The Financial Services Board (FSB) defined a Ponzi scheme as a fraudulent 'investment' operation that paid returns to its 'investors' from their own money or the money paid by subsequent 'investors' rather than from profit earned from the 'investments'. Ponzi schemes enticed 'investors' by offering higher rewards than genuine investments. Moreover, 'investors' were told that the more they brought in new 'investors', the higher their returns would be. Ponzi products initially appear genuine. Examples were given. There was no transparency. The Ponzi schemes were shrouded in secrecy. The FSB was set on eradicating Ponzi schemes, which were in contravention of the Banks Act (No. 94 of 1990). The FSB was conducting consumer awareness and a programme on financial literacy at schools. The move to Twin Peaks would help combat these Ponzi schemes, by instituting a 'one entry' requirement to the financial sector, by requiring all would-be financial service providers be fit and proper, by requiring and enabling the FSB to publish reports of its investigations, and by the imposition of stiff penalties.
ANC Members asked what action the FSB took against banks that opened special desks where these pyramid schemes operated. The banks were promoting the schemes. In the former Transkei there used to be pyramid schemes known as ‘push-push’ schemes. Those who joined first made much money, while those who joined later did not. Did the FSB’s current legislation have any gaps which prevented it from stopping Ponzi schemes? If the FSB lacked the power, then it would be necessary to empower the FSB to do so. The FSB had a responsibility always to make sure that the laws at its disposal were sufficient to address the problem. A COPE Member was unimpressed with the presentation. The FSB had plenty of legislation to support it in its work. It must provide a critical analysis of the existing legislation. Did the FSB need more powers, and, if so, what were they? A DA Member had expected much more detail and analysis. Existing laws were surely sufficient to stop Ponzi schemes. His constituents, especially pensioners, were incredibly frustrated with the FSB. He himself had found it very hard to obtain any answers. How could this scheme have continued to operate given the existing regulatory environment? Despite the FSB’s apparent disclaimer that Ponzi schemes, as deposit-taking, were the responsibility of the South African Reserve Bank, it had much to say about its desire to stop them. Why not leave the matter to the SARB? Why was the FSB asking for additional powers when the Consumer Protection Act (No. 68 of 2008) gave sufficient legislative powers? Why was it necessary to have a single door of entry to the financial services sector? There was nothing to stop the FSB from publishing reports. Were the penalties in the Consumer Protection Act 2008 not stiff enough? Which clause of the Constitution would be breached if the FSB was to maintain a list of offenders?
Among its responses, the FSB said that, under Twin Peaks, its role would be the protection of consumers by way of market conduct regulation. The South African Reserve Bank would take the responsibility for prudential regulation.
The Senior Parliamentary Legal Adviser presented a final draft of the Committee's progress report on the process of reviewing the Financial Management of Parliament Act [No 10 of 2009]. The report essentially set out the context for the way forward. The next step would be a workshop of stakeholders and a structure for receiving inputs. The amendments must be finalised and signed by 09 September 2013. The Committee adopted the report.
Prof Mohammed Jahed, coordinator of the project to establish the Parliamentary Budget Office (PBO), reported on progress in the establishment of the PBO in terms of Section 15 of the Money Bills Amendment Procedure and Related Matters Act [No 9 of 2009], with reference to the PBO's objectives, core functions, preparatory research by the Development Bank of Southern Africa (DBSA), study tours, and his secondment from the DBSA. Important in the development of the work plan were interaction with the Political Task Team, senior management and specialists, and with external stakeholders; and research, international best practices, lessons of experience, understanding South African needs, and implementing the Act.
PBOs were a relatively recent phenomenon. The growth in PBOs was in line with greater democracy. However, legislatures generally lacked sufficient technical, analytical capacity and information. Budget offices across the globe were influenced by the roles played by their legislatures in the budget process. There was no 'one size fits all model'. The lessons for South Africa's Parliamentary Budget Office were budget transparency, to enhance the credibility of the budget process, to increase accountability, discipline in public spending, and to capacitate Parliament to exercise oversight functions.
The importance of fiscal oversight, fiscal reform, and budget systems, was explained. PBO functions, organogram, and reporting line were noted. Amendments to the Act would focus on time frames and sequencing Section 15 on the Parliamentary Budget Office, and textual amendments. An outline budget was given. Among requirements for the way forward were prioritisation of implementation and acquiring office space.
