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Application of Financial Management in Public Sector of Bangladesh

Prepared for
Dr. H. M. Mosarof Hossain
Course Instructor, FIN 501: Financial Management

Prepared by
Name ID
Mashrura Rahman Aurchi 13164091
Md. Ripon Hosen 12264022
Reaz Rahman 13164111
Shiuli Biswas 12264077
Binoy Sarker 12364049
Tazul islam 12364034

MBA Program
BRAC University, Dhaka
August 13, 2014



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Introduction
A survey of senior government officers in Australia in 1983 found that 94% saw financial
management as spending no more no less than their budget allocation. This perception would
almost certainly be reflected by government officers in Bangladesh today, in so far as they had
any concept of financial management. The purpose of financial management in public sector is
to deliver for the benefit of the population as a whole the best possible value for money in the
mobilization and allocation of resources and delivery of services, based on policies established
by legislature. In the commercial world, hence the financial management has become dominant
because it provides a complete input-output model of the equity. This contrasts with the situation
in the public sector. Public sector financial management is the process of using the available
resources, measured in money, to achieve the optimal service delivery outputs. The first step
toward sound financial management in the public sector, as in any other enterprise, is the setting
of both short- and long-term goals. Once leaders are elected, they must set goals that they hope
to achieve within their official terms. This is in addition to the established governmental
responsibilities, such as security, healthcare, infrastructure and welfare. When public officials
know their plans, they will then have a framework for the allocation of finances toward the
realization of those plans. This further instills a sense of responsible spending in the officials and
also makes it easier for the public to hold them accountable for their spending when it falls short
of the plan. Sound financial management in the public sector includes the development and
management of any assets inherent in a country. For example, if a country has natural resources,
such as crude oil, it is the duty of the public officials to develop the resources and to manage the
revenue from such resources to the benefit of the society in general. In the case of crude oil, this
might include the building of refineries and the allocation of the revenue from the crude oil and
related products to needed areas.
Financial Objective of Public Sector
The purpose of financial management in public sector is to deliver for the benefit of the
population as a whole the best possible value for money ( economy,efficiency,effectiveness) in
the mobilisation allcation of resources and delivery of services , based on policies established by
the lagisature. This is achieved through an interaction between the planning and budgeting
processes and subsequent implementation management , expenditure monitoring and control and
performance measurement. In effect , a budget is a financial statement of the priorities in a plan.
Public sector organizations are established by statute or a similar vesting document passed by the
government or other law making bodies. Therefore, managers cannot change them according to
the changing conditions.
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Financial Management Cycle













Public sector financial management has three components:
i. The resource allocation decisions involved in budgeting
ii. The monitoring and control of the implementation of budget decisions
iii. The feedback or reporting to management.
In the commercial world, the accounting model, financial management has become dominant
since it provides a complete input output model of the entity. This contrasts with the situation in
public sector. In the public sector most outputs are service delivery and therefore unmonitored.
Planning
objectives and
policies
Budget
Operationalises
plan
Implementation
Control over
disbursements
Monitoring
Feedback from
accounting
systems
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Commercial and public sector accounting models


Commercial Accounting Model


In the commercial accounting, the financial model leads to the widely accepted concept of profit
maximization. It also provides a complete and simple input-output model for all the commercial
activities. This is why the accounting model has become widely accepted.

Public Sector Accounting Model






Inputs (Tk)
Materials
Labour
Capital
The business
activity
Outputs (Tk)
Goods
Services
Inputs (Tk)
Materials
Labor
Capital
Government
Activity
Education, Health
Sector, Defense,
Development etc
Outputs
Service Delivery
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In the public sector accounting model measures only work for inputs, since there are generally no
financial outputs. Concepts of profit do not apply as historically public sector accounting and
budgeting has focused on input control. Modern public sector financial controls systems
typically involve attempts either to monetize outputs or relate monetary inputs to non-monetary
outputs (e.g. Cost per patient per day at a hospital).

Budgeting and Resource allocation

Budget decisions are based on resource allocations to achieve optimal outputs. Budgets are
linked to a planning process, which should provide a medium term framework of policy
objectives to be operational in the budgets. Traditionally budgets have been incremental based on
an annual cycle, because that is the easiest way to estimate expenditure and also annual based
since it fits with the parliamentary and accounting timescales. Both approaches have come under
significant criticism for increasing allocation efficiency.
Disadvantage of incremental budgeting is that it is essentially orthodox and the existing
expenditure patterns become entrenched. As a result new activities are always an addition rather
than an alternative to expenditure. Under the incremental budgeting, attention is focused on few
activities and expenses which are visible and the major part simply carried on without any
obligation.

Development and Revenue budget

The development budget approach in Bangladesh is to some extent an attempt to implement
these approaches. This recognizes that there is a mass ongoing activity of government to which
the application of the budgeting approaches. The disadvantage of the development and revenue
budgets is that the latter becomes entrenched and incremental based. Further programs would be
completed and transferred to revenue budget and the latter will increase sources.
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Revenue budget will always tend to increase as the programs are transferred into it as a part of
the normal recurrent expenditure without any overall review of the budget in program terms ever
being carried out. Further problem of the segregation of the two budgets is the failure to
recognize clearly the resource allocation decisions being made between them.

Financial implementation of public sectors
The financial sector in Bangladesh is continuously involving towards a more modern and
efficient system of finance which is supportive of greater investment and inclusive economic
growth. The financial system of Bangladesh consists of The Bangladesh Bank, scheduled banks,
non-bank financial institutions, micro finance institutions, insurance companies, co-operative
banks, credit rating agencies and stock exchange.
Health Care:
Government-provided services play a minor role. Almost half of the rural population visited
quacks and village doctors. The health sector has been allocated Tk 93.55 billion in the annual
budget for the fiscal year (FY) from July 2012 to June 2013, which is seen as the penultimate
budget of the government that is set to complete its term in June 2014. Per capita health
expenditure US$16 (2007), $27 (2011). Budget analysis shows that the national budget as per
cent of GDP has increased from 14.5 percent in FY 2008-09 to 18.4 per cent in FY 2012-13..
The health sector budget per child has been estimated to be BDT 606 in the provisional budget of
FY2012-13, implying on average, 14.3 per cent increase per annum from actual expenditure of
FY2009-10.16 On the other hand, per capita national budget rose from BDT 6,836 to BDT
12,458. It is important to assess the health sector budget to comprehend how far the sector
commitments and programs are being translated into fiscal measures, from the perspective of the
most deprived children population.
Education Sector:
The Government of Bangladesh has demonstrated strong commitment to education since
independence by formulating relevant national policies, strategies and laws, and ratifying
relevant conventions and declarations at regional and international levels. Education gets the
second largest allocation after public administration with 11.16 per cent of total budget in
2012-13 while public administration received 12.6 per cent. Primary education is the most
important investment for consolidating the foundation of child education, after pre-schooling.
But analysis reveals that the share of primary education budget witnessed fluctuation and ranged
from around 42 to 46 per cent of total education budget from 2009-10 to 2012-13, with a
negative growth in 2011-12.

