Public Sector Accounting and Finance · May 2022

Ojaja Federal Republic Preparation of proposed budgeted estimates for 2021 to 2023 Sector code Sector name 2020 2020 2021 2022 2023 Actual estimates Approved estimates Proposed estimates Proposed estimates Proposed estimates N’000 N’000 N’000 N’000 N’000 01 Administrative sector Personnel cost 40,000.00 34,000.00 39,100.00 44,965.00 51,709.75 Overhead cost 25,000.00 21,250.00 24,437.50 28,103.13 32,318.60 Consolidated revenue charges 18,600.00 15,810.00 18,181.50 20,908.73 24,045.04 Capital expenditure 62,400.00 53,040.00 58,344.00 64,178.40 70,596.24 Sub-total 146,000.00 124,100.00 140,063.00 158,155.26 178,669.63 02 Economic sector Personnel cost 22,500.00 20,250.00 25,312.50 31,640.63 39,550.78 Overhead cost 12,600.00 11,340.00 10,773.00 10,234.35 9,722.63 Consolidated revenue charges 28,600.00 25,740.00 32,175.00 40,218.75 50,273.44 Capital expenditure 41,300.00 37,170.00 46,462.50 58,078.13 72,597.66 97 Sub total 105,000.00 94,500.00 114,723.00 140,171.85 172,144.51 03 Law and justice sector Personnel cost 15,800.00 15,800.00 17,380.00 19,118.00 21,029.80 Overhead cost 20,200.00 20,200.00 19,190.00 18,230.50 17,318.98 Consolidated revenue charges 17,500.00 17,500.00 16,625.00 15,793.75 15,004.63 Capital expenditure 38,500.00 38,500.00 36,575.00 34,746.25 33,008.94 Sub total 92,000.00 92,000.00 89,770.00 87,888.00 86,362.34 04 Sub total Personnel cost 40,800.00 38,760.00 42,636.00 46,899.60 51,589.56 Overhead cost 22,200.00 21,090.00 23,199.00 25,518.90 28,070.79 Consolidated revenue charges 16,700.00 15,865.00 13,485.25 11,462.46 9,743.09 Capital expenditure 32,300.00 30,685.00 33,753.50 37,128.85 40,841.74 Sub total 112,000.00 106,400.00 113,073.75 121,009.81 130,245.18 Summary of total expenditure by sectors Personnel cost 119,100.00 108,810.00 124,428.50 142,623.23 163,879.89 Overhead cost 80,000.00 73,880.00 77,599.50 82,086.88 87,431.00 Consolidated revenue charges 81,400.00 74,915.00 80,466.75 88,383.69 99,066.20 Capital expenditure 174,500.00 159,395.00 175,135.00 194,131.63 217,044.57 Total 455,000.00 417,000.00 457,629.75 507,225.42 567,421.66

(b) Explanation of National Chart of Accounts (NCOA) in relation to budget structure i. Functional segment: The functional classification or classification by functions of government is a detailed classification of the functions or a socio-economic objective, that government unit aims to achieve through various outlays. It therefore, organises government activities according to their broad objectives or purposes. 98

ii. Programme segment: The programme classification identifies various set of activities to meet specific policy objectives of the government e.g. Pre- primary education, poverty alleviation and food security.

iii. Geographical segment: The geographical classification is used to identify the geographical location of an entity (MDAs)or a project so that an analysis of government budget along various zones, states and local government areas in the country can be done.

(c) Steps required for budgeting with the National Chart of Accounts

i. Identify the government institutions (cost and revenue centres) from the hierarchy of administrative list and codes provided in the chart of accounts. ii. Identify the economic items that would be executed during the fiscal year. iii. Identify the functions intended to be performed by government institutions (revenue and cost centres). iv. Identify the programmes intended to be carried out by the government institutions. v. Determine the sources of financing the budgeted amount for each budget line. vi. Identify the planned location for the economic transactions or government institutions.