DA Members observed that, despite Parliament's new power to amend budgets, it never happened? How did the PBO propose to address that particular problem? The key part of the Act was the Budget Office. Members supported the idea of a workshop and redrafting the law, but there were important practical steps that had to happen concurrently, such as acquiring office space. When would the appointment of the advisory panel be complete? How could that be accelerated? Would the Budget Office be ready to advise these Committees in time for the 2013 Budget? Would individual Members of Parliament be able to make recommendations to the PBO? ANC Members wanted to know the progress in the drafting of the PBO's internal procedures and guidelines on how it would relate to the Committees, to National Treasury and to decision-making processes. The legislation provided for the Appropriations Committees to adjudicate on submissions to amend budgets and report to the House, and secondly for the Finance Committees to look at broader macroeconomic issues. The Committee's content advisers, however, did not have sufficient analytical skills to be able to make recommendations. Unless the PBO was capacitated to do that kind of work, it would not be able to fulfill Members' expectations.
Eradicating Ponzi schemes in insurance & broker industries: Financial Services Board (FSB) briefing
Mr Dube Tshidi, FSB Executive Officer, introduced the presentation to the Finance Standing Committee.
Mr Gerry Anderson, FSB Deputy Executive Officer: Intermediary Services, defined a Ponzi scheme. It was a fraudulent 'investment' operation that paid returns to its 'investors' from their own money or the money paid by subsequent 'investors' rather than from profit earned from the 'investments'.
Mr Tshidi described how 'investors' were enticed. Ponzi, or pyramid, schemes enticed investors by offering higher rewards than genuine investments. The returns were earned within a short period and, especially at first, were abnormally high. 'Investors' were told that the more they brought in new 'investors', the higher their returns would be. Such schemes were not advertised much. They relied on word of mouth, and the culture of 'quick bucks'.
The likely victims were especially family members, and also communities – including, in particular, trusted community members such as church members – pensioners, and greedy, well-off individuals. The perpetrators were very convincing and sly, and played on people's emotions. Mr Tshidi said that some churches ran in-house funeral arrangements. These were unregistered and unregulated. What was left unsaid was what would happen to clients if the administrator of such a scheme defaulted on his or her obligations.
These Ponzi products initially appeared genuine. A notable example was the scheme of Mr Herman Pretorius, who pulled a total of R1.8 billion from 3 000 investors into his Relative Value Arbitrage Fund (RVAF), a Ponzi scheme masquerading as a hedge fund or Collective Investment Scheme (CIS) vehicle. The scheme had been registered with the Master of the High Court as a trust, in order to move the scheme away from regulation. Once a trust was regulated by the High Court, there was no regulation. Mr Pretorius had not been registered as a financial services provider with the FSB because 'the information available did not require him to be registered as such'. There was no transparency. The Ponzi schemes were shrouded in secrecy and required confidential agreements.
The FSB was set on eradicating these schemes, which were in contravention of the Banks Act [No 94 of 1990]. The schemes were being investigated by the South African Reserve Bank. The FSB was conducting consumer awareness, and, in cooperation with the Department of Basic Education, a programme of financial literacy at schools.
The move to Twin Peaks was envisaged as a means to combat these Ponzi schemes, by instituting a 'one entry' requirement to the financial sector, by the requirement that all would-be financial service providers be fit and proper to enter the sector, by requiring and enabling the FSB to publish reports of its investigations, and by the imposition of stiff penalties.
Mr E Mthethwa (ANC) asked what the FSB did with banks that opened special desks where these pyramid schemes operated. This was a sign that these banks acknowledged them. Other investment companies were coming from the internet and directing potential clients as to which bank they must use. Those banks were responsible as a conduit of money. How would FSB deal with such a crisis? The banks were promoting the schemes.
Mr N Koornhof (COPE) could not applaud this presentation. He had read an article that the FSB was creating an impression that the FSB was a sleeping watchdog which had let these schemes operate under its nose, and that there was lots of huffing and puffing. This was how he experienced this presentation this morning.
The FSB had plenty of legislation to support it in its work. He asked the FSB to provide a critical analysis of the existing legislation. If this legislation did not provide enough powers, FSB should, through the Minister, approach this Committee and it would assist. It appeared from the presentation, as there was no reference to it, that the FSB was happy with its existing legislation; if that was the case, the FSB was not doing its job.
