This report replaces the report of the Standing Committee on Finance that was published on page 1863 of ATC No 67 on 3 June 2011.

Report of the Standing Committee on Finance on the Strategic Plans and the Budget Vote 10: National Treasury and the South African Revenue Service, dated 03 June 2011

The Standing Committee on Finance, having considered the Budget Vote 10: National Treasury and the strategic plans of the National Treasury and the South African Revenue Service for the 2011/12 – 2013/14 period, reports as follows:

1. Introduction

The Budget Vote 10: National Treasury (which comprises the National Treasury and the South African Revenue Service) was referred to the Standing Committee on Finance on 09 March 2011. Thereafter, the Minister of Finance, Mr Pravin Gordhan; the Director-General of the National Treasury, Mr Lungisa Fuzile (the Director-General); and senior officials at the National Treasury briefed the Standing Committee on Finance (the Committee) on the Budget Vote 10: National Treasury and the updated strategic plan of the National Treasury. In addition, the Minister of Finance (the Minister); the Commissioner of the South African Revenue Service (SARS), Mr Oupa Magashula, and senior officials at the SARS briefed the Committee on the Budget Vote 10 and the updated strategic plan of the SARS. This report presents the Committee’s deliberations with the National Treasury and the South African Revenue Service. Both briefings took place in Parliament on 31 May 2011.

2. Mandate of the Standing Committee on Finance

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 of the Republic of South Africa, legislation, the standing rules or a resolution of a House, including considering and reporting on-

(a) The national macro-economic and fiscal policy.

(b) Amendments to the fiscal framework, revised fiscal framework and revenue proposals and Bills.

(c) Actual revenue published by the National Treasury.

(d) Any other related matter set out in the Money Bills Amendment Procedure and Related Matters Act, Act No 9 of 2009.

The mandate also 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. Furthermore, the Committee must consider and report on any matters that are referred to it for consideration and reporting. In any of its activities, the Committee may confer with any Committee in the National Assembly as provided in Rules 139, 303 and 304 of the National Assembly.

3. Mandate of the National Treasury

The National Treasury derives its mandate from Chapter 13 of the Constitution of the Republic of South Africa (the Constitution). According to section 216(1) of the Constitution, national legislation must establish a national treasury and prescribe measures to ensure both transparency and expenditure controls in each sphere of government. Provision of the functions and powers of the National Treasury are contained in Chapter 2 of the Public Finance Management Act (PFMA). They are as follows:

• Develop fiscal policy framework and coordinate macro-economic policy;
• Prepare a sound and sustainable national budget and equitable division of resources;
• Equitably and efficiently raise fiscal revenue, while enhancing efficiency and competitiveness of the South African economy;
• Sustainably manage and make effective of government’s financial assets and liabilities; and
• Promote transparency to improve financial accountability and enforce effective financial management.

In addition to the mandate of the National Treasury summarised above, the National Treasury stated that it directly contributes to three of the 12 national government outcomes, namely:

• Decent employment through inclusive economic growth;
• A responsive, accountable, effective and efficient local government system; and
• An efficient, effective and development-oriented public service and an empowered, fair and inclusive citizenship.

In order to make this contribution, the National Treasury stated that it fully adopted the outcomes approach in preparing its updated strategic plan.

4. The Economic Environment

The National Treasury reported on the existing economic status. The National Treasury reported that, although the South African Reserve Bank projected a gross domestic product’s (economic) growth of 3.7 per cent for the 2011 calendar year, there was gradual increase in economic growth – caused by stable macro-economic conditions. The National Treasury further reported that the inflation rate was 4.2 per cent as at April 2011 and that this moderate rate of inflation, in the South African context, created basis for low interest rates which was at a 23-year low as at May 2011. With respect to employment, the National Treasury reported that it was projected to grow 1.8 per cent annually and that the Statistics South Africa’s figures showed that the number of persons in the South African labour force increased by 213,000 between the last quarter of the 2010 calendar year and first quarter of the 2011 calendar year. Furthermore, the National Treasury argued that admission of South Africa into Brazil, Russia, India and China (BRIC) economies to form Brazil, Russia, India, China and South Africa (BRICS) economies, would present a platform for South Africa to contribute to shaping economic reform. BRCS is the group of the countries which are all deemed to be at a similar stage of newly advanced economic development. The National Treasury was pleased to state that the South African Revenue Service had exceeded its revenue target by R2 billion in the 2010/11 financial year.

However, the National Treasury reported that, although the existing level of the inflation rate as at April 2011 was moderate, it was projected to reach an average rate of 5.2 per cent in the 2011 calendar year and to reach 6.0 per cent in the 2012 calendar year. Thus reaching the upper limit of the targeted inflation rate bracket of 3 – 6 per cent. The National Treasury further reported that another risk to the economic environment was rising costs of production owing to rising fuel prices – a process that would translate into higher food prices and, in turn, higher inflation rate. The National Treasury stated that, although employment was projected to increase by 1.8 per cent annually, unemployment remained stubbornly high in South Africa. The National Treasury described erratic capital flows, like in many developing countries, as a challenge for the country. Global risks affecting South Africa were reported as follows: slow demand in Europe (one of the South Africa’s significant trade partners) which could slow demand for South Africa’s exports; European sovereign debt’s and banking risks; and rising inflation rate in emerging economies which could negatively affect economic growth of these economies.

