REPORT OF THE JOINT BUDGET COMMITTEE ON BUDGET ANALYSIS WORKSHOP

As published in the ACT of 16 May 2007

1. Introduction
Parliamentary oversight over the executive has reached a point where the Legislature and its committees need to build capacity to keep up with reforms in the public sector. Such reforms have included new requirements for planning, budgeting, financial management and reporting. As a result the Legislature has had to refine and develop its oversight processes to ensure that information from the executive can be comprehensively interrogated to ensure better service delivery. More specifically it has impacted on the manner in which parliamentary committees perform their functions.

The Joint Budget Committee (henceforth the JBC) has, over the past years, held several workshops to develop aspects of its functioning. In accordance with this approach, the JBC held a workshop on budget analysis, practices and techniques on Monday the 19th and Tuesday the 20th of February 2007. Although the workshop focused on these subjects, discussions also touched on other issues relevant to the Committee. The workshop was facilitated by The Applied Fiscal Research Centre (AFReC) and took place at Lagoon Beach Hotel, Milnerton. Proceedings included:

• A discussion on the JBCs’ Terms of Reference;
• A presentation by AFReC on budget analysis techniques;
• A presentation by National Treasury on In-Year Monitoring instruments and;
• A presentation by the Auditor General on auditing techniques and the Financial Management Capability Model.

This Report serves both as a recap of the event and a summary of challenges and action points for the JBC on how to be more effective in its oversight role.

2. Joint Budget Committee’s Terms of Reference

Parliament has, for the past several years, been occupied with the process of reviewing and strengthening its oversight function. Part of this involves developing oversight practices over budgetary matters. As a result, Parliament decided to, amongst other things, establish a committee, the Joint Budget Committee, with the following Terms of Reference (TOR):

(1) Consider proposed allocations in the Medium-Term Expenditure Framework and the Appropriation Bill and whether these allocations are broadly in keeping with the policy directions of the Government;

(2) Make proposals regarding the processes Parliament should follow with regard to its role in the developing of budgets in accordance with constitutional requirements;

(3) On a regular basis monitor monthly published actual revenue and expenditure per department, and to ascertain whether they are in line with budget projections;

(4) consider, when tabled, the Medium-Term Budget Policy Statement, with the exception of those sections dealing with the macro-economic situation and revenue;

(5) conduct hearings on the Medium-Term Expenditure Framework and Budget Policy Review Document, with the exception of those sections dealing with the macro-economic situation and revenue;

During the Workshop, the need to operationalise the JBC’s TOR was noted as fundamental. In the process of operationalising its TOR, the Committee identified various ongoing concerns, which needed to be addressed. These include consolidating its mandate, especially its role and relationship vis-á-vis other Parliamentary structures and other state institutions, addressing issues of capacity and programming and reviewing its own progress.

2.1. The Joint Budget Committee’s TOR and Relationship with other Committees

In terms of its general mandate, the JBC identified the need to ensure that budget oversight was practiced in conjunction with other parliamentary committees, for example those engaged in overseeing state finances.

To prevent overlap and improve operations, the JBC recognized that the roles and responsibilities of each required clarification. The Committee discussed, for example, to what extent it could assess issues of institutional performance, such as value for money — which falls within the Standing Committee on Public Accounts (SCOPA’s) remit. The issue of the JBCs engagement with the provincial and local spheres and other organs of state, such as the institutions supporting constitutional democracy—the Chapter Nine Institutions — were also raised.

Once clarified, each committee could then design analytical tools to engage the executive in its respective focus area effectively. Generally, the JBC felt it would be appropriate for the Committee to be making recommendations to Parliament. Related to this, the JBC also felt that 2007 was a suitable juncture to revisit and update its 2005-2009 Strategic Plan.

In relation to the role of JBC in influencing Money Bills, the Committee stated that clarity was required in terms of the JBC’s role in the Appropriation Bill, currently formally referred to the Portfolio Committee on Finance and the Division of Revenue Bill, which the Select Committee on Finance engages with.

The JBC further recognized that it should be informed of progress and make inputs into the work of the Task Team established by the Joint Rules Committee with the aim of developing legislation in accordance with Section 77 of the Constitution to allow Parliament to amend Money Bills.

In addition, the JBC recognized that, in conducting oversight, the imperative of facilitating public participation from both organized interest groups and from disadvantaged stakeholders, such as those active in the second economy, was an ongoing challenge. The Committee felt that, to supplement informational inputs of this kind, it could also engage in more direct oversight through, for instance, visiting sites of service delivery.