Mr Koornhof pointed out that the Financial Advisory and Intermediary Services (FAIS) Act [No 37 of 2002] was in place, yet, since enactment, there had been debacles too numerous to mention. There was even more happening as one spoke. He had a whole trail of emails demonstrating that the Pretorius affair was reported to the FSB in May 2011. In January 2012 there was confirmation that it would be investigated. What had happened since January 2012? It was apparent that four or five months later, the FSB was content yet thereafter the tragedy happened. Did the FSB need more powers, and, if so, what were they?
Mr Koornhof said that the service industry had strongly criticised the FSB at a recent FSB-organised symposium, in which members of the industry said that they were being named and shamed by a few who were not doing their job. Mr Koornhof did not think that the FSB was even in a position to name them. He had asked questions through the Ministry. The FSB could tell him that thousands had been acted upon for non-payment of fees. However, he was not interested in those culprits, as they were not the ones who were stealing the money of ordinary South Africans. He was interested in those people, who, in front of the ombudsman, were being investigated, while still going around selling schemes of the kind sold by Pretorius, Fidentia and others. What was the FSB doing with those people? 'Do you have the powers – yes or no? Do you want the powers – yes or no?'
Mr Ross also had a concern with brokers within the system who were registered but who were promoting very high returns. It was unacceptable that measures were not in place to protect the ordinary citizens of South Africa. The proposed Financial Services Laws General Amendment Bill [B29-2012] proposed very harsh measures. Had the FSB studied those proposals? What would the impact of the forthcoming Twin Peaks legislation be on investment and on preventing these schemes?
Dr Z Luyenge noted that people put their trust in church members and other prominent figures in the community. In the former Transkei there used to be pyramid schemes known as ‘push-push’ schemes and these were prominent in areas like Butterworth. Those who joined first made much money, while those who joined later did not.
Dr Luyenge asked if the FSB’s current legislation had any gaps which prevented the FSB from stopping this kind of behaviour. If the FSB lacked the power, then it would be necessary to empower the FSB to do so.
Dr Luyenge asked what other institutions or behaviors in the financial sector that sought to replace this kind of behaviour because the syndicates in the community moved over the course of time. The FSB had a responsibility always to make sure that the laws at its disposal were sufficient to address the problem. So if there was no power there as of now, that must be clearly spelt out so that it could be addressed as a matter of urgency.
Mr T Harris (DA) agreed with Mr Koornhof in that the presentation was not satisfactory. He had expected much more detail and analysis of the problem. Existing laws were surely sufficient to stop such schemes.
Mr Harris asked firstly about a particular scheme. He had received numerous email messages from pensioners, in particular, who were incredibly frustrated with the FSB. He was obliged to reply to these constituents and wanted to know the latest progress with the investigation. He himself had found it very hard to obtain any answers from the FSB. How could this scheme have continued to operate given the existing regulatory environment?
Mr Harris understood the FSB to have said that Ponzi schemes, as deposit-taking schemes, did not actually fall under the FSB, but under the South African Reserve Bank. This was a poor start to the presentation: ‘Don’t ask us, ask them!’ Yet, despite the FSB’s apparent disclaimer, the presentation went on to talk about the FSB’s desire to stop them. Why not leave the matter to the SARB?
Under the Consumer Protection Act (No. 68 of 2008) there was great detail on schemes such as these. Section 38 specifically banned pyramid schemes and chain letters with various levels of participation. Section 42 banned fraudulent schemes that involved misrepresentation. Section 43 banned a whole list of structures in which people might not participate. This Act gave sufficient legislative powers to tackle the problem. So why was the FSB asking for additional powers?
The FSB had called for ‘one entry’ to the financial services sector as part of the Twin Peaks process. What were the problems with the present approach? Why was it necessary to have a single gate of entry?
The FSB had suggested that it needed to publish reports once it had investigated Ponzi schemes. If the FSB was investigating Ponzi schemes, why did it not publish its reports? There was nothing to stop it from doing so. If there was, he asked the FSB to be specific about what prevented it from publishing such reports.
The FSB was asking for stiff penalties. Were the penalties in the Consumer Protection Act 2008 not stiff enough? How exactly did these existing penalties fall short?
Which Clause of the Constitution would be breached if the FSB was to maintain a list of offenders? Even if not published, the FSB or the SARB should maintain such a list as a matter of due process?
