Critical Evaluation of Budgeting System

Of

Punjab State Electricity Board

A major project report submitted in partial fulfilment of

MASTERS OF BUSINESS ADMINISTRATION

(2007-2009)

Under Guidance of: Submitted By:

Dr. A.S. Chawla Gagan Mittal

M.B.A 2nd Year

Roll No. 2640

SCHOOL OF MANAGEMENT STUDIES

P U N J A B I U N I V E R S I T Y P A T I A L A

ACKNOWLEDGEMENT

The satisfaction, which accompanies the successful completion of any task is

incomplete without the mention of the name of the person who made it possible, because

success may be the epitome of one’s hard work, perseverance and determination cant

be achieved without someone’s encouraging guidance and advice which serve as beacon

light and crown one’s efforts with success. I extend my earnest thanks and gratefulness to

my project guide, Dr. A.S. Chawla (Professor and Head, School of Management Studies,

Punjabi University, Patiala) who’s constant supervision, a new insight at every stage, and

above all a helpful attitude stood by me. The keen interest he evinced in my progress through

all stages of the project constantly motivated me to achieve perfection in all my endeavours. I

am thankful to his timely help, cooperation & ideas that helped me to complete the project to

the best of my ability and available time.

(Gagan Mittal)

Preface

Money is not sand that is just picked, it has a cost. For the public sector govt. has to

levy tax on people (both the rich and the poor) through the budget that is an important tool of

Financial Administration. A budget is used in reinforcing the fiscal policies. In fact the

Political, Economic and Social progress of a country depends upon the success of the budget,

which is based on viable principles. The need of budgeting is correspondingly becoming

more important because it is an effective tool of planning and controlling as it shows the

policies to be followed to attain desired goals and objectives.

As budgeting is the means of laying down in the monetary and quantitative terms

what exactly has to be done and how exactly it has to be done over a coming period and then

ensure that actual results do not diverge planned course.

Chapter - 1

Introduction

to the

Industry

Power Sector In India

Power sector in India has shown significant and sustained gaps for long. The poor

performance of State Electricity Boards, with increasing financial strain emanating from low

average tariffs and high cross subsidies to agriculture and household sectors have stifled the

growth of this sector. According to Tenth Plan approach paper, “The energy infrastructure

will be major constraint on any effort to achieve a significant acceleration on the growth of

GDP in Tenth Plan period … This will place heavy demands on the generation and

distribution of electric power. Furthermore, in globally competitive environment, the quality

of these services in terms of both price and reliability are as important as availability and it is

well-known that we face serious problems on both counts.” But fundamental issues—such as

frequent power cuts, both scheduled and unscheduled, erratic voltage and low or high supply

frequency have added to ‘power woes’ of the consumers. The Indian Power industry has

since independence faced the demand and supply gap. The said gap is still prevalent even

after government initiated the reform process in early nineties.

Organizational Setup of Power Sector in India

Power as a subject is in the concurrent list of constitution of India. It means that both

the Union and the State Governments can formulate policies and laws on the subject but the

responsibility of implementation rests with the states. Distribution of electricity in particular

comes in the domain of the states.

The Government’s Ministry of Power provides overall guidance to the sector through

the Central Electricity Authority. The recently established Central Electricity Regulatory

Commission is empowered to regulate the central power utilities in accordance with the

Electricity Regulatory Commission Act, 1998. The central power utilities include the

National Thermal Power Corporation (NTPC), the National Hydroelectric Power Corporation

(NHPC), and the Nuclear Power Corporation (NPC), which are engaged in generation, and

the Power Grid Corporation, which is engaged in interstate power transmission. The

Government also owns financing institutions devoted solely to power sector lending such as

the Power Finance Corporation Limited (PFCL) and the Rural Electrification Corporation.

Recently, the Government established the Power Trading Corporation (PTC), to be

responsible for power trading among states and between states and central power utilities. At

the State level we have SEBs and EDs responsible for their respective jurisdiction areas’

power generation, transmission and distribution.

At the state level, the state governments control the sector through 21 State Electricity

Boards (SEBs) and 14 Electricity Departments (EDs). These SEBs and EDs are responsible

for generation, transmission, and distribution, usually within their own states and territories.

The central power utilities own and operate 34% of the country’s total generation capacity,

while SEBs and EDs have 52.5% of the total. In addition, privately owned utilities, operating

in certain urban centers and responsible for power distribution within their franchised areas

and some independent power producers have a share of 13.5% of the generation.

The existence of huge demand supply gap clearly indicates the inefficiency of the

mammoth organizational setup of the Indian Power Sector. On critical analysis of the setup,

we found that the inefficiency is caused as most of them have overlapping functions. The

involvement of State Government in this sector has further complicated the issue; each state

has developed its own electricity policy and pricing based on its own interest rather than

thinking of country as a whole. The different pricing regimes and distribution policies of

state governments has further aggravated the power situation. The failure of the huge federal

structure and the changing global scenarios has forced Government to think of ways to revive

this fundamental infrastructure sector.

