Budget process & cycle, interpretation of strategic plans & oversight: National Treasury Workshop

Meeting report

Workshop with National Treasury (NT): Budget process and cycle, Estimates of National Expenditure
Mr Devan Naidoo, Chief Director: Economic Services, Public Finance Division, National Treasury, noted that National Treasury (NT) had recently given a presentation to Parliamentary staff to highlight the Estimates of National Expenditure (ENE), which outlined the estimates for the current year, and the structure of the budget for the next three years. He now wanted to expand on the budget process, which was complex. National Treasury was trying to ensure that it met all the needs of South Africa, but since the Department of Science and Technology (DST or the Department) laid such a fundamental foundation for the future, National Treasury tried to ensure that it would receive a significant allocation of resources. NT would, when preparing the budget and allocation of funds, take guidance from the Minister responsible for Science and Technology, Hon Naledi Pandor.

He emphasised that throughout the budget cycle, a very strong linkage was maintained with DST, and NT staff responsible were well acquainted with all of the issues. National Treasury had open lines of communication with the DST, primarily dealing with the Chief Financial Officer, who was expected to work with the respective programme managers to balance the lines and the financial functions going forward.

Mr Naidoo turned to the aim and strategic objectives of the budget process, public finance and budget management, and the legislative framework for financial oversight.

Mr Naidoo outlined the budget process. Around June or July every year National Treasury invited departments to submit their budget proposals for the Medium Term Expenditure Framework (MTEF), which dealt with the period for the following three years. Departments were then invited to present their proposals to the Medium Term Expenditure Committee (MTEC), which comprised representatives from the Presidency, Department of Public Works, Department of Public Service and Administration and National Treasury. MTEC made recommendations to the Ministers Committee on the Budget (MINCOMBUD), who evaluated the recommendations of MTEC. The proposed allocations recommended by MINCOMBUD were submitted to Cabinet for approval, and, in November, allocation letters were issued to departments. The allocation letters set out the numbers, the purpose of the total budget, and the baseline numbers of the previous year. The 2010 budget was evaluated in the 2011 preparation process, and could be adjusted – for instance, if a department had chosen not to pursue certain capital projects, then the budget allocation to those projects could be subtracted from the previous year. Where there were fresh new projects to be considered, such as the Ministry of Science and Technology’s allocation of R358 million for postgraduate education, an additional new allocation would go into the budget. The allocation letters would assist departments with their Estimates of National Expenditure (ENE) planning. The departments, between December and February, would then draft a chapter, making the necessary changes and ultimately building up an important public record of the budget for that year and the next two years.

The Minister of Finance, when making the budget speech to Parliament, tabled the ENE chapters, Appropriation Bill and Division of Revenue Bills. Parliament then passed the Appropriation Act and Division of Revenue Act (DORA) for that for that particular year, to allocate resources to different government departments and spheres of government.

The Adjusted Estimates of National Expenditure (AENE) was a very important aspect of the Medium Term Budget Policy Statement (MTBPS) that the Minister of Finance presented to Parliament in October of each year. It created certainty in the market, for departments could receive additional money for unavoidable and unforeseeable matters.

Departmental expenditure was monitored by the submission of monthly reports to NT.  The reports covered actual expenditure to date, programmes that were over-or under-spending, revenue generated, and performance of earmarked funds. Treasury analysed these reports to ensure that the funds drawn by departments were consistent with what was needed.

Mr Naidoo outlined the spending priorities. These included enhancing the productive capacity of the economy, rolling infrastructure plans to expand fixed assets, enhancing job creation by supporting labour intensive industries and expanding employment-creating government programmes, and investing in human development and maintaining a progressive social security net.

Matters relating to safety, health and environment were fundamental in the budget process, as well anti-poverty initiatives. Ultimately the budget process centred on improving the ability of government to deliver its services.

Mr Naidoo informed the Committee about process and reporting, slow spending programmes, under-performing programmes, efficiency savings, inflation related adjustments, official development assistance, donor funding and additional funding required (see attached presentation for details).

Engagement with Committee Members
The Chairperson asked for clarification of the difference between an Appropriation Bill and a Division of Revenue Bill.