Lastly, the JBC highlighted that due to Members busy schedules and the programming arrangements for the National Assembly and National Council of Provinces, the ability of the Committee to fulfill its mandate in a timely manner was considered to be serious challenge.

2.2 Oversight over Parliament’s Budget
A further specific oversight issue identified was the question of the JBCs role in monitoring and assessing Parliament’s budget and expenditure. The Committee felt that, until the legislation regulating Parliament’s financial management has been adopted — the development of which the JBC should track — the Committee should hold Parliament accountable for budgetary matters.

3. Capacity and Training Needs
In terms of workload and capacity, the JBC highlighted a lack of human resources and other support as an ongoing concern. To better manage its workload, the Committee discussed the option of restructuring the Committee and utilising a sub-committee system, similar to that used by SCOPA. In this regard, it was emphasised that the mandates of these sub-committees should be very clear. The Committee also examined the possibility of developing relations, perhaps through memorandums of understanding, with service providers and non-executive organs of state such as the Auditor-General and the Financial and Fiscal Commission.

Training for Members on budget analysis was also raised as a focus area. Specifically the JBC, with the assistance of AFReC, identified the following training requirements or topics:

• Topic 1: Information and training on in-year monitoring activities and instruments, specifically how to effectively utilize departments’ Strategic Plans and monthly an quarterly expenditure reports.
• Topic 2: Training on public finance terminology and instruments: the JBC highlighted the need for more clarity on public finance terms such as inputs, outputs, activities, outcomes, allocative efficiency, operational efficiency, etc. These should be clearly demonstrated in terms of departmental examples.
• Topic 3: Budget formats — best practices that departments should use when budgeting.
• Topic 4: The role and nature of adjustment budgets and whether such adjustments were used for under or over expenditure.
• Topic 5: Training on performance budgeting, which would aid in determining the impact of changes in output and quality of services when resource envelopes are adjusted. The example of the rehabilitation of specific prisons in the country was used to illustrate the need to clearly understand the relationship between costs (resources, inputs) and outputs.
• Topic 6: Fiscal dumping — how to interpret early warning signals and act on instances of fiscal dumping. In this regard the JBC noted examples of extraordinary fiscal dumping exercises and highlighted the need for the appropriate timing of national budget payments to other spheres of government.
• Topic 7: Transfers and subsidies. Although linked to the concern about fiscal dumping, the JBC highlighted the need for clarity and proper understanding of the prerequisites of grants, transfers and subsidies to entities as well as information on expenditure and quality of outputs delivered.
• Topic 8: Public participation in budgetary processes: the JBC and other committees may need to explore how to link up with civil society initiatives on the budget. The Institute for a Democratic South Africa (IDASA), for example, has a programme dedicated to budgetary analysis and the Committee could enquire about possibilities for support.
• Topic 9: Vacancies in the public sector — the need to contextualise the practical problems and current remedies.

As an initial step, the JBC stated that guidelines on the annual programme of the Committee as well as a manual on best practice to inform topical and technical questions to departments would be of practical assistance and be useful for developing institutional memory.

4. Presentation by the National Treasury and JBC Discussions

The National Treasury (NT) presented on various subjects including the implementation of financial management legislation, expenditure reports and monitoring, infrastructure projects and under expenditure.

4.1 The Implementation of Financial Management Legislation
Concerning the implementation of financial management legislation such as the PFMA, Treasury stated that the lack of project planning and management capacity was a serious problem evident throughout government. Although enthusiasm was present, information and skills were often lacking at under-performing departments and entities. Examples of this were the recurring requests by some departments for monthly disbursements of one twelfth of the total annual funding envelope—this often does not coincide with the practical expenditure needs.

The JBC noted the lack of financial management skills within government. The Committee further stressed the need for departments to comply with legislative requirements and, in this context, made the example of departments not paying suppliers within the 30 day time period. Small suppliers in particular needed to be protected from extended delays in payments. Treasury stated that the necessary funds for payment of suppliers were normally adequate although, due to internal inefficiencies and poor cash management in departments, these payments were often not made within the prescribed time periods.

