Public Finance Management Act: briefing

Basic Education

19 March 2001
Chairperson: Prof Mayatula
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Meeting Summary

National Treasury explained the Public Finance Management Act and its proposed implementation plan. 

Meeting report

Mr du Plessis from the Department of Finance went through a slide presentation on the Public Finance Management Act.

Public Finance Management Act and Regulations: Introduction
Why a new approach?

The Reconstruction and Development Programme of the government requires maximisation of service delivery. This has to be done against the background of limited resources versus unlimited demands. The new approach has also been designed to satisfy constitutional obligations, specifically Section 216 of the Constitution 

Budget reforms since 1994
- Budget decentralisation - provincial governments are now responsible for compiling their own budget
- Shift to multi-year budgeting 
- In-year management - early warning system
- Less focus on inputs - there has been a shift to outputs which are the services and goods that each department delivers.

Where were we Starting From?
Financial administration was rule bound. Financial processes were controlled by prescribed rules that allowed little scope for managerial discretion. Therefore, Accounting Officers were passive and did not practice sound financial management. 
There was a focus on inputs rather than outputs. There was a need to transform the public services in terms of delivery. Counter-balanced against the problems of fiscal constraints are service delivery backlogs. In summary, there was a need to improve value for money. 

Components to Change
There was a need to move away from financial administration where detailed procedures were prescribed by the Treasury, as this resulted only in transactional accounting. There was a need to move to sound financial management, not only by the technical staff but also by line managers who do not acknowledge that they have financial management responsibilities. 

The Solution
- To modernise financial management by enabling management to provide better information. This was designed to make managers more accountable. 
- Clearer definition of roles 
- Greater transparency and accountability 
- Better information and reporting and improved management will result in improved value for money and service delivery

Practicalities
- Budgeting by outputs 
- Introduce service standards & costing systems - this would be done over a long-term period. 
- Greater responsibility over transfer payments
- Emphasis on programme managers to take responsibility for financial management

Clarity of Roles: Minister & Director General
The Public Finance Management Act (PFMA) clarifies the roles of the Minister and Departmental Head from 1 April 2000:
- The Executive Authority (the Minister and the MEC) must take responsibility for policy matters, outcomes and the presentation and approval of departmental budget and report. 
- The Accounting Officer is responsible for outputs and the implementation of departmental budget and is accountable to Parliament for financial management. 

The Benefits of the Act 
The Act will provide a framework for better use of resources and improved delivery of services

Desired outcomes over a long-term period
- Sound financial management
- Transparent budgeting process 
- Effective management of revenue, expenditure, assets and liabilities
- Unqualified consolidated financial statements, prepared on accrual basis
- Accountability of public entities and external agencies

Discussion
Mr I Vadi (ANC) asked for clarity on the difference between an outcome that the Minister is responsible for and the output. He asked if there is any material difference between the two concepts. 

Mr Du Plessis responded that outcomes can be seen as the service delivery objectives government wants to achieve. One can say that for the Department of Education, an outcome might be to increase the number of students or to increase the passing rate of the matriculation candidates. The outputs, or the services and goods the Department renders to the community, must be present in order for outcomes to be achieved. An output of the Education Department could be, for an example, to provide primary school education. 

Mr L Green (ACDP) based his question on the slide entitled "Desired outcomes over a long term period". He asked about the accountability of public entities and external agencies. Was it correct to assume that political parties are also regarded as public entities and would the funding that has been allocated to them in terms of the IEC have to be accounted for in terms of the PFMA. 

Mr Du Plessis said the PFMA sets out specific criteria for when an institution will qualify as a public entity: the institution must be established in terms of legislation, it must be substantially or fully funded either from the National Revenue Fund or by way of tax, levy or other money and it must be accountable to Parliament. The Schedules of the PFMA lists all the public entities. Schedule 1 lists constitutional institutions, which are established in terms of the Constitution such as the Independent Electoral Commission. The PFMA requirements are more or less the same for constitutional institutions as for government departments. Schedule 2 contains the major public entities such as ESKOM. Schedule 3 contains other national public entities such as the Accounting Standards Board

Mr Green added that he does not see political parties listed in any of the schedules of the Act. He asked whether this meant that political parties are not public entities. 

