Budget & appropriations processes, Division of Revenue, Expenditure Monitoring: Workshop

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Cooperative Governance and Traditional Affairs

11 April 2011
Chairperson: Mr S Tsenoli (ANC)
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Meeting Summary

A delegation from the National Treasury briefed the Committee on the Budget Process, Division of Revenue, Appropriations Processes and Monitoring of Expenditure, in relation to national departments, provinces and local government. The planning, budgeting and reporting cycle, the Money Bills Amendment Procedure and Related Matters Act, Parliamentary process, the Fiscal Framework, Division of Revenue, and Government spending were explained. The delegates also explained the provincial and local government Conditional Grants, Transfers to Provinces, Provincial Spending, and the Provincial Equitable Share Formula for 2011. Explanations were also given around the transfers to Local Government, Local Government spending, the Local Government Equitable Share Formula Structure, the data required, the Municipal Infrastructure Grants, and the Municipal Capacity Building and Other Grants. In terms of monitoring, the National Treasury outlined how the planning processes in Government worked, and gave an indication of the nature and purpose of strategic plans, Annual Performance Plans, annual reports, linking plans and budgets, National Departments’ In-Year Monitoring (IYM). They also set out the budget cycle summary, budget process, and gave an outline of the programme structure in the Department of Cooperative Governance and Traditional Affairs.

Members asked about systems in place to monitor service delivery, the relationship between budgets and monitoring and how provincial departments assisted municipalities with under and over spending, as well as how National Treasury would deal with such issues, and what kind of remedial steps would be put in place. Members commented that as long as the financial year ends differed, the figures would be skewed. Lack of capacity was questioned, as well as the expectation in the past that smaller municipalities should be performing at the same levels as some metros. Members noted that they would like to have specific information on the provincial matters, and questioned what would be done if provinces were not able to spend. Members further noted the continuing problems around unfunded mandates, and spill-over where municipalities crossed provincial boundaries. They called for explanations of the funding formulas, as well as what was to be done with disaster management. The explanations of National Treasury were particularly informative in explaining how allocations were currently made and what was being considered for the future.

Meeting report

Committee Workshop: Budget & appropriations processes, Division of Revenue, Expenditure Monitoring
The Chairperson noted that the aim of the Workshop was to strengthen the Committee’s capacity to interact more effectively with its task of oversight, in particular relating to budgetary and financial processes. He reminded Members that the adoption of the Money Bills Amendment Procedure and Related Matters Act (the Money Bills Act) had been a very important development in the history of Parliament. This law was in place but there were still some challenges, particularly in regard to the timeframes that had to be met. In the meantime, however, the Members must deepen their appreciation of the issues, so that the Committee’s crucial oversight function could be performed properly and efficiently.

National Treasury Presentation on Budget
Ms Wendy Fanoe, Chief Director, National Treasury, agreed with the Chairperson that it was very important that the Committees and National Treasury should increase their cooperation. She introduced her team, and said that National Treasury (NT) was represented by two branches at this workshop. The first, the Intergovernmental Relations Unit, was responsible for the provision of the local government fiscal framework, which included the Division of Revenue Bill. The Public Financier was the programme officer specifically responsible for the budget of the Department of Cooperative Governance and Traditional Affairs (COGTA).

She gave an overview of her presentation, saying that it would deal with the overall budget process and how it fitted together, the fiscal framework, Division of Revenue Bill, both the provincial fiscal framework and the local government fiscal framework, planning and budgeting in government, and the monitoring of expenditure in all three spheres of government. 

The budget process and cycle included planning, budgeting and reporting. This budget process included oversight by Parliament, provincial legislatures and municipal councils. The first process of the budget cycle was policy development, including the whole chain of strategic planning, operational planning and budgeting, actual monitoring of reports and performance, and Non-Governmental Organisation (NGO) reporting. This report would ultimately be overseen by the Accountant-General. An important additional layer was added in requiring compliance with the Money Bills Act. This enhanced the oversight function of Parliament and also allowed for stakeholder consultation, input  and participation in the budget process.

