A SUMMARY OF KEY ISSUES RAISED IN THE HEARING ON THE 2004/05 BUDGET AND STRATEGIC PLAN OF THE NATIONAL TREASURY
5 June 2004
PORTFOLIO COMMITTEE ON FINANCE
Prepared by Albert van Zyl Research Associate University of Stellenbosch
The Committee congratulated the National Treasury (NT) on the professional and thorough nature of the work that it continues to do. The Committee also wishes to engage the Nl in a discussion on the nature of its oversight role of specifically budgets, strategic plans and annual report. The Committee wished to raise the following issues in particular:
1.BUDGETREFORM The Committee expressed concern about a number of remaining challenges in the Budget Reform process. The key area was around the quality and reporting on measurable objectives (MO). The Committee found that these were not of a sufficiently high quality, often not being measurable, or not having timeframes specified. The NT indicated that the MOs were being refined continuously and that legislatures in both national and provincial spheres could play a key role in this process by interrogating the MOs proposed by the relevant departments The NT also indicated that 2004 would be the first year within which Annual Reports would be required to report on the MOs proposed in the preceding Strategic Plans (SP) and Budgets. The Committee also remarked that the process for dealing with the Annual Reports in the legislature has not been finalized, apart
from the role played by the Standing Committee on Public Accounts (SCOPA).
The Committee also emphasized the importance of ensuring that the information presented in the SPs, ENE and Annual Reports be presented in comparable formats.
The NT explained that the following areas would be addressed in the next phase of the Budget Reform process:
• Improving Measurable Objectives;
• Accounting reforms and the move to accrual accounting;
• Improving the quality of outer-year figures in the MTEF. This would include developing longer term budget planning mechanisms for capital projects and extraordinary expenditure such as the Census or the Elections;
• The development of consolidated accounts to include non-departmental
agencies, and
• The improvement of reporting on revenue collected by departments themselves.
These reforms would be supported by the 'Master Plan' for the implementation of the systemic reforms related to the PFMA that was finalized in March .2004. These reforms include the move to BAS from FMS the introduction of the Standard Chart of Accounts. The implementation of this Master Plan and the implementation of the PFMA more broadly is further supported by a whole range of accredited courses designed and implemented by the NT in conjunction with
IPFA and SAMDI.
2.OVERSIGHTOVERSTATEOWNEDENTERPRISES(SOE)
As indicated above the NT and the Committee agreed that reporting on the budgets; expenditure and activities of state-owned enterprises would need to be improved. The information currently provided in the ENE, Annual Reports and Strategic Plans is generally not adequate to enable Parliament to give effective oversight of them. The NT indicated that the improvement in these areas will form part of the budget reforms process over the next few years.
3.ROLEOFLEGISLATUREINBUDGETOVERSIGHT
The Committee and the NT agreed that the role of Parliament in budget process would need to be addressed as a matter of urgency. This would enable Parliament to provide much more effective support of the work of the NT in particular. Part of this process would include greater clarity over how Parliament deals with the documents specified by the PFMA and MFMA. The Committee
expressed the hope that the recommendations of the Sub-committee on Oversight and Accountability in this regard would be implemented.
4.IMPLEMENTATIONOFTHEMUNICIPALFINANCEMANAGEMENTACT (MFMA)
The NT indicated that the limited capacity of local authorities to implement the MFMA had been supplemented by the deployment of advisors from all over the world. Advisors had been deployed to 64 local authorities in 2003, but would be deployed to every local authority in the country by the end of the year. One of the conditions of this assistance is that these advisors form part of the top management of the relevant municipalities in order to ensure their participation in
key decisions.
Further support is being provided for the implementation of the MFMA through extensive workshops, the phasing of .implementation and the grading of municipalities according to their capacity. The NT undertook to brief the committee regularly on progress in the implementation of the MFMA.
5.TAXPOLICYANDTHETAXATIONOFRETIREMENTFUNDS
The Committee noted with approval that the NT was planning a tax colloquium to review the overall direction of tax policy in South Africa. The NT indicated that the last few years had seen dramatic changes in the tax system such as the introduction of Capital Gains Tax and the move from taxing at residence to taxing at source. Given all these changes the time had come to review the process as a whole and to chart a way forward.
The Committee expressed specific concern that the longstanding commitment to table legislation on the taxation of retirement funds has still not seen the light. The NT acknowledged that .it had underestimated the complexity, of this task, especially with regards to the number of interested parties that would need to be consulted. It made a fresh commitment to table such legislation before the end of the calendar year.
