ATC071109: Report on Annual Report 2006/2007 of the National Treasury.

Finance Standing Committee

Report the Portfolio Committee on Finance on the Annual Report 2006/2007 of the National Treasury, dated 9 November 2007

1. Introduction

The Portfolio Committee on Finance met on 10 October 2007 to consider the Annual Report 2006/2007 of the National Treasury.

The Annual Report was presented by the Director-General of the National Treasury. After the presentation discussions followed which are recorded below by National Treasury Programme and topic of discussion.

Recommendations are based on the engagement of the Committee with the National Treasury is provided in the final section. 

Programme 1: Administration

Staff numbers

Regarding staff numbers the Committee referred to Table 3.1 (page 200) of the Annual Report, which correlated with other tables providing staff numbers, but not with Table 6.1, which provided equity information. Dates of the staff number tables were also not the same. The Committee requested that this be clarified. 

National Treasury indicated that the distinction that was made in these tables was between positions that existed within and without the establishment. Certain specialised activities required specialists who one might use on particular projects but who could not be absorbed into a particular full-time position. So instead of using consultants such staff were employed ‘out of establishment,’ using funds from vacant posts. Thus, in the tables referred to in the Annual Report, 710 staff were employed in the establishment and another 57 were employed out of establishment. Table 5.3, for example, dealt with promotion by salary band and thus by its very nature would not include the positions ‘outside of establishment’. 

Employment Equity and Disability Statistics

Regarding the employment equity table provided in the Annual Report, the Committee indicated that no mention was made of National Treasury’s performance regarding disability: no target or measures of performance were provided, nor a breakdown by category. The Committee indicated thatNational Treasury had to do more in this regard. 

National Treasury responded that it could not force somebody within its organisation to classify themselves as an employee with disability. National Treasury did have employees who would be regarded as having a particular physical disability but these people did not want to be classified as such: this impacted adversely on the numbers in the employment equity table. In applying for positions at National Treasury people were of course at liberty to disclose on their application whether they had a disability and where this was the case special consideration was given to the application. National Treasury’s experience however had been that people preferred not to disclose this, asserting that a physical disability did not impact on their ability to do their job and therefore why did they need to disclose it. 

With regard to the targets set by the DPSA, National Treasury indicated that it continued to focus on the method by which it was recruiting. It was also going beyond just South Africa. There were many South African who found themselves abroad and National Treasury had joined forces with organisations working actively on this campaign, the so-called homecoming revolution. 

National Treasury had also launched a talent management program, which encompassed issues around performance, performance management, remuneration and reward. National Treasury was essentially setting its own development programs for staff and in this way creating its own supply to fill senior positions. In addition to performance management and creating own supply National Treasury also had two other programs, the internship program and the talent pool program. There were now about 60 people in the internship program. The talent pool program was also beginning to expand and in addition National Treasury was making bursaries available. The reality however was that the job market was tight for the kinds of skills sought by Treasury. 

The Committee responded that it would still like to have the disaggregated disability figures and that there was no reason why National Treasury could not provide these as other departments did so. The Committee also indicated that the reasons provided for the low disability equity score did not appear adequate.

National Treasury responded by reiterating its previous remark that people who could be categorised as disabled within the National Treasury at times did not want to be categorised as such. National Treasury accepted that it had not met the target but emphasised that this was not for lack of trying. National Treasury could not insist on including people as disabled when compiling its equity statistics who refused to be categorised as such. Treasury further emphasised that in recruiting staff it made use of an agency that specialised in the placing of disabled people. All of its job advertisements also indicated that National Treasury buildings were disabled-friendly. 

Secondment to the World Bank and IMF

Regarding the secondment of senior advisers to multilateral institutions, especially the World Bank and IMF, the Committee enquired after the policy-impact of such secondment on transformation of the global financial and development system. 

National Treasury responded that part of the arrangement in question was that South Africa was entitled to place senior advisors in the World Bank and the IMF. The current approach was for a particular person not to be seconded for more than 5 years, and the norm was three to four years. 

One of the main roles of these officials was to link National Treasury to discussions taking place on a weekly basis in the boards of these institutions. It was also a means for South Africa to engage with and influence the discourses around development and the flow of resources. Thus, for example, a key current issue was that some developing countries were stating that they weren’t meeting their Gleneagles commitments with regard to aid flows because developing countries lacked sufficient absorptive capacity. South Africa, however, was articulating the position that independent verifiable sources showed that a number of countries were good performers and could absorb significant additional resources. 

