National Treasury on Quarter 1 performance & Integrated Financial Management System

Standing Committee on Appropriations

08 September 2017
Chairperson: Ms Y Phosa (ANC)
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Meeting Summary

National Treasury and the Integrated Financial Management System briefed the Committee on the 2017/18 quarter one departmental spending outcomes.

National Treasury indicated that the 2017 Appropriation Act allocated R765.3 billion to national departments for the 2017/18 financial year (excluding Parliament). At the end of the first quarter, national departments had spent R166 billion (21.7 percent) of total expenditure. This R166 billion expenditure was R8.7 billion (5 percent) less than what was projected to be spent (R174 billion). On expenditure by economic classification: compensation of employees spent R37.4 billion against a projection of R36.8 billion- over by R673 million (1.8 percent); goods and services spent R11.9 billion against a projection of R14.7 billion- under by R2.7 billion (18 percent); transfers and subsidies spent R114.1 billion against a projection of R119.5 billion- under by R5.3 billion (4.5 percent); and payments for capital assets spent R2.3 billion against a projection of R3.6 billion- under by R1.3 billion (37 percent).

National Treasury identified common reasons for expenditure deviations and variations as lack of planning by government institutions; lack of contract management; amendments to scope during tenure of contracts; and maintenance and support of existing infrastructure. In an effort to address the deviations, the Office of the Chief Procurement Officer proposed interventions such as a review of the entire deviation application system in terms of Treasury Regulation 16A6.4 and attendant instruction notes, and enforcement of accountability and compliance by Accounting Officers/ Authorities. Treasury asked for Parliament’s support in dealing with deviations.

Based on the Human Resource Budget Plans (HRBPs) submitted by departments, personnel headcount target for the financial year was 410 570. However, the actual headcount at the end of the first quarter was 412 091. Therefore, in order to remain within the Compensation of Employees (COE) budget ceiling, the headcount would have to be reduced by 1 521 by the end of the financial year. Departments that had spent significantly more than projected on COE for the first quarter included Police by R412.9 million as well as Defence and Military Veterans by R320.2 million. Also, late invoicing by departments such as the Public Works was an issue the Committee would want to look into. Challenges of late/non-payment of invoices were mainly resulting from: lack of effective budget management system; inadequate internal control systems; lack of effective invoice tracking systems (manual/electronic); lack of proper delegations of authority; centralised payment processes; and lack of effective consequence management. Consequently, the impact of such late/non-payment of suppliers was: cash flow positions of SMME’s being compromised; suppliers being forced to borrow money to meet contractual obligations; counter-productivity towards the government mandate to create sustainable jobs and promote SMME’s; corruption factor; and reputational risk to government.

The Integrated Financial Management System (IFMS) directorate said forensic investigations to unearth expenditure irregularities were underway. Also, poor planning was a challenge and IFMS had adopted a bottom-up budgeting model moving forward, among a host of other measures. Efforts to improve on deliverables included: the approval of implementation approach supported by high level Programme stage Plan; finalisation of nine IFMS governance strategies and structures; creation of IFMS governance committee; and establishment of the IFMS knowledge repository. Also, funding for the IFMS programme to create dedicated financial management capacity had been secured.

Members expressed concern about expenditure deviations and variations within departments. Expenditure monitoring and evaluation mechanisms within Treasury seemed not to be working. What interventions had Treasury implemented to correct the problem of underspending? Most departments had been underspending for the past three years. What was Treasury and the Department of Monitoring and Evaluation’s positions on such recurrent underspends? What was being done to deal with identified spending delays? Most of the delays were clearly due to lack of planning within departments.

The Chairperson emphasised the need to bring down expenditure deviations and variations within departments. There was need for clarity as deviations could easily be interpreted as cases of corrupt practices. There might be need for follow up meetings with Treasury, Office of the Chief Procurement Officer and IFMS. The presentations were informative and the Committee would write to Treasury if it needed clarification on some aspects.

Meeting report

The Chairperson said the meeting’s main agenda was to share information on the expenditure of departments to enable the Committee to identify key issues and inform its oversight function.

