The 2011 Budgetary
Review and Recommendations Report of the Standing Committee on Finance on the
National Treasury, dated 03 November 2011
The Standing Committee on Finance, having assessed the
performance of the National Treasury for the 2010/11 financial year, reports as
follows:
1. Introduction
In terms of section 5(2) of the Money Bills Amendment
Procedure and Related Matters Act No. 9 of 2009, committees must annually
submit budgetary review and recommendation reports for tabling in the National
Assembly for each department. A budgetary review and recommendation report must
provide an assessment of a department’s service delivery performance given
available resources, an assessment on the effectiveness and efficiency of a
department’s use and forward allocation of available resources, and it may
include recommendations on the forward use of resources.
1.1 The Mandate and Role of the
Committee
The Standing Committee on Finance was established in terms
of section 4(1) of the Money Bills Amendment Procedure and Related Matters Act
No. 9 of 2009. The mandate of the Committee is conferred to it by the
Constitution, legislation, the standing rules or a resolution of a House,
including consideration and report on the follwing:
Furthermore, the mandate encompasses the committee’s
function to legislate, conduct oversight on the Executive’s actions and its
entities. The Money Bills Amendment Procedure and Related Matters Act No. 9 of
2009 makes provisions for a procedure for this
committee to amend money bills.
1.2 Methodology.
In complying with section 5(2) of the Money Bills
Amendment Procedure and Related Matters Act, Act No 9 of 2009, the Standing
Committee on Finance held meetings on the 2009/10 Annual Reports of National
Treasury, the South African Revenue Services (SARS), the Financial and Fiscal
Commission (FFC), the Financial Intelligence Centre (FIC), the Public
Investment Corporation (PIC), the Land Bank, the Development Bank of South
Africa (DBSA), the South African Reserve Bank (SARB),the Financial Services
Board (FSB) and the Pension Fund Adjudicator (PFA). The Office of the
Auditor-General was also invited to give input during the budget review and
recommendation report process. The report therefore reflects key issues that
were identified by the Committee.
1.3 Mandate and role of
National Treasury
The National Treasury is responsible for managing
The budget process was enhanced as a result of the Money Bills
Amendment Procedure and Matters Related Act, (Act 9 of 2009) and National
Treasury’s capacity was increased by creating a division handling international
and regional economic policy.
The
legislative mandate of the National Treasury includes developing and
prescribing measures to ensure equitable resource allocation and proper
expenditure control in each sphere of government, as well as to ensure that
this function is executed in a transparent manner. The National Treasury does this by advocating
and ensuring adherence to the following guidelines and procedures:
·
Generally Recognised Accounting Practice.
·
Uniform Expenditure Classifications.
·
Uniform treasury norms and standards.
As
the custodian of state funds, the National Treasury is therefore responsible
for coordinating departments’ budgets in all spheres of government. The Treasury’s role in this regard is to
ensure that appropriated funds are transferred to departments for implementation
of government priorities, and that government expenditure is continuously
monitored.
1.4 Strategic Overview
of National Treasury
The
overarching aim of the National Treasury is to support and promote economic
development, good governance, social progress and rising standards of living
through the accountable, economical, equitable, and sustainable management of
public finances.
During
the period under review, the National Treasury continued to accelerate its
coordinated implementation of the key strategic priorities, as depicted in the
Department’s Strategic Plan and Estimates of National Expenditure: promoting
the fiscal policy framework of the government, coordinating intergovernmental
financial and fiscal relations, managing the budget preparation process which
encompass revenue, expenditure, assets and liability management, exercise
control on the implementation of the national budget, facilitate the
implementation of the Division of Revenue Act, enforce effective financial
management practices and contribute meaningfully towards employment creation.
The
National Treasury will continue to build on its past achievements and good
performance by giving effect to government commitment of rooting out wastage,
promoting cost efficiency and phasing out of ineffective programmes.
1.5 Analysis of
Expenditure Reports
National Treasury is established in terms of Section
216 of the Constitution, 1996 and Section 5 of the Public Finance Management
Act (No. 1 of 1999). Among its responsibilities, National Treasury is required
to enforce compliance with good financial management principles and monitor the
implementation of budgets. The department’s mandate is executed through
programmes that largely play a facilitation and coordination role of the
budget. To ensure effective delivery on its mandate, the department is
allocated a budget as per programme and economic classifications that supports
the identified priorities of the department.
The
Constitution requires that budgets and budgetary processes must promote
accountability. In line with this constitutional principle, the Public Finance
Management Act (PFMA) requires each government department and public entity to
prepare reports (performance and financial) to account on their activities. The
scrutiny of such reports is very important to the oversight work of Parliament,
as it provides Members of Parliament with a holistic overview of the actual
performance against plans. This section analyses the expenditure performance of
the National Treasury.
1.6 Budget Allocation
National Treasury was allocated an appropriation for the Department, amounting to
R50.2 billion (2009/10:R62.8 billion) during the year under review and is
divided into two main budgets, that is, operational budget and transfers.
Programme 1 to 6 constitutes the Department’s operational budget, which
amounted to R1.4 billion (2009/10:R1.3 billion), which is 2.9 per cent of the
total appropriation and the remaining budget of R48.8 billion (2009/10:R61.6
billion) falls under programme 7 to 9, which is 97.2 per cent of the total
appropriation. The report stated that the operational budget comprised R552
million (2009/10: R408 million) for compensation of employees, R810 million
(2009/10: R788 million) for goods and services and R16 million (2009/10: R16
million) for the acquisition of capital assets.
1.7
Expenditure at the end of the 2010/11 Financial Year
The following presents the spending trends by the
National Treasury on its programme budget:
The total appropriation to
the Administration programme amounted to R277 million (2009/10: R247 million).
Expenditure for this programme totalled R249 million (2009/10: R243 million),
which comprises expenditure on
compensation of employees of R109 million (2009/10: R92 million), goods and
services R134 million (2009/10: R143 million), transfers R2 million (2009/10:
R1.4 million) and capital expenditure R4 million (2009/10: R7.6 million).
The total appropriation for
Public Finance and Budget Management amounted to R315 million (2009/10: R265
million). The current expenditure for this programme totalled R230 million
(2009/10: R242 million) and comprised compensation of employees R144 million
(2009/10: R123 million) and goods and services R86 million (2009/10: R119
million). Capital expenditure amounted to R1 million (2009/10: R1 million).
Transfer payments amounted to R22 million (2009/10: R20 million).
The total appropriation for
the Assets and Liability Management programme amounted R73 million (2009/10:
R61 million). The total expenditure incurred within this programme amounted to
R67 million (2009/10: R53 million) and consists of compensation of employees
R47 million (2009/10: R38 million), goods and services R19 million (2009/10:
R15 million) and payments for capital expenditure R0.6 million (2009/10:R0.1
million).
The total appropriation for
Financial Management and Systems amounted to R433 million (2009/10: R459
million). The total expenditure incurred amounted to R395 million (2009/10:
R406 million) and comprises compensation of employees R43 million (2009/10: R40
million), goods and services R352 million (2009/10: R365 million) and payments
for capital expenditure R1 million (2009/10: R1 million). The report cited
further that the major cost pressure on this Programme relates to professional
service providers for maintaining the transversal systems and the development
of the Integrated Financial Management Systems (IFMS) project.
The total appropriation for
the Financial Accounting and Reporting programme amounted to R206 million
(2009/10: R139 million) and consisted of an operational budget of R144 million
(2009/10: R86 million). The total amount spent by the programme was R164
million (2009/10: R137 million), comprised compensation of employees R66
million (2009/10: R51 million), goods and services R35 million (2009/10: R33
million), and capital expenditure R1.2 million (2009/10: R1 million), while
Transfer payments amounted to R62 million (2009/10: R53 million).
The report stated further
that this programme is responsible for the transfer of payments to the Auditor-General
of South Africa (AGSA) in terms of the Public Audit Act (Act No. 25 of 2004),
whereby National Treasury is obliged to pay audit costs in respect of the
auditing of statutory bodies for any financial year concerned where such costs
exceed one per cent of the total expenditure of such bodies. The transfer
payments in respect of these statutory audit costs amounted to R21 million
(2009/10: R19 million) during the year under review.
The total appropriation for
the Economic Policy and International Relations programme amounted to R130
million (2009/10: R96 million). The
total expenditure incurred during the reporting period amounted to R104 million
(2009/10: R94 million) and comprised compensation of employees R68 million
(2009/10: R59 million), goods and services R31 million (2009/10: R30 million)
and capital expenditure R0.5 million (2009/10: R0.5 million), while transfer
payments amounted to R5.3 million (2009/10: R5 million) for economic research.
The total appropriation for
Provincial and Local Government Transfers amounted to R12.8 billion (2009/10:
R14.4 billion) during the year under review. Total expenditure amounted to
R10.1 billion (2009/10: R14.3 billion) and included conditional grants
transferred directly from National Treasury’s vote to provinces and
municipalities amounting to R8.8 billion (2009/10: R9.2 billion) and R365
million (2009/10: R300 million) respectively. The balance of R882 million
(2009/10: R578 million) was in respect of the Neighbourhood Development
Partnership Grant to municipalities.
The total appropriation for
Civil and Military Pensions, Contributions to Funds and Other Benefits amounted
to R2.7 billion (2009/10: R4.9 billion) during the year under review. Expenditure for the period under review
amounted to R2.7 billion (2009/10: R4.9 billion) which comprised civil pensions
and other contributions R2.5 billion (2009/10: R4.8 billion) and military
pensions and other contributions R164 million (2009/10: R164 million) and goods
and service amounted to R38 million (2009/10: R25 million).
The report highlighted that
transfers are made to the South African Revenue Service (SARS), Financial
Intelligence Centre (FIC) and Financial and Fiscal Commission (FFC) for the
fulfilment of their statutory obligations, and to the Development Bank of
Foreign transfer payments
were made to:
·
The World Bank Group;
·
The African Development Bank (AfDB) and African Development Fund;
·
Common Monetary Area Compensation to
·
The African integration and support
programmes; and
·
Various international programmes, such as
Common Wealth Fund for Technical Cooperation, the Investment Climate Facility,
and the International Funding Facility for Immunisation.
Total foreign transfers
made by National Treasury amounted to R532 million (2009/10: R554 million)
during the reporting period; of which the transfers to
1.8 Analysis of the
Annual Report and Financial Statements
The indispensability and comprehensive analysis of
annual reports cannot be underestimated. Annual reports are the most salient
tools to measure the performance of a department or entity, and play an
enormous role in holding government departments accountable to the legislature
and the citizenry. According to the Guidelines for Legislative Oversight,
annual reports are key reporting instruments for departments to report against
the performance targets and budgets outlined in their strategic plans, read
together with the Estimates of the National Expenditure (ENE). They allow
Parliament to evaluate the performance of a department after the end of a
financial year. The critical information contained in the annual report, which
is backward-looking, include inter alia, service
delivery information, presentation of financial statements, audit report and
accounting officer report.
This section provides a summary and analysis of the
2010/11 Annual Report for National Treasury and looks at the overview of the
identified programmes as per National Treasury‘s 2010/11 Annual Report, wherein
only the unattained targets shall be outlined. The section further explains the
management report as per 2010/11 Annual Report, the Auditor-General’s report.
Financial statements are salient in measuring both the performance and position
of an undertaking and their short analysis is also presented.
Programme
Analysis
It is in the
interest of good ethical reporting to present accurate, fair and correct
information regarding the department‘s annual performance against its planned
objectives as set out in the different documents to Members of Parliament and
the public at large. The method or approach followed in this section is to draw
attention to targets that were not met during the 2010/11 fiscal year. The
focus is on output performance, targets, actual performance and reasons why the
targets were not met.
Programme
1: Administration
Within the
Administration Programme, the Corporate Services sub-programme set a target to
revise and approve the Information Communication Technology (ICT) operational
plan during the year under review. This target was partially achieved in that
ICT operational plan has been revised, but not approved. The Corporate Service
sub-programme further set a 60 per cent target to implement the Electronic
Procurement System. However, the report indicated that this target was not
achieved during the reporting period due to delays in the implementation of the
Integrated Financial Management System (IFMS). The report is not clear
regarding the actual work done and what the status quo is.
Programme
2: Public Finance and Budget Management
With regard
to the Public Finance and Budget Management Programme, the Budget Office
sub-programme has indicated that the Official Development Assistance (ODA)
resources should be aligned to, and mobilised for, government policies and
priorities with the focus broadened to include economic and rural development.
