ATC191024: Budgetary Review and Recommendation Report of the Standing Committee on Finance, dated 23 October 2019
BUDGETARY REVIEW AND RECOMMENDATION REPORT OF THE STANDING COMMITTEE ON FINANCE, DATED 23 OCTOBER 2019
The Standing Committee on Finance (SCOF/ the Committee), having considered the annual reports of the National Treasury, South African Revenue Services, South African Reserve Bank, Prudential Authority, Public Investment Corporation and the Financial Intelligence Centre for 2018/19 as tabled and presented to the Committee on 11 September, 8, 9, 15 and 16 October, reports as follows:
- On 09 October, the Deputy Minister of Finance, Dr David Masondo, the Director-General, Mr Dondo Mogajane and senior staff of the National Treasury (NT) and the South African Revenue Service (SARS), led by the Commissioner, Mr Edward Kieswetter, appeared before the Standing Committee of Finance to present the annual reports of NT and SARS for 2018/19.
- On 11 September, the Governor of the South African Reserve Bank (SARB), Mr Lesetja Kganyago, and Deputy Governors had also presented the SARB’s and Prudential Authority’s annual reports. The Public Investment Corporation, led by its Interim Chairperson, Dr Ruel Khoza, presented its integrated annual report on 15 October, and the Financial Intelligence Centre (FIC), led by its Director, Adv Xolisile Khanyile, presented the FIC’s annual report on 16 October.
- The Office of the Auditor General of South Africa (AGSA) also briefed the Committee (on 8 October) on the Auditor General’s audit processes, outcomes and findings on the 16 entities that it audits which report to the Minister of Finance.
2.OVERVIEW BY THE MINISTRY AND NATIONAL TREASURY
- Dr Masondo stated that the country’s economy was not growing. He said that this meant that businesses were not expanding but shrinking their operations. This had dire implications for the whole of society as low growth had started to manifest itself on the low revenue collections and the high levels of unemployment.
- He said that low economic growth, low revenues and loss-making state-owned companies were crowding out the government’s ability to invest and meet its social needs. He highlighted the emerging conflicts, some of which take a violent form, marked by competition for scarce resources in the economy.
- Dr Masondo said that the country had yet to recover from the global economic crisis and said that South Africa was not alone in this quagmire. He said that there was a growth in economic nationalism in the countries of the North, marked by tighter immigration controls and protectionism which manifested itself on higher import tariffs. He said that these had implications for our country and the recently released economic strategy paper was an attempt to foster discussions and debate and to find solutions to the range of structural reforms it proposes.
- Dr Masondo assured the Committee that National Treasury took its role as the custodian of the country’s finances seriously and should be setting an example for all government institutions. He said that while the National Treasury had achieved 84% of its performance targets, it should ideally achieve 100% and ensure sound financial management. He added that setbacks in financial performance as a result of irregular expenditure occurred due to challenges in the implementation of the Intergrated Financial Management System (IFMS) and were regrettable. He also highlighted the challenge of vacancies at senior management level.
- The Director General, Mr Mogajane, told the Committee that investigations into the IFMS had been concluded and National Treasury was taking action against officials and service providers. He also explained that NT had incurred an irregular expenditure of R588 million in 2018/19 (R122 million from the previous year) and has developed an audit action plan to address the Auditor General’s findings. He said that one of the key challenges for National Treasury was shortage of skills in Supply Chain Management (SCM) and the high vacancy rate of senior management (at Deputy Director General (DDG) level).
- He stated that the Office of the Auditor General (AGSA) had audited two programmes in the 2018/19 financial year; Programme Two (Economic Policy, Tax, Financial Regulation and Research) and Programme Eight (Technical and Management Support and Development Finance). On both these programmes the AGSA gave an unqualified audit opinion with findings.
- On the economy, Mr Mogajane added where the Deputy Minister left-off, emphasising that South Africa’s economic growth had stubbornly remained below what was needed as the full fiscal year GDP expanded by only 0,6% compared to 2017/18. He also highlighted the external pressures to the economy as a result of economic slowdown in the Euro area, the escalating global trade tensions, heightened geopolitics, higher import oil bill and, financial tightening in advanced economies which contributed to the waning global growth momentum.
- In respect of domestic pressures, he highlighted poor performance in agriculture, slowdown in mining and quarrying, contraction in construction and low demand and productivity in manufacturing.
3.STRATEGIC GOALS FOR 2018/19: NATIONAL TREASURY
- The NT is responsible for managing the country’s finances and draws its mandate from Chapter 2 of the Public Finance Management Act, as well as Chapter 13 of the Constitution. The overall legal mandate of NT is based on section 216 (1) of the Constitution which requires it to ensure transparency, accountability and sound financial controls in the management of the country’s finances and the Public Finance Management Act (1999).
- The performance of the Department as indicated in its 2018/19 annual report is measured against the Performance Indicators which were contained in its Annual Performance Plan for that year.
