The Budget Conundrum (2) – Unravelling The Jargon

Once the budget is signed into law, it is published in the NASS journal as an Act, the Federal Government Official Gazette and published online on the website of the Budget Office of the Federation. The Executive Branch is then bound to comply with the law. Legislative sanctions applicable to violation of the law may include impeachment. Compliance with the appropriation law is what we actually call 'budget implementation’ in Nigeria. Our research on country comparatives confirmed that there is nowhere in the world where such a phrase is used – presumably, once a budget is passed, implementation ought to be a given. Countries we surveyed use ‘budget utilization’ to refer to situations when the budgeted amount is not spent in full for a variety of unexpected developments, but not “implementation”. Except in Nigeria, it seemed that one is disallowed from doing anything other than comply with the law by implementing it in letter and spirit!alt

In the Nigerian context though, budget implementation is a vague term often used interchangeably with budget utilization, and refers to how much of the budget has been disbursed to the Ministries, Departments and Agencies (MDAs) of government. Note again that disbursement does not mean the funds have been spent or the intended results attained. However, in an ideal situation, disbursement should be a measurement of how the finances are spent and translated to visible projects in the country.

As noted in the last column, our entire budget process in Nigeria is vastly bureaucratic and opaque. It is also not anchored on any collective national vision, clear strategy and well thought-out programmes. It is an annual ritual for politicians and public servants to slice the fiscal pie into various expenditure sub-heads that often fail to improve the welfare of the rest of us. The process therefore involves various stages and terminology that are deliberately designed to confuse, obfuscate and create space for subsequent ‘flexible’ implementation of the budget. In the advanced and rapidly-developing economies, the budget process is highly transparent, devoid of gobbledygook and timely. Drafts, preparations and submissions between the legislature and executive are completed as and when due without any unwarranted overlap from one year to another, while being anchored on a coherent national development vision and strategy.

A typical example is the 2012 United States federal budget which was presented to Congress in February 2011 and enacted in November 2011, just a month into their fiscal year. The budget was signed into law almost immediately without need for any ‘discussions’. On the other hand, our 2012 federal budget was submitted to the National Assembly (NASS) in December 2011, barely a month before the commencement of the fiscal year in January. The 2012 Appropriation Bill was finally passed by NASS in March and it took a complete month for the President to sign it into law barely escaping a constitutional violation. By that time, we were neck deep into the second quarter of the year, but the bureaucrats and politicians are happy. This is because, the recurrent budget which these days is nearly three-quarters of the entire budget was being drawn down and spent by them even before the bill was signed into law!

The budgetary system in Nigeria is therefore pervaded by lots of distortions and perverse incentives which begin from the conception to completion; corruption is involved in all stages before passing it into law. After the budget is signed into law, Expenditure Warrants are issued to all MDAs. Expenditure Warrants are instruments issued by the Minister of Finance authorizing the Accountant-General of the Federation to issue necessary mandate for the purpose of cash-backing monies to MDAs. The warrants are issued on a quarterly basis to MDAs purposely to execute the projects contained in the annual budget. This system allows for flexibility within the MDAs to determine their project priorities. The warrant system also removes the restrictions that prohibit MDAs from initiating procurement process without funding in place. The two downsides are that the fiscal flexibility of the warrant system allows for reckless spending in many cases, and delays the commencement of procurement processes which can take months before contracts are awarded. Meanwhile, the funds when available to MDAs remain in non-interest yielding bank accounts.

Where do AIEs come in? MDAs are mandated to spend within the allocation in the Appropriation Act. However, in cases where there are unforeseen expenditures which were not reflected in the budget preparation e.g. price escalations due to exchange rate fluctuations, MDAs apply to Budget Office of the Federation (BOF) through the Minister of Finance for utilization of funds for these projects. An Authority to Incur Expenditure (AIE) is then issued to the MDAs for advance release of appropriated funds or for additional funds as required. AIEs are also issued for projects that are not cash-backed but which need to be implemented. AIEs constitute not just an authority to spend, but a public notice to outside parties like contractors and suppliers that the expenditure has the full backing of government.

There is the term ‘cash-backed’ or ‘cash-backing’ which sounds confusing. This refers to real monies that have been disbursed by the Ministry of Finance to the relevant MDAs. It means that the funds are available to the organizations to expend on capital projects appropriated in the budget. Another contentious terminology is ‘virement’. This is the agreed movement of money from one budget heading, to which it has been allocated, to another budget heading. It is used for transferring funds from where they were originally allocated but not stridently required to where they could be spent more meaningfully, immediately. Usually, the President makes his virement spending request known to the NASS and if approved, funds are accordingly redirected. While the current administration has consistently ignored this requirement and flouted the process, lack of thorough research before budgeting preparation and the ‘envelope’ system (explained below) have been identified from experience as the main causes of frequent virements.

