Department of Finance and State Expenditure: annual report

Meeting report

FINANCE PORTFOLIO COMMITTEE
9 May 2000
ANNUAL REPORTS OF THE DEPARTMENTS OF FINANCE AND OF STATE EXPENDITURE

Chairperson: Ms B Hogan (assisted by Mr S Leeuw)

Documents handed out
Presentation by the Departments of Finance and State Expenditure
Annual Report

SUMMARY
The following issues arose:
- The Departments of Finance and State Expenditure are to be merged to form one consolidated Treasury. This merger is expected to take between 18 - 24 months.

- There has been difficulty with paying out military and special pensions. The Pensions Act applies to these (some amendments have been made to this Act), but there has been difficulty in implementation. The Minister was unsure of the current position and asked the committee to invite him back within the next month for a fuller discussion of the special pension issue. He noted that they ''are perturbed about the obstacles'' experienced.

- On the new Municipal Financial Management Bill, the Minister said that the thrust of the approach is that accounting officers are to be held accountable, saying that ''managers must manage''. He does not see a future where the Treasury is held responsible in the final instance.

- Ms Hogan felt that there has to be dialogue around the reporting format of the budget. She favours a move to an outcomes based budget format system.

MINUTES
The Finance Minister, Deputy Minister and the Director General (who is also the acting Director General of the Department of State Expenditure) were present.

Introductory comments by the Minister
The line budget vote is very important as a means of accountability for the policy choices of the executive. He noted that this was perhaps the last time that there would be two separate budget votes, as the department was looking at creating one consolidated treasury with the merger between the Departments of Finance and State Expenditure.

Annual report
The following issues were covered by the Director General, Ms Ramos, in her presentation (see document):
- Budget reform
- Implementation strategy of the Public Finance Management Act (PFMA)
- Public sector procurement reform
- Restructuring of state assets
- Restructuring of the Government Employees Pension Fund (GEPF) and the Public Investment Commissioners (PIC)
- International financial relations
- Fiscus
- Restructuring the Treasury.

Discussion
Ms Hogan (Chairperson) asked the Minister when they would move to a more output (outcomes) based budget format system. She felt that they should be looking at key performance indicators and asked what attempts were made to make this change.

The Minister replied that, in this regard, capacity was a very important point. If they accept targets ''inorganically'' then that would be ''trouble'' as the targets would then seem artificial. However, this shift to outward budgeting was not an unreasonable target, but they would first need to line up issues. He said that ''output must be occasioned by understanding'', explaining that they need to develop perspective on some of the difficulties.

Ms Hogan responded that at a later date the committee and the Minister need to dialogue on the reporting requirements so the report better evaluates implementation in terms of the budget. Thus, there has to be dialogue around the reporting format of the budget.

Mr Feinstein (ANC) noted certain problems which exist. He said that there was the problem of underspending in departments and another problem was that certain local authorities could not even pay their audit fees. He asked if the proposed restructuring could deal with these issues. He also asked if the timing of the new Municipal Financial Management Bill ("the local PFMA") would impact upon these issues.

The Minister replied that the Municipal Financial Management Bill was at the finalisation stage and should be available for publication by mid-June.
Speaking on the impact of the "local PFMA" Bill on the problems noted, he said that the thrust of the approach is that accounting officers are to be held accountable. The Minister emphasised the need for financial management, and said that he does not see a future where the treasury is held responsible in the final instance. The idea is that ''managers must manage''. As part of political accountability, they must also take financial accountability.

Mr Andrew (DP) asked when the Money Laws Amendment Bill would take place. He also asked what had caused the GEPF (Government Employment Pension Fund) to go up - was it simply good investment performance and were they planning to outsource investment decisions regarding GEPF?

Regarding the money bill, the Minister said that they have prepared a draft which needs ''dusting off''. On the issue of GPEF, he said that funding levels have increased and outsourcing has resulted in a clearer and a better database. On the issue of outsourcing investment decisions, the Minister said that capacity is being built, and they would look to see if trends are moving in the right direction.
Ms Ramos added that when outsourcing, one must build capacity in an organisation. Outsourcing is not equal to the abdication of responsibility. It is simply a way to do things better and smartly.

Dr Rabie (NNP) asked if the structure of the GEPF was the same as the Dutch and Californian pension fund systems, or whether it applied to the South African situation. He also referred to the earlier comment that there was more active management of the debt portfolio, and asked for examples of this.

The Director General said that the department had ''purchased'' a risk management system (a system based on the Californian and Dutch models), and had adapted it to South African conditions, having regard to the South African yield curve, the deficit, and the output on that in the medium term. While the model is in line with the Dutch and the Californian pension models, parameters of the model are for South African conditions.

On his second question, Ms Ramos said that they had spent the last four years developing liquid benchmarks and for the first time they were in a position (fiscally) to look at active debt management.

Mr Momoto (ANC) asked if South Africa's borrowing efforts have been achieved at good rates.
Ms Ramos said that they try to borrow only a small percentage in the international capital market in any financial year. In the 1999/2000 budget, the revised deficit is 19.7 billion rand. This is the amount which they would have had to borrow in the market. However, they acquired 6.9 billion rand from privatisation, therefore, they only needed to borrow 13 billion rand in the market. Thus, there is a beneficial long-lasting effect on the country's debt.

When they borrow, they borrow at a discount (this is the difference between what the investor can get in the market and the amount shown on the government bond). In the bond market, South Africa has foreign and local investors (who buy SA bonds). Foreign investors in the SA market bring liquidity. If there are more buyers, then there is more competition. It reduces the cost of borrowing for the government.

Dr Koornhof (UDM) referred to the department's philosophy on asset management, commenting that the proceeds from state assets are used for debt servicing. He asked if it was also used to attend to the needs of the needy communities.

The Minister replied that there cannot be a ''one size fits all'' approach. Telkom proceeds were used for this but it cannot always be done. With the SAA sale, for example, the money was used to expand their fleet. This gave them a chance of going forward. One cannot always achieve the Telkom case.

Ms Jumat (ANC) asked whether the vacant posts in the department (noted in a previous Department report) had been filled. She asked what was being done to ensure that people were not leaving to work in the private sector - a problem experienced in other departments.

Mr Nair also asked if there were training programmes for personnel. He also asked about the department's use of consultancy services.

On the issue of staffing, the Minister replied that the public sector is enriched by the ability to draw people from the private sector. If people stay in the Department for 3 - 5 years, then that is good. Where there is a clear movement of people between the public and the private sector, then that is good for both sides because it strengthens what they have to offer.

The department makes use of consultancy services to perform particular functions, there are also individuals who come in and out on a contract basis, and, certain areas of government functions are outsourced. (There are approximately 300 of these).

Ms Jumat also asked a question about gender representivity in top management.
The Director General said that they have been building up representivity, but this still remains a big challenge. She said that it is a key priority.

Mr Andrews commented on the problems experienced by civil servants in receiving their lump sum pension payout timeously, saying that they often ''get sent back and forth'' when trying to sort out the problem.

The Director General replied that they have set up call centres to address such queries. They have also set internal targets to improve turnaround times. Often, applications are incomplete. There is also a backlog in processing these applications.

In response to a question by Mr Feinstein, the Minister said that the fact that the rand was weakening was really only a reflection of the strengthening of the American dollar. When the rand is compared to the Australian dollar, for example, the rand has improved. This past Thursday the rand strengthened against the Euro too. The Director General added that they must work on the development of domestic capital markets, yield curves, liquidity in these markets, and ensuring that the risk profile of the country is sustainable. ''These things need to be done''.

Mr Chiba (ANC) referred to the military pensions which were to be received by January 2000. He asked how many were still to be received.

The Director General said that p66 of the Annual Report referred to military pension administration and non-statutory forces. Applications for special pensions closed on 31 March and there are over 35 000 such applications. There has been difficulty in the payment of such pensions. The Pensions Act applies and some amendments have been made to this Act. The difficulty they were experiencing was in implementation.

The Minister said that he would have to check with pension administration before he could answer this question.

The Chairperson said that there were people waiting for these special pensions, and that the department should look at the impediments to the Act so that the obstacles to proper implementation could be sorted out.

The Minister asked the committee to invite him back within the next month for a fuller discussion of this issue and noted that they ''are perturbed about the obstacles''.

In conclusion, the Minister commented that, through the reconstruction, they wanted to build something that is permanent. He referred to their Italian counterpart, saying that the process took them 7 - 9 years to complete. The impetus, he said, is to ''deliver democracy to the people''. He added that training and investment in people are very important.