National Treasury presentation
Ms Julia de Bruyn, Acting DDG: Public Finance, National Treasury took the Committee through a presentation on the 2017/18 quarter one spending outcomes. The 2017 Appropriation Act allocated R765.3 billion to national departments for the 2017/18 financial year (excluding Parliament). At the end of the first quarter, national departments had spent R166 billion (21.7 percent) of total expenditure. This R166 billion expenditure was R8.7 billion (5 percent) less than what was projected to be spent (R174 billion). On expenditure by economic classification: compensation of employees spent R37.4 billion against a projection of R36.8 billion- over by R673 million (1.8 percent); goods and services spent R11.9 billion against a projection of R14.7 billion- under by R2.7 billion (18 percent); transfers and subsidies spent R114.1 billion against a projection of R119.5 billion- under by R5.3 billion (4.5 percent); and payments for capital assets spent R2.3 billion against a projection of R3.6 billion- under by R1.3 billion (37 percent).

Departments that spent less than their projected expenditure include: Rural Development and Land Reform by R1.2 billion (43.7 percent); Science and Technology by R705.7 million (33.5 percent); Environmental Affairs by R605.6 million (36.5 percent); and Cooperative Governance and Traditional Affairs by R385 million (29.8 percent). Total appropriation for compensation of employees in 2017/18 amounted to R150.3 billion, excluding the direct charges of the salaries of the President, Deputy President and the Judiciary. An amount of R37.4 billion had been spent on personnel at the end of the first quarter, 24.9 per cent of total compensation of employees’ expenditure. However, this R37.4 billion spending was R673 million (1.8 percent) more than the projected spending of R36.8 billion for the quarter.

Ms de Bruyn identified common reasons for deviations and variations as lack of planning by government institutions; lack of contract management; amendments to scope during tenure of contracts; and maintenance and support of existing infrastructure. In an effort to address the deviations, the Office of the Chief Procurement Officer proposed interventions such as a review of the entire deviation application system in terms of Treasury Regulation 16A6.4 and attendant instruction notes, and enforcement of accountability and compliance by Accounting Officers/ Authorities. She asked Parliament to support Treasury in this regard.
Based on the Human Resource Budget Plans (HRBPs) submitted by departments, personnel headcount target for the financial year was 410 570. However, the actual headcount at the end of the first quarter was 412 091. Therefore, in order to remain within the Compensation of Employees (COE) budget ceiling, the headcount would have to be reduced by 1 521 by the end of the financial year. Departments that had spent significantly more than projected on COE for the first quarter included Police by R412.9 million as well as Defence and Military Veterans by R320.2 million. Also, late invoicing by departments such as the Public Works was an issue the Committee would want to look into.

Challenges of late/non-payment of invoices were mainly resulting from: lack of effective budget management system; inadequate internal control systems; lack of effective invoice tracking systems (manual/electronic); lack of proper delegations of authority; centralised payment processes; large amount of accruals; high amount of litigations; and lack of effective consequence management. Consequently, the impact of such late/non-payment of suppliers was: cash flow positions of SMME’s being compromised; suppliers being forced to borrow money to meet contractual obligations; counter-productivity towards the government mandate to create sustainable jobs and promote SMME’s; corruption factor; and reputational risk to government.

Ms de Bruyn said National Treasury spent R88.3 million of its projected spending of R103.9 million at the end of the first quarter on programme one, indicating a lower than expected spending of 15 percent mainly due to outstanding invoices from the Department of Public Works for office accommodation; spent R193.2 million of the projected spending of R276.5 million on programme five, indicating a lower than expected spending of 30.1 percent, mainly due to lower payments on audit fees and delayed payments on the IFMS project; and spent R207.6 million of the projected spending of R261.3 million on programme eight, indicating a lower than expected spending of 20.5 percent, mainly due to transfers for the Municipal Finance Improvement Programme not being processed as a result of delays in the evaluation and adjudication of bids due to difficulties in identifying and appointing municipal advisors with the requisite skills.

The Department of Public Works spent R101.5 million of the projected spending of R121.7 million on programme one, indicating a lower than expected spending of 16.6 percent, mainly due to: delays in filling vacant posts and the fact that the value of invoices received was lower than what had been projected for goods and services (computer services, legal services, property payments, agency and support/outsourced services, travel and subsistence, minor assets and contractors), which was also evident in programmes three and five.

The Department of Higher Education and Training spent R22 billion of the projected spending of R22.4 billion on programme three, indicating lower than expected spending of 2 percent, mainly due to delays in the payment of the infrastructure grants to universities as these payments were made based on submissions from universities and these were not all received and processed; spent R526.6 million of the projected spending of R474.7 million on programme six, indicating higher than expected spending of 10.9 percent mainly due to delays in the payment of claims of markers, examiners and moderators for the November examinations at Community Education and Training (CET) colleges as many claims were received late. This issue had been raised numerous times with the department but it remains unaddressed.

