REPORT OF THE PORTFOLIO COMMITTEE ON FINANCE ON BUDGET VOTE 8: NATIONAL TREASURY, DATED 20 MAY 2005.
The Portfolio Committee having considered Budget Vote 8: National Treasury, including the Strategic Plan of the South African Revenue Services for 2005/8 reports as follows:
The Portfolio Committee on Finance exercises oversight of the National Treasury in line with the constitutional mandate set out in section 55(2) of the Constitution.
The Portfolio Committee on Finance hosted a hearing on 12 April 2005 at which the Deputy Minister of Finance, Mr Jabu Moleketi, the Director-General, Mr Lesetja Kganyago, and a team of senior managers from the National Treasury presented the National Treasury’s strategic plan and budget/MTEF for 2005/08. This was followed by a discussion of issues arising from the documents and presentations where members of the Committee raised a number of issues. These are noted below.
The Committee commends the Minister of Finance, the Deputy Minister, the senior management team of the National Treasury and all the National Treasury staff for their ongoing good performance in the management of the government’s finances and the economy generally.
In its deliberations on the National Treasury’s strategic plan, and the presentation by the by the Deputy Minister of Finance, the Director-General and other officials, the Committee raised the following issues:
The Committee raised concern about the fact that there were still vacancies within the National Treasury at the senior management level, and enquired what strategies were in place to ensure that these posts get filled, taking cognisance the scarcity of appropriate skills and other labour market conditions. The Committee also enquired whether the existence of vacancies within the National Treasury was impacting on its ability to deliver on its mandate.
The Director-General noted the vacancy for the head of the Budget Office existed because the person that was acting in this position has been seconded to HM Treasury in the United Kingdom as part of an capacity building exchange programme, and that when he returned he was expected to take up this position.
The Director-General noted that the Economic Policy and International Relations unit was currently being restructured in light of the expanded mandate of the unit – given South Africa’s increasing involvement in international economic forums, as well as initiatives to foster greater economic integration on the African continent. This restructuring was likely to result in those parts relating international relations being located within the Ministry, issues related to Africa being integrated with the units dealing with domestic economic policy, and then a separate macro-policy and tax policy unit.
As regards other vacancies within the National Treasury the Director-General noted that in the past year 240 appointments were made, of which 177 were from outside, but these were offset by resignations, transfers and normal attrition. The vacancy rate has decreased from about 30% to 23% presently. The National Treasury currently uses specialised headhunting agencies to source people with scarce skills.
The Director-General noted the vacancies result primarily from the scarcity of particular skills, notably chartered accountants and IT systems people, and the fact that the salary packages offered by the National Treasury are not competitive. However, he noted that the National Treasury has made significant progress in filling vacancies in certain areas, notably the Accountant-General’s Office. He also noted that even though the salary packages the National Treasury can offer are not as competitive as those of the private sector they are nevertheless sufficient to attract professionals who join the public service to serve for a period of time, before moving on. The challenge is to ensure that they training other people during their time with the National Treasury and so build capacity.
Mr Ismail Momoniat noted that issue of vacancies and skills needed to be placed in perspective, observing that the National Treasury functioned very efficiently with the staff that they had. He noted that the existence of vacancies did not mean that critical functions were not being performed, but rather that the National Treasury was not doing as much as it would like to do. He also pointed out that rather than concentrating on the issue of vacancies the focus should be on whether the National Treasury is able to produce the outputs that it is required to produce – and if there is no decline in the quality of outputs then this means that one is operating more efficiently, which is a good thing and in line with the message that National Treasury is trying to convey to the rest of government.
The Committee noted the absolute importance of ensuring that there was not an unmanageable haemorrhage of senior managers from the National Treasury to the private sector or elsewhere, and enquired as to what strategies were in place to ensure that the National Treasury remained an employer of choice, and furthermore was able to compete effectively with private sector to keep key senior managers. In addition the Committee enquired as to what strategies were in place to ensure continuity should some senior managers leave.
The Director-General pointed out that it has become evident that professionals regard working for the National Treasury to be an important step in their career development, whether they intend working in the private sector or in other parts of the public service. This is a positive development, because when they leave the National Treasury they will add value in their new positions.
The National Treasury runs a very aggressive internship programme. Currently there are 45 interns, and more will be joining later in the year. Many of them have honours degrees studying towards masters’ degrees. Those that make the grade will be absorbed into the National Treasury.
