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Zero budgeting: Why FG is adopting it in 2016 for new programmes, projects

By Francis Arinze Iloani & Sunday Michael Ogwu (Lagos)

As part of its zero budgeting policy, the federal government will start 2016 “as if there was no programme at all” in previous budgets.

In a key demonstration of its economic reforms, the President Muhammadu Buhari administration is departing from the envelope-based budgeting system that was the norm with previous administrations, especially the immediate past administration of Goodluck Jonathan.

Vice-President Yemi Osinbajo had announced the departure a couple of months ago, saying the new zero budgeting would be carefully coordinated to ensure that it is policy-driven, especially regarding the proposed social intervention policy of the President.

The envelope-based budgeting had come under severe condemnation, with critics saying it was, with its tendency for repeated expenditures, an avenue for huge corruption.

A former Director of Management Analysis Training for the US Civil Service Commission, Peter Sarant, defined zero budgeting “as a method of budgeting in which all expenses must be justified for each new period.”

Zero-based budgeting, Sarant explained, starts from a zero base, with every function within an organization analysed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether the budget is higher or lower than the previous one.

Zero budgeting identifies alternative and efficient methods of utilizing limited resources, which Osinbajo emphasised. Sarant regarded Nigeria’s new budgeting system as “a flexible management approach which provides a credible rationale for reallocating resources by focusing on a systematic review and justification of the funding and performance levels of current programmes.”

The zero budgeting concept, which came into prominence five decades ago as pioneered by an accounting manager, Pete Pyhrr, has been adopted by countries like India and the United Arab Emirate (UAE).

In a recent interview in Abuja, the Permanent Secretary of the National Planning Commission (NPC), Bassey Okon Akpanyung, provided insights into the zero budgeting policy being adopted by the present administration.

“We are not going to use incremental budgeting where you have to add on the budget you had the previous year and so on. What it really means is that we are just starting as if there was no programme at all,” he explained.

Akpanyung said that the Commission and the Budget Office would look at specific sectors that are priorities to government and select which project the federal government wants to implement.

“We will look at the pros and cons, the multiplier effects of the project and linkages to the economy and decide which is worth implementing and then set money on it, after the feasibility study that has been done and the proper costing, and then implement the project,” he said.

Explaining how projects will be selected, Akpanyung said in addition to being zero-based, the budget will be policy-based as well. “Rather than give small monies, or capital allocation, to all the MDAs, allocation which ends up not getting any project completed, we select specific core MDAs and core sectors and then look at projects that will actualize the policy of the government. That is why we are saying, it is policy-based zero budgeting,” he stated.

On words making the rounds that some MDAs may not get capital allocations in the 2016 budget, the Permanent Secretary said if the MDAs have priorities that are aligned with those of government, they will surely get allocations for capital projects.

“If they are those ones that are not on the priority, then they may not be on 2016 or even 17. But there is no MDA (ministry, department or agency) that is not essential to the economy,” he clarified.

He maintained that the federal government would be focusing on the implementation of capital projects to “ensure that it is those essential projects and programmes that speak directly to the policy of government that are implemented.”

On whether or not the nation’s N485 trillion National Integrated Infrastructure Master Plan (NIIMP) will be keyed into the 2016 to 2020 Medium-Term Plan of the government, Akpanyung replied, “The document is already with the Presidency. They are taking a look at it.”

He explained that infrastructure is a core sector of the present administration and that the Commission was awaiting a directive from the Presidency on what to do with the master plan.

Daily Trust’s analysis showed that the medium-term plan of the document, which ought to have been keyed into the budget from 2014, is already in deficit of N5.38trn due to non-implementation by two years.

The Head of the Infrastructure Delivery Coordination Unit (IDCU) of the NPC, Mr. David Adeosun, had admitted in a recent interview that the transition process to the new administration affected the launch and implementation of the plan which ought to have been keyed into the budget.

An executive summary of the NIIMP document seen by Daily Trust indicates that the initial five-year operational period of the plan has an investment portfolio of N26.9trn ($166.1bn) in order to deliver priority infrastructure projects across the country.