Programme 2: Economic Planning and Budget Management

Underspending

The Committee referred to the fact that significant underspending had occurred in a number of programmes of the National Treasury. The Committee enquired whether there were any common reasons accounting for this. There was a shortage of information provided in the Annual Report on what the reasons for underspending were in particular instances, though it seldom appeared to be the result of any simple efficiency gains. The underspending did also raise concerns about the quality of the strategic planning of the National Treasury. 

National Treasury indicated that details per program on their spending performance was on page 119 of the Annual Report which stated why a particular program had under-spent or had saved. Treasury highlighted that the biggest underspending or saving had occurred in programme 4, the financial systems programme, which was an environment that used to be dominated by consultants. Contract management of those consultants had tightened significantly over the past 3 years and savings had therefore been realised there. 

A primary reason for underspending had been delays in the implementation of the integrated financial management system (IFMS). Most of the required tenders eventually only went out at the beginning of 2007 and the adjudication was now taking place. There was a delay in the finalisation of the user requirement statements, mainly on the HR module. National Treasury had to rely on the DPSA coordination with other government departments to ensure that everyone was on board.

Regarding broader trends underlying underspending, National Treasury noted that if one looked through the programs, with the exception of program 5, one would notice that the issue of vacancies had been a key driver of the underspending. One noticed that the programs that had the lowest spending also tended to have higher vacancy rates. 

In the case of the IFMS, because of changes that were taking place and the roll out of a new system, it didn’t make sense to immediately fill all of the positions. Just as National Treasury preached to the other departments that if they could not spend their money it needed to be returned to the National Revenue Fund, so National Treasury had returned this money to the National Revenue Fund when it realised that there was a delay in the implementation of the project. 

The Committee then noted that underspending in each programme had occurred and enquired whether the management of the planning process was adequate. The Committee raised concerns to what extent the underspending was a once-off occurrence or a trend across programmes which would have to be taken into account in future appropriations. 

National Treasury agreed that the Committee was raising a point, which was of general application to all departments when it came to underspending, namely whether departments failed to plan, planned badly, or planned well but didn’t execute the plan. 

National Treasury emphasised that it did its best to ensure that the measurable objectives it provided related to what it was expected to deliver. Across the board, there was however a struggle to quantify measurable objectives. 

In National Treasury, on an annual basis, once the update of the strategic plan had been completed, the DG entered into a contract with each programme manager and checked on progress formally on a quarterly basis. This approach however did not necessarily capture the financial aspect. 

National Treasury agreed that underspending should lead to reallocation, and that funds could even be removed from the vote if necessary. The vacancy rate was high and was a key driver of underspending. Although over the next 12 months existing positions could be filled, people were also leaving, so net change was likely to remain small. 

Regarding programme 4’s R166.6 million underspending, delays in the implementation of the Integrated Financial Management System (IFMS) and in the rollout of training were to blame. Approximately 160 million was associated with delays in the IFMS. These delays would not however affect the attainment of the deadline for the project as a whole.

Regarding delays in training, in 2006/2007 responsibility for financial management training was shifted to SAMDI. Less courses were offered in 2006/2007 because a strategy had been developed in this period. This was now finalised and unspent funds from the period under review would still be used for this. 

Other variances related to conditions for transfers under the DORA not being met. Transferring funds where conditions were not met would be tantamount to throwing money away. This also accounted for a great deal of underspending.

The Land Bank

Regarding the Land Bank and guarantees by government, the Committee asked National Treasury to comment on the fact that the initial agreement had been for the Land Bank to submit its turnaround strategy to both National Treasury and the Department of Agriculture by 15 November 2005. This was subsequently changed to 30 November 2007. 

National Treasury firstly confirmed that the Land Bank was supposed to have provided government with a turnaround strategy by 15 November 2005. It was due to their failure to do so that National Treasury decided to extend the guarantee rather than to inject cash into the Land Bank. 

Subsequently a couple of events had taken place, which had created an environment in which it was difficult to get the turnaround strategy ready. The Department of Agriculture wanted to have a clear understanding of what was happening at the Land Bank and had requested that the executive committee vacate the office to give them space to get a clear understanding of what was happening. Seven to eight weeks thereafter the executive committee was brought back in. Unfortunately, while they were still working on the turnaround strategy the CEO of the Land Bank resigned. Accordingly there was something of a vacuum and government was still waiting, and working very closely with the Land Bank to ensure that a turnaround strategy was completed. Currently the Land Bank was under the acting CEO who is also working on this strategy. Though the Land Bank was provided with a guarantee and an extended guarantee, the main condition for this was that they would still have to provide the turnaround strategy. 

