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Budget: From wastes to economic growth-Part 1

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Buhari 2016 budget presentationThe adoption of zero-base budgeting (ZBB) in the 2016 Budget is a major shift from the traditional budgeting which is known to perpetuate inefficiencies and wastes even though the ZBB may not have been fully adopted in the year’s budgeting most likely due to time constraint. However, the pointer is in the right direction. The ZBB is primarily targeted at resources optimisation and inclusive economic growth.

There is somehow justified historical belief by Nigerians that any Nigerian government (state governments and NASS inclusive) will squander whatever resources it obtains from taxation, foreign borrowing, foreign aid, privatisation, and deregulation. I believe the introduction of the ZBB should be seen as a bold step by the President to commence the process of rebuilding the image of governance in respect of accountability and transparency.

There is poverty and unemployment in the land. The will to make Nigeria a powerful voice has never been lacking. But then the Nigerian dream has not materialised. Each time it appears there is hope in the horizon, something happens and everything goes wrong and the journey begins anew. The recent budget face-off was for the wrong reasons and not in the interest of the citizens.

Budget of wastes is defined as the differential between the true economic costs of budgeted activities/projects and their true economic benefits. For example, if a budget carries an estimated expenditure of N30 million for a project while the true economic cost of the project is N10 million, then the differential is a budgeted waste of N20 million. If the true economic benefit of the project is N5 million, the budgeted waste increases to N25 million. In the case where the true benefit is higher, let say N20 million and the true economic cost remains at N20 million, the budgeted waste remains at N20 million. Budget padding is the main cause of budget of wastes. The ZBB if efficiently implemented will eliminate these wastes.

Zero-base budgeting came into prominence about the time when concerns about sustainable development (SD) were gaining momentum in the late 1960s and 1970s. In 1987, the Brundtland Report provided a frequently quoted definition for sustainable development with two concepts:
The concept of needs in particular the essential needs of the world poor, to which overriding priority should be given and.The idea of limitations imposed by the state of technology and social organisation on environment’s ability to meet present and future needs.

Zero-based budgeting principles are closely tied to the concepts of sustainable development in relation to optimising the benefits derivable from our finite scarce resources and optimising the benefits to the poor. Nigerians in the past have complained that the country’s so-called GDP statistics (growth) dished out by our economic managers are not inclusive in terms of the man on the street. Efficient implementation of the ZBB principles will be a major step towards inclusive economic growth.

The major difference between the traditional incremental budgeting is that ZBB eliminates wastes and inefficiencies. Managers are encouraged to explore alternatives based on cost benefit for achieving their set objectives. Every activity or budget item is subjected to cost-benefit and value for money evaluation before resources are allocated. Projects and activities (social investments) that are beneficial to the masses and the poor have higher chances of being prioritised under ZBB compared to the traditional conventional budgeting. White elephant projects and budget padding are unacceptable practices under the ZBB

Inclusive economic growth is the perceived driver behind ZBB. The usual practice of allocating resources to activities based on the premise that they have always been funded in the past is not tenable in ZBB. Projects such as Environmental Clean-up and Climate Change mitigation are likely to receive better attention under ZBB regime compared to the traditional budgeting system. ZBB is a major driver of sustainable development in terms of managing scarce and finite resources for the benefit of all (both present and future generation). Projects targeted at education, healthcare, clean water, public safety, and essential infrastructures such as roads, railways are allocated extra weight in computing the cost-benefit analysis.

Profit should not be the only means of justifying social investments. The principle behind cost benefit evaluation is that the NPV rule alone is not enough for sound fiscal management. Thus a marginally rejected project (NPV<0) with small adjustments can be passed into a marginally acceptable project because of its effect on the poor and unemployed. The poor should be favoured in the choice of projects but only in the most cost efficient manner possible.

The ZBB will no doubt involve some transition involving culture change (civil service culture) and capacity building. A dynamic communication and feedback mechanism must be put in place to ensure that all the stakeholders are on the same page. New business/financial models are required to facilitate cost reductions, increase in productivity and operating efficiencies.
To be continued
Iringe-Koko is a chartered accountant


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BudgeteconomicnigerianZBB

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