Power Supply Units India

Power is derived from various sources in India. These include thermal power,

hydropower or hydroelectricity, solar power, biogas energy, wind power etc. the distribution

of the power generated is undertaken by Rural Electrification Corporation for electricity

power supply to the rural areas, North Eastern Electric Power Corporation for electricity

supply to the North East India regions and the Power Grid Corporation of India Limited for

an all India supply of electrical power in India.

Thermal Power in India is mainly generated through coal, gas and oil. India coal

power forms a majority share of the source of power supply in India. The electric

power in India is generated at various thermal power stations in India. The power

generated at these thermal power plants is then distributed all over India through a

network of power grid at regional and national levels. The power ministry

organization responsible for the thermal power management in India is the NTPC.

Hydropower is India is one of the mega power generators in India. Various

hydropower projects and hydro power plants have been set up by the ministry of

power for generation of hydro power in India. Various dams and reservoirs are

constructed on major rivers and the kinetic energy of the flowing water is utilized to

generate hydroelectricity. The power generator here is the running water. The

hydroelectric power plants and the hydro power generation companies are managed

by the National Hydro Electric Power Corporation (NHPC).

Wind Power in India is available in plenty as India witnesses high intensity winds in

various regions due to the topographical diversity in India. Efforts have been made to

utilize this natural source of energy available free of cost for wind power generation.

Huge wind energy farms have been set up by the government for tapping the wind

energy by using gigantic windmills and them converting the kinetic energy of the

wind into electricity by the use of power converters. The wind power advantages start

with the very fact that a wind energy power plant does not require much infrastructure

input and the raw material i.e. wind itself is available free of cost.

Solar Power in India is being utilized to generate electricity on smaller scale by

setting up massive solar panels and capturing the solar power. Solar power India is

also being utilized by the power companies in India to generate solar energy for

domestic and small industrial uses.

Nuclear Power in India is generated at huge nuclear power plants and nuclear power

stations in India. A nuclear power plant generates the electricity using nuclear energy.

All the nuclear power plants in India are managed by the Nuclear Power Corp of

India Ltd (NPCL). The electricity from all India nuclear plants is distributed by the

NPCL as per the nuclear power project scheme.

Biogas Production in India is still in its infancy stage. Also the number of biogas

plants in India is still very low. India being the largest domestic cattle producer has

plenty of biogas fuel and thus utilization of the fuel for mass biogas production by

setting up more biogas plants in India would solve the power shortage problem to

some extent.

Power Companies in India

Many government as well as private organizations have taken up the task of power

generation in India. The major Indian power companies playing prime are:

Bhakra Beas Management Board

Enercon Systems India

Essar Group

GMR Group

Gujarat State Petroleum Corporation Ltd

Jindal Steel & Power Limited

Karnataka Power Transmission Corporation Limited (KPTCL)

Karnataka Renewable Energy Development Limited

Konarka

Magnum Power Generation Limited

Nippo Batteries

Reliance Energy Ltd.

Shri Shakti

Durgapur Projects Limited

Satluj Jal Vidyut Nigam Ltd.

United Power

Ventral Systems Pvt. Ltd.

Enron India Power Plant

Celetronix Power India

Caterpillar Power India

Alton Power India

Thorium Power India

GE Power Controls India

Green Power India

Reforms in the Power Sector in India

Reforms in the power sector in India were mainly brought through passing the

Electricity Act, 2003. It brought the following changes in the operations of the power sector

in India:

a) Generation of electricity is free from licensing

Impact : More industries will be encouraged to setup captive power plants. Also, the

time required for setting up a power plant—from the proposal to the completion stage

—will be shortened considerably.

b) Captive generation freely permitted, for both or a one-to-one basis, as small as

or a group captive basis

Impact: Captive Power Plants (CPPs) will be allowed to use power not only for

captive use but also to sell to other licensees. This will allow captive generators to sell

excess power at more remunerative prices than before, and thus raise the capacity

utilization to existing plants and also encourage new capacity addition.

c) Open access for captive use on payment of wheeling charges

Impact: This will allow open access to transmission lines, thus allowing them to

bypass the SEBs and sell power directly to the distribution and trading licensees.

d) Consumers would have a right for non-discriminatory open access to

transmission/distribution network subject to payment of surcharges to meet

current level of cross subsidy as well as the applicable wheeling charges.

Impact: With this freedom to buy and sell power, initially in the wholesale market

and eventually in the retail market, the end-user will benefit both in terms of choice of

supplier and reliability of supply.

e) Stand alone Generation/Distribution of Electricity for Rural areas Permitted

Impact: This will allow potential private entrants to enter the distribution business,

while putting pressure on incumbents to enhance performance and customer service

f) Mandatory purchase of power from renewable sources by the distribution

licensee

g) Single Buyer model is completely abolished

Impact: This will bring competition in the industry. Competition among players will

also enhance efficiency and led to better customer service standards.

Roadblock to Power Sector Development

Some of the factors responsible for present situation are as under:

Lack of focus and absence of a clear-cut policy (e.g. Government of India’s initial

attempt at promoting projects based on liquid fuel like naphtha which turned

nonviable, mega projects which could not take shape etc.)

Lack of exposure of Indian entrepreneurs to the Indian power sector, which limited

their perspective on developing and operating power projects.

Inexperience of SEBs in operating in the changed market environment and their poor

financial health, which limited their escrow capacity.