4.OVERVIEW OF NATIONAL TREASURY’S PERFORMANCE
- During the year under review, NT received R29.7 billion and spent R28.6 billion which is 96.4% of its appropriated funds. The total appropriation included transfers to, among others, SARS (R9 billion); State Security (R4,8 billion) and the New Development Bank (R4,3 billion). NT therefore underspent by R1,1 billion. Some of the under-expenditure items included compensation of employees (R17.4 million), delays in the implementation of the IFMS (R203.9 million), disbursements to the DBSA Infrastructure Fund (R400 million), disbursements to the Jobs Fund Partners (R226 million) and, delays in the procurement of ICT wireless infrastructure for NT buildings (R18.5 million). Some of the under-expenditure is actually savings on payments to the African Development Bank and the New Development Bank (R55.3 million) due to positive exchange rate differences.
- Out of the 139 performance targets over its eights programmes, National Treasury achieved
113 (84.33%). 21 (15,57%) performance targets were not achieved. Most of the performance targets that were not achieved related to Programme 5: Financial Accounting and Supply Chain Management and Programme 8: Technical Support and Development Finance.
- The Administration Programme (Programme 1) which provides for strategic leadership, management and support services to the department spent 93% of its R453.8 million allocation and achieved only 80% of its performance targets.
- The Economic Policy, Tax, Financial Regulation and Research Programme (Programme
2) which provides specialist policy research, analysis and advisory services in the area of macroeconomics and regulatory reforms spent 91% of its R152 million budget for 2018/19. The under-spending in Programme 2 was as a result of the discontinuation of ERSA research and the decision to implement cost containment measures on various goods and services. Only 83.33% of the performance targets were achieved under this programme, which included the publication of 50 research papers, the publication of Budget, the Medium-Term Budget Policy Statement, and the enactment of tax laws. The targets that were not achieved included the processing of the Conduct of Financial Institutions Bill and the implementation of regulations for retirement funds.
- The Public Finance and Budget Management Programme (Programme 3) aims to provide analysis and advise on fiscal policy and public finances, intergovernmental financial relations, expenditure and planning priorities and to manage government’s annual budget process and provide public finance management support. This programme spent 99% of its R298 million budget and achieved 84% of its performance targets.
- The Asset and Liability Management Programme (Programme 4) manages the government’s annual funding programme in a manner that ensures prudent cash management. It also aims to promote and enforce prudent financial management of state- owned entities through financial analysis and oversight. This programme spent only 88% of its R101 million budget (compared to 99.9% the previous year) and achieved 92.86% of its performance targets. It did not meet its target of holding 8 interactions with the credit rating agencies.
- The Financial Accounting and Supply Chain Management Systems Programme (Programme 5) only spent 79% (compared to 88.5% the previous year) of its R1.1 billion allocation. As in the previous financial year, this was one of the worst performing programmes as it only achieved 81.82% of its performance targets.
- The International Financial Relations Programme (Programme 6) spent 99% of its 5.8 billion allocation and achieved 100% of its performance targets. The unspent funds related mainly to savings realised on payments to the New Development Bank (NDB) and the African Development Bank arising from positive foreign exchange rate differences.
- The Civil and Military Pensions, Contributions to Funds and Other Benefits Programme (Programme 7) also achieved 100% of its performance targets and spent 100% of its R5 billion budget.
- The Technical and Management Support and Development Finance Programme (Programme 8) provides advisory services, programme management and development finance support in order to improve public finance management. It also supports high- impact government initiatives, facilitates employment creation and aims to strengthen infrastructure planning and delivery. This was the worst performing programme as it only achieved 77.27% of its performance targets, failing to meet targets on the Jobs Fund projects and to approve and disburse the targeted grant funding.
- STRATEGIC GOALS OF THE SOUTH AFRICAN REVENUE SERVICE: 2018/19 5.1.SARS’s mandate is to contribute to the economic and social development of the country by collecting all taxes, duties and levies due in order to fund the South African
government’s public service programmes and priorities.
5.2. Its objective is the efficient and effective collection of revenue and control over the import, export, manufacture, movement, storage or use of certain goods.
- OVERVIEW OF THE SOUTH AFRICAN REVENUE SERVICE PERFORMANCE 6.1.In the 2018/19 Budget, an estimate of R1 345.0 billion was set for revenue collection. This estimate was however revised down to R1 302.2 billion in the 2019 Budget. SARS collected revenue of R1 287.7 billion against this revised estimate, resulting in a deficit of
14.5 billion (-1.1%) or R57.3 billion (-4.3%) against the original (printed) estimate. The net revenue outcome of R 1 287.7 billion represents a growth of R71.2 billion (5.9%) compared to the previous year (2017/18).
- SARS is part of Programme 9: Revenue Administration in the NT Annual Performance Plan. As an independent entity, it receives a transfer from NT’s budget. In 2018/19, it received a transfer of R9 billion.
- SARS received an unqualified audit opinion with findings. Findings related to non- compliance with legislation, particularly the SCM prescripts and the SARS Act. Some of the non-compliance with SCM prescripts resulted in irregular expenditure, especially in relation to the Bain & Co, Gartner and Grant Thornton contracts.
- In the year under review, SARS only achieved 48% of its performance targets. Of its 33 performance targets, only 16 were achieved, 17 (52%) were not achieved (or fully achieved).