The Pebble Bed Modular Reactor (PBMR)

Regarding the Pebble Bed Modular Reactor (PBMR), the Committee enquired after the financial aspect of this project. When would the PBMR generate revenue? Current costs for salaries alone, in terms of the Adjustments Appropriation, were in the region of R 300 - 500 million per year.

National Treasury noted that it had not been directly involved in the review and feasibility work that was done for the PBMR project. In very broad terms the feasibility assessment indicated that the commercial viability of the PBMR was very long term and depended on the PBMR becoming a significant international supplier of new generation nuclear technology. 

Partly because this was a project that depended on its becoming a significant supplier internationally, the intention had always been that the development of the project needed to involve an international business partner, or possibly several, and there had been a great deal of work on exploring the possibility of a relationship with an investment partner in the project. The R 6 billion that had been set aside on the budget for the project was a South African Government contribution, but there was as yet no clarity on investment partners and therefore the overall eventual ownership structure of the company. 

The project would not generate revenue for a long time. It was now going into a demonstration construction phase and so the full viability of the project was still to some extent under review. The project was still in a research and development stage regarding the full commercial viability of the initiative. The project, if all went according to plan, would begin to generate revenue in about four years. 

Research on Capital Spending Plans

The Committee referred to a reference in the Annual Report to research conducted on capital spending plans in government and asked what the issues were that arose from this report. 

National Treasury responded that this was an initiative that had been underway for 2 to 3 years which had seen the development of a capital projects register within the budget office. This was quite a detailed exercise in terms of which National Treasury staff had engaged not only with line departments that dealt with large capital projects but had also been engaging with SOE’s and was beginning to consolidate the major capital projects and present information on them at their different stages of development, from the planning stage to procurement to the actual development on the ground. The data that was gathered was obtained firstly from the reports that were available from the different entities themselves, but trips and on-site visits had also been conducted. The purpose of this project register was to feed into the capital budgets committee of the budget office so that when departments came to request funds for additional capital spending, National Treasury would be able to determine the performance of these departments and decide accordingly.

The Public Entities Governance Framework Review

The Committee enquired how far National Treasury was with the implementation of the 2004/2005 recommendations for the Public Entities Governance Framework Review and what its impact had been to date. 

National Treasury indicated that the project had been completed and the review had now moved into an implementation phase which had several aspects to it. One was the collection of information and financial records of public entities which constituted an information base National Treasury was now able to draw on in extending the Estimates of National Expenditure documentation. 

There were also some legislative and regulatory aspects and the public finance management amendment process was still outstanding business. 

There had also already been amendments to the Public Service Act tabled by the Minister of Public Service Administration which followed from this review and there would possibly be further aspects to this. 

Lastly, National Treasury pointed out that various departments, such as the Department of Transport, the Department of Housing and National Treasury itself, had over the course of the last two years strengthened their departmental oversight capacity over the entities that reported to them and this too had been to some extent triggered and informed by the review. 

The Neighbourhood Partnership Development Grant

Regarding the Neighbourhood Partnership Development Grant (NPDG), the Committee noted that it was a bit confused as to where it belonged as in the ENE it was located under programme 6 but in the Annual Report it was reported on as part of programme 2.

National Treasury responded that the grant itself, as a flow of funds to municipalities, was included in programme 6 along with the other provincial and municipal transfers, but that the unit which ran the program was part of the budget office. 

Official Development Assistance (ODA) and the budget

The Committee noted that in programme 2 one of the milestones for 2006/2007 was improved coordination of ODA programming with the budget processes. The Committee enquired whether progress was being made there as it wasn’t sure where in the Annual Report it was reported on. 

National Treasury noted that this remained a challenging area. Although the ODA programme did not involve a large amount of money compared to the budget, it did involve a substantial number of country assistance programmes and a range of bureaucratic requirements. To align all of these with the budget was not easy and thus this was best regarded as ongoing work.

In a further question on official development assistance (ODA), the Committee enquired what percentage of donor funds were actually aligned with the budget and were addressing budget objectives, and whether there were any further plans to ensure that donor funds addressed South Africa’s priorities. 

National Treasury noted that South Africa was in a privileged position in that the country was capable of funding its development from its own resources. In engaging with the multilateral institutions it was important to ensure that the integrity of domestic policy was protected. ODA therefore had to fit in with the framework of domestic policies. South Africa had not been willing to receive aid with ‘strings attached’, where such aid was not aligned with the domestic development agenda. 

Home Affairs 

The Committee noted that National Treasury had been involved in the re-engineering of home affairs and enquired the lessons learned and what was the state of financial management in home affairs.

National Treasury responded that in general, support to departments related firstly to supporting them in preparing their reports to the oversight institutions. National Treasury provided training in this regard, which was valuable as long as departments sent the right people to the training. But in some cases this did not occur.

