Financial Management Topic 12

TOPIC 12

 

PUBLIC FINANCE

 

QUESTION 1

a) Explain the concept of public enterprise restructuring.

QUESTION 1

1. a)

• Explain what a public enterprise is

Public enterprise restructuring involves turning around public enterprises to convert them from inefficient loss making and non-competitive enterprise to efficient, profitable and competitive institutions.

 

Discuss three forms of corporate restructuring that may be adopted by public enterprises.

• Forms of corporate restructuring:
• Privatisation – Conversion of public enterprises into private ones through the sale of the whole or part of the public enterprise.
• Concession – Where a private enterprise is granted some rights to produced goods and services on behalf of the public enterprise.
• Strategic partnership – Where the enterprise partners with a private investor.
• Lay-offs-introducing voluntary early retirement or terminating all or some of the employees.

 

December 2014 Question Four A

QUESTION 2

(a) In the context of the management and control of public finances in your country:

• Explain the meaning of the term “budget cycle“.
  

  QUESTION 2

  (a)        

  (i) The Budget cycle 

  The budget cycle is the period which begins with the initiation of the preparation of the central government budget for any new financial year. The cycle starts with the budgetary estimates preparation stage, through the authorisation of estimates into budgets for spending, the processes of spending such amounts authorised and the final accountability of such spending to Parliament as confirmed by the audit of the financial reports revealing the spending.

   

  For an efficient budget cycle and budget preparation, there is the concept of Public Expenditure Survey (PES) that adds more value to the annual budgeting process.

  PES in government financial administration is a process that involves the examination of spending activities of public sector organisations and how such expenditures have been felt through projects and developments in the economy.

  A good system of PES enables governments to note their progress and to take decisions on annual public finances, and new public expenditure plans for new year(s).

   

• Highlight any six functions of the Controller of Budget.

 

(ii) Functions of the Controller of Budget: 

• • Monitoring of revenue generation and collection by the agencies of government.
  • Revenue estimation and publication in the budget book.
  • Implementing the budget through the issuance of authority to incur expenditure papers for both capital and recurrent expenditure.
  • Assembling, collating and arranging all data, information and other necessary inputs required for budget preparation.
  • Rendering reports on the performance of the yearly budget and assessing its impact on the economy.
  • Collection and analysis of expenditure returns.
  • Establishing and maintaining a data bank in the budget office.
  • Monitoring and evaluating the performance of programmes funded through the budget.
  • Formulating fiscal monetary and economic policies required to develop the economy.

May 2014 Question Two A

 

QUESTION 3

Highlight six ways through which performance contracts have helped to restore trust and improved financial management in government departments.

1. Ways performance contracts have restored trust in governments.
   • Performance contracts have changed the attitude of employees towards work and work ethics.
   • Adoption of competitive strategy in delivery of public services driven by deliberate public disclosures and ranking of performance results.
   • Significant decline in reliance on exchequer funding by public enterprises resulting in the increase of investments in public and empowerment of public employees through progressive improvement in terms of services.
   • Increased willingness of the public to pay taxes
   • Led to improvement of the image of the government by the public.
   • Has led to creativity resulting in secondary innovations for example recycling reclamations and organic power.
   • Introduction of citizen’s service delivery charter for every public institution.
   • Had led to mandatory for all public institutions to carryout annual customer satisfaction surveys.
   • Private / public sector partnerships

 

 

 

Explain six disadvantages of using foreign debt as a source of finance to the government of your country.                                         

 

Disadvantage of using foreign debt by the government.

• • If the debt is not properly applied to variable projects, it accumulates to become a drain on the country’s resources.
  • Foreign debt can drain the country’s foreign exchange reserves hence adversely affecting the exchange rates.
  • Excessive government borrowing leads to an increase in local interest rates where financial institutions increase their lending rates.
  • If the debt is contracted recklessly, it quickly becomes a burden to the citizen.
  • Sudden capitals in-flight and debt financing can lead to currency crisis, which causes uncertainty and instability for business and adds to inflationary pressures.
  • Loss of control over economic decision making, which is economic dependence.

December 2013 Question Five A and B

• 1. Effect of loss of value on currency against the dollar
     • Inflation if the country is imports dependent
     • Expensive essential commodities
     • Cheap exports making our exports more competitive More revenue for exports since they are paid by the dollar §     A dollar fetches more in our currency term. Explain four effects on the economy of your country arising from the loss of value of the national currency against the dollar.
       

       Performance evaluation in the public sector has encountered some resistance from the employees.        

 

Reasons for resistance to performance evaluation

• • Fear by employees of losing their jobs
  • Fear of the unknown since they have very little knowledge on performance evaluation
  • Sometimes the exercise is misused by malicious superiors
  • Employees are not hardworking therefore, they know they will be found to have laxity
  • Certain performance attributes cannot be measured easily hence difficulty in performing an evaluation.

 

Required: 

Citing four reasons justify the above statement.

December 2012 Question Five A and B

 

1. c) Financial management practices in government departments are different from financial management practices in industrial or commercial companies.
   
   • Commercial companies analyze various projects with an view to determine the projects to undertake while in government departments, the task to be undertaken is specified
   • Commercial companies have to pay dividends to the shareholders eventually while in government departments surplus funds are returned to the treasury.

    

 

1. May 2012 Question Five C

   d) Reasons to justify that financial management in government departments are different from financial management practices in industrial or commercial companies Financial management practices in government departments of providing public goods or services. The objective of financial management practices in industrial or commercial companies is to make a profit and maximize shareholders wealthGovernment departments are allocated funds by the government while commercial companies have to raise funds from the capital market at a costGovernment departments may end up with surplus funds while commercial companies will always experience shortage of funds

 

Required:

Citing five reasons, justify the above statement.