Weak financial condition of SEBs was the biggest roadblock for sector’s

development.

Chapter – 2

Introduction

to the

Organisation

Introduction to the Organization

The Punjab State Electricity Board (PSEB) is a statutory body formed on 1-2-1959

under the Electricity Supply Act.1948. Subsequently with the re-organization of the erstwhile

State of Punjab under the Punjab Re-organization Act 1966 the present form came into

existence w.e.f. 1st May, 1967.

Starting with the modest installed capacity of 62 MW, the PSEB has grown up by

leaps and bounds with generating capacity 6201 MW as on 31-3-2007. The Board's gross

generation during the year 2006-07 was 36412.055 Million Units.

PSEB operates its own Generation Power Plants and also gets power as its share from

Bhakhra Beas Management Board. Apart from own generation, PSEB also purchases power

from central utilities, private power producers, traders and through shared projects. With no

significant increase in installed power during FY’07, power purchased by PSEB, by and

large was same as in FY’06. However, share of power purchased to total power available for

sale has declined on account of higher self generation during the year. The amount of power

purchased is unlikely to decline in the near future with increasing demand

It also gets power as per allocation from the Central Sector Power Projects. The

PSEB also constructs and maintains its Transmission and Distribution system for providing

efficient services to the various categories of electricity consumers in the state.

Through the well established network of Transmission and Distribution System,

PSEB is proud of serving more than 62.31 lakhs consumers comprising of approximate 51.49

lakhs General, 1.09 lakhs Industrial and 9.7 lakhs Agricultural connections.

PSEB has one of the highest Plant Load Factor (PLF) in the country. The total power

generated in the state has increased by 15% owing to higher generation through hydel power

plants. The thermal power plants have been operating at an average PLF of 78% for the last

three years and the average availability of thermal and hydel plants over the last three years is

85% reflecting the consistent sound performance of overall generation capabilities of the

Board.

The consumption pattern of PSEB is skewed towards the industrial segment, in line

with the all India pattern of consumption. Sales to this segment constitute around 40% of the

total power sales of PSEB. However, demand from the agricultural sector is increasing over

the years because with declining water tables in the state, there is increased usage of pump

sets leading to an increase in agricultural consumption. Further, there is a growing trend shift

towards more modern and energy intensive pump sets.

Basic Objectives of Punjab State Electricity Board

The basic and specific objectives, for which the board was set up, are as under:

a) To arrange, in co-ordination with the Generating Company or Generating Companies,

if any, operating in the State, for the supply of the electricity that may be required

within the State and for the transmission and distribution of the same, in the most

efficient and economical manner with particular reference to those areas which are

not for the time being supplied or adequately supplied with electricity.

b) To supply electricity as soon as practicable to a licensee or other person requiring

such supply if the Board is competent under this Act to do so.

c) To exercise such control in relation to the generation, distribution and utilization of

electricity within the State as is provided for by or under this Act.

d) To collect data  on the demand for, and the use of, electricity and the formulate

perspective plans is co-ordination with the Generating Company or Generating

Companies, if any, operating in the State, for the generation, transmission and supply

of electricity within the State.

e) To prepare and carry out schemes for transmission, distribution and generally for

promoting the use of electricity within the State.

f) To operate the generating stations under its control in co-ordination with the

Generating Company or Generating Companies, if any, operating in the State and

with the Government or any other Board or agency having control over a power

system.

Functions of Punjab State Electricity Board

The functions of the Board are prescribed in Chapter-IV of the Electricity (Supply)

Act, 1948. Accordingly the Board is charged with the general duty of promoting the

coordinated development of generation, supply and distribution of electricity within the

state in most efficient and economical manner. In order to discharge this duty effectively,

the Board operates its own generating stations, maintains its transmission and distribution

network. It has full fledged Accounts & Audit Wing to ensure efficient Financial

Management on commercial lines and for proper accounting of its financial transactions. As

the demand for the power is such, that, increase at a rapid pace, the Board also under-takes

planning for the future by preparing schemes. It gets them all approved from appropriate

authority and executes them through its construction organization.

Financials Performance of PSEB

(Rs.crs)

For the year 2004 2005 2006 2007

Revenue from Net

Sale of Power 6,111.5 6,062.5 6,701.0 7030

Subsidies and grants 838.1 923.6 1,435.9 1424

Total income 7,121.2 7,167.6 8,336.2 8709

Total expenditure (direct) 5,150.8 6,349.2 6,842.2 8989

Interest 1,192.9 1,054.3 1,052.4 1357

Surplus/Deficit (after interest & dep.) 174.9 -3833.5* 12.9 -1626

Total Loan Funds 13,177.6 12,954 12,755 15479

Key Ratios

Return on Capital Employed (%) 8.6 1.7 7.7 2.3

Interest Coverage 0.63 1.24 0.24 0.95

Debt-Equity Ratio 6.5 5.6 - -

Total Gearing ratio 7.16 6.1 - -

Note: * Included written off RE subsidy of R s 3242 cr

Source: CARE Ratings

As it clear from the table given above that with the increase in demand of electricity

the sale of the power is also increasing but it is not increasing at a very rapid pace which is

understandable because the main aim of the board is not to increase the sale of power, but is

to motivate the people to save power because in a country like India there is a huge shortage

of power supply. The board gets subsidy from the state government for the free electricity

provided to agriculture sector and other priority sectors (Because the burden of the free

electricity is beard by the state government) so it also increases the net income of the board.