This also applied to the Division of Revenue Bill process, where there was more detail around the Select and Standing Committees on Appropriations. The allocations process applied also to the Conditional Grant Framework, and this was positive because in that process, if any change was proposed by a national government department or by stakeholders, a hearing would be called to explain those changes. Some of the changes proposed had, for instance,  been incorporated in the 2011 Division of Revenue Bill, and some which had a longer term effect would be included in the 2012 budget process.  

In relation to national departments, Ms Fanoe noted an important report that flowed from the portfolio committee. This was the Budget Review and Recommendations Report (BRRR). She explained how it would feed into the budget process. The budget process started before any other documentation was introduced, with the Medium Term Budget Policy Statement (MTBPS), which was discussed in Parliament. The MTBPS indicated what priorities were identified, potential areas where additional funding would be directed, and proposed reforms to both the provincial and local government fiscal framework. These processes would be framed together and entered into what was known as the “budget day”.  During the budget day, a number of documents would be considered. She noted that important aspects related to the Medium Term Budget Policy Statement, set priorities and the Division of Revenue, followed by the Division of Revenue Bill (DORB) and the Estimates of National Expenditure (ENE). Parliament would firstly deal with the fiscal framework, then move on to the ORB, then to the Appropriation Bill. Individual portfolio committees dissected the budget and strategic plan of the department and entities reporting to them, as well as other documents. The Standing Committee on Public Accounts (SCOPA) would deal with issues raised by the Auditor-General (AG) in relation to those departments, after the tabling of annual reports in which the audit reports were contained.

The fiscal framework was determined by various factors. These included the previous budget, real Gross Domestic Product (GDP) growth, normal growth, GDP inflation, the Consumer Price Index (CPI), macroeconomic forecasts (which were reviewed after every release of the South African Reserve Bank (SARB) Quarterly bulletin), tax revenue and revenue outlook for the next MTEF, non-interest expenditure, and estimates on the new debt service costs.

The Constitution required that an annual Division of Revenue Bill should be passed. Because it had implications for the provinces, it also went through the MTEF process. The Division of Revenue Bill would firstly be approved by the National Assembly before being referred to the provincial and local governments for final approval. The introduction of the  Money Bills Act made the consultation processes much longer, and the division would be done in April. This also has implication for provinces and municipalities. Before it was possible to release the allocations to the provinces and municipalities, the allocations must be gazetted.  She highlighted Slide 9 (see attached presentation), which showed how the Division of Revenue was done. Some the processes spoke to the provincial share, which involved policy discussions at Budget Council Cabinet. Others spoke to the Local share and here, policy discussions were held at the Budget Forum Cabinet.

Ms Fanoe noted that Slide 10 indicated how funds had been changed and how shares had shifted over time. For instance, in the 2005/06 financial year the overall allocation for local municipalities was 5%, but in 2010/11 the allocation increased to 8%.

Ms Fanoe noted that the fiscal framework made R94 billion available over the MTEF period of 2011/12. This included savings of R30.6 billion, and R21.6 billion was prioritised to meet existing outcomes commitments. R9bn was added to the fiscal framework to provide more resources for government priorities. Slide number 12 indicated the division of revenue resources between the national, provincial and local government, and the breakdown of the shares. She noted that in the 2007/08 financial year the local government allocation was close to R38.5 billion, but by comparison, in the 2010/11 financial year, it was R61.1 billion, a substantial growth. She noted that it was also important to consider the “own revenue” of the provinces and municipalities, had which informed the division.

The national process determined the allocation, in terms of transfers both of the equitable share and conditional grants to provinces and municipalities. The provincial equitable share (PES) allocation was informed by provincial priorities, and the local government equitable share (LES) was allocated in terms of municipal priorities, which had been approved by the municipal councils in their revenue review.

Ms Fanoe summarised that in the case of conditional grants, the prescribed allocation could be used only for the purpose for which the funds were allocated. The reason for conditional grants was to protect funds for specific programmes and priorities, and these might include transitions, spill-overs, incentives, disaster-relief, priority infrastructure and to build capacity. Conditional grants were administered by the national department responsible for the sector. It was very important for national departments to support the provincial and local governments when they required conditional grants, and also to ensure that these were used for the purpose they were intended. Provinces received conditional grants on conditions agreed upon by the sector and National Treasury, and they were detailed in the Division of Revenue Bill. The sectors that were responsible for a programme were required to monitor the performance of their respective grants. National Treasury was responsible for monitoring both the National Transferring Officer and municipal performance through provinces for delegated municipalities.