The Director-General also noted that the current senior management team has been together for about ten years, and that they joined the National Treasury with particular aims in mind, and that there was still work to be done to ensure public finances are placed on an even sounder footing. This creates an element of peer pressure to remain and see the project through.
Lastly, the Director-General noted that where the National Treasury cannot attract fulltime employees because of the limitations on the salaries it offers, then it contracts with people with the necessary capacity on a project basis at rates that they are willing to accept.
The Committee enquired as to what systems were in place to ensure that staffs working conditions are of a high standard.
The National Treasury reported that it does have a wellness programme in place, and that this gets monitored closely. Part of the programme includes giving access to counsellors on a 24-hour basis, and the possibility for further medical referrals, as well as access to various medical aid schemes allowed within the rules of the public service. There is also a wellness programme that is specifically targeted at meeting the needs of the executive team.
The Director-General noted that there is broader problem within the public service where people at the lower end of the employment scale chose not to join one of the existing medical schemes due to issues of affordability. He indicated that this is being addressed by the Department of Public Service and Administration, and that the solution would include dealing with these employees medical aid contributions on a different basis.
The Committee enquired what measures the National Treasury has in place to examine the Constitution in respect of developing financial and related legislation, and then how the National Treasury prioritised the rollout of legislation for which it is responsible? The Committee also enquired as to what processes are in place to review existing financial management legislation with a view to identifying any loopholes or areas where the legislation may need strengthening?
The Director-General noted that the National Treasury does not control the legislative programmes of other departments, and that often these departments prepare legislation that the National Treasury does not regard as a priority, but because it contains a money bill component the National Treasury is forced to get involved, e.g. the royalty bill.
As regards loopholes: there is an ongoing process to review legislation with a financial or economic content, and where weaknesses are identified the National Treasury will put forward amendments or prepare new legislation – as was the case with the PFMA and MFMA.
The Committee agreed with the National Treasury of the need to prioritise the analysis of interest rates and exchanges rates, but enquired what informed the National Treasury’s decision to prioritise these issues.
The Director-General noted that the focus on these issues is founded on the government’s programme of action where it is stated that "the executive should work with the monetary authorities to ensure that the objective of a stable and competitive exchange rate and appropriate inflation rate is attained." He went on to note that these two variables do have an impact on growth and other objectives and so it is essential that the National Treasury have an understanding of the trends.
The Committee enquired as to whether overtime costs were significant in the National Treasury and what strategies were in place to minimise these costs.
It was noted that the senior management of National Treasury does not claim overtime, indeed people would be ‘embarrassed’ to ask for overtime. However, at the financial year-end and during budget preparation time non-sms staff is required to work longer hours and they do claim overtime. It was also noted that people prefer to take leave rather claim overtime.
The Committee enquired about what work is being done to review South Africa’s competitive position with regards to taxes and tax policy.
The National Treasury noted that tax reform processes go through a number of stages including extensive consultations with stakeholders in the relevant sectors. The areas that are currently being worked on include:
On the issue of ensuring South Africa remains competitive on the tax front, it was noted that there is a huge literature on the issue, and that the National Treasury tries its best to keep track of developments in other countries. The National Treasury also has observer status on the OECD forum that deals with tax policy, and this is an important source of information.
The Committee enquired as to how many applications for permission to impose provincial taxes had the National Treasury received, and then what the National Treasury was doing to ensure that the tax to GDP ratio targets government had set were maintained.
National Treasury noted that there is the Provincial Tax Regulation Process Act that is designed to ensure that the national tax to GDP ratio is maintained and that national creates the tax room for provinces. It was noted that to date no applications have been received from provinces as yet.
The Committee noted the importance of this revenue for certain sectors of local government, and enquired as to what plan the National Treasury has in place for replacing these revenue sources when the RSC levy is phased-out.
The National Treasury noted that it was considering a combination of grants and taxes to replace the revenue of the RSC levy, but that no final decision in this regard has been taken.
The Committee noted that in past years there have been problems with the spending of capital budgets, and enquired as to what strategies the National Treasury was putting in place to address the problem.
The National Treasury publishes information on under-spending of budgets generally, and of capital budgets particularly, but despite the information being available, the provincial legislatures appear to be reluctant to take the issues up with the provincial executives for various reasons. The National Treasury noted that the provincial legislatures have the primary responsibility to ensure that budgets get spent as planned, and to recommend steps are taken against HODs if this does not happen, for instance refusing to pay performance bonuses or instituting disciplinary measures. He observed that in his opinion under-spending is not a capacity issue, but an issue of performance, and therefore the solution lies in ensuring that there is greater accountability at every level, and that ultimately it may be necessary to fire a number of managers in order to emphasise the importance of the issue of under-spending and the need for accountability.
