Public Revenue Management 6

Public financial management
Chapter 6
Public Revenue Managemen
t
Chapter contents
Defining revenue
Determining revenue needs
Revenue forecasting process
Forecasting methods
Treasury Management
PFM Reforms
1 Public financial management Sunday, September 6, 2020
2.1 Defining revenues
 Revenues are inflows or receipts from a
ll
internal and external sources.
 Do not include refunds, proceeds from
debt
issuance and disposal of assets.
 can be generated from
 delivery of services for which mon
ey is due
 delivery of tangible goods to purch
asers
from whom payment is expected
 sources for which no commensurate
benefit
is expected. tax
2.1 Defining revenues
Sources
 Taxes
 Income, consumption, and property
 Non tax revenues
 License and permits
 Intergovernmental revenue
 Charges for services
 Fines and forfeits
 Miscellaneous revenue
2.2 Determining revenue needs
 revenue requirement estimates are ba
sed
on expected or proposed expenditure
plan
revenue forecast should be made well
ahead of budget approval to permit
evaluation of its adequacy
2.2 Determining revenue needs
 the following factors should be taken int
o
account:
 Inflation rate factor

 Political philosophy of the policy make

r
 Community growth and development
 Expanded and new programs
 Population characteristics and trends
 Nature and components of the tax base
 stability of revenue over the business
cycle
 tax efforts
2.3 Revenue forecasting process
Types of forecasts(based on length of cove
rage)
 Long-term forecasts-include a wider range
of
internal and external macro-problems that
must be
examined. Factors such as population, age,
income
structure, and employment and their impac
t on
governments tax capacity are assessed
 Medium-term forecast-used to tackle
problems
such as expected budget gaps or revenue sh
ortfalls
before they become a crisis.
 Short-term forecast-relate to formulation of
annual budget.
2.3 Revenue forecasting process
Preliminary guide to revenue forecasti
ng
Fees and charges should be evaluat
ed to
assess the extent to which they cover
costs
of services they intend to provide
policy should be developed to limit o
ne-time
revenue
identify major unpredictable revenu
e sources
adopt a clear policy on revenue dive
rsification
2.3. Revenue forecasting process
Preliminary guide to revenue forecasti
ng
monitor the periodic analysis of maj
or
revenue sources
understand and evaluate revenue sou
rces’
rate and base and impact of potenti
al changes
periodically examine tax and fees ex
emptions
prepare revenue manual on revenue
sources
that indicate factors affecting them
2.3. Revenue forecasting process
Step 1
Step 7 Compare forec
Update forecasting ast
model with actual
Step 6
Select base year
Step 2
Step 5
Assess revenue
Select bes
t growth trend
forecasting
method
Step 3
Articulate critical
assumptions
Step 4
Evaluate validity
of assumptions
9 Public financial manageme Sunday, September 6, 2020
nt
2.4 Forecasting methods
Methods
1. Qualitative techniques
 Expert opinion/jury of executive
 Naiive Forecasting
 Delphi method
2. Quantitative methods
Time series projection methods
 Trend analysis
 Moving average method
10 Public financial managemenSunday, September 6, 2020
t
1. Qualitative techniques
 relies on the judgment of experts to tran
slate
qualitative information into quantitative
estimates
(a) Expert opinion/jury of executive
involves pooling of views of group of e
xperts on
expected future revenue and combining t
hem into
a revenue estimate
nt
(a) Expert opinion/jury of executive
Allows the pooling of expertise knowledge in t
he
forecasting process, but accuracy of forecast de
pends on the
care and experience of the people providing th
e inputs
b) Naïve Forecasting: The revenue of the most re
cent
prior year is expected to be realized next period
c)Delphi method
- Involves converting the views of a group of ex
perts, who do
not interact face-to-face, into a forecast through
an
iterative process.
- Is used for eliciting the opinions of a group of
experts with
the help of a mail survey.
nt
(b) Delphi method
STEPS
1. questionnaire sent by mail to a group of
experts
2. response received are summarized witho
ut
disclosing the identity of the experts, an
d sent
back to the experts- reasons for extreme
views expressed in the first round.
3. process may be continued till a reason
able
agreement emerges in the view of the ex
perts.
nt
2. Quantitative methods
2.1 Time series projection methods
(a)Trend Analysis
The analyst calculates the rate of change
for one
time period to the next or an average
rate of
change. This rate will then be applie
d to the
most recent revenue yield to compute
the
revenue for the next year
t
a)Trend Analysis
Change (Δ) = P2-P1
P1 where P1 the base
period, and
P2 the following period
Average rate of change =Σ(Pn-P1/P1)
n , where
P1 the
base period, Pn indicates each following peri
od, and ‘n’
total periods in the data set
Forecast may be done at the lowest growth ra
te, highest
growth rate or at the average growth rate
nt
E.g. Consider the following data for of six fiscal years of a city governme
nt (in
Eth Birr).The city uses trend analysis for its annual revenue forecasting k
eeping
year Revenue (Actual) (millions)
1999 85800
2000 86800
2001 88800
2002 90300
2003 95500
2004 97600
year 1999 as the base year.Two forecasted revenue levels, the lowest and
average levels are used for the purpose
Required: Forecast the revenue of years 2005, 2006, and 2007 using the two
levels of growth rate(lowest and highest)(Round to nearest hundred)
Public financial managemenSunday, September 6, 2020
16 t
Yr Revenue Growth rate Forecast Forecast