Transfers to provinces amounted to less than 4% of own revenue. The provincial equitable share accounted for 80% and provincial conditional grants accounted for 20%. The provincial spending on the equitable share was R5.3 billion, R5.6 billion and R6 billion over the MTEF, to cover the 7.5% salary increase. In terms of conditional grants, direct transfers were R310 million, R560 million and R2.1 billion in the respective years,  for hospitals and HIV and AIDS prevention and treatment. Indirect transfers amounted to R8.2 billion over the MTEF, to address schools infrastructure backlog. The Provincial Equity Spending Formula listed some main priorities, like education and health, which then took up the majority of the equitable share. There was also a basic share, which took into account the relative poverty within the provinces. There was a further institutional component that ensured that there was money available to keep governance structures in place, and the economic activity component took into account the GDP rate per province.

In terms of the local government framework for the 2011 MTEF, Ms Fanoe listed transfers to local government on aggregate, and noted that the transfers accounted for 33% of municipalities’ revenue. Transfers accounted for 26% and 51% of municipal operating revenues and municipal capital revenues respectively. The local government equitable share accounted for 55% of transfers from the national government and 45% for conditional grants, excluding fuel levy sharing. The figures for the local government spending of the equitable share was listed, and amounts of R168 million, R339 million, and 678 million were set aside over the MTEF years for sustainable provision of free basic services. A lot of money was transferred for conditional grants like the new Urban Settlement Development Grant, Public Transport Infrastructure Grant and Systems Grants. Other funds were provided through indirect grants, which included the Regional Bulk Infrastructure Grant.

Ms Fanoe noted that the overview of the 2011 MTEF focused on reprioritising government spending. The additions to the local government fiscal framework had built on the substantial increases of the previous year, but were more constrained by the country’s resources than in the past. This had the effect, insofar as the local government fiscal framework was concerned, that there were small additions to the local government equitable share, but adjustments to the formula would make it more equitable. Municipal Infrastructure Grants (MIGs) in the cities were replaced with the new grant to metros to develop sustainable human settlements. There were also additional funds for urban transport infrastructure and additional funding and refocusing of rural transport grant. The funding for under-spending programmes was reduced with an Expanded Public Works Programme (EPWP) Incentive, Neighbourhood Development Partnership Grant (NDPG) and Rural Household Infrastructure.   

The Local Government Equitable Share formula structure that was used from the 1998/99 financial year up until 2004/5 had then been adjusted to its current formula, to ensure that the system had a better balance. The formula contained two components, and the basic services component amounted to over 90% of the formula. For the purposes of calculation, an assessment was firstly done of the number of poor households within the municipality. If there was infrastructure in place within the municipality, then that municipality should provide the infrastructure. However, where no infrastructure was already in place, the municipal infrastructure grant would capacitate the municipality to provide the needed infrastructure. However,  there was also an acknowledgement that even if the infrastructure was not in place, the municipality could apply for other service delivery methods of providing for those poor households – such as providing water tanks where there was no piped water. The only data that was available and reliable at the present moment was the 2001 Census. The 2007 community data was not used because one of the key components of the local government equitable share, being the poverty count, was not captured in this survey, and there was also a lot of missing data, even in rural municipalities.

Ms Fanoe said it would be very crucial for the Committee to monitor the municipal infrastructure grant allocation from the Department of Cooperative Governance and Traditional Affairs. It was also important to differentiate between the two types of transfers in local government. Direct transfers occurred where the money was made directly available to the municipality concerned. However, there were also indirect transfers, where national departments would spend on behalf of the municipality. A good example was the water operating subsidy, which was administered by the National Department of Water Affairs and transferred to municipalities. Municipality capacity building, and other grants such as the Municipal System Improvement Grant (MSIG) were reflected in the budget of the Department of Cooperative Governance and Traditional Affairs.

