The National Treasury briefed the Committee on virements and rollovers of funds by departments. The Committee had been worried whether the budgets were credible, as evidenced by the requests, and was also concerned whether there was proper departmental planning taking place. National Treasury set out and explained the components of an adjustment budget, explaining that this provided for significant and unforeseeable economic and financial events, expenditure recommended by a Cabinet committee, or expenditure in terms of Section 16, provided for the shifting of funds between and within votes, or allowed savings under a main division of a vote to defray over-expenditure on another main division, as well as providing for roll over of unspent funds from the preceding financial year. Virements amounted to reductions under one programme of a Department being used to offset excess spending in another programme. Conditions applied, and this was covered by Sections 30(2)(f) and 43 of the Public Finance Management Act (PFMA), Section 5 of the Appropriation Act, and Treasury Regulation 6.3. The conditions for virements were set out, and the procedure where virements required approval from National Treasury were detailed. Virements that required Parliamentary approval would be tabled in the Adjustments Appropriation Bill. The provisions of Section 43 of the PFMA were set out and explained in detail. The same was done in respect of Treasury Regulation 6.3.1, and Section 5 of the Appropriation Act. National Treasury (NT) had been considering ways of improving departmental practices around virements, perhaps by making the limits percentage apply also to the main division of the vote, or changing the limit percentage. The procedure and requirements for a rollover of funds were also then set out, including that these must be requested before end April and followed the procedures set out in Treasury Regulation 6.4. The criteria for evaluating requests for rollovers was set out. The Minister of Finance would, after considering the requests, table the approvals of rollover in the Adjustments Appropriation Bill. Approved expenditure could not exceed the total amount set aside as the contingency reserve in the approved fiscal framework. Expenditure thus approved would become a direct charge against the National Revenue Fund until the Adjustments Appropriation Bill was enacted. The Money Bills Amendment Procedure and Related Matters Act (MBAPRMA set out detailed procedures for the processing off each of the major pieces of budget legislation, revenue legislation and other money bills. Although the procedure for the adjustments budget was not set out, it was expected that the same procedure would apply in respect of the Committee’s Reports on those proposed amendments.
Finally, National Treasury presented statistics of the numbers of rollovers, and reasons, which were approved by the Minister of Finance.
Members asked for clarity as to when funding would be given, asked what the difference was between amendments to budgets that the Committee approved, and virements and rollovers, and requested whether there was any upper limit for virements, and whether it was possible for a department to request a virement if its funds had been exhausted. Members asked if there were any contradictions inherent in the shifting of funds to improve service delivery, and pointed out that if proper planning was done this should not happen, but it sometimes seemed that departments were planning for rollovers. Members wondered if all requests should come to Parliament before approval for virements was given, and suggested that provincial treasuries should be informing National Treasury of any virements approved. Representatives from the Provincial Treasuries explained how they dealt with the matters, and it was apparent that there was some divergence in their approaches. Members suggested that the National Treasury should implement a policy across all the provinces, and National Treasury pointed out that there was already quarterly reporting and perhaps the Committee should receive quarterly briefings, but conceded that government needed to see how cost overruns could be better managed, and to investigate the actual practices of budgeting. Members felt that the concept of savings, and the distinction between this and underspending, should be clearly set out.
Chairperson’s opening remarks
The Chairperson explained that Members had expressed their concerns on the rollovers of budgets and the shifting of funds by certain departments. They had therefore requested that National Treasury should address two issues. Firstly, there was a question why Parliament was involved in the passing of the budget of departments, but was not involved when funds were shifted. The second issue therefore related to the credibility of the budgets which came before Parliament. Members wondered whether there was proper planning done. The Committee wished to discuss Section 43 of the Public Finance Management Act (PFMA), and wished to get clarification whether the accounting officer needed to seek permission from National Treasury (NT) in order to shift funds. The interpretation of Section 43(4) and the role of Parliament needed to be explained. The various provincial treasuries were also represented at the meeting, and he invited them also to comment if they wished.
Public Finance Management Act (PFMA) Section 43 virements and rollovers: National Treasury (NT) briefing
Dr Kay Brown, Chief Director: Budget Office, National Treasury, set out and explained the components of an adjustment budget, explaining that this provided for significant and unforeseeable economic and financial events, expenditure recommended by a Cabinet committee, or expenditure in terms of Section 16. It also provided for the shifting of funds between and within votes, and said that savings under a main division of a vote could be used to defray over-expenditure on another main division in terms of Section 43. The adjustments budget also provided for roll over of unspent funds from the preceding financial year.
She then detailed the position on virements. Reductions under one programme of a Department’s budget could be used to offset excess spending in another programme in that department, subject to certain conditions. This was covered by Section 30(2)(f) and Section 43 of the PFMA, and Section 5 of the Appropriation Act, and Treasury Regulation 6.3. No virement could exceed 8% of the appropriated amount in a particular programme. Amounts that were appropriated for capital expenditure could not be used to supplement spending under current payments. Amounts that were specifically appropriated for a particular purpose could also not be shifted, unless approved either by legislation or by the relevant treasury. Virements thus did, to a limited extent, provide accounting officers with a budget management tool.
Where the virements required approval from National Treasury, then a submission would be made to the Public Finance Budget Analyst, who would then make a recommendation to the Deputy Director General: Public Finance. Virements that required Parliamentary approval would be tabled in the Adjustments Appropriation Bill.
Dr Brown then set out what Section 43 of the PFMA required in regard to virement between main divisions within votes, but stressed that this did not authorise a saving to be used if it was specifically and exclusively appropriated for a purpose mentioned in the main division, if it was an amount appropriated for transfer to another institution, or if it was appropriated for capital expenditure and not current expenditure (see slides 5 and 6 of attached presentation).
She then set out and explained Treasury Regulation 6.3.1, which linked with Section 43(1) of the PFMA. Approval of the relevant treasury was required in terms of this regulation for increase for compensation of employees, transfers and subsidies to other institutions, and new transfers and subsidies, as well as use of allocations that were earmarked by the relevant treasury for another purpose. Exceptions to this applied in the case of virements of funds from compensation of employees to payment of severance or exit packages.
Dr Brown noted that Section 5 of the Appropriation Act of 2010 set out when National Treasury may approve the utilisation of a saving, despite the provisions of Sections 43(4)(b) and (c) of the PFMA. It could approve utilisation of a saving for transfers to another organ of State, or amounts appropriated for payments on capital assets, if that saving could be utilised for other categories of expenditure (see slides 7 and 8 of attached presentation).
Dr Brown noted that the National Treasury (NT) had been considering ways of improving departmental practices around virements, perhaps by making the limits percentage apply also to the main division of the vote, or changing the limit percentage.
Dr Brown set out the process for rolling over funds. Requests had to be made before the end of April. The Senior Management Committee of National Treasury considered these requests and made recommendations to the Minister of Finance, in line with Treasury Regulation 6.4, which set out when rollovers may apply. Funds for a specific purpose could not be rolled over for more than one financial year, unless approved in advance by National Treasury. She set out the criteria for evaluating requests for rollovers. It would be unlikely that the rollovers would be approved for services that would result in recurring expenditure, expenditure items that were simply not ready for payment, such as telephone accounts, at the end of a financial year, unforeseen and unavoidable expenses (which were considered under a separate process) and small requests. She then indicated that those that would be favourably considered included those in respect of a new policy, especially one that might impact positively on service delivery, a request that was supported by cash flow projections, cases where the services could not be rendered by the end of the financial year, and cases where the funds were required to complete projects that had already started in the financial year. The Minister of Finance would, after considering the requests, table the approvals of rollover in the Adjustments Appropriation Bill. Approved expenditure could not exceed the total amount set aside as the contingency reserve in the approved fiscal framework. Expenditure thus approved would become a direct charge against the National Revenue Fund until the Adjustments Appropriation Bill was enacted.
Dr Brown then set out the provisions of the Money Bills Amendment Procedure and Related Matters Act (MBAPRMA), noting that this set out detailed procedures for the processing off each of the \major pieces of budget legislation, revenue legislation and other money bills. Parliament could, in terms of this Act, amend the budget legislation, provided that the provisions of Section 8(5) of the MBAPRMA were met. Once the fiscal framework was approved, the budget legislation would be amended within that scope. The provisions of Section 10)(10) were set out, and she noted that the Committee on Appropriations was obliged to indicate, amongst others, the reason for the proposed amendment, how it matched with the broad strategic priorities, the implications for the vote, the impact on the balance between categories of allocations, the impact on service delivery and how this linked to departmental plans. Although the procedure for the adjustments budget was not set out, it was expected that the same procedure would apply in respect of the Committee’s Reports on those proposed amendments.
The powers to amend were limited to the extent that the Minister of Finance would approve expenditure by using Section 6 of the Appropriations Act. Specifically, the Minister could not approve expenditure that was in excess of the approved contingency reserve, nor expenditure that fell outside Section 30(2) of the PFMA. It was likely that Section 6 would only be used to approve expenditure if delaying the approval of such expenditure would prejudice the public interest, such as rollovers, or unforeseeable and unavoidable expenditure – for instance in the case of disasters. The Minister of Finance also had the opportunity to respond to any proposed amendments, which would be tabled together with the Committee Reports.
Dr Brown tabled statistics of the numbers of rollovers, and details of the reasons, which were approved by the Minister of Finance, broken down according to budget votes (see attached presentation).
Mr M Swart (DA, ) said that the National Treasury seemed to be contradicting themselves since it said that no funds were given if there was no follow-up funding.
Dr Brown agreed that this seemed to be a contradiction, but she pointed out that if there was a problem in projects starting up, NT would check capacity before giving funds.
Mr Swart asked what the difference was between the amendments to budgets that the Committee approved, and other virements and rollovers.
Mr G Snell (ANC) saw that the National Treasury was setting lower limits for virements, and asked if there was also an upper limit set.
Ms B Ngcobo (ANC) asked whether a department could request a virement or rollover if it had exhausted its funds. She also wanted to know how long it took for a virement to be approved.
The Chairperson said that according to the MBAPRMA, Parliament could request that funds be shifted to improve service delivery. He wanted to know whether there were any contradictions between this and what was stated in Section 34 of the PFMA. He once again questioned whether proper planning was done when departments drew up their strategic plans and brought them to Parliament. It seemed sometimes that departments had already planned for rollovers to happen. He also wanted to know what the frequency of these virements and rollovers were.
Dr Brown noted that virement issues did come to Parliament. The main issue was the point at which those requests were submitted.
Mr Swart said that requests should come to Parliament before approval was given for a virement.
Dr Brown explained that the amendments to the budgets were done once the budget was tabled. She added that she did not think National Treasury was falling short of the Act in the way it was granting virements. A concern was also that the amount of money that was being shifted was quite large. She suggested that perhaps an absolute amount needed to be added to the percentage which could be shifted.
Mr Snell wanted to know what the role of Parliament was, if National Treasury approved virements. He added that provincial treasuries should inform National Treasury of virements that they approved.
Mr Swart wanted to know whether the Committee could change decisions that the Minister had already approved.
Dr Brown said that research would have to be done to determine the amounts which were changed in budgets and whether these changes had resulted in a change in service delivery. She noted that no virements were approved where there was no money available. Rollovers did allow for funding to be carried over into the next year. Rollovers could happen from one department to another, but this was not a common practice. She conceded that in some cases there was bad planning and that departments could plan to rollover funds. National Treasury could be deceived in this way.
Mr D Naidoo, Chief Director: National Treasury, added that the budgeting process involved estimates and that there needed to be room for flexibility when it came to actual expenditure.
Ms Gillian Wilson, Chief Director: Public Finance, National Treasury added that the smaller departments were usually under budgetary pressure. They normally tried to save on one programme and then shift money to another. She cited the Presidency as an example where certain pronouncements were made after the budgeting process. This made it necessary for funds to be shifted to accommodate projects that were begun through these pronouncements.
A representative from the Eastern Cape Provincial Treasury said that Section 43 did not state how often a department could do a virement. He said that departments underspent and overspent and played with figures. He added that it would not be a good idea for the Committee to get applications from departments. The shifting of funds normally happened within the programmes. He wanted to know whether conditional grants could also be rolled over.
A representative from the Gauteng Provincial Treasury said that the conditional grants were managed separately from the equitable share. In Gauteng, the cash for conditional grants was kept by the Provincial Treasury until the expenditure was done. That Treasury did not approve conditional grant rollovers. He added that there was a problem with the authority to give approval. Sometimes the Provincial Treasury would be approached for approval, only to find that it had already been given by the legislature.
A representative from the Mpumalanga Provincial Treasury said that this Treasury would reduce a department’s budget should that department violate the Division of Revenue Act. The legislature would then be informed of this. The Provincial Treasury also briefed the legislature every quarter on rollovers.
The Chairperson pointed out that the Committee had observed in the Eastern Cape that adjustments had been done to budgets, but funds were still shifted.
A representative from the Northern Cape Provincial Treasury said that Section 25 of the PFMA dealt with use of funds in an emergency situation. However, it also required that a report had to be submitted to the legislature on this use, within fourteen days. He suggested that more frequent reporting should be done regarding virements which were approved, and that there was no need to wait until the adjusted budget was tabled. Some departments still requested virements even after the adjusted budget was tabled.
A representative from the Western Cape Provincial Treasury said that this Treasury had investigated why virements were happening. It had also conducted workshops so that departments interpreted the legislation correctly. It also tried to influence the budgeting and planning process of departments. This Treasury’s analysis had shown that the departments in the province had only shown a 1% change in their approved budget and 0, 5% of the adjusted budget. The Provincial Treasury also had its own criteria in the province for rollovers. They would not be approved if they were not cash based. Departments also knew that they were accountable to the legislature for every shift in the budget. This served as a deterrent, and forced departments to plan properly.
Mr Snell said that it sounded as if each provincial legislature was doing its own thing. He suggested that the National Treasury should implement a policy across all the provinces. He also felt that the shifting of funds should be linked to deliverables.
Dr Brown said that virement reporting happened quarterly. The Committee could ask National Treasury for virements that had been requested. On the issue of conditional grants, she said that there was no option for grants to be returned if they were not spent. She added that the National Treasury could not stop departments from applying for virements, but could ask the departments to withdraw the request. Treasury would now be issuing strategic plan and performance guidelines to departments. This would require a department to show how money had been shifted and how their performance was affected.
The Chairperson added that he felt that some departments did not take the Medium Term Expenditure Framework (MTEF) seriously. This caused many problems. There were some departments who regularly requested virements.
Dr Brown agreed that planning in departments had to be improved. It was hoped that the annual performance plans would improve this. There was always a risk that there would be cost overruns and government needed to see how it could manage this better. The actual practice of budgeting also needed to be looked at.
Ms Ngcobo wanted to know if Treasury had workshops with the departments and provinces so that they acted properly.
Dr Brown replied that the National Treasury did have interaction with the provincial treasuries. The Minister also interacted with the various MECs who constituted the Technical Committee on Finance.
The Chairperson said that the Committee had exhausted the issues regarding Section 43 of the PFMA. He was however concerned about projects which were aborted because funds were shifted even though the legislature had approved the project.
Dr Brown said that Section 5 of the Appropriations Act gave Treasury the right to approve virements. She suggested that there should be more transparency when it came to the quarterly reports on virements. She also added that virements could happen at any time, whereas rollovers could only happen at the end of the financial year.
The representative from the KwaZulu-Natal Provincial Treasury explained that this Province had implemented austerity measure to try to get departments to save, especially on goods and services. Where projects had not yet started, departments could stop them, with the approval of the Provincial Treasury. He added that so far it had only given approval to the Department of Transport to stop capital projects.
A representative from the Gauteng Provincial Treasury added that some departments did proper planning, while others did not. Some just did budgets and planning in order to comply. If proper planning was done, virements would only be needed for items. The Accounting Officer could shift funds, but had to inform Treasury.
The Chairperson said that the concept of saving should be clearly defined in the Act. Some departments underspent and then called it saving.
Dr Brown referred to rollovers again, and said that these could only be done at the end of a financial year. It was, however, possible to rollover funds in the MTEF as well.
The Chairperson stressed that the goal was to have uniformity across the provinces.
The meeting was adjourned.
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