6.FINANCIALREGULATION
The committee noted with approval that the process of establishing a single financial regulator had moved forward significantly through the signing of a Memorandum of Understanding (MoU) between the NT and the South African Reserve Bank (SARB). The following specialist committees were amongst others established in terms of this MoU:
« Macro-economic Policy
• Financial Markets
• Banking and Regulation
PUBLIC PRIVATE PARTNERSHIP (PPP) ISSUES
The NT indicated that the 50 PPP projects that it currently had registered had the potential to create employment and reduce input costs in the economy. The NT indicated that it had established a number of PPP training courses in partnership with the National Business Initiative (NBI) and that over 1000 people had completed this course. It had just piloted a very popular course for PPP transaction advisors, an area where limited skills exist in South Africa.
The PPP Unit has also released a draft Code of BEE good practice for PPPs last year after extensive consultation with the Department of Trade and Industry. The Code is largely based on the provisions of the Broad Based BEE Act.
8. SUPPLY CHAIN MANAGEMENT (SCM) REFORMS l he N l indicated that reforms of the procurement process and the supply chain more broadly were continuing in terms of both financial management and policy framework reforms (as indicated in the 2003 Committee report). The latter comprehends issues related to preferential procurement and BEE more broadly. Similar reforms would ultimately be introduced in local authorities in terms of the
provisions of the MFMA.
9. NEPAD PEER REVIEW CONTRIBUTION The National Treasury made a contribution to the design of the NEPAD Peer Review mechanism that focused on issues of good economic governance. These recommendations were largely based on norms set for OECD countries and included recommendations on:- • Fiscal Policy • Corporate Governance
• Accounting and Auditing
• Financial Regulation
More broadly the NT agreed that the establishment of a single currencies in Africa is at least 50 years off. A forum of African central bank governors indicated that the African Union should first pursue regional convergence before continental convergence can be contemplated. The NT also indicated that it did not fund itself or any other department for specific NEPAD related activities, but has rather taken the approach of integrating it into its existing activities.
10.GOVERNMENTEMPLOYEESPENSIONFUND(GEPF)BOARDOF TRUSTEES
The Committee expressed concern that a new Board of Trustees for the GEPF had still not been appointed and that the Finance Minister was still interim trustee. It also acknowledged that this process was not within the sole control of the NT and that other actors involved in this process may be party to the delay.
11. COMMITTEE LOOKING AT ADMINISTERED PRICES The Finance Committee commended the NT on the establishment of a committee to look at the impact on the inflation rate of administered prices as set by a range of government entities. This committee consists of a number of other agencies and departments and is due to report back to Cabinet in June. 12.PERSONNEL&HUMANRESOURCEISSUES
The Committee expressed concern at the high vacancy rates in the NT, as well as some of the other entities reporting to the Finance Minister such as Statistics South Africa and SARS. The NT indicated that its capacity was not affected by these vacancies and that it applied very high standards in recruitment. Short-term capacity constraints were being addressed by appointing specialists on short- term contracts for specific projects. Over the longer term the NT hopes to
address this issue through its extensive learnership programme. The Committee also expressed concern over the fact that the NT had budgeted for its full personnel contingent while it has high vacancy levels. The NT undertook to provide the Committee with a detailed report on its Human Resource Policy as well as further detail on its budget for personnel expenditure.
Budget and 2003 Annual Report of the South African Revenue Service
Portfolio Committee on Finance
5 June 2004
Prepared by Albert van Zyl Research Associate University of Stellenbosch
The Committee recommended SARS for some of the vast improvements that had been brought about over the last years. These improvements resulted in some of the revenue windfalls that has facilitated the pursuit of fiscal and macro-economic stability in South Africa. The improvements include innovation in the areas of management, technology, human resource
development and processing reforms.
The Committee did however express its concerns around the quality of the information submitted to it. It would consult .with SARS about this issue and others to facilitate its general oversight of the agency.
1.ImprovementsofCustoms
The Committee commended SARS on some of the improvements that have been made in terms of Customs over the last year. Firstly all customs collection points had been transformed in terms of Siyakha (described below).
SARS is also involved in a process of upgrading the infrastructure at all 19 the land border posts where it has a presence. This would involve upgrading the office and accommodation facilities as well as the technical equipment such as scanners used to survey goods. SARS did point out that its
cooperation with other agencies in this regard, such as the SAPS and Home Affairs was not unproblematic.
A further improvement revealed by SARS was the electronic collection of Customs information. This would improve the process and outcome of the production of trade statistics.