Examiner’s report The question tests candidates’ knowledge on the preparation of budget estimates using Medium-Term Expenditure Framework (MTEF) as well as IPSAS 24 in part (a) of the question, while parts (b) and (c) test candidates’ knowledge on the explanation of functional, programme and geographical segments in relation to structure of National Chart of Account (NCOA) for budgeting purposes. All the candidates attempted the question and their performance was average. The commonest pitfalls were the inability of the candidates to explain the functional, programme and geographical segments in relation to structure National Chart of Account (NCOA) for budgeting purposes. Also candidates were unable to incorporate the additional information given in the notes to the question in the preparation of budget estimates using Medium-Term Expenditure Framework (MTEF). Candidates are advised to pay more attention to the relevant provisions of budget estimates using Medium-Term Expenditure Framework (MTEF) and also to make use of Pathfinder and Study Text for better performance in the Institute’s future examinations. 99

Marking guide Marks Marks a Preparation of proposed budget estimates Title ½ Calculation of total: Administrative sector budget estimates 3¾ Economic sector budget estimates 3¾ Law and justice sector budget estimates 3¾ Regional sector budget estimates 3¾ Summary of expenditure budget estimates by sectors 4½ 20

b. Explanation of National Chart of Accounts (NCOA) in relation to budget structure Explanation of the segments identified 6 c Steps required for budgeting with the National Chart of Accounts 4 Total 30

(a) The following measures that are needed to ensure transparent, effective and consistent application and enforcement of laws and regulations on anti- corruption are as follows:

i. The existence of bodies that include within their competence the fight against corruption. The bodies must have the necessary independence and autonomy to perform their functions, subject to checks and balances to prevent abuse, and sufficient human and financial resources to effectively apply and enforce laws and regulations on anti-corruption. Where more than one body is involved in the fight against corruption, procedures should exist for information sharing and cooperation. Inter-agency communication is vital. Examples are the Economic and Financial Commission (EFCC) and Nigeria Financial Intelligence Unit(NFIU).

ii. The establishment of codes of conducts for public officials and subsequent dissemination and related training. These codes of conduct should be clear and transparent and be combined with strict sanctions against public officials involved in corruption. Public sector managers should likewise receive clear guidance and training on the manner in which allegations of corruption should be dealt with, including referral mechanisms to law enforcement authorities, procedures for the 100 protection of informants and the means of dealing with an official against whom allegations have been made. Codes of conduct might take the form of government-wide documents or involve a series of subject-specific codes. In either case, the content of these codes should take into account areas of public service which are particularly at risk of receiving or soliciting bribes or of resorting to extortion, including law enforcement, public procurement, export credit, development assistance, and customs and tax administration. Examples are the Code of Conduct Bureau(CCB) and the Public Service Rules.

iii. The reporting by domestic officials to superiors, prosecutors or other public authorities

• Where officials have been promised, offered or given a bribe, there should be smooth and unhindered reporting process.

• Officials should know, for example, how to report on such occurrences and how this will be dealt with.

• Where the bribe involves another official, sufficient safeguard should be put in place (such as whistleblowing and witness protection programmes) to ensure that reporting is not discouraged by the prospect of the reporting person being penalised in some way.

• Procedures must be put in place that will enable officials and public employees to provide anonymous information to those responsible for investigating corruption and integrity matters. Steps to treat communications as confidential need to take into account the rights of the accused person, and the possibility that disclosure of the information might be necessary to conduct an investigation and/or prosecution.

• Indicators of the success of these mechanisms and of codes of conduct and public sector training can include instances of such reporting by domestic officials.

iv. Reporting of promises, offers and bribes by competitors, employees or other private individuals, including the media, should also be facilitated.

• Procedures might include, for example, both formal mechanisms for reporting and anonymous hot lines.

• Procedures should guard against malicious false reporting by competitors such as by obtaining independent verification of allegations before taking further action.

v. The existence of adequate accounting procedures, independent auditing, and internal company controls are also essential for detecting and preventing corrupt practices. Companies should be prohibited from making off-the-books transactions or keeping off-the-books accounts, and they should be required to maintain adequate records of the sums and the means by which money is received and spent. 101 Likewise, auditors who discover indications of a possible illegal act of bribery should be required to report this to management and, as appropriate, to corporate monitoring bodies. Consideration should also be given to imposing a duty to report to law-enforcement authorities.

vi. Sharing of information received from public officials, companies or individuals with other concerned countries that contributes to the international framework of combating corruption. In complex or large-scale corruption cases, information sharing can be essential and hence should be facilitated either by direct mechanisms or by allowing sufficient flexibility within the existing system.

