x Abu Dhabi, UAEFriday 28 July 2017

Budget cuts hurt, but also encourage greater efficiency

This move to zero-based funding may well be painful for many UAE ministries and will no doubt have an effect on services at some level. However, it might also lead to a more efficient public sector with greater transparency and accountability.

Government ministries need to provide value for money like any other product or service orientated organisation. Recent budget cuts announced by the Ministry of Finance and approved, with some reservations, by the Federal National Council, mirror a worldwide trend.

With revenues in decline, national governments are being forced to cut back on spending. In the UAE, the recently reported budget cuts were larger than expected but they are not as deep or severe as in some countries. Members of the European Union are in significant financial trouble. Greece is being supported with funds from other member states and recently the Republic of Ireland was essentially forced to hand fiscal decision making over to the International Monetary Fund.

Cuts to public spending will inevitably have an impact on the quality and provision of public services by various ministries. However, these effects can be limited if productivity is improved.

Within a competitive, open market business environment, organisations are required to constantly evaluate their businesses to ensure efficiency. Leveraging new technologies, increasing human capital investment and utilisation, innovating in product and service design; all these strategic investments contribute to productivity and organisational growth. Businesses that fail to improve efficiency run the risk of losing ground to their competitors. The consequences can be fatal.

While the competitive nature of the private sector enhances product and service quality for consumers, the public sector environment often encourages wastefulness. Some recent examples of public funding waste come from the United Kingdom. The British government has recently taken aim at publicly funded quasi-autonomous, non-governmental organisations (known as "quangos") that cost about Dh360 billion dirhams annually.

Many of these quangos are thought to offer little added value for their associated costs. However, because they function within the non-competitive environment of the public sector, there is no control mechanism to promote efficiency and ensure value for money.

Which is not to say that we should force a profit-based focus on public sector institutions. Private businesses are profit oriented by necessity and that necessity drives efficiency. In contrast, the goal of public institutions is to serve the public. Many essential public services generate no revenues and cannot have a profit orientation. Rather, their orientation is towards the more esoteric but essential goal of serving society.

The UAE public sector, like publicly funded institutions across the globe, operates in an essentially non-competitive environment. As such, it is very likely that there are areas of operation where inefficiencies have grown and value for money is not being attained. The move towards a "zero- based" budget is an attempt to address this wastefulness in government spending.

As reported in The National, some federal authorities allocate up to 92 per cent of their budget to salaries. Although this figure does appear unnecessarily high, it does not in itself indicate wastefulness or inefficiency. The important consideration for the national good is the relative value for money that is acquired for those salaries. When high salaries bring added value to the Government's functioning, they can be justified. Providing a justification, however, requires a more transparent evaluation of the relative contribution public sector employees make to their organisations.

Zero-based budgeting requires each organisation to justify all expenditures. Detailed and justifiable explanations for requested expenses must be provided. They should be linked specifically to a ministry or authority's goals and objectives. Typically, funding requirements are also grouped in order of priority to allow decision-makers to make more informed choices. If applied and enforced fully, this budgeting system should force a significant and critical evaluation of public organisations.

Ministries will be required to provide a justification for the money that they spend, and the relative value obtained for that money. This should lead to a leaner, more streamlined and efficient public sector, which in turn will contribute more to the society that it serves.

A major consideration of this new initiative is the impact that it might have on staff numbers and working conditions in the various ministries. The public sector is the major and preferred employer for UAE citizens, and is widely recognised for offering higher salaries and more generous working conditions than equivalent jobs in the private sector.

This inequality does indicate that there may be inefficiencies in public sector organisations. However, the consequences of addressing an inefficiency could lead to salary reductions or job losses within the Government, which is the country's largest employer of UAE citizens. This is a possible outcome that will have to be managed very carefully, especially in light of the ongoing challenge of Emiratisation.

This move to zero-based funding may well be painful for many ministries and will no doubt have an effect on services at some level. However, it might also lead to a more efficient public sector with greater transparency and accountability. Any improvements in efficiency would also help to minimise the negative impact of budget cuts, and ultimately be beneficial to the UAE's society and economy.

 

Dr James C Ryan is an assistant professor of human resource management in the college of business at University of Sharjah