Mr Naidoo explained that appropriation related to the right of Parliament to decide on the spending, and the Appropriation Bill therefore dealt with the spending of money that would be appropriated by Parliament. Once Parliament had considered and passed the Appropriation Bill, this was the legal authorisation to spend according to the ENE. Revenue referred to income from taxes. The Division of Revenue Bill (and Act) then dealt with how the revenue (money collected by government) would be allocated between the three spheres of government. If revenue was higher than expenditure, that was referred to as a budget surplus, but if expenditure was higher than revenue that was referred to as a budget deficit, or what was called the public sector borrowing requirement.

Ms M Shinn (DA) asked what happened to money that was not spent, and whether it could it be formally deferred or rolled over.

Ms Shinn was also interested in the actual payment cycle. She noted that budgets were tabled in February, were discussed by the departments and then approved. She enquired when the money relating to the budget would be distributed to the various entities, whether this was done before or after the budget vote was passed in the House, and whether the money would be available from the next year, from July to July. She further enquired whether, when adjustments were done in November, the money would be available in November or whether it would only be included in the next year’s budget.

Mr Naidoo clarified that the analyst responsible for a department would have his or her finger on the pulse of the finances of that department. Departments were required to complete schedules of monthly drawings. Each department must make an estimate of the cash needs of that department on a monthly basis, to ensure it could pay the bills. A department could not request money in advance that was way in excess of its needs, so the financial management systems ensured that money, as needed, was provided. If a department said that it wished to spend money on a project, but did not do that, Expenditure 32 reports were completed, and NT would ask the department why it had been unable to spend the funds. When the Section 32 reports were submitted, Parliament would identify the objective reality. A department that could not spend the money would declare under expenditure in a certain programme, and then might have the option to spend this money in other programmes, as approved, or apply to NT to roll over the money to another financial year.

Mr Naidoo added that under the planning cycle, departments had the right to receive an allocation letter, which was sent by NT, pursuant to a Cabinet decision approving the budget numbers. Departments received the allocation letters to enable the strategic planning process to continue.

The Chairperson asked when that allocation letter was sent.

Mr Naidoo responded that this happened in the middle of November, before the budget. All allocation letters were subject to the Parliamentary approval process, and the passage of the Appropriation Bill into law.

Ms Shinn still wished to know whether the money voted in June would be available immediately, or only from July.

Mr Naidoo responded that it would be available immediately, depending on the plan.

The Chairperson added that essentially, from the time of the allocation letters in November, the departments were operating on advances until their budgets were replenished.

Mr Naidoo agreed, and pointed out that the budget machinery was one continuous process.

Mr M Nonkonyana (ANC) had understood there was a financial year, with a definite start and finish date, and that adjustments could follow a process. However, he enquired how a department that had no money in, for instance, December, could then borrow and replenish.

Ms M Dunjwa (ANC) added a question as to how that advance was monitored to ensure departments did not overspend.

Mr Naidoo referred Members to a publication on ENE distributed earlier, and stressed that the budget vote for each department was an annual event. The budget speech, the ENE, the DORA and Appropriation Bill were tabled in Parliament. He illustrated this by looking at Vote 34, pointing out that the budget summary appeared at the top, and there were four columns for 2011/12, one for 2012/13 and one for 2013/14. Those budget numbers were presented on a three-year basis to ensure the continuity. When this was tabled in the previous year, it would have been entitled the 2012 ENE, and would have reflected the three years from 2009 – 2012. Year 0 came to an end on 31 March in each year, and year 1 started on 1 April. Parliament approved a rolling three-year budget each year.

He added that when the budget allocation was issued, it was always conditional on what Parliament had decided in the final Appropriation Act, so there was not a question of over-expenditure at that stage. He stressed again that it must be remembered that the budget structure provided for a three-year cycle. When Parliament had considered the 2010 Appropriation Act, the Division of Revenue Bill, and ENE last year, it would have been looking at numbers for the three years. This ENE book was updated every year.

Mr Naidoo then responded to the question on adjustments. During the course of any financial year a department might run into difficulty, and it would be necessary to make allocations. In the case of a cost overrun, adjustments would need to be made in the adjustments process. This adjustment process was called the “Mini Budget”.

Ms Dunjwa noted that National Treasury monitored expenditure of a department monthly, and asked if that related only to the national departments, or also to the provinces. She pointed out that between November and the time that the budget was announced, some of the provinces would have gone way over their spending limits. Departments were being monitored but were still over-spending year after year. She enquired what NT was doing about this.

