The Finance and Fiscal Commission (FFC) said South Africa was still some way from restoring strong and sustainable economic growth rates, as required by the National Development Plan (NDP). The economy needed to grow by 5.4% per annum to achieve NDP targets and to eliminate poverty and reduce inequality by 2030. The Economic Development Department (EDD) had developed the National Growth Path (NGP) framework in 2010. The NGP had a shorter timeframe than the NDP, and was aimed at taking the country on a higher growth trajectory by creating five million jobs over the next ten years, largely through investment in infrastructure.
Transfers and subsidies to entities accounted for nearly 80% of the total Economic Development Department (EDD) budget. Spending behaviour in 2013/14 was more erratic compared to 2012/13, because the Department was unable to maintain a consistent improvement in its cash flow disbursements over time.
The EDD had met or exceeded all its performance targets in 2012/13, compared to only 73% in 2011/12. Most indicators reported on in 2012/13 were new indicators, and it was unclear whether the Department had proper systems in place to measure, track and accurately report on the new indicators, as no proper indicator definitions had been provided in the 2014/15 annual performance plan (APP). The performance indicators also did not clearly show alignment with the targets and indicators in the NGP, Infrastructure Plan or the Medium Term Strategic Framework (MTSF).
The FFC had recommended that the government should re-direct government spending towards activities that directly or indirectly created jobs through enhancing productivity and performance. The response had been that government already had a number of job creating initiatives. Another recommendation was that government should develop and implement credible job plans for each sphere of government. There had been no response yet from the government on this recommendation.
The Committee discussed the role of the FFC, and whether the Commission had the power to enforce its recommendations. Several Committee members raised the fact that the Department had been established only in 2009, and had since tried to establish the type of structures that would support the EDD in fulfilling its mandate. This was in response to the FFC’s finding of erratic disbursement of transfers to entities. Members questioned the FFC’s statistics on employment opportunities and the growth projections for 2015 and 2016. They wanted to know what the catalysts for these growth projections were, and what could be done to improve the exchange rate, which in turn affected the inflation rate. The Committee also focused on the non-alignment of performance indicators, and the Chairperson asked the FFC to draft a document that further explained and elaborated on this concern.
The Auditor-General, briefing the Committee on its role and mandate, showed through a video presentation to the Committee that the annual audit formed an integral part of the annual regularity audit process, and confirmed that departments being audited (auditees) complied with relevant laws and regulations. Audit reports had to reflect an opinion or conclusion on the performance of the auditees against predetermined objectives. AGSA was responsible for auditing all spheres of the government, to promote accountability through providing credible information.
The National Treasury framework for managing programme performance information represented a performance management and reporting framework against which performance information should be managed and reported. All departments, constitutional institutions, trading entities and public entities should submit their APPs for audit purposes, with the annual financial statements (AFSs), to enable the auditors to perform the necessary final audit procedures.
The video gave an overview of the different audit opinions, what they implied for a department and what the responsibility of those charged with oversight over departments was.
Finance and Fiscal Commission (FFC) on Economic Development Department’s performance
Mr Bongani Khumalo, Acting Chairperson: Finance and Fiscal Commission (FFC), said the FFC was concerned with intergovernmental fiscal relations (IGFR), and its current research strategy focused on the developmental impacts of IGFR.
South Africa was still some way from restoring strong and sustainable economic growth rates, as required by the National Development Plan (NDP). Growth forecast in 2014 was expected to be 1.7% compared to 2.1% previously, mainly due to the protracted strike action in the mining and manufacturing sectors. Inflation was expected to average 6.3% in 2014, compared to 6.2% previously. While overall employment had increased by 42 000 jobs in the year ended March 2014, 49 000 jobs had been created in the public sector while the private sector had shed jobs, especially in the mining sector, where 29 000 jobs had been lost. Economic growth was expected to improve over the medium term to 3.1% in 2015 and 3.4% in 2016.
These growth projections were sensitive to future supply-side shocks, such as labour disruptions, electricity shortages and the possibility of credit rating downgrades. These risks amplified South Africa’s vulnerability to global shocks. Moderate inflation was expected over the medium term, with 5.9% forecast for 2015 and 5.5% for 2016. The economy needed to grow by 5.4% per annum to achieve NDP targets and to eliminate poverty and reduce inequality by 2030.
