GUIDELINE FOR STANDING COMMITTEE ON APPROPRIATIONS IN THE FIFTH DEMOCRATIC PARLIAMENT: Compiled by: Mr Phelelani A Dlomo Edited by: Ms Bridgette Diutlwileng Research Unit: Finance and Public Accounts Cluster
GUIDING THE STANDING COMMITTEE ON APPROPRIATIONS (SCoA) TOWARDS A MORE EFFECTIVE BUDGET OVERSIGHT IN THE 5TH PARLIAMENT OF RSA PRODUCING EVIDENCE-BASED SECTION 32 EXPENDITURE ANALYSIS FOR SCoA: ABSTRACT: This publication serves as a guiding toolkit for members of the Standing Committee on Appropriations (SCoA) in order to familiarize themselves with the content of the work of the Committee through the following sections: Committee mandate, key legislations applicable to the Committee, the roles and responsibilities of the support staff (researcher), terms and concepts which are applicable during Committee work, a framework for compiling section 32 report or quarterly expenditure reports and possible reasons for poor expenditure other than poor planning in each economic classification. The idea is to present the Committee work in a simplified approach for members to get a better understand and thus will improve the overall performance of SCoA.
TABLE OF CONTENTS PAGE NO. 1. DEFINITION OF TERMS... 4 2. THE INTRODUCTION... 7 3. THE ROLE OF THE COMMITTEE RESEARCH SUPPORT STAFF... 7 4. KEY CONCEPTS AND APPLICABLE LEGISLATIONS DURING OVERSIGHT PROCESS... 8 5. A GUIDING FRAMEWORK... 12 5.1 THE MANDATE OF THE STANDING COMMITTEE ON APPROPRIATIONS... 12 6. QUARTERLY EXPENDITURE REPORT... 12 6.1 The researcher analyses the expenditure report in the following manner:... 13 Figure 1: The process of compiling section 32 expenditure report... 13 6.2 Expenditure analysis by economic classification... 13 6.3 Analyse overall expenditure by national departments to identify over/under expenditure... 14 6.4 Linking national spending trends with provincial & local conditional grant expenditure to assess Value for Money... 15 6.5 Consolidated national and provincial report by Auditor General, Performance Audit Report on Consultants and Infrastructure and Annual Reports... 15 7. SUMMARY OF KEY ISSUES... 15 7.1 The implications of the expenditure report and recommended questions for the Committee. 16 8. BUDGET REVIEW AND RECOMMENDATIONS REPORT (BRRR)... 17 Figure 2: the six steps to analyse the section 32 report... 17 9. Other possible reasons for poor spending other than poor planning:... 18 9.1 Current payments:... 18 9.1.1 Compensation of employees:... 18 9.1.2 Goods and Services:... 18 9.2 Transfers and Subsidies:... 18 9.3 Payments for Capital Assets:... 18 10. THE FINAL REPORT... 19 11. CONCLUSION... 19 12. SOURCES:... 20
1. DEFINITION OF TERMS USUALLY ENCOUNTERED IN COMMITTEE REPORTS AND OTHER TREASURY MATERIAL 1 : Appropriation: refers to the approval by Parliament of spending from the National Revenue Fund (NRF), or by a provincial legislature from Provincial Revenue Fund (PRF). Consolidated government expenditure: refers to total expenditure by national and provincial government, social security funds and selected entities including transfers and subsidies to municipalities, businesses or other entities. In-Year-Monitoring: refers to the process of scrutinising quarterly expenditure report by the Standing Committee on Appropriations. Consumer price inflation: refers to the main measure of charting the price movements of a basket of consumer goods and services Virements: refers to the utilisation of a savings or under spending from amounts appropriated under one main division (programme) towards the defrayment of increased expenditure under another main division within the same vote. Shifts: refers to the utilisation of a savings or under spending towards the defrayment of increased expenditure within a main programme of a vote between different sub programmes and economic classification of the main division. Roll overs: refers to unspent funds from the proceeding financial year may be rolled over when activities planned to be completed by the end of that year has not been completed but are close to completion. Consumption Expenditure: refers on expenditure on goods and services, including salaries which are used up within a short period of time-usually a year. Real Expenditure: refers to expenditure measured in constant price after taking into consideration the inflation. Medium Term Expenditure Framework (MTEF): refers to the three year spending cycle or plans of national and provincial government published with the budget of at give period. Medium Term Expenditure Committee (MTEC): refers to the technical Committee that evaluates the MTEF budget submissions of national departments and recommending allocations. Estimate of National Expenditure (ENE): it is a document that sets out all the detailed spending plans of each government department for the upcoming year. 1 National Treasury (2011) 4