5. Strategic Government Initiatives

The National Treasury argued that its programmes are informed and aligned with the following strategic government initiatives:

• Creation of employment: The President of the Republic of South Africa, Mr Jacob Zuma, announced the creation of 5 million jobs by the 2014 calendar year during his 2011 State-of-the-Nation Address. As a result, R9 billion jobs fund was created to support the expansion of existing job creation programmes and to pilot other innovative approaches to employment creation – with a special focus on opportunities for young people to gain skills in productive employment. In addition, the proposed youth employment subsidy, which was being reviewed by the National Economic Development and Labour Council (Nedlac), was another initiative to encourage employment of youth.
• Finding of savings and reprioritisation of expenditure: The National Treasury reported that a total amount of R30 billion had been identified and included in the 2011 Budget allocations. Reprioritisation of expenditure was described by the National Treasury to mean recoupment of funds from less important programmes to more important ones.
• Reformed supply chain and more compliance: This entailed contribution to the work of Anti-corruption Task Team; and combating corruption and fraud in the public sector.
• Social security and health financing: This entailed exploring sustainable funding models for these initiatives – partly aimed at implementing the first stage of the National Health Insurance which is aimed at strengthening the Health Care system in the country.
• Infrastructure investment, city planning and development: Approximately R800 billion would to be spent on this initiative over the following three years.

6. Programmes of the National Treasury

The National Treasury comprises 10 programmes, namely: Administration (Programme 1); Economic Analysis and Forecasting, Taxation, Financial Regulation and Research (Programme 2); Public Finance and Budget Management (Programme 3); Asset and Liability Management (Programme 4); Financial Accounting and Reporting (Programme 5); International Financial Relations (Programme 6); Civil and Military Pensions, Contributions to Funds and Other Benefits (Programme 7); Technical and Management Support, and Development Finance (Programme 8); Revenue Administration (Programme 9); and Financial Intelligence and State Security (Programme 10).

6.1 Administration

The Administration Programme is responsible for the overall strategic management and support for the National Treasury. It comprises only the Corporate Service Division. With regard to this programme and over the following three years, the National Treasury intends to perform the following functions:

• Enhance the talent management programme to ensure relevance to the needs of the National Treasury;
• Continue the leadership development to create a pool of senior management cadres;
• Implement the in-year monitoring tool that will improve financial management and reporting from 6 to 2 days;
• Develop information and communication technology (ICT) systems and services in support of organisational objectives; and
• Implement an automated registry where departmental information can be stored, managed and accessed electronically and easily – in an effort to move towards efficient and effective paperless office.

6.2 Economic Analysis and Forecasting, Taxation, Financial Regulation and Research

The purpose of this programme is to provide specialist policy research, analysis and advisory services in the areas of macro-economics, microeconomics, and taxation, the financial sector, and regulatory reform. It comprises two divisions, namely: Economic Analysis and Forecasting, and Tax and Financial Sector Policy.

With respect to this programme and over the following three years, the National Treasury plans to do the following functions:

• Develop and maintain economic forecasting models that facilitate sound policy making through in-depth economic analysis, including macroeconomic forecasts;
• Monitor the exchange rate and explore policy measures to ensure competitiveness;
• Formulate and implement annual tax proposals;
• Produce policy paper on carbon tax proposals for Cabinet approval and submit proposal for the 2012 Budget;
• Explore policy measures to increase private savings;
• Conduct consultations with the view to implement proposals related to strengthening the financial regulatory system -in an effort to move towards “a safer financial sector to serve South Africa better”;
• Publish a policy document with proposals on modernising the framework for inward and outward investment – an important function indeed for sustainable development; and
• Explore models for financing the National Health Insurance (NHI), with the first steps towards its implementation as announced in the 2011 Budget.

6.3 Public Finance and Budget Management

The purpose of this programme is two-fold: to provide analysis and advice on fiscal policy and public finances, intergovernmental financial relations, and expenditure planning and priorities; and to manage the annual budget process and provide public finance management support. It comprises three divisions, namely: Public Finance, Budget Office, and Intergovernmental Relations.

With regards to this programme, the National Treasury aims to do the following:

• Establish the Capital Projects Unit to evaluate options for investment in liquid fuels supply capacity, review solar park proposals, and conduct pre-feasibility review of major projects in water and transport sectors;
• Work with programme 2 (above) to develop a policy framework for social security reform;
• Introduce longer-term expenditure estimates for selected programmes and entities;
• Monitor expenditure on a monthly and quarterly basis and provide analysis of expenditure trends;
• Improve the budget process and provide information by government function;
• Refine the new disaster funding grant mechanism and other aspects of managing disaster response in order to improve its effectiveness;
• Extend the coverage of the consolidated account to include information on the consolidated accounts and borrowing of government;
• Broaden focus of official development assistance (ODA) funding to include economic and rural development, creation of employment, and public service delivery improvement;
• Review the provincial and local government fiscal framework in line with national budget framework and policy objectives;
• Review the equitable share formula for local government and provinces in order to improve targeting of resources in favour of the poorer geographical areas and pro-poor programmes; and
• Implement key local budget reforms to improve budget implementation and reporting.

