Virements: National Treasury workshop

Standing Committee on Appropriations

29 January 2013
Chairperson: Mr E Sogoni (ANC)
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Meeting Summary

The Chairperson introduced the workshop saying National Treasury needed to clarify various aspects of the Public Finance Management Act (PFMA) and the Appropriations Act as the two pieces of legislation resulted in tensions between government departments and the Committee. A few items were not clear, and these had been raised with the Director General. The Committee’s view was that there had to be the same understanding about the application of these financial related Acts and the implementation of programmes.

The Committee heard the budget process was never able to be based on complete and perfect information. During the course of the year there might be a need for some departments to make adjustments. Deviations seen in quarterly and annual reports were testimony to that fact.

Sections 26 and 27 of the PFMA clarified it was Parliament that appropriated money, and then the budget would be tabled by the Minister in accordance with a format prescribed in the law. The law stipulated how revenue was expected to be raised, but also detailed current expenditure per budget vote. Section 27 was noteworthy because of the emphasis placed on the word “estimates”. The repeated use of the word “estimates” signalled that the intention of the lawmaker was to recognise possible adjustments to the baseline. The word ”estimates” also signalled there was a degree of imprecision in the budgeting process.

 The scope for the shifting of funds reduced uncertainty about appropriations. The 8% rule had different implications for different votes depending on the scope and size of the programme. Parliament needed to explore whether it needed to amend the provision, but there should not be too much complexity to the rule.

Section 5 of the Appropriations Act empowered the Minister to approve the utilisation of a saving in an amount appropriated for transfers to other entities, despite the provisions of Section 43 of the PFMA. This provision recognises that there may be changes during the course of the year in the preferred delivery arrangements for specific services or purposes. It also recognises that where there are delays in capital projects it should be possible to use savings for infrastructure maintenance or other goods and services.  The transfer though had to be for the same purposes of the main division that had been appropriated.

Capital projects were difficult to predict in respect of timing. The underspending seen every year was largely about delays in the implementation of capital projects. The clause provided a bit more flexibility to Treasury and the government to use the money, where a capital project got delayed, for other activities. This recognised that if government were to make progress in reducing underspending, there had to be more flexibility.

Regulations dealt with rollover funding, and there were clauses that dealt with unforeseeable expenditure, transfers and capital spending. Treasury regulations recoginised the fact that there was uncertainty in the estimates published during the year. Virement provision assisted managers in managing their budget during the year. The provision addressed underspending as there would be higher levels of underspending had there been rigidity on this aspect. This accommodated adjustments for programmes that might not have been there or necessary during the budgeting process.

Members sought clarity on accountability and oversight, and if there were measures in place to assist Parliament and departments to stick to the prescripts of the PFMA. Members also sought clarity on how underspending could be referred to as a saving at the end of a financial year.

In reply, Treasury clarified that the savings definition would always be contentious, but in simple terms it referred to the delivery of service at less than the anticipated cost, whilst underspending referred to the non-delivery of service.

Meeting report

Opening remarks

The Chairperson said National Treasury needed to clarify aspects of the Public Finance Management Act (PFMA) and the Appropriations Act. Certain aspects of the two pieces of legislation resulted in tensions between parliamentary committees and government departments. He gave as an example virements which was the shifting of money amongst programmes. The Committee worked closely with Treasury, and there had to be synergy in the interpretation of legislation. He stated that the invitation was not specific, but the purpose was to understand the functions of Treasury as outlined in the PFMA.

Ms R Mashigo (ANC) cautioned that the delegation should not be confused by the opening remarks, and needed to present as per the invitation.

Legislation regulating virements, irregular & unauthorised expenditure

Mr Andrew Donaldson, Treasury’s Deputy Director General (DDG) for Public Finance, said it was important to strive for the same understanding and interpretation of the PFMA, as it related to Treasury’s role and the interpretation of sections used to make decisions during the course of the year. Clarity on these would be useful, as there was confusion even among Treasury units. Complexities existed and it was useful to have an opportunity to talk through them.

He explained that Chapter 4 of the PFMA dealt with budgeting and explained the process of preparing a budget. The budget process was never based on complete and perfect information. During the course of the year there might be a need for some departments to do adjustments. Deviations seen in quarterly and annual reports were testimony to this fact.