Regarding Home Affairs and the lessons learned, National Treasury indicated the importance of leadership. If leadership did not focus on issues of administration, then problems were likely to occur. And this indeed was the case with Home Affairs. Policies needed to be implemented and administrated well and this was not the case for Home Affairs.

The basic things needed to be done and done well in the case of Home Affairs. National Treasury worked with the turnaround team appointed by the Minster in this regard. It was however still too early to assess the impact of these actions. 

Correctional Services

Regarding correctional services, the Annual Report indicated that National Treasury gave guidance to Correctional Services in the case of an efficient way forward for 5 new correctional facilities. The Committee enquired whether Correctional Services valued this assistance and whether they cooperated and whether there had been an improvement in the management of correctional services.

National Treasury noted that Correctional services had also had some financial management problems, especially related to costs and contract management of the building programmes, resulting in delays in facilities getting built as well as delays from facilities being built to their being operational. 

National Treasury had played a role in ensuring that new facilities needed to be planned properly, not just the construction costs but also the subsequent operating costs. This had been a process of tough engagement but National Treasury believed correctional services had found it useful. 

Programme 3: Asset and Liability Management 

Turnover in the Domestic Bond Market

The Committee enquired after the reasons for the turnover in the domestic bond market in the period under review.

National Treasury confirmed that liquidity had improved from 8, 1 to 11, 4 trillion, a 40.7% increase, during the period under review. Although this issue had not been dealt with in detail in the Annual Report, it was covered in the Budget Review. International investors had shown an increased appetite for domestic bonds. Their participation increased from 16.5% in 2005 to 20% in 2006, when they purchased R 34.1 billion bonds in the domestic market.

This trend was due to the upgrades that the country continued to receive in investment ratings, and which was beginning to attract investors who would not otherwise have been attracted to South Africa. Globally there had also been an increase in demand for emerging markets, though this declined subsequently due to increased volatility. But the probability of South African default had continuously decreased because of the increase in reserves and adherence to strong macroeconomic fundamentals. Thus there had been a consolidation on the South African market and the liquidity that was experienced by other emerging markets had not been a significant factor in South Africa. 

Management of guarantees

Regarding the management of guarantees, the Committee referred to the R 1.3 billion guarantee issued to South African Airways (SAA) at the end of March and the fact that this guarantee had conditions attached to it. The Committee enquired what mechanisms had been put in place to ensure that SAA did adhere to these conditions. The Committee referred also in this regard to comments by SAA in the media that it required recapitalisation to the value of R 4 billion. 

National Treasury confirmed that on the 31st March 2007 SAA had requested a capital injection from government but it was understood then that they were working on their strategy. Government decided that, instead of an injection of capital, SAA would be provided with capital to meet their current obligations and to satisfy solvency issues. This was expected to continue until the 30th September 2008. In the meantime there had been some discussion between the DPE, SAA and National Treasury in trying to come to an agreement with regards to the strategy. 

The Committee followed up by pointing out that one of the conditions that was set for SAA was that SAA would not compete as a global airline but would function as an African airline with global reach. The latter implied that international routes would be limited to key cities on each continent. The Committee enquired whether National Treasury was satisfied that SAA was meeting this condition. 

National Treasury noted that SAA had previously announced new inter continental routes but that they hadn’t taken on those routes. They had also withdrawn from certain routes. So in these respects they were meeting the conditions. National Treasury emphasised that what was transpiring with SAA was not something which would be happening again and again. 

Hedging by State-Owned Enterprises

On the general issue of state owned enterprises, the Committee enquired whether any state owned enterprise had hedged any of their borrowings and what risks existed for government as a result of current guarantees. 

National Treasury indicated that it used to regard its liabilities as the area where the risks lay, but that risk now resided in its assets, and specifically in the exposure on the SOE’s. National Treasury had conducted various stress tests to determine the probability of guarantees being called and there was indeed some cause for concern. 

Regarding hedging activities, National Treasury noted that a treasury review had ascertained whether SOE hedge positions had in fact exposed government beyond a basic hedge position which sought to cover interest rate and currency risk. National Treasury could confirm that there was no SOE which had taken a hedge position beyond its core business mandate and the requirements thereof. The SOE’s were also clear now on the position of National Treasury in this regard. 

Mzansi Accounts and Retail Bonds

The Committee requested National Treasury to comment on the Mzansi accounts and retail bounds and on the extent to which the public was participating in these two initiatives. 

