INTRODUCTION
The new administration in Nigeria
recognizes that the country’s recurrent
budget (72 percent in 2015) does not leave enough resources to be
invested in growth enabling assets such as infrastructure. As a result, it is
proposing to adopt zero-based budgeting system for the 2016 budget.
This proposal would be a radical
departure from the incremental budgeting that has been in practice in Nigeria
for many years
Definition of Zero-Based Budgeting
Chartered institute of management accountant (CIMA), defined zero-based budgeting as; a method of budgeting which requires each cost element to be specifically justified, as though, the budget related were being undertaken for the first time without approval, the budget allowance is zero. Zero-based budgeting is concerned with the evaluation of the costs and benefits of alternatives and implicit in the techniques, is the concept of opportunity cost.
National open university of Nigeria (2010), sees zero-based budgeting as; a systematic application of marginal analysis techniques which evaluate current and new programs on the basis of output, performance, cost, utility, effectiveness, relevance, level, scarce resources and priorities.
Sarant, (2011), defines zero-based budgeting as; “a technique which complements and links to existing planning, budgeting and reviews processes that indentifies alternative and efficient methods of utilizing limited resources and provides a credible rationale for re-allocating resources by focusing on a systematic review and justification of the funding and performance level of current programs.”
Tayo, T. (2015), defined zero-based budgeting as; a budgeting process that allocates funding to budget items based on efficiency and necessity rather than budget history, it opposed the traditional budgeting practice of automatically including budget items from the current year in the next year’s budget. In zero-based budgeting, budget expenditure is reviewed at the beginning of every budget cycle and each line item must be justified in order to receive funding.
Kaduna state ministry of budget and planning (2015), defined zero-based budgeting as; an integration of planning and budgeting into a single process with the objective of development and redeployment of a budget through scrutiny of programs.
Zero-based budgeting can be thought of as a tool which provides a process to evaluate programs, it allows for budget reductions and permits the re-allocation of resources from low to high priority programs, zero-based budgeting is a cost benefit analysis for all decision making in an organization.
History of Zero-Based Budgeting
Zero-based budgeting, also known
simply as ZBB, has a long and sometimes controversial history in the public
sector. Zero-based budgeting first rose to prominence in government in the
1970s when U.S. president Jimmy carter promised to balance the federal budget
in his first term and reform the federal budgeting system using zero-based
budgeting, a system he had used while governor of Georgia. Zero-based
budgeting, as carter and budget theorists envisioned it, requires expenditure
proposals to complete for funding on an equal basis starting from zero. In
theory, the organization’s entire budget needs to be justified and approved,
rather than just the incremental change from the prior year.
Interest in zero-based budgeting had been in decline for many years. The large amount of paperwork and data zero-based budgeting generates, along with doubts about the method’s ability to fully meet its theoretical promises, were at least partially responsible. Also, the improving economic conditions from the low points of the late ‘70s and early ‘80s, in the U.S., and the early ‘90s in Canada, probably reduced the perceived need for what was largely regarded as a “cutback budgeting” method.
Why Zero-Based Budgeting
In accounting terms, zero-based
budgeting is a method for preparing cash flow budgets and operating plans which
every year must start ‘from scratch’ with no pre-authorized funds. Zero-based budgeting
helps departments drill down to unit costs for all procurement, ensuring that
costs are re-assessed every year for value. Zero-based budgeting also helps to
increase the visibility in cost drivers, essentially leading to more effective
cost management, by freeing unproductive costs and re-directing them to
priority sectors.
This compares to a traditional line-item process where only incremental spending is considered and where there is no ready means to compare the value of one service versus another, and, thus, to determine different reduction in spending for different services on a rational basis. Hence, zero-based budgeting promises to move budget away from the use of across-the-board cuts (a budget reduction method that does not differentiate the value of one service versus another). It gives top management better insights into the detailed workings of departments. It clearly differentiates service level options, the impact of difference service levels on what the community will receive from government (through performance measures), and a detailed plan for the inputs necessary to provide those service level option.
Goals of Zero-Based Budgeting
According to Cornelius, E.T.
(2006), in hand book of federal accounting practices, the goals of zero-based
budgeting as summarized by the office of management and budget (OMB) in USA are
as follows;
a. To
examine the need for an accomplishment and effectiveness of existing government
programmes as if they were proposed for the first time.
b. To
allow proposed new programme to complete for resources on a more equal footing
with existing programmes.
c. To
focus budget justifications on the evaluation of discrete elements and
programmes or activities of each decision unit aid.
d. To
secure extensive management involvement at all levels in the budget process.
