6.4.1 Capital and recurrent costs
6.4.2 Staff and non-staff recurrent costs
6.4.3 Critical resources
6.4.4 Project modification
6.4.5 Relationships between inputs
6.4.6 Contingency allowance
6.4.7 Relevant exercises
Budget and manpower planning in Africa is complicated by the fact that information on the availability of resources is often completely lacking, not only when projects are being formulated, but also during their implementation. As a result, planning is fraught with uncertainty and implementation must be continually adjusted as circumstances change. The central problem of budget and manpower planning is how to deal with this uncertainty. Careful formulation and monitoring are thus important in minimising this uncertainty - which also arises from the absolute and relative limitations in the availability of financial and manpower resources.
A number of principles are important in this respect:
· Understand the relationship between capital and recurrent costs.· Understand the relationship between staff and non-staff recurrent costs.
· Clearly identify those resources critical for success and seek consensus to ensure that they will be made available.
· If resources will not be made available, modify the project accordingly.
· Understand the relationships between inputs.
· Include contingency allowances in budget projections.
Capital expenditure breeds future recurrent costs. When capital development is proceeding apace, planners and policy makers tend to forget that heavy recurrent costs will be incurred several years down the line. Capital funds are often (though not always) easier to acquire, for instance from donors, than are recurrent funds, which traditionally come from the Ministry of Finance. Typically, there is little analysis of the relationship between capital and recurrent costs, and recurrent funds tend to be committed more or less automatically in order to secure capital funding. As Chambers (1974) notes, "In planning activities, recurrent resources...have been relatively neglected, and there is a strong case for subjecting recurrent allocations and their use to more stringent appraisal, evaluation and management".
(Hint to instructors: Not all countries use their resources equally efficiently.. Another use of the ratio between capital and recurrent costs is to ask whether one's own country has the same ratio as others with similar conditions, and if not, why not. Get the participants to form pairs in order to look into this question, comparing their own country with a neighbour's.)
The same principles which apply to the ratio between capital and recurrent costs also apply to the ratio between staff and non-staff costs within the recurrent cost category. Staff costs breed non-staff
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Box 6.1: Recurrent costs and the planner. Let C be the capital cost of 1 unit (a dip) enabling a certain activity (dipping) and R the annual recurrent costs of operating that unit. Then, C/R is the ratio between them. Let I be the amount of investment funds available for building dips and O be the amount of funds available for operating them. The limit on the number of dips which can be successfully built and operated will be set by whichever is smaller, I/C or O/R. Project planners habitually ignore R and O and concentrate on C and I, assuming that O will increase to meet the needs generated by I. But the future size of O is limited by the following factors: · The rate of growth in the economy as a whole. · The relationship between the rate of economic growth and the rate of growth in the government's budget. · The priority government gives to the agricultural sector, as expressed by its share of the government's budget. · The priority given to the livestock subsector, as expressed by its share of the agricultural budget. Planners in the livestock subsector have to learn to live with these factors, which are not going to change simply because they spend too much I. However, the planner responsible for budgeting the dipping programme should think about, and perhaps seek to influence, the following: · The desirable proportion that dipping should represent of the ministry's total activities in the livestock subsector. · The C/R ratio of dips and dipping. Clearly, the planner must know what the C/R ratio is in order to allocate sufficient recurrent funds, thereby avoiding building dips that cannot subsequently be operated. But he or she may be able to do more than this. First, the project may need to be modified if the C/R ratio looks unrealistic. This might be done either by reducing the number of dips, by changing their design (e.g. making them sturdier), by delaying their construction or by replacing them with some other input. Second, the planner can investigate the feasibility of introducing users' charges, with the aim of reducing the amount of R needed from the government budget. For equity reasons, planners are often reluctant to charge for services. But if O is finite, then the issue is whether users (or some of them, at least) will be better off not paying for a service which is in very short supply, or paying for one which is plentiful. The planner can use the C/R, I/C and O/R ratios to check whether users should pay a capital subscription (because I is the limiting factor) or a users' fee. costs and the planner must know what the ratio between them is if resources are not to be wasted. Rising staff costs, coupled with a relative (and real) decline in funds available to meet other recurrent costs, has been a major cause of failure in animal health services of many countries in sub-Saharan Africa. As this trend continues, staff are unable to perform their functions effectively, as operational funds are steadily depleted. |
Resources critical to success need to be established at the outset of the planning process. They may consist either of staff or of physical inputs (or of both). In either case, given the competition for scarce resources in most developing countries, it is likely that those considered necessary for one project will also be in demand for several others. Under these circumstances, rather than plan in a vacuum, it is vital to seek consensus on which project(s) should take priority. This may require consultation with other ministries and institutes besides one's own. Critical inputs should not only be identified but, where necessary, their continued availability in the future should be ensured. This is particularly true of manpower needs in livestock services, requiring some highly specialised skills which take a long time to develop (e.g. veterinarians). Hence, there is the need to monitor changing staff ratios and to relate these to future manpower and training needs. The following steps are normally followed:
· Project/programme objectives are determined and critical manpower needs are established by category.· These needs are then related to the output of existing educational institutions for each category and for each period; transfers of staff from other sources are considered and negotiated.