The envelope system was introduced by the economic team of 2003 and worked by providing each MDA with a maximum amount for its capital and recurrent needs for the coming fiscal year. Our hope was that the system will force MDAs to make hard choices and trade-offs between investment and consumption, and lay down the basis for massive cuts in personnel and overhead budgets. It worked better then because we started with very low envelopes to MDAs, and gave greater priority to MDAs engaged in physical infrastructure and human development programs. That has changed for the worse unfortunately. The envelope system is now anti-developmental because rather than have the sub-heads receiving funds on the basis of their needs or targets, the reverse is often the case. Our budget analyses for 2011 and 2012 contained many examples of that. What is happening since 2010 is that certain indefensible amounts are assigned to favored MDAs and then the budget templates are filled to cover all the funds assigned. It is therefore hardly surprising that certain MDA projects are cash-backed but not implemented. They simply have no projects to execute – no project designs, no bidding documents, procurement processes commenced too late and so on! Meanwhile, other less favored MDAs with ongoing projects have no funds to settle certified payments.

Sometimes, supplementary budgets are needed in the course of the fiscal year. This is an expenditure statement introduced to provide funds to the government to meet new, unexpected or additional expenses in a current fiscal year. In countries like the US, supplementary budgets are drawn to fund emergencies or major challenges in the economy because their budgets are usually carefully researched and considered before they become law. In Nigeria, because of our dependency on the fluctuations in oil prices, sometimes an unexpected rise in oil price presents an opportunity to pass a supplementary budget and introduce imaginary new projects or expand the scope of existing projects, for spending of whatever surplus funds earned. The introduction of the Excess Crude Account (ECA) in 2004 helped reduce that particular type of appetite, but the ECA has become so often raided these days by the government that it is almost irrelevant as a ‘rainy day” fund.

From the foregoing, some of the failures in budget implementation stem principally from the absence of a coherent national development vision and economic strategy to guide budget formulation and programs design. Furthermore, the Ministry of Finance’s multiple controls of the Treasury and, the Budget Office, while at the same time acting the de facto planning and monitoring agency of the government, has made a weakened National Planning Commission simply a spectator. It is pertinent that the vision and strategy be clearly articulated and debated by Nigerians, while MDA roles should be properly delineated so as to provide checks and balances in the system. 



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[Column] The Budget Conundrum (2) - Unravelling The Jargon
Nasir El-Rufai posted on 08-17-2012, 08:57:16 AM


Once the budget is signed into law, it is published in the NASS journal as an Act, the Federal Government Official Gazette and published online on the website of the Budget Office of the Federation. The Executive Branch is then bound to comply with the law. Legislative sanctions applicable to violation of the law may include impeachment. Compliance with the appropriation law is what we actually call 'budget implementation’ in Nigeria. Our research on country comparatives confirmed that there is nowhere in the world where such a phrase is used – presumably, once a budget is passed, implementation ought to be a given. Countries we surveyed use ‘budget utilization’ to refer to situations when the budgeted amount is not spent in full for a variety of unexpected developments, but not “implementation”. Except in Nigeria, it seemed that one is disallowed from doing anything other than comply with the law by implementing it in letter and spirit!alt



In the Nigerian context though, budget implementation is a vague term often used interchangeably with budget utilization, and refers to how much of the budget has been disbursed to the Ministries, Departments and Agencies (MDAs) of government. Note again that disbursement does not mean the funds have been spent or the intended results attained. However, in an ideal situation, disbursement should be a measurement of how the finances are spent and translated to visible projects in the country.



As noted in the last column, our entire budget process in Nigeria is vastly bureaucratic and opaque. It is also not anchored on any collective national vision, clear strategy and well thought-out programmes. It is an annual ritual for politicians and public servants to slice the fiscal pie into various expenditure sub-heads that often fail to improve the welfare of the rest of us. The process therefore involves various stages and terminology that are deliberately designed to confuse, obfuscate and create space for subsequent ‘flexible’ implementation of the budget. In the advanced and rapidly-developing economies, the budget process is highly transparent, devoid of gobbledygook and timely. Drafts, preparations and submissions between the legislature and executive are completed as and when due without any unwarranted overlap from one year to another, while being anchored on a coherent national development vision and strategy.



A typical example is the 2012 United States federal budget which was presented to Congress in February 2011 and enacted in November 2011, just a month into their fiscal year. The budget was signed into law almost immediately without need for any ‘discussions’. On the other hand, our 2012 federal budget was submitted to the National Assembly (NASS) in December 2011, barely a month before the commencement of the fiscal year in January. The 2012 Appropriation Bill was finally passed by NASS in March and it took a complete month for the President to sign it into law barely escaping a constitutional violation. By that time, we were neck deep into the second quarter of the year, but the bureaucrats and politicians are happy. This is because, the recurrent budget which these days is nearly three-quarters of the entire budget was being drawn down and spent by them even before the bill was signed into law!



