Financial and Fiscal Commission 2005/6 Annual Report: briefing

NCOP Finance

31 October 2006
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Meeting report

FINANCE SELECT COMMITTEE

FINANCE SELECT COMMITTEE
1 November 2006
FINANCIAL AND FISCAL COMMISSION 2005/6 ANNUAL REPORT: BRIEFING

Chairperson:
Mr T Ralane (ANC, Free State)

Documents handed out:
Powerpoint presentation by Financial and Fiscal Commission
Financial and Fiscal Commission Overview of Financial Performance
Financial and Fiscal Commission Annual Report (available at www.ffc.co.za)

SUMMARY
The Financial and Fiscal Commission was mandated by the Constitution and other legislation as an independent and impartial advisory institution within the South African intergovernmental fiscal relations system. It tabled the performance indicators for the 2005/6 year and reported that it had made a number of submissions to Parliament, had made comments on the Division of Revenue Bill, and had investigated and given advice on legislation. It had made recommendations on the Health Conditional Grants, the Health Professions and Development Grant, the financing of welfare services and on the Institutional Funding Framework for housing. It had commented on the alignment of the new housing subsidies with the Municipal Infrastructure Grants and the Local Government Equitable Share formula. Further submissions related to the funding of transport, environmental health and the development component of the Local Government Equitable Share formula. It had prioritised its work and although there was high spending on relocation and staff costs, it had achieved savings as well. Staff turnover and gender equity were critical areas, and the Commission had developed a job level and remuneration range formula that was under discussion with the Department of Public Services and Administration. Its audit report was unqualified. It had achieved income of R20.1 million and had operating expenses of R19.04 million. Expenditure on staff was high. The Medium Term Expenditure Framework (MTEF) allocation was R19 million in 2006/7, rising to R2.74 by 2009/10.

A number of questions raised by Members related to the high staff turnover and difficulty in retaining staff. This led to a discussion on the difficulties that the Commission had in defining exactly its roles, reporting lines, accountability and benchmarking of salaries. It was clear that its enabling legislation did not assist in formulating exactly how it should be structured. It requested the Committee’s assistance in defining its roles and in drawing the necessary legislation. Other questions related to the combining of the roles of CEO and Chairperson, performance bonuses, black economic empowerment, the reason why the audit committee was chaired by a Commissioner, FFC’s work in the area of housing delivery, and the apparent underspend and reasons why the allocations were stated differently in the Annual Report. It was important that the legislation governing the FFC also be amended. The integration of services and specialised training were briefly discussed. The Chairperson asked the FFC to start to define areas on which it needed clarity, with a view to presenting these to the Committee early in 2007 so that the amending legislative process could commence. FFC asked that the problems also be conveyed to National Treasury and the Minister.

MINUTES
The Chairperson commented that he was disappointed that the Chairperson of the Commission was not present. Although the Chairperson had every confidence in his team it was nonetheless important that the accounting officer attend to share his views with the Committee, which took its work very seriously.
 
Briefing by Finance and Fiscal Commission
Mr Jaya Josie, Deputy Chair, Finance and Fiscal Commission (FFC) firstly again tendered the apologies of the Chairperson. He reported that the work of the FFC, an independent and advisory Chapter 13 institution, was mandated by Section 220 of the Constitution, read together with sections 214, 218, 228, 229 and 230 and with other pieces of legislation that required it to act. In the last year it had had positive interaction with different government departments, the Finance MECs, the South African Local Government Association (SALGA), the Minister of Finance and National Treasury. It had undergone some changes in the last year, as two Commissioners had left, and a new Executive Manager had been appointed. In the following year several of the Commissioners’ Terms of Office would expire. There were ongoing discussions between the Chairman, the office of the Presidency and the Minister of Finance, on nominees for replacement. An ad hoc Committee was currently reviewing all the Chapter 9 Institutions, and although the FFC did not fall under this Chapter there were bound to be some pertinent issues from that review which could have an impact.

Mr Josie tabled the performance indicators, which showed the projects undertaken and what had been achieved. The FFC had made submission to government, to both Houses and several parliamentary committees. Its submissions on the Intergovernmental Fiscal Relations Act had resulted in Government putting in place a conditional grant, pending a new instrument to replace the Regional Services Board levies.

Submissions were made on the Health Conditional grant and the Health Professions and Development Grant. Cabinet had agreed with the FFC recommendation that the Health Conditional Grant be retained, and that tertiary institutions must be modernised. The recommendations on the Health Professions Grant had addressed the loss of health staff at all levels, and looked at options to improve efficiency. FFC had suggested rationalisation of the input from the Departments of Education and Health.