The National Treasury went on to note that there are institutional problems that aggravate the problem of under-spending, notably the fact that there are usually two departments involved, i.e. Public Works and the client department. This results in HODs blaming each other for the under-spending. Another problem is the lack of clear service level agreements between these departments. Yet another problem is the fact that departments tend to plan this year for this year’s capital projects, and it is therefore hardly surprising that there is under-spending given the lead times associated with capital spending. He noted that nothing prevents departments and local governments planning and even procuring capital projects in advance. Other problems include fiscal dumping at the end of financial years, not paying contractors regularly, and the fact that the current audit process does not identify these problems.
The Committee enquired as to what are the timeframes for capacity building at the local government level in light of the implementation of the MFMA and the phasing out of the Local Government Restructuring Grant.
The National Treasury noted that it was divided municipalities into high, medium and low capacity municipalities, and that it is concentrating on the high capacity municipalities through various programmes. One of these is the partnership with the World Bank whereby international experts are being seconded to about 50 municipalities. It is envisaged that the capacity developed with these municipalities will be spread to other municipalities over time.
National Treasury noted that there is not a point at which it will be possible to say that each and every municipality has all the capacity it requires. It also noted that certain questions about the lack of capacity need to be asked: for instance, how can there be a lack of capacity when the municipal manager is being paid a salary of R1/2 million? Another problem is the lack of continuity in key management positions as a result of managers loosing their jobs when they conflict with political role-players. It was further noted that so long as there is no demand for performance and people can use the lack of capacity as an excuse then it is unlikely that the problem will get solved.
The National Treasury noted that it is phasing out the Local Government Restructuring Grant, because it was decided that the problems it was designed to address are of a more general nature, and therefore an alternative mechanism needs to be developed to address them. As it is the grant is used mainly to incentives mainly the metro municipalities to make very obvious improvements in their administrations.
The Committee noted the emphasis placed on grants to provincial and local government for capital infrastructure, and enquired what measures National Treasury was putting in place to ensure that the buildings, roads etc. that are built with these grants get properly maintained so that the money does not go to waste.
National Treasury noted that the two local government grants on its budget are designed to compliment the local governments’ own capital budgets.
National Treasury noted allocates funds to the different spheres of government, but that it is the duty of provincial governments and municipal councils to exercise proper oversight of the quality of spending and of the maintenance of capital goods. He noted that it is not possible for the National Treasury to ensure that all funds are spent properly, and that ultimately it is an issue that needs to be taken up by the institutions responsible for oversight.
The Committee enquired as to whether the quality of information from the different spheres of government has improved, particularly in the light of the fact that the lack of information appears to delay the publication of key documents by the National Treasury.
The National Treasury noted that there are significant problems with the quality of monthly expenditure figures released by provincial departments. In the first instance, HODs appear to be signing-off on these numbers without taking any kind of responsibility, and, in the second, instance the people that should be holding them accountable for the accuracy of the information they release are not doing so. He noted that National Treasury publishes the numbers, the evidence on performance, but that other role-players need to take up the issues and hold managers accountable.
In the case of the monthly figures of local government, the National Treasury noted it would soon commence with publishing these figures, even though many municipalities were not submitting the information. He noted that the approach would be to note alongside these municipalities names ‘did not submit’. But at least this would get the process started.
The Committee noted that one of the National Treasury’s objectives is to improve the quality of budget documentation, and enquired whether there is some way in which the quality of documents produced by National Treasury can be evaluated and measured. It was suggested that National Treasury might consider setting up a review panel.
The Director-General noted that there is a need to develop a methodology to measure the quality of its documents and that suggestions in this regard would be welcome. He indicated that one idea that had been mooted was to design a questionnaire for the Committee to fill in given that they are among the principal users of the documents. It was also noted that it may be a good idea to look at what Australia and New Zealand do in this regard, given that they are at a similar level of development in this regard.
The Committee noted that a number of years ago the National Treasury experimented with publishing a draft of the Division of Revenue Bill in December, but this has not become standard practice. It was noted that this makes oversight of the Bill very difficult, as members are unable to digest the vast amount of information contained in the Bill in the very short period of time currently allowed for the debating it.