6.4 Asset and Liability Management

The Asset and Liability Programme aims to ensure prudent management of government’s financial assets and liabilities. It is made of a single division, namely: Asset and Liability Management. Over the following three years, the National Treasury plans to do the following functions:

• Finance government’s gross borrowing requirements of approximately R575 billion;
• Maintain sound investor relations through roadshows and enhanced dissemination of information;
• Manage (actively) government’s debt portfolio through buy-back and switch/exchange programmes. A debt level is set to rise to R1.4 trillion, which would be 39.4 per cent of gross domestic product (GDP);
• Maintain debt service cost, as a percentage of GDP, between 2.6 and 2.9 per cent;
• Optimise the use of public sector cash through broadening the coordination – thereby reducing borrowing cost; and
• Strengthen financial oversight and monitor economic performance of Development Finance Institutions (DFIs) like the Development Bank of Southern Africa and the Land Bank.

6.5 Financial Accounting and Reporting

The purpose of this programme is to facilitate accountability, governance and oversight by promoting transparent, economic, efficient, and effective (TEEE) management in respect of revenue, expenditure, assets and liabilities (REAL) in the public sector. It comprises two divisions, namely: Specialist Functions and Office of the Accountant-General. Over the following three years, the National Treasury intends to do the following functions:

• Rollout strategic sourcing principles to 42 medium term capacity municipalities and introduce the strategic sourcing principles to 30 low capacity municipalities;
• Promulgate and implement revised preferential procurement regulations, and monitor implementation of the revised preferential procurement regulations;
• Review of procurement legislation with relevant stakeholders;
• Apply strategic sourcing methodologies to improve value for money in 32 transversal term contracts;
• Implement completed Integrated Financial Management System (IFMS) modules in identified departments (some of the modules are developed and piloted);
• Issue Treasury Instructions as a step to enforce supply chain compliance and to counter fraud and corruption;
• Develop guidelines to strengthen the monitoring and oversight function of Parliamentarians;
• Monitor improvements in financial management in national and provincial institutions and report to the Committee on Public Accounts and Standing Committee on Finance by August 2011;
• Implement Financial Management Capacity Maturity Assessment in selected municipalities and entities in order to determine the impact of financial reforms introduced at the municipal level;
• Manage an academic support programme for Chartered Accountants and other accountants (17 participants in the 2011 calendar year) in government; and
• Provide targeted support to priority departments and municipalities to improve financial management.

6.6 International Financial Relations

The purpose of this programme is three-fold: to advance South Africa’s economic interests through regular strategic analysis, engagement and negotiation at financial and economic forums; to increase Africa’s voice and improve South Africa’s participation in international institutions; and to promote regional economic integration in the Southern African Development Community (SADC) and strengthen economic links within South Africa. It comprises of a single division called International and Regional Economic Policy.

With this programme and over the following three years, the National Treasury plans to do the following functions:

• Finalise agreement on a new revenue-sharing formula in the Southern Africa Customs Union (SACU);
• Formulate proposals and establish a regional infrastructure fund;
• Increase shareholding in the African Development Bank to 6 per cent. This also intends to contribute to increasing South Africa’s voice in the African continent and beyond;
• Promote and support the development of African countries; and
• Facilitate engagements between regional and international financial institutions and forums, and the Ministry of Finance, e.g. Group 20 (G20), International Monetary Fund (IMF), World Bank and so forth.

6.7 Technical and Management Support and Development Finance

The aim of this programme is to promote public and private investment in infrastructure and public services by providing the following: technical support for capital planning and Public Private Partnerships (PPPs); advice on financing alternatives for municipal development; and financial assistance for neighbourhood development projects. This programme has 6 divisions, including the following: the new jobs fund which supports the creation of self-sustaining employment; and the post-disaster recovery and reconstruction transfer which deals with post-disaster recovery activities.

With this programme and over the following three years, the National Treasury plans to do the following:

• Build project management capacity in government;
• Ensure improved infrastructure delivery, through the implementation of the Infrastructure Delivery Improvement Programme (IDIP). The IDIP had 36 technical assistants – that is 4 technical assistants are seconded in each of 9 provinces;
• Support municipalities in planning and implementing integrated neighbourhood development programmes in townships; and
• Develop project appraisal methodology for capital and infrastructure projects.

6.8 Other Programmes

The National Treasury reported that Programmes 7, 9 and 10 account directly to Parliament. These programmes were not dealt with during this deliberation.