Loss of social workers had been another problem identified and the FFC report on this aspect suggested that the government should redefine the “basket” of social welfare services, which should remain within the competencies of provincial and local government. More funding had now been allocated.

Government had accepted all FFC’s recommendations on the assignment of powers and functions. FFC was currently engaged in another exercise on the demarcation process, where there had been disputes about functions, powers and responsibilities. It had also advised on the Institutional and Funding Framework for Housing. The data, criteria and quality of work in the projects were problematic. Government had suggested that administrative costs were already accounted for in the funding given to municipalities, but FFC disagreed, believing that it would be inappropriate to expect all municipalities to service the costs.

FFC had recommended that the Municipal Infrastructure Grant (MIG) and Local Government Equitable Share Formula should be combined. Government thought this might be difficult because the MIG programme had some time lags. FFC recommended the formula should be simpler and more transparent.

FFC had also made recommendations on inter-modal transport planning, which were accepted. The Gautrain Rapid Rail link had provided some lessons on coordination of planning. It had recommended also that environmental health services should be included in the basic component of the Local equitable share formula, and there was a need to develop a “package” rather than try to rely on the provisions of the National Health Act. FFC was still working on the Development Component of the Local Government Equitable Share Formula and the final proposals would be included in the next Annual Report. Two additional research projects had been commenced in the past year, but these had been shelved with the loss of staff.

The financial statements were tabled, but not discussed in depth. Mr Josie stated that FFC had received adjustments to the budget to cover some outstanding issues arising from relocation of offices and new computer systems. It had an unqualified report. It had, however, achieved some savings. It had a strong equity and transformation profile. The total income was R20.1 million and the operating expenses R19.04 million. Expenditure on staff was high, as was to be expected. The Medium Term Expenditure Framework (MTEF) allocation was R19 million in 2006/7, rising to R2.74 by 2009/10.

In future FFC hoped to enhance and improve its knowledge management system and information systems, to improve the research agenda and to undertake some long term studies if it could increase its research capacity. Challenges remained in the retention of staff and commissioners. Around 1% of the budget was spent on training but staff were headhunted by other departments and the private sector.

Discussion
Mr M Goeieman (ANC, N Cape) noted the concerns on the loss of staff and asked why staff were moving from FFC. He asked if other divisions, such as National Treasury, were able to pay more or if the challenges were greater.

The Chairperson agreed that this was a fundamental question. He asked if there were skills retention strategies in place. He commented that FFC should not be a fluid structure constantly in transition, whose projects could not be completed through lack of staff. He queried whether the FFC was really doing its work, and suggested that the matter needed to be discussed with the Department of Public Service and Administration (DPSA).

Mr E Sogoni (ANC, Gauteng), on the issue of staffing, asked who was responsible for the appointment of Commissioners, as he saw that there were two women. He asked what interventions were planned to ensure a better balance among both commissioners and staff.

Mr Sogoni also referred to a remark in the Annual Report that National Treasury (NT) might agree with proposals. He asked whether NT would assist with salary structures. He asked for clarity on any discussions with Public Service and Administration. He asked whether FFC was in fact asking to be part of the public service, as this was surely in conflict with its Chapter 13 status.

The Chairperson asked whether FFC was giving value for money on the services it rendered, and whether it was possible to quantify the impact of its spending.

Mr D Botha (ANC, Limpopo) said that he had noted all the positive aspects of the report but had not really had a sense of the major challenges, other than the staff retention. He asked if there were others.

Mr Josie indicated that he could cover all these questions by giving a history of the FFC and an indication of the current situation. When the FFC began, it was a Chapter 13 institution, along with others such as the Revenue Services (SARS) and the Reserve Bank, all of which required a very specialised knowledge base and specific skills in fields such as macro-economics, fiscal policy and development. There were very few people at that time in South Africa with those specific skills and many were immediately absorbed by government. He was very much in favour of setting up a specialised institute to train graduates in public finance skills but this had not yet got off the ground. Many of the FFC staff attended universities and obtained Masters and Doctoral degrees. However, having trained such people, they were then immediately a target for head-hunting by other public institutions, including National Treasury and Reserve Bank, and private firms. Whilst they remained in South Africa and thus added to the general pool of skills, it was nonetheless a loss to FFC.