Mr Du Plessis replied that political parties are not listed as public entities and the provisions of the PFMA are not applicable to them. 

The Chairperson asked when would departments be expected to deliver or specify outputs.

Mr Du Plessis replied that Section 27(4) requires departments to specify measurable objectives when the budget is tabled in Parliament. This section of the PFMA has been delayed until 1 August 2002 and departments are only bound to specify those measurable objectives in the 2003/2004 budget. Even though implementation of this section has been delayed, National Treasury has asked departments to specify outputs and service delivery outcomes in the 2001/2002 budget documentationEven though the quality at this stage is not exactly what is required in terms of the PFMA, at least this is a start. In many cases, departments have only indicated what can be measured without specifying the quantity and quality indicators. 

Overview of the Act
What does the PFMA do?

The Act repeals 10 Exchequer Acts, establishes a national treasury, provides a framework in place of detailed procedures. This is a framework within which the accounting officer must manage his department. The Act also ensures much stronger oversight over public entities. It establishes an Accounting Standards Board that sets standards of generally recognised accounting practice. There are also regulations drawn up by Treasury.

Modalities of the New Act
The new Act will cover national departments, constitutional institutions, provincial departments and public entities. It excludes universities due to autonomy of these institutions and it also excludes local government. 

Cabinet has approved a phased implementation - although most of the provisions of the PFMA have come into effect from 1 April 2000. The plan for the implementation of the PFMA is for future "qualitative changes". 

National & Provincial Treasuries
The PFMA provides for broad national powers to monitor and enforce the implementation of the Act in departments. It also provides for the National Treasury to issue frameworks. National and Provincial Treasuries need to take leadership in financial management such as providing guidance and support. 

Budgets
The PFMA requires departments to specify outputs and measurable objectives (see s27 (4) of the PFMA). 

Executive Authorities
The Minister's statutory responsibilities are set out in the Act, for example, considering financial reports and reporting to Cabinet and Executive Council. 

Role of the Accounting Officer
All departments and constitutional institutions must have an accounting officer who is usually the head of department. There must be a performance contract between the Minister and the departmental head specifying the outputs that the departmental head must achieve. The duties of the Accounting Officer are set out in Section 38 of the Act.

Public Entities
Schedule 2 entities report directly to Parliament via the Minister. They have some managerial autonomy. They must provide information on budget and corporate plans. 

Loans and Guarantees
- Restricted authority to borrow or 'guarantee' 
- Foreign liabilities and borrowing illegal
- State bound by individual 'organs'

General Treasury Matters 
Responsible for establishing/dealing with:
- Norms and standards
- Financial misconduct
- Accounting Standards Board

Discussion
Prof S Ripinga (ANC) asked how autonomous institutions like universities and business institutions that receive money from national revenue, give account.

Mr I Vadi (ANC) added that there is a large abuse of funds at universities, which usually necessitates the Minister appointing an administrator to investigate the matter. He asked for an explanation for the exclusion of Universities as public entities. Secondly, he asked what could be done to enforce greater control and discipline over the use of public resources there. 

Mr L Modisenyane (ANC) asked about annual reports and the time frame within which they must reach Parliament.

Mr Du Plessis replied that in the case of the Schedule 2 public entities [business institutions] there is the autonomy to manage their day to day affairs without the interference of the Minister. However, in terms of the Public Finance Management Act they will have to, before the beginning of a financial year, have a corporate plan or strategic plan setting out their aims and objectives. They must also at the end of the financial year report in terms of the financial report required in terms of the PFMA. The difference between Schedule 2 and 3 Public Entities is more autonomy in the day to day business. The reason for this is that these entities are performing in terms of business principles. 