vii. Effective public awareness and assistance programmes are essential to the successful detection and reporting of corruption and practices lacking in integrity. These include activities (e.g. public campaigns) and information (e.g. easily accessible websites). Private sector awareness of laws and regulations on anti-corruption is essential and it may be desirable to establish, or assist professional bodies in carrying out training programmes for lawyers, accountants, auditors and others.

viii. As part of private sector awareness, individuals and companies might be permitted to submit a request for an opinion (based on the facts of a prospective transaction) as to whether the transaction would constitute an offence of bribing a public official. Such assistance should not create undue exceptions to corruption offences or otherwise undermine anti-corruption and integrity laws and regulations.

(b) Ways by which procurement officers can detect bid rigging Procurement officers can detect bid rigging through the following measures:

i. Check for warning signs and patterns when businesses are submitting bids Certain bidding patterns and practices seem at odds with a competitive market and suggest the possibility of bid rigging. Search for odd patterns in the ways that firms bid and the frequency with which they win or lose tender offers. Subcontracting and undisclosed joint venture practices can also raise suspicions;

ii. Look for warning signs in all documents submitted Telltale signs of a bid-rigging conspiracy can be found in the various documents that companies submit. Although companies that are part of the bid-rigging agreement will try to keep it secret: carelessness, or boastfulness or guilt on the part of the conspirators, may result in clues that ultimately lead to its discovery. Carefully compare all documents for evidence that 102 suggests that the bids were prepared by the same person or were prepared jointly;

iii. Observe warning signs and patterns related to pricing Bid prices can be used to help uncover collusion. Look for patterns that suggest that companies may be coordinating their efforts such as price increases that cannot be explained by cost increases. When losing bids are much higher than the winner’s bid, conspirators may be using a cover- bidding scheme. A common practice in cover schemes is for the provider of the cover price to add 10% or more to the lowest bid. Bid prices that are higher than the engineering cost estimates or higher than prior bids for similar tenders may also indicate collusion;

iv. Check for suspicious statements at all times When working with vendors, watch carefully for suspicious statements that suggest that companies may have reached an agreement or coordinated their prices or selling practices; and

v. Look for suspicious behaviour at all times Look for references to meetings or events at which suppliers may have an opportunity to discuss prices, or behaviour that suggests a company is taking certain actions that only benefit other firms.

(c) Powers of the Code of Conduct Bureau (CCB) The Code of Conduct Bureau was set up to:

i. Receive declarations by the public officers made under paragraph 12 of Part 1 of the Fifth Schedule of the 1999 Constitution; ii. Examine the declarations in accordance with the requirements of the Code of Conduct or any law; iii. Retain custody of such declarations and make them available for inspection by any citizen of Nigeria on such terms and conditions as the National Assembly may prescribe; iv. Ensure compliance with and, where appropriate, enforce the provisions of the Code of Conduct or any law relating thereto; v. Receive complaints about non-compliance with or breach of the provisions of the Code of Conduct or any law in relation thereto, investigate the complaint and, where appropriate, refer such matters to the Code of Conduct Tribunal; and vi. Carry out any other functions as may be conferred upon it by the National Assembly. 103

Examiner’s report Part (a) of the question requires candidates to discuss the measures that are needed to ensure transparent, effective and consistent application and enforcement of laws and regulations on anti-corruption, while part (b) tests candidates’ knowledge of how procurement officers can detect bid-rigging, and part (c) of the question is on powers of the Code of Conduct Bureau. Few candidates attempted the question and performance was below average. The commonest pitfalls were the inability of the candidates to identify the measures that are needed to ensure transparent, effective and consistent application and enforcement of laws and regulations on anti-corruption, while others could not explain the ways by which procurement officers can detect bid-rigging. Candidates are advised to have adequate knowledge of relevant provisions of Procurement Act 2007 and other laws or regulations for better performance in the Institute’s future examinations.

Marking guide Marks Marks a Measures that are needed to ensure transparent, effective and consistent application and enforcement of laws and regulations on anti-corruption Identification of measures 5 Explanation of measures identified 5 10 b Ways by which procurement officers can detect bid rigging Identification of ways to detect bid rigging 2 Explanation of ways identified 3 5 c Powers of the Code of Conduct Bureau (CCB) 5 Total 20

(a) Powers of State Board of Internal Revenue Service The state Board of Inland Revenue Service has the power and responsible for:

i. Assessing, collecting and accounting for all taxes, fees, and levies in the state. The Commissioner of Finance is to prescribe the manner the Board is to account for the taxes, fees and levies collected; ii. Supervise the collection of all revenues due to the State Government with other ministries, extra-ministerial department, parastatals and government companies; 104

iii. Revise all obsolete rates collectable by the Board and initiate review and advice the Governor on it; iv. Liaise on tax and revenue matters with the Federal Government directly through the Joint Tax Board and make recommendations where appropriate to the Joint Tax Board on Tax policy, tax reform, tax registration, tax treaties and exemption as may be required from time to time; v. To administer the provisions of the Personal Income Tax Act 2004 as amended and relevant tax laws in the State; and vi. To generally control the management of the service on matters of policy subject to the provisions of the edicts and imposing discipline on employees of the State Internal Revenue Service.

(b) Functions of Department of Petroleum Resources (DPR)

i. DPR has the statutory responsibility of ensuring compliance to petroleum laws, regulations and guidelines in the oil and gas industry.

ii. Supervising all petroleum industry operations being carried out under licences and leases in the country.

iii. Monitoring the petroleum industry operations to ensure that they are in line with national goals and aspirations including those relating to flare down and domestic gas supply obligations.

iv. Ensuring that health safety and environmental regulations conform to national and international best oil field practices.

v. Maintaining records on petroleum industry operations, particularly on matters relating to petroleum reserves, production/exports, licences and leases.

vi. Advising government and relevant government agencies on technical matters and public policies that may have impact on the administration and petroleum activities.

vii. Processing industry applications for leases, licences and permits;

viii. Ensuring timely and accurate payments of rents, royalties and other revenues due to government.

ix. Maintaining and administering the National Data Repository (NDR).

x. Ensuring responsibility for the collection of royalty on crude oil and gas, rentals, penalty on gas flared, signature bonus and miscellaneous income into federation account. 105

(c) Powers of the Revenue Mobilisation, Allocation and Fiscal Commission (RMAFC) The Commission shall have power to: i. Monitor the accruals to and the disbursements of revenue from the federation account;

ii. Review, from time to time, the revenue allocation formulae and principles in operation to ensure conformity with changing realities;

iii. Advise the federal, state and local governments on fiscal efficiency and methods by which their revenue is to be increased;

iv. Determine the remuneration appropriate to the holders of the offices as specified in Parts A and B of the First Schedule to this Act;

v. Make recommendations and submit its finding by a report thereto to the government of the federation or of the state, as the case may be, regarding the formula for the distribution of the federation accounts and the local government accounts;

vi. Discharge such other functions as may be conferred on the Commission by the Constitution of the Federal Republic of Nigeria, this Act, or any other Act of the National Assembly;

vii. Be a statutory member of each of the following government agencies:

• The Federation Account Allocation Committee;

• The Local Government Joint Account Allocation Committee;

• The Joint Tax Board;

• The Niger-Delta Development Commission; and

• The Commission on Ecological Fund;

viii. Have the power to demand and obtain regular and relevant information, data or returns from any Government agencies including the following:

• The Nigerian National Petroleum Corporation;

• The Nigerian Customs Service;

• The Federal Board of Inland Revenue;

• The Central Bank of Nigeria; and

• The Federal Ministry of Finance. 106

(d) Sources of revenue payable to the federation account

i. Direct taxes: These are payable by the individuals and firms such as company income tax, hydrocarbon tax, petroleum profit tax, capital gain tax, back duty assessment, and personal income tax of foreigners residing in Nigeria.

ii. Indirect taxes: These are taxes on goods and services in the form of custom and excise duties, forfeiture penalties, VAT, etc.

iii. Mining: These are oil pipeline licence fees, rents of mining rights, mining fees, royalties on minerals, NNPC earnings from direct sales, penalties for gas flared, and rent of oil wells.

