Budget Review & Recommendations Report: Research & Committee Section briefings

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Public Enterprises

12 October 2010
Chairperson: Mr C Gololo (ANC)
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Meeting Summary

The Committee Secretary reminded the Committee that the Money Bills Amendment Procedure and Related Matters Act set out the procedure for consideration of money bills, and Section 5 of that Act empowered the National Assembly, through its committees, to annually assess the performance of each national department. Committees were now required to prepare and table their Budget Review Recommendations Reports (BRRR) to the National Assembly, the Minister of Finance and the Cabinet Minister responsible for the relevant department. The structure and content of the BRRR was explained, including the mandate of the Committee, the methodology to be used and the information to be included. He stressed that performance measurement and evaluation were to be taken into account and it was important for the Committee to compare and assess the Strategic Plans, budget, programme and plans, key performance indicators and measurable objectives. A Committee should use the reports stipulated in Section 32 of the Public Finance Management Act, the Annual Report, and may also use other information, such as quarterly performance reports, its own research, reports from the Standing Committee on Public Accounts, the State of the Nation Address, Reports of the National Planning Commission and the Ministry of Performance, Monitoring and Evaluation, Reports of the Auditor-General, recommendations by the Financial and Fiscal Commission, fact-finding reports, and prior Budget Review Recommendations Reports and reports on budget votes. Members asked about the Committee’s power to ask that funding be redeployed from one area to another, whether

The Committee Researcher noted that the BRRR posed some problems of timing and in respect of sources of information. In addition the Department of Public Enterprises, whom this Committee oversaw, was different from other departments in that it in turn had to oversee the nine public enterprises of government, and ensure that each of the strategic policy mandates was followed, reflected in the shareholder compacts and followed. He recommended that the Department should be asked to outline the shareholder compacts in respect of each of the State Owned Enterprises (SOEs). He isolated important issues as being the Independent Power Producers, the Pebble Bed Modular Reactor and the salaries and management aspects to be decided by the remuneration panel. He noted the fairly significant decreases in the current financial year, when compared to the 2009/10 financial year and the impact of the transfers for Alexkor and Broadband Infraco. He gave some analysis of the expenditure trends. He stressed that in future the expenditure in many areas was expected to decrease and that, in particular, government would not be funding infrastructure. He recommended that ineffective programmes could be dispensed with and the use of consultants should be reduced, along with other cost-cutting measures. There should be better risk management analysis, to avoid risky commercial decisions, and completion of a funding model. He also suggested that the Department should clarify how each of the SOEs contributed to the country’s Industrial Policy Action Plan (IPAP), and said that the outcome of the Presidential Review Committee could serve as a key guideline for Members.

Meeting report

Election of Acting Chairperson
The Chairperson had tendered apologies and Mr C Gololo (ANC) was elected the Acting Chairperson

Budget Review Recommendations Report: Committee Section briefing
Mr Disang Mocumi, Committee Secretary, briefly reminded the Committee that the Money Bills Amendment Procedure and Related Matters Act set out the procedure for consideration of money bills, in terms of Section 77 of the Constitution. Section 5 of that Act empowered the National Assembly, through its committees, to annually assess the performance of each national department. The relevant committees should submit a Budget Review Recommendations Reports (BRRR) annually, for tabling before the National Assembly. The BRRR should also be submitted to the Finance Minister and the Cabinet Member responsible for that particular department.

Mr Mocumi explained the structure and content of the BRRR, which included a consideration of the mandate of the Committee, and the methodology to be used to compile the BRRR. The mandate, vision and mission statement of the Department must be considered, as well as its strategic priorities and its objectives. When assessing performance, the Portfolio Committee should look at performance measurement and performance evaluation. Strategic priorities of the Department should be used by the Committee to assess whether the Department was performing in terms of its own plans, as well as to check its expenditure in relation to the budget vote and strategic plan. He stressed that measurable objectives should thus be tabled with the budget at the beginning of a financial year. The Committee would also need to evaluate the strategic and operational plans against the outcomes, which essentially involved looking at service delivery.