However, the report indicated that during the year under review, alignment with
the rural development programme has not commenced.
A further
target for the department was that 500 officials would participate in both the
budget formulation and budget analysis courses per year. However, the report
indicated that 129 participants completed the Budget Formulation courses out of
221 and 88 participants completed the Budget Analysis courses out of 170.
In terms of the Technical and Management
Support sub-programme, the target to complete one project as measured by the number
of hospital Public Private Partnership (PPP) project reaching financial closure
has not been achieved during the year under review. The report indicated that
the delays in concluding agreement with Provincial Health Departments and
Treasuries resulted in the late start of the project, but that the target will
be met in the next 18 months.
Programme 3: Asset and Liability Management
With regard
to the Governance and Financial Analysis sub-programme, the department set a
target to review three major metros (
Under the
Liability Management sub-programme, with regard to finance government’s gross
borrowing requirement, the department has set a target to achieve gross
issuance of R191.7 billion during the year under review. However, the report
indicated that the gross borrowing requirement of R156.2 billion was financed
during the reporting period.
The
department further indicated that debt service costs will be managed at a
target of 2.6 per cent of Gross Domestic Product (GDP). However, the target was
not met, as the report highlighted that debt service costs were 2.5 per cent of
GDP.
Programme
4: Financial Management and Systems
Under the
Supply Chain Policy sub-programme, the department set a target to introduce
strategic sourcing principles to all spheres of government. However, the target
was not met due to a decision to reprioritise implementation of the Integrated
Financial Management Systems (IFMS).
Under the
Financial Systems sub-programme, the department set a target to implement the
Procurement Management Module in the Department of Defence. However, the target
was not achieved due to delays experienced with the State Information
Technology Agency (SITA). Another target was set to implement the Human
Resource Management Module in the Department of Public Service Administration
and Free State Provincial Department of Education. However, in
Programme
5: Financial Accounting and Reporting
Under the
Technical Support Services sub-programme, the department had set to contribute
toward development of local and international standards on accounting, auditing
and risk management; as well as to attend all International Public Sector
Accounting Standard Board (IPSASB) meetings and submit a report within 7 days
of attendance. However, the 2010/11 Annual Report indicated that the 3 of 4
meetings were attended and reports submitted. The report further stated that
the February meeting could not be attended due to unforeseen circumstances,
which are not explained.
Under the
Internal Audit Support sub-programme, the department had targeted 70 workshops
to support the implementation of audit committee guidelines. The report
indicated that the target was not achieved, thus the workshops were abandoned
because the need had been reduced, and as most of the audit committee had been
trained in the previous financial year.
Under the
Risk Management Support sub-programme, the department had targeted 15 learners for
Risk Management Learnership (RML) implementation.
Although the preparation for roll out had been put in place as reported, the
target was not achieved due to funding constraints.
Programme
6: Economic Policy and International Financial Relations
Under the
Tax Policy sub-programme, the department has set a target to publish a
discussion document to explore options dealing with the tax treatment of
financial instruments, carried interest in private equity transactions and the
deductibility of interest payments. However, the 2010/11 Annual report
indicated that the target was not achieved and the document would be completed
in the 2011/12 financial year.
1.9 Report of the Accounting Officer
The report of the Accounting Officer
cited that among key challenges faced by the department are the attraction and
retention of scarce skills despite the successful internship programme of the
department. The Chartered Accountant Academy Programme suggests real
collaboration between the department and the South African Institute of
Chartered Accountants and the local government metros to expand the programme
to the wider public sector.
The
report indicated that the wider income inequality necessitates reforms that are focusing on reducing this
imbalance through sustained job creation, combating the abuse of market power
and realisation of greater income security. The report further stipulated that
the department undertook several initiatives to monitor the implementation of
the Public Finance Management Act (Act No: 1 of 1999) (PFMA) and Municipal
Finance Management Act (No 56 of 2003) ( MFMA), such as the introduction of a
Financial Management Capability Maturity Model.
The introduction of the
Financial Stability Board in 2009 in response to the global economic meltdown
by the G20 necessitated the alignment of the South African financial sector
policy to the global regulation of the financial services industry. The report
cited that the rationale is to ensure regulation in important areas through
bolstering a methodological risk approach to mitigate risk by hedge funds and
over the counter derivatives and improving bank resilience to market
volatility. With regard to regional integration, the National Treasury placed
an emphasis on encouraging integration and development through the Southern
African Development Community (SADC) and fostering new partnerships.
The Accounting Officer’s
report further indicated that the department’s revenue during the year under
review amounted to R3.3 billion (2009/10: R3.5 billion) and consisted of sales
of goods and services of R51 million (2009/10: R300 million), fines, interest
and dividends of R2.6 billion (2009/10: R2 billion) and other recoveries
amounting to R0.7 million (2009/10: R1.2 billion).
The Local and foreign assistance
received in cash amounted of R11 million (2009/10: R15 million) during the year
under review. The expenditure incurred
amounted to R12 million (2009/10: R16 million) and other funds amounting to
R34.2 million (2009/10: R10.3 million) were transferred to external spending
agencies on behalf of the Reconstruction and Development Fund.
The report indicated that
payments of R193 million (2009/10: R71 million) were processed during April
2011, which relate to the 2010/11 financial year. These payments were not
included in the financial statements for the 2010/11 financial year, which were
prepared on the modified cash basis of accounting. Departmental revenue
amounting to R190 million (2009/10: R203 million) was received after year-end
and surrendered to the National Revenue Fund.
The report indicated that
through the human resource business partnership model, there has been an
improvement with regard to internal hiring, which increased to 54 per cent
against the target of 45 per cent, and the quality of hiring new employees has
improved to 85 per cent, there is still need for critical and scarce
skills. However, the skills database is
being implemented to assist in this regard.
The internship programme
has improved with a conversion rate improving to 71 per cent, the department
employee base comprises of 6 per cent of interns in this regard, which reflect
4 per cent higher than the target of 2 per cent as recommended by the
Department of Public Service and Administration (DPSA). The training remains an important element of
capacitating the Department and as such the Human Resources Development
business unit has expanded its training portfolio and provided an average of
8.15 training days per employee during the year under review. To further the training, the business unit
also introduced its Leadership Development Programme (LDP) for senior
management; from Deputy-Director to Deputy Director-General (DDG) level. During
the year under review, 53 per cent of staff in these positions has already
attended the training. The human resource management has improved its
performance agreement to 95 per cent whilst escalating the submission of
performance reviews to 78 per cent.
In terms of the Information
and Communication Technology (ICT), the department has adopted the COBIT
compliance framework as recommended by the DPSA, as its operational standard.
This is in line with the business unit’s strategy of developing its strategic
information systems plan that includes revision of existing ICT governance
policies, processes and procedures that will also support its implementation of
an Enterprise Architecture.
With regard to facilities
management, the report indicated that provision of parking is a significant
challenge to the department. Facilities Management is now providing an
ergonomic working environment in all business environments as well as 100%
subsidised parking for all of National Treasury’s level 9 and above employees.
The department also achieved 100 per cent effectiveness rating for its delivery
against occupational health and safety standards and 84 per cent client
satisfactory rating on its service call resolution.
The report has cited that
programme 8 was administered by the Government Employees Pension Fund (GEPF)
and recently by the Government Pensions Administration Agency (GPAA) since
2010. During the period under review, an irrecoverable accumulated loss of
approximately R419.7 million of pension benefits was realised which resulted
from ineffectiveness of control activities.
1.10
Analysis of Financial Statements
The
Auditor-General (AG) expressed an unqualified audit opinion on the financial
matters of the National Treasury as at 31 March 2011. His opinion means that
that the financial statements present fairly, in all material respects, the
financial position of the National Treasury as at 31 March 2011, its financial
performance and its cash follow for the year then ended, in accordance with the
Departmental Financial Reporting Framework
prescribed by the National Treasury and the requirements of the Public Finance
Management Act No 1 of 1999 (PFMA) and Division of Revenue Act No 1 of 2010 (DoRA).
The
following are emphasis of matters as reported by AG report:
1.10.1 Irregular expenditure
The
irregular expenditure to the amount of R11 million (2009/10: R12.1 million was
incurred as a result of contravention of the Special Pension Act No. 69 of
1996) and treasury regulations (TR) 8.2.1 and 8.2.2.
1.10.2 Material losses
The
report indicated a material loss to the amount of R3.6 million (2009/10: R4.5
million) were reported as a result of criminal conduct and ineffectiveness of
control activities within programme 8: special pension
1.10.3 Financial reporting framework
The
financial reporting framework prescribed and
applied by the National Treasury is a compliance framework. It reflected that
the financial statements had been properly prepared instead of fairly presented
as required by section 20(2)(a) of the Public Audit Act
of South Africa, Act No. 25 of 2004 (PAA), which requires an opinion on the
fair presentation of the financial statements of the National Treasury.
1.10.4 Predetermined Objectives
The
findings of the AG indicate that there are no matters to report on the
predetermined objectives.
1.10.5 Compliance with the laws and regulation
The
report of AG has indicated the following finding with regard to the compliance
with laws and regulations:
·
The accounting officer did not prepare
adequate quarterly reports on the progress made in achieving measurable
objectives and targets were as required by Treasury Regulation (TR) 5.3.1.,
·
The accounting officer did not submit the
annual performance report in time as required by Part C of General Notice 1111 of 2010, issued
in Government Gazette No. 33872 of 15
December 2010,
·
The accounting officer submitted financial
statements for auditing that were not prepared in all material aspects in
accordance with the Departmental Financial Reporting Framework prescribed by
the National Treasury as required by section 40(1)(b)
of the PFMA. The material misstatements identified by the AG of South Africa
with regard to irregular expenditure, material loses and liabilities not fully
quantified and disclosed subsequently corrected,
·
Expenditure was incurred without approval of
a delegated official as per the
requirements of section 44 of the PFMA and TR 8.2.1 and 8.2.2, and
·
Payment that were made and identified within
programme 8: special pensions were in contravention of the Special Pension Act
and PFMA.
1.10.6 Leadership
Management did not adhere
to the internal policies and procedures and as a result there were instances of
non-compliance with the PFMA and TR. Internal control deficiencies and
misinterpretations of the Special Pensions Act resulted in instance of non-compliance
thereof.
1.10.7 Investigations
·
A forensic investigation was conducted by the
internal audit unit and an independent consulting firm into allegations
received from the Public Service Commission. The investigation was initiated
based on the allegations of possible procurement irregularities, the use of
public resources for private purposes and leave irregularities. The
investigation has been finalised and the matter is now being dealt with through
internal disciplinary processes.
·
An investigation is being conducted by the
Specialised Audit Services (SAS) into an allegation received from the Public
Service Commission. The investigation was initiated based on the allegation of
possible irregularities in the appointment of a transversal contract. The investigation
is still in progress
·
An investigation is being conducted by the
Public Service Commission into an allegation received by their office in terms
of irregular appointment of service providers by the National Treasury. The
investigation is still in progress
1.11 Human Capital
The department’s total staff complement of 1 111
comprises of the following:
The National Treasury had a vacancy rate of 14 per
cent (179 posts) at the end of the 2010/11 financial year.
A total of 140 critical skills positions were filled
during the 2010/11 financial year. One
(1) appointment was made in August 2011 and five (5) more internal staff
members have declared their status after awareness sessions. There is a
concerted effort to recruit more people with disabilities through relevant
networks.
Entities under National
Treasury
2. South African Revenue
Services (SARS)
2.1 Mandate and Role of
SARS
The South
African Revenue Service was established by legislation to collect revenue and
ensure compliance with tax law. Its vision is to be an innovative revenue and
customs agency that enhances economic growth and social development, and
supports
In accordance
with the South African Revenue Service Act 34 of 1997, the service is an
administratively autonomous organ of the state: it is outside the public
service, but within the public administration. Although
SARS aims to
provide an enhanced, transparent and client-orientated service to ensure
optimum and equitable collection of revenue.
2.2 Economic Context of 2010/11
The Commissioner of SARS
reported that the fiscal year ending showed significant improvement from the
previous year in both the global and economic environments. Strong growth
levels persisted in emerging economies, while in developed markets it remained
uneven.