Specific focus on COGTA and planning, monitoring and budgeting
Mr Petrus Matji, Director, National Treasury, gave a presentation focusing on government planning, monitoring, and the budget process, using examples of what was happening within CoGTA, the department over which this Committee exercised oversight. Planning responded to specific issues. South Africa had identified five priorities in the  2011 State of the Nation Address. Therefore, the planning was supposed to respond to the five priorities, and the twelve outcomes linked to those priorities. CoGTA, and any other department, when preparing its strategic plan and budget programme, should be linking its plans so that they would respond to those five priorities in one way or another. The diagram in Slide 31 showed where the government planning started, with Constitutional and legislative mandates at the helm. A national department should strategise how it was going to respond to those priorities. The vision, mission and values should be linked to the five priorities for the period. The strategic goals for the 5-year period should also assist in responding to the main government drivers in between budget programmes.

The Annual Performance Plans (APP) were the tools that could assist the Committee in evaluating the performance, linked to the budget, of CoGTA. The Annual Report was another tool that also assisted the Committee in oversight, and the Committee should check alignment between what was in the Report, and the overall 5-year plan. The Annual Report also provided the Committee with the information that would allow it to interrogate the achievements made or issues that were presented. This Report published the information used to engage the government meaningfully, and was drafted according to specific guidelines provided by NT.

It was critical to ensure that there was a linkage between the strategic plan of the department, and the budget. Therefore, it was very important to check the strategic plan when it was presented, and ensure that it did indeed conform to Treasury Regulation 5.1 and talk directly to the budget. There should be clear deliverables, which gave an indication of what had been achieved and not achieved and how that could be addressed in future..

 National Treasury did what was called “in-year monitoring”. After the budget had been approved and the departments started implementing, National Treasury would assess how the money was used, according to what had been requested. The in-year monitoring allowed NT to go back and check how the departments were responding to the original plan that they had presented. In the case of CoGTA, the in-year monitoring report was submitted to the Public Finance Unit of National Treasury, which would then look at various components of the report that detailed the departmental expenditure. These included the main division of the vote (according to programmes and sub-programmes), economic classification, earmarked funding, specific projects, such as the 2010 Soccer World Cup, and the cash flows. The purpose of in-year monitoring was to check the actual results against the initial projections. This was a tool that assisted National Treasury in providing oversight over a specific department. It also help in making decisions at political level. The municipal course was guided by what was reported  in the in-year report. Any challenges would be picked up in the report so that assistance could be given to the department in achieving the specific targets that it had set out in its strategic plan.

In terms of the budget cycle summary Mr Matji noted that a department would submit its estimates of expenditure for the Medium Term, based on its strategic plan and that would be presented to the Medium Term Expenditure Committee (MTEC), which was constituted by National Treasury, Department of Public Service and Administration (DPSA), the National Planning Commission, the Presidency, and CoGTA. MTEC would consider the submissions and make recommendations to the Minister’s Committee on the Budget. These recommendations would then be taken to Cabinet. The adjustments estimates process was based on Section 30(1) and (2) of the PFMA and the Adjustment Budget would be tabled. The Minister would administer the Medium Term Policy Statement highlighting key government priorities, size of budget, division of revenue and allocations. The department would send letters that clearly outlined the provision for earmarking certain amounts or set conditions.

In terms of the detailed budget process breakdown he stated that the National Treasury prepared guidelines that would be sent to departments, and there would be a two way engagement between National Treasury and departments in terms of the content of the guidelines, and any questions would be addressed. The guidelines would help the department to prepare for the submissions, and he likened them to a business proposal that would be put forward in a business environment, which would then structure the priorities of the department. Funding requests were normally made in July. These would be interrogated until presented to the portfolio committee, and before this they would be checked for whether they were aligned to the five government priorities and how they responded to the twelve outcomes identified by government. Therefore there was a direct linkage between planning and how the budget responded. If the committee was happy with the proposals, they would be used to produce Adjusted Estimates of National Expenditure (AENE), which were tabled in October. Once the AENE were completed, this would proceed to the Estimates of National Expenditure (ENE), which were used to prepare for budget day. The final produce would be presented by each Minister to Parliament on budget day.