4.2 Monitoring Expenditure and Infrastructure
Treasury highlighted the importance of monitoring budgeted versus actual revenue and expenditure figures as well as audited outcomes of previous budgets. Treasury agreed that PFMA Section 32 reports — whose purpose was to report on the implementation of the Appropriation Act, and after October of each year, the Adjustments Appropriation Act — were important but limited oversight instruments: they could not, for example, assist the JBC and other oversight bodies in picking up on fiscal dumping in the last quarter of each financial year. Apart from Section 32 Reports, NT also produces an internal report, which monitors departments and entities’ expenditure patterns and service delivery. These reports are not published.

Treasury also presented on the financing, expenditure and monitoring of infrastructure projects. Some of the problems in infrastructure roll-out were highlighted, such as the lengthy delays in environmental impact assessments and delays associated with litigation. Treasury also explained its national infrastructure project register, which tracks the progress of governmental infrastructure projects from the identification phase through to the design, construction and completion phases. Similar registers were also being established for provincial government infrastructure programmes. Notably, the register was not currently reflected in Section 32 reports. Treasury stated that it was reliant on accurate and timeous input from departments and provinces for the updating of this register. Treasury added that it would be difficult to utilise the register for oversight purposes as it was complex system.

Treasury also indicated that there were separate teams to monitor individual infrastructure projects although their ability in this regard varied: large construction projects, such as dam construction, were easy to monitor whilst smaller projects, such as the Department of Trade and Industry (DTI)’s small enterprises development agency outlets in towns, were more difficult. The NT stated that the monitoring of these projects should also be a bottom-up participative process in that communities should assist with the verification of completion and quality standards. The NT could only effectively focus on the financial reporting aspect of departments’ service delivery programmes and outputs. Some monitoring functions are delegated to Provincial Treasuries.

Treasury added that the monitoring of infrastructure projects at local level was particularly problematic. The example of the multi-purpose community centres (MPCCs) was used—with NT indicating that local authorities often did not want to maintain and operate these centres. The tracking of Housing was also noted as a challenge — Treasury explained that the nature of the Department of Housing’s database as well as its internal tracking systems made it difficult to count finalized units. The example of the slow pace of the N2 Gateway project was given. This project generated unique delivery problems and delays, compounded by community preferences for the location of houses and the relative cost of temporary relocation.

The JBC noted the lack of proper asset registers and the need for departments, provinces and municipalities to properly value and account for their assets was emphasized. In addition, the Committee referred to the importance of parliamentary oversight over the Gautrain rapid rail project and the issue of monitoring the transfers of funds from national to provincial government for this purpose. Treasury indicated it was currently piloting a project monitoring tool to ease financial accounting of transfers and subsidies.

Concerning the question of monitoring and enforcing conditional grants, Treasury explained that, in cases where government departments failed to meet conditions for grants, it had yet to use the legislated mechanisms to enforce compliance. Instead, the practice had been for NT to facilitate quarterly meetings with the relevant departments and entities. The NT added that it would welcome the assistance of the JBC in formulating and overseeing the implementation of criteria for grants.

4.3 Under-Expenditure
Treasury reported that under-expenditure was still a concern, especially in some essential services such as Health — the Hospital Revitalization Programme was used as an example Funds were, however, still allocated to these services due to their importance. In other cases funds were redirected to other departments. Generally reasons for under-expenditure varied but, as was the case of Health, dysfunctional supply chain management and a lack of management skills were often cited as causes. A further example related to the construction of certain correctional centres, where the lack of proper feasibility studies severely hampered roll out. Even though the NT proposed that Public Private Partnership’s (PPP) arrangements should be followed with the building of these centres, the relevant Department resisted. The issue of the correctional centres was of great concern to the JBC as the centres were supposed to be near completion.

Finally Treasury asserted not all instances of under-expenditure were due to poor financial management: in the case of the Department of Land Affairs, for instance, money destined for land restitution projects was taken away due to external difficulties in the restitution process. Generally, however, most cases of under- expenditure could often be traced to inadequate strategic planning.

4.4 Vacancies
On the subject of vacancies in the public sector, Treasury revealed that employee appointment procedures in government were complex and lengthy and should perhaps be streamlined. In addition, NT indicated that vacancies in departments were sometimes inflated to that they could vire from these budget line items at the end of financial year to cover other expenditure.

The JBC stated its concern about the skills mismatch in the public service as well as the payment of bonuses despite the failures and lack of performance contracts. The Committee further raised the issue of unrealistic bonuses when Key Performance Indicators have not been met. Key Performance Indicators (KPI’s) should be thoroughly researched and require focused scrutiny.

