The 2011 Budgetary Review and Recommendations Report of the Standing Committee on Finance on the National Treasury, dated 03 November 2011
The Standing Committee on Finance, having assessed the performance of the National Treasury for the 2010/11 financial year, reports as follows:
In terms of section 5(2) of the Money Bills Amendment Procedure and Related Matters Act No. 9 of 2009, committees must annually submit budgetary review and recommendation reports for tabling in the National Assembly for each department. A budgetary review and recommendation report must provide an assessment of a department’s service delivery performance given available resources, an assessment on the effectiveness and efficiency of a department’s use and forward allocation of available resources, and it may include recommendations on the forward use of resources.
1.1 The Mandate and Role of the Committee
The Standing Committee on Finance was established in terms of section 4(1) of the Money Bills Amendment Procedure and Related Matters Act No. 9 of 2009. The mandate of the Committee is conferred to it by the Constitution, legislation, the standing rules or a resolution of a House, including consideration and report on the follwing:
Furthermore, the mandate encompasses the committee’s function to legislate, conduct oversight on the Executive’s actions and its entities. The Money Bills Amendment Procedure and Related Matters Act No. 9 of 2009 makes provisions for a procedure for this committee to amend money bills.
In complying with section 5(2) of the Money Bills Amendment Procedure and Related Matters Act, Act No 9 of 2009, the Standing Committee on Finance held meetings on the 2009/10 Annual Reports of National Treasury, the South African Revenue Services (SARS), the Financial and Fiscal Commission (FFC), the Financial Intelligence Centre (FIC), the Public Investment Corporation (PIC), the Land Bank, the Development Bank of South Africa (DBSA), the South African Reserve Bank (SARB),the Financial Services Board (FSB) and the Pension Fund Adjudicator (PFA). The Office of the Auditor-General was also invited to give input during the budget review and recommendation report process. The report therefore reflects key issues that were identified by the Committee.
1.3 Mandate and role of National Treasury
The National Treasury is responsible for managing
The budget process was enhanced as a result of the Money Bills Amendment Procedure and Matters Related Act, (Act 9 of 2009) and National Treasury’s capacity was increased by creating a division handling international and regional economic policy.
The legislative mandate of the National Treasury includes developing and prescribing measures to ensure equitable resource allocation and proper expenditure control in each sphere of government, as well as to ensure that this function is executed in a transparent manner. The National Treasury does this by advocating and ensuring adherence to the following guidelines and procedures:
· Generally Recognised Accounting Practice.
· Uniform Expenditure Classifications.
· Uniform treasury norms and standards.
As the custodian of state funds, the National Treasury is therefore responsible for coordinating departments’ budgets in all spheres of government. The Treasury’s role in this regard is to ensure that appropriated funds are transferred to departments for implementation of government priorities, and that government expenditure is continuously monitored.
1.4 Strategic Overview of National Treasury
The overarching aim of the National Treasury is to support and promote economic development, good governance, social progress and rising standards of living through the accountable, economical, equitable, and sustainable management of public finances.
During the period under review, the National Treasury continued to accelerate its coordinated implementation of the key strategic priorities, as depicted in the Department’s Strategic Plan and Estimates of National Expenditure: promoting the fiscal policy framework of the government, coordinating intergovernmental financial and fiscal relations, managing the budget preparation process which encompass revenue, expenditure, assets and liability management, exercise control on the implementation of the national budget, facilitate the implementation of the Division of Revenue Act, enforce effective financial management practices and contribute meaningfully towards employment creation.
The National Treasury will continue to build on its past achievements and good performance by giving effect to government commitment of rooting out wastage, promoting cost efficiency and phasing out of ineffective programmes.
1.5 Analysis of Expenditure Reports
National Treasury is established in terms of Section 216 of the Constitution, 1996 and Section 5 of the Public Finance Management Act (No. 1 of 1999). Among its responsibilities, National Treasury is required to enforce compliance with good financial management principles and monitor the implementation of budgets. The department’s mandate is executed through programmes that largely play a facilitation and coordination role of the budget. To ensure effective delivery on its mandate, the department is allocated a budget as per programme and economic classifications that supports the identified priorities of the department.
