National Treasury & SARS 2018/19 Annual Report, with Deputy Minister

This premium content has been made freely available

Finance Standing Committee

09 October 2019
Chairperson: Mr J Maswanganyi (ANC)
Share this page:

Meeting Summary

Annual Reports 2018/2019

The Standing Committee met with the Deputy Minister of Finance and senior National Treasury (NT) officials to be briefed on the NT’s annual report, following a meeting the previous day with the Auditor General of South Africa (AGSA) on the Treasury’s audit outcomes, which had highlighted irregular expenditure of R466 million for the 2018/19 financial year.

Committee Members expressed concern that while the NT had been given an unqualified audit opinion, it was accompanied by findings about failings in supply chain management (SCM), and weaknesses in internal controls and record keeping. NT officials assured the Committee that remedial steps were being implemented and that action was being taken against officials and service providers who had transgressed regulations. A forensic investigation into irregularities in the development of an Integrated Financial Management System (IFMS) had been completed, and charge sheets had been drawn up.

The Committee was told that the NT’s work was hampered by high vacancy rates at the senior management level. The Cabinet had been approached for a special dispensation to enable these posts to be filled.

The Deputy Minister said the NT was aware that, as custodian of sound management in government, it had to set an example. However there had been setbacks. The NT had met 84% of its performance targets, but it should have been at 100%.

In his opening remarks at the meeting, the Deputy Minister said low economic growth, high unemployment, poor revenue collection, loss-making state-owned enterprises and a high public service wage bill were crowding out the government’s ability to invest in meeting social needs. South Africa had not yet recovered from a global economic recession. A growth in economic nationalism and trade protectionism in northern countries would have a big impact on South Africa. The country had its own structural problems and the recently released economic strategy paper was an attempt to address them.

The SARS Commissioner told the Committee that the damage done at SARS was more serious than had been reported by the Nugent Commission of Inquiry into the administration and governance at the organisation. He described it as “deep and incalculable.”

The Deputy Minister said that SARS was working to correct many of the concerns about its performance raised by the Auditor General of SA (AGSA) and the Nugent Commission. He said SARS was an important institution for democracy, and if it was not doing well if was difficult to generate revenue to provide services to the people.

SARS said that in spite of the many challenges, there had been commendable achievements for the 2018/19 financial year. It had collected a net amount of R1 287.7 billion against the 2019 budget estimate of R1 302.2 billion, resulting in a shortfall of R14.5 billion. Revenue growth had been R71.2 billion, or 5.9% against a gross domestic product (GDP) growth of 4.8% for the period.

Committee Members criticised the shortcomings in the organisation’s supply chain management pointed out by AGSA, and insisted that there should be proper consequence management through taking action against officials who had transgressed against regulations. They expressed concern about the number of vacancies and the lack of women in top management positions at SARS.

Meeting report

 

Deputy Minister’s opening remarks

Mr Amos Masondo, Deputy Minister of Finance, said low economic growth, high unemployment, poor revenue collection, loss-making state-owned enterprises (SOEs) and a high public service wage bill were crowding out the government’s ability to invest in meeting social needs.

South Africa had not yet recovered from a global economic recession. A growth in economic nationalism in northern countries would have a big impact on the country. It had its own structural problems and the recently released economic strategy paper was an attempt to address them.

The National Treasury (NT) was aware that as custodian of sound management in government, it had to set an example. However, there had been setbacks, with irregular expenditure in the development of the NT’s Integrated Financial Management System (IFMS). The NT had met 84% of its performance targets, but it should be at 100% cent. One of the problems was a high vacancy rate at senior management level.

Department of Finance 2018/19 annual report

Mr Dondo Mogajane, Director General, NT, told the Committee the NT was conducting a major organisational review to see whether it was “fit for purpose.”