- SARS has got 5 predetermined outcomes. Outcome 1 seeks to achieve increased customs and excise compliance. Under this Outcome, three out of five performance targets were achieved. Outcome 2 seeks to achieve increased tax compliance and only two out of 12 targets were achieved under this outcome. Outcome 3 seeks to achieve increased ease and fairness of doing business with SARS. Six out of seven performance targets were achieved under this programme. Outcome 4 seeks to achieve increased cost-effectiveness and internal efficiencies at SARS and had only one performance target which was achieved.
Outcome 5 seeks to achieve increased public trust and credibility of the revenue collector. Two out of four performance targets were achieved under this programme.
7.STRATEGIC GOALS OF THE SOUTH AFRICAN RESERVE BANK 2018/19
- SARB’s constitutional mandate is to protect the value of the South African currency in the interest of balanced and sustainable economic growth.
- As a result of the Financial Sector Regulation Act of 2017, the SARB is further mandated to maintain, promote and enhance financial stability.
8.OVERVIEW OF THE SOUTH AFRICAN RESERVE BANK PERFOMANCE FOR 2018/19
- The Governor of the South African Reserve Bank told the Committee that the SARB was one of only six central banks in the word that still have private shareholders. He said that the SARB had two million shares in issue. He explained that dividends to private shareholders were capped at 10 cents a share with a maximum payout of R200 000 per year and 90% of any remaining surplus accrues to government after setting aside contingencies, reserves and tax.
- He clarified that private shareholders have a say in the appointment of the board. He said that while this ensured good governance, private shareholders had no role in policy or regulatory decisions. Government appoints eight members to the board, including the four executives, while private shareholders elect seven members, the Governor said.
- The SARB’s key functions are to issue banknotes and coin, regulate and supervise certain entities in the financial system, ensure the effective functioning of the National Payment System, manage the official gold and foreign exchange reserves, administer the exchange control regulations and act as banker to the government.
- The SARB’s monetary policy role was to ensure price stability or low inflation. The Governor said that this function had socio-economic impact as low or stable inflation protects the purchasing power of South Africans and reduces uncertainty, thus helping firms and household plan for the future.
- SARB’s financial stability role helped to monitor and mitigate against risk to financial stability in the country by providing for, among other things, a legal framework for the resolution of systemically important financial institutions (SIFIs).
- The SARB had a profit of R5.8 billion in 2018/19; R3.6 billion higher than in 2017/18.
This profit includes R547 million made by the African Bank.
- The SARB had five key strategic focus areas (SFAs). SFA 1 aims to maintain headline inflation with the target range of between 3% and 6%. Inflation remained within range at 4.7% and is projected to remain within range over the three-year forecast horizon.
- SFA 2 seeks to protect and enhance financial stability in order to achieve a safer financial system. The SARB reported that there were no systemic risk events that occurred within the financial system in 2018/19.
- SFA 3 seeks to promote and enhance the safety, soundness and integrity of regulated financial institutions. The SARB reported that the prudential Authority was successfully launched in 2018 and there were no failures of systemically important financial institutions (SIFIs) although some smaller institutions were placed under specific regulatory action.
- SFA 4 seeks to enhance the functioning of South Africa’s financial markets in support of economic resilience. The SARB reported that the key focus for the year under review was to broaden the scope of this focus area. It said that reserves accumulated were below the planned levels at December 2018 partly due to a delay in finalising the reserve accumulation strategy.
- SFA 5 seeks to ensure cost-effective availability and integrity of notes and coin. The SARB reported that the currency producing subsidiaries delivered all notes and coin orders effectively both for the SARB and the international export market although the quality of banknotes fir for re-circulation was below the desired level.
9.STRATEGIC GOALS OF THE PRUDENTIAL AUTHORITY FOR 2018/19
- Formed from the merger/ integration of the Banking Supervision Division of the SARB, the Insurance Prudential Supervision of the Financial Services Board and the Co-operative Financial Institutions (CFIs) Supervisory Unit of the Cooperative Banking Development Agency (CBDA) of National Treasury, the PA supervises banks, insurance companies, CFIs and securities and derivative market infrastructures.
- The Prudential Authority (PA) was established on 01 April 2018, following the passing of the Financial Sector Regulation Act, Act 9 of 2017. It is a juristic person operating within the administration of the SARB. Its vision is to achieve a safer financial system through excellence in prudential regulation.
10.OVERVIEW OF THE PRUDENTIAL AUTHORITY PERFOMANCE FOR 2018/19
- The PA reported that the banking sector is dominated by five large banks which collectively held 90.5% of the total banking sector assets as at 21 March 2019. The local branches of international banks held 5.6% of the total banking sector assets and other banks held 3.8%, it said.
- The total assets of the banking sector increased by 8.70% from R5 201 billion in 2018 to R5 654 billion in 2019. The Liquidity Coverage Ratio (LCR) of all banks increased by 15.2% from 123.6% in 2018 to 142.4% in 2019, well above the minimum requirements of Basel III’s regulatory framework.
- On Mutual Banks, the PA said that the sector remained profitable, although there was a declining trend in profitability. The total mutual banking assets increase to R3 136 million and the total capital adequacy ratio remained stable at 23.10%. in the previous financial year, VBS Mutual Bank was placed under curatorship on 11 March 2018 and was liquidated in October 2018.
