Auditor-General on National Treasury & SARS audit outcomes; National Treasury and SARS on their 2010/11 Annual Reports

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Finance Standing Committee

18 October 2011
Chairperson: Mr T Mufamadi (ANC)
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Meeting Summary

In the year 2009/10 National Treasury received an unqualified audit report with no findings on predetermined objectives and compliance. However in 2010/11 National Treasury received an unqualified audit report with findings on predetermined objectives and compliance. The drivers for the audit outcomes for the 2010/11 financial year were that expenditure was incurred in contravention of the Special Pensions Act and Treasury Regulations and that there was a failure to prepare adequate quarterly reports on the progress made in achieving measurable objectives and targets as required by Treasury Regulation 5.3.1. The financial statements were not prepared in all material aspects with the Department Financial Reporting Framework prescribed by National Treasury as required by section 40(1)(b) of the Public Finance Management Act.

Members expressed shock at such a report and that it was embarrassing to see National Treasury executing some tasks with misinterpretation and poor understanding of internal policies and procedures. Members asked whether the Auditor-General had interacted with National Treasury on the missing quarterly reports. There were similar problems at the Financial and Fiscal Commission (FFC) hence there was a problem in the finance family. It was suggested that the Chairperson interact with the political head of the FFC and National Treasury to address the issues. The comment was made that the interaction would have been more informative had National Treasury been present at the meeting.

Afternoon session
Both National Treasury and the South African Revenue Service (SARS) briefed the Committee on their Annual Reports. Key to the National Treasury presentation were the outcomes of the Auditor-General's audit report. The Department had received an unqualified report but with matters of emphasis. There was irregular expenditure of R23.2 million: R8.1 million of this related to Programme 8: Special Pensions and this was due to a misinterpretation of the Special Pensions Act; R3.1 million involved a service provider that had been appointed to do scoping. Due to the urgency of addressing the challenges in Special Pensions, implementing change management and the need to avoid interruption of service provision, the contract was extended. Further, material losses amounting to R3.6 million were incurred as a result of losses through criminal conduct within Programme 8: Special Pensions.

The National Treasury instituted investigations into special pension matters through the Special Investigating Unit, Percy Sonn and Nexus Forensics to ascertain the root causes and determine the appropriate corrective action and recommendations. The findings of the SIU investigation raised the following: there were 518 beneficiaries that were deceased, 285 beneficiaries had been included as having committed Schedule 1 convictions. There were also 141 cases that involved fraud. This was as a result of falsified biography and affidavits of the applicants’ political history being submitted. The National Treasury instituted appropriate remedial actions.

The Committee was disappointed there were matters of emphasis, especially as the Department was a centre of excellence and National Treasury had a programme in place that taught other departments about financial accounting. The Committee was concerned with the non-submission of quarterly reports, an issue that had been raised by the Auditor-General. The Committee wanted to know whether the previous DG for National Treasury was involved in the investigations.

The SARS presentation highlighted some tax and compliance issues. 81% of people filed their tax returns on time. There was an 11% reduction in outstanding returns and R17.7 billion was recovered from the debt book. Further, 83% in investigative audits conducted by SARS were successful and netted R3.9 billion in audit yield, R191 million was collected in revenue from penalties and there were 23 580 seizures that were completed to the value of R994 million. Lastly there was a 65% success rate in litigation. The human capital levels and employment equity ratios were said to have remained stable. Out of the current staff complement of 15 296, 31% were white, 52% were blacks, Coloureds and Indians were 11% and 6% respectively. SARS continued to exercise the utmost prudence when utilising taxpayers’ funds. Figures of lease and travel costs were given to the Committee. Total lease costs for 2011 was R462 million compared to R412 million in the previous year.

SARS received an unqualified report from the Auditor-General with no matters of emphasis.

The Committee was impressed with the presentation from SARS and the clean audit report. The Committee asked why there was a vacancy that took so long to fill up and whether the vacancies were funded or unfunded. In addition they asked if the 625 people who were employed by SARS in 2010 for customs were still employed by SARS.



Meeting report

The Chairperson appreciated the work the Committee had executed since the short recess. He had been informed on a daily basis of what had been happening in the Committee in his absence. He noted that there would be no presentation on the audit outcomes of SARS.

National Treasury Audit Outcomes: Auditor-General South Africa (AGSA) presentation
Mr Thami Dibishi, Senior Manager, Auditor-General South Africa, apologised that the focus would be on National Treasury only and not SARS. The communication forwarded from Parliament to AGSA indicated that the AGSA was to present on the audit outcomes of National Treasury and Statistics South Africa but then it subsequently changed to SARS.