· Allowances are made for wastage, caused by factors such as retirement, resignation, emigration, dismissal or death. (Wastage rates are frequently neglected in manpower planning, leading to the inefficient use of resources arising from unexpected manpower shortages.)
This procedure yields information on expected staff surpluses or deficits by category. A plan can then be devised to compensate for any anticipated shortages, giving careful consideration to the capacity of existing institutions to meet demands, the funds available for expanding them where necessary and the time that will elapse before additional manpower will come on to the market (e.g. trained veterinarians).
The approach taken to project design will determine the size, scope and nature of resource needs. If critical resources cannot be obtained for the project as currently designed, it will have to be modified. Modification will involve one or several of the following options:
· Reducing the size of the project, thereby scaling down the demand for scarce resources.· Redesigning the project by substituting scarce resources with others which are cheaper and/or more plentiful.
· Rescheduling project operations to allow more time for resources to become available.
There may be considerable scope for resource modification without altering basic project/programme objectives.
The relationships between inputs should be understood and specified. All, not just some, inputs may need to be available before a given new technology can work. For instance, a new printing press cannot function unless paper, plates and ink are also provided. Alternatively, certain inputs may be vital over one period but not needed over another. For instance, seed is required during the planting season but not thereafter; peak labour requirements will occur during planting, weeding and harvesting, but not during the dry season.
Techniques such as critical path analysis and bar chart planning have been used to establish resource-to-resource and resource-to-activity relationships more precisely and to improve the scheduling of operations. The former relies on a precision of control rarely achievable in livestock projects/programmes in Africa. However, the latter can be of use in:
· identifying and establishing resource linkages
· examining the assumptions regarding the availability of critical components
· examining potential conflicts in the scheduling of project activities
· monitoring capital and recurrent expenditures.
Figure 6.1 relates project activities to labour availability. Activities are first scheduled according to specified time periods, then the labour needed for each period is calculated. The labour requirement is then compared with the amount of labour available to determine the surplus or deficit for each period. Any necessary rescheduling or redefinition of activities can then be carried out.
Figure 6.1. Labour resource and activity relationships for a hypothetical project plan.
Provision should be made for unforeseen delays or shortages by including contingency allowances for all inputs in budget projections. Contingencies are of two kinds:
· Physical contingencies, which compensate for the under-estimation of infrastructural needs in the capital budget. It is normal to allow between 10 and 15% for such items. Where capital expenditures are tied to specific components (e.g. housing to staff) or where there is no uncertainty with respect to physical needs (e.g. construction of standard buildings to design specifications), physical contingencies should not be applied.· Price contingencies, which compensate for inflation of both capital and recurrent cost items. If necessary, variable inflation rates may be applied to different items in the budget.
Contingency allowances should not be so large as to cover all conceivable cost over-runs, since this will reduce the incentive for careful cost estimating, relax the pressure for tight control during implementation and lead to misleadingly low estimates of rates of return on the proposed project (Gittinger, 1973).
Contingency allowances are best shown separately in cost tables, with appropriate footnoted explanations on how they were arrived at.
Exercise 6.1: Budget and manpower planning.