May 2012 Question Five C

 

QUESTION 6

1. b) Explain four arguments against a balanced budget in public finance.
   

   QUESTION 6

   1. Explain four arguments against a balanced budget in public finance
   • A balanced budget restricts the freedom of action on the part of the authorities, restricting the possible use of fiscal policies.
   • A balanced budget cannot counter balance the behaviors of the private sector as the change in the purchasing power of money depends upon demand for and supply of goods and services by both public and private sector.
   • A balanced budget cannot help the economy in recovering from depression, since only a budget deficit will be necessary so as to enhance a balance in the recovery process.
   • There is no guarantee that a balanced budget is a means to ensure financial discipline and efficient management by the government.

   November 2011 Question Five B

November 2011 Question Five B 

 

QUESTION 7

1. c) Highlight the main differences between the public sector and the private sector from the point of view of financial management.
   

   QUESTION 7

   1. Highlight the main difference between the public sector and private sector from the point of view of financial management

   Private sector 1.      Objective is to maximize profit/ value of the firm. 2.      The finances are managed by finance managers. 3.      Firm management is accountable to ordinary shareholders. 4.      Competition is a key factor on the agenda of the company operations.

   Public sector 1.      Objective is to meet social needs.   2.      Finances are managed by full time civil servants 3.      The government is accountable to its citizens 4.      No competition in the provision of services.

   December 2010 Question Five C

December 2010 Question Five C

 

 

QUESTION 8

1. In the context of public finance:
   • 1. • distinguish between a deficit budget and a surplus budget.
          

          QUESTION 8

          1. In the context of public finance
             1. Distinction between a deficit budget and surplus budget

          A deficit budget is where the firm’s expenditure exceeds the revenue.

          A surplus budget is one where the firm’s expenditure is less than the revenue. 

           

           

      

     June 2010 Question Five

   • Explain three advantages and two disadvantages in each case, of a deficit budget and a surplus budget
     1. Three advantages and two disadvantages in each case of a deficit budget and a surplus budget.
   • Advantages  Deficit;
     • Enhances creativity and innovation on the part of the government.
     • In case of recession the budget deficit is necessary to increase the level of economic activity.
     • It can enhance the investment for the future especially if more funds are channeled towards key areas such as health, education, infrastructure etc.

      

     Surplus;  

     • Increased development activities since there will be enough funds available.
     • The government is not constrained to giving a satisfying budget.
     • Provides an opportunity to think of investing in the sectors of the economy which are lagging behind and channeling in more funds in future budgets.

      

     Disadvantages  Deficit;

     • Development activities in the country may be slowed down especially if the government will be unable to finance the deficit.
     • A budget deficit will imply that there are lower revenues and increased government expenditure, this may lead to inflation
     • In effort to cover the deficit the government may opt to borrowing which can lead to a huge or further public deficit.

     Surplus

     • It can lead to or enhance corruption if monitoring of public funds is not done appropriately.
     • Leads to tying up of funds which could have been invested for future benefits.
2. Highlight three ways in which a government could enhance revenue collection in a country
3. Highlight three ways in which a government could enhance revenue collection in a country
   • Carrying out tax reforms that aim towards netting every potential tax payer.
   • Through fines and penalties to those who fail to pay taxes.
   • Ensuring a fair expenditure so as to instill public confidence in paying taxes.

June 2010 Question Five

 

QUESTION 9

1. Write explanatory notes on the following terms:
   • Financial innovation.
     
     1. Financial innovation

     It is the advancement over time in the financial instruments and payment systems used in the lending and borrowing of funds. These changes, which include innovations in technology, risk transfer and credit and equity generation, have increased available credit for borrowers and given banks new and less costly ways to raise equity capital.

      

     iii.        Direct taxes

     This are taxes whose incidence and impact falls on the same person. They are progressive in nature i.e. they increase with increase in income.

      

   • National budget (iii) Direct taxes.
   •   ii.           National budget This is a financial statement containing an estimate of government revenue and expenditure during the coming financial year. It is presented by the minister of finance for approval in the national assembly.
2. Briefly describe how the objectives of organisations in the public sector differ with those in the private sector.

 

How objectives of organizations in the public sector differ with those in the private sector

1. • Private sector firms are vulnerable to competitive pressure thus they are forced to invest heavily in marketing of their products so as to maintain their market share.
   • Private firms adopt various strategies such as mergers, acquisitions so as to maintain their competitive edge and ensure that they are always growing in their operations.
   • Private firms are aimed at maximizing the value of wealth of owners unlike public sector firms aim at provision of social services (social needs)

 

Name and briefly describe three functions of public finance in a country’s economy.                                                                                             

 

Three functions of public finance in a countries economy

• It’s an economic tool to control inflation and recession.
• It’s used to correct unequal distribution of income.
• It can be used to encourage or discourage the production and consumption of a given commodity

December 2009 Question Five

b)

1. Argue the case for privatization of state corporations ii. Distinguish between corporate finance and public finance
   

   b)

   1. Argue the case for privatization of state corporations
      • To provide funds for the government to meet its expenditure
      • To create some competition in the industrial sector since private firms aim much at profit maximization
      • Quick remedial measures; in private sector enterprises quick remedial measures must be taken to avoid wastages, losses and to secure benefits from business opportunities. There is no scope for red tapism.
   2. Distinguish between corporate finance and public finance

   Corporate finance is the area of finance dealing with monetary decisions that business enterprises make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize shareholder value. Although it is in principle different from managerial finance which studies the financial decisions of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms.

    

   Public finance is the study of the role of the government in the economy.

    

August 2009 Question Five B