Mr Matji then outlined specifics around CoGTA. Its programme structure had changed in 2011/12. The largest portion of money from CoGTA went to the transfers, at about 99% of budget. Therefore, when this Committee interrogated CoGTA’s budget, it should be focusing on key programmes, in order to ensure that there was delivery on infrastructure projects on the ground. These could be found under the Governance and Intergovernmental Relations programme, and amounted to R43 billion. There was therefore a need to ensure value for money in such programmes, which received substantial allocations. He reiterated that the bulk of money was going on transfers. South African Local Government Association (SALGA) supported CoGTA through its work assisting municipalities, and also ensuring that the Department was adding value with the transfers that it made. It was important to look at spending trends, and programmes and their deliverables, to assess whether the outputs in fact equated to the amount of spending.

Mr Matji concluded that many departments posed as a challenge the fact that they did not have capacity to spend. However, it would help if the oversight process included questions that would assist the relevant department to plan in advance. Once the department then received the budget, it should know how it was going to spend, and isolate specific actions that would ensure that service delivery became a reality.

Discussion
The Chairperson thanked the delegation for a comprehensive and informative presentation. He asked which system were in place, either at national levels or at specific municipalities, to monitor the actual service delivery. The AG frequently raised issues around service delivery and predetermined objectives. He also asked about the relationship between the budgets and monitoring, and the need to ensure a translation of money into service delivery.

Mr Matji responded that Ms Fanoe had indicated that the budget process began not on 1 April, but in fact much earlier. Municipalities needed to plan much further ahead, in terms of their service deliverables, and that talked about how they would do their Integrated Development Plans (IDPs). Normally, municipalities’ IDPs might include projects that they were not capable of being implemented, and that caused a delay in some of the projects. If there was not proper alignment between projects and planning, then municipalities would encounter problems. He stressed that the year of implementation should not also be the year of planning. Instead, planning should take place at least six months prior to the implementation date.

Ms W Nelson (ANC) asked if how the provincial departments assisted the municipalities in terms of under-spending and over-spending. She also asked how National Treasury would deal with such issues, and what kind of remedial steps would be put in place.

Ms M Wenger (DA) noted that as long as there was differentiation in financial year-ends, the figures on staff, figures and percentages would remain skewed. Ms Wenger also asked for clarity on the lack of capacity in the municipalities, which was related to percentages in spending. She also noted that National Treasury expected small municipalities to fall on the same level as metros, even if they lacked capacity.

Ms M Segale-Diswai (ANC) noted that there was differential treatment of certain aspects, and Members, when doing oversight, did not want a blanket overview, but would like to be able to hone in on specific provincial matters.

 Mr M Nonkonyane (ANC) noted that the Committee’s oversight over the years had shown problems in capacity, particularly the capacity of financial officers at rural municipalities who failed to ensure compliance with legislation. He asked all delegates to share how monitoring could assist in addressing these capacity problems.

 Ms I Ditshetelo (UCDP) asked what happened if a province did not spend its budget, and whether that province would receive the allocation that it requested in the following year. She also noted that NT said it monitored quarterly reports, but asked what this meant in terms of monitoring the use of funding in the provinces.

The Chairperson noted that under-funding was a very important point raised by Ms Nelson. However, he said that even if municipalities collected every cent owing to them, they would still not be able to deal with the problems around responsibility. Some of the challenges they faced were in areas that actually fell outside their competency, so this was no justification for under-funding. He cited instances of housing and water, which strictly did not lie with the municipalities, but with the provincial departments. However, he asked NT to explain the under-funding, with clear examples rather than speculation. He also noted that “spill-overs” were referred to in the presentation. CoGTA had explained that some municipalities spanned provincial boundaries, and there was reluctance to render services because there was no guarantee that spill-over funding would be received. He asked if there was a substantial problem with this on the ground, and what was likely to happen in such a situation.

The Chairperson noted that the MIG formula, and the nature of allocations, did mean that certain elements “fell in the cracks”. The Committee had just returned from an oversight visit to the Northern Cape, where the impact of the flooding disaster was clearly visible. However, anything that would pre-empt future flooding was far beyond the MIG resources. If there were further heavy rains, it was obvious that the areas would flood again. For instance, R5m funding would be required to build a canal, which would be the long-term solution for the municipality.