Remuneration was one of the major reasons why people left FFC. When FFC began, it had no benchmark against which to peg its remuneration either for Councillors or staff. It was not in quite the same position as the Reserve Bank or SARS because its recommendations did not directly influence government policy. It was not in the same position as the other Commissions in Chapter 9, because the appointment process for Commissioners for the FFC required specialist knowledge and skill, and because the Chairperson and Deputy Chair of the Board were accounting officers, controlled by the Public Finance Management Act (PFMA) and therefore were more similar to the public sector. In the absence of any other benchmark, it had been decided to use the private sector remuneration as a guideline for both administrative staff and the Commissioners. The research staff remuneration was pegged at academic levels. The competition was now coming from the public sector so that was perhaps a more appropriate guideline. There was a further consideration; that FFC was using public funds. It could therefore not simply use the market rates, as it felt that it could not budget in this way with public money.

For these reasons, FFC had last year approached NT to ask how it should benchmark the remuneration. It had looked to NT as its own budget was drawn from that of NT, although it did not reflect a line item of the FFC allocation; FFC had to get its funding from the National Development Fund.

Another related issue was that of protocol. There was not only uncertainty about remuneration but also on the structure and powers of the FFC. Many of the Commissioners, despite holding the highest qualifications and experience, were still being paid on part-time rates. The remuneration was set by Presidential decision. The Commissioners were in theory independent and could submit their own reports on matters, rather than follow the Commission’s majority recommendations. Commissioners did not have conditions and terms of employment, had no performance contracts, and, despite their onerous accounting responsibilities, were not being properly remunerated. They were paid for the number of hours at meetings. By way of contrast those in similar positions in India were appointed at junior minister level, and in Australia they fell under the auspices of the Ministry. Those who had left the Commission had really been given very little other option. If there was such uncertainty at top level appointments, then naturally this filtered down to the administrative staff. Sometimes FFC’s board battled to reach a quorum.

The Commissioners also differed from other Commissions because they had a fiduciary responsibility. The Commission was not a Board. Every Commissioner had special skills relating to the Commission’s work.

Mr Josie urged the Committee to consider also the question of the reporting chain of the Commissioners. The FFC was only required to present the Annual Report to Parliament. To answer the Chairperson’s question on value, Mr Josie did not know who would assess that value. Although FFC had its own performance review systems, it seemed that there was lack of clarity on accountability. Independence should not mean lack of accountability. There was no certainty on the protocols governing FFC’s relationship with Parliament. The internal performance structures investigated whether the spending was going to the core of the FFC’s functions. The major expenditure was staff costs, but he pointed out that the Commission depended on human resources, which were its assets.

The Chairperson asked why, despite the time and money expended on training, there was still such high turnover. He wondered if it was always due to remuneration issues, or if it was affected by the style of management.

Mr Vokwana stated that the management culture had been examined, with a view to seeing its impact upon management style and the possible impact on the turnover. Independent exit interviews were conducted with staff leaving, and the vast majority indicated that they were leaving for better remuneration.

Mr Goeieman noted that the Chairperson was also the Chief Executive Officer.

Mr Josie replied that this was a strange anomaly. The two posts were indeed combined. This was another point to be addressed.  He believed that there was a need for further discussion on a range of issues. He suggested that it was necessary to interact with other Parliamentary committees to work out some recommendations. He would like this Committee to champion the necessary amendments to the legislation that would make the position of the FFC more secure and certain.

Mr Sogoni asked if performance bonuses were awarded, and that FFC should forward any guidelines to the Committee.

Mr Josie confirmed that bonuses were paid, but only to the administrative staff. This was yet another issue to be addressed under staffing. He would make a copy available to the Committee.

Mr Sogoni asked for clarification of the figures and how black economic empowerment (BEE) was applied in supply chain management.

Mr Mavuso Vokwana, Chief Financial Officer, FFC, replied that FFC was fully aware of the implications of BEE and was busy implementing policies on supply chain management. These details would be included in the next report. Insofar as recruitment was concerned in FFC, an employment equity progress report was sent through on 2 October and he would make a copy available to the Committee.

Mr Sogoni noted the comment concerning the inability of municipalities to fund services.

Mr Sogoni asked why the internal audit committee was chaired by one of the Commissioners.

Mr Kashumi Mzaidume, Executive Manager, FFC, stated that the principle that the audit committee should be independently chaired had arisen from the King II report on governance, and was not in fact a requirement of the PFMA.

Mr Sogoni believed that the Treasury Regulations were clear on this issue.

Mr Mzaidume stated that he was referring to the specific context of FFC. However, he explained that this situation had only arisen through a certain set of circumstances, had applied only during the six months, and would be corrected in the next financial year.

Mr Sogoni noted that only the Western Cape seemed to have approached the FFC for comment, and asked whether any other province had called upon it.

Mr Josie replied that the requests for recommendations came from many sources, and the FFC acted under Section 214(a) to (j) of the Constitution. None of the other provinces had approached the FFC. They could develop their own revenue systems, which they would then submit to the Minister of Finance, who in turn would pass it to FFC. No documents had been received.