- By March 2019, the life insurers total assets stood at R 3 011 billion, while non-life insurers’ assets were at R197 billion and composite reinsurers, R 33 billion. The PA was in the process of converting the registration of all previously registered insurers to a license in accordance with the Insurance Act of 2017. The following insurance companies were being resolved; Nzalo Insurance Services Limited, Bophelo Life Insurance Company (provision winding-up – February 2019), Insure Group Managers (voluntary curatorship), and Lion of Africa Insurance Company Limited (license suspended –November 2018)
- South Africa had 4 Cooperative Banks and 26 CFI at the end of February 2019 with total assets of R369 million. The PA regulates both Cooperative Banks and CFIs. CFIs were in the process of reapplying for registration with the PA as they were registered with the CBDA, whose regulatory oversight function has been taken over by the PA.
- The PA is also responsible for prudential supervision of market infrastructures which include stock exchanges (JSE Limited, A2X (Pty) Ltd, ZAR X (Pty) Ltd, Africa Exchange (Pty) Ltd and Equity Express Securities Exchange), central securities depositories (Strate (Pty) Ltd and Granite), clearing houses (Strate (Pty) Ltd and JSE Clear), central counterparties and trade repositories.
11.STRATEGIC GOALS OF THE PUBLIC INVESTMENT CORPORATION 2018/19
- The PIC is a state-owned asset management company which manages financial assets of the Government Employees Pension Fund (GEPF), Unemployment Insurance Fund
(UIF), Compensation Commissioner Fund (CCF) and, the Associated Institutions Pension Fund (AIPF).
- The mandate of the PIC is to invest funds on behalf of its clients based on the investment mandate set by each of its clients and approved by the Financial Sector Conduct Authority (FSCA). It invests in both listed and unlisted assets. Its investments are in bonds, equities, property, cash and capital market portfolios in the domestic and foreign markets.
- The strategic objectives are to: grow revenue and control cost in order to run a financial sustainable investment management operation; generate excess returns over benchmarks; contribute towards the growth and transformation of the economy through impact investment, private equity investment, structured investment products (SIPs), and unlisted property investments; facilitate broad-based economic empowerment and skills development through investment activities and; drive and facilitate transformation through investments activities in listed and unlisted investments.
12.OVERVIEW OF THE PUBLIC INVESTMENT CORPORATION FOR 2018/19
- The PIC is by far the largest asset manager in South Africa and its assets to R2.131 trillion in 2019, increasing by R47 billion from the previous year. It also reported good investment performance for the financial with listed investment portfolios outperforming benchmark returns for its clients. There was however some underperformance on some unlisted portfolios due to a few large transactions that were impaired. R15 billion worth of investments were approved in the 2018/19 financial year in unlisted investments, impact investments (R5.46 billion), private equity and SIPS (R4.59 billion) and properties (R4.93 billion) – all exceeding the R4 billion target each. However, all these portfolios underperformed and did not meet their return on investment targets with private equity and
SIPS achieving -0.28% against a target of 10%, impact investments achieving 3.24% against a target of 8% and properties 9.8% against a target of 9.9%.
- Five percent of assets under management were invested in the global equities and bonds and USD 873 million investment to the rest of the African continent was approved in the financial year under review.
- On social impact investment, the PIC said that it had invested in sectors that contribute towards job creation, housing development, healthcare, education, student accommodation, agricultural sector and the financing of SMMEs. It had also continued to support transformation in the asset management sector by placing R107 billion of its externally managed portfolio in listed investments under black asset managers. It said that this represented about 60% of its externally managed portfolio. It also said that more than 75% of brokerage business is allocated to transformed BEE Brokerage firms.
- While the PIC remained financially stable and profitable, it received an unqualified audit opinion with findings from the AG for failure to comply with laws and regulations. This was a regression from the previous two years (2016/17 and 2017/18) where it received unqualified audit opinions with no findings. On audited financial statements the PIC achieved an unqualified opinion because it corrected all material misstatements on disclosures of capital identified during the audit. There was an irregular expenditure of R1,7 million which related to legal expenses that were procured and used without proper approval.
- On procurement and contract management, the AG said that some goods and services worth R2,5 million were not procured in line with National Treasury Instruction Note 3 of 2016/17.
- On assets under management, the PIC did not in all instances comply with investment policies, guidelines and procedures provided for in the PIC Act of 2004. Some incidents of non-compliance were as follows;
- Some investment deals entered into did not comply with governance process in terms of the established policies and procedures,
- Due diligence performed, in some instances, was not sufficient and appropriate as not all aspects prescribed in the policies and procedures were complied with prior to approval of the investment deals;
- A legal contract signed with a counterparty was not aligned to the structured deal as approved by the governance structures;
- In some instances, conditions precedent were not incorporated into the legal contracts with the investee companies; and
- In some instances, sufficient appropriate audit evidence could not be obtained that showed that established policies and procedures were complied with for deal origination, disbursements and monitoring of investments as some supporting documents were not provided.