In case of universities, although all the provisions of the PFMA are not applicable to these institutions, there are huge transfer payments made from the Dept. of Education to Universities. In terms of the Accounting Officer's responsibilities he must ensure that efficient and effective internal controls and financial management procedures are in place within those institutions in transferring funds to them. There must even be a certificate from these institutions that they do have proper internal control and proper financial management practices in place. Therefore, there is enough scope within the PFMA for the Accounting Officer or the Education Department to get involved in the financial administration within the University. Thus the Minister can interfere in terms of the PFMA. 

Mr Vadi said that universities are not under any obligation to table reports to Parliament in terms of their affairs. He asked if this was not a weakness. He accepted that the PFMA imposes a sort of an indirect control. However, in the last few years some of the universities have gone out of control and some of them are almost bankrupt. Should not the state, while it is not violating the principle of university autonomy, begin to tighten the financial control system of the administrations in order to avoid a situation where almost a third of the universities in the country are annually bankrupt. He said that this situation would clearly not be in the public interest. He felt that the Committee should discuss the reason behind their exclusion in the important provisions of the Act. 

Mr A Mpontshane (IFP) wanted clarity on approving unauthorised expenditure. How far can the provinces enter into unauthorised expenditure - with the hope that the Act recognises it? 

Mr Du Plessis replied that no one is allowed to have unauthorised expenditure. But should that occur, the definition of unauthorised expenditure is spending more than the legislature has approved and also not spending according to the programme description of the specific department. Should there be any overspending by the provinces, the legislature will look at the unauthorised expenditure. If there are suitable reasons for it, that might result in the approval of additional funds. 

Mr R Ntuli (DP) commented that there are a few departments that repeatedly engage in underspending. This results in poor delivery. He asked how the Act addresses this situation for the people on the ground who are suffering. 

Mr Du Plessis replied that departments must report on a monthly revenue and expenditure. The Minister must ensure that the budget is spent in accordance with the original budget plan. In addition, the monthly reports must be sent to National Treasury, which will then make a follow up should there be any indication of overexpediture or underexpenditure. Should there be any underexpenditure, the Minister must report to the Cabinet. 

Overview of the Treasury Regulations
Mr du Plessis ran through the Powerpoint presentation with no extra detail/

Discussion
Mr Geldenhuys (NNP) noted that in the past there have been many complaints about state departments not paying their bills despite the time limit of 30 days as indicated in one of the slides (expenditure management). Has there been an improvement in this regard, and what is the reason for limitation of 30 days instead of 90 days?

Mr R van den Heever (ANC) commented that he was interested in the autonomy that has been granted to Accounting Officers. An example of this is that Accounting Officers have been given power to deal with losses without referring to Treasury. He further commented that he was aware of the fact that there are certain checks and balances over how the Accounting Officer may exercise his power. He asked if this did not call for an extraordinary maintenance of the balance between the powers that have been given to the Accounting Officer as opposed to the checks and balances that are in place. 

Ms I Mutsila (ANC) wanted extra clarity on fruitless and wasteful expenditure, particularly wasteful expenditure that could have been prevented. 

Mr Aucamp based his questions on irregularities and asked when would one make a choice whether to report an irregularity to the Auditor General or the Executor. Secondly, he asked for Mr Du Plessis's opinion if these measures would be sufficient to bring corruption to a halt. 

Mr Du Plessis replied to the first question and said that to require payments within 30 days is a normal business practice. Payments not received within a 30 day period constitutes financial misconduct in terms of the Act and the Accounting Officer is at liberty to take disciplinary steps against staff members not complying with this requirement.

Regarding autonomy that has been given to accounting officers he responded that the Department has attempted to strike a balance with the new Treasury Regulations. Currently, steps have been taken to empower Accounting Officers. Thus the position is not as in the past when they had to refer each and every loss to the Treasury. 

Regarding fruitless and wasteful expenditure, especially expenditure in vain that could have been prevented - he answered this by making an example where a requisition is submitted for the printing of documents, and there was only a need for 100 documents but the department has produced 500. One can say that the cost of the 400 excess documents was fruitless and wasteful expenditure. This expenditure must be recovered from persons responsible.

Whether it was possible to stop corruption was doubtful. However, there is an honest attempt to put a stop to it. 

The meeting was adjourned. 

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