Mr Naidoo said the relevant legislation was the Appropriation Act, which was passed annually, the Adjusted Estimates of National Expenditure Act (AENE Act), the Public Finance Management Act (PFMA) and the Municipal Finance Management Act (MFMA). All those pieces of legislation provided the platform for expenditure control by central government, provincial government and local government. The PFMA had detailed and specific provisions on the obligations of the Director General of the National Treasury, as well as the provincial Directors General and the Provincial Treasury, each of whom were legally obliged to ensure effective management. He agreed that it was sometimes difficult to understand why the over-expenditure occurred, but noted that National and Provincial Treasury endeavoured to ensure that departments did not commit to spending without funding.

Ms Dunjwa expressed concern that in the Eastern Cape, the provincial departments of Health and Education had for years experienced financial challenges. She asked how this had happened, whether NT could not see that those departments were deteriorating, and whether this was due to limitations in the monitoring, or challenges around skills and capacity.

The Chairperson responded that where there was a problem in provincial governance, such as wasteful expenditure, National government could dissolve that structure and send in another department. He pointed out that at one time the Department of Public Service and Administration was sent in to take over certain functions in Eastern Cape.

Ms P Mocumi (ANC) added that there could be embarrassments at the end of the financial year, if it was discovered that a department had under- or over-spent. She pointed out that this indicated that Treasury interventions were not yielding positive results, and asked what the point was of monitoring if Treasury still did not assist the departments in spending within the allocated budgets.

Mr Naidoo said it was a difficult and complex matter. During the budget process last year, one of his staff had asked whether he had approved a R36 million transfer by a department to one of its entities, which was picked up during the monitoring. Mr Naidoo noted that it was then identified that this had not been approved in the 2010 budget, but an employee of another programme had asked an employee in the Chief Financial Officer’s office to make the improper transfer. This, having been picked up, was timeously corrected. He said that the monitoring system and the enforcement system still needed improvement, and more should be done to ensure that it could become an early warning system, rather than finding out irregularities after the fact. Over-expenditure ought not to happen if the necessary provisions in the law were being obeyed. The legislative system was in place, but human factors needed to be addressed. He added that unauthorised expenditure had to be presented to the Standing Committee on Public Accounts (SCOPA), which was responsible for what action should be taken.

The Chairperson commented that every year the Auditor General gave a report on monies wrongly spent, and the relevant departments were called in to SCOPA to explain. However, in reality that was as far as things could do. SCOPA did not have the power to execute any sanctions; it could only make recommendations to the relevant body, but it then reported the irregularities to Parliament. Parliament should be taking action, but even here, very little was done to implement penalties. The National Treasury monitored, and the Auditor-General did an analysis and reported to Parliament, SCOPA summoned departments to appear before it and presented its report to Parliament, but matters tended to end there. In fact the Minister should also report to Cabinet, and Cabinet should take action.

The Chairperson asked for clarification on the statements on the passing of the Appropriation Act.

Mr Naidoo responded that Parliament considered the Appropriation Bill and the Division of Revenue Bill. The Appropriation Bill was drafted by National Treasury, which acted as the professional secretariat in the process, and it was based on the budget process, MINCOMBUD and Cabinet decisions. Once each of the bills was passed by Parliament, they became Acts.

Ms Dunjwa reiterated that over-spending still remained a problem.

Ms Mocumi asked what recourse was taken if a department did not submit a monthly report.

Mr Naidoo cited the Budget Review Recommendations Report (BRRR), and said that NT would respond to each committee’s recommendations and analysis. If a committee was unhappy about the expenditure, NT would be asked to table a set of forward-looking recommendations on the problem. He stressed that prevention was better than cure. Again, there should be better systems, and early warning systems, for the bigger amounts to prevent any improper spending and ensure that stated amounts were spent according to the budget. He conceded that there was a lot of work to be done on this. It would be preferable to ensure, in advance, that the proper supply chain management processes were in place to take matters further.