Towards the fourth
quarter of 2010/11, geographical instabilities in the Middle East and North
Africa, natural disasters in Asia, huge fiscal imbalances in Europe and United
States, as well as rising global inflation caused by high food and energy
prices, began to gather momentum and increased uncertainty for economic growth
and investment.
The year in review
tested SARS’ resilience in the face of the economic pressure and continuing
organisational change. This added to the significantly more demanding environment
to meet revenue targets in an economic downturn. SARS performed strongly,
collecting a total of R674.2 billion, R2 billion above target.
This reflected a growth of R76 billion, or 13 per cent against revenue
collections in 2009/10.
Six of the seven
categorised tax types showed an increase year-on-year, with only Corporate
Income Tax (CIT) showing a marginal decrease. The main contributors to the
overall increase were Personal Income Tax (PIT), R21.6 billion, and VAT, R35.6
billion, which collectively added to R57.2 billion.
2.3
Cost of Collections
The cost of collection
remained steadily in the 1 per cent to 1.2 per cent range over the past six
years, with the 2010/11 figure at 1.1 per cent or 0.1 per cent lower than the
previous year.
This cost of around 1
cent for each R1 collected is in line with international practice and places
SARS among the more cost efficient revenue administrators globally.
2.4 Debt and Credit Books
During the
2009/10 financial year, SARS reported a 30 per cent increase in the debt due to
it to R79 billion, which was attributed to a combination of the economic
difficulties of the financial year and its own challenges, as well as those of
taxpayers in managing their accounts.
SARS made
significant investment through the modernisation programme in account
maintenance and debt management, providing further checks and balances and
providing taxpayers the ability to view and manage their own accounts. This is
already having a significant impact on both the debt and credit books, and the
Commissioner reported that during the 2010/11 financial year SARS were able to
make significant gains into curtailing the growth in the debt due to just R6.6
billion, or 8.3 per cent.
On the credit
side, SARS ended the financial year with a total of R49.8 billion in payment
liabilities, compared to R49.2 billion in 2010. The credit book saw an overall
decline in credits for all tax types except VAT and is further evidence of the
improvements which the modernisation programme is delivering for both taxpayers
and SARS. PAYE credits dropped from over R8 billion at the end of the 2009/10
financial year to R5.9 billion last year as a result of PAYE enhancements.
The
modernisation of VAT, which began at the start of this financial year, is
already beginning to show similar impact on the speed and accuracy with which
SARS is able to process VAT declarations and pay refunds. Currently over 80 per
cent of VAT declarations are processed within 24 hours and, where due, refunds
are paid within 48 hours. This has seen the VAT credits reduce from R27.8
billion at the start of the financial year to R22 billion currently, a decline
of almost 21%. Further, improvements are anticipated as the VAT modernisation
continues. As part of the new VAT risk process, VAT vendors selected for
further verification of their refund claims are requested to submit documents
in support of their declaration or to revise their declaration where an error
is suspected. To date, almost a quarter of all vendors given this option have
opted to revise their refund claims downwards in the total amount of over R2
billion rather than to submit supporting documents.
SARS
have recently introduced a self-management
functionality for VAT vendors in which they are able to see and more
importantly manage their own VAT accounts. These enhancements will continue to
be an important focus of their work in modernising VAT, Customs and Corporate
Income Tax areas over the next three years.
2.5 Tax and Custom Compliance
A
tough economic environment resulted in a decline in compliance. However, SARS’s effective approach of educating taxpayers of their
tax obligations, providing efficient service to the compliant while taking the
appropriate enforcement actions to detect and deter non-compliant taxpayers and
traders, has helped to mitigate this trend.
Some
key highlights in compliance gains during the year include:
This
growth will not necessarily translate into direct revenue gains, as these
individuals were and are already being taxed by their employer
under the SITE system while others are below the tax threshold.
The
significance of having all those in formal employment on the tax register is
twofold, firstly, it recognises the contributions of all taxpayers rather than
just those who are required to submit a return each year and allows for a
direct engagement between SARS and these taxpayers; and secondly it provides
for a more comprehensive compliance approach by providing insight into all
taxpayers.
2.6 Enforcement
achievements
Visible
and effective enforcement is an important motivator for compliance. In this
regard, SARS reported a range of successes on both the tax and customs front
during the year in review, including:
2.7 Customs Modernisation
In
addition to ensuring maximum compliance with tax and customs legislation, SARS
has a second and equally important mandate, to facilitate trade and to protect
our country’s borders.
At
no time has this mandate been more crucial to support of our government’s
priorities of job creation through economic growth.
Facilitating trade is about speeding up the movement of goods in and out of
verification, often physically.
The
way SARS and other customs authorities around the world are attempting to
balance service and enforcement is through a risk-based approach in which low
risk goods are allowed to move relatively unimpeded while high risk goods are
subjected to more stringent verification processes. This is at the heart of
SARS’ Customs modernisation programme which they embarked on in 2009 and which
seeks to provide an automated, electronic risk-based process of goods
clearance.
The
new Customs Risk Engine has given SARS the ability to move from being a gate
keeper to a risk manager, targeting specific consignments with a higher it
rate. The Customs Risk Engine has been redesigned to such an extent that it
enables more precise risk targeting and selection, thus driving better
efficiency and output. This precision has enabled declarations to be controlled
by the risk engine, thereby ensuring that cargo that are stopped for inspection
have a more likely chance of being non compliant. This reduces time and
resource inefficiencies being employed on legitimate traders and enforcing compliance
on illegitimate traders.
SARS
reported that another aspect of the Customs modernisation programme is a
re-engineered and more robust inspection process. Importantly, this contributes
significantly in the fight against corruption in that inspectors are no longer
allowed to select the cases they work on. Instead, in line with SARS’ tax
reforms, Customs now uses the “get next item” concept in which cases identified
by the risk engine are randomly assigned to inspectors.
SARS
are increasingly focused on textile and other imported products to target
undervalued imports by working with industry through NEDLAC along with
historical data gathered over a number of years to improve and update their
list of prices in a valuation database.
A
cornerstone of the modernisation programme is the replacement of the Customs
legacy system. SARS’ investment in the subsidiary company Clidet
967 (Pty) Ltd provides the basis for the development of a world-class customs
software platform not only for
The
‘Preferred Traders’ initiative continues to grow. These are traders that have
demonstrated a greater assurance of their compliance and will therefore be
rewarded with greater service benefits and more rapid movement of goods. At the
end of the financial year, a total of 125 client engagements were conducted, 49
audits were finalised and 39 clients were recommended. The majority of clients
that were engaged with, have welcomed the initiative
and are showing high levels of commitment to
the process.
2.8 Service
Enhancements
SARS
reported that significant progress has been made over the past 3 years and this
has realised dramatic improvements in return processing turnaround times,
increases in service levels and efficiency improvements to the extent of
releasing resources to focus on higher value-adding activities.
Further
improvements to the income tax process for individuals together with
enhancements to the PAYE process have been realised in 2010. The modernisation
programme has simultaneously commenced with the modernisation of the CIT and
VAT. Some of the key highlights during this year were:
SARS
reported that during the past three years, they have also invested
significantly in a Customer Service Programme. To date, considerable progress
has been made in the programme. Some key achievements have been:
2.9 Human
Capital
SARS headcount increased very marginally during 2010/11,
compared to the previous financial year with a total of 15 296 employees, or 33
more than the previous year. This included the recruitment and training of an
additional 625 Customs and Border Control agents.
SARS reported that their commitment toward employment equity
continues to grow with the number of black employees, woman and
woman-in-management on the upward trend.
The year
under review saw the total percentage of black employees rise to 69 per cent
from 67 per cent a year earlier, comprising 52.32 per cent Africans, 10.64
coloureds and 6.2 per cent Indians. At the management level, more than 60 per
cent of management staff are African, coloured or
Indian and 45 per cent are women.
5.10 Governance
The Auditor-General has given SARS an unqualified audit report
for 2010/11, the seventh in a row which reflects their on-going commitment to
good governance.
SARS’s physical offices are
established to provide ready access to taxpayers that are unable to utilise
their electronic channels. SARS leases property for its physical footprint to
ensure that it remains agile and responsive to the shifting patterns of
commercial centres and transport routes. For the year ended March 2011, the
total lease cost was R462 million relative to R412 million in the previous
financial year.
SARS attributed this variance to the contracted escalation rates
applicable to lease agreements, expansion of the branch office footprint, and
increase in charges by the Department of Public Works for government buildings
in terms of the devolution of budget as well as the commissioning of Riverwalk in
SARS reported that they place extremely strict controls on S &
T expenses. These include a reduction of the budget on a year-on-year basis,
utilisation of low-cost carriers where possible and practical, discounted rates
with preferred hotel suppliers and deduction of travel expenses directly from
employee salaries if the expenses are not acquitted within 7 days. For the year
ended March 2011, the total travel expenses were R96 million relative to R79
million in the previous financial year.
3. Financial and Fiscal
Commission (FFC)
The FFC is coordinated by the Minister of Finance and
consists of a full time chairperson and deputy chairperson (nominated by
national government), who is also the chief executive and accounting officer of
the FFC. There are seven other commissioners (two national, three provincial
and two organised local government [SALGA] nominees).
All appointments are made by the President of the
3.1 Mandate of the FFC
The primary mandate of the FFC is to provide
recommendations to the three spheres of government and other organs of state
on: the division of revenue between and among the three spheres of government
and, any other financial and fiscal matters.
In the discharge of its mandate, the FFC timeously tabled submission and recommendation
on the following:
·
2011/12 Division of Revenue
·
2011/12 Division of Revenue Bill
·
2011 Fiscal Framework and Revenue Proposals
·
2010 Medium Term Budget Policy Statement(MTBPS)
·
2011 Appropriations Bill
·
Additional 2010/11 Submission
-
Submission on the Financial Management of
-
Submission on the Local Government Municipal
Property Rates Amendment Bill, 2010 to the Department of Cooperative Governance
and Traditional Affairs
-
Submission on the Challenges Encountered With The
Funding Norms Applicable To
3.2 Report of the Accounting
Officer
The
Accounting Officer report indicated that the commission research has progressed
rapidly owing to the Commission’s Five Year Research Strategy and its response
to challenges faced by the municipalities. The research work has benefited the
commission researchers as well though the presentation and journal publications
and commission plan to disseminate its work through the use of social networks
with aim of enhancing the quality of its output.
The report
further cited that the recent perception survey and the commission impact
assessment had established the need for the commission to interact with its
stakeholders while at the same time responding to their needs. However, the
challenge in this matter is the requirement of adequate budget and the presence
of the Commissioner.
The report
cited that although the staff turnover has been reduce the human resource
dimension still continue to remain a challenge. During 2010/11 the Commission
review its operating model with specific focus to a more specialised research
and support structure that would benefit from the outsourced specialist and
technical skills. The vacant posts were freeze, except in core business areas
of the commission. This has impacted severely in the finance section, where
inexperienced staff are kept and trained to perform in high risk areas such as
procurement. However, this challenge is addressed through increased supervision
for the staff. This challenge can be attributed to the inadequate budget of the
commission.
The
Information and Communication Technology still remain a challenge for both Midrand and
The report
indicated that with regards to finance, the commission budget is under immense
pressure, as a result of exorbitant audit fees, travel and accommodation costs
with increase stakeholder focus. The decision to reduce office space in both Midrand and
In terms
of governance, the report indicated that the submission has being made to the
Finance Minister with regard to the conflation of the role of chairperson,
Accounting Officer and Chief Executive of the commission and two vacancies for part time commissioners
that have been vacant since 2008.
The Accounting Officer report
indicated the key development as underpinned by the Commission’s theme of its
continued focus on expenditure outcomes, accountability institutions, equitable
growth and redistribution of resources, and flexible response in an effort to
realise the ideal of positive public expenditure outcomes. The report further cited that as part of the
stakeholder focus, the Commission will continue its effort to reach a broader set of stakeholders, strive
for accountability to Parliament, provincial legislatures and general public in
the its alignment of allocated resources with expected outputs.
The total appropriation of the
Commission for the year under review was R31.8 million. The programme
allocations during the year under review were as follows:
·
Research and Recommendations Programme was R12.9
million (expenditure was R11.3 million, which is 87.9 per cent of the programme
allocation);
·
Corporate Services Division was R8.1 million
(expenditure was R8.7 million, which is 108 per cent of the programme
allocation);
·
Finance Division was R3.8 million (expenditure was
4.4 million, which is 113 per cent of the programme allocation); and
·
Administration was R8.9 million (expenditure was
R8.9 million, which is 136 per cent of the programme allocation.