The Department of Social Development spent R1.2 billion of the projected spending of R1.7 billion at the end of the first quarter on programme three, indicating lower than expected spending of 30.3 percent, mainly due to payment to South African Social Security Agency for Social Grants Administration in April 2017 not yet captured due to a change in the Basic Accounting System from version 4 to version 5; spent R143.5 million of the projected spending of R390.4 million on programme four, indicating lower than expected spending of 63.2 percent, mainly due to delays in transfers to provinces for Social Worker Employment Grant due to late appointment of social workers, delay in the payment of first tranche to the National Student Financial Aid Scheme (NSFAS) due to challenges encountered with the approval of the Memorandum of Understanding, which was only signed on 31 May 2017.

Lastly, the Department of Health spent R4.5 billion of the projected spending of R4.6 billion on programme three, indicating lower than expected spending of 1.9 percent, mainly due to outstanding transfers to NGOs for HIV/AIDS which will be made once service level agreements have been finalised; spent R5 billion of the projected spending of R5.2 billion on programme five, indicating lower than expected spending of 3.3 percent, mainly due to limited capacity at the National Department of Health to evaluate bids and finalise contracts for projects funded from the indirect Health Facility Revitalisation component; spent R798 million of the projected spending of R430.6 million on programme six, indicating higher than expected spending of 85.3 percent, mainly due to transfers to public entities for quarter two that were due in July but were erroneously processed in the last week of June.

Discussion
The Chairperson emphasised the need to bring down expenditure deviations and variations within departments. There was need for clarity as deviations could easily be interpreted as cases of corrupt practices.

Mr A Shaik Emam (NFP) commented that the presentation was enlightening. However, expenditure monitoring and evaluation mechanisms within Treasury seemed not to be working. There were numerous challenges relating to robust reporting even on the State Information Technology Agency (SITA) itself. He expressed concern about underspending especially by NGOs involved in the fight against HIV/AIDS. What was the process being followed by Treasury to correct the problem of underspending? Was it in its domain? Where did the strategic plans and budgets come in when there was such underspending which leads to fiscal dumping? It was problematic that allocated funds were not being used timeously. Who were the culprits doing the same things repeatedly year in year out? Interrogating every one of them would be necessary.

The Chairperson felt Treasury could not account for the spending deviations within departments and entities, but could only shed light and provide relevant information on same.

Mr Shaik Emam said Treasury was responsible for the disbursement and approval of funds. Hence it was worrying that underspends were being recorded year in year out. Treasury should be in a position to guide the Committee.

Ms de Bruyn, in response, suggested that SITA, the Department of Public Works and Treasury appear before the Committee to discuss problems such as late invoicing. This could assist in identifying the root causes of expenditure deviations. Treasury received reports from departments on a monthly basis in accordance with the Public Finance Management Act (PFMA). The PFMA gave departmental accounting authorities the mandate and responsibility of ensuring that funds are spent judiciously. Therefore, the accounting officers take responsibility for provisioning and procurement systems, with Treasury undertaking high level oversight. Generally, departments tend to underestimate spending timeframes- they err on the side of optimism, which partly explained underspending. Also, Treasury would identify repeat offenders that would need to appear before the Committee to explain such consistent underspends.

Ms S Shope- Sithole (ANC) asked why Treasury had not presented any information on the South African Airways (SAA). SAA was a cause for concern currently and the Committee should be seen to be prioritising it.

Ms D Senokoanyane (ANC) asked if Treasury was in a position to analyse procurement applications. Most departments had been underspending for the past three years. What was Treasury and the Department of Monitoring and Evaluation’s positions on the recurrent underspends? What was being done to deal with identified spending delays? Most of the delays were clearly due to lack of planning within departments.

Mr N Gcwabaza (ANC) expressed concern about what seemed to be a distant presence and authority of Treasury- the custodian of the national fiscus. Various irregularities in relation to expenditures and planning within the departments had to be addressed. Some departments had decided to augment their numbers against the stipulated personnel ceiling. Who was approving such? Was monitoring lost to Treasury such that entities were doing as they pleased? Also, who must initiate legislation to facilitate the restructuring of entities in line with recommendations by the presidential review on State-Owned Entities? He asked if the reporting systems being used by departments and entities were up to international auditing and reporting standards. How did the Office of the Chief Procurement Officer help with procurement within departments to facilitate access of government contracts by small and emerging suppliers?

