Efficiency in public spending - study case of Timor-Leste

EFFICIENCY IN PUBLIC SPENDING

STUDY CASE OF TIMOR LESTE

 

Basilio Ribeiro de Carvalho Soares

 

The budget execution of the government of Timor Leste for the fiscal year 2011, 2012 and 2013 respectively have shown that the amount of the expenditures incurred are greater than the revenues received during for the each fiscal year (Annual Audited Financial Report Ministry of Finance 2011, 2012, and crystal Report 2013). This indication eventually leads this nation to the shortage of the fund every year. However, this shortage of the fund is covered by the Petroleum Fund so that this deficiency of the budget execution can be resolved.

The Petroleum Fund itself is a fund that is collected from sources such as gross receipt (including tax revenue) of the oil sold or the export of the petroleum and any amount received from the net investment return from Timor Leste Sovereign Wealth Fund (Petroleum Fund Law 2005). However, the petroleum Fund Report 2012, in their findings, has asserted that the production of oil from Bayu Undan and Kitan fields will completely diminish in a decade or so. If this inefficiency of the budget execution will occur in the years ahead and the oil production at South Sea of Timor Island will run out, this country will face a financial crisis like what is happening now in Greece, Portugal and Spain.

Efficiency is a level of performance which describes how far an institution either a government institution or a company is expected to increase its output and to achieve the expected outcomes without absorbing further resources. Efficiency is also described as a comparison between input and output or the costs and benefit. For instance, a machine, at a given cost, will be considered as efficient, if it can produce a large amount of quantity of outputs compared to other equipment.

Although it has been criticized that the government budget had been inefficiently executed these past few years (2011, 2012 and 2013) respectively, the trend of inefficiency in the government budget spending will be likely to continue in the future years ahead. Furthermore, in order to resolve this problem and to make the fund to be spent efficiently, there are some options that are considerably important to be decided by the government and these options could become solutions for the government to make the budget execution becoming more efficient. These options are preparation of the projected cash flow, proper planning programs made by each line ministry including clear identification of goals, eradicating the corruption practices.

Cash flow forecast is an accounting tool that is used to estimate any potential amounts of revenue received and the disbursements are going to be made during a given of period (generally monthly basis) in the future. It is important that the government has to prepare its own cash flow forecasts in order to manage its cash efficiently. The objective to prepare the projected cash flow is to provide the owner of the fund (the government) the projected amount for the future cash requirement so that the liquidity crisis can be avoided as well as both the cash outflow and inflow of the government can also be monitored. Furthermore, a good cash flow forecast enables good cash flow management. This will help the government to ensure the funds that have been allocated in the budget book will meet the government needs. Hence, with a proper cash flow forecast, it will avoid the possibilities to absorb more resources. Also, it will help the government to reduce its borrowing. It is a fact that, in Timor Leste, during these last three years, most of the line ministries, have executed the fund recklessly without making a proper projected cash management, how much they are going to use the fund, when these funds are going to be utilized and for what purposes the funds are going to be used. For instance, most of the line ministries have drafted a budget and allocated dollars amount into each activity or program and these dollars amount will be used for the activities that have been set up in their annual working plan. However, the day when the program is implemented, the amounts of dollars that have been allocated in each activity of the program in the budget book are not sufficient enough to fund this particular activity. As a result, these particular line ministries will do a “Virement - Transferring the funds from one activity to another activity.” Consequently, some other particular activities or programs might not be successfully implemented because of the shortage of the funds. This is a result of the absence of a cash flow forecast.

Another issue that has to be examined is there are no clear plans and goals that put in place. Like other developing countries, Timor Leste also determines the size and the composition of the budget which can be assumed to reflect legitimately the goals of its own people. However, in a technical level a question that needs to be raised is how efficient the money that has been allocated to each function or program will be executed?  This is the classic case in economy called guns versus butter where the government to some extent will spend more money to increase the capabilities of its military defense and reducing the budget allocation for social goods (health and education) compared to what the people would prefer to have. As an example, in Timor Leste, in 2013, there was a controversial program organized by the Ministry of Tourism. This Ministry has created a program called “Miss Tourism 2013” (later called Miss Timor Leste) which was not included in their “2013 annual working plan” and also there was no funds allocated in their fiscal budget 2013 for such activity. This program was criticized by the parliament and societies as this program did not have any advantages to promote Timor Leste Tourism Sector. However, the Minister of Tourism insisted to run this program and convinced the people that this program will give the advantage to promote Timor Leste’s Tourism Sector. The reason they provide to the parliament, the government and the societies was by running this program, it could help the government to expose Timor Leste tourism sector and this sector will eventually be known all over the world. In order to support this program to run successfully, the Ministry made a transfer – called virement - of the budget from other activities or program to this “Miss Timor Leste” Program which was not included in their “2013 budget.” As a consequence, some of other important activities that had been included in their “2013 annual working plan” were not successfully implemented.

Furthermore, the delay in implementing programs also frequently happens in the line ministries. Hence, the delay affects the budget spending will not be executed and it eventually leads to the inefficiency. The delay occurs because of the following reasons:

1.      Too much bureaucratic administrative process.

2.   The inflexible laws or regulations and also sometime there are now laws in place that allow the programs to be executed. However, if there is an initiative to drat the laws, it will still take time to draft the laws.

3.   Unplanned working activities. For instance, when a program or a project has been agreed to be executed and must be finished in a certain period, this plan sometimes must be postponed because there is an urgent meeting or another activities that need to be finalized shortly.  

4.   Lack of experienced and skilled employees in both management and technical areas.

 This delaying process will eventually give impact on the execution of the budget as some of the programs might not be probably implemented at the end of the fiscal year. Thus, this leads to inefficiencies.

 

 Lastly, corruption is the common problems that all countries in the world are facing. Corruption in its various forms will definitely undermine the development of a country and also has a significant negative impact on the efficiency of public expenditure and productivity. Corruption and inefficiency can also be linked because when an individual who engages in this corruption practice, there will be an increase in inefficiency which means the dollar amounts that should be spent for the development of the country have been used for the personal purpose. Hence, inefficiency of public spending occurs. Let’s take a look an example of the case of Minister of Justice RDTL, Mrs. Lucia Lobato who was allegedly engaged in a corruption practice, in which she has been convicted and already jailed in 2013. Bribe is another instrumental component of corruption practice. If the corruption are not exist, the money would have been used efficiently for public interest such as upgrading the physical infrastructures by building the roads, bridges and buildings, improving health and education system and so on.

 

Alternative solutions that need to be considerably taken in order to tackle out the problems mentioned above and to make the budget efficiently spent are designing a template to record the cash flow forecasts, establishing a clear annual working plan including making clear goals, recruiting the right technical people to conduct the technical work activities, providing moral education to our children started from the basic schools, drafting the anti-corruption law.

 

First of all, by designing a template of the cash flow forecasts, the government will be able to predict the budget execution in a year so that the government will be able to forecast how much amount of dollar will be spent, how these dollar amount will be allocated in a certain each activity, when these budget spending will be appropriately executed and for what purposes these funds are going to be used so that the funds will not be used recklessly. Efficiency has also to do with the comparison between costs and benefit because the public spending will be said efficient when at a given the amount spent, it produces the largest possible benefit for the country’s population.

 

Secondly, it is necessary for each line ministry to make a clear annual working plan including clear goals and they must stick with the plan so that any potential overlapping and unplanned programs can be avoided. They also need to understand that the annual plan they are drafting in each year must reflect and be linked with the National Strategic Development Plan that had been drafted and launched by the government of Timor Leste. By making a plan, the line ministries will have the ability to determine whether the tasks may be attempted or not, to find out the most effective solutions how to reach the targets in efficient ways, to understand what are the best strategies, to have clear goals toward the future and have preparations to overcome any unexpected difficulties without absorbing more resources.

 

Another solution is that in the strategic management it is important to implement the concept “putting the right talented-skilled employees in the right positions” and this notion must be started implementing as earlier as possible. It is necessary to recruit the right technical people to conduct the activities that are related with their educational background and experiences in the related areas. If an institution is going to recruit the wrong technical people, this can adversely affect the business’ effectiveness and efficiency at performing some function.

 

Besides establishing a legal institution to fight the corruption such as establishing a commission Anti-Corruption institution, moral and ethical education should be introduced and taught in early childhood education so that our children will understand and be able to distinguish the bad and good behaviors because corruption, in this case, is considered as a bad behavior and it harms the country’s development. Also, the government needs to start thinking to draft the anti-money laundering laws in order to fight the money laundering practices.

 

Furthermore, the government also needs to provide better salary and incentives to its employees so that these employees will not engage in any form of corruption practices.

 

Another important factor is keeping the inflation as lowest as possible. Due to the rises in prices, any amount of income seems to be not sufficient enough for every individual. If the inflation rate is being kept low, the societies will have the purchasing power to sustain their lives.

 

Which areas are most important to increase the efficiency of public expenditures? Health, education and infrastructure are the most important areas. If the government is going to increase the budget execution and to prioritize to these sectors and off course the budget execution should be well organized and fully controlled, it will produce outcomes such as increasing the educated, skilled and qualified human resources, attracting more investors to invest in country, more literacy, increasing in human capital, good health system and so on.

 

Why education, health and infrastructure are so important?

 

Education is important because it is considered as an investment in physical capital for a country’s long-run economic success. For example, if an individual is well educated, that person might generate new ideas about how best to produce goods and services and these ideas eventually enter into society’s pool of knowledge so everyone can use them.

 

Health sector is considered as important also because if the people live in the good health condition, these people will be more productive in producing goods and services and if these people become more productive and more goods and services produced, it will give an impact in the increase of national economic growth.

 

Infrastructure is another important point. If the roads, bridges and buildings are built, the investors might come to build their businesses in country. The investors will not bear the costs to run their businesses in a country where the physical infrastructures remain poor.

 

To sum up, by establishing the cash flow forecasts, drafting clear annual working plan and clear goals as well as putting the system in place to tackle out the corruption, the inefficiencies of budget execution, in the future, might reduce. Furthermore, if good health and education system as well as the physical infrastructure put in place and if the government seriously to increase the budget spending in efficient ways in those areas and off course they need to seriously monitor and control these budget spending, these sectors will become important sectors that will trigger the increase of economic growth. Therefore, the budget execution on public interest will be efficiently used, and the outcomes will benefit to the people.