Overall, Mr Harris had more questions than answers on the presentation.
Mr Tshidi thought that Mr Harris had, in his many questions, embodied an holistic answer, in the sense that he had quoted the Consumer Protection Act 2008 which provided for a specific Commissioner, under the Department of Trade and Industry, to administer the Act. Ponzi schemes were, correctly, in that space. The FSB was not in that space. He appreciated Mr Harris' holistic answer.
Mr Tshidi said that, in law, one could never claim to have all the powers that the law theoretically gave to one, because, as soon as one created law, people would find a way to go around it. However, as for the 14 Acts given to the FSB to implement, including the FAIS legislation, the FSB was complying as a regulator and was doing what needed to be done. Brokers fell under the FSB legislation, and action must be taken by the FSB. The FAIS ombud was issuing determination after determination.
Mr Tshidi said that the Twin Peaks process would 'draw a clear line'. The prudential wing of the FSB's regulation would be 'moving away' in favour of the market conduct wing of FSB's regulation: the FSB's sole business would be the protection of consumers. It would move away from the notion that the FSB regulated non-banking financial business while the SARB regulated banking. SARB would take the responsibility for prudential regulation. Nothing should fall between the cracks.
The idea of the one entry point was to prevent people from operating within the financial sector unlicensed. Many of the people who were operating today would not pass through that single point of entry when implemented. He explained the current system of licensing. There was no continuing system of checking whether a financial services provider was 'fit and proper'. The single entry point would provide such checks. At present there were many entities and individuals in the financial space who had been licensed, but, as with the banks, who had also been licensed, no one had checked to see that they were 'fit and proper' in protecting consumers. No one was responding to the pleas of consumers that bank charges in South Africa were so high. In Twin Peaks that would be a matter of conduct, and the FSB would, as the market conduct regulator, have to check that.
Under the Constitution, all citizens had the right to participate in the economy and make a living, but it had to be asked if that right was absolute. It could not be absolute to the extent of infringing other people's rights by defrauding them.
Mr Anderson replied that the FSB did have a list of those who were debarred from providing financial products. This list was available and was could be searched by name and identity document (ID) number.
Mr Anderson said that the FSB was not a product regulator, except for Collective Investment Scheme (CIS) portfolios, where the FSB specified parameters. Also the FSB had not regulated hedge funds. The need to regulate hedge funds arose after the 2008 global financial crisis. The Group of 20 (G20), the World Bank, the International Monetary Fund (IMF) had decided that hedge funds and over the counter derivatives (OTCs) must be regulated. The FSB was now busy in complying with international requirements. The FSB's introduction of regulation of hedge funds was nearly finalised. Mr Herman Pretorius' Relative Value Arbitrage Fund (RVAF) was a hedge fund. His 'investment scheme' under the rules then in force did not need to be regulated. So that the comment that the FSB was a sleeping watchdog was unfair. The FAIS did not regulate products but rather the conduct of the broker in relation to the client.
Mr Anderson replied that it was unfair to put everyone in the same basket. It was very hard to predict if fraud would occur in a scheme which usually started out, as Mr Tshidi had indicated in the main presentation, as an honest scheme. It was the FSB's experience that Ponzi schemes usually started as a genuine attempt to make money.
Mr Koornhof found the FSB's responses more positive than the presentation. If the FSB was not a product regulator, should there be one? Did the FSB want to be a product regulator? If the FSB did not want to regulate products, who should do so. If one could not regulate, who should? Did the FSB not think that legislation was needed? Where a scheme was found to be a Ponzi scheme, all brokerage must be paid back. All undue profits made by that investment should be returned [to the investors]. Could the FSB legislate for that? If the FSB did so, one would see the last Ponzi scheme in South Africa. What should be done, not necessarily by the FSB, but by the industry?
Mr Harris said that there were several entry points into the sector. There were different regulators and different structures, and quite appropriately so. The Registrar of Banks would be surprised, and take offence, to hear the FSB's apparent view that there was no check on anyone applying for a banking licence? Given that someone selling insurance products required quite a different regulatory environment from someone who was setting up a bank, he did not see the reason for a single entry point to the financial services sector. Rather than institute a single entry point, it was important to ensure that there were no regulatory gaps. This was part of the aim of Twin Peaks.
Mr Harris asked again what in the Constitution prevented the FSB from doing what it wanted to do in terms of lists of offenders.
Mr Harris thought that this session had raised a great many other issues. He suggested calling in the South African Reserve Bank and the Department of Trade and Industry (the dti) to work out exactly where the regulatory gaps were at present.
Mr Tshidi said that the FSB currently did not regulate financial products. This was contrary to the international position. With a view to the Twin Peaks process, the FSB had asked itself if it should regulate products. It did not yet have the answer, but the inclination was to say that perhaps the regulators must be involved at the stage of the design of products. There was no way in which the regulators could continue to stand aside and say that they did not regulate products. There had to be involvement on the part of the regulators. Products, indeed, were currently a problem.
It was not sufficient simply to close a Ponzi scheme while leaving the offenders to run away with the money. However, in the markets, if a person manipulated prices and was caught, whatever he or she had gained up to that point must be paid back to those affected. The same concept had to be applied to the Ponzi schemes. Moreover, on top of that, there must be a stiff penalty. The sooner this was done the better, as it was the only way.
Every citizen of the country had the constitutional right to take part in the economic activities of the country in order to make a living. However, that right could not be exercised at the expense of other citizens by stealing their money or deceiving them.
To make a list of offenders and publish it was likely to bring about legal challenges. Hence the FSB was cautious.
The FSB was not passing the buck on the question of single gate of entry to the financial services sector. The designers of Twin Peaks – the National Treasury, the SARB, the FSB, the dti, the Competition Commissioner, and the National Credit Regulator – all agreed that entities obtained licences to perform specific services. However, the single point of entry concept required that any entity must be fit and proper to perform the services that it intended to perform. Moreover, any entity must be fit and proper not only from a prudential perspective but also from the perspective of the market conduct regulator. FSB would welcome the opportunity to join with the SARB and other institutions involved in Twin Peaks in briefing the Committee.
Mr Anderson did not dispute that certain conduct by people engaged in business was prohibited. The problem with Ponzi schemes was very wide. Much of it might be in contravention of the Banks Act. Other parts of it might fall under the Consumer Protection Act, which was powerful and should be followed. However, it might not be known generally, that these property syndication schemes and their promoters were regulated by the dti in terms of a notice under the Business Practices Act.
The Chairperson saw a need for interaction with and among the institutions concerned with the challenges faced by consumers from time to time, over and above the economic actors in the financial services sector. The picture would become clearer with the Twin Peaks process, in particular, market conduct vis-a-vis prudential regulation.
Financial Management of Parliament Act: Committee progress report
Adv Frank Jenkins, Senior Parliamentary Legal Adviser, presented the Finance Standing Committee with a final draft of the Committee's progress report on the process of reviewing the Financial Management of Parliament Act [No 10 of 2009].
Page 1 was just a standard introduction. Page 2 quoted the House's 20 September 2012 resolution. The section on progress was more on the background of referring the Act to the Committee for review. He referred to his previous week's presentation and to the Premier of Limpopo vs the Speaker of the Limpopo provincial legislature court case. He reviewed that case, in particular, that the Financial Management of Parliament Act wrongly assumed that provinces had the authority to pass legislation on the financial management of their legislatures, and that the Constitutional Court had deemed that assumption to be wrong (see previous week's report).
The House's resolution spoke of the work done by the Speakers' Forum. He had not seen that work on paper, and he was seeking, from the Legislative Support Sector, which examined issues of the Speakers' Forum, some documentation. However, the Forum had indicated that Parliament would pass legislation for provincial legislatures to give them authority to pass legislation on the financial management of their legislatures. This was the main purpose of reviewing the Act. Some other aspects of the Act needed to be reviewed. He mentioned in particular the oversight mechanism. Parliament already had a multi-party structure, the Parliamentary Oversight Authority (POA) performing that governance function, but the Act at present constrained it by saying that the Speaker of the National Assembly and the Chairperson of the National Council of Provinces, as part of Parliament's Executive Authority, could not be part of the oversight mechanism. There was now discussion of forming a sub-committee of the POA to perform the oversight and this sub-committee would not include the Speaker and the Chairperson. Such a creation would require reconsideration of Section 4 of the Act.