7. Resource Plan of the National Treasury for the 2011/12 Financial Year

Table 1 (below) summarises budget per programme as follows:

Table 1: Budget per programme: 2010/11 – 2011/12 period

# Programme/ entity	Budget allocation
R’000	2010/11 Budget	2010/11 Preliminary Outcome	2011/12 Budget	per cent Change Budget
1. Administration	276,551	248,661	281,088	1.6
2. Economic Policy, Tax, Financial Regulation and Research	106,245	86,060	120,364	13.3
3. Public Finance and Budget Management	187,117	157,437	198,938	6.3
4. Asset and Liability Management	20,822,800	20,813,904	822,594	-96.1
Operational budget	72,800	67,204	72,594	-0.3
Eskom	20,000,000	20,000,000	0	-100.0
Land Bank	750,000	746,700	750,000	0
5.Financial Systems and Accounting	639,222	559,125	658,220	3.0
Operational budget	577,054	496,961	595,207	3.2
Transfers	62,168	62,164	63,013	1.4
6. International Financial Relations	565,222	558,683	812,380	43.7
Operational budget	31,917	26,587	32,624	2.2
Transfers	533,305	532,096	779,756	46.2
Sub-total	22,597,157	22,423,870	2,893,584	-87.2
Operational budget	1,388,222	1,187,539	1,460,894	5.2
Transfer budget	37,316,681	37,038,617	21,137,297	-43.4
Percentage of operational to transfer budget	3.7%	3.2%	6.9%	86.5%
7. Civil and Military Pensions, Contributions to Funds and other Benefits	2,698,187	2,697,847	3,139,833	16.4
8. Technical Support and Development Finance	1,779,185	1,474,065	4,156,180	133.6
Operational budget	136,538	104,629	160,079	17.2
Transfers	1,642,647	1,369,436	3,996,101	143.3
9. Revenue Administration	8,142,208	8,142,208	8,653,573	6.3
10. Financial Intelligence and State Security	3,488,166	3,488,166	3,755,021	7.7
Grand Total	38,704,903	38,226,156	22,598,191	-41.6

Source: National Treasury (2011)

8. Deliberations with the National Treasury

8.1 Comments and Questions raised by the Committee

Comments and questions of the Committee are summarised in this sub-section as follows.

The Committee sought clarity on the increasing government’s wage bill, and on whether a higher wage bill was not a risk for the economy since a higher wage bill could imply that the demand might be boasted.

The Committee requested an explanation as to whether savings as reflected in the strategic plan could be as a result of underspending or doing things efficiently as the former could be misleading if it was referred to as savings since underspending could mean compromising service delivery.

With regards to ODA, the Committee requested more information on the funding intake into the developmental agenda.

In terms of the equitable share, the Committee raised a question on whether South Africa would be using data from 2011 census for planning purposes in the 2011/12 financial year.

The Committee requested to know the potential impact of the social and political developments in Northern Africa on the fuel price and inflation.

The Committee requested to know the degree to which Members could get access to information on fraud and corruption, as relevant information could be classified in terms of the proposed Protection of Information legislation.

The Committee wanted to know how many of the reported 213,000 new jobs were created in the private sector. It also wanted to know what steps are being taken in ensuring that the creation of 5 million jobs, as was announced by President Jacob Zuma, was achieved.

The Committee wanted to know where South Africa stood with regard to SACU and when it will be concluded, and if this would not destabilise neighbouring countries.

The Committee wanted to know the position of the National Treasury with regards to Public Private Partnership (PPP) for prisons.

The Committee noted that there are logistical problems in ports, as trade are not executed with ease and ask the National Treasury what was done to address this challenge in ports. Richard Bay ports were used as an example where these challenges existed.

The Committee noted that, in terms of outcomes, the National Treasury did not mention any training plans (skills development) since it needs additional expertise for itself and the economy at large in order to grow.

The Committee sought clarity on the benefits that the BRICS group would develop for South Africa as a country. Furthermore, the Committee requested to be informed about plans South Africa has in order to ensure that African business community would seize opportunities that might be presented by BRICS.

The Committee noted the rising debt cost and sought clarity on why service costs were rising and how it would be managed to acceptable levels.

The Committee wanted to know what systems would be used to assess the performance of programme 1.

The Committee wanted to know what the current shareholding in the African Development Bank was.

The Committee wanted to know on whether the National Treasury was satisfied with implementation of the Public Finance Management Act by relevant entities.

The Committee noted that transformation within the National Treasury was minimal in terms of women representation in senior management positions which was not in line with South Africa’s percentage of women in the country, and wanted to know if the National Treasury was satisfied with the transformation (female representation in critical leadership positions) within it.

The Committee wanted to know who would look after municipalities which were not directly targeted by the National Treasury.

8.2 Responses by the National Treasury

In relation to comments and questions of the Committee, the National Treasury responses are summarised below.

With regards to the high wage bill, the National Treasury argued that South Africa needed an understanding in the public sector to balance considerations of those who required wage increases in relation to increasing inflation versus increasing employment, particularly of frontline service delivery as opposed to administrative staff. Furthermore, the National Treasury reported that it creates a budget every year to cater for cost of living increases and additional employment. However, the National Treasury further reported that the additional employment portion had been severely eroded over past few years due to higher than expected salary increases.

With respect to the appropriateness of tax rates, the National Treasury informed the Committee that South Africa operated in a tight fiscal environment – for example, the tax GDP ratio was more than 28 per cent before recession and currently it was 25 per cent since there was slow economic growth in the South African environment. The National Treasury added that they could widen the tax base by either increasing businesses or individuals taxes (or both), or by creating more businesses that pay tax, but it was not happening at the required (or expected) rate.