Investigations into the IFMS challenges had been completed and a process of “consequence management” for officials and service providers was under way. The NT’s annual financial statements provided details of irregular expenditure of R588 million for the 2018/19 financial year. Of this, R122 million came from previous years. This was due to the fact that R687 million of the irregular spending of R809 million in 2017/18 had been condoned, leaving the balance of R122 million still to be condoned once the necessary investigations and remedial steps had been undertaken.

Mr Mogajane said staff retention was a major issue, as the NT had to compete with the private sector in attracting staff. Many senior officials were in acting positions. The NT had approached the Cabinet for a special dispensation to allow these positions to be filled.

Ms Laura Mseme, Chief Director: Performance Management and Strategy, NT, presented a detailed breakdown of the NT’s performance in meeting pre-determined objectives. Overallthe NT had achieved 113 of the 134 targets (84.33%) that had been set. Eighteen targets were partially achieved and three were missed.

One of the targets missed was the expenditure ceiling. The ceiling announced in the main budget was greater than the one which had been set. The others related to the development of a curriculum on risk management for higher learning institutions and a failure to fully complete a risk-based internal audit plan.

Mr Mogajane said the NT had spent 96.4%, or R28.7 billion of its appropriated budget. The under-spending of R1.1 billion did not have a material impact on pre-determined objectives. Main causes of under-spending were the fact that R400 million in infrastructure funding was not disbursed by the Development Bank of Southern Africa, and R203.9 million was not spent because of delays in implementing the IFMS. Disbursements to Jobs Fund partners had been R226 million less than projected.

Mr Mogajane referred to a report of the Auditor General of South Africa (AGSA) which, while expressing an unqualified audit opinion on the NT’s annual financial statements, had drawn attention to failures in record keeping and supply chain management (SCM). Remedial action was being taken. An audit action plan had been developed to address internal control failures. There were regular progress reports, and a comprehensive review of SCM was almost complete.

In general, the Committee should feel comfortable that the day to day operations of the NT were intact. However, the leakages in SCM were a worry. Other concerns were low revenue collection by the SA Revenue Service (SARS) and low economic growth.

Discussion

Mr I Morolong (ANC) said the Committee expected the National Treasury to set precedents for financial management, but both the AGSA report and the annual report indicated a growing regression in audit outcomes, especially in irregular expenditure. The Committee wanted to be kept abreast about action plans and consequence management where there was poor performance by officials. Other departments could not be expected to set the bar high if Treasury was not leading by example. He was worried about the condonation of irregular expenditure and the fact that the Jobs Fund had not reached its targets. He asked why the fund’s targets focused on the number of projects, and not the number of jobs created.

Ms D Peters (ANC) referred to the fact that 127 Jobs Fund projects were approved, as opposed to the target of 150. She asked how many jobs would have been created if the balance of 23 had been approved. The NT should work even harder than the 150 target. The NT had reported that it had supported 90 criminal investigation cases, and asked what the results of the investigations had been. They should be applauded for training 1 185 municipal officials in financial management, but she wondered what tangible impact this had had. The state of municipalities left much to be desired, especially in the area of supply chain management. She asked how the work done by the NT impacted on training being done by Department of Cooperative Governance and Traditional Affairs (COGTA).

Mr W Wessels (FF+) said there were many repeat findings in the AGSA report. He asked why the Treasury was failing to implement repeated recommendations made by the Auditor General. The NT should set an example, and it was concerning that basic things like proper record keeping were not being done and that levels of audit assurance were lacking. Although there was an audit action plan, it was not the first, so what was different about the current one? On the issue of consequence management, he asked what plans were in place to ensure disciplinary action was taken in cases of irregular expenditure. He commented that only 3.3% of posts had been evaluated, and asked whether this was enough to ensure that NT functions were streamlined.

Ms Z Nkomo (ANC) said irregular expenditure had increased over two years. She asked whether there were detailed plans to ensure proper consequence management. On applications for condonement of irregular expenditure, she asked why the National Treasury would accept something that was wrong.