The Economic Development Department (EDD) had developed the National Growth Path (NGP) framework in 2010. The NGP had a shorter timeframe than the NDP, and was aimed at taking the country on a higher growth trajectory by creating 5 million jobs over the next 10 years, largely through investment in infrastructure.
Mr Ghalieb Dawood FFC Program Manager: Provincial Budget Analysis Unit, said the EED had been established in 2009 and assumed responsibilities relating to creating jobs through inclusive growth and implementation of the NGP. The Department was responsible for five public entities -- the Competition Commission, the Competition Tribunal, the International Trade Administration Commission of South Africa, the Industrial Development Corporation and the Small Enterprise Finance Agency. Departmental spending had increased, from R400 million in 2010/11, to R771 million in 2013/14, due to increases in compensation of employees, goods and services and transfers and subsidies. The increase could partly be ascribed to the R180 million provided between 2010/11 and 2013/14 as initial capitalisation for the Agro-Processing Competitiveness Fund under the Industrial Development Corporation (IDC). Transfers and subsidies to entities accounted for nearly 80% of the total EDD budget. Growth of transfers and entities were slower over the 2014 Medium Term Expenditure Framework (MTEF), compared to the 2010/11–2013/14 period.
The EDD had spent 99% of its total budget by March 2014, compared to 97% at the same time in 2012 and 2013. In-year spending behaviour in 2013/14 had been more erratic, compared to 2012/13. The Department was therefore unable to maintain consistent improvement in its cash flow disbursements over time, and by smoothing expenditure through the phasing of transfers to entities across each quarter, the Department could improve cash efficiency.
The Chairperson asked for clarification on what was meant by ‘smoothing expenditure’.
Mr Dawood said the Department planned its cash management and disbursements over a twelve-month cycle. Usually, departments tried to smooth out disbursements over a cycle, so that a consistent pattern of how resources over a cycle were disbursed could be established. If a department had spent 50% of its allocation by the middle of a financial year, it could be reasonably assumed that 100% of the budget would be spent by the end of the financial year. An irregular spending pattern made it difficult to determine whether the full allocation would be spent by the end of the financial year. The irregular spending pattern in this case, correlated with the under-spending in certain programmes, and could be due to the inefficient management of cash flow in the Department.
Ms Sasha Peters, FFC Programme Manager: National Budget Analysis Unit, said the EDD had met or exceeded all its performance targets in 2012/13, compared to 73% in 2011/12, although it had spent only 96.7% of its budget in 2012/13, compared to the same share in 2011/12. Most indicators reported on in 2012/13 were new indicators, and although this might suggest the Department was expanding its scope of work, many indicators read as activities and were not strategic in nature. The Auditor-General had made no material findings on the performance information concerning usefulness and reliability. It was unclear whether the Department had proper systems in place to measure, track and accurately report on the new indicators, as no proper indicator definitions were provided in the 2014/15 APP. The performance indicators also did not clearly show alignment with the targets and indicators in the NGP, the Infrastructure Plan or the Medium Term Strategic Framework (MTSF).
Ms Peters gave an overview of the entities under the Department, as well as the transferred amounts and expenditure. Generally, the entities showed sound spending performances, with some evidence of procurement irregularities. The EDD, as the executive authority, had the responsibility for monitoring the performance of public entities under its control. The FFC had recommended that government should re-direct government spending towards activities that directly or indirectly created jobs through enhancing productivity performance. The response had been that government already had a number of job-creating initiatives. Another recommendation was that government should develop and implement credible job plans for each sphere of government. To unblock “prisoner’s dilemma” scenarios, government should ensure collaboration across a broad set of actors – not only employers, but also unions, economic development agencies, Sector Education and Training Authorities (SETAs), secondary schools, colleges, universities, vocational training centres and business support providers. There had been no response from government on this recommendation.
Mr S Tleane (ANC) said it was acknowledged by the FFC that the Department had been established in 2009 and the EDD had since, on an ongoing basis, tried to establish the type of structures that would enable it to fulfil its mandate. In this regard, it would be difficult for the government to expect stabilisation, especially in terms of expenditure. He agreed that there needed to some kind of a system, but if the Department also had to deal with constant changes, it would be very difficult to achieve. He asked the FFC to elaborate on what exactly the Department could do to achieve stability -- as well as stability in its oversight function. The Gini coefficient, measuring income disparities, had a European influence and he asked if the principles could be applied to South Africa to get fair and effective parameters.