Ms Fanoe responded to the queries around the provincial and local government fiscal framework, noting that NT had completed a provincial equitable share review, and that would continue through the subsequent budgets. In the 2011 budget, a new health component formula had been introduced. This was very different to the past, because the past component looked at whether people had access to medical aid. The new formula took into account how much was in the hospital, with a sophisticated breakdown at services level. That was one of the reforms that ensured that the actual workload and actual incidents where services were not delivered would be taken into account. National Treasury was also going to be looking again at the education component, and refine it. Another issue that was important in relation to the provinces was that the equitable share formula data was more up to date, within the last year, using mixed population estimates, and taking moderation shifts into account to a greater extent than did the local government equitable share formula.

Ms Fanoe also commented on the support that NT could provide in relation to the conditional grants. The National Transferring Officer should be responsible for the transfer of the conditional grant. The conditions for the conditional grants were stipulated in a conditional grant framework, which specifically indicated what the responsibilities of both the National Transferring Officer and the Receiving Officer were. At a provincial level Provincial Treasury and Departments would work together. NT was also strengthening its internal capacity to support Provincial Treasury who in turn would support the provincial department. She indicated that the need to build capacity in provincial treasuries was a key priority.

Ms Fanoe then commented on the questions around the local government fiscal framework. It was necessary to look at what had happened in the past, to give a context. Prior to 1994, conditional grants that went to local government were very much manipulated, and did not go to the most needy municipalities. Initially, after 1994, National Treasury had to ensure that municipalities were treated equitably and fairly, measured against each other. A number of the largest grants that went to local government were informed by formula allocations. However, it was realised over time that the one-size-fits-all approach had created problems, because it did not acknowledge that municipalities were different. In the past two or three years, NT had started to target municipalities differently. For instance, about three years ago the minimum allocation through the MIG was introduced, because some of the municipalities were so small that they received basically no MIG allocation. Now they were receiving R5 million minimum allocation. NT had also reformed the equitable share formula to target poorly-resourced municipalities. This was ongoing work. It was NT’s intention to ensure that the  system responded more appropriately to the differing needs of municipalities. NT was also looking at whether the current grants to municipalities were actually working, and had discovered, for example, that water infrastructure grants and sanitation grants might come from different sources, as well as the MIG. There had been no alignment in the past between the various grants, and this would be addressed.

Mr Matji noted the NT division focused on funding, but before it released money it had to ensure there was proper planning. His colleagues in another unit of NT would be monitoring. Where there had been funding or investment, then a check would be done on the background issues that might getting value for money out of the system. Capacity building included technical skills, project management, artisans, IT and other matters that were needed to get the infrastructure running. NT knew this was one of the key challenges that needed to be addressed. The question was how to deal with these issues in the short to medium term, and then in the medium to long term. NT was looking at how much money had been put to addressing capacity building. NT was looking also at how the Siyenza Manje Project was operating, and how it could be restructured to best address the key government priorities of service delivery in local government. Previously, it had focused too much on national departments and provinces, leaving the local municipalities to the last, despite the fact that it was at local level where service delivery took place. COGTA was working on the establishment of the Municipal Infrastructure Agency, which would assist poor municipalities with service delivery in the short and medium term, and money had been budgeted for this. COGTA was trying to source specialists to assist municipalities that were incapable in executing their funding.

He further stressed that over the long term there was a need to strengthen and professionalise local government. A concept document had been developed, and funding was made available, for the rollout of a project in the next year, to try to ensure that people were not simply “exported” to municipalities, without the problems actually being addressed. Interns, who would be employed by municipalities, would be invited to participate and create a sustainable  local government system.

Mr Matji conceded that there was a need for integrated disaster planning, from national infrastructure down to end user. This was a multi-departmental responsibility. The government vehicle of the National Disaster Management Center (NDMC) must be used, and all spheres of government were supposed to make submissions to the NDMC, which would then be referred to NT for evaluations and recommendations.

The workshop was adjourned.

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