Mr Dibishi pointed out that in 2009/10 National Treasury received a financially unqualified audit report with no findings on predetermined objectives and compliance. However in 2010/11, National Treasury received a financially unqualified audit report with findings on predetermined objectives and compliance. The drivers for the audit outcomes for the 2010/11 financial year were the expenditure incurred in contravention of the Special Pensions Act and paragraph 8.2.1 and 8.2.2 of the Treasury Regulations. In addition there was a failure to prepare adequate quarterly reports on the progress made in achieving measurable objectives and targets as required by Treasury Regulation 5.3.1. The financial statements submitted for auditing were not prepared in all material aspects with the Department Financial Reporting Framework prescribed by National Treasury as required by section 40(1)(b) of the PFMA. Lastly the accounting officer had not submitted the required performance report in terms of General Notice 1111 of 2010, issued in Government Gazette No 33872 of 15 December 2010.

Discussion
Dr Z Luyenge (ANC) appreciated the report from AGSA. The National Treasury took the position of Auditor-General over other departments, hence the issues that had been raised by the Auditor-General should not have been found in National Treasury. He asked if National Treasury engaged with the AG on matters that affected the Department . He asked if there was a mechanism that could be employed by the AG to ensure that as they executed their mandate, it not only focused on compliance but also on outcomes such as service delivery.

Mr D George (DA) was concerned about the irregular expenditure in contravention of the Special Pensions Act. He asked what the irregular expenditure was. He ofs surprised to see the audit outcomes on National Treasury. He asked if the AG was involved in special investigations and how far down did the AG follow the trail of the procurement processes.

Ms N Sibhidla (ANC) requested that examples of the discrepancies that the AG found on the quarterly reports be given to the Committee. She asked if National Treasury had responded to the matters of emphasis that had been raised.

Mr Dibishi responded that the AG and National Treasury conducted meetings. The AG had quarterly interventions where they met not only National Treasury but also all other departments to discuss the commitments relating to the previous year’s report. The clients or departments were supposed to commit themselves to resolving the issues identified in the reports. The objective of the quarterly meeting was to discuss how far the Department had gone to resolve the issues that the AG had picked up. Only at the end of the year would the AG audit the processes. On the AG’s mandate to reflect on service delivery as opposed to compliance, with the introduction of the audit on the predetermined objectives, service delivery was what the AG was targeting to achieve. Currently an audit was being conducted on the readiness of government departments to report on predetermined objectives. The AG intended to take the issue of predetermined objectives a level further by drilling down to issues of service delivery. He added that, if on the one hand financial statements were correct, and, on the other hand predetermined objectives did not indicate service delivery,then the entities would be qualified. With regards to irregular expenditure, there were a number of issues that had been picked up that related to the Special Pensions Act such as who qualified to get a pension in terms of the Act. People who were found guilty of having committed Schedule 1 offences were not supposed to get a pension. A number of people who had committed Schedule 1 offences received pensions. The National Treasury was sent a document by the Special Investigating Unit (SIU), Percy Sonn and Nexus informing the Department that it was supposed to stop payments. The National Treasury stopped some of the payments but not all of the payments. The AG only got involved in the investigations right at the end when they evaluated the report that the investigators had given to the entities. The AG’s powers to carry out investigations were limited and they did not have the same power as the SIU.

On the issue of how far the AG drilled down when it came to funding, the biggest issue was the limitations brought about by the audit process. The AG selected samples that they then tested as opposed to covering all the expenditure in an entity. In looking at the sample, the AG looked at the predetermined objectives and if the money was used for the reason it was given. If the money was not used for that, then the only thing that the AG could do was to report it as an unauthorized expenditure if it was a Department. If it was a public entity, then it would fall back on irregular expenditure. The PFMA was specific that if a Department had incurred an irregular r an unauthorized expenditure, it was the responsibility of the accounting officer to investigate the reasons thereof. The AG however conducted small investigations that were process related. For the bulk of investigations, the AG did not have the powers and mandate to do them. The biggest issue with the quarterly reports was not necessarily the alignment. What the AG needed to look at by year-end was an accumulation of all four quarterly reports. There were missing quarters from National Treasury where the AG could not determine if there was progress or if alternative measures had been put in place to address poor performance. To make matters worse, Treasury had only provided one quarterly report to the AG.

Ms Sibhidla asked if the AG had engaged National Treasury on the missing quarterly reports and what was its response. Was National Treasury aware of Schedule 1 offences?

