Induction Workshop by AGSA & National Treasury

Meeting report

Presentation on Standing Committee on Appropriations (SCoA) Induction

Mr James Archer, Director: Public Finance, National Treasury said that he was from the unit that oversees the various departments under urban development and infrastructure, and in particular Human Settlements. The oversight of the Portfolio Committee on Human Settlements, Water and Sanitation was massive, and Treasury would support the Committee as much as they could.

He broke the presentation down into four sections:

1. Budget Process

This section described the purpose of the budget; how the Medium-Term Expenditure Framework (MTEF) works; the budget cycle; the budget preparation summary: the technical and political structure during the budget process; and the Parliamentary process.

2. Structure of Budget Documents

This covered the budget review; the Division of Revenue Bill (DoRA); the Appropriation Bill; the structure of the Bill; the Estimates of National Expenditure (ENE); and the adjusted estimates of expenditure.

3. Monitoring In-year Expenditure

The monitoring aspect included legislation and background ; roles and responsibilities; individual sector Portfolio Committee; National Treasury; Accounting Officers (Directors-General); non-financial performance; process followed; content of the monthly report ; and monthly feedback reports by National Treasury.

4. High level baseline analysis and structure

Finally, Mr Archer referred to the analysis and structure involving the department and programme; the department and economic classification; the DoRA; main spending items – Department of Water and Sanitation (DWS) and Department of Human Settlements (DHS)

Besides the Human Settlement Development Grant (HSDG), he said the Urban Settlements Development Grant (USDG) was a supplementary capital grant that goes to metropolitans, and was meant to help supplement the capital budget to deliver bulk infrastructure, land etc. mainly to the poor urban population.  In the next year or two, there would also be a separate Informal Settlements Upgrading Grant ISUG), because the housing problem in South Africa was an informal settlement problem, and there needed to be more support for poor households in delivering basic services and securing tenure.

The main issues during the 2018/19 year were:

Department of Water and Sanitation (DWS)

• Underspending: Regional Bulk Infrastructure Programme (RBIG) Indirect -- R262m;
• Unauthorised expenditure (spending more than appropriated): “War on Leaks” and bucket eradication programmes -- R1.4bn;
• Overdraft (drawing down more from the National Revenue Fund than allowed): R896.7m;
• Accruals (money owed to service providers for work completed): R416m, down from R1.5bn in 2017/18;
• Irregular expenditure (war on leaks): R1.9bn;
• Water Trading Entity (WTE): high spending, low collections.

Department of Human Settlements (DHS)

• Performance by provinces: Human Settlement Development Grant (HSDG) -- financial and non-financial, which was the main housing grant; there were issues in that some provinces were not being held to account for the money that was being allocated to them. The oversight on the actual outcomes was not monitored correctly.
• Oversight by the DHS;
• Policy development and review -- some policies were outdated or were never implemented;
• National Upgrading Support Programme (NUSP), which was a programme that was supposed to help municipalities with upgrading plans for informal settlements, but there had been some underspending.
• The title deeds programme was underperforming.
• Informal settlements had not been prioritised, hence the newly expected grant.
• The social housing programme was one of the best programmes and policies within human settlements, but its implementation was slow, and it was underperforming.

 

Discussion

The Chairperson thanked Mr Archer for the important information, as it would help the Committee to oversee the two sectors.

Ms E Powell (DA) asked for clarity on who was responsible for funding the capital infrastructure in district municipalities. For example, in the Eastern Cape there were extensive problems with numerous villages that had not had access to water since the advent of democracy.

Mr M Mabika (DA) said that the Auditor General (AG) would give a report year-in and year-out to say, for instance, that the money that was given to a particular district municipality had not been spent accordingly. He wondered if the AG was really assisting enough to turn things around, because even after the report was given, in some cases no improvement was being made. He questioned if the AG just gave an opinion without having any means to perhaps assist in ensuring that things were done accordingly.

Ms S Mokgotho (EFF) said that the Committee was responsible for ensuring that the departments were accountable for their expenditure. For example, in the first term, the Committee was told that some provinces underspent, and it seemed as if the Director General (DG) was afraid to hold people in the provincial and local government account. As Members of Parliament (MPs) they should take the DG to task, because she was concerned that what had happened in the first term may repeat itself in the second term, where there was a lot of money that was not used but was supposed be spent on service delivery, which was where service delivery had been budgeted for. She suggested that perhaps they were deliberately encouraging under-spending to compensate for their accruals and as a result, projects that were meant to be completed in the first term had not been done, but instead accruals had been paid. She questioned the money with which those accruals were paid.

Ms L Arries (EFF) said that besides the quarterly and monthly monitoring feedback of budget processes, that Treasury picks up only on irregular and fruitless expenditure at the end of the financial year. She questioned if there was another way that Treasury could somehow do a midyear assessment, or whether they were able to do assessments only at the end of the financial year.

Ms N Sihlwayi (ANC) commented that there were various sectors that were scheduled to meet and deal with the budget preparation, and questioned the tools that they were utilising to deal with the budget preparation. One of the issues that had been raised by the President in the State of the Nation Address (SONA) was the lack of integration and coordination. She mentioned this because she had seen the effectiveness of participation and monitoring of plans by the Department of Public Service and Administration (DPSA). With regards to grant allocations to provinces, she asked for clarity on who was responsible for giving guidelines on conditional grants, because there was a concern that the grants were being used for something else, resulting in non-service delivery or non-performance. She questioned whose role it was to monitor that grant spending, and who formulated the guidelines in how the grants were spent. She was worried about Treasury’s high-level monitoring, and asked which structure in government should be detailed in the monitoring. Regarding the budget projections for the last financial year, she questioned why Treasury had decreased the DHS budget between 2018/19 and 2019/20, when in fact the issues were increasing.

Ms G Tseke (ANC) said it appeared as if National Treasury (NT) had allocated a committee of some kind that was responsible for rollovers, which meant that NT supported the rollovers by municipalities. She questioned why they had that Committee, and if it was an encouragement to have rollovers when there was no service delivery in different municipalities. She questioned how and when NT intervened when they noticed issues in a certain department – for example, the challenges of under-spending, unauthorised spending and overdraft accruals mentioned in the DWS, despite the in-year monitoring process. Treasury had mentioned that they interacted with the departments on a monthly basis, so she questioned how they would intervene.

She referred to the three functions of the budget, which state that resources must be allocated to political priorities. However, in the SONA 2010, the former President had made an announcement to say that sanitary towels must be distributed freely to young girls in schools of rural areas, yet there was no specific department that had such a budget to ensure that they procured sanitary towels. There was the confusion that it was the responsibility of NT to allocate money to different departments to ensure that political priority, so she questioned how Treasury would ensure that political priorities were budgeted for.

Mr M Tseki (ANC) asked if it was true that the Committee passed the budget and that generally as Parliament, they were responsible for the budget that was passed. He was uncertain if the presenter had noticed the process between the Executive and the legislature and how it was done. He agreed that the process of National Treasury’s monitoring was important, and equally the Committee’s monitoring in terms of oversight, but with the high allegations of corruption, he questioned Treasury’s role in dealing with those allegations.

Mr M Mashego (ANC) commented on the statement that the budget was meant to be allocated to political priorities, and raised his concern about fruitless expenditures. He questioned how rollovers were denied if they were still applied for. What had the presenter meant by ‘normal’ and ‘abnormal’ debt, and how it differentiated? He questioned the importance of the number of days -- for example, it had mentioned that within 15 days at the end of each month, the accounting officers must submit information for various reasons that the DG must account for, and he questioned the importance and the implications of the number of days specified. He was confused where it was said that in the absence of a budget being passed by Parliament, money could not be spent, but then it was later indicated that money could be spent within an “x amount” -- he questioned what the “x” on the slide was. It was important to debate this. He inferred that the slide answered the allegations of corruption in itself, and where the under-spending and accruals needed to be accounted for. 

The Chairperson asked to what extent all the instances of overdrafts, accruals, irregular and unauthorised expenditure were criminal offences. The DHS for instance, was responsible for the broader housing in society. She commented on Mr Archer’s statement that he did not agree with the concept of RDP housing, and questioned what the Committee should monitor as role-players of the infrastructure industry, and if it should perform a role in leading infrastructure development.

Regarding the current system of incremental budgets used in the budgeting process, she said that the zero-budget approach would have been more helpful in focusing on the Medium-Term Strategy Framework (MTSF). Both the Committee and Treasury had a responsibility for monitoring departments’ spending, yet there was no convergence. When the DHS and DWS present a quarterly report to the Committee, they appear to be completely different to the monthly reports that they submit to Treasury. Treasury was responsible for the money flow, and was authorised to monitor irregular expenditure. She requested that Treasury share the monthly reports that the departments submit to them, as it would be helpful to identify corrupt expenditure. The people of South Africa wanted to see that money was being used as budgeted for. It also appeared as if Treasury had not been taking action to hold departments accountable for programmes that had not been implemented accordingly or programmes that had not been fruitful. Instead, it continues to fund those programmes that are underperforming. She questioned who was responsible to ensure that the various departments’ mandates were funded accordingly.

National Treasury’s response

Mr Archer responded that the questions raised by the Committee were also helpful for Treasury to have introspection.

Regarding who funds the district municipalities, he said local government that receives a municipal infrastructure grant that should fund such projects. In respect of how the AG assists, it was not really their responsibility to take action but it helps Treasury to highlight certain issues that should be dealt with. The various departments’ accounting officers were meant to take action, and municipalities had some authority of their own, as they have their own municipal councils, unlike provinces and national government that were regulated by Parliament, so the municipal managers and mayors were to account. The AG was just meant to highlight necessary warning signs, but it was not for them to take on decisions of expenditure for municipalities.

For holding provinces to account for their spending, the Division of Revenue Act had conditions and responsibilities that the DG could apply. For example, if a particular province was not spending accordingly it could then invoke the prescripts to withhold money, and could even stop and reallocate the money. There were certain processes in place, so the DG did have the power in such instances, especially with the conditional grants. The Portfolio Committees should hold the departments to account for the actions that they were taking, especially when the powers were already conferred in terms of the Division of Revenue Act.

Regarding picking up unauthorised and irregular expenditure during the year, he said that the final audit outcome came only at the end of the financial year, but through the in-year monitoring Treasury was able to get early warnings and identify issues and when they did pick up on those irregularities, it immediately writes to and meets with the respective department. Sometimes it may start off at a technical level, but it may progress to a DG level and even to a ministry level, which had happened many times with the DWS over the past three years. The Public Finance Management Act (PFMA) states that the accounting officers of the departments must take responsibility, but then it is in the hands of the Executive, the Ministers and the legislation to take further action.

With reference to the Medium Term Expenditure Committee (MTEC), the interdepartmental committee and lack of integration and coordination, and the question as to who provides the guidelines on how provinces spend money, he responded that the Division of Revenue Act had conditional grant frameworks for each and every grant that states what the grant’s purpose was, expected outcomes, what the money can and cannot be spent on and other rules of engagement; and each year the national departments would sit with National Treasury to draft those conditions. The national departments have that guidance because they were the policy custodians and decide what provinces and municipalities can spend the money on, which was approved by Parliamentary processes.

Regarding the concern about Treasury’s high-level monitoring, he responded that NT did have a deep level of analysis but it all comes down to National Treasury’s responsibility to hold the departments to account. However, Treasury does not have transparency with supply chain management (SCM) issues or actual project spending issues at the provincial or municipal level. Such responsibilities were for the heads of departments, municipal managers and the DGs to adhere to, and a lot of responsibility was also placed on accounting managers.

As for the decreased budget for the DHS, he said he would find out more detail, but that it may actually be due to the history of actual spending instead of an allocated budget, but usually the DHS spends close to its budget.

There was a process in the intergovernmental relations division that dealt with municipal rollovers, but Public Finance deals only with national rollovers, and there were very strict criteria, Treasury does not encourage rollovers -- they want the departments and municipalities to spend all of their money. When it comes to municipalities, Treasury considers rollovers only for their conditional grants, but not for their own funds, because that was council-approved money. Regarding when Treasury does not approve rollovers, he said that usually rollovers were for real commitment, and there were several budget questions that the department and analysis had to answer before it went to the Committee that looked at those rollovers. To confirm, Treasury does not encourage rollovers, but are aware that in some instances it is necessary to be provided.

Mr Archer replied on the issue of the budgets allocated to political priorities, and agreed that the SONAs and MTFSs had never been fully funded. Part of the problem was the constrained fiscal and economic environment because there are certain budget items that cannot be neglected, so whenever there is a SONA or MTFS, that was merely an additional priority. Treasury often tries to look at the programmes that were under or over spending or underperforming and can be closed down. Through the MTEC process, there are recommendations that are provided, but it is for the Committees to decide if they would continue, so it becomes a political decision on whether or not their programmes can be stopped and have its funds reallocated to other priorities. Recently Treasury had done an analysis on the new MTSF, and it had found that for some priorities there was already an overspending if those priorities were to be funded, so there really was an issue with considering the hierarchy of priorities. The Department of Planning, Monitoring and Evaluation (DPME) was also meant to assist Treasury in that regard.

In terms of what was ‘normal’ or ‘abnormal’ debt, he responded that public entities borrow a lot, which was fine only if they were allowed to borrow and if they had a cash inflow to cover their debt. Debt could also be used for socio-economic gain, especially with infrastructure, but bad dept was when debt was made for consumption, because that would always be a loss. I

Regarding the 15-day repercussions, Treasury would raise it as an issue, but it would become an audit finding effectively.

He referred to how much could be spent before the Appropriation Bill was signed, and said that Section 29 of the PFMA says that for the first four months of the financial year, the budget may not exceed 45% of the previous budget total, and then the following months thereafter cannot be more than 10% each month and in total cannot be more than the previous year.

He said unauthorised or irregular spending were not necessarily criminal offenses, but irregular spending implied that the money was being used for something slightly different than what it was intended for, and unauthorised meant that there was spending that was more than that appropriated by Parliament, and these may lead to investigations and charges of financial misconduct. He suggested that the Committee should look at what the provinces’ approved business plans were, compared to what they were actually doing and reporting on the Housing Subsidy System (HSS), to ensure that the Departments were holding the provinces to account for the business plans.

There were laws in place to ensure that departments should be following transformation policies.

On incremental budgeting versus zero-based budgeting, he said that it was a decision considered by Treasuries across the world, where zero-based budgeting would mean that the budget would start on a blank slate every year and decisions of allocation would follow without any prior programme of spending. This did become tricky, because some programmes would always be a priority, so it just ended up being incremental. However, the issue was that the budget could not proceed incrementally without getting rid of some things.

With regard to the convergence of Treasury, the AG and the departments, Treasury was aware of the AG’s reports and tries to converge with the AG and the departments as well. He was certain that the monthly reports could be provided to the Committee, but this would be confirmed.

The Chairperson asked of Mr Archer to avail himself to the Committee’s future engagements to interrogate money that was hidden in goods and services that were meant to be spent on service delivery.

Presentation on Public Finance Management Act and Treasury Regulations

Ms Moipone Ramoipone, Director: PFMA Support, National Treasury presented on the following aspects of the Public Finance Management Act and Treasury regulations:

• The hierarchy of the legislative framework;

• Departments and Constitutional Institutions (Chapter 5) – the appointment of the Accounting Officer (AO); the AO’s general responsibilities of AO and reporting responsibilities; the AO’s responsibilities when assets and liabilities were transferred; and virements and shifting of funds.
• Rollovers;
• Executive Authorities (Chapter 7);
• Financial responsibilities;
• Delegations of Authority in terms of the PFMA -- Sec 44, 56, 79 and 92;
• Borrowings (Chapter 8) -- Approval for Loans, Guarantees (Sec 66);
• Financial Misconduct (Chapter 10) -- Investigations into financial misconduct, criminal proceedings and reporting of financial misconduct.

Due to time constraints, no questions and answers could be facilitated on the PFMA presentation, but Ms Ramoipone would be invited to the Committee’s budget review to engage with further questions.

 

Presentation on Capacity Building Programme

Ms Corne Myburgh, Business Executive: Auditor General of South Africa (AGSA), presented the following sections:

• AGSA mandate -- mandate of the AGSA; delivering on its mandate to audit and report; the work of AGSA; the audit process (risk assessment, risk response, reporting); the different outcomes of an audit (clean audit outcome, financially unqualified opinions with findings, financially qualified opinion with findings, adverse opinion with findings, disclaimed opinion with findings); and  AGSA’s work as it relates to Parliament;
• Audit outcome trends --  trends over the past 10 years; history of irregular expenditure, fruitless and wasteful expenditure, and unauthorised expenditure; and dealing with unauthorised, irregular and fruitless wasteful expenditure.

An analysis done last year to look at what was identified for 2016/2017, showed that last year almost 90% of irregular expenditure was not investigated, as was required by the PFMA, which failed to understand the reason behind irregular expenditure, how to prevent it and how to stop it. The analysis of unauthorised expenditure showed that 81% of unauthorised expenditure was not dealt with, and 80% of fruitless and wasteful expenditure had not been investigated and recovered.

Ms Myburgh said that in government as a whole, the root causes of poor outcomes were: blatant disregard for controls; lack of compliance with legislation and AGSA recommendations; continued capacity gaps in administration; vacancies and instability slowing down systematic and disciplined improvements; unethical behaviour in administration and by political leaders; leadership’s inaction / inconsistent action to address persistent transgressions created a culture of ‘no consequences.’

• Public Audit Act (PAA) amendments – the key expansion to AGSA’s mandate, which allowed it to refer material irregularities, take binding remedial action, and issue a certificate of debt; material irregularity vs irregular expenditure; legal obligations of an AO/AA to address an irregularity; and implementation of the expanded mandate.

• Oversight and monitoring -- oversight initiatives; the role of oversight and executive authority; effective oversight in preventing and tracking material irregularities; and the top four root causes, commitments and proposed recommendations.

Ms Myburgh said the measures of success were robust financial and performance management systems; oversight and accountability; and commitment and ethical behaviour.

Presentation on Water Portfolio -- prior year audit outcomes

Ms Surette Taljaard, Senior Manager: AGSA, presented on the water portfolio’s prior year audit outcomes, based on the Budget Review and Recommendations Report (BRRR) for 2017/18. She described the water value chain, audit outcomes over five years for the Department of Water and Sanitation (DWS), the Water Trading Entity (WTE) and the Water Research Commission (WRC). She also covered the overall audit outcomes of the water boards over four years, and the financial health of the Department and the WTE.

She said material uncertainty related to the going concern/financial sustainability of the DWS had been included in the audit report: The Department had an overdraft of R119 million and unauthorised expenditure of R526 million during the year ended 31 March 2018. It was an indication that a material uncertainty existed that may cast significant doubt on the Department’s ability to continue as a going concern (thus its ability to undertake its objectives where the vote had been depleted).

Material uncertainty related to the going concern/financial sustainability of the WTE was also included in the audit report: The entity had an overdraft of R1.411 billion and a net loss of R2.692 billion during the year ended 31 March 2018. It was an indication that a material uncertainty existed that may cast significant doubt on the Department’s ability to continue as a going concern. Furthermore, the budget for the 2018-19 financial year was approved only on 3 August 2018.

Ms Taljaard referred to the financial health of the water boards, and said that unauthorised, irregular as well as fruitless and wasteful expenditure had increased over five years for the DWS, the WTE and the water boards. She explained the top root causes, commitments and proposed recommendations. The causes boiled down to:

• Instability in leadership, with specific reference to the Director General position and the Chief Financial Officers;
• Inadequate policies and procedures relating to implementing agents;
• Insufficient oversight control over decisions taken by one division that affected another division;.
• Insufficient control of budget processes;
• Management did not implement adequate record keeping processes in order to retrieve information as required.

 

Presentation on Human Settlements -- Prior year audit outcomes

Mr Londoloza Songwevu, Senior Manager: AGSA, presented on the Human Settlements portfolio’s prior year audit outcomes, based on the Budget Review and Recommendations Report (BRRR) for 2017/18. - Audit outcomes of portfolio over four years.

His presentation covered the Human Settlements value chain, the executive summary on the provinces’ audit outcomes, the executive summary on key projects audited, Programme 4: housng development finance, and unauthorised, irregular as well as fruitless and wasteful expenditure over five years.

The fruitless and wasteful expenditure involved the DHS, where vehicles had been rented when there were Departmental vehicles available. With the National Home Builders Registration Council (NHBRC), work had needed to be re-performed on an Eastern Cape provincial DHS project; and executives had been suspended. In addition, the Community Schemes Ombud Service (CSOS) had paid VAT to entities not VAT registered, and incurred costs for flights paid and booked but not taken; and the cancellation of tenders.

Although the DHS had no irregular expenditure, the NHBRC’s declarations of interest were not submitted, and the preference points system was not applied or applied incorrectly. The CSOS had also not applied the preference point system or applied it incorrectly, and actual expenditure had exceeded budget.

Mr Songwevu said the root causes were the slow response to improving key controls and addressing key risk areas; inadequate consequences for poor performance and transgressions, and instability or vacancies in key positions.

AGSA’s recommendations were that the Portfolio Committee must request management:

• To provide feedback on the implementation and progress of the action plans to address poor audit outcomes during quarterly reporting.
• To provide quarterly feedback on the status of key controls.
• To provide feedback on consequence management measures taken against transgressors as part of a follow up for all irregular, fruitless and wasteful expenditure incurred.

 

Discussion

The Chairperson questioned whether the PFMA legislation was helpful, or if it should be reviewed. Legislation and policies were meant to resolve problems. If it did not do so, then it was a problem of its own.

A Committee Member said that she was concerned with the irregular expenditure in the Lesotho Highlands Water Project (LHWP), in that a lot of money had been budgeted for the programme which was not yet complete, and the period in which it was meant to be completed had already lapsed. She asked the AG what they were doing about such irregular expenditure, and if they were following up on that matter to hold those accountable.

Ms Arries commented on the LHWP, and said that every month it had received royalties from South Africa, regardless of how much water it provided. She raised concern that the agreement did not seem fair, in that the LHWP were secure in the amount of money they receive from South Africa, yet how much water was provided in return was not secure. She suggested that the agreement be revisited because there was a lot of money invested.

AGSA’s respons

Ms Myburgh responded that, in terms of accountability on the case of irregular expenditure, the PFMA puts the responsibility on the accounting officers. The DG was responsible for investigating and determining accountability, preventing and stopping irregular expenditure, and for implementing consequence management. It was the accounting officers, the DG or the accounting authorities that were responsible for doing that.

The mandate for the amended Public Audit Act (PAA) and the referral to public bodies came in to effect from 1 April 2019. It was not certain what Treasury would do regarding irregular expenditure, but it was the responsibility of the accounting officers who were empowered, had the delegation and authority to investigate, identify accountability and collect money that had been paid in vain, but fruitless and wasteful expenditure should not be condoned.

Regarding who can make the Head of Department (HoD) or DG implement the recommendations or the issues that had been identified, HoDs and accounting officers report to the Ministers. The AGSA empowers the Ministers on a regular basis by informing them, and there would also be certain information available to Portfolio Committees. The Standing Committee on Public Accounts (SCOPA) also had hearings. It was up to the executives, and the Parliamentary roles and functions, who have the power to make HoDs and DGs implement. With the amendments to the PAA, if an accounting officer does not implement the recommendations there can now be consequences.

With regard to the findings and audit process, the AGSA was doing an interim status of records review, which was a process that has been implemented to identify the control weakness and risks, which would then assist the executives and management to identify problem areas. The audit process looks backwards into the financial year, but the interim status of records review and regular engagement with accounting officers and executives assists to identify and control problem areas.

The AGSA does not look at service delivery to see if there had been service delivery or not, but they do the audit in terms of the PAA to ensure that it meets its principles and to ensure that the information that is reported is credible. The PAA will result in consequence management and through the process, accounting officers will be responsible for implementing consequence management, otherwise there would be consequence management imposed on the accounting officers themselves.

Mr Londoloza said that the AGSA had a very good relationship with the management at the Community Schemes Ombud Service (CSOS), where it tries to assist through the audit processes. Management at CSOS acknowledge their issues, but the challenge is how they can be resolved.

AGSA can only report on the irregular expenditure in the Free State to check for material irregularities, but the responsibility is with the accounting officers. Regarding reporting on contractors, at times it is the fault of the contractors through their inefficiency and not using the funds appropriately, but there are instances when it is the provincial department itself that would frustrate the contractor. AGSA’s report would specify the reasons.

The Chairperson thanked the presenters for their work, and said the Committee would continue to learn about financial terms as they continued to work together. She suggested that what needed to be done was to investigate the problems in the system, and ensure that where money is spent it achieves the priorities as set by government.

The meeting was adjourned.