The total income of the board is increasing in the last few years but it should be noted that

the total expenditure that is directly identifiable with the sale of power is also increasing and

it is increasing more rapidly than the sale that’s why PSEB’s financial performance is on

lower side, in some years it is even in deficit. Total loan funds of PSEB have also increased

from the year 2006 to 2007 which is also increasing the interest burden. Return on capital has

decreased by more than 66% in the year 2007. So in all it can be said that It is clear from the

above figures that the financial performance of the PSEB is on the lower side, moreover not

is not consistent over a period of time which make the things worse, But Being a state run

organization and that too a non profit organization, this performance is understandable

especially in the Indian context.

Chapter – 3

Introduction

to

Budgeting

Budget

Budget generally refers to a list of all planned expenses and revenues. It is a plan for

saving and spending. A budget is a document that translates plans into money - money that

will need to be spent to get your planned activities done (expenditure) and money that will

need to be generated to cover the costs of getting the work done (income). It is an estimate,

or informed guess, about what you will need in monetary terms to do your work.

A budget is a plan that identifies the financial resources required to achieve

programmatic objectives. Once constructed, this plan assists staff and board in managing the

organization both programmatically and financially throughout the year.

A budget is not:

Written in stone – where necessary, a budget can be changed, so long as you take

steps to deal with the implications of the changes. So, for example, if you have

budgeted for ten new computers but discover that you really need a generator, you

could buy fewer computers and purchase the generator.

Simply a record of last year’s expenditure, with an extra 15% added on to cover

inflation. Every year is different. Organizations need to use the budgeting process to

explore what is really needed to implement their plans.

Just an administrative and financial requirement of donors. The budget should not be

prepared as part of a funding proposal and then taken out and dusted when it is time

to do a financial report for the donor. It is a living tool that must be consulted in day

to day work, checked monthly, monitored constantly and used creatively.

Two key questions you should be able to answer about budgeting are:

Why budget? And

Who should be involved in budgeting?

Why Budget? Need For Budget

Why is it important for an organisation, project or department to have a budget?

The budget is an essential management tool. Without a budget, you are like a pilot navigating

in the dark without instruments.

The budget tells you how much money you need to carry out your activities.

The budget forces you to be rigorous in thinking through the implications of your

activity planning. There are times when the realities of the budgeting process force

you to rethink your action plans.

Used properly, the budget tells you when you will need certain amounts of money to

carry out your activities.

The budget enables you to monitor your income and expenditure and identify any

problems.

The budget is a basis for financial accountability and transparency. When everyone

can see how much should have been spent and received, they can ask informed

questions about discrepancies.

You cannot raise money from donors unless you have a budget. Donors use the

budget as a basis for deciding whether what you are asking for is reasonable and well-

planned

Who Should Be Involved In Budgeting?

Budgeting is a difficult and responsible job. Your organization’s ability to do what it

has planned to do and to survive financially depends on the budgeting process. Whoever does

the budgeting must:

Understand the values, strategy and plans of the organization or project;

Understand what it means to be cost effective and cost efficient

Understand what is involved in generating and raising funds.

To ensure you have all these understandings, it is usually a good idea to have a small

budgeting team. This may only mean that one person does a draft budget which is then

discussed and commented on by the team. Where staff is competent to take full responsibility

for the financial side of the organization or project, the following would normally be

involved in the budgeting process:

The Finance Manager and/or Book keeper;

The Project Manager and/or Director of the organization or department.

Where staff lacks confidence to do the budgeting, then Board members can be

brought in. Some Boards have a Finance Committee or a Budget Sub-Committee. It is a good

idea to have someone on your Board with financial skills. S/he can then help the staff with

budgeting.

Objectives of Preparing Budgets

As with most good practice in managing an organization, good practice in budgeting

involves clarity of purpose, detailed planning and considerable thought. Among the questions

you should be asking yourselves throughout the preparatory budgeting stages, and while you

are actually developing your budget, are:

Could we have spent less last year and still achieved the same results, or better?

Have we wasted money in the past? If so, can we avoid doing so in the future?

Following are the broad objectives behind the preparation of budgets in the organisations

a) To establish standards for performance

b) To make everyone aware in the organization what is expected from them

c) To establish a proper future course of action by following which the goals can

be achieved

d) Goals given in terms of monetary terms are easy to understand

Corporate Budget

The budget of a company is compiled annually. A finished budget usually requires

considerable effort and can be seen as a financial plan for the new financial year. While

traditionally the Finance department compiles the company's budget, if the actual numbers

delivered through the financial year turn come close to the budget, this suggests that the

managers understand their business and have been successfully driving it in the intended

direction. On the other hand, if the actuals diverge wildly from the budget, this sends an 'out

of control' signal, and the share price could suffer as a result.

Government Budget

The budget of a government is a summary or plan of the intended revenues and

expenditures of that government. It is prepared for a specified period of time; usually the

period is one year. A budget is an organizational plan stated in monetary terms.