Mr Dibishi responded that the AG had engaged National Treasury on the missing quarterly reports. The response the AG got was that there were monthly reports that National Treasury had tabled and discussed amongst themselves. The monthly reports did not carry sufficient information as was required of quarterly reports. After National Treasury got the report they were fully aware of all the cases that related Schedule 1 payments. National Treasury managed to stop some of the payments of Schedule 1 offenders but they continued to pay other people.

Ms Z Dhlamini-Dubuzana (ANC) stressed that the engagement would have been more meaningful if National Treasury was present at the meeting. She highlighted that the role of the Committee was to conduct oversight hence the Committee had a role to play in expecting quarterly reports and should not point fingers. It was embarrassing to see National Treasury executing some tasks with misinterpretation and poor understanding of internal policies and procedures.

Mr George agreed that the Committee was supposed to expect quarterly reports and they were supposed to conduct proper oversight. The Committee did not perform its job yet the Committee expected the Department to perform its job properly. There was however need to closely monitor National Treasury. What the AG had highlighted was a shocking indictment of National Treasury, that looked after everyone's money.

Dr Luyenge said that it was the first time that the Committee had received a report of such a nature from the AG on National Treasury. The Chairperson needed to be mandated to interact with the political heads of the Department. It was not a matter of political parties but a matter that related to the whole country. It was unacceptable for National Treasury to operate in such a way especially when they had a new Director-General.

Ms Sibhidla highlighted that the Committee had received a report from Financial and Fiscal Commission and the picture was not good. There were issues with both the FFC and National Treasury. This was a reflection that there were some problems in the finance family. She asked for the list of names of people who had received pensions but who did not qualify.

Mr Dibishi responded that National Treasury was in possession of the entire list and the lists were divided into categories.

The Chairperson said that the Committee was supposed to appreciate the presentation of the AG. There was need to interact with the political head. Oversight was not something that could be determined outside the legal framework therefore it was for Parliament to see that what had been envisaged in law was supposed to be implemented. The presentation was very brief but detailed.

Mr George asked if there had been proper succession planning and if there had been discussions with the previous accounting officer.

Mr Dibishi responded that a discussion had taken place with the previous accounting officer. The payment to the recipients of the Special Pensions occurred outside National Treasury, as such it was not only an issue of paperwork. The issues could not be finalised and wrapped up there and then as the issues dated far back.

The Chairperson highlighted that the audit report had pointed the Committee to areas of emphasis that needed to be addressed. He repeated that National Treasury had received a financially unqualified report with findings on predetermined objectives and compliance.

Afternoon session
The Chairperson said that there was need to focus on the presentation by National Treasury in light of the Medium Term Budget Policy Statement (MTBPS) in the following week.

National Treasury Presentation
Mr Nhlanhla Nene, Deputy Minister of Finance, gave an apology on behalf of the Minister of Finance. He provided an overview of the presentation. The February macroeconomic forecast projected GDP growth of 3.4% in 2011 and it was set to rise to 4.4% by 2013. The IMF latest growth forecast was 3.4% this year and 3.6% next year. Inflation remained within the target band and investment rose by 3.1% year or year in the first quarter of 2011. Credit rating agencies that rated South Africa affirmed South Africa's investment grade rating and removed the negative outlook. Debt stock rose in line with wider budget deficit. In addition forecasts would be updated when the MTBPS is tabled on 25 October. SARS had an exceptional record in revenue collection and this made South Africa unique among developing countries both in terms of the fiscal independence and in terms of strong growth in tax compliance. SARS had exceeded revenue expectations.

Mr Lungisa Fuzile, Director-General, said that National Treasury was responsible for managing South Africa's national government finances, and it drew its mandate from Chapter 2 of the Public Finance Management Act together with Chapter 13 of the Constitution. National Treasury had fully adopted government's outcomes approach: Treasury contributed directly to Outcomes 4 (decent employment through inclusive economic growth), 9 (a responsive, accountable, effective and efficient local government system) and 12 (an effective and development orientated public service and an empowered, fair and inclusive citizenship). During the reporting period National Treasury continued to respond to the 2008 recession with appropriate fiscal and other measures to promote sustainable growth. Promoting greater accountability and transparency in government was one of its key focus areas and it had developed fraud protection guidelines and issued instruction notes strengthening supply chain management practices.

The National Treasury outlined its major achievements. Government had placed job creation at the heart of policy formulation. Government provided for the creation of a R9 billion jobs fund in the February budget. The focus was on health financing initiatives such as National Health Insurance (NHI). It had revised the provincial and local government equitable share formulae, resulting in the reform of the health component (provincial formula) and more funds being directed towards poor municipalities (local government formula). In addition a number of papers were published for public comment such as reducing greenhouse gas emissions: the carbon tax option, confronting youth unemployment: policy options for South Africa and a safer financial sector to serve South Africa better.