Of the total revenue of R31.8
million received by the Commission, R31.4 million was from government grants
and R401 661 thousand from other income. The report indicated that the
Commission did not incur any expenditure in respect of a major non-mandate
event during the year under review. The report indicated that with regard to
internal policy review, the Executive Committee approved among others the following
governance policies and prescripts for implementation:
·
Facilities Policies and Procedures
·
Human Resource Policies and Procedures
3.3 Highlight/Achievement and Challenges
The report
indicated that the significant issues that the FFC sought to
address was the appropriate consolidation of deficit and debt reduction
following an increased expenditures as a result of aftermath of the 2008/09
global financial crisis. The report indicated further that the FFC had to
address issue pertaining to the appropriateness of government countercyclical
stabilisation policy, increase intergovernmental grants to generate employment
and reduce the inequalities and poverty. The creation of favourable condition
for economic development in the urban environment was the other issues that the
FFC had to address. The other issue that the FFC has to address was the need
for government to focus more closely on fiscal responsibility, improving the
quality of services and pay attention to the issues of unfunded mandates
The
reported indicated that, with regard to internal strategic dynamics, the
Commission was concerned by ever shrinking resource envelop and the need to
adopt lean, highly-networked, research focus delivery model. The second issue
was the antiquated Information Communication Technology and systems which were
at the brink of total collapse, and impacted negatively on Commission’s effort
on research, Information Management (IM), Enterprise Content Management (ECM)
and Knowledge Management (KM) as well as day to day operations. The increase
demand on the service of Commission brought about by among other changes in the
legislation and stakeholder education, engagement, and awareness programme. The
report cited the legacy of R3.4 million deficit that
the Commission has been seeking to erase for more than four years. The report
indicate the important issues of the compliance, which consumed more than 8 per
cent of the Commission’s budget
3.3.1 Achievement
·
The Commission indicated that it met all its
constitutionally mandated obligations as documented in the Commissions’
submission for the 2012/2013 Division of Revenue. The submission indicated
three pillars that sustainable economic growth and development relies on, that
is macroeconomic stability, progressive realisation and sustainable
development. These pillars suggest that government intervention should not only
be financed in a sustainable, non-inflationary manner at national, provincial and
local government levels, but that attention also needed to be paid to the
allocations and technical efficiencies of public expenditure as well as to
their potential impact on the environment.
·
The report indicated that the Commission has
responded timeously to all stakeholder requests in
line with the requirements of the Financial and Fiscal Commission Act.
·
The Commission strengthened its engagement with
Parliament, provincial legislatures, local government, national and provincial
executives, Institutions Supporting Democracy, as well as a variety of
non-state and non-government organisations.
·
The reported indicated further that the Commission
published detailed research reports, made supplementary submissions, provided
advisories and detailed technical comments on a number of important
intergovernmental fiscal relations issues.
·
The Commission staff published articles in local
and international accredited journals and contributed book chapters in the
field of intergovernmental fiscal relations.
·
The Commission, in partnership with the Poverty and
Economic Policy Analysis Research Network, provided training in modelling of
the impact of macroeconomic policies with the objective of further knowledge on
the microeconomic impact on macroeconomic policies and shocks.
·
The report cited that the Commission has assisted
other African countries in thinking around their own intergovernmental fiscal
relation.
3.3.2
Challenges
·
The report indicated that under the human resource
the complex change management strategy is still remains work in progress. The
Commission hope to complete the work by
the end of current financial year,
·
Under the Research unit, the productive capacity
has been challenge by the resource constraint to fulfil broad mandate and this
resulted in suspension of necessary staff training and development,
·
The failure of the institution to consult with the
Commission in situations where such consultation is legally prescribed and the
failure by line departments to response to the Commission’s recommendations,
·
The serious issues of governance remain unresolved,
that is the conflation of the position of the Chairperson and Chief Executive
Officer continue to pose an unacceptable and unmitigated risks,
·
The Commissioners allowance has not been reviewed
since 2008 and it pose as a disincentive to the recruitment and active
participation of suitably qualified part-time Commissioners,
·
The report indicate that the three vacancies within the rank of
Commissioner remains unfilled, and
·
With regard to compliance, the report indicated
that the compliance has its own financial implications, and audit fees
currently stand in excess of more than 8 per cent of the Commission’s budget.
3.4 Performance overview
The method
or approach followed in this section is to draw attention to targets that were
not met during 2010/11 fiscal year. The focus is on output (deliverables)
performance, targets, actual performance and reason why they are not met.
3.4.1 Strategic objective: Generate
quality, innovative, pioneering research that informs key Intergovernmental
Fiscal Relation strategic debate and choices
·
The report indicated that the financing of Natural
Disasters in South Africa Research Project has not been achieved during the
year under review and the Research project was extended to the 2011/12 research
cycle,
·
The report further indicated that the Building
Accountable Provincial Government Institutions Research Project has been
partially achieved, and the delay was attributed to data constraints,
·
The Role of Intergovernmental Fiscal Relations in
Promoting Innovation in South Africa Research Project has not been achieved
during the year under review, however, it is work in progress, and
·
The National Planning in a Decentralised
Environment:
3.4.2 Strategic Objective:
Compliance with legislation and adherence to relevant corporate governance best
practice
·
The report highlighted that the Protected
Disclosure mechanisms initiative for the Fraud Hotline was not achieved during
the year under review due to pending
written authorisation from the Public Service Commission (PSC) for use of ITS
Fraud Hotline,
·
The FFC Budget Performance project to spend as per
the approved Business Plans and Budget was partially achieved with an
unqualified audit opinion but with matters of emphasis, and
·
The report indicated that the Commission and
Committee Meetings as measured by Part 3 of Financial and Fiscal Commission Act
was partially achieved. However, 3 meetings of
different outputs under this project did not quorate
due to vacancies.
3.4.3 Strategic Objective:
Progressive and Innovative management of human resources that attracts,
develops and retains key talent and leverage external expertise
·
The report indicated that the Review of the
Delivery Model as measured by the Commission’s approval of the New Delivery
Model Concept was partially achieved. The delay was due to the Organisational
Development and Risk Assessment that is in progress,
·
The report indicated that the Recruitment of Talent
programmes measured by appointment of qualified personnel is on hold, pending
reorganisation.
3.4.4 Strategic Objective:
Coordinated, coherent, high-quality, innovative and cost-effective approach to
ICT that meets the needs of the Commission, the Commission Secretariat and
stakeholders
·
The report highlighted that the ICT governance as
measured by the best practice approved ICT strategy was not been achieved
during the year under review due to prioritisation of stabilising the system,
and the implementation of the ICT Policies and Procedures have not been
achieved, and
·
The report goes further to indicate that the
upgrade of ICT infrastructure and streamlining of the ICT network and
connectivity have not been achieved mainly due to budget constraints.
3.4.5 Strategic Objective:
Facilitate engagement between stakeholders on key IGFR issues
·
The report cited that the Development of the
stakeholder-inclusive engagement programme was not achieved during the year
under review due to funding constraints.
3.4.6 Strategic Objective: Adopt a
Prudent and Transparent Approach to the Management of Finance
·
The report indicated that the Budget under
Austerity programme as measured by savings was not achieved due to the budget
inadequacy, and
·
The Commission report goes further to pinpoint that
the Alternative Revenue Sources initiative have not
been achieved due to the absence of convergence.
3.5 The report of the
Auditor-General (AG)
The report of the AG
indicated that the financial statements present fairly, in all material
respects, the financial position of the Financial and Fiscal Commission as at
31 March 2011, and its financial performance and cash flows for the year ended
in accordance with SA Standards of Generally Recognised Accounting Practice
(GRAP) and the requirements of the Public Finance Management Act (PFMA) (Act No
1 of 1999). However, the following were the emphasis of matters that the AG
drew attention to:
3.5.1
Irregular expenditure
The AG cited that the Commission
incurred irregular expenditure of R203 719 thousand, as the expenditure
was incurred in contravention of Treasury Regulation 16A9.1 (d) relating to
supply chain management.
3.5.2
Fruitless and wasteful expenditure
The AG indicated that the Commission
incurred fruitless and wasteful expenditure of R132 324 due to interest and
penalties arising from the late submission of EMP 201 returns and late payments
to SARS.
3.5.3 Going
concern
The Commission incurred net losses
of R1.7 million as at 31 March 2011, and as of that date the Commission‘s total
liabilities exceeded its total assets by R3.1 million. These conditions
indicate the existence of a material uncertainty that may cast significant
doubt on the commission’s ability to operate as a going concern.
3.5.4
Restatement of corresponding figures
The corresponding figures for 31
March 2010 have been restated as a result of an error discovered during 2011 in
the financial statements of the Financial and Fiscal Commission, and for the
year ended 31 March 2010.
3.5.5
Predetermined Objectives
The AG indicated that the reported
performance against predetermined indicators and targets was not consistent
with the quarterly reports.
3.5.6
Procurement and contact management
The AG indicated that goods and
services were procured from suppliers who failed to provide written evidence
from SARS that their tax matters were in order, as per the requirements of
Treasury Regulation 16A9.1 (d). The report further stipulate that contracts
were extended or modified to the extent that competitive bidding processes were
circumvented, contrary to the requirement of a fair, equitable, transparent,
competitive and cost-effective supply chain management system in terms of
Treasury Regulation 16A3.2.
The AG also stated that the
Accounting Officer did not take effective and appropriate steps to prevent
irregular, fruitless and wasteful expenditure as per the requirement of section
38(1)©(ii) of the PFMA and Treasury Regulation 9.1.1.
The AG indicated further that payments due to creditors were not settled
within 30 days from receipt of an invoice, as per the requirements of section
38(1)(f) of the PFMA and Treasury Regulation 8.2.3.
3.5.7
Oversight responsibility regarding reporting and compliance
The report of AG indicated that the
accounting officer did not exercise adequate oversight over the financial
statements, report on predetermined objectives and the compliance process
resulting in material adjustments to the financial statements, findings on
predetermined objectives, and non-compliance with laws and regulations.
3.5.8
Financial and performance management
The AG cited further that the
financial statements and the report on predetermined objectives contained a
number of misstatements that were corrected. This was mainly due to staff
members not fully understanding the requirements of the financial reporting and
performance reporting framework. Furthermore, non-compliance issues were not
identified due to the lack of adequate processes over compliance-related
issues.
3.5.9
Review and compliance with laws and regulations
The AG report identified instances
of non-compliance with laws and regulations that were not prevented by the
commission. This was mainly due to the lack of oversight and implementation of
processes to monitor compliance with all laws and regulations requirement of a
fair, equitable, transparent, competitive and cost-effective supply chain
management system in terms of Treasury Regulation 16A3.2.
The AG also stated that the
Accounting Officer did not take effective and appropriate steps to prevent
irregular, fruitless and wasteful expenditure as per the requirement of section
38(1)©(ii) of the PFMA and Treasury Regulation 9.1.1.
The AG indicated further that payments due to creditors were not settled within
30 days from receipt of an invoice, as per the requirements of section 38(1)(f)
of the PFMA and Treasury Regulation 8.2.3.
3.5.10
Oversight responsibility regarding reporting and compliance
The report of AG indicated that the
accounting officer did not exercise adequate oversight over the financial
statements, report on predetermined objectives and the compliance process
resulting in material adjustments to the financial statements, findings on
predetermined objectives, and non-compliance with laws and regulations.
4. Financial
Intelligence Centre (FIC)
The FIC was established in terms of The Financial Intelligence Centre Act No 38 Of
2001 (FIC Act). The FIC
Act establishes the FIC as
The FIC receives information for analysis and processing from ‘accountable institutions’. It refers information
to Law Enforcement such as the South African Police Services (SAPS), Hawks, South
African Revenue Service (SARS), and the Intelligence Services. It also exchanges information with similar and equivalent bodies in
other jurisdictions, such as other financial intelligence
units, and Interpol.
The FIC coordinates SA’s
policy on the Anti-Money
Laundering (AML) and Combating of Financing of Terrorism (CFT) and administers the FIC Act. It liaises closely with
National Treasury, other departments and all stakeholders in public and private
sector and internationally. It gives
guidance to the supervisory bodies (South African Reserve
Bank and Financial Services Board), and accountable
institutions. The FIC monitors and inspects for
compliance where no supervisory bodies exists, such as the Post Bank, Ithala, and Kruger Rand dealers. It leads SA in the Financial
Action Task Force (FATF) and
participates in other international bodies. It also maintains efficient and
secure data systems.
4.1 Strategic
Objectives
Unlike
other reporting institutions, the FIC is not funded along programmes lines, and
as such, the FIC reports on the following six pre-determined strategic
objectives:
·
Improve consumption of FIC
products and Services,
·
Improved Compliance by
Accountable Institutions,
·
Improved Anti-Money
Laundering/Combating Financing of Terrorism Capacity in the Eastern and
·
Improved Anti-Money
Laundering/Combating Financing of Terrorism Framework in
·
Develop and Commissioning of The
FIC’S Information and Communications Technology System, and
·
Become a More Sustainable and
Capable Institution.
4.1.1 Improved
Consumption of FIC Products and Services
In
this case there were two objectives and accompanying targets of which only one
was successfully achieved. The focus below is on the one not achieved:
The
FIC had planned to provide timely responses to requests for financial products
by law enforcement agencies and investigating authorities. The set target was
90 per cent requests responded to within agreed response time; however the FIC
only responded to 59 per cent of requests within agreed period. As such the
target was not achieved.
Reasons
for not achieving the set target include:
·
capacity constraints,
·
the sharp increase in the number of requests for
information, and
·
significant scope of work in some matters
4.1.2 Improved
FIC Act Compliance of Accountable Institutions and Society in General
In this
case the FIC had three objectives of which two were convincingly achieved;
therefore the focus below is on the one in which the set target was not
achieved as planned.
The FIC had planned to undertake
administrative actions and assist in criminal prosecutions relating to
non-compliance in pursuit of improved compliance of the FIC Act. Target and
actual performance was as follows:
·
To establish inspectorate and regulatory
enforcement capability in the fourth quarter. As at the end of the financial year
the FIC had not met the target as planned despite having made progress.
·
Administrative action taken. Again, completion was
not met despite progress made.
·
Report on support provided in the fourth quarter.
This target was met as planned as reports were compiled based on 122 joint
compliance reviews conducted with supervisory bodies.
4.1.3 Improved Anti-Money
Laundering/Combating Financing of Terrorism Capacity in the Eastern
and Southern African Anti-Money Laundering Group (ESAAMLG) Region
In this
case there were three objectives and accompanying of which two were
successfully achieved. Below are details on the unachieved objective and
accompanying target.
The FIC had planned to improve the FIC’S
understanding of the scope of and need for technical assistance within the
ESAAMLG region necessary to strengthen the region’s anti-money
laundering/combating financing of terrorism regimes. The target was to have a
report on priorities and needs for technical assistance within the ESAAMLG
region approved in the second quarter. The target was not achieved.
4.1.4 Development and
commissioning of the FIC’S Information and Communications Technology System
The FIC had planned to establish a business
continuity plan and business continuity system; and the target was to have the
business plan approved and the business continuity system implemented in the
fourth quarter. However only the business continuity plan was approved but the
business continuity system was not implemented. So the latter was not achieved.
4.1.5 Become a more
Sustainable and Capable Institution
In this
case the FIC had set three objective accompanied by their respective indicators
and targets; and only one was achieved convincingly. The focus below is on
those that were either not achieved or not clearly/convincingly achieved.
The FIC
had planned to secure appropriate premises for it in the medium to long term.
To achieve this objective, the FIC had set a target of having an accommodation
needs delivery plan approved in the fourth quarter of 2010/11. As at the reporting period, the FIC has not clearly indicated if
such target was achieved or not.
The FIC had planned to maintain human
resource capacity to sustain the business of the FIC; and the target was to
ensure 16 per cent staff increase year-on-year. The FIC reported that despite
having achieved the set target; the high staff turnover rate offset its
recruitment efforts. Ultimately, year-on-year staff increase stood at 1.36 per
cent instead of the targeted 16 per cent.
4.2 Financial Information
The FIC
funds are voted on the National Treasury budget. It has received an allocation
of R181.4 billion during the year under review.
During the
period under review, the FIC materially under spent by R45.4 million on its
allocated budget. The main determinant of this under spending is the FIC’s inability to expand human resource capacity at the
anticipated rate. There under spending impacted adversely on certain operations
such as those of analysis and compliance enforcement.
In
addition to the under spent funds, the FIC had savings on Information
Communication Technology (ICT) expenditure.
The FIC’s statement of its financial position reflected a short
term financial positions as it had operating capital amounting to R54 million.
Basically current financial assets exceed current financial liabilities, which
shows that the FIC is managing its debts and other liability well, therefore
not susceptible to short-term financial risks.
The FIC
reported a surplus of R45.4 million, a 117 per cent increase from the previous
year’s surplus of R20.9 million.
4.3 Report of the Auditor
General
The
financial statements presented fairly in all material respects. The FIC
Financial performance and cash flows for the period under review ended in
accordance with South African Standards of Generally Recognised Accounting
Practice (SA Standards of GRAP) and the Public Finance (PFMA) Management
Requirements. Therefore the FIC received an unqualified audit with the
following matters as follows:
4.3.1 Emphasis of matters
4.3.1.1 Irregular and
fruitless and wasteful expenditure
The report indicated that
the FIC incurred irregular and fruitless and wasteful expenditure of R4.9
million with regard to contravention of the National Treasury Practice Notes
and Treasury Regulations requirement relating to supply chain management, R47 000
thousand due to interest and penalties arising from late payment of supplier
invoices, and R281.9 thousand due to poor performing contractors appointed and
the work later scrapped and started over again.
4.3.1.2 Material under spending of the budget
The FIC has materially
under spent its budget by R45.4 million due to capacity constraints resulting
from shortage of specialised skill in the market. As a consequence the entity
did not achieve 25 per cent of its planned targets for the year under review and
this impacted adversely on the analysis and compliance enforcement.
4.3.1.3 Compliance with laws and regulations
The AG had
a finding on the following non-compliance with laws and regulations:
·
Procurement and
contract management
Goods and services were procured without
inviting at least three price quotations as per the requirement of Practice
Note 8 of 2007-08 issued in terms of section 51(1)(a)(iii) of the PFMA. Goods
and services were not procured through competitive bidding and the deviation not
approved in terms of Treasury Regulations 16A6.4. Awards were made to suppliers
who did not submit a declaration on whether they are employed by the state or
connected to any person employed by the state as per requirements of Treasury
Regulations 16A8.3 and Practice Note 7 of2009/10.
·
Expenditure
Management
According to the AG, the Accounting
Authority did not take effective and appropriate steps to prevent irregular
expenditure, as per the requirements of section 51(1)(b) (ii) of the PFMA.
·
Income Tax Act
Deductible tax from personal service
providers were not affected by the FIC as required by the fourth schedule of
the Income Tax Act.
·
Annual financial
statements
The financial statements submitted by the
Accounting Authority were not prepared in all material aspects in accordance
with accounting practice (and supported by proper records) as per the
requirements of section 55(1)(a) and (b) of the PFMA. The AG had to correct
material misstatements regarding capital assets, expenditure and disclosure
items.
·
Leadership
The AG found that the FIC did not exercise
oversight responsibility regarding compliance with laws and regulations.
Internal control processes are not in place to prevent and detect irregular and
fruitless and wasteful expenditure.
·
Financial and
Performance Management
The AG found that reliable, complete and
accurate monthly and quarterly financial statements are not prepared and
reviewed. Lack of appropriate means for monitoring compliance with applicable
legislation and Treasury Regulations on a regular basis resulted in the
findings reported above. The appropriate level of management does not regularly
review compliance with Treasury Regulations, practice notes and PFMA
requirements.
·
Other Reports by
the AG
The AG also reported that in 2009 an
investigation was conducted for a case of fraudulent misconduct by an employee
who has since been dismissed. Criminal proceedings and investigations by the
relevant authorities against the employee in question are on-going.
5. Public Investment
Corporation (PIC)
The mission of the PIC –
having been established by an Act of Parliament to provide for the investment
by the Corporation of certain monies received or held by, for or on behalf of
the Government of the Republic and certain bodies, councils, fund and accounts
– will:
The PIC is an investment
management company focussing on public sector entities, and is registered with
the Financial Services Board (FSB). Its investments are governed through client
mandates. The PIC was established in 1911 as the Public Debt
Commissioners.
5.1 Highlights of the year under
review
·
The report indicated that the Assets Under
Management (AUM) of the PIC exceeded R1 trillion in the year of celebrating its
centenary,
·
On the 1 February 2011, 14 new PICeeds
were recruited, leaving the organisation with a group of 20 PICeeds.
The PICeeds programme intake increased by 33 per
cent,
·
The report cited that R45 billion was earmarked for
development investment, with the focus being on social and economic
infrastructure development, environmental sustainability, job creation,
enterprise development and Broad-Based Black Economic Empowerment (BBBEE),
·
The purchase
of 50 per cent of the Victoria and Alfred Waterfront was one of the most important
transaction that the PIC undertook on behalf of the GEPF in the year ended
March 2011,
·
The report indicated that the consolidation of the
property division with regard to the amalgamation of Advent Asset Management
into the PIC Properties Division as well as the acquisition of CBS Property
Management business was finalised, and
·
The GEPF revised mandate allows for 5 per cent
offshore investment and 5 per cent in
5.2 Key operational
development for the year under review
In 2010 the organisation concluded
the amalgamation of Advent Asset Management into the PIC Properties Division as
well as the acquisition of CBS Property Management business to form a new
properties division called PIC Real Estate Asset Managers (PIC REAM). The
strategic priorities of the PIC for the next 10 years include:
·
Grow the property assets under management;
·
Outperform IPD benchmarks;
·
Streamline Property Management business (service
and profitability);
·
Enhance management capabilities; and
·
Incorporate ESG into the Property Investment
process
5.3 Performance
against predetermined objectives
Objectives
1: Conduct sustainable and efficient PIC Operation
The report indicated that the target to enhance reporting within the
Customer and Stakeholder relationship management system was not achieved but in
the process due to the procuring of electronic system. The target to Review the
Fixed Income Portfolio and manager diversification has not been achieved, but
work is in progress.
Objective
2: Invest funds in funds targeted for development
The report indicated that the target to achieve gross total quantum
invested in Isibiya Funds of R14 billion was not
achieved, however, the outcome was that R13.9 billion was invested during the
year under review.
Objective
3: Meet returns objectives for invested return
The target to achieve the investment return (General) (Isibiya), of 10 year plus 500 basis points (bps) was not
achieved due to asingle transaction that adversely
affected the performance of Isibiya. The target to
achieve performance that exceeded benchmark by 50 per cent of average tracking
error assumed (internally managed funds) was not achieved (42 per cent
achieved) because performance was affected by the strategic and transition
funds which were implemented per client decisions. The target for Directly-held
portfolio total return was not achieved.
5.4 Financial report
In terms of operating performance, the revenue increased
to R347 million during the year under review, which is an 11.9 percentage
increase from the previous year of R310 million. The operating expenses has
increased to R246 million, which is a 7.4 percentage increase as compared to
the previous year of R229 million. The report cited further that the operating
expenditure is mainly driven by employee and Information Technology (IT) costs.
This represent between 55 per cent and 65 per cent of the revenue and 75 per
cent to 85 per cent of the operating expenditure. The report indicated further
that the net profit of the organisation has recorded an increase of R111 million
during the year under review, which is a 54.2 per cent increase as compared to
the previous year of R72 million. The net assets have recorded an increase of
R561 million, which is a 25.5 per cent increase from the previous year of R447
million.
In terms of the dividend policy, the
report cited that the PIC did not pay dividend to the shareholder (2010: R78.1
million). During the year under review the report cited that there have been no
significant changes to the organisation except for the Advent whose operation
was absorbed into PIC’s operations and the subsidiary
company discontinued. The report indicated that the PIC exceeded the financial
sustainability targets during the year under review, with return on equity at
26.8 per cent, Earnings before income and tax at 39.9 per cent, personnel
cost/management fees at 45.5 per cent and IT cost/management fees at 5.3 per
cent.