Examiner’s report The question tests the candidates’ knowledge of the powers and responsibilities of State Board of Internal Revenue Service in part (a), while part (b) requires candidates to explain the specific functions of the Department of Petroleum Resources (DPR). Part (c) is on powers entrusted with the Revenue Mobilisation, Allocation and Fiscal Commission. Most of the candidates attempted the question and performance was average. The commonest pitfalls were the inability of the candidates to differentiate between the powers and responsibilities of State Board of Internal Revenue Service and Federal Inland Revenue Service (FIRS). Candidates are advised to make use of Pathfinder and Study Text of the Institute for better performance in future examinations.

Marking guide Marks Marks a Powers of State Board of Internal Revenue Service 4 b Functions of Department of Petroleum Resources (DPR) 4 c Powers of Revenue Mobilisation, Allocation and Fiscal Commission (RMAFC) 6 d Sources of revenue payable to the federation account Identification of revenue payable 1½ Explanation of the identified revenue payable 4½ 6 Total 20 107

a. Computation of relevant ratios for Koki Event Center S/N Details Formulae 2021 2020

i. Current ratio Current assets Current Liabilities 6,997.996 467,461 = 14.97 : 1 5,902,569 385,772 = 15.30 : 1 ii. Quick asset ratio Current assets- Inventories Current liabilities 6,997,996-239,615 467,461 = 14.46 : 1 5,902,569-296,017 385,772 = 14.53 : 1 iii. Working capital/Total assets ratio Current assets- Current liabilities Total assets 6,997,996-467,461 12,614,410 0.52: 1 5,902,569-385,772 11,475,064 0.48 : 1 iv. Total debts to Total assets ratio Total debts Total assets 9,169,773 12,614,410 = 0.73 : 1 7,791,076 11,475,064 = 0.68 : 1 v. Long-term debts/Total assets ratio Long-term debts Total assets 8,702,312 12,614,410 = 0.69 : 1 7,405,304 11,475,064 = 0.65 : 1 Interpretation of the accounting ratios

i. Current ratio In the two years, the company carried too much liquid capital than necessary. The best ratio here is 2:1. However, the result for 2021 is better than 2020. Therefore, the company is tying down too much fund that could have been invested in some other investments or start another event centre.

ii. Acid test ratio The company also carried too much cash, based on acid test ratio in both years which this means that there was idle cash in the business. This means that the company is tying down too much fund that could have been invested in some other investments or start another event centre.

iii. Working capital/Total assets ratio This ratio is appropriate for both years. However, the best could have been ratio 1:2. This capital structure ratio is of high benefit to the growth of the company.

iv. Total debts /Total assets ratio The result of this ratio is permissible, however, it is better to finance the company with more debts than cash because of tax benefits. For example interest payable on loan is tax-exempt. 108

v. Long-term debts/Total assets ratio The ratio is still permissible, however, it would be better if it is 2:1. Additionally, it is better to obtain more loans to finance the business because of the tax benefit of using loan to finance a business because of tax relief.

(b) Ways of conducting analytical review are as follows:

(i) Developing an independent expectation; (ii) Identify differences between expected and reported amount; (iii) Investigate the reasons for the differences; and (iv) Evaluate the differences and draw conclusion.

(c) Ways the performance appraisal of a profit-oriented entity differ from a local government public-oriented entity According to IPSAS 24 on presentation of budget information in financial statements, public sector entities, including local governments are required to present a comparison of the budgeted amount for which it is held publicly accountable and actual amount, either as a separate additional financial statement or as an additional budget columns in the financial statements, currently presented in accordance with IPSASs. The comparison of budgeted and actual amounts shall be presented separately as:

(i) The original and final budget amounts; (ii) The actual amounts on a comparable basis; and (iii) By way of the note disclosure, an explanation of material differences (variances) between the budget for which the entity is held publicly accountable and actual amounts, unless such explanation is included in other public documents issued in conjunction with the financial statements and a cross reference to those documents is made in the notes. A profit-oriented entity performance appraisal is in form of revenue growth, revenue per client, profit margin, client retention rate and customer satisfaction.

Examiner’s report Part (a) of the question tests candidates’ knowledge of computation of relevant ratios, while part (b) requires the candidates to state the ways by which analytical review can be conducted. Part (c) also requires the candidates to state the ways the performance appraisal of a profit-oriented entity would differ from that of a push oriented entity. Majority of the candidates attempted the question and performance was good. 109 The commonest pitfalls were the inability of the candidates to state the ways by which analytical review can be conducted and the ways the performance appraisal of a profit-oriented entity would differ from that of a public-oriented entity. Candidates are advised to cover all sections of the syllabus for better performance in the Institute’s future examinations.