A brief outline was given on Programme 2 that related to public finance and budget management (Division 1: Budget office). The objective was to ensure that the budget frameworks for the MTBPS and the Budget Review were tabled on time and included an estimate of the structural budget balance. The National Treasury also published a consolidated government account in the 2011 budget that included details of payments and revenues of state entities largely financed by government, and provided information on consolidated government borrowing. A shift was also made towards functional budgeting in developing the 2011 Medium Term Expenditure Framework (MTEF). This approach grouped together national, provincial and local government, and government agencies, in terms of the function they performed. The budget process focused extensively on finding savings and reprioritizing within baselines and across departments. The funds identified (R30.6 billion) were mostly reallocated within the functional budget baselines, curbing unnecessary and potentially wasteful expenditure. Further summaries were given on Programme 2: Division 2: Public Finance, Division 3:Intergovernmental Relations and on technical and management support.

Under Programme 3: Asset and Liability Management, National Treasury successfully financed the revised gross borrowing requirement of R190.9 billion. The debt service cost dropped from the projected 2.6% of GDP to 2.5% owing to the strong levels of the Rand and also due to a lower than forecast interest rate environment. National Treasury had achieved a saving of up to 3.4% on borrowing costs due to intergovernmental cash coordination. Moreover Fitch ratings and Standard & Poor's removed its negative outlook on South Africa's investment grade sovereign rating, while R&I and Moody's maintained a stable outlook during the reporting period.

For Programme 4: Financial Management and Systems, the supply chain management user requirement for the Integrated Financial Management System (IFMS) was completed for the Asset management, Catalogue management and Inventory Management modules. The implementation of the strategic sourcing principles was delayed following a decision to reprioritize the IFMS Procurement Management Module. A new comprehensive rollout plan would be finalised and executed in 72 municipalities by March 2012.

Under Programme 5: Financial Accounting and Reporting, National Treasury had strategic support plans developed and implemented for all prioritised entities. It prepared and tabled Consolidated Annual Financial Statements for all entities. Furthermore it had assisted in procurement fraud investigations in 20 institutions and they trained 3 093 officials in Accounting, Risk Management and the PFMA and Asset Management.

For Programme 6: Economic Policy and International Financial Relations, under Division 1: Tax and Financial Sector Policy, National Treasury published a policy document containing proposals for financial sector regulatory reform: “A safer financial sector to serve South Africa better". A final Regulation 28 of the Pension Fund Act was issued on Budget Day 2011 (for implementation in July 2011) to ensure that the savings that South Africans contributed towards retirement were invested in a prudent manner. Work continued on environmental fiscal reform and the possible uses of taxes and incentives to deal with climate change. A discussion paper entitled "Reducing Greenhouse Emissions: The Carbon Tax Option" was published in December 2010. Furthermore the Mineral and Petroleum Royalty Act was implemented on 1 April 2010, resulting in new revenue to the fiscus. Other subdivisions of the programme were Division 2: International and Regional Economic Policy and Division 3: Economic Policy.

A brief summary was given for Programmes 7, 8 and 9 that were primarily fiscal transfer programmes.
Programme 1: Administration was the last to be discussed. The programme related to the departments support office that provided corporate services, communication, legal and security services to the other programmes. Highlights included the internship programme that continued to grow with interns making up 6% of the department's employee base. 71% of interns were placed into permanent positions in the department. Internal appointments increased to 54% against the target of 45%. A departmental Enterprise Risk management strategy was reviewed and implemented in line with the Public Sector Risk Management Framework. Adherence to the strategy continued to be monitored closely. In addition the turnaround of tender processes was improved from an average of 91 days in 2009/10 to 60 days.

In terms of the human capital the total staff complement was 1 111. 55% were female, 79% were black. At senior management level, 66% were blacks and 38% were female. The National Treasury had a vacancy rate of 14% (179 posts) at the end of the 2010/11 financial year. In addition a total of 140 critical skills positions were filled during 2010/11 financial year and there was an ongoing effort to recruit more people with disabilities through the relevant networks.

An in-depth detail of the expenditure per programme was given. In addition a report on efficiencies was given. The Department spent 94.9% of the allocated budget.