Ms S Plaatjie (COPE) sought clarity on how NT would advise on the financial implications of sectoral policies and work with departments, sectors, provinces to ensure alignment of policies, resources and plans. He commented that this still related to monitoring. He asked whether, when NT gave allocations to provinces, they were channelled through National departments, and where the monitoring of that spending lay. For instance, he cited a Ministerial announcement some years ago about the building of a court in a particular municipality, yet when the local municipality followed up with the provincial departments, there was nothing on paper, and this uncertainty continued for the next two years. He enquired where the reporting lines lay.

Mr Naidoo referred Members to Vote 3, which related to the Department of Cooperative Governance and Traditional Affairs. In particular, programme 3, on governance and intergovernmental relations, set out how the money would be spent. The DORA set out the Provincial Equitable Share (PES) formula, which showed how the money would be shared between the different spheres of government.

Mr Nonkonyana thanked Mr Naidoo for his useful explanations. He noted that many people would not understand even the basis of accounting, which resulted in over- or under-expenditure. All the processes were good, but he did not see that Parliament was playing an activist role, other than conducting oversight.

Mr Naidoo replied that NT was reviewing the BRRR reports and writing responses to every single recommendation or requirement. National Treasury engaged with departments to agree on funding proposals. A mere idea could not be funded, but there had to be a business plan. Parliament should decide what its role should be. NT, as the professional Secretariat in the budget process to the MINCOMBUD, did the “nuts and bolts” of calculations and presentations, and the Ministers, once satisfied, would make presentations to Cabinet. NT then drafted the Appropriation Bill and the Division of Revenue Bill, based on the proposed budgets, and the Bills would be considered by Parliament. Over time, Parliament could build more effective systems to address under- and over-spending matters, which were of concern, and define its role according to how it saw the processes.

Mr Nonkonyana would like to see a formal proposal that Parliament could engage and intervene further in the process. He suggested that this Portfolio Committee should have some engagement and consultation beforehand, and could intervene where there was any outcry.

The Chairperson urged Members to summarise their concerns and ask National Treasury to elaborate on them.

Continuation of briefing
Mr Naidoo turned to the slide on funding proposals. He noted here that the criteria were identifying outputs and outcomes, the detailed costing of the proposals, and consideration of whether they had been costed bearing in mind the life cycle of the project and the spending over the MTEF. National Treasury would also look to what legislative, administrative and implementation plans were in place, what monitoring and evaluation methods existed, and what risks there were in the project, and would try to link those with any other relevant plans within the department or across different departments.

When it came to the motivations for funding, National Treasury looked at whether this was an extension of an existing project or a new matter, and any relevant past financial information from the balance sheets, income statements and cash flow statements. A good proposal would also quantify the financial aspects. NT encouraged departments and agencies to look to the private sector to invest, where possible, and to look into public/private partnerships and development finance institutions (DFI) also for funding. After this, NT would ask for a Project Concept note, and the benefits and costs associated with the projects.

Mr Naidoo explained the needs analysis, which considered the needs of society, and possible options and other alternatives that could have been considered.

He then went through the cost-benefit analysis and the financial implications, including whether the project was affordable and sustainable, and whether it should be funded by the fiscus. He also outlined the implementation readiness, and also funding and approvals. Mr Naidoo stressed there was too great a reliance on the fiscus for funding requests, and again encouraged departments and agencies to be more creative in looking to the private sector, donors, development finance institutions, and public/private partnerships. Finally, he noted that there was a need also to consider whether any environmental regulatory approvals needed to be obtained.

NT presentation for Parliamentary staff: Economic Services Departments and Vote 34 for Department of Science and Technology
Mr Naidoo then tabled a presentation that NT had prepared for Parliamentary staff. It set out the 2011 MTEF baseline budget for the nine Economic Services Departments, and their three-year allocation of R96.2 billion. This budget planned to secure projects of public benefit that could not be secured by private funding, looked at capital investment and creation of jobs, and building robust regulatory institutions to enhance service delivery. It also focused on human resources development. The Minister had announced an R800 million fund for projects on the green economy and environmental protection, and disbursements from this fund would depend on robust business plans to foster environmental protection.