Marking guide Marks Marks a Computation of relevant ratios Identification of the formula 2½ Calculation of the ratios 7½ Interpretation 5 15 b Ways of conduction analytical review 3 c Ways the performance appraisal of a profit-oriented entity differ from public-oriented entity 2 Total 20

(a) Principles of debt rescheduling There are three main principles that guide the rescheduling process. These principles are discussed below:

(i) Imminent default This principle applies to the debtor country and requires the debtor nation to prove that it will not be able to meet its external debt service obligations unless granted relief. This proof can be shown through accumulation of debt service arrears. The IMF balance of payments projections of the country also serve the purpose, as these projections always provide an indication of the country’s economic position. This requirement is very important, as a debtor country will be denied access to the rescheduling process without the Club being satisfied that this condition has been fulfilled.

(ii) Burden sharing The principle of burden sharing applies to the creditor countries. It requires the Creditor to be prepared to share fairly and equitably the burden of the rescheduling in the proportion of their individual exposure to the debtor countries. In effect, the creditor must agree to provide the debtor country with relief that is commensurate with their exposure. The counterpart, from the point of view of debtors, is the principle of comparability of treatment, 110 which extols the need for debtors to treat creditors equitably in meeting the debt service obligations.

iii) Conditionality This principle, which is generally regarded as the “golden rule” of the Paris Club of Creditors also, applies to the debtor countries. It requires the debtor nation to put in place an IMF structural adjustment programmes before approaching the Club for rescheduling process. Sometimes such programmes determine the type of agreement, which the official creditors would be prepared to reach with the debtor country.

(b) Forms of debt conversion

(i) Debt for equity conversion. This is the exchange of a country's foreign denominated debt for local currency, which can be, used either for the establishment of new enterprise or for the purchase of equity share in an existing private sector concerns. (ii) Debt for debt conversion. This involves the exchange of foreign currency debt for domestic currency denominated debt e.g. Government Development Stock (GDS) that can be sold or traded in the domestic secondary market.

(iii) Debt for cash conversion. It entails the exchange of foreign currency denominated debt for local currency which can be used for local working capital, loan repayments and local tax payments.

(iv) Debt for export conversion. Under this arrangement, exports are paid for in a combination of cash that is, foreign currency and debts conversion proceeds.

(v) Debt for nature. This arises when the domestic currency proceeds of debt conversion are applied for development of conservation, promoting wildlife tourism and other natural resources. Another variant is a situation whereby the foreign currency denominated debt is exchanged for a particular natural resource for a given period.

(vi) Debt for development. In this case, the proceeds of debt conversion are employed for development activities of non-governmental private voluntary organisations such as foundations, trusts and multi-national aid organisations

(vii) Relending. Under this category, the proceeds of debt conversion are given out as fresh loan(s) to non-governmental private economic entity mostly multinational corporations. This practice is usually employed whenever the Central Bank does not have adequate foreign exchanges to pay the beneficiaries of debt conversion. 111

Examiner’s report The question tests candidates’ knowledge on the main principles of debt rescheduling and forms of debt conversion. Majority of the candidates attempted the question and performance was average The commonest pitfalls were the inability of the candidates to discuss the forms of debt conversion. Candidates are advised to make use of the Institute’s Pathfinder and Study Texts for better performance in future examinations.

Marking guide Marks Marks a Principles of debt rescheduling process Identification of main principles 2 Explanation of main principles identified 3 5 b Forms of debt conversions Identification of forms of debt conversions 2½ Explanation of forms of debt conversion identified 7½ 10 Total 15

(a) Effects of public expenditure The effects of public expenditure on the economy can be examined by reference to its impacts on a number of macroeconomic and socio-political activities as discussed below:

(i) Public expenditure and economic stabilisation The philosophy of laissez-faire does not always guarantee automatic achievement of economic objectives of full employment, general price stability, equitable distribution of income, socially desired growth rate as well as soundness of foreign accounts. In fact, the more advanced and free the market economy, the greater the tendency of fluctuations in macroeconomic variables such as income, employment and general price level. Public expenditure as an anti-cyclical tool can be designed in such a manner as to create effective demand thereby stimulating investment activities. Stimulation of investment will lead to increase in employment, output and reduction in price, other things being equal. It must be 112 emphasised however, that the total demand should be regulated so that the demand flows would match the supply flows, otherwise the stimulating effect would result into inflationary pressure.