The budgetary system in Nigeria is therefore pervaded by lots of distortions and perverse incentives which begin from the conception to completion; corruption is involved in all stages before passing it into law. After the budget is signed into law, Expenditure Warrants are issued to all MDAs. Expenditure Warrants are instruments issued by the Minister of Finance authorizing the Accountant-General of the Federation to issue necessary mandate for the purpose of cash-backing monies to MDAs. The warrants are issued on a quarterly basis to MDAs purposely to execute the projects contained in the annual budget. This system allows for flexibility within the MDAs to determine their project priorities. The warrant system also removes the restrictions that prohibit MDAs from initiating procurement process without funding in place. The two downsides are that the fiscal flexibility of the warrant system allows for reckless spending in many cases, and delays the commencement of procurement processes which can take months before contracts are awarded. Meanwhile, the funds when available to MDAs remain in non-interest yielding bank accounts.



Where do AIEs come in? MDAs are mandated to spend within the allocation in the Appropriation Act. However, in cases where there are unforeseen expenditures which were not reflected in the budget preparation e.g. price escalations due to exchange rate fluctuations, MDAs apply to Budget Office of the Federation (BOF) through the Minister of Finance for utilization of funds for these projects. An Authority to Incur Expenditure (AIE) is then issued to the MDAs for advance release of appropriated funds or for additional funds as required. AIEs are also issued for projects that are not cash-backed but which need to be implemented. AIEs constitute not just an authority to spend, but a public notice to outside parties like contractors and suppliers that the expenditure has the full backing of government.



There is the term ‘cash-backed’ or ‘cash-backing’ which sounds confusing. This refers to real monies that have been disbursed by the Ministry of Finance to the relevant MDAs. It means that the funds are available to the organizations to expend on capital projects appropriated in the budget. Another contentious terminology is ‘virement’. This is the agreed movement of money from one budget heading, to which it has been allocated, to another budget heading. It is used for transferring funds from where they were originally allocated but not stridently required to where they could be spent more meaningfully, immediately. Usually, the President makes his virement spending request known to the NASS and if approved, funds are accordingly redirected. While the current administration has consistently ignored this requirement and flouted the process, lack of thorough research before budgeting preparation and the ‘envelope’ system (explained below) have been identified from experience as the main causes of frequent virements.



The envelope system was introduced by the economic team of 2003 and worked by providing each MDA with a maximum amount for its capital and recurrent needs for the coming fiscal year. Our hope was that the system will force MDAs to make hard choices and trade-offs between investment and consumption, and lay down the basis for massive cuts in personnel and overhead budgets. It worked better then because we started with very low envelopes to MDAs, and gave greater priority to MDAs engaged in physical infrastructure and human development programs. That has changed for the worse unfortunately. The envelope system is now anti-developmental because rather than have the sub-heads receiving funds on the basis of their needs or targets, the reverse is often the case. Our budget analyses for 2011 and 2012 contained many examples of that. What is happening since 2010 is that certain indefensible amounts are assigned to favored MDAs and then the budget templates are filled to cover all the funds assigned. It is therefore hardly surprising that certain MDA projects are cash-backed but not implemented. They simply have no projects to execute – no project designs, no bidding documents, procurement processes commenced too late and so on! Meanwhile, other less favored MDAs with ongoing projects have no funds to settle certified payments.



Sometimes, supplementary budgets are needed in the course of the fiscal year. This is an expenditure statement introduced to provide funds to the government to meet new, unexpected or additional expenses in a current fiscal year. In countries like the US, supplementary budgets are drawn to fund emergencies or major challenges in the economy because their budgets are usually carefully researched and considered before they become law. In Nigeria, because of our dependency on the fluctuations in oil prices, sometimes an unexpected rise in oil price presents an opportunity to pass a supplementary budget and introduce imaginary new projects or expand the scope of existing projects, for spending of whatever surplus funds earned. The introduction of the Excess Crude Account (ECA) in 2004 helped reduce that particular type of appetite, but the ECA has become so often raided these days by the government that it is almost irrelevant as a ‘rainy day” fund.



From the foregoing, some of the failures in budget implementation stem principally from the absence of a coherent national development vision and economic strategy to guide budget formulation and programs design. Furthermore, the Ministry of Finance’s multiple controls of the Treasury and, the Budget Office, while at the same time acting the de facto planning and monitoring agency of the government, has made a weakened National Planning Commission simply a spectator. It is pertinent that the vision and strategy be clearly articulated and debated by Nigerians, while MDA roles should be properly delineated so as to provide checks and balances in the system. 



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