13.STRATEGIC GOALS OF THE FINANCIAL INTELLIGENCE CENTRE 2018/19
- The Financial Intelligence Centre (FIC) was established in terms of the Financial Intelligence Centre Act, 2001 (Act 38 of 2001). It was established to identify the proceeds of unlawful activities; combat money laundering activities and the financing of terrorist and related activities; implement terrorist property financial sanctions in terms of resolutions adopted by the United Nations (UN) Security Council; including requiring accountable institutions to freeze property and transactions in terms of these sanctions; share information with investigating authorities, including the National Prosecuting
Authority, law enforcement authorities, intelligence services, the Public Protector, South African Revenue Services (SARS) and supervisory bodies.
- The FIC is a statutory body that operates outside the public service, but within the public administration, as envisaged in section 195 of the Constitution. It is registered as a Schedule 3A national public entity in terms of the Public Finance Management Act, 1999 (Act 1 of 1999) (PFMA).
- During the 2018/19 financial year, the FIC has focused on the upcoming peer-review mutual evaluation by the International Monetary Fund, Financial Action Task Force (FATF) and the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG). The last of these occasional mutual evaluation was conducted in 2009, where a number of legislative and operational gaps were identified.
- Strategic Outcome 1 of the FIC seeks to improve the collection of financial intelligence and the enforcement of compliance with the FIC Act. This is done through, among others, providing guidance to accountable and reporting institutions, monitoring of supervision by supervisory bodies, information gathering and reporting. Strategic Outcome 2 seeks to achieve increased utilisation of FIC products and services. This is done through the assessment, analysis and interpretation of financial information in order to support law enforcement in investigations, prosecution and asset forfeiture efforts.
- Strategic Outcome 3 seeks to promote national interest in maintaining the integrity of South Africa’s financial system. Strategic Outcome 4 seeks to improve and maintain good corporate governance for a sustainable operating environment.
14.OVERVIEW OF THE FINANCIAL INTELLIGENCE CENTRE PERFOMANCE FOR 2018/19
- From the four strategic outcomes mentioned above, the FIC had a total of 20 performance targets. It achieved 17 of these targets, which translated to 85% success rate. According to the FIC Act, all accountable and reporting institutions need to register with the FIC. The number of institutions registered with the FIC in the year under review increased from 40 799 the previous year to 42 352. Accountable and reporting institutions with the largest number of registered entities were the attorneys (14 298), followed by estate agents (10 444), investment advisors and intermediaries (8 441), motor vehicle dealers (3 891) and gambling institutions (3 590).
- The FIC and supervisory bodies conducted 875 inspections with accountable and reporting institutions in the year under review. The main finding of inspections was that institutions were not reporting cash transaction reports (CTRs) of R24,999 and above. Sanctions to the value of about R12 million were issued by the FIC to mainly motor vehicle dealers for failure to report CTRs. The SARB, a supervisory body under the FIC Act, issued five administrative penalties to financial institutions for non-compliance. HSBC was fined R15 million and Bidvest Bank R5.25 million for, among others, failure to file financial transaction reports.
- In the period under review, accountable and reporting institutions filed 5 214 568 CTRs and 288 434 suspicious transaction reports. Most of these reports were made by banks (4 460 375 CTRs and 175 580 STRs). The FIC only referred 1 054 matters to law enforcement for further investigation and law enforcement agencies proactively requested 1 840 reports from the FIC. Using section 34 of the FIC Act, the FIC blocked funds which were suspected
to be proceeds of crime to the value of R53.6 million. It reported to have contributed in the recovery of R2.14 billion in criminal proceeds during 2018/19.
- The FIC received a transfer of R284 5 million and spent R284 4 million. It has not obtained a clean audit in the past five years, with the AG raising several issues including non-compliance with SCM prescripts. It received an unqualified audit opinion with findings. It also incurred irregular expenditure of R1.8 million, which was incurred in the prior year.
15.AUDITOR GENERAL OF SOUTH AFRICA REPORT
- The office of the AGSA performs audits on 16 entities that report to the Minister of Finance. These are: NT, SARS, IRBA, PIC, FIC, Office of the Ombudsperson for Financial Services Providers (FAIS), Financial Sector Conduct Authority (FSCA), Pension Fund Adjudicator (PFA), Development Bank of Southern Africa (DBSA), Government Technical Advisory Centre (GTAC), Financial and Fiscal Commission (FFC), Government Pension Administration Agency (GPAA), Land Bank (LB), Land Bank Insurance SOC Limited (LBIC), Land Bank Life Insurance SOC Limited (LBLIC), and Cooperative Banks Development Agency (CBDA).
- None of these entities received a qualified audit opinion. Only four (25%) entities (LBIC, FSCA, IRBA and PFA) received clean audits and the remaining eight (75%) received unqualified audit opinions with findings. The DBSA, PIC and FAIS Ombud regressed from the previous year from clean audits to unqualified audits with findings. The AG Office reported that financial statements and performance preparation remained a concern as material adjustments had to be effected on the annual financial statements and annual performance reports that were submitted for audit. The Office of the AG said that 56% of these auditees achieved unqualified opinions only because they corrected all misrepresentations identified during the audit.
- The office of the AGSA said that the most common findings on the entities that received unqualified audit opinions with findings were: failure to comply with supply chain management (SCM) prescripts, failure to comply with laws and regulations; material adjustments to financial statements submitted for audit; material findings on usefulness of performance information; material findings on usefulness and reliability of indicators and targets for performance reporting.