Sections 26 and 27 clarified it was Parliament that appropriated money, and then the budget would be tabled by the Minister in accordance with a format as prescribed in the law. The law stipulated how revenue was expected to be raised, but also detailed current expenditure per budget vote.

Section 27 was particularly important because of the emphasis placed on the word “estimates”. The language in the section was quite important. The repeated use of the word estimates signalled that the intention of the lawmaker was to recognise the possible adjustments to the baseline. The word “estimates” also signalled there was a degree of imprecision in the budgeting process. The idea that there might be adjustments during the year was therefore implicit in the language used in Section 27. This was an important context within which to read Section 43 and its provisions for the shifting of funds.

Section 27 prescribed that the accounting officers should submit measurable objectives for each main division, and that information should be consolidated and published. Chapter 4 also prescribed publishing of reports on state of the budget. Within 30 days of the end of each month, Treasury should publish a statement of actual revenue and expenditure with regard to the Nation Revenue Fund (NRF). This was done on the basis of comparison to the previous year.

Chapter 5 of the PFMA dealt with the roles of accounting officers, and this was where virements were addressed. Section 43 provided for the utilisation of savings by accounting officers, unless Treasury directed otherwise. The amount could not exceed 8% of the budget of such a division. The accounting officer was expected to submit a report within seven days in respect of the utilisation of the saving. There were limits to the scope for virements.

National Treasury regulations that provided for the shifting of funds were dealt with in Treasury Regulation 6. This regulation prescribed that approval from Treasury was required if compensation of employees would  increase as a result. Treasury approval was required if a department introduced a new transfer to a new entity, or a subsidy was being introduced. The approval allowed for the new transfer to be entered into the financial management system. Treasury did not have authority to change an allocation that was exclusively appropriated for by the Act.

Regulations dealt with rollover funding, and there were clauses that dealt with unforeseeable expenditure, transfers and capital spending. The implications of the regulations were that they were giving recognition to the uncertainty of the estimates published during the year.

Virements provision assisted managers in managing their reports during the year. The provision also addressed underspending as there would be higher levels of underspending had there been rigidity about the shifting of funds. This accommodated adjustments for programmes that might not have been there or were necessary during the budgeting process.

This section provided protection for transfers to institutions as accounting officers did not have arbitrary powers to change or reduce transfers. The provision facilitated Treasury oversight on transfers to entities during in-year adjustments. These regulations assisted Treasury officials in monitoring and keeping track of in-year management expenditure by departments.

There were disadvantages to the way the clauses were formulated. The scope for the shifting of funds reduced uncertainty about appropriations. The 8% rule had different implications for different votes depending on the scope and size of the programme. Parliament needed to explore whether it needed to amend the provision, but there needed not to be too much complexity to the rule.

Section 5 of the Appropriations Act empowered the Minister to approve the utilisation of a saving in an amount appropriated for transfers to other entities, despite the provisions of Section 43 of the PFMA. This provision recognises that there may be changes during the course of the year in the preferred delivery arrangements for specific services or purposes. It also recognises that where there are delays in capital projects it should be possible to use savings for infrastructure maintenance or other goods and services.  The transfer though had to be for the same purposes of the main division that had been appropriated.

Capital projects were difficult to predict in respect of timing. The underspending seen every year was largely about underspending and delays in the implementation of capital projects, and generally the uncertainty about the timing of the cash outlay on the projects. The clause provided a bit more flexibility to Treasury and the government to use the money, where a capital project got delayed, for other activities. This recognised that if government were to make progress in reducing underspending, there had to be more flexibility.

The Chairperson requested a comment on Section 6 of the PFMA.

Mr Donaldson commented that the section dealt with the functions of Treasury and that the section was very wide ranging, disorganised and clustered with budget related activities. It would be preferable if Treasury came back for a presentation on the section, or Members could just raise the concerns they had with that specific section.

Discussion
Dr M Van Dyk (DA) commented that clarity needed to be provided on accountability and oversight. The Committee dealt with departments throughout the year, and accountability remained a concern. Over and above money that had not been spent there was still unauthorised, wasteful and irregular expenditure. This was tantamount to corruption.

He asked if Treasury had measures to assist Parliament and departments to stick to the prescripts of the PFMA, and also empower these institutions to act against those found to have transgressed the law. The PFMA made accountability the sole responsibility of the accounting officer, and experience had shown that nothing was done to those officials who abused government money. He asked if the measures were there to ensure accountability, and if officials cared about government money.