Example. The exercise which follows is based on data from a rural development project document in an imaginary country. Eight areas, designated as Rural Development Zones, have been identified as suitable for intensive development. The project is intended to improve crop and livestock production through the provision of extension and marketing services, the construction of roads, input supply depots and stock water supplies, the development of small irrigation schemes and the rationalization of land use practices through resettlement. Rangeland areas are to be fenced and improved pastures will be introduced on a trial basis in selected areas. Veterinary services are to be increased and breed improvement schemes will be implemented.
The proposed capital development programme will be phased as follows:
|
Rural Development |
Year of commencement |
Year of completion |
|
A to E |
1 |
5 |
|
F to H |
2 |
5 |
Capital development and recurrent cost budgets are given for area A in Tables 6.1 and 6.2. Note that:
· Major recurrent and capital cost categories are broken down by item in sufficient detail to ensure that all important cost components are included. Where detailed itemisation is not needed, costs may be aggregated (as in the case of office running costs).· Financial budget projections have little meaning beyond a three- to five-year time horizon. The time period chosen will normally depend on the budgetary planning period adopted by the government and/or donor agency involved (e.g. triennial review period or a five-year national plan period).
· While the tables presented here only summarise the project's capital and recurrent costs, government and donor commitments will normally need to be clearly specified and separated out for negotiation purposes.
Table 6.1. Capital cost budget for Rural Development Zone A (years 1-5) (A$).
Table 6.2. Recurrent cost budget for Rural Development Zone A (years 1-5) (A$).
Exercise: (estimated time required: 4 hours).
Question 1. Tables 6.1 and 6.2 make no provision for physical or price contingencies. All costs are expressed in terms of constant prices. Complete the summary cost tables (Tables 6.3-6.5), given the following contingency allowances:· a physical contingency allowance of 10% for capital expenditures on land, livestock and irrigation development· A price contingency allowance of 10% per annum on all capital and recurrent cost items (compound interest tables may be used).
What proportion of the total 5-year budget is made up of contingency allowances? Note the impact of a 10% inflation rate on annual and total budgetary needs. Note as well the changing relationship between capital and recurrent costs in the budget, as portrayed in Figure 6.2. Assuming inflation continues at 10% a year until year 10, plot recurrent cost commitments to that date in Figure 6.2.
Question 2. Table 6.6 gives some illustrative examples of recurrent expenditure as a proportion of investment expenditure, also known as "r" coefficients, for some agricultural development projects.;· Assuming that no capital costs are incurred from year five onwards and that recurrent costs continue to year 10 at year 5 levels, calculate the "r" coefficient for Rural Development Zone
A using the total financial costs you calculated in Tables 6.3 and 6.4.· Suppose now that you did not take account of price contingencies in your calculations of capital and recurrent costs. Recalculate the "r" coefficient for Rural Development Zone A on this basis.
Compare this coefficient to the one you obtained previously and comment on the results.· The preceding calculations use total recurrent costs and include costs which do not necessarily recur in every year of the project. Identify and list some of these cost items from Table 6.2.
Question 3. Table 6.7 summarises programme needs for junior level extension agents. Staff for these categories can be obtained from the 2-year National Agricultural Certificate Course. Twenty junior level staff currently in the field are also available for immediate transfer to the new programme.
Table 6.3. Summary capital costs for Rural Development Zone A (years 1-5) (A$).
|
Item |
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
Grand total |
|
a) Construction |
46,200 |
33,500 |
12,000 |
12,000 |
|
103,700 |
|
b) Vehicles |
18,000 |
|
14,500 |
14,500 |
|
47,000 |
|
c) Land development |
58,155 |
55,655 |
53,155 |
43,155 |
41,280 |
251,400 |
|
d) Livestock development |
41,965 |
40,915 |
33,915 |
|
|
116,795 |
|
e) Irrigation development |
59,350 |
30,850 |
|
|
|
90,200 |
|
+ Physical contingency @ 10% on c) d) and e) |
|
|
|
|
|
|
|
Total capital cost (constant prices) |
|
|
|
|
|
|
|
+ Price contingency on items (a-e) |
|
|
|
|
|
|
|
Total financial cost |
|
|
|
|
|
|
Table 6.4. Summary recurrent costs for Rural Development Zone A (years 1-5) (A$).