(ii) Public expenditure and production Public expenditure can help the economy to attain a higher level of production. Through stimulation of investment activities, it can help to create conditions favourable for market forces to push up production. It can be used to create human skills through education and training and maintenance of social overheads. Expenditure on education and health promotes human capital development and also promotes physical stock of capital for growth. Expenditure on education, health, communication, increases people’s productivity at work and hence their incomes. With rise in income, savings also increase and this in turn has a beneficial effect on capital formation and investment. Through research and development, new and effective methods of production can be invented whereby local resources are used.

(iii) Public expenditure and economic growth The goals of planning are growth and social welfare, which can be realised only through government expenditure. Consequently, the government allocates funds to various sectors like agriculture, industry, transport, communications, education, energy, health, exports, and the likes with a view to achieve impressive growth. Government expenditure has been very helpful in maintaining balanced economic growth in the country. In furtherance of this, government takes keen interest in allocating more resources for development of backward regions. Such efforts reduce regional inequality and promote balanced economic growth. The government propels the growth in an industry by either increasing its spending in it or supporting it in the forms of subsidies, lower interest rate for investments etc. For example, the government through Central Bank had created various funds with differential interest rates to be disbursed to perceived users with the aim of correcting market failure thereby growing the economy.

(iv) Public expenditure and distribution An important aspect of the market mechanism is the inequalities of income and wealth, which arise on account of nature endowment and get widened through the institutions of private property and inheritance. Welfare consideration favours an equitable distribution of income and wealth since the purpose of economic policy is to attain the maximum level of social benefits possible. A shift towards equality may be achieved through various forms of public expenditure, especially those that are meant to help the poorer sector of the society. For 113 instance, items of common consumption may be subsidised and production of those, which are in short supply, can be taken up by public sector. Public expenditure on social security and subsidies to the poor are aimed at increasing their real income and purchasing power. Expenditure on education, communication and health has a positive impact on productivity of the weaker section of society, thereby increasing their income earning capacity.

(b) Principles of public expenditure on the economy

(i) Principle of economy: The resources of the economy are limited relative to need. Public expenditure is the financial counterpart of the limited resources, which the government uses directly, or places at the disposal of certain sections of the society for the purpose of achieving specific objectives. According to this principle, the use of public expenditure must not be more than what is just necessary. Utmost care must be taken to avoid waste of public funds.

(ii) Principle of sanction: According to this principle, no public funds must be used without proper authorisation and that funds must be applied only for the purpose for which they have been sanctioned. In a democratic setting, it is the responsibility of the legislature to sanction expenditure on demand by the executive authorities. The essence of such a measure is to prevent unscrupulous and unwanted use of public expenditure, and hence a check on misappropriation of public fund.

(iii) Principle of benefit: This is a most fundamental principle of public spending. According to this principle, money is to be spent to promote maximum social advantage (MSA) to the economy. Any public expenditure is to be viewed against the benefit that would accrue from it. Public expenditure is to be incurred, if only it will be beneficial to the society. The beneficial nature of public expenditure can manifest itself in terms of its effects on employment, consumption, savings, investment, output, price, income distribution, and so on.

(iv) Principle of surplus: This is completely opposed to the practice of deficit budgeting. According to this principle, government should be more prudent in the utilisation of resources and aim at meeting its current expenditure needs out of its current revenue. It should not overspend and run into debt. All efforts should be directed at achieving a moderate surplus. Such moderate surpluses recorded in the past should be used to meet some reasonable but unavoidable deficits during other periods.

(v) Principle of elasticity: The principle of elasticity requires that public expenditure should not in any way be rigidly fixed at all times. Rather, it should be fairly elastic. Public authorities should be in a position to adjust 114 the expenditure as the situation demands. During the period of depression, it should be possible for government to increase expenditure so that the economy is lifted from low level of employment. During boom period, the state should be in a position to curtail expenditure without causing any distress to the people.