In line with the new budgeting policy, and barring any last minute changes, the present administration has outlined its infrastructure policy thrusts, key performance indicators (KPIs) and targets.

As part of its medium-term plan, the federal government targets the creation of 150,000 jobs in the infrastructure sector in 2016, and increased installed electricity generation capacity to 10,000mw, thereby increasing the rate of the population that has access to electricity to 55 per cent, from a baseline of 40 per cent.

The percentage of federal government roads in good condition is to be increased to 31.5 per cent from the present 31 per cent, while narrow and standard gauge rail network is to be increased to 4,600km by 2016.

To achieve its targets, government projects to attract private sector investments of N315.2bn ($1.5bn) in infrastructure in 2016.

A copy of the draft medium-term plan of the federal government showed that in terms of employment opportunities in all sectors of the economy, it intends to create 2.23 million, 2.48 million and 2.69 million new jobs in 2016, 2017 and 2018 respectively.

The measure aims to reduce unemployment rate to 5.29 per cent by 2018 from a baseline of 6.41 per cent, while under-employment rate will be brought to 18.06 per cent by the same year from a baseline of 18 per cent.

In the 2016 to 2018 fiscal period, the federal government plans to grow the nation’s Excess Crude Account (ECA) to $7.65bn from a baseline of $6bn, while also increasing the foreign reserve to $36.15bn from a baseline of $31.30bn.

Government also plans to increase the contribution of the steel, mining, industrial and manufacturing sectors to the gross domestic product (GDP) to 13.77 per cent by 2018 from a baseline of 10.1 per cent.

It also projects to increase the volume of domestic gas utilisation to 500,000 metric tons next year and 840,000 metric tons by 2018.

Experts and economic analysts have been unanimous in their applause of the proposition by the federal government, which is expected to cut waste.

A development economist with the Pan Atlantic University, Dr Kelehume Ikechuchwu told the Daily Trust, “This government inherited problems from the previous administration and part of the problems is that oil price which was trending at $110 in the last 10 years suddenly dropped and is selling currently at $47 per barrel. What this means is that they do not have enough money to run the government. To run a government with a lean reserve and a lean income from all sources, those in government now need to look back and evaluate the practice they inherited and see what exactly they need to do.”

Ikechukwu said the zero budgeting system requires that going forward, every sector has to look mainly at its needs. On the contrary, the previous method looked at the past budget and decided whether the government wanted to increase the current one looking at population dynamics, based on the new people that had come into that sector.

“Right now, they are saying even if we did N20bn for the health sector last year, it does not mean we will do N20bn this year for the health sector,” he clarified.

On how zero budgeting can cut waste, a development researcher, Daniel Ikhuoria, explained, “Any government that is looking at prudence and no-go areas would usually do a zero-based budgeting by justifying every line item declared in the budget. Nobody would put in any frivolous thing based on the previous year’s budget, which was hitherto the practice.”

Ikhuoria expatiated, “For instance, every year, as we observed in previous budgets, there were provisions for the purchase of computers every year on an incremental basis. The same thing went for renovation, for sewage clearing, for purchase of tractors, for purchase of cars and for travels. But these line items may not necessarily be needed in a current budget year.”

An economist with the University of Abuja, Professor Sarah Anyanwu, agreed with the government that zero-based budgeting is good, because, to her, “it would eliminate waste and corruption.” Prof Anyanwu described the move as desirable for an economy that wants to move forward.

“It encourages prudent spending and focus. The system puts the burden of proof on the MDAs and demands that each MDA justify the entire budget in detail and prove why it should spend the country’s money in the manner proposed,” she said.

Prof Anyawu said a justification package must be developed by each MDA for every project or activity. The package includes an analysis of cost, purpose, alternative courses of action, measures of performance, consequences of not performing the activity and the benefits.

She, however, warned that zero budgeting is a systematic approach to the solution of problems and not foolproof.

“It suffers from certain problems and limitation, which may include an increase in time and effort required for budget preparation,” she warned.

She hinged its success upon “the precision of estimates based on facts and sound judgment.”