|
Item |
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
Grand total |
|
a) Salaries |
77,570 |
78,770 |
78,770 |
77,570 |
63,850 |
376,530 |
|
b) Vehicle costs |
26,800 |
26,800 |
26,800 |
26,800 |
26,800 |
134,000 |
|
c) Tractor pool costs |
8,710 |
8,710 |
8,710 |
8,710 |
8,710 |
43,550 |
|
d) Other recurrent costs |
22,890 |
31,690 |
34,255 |
35,895 |
36,890 |
161,620 |
|
Total recurrent costs (constant prices) |
|
|
|
|
|
|
|
+ Price contingency @ 10% on items (a-d) |
|
|
|
|
|
|
|
Total financial cost |
|
|
|
|
|
|
Table 6.5. Summary capital and recurrent costs for Rural Development Zone A (years 1-5) (A$).
|
Item |
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
Grand total |
|
Capital costs |
|
|
|
|
|
|
|
Recurrent costs |
|
|
|
|
|
|
|
Total financial costs |
|
|
|
|
|
|
Figure 6.2. Capital and recurrent costs (Rural Development Zone A).
Complete the table, calculating the surpluses or deficits of junior staff available for the programme. Discuss what courses of action may be considered to ensure that adequate numbers are available during and after the implementation phase. Retirements, transfers and dismissals are expected to be 10% per year.
Assume now that 20% of certificate graduates are absorbed by the private sector and are not available for government employment. Recalculate the table. Comment on the sensitivity of the programme to changes in the availability of certificate graduates. Discuss possible courses of action open to the programme planning staff.
Table 6.6. Recurrent expenditure implications of projects (some examples).
|
|
"r" coefficient1 | |
|
Agricultural sector |
| |
|
|
Forestry |
0.04 |
|
|
Veterinary services |
0.07 |
|
|
Fisheries |
0.08 |
|
|
General agriculture |
0.10 |
|
|
Livestock |
0.14 |
|
Other examples |
| |
|
|
Agricultural colleges |
0.17 |
|
|
Rural health centres |
0.27-0.71 |
|
|
Feeder roads |
0.06-0.14 |
1 If a livestock development programme including water supply system, fencing, internal roads etc costs $ 1 million, we can estimate that it would cost an average of $ 140,000 in each subsequent year to meet salary, operating and maintenance costs.
Table 6.7. Junior staff requirements and availability in all zones.
|
|
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 | |
|
Transferred junior officers at start of year |
20 |
18 |
16 |
14 |
13 | |
|
Retirements, transfers and retrenchments |
2 |
2 |
2 |
1 |
1 | |
|
New junior staff required by programme: |
25 |
30 |
28 |
14 |
0 | |
|
|
Agricultural credit officer (ACO) |
2 |
1 |
1 |
- |
- |
|
|
Agricultural extension officer (AEO) |
10 |
25 |
25 |
14 |
- |
|
|
Agricultural livestock extension officer (ALEO) |
5 |
2 |
- |
- |
- |
|
|
Mechanisation assistant (MA) |
4 |
1 |
1 |
- |
- |
|
|
Grain storage officer (GSO) |
4 |
1 |
1 |
- |
- |
|
Total junior staff required |
45 |
48 |
44 |
28 |
13 | |
|
Total available certificate graduates |
20 |
20 |
20 |
20 |
20 | |
|
Balance available for programme (+,-) |
|
|
|
|
| |
Important points (6.2-6.4)
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· Seven major steps in budget and manpower planning for a project, programme or policy are: - identification · Knowledge of the principles of budget and manpower planning is critical at the formulation and monitoring stages. · Budget and manpower planning in Africa is characterised by uncertainties because of the lack of information on the availability of resources. · Four important considerations in budget and manpower planning are: - Understand relationships between recurrent and capital costs, and personnel costs and non-personnel costs. - Identify resources critical to project success and find out the possibility of project modification in case of non-availability of these resources. - Understand the relationship between inputs. - Include contingency measures for all project inputs. · Capital expenditure incurs future recurrent costs. Likewise, staff costs breed non-staff costs. · During formulation, it is important to identify which inputs are crucial for the success of the project and to negotiate to secure them. · When assessing the future availability of manpower, allow for wastage and for the time required to train replacements and additions. · If crucial resources will not be available, modify the project. · Think about phasing inputs. Bar charts can be a useful tool for scheduling operations. · As a safety measure, include contingency allowances in budget projections. Contingency measures are of two types: - physical contingencies |