Characteristics of Zero-Based Budgeting
a. Linking
of annual budgets to national vision documents
b. Formulation
of decision packages through line-item budgeting
c. Elimination
of overlapping inter-ministerial expenditure
d. Justification
of all expenditure heads from scratch and not merely adding a margin to the
previous year’s figures
e. Setting
operational efficiency targets in order to promote value for money audit (VFM)
f. All
budget items both old and newly proposed are considered totally afresh.
g. Managers
at all levels participate in the zero-based budgeting process and they have
corresponding accountabilities
Steps in Implementing Zero-Based
Budgeting
Generally speaking, zero-based
budgeting consists of the following important stages, steps/ procedures;
1.
Identification
of decision units.
2.
Preparation
of decision packages.
3.
Prioritization
of decision packages within a decision unit.
4.
Prioritization
of decision packages of various decision units.
5.
Allocate
resources.
6.
Monitor
and evaluate.
Identification
of decision units
Each cost center can be a
decision unit. Decision units should be a particular activity or a group of
activities that can be independent and meaningfully indentified and evaluated.
Decision units should not be overlap; the decision units should be discrete
entities for management purposes, e.g. sites or programs.
Decision
packages
A decision package is a document,
which identifies a discrete activity, function or operation within a decision
unit for evaluation and comparison with other activities. Each decision package
should be “standalone” containing the following information;
Ø
Identification
of data program/activity for which the package is made
Ø
Objective of the decision unit
Ø
Objective
of decision package
Ø
Feasibility
assessment
·
Is
the program required?
·
Is
the program technically feasible?
·
Is
the program operationally viable?
·
Is
the program sound?
The
benefit-cost-analysis
Ø
Benefit/output
(tangible) at existing threshold/optimum level
Ø
Tangible
cost at the existing threshold/optimum level
Ø
Yearly
phasing of the proposed expenditure
Ø
Consequence
of non funding
Ø
Alternatives
considered
Ranking/prioritization
The following are example of
criteria for ranking a decision package
Ø
Statutory/legally
committed active programs
Ø
Emergent
programs arising from national events
Ø
Advancement
of knowledge or using innovative method
Ø
Application
of knowledge or using innovative method
Ø
Development
of technology based solutions
Ø
Welfare/safety
issues
Ø
Facilitation
of policy/ decision making
Allocate
resources
Once all the decision packages
have been ranked on the basis of pre-determined criteria, the funding decisions
for the cost of total decision packages is made. While funding a decision
package, it is necessary for management to indicate also the level at which
activity/program should be carried out existing threshold or optimum level.
Monitoring
and evaluation
Since all the decision packages
have to complete for funding, only those which are most relevant to the
government are funded. The monitoring and evaluation is done on the basis of
the content and particularly the outputs described in the decision package with
fixed accountability.
Advantages of Zero-Based Budgeting
1. Supports
cost reduction by encouraging active resource allocation over automatic budgets
increase.
2. Increases
organizational efficiency by forcing government agencies to work together in order to activity prioritizes programs.
3. Improves
alignment of resources allocations with strategic goals by forcing cost centers
to identify their mission and priorities.
4. Improves
public perception through perceived increases in transparency and accountability, both internally within their organization and externally with
the public.
5. Reveals
inflated or unjustifiable budgets as each line item has to be defended.
6.
Ensures
elimination of inefficient or wasteful projects.
7.
It
allows for optimum allocation of resource. This is made possible by the formulation of alternative courses of action and evaluating each on its own
merit.
8.
It
provides a better yardstick for the measurement of performance.
9.
It
is good for profit-oriented projects.
10. The technique allows for the
participation of the various organs of the decision unit.
Disadvantages of Zero-Based
Budgeting
1.
Implementing
zero-based budgeting at all can be a major challenge for public sector organizations with limited funding, and can constitutes a major risk when
potential cost is high and potential savings are uncertain.
2. Government
agencies may face extreme constrains relating to their ability to complete
zero-based budgeting within a budget cycle and the availability of personnel to
drive the process internally.
3.
Prioritization
process may be problematic for department with intangible output.
4.
Switching
to zero-based budgeting may requires a modification of the system, which may
necessitate a general review, overhauling, adding to or scrapping of
activities, function etc.
5. It
involves the task of analyzing and ranking voluminous data and information which a number of civil servants find difficult to manage. This situation is
further complicated by lack of qualified and competent personnel in the public
sector.
6. In
determining decision packages, there is the problem of fixing the minimum level of expenditure.
7. There
is the need to make accounting structure conform to the ‘zero-based philosophy
for the purpose of evaluation and control. Hence, it may necessitate a general
review overhauling, adding or scrapping of activities and functions.
8. It
is not so good for recurrent expenditure; it has not been successful in the
public sector.
9.
Bureaucrats often do not trust the approach
and hence frustrate its effectiveness.