Adjusted Estimate of National Expenditure (AENE): sets out amendments to be made to the main budget for the year. Unforeseeable and unavoidable Expenditure: refers to the spending that could not be anticipated at the time of the main budget. Self Financing Expenditure: refers to the spending financed from revenue derived from a vote s specific activities. State Debt Costs: refers to the costs of interest in the government debt Contingency Reserves: refers to the amount sets aside and not allocated changes in the economic environment and to meet unforeseen spending pressures. Declared Savings: refers to unspent funds that departments explicitly indicate they will not reallocate to fund their other spending Direct Charge against National Revenue Fund: refers to the amount spent in terms of statutes and not require parliamentary approval and thus are not contained in the Appropriation Bill. These funds are not budgeted for under any programme or vote. (it includes State Debt Cost, Contingency Reserves, Sector education and training authorities, national skills fund, salaries of judges, salaries of magistrates, salaries of the President and deputy president, remuneration of members of Parliament, general fuel levy, provincial equitable share and unallocated funds) Provincial Equitable Share: refers to the allocation of revenue to the provincial sphere of government as required by the Constitution. Local Government Equitable Share: refers to the allocation of revenues to the local sphere of government as required by the Constitution. Function Shift: when a function shifted from one vote to another or institution in terms of legislation or following the reassignment of responsibilities for the functions, of note is that the associated assets and liabilities need to be shifted National Budget: refers to the projected revenue and expenditure that flow through the National Revenue fund. Deficit: refers to total outflows which outweigh the total inflows. For instance, in case of deficit government expenditure exceeds total revenues collected in the economy. Surplus: this refers to the total inflows which outweigh the total outflows in the economy. South African Custom Union (SACU): refers to an agreement that allows for the unrestricted flow of goods and services, and sharing of customs and excise revenue, between South Africa, Botswana, Namibia, Lesotho and Swaziland. 5
National Revenue Fund: refers to Fund where all income received by government must be paid to, which National Treasury is in charge of. This money can only be withdrawn through Appropriations Bill or as a direct charge against the Fund. Provincial Revenue Fund: refers to Fund where all money received by government must be paid to, which Provincial Treasury is in charge of. This money can only be withdrawn through Appropriations Bill or as a direct charge against the Fund. March Spike: refers to a situation where most of the budget is spent in the last quarter of the financial year. Under expenditure: refers to the utilisation of the allocation less than the original projections. Over expenditure: refers to the utilisation of allocation more than original projections (excess spending). Budget Review: refers to the document that discusses policy elements that should form part of a comprehensive plan to achieve social cohesion of economic objectives. Baseline: refers to the initial allocations used during the budget process, derived from the previous year s forward estimates Off-Balance Sheet budget: refers to the financing of the property or projects without being funded by state coffers, but through government guarantees. For instance public entities are using government guarantees to source funding from domestic and international capital/ financial market. Conditional grant: refers to the allocation of money from one sphere of government to another, conditional on certain services being delivered or on compliance with specified requirements. Public Private Partnership: refers to the contractual arrangement in which a private party performs part of a government functions and assumes the associated risks. Money Supply: total stock of money in an economy National Treasury (2009-2012) 6
2. THE INTRODUCTION This publication provides a guideline for analysing Section 32 quarterly expenditure reports that are published by National Treasury as required by the Public Finance Management Act, No.1 of 1999 (PFMA) 2. The guideline also introduces the Standing Committee on Appropriations (SCoA), which analyses the section 32 reports as part of its mandate and functions which is sets out in the Money Bill Amendment Procedures and Related Matters Act, (No. 9 of 2009). The guideline further outlines and defines some important State and legislative processes that are important considerations for the Standing Committee on Appropriations in implementing its oversight practices according to its legislative mandate. For example, the guideline provides insight into how section 32 of the Public Finance Management Act No.1 of 1999 (PFMA) is implemented by National Treasury through the publication of monthly/quarterly expenditure reports on the Treasury s website. In addition to these reports being available in the National Treasury s website in tabular form, it is also common practice for the Treasury to table a more detailed expenditure report that includes some service delivery performance information before the Committee in order to facilitate more effective budgetary oversight by the Committee. The guideline illustrates the process and flow of the quarterly expenditure reports from the time they are first published by the National Treasury to the final debate and adoption or noting of the Committee report by the National Assembly. The final report includes findings and recommendations to the Executive Authority concerned for implementation. The publishing of the expenditure reports allows the Committee to exercise its legislative mandate, which is to conduct budgetary oversight over the Executive. Amongst others, the Committee uses Section 32 reports to carry out its oversight role, and to collaborate with other parliamentary committees in addressing spending deficiencies identified in different departments. Central to the effectiveness of the Committee work is the timeliness of tabling such reports by National Treasury, the adoption by the House, and follow-ups or tracking of the implementation of Committee recommendations. 