He noted that the Department could also invite inputs or evidence from the Department and other stakeholders, although it must make its own decisions based on its own research. Some of the documents that may be used by the Committee were contained in Section 32 of Public Finance Management Act, which provided for the publication of reports on the state of the budget. This Act also indicated how under and over spending could be identified. He added that the Committee may supplement the Section 32 reports with appropriations reports on quarterly spending. The Committee would also need to look at the Annual Report of the Department, in order to assess what it had achieved, and how this correlated with the Department’s Strategic Plan. Reports from the Standing Committee on Public Accounts (SCOPA) could also be used, in respect of any fruitful and wasteful expenditure, irregular expenditure, over-spending and unauthorised spending. Other sources of information might include the State of the Nation Address, Reports of the National Planning Commission and the Ministry of Performance, Monitoring and Evaluation, Reports of the Auditor-General, recommendations by the Financial and Fiscal Commission, fact-finding reports, prior BRRR’s and reports on budget votes.

The Committee should then set out its observations and summarise its key findings in a coherent and logical format, based on the analysis of this information. The Committee Secretary emphasised that the Committee should make clear statements whether it was satisfied with the Departments’ service delivery performance

Discussion

Mr P Van Dalen (DA) asked whether the Committee was allowed to require that funds be redirected from one part of the Department to another part, if funds had been used in an irregular manner.

Mr M Sonto (ANC) asked if the Committee should be verifying spending trends over the last six months.

Mr S Van Dyk (DA) stressed that the BRRR was all about the Committee assessing the performance of the Department, its outcomes, its spending and whether this had been wasteful, and whether it had met its goals, targets and aims. He noted that it must be presented to the Minister of Finance.

Mr A Mokoena (ANC) asked if there was a recommendation part of that report.

Mr Mocumi responded that the Committee would have to look at the Department’s Medium Term Budget spending for the last six months, and if funds were under spent or over spent, the Committee would make recommendations to the Department, in terms of its strategic plan and objectives. The BRRR was very clear about the recommendations to be made. Redirection of funds from one part of the Department to another was not allowed.

Mr Mokoena wondered if this last statement was entirely correct; he thought the BRRR was not clear on that point.

The Chairperson asked that the Committee Secretary and Committee Researcher should look further into that aspect and report back.

Department of Public Enterprises (DPE) financial matters analysis: Research Unit
Mr Erik Boskati, Committee Researcher, noted that the Money Bills Amendment Procedure and Related Matters Act posed many challenges, both in terms of the timing of presentation of Annual Reports, and the sources of information to be included in the Committee’s BRRR.

He added that the Department of Public Enterprises (DPE or the Department) differed from other departments, in that most were service orientated, whereas the DPE played a largely oversight role over the nine public enterprises of government. If the State Owned Enterprises (SOEs) were badly managed, the Committee would be looking to the DPE for explanations.

Mr Boskati set out the strategic priorities of the DPE, and said it was important for this Department to integrate the strategic policy mandates, which meant that all the SOEs should follow a particular government policy in terms of investment, infrastructure, and other aspects. He also emphasised that funding should be coordinated between the different SOEs, especially those that were embarking on an infrastructure programme, and the SOEs must not rely on the fiscus for their infrastructure.

The Department’s other strategic priority related to shareholder management, and monitoring and being involved in shareholder activities. The nine SOEs operated in various sectors of the economy, and therefore it had a responsibility to appoint executive directors of these SOEs, after Cabinet approval, and to ensure that every SOE had its own strategic role to play within the economy of South Africa. He stressed that the shareholder compacts were very important binding contracts between the Department and the SOEs, which laid down the guidelines to be followed by the SOEs for monitoring and accountability. He also explained that there were measurable outputs which could be used by Parliament to measure the Department with regard to the SOEs. The issue of the Independent Power Producers (IPPs) had been highlighted in the Integrated Resource Plan (IRP) but it was unknown when this would be fully operational. He emphasised that the Pebble Bed Modular Reactor (PBMR) would no longer be funded. A remuneration panel had been appointed to look at the salaries of the management of Denel, and to set up guidelines for the salaries of the management of SOEs. The appointment of the Director-General was crucial for shareholder compacts and performance contracts, which played a key role in the performance agreements between the Department and the SOEs.

Mr Boskati then noted that the budget allocation showed a significant reduction in various areas of the Department. The general perception was that this decrease in allocation for the Department was mainly in respect of  administration and shareholder management of various SOEs. In this term, the Department’s decreased allocation was due to two transfers:  Alexkor and the Broadband Infraco matter. He stressed that it was important for Parliament to have an idea of how much the SOEs of the Department had secured for themselves in terms of infrastructure funding, or any other project they invested in. He mentioned that the SOEs secured some funding from different sources, like the Development Bank of Southern Africa, the International Monetary Fund, and similar funding, and therefore the SOEs would no longer secure funding from government or rely on the fiscus for their infrastructural or other projects needs.