Personal or Family Budget

In a personal or family budget all sources of income (inflows) are identified and

expenses (outflows) are planned with the intent of matching outflows to inflows (making

ends meet.) In consumer theory, the equation restricting an individual or household to spend

no more than its total resources is often called the budget constraint.

In summary, the purpose of budgeting is to:

1. Planning the use of resources and allocating them among potential activities to

achieve the objectives of the organisation.

2. Provide a forecast of revenues and expenditures i.e. construct a model of how an

organization might perform financially speaking if certain strategies, events and plans

are carried out.

3. Enable the actual financial operation of the organization to be measured against the

forecast.

Types of Budget

1. Sales Budget : The sales budget is an estimate of future sales, often broken down into

both units and rupees. It is used to create company sales goals.

2. Production Budget : Product oriented companies create a production budget which

estimates the number of units that must be manufactured to meet the sales goals. The

production budget also estimates the various costs involved with manufacturing those

units, including labour and material.

3. Cash Flow/Cash Budget : The cash flow budget is a prediction of future cash

receipts and expenditures for a particular time period. It usually covers a period in the

short term future. The cash flow budget helps the business determine when income

will be sufficient to cover expenses and when the company will need to seek outside

financing.

4. Marketing Budget : The marketing budget is an estimate of the funds needed for

promotion, advertising, and public relations in order to market the product or service.

5. Project Budget : The project budget is a prediction of the costs associated with a

particular company project. These costs include labor, materials, and other related

expenses. The project budget is often broken down into specific tasks, with task

budgets assigned to each.

6. Revenue Budget : The Revenue Budget consists of revenue receipts of government

and the expenditure met from these revenues. Tax revenues are made up of taxes and

other duties that the Union government levies.

7. Expenditure Budget : A budget type which includes spending data items

Techniques of Budgeting

There are two main techniques for budgeting namely Incremental Budgeting and Zero

Based Budgeting.

Incremental Budgets are budgets in which the figures are based on those of the

actual expenditure for the previous year, with a percentage added for an inflationary

increase for the New Year. This is an easy method that saves time but it is the “lazy”

way and is often inaccurate. This budgeting technique is only suitable for

organizations where each year is very similar to the previous one in terms of

activities. Very few dynamic organizations or projects are so stable that this

budgeting technique really works for them.

In Zero Based Budgets, past figures are not used as the starting point. The budgeting

process starts from “scratch” with the proposed activities for the year. The result is a

more detailed and accurate budget, but it takes more time and energy to prepare a

budget in this way. This technique is essential for new organizations and projects, but

it is also probably the best route to go in a dynamic organization that is proactive in

taking on new challenges.

Keys To A Successful Budgeting Process

1. Clearly identify programmatic objectives that are aligned with the mission and strategic

plan.

2. Determine the financial resources needed and available to achieve program goals.

3. Involve staff and board members in the process to improve accuracy of information and

commitment to the plan.

4. Document! Don’t rely on memory. Write down assumptions and formulas. This will be

very important in managing the budget throughout the year.

5. Customize your process. The steps each organization takes will be somewhat different.

Chapter – 4

Research

Methodology

Research Methodology

The research methodology includes how the project will be undertaken, how the

information regarding project will be collected and what will be the sources of data

collection.

Scope of the study

The study has been conducted as a part of the major research project In the partial

fulfillment of Master of Business Administration (MBA). The study mainly focuses on the

budgeting system of Punjab State Electricity Board. It comprises the features of budgeting

system of PSEB, types of budget prepared by the board, major highlights of the budget for

the current year, findings from the study and recommendation to improve further.

Objectives of the Study

The objectives behind conducting the study are as follow:

1. To study the features of the budgeting system of PSEB.

2. To study, what are the various heads to which the funds are allocated?

3. To critically evaluate the budgeting system of PSEB.

4. To make some suggestions for the further improvement in the preparation of the

budgets.

Data Collection:

The core findings of the study are based upon the information collected through

primary sources i.e. information gathered from PSEB sources. The study also include the

information collected from secondary sources i.e. web sites of the various government

agencies, statistical abstract published by the state government etc.

Modes of Data Collection

The study is based on both Primary and Secondary data which includes

a) Primary Data

The Primary Data has been gathered through the direct personal interviews with

financial as well as technical and other supporting staff of the concern.

b) Secondary Data

Secondary Data has been gathered from web sites of the various government

agencies, statistical abstract published by the state government etc.

Analysis and Interpretation of the Data:

After the collection of the data and information it has been used for the

achievement of the project objectives.

Recommendations to the PSEB:

After analysing and interpreting the information some recommendations has been

made for PSEB that might be useful for further improvement of its budgeting system.

Chapter – 5

Crtical Evaluation

of

Budgeting System

of

PSEB

Budgeting Process followed By PSEB

Following Budgeting process is followed at PSEB while preparing budget for the

organisation:

1. First of all the key areas or activities are identified which are to be included in the

budget and the persons involved or charged with responsibility of these areas are

also identified so that they can provide the first hand information about these

areas. The key areas identified by PSEB are generation, transmission and

distribution of electricity, Human Resources and administrative structure. These

are major areas for which the whole budgeting process is to be initiated.