Regarding retail bonds, National Treasury responded that, in gross terms, since the retail bonds were introduced 2 ½ years back it had been able to raise an amount of about R3 billion. About 1.5 billion had been redeemed since, that has been given back to the investors, since the bond maturity had been two years. But the majority of investors that had invested in retail bonds (about 65%) preferred not to earn interest on a monthly basis or twice a year but instead re-invested. For National Treasury this was a very positive trend as it indicated the willingness of investors to invest further rather than enjoy the immediate benefits of investment returns. 

Treasury would also be introducing inflation-linked retail bonds and had signed a deal with a major retail company to sell the bond through them as well as through the post office and the office of the National Treasury. 

Although the retail bond share (R 3 billion) of the total debt of R 550 billion was small, the retail bond had actually had a great impact. Institutions and organisations were for example issuing instruments that were structured around the retail bonds. Most importantly of all, the new instruments encouraged and would continue to encourage more South Africans to save. 

Regarding the Mzansi accounts, National Treasury noted that according to the Financial Sector Council report for 2006 that was released recently, about 4.2 million Mzansi accounts had been opened by people leaving in the Living Standard Measure 1-5 of the adult population. This number included the accounts provided by the Post Bank. If one took away the Post Bank accounts the number was 2.8 million. Treasury noted that at the same time last year the total number of accounts supplied by all the commercial banks including post banks was 3 million, so there been increase from 2005 to 2006 of about 1.2 million.

The Mandate of the Development Finance Institutions

On the Development Finance Institutions (DFI’s) the Committee referred to a review of these institutions and enquired whether there was any closure on the nature of their mandate. The issue was especially pertinent given the role these institutions needed to play in the development of especially the underserviced and unbanked areas. 

Treasury responded that it was happy to indicate that the first phase of the DFI review had been completed and a broad picture now existed of the current challenges facing the DFI’s in South Africa. They seemed to face almost the same challenges. However, such questions were part of the second phase where National Treasury would try to establish the nature of the South African DFI system, before it came up with a formal DFI policy. 

Programme 6: Provincial and Local Government Transfers

Support to Municipalities

Regarding municipalities, the Committee referred to information provided in the Annual Report on the financial management conditional grant. The Committee noted that at the end of the national fiscal year an average 38% of disbursed amounts had been spent. Given that this was three quarters into the municipal financial year, the Committee enquired what Treasury was doing to improve spending performance by the municipalities, since this kind of challenge was at the heart of service delivery problems. A further, related question posed by the Committee concerned the direct support provided by National Treasury to municipalities. The Strategic Plan had indicated that 157 municipalities were to be supported in the medium term, with an intermediate target of 50 for 2006/2007. It was however reported in the Annual Report that hands-on support had only been provided to 25 municipalities in 2006/2007. This issue required comment because again matters of capacity appeared to be at the heart of current service delivery problems.

National Treasury responded that it currently engaged in a package of initiatives to assist municipalities to effectively spend the conditional grants they received. Siyenza Manje was one such initiative that provided direct hands -on support; the financial management technical advisers were there to provide secondary support as well. There were also DPLG programmes that supported municipalities. A further big initiative around technical capacity support was the 469 graduate interns that were serving in municipalities already for a 2 year period. So there was a critical mass of capacity support being provided to municipalities. 

A further means of support was the direct meetings and visits to municipalities to get them to deliver appropriate plans to ensure that they did provide reports to the councillors themselves firstly, and to move accountability towards the municipal managers. National Treasury believed these initiatives were beginning to bear fruit.

However, it had to be acknowledged that in some of the municipalities there was a high turnover of staff. Because of high turnover of actual senior management staff there was a dip in the use of conditional grants and renewed commitment then needed to be attained through council resolutions. 

National Treasury indicated that the 469 graduates that were in position were in fact working in over 220 municipalities, so the target of 157 municipalities being supported was actually exceeded if one counted these graduate interns. One also needed to understand that there was definitely a scarcity of skills in the financial management area. And to get people to want to serve a year or two as advisors and technical experts in some of the municipalities was a challenge that needed to be recognised. The other measure that had proved useful had actually been to call the municipal managers in to account to committees of parliament and this had apparently really changed the mindsets of managers who were now eagerly providing reports and the support needed to track progress with reforms. 

Recommendations

The Committee recommends that National Treasury provides more disaggregated figures in reporting on its attainment or non-attainment of disability targets.

The Committee recommends that National Treasury, in future, provides more specific as well as detailed reasons for underspending of particular programmes. The Committee felt that in some respects the shortage of information made the annual report inadequate as an oversight document.

The Committee recommends that National Treasury provide a report on Official Development Assistance (ODA) indicating both current amounts of ODA inflows and the policy framework utilised by National Treasury in determining whether potential ODA funding was in line with the objectives of Government.