Mr Khumalo said the measure to assess income distribution came down to a choice, and he agreed that the Gini coefficient had very serious weaknesses. It aggregated all the information and it treated people as if everyone started from the same point. While it was an easier index to work with, it certainly should not be used to inform policy development. The Department had been established when there were pressing issues that needed immediate attention. The EDD was supposed to focus on the macro foundation of the country’s economic policy. It would be problematic if the Department could not coordinate the activities of municipalities, provinces and government.
Mr S Marais (DA) asked if the recommendations made by the FF carried any weight, and asked for an elaboration of the institution’s role. He disagreed with Mr Tleane about the appropriateness of the Gini coefficient and asked what had led to the improvement in the Gini coefficient. He referred to the inflation increase, and asked what the offset was in terms of improved export revenue. Overall employment had increased by 42 000, but it did not really reflect in the unemployment rate. It was more important to look at how many jobs that should have been preserved, had been lost. What were the actual figures that showed the losses? He asked what the situation was with China and India in the BRICS framework, if Brazil and Russia had the poorer outlooks, because it impacted on South Africa’s economic development position. Over the medium term, growth was projected at 3.1% for next year. This was an improvement from 1.7%, and he asked what the catalysts for such growth were. He asked about the decrease in the allocation to the Small Enterprise Finance Agency (SEFA), what the possible impact on the lower level of economic development was and also what the impact on the Ministry would be.
Mr Khumalo said the FFC made recommendations to Parliament, provincial legislatures and to organised local government. The recommendations would then be processed by the Minister of Finance on behalf of government. When the Minister of Finance tabled the Budget, he should table it with the Division of Revenue Bill, an explanatory memorandum that explained how the Commission’s recommendations were taken into consideration. This memorandum would explain whether recommendations had been accepted or not, with explanations. Once the Commission’s recommendations had been tabled, those recommendations were now ‘owned’ by Parliament and the discussion around whether they should be implemented or not should be settled between the legislature and the executive. It was no longer of concern to the Commission, except when Parliament or the executive wanted clarification or assistance in the implementation of recommendations. Recently the FFC had commissioned an independent assessment of how government had been dealing with the recommendations over the past 20 years and the outcomes were positive. The Commission needed to make sure that the recommendations made were useful in interrogating the financial and fiscal issues relating to the implementation of the mandate.
The improvement in the Gini coefficient was very small, and could be partly credited to the grant system and job creation measures. If the downside risks of the projected economic growth materialised, it could negatively affect the South African economy, as it affected Brazil and Russia as opposed to China and India. The FFC was of the view that the Brazil-Russia situation would not negatively impact on the South African economy. A written response would be submitted to the Committee on the numbers in terms of job creation and job losses.
Mr Dawood said if a comparison was made between this year’s figures of national expenditure and last year’s figures, it showed a reduction of R146 million over the MTEF. Last year’s 2015/16 national expenditure for the SEFA was supposed to have been R502 million, but this year the allocation had been R406 million. SEFA had a number of different income sources and in addition to the transfer from EDD, they also received funding from the Industrial Development Corporation (IDC). One would hope that the reduction of the transfer from EDD had been mitigated by the increase of funding from the other sources so that it did not impact on the provision of support to small and medium enterprises (SMEs). SMEs were a priority for government, especially in terms of job creation. Because of budget ceilings, more departments had to prioritise commitments.
The Chairperson said SEFA was a new entity, and had started operating only towards the end of the last financial year. The entity was a subsidiary of the IDC, and it was expected that there would be changes in the financial structure.
Mr Mbatha said the allocation was a significant amount and it set a precedent -- that less money would be allocated to the support of small businesses.
The Chairperson said the Department had already briefed the Committee on SEFA, and it had been explained.
Mr L Pikinini (ANC) said government had intervened during the global financial crisis and created an environment conducive for the private sector to prevent job losses. He asked why the private sector had not exploited the situation.
Mr P Atkinson (DA) said the projection of the growth rate and job opportunities was optimistic and apart from keeping fingers crossed, what else needed to be done to increase the growth rate. Inflation had been severely affected by the exchange rate, and he asked if anything could be expected that would improve the exchange rate. He said the Department had received an unqualified audit opinion, but with an emphasis of matter. He asked what specifically the emphasis of matter was.
Mr Khumalo said the figures were optimistic and were based on the assumption that the pickup in the developed economy (Euro zone and United States) would yield positive benefits for the South African economy. It was also premised on the fact that there would be no internal shocks, because internal shocks experienced last year had contributed to the decrease in the actual versus the potential growth. The projections of the past three years were considered, as well as what the actual outcomes were in projecting the ‘optimistic’ figures. The FFC had made its own projections, but based on projections made by the Reserve Bank, Reuters and the International Monetary Fund (IMF), there were some correlations in the assumptions.
Mr Lourens van Vuuren, Business Executive, Auditor General of SA (AGSA), said the emphasis of matter had been highlighted in the 2012/13 audit report of the EDD. He clarified that emphasis of matter was not negative reporting, but referred rather to highlights that had already been adequately disclosed in the financial statements. The emphasis of matter in the EDD’s 2012/13 report had merely been a note to state that the entity had made material adjustments to the previous year’s figures and they had been adequately disclosed. There had been no issues with EED’s findings, but it was merely a note to show that changes had been made, and that those changes should be considered when the report was scrutinised. The 2012/13 audit outcomes were historic, and the 2013/14 audit outcomes would be available in the next few weeks. It was better to wait for those reports to become available. They would be discussed during the Budgetary Review and Recommendations Report (BRRR) process.
Mr M Mbatha (EFF) said the Commission was a Chapter 13 institution under the Constitution, but it seemed it struggled with to enforce its recommendations. He asked if there were any other suggestions that could improve the manner in which the Commission’s recommendations were being considered. It was good that it had been recorded that it was government -- and not the private sector -- that had been consistently creating quality jobs. It had been said there was R1 trillion sitting with corporate South Africa that should have been invested back into the economy in various ways. There was an assumption that the private sector would react to infrastructure investment by doing something, but there was nothing specific on what was expected. It was good to drive infrastructure, but companies moved territory to neighbouring countries, employed nationals from that country, and then used the roads built by South Africa to conduct their businesses. There should be an instructional role of give and take given to the private sector. There seemed to be no expectation from the Commission itself on the consideration of the recommendations. If a strong coordination with municipalities was recommended, and the Department was not able to comply for consecutive financial years, local municipalities could not consistently plan to enrich their economic policies and growth. There would continue to be expectations of what local input had to be, but there would be no tangible activities that supported the initiatives.
Mr Khumalo said business confidence was still very low in South Africa and there was scepticism on whether investments were really safe. It was really up to the private sector to use the available opportunities, as this would give government the opportunity to modernise its programmes and infrastructure assets. In a recent meeting with municipal mangers, the lack of interface between the three spheres of government was a key issue. If municipalities were not functional, it affected ground level communities in terms of service delivery and health and safety concerns. The Department should have a very direct programme from an IGFR point of view, to achieve the desired stability. The programmes the Department needed to run had been identified, but they needed to be consolidated before the roll-out.
The Chairperson said some of the issues were not directed at the FFC, but rather the whole Committee in its oversight function.
Mr M Mabika (NFP) asked if the 42 000 created jobs were temporary or permanent, and at what salary level.
Mr Khumalo said the Public Service Commission would be in a better position to address this question.
Mr M Cele (ANC) asked if this information had been shared with the Department, especially the findings on how the Department was measured. He asked that the term ‘unblock prisoner’s dilemma’ be explained.
Mr N Kwankwa (UDM) asked if the FFC could give an indication whether or not South Africa had been able to use its links with BRICS and the G20 to improve the country’s developmental capacity. He asked whether the Commission’s research showed if political elites earned the trust and cooperation of the bureaucrats in the public sector, because businesses seemed not to take the opportunities offered by government, nor did they participate in the economy. He also asked whether the public service enjoyed enough autonomy for it at some point to reach a requisite level of professionalism.
Ms D Rantho (ANC) said the Commission was concerned with the IGFR, and asked how it would assist the provincial government to get on par with the national government.
Mr Khumalo said if a province was not performing, there was an expectation that support would be provided by national government. The Constitution also provided for various interventions, as well as a report that could be tabled by the Auditor-General. The Commission did not have the authority to instruct anybody or any department to act on non-performance.