5.5
Auditor-General report
The report of Auditor-General (AG)
indicated that the financial statements present fairly, in all material
respects, the financial position of the PIC as at 31 March 2011, and its
financial performance and cash flows for the year then ended in accordance with
SA Standards of Generally Accepted Accounting Practice (GAAP) and the
requirements of the Public Finance Management Act (PFMA) (Act No 1 of 1999) and
Companies Act (Act No 71 of 2008). The AG opinion had no findings with regard
to emphasis of matter.
6. Land Bank
Land
Bank is a specialist agricultural bank guided by a government mandate to
provide financial services to the commercial farming sector and to
agri-business and to make available new, appropriately designed financial
products that would facilitate access to finance by new entrants to agriculture
from historically disadvantaged backgrounds. Today, the Bank is a true South
African development finance institution that serves all farmers equally. The
mission of Land Bank is:
·
To develop and provide appropriate
products for commercial and development clients;
·
To leverage private sector investment
into the agricultural sector;
·
To develop partnerships with
intermediaries for on lending;
·
To develop techniques for financing
high-risk agriculture and new business areas;
·
To support programmes
of the Ministry of Land Affairs and Agriculture by aligning the Bank's products
with these programmes; and
To contribute to rural development by
linking up with government structures and activities.
6.1 Financial analysis
The
Business and Corporate Banking provides mostly wholesale funds to agriculture
cooperatives and/or businesses, which in many instances lend funds to their
customer base. The net operating income for the 2010/11 financial year declined
significantly from R183.6 million in 2009/10 to R10.1 million the current
financial year. This translates in a 95 per cent reduction from the previous
financial year.
On
Retail review, the net operating income increased significantly from R94.6
million in 2009/10 to R269.0 million in the 2010/11 financial year which is an
increase of more than 100 per cent.
6.2 Government imperatives
Over
the past financial year, the Bank has given extra attention to this strategic
area, including the drafting of a development policy. The approved policy
provides a basis for the Bank’s role in agriculture and rural development.
There are three instruments which are currently in place, among others, an
emerging farmer support facility, approved by Cabinet and in its pilot phase.
6.3 Remuneration report
The
remuneration increase of executive officers has increased significantly
compared to the previous financial year. Most importantly are bonuses which
increased from R580 000 in 2009/10 to R2.5 million in the 2010/11
financial year. Basic salaries of the executive officers increased from R9.8
million to R13.1 million in the 2010/11 financial year. In total these salaries
increased from R10.8 million in 2009/10 to R15.7 million in the 2010/11
financial year.
6.4 Learning and Development
The
revitalised personal development plan for employees is encouraging academic
(educational qualification) and skills development (leadership, management and
technical) amongst staff.
Ten
bursaries in the fields of agriculture (primarily), information technology and
finance were awarded to previously disadvantaged individuals.
6.5 Performance against
predetermined targets
The
Bank has achieved most of its key performance indicators which is commendable,
however, there are areas where the Bank did not perform as expected. Some of
the areas where the Bank did not achieve include these key performance areas:
Mainstream development into the operating model; emphasise employment equity;
and diversify income stream.
In
terms of environmental performance; the Bank has recognised that it has an
important role to play in addressing global environmental concerns such as
water quality and sustainable agriculture. Going forward the Bank will place
more emphasis on the environmental impact when granting credit.
6.6 Financial Statements
In
terms of cash and cash equivalents, the Bank does not show any significant
improvement in this component. However, it should be noted that the Bank’s
overall trade and other receivables increased remarkably from R47.9 million in
2009/10 to R189.2 million in the 2010/11 financial year. This is attributed by
the new line item of dividend receivables which amounted to R50 million. The
LBIC-Intercompany balances, one of the items for
trade and other receivables also increased significantly from R22.3 million in
2009/10 to R109.2 million in the 2010/11 financial year. Loans to employees
increased from R1.1 million in 2009/10 to R1.2 million in the 2010/11 financial
year.
Industrial
share for local equities decreased from 43.25 per cent in 2009/10 to 40.13 per
cent in the 2010/11 financial year.
The
Bank had granted an amount of R333.4 million to individual farmers but not yet
disbursed at the end of the financial year.
6.7 Fruitless and wasteful expenditure
This
refers to expenditure which was made in vain and would have been avoided had
reasonable care been exercised. The Land Bank incurred an amount of R0.1
million in the current year which shows an improvement compared to the 2009/10
financial year of R0.9 million. This includes late payment and penalty interest
charges regarding the non-timely payment of utility and Telkom
accounts.
7. Development Bank of
The
Development Bank of Southern Africa exist as a juristic person by the name the
‘Development Bank of Southern Africa Limited’ and its role, powers, functions
and duties are defined by the Development Bank of Southern Africa Act, 1997. Published in Government Gazette No17962 –Vol. 382 on 25 April 1997
– No 641.
The
DBSA is registered as a company in terms of the Companies Act, 1973, but is
exempt from the provisions of the Companies Act, 1973 (Act 61 of 1973). The
Minister may however by notice in the Gazette apply any provision of the
Companies Act, 1973, the Banks Act, 1990, or such other law to the Bank, in so
far as such provision is not inconsistent with the provisions of the
Development Bank of Southern Africa Act, 1997 (Act 13 of 1997) with such
modifications as the Minister may deem fit and may specify in that notice, and
may withdraw or amend any such notice.
7.1 The Chief Executive Officer’s report
The Bank,
through the Siyenza Manje
project has deployed 826 professionals to 186 municipalities and 20 provincial
departments; has assisted municipalities by deploying 1 114 technical and
1 994 non-technical DBSA officials and expedited Municipal Infrastructure
Grants projects to the value of R8.7 billion. In the Siyenza
Manje project; the Bank contributes 30 per cent of
the total allocation, while the National Treasury contributes 70 per cent of
the funding.
7.2 Sustainability overview
The Bank
is mandated to provide technical, financial and other assistance in pursuit of
the objectives as set out in section 3 of the DBSA Act. The Bank focuses its
investment on infrastructure funding, which is broadly defined in the Act and
acts as a catalyst to maximise the private sector access to opportunities in
the provision of public sector funding.
7.3 Development impact overview
The
report indicates that some organisational goals relating to capacity
development and deployment, community development facilitation and rural
development were achieved.
7.4 Financial performance overview
The overall financial performance
and position of the DBSA is fairly sustainable, however there are a few issues
with regard to the position of specific line items. Cash and cash equivalents
have been increasing over the past four years up to the 2009/10 financial year.
In 2010/11, the Bank recorded R1.2 billion in cash and cash equivalents which
is below the average of the five year period (R1.9 billion between 2006/07 to
2010/11). The financial market assets declined from R5.5 billion in 2009/10 to
R4.2 billion in the year under review.
In terms of its liabilities, the
DBSA has reduced the value of its total debts (liabilities) for the year under
review from R27.3 billion in 2009/10 to R29.5 billion. Total equity slightly
increased from R17.8 billion in 2009/10 to R17.9 billion in the period under
review.
With regard to the financial
performance of the Bank, interest on investments decreased from R525 million in
the 2009/10 financial year to R469 million for the 2010/11 financial year. The
profit for the year (before transfer to the Development Fund) decreased significantly
from R875 million in the 2009/10 financial year to R332 million for the year
under review.
7.5 Annual Financial statements
The
report of the independent auditor showed that the financial statements of the
Bank presented fairly, in all material respects, the financial position of the
Bank as at 31st March 2011, and its financial performance and cash
flows for the year ended in accordance with International Financial Reporting
Standards and in the manner required by the Public Finance Management Act 1 of
1999 as amended by Act 29 of 1999, (PFMA) and the Companies Act of South
Africa, sections 284 to 303, as specified in the Bank’s Act of 1997.
One of the challenges faced by the
Bank as indicated earlier is the growing developmental needs and the increasing
risk levels of the Bank’s existing loan book.
8. South African Reserve
Bank (SARB)
The
South African Revenue Service Act 34 of 1997, gives
SARB the mandate to perform the following tasks:
·
collect all revenues that are due;
·
ensure maximum compliance with the
legislation; and
8.1 Overview of the Accounting Officer (Governor)
The Accounting Officer indicated
that owing to the recent global financial crisis, and the persistent global
imbalances and volatile capital flows, the international monetary system and
international monetary mechanism are at the centre of debate on global reform.
These conditions happen to direct the bank’s focus on stability, which include price stability, financial stability and the stability
of the banking system. Global
developments have continued to impact on the domestic economic condition and
policy environment, with significant risks that emanate from
Domestic
inflation has remained within the target range of 3-6 per cent since March
2010, and as such the bank was able to reduce the repurchase (repo) rate to 5.5 per cent, the lowest nominal level of the
policy rate in 30 years. However, the expected challenge for monetary policy
going forward might be caused by the global commodity price increases since
this began to pose a risk to the inflation outlook.
The recent
global financial crisis has taught a lesson that financial stability should be
seen as a separate objective with price stability. This has led to the Bank’s
Financial Stability Committee to be reconstituted and given responsibility for
macro prudential oversight and policy implementation (work is under way to
determine the exact nature of such oversight and appropriate policy
instruments). The Accounting Officer’s report indicated that the credit market
is subdued and there is no evidence of incipient assets market bubbles.
The bank is an active member of
Basel Committee on Banking Supervision, and as such it has been an active
participant on banking regulatory reform, which resulted in the publication of
the global regulatory framework for more resilient banks and banking systems, which incorporates the details of global regulatory
standards on bank capital adequacy and liquidity. However, the report indicated
that these changes should not have a material impact on South African banks
which remain well capitalised and characterised by low leverage ratios.
Capital
flows to emerging markets including South Africa moderated in the final quarter
of 2010 and early 2011, and between
November 2010 and March 2011 there were cumulative net sales of bonds
and equities by non-residents. However, the report indicated that despites the
unstable pattern of cash flow, the bank, with the assistance of the National
Treasury, has been able to continue with its policy of foreign exchange
reserves accumulation. In the 2010/11 financial year the Bank purchased
approximately US$10, 3 billion foreign reserves. However, the need to sterilise
the impact of these purchases of foreign exchange on domestic liquidity
resulted in the Bank reporting an after-tax loss for the second consecutive
financial year, amounting to R1, 2 billion.
8.2
Strategic
Overview
During
February 2011, the bank reviewed its strategy in light of recent and envisaged
future development in the global and domestic environment, which includes:
·
different
scenarios for global economic developments and possible implications for
·
the
current domestic economic outlook;
·
developments
in the regulatory environment in respect of both macro- and micro prudential
challenges;
·
organisational
priorities, including a review of the legal framework of the Bank, with a focus
on the necessary authorities required, especially as this affects financial
stability and macro prudential regulation, as well as the need for alignment of
other relevant pieces of legislation;
·
the
value statement of the Bank; and
·
challenges
facing central banks as a consequence of the global financial crisis, now in
its fourth year
It
was therefore agreed that the following strategic focus areas will guide the
bank’s activities:
·
Giving
effect to the bank mandate: Monetary policy formulation and implementation
shall be in accordance with the Constitution (Act No 108 of 1966) of the
Republic of South Africa and within the context of the elaboration of the
Bank’s mandate contained in the letter addressed to the Governor of the Bank by
the Minister of Finance date 16 February 2010,
·
Understanding the regional, continental and global
environments: The Bank will draw on its
participation in forums such as the Committee of Central Bank Governors (CCBG)
in the Southern African Development Community (SADC), the International
Monetary Fund (IMF), the Group of Twenty (G-20) and the Bank for International
Settlements (BIS) to evaluate and analyse developments, so as to be able to
implement policies and risk mitigation measures appropriate for South Africa,
·
Building the institution and investing in people: New impetus will be given to organisational
effectiveness and operational efficiency, and to enhancing a culture of
excellence where people and values matter, and
·
Understanding the domestic environment and
enhancing the role of the Bank in society: The Bank will continue to be a constructive
role-player in society, actively engaging with stakeholders and working to
build the country.
8.3
Monetary
Policy
The
report indicated that the subdued growth performance and slow recovery of
economic growth in developed economies have resulted in a prolonged periods of
abnormally low global interest rates. This has encouraged continued capital
flows to more dynamic, higher-yielding emerging –market economies.
Domestically, the gross domestic product (GDP) growth has remained below
potential and growth has been relatively slow compared with that of
The
World Economic Outlook published by the IMF projected in April that global
growth would average 4,2 per cent in 2010, compared
with the 3,1 per cent forecast in October 2009. Domestic economic growth
prospects had also improved, and the domestic inflation outlook remained
favourable. However, the monetary policy report further stipulated that the
risk to the global growth outlook were viewed as having changed for the worse.