2. After the identification of key areas, the budgeting goals and objectives related to

these areas are defined for that particular budgeting period. So that according to

these goals the budgeted allocation can be made. E.g. the objective for a particular

year may be to achieve 10% growth in the generation capacity.

3. After defining the goals and objectives, detailed information about the key areas

is gathered from the persons in charge of a particular area. E.g. the detailed

information about a particular power station can be gathered by meeting the

engineer-in-chief of that power station.

4. After gathering all the necessary information the data is compiled where the

unnecessary information is eliminated and the draft of the budget is prepared. The

draft is prepared by the Accounts Officer (Budget).

5. After the initial draft has been prepared, the draft is reviewed by the budgeting

committee comprising of 8 to 10 members from the Finance and Accounts

department. At this stage the suggestion can be made for any modifications.

6. After making all the necessary adjustments the budget is presented for the final

approval in front of the general board meeting, where it is often approved without

any major modifications.

7. After the final approval of the budget, it is implemented and communicated to all

the departments by sending of a copy of it.

8. After this, the budget is periodically updated and revised as there are changes during

the year. Depending on the significance of changes, the board approves revisions.

Features of the Budgeting System of PSEB

Punjab State Electricity Board is a very big organisation. It has to exercise its

control over the various departments in the head office as well as various power stations

and sub stations around the whole state. It has the responsibility to prepare budget for all

of these departments, power stations and sub-stations. Following are the features of the

budgeting system of PSEB:

1. The PSEB Budget is prepared by finance department’s budget division. Mr.

Anurag Aggarwal is the head of the Finance and Accounts department. The

responsibility for preparing the budget lies on Accounts Officer (Budget). After

the preparation it has to be approved by head of the finance and accounts

department.

2. The budget is prepared in consultation with the Financial Advisor PSEB, Chief

Accounts Officer (Head Office), Chief Engineers of the power stations, Engineer

in Chief of various regional head of the transmission and distribution activities.

3. PSEB prepares two separate budgets every year. One budget for the Estimated

Capital Outlay which includes sub heads like Outlay on Net Works and

Equipments, Establishment Charges (Direct) and the second one for the Revenue

Account which Includes sub heads like Repair and Maintenance, Employee Cost

(Work Charged and Regular), Administrative and General Expenses.

4. Another feature of the budgeting system is that PSEB has to depend on the state

government for its budget allocation. Being a state run organisation state

government provides the major portion of funds to the board for its working. So

before preparing budget for the organisation, it has to first of all bear in mind the

funds to be allocated to the power sector in the state budget. Although the state

government allocate funds according to the needs of the board but the budgeting

system of PSEB has to work according to the policies of the government

5. The budget allocation to various departments and power stations is target based

especially in case of capital outlay budget. The amounts are allocated purely on

the basis of planned expansion targets in consultation with the person in charge of

the particular department or power station or sub station. It is possible that no

allocation is made to a particular power station or department in a particular

budgeted year. But it is done only in case of capital outlay budget. Under revenue

account budget, each department is allocated sufficient funds because the nature

of the work is such that it is bound to have contingencies and emergencies (Repair

and Maintenance). The amount under revenue account budget is allocated on the

basis of past experiences and past figures on incremental basis. So, it can be said

that the budgeting technique used in case of revenue account budget is

Incremental Budgeting Technique and in case of Capital Outlay budget is Zero

Based Budgeting.

6. Another feature of the budgeting system of PSEB is that it does not prepare

budget for its revenues. It means there are no targets of revenue generation that it

tries to achieve. The main reason for this is the nature of service that it provides.

The main aim is not to increase the revenue by increasing the distribution of

electricity; in fact the aim is to encourage the people to use the electricity

carefully and so that they make every effort to save it although every effort is

made to increase the generation and distribution of electricity.

7. Another feature of the budgeting system of PSEB is that it does not allow the

actual expenditure to exceed the amount allocated in the budget. In any case it

should be kept with in the amount allocated. If amount more than allocated is to

be spent then the permission of the prescribed authority has to be taken in

advance.

8. Flexibility is another feature of the budgeting system of PSEB. The budget that is

prepared is not a final budget which is unchangeable. It can be revised if any

uncertainty happens or any emergency arises or according to what so ever a

particular situation demands and the nature of the work of PSEB is such that the

happening of unforeseen events is common.

9. Budgets are prepared in advance. There are likely to be price increases between

the time of preparation and the time when the amount is spent. So, PSEB takes

this into account while budgeting by estimating what the costs or value will be

when the expenditure is made. This aspect is covered under the provision for

contingencies. Around 8 to 10 percent of the total budget is kept under the head

Lump sum Provision.