National Treasury noted that due to the need to make last minute changes to the Division of Revenue Bill in the light of changing revenue projections, it is not practical to publish the Bill earlier.
The Committee enquired as to what factors were considered in deciding on the 30/70 ratio of floating to fixed debt, as well as the 20/80 foreign to domestic debt ratio. The Committee also enquired as to how South Africa’s foreign debt burden compared to that of other countries.
The National Treasury noted that the biggest risk it faced in managing domestic debt was the interest rate, whereas for foreign debt the risk factors included both the interest rate as well as the exchange rate. Therefore the ratio of domestic to foreign debt reflects the relative risks associated with these two variables, especially in the light of the volatility of the currency in recent years. Those countries that were highly exposed to foreign debt during the 1998/98 crisis suffered tremendously. South Africa is fortunate to have a very liquid domestic debt market, indeed one of the top ten in the world. Therefore instead of the National Treasury having to borrowing money in foreign markets, foreign investors come to South Africa to buy domestic bonds and so they take on some of the exchange rate risk as opposed to it being borne by the National Treasury.
The Bretton-Woods institutions recommend that emerging market economies should have 40/60 ratio of foreign to domestic debt. The current ratio of 20/80 was developed when South Africa’s net open forward position was at about R18 billion in 1999. South Africa now has a surplus of some R16 billion, but this is not going to result in a significant change in the above ratio, because the risk associated with foreign debt is still substantially higher than that of domestic debt, particularly given the strength of the domestic bond market.
As regards the ratio between floating to fixed, the ratio is influenced by interest expectations. In this regard it is expected that interests will decline over the medium term. In order to take advantage of this the National Treasury needs to either shorten the term of its fixed debt or issue floating debt. However, issuing floating bonds (debt) has its own risks in that should inflation pick up, then interest rates will rise and the National Treasury will have to redeem this floating debt at higher interest rates. For this reason it was decided on a 30/70 mix of fixed to floating bonds.
The Committee enquired as to whether the guidelines for treasury operations of state owned enterprises had been developed given that targets had already been set for compliance with these guidelines. In addition the Committee enquired as to how did the National Treasury arrive at the 25% compliance target with these guidelines referred to in the strategic plan.
The National Treasury noted that when this project was initiated the intention was to employ consultants to assist SOEs with their treasury operations. However, when the tenders were reviewed Cabinet decided that the National Treasury should do the project given that most of the companies had conflicts of interest having previously done work for the SOEs concerned. National Treasury capacity is however limited and therefore the project are going to take longer to complete than initially planned.
The National Treasury indicated that the guidelines have been developed and circulated to the SOEs. However given the diversity of SOEs the guidelines need to adapted and modified to the requirements of the different enterprises. Once each enterprise has its own special guidelines in place, then it will be possible to measure their adherence to them.
The Committee enquired as to how the National Treasury measured the liabilities of government and how it balanced these against the assets of government so as to arrive at an understanding of the net worth of government.
The National Treasury indicated that in the past it tended to focus on the liabilities of government, but after a number of shocks to the system notably the bad experience with the SAA hedge book, it was decided to look at the liabilities of government more broadly and to include all the liabilities of all entities and enterprises belonging to government. It was also decided to begin a process of valuing all governments assets, so that the liabilities could be compared to the assets and certain ratios could be developed to manage the government’s exposure to certain risks could be managed more effectively. The process of valuing government’s assets still has a long way to go. It is expected that the process will be completed in two or three year’s time.
One of the questions when valuing the government’s assets is how does one value future revenue. This is particularly an issue at the local government sphere where municipalities want to use this ‘asset’ as security for borrowing. The National Treasury noted that this is an issue that is being debated internationally, and there do not appear to be any clear answers at present.
The Committee enquired as to how the National Treasury intended using the R9.6 billion surplus revenue that was announced after the tabling of the budget.
The Director-General noted that these funds were not available for allocation to other expenditures due to the fact that the budget had already been tabled and therefore they would be simply used to reduce government’s borrowing requirement, and so reduce the cost of debt servicing which would release resources for future spending.
The Committee enquired as to how the R165 billion required by state owned enterprises for their recapitalisation was going to be raised, given that no provision appears to have been made for this in the budget. The Committee enquired as to whether the funds were going to be raised internationally or domestically, and if the latter, what measures were being taken to prevent the crowding out of private sector borrowing.