- On non-compliance with laws and regulations, the most common findings were material misstatements in financial statements, procurement and contract management lapses, failure to prevent irregular, fruitless and wasteful expenditure and, lack of consequences management.
- The AGSA raised concerns on the IFMS programme of the National Treasury as it did not have a formal business case, proper project management and inadequate budget monitoring. There were also vacancies in key positions within the IFMS which the AGSA said may cause delays in the implementation of the programme.
- On the status of internal controls, when it came to financial management and governance, the AGSA raised concerns of lack of effective leadership at the GPAA, PIC and FFC, lack of proper record keeping at NT, PIC, GPAA and FFC, lack of daily and monthly controls at NT, GPAA, GTAC, IRBA, FAIS Ombud and FFC, lack of monitoring of compliance at DBSA, FIC, LB, LBLIC, PIC, SARS, NT, GPAA, GTAC, FAIS Ombud and FFC and, lack of proper risk management at the PIC. The AGSA further said that there was slow or no response in improving key controls and addressing risk areas from management in some entities.
- National Treasury and entities within the finance portfolio incurred R82 million in fruitless and wasteful expenditure, an increase of R11 million from the previous financial
year. Most of this fruitless occurred at NT and SARS with R65 million of it occurring in the IFMS project (for the payment of perpetual software licenses).
- Irregular expenditure incurred by the finance portfolio entities also increased from R960 million in 2017/18 to R1 billion in 2018/19, with the biggest contributors being NT (R466 million) and SARS (R454 million). The majority of this irregular expenditure was as a result of non-compliance with procurement processes and deviations from the competitive bidding.
- On Supply Chain Management (SCM), the report of the AGSA shows that there was a regression in SCM compliance 53% of auditees within the finance portfolio had findings (40% of them material findings). Most of the findings on SCM related to uncompetitive and unfair procurement and an instance where the contract awarded differed from the original invitation to tender and other contracts which were extended and modified without the approval of delegated officials.
- The Office of the AGSA advised the Committee to: monitor and regularly follow-up with the executive authority and the accounting officers/ authorities on:
- Progress on the development and implementation of audit action plans put in place by the entities to improve their audit outcomes;
- Management of vacancies to ensure stability of leadership;
- Progress on IFMS2 implementation and status of consequences management following the outcome of the forensic investigation and;
15.11. The Office of the AGSA further advised the Committee to ensure that the culture of consequence management should be enforced in the portfolio.
16.OBSERVATIONS AND RECOMMENDATIONS
- The focus of this Report is on the annual reports of the NT, SARS, PIC, FIC, SARB and the Prudential Authority. The Committee was also briefed by the Office of the AGSA on the other entities that fall within the finance portfolio. The Committee acknowledges and thanks the Office of the AGSA for the invaluable briefing which gave it a snapshot of performance across the 16 auditees of the finance portfolio that it audited in the 2018/19 financial year. Within the limits of space and time, the Committee tries to consider the annual reports of other entities during the year.
- The Committee commends the entities (the FSCA, IRBA, PFA and LBCI) that achieved clean audits for the 2018/19 financial year. The Committee expresses its concerns on those that have regressed (DBSA, PIC and FAIS Ombud) or maintained their status of unqualified audits with findings (NT, SARS, LB, GPAA, FIC, GTAC, FFC, CBDA, LBLIC).
- The Committee notes that the audit outcomes of the finance portfolio have continuously regressed over the five-year period of the MTSF (2014/15 to 2018/19) from 44% unqualified audit opinions with no findings to 25%. The Committee further notes that financial statements and performance preparation remains a concern for the AGSA as material adjustments had to be effected to annual financial statements (AFS) and annual performance reports (APRs) submitted for audit. As a result of this, the AGSA said that 56% of entities achieved an unqualified opinion only because they had corrected all misstatements identified during the audit. The AGSA further noted the disregard for compliance with legislation highlighting some common non-compliance areas as material misstatements in submitted financial statements, poor procurement and contract management, lack of consequence management and failure to prevent irregular, fruitless and wasteful expenditure. Despite assurances to the previous Committee that audit action plans will be implemented, there appears to be continuous lapses as the AGSA further
raised issue on the status of internal controls when it came to financial management and governance, highlighting the following:
- lack of effective leadership at the GPAA, PIC and FFC;
- lack of proper record keeping at NT, PIC, GPAA and FFC;
- lack of daily and monthly controls at NT, GPAA, GTAC, IRBA, FAIS Ombud and FFC;
- lack of monitoring of compliance at DBSA, FIC, LB, LBLIC, PIC, SARS, NT, GPAA, GTAC, FAIS Ombud and FFC; and
- lack of proper risk management at the PIC.
- The AGSA further said that senior management and executive authorities were not responding with the required sense of urgency to AGSA’s calls for improving internal controls and risk management. All these are issues of grave concern to the Committee as the NT is the custodian of financial management and prudence for the whole of government and should lead by example. The Committee calls upon the Minister of Finance and accounting officers/ authorities to play more heightened oversight on the implementation of the AGSA’s recommendations and the audit action plans. The Committee requires the Ministry and NT to report to it on a quarterly basis on the implementation of the audit action plans across the finance portfolio.