The Chairperson said the Committee should consult the Constitution to understand the FFC and the powers afforded to them. The EDD had been established in 2009 and was immediately mandated with the response plan to the global financial crisis, and had assisted the Department to implement the plan. She asked what the coordination role of the Department was in terms of job creation. When the NGP was crafted in 2010, it accelerated job creation through infrastructure as a job driver. This intervention addressed employment opportunities, economic growth and also addressed the income disparities and the Gini coefficient. The inflation concerns would be addressed through the NGP. She asked if the ‘smoothing of transfers’ should happen irrespective of entities’ performance, because there was an understanding that transfers could only happen once the Department was satisfied that the entity was performing. In the Committee’s oversight function, the Department would be questioned why money was transferred to an entity that was not performing. She asked for elaboration on the performance indicators that did not clearly show alignment with the targets and indicators in the NGP, Infrastructure Plan and the MTSF.
Mr Khumalo said a written response would be submitted to the Committee on the coordination role of the Department on job creation.
Ms Peters said analysis showed that because there were new indicators, it would have been more useful if the indicators were not SMART specific, because they were not specific or time bound. It was also not clear which macro development plan the indicators took their cues from.
The Chairperson asked Ms Peters to draft a report to elaborate on the alignment issues in the audit report of the EDD. She thanked the FFC for their contribution.
Office of the Auditor-General on their role and mandate
Mr Van Vuuren, played a video that outlined the audit process and the key concepts most important to Committee Members. He gave an overview of the supporting documents that could assist members in understanding audit reports.
AGSA had a constitutional mandate and, as the Supreme Audit Institution (SAI) of South Africa, it existed to strengthen the country’s democracy by enabling oversight, accountability and governance in the public sector through auditing, thereby building public confidence.
The annual audit formed an integral part of the annual regularity audit process, and confirmed that departments being audited (auditees) complied with relevant laws and regulations. It reflected upon the usefulness of performance information and the reliability of reporting. Audit reports must reflect an opinion or conclusion on the performance of the auditee against predetermined objectives. AGSA was responsible for auditing all spheres of government, to promote accountability through providing credible information. The regulations that governed the audits were the Public Finance Management Act (PFMA), the Treasury regulations issued in terms of the Public Finance Management Act (PFMA), the Public Service Regulations (PSR), and the guidelines and instructions issued by National Treasury (NT).
The National Treasury framework for managing programme performance information represented a performance management and reporting framework against which performance information should be managed and reported. The principles and requirements set out in the framework were used as a basis for the auditing. All departments, constitutional institutions, trading entities and public entities should submit their APP for audit purposes, with the annual financial statements (AFS), to enable the auditors to perform the necessary final audit procedures.
The documents that were used for performance accountability were the Strategic Corporate Plan, the APP, the budget, quarterly performance reports, performance agreements and the Annual Report (AR). The audit criteria included both main criteria and sub-criteria. The main criteria dealt with compliance with regulatory requirements, and usefulness and reliability of information. The sub-criteria related to the existence of records, whether they were submitted on time, and the presentation, measurability, relevance, consistency, validity, accuracy, and completeness of the financial statements presented. When auditing, AGSA followed an approach to ensure that the implementation of the performance management systems, processes and relevant controls were understood and tested. The measurability and relevance should also be tested, so as to reach a conclusion on the usefulness of the reported performance information, for selected programmes or objectives
The video gave an overview of the different audit opinions, what it implied for a department and what the responsibilities of those charged with oversight over departments were.
The Chairperson said the video covered exactly what the Committee needed to understand, especially the differentiation between the mandates of National Treasury.
Mr Van Vuuren said there was a detailed presentation which the Committee could use, and the AGSA was available to come and present again if Members needed any more assistance before the BRRR process.
The Chairperson said the Auditor-General would come and present on the audit findings of the Department.
Mr Mbatha asked if the video was available to the Committee, because it was very useful.
The Chairperson said it should be made available to the Committee on a memory stick. Committee Members should read through the supporting documentation provided by the Auditor-General. The Committee’s planned workshop had been postponed to 19 and 20 September 2014.
The meeting was adjourned.
- PC Economic: Workshop by the Office of the AG on their role and mandates 1
- PC Economic: Workshop by the Office of the AG on their role and mandates 2
- PC Economic: Detailed briefing on Trade Policy as well as an update on existing trade agreements 1
- PC Economic: Detailed briefing on Trade Policy as well as an update on existing trade agreements 2
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