The National Treasury indicated that it is required to borrow about R96 billion this fiscal year. When National Treasury when planning its borrowing strategy this year it need to take into account the likely extent of public sector borrowing, particularly by state owned enterprises, as well as the declining liquidity in the bond market as investors move to equities. Another factor was the fact that foreign debt currently stood at only about 13% of the total government debt. The National Treasury has therefore sought to design a borrowing strategy that would create space for the state owned enterprises to borrow while at the same time not crowding out the private sector. The strategy includes borrowing $1.3 billion in foreign markets, and reducing the number to treasury bills by between R1 to 2 billion. This creates significant space for borrowing by state owned enterprises. Also important is the fact that the state owned enterprises need to borrow via the National Treasury, which will enable the National Treasury to ensure that the funding strategies of these enterprises is in line with government’s overall strategy, and will therefore not put pressure on the domestic bond market.
The Committee identified a number of discrepancies in the performance targets set for supply chain management in the current strategic plan compared to the plans of previous years. It was noted that these discrepancies highlighted the need for the National Treasury to give reasons for changes in performance targets related to particular programmes.
The National Treasury noted the discrepancy between the years is partly due to the fact that certain of the contracts only fell due in the new financial year. And so while a lot of work was done last year the results of that work could only be realised this year when the relevant contracts fell due.
The other reason for revising the performance targets was the fact that National Treasury has devolved responsibilities for many of the old state tender board contracts to other departments so that the departments directly responsible for these contracts can manage them – in the spirit of the PFMA. The National Treasury has retained control of particular contracts particularly those of a transversal or strategic nature, for instance medicines. Key changes have also been made in the way National Treasury procures the services of consultants, particularly those involved in servicing some of the large transversal systems. The contracts have now been written up as proper service level agreements that distinguish between enhancements to systems, training and maintenance. Following this National Treasury has specified that it will not pay for any enhancements unless they have been specifically agreed to. The result has been a very significant drop in the cost of these contracts.
The National Treasury also noted that it has contracted out the development and presentation of courses for supply chain management to IPFA and SAMDI, and that in future SAMDI will be responsible for the accreditation process. This also necessitated changes in the performance targets, since National Treasury will no longer be presenting the courses but simply monitoring the quality.
The Committee enquired what the National Treasury was doing to ensure that it achieved an unqualified audit report.
The National Treasury noted that there are two issues related to this question: firstly, the National Treasury’s own audit reports, i.e. those pertaining to the department itself have been unqualified for a number of years. The second issue relates to the audit reports on the consolidated financial statements of government, which deal with the whole of government. These audit reports are qualified to the extent that the original financial statements of the different departments were qualified. In the first instance, it is the responsibility of the accounting officers of these departments to ensure that they put in place the necessary financial management systems to ensure that their department’s financial statements do not get qualified. However, the National Treasury has a responsibility to support these departments in various ways, including ensuring that they understand the format in which they have to report to the National Treasury, that they are aware of any new policies and regulations pertaining to financial management, and where they need assistance in rolling out these policies that this gets given.
There are, nevertheless, a number of issues that pertain to what the National Treasury does in consolidating the financial statements. These issues have been identified and are being addressed.
The Committee noted that the Auditor-General raised concern about the functioning of internal audit within government departments in his General Audit Report for 2003/04, and enquired what the National Treasury was doing to remedy the problems that existed.
The National Treasury indicated that it has conducted its own review of internal audit within government departments, and had identified many of the same problems noted by the Auditor-General, including the fact that many accounting officers do not appear to understand the role of internal audit and its importance. The National Treasury noted that many of the issues relating to qualified audit reports, poor quality reporting and inefficient procurement processes etc. would be addressed if internal audit was functioning within departments, and that primary responsibility for ensuring this rested with the accounting officers of departments. They need to understand internal audit and accord it the necessary status within the department so that it can achieve its objectives.
The National Treasury has undertaken a number of initiatives to develop a common understanding within government of what internal audit is about, including holding a national conference for internal auditors from all spheres of government, requiring departments to move internal audit out of the CFO’s division and to locate in the accounting officer’s office, and ensuring the establishment of Audit Committees for departments. On the latter issue the National Treasury noted that about 90% of departments now have functioning Audit Committees and that these committees are placing increasing pressure on accounting officers to ensure that internal audit is functioning effectively within their departments.
It was however noted that the oversight committees of Parliament and legislatures have an important role to play in ensuring that accounting officers prioritise the establishment and functioning of internal audit units.
The Committee requested the National Treasury to clarify the target dates relating to the development of the accrual system, particularly what was planned to be achieved by 30 September 2005.