Mr Donaldson replied that there were instruments to enforce accountability. Section 6 of the PFMA gave all sorts of powers to Treasury to monitor departments. Treasury officials also spent a lot of time advising departments. There was much that could be done about the advisory role, and that could be linked to training and capacity building. Treasury would certainly not overcome mismanagement of funds through enforcement and policing; the department had to invest in support, training and capacity building. Things went wrong sometimes due to incoherent policies that were impractical to implement. Getting policies right was most important in preventing and stalling financial mismanagement.

Mr Donaldson said Treasury sometimes seconded officials or assigned them to other departments, but it also participated in task teams, decision and advisory forums, and management of programmes. Treasury had built up capacity to provide technical assistance and support to projects. The Minister was capacitated by Section 100 of the Constitution to intervene and run provincial departments.

These were challenging interventions to undertake. They were difficult to do as it required interventions in ways that were of a political nature. These interventions were contentious and might involve some risk. One should not forget the implications and complexities around interventions – as seen in Limpopo currently. It was important to be realistic about what Treasury could do; there was limited capacity.

There was a very wide range of measures that were in place; Treasury had capacity and there were statutory powers. Government was a large organisation with wide activities; Treasury had to be strategic and give careful thought to prioritising its own interventions in order to get the balance right between improving financial management and corrective interventions.

In the last two years there had been an increase in the need for Treasury to intervene in terms of forensic investigations. The largest growth in capacity at Treasury had been built in the Accountant General’s office and building capacity to participate in inspections.

Mr N Singh (IFP) asked if there was any way to address the time it took to approve unauthorised expenditure. The thinking that Parliament appropriated money at the beginning of each year were just nice words, as in reality government was more involved in that process. He asked what Treasury’s view was about the role it could give Parliament in analysing the budget. The Committee needed specialist budget analysts, as piloted in KwaZulu Natal.

When looking at all the departments and public entities, the challenge had been the transfer of money to the departments’ accounts with zilch accountability. Departments vire and mis-spend the money. He asked if there were checks and balances to avoid this behaviour from departments.

Mr Singh sought clarity on emergency funding. He asked if emergency funding worked, especially in the case of natural disasters. Sometimes it took two years before such payments were made, in which time another disaster might have occurred.

Mr Donaldson commented that he agreed – the process of approving took a bit long. Progress had been made in catching up through finance bills and implementing decisions of the Standing Committee on Public Accounts (SCOPA). An example was the establishment of a parliamentary budget office. He agreed that the Committee’s involvement could assist in improving the quality of the budget. The most important mechanism for Treasury was the transparency of the budget plans and their links to reports.

Mr Donaldson said Treasury dealt with applications from entities in respect of surplus funds throughout the year. Treasury tended to give approval for the retention of surpluses. If this were not to happen, departments would overspend unnecessarily. Treasury played an active role in tight fiscal circumstances. Treasury also played a role in the spending of public entities as well. Budgets of public entities were now a considerably larger part of the work that Treasury undertook than they were five years ago.

Mr Donaldson commented that the budget arrangement for emergencies worked well. Treasury got complete reports from the Disaster Management Centre. The delays in rehabilitation of infrastructure were not so much about the availability of money but rather they were due to contract management and procedures. The delays in spending once the money had been allocated was not a budgeting issue, it was about project management.

Mr Singh asked if there was a virement percentage for municipalities. Were there any regulations in the Municipal Finance Management Act (MFMA) that guarded against this? He asked if Treasury sent officials to assist departments to avoid conflicting reporting as was the case with the Department of Human Settlement’s (DHS) Rural Housing Infrastructure Grant (RHIG) programme last year. It was an ugly scene to watch departments dispute Treasury figures in the presence of Members of Parliament. How many officials worked with departments, and how often did they interact?

Mr Donaldson said Treasury officials worked well with departments but occasionally disagreements emerged. Members should not be surprised by that. Treasury had a difficult job to do. In many departments there were differences of opinions amongst the different sections as to where priorities lay. Treasury officials would play a role in finding the right balance in allocating resources and developing programmes. The Committee need not be perturbed by Treasury’s conflicts with other departments. Identifying contentious issues was what Treasury should be doing – and not sweep matters under the carpet.