The Constitution requires that budgets and budgetary processes must promote accountability. In line with this constitutional principle, the Public Finance Management Act (PFMA) requires each government department and public entity to prepare reports (performance and financial) to account on their activities. The scrutiny of such reports is very important to the oversight work of Parliament, as it provides Members of Parliament with a holistic overview of the actual performance against plans. This section analyses the expenditure performance of the National Treasury.
1.6 Budget Allocation
National Treasury was allocated an appropriation for the Department, amounting to R50.2 billion (2009/10:R62.8 billion) during the year under review and is divided into two main budgets, that is, operational budget and transfers. Programme 1 to 6 constitutes the Department’s operational budget, which amounted to R1.4 billion (2009/10:R1.3 billion), which is 2.9 per cent of the total appropriation and the remaining budget of R48.8 billion (2009/10:R61.6 billion) falls under programme 7 to 9, which is 97.2 per cent of the total appropriation. The report stated that the operational budget comprised R552 million (2009/10: R408 million) for compensation of employees, R810 million (2009/10: R788 million) for goods and services and R16 million (2009/10: R16 million) for the acquisition of capital assets.
1.7 Expenditure at the end of the 2010/11 Financial Year
The following presents the spending trends by the National Treasury on its programme budget:
The total appropriation to the Administration programme amounted to R277 million (2009/10: R247 million). Expenditure for this programme totalled R249 million (2009/10: R243 million), which comprises expenditure on compensation of employees of R109 million (2009/10: R92 million), goods and services R134 million (2009/10: R143 million), transfers R2 million (2009/10: R1.4 million) and capital expenditure R4 million (2009/10: R7.6 million).
The total appropriation for Public Finance and Budget Management amounted to R315 million (2009/10: R265 million). The current expenditure for this programme totalled R230 million (2009/10: R242 million) and comprised compensation of employees R144 million (2009/10: R123 million) and goods and services R86 million (2009/10: R119 million). Capital expenditure amounted to R1 million (2009/10: R1 million). Transfer payments amounted to R22 million (2009/10: R20 million).
The total appropriation for the Assets and Liability Management programme amounted R73 million (2009/10: R61 million). The total expenditure incurred within this programme amounted to R67 million (2009/10: R53 million) and consists of compensation of employees R47 million (2009/10: R38 million), goods and services R19 million (2009/10: R15 million) and payments for capital expenditure R0.6 million (2009/10:R0.1 million).
The total appropriation for Financial Management and Systems amounted to R433 million (2009/10: R459 million). The total expenditure incurred amounted to R395 million (2009/10: R406 million) and comprises compensation of employees R43 million (2009/10: R40 million), goods and services R352 million (2009/10: R365 million) and payments for capital expenditure R1 million (2009/10: R1 million). The report cited further that the major cost pressure on this Programme relates to professional service providers for maintaining the transversal systems and the development of the Integrated Financial Management Systems (IFMS) project.
The total appropriation for the Financial Accounting and Reporting programme amounted to R206 million (2009/10: R139 million) and consisted of an operational budget of R144 million (2009/10: R86 million). The total amount spent by the programme was R164 million (2009/10: R137 million), comprised compensation of employees R66 million (2009/10: R51 million), goods and services R35 million (2009/10: R33 million), and capital expenditure R1.2 million (2009/10: R1 million), while Transfer payments amounted to R62 million (2009/10: R53 million).
The report stated further that this programme is responsible for the transfer of payments to the Auditor-General of South Africa (AGSA) in terms of the Public Audit Act (Act No. 25 of 2004), whereby National Treasury is obliged to pay audit costs in respect of the auditing of statutory bodies for any financial year concerned where such costs exceed one per cent of the total expenditure of such bodies. The transfer payments in respect of these statutory audit costs amounted to R21 million (2009/10: R19 million) during the year under review.
The total appropriation for the Economic Policy and International Relations programme amounted to R130 million (2009/10: R96 million). The total expenditure incurred during the reporting period amounted to R104 million (2009/10: R94 million) and comprised compensation of employees R68 million (2009/10: R59 million), goods and services R31 million (2009/10: R30 million) and capital expenditure R0.5 million (2009/10: R0.5 million), while transfer payments amounted to R5.3 million (2009/10: R5 million) for economic research.
