THE IMPACT OF CAPITAL BUDGETING ON THE PERFORMANCE OF GOVERNMENT CORPORATION (A CASE STUDY OF NNPC PORT HARCOURT, RIVERS STATE)

CHAPTER ONE

INTRODUCTION

1. BACKGROUND OF THE STUDY

The federal government of Nigeria (FGN) since her independence in 1960 has adopted as many as six different fiscal budgeting models. These budget systems include; Line – Item budgeting system, Incremental Budgeting Programming, Performance-Based Budget System (PPBS), Zero-Based Budgeting System, Rolling Plan Budgeting System and the Performance Based budgeting System Central Bank of Nigeria (CBN), (2010). One of the most serious dangers in capital budgeting in the public sector is the potential loss of accountability. The reason accountability is lost is that the existence of two separate accounts one for current expenditures and one for capital obscures the critical `bottom line’ for the public on which overall affordability is judged. Notwithstanding the seeming virtues of capital budgets, opinions continue to be divided, as they have been during the past seven decades, about their utility in governments. In the present context, in which some more advanced countries have budgetary surpluses and use them to reduce levels of public debt, there is little incentive to revive the debate about the need for capital budgets. In the developing world, however, where many governments operate on the edge of financial instability, the debate about capital budgets and their equivalents continues. A key challenge in government budgeting is to define an appropriate balance between current and capital expenditures. Budgeting for government investment also remains not well integrated into the formal budget preparation process in many countries. Experience shows that in the absence of properly organized capital budgets, governments resort to borrowing without due consideration of the sustainability aspects, assets are inadequately maintained, and major projects suffer from overall poor management and performance. The current public budgeting regime – the Performance-based Budgeting (PBS) is intertwined with the Medium Term Expenditure Framework (METF). In recent times, the Federal Government embarked on various reforms and modernization programs to strengthen the budget institutions and capacity of its budgeting and public financial management systems. Nevertheless, the country is yet to catch-up with the latest developments and current best practices in public budgeting, financial planning and fiscal management. These defects and relative lack of efficiency in budget practices affects or impact negatively on the quality of the Nigerian public financial management, and also public services in the economy. Public analysts and commentators on Nigeria’s fiscal matters have contended that the Nigerian governments at all levels have not yet institutionalized suitable performance management control mechanism to facilitate effective measurement of budget / financial performance in the federal public service. The omission of budget performance reporting, which is a vital aspect of budgetary and organizational controls in Nigeria have constituted the main reason for inherent inefficiencies and not-too reliable financial accountability in the Nigerian public sector. A formal minister, Dr Okonjo-Iweala corroborated this fact, stating that the FGN budget was not good enough for development. Several media reports have consistently alerted the public concerning missing public funds in Nigeria such as that of the Nigerian National Petroleum Corporation (NNPC) short remittances crude oil export sales. Most of these adverse reports have led to the commissioning of special audit and forensic investigations such as the investigation carried out by PWC [2015].

1.2 STATEMENT OF PROBLEM

Government prepares budget in form of public policy to serve as a driving force through which are mission could be achieved. As good as our budget is, the performance of which can be measured in terms of accomplishment is nothing to write home about, (Olurankinse, 2012). It is arguable whether these poor results could have been prevented by the establishment of capital budgets. Moreover, for countries that continue to depend on debt finance as a major instrument of budgetary resources, the issue arises whether capital budgets promote an improved process of decision making and an overall management culture that permits continuing attention to the government’s net worth. For both these reasons, it is important to revisit the debate about capital budgets. More specifically, it is important to consider whether capital budgets provide an improved framework for allocating, using, and accounting for resources. Budget accomplishment is far from reality and the disparity between budget and accomplishment are so wide and kept on abating as years pass by. It is based on the above premise that the study sought to examine the impact of capital budgeting on the performance of Government Corporations.

1.3 AIMS OF THE STUDY

The major purpose of this study is to examine the impact of capital budgeting on the performance of Government Corporation. Other general objectives of the study are:

1. To examine the expenditure and revenue of government corporations.
2. To examine the capital budgeting techniques used in Government corporations.
3. To examine the impact of capital budgeting on the performance of Government Corporations.
4. To examine the level of performance of government corporations.
5. To examine the relationship between capital budgeting and performance of government corporations.
6. To examine the factors hindering proper budgeting in Government Corporations.
   1. RESEARCH QUESTIONS
7. What is the expenditure and revenue of government corporations?
8. What are the capital budgeting techniques used in Government corporations?
9. What is the impact of capital budgeting on the performance of Government Corporations?
10. What is the level of performance of government corporations?
11. What is the relationship between capital budgeting and performance of government corporations?
12. What are the factors hindering proper budgeting in Government Corporations?

1.5 RESEARCH HYPOTHESES

Hypothesis 1

H₀: There is no significant impact of capital budgeting on the performance of Government Corporations

H₁: There is a significant impact of capital budgeting on the performance of Government Corporations

Hypothesis 2

H₁: There is no significant relationship between capital budgeting and the performance of Government Corporations

H₁: There is a significant relationship between capital budgeting and the performance of Government Corporations.

1.6 SIGNIFICANCE OF THE STUDY

This study will provide useful information for researchers regarding capital budgeting techniques, process, benefits and its impact on the performance of government corporations. Other than that, the researchers can also use the study as their basis for further research. This study will provide useful information for researchers regarding capital budgeting techniques and its impact on the performance of government corporations. Other than that, the researchers can also use the study as their basis for further research. The study will be important to academicians who may wish to carry out further research in capital budgeting and performance of government corporations as this will add more to the existing body of knowledge.

1.7    SCOPE OF THE STUDY 

The study is based on the impact of capital budgeting on the performance of Government Corporation, NNPC, Rivers state.

1.8 LIMITATION OF STUDY

Financial constraint– Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint– The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8 DEFINITION OF TERMS

Capital Budgeting: Capital budgeting, and investment appraisal, is the planning process used to determine whether an organization’s long term investments such as new machinery, replacement of machinery, new plants, new products, and research development projects are worth the funding of cash through the firm’s capitalization structure.

Performance: The accomplishment of a given task measured against preset known standards of accuracy, completeness, cost, and speed. In a contract, performance is deemed to be the fulfilment of an obligation, in a manner that releases the performer from all liabilities under the contract

Government Corporations: A large organization created by a country’s government to carry out commercial activities.