• The ‘S’ in ‘SPF’ stands for ‘sloppy’

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    After public grumbling about the inclusion of P501 billion in “lump sum” funds in next year’s P2.6 trillion national budget penetrated the thick fog of logic repellent that surrounds Malacañang last week, Communication Secretary Herminio “Sonny” Coloma Jr. sallied forth to offer an explanation.

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    Granted, there is probably nothing Coloma could have said that would not reinforce the common impression that the enormous presidential slush fund is yet another attempt by President B.S. Aquino 3rd to make an end-run around the Constitution and the Supreme Court.

    What he eventually came up with, however, leaves one wondering whether Coloma is holding back an alternate explanation for people who are not mentally challenged, or if he really couldn’t grasp a “best practice” if he were locked in a phone booth with it:

    “Based on established management practice, it is customary that a certain portion of the annual budget is set aside for contingency expenditures that are essentially variable and not amenable to precise determination at the time of budget preparation,” he said. “The national government, perhaps the largest corporation in the Philippines, follows such best practice in establishing the Special Purpose Funds totaling P501 billion.”

    The “set aside” portion of the budget is organized into what the Palace is calling “special purpose funds” or SPFs. Not only does this move beg the question of why something that can be defined enough to be a “purpose” cannot be subjected to a proper budget process, it completely flies in the face of the “bottom-up” and “zero-based” budgeting approach the Administration has assured the country it was following for the sake of greater transparency and credibility.

    For the record, having a large, speculative portion of a budget arbitrarily designated for “contingency expenditures” is not “established management practice.”

    In a normal budget process, the sort followed by enterprises that wish to sufficiently fund activities without financial waste or abuse, every project (which are represented by individual line items in the national budget) has a base cost.

    This has two underlying assumptions: first, that the resource cost has been estimated accurately; and second, that none of the risks that can be associated with the project will be realized.

    Both of those assumptions have to be tested, of course. In terms of resource costs, there is not much excuse for producing an estimate that varies by more than a couple percentage points from the actual costs; allowances can be made for things like inflation or seasonal changes in costs of materials, but beyond that, if the costs are really “not amenable to precise determination at the time of budget preparation,” or otherwise unavailable, then the entire project should be reconsidered, because the likelihood that it actually cannot be carried out has just increased enormously. In terms of risk factors, a bit more variability is acceptable and expected, but there are still a number of fairly rigorous techniques for assessing how risks might translate into actual costs that should be covered, such as the probability-impact matrix or cost-impact matrix.

    Once the testing of the assumptions is completed, what results is a base cost, plus a contingency based on risk coverage and allowances for anticipated excess costs (such as inflation). The total of the base plus contingency then equals the budget amount. Savings are realized if at the completion of the project, or in some cases, at the completion of particular steps in the project’s life, there are unspent funds. If budgeting is done correctly, this amount should be minimal.

    In a zero-based budget—the approach the Aquino Administration is not following, despite what they tell their constituents—there is no such thing as a “contingency fund.” Money is either budgeted, or it is not. The only way there can be a discretionary reserve (which still should be subject to strict rules to prevent waste or abuse) is if the available funds exceed the budget amount, which is not the case at all with the 2015 budget prepared by Malacañang. In his briefing last week, Coloma explained that P123 billion of the P501 billion were “unprogrammed” funds, or “standby appropriations with no funding source yet,” which indicates that the entire budget exceeds available revenue by at least that amount.

    But again, if the Administration wishes to dispute that and claim that the funds really do exist and just haven’t been designated yet—in other words, demonstrate that they haven’t prepared a deficit budget (which is also quite different from a “zero” budget)—then they should also explain why those “standby appropriations” are not part of the regular budget, rather than appearing to be a stealthy new form of the illegal DAP, as the only other explanation would involve (again) money being diverted from other, already budgeted programs to fund the “standbys.”

    At best, having a budget that is one-fifth “miscellaneous” is sloppy, and potentially means that functional underspending of somewhere between P378 billion and P501 billion will occur in the next fiscal year. Even if the money is used for what would be considered worthwhile expenditures, the likelihood is that some other programs that could have been more robustly financed will suffer. Unfortunately, given the pliant nature of the Philippine Legislature, there seems to be little to stop that from happening now.

    ben.kritz@manilatimes.net

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    4 Comments

    1. Itong administration ni Thief Executive ang kalaban ni Webster. Pati definition ng savings eh pinapapalitan. Ung association ng Accountants sa Pinas dapat magalsa kasi itong si noynoy at Coloma eh binabago ang accounting principles at terms. Papayag ka kayo na gaguhin ng mga ito ang pinagsunugan nyo ng kilay sa pagaaral?

    2. Good article. We must remove the lump sum allocations from the budget. Unfortunately I agree that our bought Congress will just ok what the briber has submitted. But, do not give up hope. Keep on informing and keep on pushing to rid ourselves of this source of corruption.

    3. While at it, let’s task his AIM buddies and see if they agree with Coloma’s “best management practice.”

    4. Ex-Ambivalent on

      By inertia or design, budget practice seems little changed from the past. Stripped of its rationalizations, Coloma’s statement becomes the short-but-true, “It is customary that a certain portion of the annual budget is set aside.”

      This is an old practice that is as obsolete as wang-wang and “brought to you thru the efforts of.” If we are on a daang matuwid, this budget practice is a familiar but rotten tree that has finally fallen across the highway. To continue on the road (matuwid-ly), we have to remove it.

      To be fair, line agencies may not all be accustomed to performing costing as you have described. What they are accustomed to, over several administrations, is a DBM closely managing the release of funds, accelerating, decelerating, impounding, supplementing. Real power.

      And while “special purpose funds” are surely not new, what is disappointing is their perpetuation. The distinction of “special” from regular seems to be that these are open to an greater degree of discretion in the same sense that “special assistants” are less accountable than department secretaries. But to the tune of 1/5 of the budget and, by my estimate, P8,000 per working age Filipino?

      In management-speak, you could say it is just a process weakness able to be overcome by good intentions, but this one is scaled up to P501 billion, or enough to buy San Miguel.

      Twice a year.

      And so even ignoring that it is public money, that grand scale is a good enough reason why the DBM and the administration should hold themselves to a higher standard than any mere corporation.