Domestically, employment trends appeared to be lagging the recovery. The
Quarterly Labour Force Survey published by Statistics South Africa and released
ahead of the May 2010 MPC meeting reported that employment had contracted by
171 000 jobs in the first quarter of 2010. The report indicated that the MPC
noted a concern over the level of wage increase in the economy.
During
the July 2010 MPC meeting, the immediate liquidity concerns relating to the
sovereign debt crisis appeared to have abated somewhat, although longer-term
solvency risks and uncertainties remained. Growth in a number of advanced economies
appeared to be losing momentum and planned fiscal consolidation and austerity
programmes in a number of countries were expected to lead to persistently low
growth going forward.
The
report noted that the MPC stated that it was very aware of the impact of both
the level and volatility of the exchange rate on the economy, particularly on
the manufacturing, export and import-competing sectors, and that it was ready
to continue to play its part, in a considered manner, such as by way of
increased foreign-exchange purchases when conditions permit. However, it should
be noted that the rand exchange rate was influence by a number of exogenous
factors
The
report indicated that the inflation expectations in the financial markets had
also improved, and the Bank’s inflation forecast had been revised downwards,
with Consumer Price Index (CPI) inflation now expected to average 3,7 per cent in the third quarter of 2010, rising to 4,8 per
cent in 2011 and 5,2 per cent in the final quarter of 2012. The biggest risks to
the inflation outlook at the March MPC meeting remained food and administered
prices, in particular oil prices. International oil prices had already
accelerated in the latter part of 2010 in response to strong global demand and
this upward trend had been reinforced by the geopolitical events in North
Africa and the
The
report cited that by contrast, there were indications that high real wage
settlements, which had been a significant upside risk to the inflation outlook,
might be moderating. According to Andrew Levy Employment Publications, the
overall average wage settlement rate in collective bargaining agreements
amounted to 8, 2 per cent in 2010, compared with a rate of 9,3
per cent in 2009. The MPC decision at the March 2011 meeting was to keep the repo rate unchanged at 5, 5 per cent per annum. This is
because the MPC was of the view that the risks to the inflation outlook were on
the upside, but that these risks and underlying pressures were mainly of a
cost–push nature
8.4
Operational
Review
The
operations of the bank are related to the activities covered under the market
operations, and are the following:
The
report indicated that during the 2010/11 financial year, domestic money-market
liquidity expanded with an injection of R80.8 billion, owing mainly to
foreign-exchange purchases by the Bank. The increase in the money-market
liquidity was also partly neutralised by the transfer of the National
Treasury’s tax and loan account balances with commercial banks to the Bank
amounting to R42, 5 billion and through longer-term foreign-exchange swap
transactions
The
report highlighted that the official gross gold and foreign-exchange reserves
increased from US$42, 0 billion on 31 March 2010 to US$49, 3 billion on 31
March 2011. The increase of US$7,3 billion was mainly
due to foreign-exchange purchases for purposes of foreign-exchange reserve
accumulation amounting to US$6,0 billion, valuation adjustments of US$2,0
billion, and the proceeds of the government’s foreign bond issuance, which were
deposited with the Bank, amounting to US$0,8 billion, while US$1,6 billion was
used to fund foreign payments on behalf of government departments.
The
report cited that the management of the gold foreign-exchange reserves is
guided by three main objectives, namely capital preservation, liquidity and the
enhancement of returns. The Bank aims to achieve a market-related rate of
return on the reserves within the constraints of a framework of approved risk
parameters. The bank gold and Special Drawing Rights (SDR) holdings are managed
passively; however, the foreign-exchange reserves are managed actively by the
Bank and by six external private-sector fund managers, plus the Bank for
International Settlements (BIS) and the World Bank. Due to the numerous risks
that the bank is exposed to, the Governor Executive Committee (GEC) approved
the revised investment policy for the management of the foreign reserves.
The
report indicated that the policy decisions on exchange controls vest with the
Minister of Finance and the Bank is responsible for the administration of
exchange controls in terms of authority delegated by the Minister. In his 2010
Budget Speech, the Minister of Finance announced a tax and exchange control
Voluntary Disclosure Programme (VDP). The VDP provides, inter alia, the basis for and deals with the procedures and
processes applicable to regularise exchange control contraventions.
Furthermore, the Minister announced a project to modernise the exchange control
legislation and policy. The Financial Surveillance Department of the Bank and
National Treasury are in the process of preparing recommendations in this
regard.
The
report indicated that a key objective of the Bank is to ensure that the legal
framework for the regulation and supervision of banks and banking groups in
South Africa remains relevant, reflects local and international market
developments, and that it complies with the applicable international regulatory
and supervisory standards and best practice. The Bank has commenced with a
formal process to refine and, where necessary, amend the regulatory framework
in accordance with the latest internationally agreed regulatory and supervisory
best practice and standards
In
February 2011 the National Treasury released a policy paper entitled: A Safer
Financial Sector To Serve South Africa Better, on
proposed reforms to the financial regulatory structure in
Internal
control is a priority focus area and an integral part of the Bank’s management
and accountability function. The Internal Financial Control (IFCs) constitute an important component of an overall
internal control structure in the Bank and is designed and implemented to
enhance the probability of providing assurance on the integrity of the Bank’s
financial information. The Internal Audit Department (IAD) is mandated to
evaluate and independently contribute to the improvement of control process,
governance and risk management of the Bank and its subsidiaries. The full mandate
and authority of the IAD are contained in an Internal Audit Charter approved by
the Board and the charter is revised and updated annually to ensure that the
internal audit function remains relevant, current and in line with changes to
the International Standards for the Professional Practice of Internal Auditing
of the Institute of Internal Auditors (the Standards), codes of ethics,
governance and legislation.
The
report indicated that at the start of the of the 2010/11 financial year, the
Bank had a total permanent staff complement of 2 033, which increased to 2 101
by the end of 31 March 2011, excluding the Governor and deputy governors.
However, the overall turnover rate during the year under review was 4.72 per
cent compared with a turnover rate 3.36 per cent in the previous financial
year. Among the most reasons that resulted in an increase turnover during the
year are the better prospect and remuneration, retirement, voluntary separation
(termination in terms of competency to work programme), retirement (enhanced
early retirement- 5 years). During the year under review the number of contract
worker amounted to 114, while people living with disability constituted 1.7 per
cent of the Bank‘s permanent workforce
In
terms of equity, Africans constituted 63 per cent of the Bank’s total
workforce, with African females constituted 28 per cent. The report further
indicated that the Bank’s expenditure on staff training amounted to R26.1
million (R18, 7 million for local training and R7, 4 million for foreign
training) in respect of 1 190 employees of which 108 attended international
training.
The
report highlighted that the bank provides bursaries for higher education for
dependants of all staff and pensioners. Bursaries were provided to 393
dependants at a cost of R9,0 million during the review
period (298 dependants at a cost of R6,6 million in the previous review
period). During the year under review, 31 completed their studies, compared
with 16 in the previous financial year.
8.5 Financial Statements
The
director’s report indicated that the preparation of the bank financial
statement are prepared on a going–concern basis, taking cognisance of certain
unique aspects relating to the Bank’s ability to create and withdraw domestic
currency, its role as lender of last resort, and its responsibilities in the
area of financial stability, and in its relationship with government concerning
foreign-exchange and gold transactions.
The
report indicated that the remaining profits due to government in terms of the
South African Reserve Bank Act over the past two years are as follows: R52.9
million as at March 31, 2011 (this payment emanated from Corporation
Public Deposit) and R37.5 million as at March 31, 2010. The report indicated that under the year
under review the bank incurred a loss after taxation amounting to R1.2 billion.
This was reported as the result of the high cost associated with holding the
country’s gold and foreign reserves
In
terms of dividends declared, the bank declared
a final dividend of 5 cents per share on 1 April 2011 and paid on 13 May
2011, bringing the total dividends paid to R200 000 for the year 2010/11.
In
terms of financial position, the bank total assets during the year under review
amounted to R363 billion, (R330.8 billion: 2009/10) which is an 8.9 per cent
increase. This increase was largely caused by an increase of R26.8 billion in
gross foreign assets and domestic assets increase of R5.4 billion. During the
year under review, the total liabilities have increased to R354.3 billion,
which is a 9.4 per cent increase from the previous year.
8.6 Auditor’s opinion
The Auditor-General expressed an
unqualified audit opinion on the financial matters of the SARB as at 31 March
2010. His opinion means that the financial statements
of the South African Reserve Bank have been prepared, in all material respects
in accordance with the basis of accounting described in Note 1 to the financial
statements and in the manner required by the South African Reserve Bank Act. There was no emphasis of matter.
9. Financial Services Board (FSB)
The FSB was established in 1990, to
regulate and supervise the non-banking financial sector of
The FSB is a
unique independent institution established to oversee the South African
Non-Banking Financial Services Industry in the public interest. The FSB
is committed to promote and maintain a sound
financial investment environment in
The mission of the FSB is to promote, amongst other:
·
Fair treatment
of consumers of financial services & products;
·
Financial
soundness of financial institutions;
·
Systemic
stability of the financial services industries; and
·
Integrity of
financial markets and institutions.
The FSB administers the
following Acts of Parliament:
9.1 Report by the Chief Executive Officer (CEO)
The Chief
Executive Officer’s (CEO) report indicated that the organisation reviews human
resource policy and procedures annually, in consultation with its employees to
ensure best practice. The staff complement, which includes contract staff, was
449; an increase of 7 per cent from the previous year when it totalled 418. In
addition, 1.6 per cent of the staff are people with
disabilities. During the year under review, the staff turnover was 10 per cent,
2 per cent of which was employer controllable (retirement and dismissal) and 8
per cent employee controllable (resignation). The FSB spent R2.5 million on
staff training and other development programmes during the year under review.
During the period under review, 3 bursaries were awarded to full-time students
(non–FSB staff). The Information Communication Technology (ICT) system was upgraded
and approved for implementation on 30 September 2010.
In terms
of ICT application development and maintenance, the FSB reported that the
organisation focus area was to streamline interaction with regulated
industries, the regulator and the general public through the use of
system-to-system communication, online web applications and batch imports of
bulk data into various FSB systems. The project to develop a system that will
enable the FSB’s Collective Investment Scheme (CIS)
department to receive fund data electronically from the Association for Saving and Investment in South Africa (ASISA) has been
initiated, and its completion was scheduled for 1 July 2011.
9.2 Financial position and financial
performance analysis
For the
year under review, total net assets as indicated in the statement of financial
position amounted to R154 million, which is an 11.2 per cent increase when
compared to the previous year’s R138.5 million.
During the year under review, FSB revenue increased to R408.6 million,
which is a 20.4 percentage increase from the previous year of R339.4 million.
This resulted to a total net surplus of R15.0 million during the year under
review as compared with the deficit of R14.6 million in the previous reporting
period. The FSB income from investment accounted for R14.1 million during the
reporting period, which is a 6 per cent increase from the previous reporting
period.
For the
year under review, the total amount of incentive bonus paid to Executive
management amounted to R1. 8 million (2009/10: R1.2 million), while
Non-Executive member’s fees amounted to R870 790, which is an 8 per cent
decrease from the previous year of R946 000.
9.3 Analysis of performance against
predetermined objectives
Strategic Focus Area 1:
Clients/Partners
The objective of this focus area is
to facilitate communication processes with clients and partners to enhance
performance, accountability and public confidence. However, the report
indicated that the FSB strategic objective, which was measured against the
approval of the plan, was not achieved in other divisions, such as Insurance
and Capital Market department. The reasons given for this is that there was a
delay in finalising the plan due to coordination with other supervisory
departments in other divisions and the formal regulatory and supervisory plan
was not approved.
The project to implement a
regulatory and supervisory plan, which was measured against a 90 per cent
target, was not achieved in the Retirement Fund division (73 per cent
achieved). The reason for the underperformance was that the time required to
visit large administrators was underestimated, as well as the resignation of 5
staff members.
The project to annually prepare a
comprehensive industry and stakeholder based engagement plan, measured against
the approval of the plan by 28 February 2010 was not achieved. The reason for
the underperformance was that apart from the FAIS and the Actuarial (Retirement
Funds) Department, none of the departments prepared the plan, and regular
communication to stakeholder to provide knowledge and guidance was not
incorporated into the plan.