Mr G Hill-Lewis (DA) put it to the DG that in September he had attended a meeting of the ANC national executive Committee in his capacity as DG to make a presentation on NT business. A copy of the presentation, marked secret, had subsequently been leaked. He said the Constitution and public service regulations required the separation of party and state. He asked Mr Dondo to explain whether in hindsight he thought it had been appropriate to attend the meeting.

Addressing the Deputy Minister, Mr Hill-Lewis said that since the election he had personally tabled around two dozen Parliamentary questions to the Finance Ministry, and many more had been tabled by other parties. The Ministry had responded to fewer than five. He asked for an explanation, adding that the rules of Parliament required replies within 10 working days.

On the issue of consequence management, Mr Hill-Lewis asked how many people had been disciplined for irregular expenditure in the previous year, and what the outcomes were.

On the NT’s annual performance plan (APP), he said all the targets that had been set carried an equal weighting. The NT’s overwhelming mandate was to stabilise the country’s debt by sticking to an expenditure ceiling. He suggested it was a misrepresentation to say the NT had achieved 90% of its targets when it had missed the most important one.

National Treasury’s response

In response to Mr Hill-Lewis’s questioning of his attendance at the ANC meeting, Mr Dondo said that he had studied public policy and administration at university. He was well aware of the need to draw a line between politics and the public service, and did not feel conflicted if he put on an ANC T-shirt in his spare time. He had a democratic right to be a member of a political party. As a Director General, he would be willing to share his knowledge with any party that requested it. He gave an assurance that political allegiances had no bearing on the way in which the NT carried out its work.

He said the NT’s primary goal was to stabilise the country’s debt at acceptable levels. While efforts were made to achieve specific targets, there were factors beyond the control of the NT, such as slow economic growth or SARS not collecting enough revenue. He said auditing the NT on macro-economic variables was a contentious issue.

Mr Dondo said he would provide the Committee with details of consequence management processes. The IFMS information technology programme accounted for the bulk of the irregular expenditure. Following a forensic report, charge sheets had been prepared and disciplinary action was under way. The process would have to be handled carefully, with legal assistance throughout. Steps were being taken to recover money from service providers which had been paid irregularly.

Mr Dondo said the training of local government officials was a huge challenge. However, it was not only officials who were responsible for SCM transgressions. Politicians also interfered in the processes. People could be trained in SCM and contract administration, but they had to be held accountable by oversight bodies in councils.

On the Jobs Fund, he said R9.2 billion had originally been allocated to the Development Bank of Southern Africa (DBSA) for this purpose. This had not worked and the money had been brought back to the Government Technical and Advisory Centre (GTAC), which was responsible for the disbursement of funds. Reporting lines were now being clarified. The way in which the Jobs Fund operated could create an impression that there was under-spending. Funds were committed over periods stretching longer than one financial year, meaning commitments made without actual payments could show up as under-spending.

Ms Mseme said an intergovernmental relations (IGR) division was currently conducting a study on all training provided for local and provincial government officials. There was a need to address systemic challenges such as high staff turnover instead of continually training. NT and COGTA had signed a memorandum of understanding on how to complement each other’s work.

Ms Mseme said irregular expenditure had declined to R588 million, from R889 million the previous year. A request for condonation by the Chief Procurement Officer (CPO) had been delayed by the consequence management process.

Mr Dondo explained that irregular expenditure would continue to be listed as such in the financial statements until there had been a demonstration of consequence management.

On repeat audit findings, Ms Mseme said an audit committee set up last year had now been reviewed and strengthened.

On the weighting of targets, she agreed that certain areas of work were critical. However, she did not believe in encouraging “ivory towers of achievement.” The NT had to deliver equally on all its mandates.

On job evaluations, she said the NT was busy with a review of its entire strategic programme. A “huge amount of work” was being done.

Deputy Minister Masondo, responding on Parliamentary questions, referred to a report from the Leader of Government Business in Parliament which had been presented to the Cabinet. According to that report, the Finance Ministry had received 20 questions from the National Assembly and responded to nine. The other 11 were still in the system. Four questions had been received from the National Council of Provinces (NCOP), and two had been answered. He said the Ministry did take Parliamentary questions seriously.