The penultimate issue in the report was how to treat Parliament's unspent funds, and the last issue the time frames for the submission of annual reports. Despite sending email messages, requesting inputs from those concerned, he had not yet received specific answers. Although no one had reported problems, Adv Jenkins view was that there was incongruity between requirements of the Act and the Public Finance Management Act [No 1 of 1999] (PFMA) (See previous week's report). The progress report essentially set out the context for the way forward. The next step would be a workshop of stakeholders and a structure for receiving inputs. He did not recommend putting deadlines for the Committee, except that legislation must be finalised and signed by 09 September 2013.
The Committee agreed unanimously to the report.
Establishment of Parliamentary Budget Office (PBO): presentation by the PBO
Chairperson Mufamadi explained that the Finance Standing Committee was now joined by the Appropriations Standing Committee, Appropriations & Finance Select Committees, as the four Committees were jointly responsible, to examine the amendment of the Money Bills Amendment Procedure and Related Matters Act [No 9 of 2009]. The Speaker's Office deemed it necessary to have a political advisory committee to the administrators to oversee the work that underpinned the amendments to the Act. The chairpersons of all the financial committees were members. The approach to the amendments had been decoupled. The first aspect was delegated to Adv Jenkins, who was examining substantive areas for amendment, and was now ready when required to give an update to the Committees. Secondly, Section 15 of the Act established a Parliamentary Budget Office. There was a process to establish the Office as soon as possible. Through the Speaker's' Office, the services of Professor Mohammed Jahed on secondment from the Development Bank of Southern Africa (DBSA) had been secured to focus on the establishment of the Budget Office.
Prof Jahed said that the objective of the PBO was to provide independent, objective and professional analysis and advice to Parliament on matters related to the budget and Money Bills. Section 15(2) of the Money Bills Amendment Procedure and Related Matters Act 2009 outlined the core functions of the Budget Office as reviews and analysis; and advice and analysis abreast of policy debates on proposed amendments, reports tabled and adopted with budgetary implications, and unfunded mandates.
In preparation for the establishment of the PBO, there was research by the Development Bank of Southern Africa (DBSA). The financial committees and the Speaker had undertaken study tours of Kenya, Germany, Sweden, Japan, and the Republic of Korea. He himself had been seconded from the DBSA.
Work plan development
In the development of the work plan there was interaction on critical factors with the Executive Authority and with the Political Task Team for guidance and advice. The Political Task Team comprised the House Chairpersons, and the Chairpersons of the Finance Standing and Select Committees and the Appropriations Standing and Select Committees of the National Assembly (NA) and National Council of Provinces (NCOP) respectively, and Co-Chairpersons of the Review of Rules Committee.
The development of the work plan involved the interaction of senior management in Parliament and specialists, engaging external stakeholders, research, international best practices, lessons of experience, understanding specific South African needs, and implementing the Act.
Research concerned what PBOs did - evidence-based budget analysis, economic forecasts, fiscal projections, examining proposals, and the impact of alternative spending policies.
International trends in PBOs were noted. PBOs were a relatively recent phenomenon. The growth in PBOs was in line with greater democracy. In many countries there was growing trend of increased executive oversight over the legislature. Legislatures generally lacked technical, analytical capacity and information. Therefore was a decline in legislative oversight abilities.
Budget offices across the globe were influenced by the roles played by their legislatures in the budget process. Budget approving legislatures could not amend, but only approve or reject the executive budget (Sweden, UK).
Budget influencing legislatures could amend, but could not formulate the budget (Italy, Netherlands).
Budget making legislatures had legal and technical capacity to amend or reject executive budget proposals and substitute their own (Japan, USA).
The varying influence of legislatures in budgeting reflected differing authority to modify executive budget proposals. Countries reported that their legislatures had unrestricted powers to amend the budget, but they did not have the technical capacity to do so. Legislatures, however, could make amendments only if they did not change the overall fiscal position, while they might only decrease, not increase, proposed spending. Legislative influence was also affected by the time available to consider requests. A legislature that had limited time to examine budget proposals was at a disadvantage.
The committees were the appropriate structures for examining budget proposals, and should be given more support and authority. Staff establishments, reporting lines, functions of PBOs, and international experience and lessons had been considered.
There was no 'one size fits all model'. Roles were influenced by the type of political system, the legislature’s formal powers to amend budgets, the political environment, and its technical capacity.