An outcome of the AG Audit report was given. The Department received an unqualified report but with matters of emphasis. There was irregular expenditure of R23.2 million. R8.1 million related to Programme 8, specifically special pensions. This was due to the Board misinterpreting the Special Pensions Act (Act 69 of 1996) as some beneficiaries had committed Schedule 1 offences. R3.1 million related to a service provider that had been appointed to do scoping. Due to the urgency of addressing the challenges in Special Pensions, implementing change management and the need to avoid interruption of service provision, the contract was extended. Furthermore material losses amounting to R3.6 million were incurred as a result of losses through criminal conduct within Special Pensions under Programme 8.

The National Treasury instituted investigations into special pensions matters through the Special Investigating Unit, Percy Sonn and Nexus Forensics to ascertain the root causes and determine the appropriate corrective action and recommendations. The findings of the SIU investigation raised the following: there were 518 beneficiaries that were deceased, 285 beneficiaries had been included as having committed Schedule 1 convictions. There were also 141 cases that involved fraud. This was as a result of falsified biography and affidavits of the applicants’ political history being submitted. There were also 752 cases that were deemed to be cases in which the Act had been misinterpreted by the Special Pensions Board. National Treasury instituted appropriate remedial actions. The 518 deceased cases were stopped immediately. All of the 141 fraud cases were handed over to the Commercial Crimes Unit of SAPS. The SIU legal department advised National Treasury that a high court determination needed to be obtained in relation to the 752 cases that had been deemed to be incorrectly misinterpreted. A management action plan had been signed by National Treasury Director-General and
Government Pensions Administration Agency (GPAA) Chief Executive Officer to urgently deal with cleaning up of all administrative issues within Programme 8 by the end of the 2011/12 financial year. Further investigations were continuing with regards to all transgressions.

Lastly National Treasury reported on its second quarter performance for the 2011/12 financial year.

Discussion
Ms N Sibhidla (ANC) asked for an explanation from National Treasury about the AG’s findings such as the non-submission of reports.

Ms Z Dlamini-Dubazana (ANC) noted that under Programme 1 the measurable objective was to ensure effective leadership, management and administrative support to the Department through the continuous refinement of organisational strategy and structure, in compliance with appropriate legislation and best practices. However the AG reported that management had not adhered to internal policies, procedures and guides. As a result there were instances of non-compliance with the PFMA and Treasury Regulations. Internal control deficiencies and misinterpretations of the Special Pensions Act resulted in instances of non-compliance. She asked if National Treasury had achieved its measurable objective under Programme 1. She asked what were the key procedures that needed to be followed in the procurement process and what was the outcome of the feasibility studies conducted on the procurement of rolling stock for the Passenger Rail Agency of South Africa. Further, was National Treasury able to identify areas of development and at what cost? She noted that R3.6 billion had been allocated to rural large and small towns. She asked if the money was a direct allocation from National Treasury and how were the 185 Neighborhood Development Partnership Grant (NDPG) performing.

Mr S Swart (ACDP) remarked that it was a disappointment to have matters of emphasis especially in light of the fact that National Treasury was a centre of excellence and it had a programme in place that taught departments about financial accounting. They needed to set an example and maintain its excellence. Matters of emphasis and additional matters had to be addressed. He asked if National Treasury was in the process of making an application to court and what had been done to recover in civil courts the amounts that were incorrectly paid. There was need for more information on the forensic investigation that had been conducted by the internal audit unit and independent consulting firms into allegations received from the Public Service Commission. Lastly he asked what had been done to address the vacancy rate in National Treasury.

Mr D George (DA) said that National Treasury had disappointed him. The issue of law with regards to special pensions had not been raised in the Committee before. The former DG, Mr Lesetja Kganyago, was re-deployed to the Reserve Bank very suddenly. The Member expressed his concern that the succession policy at National Treasury was not adequate. If the issues of Special Pensions occurred under the tenure of the previous DG, then Mr Kganyago was supposed to appear before the Committee. He asked how far the investigation that National Treasury conducted had gone and if the former DG was part of the investigation.

Ms N Sibhidla (ANC) asked why National Treasury had not met the targets in the strategic plan and if the DFI body was established in this financial year.

Mr Fuzile responded that the statement that management had not adhered to internal policies, procedures and guides only related to Special Pensions. He read out section 19(1) of the Special Pensions Act that no person or organ of the state was supposed to interfere with the decision of the board. What added complications to the process was that at one stage, people who qualified under all other processes with the exception of the offences, had pleaded with the relevant authorities alleging that they had committed petty crimes. They sought to have an amendment to the Act and this created a dilemma for the GPAA. If such people were to be removed there was a concern that such people would have to be reinstated again and National Treasury would have to back pay them. However the amendment had not gone through. More often than not he avoided saying anything that could be construed as attacking an institution that he ought not to be attacked but the way the AG had described National Treasury management’s failure to adhere to internal policies, was incorrect. National Treasury was disappointed because they were an institution that thrived on moral authority. They were not supposed to have blemishes on the department’s image.