On the DG’s attendance at an ANC meeting, Mr Masondo said the Constitution guaranteed everyone’s right to freedom of association. It also required public servants to act in the interests of all South Africans. He could not see anything wrong with the DG agreeing to make a presentation to the ANC or any other political party or organisation. It was important to deepen democracy by opening up spaces for information sharing.

Mr Masondo said a memorandum of agreement between the NT and Cogta on a division of labour in providing support to local government would be finalised soon.

The Chairperson invited follow-up questions.

Mr Hill-Lewis said that while he had respect for the DG’s professionalism, it would not be appropriate for him to make an NT presentation to a closed meeting of any political party. The Public Service Commission should issue a practice note on this issue, given an increasing tendency for senior officials to attend ANC meetings in their capacity as civil servants.

The Chairperson said the DA had in 2012 defended the Public Protector’s decision to address a DA women’s meeting. He said DGs would not refuse requests to address any political party.

In his concluding remarks, the Chairperson said the NT was unlike any other department in that it drew its mandate from the Constitution. It was responsible for enforcing compliance with regulations at other departments, yet the NT itself was regressing. If this continued, its moral authority would be questioned. The AGSA report had raised serious issues which had to be attended to.

Mr Hill-Lewis attempted on a point of order to reopen the issue of the DG’s attendance at an ANC meeting. The Chairperson overruled him and adjourned this part of the meeting.

After being briefed by the National Treasury in the morning, the Committee reconvened in the afternoon for a briefing by the SA Revenue Service (SARS) on their annual report. The Chairperson invited the Deputy Minister to make opening remarks.

Remarks by Deputy Minister

Deputy Minister Masondo said SARS was working to correct many concerns about its performance raised by the Auditor General of SA (AGSA) and the Nugent Commission of Inquiry into Tax Administration and Governance at SARS. He said SARS was an important institution for democracy. If it was not doing well, it was difficult to generate revenue for services to the people.

The Chairperson invited the SARS Commissioner, Mr Edward Kieswetter to brief the Committee.

Briefing by SARS

Mr Kieswetter began by pointing out that, of all the chief officers in the delegation, only the chief financial officer was there in a permanent, and not an acting, capacity. Consolidating the leadership of SARS was one of the challenges the organisation faced.

He said the success of SARS was central to the success of democracy. The Nugent Commission had found a significant failure of integrity and a deliberate dismantling of key governance elements. A systematic hollowing out of critical capabilities and a fundamental breakdown of important relationships had done “incalculable” damage.

Of 33 strategic objectives, 16 had been achieved and five were just below target. Areas of under-performance included taxpayers’ compliance in paying company and personal income tax, and in filing VAT returns.

In spite of this, there had been commendable achievements during the 2018/19 financial year. SARS had collected a net amount of R1 287.7 billion against the 2019 Budget estimate of R1 302.2 billion, resulting in a shortfall of R14.5 billion. Revenue growth was R71.2 billion, or 5.9% against a gross domestic product (GDP) growth of 4.8% for the period.

For the year, SARS had received 4 886 360 personal income tax returns. Of these, 54.59% had been submitted electronically, an over-performance due to ongoing efforts to promote e-filing.

SARS had achieved a cost to revenue ratio of 0.84%, meaning it had contained costs while increasing the revenue collected. However, the ratio was still below international benchmarks. This indicated significant financial constraints which limited its capacity to enforce legislation.

For employment equity, 76.03% was achieved. The target was not met because of a freeze on recruitment, which left a shortfall of 290 employees.

Mr Kieswetter said SARS had obtained an unqualified audit opinion from the Auditor General of SA (AGSA), but there were key findings about supply chain management (SCM) involving contracts and bidding processes which had resulted in irregular expenditure.

The SARS workforce was stable, with an average age of 43 and an average of 16 years of service. The number of 12 491 permanent employees was 310 fewer than the previous year, due mainly to cost reduction requirements. A lack of funding to backfill vacancies would have an impact on capacity.