Lessons for South Africa's Parliamentary Budget Office
The lessons for South Africa's Parliamentary Budget Office were budget transparency (Parliament and civics), to enhance the credibility of the budget process, to increase accountability, discipline in public spending, and to capacitate Parliament to exercise oversight functions.
Legislative fiscal oversight in South Africa took place in committees with a significant part occurring in sittings of the Houses in the form of questions to the President, Deputy President, questions to the Ministers, Deputy Ministers, debates, motions, and committee reports flowing from interaction with departments and oversight visits. Fiscal oversight was about Government expenditure, Government borrowing, taxation, and, very importantly, about regulation. Fiscal oversight was also about the infrastructure - National Treasury, the SARB, and SARS. This was an area that had been given insufficient attention in South Africa.
Fiscal reform should be a critical part of oversight. For example, was the Medium Term Expenditure Framework (MTEF) still relevant as a form of budgeting? The budgeting system was key for attaining objectives and ability of Government to employ limited resources with maximum effect. Together with fiscal reform went reform of the public service.
Budget systems had three basic functions - fiscal discipline, 'allocative efficiency' (resource allocation in line with governmental priorities, and 'delivery efficiency' (the least-cost provision of public services). Fiscal oversight must be exercised over budget systems.
The budgeting system was most important component of public service delivery and was the key instrument for translating Government's priorities and strategic plans into public goods and services. Government played a massive role in the economy though the expenditure process and set the overall tone for the economy. Any policy or plan which did not consider budget constraints was unlikely to be successfully implemented.
To ensure good governance a budget captured and implemented principles of accountability, transparency, democracy, and participatory governance.
The ideal potential functions for the PBO were identified in three streams (economic stream, public finance stream, and public policy stream) (see slide 19).
Structure followed function. An organogram was given, showing the director, three deputy directors, and support staff, with two analysts for each area – a total of 12 serving the Finance and Appropriations Committees to begin with. (See slide 20).
The PBO reporting line was described. Almost all PBOs reported to the legislature's executive authority. The exemption was Canada, where the PBO reported to the legislature's chief librarian. Much work had been done on organisational design and other issues, including supply chain management. (See side 21).
External stakeholders were listed (see slide 23). Academic institutions were also very interested in providing support and capacity building. There had been much support from other Government departments. In this sense, everyone saw the potential benefits of a PBO.
Amendments to the Act
The Money Bills Amendment Procedure and Related Matters Act 2009 envisaged that the Director would appoint the Deputy Directors/Senior Analysts and other support staff. This process was currently with the Standing Committee on Finance. Amendments to the Act would focus on time frames and sequencing Section 15 on the Parliamentary Budget Office, and textual amendments.
The implementation plan
A policy statement would give guidance on implementation and prioritisation (see slide 25).
A draft budget was presented (See table, slide 26).
The way forward
Prof Jahed called for implementation to be prioritised. Office space was required. There had been presentations to Parliament's executive authority, the political task team, and the Parliamentary Oversight Authority (POA). There would be a continuation of stakeholder engagement, and it was hoped to make presentations to party caucuses. Finally, it was hoped, with the support of National Treasury, to arrange an international seminar.
At this stage, Chairperson Mufamadi invited only questions of clarity. There would be scope for more detailed engagement in future meetings.
Mr M Swart (DA) observed that, despite the Money Bills Amendment Procedure and Related Matters Act 2009's giving Parliament power to amend budgets, in effect it never happened. The Appropriations Standing Committee could see that there was huge under expenditure in certain departments but those monies were never shifted to where the monies could be used to better advantage – to another department or to another area in the same department. It was National Treasury which did the shifting of those funds. Moreover, at the beginning of the year, each department put in a large provision for the compensation of employees. Three months later they said that they would not engage these employees and they asked to move the money somewhere else. Then there were movements of money that were illegal in terms of the PFMA. How did the budget office propose to address that particular problem.
Mr B Mashile (Mpumalanga, ANC) wanted to check the state of progress in the drafting of the PBO's internal procedures and guidelines on how it would relate to the Committees, to the National Treasury and to decision-making processes.
Mr Harris said that the key part of the Act was the Budget Office. Clearly the focus on the way forward was the most important point at this stage. He and his colleagues supported the idea of the workshop and redrafting the law, but there were important practical steps that had to happen concurrently, such as acquiring office space. To whom did the Committees need to speak to accelerate the process? When would the appointment of the advisory panel be complete? How could that be accelerated? Would the Budget Office be ready to advise these Committees in time for the 2013 budget?