Ms A Mfulo (ANC) said the role of the Committee was undermined and was not clear. She asked that Treasury speak to what the role of the Committee was.

Mr Donaldson replied the role of the Committee included asking questions during the budget preparation process and oversight. Questions needed to be asked about whether the budget was allocated appropriately or whether there was progress in service delivery. These were issues Treasury officials had to deal with and could only partially do so. The work officials did was immense. They could not be expected to cover every aspect of a department; they had to be strategic. Treasury needed to find ways of sticking to the important matters, and not be distracted by items that would take a lot of time and yet were not important for service delivery

Ms Mfulo asked Treasury to clearly define “savings” made on the budget. She said departments underspent and this was encouraged as it was called savings. It appeared that calling it “savings” and not underspending encouraged the bad practice of not spending. Underspending undermined the planning processes. Under-expenditure should not be called “savings”; this meant someone did not do his job.

Mr Donaldson replied that the “savings” definition would always be a contentious. He defined savings as the delivery of service at less than the anticipated cost, whilst underspending referred to the non-delivery of service.

Ms Mfulo commented that the timing for the submission of the second quarter report was a challenge as it was submitted at the same time as the Medium Term Budget Policy Statement (MTBPS).

Mr Donaldson agreed that the second quarter report should be looked at ahead of the MTBPS. The challenge was the information became available at the last stage of the MTBPS; it was not practical to have the report a month earlier, unless the MTBPS could be shifted to the end of November.

Ms Mfulo commented that if proper monitoring was done, it should be easy to make a determination when mismanagement of funds was about to happen. A measurement that would give immediate attention to mismanagement of funds needed to be found. At the moment this was not happening; Treasury itself was not performing admirably. How could Treasury then monitor other departments if it was failing.

The Chairperson pleaded with Members to focus questions on those matters that Treasury prepared on and could thus be in a position to answer.

Mr M Swart (DA) commented that when budgets were prepared for departments, the intention was for them to use all of the money on programmes. Treasury ensured there was an income to cover expenditure. However, it was worrying that already in the second quarter some departments had already noticed they would not spend, and had approached Treasury asking for the money to be shifted. People out there were wondering about this and yet Treasury approved it. It appeared that the funds were shifted to avoid under-expenditure at the end of the year. This would not enable Members to ensure service delivery to the people.

Mr Donaldson commented that Members did not see interactions between Treasury and departmental officials about proposed shifts in spending. There were so many of these requests that Treasury denied. He cited the example of the request by the Local Organising Committee (LOC) for the on-going Africa Cup of Nations (AFCON) tournament. Their prices were very much higher than what was agreed to. There were a lot of negotiations around how much it would cost to successfully host the tournament. This happened very much during the course of the year. The vast majority of spending occurred in the activities that it was intended for. The shifting of funds was in the region of 5%-7%; but most spending was pretty stable in terms of planning and the outcomes.

Ms Mashigo said she became concerned with Treasury during the adjustments. When Parliament approved the budget, it usually was content that Treasury was satisfied with the programmes and how expenditure would occur. Parliament was happy that a lot of the adjustments were denied during this financial year. The Committee was concerned with the public entities because they used a lot of public money that should be geared towards service delivery. Something had to be done to make the public entities were more accountable. She agreed that something had to be done about the 8% threshold.

Mr Donaldson commented that the growth in government spending since 2003 had resulted in many departments having capacity constraints. That resulted in underspending in programmes lagging behind. Some of the financial challenges were symptomatic to management and institutional capacity of government departments not keeping pace with the resource allocated for new priorities.

Mr P Gelderblom (ANC) wanted to know about the success of the PFMA within provinces. It appeared provinces had challenges when it came to implementing the PFMA, and this was more so in Limpopo and the Eastern Cape. What challenges and success were there regarding the PFMA?

Mr Donaldson commented that there was no specific answer to the question, but without the PFMA the country would be worse off. Without the PFMA, Treasury would not know what was happening in provinces. There were several matters found wanting in both the national departments and several provincial departments. But equally important was the recognition that there had been progress in service delivery in portfolios like human settlements and transport.

The Chairperson commented that the law prescribed intervention by Treasury when departments failed in the expectations of the PFMA. He agreed the section on the role of National Treasury was not explicitly written. He commented that although there could be no precision with the budget, the role of Parliament in the budgeting process appeared insignificant, especially since departments, as early as Quarter 2, were shifting funds. The MTEF should allow for predictability and officials should know two years ahead of time as to how much money they would receive.

