Examining the Public Sector Industry Value Chain

• Tax Revenue

  This is the largest source of Government funding. Governments set a tax policy and taxpayers. Tax types include Income Tax, which is the tax that is paid on earnings, Value Added Tax (VAT) which is a tax imposed on finished goods and Customs Duties which include the duties that are imposed on goods and services that are "exported out of" or "imported into" a country. Additional forms of taxes may include a Skills Development Tax and Property Taxes.

• Revenues from Services

  This includes the money that is generated through the provision of services to citizens. As an example, Governments charge for the provision of utilities and these charges are paid to Governments by Citizens, which the Government recognizes as revenue. Additional sources of revenue can include stamp duties and fines and penalties.

• Fundraising

  Internal Funding: Governments collect money for Social Security (as an example) and rather than put this money into a bank account, the government allocates the money for expenditure and creates an IOU to Citizens for which the Social Security was collected.

  External Funding: Governments issue securities in the form of bonds to investors, the money that is exchanged for the security is also used for Government funding.

• Borrowing

  Governments can borrow money from institutions and promise to repay loans at a healthy interest rate. They typically borrow from institutions such as the International Monetary Fund and the World Bank.

• Printing

  Governments have the power to print money. Even though this form of funding allows for immediate cash flow in the short term, it is important to note that there is a strong economic impact in future years, as the relevant currency will be devalued over time as a result of inflation.

  

As a Government raises money within a given financial year, they initiate planning to spend the money to achieve defined outcomes in subsequent years – this is known as the budgeting process. The Government defines outcomes to be achieved in accordance with defined policies. Monies are then allocated to relevant Ministries or Departments who in turn use the money to fund specified programs and projects that are linked to the overall Government Outcomes.

• Mandatory Expenditure

  This includes monies that are spent for welfare and the well-being of people and the economy, for example, maintenance of Infrastructure. Government have no choice but to spend this money, or to become liable for future expenditures as a result of not allocating money to specific requirements. Another example would be the repayment of loans and the payment of the interest associated with loans.

• Discretionary Expenditure

  This is the money that is allocated to programs and projects that are aligned to defined Government outcomes and can be seen as investments that Governments make for future prosperity. Because the Government is allowed a certain degree of flexibility in defining agreed outcomes, expenditure in attainment of these outcomes can be seen to be discretionary. Another example of discretionary expenditure is when the Government spend money to address an immediate need, for example, during an unforeseen natural disaster, Government may spend money to aid recovery within impacted areas and communities.

  

Now that we've examined the key components of money flow within the public sector, including funding, budgeting, and expenditure, it's important to understand how these elements collectively influence the business value of public sector organizations.

Efficient management of these financial flows ensures that resources are used optimally, services are delivered effectively, and public trust is upheld. This, in turn, enhances the overall business value by fostering transparency, accountability, and sustainability.

In the next lesson, we will explore how these financial practices translate into tangible business value and how performance is measured in the public sector.

Measuring Value in the Public Sector is not straight forward, because:

• Government outcomes tend to be intangible, and therefore hard to meaningfully describe in concrete or quantifiable terms.
• Government outcomes change, often slowly, over the long-term, and so measurable change within traditional planning cycles may not be realistic.
• Government outcomes can be complex, affected by the interactions of several or many organizations, and so direct measures of success are not within the control of a single department or agency.

Yet, performance and value in the public sector is measured by quantifying the magnitude of outcomes achieve for money spent, this entails formulating a detailed understanding of the outcomes that Government aspires to achieve, as well as a detailed understanding of the money that was spent for the attainment of these outcomes.

Remember, Governments define their aspired outcomes as part of their budgetary planning process, and to measure these outcomes, Government define the associated metrics and KPIs that will be measured to assess the impact or magnitude of these outcomes.