- The Committee notes that the fruitless and wasteful expenditure increased from R71 million in 2017/18 to R82 million in 2018/19 and that the majority of it was caused by National Treasury and SARS, with R65 million of it attributable to the IFMS 2 project. While the Committee notes that all the fruitless and wasteful expenditure has been investigated or has been referred for investigation, the Committee believes that consequence management on the IFMS 2 project has been very slow. It has been a whole year since the forensic investigation into the IFMS was concluded yet there seems to be no
tangible action taken against anyone. While the Committee acknowledges that due process needs to be followed, the National Treasury needs to move swiftly in implementing the recommendations of that forensic investigation report. In line with the advice of the AGSA, the Committee will seek a briefing on the findings and recommendations of that forensic report and an update on the steps being taken to hold the responsible service providers and officials to account.
- The Committee is concerned about the increase in irregular expenditure for entities under finance portfolio from R960 million in 2017/18 to over R1 billion in 2018/19. The Committee notes that most of this irregular expenditure is from NT (R466 million) and SARS (R454 million) and the majority of it was caused by non-compliance with SCM prescripts and deviations from competitive bidding. The AGSA further reported that 56% of entities (FIC, GPAA, GTAC, FFC and CBDA) in the portfolio in 2017/18 and 27% (PIC, SARS and FFC) in 2018/19 that had an irregular expenditure had not reported such irregular expenditure for investigations. The Committee calls upon the Executive Authority, the Minister of Finance, to heighten his oversight on this increasing irregular expenditure and to ensure consequence management. The Committee will hold the Minister and accounting officers to account in this regard and requires the Ministry to brief the Committee on a quarterly basis on progress and actions being taken.
- The AGSA has noted in its reports that prolonged vacancies at senior management levels causes a competency gap and affects the rate of improvement in audit outcomes. The Committee has been told of vacancies at senior management level and a number of acting positions. The Committee requires the Ministry to submit a detailed report on senior management vacancies and steps and timelines for their filling within a month following the adoption of this report in Parliament. This report should contain information of when such vacancies (or acting appointments) have existed and reasons for the delays in filling
them. The report should also specify the cost to government of these unfilled senior vacancies.
- The Committee notes NT’s improvement of performance targets from 79.19% the previous year to 84.33% in 2018/19. The Committee also notes that it spent 96% of its allocation as compared to 98,3% in the previous year, an under-expenditure of R1.1 billion. The Committee believes there is room for improvement in ensuring that NT’s financial expenditure is more aligned to the achievement of performance targets.
- The Committee notes further that most of the performance targets that were not achieved related to Programme 5: Financial Accounting and Supply Chain Management and Programme 8: Technical Support and Development Finance. The Committee believes that NT should do more to ensure the achievement of targets under these programmes, particularly those that seek to contribute towards better financial management, improved supply chain management and those that support high-impact government initiatives that facilitate employment creation and improvement of infrastructure planning and delivery. The Committee is concerned that the failure to achieve targets on the Jobs Fund projects and on the disbursement of targeted grant funding impacts negatively on job creation in an environment where there is a high unemployment in the country. The Committee requires NT to quantify the number of jobs that the Jobs Fund projects have created and the number of jobs that were not created as a result of failure to disburse such funds and report to it in the next quarterly briefing.
- As stated in the Committee’s Budget Vote Report of NT of July 2019, the Committee urges the National Treasury to expedite its work on the revision of the country’s procurement framework and modernization of approvals for expenditure deviations by introducing the long-awaited Public Procurement Bill for processing by Parliament.
- The Committee requires the NT to put back on the agenda the holding of the Financial Sector Summit that has been repeatedly postponed. The Committee will carry on the work of the previous Committee on Financial Sector Transformation and urges the Ministry and National Treasury to prioritise this issue.
- The Committee notes that SARS collected revenue of R1 287.7 billion against a revised estimated of R1 302.2 billion, which represented a revenue growth of 5.9% from the previous year. Despite this growth, revenue collection resulted in a deficit of R14.5 billion against the revised estimate or R57.3 billion against the original printed estimate in the 2018/19 budget. The Committee further notes that the deficit was mainly due to shortfalls in the collection of company and personal income taxes and VAT, while company income tax and VAT refunds were higher than anticipated.
- The Committee is concerned about SARS’s achievement rate of its overall performance targets at 48% (where it achieved only 16 of the 33 performance targets) in the year under review. We urge the new Commissioner to turn the situation around.
- The Committee believes there is a dire need to restore confidence and leadership at senior management levels at SARS and urges that senior key vacant (or acting) positions be filled expeditiously in order to ensure leadership stability at SARS. The Committee urges SARS to look more into issues of gender representation at senior management level when it fills its vacant positions.
- The Committee will continue to closely monitor the implementation of the Nugent Commission recommendations that seek to improve tax administration, governance and revenue collection.