Mr Boskati stated that, when analysing the expenditure trends, there was an overall decrease in spending of R3.9 billion, compared with the previous financial term. Looking specifically at the Department’s programmes, he stressed that administration would increase slightly, by 5.23%, generally in line with inflation. Expenditure was expected to grow moderately over the Medium Term Expenditure Period (MTEF), at an average annual rate of 6.7%, from R92 million in 2009/2010 to R111.8 million in 2012/13.

Mr Boskati said that spending on energy and broadband was mainly reflected in transfer payments, and therefore, expenditure was expected to decrease on this programme from R1.96 billion in 2009/2010, to R14.9 million in 2012/13, at an annual rate of 80.3%.  There was only one transfer on this programme, which was R138.6 million earmarked for Broadband Infraco. The decrease generally was attributed to government’s contribution to the Pebble Bed Modular Reactor coming to an end.

Mr Boskati stated that R54.4 million had been allocated to the legal, governance and transactions programmes in the budget vote for 2010/11, and that this represented a decrease by R94.9 million in real terms, of 62.71%, on the 2009/10 year. The only projected transfer was for Alexkor, estimated at R36 million, as part of the funding of the Richtersveld land claims settlement agreement. Expenditure was expected to decrease over the MTEF period from R145.9 million to R20.4 million, at a rate of 48.1%, due to the finalisation of the Richtersveld Community’s land claim.

The manufacturing enterprises budget allocation had drastically decreased from R199.3 million in 2009/10 to R16.2 million in 2010/2011, an average of 56.3%. He highlighted that neither Denel nor Safcol were expected to receive any transfers as they had done in the previous financial years. The implication of the allocation to the programme was meant only for the management and the oversight functions of the manufacturing sector. Expenditure was expected to decrease from the R199.3 million of 2009/10, to R16.7 million in 2012/13, an average of 56.3% per annum

In respect of transport enterprises, this programme had been allocated R18.5 million for 2010/11 financial year, which was a 98% cut on the 2009/10 year, with no transfers to any of the SOEs that fell under this programme. Expenditure was expected to decrease significantly to R23.4 million over the MTEF period, at an average annual rate of 75.4 %.

The budget allocation for the Joint Project Facility (JPF) programme for the year 2010/11 was projected at R9.8 million, but, like all other programmes it received considerably less than in the previous financial year, when it had received R26 million. The JPF was established in 2005/6 to support functions such as remuneration, goods and services, and was funded by all the SOEs. Expenditure was expected to decrease from R26 million in 2009/10 to R9.1 million in 2012/13, at an average annual rate of 29.5%. He stressed that this was due to the completion of some of the projects and the shift of oversight and implementation of these projects to the relevant SOE teams.

Mr Boskati noted that two transfers were effected: one to Alexkor, for R36 million, for the land claim, and one to Broadband Infraco of R138 million, which was for the ITC sector.

Mr Boskati said that the decrease in allocation of some of the programmes meant that there would be an overall decrease in the budget of the Department from the next financial year, with a decrease in funds from the fiscus.

Mr Boskati then set out the recommendations. He recommended that ineffective programmes should be dispensed with, and that the use of consultants should be reduced, as a cost cutting measure. Some struggling SOEs, such as Denel, would have to work hard to sustain themselves financially. Eskom would need to secure the required shortfall from sources of funding other than the fiscus. He suggested that the DPE would have to mandate the SOEs to embark on cost-cutting measures to eliminate ineffective programmes, in line with the statement of the Minister of Finance, which would then relate to SOEs’ expenditure on high salaries, frills, travel, and similar items. There should be better risk management analysis, to avoid risky commercial decisions, as exemplified by SAA’s order of 15 aircrafts over a ten year period, for routes that may turn out to be unprofitable. There should be a completion of the funding model since no further funding would be provided, especially for those SOEs embarking on infrastructure programmes.

He also recommended that the DPE should provide the Committee with each of the SOE Shareholder Compacts so as to enable the Committee Members to familiarise themselves with SOEs’ key performance.
The Department should also provide clarity on how each of the SOEs spoke to the country’s Industrial Policy Action Plan (IPAP). Lastly, he stressed that the outcome of the Presidential Review Committee would also serve as a key guideline for Members of the Committee, especially on the strategic importance of some of the SOEs.

The meeting was adjourned.

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