The Chairperson asked about Treasury’s deduction from underspends by various departments. As a key stakeholder, Treasury had to advise the Committee and suggest possible solutions. She expressed concern about the delays in the payment of the first tranche to the National Student Financial Aid Scheme. On the digital terrestrial transmission (DTT) project, the Committee was not hearing about progress made on its implementation, but only about expenditure on frills such as travelling rather than on the project itself. Had the department responsible for DTT rollout submitted its cost containment measures?

Ms de Bruyn replied that part of the challenge was that expenditure was being predicted on the basis of departmental projections. At times, some of the projections were miscalculated and Treasury expected departments to work on such miscalculations. Treasury would interrogate entities, and in most case, it would not necessarily be due wrongdoing but to planning that was not at the level of detail required by Treasury and the Committee. The accrual accounting method used by entities seemed much better than the modified cash method used by departments. Therefore, the push internationally was to also have departments using the accrual accounting method. On progress on the DTT drive, the project involved extensive awareness campaigns within communities which reflected on travelling expenses. She assured the Committee that delays in disbursing NSFAS funds would be taken up further with the responsible department. Also, Treasury was constrained in undertaking its oversight beyond what was provided for by the PFMA. Treasury was also subject to personnel caps and other cost saving measures such that it also had unfilled posts.

Mr Gcwabaza said that mismatches between expenditure and targets achieved, seen year-in and year-out, within departments, was a problem the Committee had to tackle. Performance targets achieved had to speak to expenditure.

The Chairperson added that departmental expenditure projections should be aligned to their respective annual performance plans. Accurate cash projections were key. She asked Treasury to assist as there was need for a balance between performance and compliance within departments. Also, delays in invoicing seemed to be a culture and an attitude issue. Departments had to improve in these areas.

Mr B Topham (DA) said it had to be appreciated that the PFMA spoke to the full year spend. Secondly, there could probably be no direct correlation between targets and spends. It was theoretically a challenge to balance the two, and the choice of targets might be the bigger issue.

Integrated Financial Management System (IFMS) presentation
Mr Phila Mhlakaza, Acting Chief Director: IFMS Chief Directorate, National Treasury, said he had been newly appointed. He assumed duty on 1 September, and had not been able to deal with the pertinent issues the Committee expected the chief directorate to address. However, forensic investigations to unearth irregularities were underway. This explained the underspending by IFMS as a number of invoices had been put on hold. Also, poor planning was a challenge and IFMS had adopted a bottom-up budgeting model moving forward, among a host of other measures.
Efforts to improve on deliverables included: the approval of implementation approach supported by high level Programme stage Plan; finalisation of nine IFMS governance strategies and structures; creation of IFMS governance committee to be constituted by a business owners committee, design authority board, risk committee and communications committee; and establishment of the IFMS knowledge repository. Funding for the IFMS programme to create dedicated financial management capacity had been secured. Also, the process of developing an IFMS costing model with SITA (first version) as a means of bringing costs down, and negotiations on termination and settlement of IFMS I contracts were underway.

Discussion
Mr Topham said the crux of the matter was when the aforesaid Programme stage Plan would be implemented, and if there were any holdups.

Mr Mhlakaza explained that the directorate had not yet been given a formal mandate by the Director-General in terms of the turnaround strategy. However, the urgency of dealing with challenges was well understood. Currently, forensic investigations linked to payments were underway and would be exhausted by the end of September.

Ms Shope-Sithole felt it was unfair to ask the newly appointed Acting chief director hard questions. He had to be given an opportunity and time to be on his feet. She suggested the meeting with IFMS be rescheduled so that the Committee would not be seen as if it was conducting a ritual, but being effective in its oversight mandate.

Mr Gcwabaza said issues surfacing in the media should be articulated before the Committee. Why were issues pertaining to various irregularities within IFMS finding expression in the media and not being tabled before the Committee? He agreed that it would be premature to ask the newly appointed acting chief director hard questions. 

The Chairperson said there might be need for follow up meetings with Treasury, Office of the Chief Procurement Officer and IFMS. The presentations were informative and the Committee would write to Treasury if it needed clarification on some aspects.
 
The meeting was adjourned.

 

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