The project to review and update
Service Level Commitments (SLCs) which was targeted
to be approved by 28 February 2010 was 82 per cent achieved. The reason for
this is that there were 6 vacant positions during the period due to
resignations and internal movements. One staff member is reported to be on disability.
The project was only reviewed in the Insurance division, but the internal
process was not finalised. The delay in
this regard was that the review of the SLCs did not
highlight the need for substantial change.
The project to design a policy to achieve
consistency in regulatory action measured against the annual industry survey
was not achieved. The reason is that the annual industry survey was not
conducted. However, random checks are report to have been performed by the
managers of the Retirement Funds division.
Strategic
focus area 2: Internal process
The objective is to protect all
investors by ensuring integrity and confidence in financial services. The
project to compile an enforcement policy (DMA, Pensions, Insurance, FAIS, and
Capital Markets) as measured by the approval of the enforcement policy by 30
June 2010 was not achieved. The reason was attributed to the nature of the new
enforcement process, and the FSB opted for a set of guidelines in the form of
an enforcement manual rather than a policy. The manual was drafted, approved
and implemented and based on the second manual that was created for the
Enforcement unit, the FSB decided to execute the enforcement function based on
the two manuals to build up history before compiling a policy
The report indicated further that
the effective utilisation of committee and consultation processes with industry
as measured against the meetings of the advisory committee held (at least
quarterly) was not achieved within the FAIS division. The reason was that there was no specific
submission for the meeting held in May 2010 and members agreed to issue a
report on on-going issues, while the September meeting moved to August 2010.
The project to implement processes
and procedures required by relevant legislation as measured by 90 per cent
adherence to SLCs was not achieved within the
Insurance division. The reason was that short-term process was programmed and
tested. Only 75 per cent was achieved and the delay in finalisation was due to
additional functions that were added and staff turnover experienced by service
providers.
The project for approval of the
Information Technology (IT) strategy and plan as measured by the approval by
February 2010 was not achieved. The reason was that the rolling out of the IT
strategy and plan was only approved by the Board on 30 November 2010.
Strategic
focus area 3: Learning and Growth
The objective is to implement
organisational development strategies that will positively impact the work
environment. The project to compile a leadership development programme as
measured by the approval of the plan by 28 February 2010 was not achieved. The
reason was that the project was deferred to the following financial year
(2011/12).
The project to conduct a staff
survey by 30 September 2010 was only conducted during November 2010. As such,
the target was not achieved within the timelines.
Strategic
focus area 4: Financial
The objective is to ensure long-term
financial sustainability by improving revenue collection, investing
strategically in the organisation, and improving financial reporting and
managing it cost-effectively. The project to approve a debtor policy by 28
February 2010 was only approved by the Executive Committee (Exco)
on 8 April 2010 and by the Board on 30 June 2010.
9.4 The report of the Auditor-General (AG)
The
Auditor-General expressed an unqualified audit opinion on the financial matters
of the FSB as at 31 March 2010. His opinion means that the financial statements
present fairly, in all material respects, the financial position of the FSB as
at 31 March 2011, its financial performance and its cash follow for the year
then ended, in accordance with the South African Statements of Generally
Recognised Accounting Practice (SA Statements of GRAP) and in the manner
required by the Public Finance Management Act (No: 1 of 1999) and FSB Act (No
97 of 1990).
The
findings of the AG indicate that there are no matters to report on the
predetermined objectives and on compliance with laws and regulations. The
report of the AG considered internal control relevant to the audit of financial
statements and the report on predetermined objectives and compliance with
Public Finance Management Act (Act No. 1 of 1999 (PFMA) and the FSB Act, but
not for the purposes of expressing an opinion on the effectiveness of internal
control.
10. Pension Fund
Adjudicator (PFA)
The office
of the Pension Funds Adjudicator was established with effect from 1 January
1998 to investigate and decide complaints lodged in terms of the Pension Funds
Act (No. 24 of 1956). The purpose of the Pension Funds Adjudicator is to
resolve disputes in a procedurally fair, economical and expeditious manner. The
Adjudicator’s office investigates and determines complaints of abuse of power,
maladministration, disputes of fact or law and employer dereliction of duty in
respect of pension funds.
10.1
Operational report of the PFA
The report indicated that the major
challenges faced by the PFA related to compliance with the PFMA, Treasury
Regulations, implementation of the new policies drafted and approved by the
Financial Service Board (FSB), and an out-dated Information Technology (IT) and
case management system. In the finance division, the challenge was exacerbated
by the sudden resignation of two key personnel.
The turnaround times in dealing with complaints remains a challenge for
the PFA. However, it is reported that a new case management system should
alleviate a number of problems once it is fully implemented and fully
functional.
The report indicated that with
regard to case management, 6 220 new complaints were received during the
year under review, 894 complaints were settled by conciliation, 1 430 were
determined and 3 799 were resolved without requiring determination.
In terms of human resources
management, the PFA has reported to have 55 staff members, compared to 54 staff
members in the previous financial year.
The report indicated further that in an effort to improve the quality of
drafting, all staff members were required to undergo legal training, which
would result in improvement in the quality of work. The report further indicated that no funds
have been spent on the purchase of tickets for the 2010 FIFA World Cup. However,
R8 666 had been spent to purchase of 60 scarves, mugs and gift bags, and
seven flags for staff members. Most of the challenges faced by the PFA were
reported to have been addressed or are in the process of being resolved.
In terms of employment equity, out of 55 staff
members, 37 were females and 18 were males. Africans make 81.8 per cent of the
total staff, while coloureds make 10.9 per cent.
10.2 Report of the Auditor General
(AG)
The
Auditor-General expressed an unqualified audit opinion on the financial matters
of the PFA as at 31 March 2010. His opinion means that the financial statements
present fairly, in all material respects, the financial position of the PFA as
at 31 March 2011, its financial performance and its cash follow for the year
then ended, in accordance with the South African Statements of Generally
Recognised Accounting Practice (SA Statements of GRAP) and in the manner
required by the Public Finance Management Act (No: 1 of 1999) and the Pension
Fund Act (No 24 of 1956). However, the AG draws attention the following emphasis
of matters:
10.2.1
Irregular expenditure
During the
reporting period, the Office of the Pension Funds Adjudicator incurred irregular
expenditure of R1 216 609.
10.2.2 Fruitless and wasteful
expenditure
During the
reporting period, the Office of the PFA incurred fruitless and wasteful expenditure
of R590 164.
10.2.3 Predetermined objectives
In terms
of reliability of information, the AG reported that the performance information
was deficient in respect of accuracy and completeness. The reported performance against targets is not
accurate and complete when compared to source information.
10.2.4
Compliance with laws and regulations
In compliance with section 51 (1)
(a) (i) of the PFMA, the report indicates that the
accounting authority did not ensure that the entity had and maintained an
effective, efficient and transparent system of internal control with regard to
performance management, which describes and represents how the institution’s
processes of performance planning, monitoring, measurement, review and
reporting are conducted, organised and managed.
The AG report indicated that with
regard to procurement and contract management, goods and services with a
transaction value of between R10 000 and R500 000 amounting to R1 080 357 were
procured without inviting at least three written price quotations from
prospective suppliers, as per requirement of National Treasury Practice Note 8
of 2007/08 issued in terms of section 76(4)(c) of the
PFMA. Furthermore, the AG report indicated that there was no evidence that
goods and services with a transaction value of between R2 000 and R10 000
amounting to R136 252 were procured by obtaining at least three verbal or
written price quotations from prospective suppliers, as per requirement of
National Treasury Practice Note 8 of 2007/08 issued in terms of section 76(4)(c) of the PFMA.
In terms of expenditure management,
the report cited that the accounting authority did not take effective and
appropriate steps to prevent irregular and fruitless and wasteful expenditure,
as per requirements of section 51(1)(b)(ii) of the
PFMA.
The financial statements submitted
for audit purposes did not comply with section 55(1)(c)of
the PFMA. Material misstatements were identified during the audit, some of
which were corrected by management, as well as some that were not corrected,
are included in the basis for qualified opinion paragraph.
10.2.5
Property plant and equipment: Basis for qualified opinion
The AG indicated that the fixed
assets of the PFA did not meet the audit criteria and as such the AG did not
express an audit opinion on the depreciation calculation of R 699 341 and
the amortisation charge of R23 314 during the year under review. The
accuracy of the fair value adjustment of R 424 653 could not be verified.
The PFA has re-valued its assets for
the first time in the current financial year. However, it has not applied
GRAP3: Accounting Policies Change in Accounting Estimates and Errors correctly
in that no retrospective application per GRAP17: Property, Plant and Equipment,
has been affected.
10.2.6 Internal control
The AG
report did not indicate significant matters with regard to internal control.
10.2.7 Leadership
The
following were raised by the AG’s report:
The Accounting authority did not
exercise oversight responsibility regarding financial and performance reporting
and compliance and related internal controls.
Management did not implement proper
record keeping in a timely manner to ensure that complete, relevant and
accurate information is accessible and available to support financial and
performance reporting.
The accounting authority did not
prepare regular, accurate and complete financial and performance reports that
are supported and evidenced by reliable information.
Management did not review and
monitor compliance with applicable laws and regulations
10.2.8 Other reports
The AG
indicated that two investigations were held during the year in respect of
financial misconduct with management:
·
A forensic investigation into possible fruitless
and wasteful expenditure was conducted for year ended 31 March 2010.
·
Matters identified in the management report of the
Auditor-General in respect of the Office for the Pension Funds Adjudicator for
the year ended 31 March 2010.
10.3
Financial Analysis
The total assets of the PFA amounted
to R11.6 million during the year under review, which is a 3.7 per cent increase
from the previous financial year. The liabilities for the reporting period
amounted to R 2.2 million, which is a decrease of 55 per cent as compared to
the previous financial year amount of R4.9 million. Total revenue during the
reporting period amounted to R35.3 million, a decrease of 7.0 per cent compared
to the previous financial year R38 million. Total expenses amounted to R32.2
million, which is a 7.7 percentage decrease, compared to the previous year figure
of R34.9 million. This resulted in a surplus of R3.1 million, which has
increased by 1.2 per cent when compared to the previous financial year.
11. Committee’s
Observations
To adequately address
the challenges faced by
· To advance
economic growth and job creation through appropriate macro-economic, fiscal and
financial policies.
· To play a
pivotal role in the management of government expenditure, setting financial
management norms and standards for state departments, monitoring their
performance and reporting any deviations to the Auditor-General.
Within this specific
mandate, the Committee raised a number of issues with regards to expenditure
trends. A number of government departments are allocated substantial amounts of
monies to address challenges, but further engagement is needed with National
Treasury on the manner in which these challenges would be addressed.
The Committee commended
the work of National Treasury and the entities that report to it, and commended
entities with clean audits and for the well drafted annual reports, but also
raised its concern with the audit outcomes expressed by the Auditor General for
some of the entities.
The Committee further
stated that a lot of public funds were being wasted on irregular as well as
fruitless and wasteful expenditure and that processes and procedures need to be
tightened in order for this to be rectified.
The Committee also found
it alarming that a lot of money was wasted on rent, parking, travelling, and
subsistence and travel allowances, and urged the entities to exercise caution
and to tighten up where that was concerned.
The Committee further
noted that fraud was rife in some entities, and that criminal charges should be
laid against those found guilty of abusing public funds.
The Committee noted that
strategic objectives of entities would assist the Committee in its oversight
role and in determining what was achieved against financial allocations.
The Committee further
noted that in some entities, strategic plans do not directly link with the
annual reports, and urged entities to clearly link the strategic plans with
their annual report for the next financial year.
The Committee noted that some key positions in entities remained vacant;
some for long periods, resulting in entities paying professional fees to
companies contracted to do the work, and urged entities to fill these positions
with the urgency it deserves.
The Committee noted that
some entities that had pending legislation should speed up the process of it
being considered by Parliament, as this may help the Committee to exercise
better oversight.
12. Conclusion and
Recommendations
The Standing Committee on Finance, having considered
the annual reports and related documentation from the National Treasury, the
South African Revenue Services (SARS), the Financial and Fiscal Commission
(FFC), the Financial Intelligence Centre (FIC), the Public Investment
Corporation (PIC), the Land Bank, the Development Bank of South Africa (DBSA),
the South African Reserve Bank (SARB), the Financial Services Board (FSB) and
the Pension Fund Adjudicator (PFA), recommends that:
Report to be considered.