Mr Kieswetter said SARS had a new five-year strategic plan which aimed to build “a smart modern SARS with unquestionable integrity, trusted and admired by government, the public as well as our international peers.”

Discussion

Ms D Mabiletsa (ANC) urged SARS to attend to supply chain management (SCM) issues raised in the audit report. She also raised concern about the freezing of posts.

Mr Morolong said SARS should rest assured that the Committee would seek progress reports on consequence management for transgressions of regulations. SARS continued to miss revenue collection targets. He asked if the targets were realistic and how the risk of missing them could be mitigated.

Ms Nkomo asked what the plans were to address funding constraints.

Ms Peters commented that although SARS was reporting a 49% representation of women at management level, this was not reflected by the gender make-up of the delegation appearing before the Committee. She asked what challenges there were in attracting competent women, and said they should not be employed in areas where they could not be seen. She asked how much revenue had been collected from an environmental levy on plastic bags, suggesting this could be used to alleviate job creation funding pressures. She said some municipalities were not passing PAYE deductions from employees on to SARS, and asked what SARS could do in building their capacity to attend to this.

Mr Hill-Lewis said he was concerned that senior executives across the civil service escaped consequences for wrongdoing by resigning. He asked for an assurance that criminal actions, and the recovery of financial losses, would be pursued. SARS had been through a difficult time. He asked the Commissioner whether it would take longer than originally anticipated to stabilise the organisation.

SARS’s response

Commissioner Kieswetter assured Ms Mabiletsa that people would be held to account for SCM transgressions. He said the freezing of posts was due purely to a shortage of funds.

He told Mr Morolong that he had every right to hold SARS to account for consequence management. He said revenue targets were realistic and were decided by the National Treasury, with an input by SARS. This year, SARS had made a formal submission on what it believed revenue collection should be. There was no benefit in picking the wrong number, whether it was high or low.

On consequence management, he said that arising from the recommendations of the Nugent Commission, it had been resolved to part ways with two senior executives following a process of allowing them to make representations. Two more such cases were due to be resolved in the next month.

Responding to Ms Peters, he said that SARS had over the past five years lost the ability to attract the right people, and had to work to become a sought after employer again. Plans to rebuild senior executive levels presented an opportunity to employ more women in senior positions.

Mr Kieswetter said he had found the situation at SARS to be worse than the Nugent Commission had reported. The damage done had been “deep and incalculable,” and rebuilding trust would take a long time. As an example, 90 employees in the Western Cape had launched a class action against a provision that prevented anyone other than Africans from applying for certain jobs. This was unconstitutional and created racial tensions. Another example was that when auditors were pursuing matters that presented a high risk to certain people, 3 000 files had been uplifted to Pretoria to be reviewed and used against certain individuals.

Mr Kieswetter invited other members of the SARS delegation to make inputs.

Mr Johnstone Makhubu, CFO, SARS, said the plastic bag levy had raised R300 million the previous year, and R326 million was targeted for the current year. Its purpose was not so much revenue collection as to encourage a change in behaviour in the general population.

Mr Mark Kingon, Acting Special Advisor, SARS, said the withholding of PAYE systems by municipalities went hand in hand with problems with VAT payments. Municipalities were slow to submit VAT forms. He warned municipalities against VAT agents who charged them up to 25% of the VAT refunds they claimed on their behalf.

Mr Viwe Mlenzana, Acting Chief Officer: Enforcement, SARS, said SARS was pursuing seven cases involving illicit financial flows totalling R5.9 billion. The cases depended on cooperation from foreign jurisdictions.

The Chairperson closed the meeting with a call on SARS to address gender balance issues in senior management. He said for three years SARS had received unqualified audits with findings, and these findings had to be addressed seriously.

The meeting was adjourned.

Download as PDF

You can download this page as a PDF using your browser's print functionality. Click on the "Print" button below and select the "PDF" option under destinations/printers.

See detailed instructions for your browser here.

Share this page: