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Friday, November 1, 2013

Execution is key

Posted on 28 October 2013 - 07:42pm
Last updated on 28 October 2013 - 11:24pm
Raja Ahmad Shahrir

AS expected, Budget 2014 included the announcement of the GST implementation, the reduction of subsidy, and spending allocation to boost the economy, all embedded within the prime minister's "5 thrusts" framework, with the hope to improve the nation's fiscal deficit.

From a planning perspective, I believe that the budget contains steps needed to grow Malaysia and enhance the economy through the development of basic infrastructure, enhancing human capital development by focusing on the right sets of skills and knowledge, boosting economic activity to increase domestic and foreign investments, restructuring the tax system to enhance revenue etc.

However, this is the same general view, year in, year out.

So what's next? Are we to sit back and go back to business as usual, with the frame of mind that all these plans tabled on Friday will bolster the economy as it said it would?

A budget is just a plan, and if no proper measures are taken during implementation, then we may even experience a potential increase in fiscal deficit in 2014 compared to 2013.

Address cost issues first

As mentioned in my previous write-up, what we are facing is more a cost problem rather than a revenue problem. Cost problems in the form of wastage and leakage though ineffective and inefficient management.

One of the things that came to mind when reading the budget was the RM46.5 billion allocated for development expenditure. Taking an excerpt from the prime minister's speech:

"From the Development Expenditure of RM46.5bil, a sum of RM29bil is allocated to the economic sector. A sum of RM10.5bil is allocated to the social sector for education and training, health, welfare, housing and community development.

In addition, RM3.9bil is allocated to the security sector. The balance of RM1.1bil is for general administration and RM2bil for contingencies."

First, there are numerous plans such as the billions to develop five regional corridors, development of the West Coast Expressway from Banting to Taiping, RM700 million for a new air traffic management centre, RM128 million to upgrade the police headquarters, district police headquarters and staff quarters, etc.

What is unclear to the public is whether these estimated costs are reflected accurately according to the development cost. Are the cost of materials, labour and overheads reflective of market prices and will there be a supplementary budget to support these costs?

In 2012, the AG's Report found the Marine Parks Department had bought marine binoculars for 2,805% higher than market price, the Majlis Amanah Rakyat bought an oven at RM1,200 when the actual price in the market was found to be RM419, and many more instances where items were bought at exorbitant rates compared to their market value.

Furthermore, several blueprints are in the pipeline such as the Services Sector Blueprint and the National Aviation Policy. Who will be hired to develop them and at what cost? What is the likelihood we won't get another National Education Blueprint issue?

What are contingencies and other expenditures?

Second, what items fall under the category of "contingencies"? A whopping RM2 billion has been allocated for "contingencies". A report also showed that 12.4% of the overall budget is allocated for "other expenditures".

These categories should be further clarified to the public. Without proper clarification, it is likely that the public may perceive these allocations as a measure to replenish the government's coffers.

Another highlight of Budget 2014 that caught my attention was the set-up of several funds. Among them are the Night Market Entrepreneur Scheme and Graduate Entrepreneurship Fund, costing RM100 million and RM50 million respectively.

While these are reasonable initiatives to boost the development of entrepreneurs and strengthening of small and medium enterprises, what steps are in place to mitigate the issue of non-performing loans? Borrowers that do not end up paying back the loan will only contribute to the cost escalation.

The prime minister did state in his budget speech that emphasis will be given to increase efficiency spending as well as improving audit methods. Part of the plan is to take a proactive action for projects valued at more than RM100 million by auditing during the implementation of these projects.

Key questions are how is the audit process going to be performed, who will be conducting these audits? What will be audited? Is the scope limited to the implementation stage? What about the conceptualisation and design phase?

Singapore's auditing process

Singapore has what is called a gateway process to strengthen the cost management of public sector development projects. This process involves staged approvals for concept, design and implementation.

A panel called the Development Projects Advisory Panel examines the specifications and designs of the projects at an early stage of project conceptualisation.

Furthermore, to ensure efficient and effective use of resources, the Value for Money Review Office, (which is under the Accountant-General's Department of the Ministry of Finance) conducts regular reviews of government projects. These reviews are performed to ensure accountability, value-for-money and fiscal discipline within the public sector.

As we move on from Budget 2014, the prime minister needs to be transparent and open to the public with regard to how the budgeting process was performed (how the allocated spending was derived), and what are the action plans to ensure the initiatives and projects will be executed effectively and efficiently (tender process, accountability, cost control measures and audit process). By providing clarity to these types of information, the public will have a better sense of where and how the additional revenue will be spent.

OECD budget improvement process

For OECD countries, a detailed study was conducted to identify mechanisms to improve budgeting process. Basically, MOF can use performance results to motivate agencies to improve performance.

To do so, the ministry has a number of potential mechanisms at its disposal. These incentives can be financial or non-financial, and formal or informal. There are three mechanisms to manage budgeting process (see table below).

Both Australia and the UK have requirements that link increases in spending or new spending to performance targets or performance evaluations.

For example, the UK has a more systematic approach in which each department develops three-year spending plans and public service agreements, which include performance targets negotiated with the Treasury.

The MOF can use performance results to hold other ministries and agencies accountable for performance. There is a debate about how tightly performance results should be linked to funding.

There are many areas that can be improved in Budget 2014. We need to address cost issues seriously by identifying and plugging leakages, and improving the budgeting process by learning from countries with leading practice.

There must be efforts to improve the implementation of the budget by setting targets and reviewing the performance of each ministry. Every working adult pays taxes directly or indirectly, so the BN government must be accountable to all communities.

Raja Ahmad Shahrir is research associate at Institut Rakyat. Comments:

Table of potential mechanisms

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