Report of the Portfolio Committee on Finance on Budget Vote 8: National
Treasury, dated 20 May 2005:
The
Portfolio Committee on Finance, having considered Budget Vote 8: National
Treasury, reports as follows:
1.
Introduction
The Portfolio
Committee on Finance exercises oversight of the National Treasury in accordance
with the constitutional mandate as set out in section 55(2) of the
Constitution. In line with this Constitutional mandate, the Portfolio Committee
on Finance hosted a hearing on
2.
Committee commends National Treasury for its continued
good performance
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.
3.
Issues raised by the Committee
In
its deliberations on the National Treasury’s strategic plan, and the
presentation by the Deputy Minister of Finance, the Director-General and other
officials, the Committee raised the following issues:
3.1
Filling of vacancies at senior management level
The Committee
raised concern about the fact that there were still vacancies within the
National Treasury at the senior management level, and enquired whether there
were strategies in place to ensure that the vacancies 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 existence of a vacancy for the head of the Budget
Office. The DG stated that the person who acted in that position had been
seconded to HM Treasury in the United Kingdom as part of a 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.
3.2 Succession
management
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.
3.3 Working conditions at the
National Treasury
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.
3.4
Development and roll-out of legislation
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.
3.5 Prioritisation of analysis of
interest rates and exchange rates
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.
3.6 Overtime payments to
personnel
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.
3.7 Work on tax policy
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:
·
Taxing the retirement fund industry;
·
Changes to the treatment of medical schemes;
·
Adjustments to the treatment of the film industry;
·
The mineral royalties bill
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.
3.8 Applications for provincial
taxes by provinces
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.
3.9 Replacing the RSC levies
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.
3.10
Under-spending of capital budgets
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.
3.11
Developing capacity at local government
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.
3.12
Ensuring the maintenance of capital infrastructure
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.
3.13
Quality of information
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.
3.14
Measuring the quality of documentation produced by National Treasury
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.
3.15
Early publishing of the Division of Revenue Bill
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.
3.16
Debt ratios
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.
3.17
State owned enterprises
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.
3.18
Measuring the net worth of government
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.
3.19
Use of the revenue surplus of R9.6 billion
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.
3.20
Recapitalisation of state owned enterprises
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.
3.21
Performance targets for supply chain management
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.
3.22
Achieving unqualified audit reports
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.
3.23
The functioning of internal audit
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.
3.24
Development of the accrual system
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
The National
Treasury noted that it aimed to publish a plan for the implementation of the
accrual system in government by
3.25
Special pensions
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.
3.26
Funding of the FFC
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.
4.
Committee recommendations
Based
on its deliberations the Committee makes the following recommendations:
- That when the National Treasury changes output
targets for particular programmes between one strategic plan and the next, that
it should note the changes and clarify why the changes were made.
- That the National Treasury should put forward
proposals for monitoring and reviewing the quality of the documentation
prepared by the National Treasury.
- That the National Treasury indicate its reporting
responsibilities to the Finance Committee in its Strategic Plan, in the same
way as it indicates its reporting responsibilities to the Standing Committee on
Public Accounts.
- That
the National Treasury submit its quarterly reports on the implementation of the
budget to the Committee.