5. Presentation by the Auditor General and JBC Discussions
The Auditor General, Mr Terence Nombembe, in his first interaction with the JBC, presented on the Financial Capability Model. Prior to discussing the model, the AG explained the three types of audits undertaken by his office:

(a) audits on the reliability of financial information presented in annual reports, which look for adequate evidence for the financial info presented in annual report. The AG noted the increasing intensity of doubt about evidence in some entities’ annual reports.

(b) audits of service delivery information — officially known as ‘‘audits of predetermined objectives’’. Underlying information should support objectives set out in strategic plan. The AG reported that the NT and the Dept. of Public Services and meet to define what information should be included in annual reports.

(c) performance audits, which take a closer look at the delivery competence of entities. Performance audits cover issues of efficiency, effectiveness, and economy (the three ‘‘Es’’) of public expenditure management. For example, such audits examine the input/output ratios of entities service delivery programmes.

The Auditor General conceded that it is a common mistake to confuse the last two types of audits. It is the intention of the AG to reverse the level of concentration in the first type of audit towards a focus on the last two types of audits. A balance between the three types of audits would bring the operations of the AG closer to similar benchmark institutions in the world.

The AG informed the Committee that for purposes of performance audits his office would work together with stakeholders such as the JBC.

The Financial Management Capability Model
The Auditor General of Canada has developed a Financial Management Capability Model that can be used by regularity auditors to determine the financial management capabilities of government departments. This model formed the basis for the model currently under development by the South African Office of the AG. The object of this model was to provide a framework to enable the reader of Annual Reports to assess the adequacy of financial management, to monitor progress and to make comparisons.

The AG explained the various levels of analysis contained in the model:

• Level 1: Start-up level. No proper control framework exists — basic planning and control taking place on an ad hoc basis.
  Financial accounting and internal control systems not properly developed. No internal audit systems or audit committee established.
• Level 2: Development level. This level involves the development of proper internal control frameworks and financial accounting processes. Internal audit systems and audit committees are established. Both Level 1 and 2 are considered unacceptable for departments and the AG typically requires progress reports from relevant departments on how they plan to improve.
• Level 3: Control level. The focus at level 3 is on the proper implementation and functioning and the performance of financial accounting and internal control systems, including compliance with financial management legislation. The AG noted that not all departments and entities in South Africa had reached this level and added that performance audits would gradually increase in volume once financial management requirements (Level 3) are met.
• Level 4: Information level. The focus on Level 4 was on measuring how resources are used with reliable and sufficient financial information. This level of capability typically resulted in unqualified audit reports.
• Level 5: Managed level. The focus is on balancing efficient and economical use of resources with quality and/or effectiveness of results achieved.
• Level 6: Optimising level. The focus is on continuous improvement and learning.

The AG indicated that the model provided a benchmark for improvement and assists by asking the most relevant questions, and in simplifying conclusions over the capacities of entities. TheAG stated that explanations and assessments based on the Financial Management Capability Model would be included in the next General Report of the AG.

6. Recommendations
In line with its Terms of Reference, the Joint Budget Committee recommends the following:

6.1 For the JBC to fulfil its oversight and monitoring responsibilities, the Committees TOR must be further clarified and developed. It follows that an operational system for the Committee should be designed and implemented.

An operational system should address, amongst other issues, the overlapping functional areas between the JBC and other committees, for example SCOPA and the Portfolio and Select Committees on Finance, as well as the Committee’s reporting functions. Such a plan would empower the JBC to alert the relevant sector committees to interrogate departments on expenditure management issues as they arise. One additional option may be for the JBC to include a matrix of key questions as an annexure to every quarterly report.

6.2 In addition, the Committee should undertake a formal training needs assessment. As an initial step, guidelines on the annual programme of the Committee as well as a manual detailing topical and technical questions to departments could be developed.

6.3 Related to the above, the capacity needs of the Committee should to be addressed. This would necessitate, amongst other things, addressing the issue of institutional memory and ensuring continuity in the Committee’s human resources and technical support.

6.4 The JBC should confer with other committees on strategic plans and budget votes in order t track input/output ratios and later assess the outcomes achieved. The Committee also indicated that PFMA Section 32 reports provide little information that could be used by committees to detect early warning signs on spending and service delivery. The JBC will further engage with National Treasury on this matter.

6.5 That the JBC should consult with the AG in future, specifically on the Financial Management Capability Model and whether departments have reflected on this model.

Report to be considered.