Ms Dlamini-Dubazana asked what National Treasury 's defence was to the audit report it had received.

Mr Fuzile responded that on the non-submission of reports, that this had been a minor issue of form that was overemphasized over substance. National Treasury was involved in a quarterly process where they indicated to the DG where they were in terms of the targets set for that year. Some aspects of National Treasury work lent themselves easily to quantification and were supposed to be reported on quarterly. However, other work was not supposed to be quantified. The only way National Treasury could report on an annual basis was because it monitored what happened during the year. There was a matter of differences between National Treasury and the AG. He further highlighted that National Treasury did not interact with the AG during the course of the year. The AG would only look at the records once the year had ended

Ms Sibhidla highlighted to National Treasury that the AG said the two departments interacted quarterly. She asked if it was true that the AG had found only one quarterly report and that the AG had raised the matter.

Mr Daluhlanga Majeke, Chief Financial Officer, National Treasury, responded that there was a section 40 report that was supposed to be reported on. As management they had decided to pursue issues that related to performance. There was a need to determine what the term “adequate” meant with regards to designing templates. The quarterly report was presented but the AG wanted the reports in the same format as the strategic plan.

Mr Fuzile responded that the former DG had instituted one of the investigations.

Mr Kenneth Brown, Deputy Director-General: Intergovernmental Relations, responded to the question of the Neighborhood Development Partnership Grant that National Treasury appropriated the grant and that it flowed directly to the relevant municipality.

Mr David van Niekerk, Chief Director: Neighbourhood Development Programme (NDP) budget office, National Treasury, responded that the target that had been set for the year was 100 projects however 185 projects had been approved hence the target was surpassed. In terms of construction a target of 35 projects was set but National Treasury achieved 67 projects. An amount of R882 million out of R1 155 billion had been transferred to 57 municipalities that was equivalent to 76%. The figure was not 100% because the Neighbourhood Development Partnership Grant (NDPG) was a conditional grant and municipalities had to comply with a number of conditions. One of the most important conditions was that the leveraging of private sector funding and other government departments funding. If the condition was not met then National Treasury would assist the municipalities in trying to achieve this. It the condition was not met then National Treasury would not be able to provide further funding. The National Treasury to assist municipalities to interact with National Treasury in real time established Management Information Systems (MIS). Programme managers were placed in some of the municipalities to assist the municipalities. One such municipality was the Buffalo City Municipality that had six municipal managers in 18 months.

Mr Fuzile added that a process was underway to ensure that people who were not supposed to receive pensions did not receive them. This was supposed to be done in a manner that was consistent with the law and that was not supposed to humiliate people. To the extent that people had unduly benefited, National Treasury would look at the cost of hiring a lawyer and recouping the money versus the money that there were supposed to recoup. If the cost of hiring a lawyer was higher than the money that they were supposed to recover then National Treasury would write of the monies.

Mr Swart highlighted that Special Pensions Act referred to Schedule 1 of the Criminal Procedure Act that related to serious crimes. He did not understand why people were given pensions under the speculation that the law was going to be amended. Petty offences were not Schedule 1 offences.

Mr Fuzile responded that people approached the Board with criminal records that they did not reveal. The Board would then grant the person a pension under the impression that the person did not have a criminal record. Thereafter the SIU would come in and investigate people who had committed crimes and then report that there were people who were not supposed to receive a pension. The people then came and lobbied saying that they had committed petty crimes. Hence there was a contemplation of an amendment that caused a delay. The amendment was underway and it eventually changed the age under the Special Pensions Act.

Mr Freeman Nomuvula, Head: Office of Accountant General, stressed that the Committee was supposed to recognized that National Treasury had suspicions that there were problems with the special pensions hence investigations were instituted by National Treasury. He urged the Committee to link all the issues and then request the DG to brief the Committee at a later stage.

Mr George asked if National Treasury was disagreeing with the findings by AG as they related to Section 21.

Mr E Mthethwa (ANC) proposed that the Committee be briefed on the matter at a later date. There was need to follow the process until it was finalised.

Mr Fuzile responded that the issue of the forensic investigation arose during the time of his predecessor. The investigations were finished and the disciplinary processes started and stalled due to a number of reasons that affected the people who were presiding and leading evidence. The process was however concluded and National Treasury was waiting for a final decision. The Development Finance Institutions Council was established in 2008 but what happened was that government was reconfigured hence the council was destabilized. The report that gave rise to the council was being implemented.