Mr Sogoni noted that in the arena of housing delivery by municipalities and service providers was problematic. He asked if the FFC had done any research on the size of the grants, or had taken into account the different sizes of land, houses, and the difference in quality of services.

Mr Josie said that this was an ongoing debate. Many of the questions did not fall within the competency of the FFC. FFC could not do a great deal on the issue of the grant, other than to recommend an increase, which it already had done, because it was felt that the grant did not take into account the divergence that Mr Sogoni mentioned.

The Chairperson referred to the Annual Report, which mentioned an underspend of around R613 000. He asked why this had occurred. He further stated that there appeared to be a discrepancy as one page of the Annual Report mentioned that R19 million had been received as a grant, whereas another gave an allocation figure of R17.1 million. He asked that the figures be clarified.

Mr Vokwana clarified that the surplus arose from some of the issues raised by the Deputy Chairperson. There had been loss of staff, and some of the projects had been put on hold, although they had been budgeted for. Relocation costs had taken up a large part of the budget. On the apparent discrepancy, he stated that the FFC had an adjusted estimate from National Treasury of R1.1 million, which was the difference between the figures. This had not been specifically dealt with in the presentation but full documentation was available. In addition, the salary costs had fallen, and this year there were only seven Commissioners.

Mr Sogoni believed that this should have been explained in the Report and asked whether it was not possible to make a specific reflection of this in the financial statements.

Mr Vokwana stated that the presentation of the statements followed the standard accounting practices but he would speak to the auditors.
 
The Chairperson asked for an explanation of the consultant’s costs, and asked if they were linked to the BEE issues.

Mr Vokwana stated that full details of these costs were provided to the auditors. The costs were in respect of outsourced work, such as a placement agency placing advertisements for jobs. The term “professional services” was used in the report in the accounting sense of the word.

The Chairperson referred to the mission of FFC as stated in the Annual Report and asked whether there were challenges to the “engendering of a culture of honesty… with a strong fiduciary backing”.

Mr Josie stated that Dr Havenga from Pretoria University had delivered a lecture on fiduciary responsibilities. It was part of the process of looking at a system of values. Values were linked to ethical principles and understanding the mandate. Once the ad hoc committee considering the Chapter 9 Institutions had completed its mandate, no doubt there would be a need for further legislative change. Although the Promotion of Administrative Justice Act and the PFMA both applied to FFC, these were generic and FFC really needed to be covered with serious nuanced regulations. Once again, he requested support from this Committee in determining and implementing the legislative needs.

The Chairperson mentioned that at a Joint Budget meeting the previous day it had been suggested that a number of departments should become involved in setting up a completely integrated model, such as a school, where all services were provided simultaneously. He wondered if FFC was involved in such interaction.

Mr Josie answered that there was integration of all areas in the MIG. It was not so much the competencies of the different spheres that was important, but the needs of the people. Integrated planning was being discussed by the provinces, and between province and municipalities. FFC was currently involved in a project with the Department of Housing, and could look at specific areas if requested to do so by the Committee.

Ms Ntwanambi (ANC, W Cape) raised the idea of the specialised training mentioned earlier by Mr Josie, and asked whether it was possible to include the Further Education and Training Colleges.

Mr Josie replied that training was a key issue. FFC had been trying to interest government and universities in the topics. Many international universities were supportive of the process. FFC had trained a number of parliamentarians and Mr Sogoni and he had had ongoing discussions about independent training of MPs through the colleges.

Ms Ntwanambi asked whether FFC was affiliated to any professional body, which could perhaps give input on the salary scale problems.

Mr Josie replied that it was not, although individual staff and Commissioners might belong to their own profession’s umbrella bodies.

Mr Sogoni asked why provision was still made for Regional Service Council levies, as these had been terminated.

Mr Botha indicated, and Mr Josie confirmed, that they had fallen away from June 2006 whereas the Report covered the previous year, when they were still in force.

The Chairperson commented that during the meeting with the then Chairman of the Commission last year, a request had been made that the governing legislation of the FFC should be tightened. There was no reason to live with an Act that created unintended consequences. He believed that it would be useful for FFC to start to define the areas in which there needed to be clarity. The introduction of legislation would have the added benefit of public hearings so that all issues were on the table from all interested parties. He suggested that if this was possible some proposals should be put forward early in the next year.

Mr Josie thanked the Chairperson and agreed fully with him. He asked also that the Committee should raise the concerns with the Minister and with Treasury. He believed that National Treasury would sponsor the new legislation. He pointed out that a similar process had started in 2003 but had not reached finality.

The meeting was adjourned.
 

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