He then noted that the Department of Science and Technology fell under Vote 34. He summarised the budget. The 2011 MTEF baseline was R14.8 billion, which was split into allocations of R4.4 billion for 2011/12, R4.9 billion for 2012/13, and R5.5 billion for 2013/14. He noted that the allocation for the Square Kilometre Array Project (SKA) was R547 million. The DST had requested that this R547 million be deferred to the two outer years, split respectively into R219 million and R328 million, and that “savings” of R509 million be reflected in 2011/12. He explained that this meant that, for technical reasons, the DST could not spend the money in this year. NT had advised that if the DST could not spend the money, which was provided for by a commitment in the Appropriation Act of the previous years, then it should declare this as a saving, to ensure that when the project was ready to proceed, the funds would still be available through a Parliamentary decision.

He also noted that R43 million in savings were identified which should be ploughed back into the budget to ensure that funds were available for the job creation fund announced by the Minister.

He noted the transfers to the National Research Foundation of R3.3 billion over three years. There was R358 million budgeted for bursaries for post-graduate education, split over three years. The Council for Scientific and Industrial Research received R2.2 billion, split over three years.

Mr Naidoo turned to the budget summary, as set out in the ENE at page 733, for year 1 of the MTEF. He noted that Programme 1: Administration was allocated R192 million, Programme 2: Research Development and Innovation was allocated R854.6 million and the programmes for International Cooperation Resources received R137 million, while Human Capital and Knowledge Systems received just under R2 billion and Socio-Economic Partnerships the amount of R1 270 million. Therefore, for Year 1, there was a total of R4.4 billion in Year 1. He briefly mentioned that the numbers increased significantly in the outer years of 2012/13 and 2013/14. He said that this indicated that NT believed that science and technology were important indicators for the long-term competitiveness of society.

Engagement with Committee
Ms Shinn asked an inaudible question on page 733 of the ENE.

Mr Naidoo clarified that “administration” referred to the overall management of the Department and ensured that the organisations who were funded complied with good governance, and dealt with all of the corporate management services in the department. The total of R192 million was budgeted for that financial year, and the current payments totalled R189 million to date.

Ms Shinn assumed that the balance would be paid before the end of March.

Mr Naidoo responded that this book was prepared in advance, and related to the next financial year, so although it had been tabled by the Minister in Parliament in the previous week, the numbers in the budget summary applied to the 2011/12 financial year, from 1 April 2011 to 31 March 2012.

Ms Shinn asked whether the current payments that Mr Naidoo outlined was money spent for the financial year to end March 2012, or related to the current year’s budget.
 
Mr Naidoo replied that the ENE represented the financial plan for the next three financial years.

Ms Shinn said that she was still trying to understand whether the R189 million was a current payment.

Mr Naidoo said R189 million, plus a further R1 million, would add up to R190 million (with rounding up). The total budget was R192 million, and current payments accounted for R189 million, while transfers and subsidies accounted for R1 million.

The Chairperson also asked for clarification, pointing out that the DST was still running the accounts for the 2010/11 financial year.

Mr Naidoo replied that this was regarded as “current for the next financial year”.

Ms Shinn again queried the process.

Mr Naidoo said that the 2011/12 numbers would also have appeared in the ENE for the previous year, as it covered three years.

Ms Shinn asked about payment for ongoing projects.

Mr Naidoo said that each year the ENE would add to the outer years of the three year ENE. There were ongoing expenses, for instance the staff, rent and operating expenditure.

The Chairperson reiterated that since this was only 2 March 2011, the budget for 2011/12 would not yet have started, and again asked what “current payments” meant.

Mr Naidoo explained it was operating expenses for that financial year.

The Chairperson asked for clarity on the figures of R189 million, and R192 million.

Mr Naidoo clarified that the total was R192 million, which was made up (with rounding) of R189 million plus R1 million for transfers and subsidies. In this financial year the total represented the sum of the two columns.

Ms Shinn referred to the emphasis on having an adequate business plan. She asked what influence National Treasury had if, for example, three departments said they needed a vaccine facility to be built, and whether the three budgets would be drawn together, to achieve economies of scale, and to get a common process.

Mr Naidoo responded that a good example of such a project would be that on Acid Mine Drainage, which spanned the departments of Water Affairs and Mining. NT would try to ensure that the departments were not duplicating efforts, that the spending was related to the project outcome, and that Treasury was not double-spending in one year. Government as a whole could do a lot better. He agreed that the efforts of the Ministry of Science and Technology cut across many areas, but in relation to the funding NT tried to ensure there was no duplication.