2.ImplementationofSiyakha
The Committee welcomed the imminent rollout of phase 2 of the Siyakha programme. SARS pointed out that the project was in many cases delayed by the difficulty of finding appropriate premises, especially in the case of Gauteng. SARS acknowledged that there was no pre-existing blueprint for the roll-out of Siyakha as SARS was in the process of innovating as they
implemented. This would facilitate learning at every stage of the project SARS undertook to brief the comment on the rollout of phase 2 of Siyakha.
3.Improvementofdocumentationandoversight
The Committee expressed concern .about the .nature of documentation presented to it on the activities of SARS It specifically expressed a desire to have a follow-up hearing once the 2003 Annual Report for SARS is tabled.
The Committee expressed concern about the limited extent of the data and information provided in the ENE and SARS Strategic Plan and Annual Report. What information does get to the Committee is often too late to enable, it to perform its oversight. SARS undertook to revise its 2004 documentation and to present it to the Committee in the same format as used by departments in the ENE.
4.ImprovingIndustryknowledge
SARS indicated that its capacity to engage analytically with certain industries is still limited. It was engaging these industries on a sectoral basis both to build its own understanding, but also to understand the sector specific challenges. Lessons had been learnt in the retail, electronics, and gambling industries. Such engagement could build better broad compliance, but also help to identify non-complying individual enterprises. Where possible SARS was trying to improve compliance without being vindictive and trying to build partnerships with industry. SARS found that most businesspeople were receptive to such interaction.
In some cases SARS found that it was too reliant on the information provided by industry SARS is now trying to build the capacity to verify such
5.Duplicationofcontrols
One of the issues that the Auditor General (AG) based its qualification of the Administered Revenue Account on was the fact that certain registers such as the customs register and the IRPS register, were not kept up to date. SARS argued that its focus was on collection and not compliance, and that these registers were mere checks .and did not form part of the system of collection.
Even though some of them were not up to date, this did not therefore affect the system of collection. The Committee recommended .that such duplication of controls should rather be eliminated and not perpetuated.
6.Debtmanagementsystem
The Committee recommended SARS for the improvements with regard to the collection of debt. Over the last year the: debt book has been stabilized and has not increased at all. This has been done by increasing the number of staff that are deployed to this end and by investigating the whole cycle of payments becoming debt. In this manner SARS hoped to intervene soon enough to prevent due payments becoming debt.
SARS has also learnt to be more selective about its debt collection, and to target specific sources more aggressively. SARS has also initiated personal meetings with debtors that owe more than R 1 million to SARS, rather than managing the relationship through correspondence. They found that this required special capacity that many SARS staff did not have. SARS would be embarking on a programme of building such capacity.
7. Technological advances such as e-filing
The Committee welcomes some of the technological advances being made by SARS. such as e-filing. After a slow start, the untake of e-filing has improved. SARS is continuing public awareness campaigns to boost this. In general SARS also found that it was easier to minimize fraud on such a
system.
Other improvements include the -introducing of software that can display a single debt profile for each user. This could prevent the payout on certain tax returns where users owe on other accounts.
Eliminationofprocessingbacklogs
The Committee commended SARS for the elimination of backlogs in the processing of Income Tax returns.
UnqualifiedAuditReports
The Committee commended SARS for its unqualified Audit Report. SARS argued that it was only the Audit Report for its administered income that was qualified and that of the rest of its activities it received an unqualified opinion.
On its administered income, many of the reasons for the qualification of the AG's opinion was based on definitional rather than substantial differences between SARS and the AG, one example hinging on the writing back of stale checks as income.
10.Systematicprocessofeliminatingthetaxgap
The Committee expressed its satisfaction at the progress that had been made in understanding the nature of the tax gap. SARS pointed out that the gaps consisted of non-registering, non-filing and non-paying users. SARS has made progress in reducing the numbers of non-filing users and it arrested the growth in debt ( over the last year SARS improved industry knowledge referred to above (section 4) has further contributed to the reduction of the tax gap.
The SARS pointed out that contrary to conventional wisdom, the informal sector was not a major contributor to the tax gap.
11.Increasedprosecutionoftaxoffenders
SARS was also commended on its increased prosecution of tax defaulters. This discussion of building improved industry knowledge (see section 4) also made a large contribution to the reduction of the tax gap.
2. Customer service improvements
SARS also made giant strides in .-improving its customer services. Such improvements include the enlargement of various call centres and the introduction of a 'one-stop shop' providing information on the tax regime to potential investors.