The National Treasury noted that it aimed to publish a plan for the implementation of the accrual system in government by 30 September 2005. It indicated that this implementation plan was likely to specify a phased process aimed at ensuring that those responsible for implementing the system were ready and willing to do so, that the necessary tools are in place, and that there are people trained to do the work. It also indicated that when it came to actual implementation departments that are ready to implement would be identified and required to make a complete transition to accruals, as opposed to adopting a phased approach. So while a three-year implementation plan is envisaged it is phased plan in the sense that there will be a succession of departments moving to accruals as opposed to implementing certain aspects of accruals and then other aspects. This would minimise any difficulties the Auditor-General might have in auditing these departments’ accounts.
The Committee noted that legislation for the special pensions is long overdue, and that National Treasury has been noticeably reticent regarding as to when it is likely to be tabled.
The National Treasury noted that it has a project to process and review all applications for special pensions and that this process is nearing completion. The National Treasury was also involved in transferring the administration of these pensions to the normal pension system. It was also indicated that the necessary amendment Bill to the 1996 Act will be tabled towards the end of May this year, but that this Bill would not revise the eligibility criteria for the special funds.
The Committee noted that there is a decline in the transfers to the FFC and enquired as to whether this may compromise the work of the FFC and its independence.
The National Treasury noted that the decline in transfers arose from operational adjustments on the side of the FFC, and that these were agreed to by the National Treasury.
Based on its deliberations the Committee makes the following recommendations:
Report on SARS’ strategic plan for 2005/08 and its operational budget and MTEF for 2005/08 and the related presentations by the Commissioner are as follows:
SARS is a public entity reporting to the Minister of Finance. The Portfolio Committee on Finance exercises oversight of SARS in line with the constitutional mandate set out in section 55(2) of the Constitution.
The Portfolio Committee on Finance hosted a hearing on 6 April 2005 at which the Commissioner of SARS, Mr Pravin Gordhan, and a team of senior managers from SARS presented the SARS strategic plan and operational budget/MTEF for 2005/08. This was followed by a discussion of issues arising from the documents and presentations during which members of the Committee raised a number of issues. These are noted below.
The Committee commends the Commissioner, his senior management team and all the SARS staff for their outstanding revenue collection performance in 2004/05.
The Committee also commended SARS for the ongoing improvements in tax administration, and progress made with transforming SARS.
The Committee also noted the improvements in the quality of SARS’ strategic plan, and commended SARS for preparing a very clear and concise document.
In its deliberations of SARS’ strategic plan, and the presentation by the Commissioner, the Committee raised the following issues:
The Committee noted that in its ‘Strategic Objective 3: Improved compliance and risk reduction’, SARS identifies a number of sectors that it intends focusing on in the coming year, namely sweets, clothing/footwear/textile, cell phones, property, trusts, tobacco, alcohol and high net worth individuals. The Committee noted that these sectors differ from the sectors SARS identified last year as warranting special attention, namely financial services, mining and manufacturing. The Committee asked whether the problems with the sectors identified last year have been resolved and therefore they have been removed from the ‘watch list’.
The Commissioner indicated that while the sectors identified last year are more compliant than they were, there is still work to be done. He noted that to get all the players in a particular sector compliant could take years. He however indicated that interactions with the sectors identified last year had become part of SARS’ normal processes, and so they were not identified as strategic priorities. He indicated that over time SARS planned to build an understanding of all sectors, but that this was a step-wise process.
The Commissioner also indicated that interactions with sectors make a real difference. The interactions may include audits, investigations and industry meetings. Following such interactions the players in the sectors are generally more careful as they know that they are being watched by SARS.
SARS noted that compliance risk in the different sectors relates to the legislative environment within which companies operate within their different sectors, as well as the complexity of the business structures they use. In other sectors the compliance risk relates more to the nature of their trading activities, notably in the retail sectors identified as focus areas in the current strategic plan.
In terms of SARS’ audit activities, almost 40% are focused on the financial services, mining and manufacturing sectors. And while these sectors contribute almost 60% of total revenue, they contribute almost 70% of what is referred to as compliance revenue, i.e. revenue that is derived from SARS’ own compliance efforts. The result is that the focus on these sectors is bearing results. Similarly current data shows that while SARS’ only does 2.5% of its audits in the retail sector this generates 5% of the compliance revenue, which suggests that the new focus in the current strategic plan is appropriate, and will yield positive revenue outcomes.