With regards to SACU, the National Treasury responded that it was not the intention of South Africa to negatively contribute to the fiscal sustainability of neighbouring countries, but the current formula of SACU and the way of doing things with neighbouring countries was not sustainable in the long run.

In response to a question on staff training and skills development, the National Treasury explained that good progress is currently made in the talent management programme. There were a series of training activities, namely; training of chartered accountants and other accountants which is led by the Accountant-General.

With regards to BRICS and the benefits it might bring to South Africa and the African continent, the National Treasury responded as follows: Africa, of which South Africa is part of, is one of the biggest economies in the world, and agreements signed provides for areas of cooperation on trade, investment, and sharing research and ideas. The National Treasury argued that these agreements promoted competitive cooperation and advised that businesses should develop creative and innovative ways of deriving maximum benefits that would be presented by the inclusion of South Africa in BRIC to form BRICS.

With respect to savings and underspending, the National Treasury reported that savings of R30 billion at the end of 2010/11 financial year were as a result of withdrawal from programmes which were no longer relevant to the country. The National Treasury informed the Committee that savings were defined differently from underspending. Savings was further defined by the National Treasury to mean cheaper ways to procure goods and services by the departments- real savings.

With regard to the equitable share and the use of Statistics South Africa’s updated figures, the National Treasury explained that it would be ideal to make use of the most recent numbers but it takes time to process high volumes of data from the census. This would be the reason for the delay in the use of data from the latest census. The National Treasury pointed out that the 10-year gap between censuses that were conducted in South Africa remains a challenge with regards to the appropriateness of data. This is the reason why the National Treasury would use updated data if it was available before it embarked on some of its projects.

With regards to supply chain, the National Treasury reported that information on the procurement of goods and services would be published on their website –including information in black-listed service providers.

The National Treasury reported if it could still find properly structured PPP’s in the area of building prisons; where designs were not expensive and service providers delivered what was required at a reasonable price, it would remain committed to persuing PPP’s.

With regards to challenges in mining activities and trade, the National Treasury admitted that logistics and transportation system (trading) remained a challenge in South Africa. Examples provided by the National Treasury were that licensing for water and access to energy was challenging for the mining sector. However, the National Treasury revealed that some remedies to these challenges would be partly addressed by R800 billion which was intended to address these challenges. National Treasury further indicated that Eskom would invest 36 per cent of the R800 billion, while Transnet was making certain investments to partly address these challenges.

With respect to the 14 per cent increase in spending, the National Treasury explained that it was as a result of economic research at different universities.

In relation to a question on debt costs, the National Treasury responded that South Africa ran a deficit during the recession owing to its counter-cyclical policy – for example, debt levels had to be increased in order to minimise the negative impacts of the most recent global economic crisis and that the higher levels of debt meant a slight increase in debt service costs. However, the National Treasury was proud to emphasis than South Africa compared favourably to most countries since the debt, as a percentage of the GDP, was currently at 40 per cent.

To a question on transformation and women representation in senior management position, the National Treasury responded that 3 of its 10 Deputy Director-Generals were women – although 1 of them is in an acting capacity. However, the National Treasury further reported that it was increasing the number of women in senior management positions in line with demographics.

With regards to compliance with the PFMA, the National Treasury responded that compliance with the PFMA was at a slow pace. The National Treasury reported that, in order to address this, specific departments facing financial management challenges had been identified and targeted and the National Treasury had reached an agreement on how they were going to work together in addressing financial management challenges.

With regards to shareholding in the African Development Bank, the National Treasury mentioned that the current shareholding was more than 200,000 shares in the bank, which could be translated to approximately 4.6 per cent. The National Treasury added that it was the third largest shareholders in the African Development Bank and that it was undersubscribed by 50 per cent. There was however room for increasing its shareholding in the Bank.

With regards to the impact of the northern Africa’s social and political developments on South Africa, the National Treasury reported that Lybia was responsible for 2 per cent of oil supply, so it was not that significant and did significantly explain the type of increase realised in oil prices.

With regards to service delivery challenges at the local government, the National Treasury responded that it was always the challenge of adequately funding municipalities that was negatively contributing to service delivery, but there was a host of things including human problems, incorrect political choices, lack of planning, appointment of inexperienced and unqualified people into strategic positions and poor procurement practices. The National Treasury added that only a few municipalities could not perform better due to insufficient funding.

With respect to creation of jobs, the National Treasury reported that most of jobs were created in the private sector, mainly in sectors of finance and manufacturing.

9. Core Outcomes of the South African Revenue Service

The South African Revenue Service (SARS) reported that it had identified four enduring core outcomes as follows:

• Increased customs compliance;
• Increased tax compliance;
• Increased ease and fairness of doing business with SARS; and
• Increased cost effectiveness, internal efficiency and institutional respectability.

SARS explained that the above-mentioned core outcomes manifest along the entire trader/taxpayer value chain which would be achieved through compliance philosophy. SARS further explained that compliance philosophy links its actions to the degree of taxpayer/trader compliance which would be achieved by increasing efficiency resulting from the Modernisation programme.