The Chairperson said one of the duplications that National Treasury should take into consideration was highlighted by the National Research Foundation (NRF) on the skills development entity. NRF was concerned about human capital development and funding relevant to that project. He proposed that Mr Naidoo should raise with NT the concerns about budgeting components for human development. If all the allocations that NT gave to all the departments for human capacity development and skills development could be channelled into one competent entity, such as NRF, they would have a far greater impact, with more organised programmes managed by NRF, who had the skills and competence to do so.

Mr Naidoo agreed that was something that should be considered as rationalisation and centralisation of monies had a better impact. He would be very happy to discuss this with the DST and NRF.

The Chairperson continued that NRF also had an offspring PhD project, derived from a United States project, on the basis that if government wanted to develop the economy into a knowledge-based economy, then there must be an effort to produce a certain quantity of PhD graduates, who could then give effect to building a total knowledge-based infrastructure. South Africa had a pool of young people, of whom 80% were from previously disadvantaged communities, but most could only afford to continue their studies to bachelor level, despite their potential to continue further. For instance, he had seen a CV of one youngster who had achieved eight distinctions, including maths, physics, chemistry, computer science and psychology. He had managed to obtain a merit scholarship to do his Honours degree, but he was unable to go further, despite wanting to do so. The PhD project was trying to harness this kind of talent, and would offer potential students what they could realistically earn, to enable them to continue with their studies and also support their families. Although NRF had the ideas, it did not have the funding.

Mr Naidoo said that NT should meet with DST and the NRF to look at proposals, since NT was very keen to look at any project that could improve value. He asked for details of the contact person, to enable him to take the proposal further.

The Chairperson commented that if NT could support this, it would mean a big difference in the number of PhD graduates.

Mr Naidoo said that NT had many meetings with Dr van Jaarsveld and his team, and Dr Molapo. The National Students Financial Aid Scheme (NSFAS) had been allocated R6 billion, and the amount allocated to postgraduate allocation was R358 million. Education needed to be adequately resourced.

The Chairperson thanked Mr Naidoo, but said that there was still a lot to go through. In the past, NT had taken Members through interrogation of strategic plans and annual reports, which Members needed to understand, and it might be useful to have another workshop on that.

Mr Naidoo said NT was willing to take the Committee through any amount of detail it required.

The Chairperson said this was the most important training for any committee, as it helped Members to understand exactly what entities should be aiming for.

Mr Naidoo referred Members to pages 733 and 734, which was the strategic overview setting out the overall objects of the DST, its savings and cost measures, and selected performance indicators. He said that the next table on page 736 highlighted the expenditure estimates. He explained how Members could use the book on ENE for easy reference. He noted that in 2013/14, government was projected to collect revenue of R904 313 billion, but the spending would exceed that, resulting in a deficit of R148 714 billion, which was 4.2% of GDP.

Ms Shinn asked for some clarification on the figures.

Mr Naidoo reiterated that the ENE reflected the three-year position, so each year the Minister would be making a presentation on the next three years. Departments would know what their allocations were for the previous and the next year, because these had already been approved by Parliament. Typically, there would be a base line and then some additional money, but some money might not have been able to have been spent. The additional allocation would be approved. He highlighted the expenditure by national vote.

Ms Shinn asked where to find the DST’s budget allocation as a percentage of total budget.

Mr Naidoo explained that DST received R4.4 billion under Vote 34, as compared to the total government expenditure of R889 billion for the year, giving a percentage of 0.9%.

Mr Naidoo then briefly took Members through the ENE book, picking out items of interest, which would help Members in using the book.

The Chairperson thanked Mr Naidoo for the very important training in helping Members as to how to interrogate reports that came to Parliament and how frequently they should be monitored, in terms of bi-monthly reports to Cabinet and so forth. The book had everything that was needed; it was a matter of understanding. Members had an idea of the book and were better able to understand the tables. He thanked Mr Naidoo for his input.

Ms Shinn thanked Mr Naidoo for his input.

Mr Nonkonyana also expressed his appreciation for the clear language and style of presentation, and thanked the Chairperson on his leadership.

The Chairperson added that the CSIR and the University of Pretoria ran a course jointly for those wanting training in Technology and Research Management, and asked anyone interested to submit his or her name.

The meeting was adjourned.