- The Committee believes that there is a need for a discussion and clarity on the recommendations of the Nugent Commission and the Davis Tax Committee on the administration of SARS, as the former recommended the appointment of an Inspector
General and the latter, the establishment of a governance or advisory Board. The Committee expects to be briefed by the National Treasury and SARS on the Katz Commission, Davis Tax Committee and the Nugent Commission on the administration of SARS once a discussion document on these issues has been finalized.
- The Office of the Tax Ombud (OTO) currently depends on SARS for support for its governance, fiduciary and administrative functions. The International Association of Ombuds has granted the OTO “observer” status until it can demonstrate its independence from SARS. The OTO needs to be more independent and strengthened and be allocated sufficient resources to do its work more effectively. The Committee expects NT to introduce amendments to improve the operations and powers of the OTO to internationally acceptable standard in the interest of taxpayer rights.
- The Committee notes that the profits of the SARB group increased by R3.6 billion to R5.8 billion in 2018/19, from R2,2 billion in 2017/18. The Committee commends the SARB for this performance. The Committee further notes that the inflation rate still remains within the target range at 4,7% and is expected to remain within range over the next three year forecast horizon.
- The Committee notes further that the new African Bank made profits of R547 million in the year under review and notes that there have been requests from potential buyers to purchase the bank. The Committee believes that this presents an opportunity for the establishment of another black-owned bank or a state bank that can contribute towards transformation and more competition in the commercial banking sector. The Committee urges the Minister of Finance to explore the viability of this latter option.
- The Committee welcomes the establishment of the Prudential Authority as per the Financial Sector Regulation Act of 2017 and its inaugural annual report. The Committee believes that the establishment of the PA will help improve prudential regulation of
financial institutions in the country. The Committee notes the growth in assets under management of the PIC by R47 billion to R2.131 trillion in 2018/19. The Committee further notes the performance of the listed investment portfolios. The Committee is however concerned about underperformance in the unlisted portfolios. All the unlisted portfolios did not meet their benchmark returns in the period under review. The Committee welcomes the decision by the Interim Board to be transparent about unlisted investments and publishing this portfolio on its website annually.
- The Committee is concerned about the regression in audit outcomes of the PIC which resulted from its failure to comply with SCM prescripts and the PIC Act. It is of grave concern that in some instance the PIC did not comply with its own investment policies, guidelines and procedures, which signifies a failure of governance. The Committee expects the Interim Board to play its role in arresting the situation.
- The Committee still awaits the President to sign into law the PIC Amendment Bill, which was passed by the Fifth Parliament, as it sought to deal with greater transparency and better governance at the PIC. The Bill contained very important provisions, among others, for the representation of organised labour on the PIC Board and was a result of thorough consultative processes by Parliament.
- The Committee welcomes the appointment of the Interim Board and the representation of organised labour. The Committee believes that there should be safeguards against conflict of interest of members of the Board in order to manage risk. The Committee expects the declaration of interest of the present Interim Board to be made public in the interest of transparency.
- The Committee welcomes assurances from the PIC that it was working to recover monies from some of the infamous deals. The Committee expects to be briefed regularly on the progress and outcomes of these processes and civil claims.
- The Committee welcomes the assurance from the Interim Board of the PIC that it will review the salary structure of PIC executives. The Committee will hold the Interim Board to account on this.
- The Committee notes that the FIC achieved 17 of its 20 performance targets, which translated to 85% achievement rate. It further notes that the FIC spent 100% of its allocation in the year under review. The Committee commends the FIC on these achievements.
- The Committee is concerned however that the FIC has not obtained a clean audit in the past five years, with the AGSA raising several issues including non-compliance with SCM prescripts. It received an unqualified audit opinion with findings and incurred an irregular expenditure of R1.8 million.
- The Committee notes the compliance sanctions imposed on motor vehicle dealers for failure to report cash transactions reports. It also notes the R15 million fine on HSBC bank and R5.25 million fine on Bidvest for non-compliance by the SARB. The Committee believes that these fines would help to encourage a culture of compliance with the FIC Act and assist in uncovering money laundering and its predicate offences.
- The Committee is of the view that the performance of the FIC should be measured by the outcomes of its interventions in uncovering money laundering, illicit financial flows and related predicate offences such as corruption and tax evasion. While the FIC received
5.2 million cash transaction reports (CTRs) and 288 484 suspicious transaction reports (STRs) from accountable and reporting institutions, it only managed to refer less than 2900 information products (intelligence packages) to law enforcement agencies, on request (1 840) and proactively (1054). While there is no expectation that all CTRs and STRs filed by accountable and reporting institutions will result in law enforcement activity, the number of referrals seems to be low.
- The Committee notes that the FIC intelligence products assisted law enforcement to recover R2.14 billion worth of criminal proceeds (assets). This Committee commends the FIC for its contribution to this good work.
- The Committee believes that the FIC should make use more of section 34 powers of the FIC Act to freeze/block suspected proceeds of crime. The amount of R53 million blocked in this financial year seems to be too little compared to the billions of Rand that are estimated to be flowing out of the country annually in illicit financial flows and circulating in the economy as a result of profit-driven crimes such as corruption, fraud and money laundering.
- The Committee wishes to thank the Deputy Minister of Finance, the Office of the AGSA and senior officials of the Department and entities for their availability to brief the Committee on the annual performance reports.
Report to be considered.
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