SARS provided that the Human Resources strategy to influence compliance was as follows:

• Increase human resources to deal with high revenue generation taxpayers and traders requiring specialised skills to improve tax and customs compliance;
• Reduce “human” effort on processing medium term revenue generation taxpayers and traders to increase ease and fairness of doing business with SARS and to become more cost effective and internally efficient; and
• Effectively second human resources to broaden engagement with low revenue generation taxpayers and traders to improve tax and customs compliance.

10. Strategic Priorities of the South African Revenue Service

The South African Revenue Service (SARS) reported that it had developed 7 strategic priorities as follows:

• Strategic priority 1: Drive revenue realisation to deliver timeously and ensure sustainability;
• Strategic priority 2: Drive productivity, service quality and cost efficiency;
• Strategic priority 3: Deliver (fully) on SARS’ Custom’s mandate;
• Strategic priority 4: Improve SARS’ operating model, streamline governance, and strengthen leadership;
• Strategic priority 5: Implement segmentation to strengthen SARS’ business model;
• Strategic priority 6: Enable SARS’ personnel to perform at their optimal levels; and
• Strategic priority 7: Deepen key external relationship to manage the whole value stream.

With the Strategic priority 1, SARS intends to do the following:

• Increase the taxpayer register through the inclusion of individuals/businesses that are eligible to pay tax as well as the inclusion of individuals/businesses that are likely to become eligible in the future;
• Streamline the audit and customs inspection processes; and strengthen audit capability to deal with complex cases and serious taxpayer and trader non-compliance;
• Re-engineer the debt collection processes;
• Expand the administration of penalties for non-compliance;
• Expand the use of third party data, time-series taxpayer history and statistical scoring methodologies to enhance SARS’ compliance risk detection and rating capabilities for Personal Income Tax (PIT), Pay-as-you-earn (PAYE), Corporate Income Tax (CIT), Value-added tax (VAT) and customs; and
• Conclude the voluntary disclosure programme to encourage proactive disclosure of non-payment by non-compliant taxpayers.

With the Strategic priority 2, SARS intends to do the following:

• Improve the ease and speed of registration and other interactions for businesses supported by a single view of each taxpayer and trader;
• Improve turnaround times and reduced paperwork for transactions and queries (via automation) for priority taxpayer and trader segments; and
• Implement a revised service delivery philosophy, service charter and channel strategy that meets taxpayer/trader needs.

With the Strategic priority 3, SARS intends to do the following:

• Develop (with other government departments) a seamless transition to an integrated border management model;
• Enhance a service offering (e.g. reduced paperwork, quicker processing times, etc) to preferred traders comprising 80 per cent of all legal trade entering the country;
• Improve ease and speed of declaration processing and inspections, through modernising processes and systems;
• Prioritise and expedite Customs inspections through the use of additional data resources and the continued rollout of non-intrusive inspection capability to vastly improve SARS’ ability to inspect the goods crossing South Africa’s ports of entry;
• Enhance border control detection capability through the Customs Border Control Unit (CBCU) and the Dog Detection Unit (DDU) - thereby improving security at ports of entry; and
• Enhance the traveller experience when entering and leaving the country.

With the Strategic priority 4, SARS plans to do the following:

• Implement (fully) the new operating model, with integrated workforce plan that makes SARS’ workforce more empowered, agile and responsive to meet the needs of SARS’ taxpayer and trader;
• Streamline SARS’ governance framework to reduce unnecessary levels of bureaucracy while still maintaining appropriate levels of oversight; and
• Embed (further) the SARS’ values-based leadership model with appropriate resourcing and capabilities.

With the Strategic priority 5, SARS intends to do the following:

• Deliver tailored services to meet the needs of SARS’ five priority segments, namely: larger business, medium-sized businesses, practitioners, traders, and individual taxpayers; and
• Accelerate the development of a small business segment in support of entrepreneurship, economic growth, and job creation - including the enhancement of the Turnover Tax system.

With the Strategic priority 6, SARS plans to do the following:

• Embed a workforce planning methodology to inform employee development, redeployment and recruitment;
• Enhance SARS’ employee value proposition to attract and retain skills that SARS needs;
• Improve performance management processes to empower managers to effectively manage employee performance;
• Improve SARS’ organisational culture and employee engagement; and
• Build an external skills pipeline to enable sustainability and creation of employment.

With the Strategic priority 7, SARS intends to do the following:

• Enhance outreach, education, service, and enforcement by building collaborative partnerships with private, public and international sector partners, and utilising their feedback to improve compliance;
• Make a broader societal contribution through targeted, high–impact initiatives; and
• Build institutional respectability and service delivery excellence for SARS and its governmental partners.

11. Performance Targets of the South African Revenue Service

The South African Revenue Service reported that a focus to achieve its outcomes would be done in line with government’s outcomes approach and that it would be tracking its progress. The following targets of SARS are summarised as per core outcomes.

11.1 Increased Customs Compliance

Table 2 (below) presents performance targets to assess the achievement of this core outcome.