3. THE ROLE OF THE COMMITTEE SUPPORT STAFF The Committee is supported by a number of officials with various roles. This includes the Committee Secretary, Researcher, Content Advisor and Committee Assistant. The Committee researchers major role starts immediately after the tabling of the quarterly reports by National Treasury with the proactive analysis of the reports to identify critical expenditure trends and patterns and to present the analysis before the Committee. The presentation usually includes a three-year analysis of expenditure trends or more, to highlights poor spending patterns as well as other areas of weaknesses that are identified in various departments. In the event that there are no available cash flow projections, departments are expected to spend at least 25 per cent of their budget in each quarter, and failure to do that results in the department being invited to appear before the Committee (SCoA) to explain the variance(s) 3. The main objective of the researcher s briefing is to assist the Committee to identify poor spending departments to appear before it. However, due to limited capacity, the Committee usually cannot 2 Public Finance Management Act (No. 1 of 1999) as amended by Act No. 29 of 1999. 3 In the instance that expenditure and cash flow plans are absent, 25 per cent expenditure per quarter is the benchmark for in year budget expenditure monitoring. However, due to the different nature of department expenditures, this benchmark may not necessarily be applicable in all instances. For example, certain departments deal with infrastructure delivery cannot necessarily fit in to the mode of 25 per cent expenditure per quarter; sometimes they will spend less or even more than expected. Therefore 25 per cent is just a benchmark which is most applicably to the frontline service delivery departments. 7
invite all departments that are identified as having poor spending, and therefore it has always been a practise to invite only a few of the most conspicuous departments to appear before the Committee. The researcher identifies and prioritises departments based on the following criteria: Departments which forms part of the policy priorities of government as identified in the State of the Nation Address (SONA) of the year under review; Departments that have either spent below or above 25 per cent of their projected expenditure in each quarter or deviated significantly from their cash-flow projections; and Departments that have not complied with the provisions of the Public Finance Management Act or Treasury Regulations and any other relevant legislation that is still within the committee s mandate. For example, departments that have exceeded the 8 percent Virements and 4 Shifts as required by section 43(2) of the PFMA; departments that have shifted or made Virements 5 from their capital or transfer budgets to their current payments budgets 6 ; non-compliance with section 5(1) of the Appropriations Act which states that only the Minister of Finance can approve movements of funds from the capital and/or transfers budgets in order to expedite service delivery, 7. Departments that have a potential for fiscal dumping and march spike; and Wherever there is less correlation between budget expenditure and the achieved pre-determined performance objectives, Departments that have spent almost all their budgets but have not met most of their predetermined objectives (targets) at the end of the financial year. Upon completion of the hearing process with the identified departments, the committee Secretary/ Content advisor writes and edits the Committee report, upon which the researcher s analysis provides foundational information. The research analysis plays a key role as an input in the decisions and processes of the Committee to deal with section 32 report published by the National Treasury. 4. THE KEY CONCEPTS AND APPLICABLE LEGISLATIONS DURING OVERSIGHT PROCESS Table 1- sets out the key fundamental legislative oversight tools which are mainly used to strengthen Committee oversight over the Executive. It is important for the Committee, including support staff, to fully understand these instruments in order to be utilised optimally. 4 Shift- refers to the utilisation of a savings or underexpenditure towards the defrayment of increased expenditure within a main division (programme) of a vote between different segments (subprogramme and economic classification) of the main division. Shift also includes reallocation of funds which have incorrectly been allocated during the Estimate of National Expenditure process. 5 Virements- refers to the utilisation of a savings or underspending from amounts appropriated under one main division (programme) towards the defrayment of increased expenditure under another main division within the same vote. Section 43(2) of the Public Finance Management Act sets out parameters which suggests that the amount to be used for this purpose may not exceed 8 per cent of the amount appropriated under that main division. 6 Public Finance Management Act (1999) 7 Appropriation Act (2012) 8
Table 1: Key Legislations for the Standing Committee on Appropriations LEGISLATION NAME 1. CONSTITUTION OF THE REPUBLIC OF SOUTH AFRICA Below are legislations and provisions impacting on the work of SCoA The Constitution empowers Parliament to provide mechanisms to carry out its oversight functions, law- making process, public participation, and ensuring good governance in the democratic state. 1 Relevant oversight structures and processes Parliament carries out its functions through its committees. Processes in this regard are documented in the Rules of the National Assembly, Joint Rules of both Houses and other policy documents 2. APPROPRIATION ACT 2 To appropriate monies from the National Revenue Fund (NRF) for the requirement of the State 3. 3. DIVISION OF REVENUE ACT 5 The Act provides for the equitable division of nationally raised revenue among the three spheres of government - national, provincial and local government. The Act also prescribes conditions for any allocation outside the equitable share and details responsibilities of all three spheres of government. The Act is normally referred to the Standing Committee on Appropriations as a Bill after the adoption of the Fiscal Framework and the Division of Revenue Bill the Committee has four months to report the Bill 4. The Act serves to divide nationally raised revenues to all three spheres of government. The Act is referred to the Committee as a Bill after passing of the Fiscal Framework and the Committee is required to consider it and report considering the fact that Parliament must passed the Bill in no later than 35 days. 6 9
4. PUBLIC FINANCE MANAGEMENT ACT NO. 29 OF 1999 The Act regulates financial management in the national and provincial spheres of government to ensure that all revenue, expenditure, assets and liabilities of these spheres of government are effectively managed. The Committee refers to the Act as an oversight tool to ensure effective and efficient financial administration between national and provincial government. 5. TREASURY REGULATIONS The Treasury Regulations are applicable to all departments and constitutional institutions; and to the South African Revenue Service, but only to the extent that it collects and administers State revenue; and as agreed to between it and the National Treasury 7. The Regulations serve as complementary guidelines to assist with the implementation of the Public Finance Management Act. It is important to note that these regulations do not apply to Parliament, provincial legislatures and public entities. 6. INTERGOVERNMENTAL FISCAL RELATIONS ACT NO. 97 OF 1997 7. PREFERENTIAL PROCUREMENT FRAMEWORK ACT NO.5 OF 2000 To promote co-operation between the national, provincial and local spheres of Government on fiscal, budgetary and financial matters; to prescribe a process for the determination and equitable sharing and allocation of nationally raised revenue 8. To give effect to section 217(3) of the Constitution by providing a framework for the implementation of the procurement policy contemplated in section 217(2) of the Constitution 9. The Act gives effect to chapter 3 of the Constitution, which provides for the principle of cooperative government and intergovernmental relations amongst the three spheres of government. The Act informs public procurement and Supply Chain Management policies and processes within government. 10
8. MUNICIPAL FINANCE MANAGEMENT ACT NO. 5 OF 2003 To ensure sound and sustainable management of the financial affairs of municipalities and other institutions in local government, to establish treasury norms and standards for the local sphere of government. The Act serves as an oversight tool to ensure effective and efficient financial administration at local government level. 9. PUBLIC SERVICE ACT OF 2007 The Act provides for the organisation and administration of the public service of the Republic, the regulation of the conditions of employment, terms of office, discipline, retirement and Discharge of members of the public service. The Act serves as an oversight tool to ensure effective and efficient public management. 10. MONEY BILLS AMENDMENT PROCEDURE AND RELATED MATTERS ACT NO. 9 OF 2009 To provide for a procedure to amend Money Bills before Parliament and for norms and standards for amending money Bills before provincial legislatures. The Act serves as an instrument for the formation of the finance and appropriations committees and prescribes the Committee mandates of the Standing Committee on Appropriations (SCoA), (section 4(3) and (4)) 10. 11
5. GUIDING FRAMEWORK This section outlines the oversight tools used by the committee as well as the processes and practices that are carried out by the researcher in doing the work of the committee. 5.1 THE MANDATE OF THE STANDING COMMITTEE ON APPROPRIATIONS The Standing Committee on Appropriations (SCoA) derives its mandate from section 4(3) of the Money Bills Amendment Procedure and Related Matters Act No. 9 of 2009, (4) (a), which requires that the Committee considers and reports on spending issues, actual expenditure published by National Treasury, recommendations of the Financial and Fiscal Commission and amendments to the Division of Revenue Bill and Appropriations Bill 8. Section 32 of the Public Finance Management Act requires that National Treasury, within 30 days after the end of each month, publishes in the National Gazette a statement of actual revenue and expenditure with regard to the National Revenue Fund (NRF) 9. The analysis of these expenditure statements is at the core of the work of the committee. 6. QUARTERLY EXPENDITURE REPORT The quarterly expenditure reports are published by the National Treasury as required under section 32 of the PFMA, which states the following: I. Within 30 days after the end of each month, National Treasury must publish in the national Government Gazette a statement of actual revenue and expenditure with regard to the National Revenue Fund 10. II. III. After the end of a prescribed period, but at least quarterly, every provincial treasury must submit to the National Treasury a statement of revenue and expenditure with regard to the Revenue Fund for which that treasury is responsible, for publication in the national Government Gazette within 30 days after the end of each prescribed period 11. The statement must specify the following amounts and compare those amounts in each instance with the corresponding budgeted amounts for the relevant financial year: (a)the actual revenue for the relevant period, and for the financial year up to the end of that period 12 ; (b) The actual expenditure per vote (distinguishing between capital, transfer and current expenditure) for that period, and for the financial year up to the end of that period; and (c) Actual borrowings for that period, and for the financial year up to the end of that period 13. IV. The National Treasury may determine (a) The format of the statement of revenue and expenditure; and (b) Any other detail the statement must contain 14. 8 Money Bill Procedures and Related Matters Act No. 9 (2009) 9 Public Finance Management Act No. 1 (1999) 10 Public Finance Management No.29 (1999) 11 Ibid 12 Ibid 13 Ibid 14 Ibid 12
6.1 THE RESEARCHER ANALYSES THE EXPENDITURE REPORT IN THE FOLLOWING MANNER: Analyses of Overall Expenditure by All Government Departments for a specific Period To provide an analysis of aggregate expenditure in relation to the amount allocated for a particular financial period. This includes an analysis of both financial and non financial data. The report also provides an overview of the expenditure patterns for a given period (i.e. 5 year, 3 year period) based on section 32 reports. Figure 1 below outlines the various types of reports which can be consulted to compile the research: Figure 1: The Process of compiling section 32 expenditure report 6.2 Expenditure Analysis by Economic Classification The report is categorised into 4 types of economic classifications namely: Current payments - payments for the department s operational requirements. These include Compensation of Employees and Goods and Services such as, Computer Services, Consultants, Travel and Subsistence) 15, 15 National Treasury (2012) 13
Transfers and Subsidies- payments made by a department to other entities including transfers to sub-national spheres of government, households, non-profit organisations, public corporations, public agencies, higher education institutions, foreign governments and international organisations 16. Payments for Capital Assets - payments made by the department for an asset(s) that can be used for more than one year and from which economic or social benefit are expected to flow. This includes assets such as vehicles, land and buildings, machinery and equipment, software and other intangible assets) 17. Payments for Financial Assets - payments made by the department as loans to public corporations or as equity investment in a public corporation. This category also includes payments for thefts and losses, and these items are mostly not budgeted for or projected and thus these payments only appear as historical information in the expenditure report due to the fact that Parliament only appropriates and approves expenditure of one year at a time). 18 The aim of conducting expenditure analysis by economic classification is to ascertain the economic category that consumes most of the allocated budget of the department, as well as to get to the minute details regarding expenditure on standard items and to ensure that there is balanced and equitable expenditure between all categories of expenditure. Based on this information, the Committee can make a decision whether to invite the department with the most conspicuous economic classification to account (e.g. over-expenditure on travel and consultants versus under-expenditure on the capital budget). Analysis by economic classification can assist in a deeper tracking of expenditure in the event that departments only spend money at the end of the third and the fourth quarter. It is always a challenge when departments transfer funds during the last quarter of the financial year as this may not always translate into value for money, but could be fiscal dumping, where resources are spent on areas of less priority or wasted. The proportion of allocation for payments to capital assets always receives the smallest allocation while transfers and subsidies are always the highest, therefore it is imperative to ensure that all budgets are spent according to strategic planning documents and that they are spent on exactly what they were budgeted for. 6.3 Analyse Overall Expenditure by National Departments to Identify Over/under- Expenditure in Departments The analysis aims to assess the aggregate expenditure of the department versus its stated expenditure projections in order to determine whether there is over or under expenditure. This enables researchers to isolate departments with conspicuous expenditure patterns from those whose expenditure patterns appear stable and focus their analysis on the worst-performing departments. In the absence of cash-flow projections (which is usually the case) departments are identified based on the 25 per cent benchmark that should ideally be spent each quarter. Departments are further 16 Ibid 17 Ibid 18 National Treasury (2013) 14
identified and selected through their non-achievement of their quarterly performance targets. Following selection of departments based on their financial and non-financial (service delivery) performance as indicated, departments are called to appear before the Committee to assess them individually using additional sources of information. This includes performance information published by the Auditor General, Finance and Fiscal Commission, Public Service Commission, Human Science Research Council, Statistics South Africa, Department of Performance Monitoring and Evaluation, International Labour Organisations, World Bank, International Monitoring Fund and any other independent and official source of information. 6.4 Linking National Spending Trends with Conditional Grant Expenditure to Assess Value for Money Approximately 68 per cent of the national budget is allocated through conditional grants to provincial and local government. In order to assess and monitor the expenditure and the implementation of these grants; including the assessment of their transfer and coordination from national departments, researchers analyse both national treasury expenditure reports and conditional grant reports. Important issues to track and monitor include whether the conditional grants are transferred timeously and whether receiving entities are given enough time to plan for such allocations; as well as ensuring that there is no fiscal dumping. Some departmental budgets consist of 96% transfer budgets to implementation agencies, which mainly entail frontline service delivery. 6.5 Consolidated National and Provincial Report by Auditor General, Performance Audit Report on Consultants and Infrastructure and Annual Reports These reports are analysed and compared with the expenditure reports in order to check if all internal control systems, compliance mechanisms and governance structures are in place and are operating effectively; to understand the audit opinion and the rationale behind the opinion; to assess whether there is value for money on projects completed by government; as well as to assess the extent to which the departments make use of consultants instead of creating their own capacity. While consultants can be useful in providing scarce skills periodically, they should ideally not be an ultimate solution for all the implementation challenges of the department. It is even more concerning when consultants are procured to perform the core functions of the department as this could result in the loss of institutional memory and lack of skills transfer. Rather, departments should be encouraged to develop internal capacity for the core business to ensure continuity and stability. These reports are also used to assess whether the Standing Committee on Public Accounts (SCOPA) resolutions are implemented as agreed by the departments, as well as to ensure that the improvement audit plans are implemented as agreed with the Auditor General (AGSA). 7. SUMMARY OF KEY ISSUES: This section of the analysis report summarises critical and key issues that the Committee should followup emanating from the report on the quarterly expenditure of departments. These issues form part of the researcher s observations or findings to assist the Committee to determine its recommendations and identify areas of oversight visits 15
7.1 The implications of the expenditure report and recommended questions for the Committee: This section outlines the possible or proposed questions which the Committee may pose to interrogate the Department. This information will assist the Committee to identify areas of weaknesses and make possible recommendations to the Department to improve expenditure trends. Is the Annual Performance Plan (APP) and Strategic Plan (SP) of the Department aligned to the allocated budget? If the annual performance plans were credible enough what is the rationale behind the movement of funds? Why did the Department spent less than its projected amount for a particular programme, economic classification or overall? Were the conditional grants transferred on time to avoid the March spike or fiscal dumping? Why did the Department spent more than its projected amount for a particular programme, economic classification or overall? What are the tangible outputs for such expenditure or what is value for money for the recorded expenditure? Is there a correlation/relationship between the level of expenditure and the number of targets achieved which were planned for that particular period? What is the rationale behind the non compliance with the provisions of the Public Finance Management Act? (i.e. section 43: the movement of funds more than the required threshold of 8 per cent, the movement of funds from transfers budget to defray current payments and or the movement of funds from capital budget to defray current payments). What steps have been taken to make sure this does not happen in future expenditure? Considering the number of vacancies, does the Department have capacity to deliver on its mandate? How many funded vacancies in the Department and why are these funded vacancies not filled within the required timeframes? What are the costs and the time schedules for the infrastructure projects if there are any? Provide breakdown information in some of the areas. In overall, how much budget is allocated for consultants and how much is allocated for internal capacity building? 16
8. BUDGET REVIEW AND RECOMMENDATIONS REPORT (BRRR) The South African public finance management system has evolved and still in the process of transformation 19. The budget system has gone through fundamental reforms and still under transition with the latest financial reform being the passing of the Money Bills Amendment Procedure and Related Matters Act in 2009. The Money Bills Act allows Parliament to amend the national budget. This requires Parliament to critically engage with the budget as a cornerstone of participatory democracy. The section 32 reports are published monthly or quarterly for national departments and for provinces by National Treasury as part of Good Governance 20 practices as well as to facilitate easier implementation of the Money Bills Act. Section 5(1) of the Money Bill Act requires Parliament to annually assess the performance of each department with specific focus to the first six months of the current financial year, considering the department s performance in the previous financial year, the assessment of performance according to the medium term estimates of expenditure as well as the other important reports such as the Report of the Auditor General and the Reports of the Committee on Public Accounts (SCOPA) 21. All expenditure and service delivery performance reports for at least two financial years are incorporated into the BRRR. The BRR reports are compiled and tabled to the National Assembly before the budget adjustment and medium term budget policy statements in October. This exercise runs concurrently with the annual reporting by the departments of government when they report to Parliament on their performance for the past financial year. FIGURE 2: THE SIX STEPS TO ANALYSE THE SECTION 32 REPORT PUBLISHED BY NATIONAL TREASURY 19 Public Finance Management System in South Africa (2000) 20 Good Governance- consists of 3 pillars namely accountability, transparency and public participation process. 21 Money Bill Amendment Procedures and Related Matters Act (2009) 17
9. Other possible reasons for poor spending other than poor planning: The section below outlines the main issues that are normally identified by the Committee in each category of economic classification during the In Year- Monitoring (IYM) processes. These issues form part of the main reasons for the poor expenditure which are generally reported by departments nationally 22. 23 9.1 Current payments:the current payment category consists of two sub-categories namely, compensation of employees and goods and services. 9.1.1 Compensation of employees: While under expenditure is mostly due to the high number of vacant positions not being filled timeously; over expenditure is most often due to the employment of large numbers of staff outside the approved and budgeted post establishment, which leads to the department paying salaries for employees that were not budgeted in the pay roll. Over expenditure might also be attributable to things such as Occupation Specific Dispensation (OSD) where people of a particular profession are entitled to an additional incentive to their salaries 24. 9.1.2 Goods and Services: under expenditure might be due to the late payment or non-compliance of departments with 30 day payment principle of invoices. On the contrary, over expenditure in this case might result from acceleration of payment of overdue invoices. This normally happens towards the end of the financial year, and contributes to the March spike phenomenon25. 9.2 Transfers and Subsidies: Slow payment on transfers and subsidies is normally due to the lack of compliance by the receiving entities with Public Finance Management prescripts. The Division of Revenue Act outlines the requirements that must be fulfilled by the receiving entity as well as the transferring officer 26. In this category, there is usually no over spending on the side of the Department, but the major issue is around the timing of transferring of these funds to the receiving entities. For example, funds are normally transferred during the second and third quarter, but most of the time departments transfer these funds under pressure between the third and the fourth quarter which results to the fiscal dumping and also a March spike 27. This does not yield any value for money as this period marks the end of the financial year and therefore hinders entities from spending according to their plans. 9.3 Payments for Capital Assets:The under expenditure on CAPEX is most frequently due to delays in procurement processes; whereas over expenditure is usually due to delays in the procurement process. The latter happens when procured capital goods or assets are all paid at the same time, under pressure when goods and services are being delivered28. Over expenditure in this category could also be due to the rollover of funds which were not spent in the last financial year due to the non completion of certain projects29. 22 The reasons outlined in paragraph 6 for poor expenditure are not exhaustive as every case is underpinned by unique and different circumstances. 23 The reasons for Payments for Financial Assets will not necessarily be highlighted since this category of economic classification does not form part of the expenditure projections, rather it is reported as historical information. This category is not budgeted under any programme or any budget vote. 24 National Treasury (2009) 25 march spike- refer to paragraph 7 in the definition of terms 26 Ibid 27 Standing Committee on Appropriations Report (2011) 28 National Treasury (2012) 29 Ibid 18
The reasons for under expenditure may vary in nature depending on the circumstances, and can range from poor planning, poor terms of references being developed, and inability to produce accurate project costing, which in turn leads to inaccurate projections and variation orders. There are instances however, in which these factors may lead to over expenditure. It is difficult to apply the 25 per cent quarterly benchmark to departments that deal primarily with infrastructure delivery because their expenditure curve is not necessarily the same as that of the front line service delivery. This is due to the fact that infrastructure projects might take longer than anticipated to be completed and therefore expenditure might be delayed by factors beyond the department s control. 10. THE FINAL REPORT The report provides an overall assessment of departmental expenditure and the reasons behind the reported expenditure. The report highlights Committee observations or findings and further recommends to the executive corrective measures to address the identified challenges. The report becomes accessible to portfolio committees and other stakeholders after the adoption by the House. The office of the leader of government business (Deputy President) is expected to take this report and direct it to the relevant department to implement its recommendations and findings. The report includes both financial and non-financial information provided by different stakeholders to ensure effective checks and balances in the use of State resources. The inclusion of other sources in the analysis makes the analysis well-balanced and more factually accurate. 11. CONCLUSION Since the Money Bills Amendment Procedure and Related Matters Act No. 9 was passed in 2009, the South African Parliament was empowered to amend the national budget. This provides Parliament with an opportunity to engage with the proposed budget in details provided all Committees are well capacitated. Part of Parliament s responsibilities is to assess government performance through the compilation of Budget Review and Recommendations Reports as required by section 5(1) of the Act. Although the Committee (SCoA) based on its legal mandate is not required to compile the BRR Report, however, it is expected to analyse and make recommendations for all proposed amendments. The process of analysing the quarterly expenditure reports has been contextualised, described and key steps outlined in figure1 and figure 2 above clearly indicates the process of the tabling, analysis and processing of section 32 reports by the National Treasury until the reporting stage by the Committee, and finally the adoption of the final report by the House. Furthermore, this does not exclude inputs from other independent institutions such as Auditor General (AG), Finance and Fiscal Commission (FFC), Public Service Commission (PSC). Once the report is adopted by the National Assembly the findings and recommendations are then referred to the respective portfolio departments for the implementation. The report further highlights the key issues in relation to over or under expenditure (poor expenditure) on current payments, transfers and subsidies, payments for capital assets and payments for financial assets; and it also provides more in-depth information emanating from the deliberation between the Committee and the Departments. 19
12. SOURCES: National Treasury (2009) Adjusted Estimates of National Expenditure, Parliament, Cape Town National Treasury (2000) Treasury Regulations, Treasury, Pretoria National Treasury (2012) Estimate of National Expenditure, Parliament, Cape Town National Treasury (2000) Preferential Procurement Policy Framework, Treasury, Pretoria National Treasury (2013) Estimate of National Expenditure, Parliament, Cape Town National Treasury (2010) Budget Review, Parliament, Cape Town National Treasury (2011) Medium Term Budget Policy Statement, Parliament, Cape Town Money Bill procedures and Related Matters (Act No.9, 2009) Public Finance Management (Act No.1 1999), as amended by Act No. 29 of 1999 Paper, on public finance management in South Africa (2000) University of Pretoria Reports on quarterly expenditure can be found on the following websites: http://www.treasury.gov.za/comm_media/press/monthly/monthly_2013.aspx http://www.treasury.gov.za/comm_media/municipal%20budget/default.aspx http://www.treasury.gov.za/documents/provincial%20budget/default.aspx (Footnotes) 1 Constitution of the Republic of South Africa (1996) 2 The year and the Act number changes each and every year when the budget is passed and therefore it will not be specified. 3 Appropriations Act (2013) 4 Money Bill Amendment Procedures and Related Matters (2009) 5 The year and the Act number changes each and every year when the budget (Appropriations Bill and Division of Revenue Bill) is passed and therefore it will not be specified 6 Money Bills Amendment Procedures and Related Matters Act (2009) 7 National Treasury (2000) 8 bid, 2012 9 Preferential Procurement Policy Framework Act No. 5 (2000) 10 Ibid 20
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