Alignment Model for the Infrastructure Delivery Cycle and the Budget Cycle

Alignment Model for the Infrastructure Delivery Cycle and The Budget Cycle

Alignment Model for

The Infrastructure Delivery Cycle

and

The Budget Cycle

June 2006

Note:This document has been prepared from a presentation which has been prepared by the programme management team responsible for the implementation of the Infrastructure Delivery Improvement Programme (IDIP). Slides from the presentation as well as the explanatory text for each slide have been copied and pasted into this document. The presentation makes use of slide animation to enhance the explanation of the concepts detailed in each slide and therefore it is recommended that the corresponding presentation be viewed whilst reading this document.

Introduction

In his State of the Nation addresses over the past 2 years President Thabo Mbeki made the following statements:

“Certainly it is a reflection of weaknesses in the governance system that the plans to build school infrastructure are unfolding at a much slower pace than envisaged.”
“We need massively to improve the management, organisational, technical and other capacities of government so that it meets its objectives.”
- State of the Nation Address 2005

“We cannot allow that government departments become an obstacle to the achievement of the goal of a better life for all because of insufficient attention to the critical issue of effective and speedy delivery of services.”
“Integration of planning and implementation across the government spheres is therefore one of the prime areas of focus in our programme…”
- State of the Nation Address 2006

The Infrastructure Delivery Improvement Programme (IDIP)

The IDIP has been mandated by Cabinet to address deficiencies in the delivery of infrastructure. The ultimate goal of the Infrastructure Delivery Improvement Programme is to contribute to the Accelerated Shared Growth Initiative in South Africa (ASGISA) by improving the effectiveness & efficiency of the delivery of public sector infrastructure through institutionalising best practice tools and building capacity.

Problem Statement

The following problems pertaining to infrastructure delivery have been identified:

Continuing under expenditure of infrastructure budgets.
Inappropriate expenditure patterns characterized by the 4th Quarter expenditure spike.
Currently there appears to be very little alignment between the Infrastructure Delivery Cycle and either the Budget Cycle or the Strategic Planning Cycle.
Currently the budget for large multi-year projects is committed to 1 financial year instead apportioning the budget across the MTEF.

The proposed solutions to these problems are detailed in this Alignment Model for aligning the Infrastructure Delivery Cycle with the Budget Cycle. The adoption and implementation of the recommendations made in this model will contribute greatly to improved delivery of education infrastructure.

Overview of the topics covered in this Model

The following topics are explained in order to explain the root causes of the problems and to explore the solutions to these problems.

An overview of The Strategic Planning Cycle;
An overview of The Budget Cycle;
An overview of The current Infrastructure Delivery Cycle;
The proposed improvements to the Infrastructure Delivery Cycle;
The corresponding alignment and interdependence between these 3 cycles;
An overview of the Infrastructure Plan, Infrastructure Programme Management Plan (IPMP), & Infrastructure Programme Implementation Plan (IPIP);
Budget allocation for Infrastructure Delivery Programmes;
Managing cashflows across years to ensure 100% effective expenditure; and
The benefits & challenges associated with the proposals put forward by this model.

Alignment Model for aligning the Infrastructure Delivery Cycle with the Budget Cycle

Herewith follows the Alignment Model for aligning the Infrastructure Delivery Cycle with the Budget Cycle.

An overview of The Strategic Planning Cycle (Slide 7 of the presentation)

The 5 year Strategic Plan is linked to the 5 year electoral cycle. In each year within the period covered by the Strategic Plan a Budget as well as an Annual Performance Plan is prepared. These should both be linked back to the 5 year Strategic Plan and should show how the targets and priorities set out in the 5 year Strategic Plan are going to be addressed. A budget and an Annual Performance Plan should also be prepared for the 2nd & 3rd years of the Medium Term Expenditure Framework (MTEF).

The next slide will drill down into one of the MTEF periods.

Slide 7 of the presentation

The Budget Cycle (Slides 8, 9 & 10 of the presentation)

The Budget Cycle is a 3 year cycle consisting of planning processes, implementation processes & closure processes being undertaken in each year. As mentioned earlier the budget should show how the targets and priorities set out in the 5 year Strategic Plan are going to be addressed.

In many cases budgets are not informed by the strategic plan and actual projects.

Slide 8 of the presentation

By virtue of the fact that the budget cycle spans a period of 3 years it is clear that in any 1 year an official will concurrently be dealing with different activities of 3 budget cycles, viz:

1.Closure activities for the previous years implementation;

2.Implementation activities for the current years implementation; and

3.Planning activities for next years implementation.

Slide 9 of the presentation

The following information is used as input to prepare the budget:

Draft Budget due 31 August

1st Quarter Report from this year due mid July

Updated Budget due mid December

2nd Quarter Report from this year due mid October

Final Budget due 17 February

Budget Allocation Letter
3rd Quarter Report from this year due mid January

Slide 10 of the presentation

What has become clear is that departmental budgets are prepared on the basis of the historical budget information listed above and that actual project information is not used to inform these budgets. It is therefore critical that a means be found to ensure that the budgets prepared by departments are informed by actual projects. This alignment will be explored in a later slide

The Linkage of the Infrastructure Plan to the Strategic Planning Cycle(Slide 11 of the presentation)

Each year the Infrastructure Plan should be re-prioritised on the basis of the:

Targets and priorities set out in the Strategic Plan & Annual Performance Plan
The anticipated MTEF Budget, and
The progress of the current projects being implemented.

Slide 11 of the presentation

The next slide will drill down into one of the MTEF periods and explore the Infrastructure Delivery Cycle in more detail.

The current Infrastructure Delivery Cycle (Slide 12 of the presentation)

The current Infrastructure Delivery Cycle currently covers the same timeframes as the Budget Cycle (i.e. 3 years). It also requires the various phases of planning, implementation and closure however, due to the nature and complexity of infrastructure planning as well as the number of role-players involved in the delivery of infrastructure, the planning, design and tendering phases of delivery are normally in excess of 1 year which means that there is less than 1 year remaining for implementation of the projects. This invariably leads to the projects not being completed resulting in unspent budgets being rolled-over into the next year. This is very often exacerbated by the lack of clarity between client departments and their implementing agents of what precisely needs to be delivered, where, by whom, when, and at what cost.

The current Infrastructure Delivery Cycle is also a root cause of the problems relating to underexpenditure and resultant rollovers of infrastructure budgets. This is due to insufficient time being allotted for design and tendering to take place from the time that the approved projects list is given to the implementing agent and before implementation starts. The result is that the 1st half of the year in which implementation is required to be undertaken is spent tendering for the contractor making it virtually impossible to spend any money during this period. This is also the root cause of the 4th quarter expenditure spike. When one looks at the curreny Infrastructure Delivery Cycle it is evident that year after year budgets are not spent and are rolled over to the next year.

Slide 12 of the presentation

President Thabo Mbeki, in his State of the Nation Address indicated that, “Better supervision of infrastructure projects undertaken by government will be introduced, to ensure that capital budgets are spent without roll-overs”

Good supervision of properly planned projects can and will alleviate delays in implementation which lead to roll-overs, however the reasons for roll-overs has been identified as poor planning and inappropriate budgeting of infrastructure projects and no amount of supervision will alleviate roll-overs ascribed to projects which have been badly planned and budgeted for.

Proposed changes to the Infrastructure Delivery Cycle (Slides 13, 14 & 15 of the presentation)

As already mentioned the problems being encountered in the current Infrastructure Delivery Cycle often stem from a lack of clarity between client departments and their implementing agents of what precisely needs to be delivered, when, and at what cost. In order to solve this stalemate it is proposed that the handover of projects from the client department to the implementing agent be improved by means of a formal process in which all parties agree to exactly what needs to be done, where, by whom, when, and at what cost. To facilitate the process of agreement between parties two additional plans have been put in place:

•The Infrastructure Programme Management Plan (IPMP); and

•The Infrastructure Programme Implementation Plan (IPIP).

Slide 13 of the presentation

The client department first enters into a Service Delivery Agreement (SDA) with its implementing agents based on an agreement of the functions to be performed by each party. Immediately after the Infrastructure Plan has been updated the client department prepares or updates an Infrastructure Programme Management Plan (IPMP) on the basis of the updated Infrastructure Plan as well as the updated Annual Performance Plan (APP). The IPMP stipulates exactly WHAT the client department intends to achieve in the next 3 years of implementation with a very detailed plan (accompanied by a list of projects) to be designed & tendered during the next year. The IPMP must also state WHERE the projects are to be located. The implementing agent responds to the IPMP with its own Infrastructure Programme Implementation Plan (IPIP) which validates the implementing agents understanding of WHAT needs to be done and explicitly indicates HOW this will be achieved, WHENBY WHOM. The IPIP is submitted to the client department who review and approve it before giving the implementing agent approval to proceed with the work contained in the IPIP.

Slide 14 of the presentation

Once the client department has approved the IPIP submitted by the implementing agent the implementing agent is able to continue with detailed project designs, followed by the project tendering process. These phases should take up most of the following year resulting in very detailed business plans with associated realistic costing, timeframes and cashflows for each project. From these business plans and cashflows it can be established exactly how long each project should take and, if a project is to span a financial year, what portion of the project will be completed within each financial year. Therefore project implementation for projects planned in Year 0 of the MTEF would typically start in year 2 of the MTEF as opposed to Year 1. However, the detailed planning and design now undertaken would assist in establishing exactly what multi-year commitments are required to be made to complete the projects that would span financial years. Multi-year commitments must be funded from the year in which they are to be implemented and should not be funded from rolled over funds.