The Committee inquired how SARS strikes a balance between facilitating trade and acting against illicit goods, most notably at the countries various ports of entry.
The Commissioner noted that it was always a difficult balance to achieve, and that different industry players had differing views on where the emphasis should be, and whether SARS was being too tough or too lenient.
He noted that SARS was in the process of developing a better risk profiling system, an improved intelligence capability and better co-operation with South Africa’s major trading partners. He noted that SARS is a member of the World Customs Organisation, and therefore has certain obligations to fulfill in terms of developing effective mechanisms to respond to trade facilitation and security imperatives. SARS also participates in the Container Security Initiative of the United States, the aim of which is to facilitate trade while managing risks. The Commissioner noted that ultimately the approach to combating illicit goods needed to become systemic – an engineering process, rather than ad hoc process.
The Committee noted that last year SARS indicated that it would be working with the NPA to develop their capacity to prosecute customs and tax related cases. The Committee requested information on what progress had been made on this front.
The Commissioner indicated that the NPA is still building their prosecution capacity and that SARS had not yet evaluated what specific assistance they could give. However, given that there is a new Director of Public Prosecutions this matter would be addressed shortly. The Commissioner noted that SARS could only investigate tax and customs infringements, and that unless there is specialised capacity within the NPA to prosecute cases these matters cannot be taken forward effectively.
The Committee noted the importance of accurate revenue estimates for the purposes of planning the national budget, and inquired how SARS projected revenues, and why these projections were so volatile?
The Commissioner indicated that the revenue projections were based on the National Treasury’s macro-economic forecasts, and were therefore as accurate as these forecasts. He noted that the MTBPS provides an opportunity to revise these forecasts and provide revised revenue projections.
He noted that two main factors impacted on the final revenue collected, firstly, the actual performance of the economy and the currency. He noted that different sectors of the economy respond differently to changes in key prices and consumption trends, which impacts on where profits get generated, and therefore where SARS collects its revenue. The second factor was how SARS managed revenue collection, and how corporates responded to SARS actions. For instance in 2004 SARS emphasised the importance of section 19(3) of the Income Tax Act, which requires companies to pay provisional tax in line with their latest profitability figures. This factor alone generated about R7bn in tax this year. The outcome of measures of this nature is unpredictable, as it depends on how companies respond to SARS initiatives.
The Commissioner also explained that when it came to revenue targeting the targets set depended on the underlying trends in revenue collections and then expectations as to the performance of the economy. The targets for the MTEF are adjusted on a regular basis depending on the performance of the economy.
The Committee inquired what the extent of SARS’ debt book is and how this was being managed.
The Commissioner indicated that the debt book of SARS stands at about R60bn of which about half has been classified as uncollectable due to various circumstances and is therefore in the process of being written-off. Of the remaining R30 bn about R8 bn is subject to litigation. The Commissioner noted that in some cases the litigation process can be speeded up, while in others SARS simply needs to let the law take its course. The Commissioner noted that although the ‘pay now argue later’ principle is available it is not generally applied.
The Committee inquired how SARS understood the linkages between small traders and larger businesses, and to what extent syndicates were in fact controlling small trading activities.
The Commissioner noted that one of the aims of SARS is to get a better understanding of the second economy and the informal sector. To this end numbers of SARS personnel had engaged in ‘walk-abouts’ – visiting and talking to people engaged in these areas of the economy. He noted that there were two interesting trends when it came to small traders: firstly there were significant linkages to larger businesses that needed to be understood better. There were many sophisticated operations where people import goods into the country, have sophisticated distribution networks to traders both informal and formal. Many are doing very well, and SARS needs to introduce themselves to these players, and get them to be part of the SARS net. Secondly, that there are large numbers of foreigners involved in these businesses. The Commissioner suggested that there maybe a couple of million of people involved in businesses of this nature.
The Committee inquired as to who determines the tax to GDP ratio and what informs it.
The Commissioner indicated that the National Treasury sets the tax to GDP ratio on a year-to-year basis. Over the last number of years it has been set at between 24 and 25% of GDP. As to what informs it, the Commissioner indicated that it is a policy decision taken by the Minister of Finance. He noted that while it is generally accepted that it should remain at current levels, there was nevertheless some who thought it should be increased given the developmental nature of the country. He noted that in European countries the ratio was generally above 30% and sometimes as high as 40%, but this needed to be seen in the light of the welfare systems operating in these countries.