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Off-Farm Extension Services:
Animal husbandry services are largely provided by the private sector (52%), and the
government (43%). Over 35% of the users are dissatisfied with government services compared
with 13% for the private sector.
Poultry rearing. In the urban areas, 70% of the people received these services from the
government and 34% from the private sector, as opposed to 33% and 45%, respectively, in the
rural areas sector.
Banking Sector:
The government's encouragement during the late 1970s and early 1980s of agricultural
development and private industry brought changes in lending strategies. Managed by the
Bangladesh Krishi Bank, a specialized agricultural banking institution, lending to farmers and
fishermen dramatically expanded. The number of rural bank branches doubled between 1977 and
1985, to more than 3,330. Denationalization and private industrial growth led the Bangladesh
Bank and the World Bank to focus their lending on the emerging private manufacturing sector.
Bangladesh Bank is also responsible for planning the government's monetary policy and
implementing it thereby.
Implementing an Effective Dairy Development Planning Process:
The financial resources commonly deployed by developed countries to support their heavily
subsidized dairy industries are not available in developing countries. This absence of significant
resources highlights the necessity for forging an enabling environment that is supportive of
sector development through carefully crafted and focused policy interventions. These
interventions should ensure engagement of the private sector through innovative partnerships,
cost-sharing arrangements and meaningful participation of smallholders. In Asia, where the
majority of milk is sourced from smallholders with two to five cows, this requires a deliberate
and creative development vehicle generated and endorsed through a carefully organized planning
process.
Transportation and Communication:
Modern transport and communication infrastructure play a significant role in the socio-
economic development of a country. Among all infrastructure systems, a well-knit transport and
communication system is crucial for the advancement of a developing country. In FY2009-10,
growth in this sector and its contribution to GDP at constant price were about 10.79 percent and
7.69 percent respectively. These rates were 10.91 percent and 7.93 percent respectively during
FY2010-11(BBS estimation). The Government has identified regional and international transport
connectivity and started linking the country with the connectivity network for ensuring socio-
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economic development of the country. RHD is currently operating about 153 ferry boats in 60
ferries on its road network throughout the country. The road network under roads and highways
division combining different types of roads built over a period from 2001 to 2011. A total
number of 152 development (or investment) projects including 6 JDCF projects has been
included in the Annual Development Program (ADP) of Roads and Highways Department for
FY 2010-11. An amount of Tk.2, 063.61 crore is allocated for a total of 152 investment projects.
The Government is committed to transform BR into a feasible and market oriented organization
with managerial, financial and administrative autonomy to meet its objectives.
Insurance Corporation:
The insurance sector is regulated by the Insurance Act, 1938 with regulatory oversight provided
by the controller of insurance on authority under the Ministry of Commerce. A separate
insurance regulatory authority is being established. A total of 62 insurance companies have been
operating in Bangladesh, of which 18 provide life insurance and 44 are in the general insurance
field. Among the life insurance companies, except the state-owned Jiban Bima Corporation
foreign owned American Life Insurance Company, and the rest are private. Among the general
insurance companies, state-owned Shadharan Bima Corporation is the most active in the
insurance sector. A total of 31 insurance companies are listed in the capital market, of which
eight offer life insurances.
Potential Sectors :
Agribusiness
Ceramics
Electronics
Frozen Foods
Garments and Textitles
ICT and Business Services
Leather and Leather Goods
Light Engineering
Power Industrry
Life Science


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MONITORING OF PUBLIC SECTOR FINANCIAL MANAGEMENT
Implementation Monitoring and Evaluation Division, Image commonly known as IMED, is the
central and apex organization of the Government of the Peoples Republic of Bangladesh for
monitoring and evaluation of the public sector development Projects included in the Annual
Development Program (ADP). As per Allocation of Business among the Different
Ministries/Divisions, the IMED also deals with the matters relating to Central Procurement
Technical Unit (CPTU) and administration of The Public Procurement Act, 2006 and The Public
Procurement Rules, 2008. The CPTU of IMED acts as a central organ of the government for
policy formulation, coordination, monitoring and improvement of the public procurement
process in Bangladesh.
The prime function of IMED is to monitor and evaluate the implementation of development
projects in order to enable the ministries and executing agencies to ensure their proper
implementation. Through monitoring, it points out to the project implementing ministries and
other appropriate authorities the progress of implementation and problems, if any, relating to the
quality, time, cost for taking remedial measures.
The Rules of Business of the government allocated the following functions to the IMED:
Monitoring and Evaluation of the implementation of development projects included in
the Annual Development Programme.
Collection and compilation of project-wise data for preparing quarterly, annual and
periodical progress reports for information of the President, NEC, ECNEC, Ministries
and other concerned.
Rendering such advisory or consultancy services to Ministries/Agencies concerned on
implementation of projects as and when necessary.
Field inspection of projects for on the spot verification of implementation status and such
other Co-ordination works as may be necessary for the removal of implementation
problems, if any, with the assistance of related Ministries/Agencies.
Submission of project inspection reports to the President and Ministers concerned when
attention at such levels are considered necessary.
Matters relating to Central Procurement Technical Unit (CPTU).
Matters relating to The Public Procurement Regulations, 2003.
Such other functions as may be assigned to the Division by the Prime Minister from time
to time.