Table 2: SARS’ performance targets (customs) – 2011/12 – 2013/14 period

Measures	Baseline	Targets
		2011/12	2012/13	2013/14
Customs revenue collected (Rbillion)	MTBPS target for 2010/11	As per agreed target with Minister	As per agreed target with the Minister	As per agreed target with the Minister
per cent Trade volume coverage by Preferred Traders [Number of Preferred Traders declarations processed vs total number of declaration processed]	0	5	12	25
per cent of cargo declarations targeted [Number of lines of declarations targeted vs total number of lines of declarations]	14	13	12	11
per cent update in electronic manifest submissions [Number of electronic manifest submissions vs total number of manifest submissions]	0	60	80	95
per cent increase in Customs compliance index	Not defined currently	Develop measure and baseline	Track against baseline	Introduce measure into SARS performance management
per cent decrease in size of illicit economy
Achieving progress against identified benchmarks [e.g. post clearance audit coverage]	Not defined currently	Develop measure and baseline	Track against baseline	Introduce measure into SARS performance management

Source: SARS (2011)

11.2 Increased Tax Compliance

Table 3 (below) presents performance targets to assess this core outcome.

Table 3: SARS performance targets (tax) -2011/12 – 2013/14 period

Measures	Baseline	Targets
		2011/12	2012/13	2013/14
Total revenue (excluding Customs revenue) collected (Rbillion)	MTBPS	As per agreed target with the Minister	As per agreed target with the Minister	As per agreed target with the Minister
per cent PIT filing compliance [Number of PIT returns submitted in tax year due vs Total number of PIT required in tax year]	79	79	80	81
Cash recovered from debt book (Rbillion)	8.8	11	11	11
per cent Audit coverage of registered taxpayers (PIT, CIT, VAT/Excise and PAYE) above the threshold	3	4	5	6
per cent Increase in the Small Business register	Not defined currently	Develop and measure baseline	Track against baseline	Introduce measure into SARS performance management
Debt book as a per cent of tax revenue
per cent CIT and VAT filing compliance [Number of CIT and VAT returns required in tax year]
Tax compliance index for each tax product
Achieving progress against identified benchmarks (e.g. audit performance)

Source: SARS (2011)

11.3 Increased Ease and Fairness in Doing Business with SARS

Table 4 (below) presents performance targets to assess this core outcome.

Table 4: SARS performance targets (filing) – 2011/12 – 2013/14 period

Measures	Baseline	Targets
		2011/12	2012/13	2013/14
per cent Update in electronic filing, declaration and payment submissions for all tax products [Number of electronic filing, declaration and payment submissions vs total filing, declaration and payment submission]	80	80	81	82
per cent Update in electronic customs bills/ declarations (EDI)	70	80	90	95
Average processing turnaround time for PIT returns (working days)	1.7	1.7	1.7	1.7
Average processing turnaround time for CIT refunds (working days)	2.85	2.85	2.85	2.85
Average processing time for VAT refunds (working days)	21	15	10	<5
Average processing time for VAT registrations (working days)	Not defined currently	Develop measure and baseline	Track against baseline	Introduce measure into SARS performance management
per cent First contact resolution in contact centre and branches
per cent Reduction in escalated service queries
Taxpayer and trader compliance burden
Achieving progress against identified benchmarks (e.g. complaints resolution)

Source: SARS (2011)

11.4 Increased Cost Effectiveness and Internal Efficiency

Table 5 (below) presents performance targets to assess this core outcome.

Table 5: SARS performance targets (operations) – 2011/12 – 2013/14 period

Measures	Baseline	Targets
		2011/12	2012/13	2013/14
Treasury allocation to revenue percentage	1.3	1.2	1.2	1.2
Unqualified report by Auditor-General (AG)	Unqualified report	Unqualified report	Unqualified report	Unqualified report
per cent of files digitised within SARS	Not defined currently	Develop measure and baseline	Track against baseline	Introduce measure into SARS performance management
Unit cost per process
Productivity per employee
Achieving progress against identified benchmarks (e.g. cost per process)

Source: SARS (2011)

12. Resource Plan of SARS for the 2011/12 Financial Year

Table 6 (below) summarises the budget as per line item as follows.

Table 6: Line item budget – 2010/11 – 2013/14 period

Item	Budget Allocation				per cent Change (Budget)
R’000	2010/11	2011/12	2012/13	2013/14	(in 2011/12)
Total funds available	8,331,000	8,910,573	9,512,723	10,037,482	0.07
National Treasury Grant	8,066,810	8,653,573	9,244,374	9,757,215	0.07
Interest income	48,000	30,000	30,000	30,000	-0.38
Other income	216,190	227,000	238,349	250,267	0.05
Funding allocation	8,331,000	8,910,573	9,512,723	10,037,482	0.07
Modernisation and initiatives	838,376	896,700	957,296	1,010,105	0.07
Enforcement	2,239,502	2,395,300	2,557,167	2,698,231	0.07
Service	3,678,774	3,934,700	4,200,595	4,432,317	0.07
Support	1,574,348	1,683,873	1,797,664	1,896,830	0.07

Source: SARS (2011)

13. Projected Human Resource Capacity

Table 7 (below) summarises the human resource plan as follows.