Mr Ross asked if individual Members of Parliament be able to make recommendations to the PBO.
Mr G Snell (ANC) thanked the team for the work done to date. However, from the figures in the MTEF it appeared that the PBO's role in the next four years would be confined just to supporting these four Committees. This would hinder the process going forward.
Prof Jahed replied that the PBO would take guidance on amendments from the Chairpersons of the four Committees on the basis of the work done within the Committees. Also within the Committees was support staff such as researchers and content advisers. It was not the work of the Budget Office to do their work for them. Thus the technical work would be undertaken in those Committees. Anything that was outstanding would be referred by the Chairpersons to the PBO.
With only 12 persons, the PBO could not do much more than support the Finance and Appropriations Committees in their specific work as identified by their Chairpersons.
Unfortunately, it would not be possible to emulate the situation in Korea where individual Members of Parliament could walk into the budget office and make requests.
Later, the PBO would hopefully be able to consider, however, supporting the other committees of the National Assembly and the National Council of Provinces.
The PBOs three functions would operate in a matrix fashion (fiscal, economic and policy aspects).
It was important to take advantage of the amendment process, because it did give authority through the Committees to question the allocation of funds and if it was in line with objectives.
The Act did give leeway to review the MTEF in terms of the objectives of economic monetary policy. It should also give Members oversight over the fiscal infrastructure.
Chairperson Sogoni said that the other question was when the PBO would move into suitable office accommodation. This process was a very important one to show that the PBO had sufficient support. It was the responsibility of the Committees to give the PBO support in its mandate and establishment. The Chairpersons could assist in examining the PBO's draft budget, mindful that the staff complement of the PBO was quite modest. The legislation did provide for the advisory panel, but it was necessary to start with first things first, such as getting the PBO running, and then move to the next phase. It was necessary to share overseas experiences to decide which were most appropriate as models for South Africa's own PBO.
Mr Mashile said there was a need for some procedural steps for the Committees to link with the PBO, otherwise the PBO might find itself not knowing how it should prioritise its obligations. It was, moreover, important to nurture the skeletal staff of the PBO.
Prof Jahed replied that the PBO had examined the process of business flow. It would be up to the Committees to decide which was the best route to follow. The PBO's guidance was basically from the Chairpersons.
Mr Snell said that the legislation made provision for two specific things to happen. The first was for the Appropriations Committees to adjudicate on submissions to amend budgets and report to the House. The second was for the Finance Committees to look at broader macroeconomic issues. The Committee's content advisers did not have sufficient analytical skills to be able to make recommendations. Unless the PBO was capacitated to do that work, it would not be able to do what one wanted it to do.
Prof Jahed believed that each Member of Parliament should be appropriately capacitated and supported, as in the rest of the world. Adequate research capacity for the Committees would make the work of the PBO that much easier. Perhaps the PBO could assist in enhancing the capacity of the Committee researchers.
Chairperson Mufamadi acknowledged the work done already. He noted Mr Harris' concern for time lines and time frames. The technical team under Professor Jahed had not yet had the opportunity to take Members through a detailed presentation. He urged Members to think about the presentation. He would allow the whips to find a way to coordinate the Committees to have a substantial discussion and an intelligent input to continue to guide the work that the technical team was doing, and to decide when the Committees should meet jointly again. There was also the parallel process driven by Adv Jenkins on the substantive amendments of the Act. Members would require a briefing sooner rather than later. The technical team should be allowed to continue its work, and Members would make their own inputs as the finance cluster.
Chairperson Sogoni thanked Chairperson Mufamadi and Members.
The meeting was adjourned.
- PC Finance: Consideration & Adoption of Committee progress report on Financial Management of Parliament Act in 2009-1
- PC Finance: Financial Management of Parliament Act in 2009 (Act 10 of 2009) Committee progress report 1
- PC Finance: Financial Management of Parliament Act in 2009 (Act 10 of 2009) Committee progress report 3
- PC Finance: Consideration & Adoption of Committee progress report on Financial Management of Parliament Act in 2009-3
- PC Finance: Consideration & Adoption of Committee progress report on Financial Management of Parliament Act in 2009-2
- PC Finance: Financial Management of Parliament Act in 2009 (Act 10 of 2009) Committee progress report 2
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