Examiner’s report Part (a) of the question tests candidates’ knowledge of the effects of public expenditure on the economy, while part (b) requires the candidates to identify and explain the principles of public expenditure. Majority of the candidates attempted the question and their performance was average. The commonest pitfalls were the inability of the candidates to identify the effects of public expenditure on the economy and they were also unable to explain the principles of public expenditure. Candidates are advised to make use pay more attention to both the public sector accounting and public finance sections of the syllabus for better performance in the Institute’s future examinations.

Marking guide Marks Marks a Effects of public expenditure Identification of principles of public expenditure 2 Explanation of principles of public expenditure identified 3 5 b Principles of public expenditure on the economy Identification of effects of public expenditure 5 Explanation of effects of public expenditure identified 5 10 Total 15

(a) Reasons for divergence between private and public appraisal of project There are many reasons for the divergence between the two systems of appraisal. These are: (i) The structure of income distribution in the society may cause a divergence between private and social appraisal. Since the market prices are essentially determined by income distribution, then it will not reflect the society's evaluation except the income distribution in the society is made equal; 115

(ii) The existence of externalities, which may be positive or negative, are not considered at all by the commercial or private enterprise analysis of project;

(iii) Neglect of consumers surplus in the commercial evaluation of project. This will result in under-estimation of the benefit from the society's view point; and

(iv) Price distortion through price control, wage control and interest rate regulations by government influence the price system.

(b) Difference between Cost-Benefit Analysis (CBA and Cost-Effectiveness Analysis

- (CEA)

i. The cost effectiveness analysis (CEA) approach identifies either the least cost method of realising an objective or the maximum output attainable at a given cost. In contrast to cost-benefit analysis (CBA), focus on cost and benefit. Cost effectiveness analysis does not attempt to supply information on the benefits of achieving goals. Rather, the emphasis is on the least or minimal cost of achieving the specific objective of a public sector project. ii. The CEA compares the relative cost and outcomes (effects) of a project, whereas CBA assigns a monetary value to the measure of the effect of a project. iii. CEA is a mixed (qualitative and quantitative) project evaluation technique, whereas the CBA is a quantitative project evaluation technique. iv. CEA generally does not consider opportunity costs, whereas opportunity cost should be taken into account in CBA.

(c) Procedure and limitations of cost effectiveness analysis Procedures of cost-effectiveness analysis are as follows: (i) Objective definition: This is meant to determine what actual target is. That is, what are the projects? (ii) Sourcing and assessment of alternatives: After the public project has been determined, what are the cost alternatives that are available? The information in this regard have to be collated; (ii) Selection of measure to be adopted: It has to be determined what types of approaches will enable management to achieve the set objectives within a reasonable period of time; (iv) Development of cost estimates: Cost estimates have to be collated, addressing the issues of what to include and how to measure them; and (v) Taking the final decision: Having ascertained the adequacy of cost effectiveness measures and relying on the information on cost estimates, the public sector organisation evolves the final decision, based on the principle of least cost. 116

(d) Limitations of cost-effectiveness analysis

(i) Procedures are subjective, since they are based on the personal judgment of the decision-maker. (ii) What is an appropriate measure of effectiveness cannot be easily resolved. (iii) It may lead to wrong decisions resulting from imperfect information on which costs are based and benefits derived.

Examiner’s report Part (a) of the question requires the candidates to highlight reasons for divergence between private and public appraisal of project, while part (b) asks the candidates to differentiate between Cost-Benefit Analysis (CBA) and Cost –Effectiveness Analysis (CEA). Part (c) asks the candidates to identify the procedures and limitations of Cost- Effectiveness Analysis. Few candidates attempted the question and their performance was poor. The commonest pitfalls were the inability of the candidates to differentiate between the Cost-Benefit Analysis (CBA) and Cost –Effectiveness Analysis (CEA). Also candidates could not identify the procedures and limitations of Cost-Effectiveness Analysis. Candidates are advise to make use of Pathfinder and Study Texts of the Institute for better performance in future examinations.

Marking guide Marks Marks a Reasons for divergence between private and public appraisal f project 4 b Difference between Cost-Benefit Analysis (CBA) and Cost - Effectiveness Analysis - (CEA) 5 c Procedures of Cost-Effectiveness Analysis 3 Limitations of Cost-Effectiveness Analysis 3 6 Total 15 117 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA