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ATC210216: Budgetary Review and Recommendation Report of the Standing Committee on Finance, Dated 16 February 2021

Finance Standing Committee

BUDGETARY REVIEW AND RECOMMENDATION REPORT OF THE STANDING COMMITTEE ON FINANCE, DATED 16 FEBRUARY 2021

 

The Standing Committee on Finance (SCOF/ the Committee), having considered the performance report and audited financial statements of the National Treasury (NT) andtheSouth African Revenue Service (SARS) for the 2019/20 financial year, reports as follows:

 

  1. INTRODUCTION
    1. On 06 October, the Deputy Minister of Finance, Dr David Masondo, the Director-General of National Treasury, 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 virtually before the Standing Committee of Finance to present the (preliminary)annual reports of NT and SARS for 2019/20.  NT further presented the audited annual report on 10 February 2021, following its tabling in Parliament at the end of January 2021. On the same day, 10 February, the Committee was also briefed by the Office of the Auditor General of South Africa (AGSA) on the audit outcomes of the finance portfolio.
    2. On 08 October, the Governor of the South African Reserve Bank (SARB), Mr Lesetja Kganyago, and the Deputy Governors had also presented the SARB and Prudential Authority’s annual reports. 

 

  1. OVERVIEW BY THE MINISTRY AND NATIONAL TREASURY
    1. Dr Masondo stated that the 2019/20 audits for NT and SARS annual performance were still underway and as a result, draft performance reports would be presented. He noted that the 2019/20 marked the end of the 2014-2019 Medium-Term Strategic Framework and the corresponding five-year Strategic Plan. He noted further that NT had achieved 83% of its performance indicators and had spent 97% of its budget in 2019/20.
    2. He said that the 2020-2025 Strategic Plan had been updated to reposition the National Treasury towards service delivery. Among issues that the new strategic plan focussed on was to prioritise, modernise and automate the country’s procurement system. He said that NT was reviewing the public input on the Draft Public Procurement Bill and engaging stakeholders. He added that NT had released an interactive Covid-19 procurement dashboard on its website which shows the commodities purchased, the quantities and prices of items.
    3. Dr Masondo announced that the State Bank Memorandum had been sent to the Cabinet for consideration.
    4. Responding to the presentation of the office of the AGSA on the finance portfolio on 10 February, the Deputy Minister said that the National Treasury would welcome the opportunity to brief the Committee in more detail on the areas of concern raised by the AGSA, particularly on the Integrated Financial Management System project and the challenges at the Land Bank.
    5. Dr Masondo acknowledged the role of the AGSA in ensuring accountability and assurance to the markets. He added that the audit outcomes, among other things, enable state institutions to raise funding in the markets. He also commented on the issue of vacancies, assuring the Committee that some of the senior key positions had been filled and/or in the process of being filled.
    6. The Director-General, Mr Dondo Mogajane, said that NT had performed well given the economic context. He said that South Africa’s economic growth was stubbornly low, highlighting both the external and domestic pressures to the economy. In this regard, he said that Government needed to tackle its structural constraints by stimulating growth, increasing public trust and confidence, reducing policy uncertainty and, lowering the costs of doing business.
    7. He said that building capacity that will enable efficient and effective management practices in all spheres of government was important. He highlighted that NT had supported the investigation capacity of the state on critical and complex financial investigations. He further said that the internship programme of NT will ensure that skills around finance remain in the public sector over time. He also pointed out that the Neighbourhood Development Programme that provided support to municipalities in spatially targeted areas and funded catalytic projects that contribute to socio-economic transformation and inclusive growth by attracting public and private sector investments into these precinct was starting to bear fruit.

 

  1. STRATEGIC GOALS FOR 2019/20: NATIONAL TREASURY  
    1. 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).

 

  1. OVERVIEW OF NATIONAL TREASURY’S PERFORMANCE
    1. During the year under review, NT achieved 100 of its 120 indicators, leading to an achievement of 83.3 per cent of its annual targets. It managed to spend 97.2 percent of its appropriated funds, leading to an under-expenditure of R857.6 million. It said that this under-expenditure had no negative impact on its predetermined objectives as R473.1 million were unspent funds on the International Bank of Reconstruction and Development’s (IBRD) and the African Development Bank’s (AfDB) delayed subscriptions.
    2. The Administration Programme (Programme 1) which provides for strategic leadership, management and support services to the department achieved only 66.67% of its performance targets. It managed to spend 88.7 per cent of its R511.4 million budget, resulting in an under-expenditure of R57.7 million. The under-expenditure was mainly on the compensation of employees due to vacant posts that were not filled and utility bills that were lower than expected, among others.
    3. 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 achieved 91.67% of its performance targets. The programme spent 90.4 per cent of its R131.1 million budget, resulting in the underspending of R13.2 million. The under-expenditure was mainly on the compensation of employees due to vacant posts that were not filled and savings on consultancy fees.
    4. 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 achieved 85.19 per cent of its performance targets and spent 96.3 per cent of its R318.6 million budget for 2019/20, leading to an under-expenditure of R11.7 million.  The under-expenditure was attributed to savings on consultancy services relating to the editing and publication of the 2020 Estimates of National Expenditure and Budget Review documents.
    5. 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 achieved only 71.43 per centof its performance targets, as compared to 92.86 per centthe previous year.This programme spent 94.0 per cent of its R102 million budget. It had received virements of R1.5 million from Programme 8. The under-expenditure was attributed to savings on the compensation of employees as a result of unfilled posts.
    6. The Financial Accounting and Supply Chain Management Systems Programme (Programme 5) achieved 84.38% of its performance targets for 2019/20. It spent 79.3 per cent of its R1 billion budget, leading to an under-expenditure of R207.4 million. The underspending was attributed to: goods and services under Computer Services, consultancy services relating to the Municipal Finance Recovery Service (MFRS) as a result of the delays in appointing a panel of service providers leading to the postponements of various projects to the current financial year (2020/21) and, lower expenditure as a result of delays on the implementation of the Integrated Financial Management System (IFMS).
    7. The International Financial Relations Programme (Programme 6) again achieved 100% of its performance targets, although it spent only 91.8 per cent of its R5.9 billion budget for the year. The programme received virements totalling R120 million from Programmes 2,3,5,7 and 8 of the Department. The under-expenditure of R489.4 million was mainly attributed to unpaid subscriptions to the IBRD and the AfDB.
    8. The Civil and Military Pensions, Contributions to Funds and Other Benefits Programme (Programme 7) also achieved 100% of its performance targets and spent 99.3 per cent of its R5.5 billion budget for 2019/20. There was an under-expenditure of R37.4 million.
    9. 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 programme achieved 77.78% of its performance targets. NT reported that this programme has been restructured and realigned with other programmes and it will not be reporting on it as a stand-alone programme in the coming year.The Programme spent 98.7 per cent of its R2.7 billion. The underspending was attributed to unspent funds on mainly the Neighbourhood Development Partnership Grant and the Jobs Fund.

 

  1. STRATEGIC GOALS OF THE SOUTH AFRICAN REVENUE SERVICE: 2019/20
    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.
    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.

 

  1. OVERVIEW OF THE SOUTH AFRICAN REVENUE SERVICE PERFORMANCE
    1. SARS constitutes Programme 9: Revenue Administration, in the NT’s strategic and annual performance plans. It received a transfers of R9.5 billion in the 2019/20 financial year.
    2. It collected R1 355.8 billion in 2019/20, compared to R1 287 billion the previous year; an increase of 5.3%. The gross amount of revenue collected was R1.6 trillion, offset by refunds of R292.0 billion. There was a deficit of R3.2 billion (0.2%) from the revised estimate of R1 358.9 billion. 
    3. SARS’ report showed that: revenue collection out-performed the country’s economic growth. There was a 30% decrease in taxpayer complaints and the VAT refund turnaround time was reduced from 27.88 days in the previous year to 18.5 days in the year under review.SARS further reported that inbound queries by taxpayers declined by 20% and its compliance interventions yielded over R100 billion.
    4. SARS has got 5 predetermined outcomes. Outcome 1 seeks to achieve increased customs and excise compliance. Outcome 2 seeks to achieve increased tax compliance. Outcome 3 seeks to achieve increased ease and fairness of doing business with SARS. Outcome 4 seeks to achieve increased cost-effectiveness and internal efficiencies at SARS. And outcome 5 seeks to achieve increased public trust and credibility of the revenue collector. SARS achieved 78.22% of its targets in 2019/20 as compared to 48% the previous year.
    5. In the 2019/20 financial year, SARS reported that it performed 5 832 seizures with an estimated value of R2.4 billion. The most significant category of seizures was counterfeit goods valued at R1.1 billion for the year, followed by narcotics valued at R971.4 million and cigarettes valued at R103.5 million.
    6. SARS reported that Personal Income Tax(PIT), Corporate Income Tax(CIT) and Value Added Tax (VAT) remained the largest sources of tax revenue, comprising approximately 80% of the total tax revenue collections. The PIT contribution has increased to 39% in the 2019/20 financial year from 38.3% for the prior year, mainly attributed to the reduced fiscal drag relief.
    7. It reported further that there was a growth in CIT collections due to improved company profits, particularly in the mining and quarrying sector. However, this was offset by the contraction in CIT provisional tax payments mainly from the manufacturing and the finance sectors. SARS said that these sectors were negatively impacted by the continuing unreliable electricity supply, a weak business and consumer confidence, as well as uncertainty about global growth prospects. Domestic VAT collections were below the RE by R0.1 billion, as high unemployment, sluggish household income growth and high indebtedness continued to subdue consumer spending.
    8. SARS said that its tax directives for retrenchments in 2019/20 reflected a total of 287,000 versus 239,000 for the prior year. It said that this signalled an erosion of the tax base especially for PAYE i.e. the 287,000 represents a number of PAYE contributors that will likely not to contribute to the 2020/21 financial year tax base unless reabsorbed into employment.
    9. SARS noted that the official Quarterly Labour Force Survey (QFLS) reflected a quarter-on- quarter unemployment rate increase of 1% for 2020 Quarter 1 to 30.1%. It said that this put employment taxes under pressure. It also reported that a total of 230 Business Rescue applications were received in 2019/20, of which 9 related to large businesses and 221 to SMMEs. Furthermore, a total of 3,480 Liquidations applications were received of which 61 related to large businesses and 3,419 to SMMEs.
    10. SARS has got 5 predetermined outcomes. Outcome 1 seeks to achieve increased customs and excise compliance.Outcome 2 seeks to achieve increased tax compliance. Outcome 3 seeks to achieve increased ease and fairness of doing business with SARS. Outcome 4 seeks to achieve increased cost-effectiveness and internal efficiencies at SARS. And outcome 5 seeks to achieve increased public trust and credibility of the revenue collector.  

 

  1. STRATEGIC GOALS OF THE SOUTH AFRICAN RESERVE BANK 2019/20
    1. SARB’s constitutional mandate is to protect the value of the South African currency in the interest of balanced and sustainable economic growth.
    2. As a result of the Financial Sector Regulation Act of 2017, the SARB is further mandated to maintain, promote and enhance financial stability.

 

  1. OVERVIEW OF THE SOUTH AFRICAN RESERVE BANK PERFOMANCE FOR 2019/20
    1. 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.
    2. 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. 
    3. 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.
    4. 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.
    5. 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).
    6. SARB reported that it had lowered interest rates by 300 basis points since January 2020 in response to the Covid-19 pandemic. As a result, the repo rate was now at its lowest record. It had also made liquidity available to banks, through a range of facilities in addition to the usual weekly repo auctions. It also provided regulatory relief to the financial sector, to help maintain the flow of credit in the economy.
    7. SARB said that it has also supported the National Treasury’s loan guarantee scheme for funding for small and medium enterprises (SMEs), starting at R100 billion, with an option to scale up to R200 billion over time. It reported that it was also buying government bonds in the secondary market, to improve the functioning of the South African market.
    8. The SARB reported that it had group net profit of R2.85 billion in 2018/19, which was lower than the R5.8 billion in 2018/19. It said that the losses in the 2019/20 financial year were due to losses made by the Corporation for Public Deposits (CPD). The CPD had lost R2.77 billion mainly due to credit loss allowance on the Land Bank promissory notes of 0.6billion.
    9. The SARB group net profit after tax of R2.85 billion included an impairment loss on African Bank Limited of R2.3 billion.  It further reported that the SA Mint net profit after tax of R0.9 billion had increased by 42.2% when compared to the previous year as a result of strong Krugerrand sales.
    10. The SARB reported that its corporate social investment continued it focus on education with the Monetary Policy Committee Schools Challenge growing to reach over 3200 learners in over 400 schools annually.
    11. 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%. The SARB reported that inflation has remained firmly within the target range in the year under review and was projected to remain within the target range over the two forecast horizon.
    12. 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 2019/20. It highlighted however that the Covid-19 pandemic will have major implication for the economy and the financial system and may develop into a systemic risk event. It said that it had finalised and published its methodology to determine whether a bank is systemically important and communicated this to designated banks and the public in the Financial Stability Review.
    13. SFA 3 seeks to promote and enhance the safety, soundness and integrity of regulated financial institutions. Under this focus area, the SARB reported that there were not failures of SIFIs during the year under review, although some smaller institutions were placed under specific regulatory action. It said that all regulated institutions were being closely monitored in terms of governance and risk management practices, and the Prudential Authority was leveraging technologies to enhance its supervision capabilities.
    14. SFA 4 seeks to enhance the functioning of South Africa’s financial markets in support of economic resilience. The SARB said the strategic objectives and key purpose of this focus area had been defined and said that a strong foundation had been laid for further progress in this focus area in the current year.
    15. 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. It said that the quality standard for banknotes in circulation was being redefined.

 

  1. STRATEGIC GOALS OF THE PRUDENTIAL AUTHORITY FOR 2019/20
    1. 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.
    2. 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.

 

  1. OVERVIEW OF THE PRUDENTIAL AUTHORITY PERFOMANCE FOR 2019/20
    1. The PA reported it had responded to the Covid-19 challenges by providing some regulatory relief to banks and offered guidance on how to manage the crisis from the regulatory and accounting perspectives. It said that it implemented measures to provide temporary capital and clear criteria on how banks can utilise their capital liquidity. It also reduced the minimum liquidity coverage ratio requirements from 100% to 80%. 
    2. The PA said that following the promulgation of the Insurance Act, it was required to convert all registered insurers by no later than 30 June 2020 and it met this deadline.
    3. In the year under review, the PA imposed administrative and financial penalties of close to R40 million in respect of the FSRA and the Financial Intelligence Centre Act.

 

  1. REPORT OF THE AUDITOR-GENERAL SOUTH AFRICA ON NATIONAL TREASURY AND ENTITIES REPORTING TO THE MINISTER OF FINANCE
    1. The Office of the Auditor-General of South Africa (AGSA) audits 16 of the entities that report to the Minister of Finance. These include the regulatory agencies, development banks, state-owned insurance and investment companies, government agencies, National Treasury and SARS. The regulatory agencies audited are the: Accounting Standards Board (ASB), Co-operative Banks Development Agency (CBDA), FAIS Ombud, Financial and Fiscal Commission (FFC), Financial Intelligence Centre, Financial Sector Conduct Authority, Independent Regulatory Board for Auditors (IRBA), Pension Funds Adjudicator (PFA). The SARB and the Prudential Authority are audited by private auditors. The Development Banks audited are the Land and Agricultural Development Bank of South Africa (LB) and the Development Bank of Southern Africa (DBSA). The audited government agencies are the Government Technical and Advisory Centre (GTAC) and the Government Pension and Administration Agency. The insurance and investment companies are the Public Investment Corporation, Land Bank Insurance SOC and the Land Bank Life Insurance SOC Limited (LBLIC). The latter two are subsidiaries of the Land Bank. SASRIA is currently not audited by the AGSA but by private auditing firms.
    2. The AGSA noted some improvements by 13% in the number of unqualified audits compared to the 2018/19 financial year. The entities that improved were the FIC, the FAIS Ombuds and, the DBSA who now joined other entities that obtained clean audits.
    3. The AGSA reported that the audit outcomes of NT, PIC, SARS, LBLIC, GPAA, GTAC, FFC remained unchanged with unqualified audit opinions with findings on compliance with legislation and/or predetermined objectives.
    4. The Land Bank and the CBDA regressed from unqualified audit opinions with findings to a disclaimer of opinion and a qualified audit opinion, respectively. The LBIC also regressed due to material findings of the audit of pre-determined objectives and material non-compliance with laws and regulations.
    5. On credible financial and performance reporting, the AGSA reportedon the quality of financial statements and performance information submitted for audit across the portfolio, noting some improvements. It however said that 31 per cent of the entities in the finance portfolio had only achieved unqualified opinions because they had corrected all the financial information misstatements identified during the audit. It further said that 19 per cent had no material findings on performance information only because they had corrected all the misstatements identified during the audit. 
    6. On non-compliance with legislation, the AGSA highlighted the top five non-compliance areas as 1. Annual financial statements performance and annual report (CBDA, FFC, GTAC, NT, LB & LBIC), 2. Procurement and contract management (FFC, GTAC, GPAA, NT, LB & PIC), 3. Expenditure management - prevention of irregular, fruitless and wasteful expenditure (CBDA, FFC, SARS, GTAC, GPAA, NT & PIC), 4. Consequence management (GPAA), and 5.Assets under management (Non-compliance with Public Investment Corporation Act. 2004 (Act 23 of 2004) (PIC).
    7. Across the finance portfolio, fruitless and wasteful expenditure increased from R82 million in the previous year to R149 million in 2019/20, with NT and the Land Bank accounting for most this, the AGSA reported. The irregular expenditure also increased from R766 million in 2018/19 to R1.38 billion in 2019/20, with the Land Bank (R769m), NT (R249,1m) and SARS (R331m) contributing over 90 per cent of this. 
    8. With respect to the National Treasury, the AGSA reported that the overall audit outcomes of the NT had remained unchanged over the past five years. During this time, NT has received unqualified audit opinions with findings on compliance with legislation and/or predetermined objectives. It reported that NT submitted to it financial statements for audit which contained a number of material misstatements. It said that material differences were identified on the annual performance report of NT that was submitted for auditing. It said that this material differences were corrected by the management of NT, which then resulted in there being no material findings reported in the audit report.
    9. The AGSA said that its findings on NT’s non-compliance with legislation related to such as areas as expenditure management (failure to prevent irregular, fruitless and wasteful expenditure), procurement and contract management, transversal contracts and material misstatements on the financial statements.
    10. The AGSA reported that NT incurred irregular expenditure of R249 million and fruitless and wasteful expenditure of R67,6 million in the current year. It also found that the resources of NT were not utilised economically (as required by section 38(1)(b) and section 45b of the PFMA) as it incurred expenditure for annual technical support and maintenance of R67 million (R267 254 million since 2016-17) on the software licenses of the commercial off-the-shelf (COTS) Enterprise Resource Planning (ERP) system that was purchased to implement an Integrated Financial Management System (IFMS 2) for government. It said that this technical support and maintenance was paid for but the services were not utilised as the implementation of this project is delayed due to various governance challenges. It said that that there was neither a formal business case, nor programme charter, nor proper project management for the implementation of the IFMS. It also said that there were insufficient resources and limited steering committee meetings relating to the IFMS programme and all this may result in failure to deliver the overall quality solution on time and with the funds allocated. The AGSA also highlighted the issue of instability as a result of vacancies in key positions at the National Treasury. It said that this had an impact on the control environment.
    11. On the SARS, the AGSA reported that its audit outcome remained unchanged from the previous financial year as unqualified with findings on compliance with legislation. It said that the non-compliance related to expenditure management. The AGSA said that SARS did not have adequate preventative controls to prevent the re-occurrence of irregular expenditure, however the detective controls implemented were adequate to identify and disclose the irregular expenditure incurred in the financial statements. Furthermore, management was also not able to prevent the re-occurrence of fruitless and wasteful expenditure as a result of lease payments made for premises that have not been utilised, the AGSA said.
    12. The AGSA said that the material non-compliance relating to expenditure management was reported during the financial year under review. It said that the quality of the submitted financial statements was a concern in the current year as it contained misstatements on assets. It said that although the management of SARS made the required adjustments, these were not material to be included in the audit report, but still remain a concern. It said that this was a regression compared to the prior year. These misstatements related to fully depreciated property, plant and equipment (PPE) as well as intangible assets that were still in use.
    13. The AGSA said that there were no material findings identified in the audit of predetermined objectives. The SARS submitted an annual performance report that was free from material errors, omissions and misstatements. It said that the latter can be attributable to effective oversight responsibility given to the core business of the SARS.
    14. On the Land Bank, the AGSA reported that it had regressed when compared to the prior year to a disclaimer with findings. It said that the disclaimer of opinion was due to the going concern assessment not being submitted, material misstatements identified relating to the expected credit losses (ECL) and which ultimately affects the valuation of the loan book. It said that the Land Bank had incurred a net loss of R2.4 billion in the year under review. It emphasised that the Land Bank was experiencing significant liquidity challenges, as it has been unable to meet its obligations as they fell due, all of which cast significant doubt over its ability to continue as a going concern from 31 March 2020.
    15. It said that the financial statements submitted by the Land Bank for audit contained material misstatements that were not corrected by management. This was as a result of the weak control environment over the loans and advances account balance and its corresponding expected credit losses provision, the AGSA said. It said that the weak control environment was most notable on the management of the indirect book by the banks’ Service Level Partners (SLA’s), which comprises about 59 per cent of the entire loan book. The control environment weaknesses that resulted in a disclaimer were not being communicated for the first time to the bank, the AGSA said. It said that over the past three years, the AGSA has been highlighting these weaknesses and soliciting commitments from management to address them, especially those relating to the management of loans and advances. The AGSA also emphasisedthat the vacancies that existed in the executive committee (EXCO) contributed to the weak control environment at the Land Bank, highlighting, approximately 26% of the key positions in EXCO were filled in an acting capacity in the year under review. 
    16. Lastly on the Land Bank, the AGSA reported that it incurred an irregular expenditure of R769 million and fruitless and wasteful expenditure of R16, 5 million.
    17. With respect to the PIC, the AGSA reported that the PIC, although it remained unqualified with findings on compliance with legislation, had improved in terms of the quality of financial statements as no material adjustments were identified on the financial statements submitted for audit in the current year. The AGSA said that during the audit, instances of non-compliance with policies, guidelines and procedures relating to Assets under Management (AuM) were identified and reported. Significant matters on AuM included instances where there was inadequate identification and monitoring of Politically Exposed Persons (PEPS), inadequate collateral management system and,inadequate justification of assumptions used in some of the pre investment valuations where some due diligence information was not provided.
    18. Other issues included: non-compliance with National Treasury instruction note was also identified as a result of procurement of public relations services on an emergency basis even though there was no emergency and, deviation from National Treasury was not obtained relating to the procurement of a credit risk rating company. The AGSA said that this resulted in expenditure management non-compliance as effective steps were not taken to prevent irregular expenditure.
    19. The AGSA said that the PIC should implement robust investment processes (e.g. interrogation of multiples and rates used in valuations, identification of PEPs and monitoring) and also enhance monitoring of compliance with procurement prescripts.
    20. On GPAA, the AGSA reported that while its audit outcomes remained unchanged, it had seen some improvement in the quality of financial statements submitted for auditing and the underlying internal controls. It however said that material non-compliance relating to procurement and contract management, expenditure management and consequence management remained serious concerns at GPAA. It reported that there was non-compliance with the PFMA, Treasury regulations and other Supply Chain Management (SCM) prescripts. It said that non-compliance with SCM prescripts related to procurement where bids were irregularly evaluated and awarded. This resulted in non-compliance with expenditure management as effective steps were not taken to prevent irregular expenditure, the AGSA said.
    21. The AGSA said that GPAA continued to struggle with the execution of disciplinary action on misconduct identified. Disciplinary actions are not finalised timeously and/ or action are not taken against officials that are transgressing SCM prescripts, it said.
    22. It added that a number of key management positions remained vacant at GPAA. The uncertainty in key management positions is reflected by the number of executives and senior managers acting in positions for a period exceeding the allowed twelve (12) months, the AGSA said, adding that this challenge has been recurring.
    23. On the DBSA, the AGSA reported that its audit outcome had improved from the previous year and was financially unqualified with no material findings on compliance with legislation and predetermined objective. It said that the DBSA had adequate and effective internal controls in place and had strong governance and oversight over credit risk management and assets and liability management. It commended the DBSA for maintaining effective credit policies and standards that include a rigorous review and approval of credit and monitoring of credit risk post lending. The AGSA further reported that the general risk profile of DBSA loans is concentrated and introduces volatility in expected credit losses. It added that the uncertainty of the COVID 19 pandemic together with the ailing economy has resulted in a 64 per cent increase in expected credit losses. It however noted that the majority of the DBSA loans remained in the medium risk category and the non-performing loans rate was 7.15 per cent of the gross loan book. It said that the net cash generated from operating activities had decreased by 4.8 per cent.
    24. The AGSA said that the dilution in Return on Equity (ROE) and net cash generated from operations is attributable to increased expected credit losses in the Bank’s development loan book associated with the difficult economic conditions, volatile commodity prices and the anticipated impact of COVID-19 on some of the key clients. It said that the DBSA had however shown some resilience and has maintained a positive net asset position, achieving the target of 5.1 per cent net interest margin and managing to grow the loan book by 18%. It added that the DBSA had a strong liquidity position to finance operations and fulfil its legislative mandate, while complying with regulatory prescripts on debt to equity ratio and capital adequacy, among others.
    25. The Office of the AGSArecommended that the Committee follows up on: the filling of key positions in the finance portfolio; the adequacy and implementation of audit action plans across the portfolio and; the Department and entities to ensure that there are systems in place to ensure compliance with legislation and more specifically on expenditure management, supply chain management and consequence management. The AGSA further recommended to the Committee that it enhances its oversight over the IFMS project in order to ensure that it is developed and implemented by government. It also urged the Committee to enhance oversight over the Land Bank to ensure that the liquidity challenges are addressed and the audit action plan to address the disclaimer is monitored and implemented effectively.

 

 

  1. OBSERVATIONS AND RECOMMENDATIONS

 

GENERAL OBSERVATIONS AND RECOMMENDATIONS ON THE FINANCE PORTFOLIO

  1. The Committee regrets the delays by the National Treasury in tabling its annual report with audited financial statements in Parliament. The reportwas only tabled at the end of January 2021, following the resolution of a dispute between NT and the AGSA over the fruitless and wasteful expenditure in respect of the IFMS 2 project.While the Committee recognises NT’s prerogative to challenge the findings of the Office of AGSA, and there is need to comply with all the due process prescripts of dispute resolution thereof, the Committee notes that this,nonetheless,negatively affects the Committee’s oversight role and the National Assembly’s programming schedule. The Committee urges NT and the Office of the AGSA to work more cooperatively and efficiently in order to avoid these delays in the future, especially on issues that are recurring such as the fruitless and wasteful expenditure on the IFMS 2 project.
  2. While the Committee has not met and assessed all the entities that report to the Minister of Finance for the 2019/20 reporting period, it has an appreciation of issue affecting them based on the 2019/20 audit outcomes report on the finance portfolio presented to it by the AGSA. The Committee extends its gratitude on the continued role of the AGSA in ensuring accountability and assurance. It further notes all the AGSA’s recommendations to the Committee and will implement them. In this regard, the Committee makes some observations and recommendations even on the entities that it has not yet met over the 2019/20 reporting period.
  3. The Committee notes that there were some improvements in the number of unqualified audits in the 2019/20 financial year as compared to the previous reporting period (2018/19). The FIC, the FAIS Ombuds and the DBSA have again joined the FSCA, IRBA and, the PFA in obtaining clean audits. The improvement in obtaining clean audits by entities in the finance portfolio has improved from 25 per cent in 2018/19 to 38 per cent in 2019/20 and the Committee commends this.
  4. The Committee is concerned that 62 per cent of the entities’ audit outcomes in the portfolio remained unchanged or deteriorated, with 50 per cent of these (NT, PIC, SARS, LBLIC, GPAA, GTAC and FFC) obtaining unqualified audit opinions with findings on compliance with legislation and/or predetermined objectives, and 12 per cent regressing (Land Bank and CBDA) to a disclaimer of opinion and a qualified audit opinion, respectively.
  5. The Committee notes further that the negative audit outcomes in some of these institutions have been variously recurring over, at least, the past five reporting years of the 2014-19 Medium-Term Strategic Framework. The Committee urges the Minister of Finance to intervene and ensure that the audit action plans that are developed in response to the AGSA’s findings are implemented across the finance portfolio. In this regard, the Committee will in the next quarter schedule a briefing bythe Minister of Finance on the progress in the implementation of audit action plans across the finance portfolio for the 2019/20 audit outcomes.That briefing shall involve the implementation of the audit action plans of NT, PIC, SARS, GPAA, GTAC, the FFC, the Land Bank, the LBLIC and the CBDA. 
  6. The Committee notes that some of the root causes of poor audit outcomes are as a result of management (accounting officers/authorities and senior management) not responding with the required urgency in addressing identified risks and improving internal controls. Another contributing root cause highlighted by the AGSA however is the instability and prolonged vacancies in key positions. In this regard, the Committee requires the Minister of Finance, in 30 days after the adoption of this report, to provide it with a written report on the vacancies and acting positions at senior management level in the National Treasury and in the entities across the finance portfolio. That report should specify how long those positions have not been filled, the reasons for such delays, the processes being undertaken to fill those vacancies and, the timelines for filling them.
  7. The Committee is concerned that the National Treasury and entities in this critical portfolio of finance are found wanting on compliance with legislation. The Committee has previously expressed itself that the finance portfolio should lead by example as the National Treasury is the custodian of financial management and prudence across all the spheres of government and state-owned companies. It is therefore regrettable and unacceptable that some entities in this portfolio were found to be non-compliant with such basic prescripts as procurement and contracts management (CBDA, FFC, GTAC, Land Bank and LBIC) and expenditure management (failure to prevent irregular, fruitless and wasteful expenditure) (NT, PIC, CBDA, FFC SARS, GTAC and, GPAA).
  8. The Committee notes that across the finance portfolio, fruitless and wasteful expenditure increased from R82 million in the previous year to R149 million in 2019/20, with NT and the Land Bank accounting for most this. The irregular expenditure also increased from R766 million in 2018/19 to R1.38 billion in 2019/20, with the Land Bank (R769m), NT (R249,1m) and SARS (R331m) contributing over 90 per cent of this. The Committee will follow up on consequence management issues when the Minister presents on the implementation of audit action plans for the 2019/20 financial year on 12.4 above.
  9. The Committee will further hold a separate briefing, within this quarter or the next, focussing on the IFMS 2 project- which has incurred fruitless and wasteful expenditure of over R267 million since 2016-17 (including R67 million in 2019/20).
  10. The Committee will also seek a presentation on the challenges at the Land Bank and its subsidiary insurance companies. In this regard, the Committee will require the Ministry to also brief it on the possibilities of the Land Bank being turned into a bank that is regulated under the Banks Act.
  11. The Committee notes with concern that there were instances of non-compliance with policies, guidelines and procedures relating to Assets under Management (AuM) at the PIC. It notes that significant matters on AuM included instances where there was inadequate identification and monitoring of Politically Exposed Persons (PEPS), inadequate collateral management system and, inadequate justification of assumptions used in some of the pre-investment valuations where some due diligence information was not provided.The Committee met with the PIC on 02 December 2020 to get a briefing on the implementation of the Mpati Commission report and its recommendations. In that meeting, the Committee was informed by the PIC of the improvement in its audit outcomes, although there were findings on some historical issues, most of which came from the previous years. The Committee urges the PIC Board and management to ensure that the PIC implements robust investment processes and also enhance monitoring of compliance with procurement prescript. The Committee will continue to heighten its oversight over the PIC and follow-up on the implementation of the Mpati Commission report and its recommendations. There are a number of outstanding issues on the PIC including the signing of the PIC Amendment Bill which was passed by Parliament 2019 and is currently awaiting signature from the President since then. 

 

NATIONAL TREASURY

  1. The Committee notes that the National Treasuryachieved 83 per cent of its performance targets and spent 97 per cent of its budget in the 2019/20 financial year. The Committee believes there is room for improvement in ensuring that NT’s expenditure aligns with performance targets across its programmes.
  2. The Committee notes that 96 per cent of senior managers signed their performance agreement in 2019/20. The Committee requires NT to supply it with the details of the performance agreements and key performance areas of senior management of the NT in order to enhance its oversight role on the performance targets of the Department. It also requires to be supplied with details and reasons of those senior managers who did not sign their performance agreements and the reasons thereof. Thisreport should be submitted to the Committee within 30 days after the adoption of this report by Parliament.
  3. The Committee notes that while the staff complement seems to be quite representative of the country’s demographics (88 per cent black and 59 per cent female), the total staff complement of persons with disabilities seems very low at 0.76%. The Committee urges NT to improve the representation of people with disabilities within its staff complement.
  4. As stated in 12.9 above, the Committee requires a briefing from NT focussing on the IFMS 2 project- which has incurred fruitless and wasteful expenditure of over R267 million since 2016-17 (including R67 million in 2019/20). This briefing should include the findings of the forensic investigation undertaken by NT on this project and the progress made in ensuring consequence management.
  5. The Committee urges the National Treasury to expedite the introduction of the long-awaited Public Procurement Bill for processing by Parliament. NT must provide clarity on this when it presents its annual performance plans this year.
  6. The Committee notes the announcement by the Deputy Minister that the State Bank Memorandum has been sent to the Cabinet for consideration and approval. In the next term the Committee will require a briefing on the progress and timeframes in establishing the State Bank. 
  7. The Committee requires that NT puts back on the agenda the holding of the Financial Sector Summit that has been repeatedly postponed over the years.

 

SARS

  1. The Committee notes that SARS collected gross revenue of R1 647.8 billion, which was offset by R292.0 billion of refunds, leading to a net revenue of R1 355.8 billion. Thisnet revenue collected was only R3,2 billion less than the revised estimate (RE) of R1 358.9 billion in the February 2020 Budget. The Committee notes further that this net revenue outcome represents growth of R68.2 billion when compared to the revenue collected in 2018/19 (R1 287 billion).
  2. The Committee notes the decrease in general taxpayer complaints by 30% and the improved turnaround time for VAT refunds from 27.88 days in 2018/19 to 18.5 days in 2019/20. The Committee also noted that SARS achieved 78% of its performance indicators as compared to only 48% the previous year. The Committee commends SARS for these and other improvements in its performance indicators and believes there is still room for improvement.
  3. The Committee notes the growth in the contribution of Personal Income Tax (PIT) from 38.3% in 2018/19 to 39% of the total revenue collected in 2019/20. The Committee also notes the decline in the contribution of Company Income Tax (CIT) from 16.6% in 2018/19 to 15.9% of total revenue collected in 2910/20. The Committee is however concerned that the increased unemployment, retrenchments, business rescue and liquidation applications, as a result of the economic environment and the Covid-19 pandemic, will negatively affect the tax base in the coming years—leading to reduced revenues, as projected in the 2020 Medium-Term Budget Policy Statement.
  4. The Committee notes that SARS has been under-funded by at least R800 million per annum over the past few years, as a result of cuts related to the funding of higher education. The Committee recommends that the Minister of Finance considers favourably SARS’s additional financial requirements to fill the vacancies of data analysts, specialised investigators, auditors and IT security specialists as this could assist in rebuilding SARS’s capacity to serve taxpayers and collect more revenue.
  5. The Committee requires SARS to give it a detailed presentation on the illicit economy, tax evasion and the ‘tax gap’. The Committee has long expressed itself on the need for SARS to focus more on the illicit economy in order to also curb illicit financial flows.This however requires SARS to collaborate with other agencies in doing this. In this regard, the Committee reiterates its proposal that the President considers establishing an Inter-Ministerial Committee (IMC) to tackle Illicit Financial Flows (IFFs) as tackling these requires the collaboration of various agencies which belong to different Ministries such as Finance, the Police, Justice, Trade and Industry and Minerals and Energy. The Committee further recommends that the work of this IMC pays particular attention to aggressive tax avoidance including Base Erosion and Profit-Shifting (BEPS) by multi-national companies. The Committee further recommends that the work of the IMC be jointly overseen by the relevant committees of Parliament.
  6. The Committee reiterates the recommendation it made in its 2020 Revised and Proposed Fiscal Framework Report that it requires NT (and SARS) to update it in the 2021 Budget Review on the developments in resolving the impasse on the taxing rights of countries when it comes to income derived from digital activities. The Committee is aware that South Africa is one of the few countries that are already collecting VAT from the digital economy and commends this. The Committee recommends that while NT participates on the Organization for Economic Cooperation and Development (OECD), it should work in collaboration with African Tax Administration Forum in order to advance the interests of African countries in the resolution of the global digital tax framework. 
  7. The Committee notes with concern that SARS has a very high debt book at R177 billion and recommends that it pays a particular attention to its debt management. 

 

SARB AND PRUDENTIAL AUTHORITY

  1. The Committee notes that the profits of the SARB group declined to R2.85 billion in 2019/20, from R5.8 billion in 2018/19, mainly due to the Corporation for Public Deposits’ credit loss allowance on the Land Bank promissory notes.
  2. The Committee notes that South Africa’s inflation is within the target range and that the inflation outlook over the next two years is projected to remain firmly within the target range of 3 to 6 per cent.
  3. The Committee commends the SARB and the Prudential Authority for the roles they have played so far in responding to the Covid-19 pandemic, through monetary and regulatory interventions. The Committee notes that the SARB has lowered interest rates by 300 basis points since January 2020, in response to the Covid-19 pandemic. It also notes the regulatory relief to the financial sector and its purchase of government bonds in the secondary markets to improve the functioning of the South African market.

 

The Democratic Alliance (DA) reserve their position.

 

Report to be considered.

 

 

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