Table 7: Human resource plan – 2010/11 – 2013/14 period

Item	Actual	Targets
	2010/11	2011/12	2012/13	2013/14
Permanent employees	15,034	15,330	15,434	15,635
Temps	862	650	550	400
per cent Net Growth Excl temps	1.9 per cent	1.9 per cent	3.0 per cent	4.0 per cent
Total	15,896	15,980	15,984	16,035

Source: SARS (2011)

14. Deliberations with the South African Revenue Service

14.1 Comments and Questions

Following the interaction with the SARS, the Committee noted the following issues:

The Committee wanted to know if the target of R741 billion was based on 3.4 per cent GDP, and whether it is possible that the growth rate continues on this trend that SARS may come in above its target.

The Committee noted corruption within SARS, and wanted to know what further steps do SARS intend instituting to stamp out corruption. The Committee commended SARS on good work done in this regard.

The Committee wanted to know what measures are used to evaluate the 7 objectives, and what tracking system is used to track the implementation of these objectives

The Committee noted the interest income of R30 million and wanted more clarity on the matter.

The Committee sought clarity on over-collection. Whether the projection was intended to achieve that and how realistic projections were. The Committee also wanted to know what the impact of the 2010 FIFA World Cup was in over- collection.

The Committee noted that the strategic priorities from SARS decreased from 11 to 7 over the past 3 years, and wanted to know what benefits will this yield.

The Committee wanted to know what the cost and return on investment was for the modernisation programme, and at what point will this programme be completed. In addition, the Committee noted that it has become increasingly difficult to obtain a clearance certificate due modernization and requested reasons for this. The Committee also wanted to know to what extent compliant measures assist SARS in achieving its targets.

The Committee noted the increase in the tax payer database, and wanted to know the database was reliable.

14.2 Responses by SARS

Projections for accurate compliance remain a challenge because of the different amounts being collected. Higher economic growth, results in higher revenue collection. Although the 2010 FIFA World Cup assisted with revenue collection, the event costed a lot of money.

In terms of modernisation and return on investment, SARS is changing the institution in terms of design and products. Work started on VAT, to make it more efficient for both SARS and the tax payer. A huge change in customs modernisation is currently underway whereby less paper is produced and more electronic transactions are processed.

SARS admitted that corruption schemes exists and have lately arrested a lot of people, including 20 employees. Part of the benefits of modernizing VAT is the tracking of transactions people claim. Over the last two months, a process of modernising the VAT system has begun. This includes a higher level of security and enhanced identification of internal fraud capabilities.

In terms of the outcomes and strategic priorities, SARS had 11 priorities, with modernizing being one; there are still a few things outstanding. SARS have begun automating a lot of things, and linking up credit bureaus, there were issues of expansion, which were dropped, as priorities were revisited. Priorities continue to change, but core remains the same and are enduring.

Although SARS received a grant from National Treasury, the expenditure patterns did not match, hence the R30 billion interest on income.

With regard to tax certificate clearance, SARS indicated that tax clearance certificates are part of the modernization programme and that there are still a few flaws in the system. As SARS digitize and link systems, more stringent measures are put in place as to who get tax clearance certificates.

In terms of debt recovery, SARS reported that a total amount of R13.8 billion was recovered with the bulk the money recovered from administrative penalties. There were 86000 people that paid penalties, amounting to R761 million.

The tax register contains over 10 million people. There are 4 million new SITE payers on the tax register which was automatically registered by their employers.

15. Recommendations

Having considered the strategic plans (including budgets) of the National Treasury and the South African Revenue Service, and the Budget Vote 10: National Treasury, the Standing Committee on Finance recommends that the House approves the said strategic plans and the Budget Vote 10.

Furthermore, the Standing Committee on Finance makes the following recommendations:

• The National Treasury should submit a detailed progress report to Parliament on the financing options proposed for the much-needed National Health Insurance Fund. This report should be submitted to Parliament within six calendar months after the adoption of this report by the House;

• The National Treasury should increase the percentage of women in senior management positions to levels that are in line with the demographics of this country - with a special focus to the level of the Deputy Director-General;

• The National Treasury should submit a plan to Parliament on how they are going to contribute to the assistance of other municipalities that were not included in its strategic plan. This report should be submitted to Parliament 30 working days after the adoption of this report by the House;

• The National Treasury should review the equitable share formula as a matter of urgency;

• The Standing Committee on Finance recognises and acknowledges the procurement system introduced by the Minister of Finance and Parliament awaits details on this system;

• The Financial Services Board (FSB) should fill the vacant posts on its board as a matter of urgency;

• The SARS should provide the Committee with a detailed report on the reliable tax payer database within 3 months after the adoption of this report by the House; and

• The SARS should provide the committee with a detailed report on the return on investment of the modernisation programme within 3 months after the adoption of this report by the House.

16. Conclusion

The Standing Committee on Finance would like to express its sincere thanks to the Minister of Finance, the Deputy Minister of Finance, and officials of the National Treasury and the South African Revenue Services for their continuous willingness to engage with the Committee on financial and fiscal issues in the spirit of cooperative governance.

17. Condolences and Congratulations

The Standing Committee on Finance expresses its condolences to the Deputy Minister of Finance, Mr Nhlanhla Nene, for the loss of his family member – the Deputy Minister of Finance is in the prayers of the Members of the Standing Committee on Finance.

The Standing Committee on Finance further expresses its congratulations to Mr Lungisa Fuzile on his appointment as the Director-General of National Treasury.

Report to be considered.