10. Activity wise allocation is another feature of the budgeting system of PSEB.

There are three main activities i.e. Generation of Electricity, Its Transmission and

Distribution. All these three activities have been explained:

a) Generation :

It is one of the most important activities that are done in the field of

electricity. For this function it has its own power generation stations. These power

generation stations are of two types, first are hydro power stations and second are

thermal power stations. Most of the funds of the total budget of the board are

allocated for this function only. The amount allocated to this function under

capital outlay budget is Rs. 73219.80 lakhs and under repair and

maintenance head is Rs. 12112.45 lakhs (Total 85332.25 lakhs) for the

budgeted year 2008-09. It was 149627 lakhs last year, the main reason for

this much reduction is that last year only Rs. 22316 lakhs were spent on

generation out of Rs. 149627 allocated funds. So this year, the board has

decided to reduce the level of allocations so that there is no over allocation.

b) Transmission :

Electric power transmission is the bulk transfer of electrical power (or

more correctly energy), a process in the delivery of electricity to consumers. A

power transmission network typically connects power plants to multiple

substations near a populated area. Transmission plays the same role which the

wholesaler plays in the marketing chain. Rs. 38362.01 lakhs has been allocated

to this activity under capital outlay budget and Rs. 2660 lakhs (Total Rs.

41022.01 lakhs) has been allocated under repair and maintenance head for

the budgeted year 2008-09. The amount allocated to this activity during the

last budgeted year was Rs. 33500 lakhs.

c) Distribution :

It is perhaps the most important function of the board. It includes the

distribution of power from sub stations to final consumers. The distribution

function of the board both utilizes resources and earns revenue for the board. Rs.

104615 lakhs has been allocated to this activity under capital outlay budget

and Rs. 8087.20 lakhs (Total Rs. 112696.20 Lakhs) under repair and

maintenance head for the budgeted year 2008-09. The amount allocated to

this head during last budgeted year was Rs. 64919. This means that the

board is focussing more on transmission and distribution functions more

than generation.

Allocation to Various Heads Under the Budget of PSEB

The budget of PSEB being a budget of a government department mainly focuses

on the expenditures that are to be incurred in the budgeted year. It does not state the

targets in profit terms because of being a public utility service providing organization.

Following are the major components of the budget prepared by Punjab State Electricity

Board:

A. Head of Revenue Account

B. Head of Capital Outlay

A. Head of Revenue Account :

Revenue Account Head of the budget of Punjab State Electricity Board has 3

further sub-heads under it, each of these represents the amount allocated to that

particular head during the particular budgeted period. These 3 heads are as under:

a) Repair and Maintenance

This head includes the amount allocated for the repair and maintenance of

the plants and machinery of the different power plants. It is an important head of

the budget because the nature of the plant and machinery at the power plants is

such that it is bound to break downs and failures. Rs. 35441 lakhs have been

allocated to this head for the budgeted year 2008-09. An increment of 8.7%

has been made under this head from the last year, which is acc. to the

incremental policy of the board.

b) Employee Cost (Work Charged and Regular)

This head includes the amount allocated for providing remuneration to the

employees. It includes all the staff that is working in the head office, all the power

station and other sub stations. It includes the both type of staff whether it is on

work charged basis or on regular basis. Rs. 4214.88 lakhs have been allocated to

work charged employees and Rs. 202286.14 has been allocated to regular

employees under this head for the budgeted year 2008-09.

c) Administrative and General Expenses

This head includes allocation for administrative and general expenses for all

levels of operations. Rs. 66500 lakhs have been allocated to this head for the

budgeted year 2008-09 which are 6.5% more than the last year.

B. Head of Capital Outlay

Capital Outlay head of Budget of PSEB has 2 further heads under it each of

which represent the capital outlay allocated to that head for the particular budgeted

year. The total outlay allocated under all three heads is Rs. 240139.29 Lakhs for

the budgeted year 2008-09. These 2 heads are as under:

a) Outlay on Net Works and Equipments

This head includes the amount allocated to the main three activities i.e.

Generation, Transmission and Distribution and for the equipments for these three

activities. The total amount allocated is Rs. 219013.09 lakhs to this head for

the budgeted year 2008-09. The allocation under this head has been

increased to Rs. 454448 lakhs for the budgeted year 2009-10 i.e. an addition

of 107% has been made. The main reason for this much increase is that the

replacement of many equipments of Transmission and Distribution system

has been planned.

b) Establishment Charges (Direct)

Work-charged Establishment include such establishment as is employed

upon the actual execution, distinct from general supervision, of a specified work

or upon subordinate supervision of departmental labour, stores, running and

repairs of electrical equipment and machinery in connection with such a work

excluding the daily paid labour and muster roll employees on the work. In the

budget of PSEB these charges are directly identified with the person in charge of

the special tasks and are considered capital in nature. Rs. 6075.20 lakhs have

been allocated to this head for the budgeted period of 2008-09. The allocation

under this head has been increased to Rs. 6570 lakhs for the budgeted year

2009-10 i.e. an addition of 8% has been made.

Performance of PSEB in Meeting the Budgeted Targets

As PSEB does not prepare its revenue targets budget, so its performance in achieving

budgeted targets can not be determined at this front. So the performance in achieving

budgeted targets would be determined by way of making an analysis of amount allocated and

amount spent on a particular activity.