Slide 15 of the presentation

Best Practice Project Budgeting (Slide 16 of the presentation)

As discussed earlier it would appear that, in many cases, the budget for large multi-year projects is committed to the year in which the project is scheduled to start even though it is clear that the budget will not be spent during that year. This results in the funds being rolled over in order to complete the project implementation in the next year. Clearly this is not good practice as far as budgeting is concerned.

It is clear that if proper planning and design has been done this should result in very detailed business plans with associated realistic cost estimates, timeframes and cashflows for each project. From these business plans and cashflows it can be established exactly how long each project should take and, if a project is to span a financial year, what portion of the project will be completed within each financial year and therefore exactly what portion of the overall project budget should be committed from each year.

Slide 16 of the presentation

Concurrent infrastructure delivery activities that need to be undertaken in any 1 year (Slides 17 & 18 of the presentation)

By virtue of the fact that the Infrastructure Delivery Cycle spans a period of 4 years it is clear that in any 1 year an official will concurrently be dealing with different activities of 4 Infrastructure Delivery Cycles, viz:

1.Completing the implementation of planned multi-year projects whose implementation started the previous year;

2.Starting the implementation of new projects which were designed & tendered in the previous year;

3.Starting the design of new projects which have been identified in the Infrastructure Programme Management Plan (IPMP);

4.Updating the Infrastructure Plan and preparing the Infrastructure Programme Management Plan (IPMP) & Infrastructure Programme Implementation Plan (IPIP)

The question arises; “Do departments have the required capacity to effectively manage all these concurrent infrastructure delivery activities?”

Slide 17 of the presentation

Considering both the Budget Cycle activities as well as the Infrastructure Delivery Cycle activities that need to be undertaken concurrently in any 1 year by a department leads to the question, “Do departments currently have the capacity to effectively deliver on this mandate?”

Slide 18 of the presentation

The alignment and interdependence between the Budget Cycle and the Infrastructure Delivery Cycle (Slide 19 of the presentation)

The linkages and interdependence between the Budget Cycle and the Infrastructure Delivery Cycle can be appreciated by considering a cycle with a common year of implementation:

As described earlier the inputs to the Budget process are the Annual Financial Statements (AFS) from last year as well as the Quarterly Reports from this years implementation.

It is clear that the proposed Infrastructure Delivery Cycle is a longer cycle than the Budget Cycle (4 years versus 3 years) due to the increased lead time required for infrastructure planning, reaching agreements between client department and implementing agents, as well as detailed project designs. Therefore it is clear that the infrastructure planning process leads the budget planning process by 1 year.

This lead adds immense value to the budget planning process because infrastructure planning and project design can now also become inputs into the budget planning process and therefore the budget planning process is strengthened with the inclusion of actual projects. This clearly indicates a dependence of the Budget Cycle on the Infrastructure Delivery Cycle.

The Draft APP in turn becomes an input into the current year’s infrastructure planning process thereby creating the dependence of the Infrastructure Delivery Cycle on the Budget Cycle.

Project tendering & project implementation then feed into the implementation of the budget, quarterly reporting as well as the preparation of the Annual Financial Statements(AFS) further strengthening the linkages between the cycles.

Slide 19 of the presentation

The Infrastructure Plan (Slide 20 of the presentation)

As discussed earlier, the Infrastructure Plan sets out the infrastructure priorities for the next 10 years and should be re-prioritised annually on the basis of the:

•Targets and priorities set out in the Strategic Plan & Annual Performance Plan

• The anticipated MTEF Budget, and

• The progress of the current projects being implemented.

Slide 20 of the presentation

The Infrastructure Programme Management Plan (IPMP) (Slide 21 of the presentation)

Immediately after the Infrastructure Plan has been updated the client department prepares or updates an Infrastructure Programme Management Plan (IPMP) on the basis of the updated Infrastructure Plan as well as the updated Annual Performance Plan (APP). The IPMP stipulates exactly WHAT the client department intends to achieve in the next 3 years of implementation with a very detailed plan for Year 1. The IPMP should be accompanied by a list of projects to be designed & tendered during the next year clearly stating WHERE the projects are to be located. The plans for Years 2 & 3 can be less detailed than the plan for Year 1.

The implementing agent responds to the IPMP with its own Infrastructure Programme Implementation Plan (IPIP) which validates the implementing agents understanding of WHAT needs to be done and explicitly indicates HOW this will be achieved, WHENBY WHOM. The IPIP is submitted to the client department who review and approve it before giving the implementing agent approval to proceed with the work contained in the IPIP.