some items of recurrent expenditure, – decreases in other items of recurrent expenditure Examples: – A new computer system: What increases / decreases in recurrent expenditure? – A new training department.... In government, how is investment in capital equipment/projects justified? 27

28. Effect of capital expenditure on recurrent expenditure In the private sector, capital investment is justified mainly by the increase in profit that it produces: – i.e. increases in sales and / or reduction in costs In government, how is investment in capital equipment/projects justified? 28

29. Budgets must include estimated recurrent cost increases or decreases caused by capital investments Need to estimate the cost changes caused by capital investment Medium term estimates are needed – e.g. 3 years These estimates of current cost must be put into the Strategic Budget Plan. 29

30. Example: Cost changes caused by capital investment In 2010, a donor proposes a grant to construct a new provincial training centre, cost $500,000, and to run the first set of training courses $50,000 (salaries, staff allowances and materials) The estimated ongoing running costs of the centre are to be paid by the Ministry. In 2011 -2013 the costs are estimated at $55,000 per year. The Ministry’s budget estimated allowance for training in that region is $35,000 per year. What are the Ministry’s options? 30