The Chairperson highlighted that appropriate remedial actions for National Treasury were too limited. Treasury had narrowed its remedial actions to one aspect - that was the pension fund. It was important that National Treasury take the comments of the AG in their entirety. The National Treasury was supposed to provide the Committee with a detailed report on how they were dealing with the issues that the AG had raised. The Committee was supposed to appreciate that National Treasury itself started the investigations.

Mr Fuzile concluded by saying that National Treasury had taken note of everything raised by the Committee and that National Treasury took seriously what the AG had noted.

South African Revenue Service (SARS) presentation
Mr Oupa Magashula, SARS Commissioner, began by giving an economic context to the 2010/11 fiscal year. Towards the 4th quarter there were geo-economic instabilities in the Middle East and some fiscal imbalances in Europe. As such the economic environment tested the resilience of SARS. It was more demanding to meet revenue targets in an economic downturn. SARS collected R674 billion in the last financial year as opposed to the R599 billion in 2009/10. As such there were double-digit figures in growth from 2009/10. There were many countries that would kill for double-digit growth figures in tax revenue collection year on year. There was a decrease in corporate income tax. The main contributors to the tax revenue were income tax and VAT. It was important to ensure that SARS collect their revenue in the most cost effective way. Over the past years the cost of revenue collection ratio varied between a low of 1.0% to a high of 1.2%. For the 2011 fiscal year this rate was 1.1% - that would be around 1 cent for every rand collected. This was not only in line with international standards but it also made SARS one of the most cost effective revenue collectors globally.

He went on to give an analysis of the debt and credit books. There was need to ensure that each taxpayer paid what they owed not only in time but also in full. This was however difficult because of the voluntary nature of compliance where taxpayers completed their own declarations. Where a taxpayer made an error, the error would remain on the debt books of SARS until the taxpayer or SARS rectified the error. Any payment that was received without a return would be listed in the SARS credit book until they were able to allocate the tax return. SARS was making significant investment through the modernisation programme in account maintenance and debt management that provided further checks and balances plus gave tax payers an opportunity to view their own accounts. The opportunity for taxpayers to view their own accounts resulted in significant progress on the debt and credit books. On the credit side SARS ended the year with R 49.804 billion as opposed to R42.173 billion in 2010. The modernisation of the debt and credit books was very crucial. Over 88% of VAT declarations were processed within 24 hours and the refunds would be paid within 48 hours. VAT was the largest tax administered by SARS and in addition it was prone to a lot of abuse. SARS had introduced a number of measures such as additional verification processes to reduce risk fraud under VAT because VAT refunds were difficult to recover if they were paid to people who had fraudulently claimed them.

Highlights on tax and compliance were given to the Committee: 81% of people filed their tax returns on time. There was an 11% reduction in the outstanding returns and R17.7 billion was recovered from the debt book. Furthermore 83% in investigative audits conducted by SARS were successful and netted R3.9 billion in audit yield, R191 million was collected in revenue from penalties and there were 23 580 seizures to the value of R994 million. Lastly there was a 65% success rate in litigation.

The human capital levels and employment equity ratios were said to have remained stable. Out of the current staff complement of 15 296, 31% were white, 52% were blacks, Coloureds and Indians were 11% and 6% respectively. SARS continued to exercise the utmost prudence when utilising taxpayers’ funds.

Figures of lease and travel costs were given to the Committee. The total leases costs for 2011 was R462 million, compared to R412 million in the previous year. This was due to the expansion of SARS branch offices such as in Port Shepstone and contracted escalations. SARS offices were located in public malls where it was easy for the public to access the offices. Strict measures were placed on travel costs. SARS deducted travel expenses directly from employee salaries if the expenses were not acquitted within 30 days. The total travel expenses for 2011 was R96 million as opposed to R76 million in 2010. SARS had received an unqualified audit opinion from the AG with no matters of emphasis for the 7th time in a row. The SARS financial statements also included the financial statements of their wholly owned subsidiaries.


The Commissioner highlighted the areas where SARS had failed to meet their goals. One target was the filling of 95% of leadership positions. SARS had only achieved 92% because the rollout of the new operating model. In addition SARS had set a target of 100% for placing their employees on a career model. SARS had achieved 99.3%. This was because newly appointed employees had not been placed, as no career data was available for them yet.

In conclusion the Commissioner presented to the Committee the SARS expenditure to date.

Discussion
The Chairperson said that the presentation was a reflection of the amount of time that the SARS team under the Commissioner had put in.