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How It Works
MED is involved in the whole gamut of activities in a project cycle - from project preparation
(pre-project) to project completion and even impact evaluation. Following is a brief description.

a) Pre Project Phase: During this phase IMED examines the following:
Rationale of project cost estimates and implementation schedule, duplication/overlap with other
projects, consistency with the Five Year Plan objectives, comparison with experience of similar
projects implemented earlier, size of project manpower and sustainability of institutional
framework for project implementation. It suggests improvement as member of the project
approving committees of the Planning Commission and Departmental Project Evaluation
Committees (DPEC) of the Line Ministries.
b) Implementation Phase: During implementation, IMED monitors progress to ensure timely and
quality implementation. It has evolved a system of information flow from projects, agencies and
ministries for effective monitoring. The instruments for information generation consist of: (a)
periodic reports, (b) procurement reports, (c) field inspections, (d) monthly coordination/review
meetings, (e) special meetings with the Project Directors. Information so collected are processed
and analyzed on a monthly, quarterly & annual basis to review implementation performance of
Ministries/Divisions which is followed by macro reviews at the NEC, the ECNEC and by the
Honble Prime Minister.
c) Post-Implementation Phase: Terminal evaluation reports are prepared by IMED on all projects
immediately on completion. It contains an analysis of the project progress with
recommendations. It also commissions ex-post evaluation of selected projects for assessing their
impacts on the community and the lessons learned are used in future project design and
implementation.
Output of IMED
IMED monitors more than 1200 projects of the ADP and evaluates around 200 projects on an
annual basis. IMED output consists of :
monthly performance evaluation of projects of the Ministries/Divisions,
quarterly performance evaluation reports of ADP included projects,
annual review report on ADP implementation,
annual project evaluation reports,
project directors' profile, and
Such other special reports prepared at the direction of the Honble Prime Minister,
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Planning Minister, the NEC and the ECNEC.
The main thrust of IMED's monitoring activities is identification of implementation problems
and their timely resolution to accelerate project progress. All the reports prepared by IMED
contain identified implementation problems and suggestions for action. These are discussed in
review meetings held at the Ministry, the NEC and the ECNEC. The process helps resolution of
project problems in time.
Conclusion
The basic tenet in financial management is that costs should be incurred only if by so doing, the
community or organization can expect to move toward agreed-upon goals and objectives.
Determining whether the commitment of governmental resources improves conditions in the
broader community can get complicated, however, particularly when no basis exists for
assessing the value to individuals of such actions. The Pareto criterion suggests that the welfare
of a community is improved if some members are made better off while no one is made worse
off. This criterion has no logical flaws and does not require interpersonal comparisons of utility.
Not all members of the community are likely to benefit equally from a given government
action. Therefore, many public choices are still open to political decision. Despite the best
efforts to achieve rigor and sophistication, scientific analysis cannot provide definitive answers
to many of the questions involved in the allocation of government resources. Nevertheless, a
continuous search must be maintained for more productive ways to operate public organizations
and to assess their capacity to meet changing conditions and demands for the delivery of
services. The common denominator among the various resources of any organization is the cost
involved in their utilization. The production of public goods and services requires the
acquisition and allocation of relatively scarce resources, the values of which are measured and
compared in the common unit of money.







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