The Committee inquired whether SARS is able to measure how much revenue can be attributed to new entrants to the tax net, as well as how much revenue is being lost due to the early death of tax payers as a result of HIV/AIDS.
The Commissioner indicated that at present SARS was not able to do this kind of analysis, but hoped to develop the information systems to do so in future.
The Committee noted that in its 2003/04 strategic plan SARS indicated that it would seek business opportunities both within South Africa and in the SADEC region. The Committee wanted to know what progress had been made in this regard.
The Commissioner indicated that SARS is seeking to service other government departments that wish to levy surcharges. The aim is that these surcharges should piggy-back on existing tax bases that SARS already administers, e.g. SARS collects SDL and UIF as part of its PAYE system, but only where the persons liable to pay these levies are already taxpayers. So for instance the UIF for domestic workers is still managed by the Department of Labour.
The Committee inquired about the level of co-operation between SARS and neighbouring countries.
In this regard, SARS has been involved in helping a number of countries understand whether they need to switch from a sales based tax to a VAT system, or in some instances where there has not been a tax on the sale of goods and services whether they should introduce such a tax.
In the case of Lesotho, SARS actually collects the VAT for the government. SARS is also working together with Lesotho to ensure that second-hand vehicles that are imported through South Africa destined for Lesotho, actual get to Lesotho and also do not simply ‘round-trip’ through that country back into South Africa. SARS is also working on a single administration document with Lesotho that will serve as a model for SARS’ activities in other regions such as the Trans-Kalahari Corridor. There are also plans to link this corridor with the Maputo Corridor so that there will be single customs administration system running from Mozambique through to Namibia.
In Swaziland, SARS has invested in an integrated customs business system whereby the Swazi customs administration will use exactly the same system as SARS on the South African side. A memorandum of understanding between the two countries, which is to be signed shortly, governs this.
SARS is also working with Zimbabwe around the development of a single customs declaration document, particular for use at Beit Bridge. Indeed one of the key objectives of the Southern African Development Community sub-committee on customs co-operation is to develop a single customs declaration document that applies throughout the region, i.e. SADC.
SARS has entered into memoranda of understanding with Zambia, Uganda, and Tanzania whereby the tax administrations exchange information in order to enforce compliance. SARS also sits on the regional branch of the World Customs Organisation which means SARS co-operates with countries beyond those in the SADC region.
SARS has also been assisting other countries in understanding how to set up tax systems, notably the DRC, Southern Sudan and Rwanda.
The Committee noted that it was difficult to interpret the performance scorecards SARS had provided, as they did not indicate what the current level of performance was and therefore what improvements were being aimed at. Particular concern was expressed with regard to ensuring effective border control.
SARS noted that while there has been some disagreement with the Auditor-General regarding the appropriate examination rates of cargo, SARS has now implemented a system whereby all the ports of entry are divided into three categories, and fixed examination rates are set for each category. A target success rate of 25% is set, meaning that when SARS examines a consignment they are aiming to find some form of non-compliance in 25% of the cases. The theory is that this approach as a deterrent, and so the level of compliance should increase on average. However, as SARS’ risk profiling improves the success rate of finding illicit cargo may improve at the same time as overall compliance improves. It is therefore difficult to set absolute performance targets. However, SARS is in the process of developing new baselines against which to measure performance.
The Committee expressed concern that senior managers from SARS would receive lucrative offers from the private sector, and therefore inquired what strategies SARS has in place to retain senior managers.
SARS indicated that the key components of their retention strategy included:
It was noted that SARS has done well in terms of the ‘best company to work for’ award over the past number of years.
The Committee asked what was SARS’ strategic thinking around the difference between the informal economy (i.e. successful businesses that operate outside of the formal sector) and the second economy (essentially a survivalist economy), and how this impacted on attempts to broaden the tax base.
SARS indicated that its approach was essentially to firstly understand the economy better, i.e. to understand ‘who is out there’ and secondly, to then draw them into the system – to get them onto the books even though they probably do not contribute much revenue.
The value of getting these businesses onto the books is twofold: it enables SARS to prevent a compliance drift whereby businesses already in the system use the informal sector as a means of escape. Second it enables SARS to build a compliance culture by being able to direct education services, such as providing small businesses with accounting tools. Indeed all the small business services aim at providing SARS with information that can then be used to manage compliance, and facilitate the process of businesses moving into the formal sector more smoothly, as opposed to hitting an insurmountable cliff-face.
Based on its deliberations the Committee makes the following recommendations:
Report to be considered.