The shifting of funds gave the impression that departments just require money without properly planning for it. Should there not be conditions that specify circumstances upon which shifting of funds could occur? Virements undermine the process of budgeting; there should be a way of giving some kind of control. The shifting of money was a challenge. When asked about it, departments always said they had reached agreement with Treasury on the virement.

Follow ups
Ms Mfulo commented Treasury should come out clearlyon the definition of  “savings”. Treasury needed to ensure that the understanding of what a saving was filtered down to departments.

The Chairperson agreed and related the story of a department, implementing a flagship programme of government, that returned the allocated funding during adjustments because it claimed the money not enough. Not even a cent was spent of this money. It was ideal when departments spent money and then later proved to Treasury that the money was insufficient.

Mr Donaldson commented that delays were common all over the world in respect of big capital projects. This warranted further understanding on whether the PFMA assisted with this. In some ways the PFMA gave statutory certainty for requirements of financial management and supply chain management. Supply chain procedures were sometimes demanding and officials might have difficulty in implementing them. But the PFMA was no substitute for good planning, and other minimal requirements for big projects such as environmental compliance. The PFMA was not a substitute for dealing with the regulatory issues that might inhibit progress. The PFMA had a role in creating an atmosphere that was conducive to building public infrastructure.

The Chairperson drew the Committee’s attention to Section 14 of the Division of Revenue Act (DORA), where it specified that Treasury should consult with Parliament on the budget. Consultation had to happen.

The Chairperson also sought clarity on the role of Parliament specifically with regards to projects that were announced by the President in his State of the Nation address. State-owned enterprises (SOEs) would be raising funds for the projects. How could such activities be monitored, bearing in mind that this was money not from the fiscus?

Mr Donaldson commented that the point was crucial as Parliament did not have a direct role on the investment plans of public entities. It was only limited to the enabling legislation that provided for procedures for which funds might be raised. Some SOEs had borrowing powers and others did not. There were specific clauses in the enabling legislation that recognised where funds might be raised. It was unusual in the enabling legislation that establishes an SOE, for Parliament to be directly involved in decision making about projects. It might well be that there was a need to strengthen legislation regarding those SOEs that received appropriated funds. This was an area of possible development of budget law. He noted a clause in the PFMA that specified that Parliament needed to be informed of future capital projects.

The Chairperson said another issue was whether the PFMA should be stuck to as there were issues with planning for big projects. Departments only issued tenders around April; spending only start happening around August. This had necessitated that the Committee recommend that any department undertaking a major project, should present plans prior to budget approval to Treasury. This approach was a guarantee that spending would happen; planning should happen way ahead of time and not during the financial year.

Ms Mfulo commented that the Committee needed to tell Treasury that for every expenditure activity, and as part of monitoring and evaluation, it should insist on detailed planning. This should be a norm at Treasury.

Mr Donaldson commented that departments were obliged to have longer-term and detailed plans for the year in question. These plans were indeed useful for monitoring purposes. Detailed plans were a challenge in bigger departments though, but it was absolutely correct that with a plan it was easy to monitor.

The Chairperson commented that the issue of second quarter reports needed further engagement, as it would always be a challenge. It was important to get the reports in as early as possible, especially as now they would clash with the Annual Performance Plans (APPs).

Ms Mashigo sought clarity on unfunded and funded mandates.

Mr Donaldson commented that many departments had a staff establishment that was not fully funded. Treasury was encouraging departments to limit their staff complement to what could be afforded. In principle, a department’s staff establishment should be funded. In many areas of government, one needed funding for contract employment. The word funded referred to whether the budget could accommodate the structure or staff complement. The “unfunded mandate” term, as used in the heading of the title of Section 35, referred to legislation that might have financial implications for the state.

Closing remarks
The Chairperson said the discussion should continue. The importance of the workshop was to ensure clarity of purpose between Parliament and National Treasury. There need not be clashes; Treasury should support the work of Parliament. He congratulated Treasury for being recognised as one of the best in the world, in terms of budget transparency. This was no easy feat, but there was still room for improvement. Delegations received from the Western world were an indication of the improvements SA continued to make.

The meeting was adjourned.

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