(millions Birr) (at.011) (at.057)
1999 85800 -------
2000 86800 .011
2001 88800 .023
2002 90300 .016
2003 95500 .057

2004 97600 .021
2005 98700 103200
2006 99800 109100
2007 100900 115300
Public financial managemenSunday, September 6, 2020
17 t
Solution
Trend Analysis
Sol:Yr 2000 growth rate= 86800-
85800/85800
Forecasts
Yr 2005 at lowest growth rate
97600+(.011x97600)
Yr 2005 at highest growth rate
97600+(.057x97600)
t
(b) Moving average method
the forecast for the next period
represents a simple arithmetic avera
ge or
a weighted arithmetic average of th
e last
periods
t
b)Moving Average Method
This allows the number of past period
s
to be added. For a 3 yr Moving Avera
ge,
the collections of three years (20000,
25000, 30000) will be added and the
total will be divided by 3
When the next yr’s figure is
available(45000), add the recent 3
amounts and divide it by 3
t
2.5 Treasury Management
Treasury implements various financia

l
decisions made by govt. Its focus is on
the
financial assets and liabilities. Treasury a
lso
has an important role in risk reduction
and
mitigation.
 Treasury advises on and executes the
various strategic decisions of the govt.
This
responsibility includes obtaining and
managing
financing and the effective control of f
unds
once financing is obtained.
t
2.5 Treasury Management
Treasury Functions
Treasury encompasses the major
functions of cash & liquidity mgt and
financial risk mgt.
Within these two broad categories
there are several functions such as;
Cash Mgt, Mgt of govt bank accoun
ts,
Debt Mgt, Risk Mgt, ……….
t
2.5Treasury Management
…., Administration of Foreign Grants and Aid, an
d
Financial Assets mgt.
1.Cash Mgt
This includes,
a)Accurately forecasting timing and amount of ca
sh
flows
b)Control of cash flows
c)Centralizing cash balances in Treasury Single
Accounts
d)Arranging funding to cover temporary and long
er
term cash short falls
t
2.Liquidity Mgt: This function includ
es:
Providing the ability to take advantage
of
opportunities as they arise, for timely
investments, or new acquisitions
Funding for future projects and acquisit
ions
Serving as a financial buffer against an
unexpected decline in revenues
Meeting the need for collateral against
borrowing or debt issuance
Funding cash- intensive activities, such
as
research and development
t
3.Risk Mgt: This function includes
Identification of key risks, including ris
ks
that arise from financial markets, extensi
on
of credit and the ability to obtain financin
g
Development of alternative risk mgt
strategies and their implementation
Development of infra structure to
monitor risks and report on compliance
with policies and performance reporting
t
4. Treasury aspects of Aid Mgt:
Foreign grants must be budgeted whether t
hey
are given as grant or in kind.
Minimum requirements for good mgt of gran
ts :
a) Expenditure financed with grants must be
submitted to the same scrutiny and prioritizati
on
as other expenditures
Transactions relating to grants must be
accounted for and data collected and recorded
at
the central level
t
5.Debt Mgt: General Issues:
- only one government authority should
be
authorized to borrow.
-Regulations should provide for the
amount
of borrowing
- The objectives of the debt management
policy should be clearly stated and made pu
blic.
-Set borrowing objectives in conformity
with fiscal targets.
t
6)Mgt of Govt bank accounts:
a)Treasury must be responsible for
supervising all central government bank
accounts, including any extra-budgetary
funds.
b)When commercial banks are involved
in
revenue collection or expenditure
payments, the banking arrangements mu
st
be negotiated and contracted by the
Treasury.
t
7.Mgt of Govt Financial Assets: Government
financial assets consist of shares in enterprises,
loans granted by the government, payments of
guarantees not honored by debtors, etc.
a)Keep records of all such assets and authorize
disbursements and track payments.
b)Get financial information on enterprises in w
hich
the government has shares, monitor the dividen
d
payments, and deal with the financial aspects of
privatization.
t
Public financial management 30
End of Chapter 2

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Public Revenue Management 6

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Public financial management

 Political philosophy of the policy make

Yr Revenue Growth rate Forecast Forecast

2002 90300 .016

2003 95500 .057

Treasury implements various financia

End of Chapter 2

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