Source – Official website of PSEB

As it can be inferred from the above table that PSEB has been able to keep its

spending with in the amount allocated in the previous 4 years. The amount allocated to

various activities was same in the budgeted years of 2004-05 and 2005-06 i.e. 91926 lakhs

but the allocation drastically fell down to Rs. 2363 lakhs for the budgeted year 2006-07 and

with the change in the government in Punjab State from the year 2007 the total allocation to

these activities again increased because the new government in Punjab was very clear about

their goal in the electricity sector that’s why the allocation increased so much. But from the

budgeted year 2005-06 there is a trend that the amount allocated to a particular activity is

very big but the expenditure made is very less this shows that the targets that were fixed in

the beginning of the year has not been achieved. E.g. in the budgeted year 2007-08 Rs.

149627 lakhs were allocated to the generation activity but the amount spent is only Rs. 22316

which means that the target which was originally fixed for generation of power in the

beginning of budgeted year 2007-08 has not been achieved. Similar is the case with

transmission and distribution activities during that year. This means only 30% of the total

allocations have been spent which indicate the failure of the budgeting system of PSEB

because the basics of the budgeting system tells us that we should be able to anticipate our

future spending and should allocate according to those anticipations but PSEB has failed to

precisely anticipate or estimate its future spending which shows the inefficiency of the

budgeting system of PSEB.

Evaluation of the Budgeting System of PSEB

Positive Points

1. The PSEB budget is prepared after detailed discussions with the persons in charge

of the various departments and activities who can provide the real time picture of

the situation at the work, which enable it (PSEB) to prepare a precise and realistic

budget with realistic goals. It is a good point of the budgeting system of PSEB.

2. The budgeting system of PSEB follows a proper process where at each step, each

and every aspect of all the areas to be covered are carefully studies so that nothing

remain untouched and so that each activity can be covered under the budgeting

process. It is another good point of the budgeting system of PSEB.

3. PSEB uses two types of budgeting techniques. One is zero based budgeting

technique i.e. for capital outlay budget and the second is incremental budgeting

technique i.e. for revenue account budget and I think it is another good point of

the budgeting system of PSEB because nature of the both type of budgets

demands these very techniques.

4. A general feature of any good budget is that there should be enough categories to

give you a meaningful picture of where your money goes and where you might be

able to cut costs. The budget of PSEB is prepared on these very lines because it

has enough categories. The budget of PSEB is multi dimensional in nature. It

divides the budget allocation on the basis of various dimensions. The budget is

allocated activity wise i.e. generation, transmission and distribution. The budget is

also allocated on the basis of project wise like hydel power projects or thermal

power projects. It also allocates funds according to the location of the various

projects like Mukerian Hydel Project, Giddarbaha Thermal Project etc. Another

dimension that is taken into account is the person in charge of a particular work

like Chief Engineer Hydel Project, Chief Engineer Civil Design and Construction,

Chief Engineer Thermal Design etc. So it gives a very detailed picture of the

allocations which makes it easy to control the costs.

5. There is a proper scope for the revision of the budget during the year. It means if

there is a need to change i.e. to add something or remove something, then it can

be done. This shows the flexible nature of the budgeting system of Punjab State

Electricity Board.

Pitfalls and Suggestions for Further Improvement

1. PSEB does not state its targets in terms of revenue to be generated from the

activities. It is accepted that PSEB is a non profit organisation even then it should

prepare some revenue targets to support its spending because at the end of the day

what matters is that you are not paying out of your own pocket. Revenues also

help in evaluating the financial performance.

2. Another pitfall in the budgeting system of PSEB is that it has been unable to make

precise estimates of the future spending or amount needed to spend to achieve a

particular objective. In last few years there is a trend of making huge allocations

and spending less on the proposed activities. E.g. in the budgeted year 2007-08

Rs. 149627 lakhs were allocated to the generation activity but the amount spent is

only Rs. 22316 which means that the target which was originally fixed for

generation of power in the beginning of budgeted year 2007-08 has not been

achieved. Similar is the case with transmission and distribution activities during

that year. For solving this problem there is a need to hire some professionals who

have expertise in making the precise estimates by research and investigation.

3. PSEB hasn’t been able to achieve the budgeted targets in the last 2-3 years (data

of 4 previous years is available). The allocations that are made for the

achievement of the targets haven’t been converted to spending. In budgeted year

2007-08 only 33% of the allocations were actually spent. This shows a failure of

the budgetary control system. Because if you can’t achieve the budgeted targets

then what is the fun of having a budgeting system. For the solution of this

problem budgetary control system should be applied more strictly and the persons

in charge of various activities should be made accountable to their jobs. There

should be a provision of proper action against the defaulters.

Limitations of the Study

1. The most of the important information about the internal working of the organisation

was not made available because organisations do not disclose it because of its

confidential nature.

2. Due to the heavy workload in the organisation the department employees were not

able to devote much time to the study.

3. The analytical ability of each person is different. The report is purely based on my

personal analytical skills. So there is always a scope of further improvement in the

report.

References

Actual Budget of PSEB for the year 2008-09 (Revised) and 2009-10

(Estimates)

Official website of PSEB i.e. www.psebindia.org

http://www.nonprofitsassistancefund.org/files/MNAF/ArticlesPublications/

BudgetingProcess.pdf

http://www.indiahousing.com/infrastructure-in-india/power-sector-

india.html

www.careratings.com/scripts/TransactionForm1.aspx?docid=649

Narang K.L, Gupta S.P, Cost Accounting – Principles and

Practices(2008) Revised Edition