Mr Swart said that the report was highly commendable. What was impressive was the increase in the tax net of five million. He also congratulated SARS on the clean audit. He asked what was the exact debt that SARS had on their books because there were two different figures.

Mr Mthethwa asked why there was a downfall in tax collections in the previous financial year.

Ms Sibhidla asked how the new customs engine worked and what systems did they use to detect suspicious ships in the water. He asked if other countries had the same systems and equipment as SARS. If not, how did SARS and other countries link their activities. Lastly she asked how often did SARS review the software that was introduced and how much did it cost SARS.

Ms Adams highlighted that there was a vacancy in the EXCO since 23 May 2010. She asked when SARS intended to fill this position and why there was a decrease in the customs union net value.

Ms Dlamini-Dubazana congratulated SARS on its audit report from the AG. She asked what happened to the 625 people SARS had recruited for customs in 2010 and what was the problem with the National Health Laboratories.

Ms Sibhidla asked if unfilled vacancies were funded or unfunded posts.

Mr Mthethwa asked if SARS offered assistance to the border posts of other countries.

Mr Magashula responded that SARS had collected R599 billion in 2009/10 and in 2008 it was R625 billion. This was a 13% increase. The R599 billion had been a revised figure.

Ms Trix Coetzer, Chief Financial Officer, South Africa Revenue Service, responded that one of the figures in the document was a snapshot of the morning of the 1st of April. SARS did not have an integrated debtor system yet because SARS was not an integrated revenue accounting. On the date they compiled the annual report, some of the cash would be allocated to the debtor book and as such the allocation was supposed to be backed up to prevent incorrect interest calculations from happening. So it was cash that SARS could not identify in the first few hours of the 1st of April. It was also critical for SARS, in preparation for integrated account revenue management, that they match assessments or invoices from taxpayers and their payments so as to avoid a messy debtor system. The actual figure was R6 billion out of R674 billion which was about 1%. The SACU pool was an integrated formula applicable since 2004. It involved customs and duties within the SACU border union. The formula involved the determinations of the GDP and the contribution to trade. Due to the downfall of the economic climate, Swaziland’s portion of the pool would be reduced if they defaulted on the calculation. The biggest contribution to the reduction was the GDP of a country.

Ms E Pule, Chief Officer: Human Resources, SARS, responded that there was one position that was difficult to fill which was the position of Chief Officer: Segmentation. The reason for this was because of the profile that SARS wanted given the change in their operating model. SARS wanted someone who was stronger in terms of general management and experienced in tax. As such SARS reverted back to EXCO to review the profile. SARS was en route to fill the position. A total of about nine people had been interviewed. In addition there were only funded vacancies at SARS. The 625 people who were recruited for customs in 2010 were younger than 30 years and all of them were permanently employed.

Mr Barry Hore, Chief Officer: Operations, SARS, responded that he would not be doing the country a favour if he revealed the systems that SARS used to detect suspicious ships and containers. There were standards globally that helped the systems of different countries to talk to one another. SARS also reviewed their software on a daily basis.

Mr Kosie Louw, Chief Officer: Legal and Policy, SARS, added that the Customs Act made provision for a one stop border post. South Africa could enter into agreement with other countries that the laws of both countries could apply to a common ground. An agreement was entered into with Mozambique in 2007 but the agreement also provided for annexures that SARS were busy developing. The agreement did not cover only the activities of SARS but also of other organisations such as Home Affairs, the South African Police Service and Agriculture. Before SARS signed the annexures they would approach the Committee. There was need for the Chairperson to guide SARS on the way forward.

Mr Ivan Pillay, Deputy Commissioner, SARS, responded that SARS was very careful when they dealt with other government institutions. SARS had conducted a number of workshops and discussions on the annexures. Recommendations were made to the Department of Home Affairs (DHA). The Department of Home Affairs had to go through their governance processes and SARS was awaiting a response from the DHA. A multi-agency working group was formed to look at procurement issues. If procurement were improved then service delivery would be improved. SARS was trying to fix the procurement process in the Department of Health in the Eastern Cape. SARS was working together with National Treasury, SIU and the Financial Intelligence Centre. The Premier of the Eastern Cape, the MECs of Finance and Health and the Head of Department for Health were offering additional support.

The Chairperson said that the issue of border post control was a matter that the Committee had raised on numerous occasions. The Committee appreciated that some progress had been made in trying to address the matter. There was need to consider an Inter-Committee engagement where a full briefing would be made to the relevant Committees. He appreciated the good work that SARS had done and it should stay positive.

The meeting was adjourned.



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