The total appropriation for Provincial and Local Government Transfers amounted to R12.8 billion (2009/10: R14.4 billion) during the year under review. Total expenditure amounted to R10.1 billion (2009/10: R14.3 billion) and included conditional grants transferred directly from National Treasury’s vote to provinces and municipalities amounting to R8.8 billion (2009/10: R9.2 billion) and R365 million (2009/10: R300 million) respectively. The balance of R882 million (2009/10: R578 million) was in respect of the Neighbourhood Development Partnership Grant to municipalities.
The total appropriation for Civil and Military Pensions, Contributions to Funds and Other Benefits amounted to R2.7 billion (2009/10: R4.9 billion) during the year under review. Expenditure for the period under review amounted to R2.7 billion (2009/10: R4.9 billion) which comprised civil pensions and other contributions R2.5 billion (2009/10: R4.8 billion) and military pensions and other contributions R164 million (2009/10: R164 million) and goods and service amounted to R38 million (2009/10: R25 million).
The report highlighted that
transfers are made to the South African Revenue Service (SARS), Financial
Intelligence Centre (FIC) and Financial and Fiscal Commission (FFC) for the
fulfilment of their statutory obligations, and to the Development Bank of
Foreign transfer payments were made to:
· The World Bank Group;
· The African Development Bank (AfDB) and African Development Fund;
Common Monetary Area Compensation to
· The African integration and support programmes; and
· Various international programmes, such as Common Wealth Fund for Technical Cooperation, the Investment Climate Facility, and the International Funding Facility for Immunisation.
Total foreign transfers
made by National Treasury amounted to R532 million (2009/10: R554 million)
during the reporting period; of which the transfers to
1.8 Analysis of the Annual Report and Financial Statements
The indispensability and comprehensive analysis of annual reports cannot be underestimated. Annual reports are the most salient tools to measure the performance of a department or entity, and play an enormous role in holding government departments accountable to the legislature and the citizenry. According to the Guidelines for Legislative Oversight, annual reports are key reporting instruments for departments to report against the performance targets and budgets outlined in their strategic plans, read together with the Estimates of the National Expenditure (ENE). They allow Parliament to evaluate the performance of a department after the end of a financial year. The critical information contained in the annual report, which is backward-looking, include inter alia, service delivery information, presentation of financial statements, audit report and accounting officer report.
This section provides a summary and analysis of the 2010/11 Annual Report for National Treasury and looks at the overview of the identified programmes as per National Treasury‘s 2010/11 Annual Report, wherein only the unattained targets shall be outlined. The section further explains the management report as per 2010/11 Annual Report, the Auditor-General’s report. Financial statements are salient in measuring both the performance and position of an undertaking and their short analysis is also presented.
It is in the interest of good ethical reporting to present accurate, fair and correct information regarding the department‘s annual performance against its planned objectives as set out in the different documents to Members of Parliament and the public at large. The method or approach followed in this section is to draw attention to targets that were not met during the 2010/11 fiscal year. The focus is on output performance, targets, actual performance and reasons why the targets were not met.
Programme 1: Administration
Within the Administration Programme, the Corporate Services sub-programme set a target to revise and approve the Information Communication Technology (ICT) operational plan during the year under review. This target was partially achieved in that ICT operational plan has been revised, but not approved. The Corporate Service sub-programme further set a 60 per cent target to implement the Electronic Procurement System. However, the report indicated that this target was not achieved during the reporting period due to delays in the implementation of the Integrated Financial Management System (IFMS). The report is not clear regarding the actual work done and what the status quo is.
Programme 2: Public Finance and Budget Management
With regard to the Public Finance and Budget Management Programme, the Budget Office sub-programme has indicated that the Official Development Assistance (ODA) resources should be aligned to, and mobilised for, government policies and priorities with the focus broadened to include economic and rural development. However, the report indicated that during the year under review, alignment with the rural development programme has not commenced.
A further target for the department was that 500 officials would participate in both the budget formulation and budget analysis courses per year. However, the report indicated that 129 participants completed the Budget Formulation courses out of 221 and 88 participants completed the Budget Analysis courses out of 170.
In terms of the Technical and Management Support sub-programme, the target to complete one project as measured by the number of hospital Public Private Partnership (PPP) project reaching financial closure has not been achieved during the year under review. The report indicated that the delays in concluding agreement with Provincial Health Departments and Treasuries resulted in the late start of the project, but that the target will be met in the next 18 months.
Programme 3: Asset and Liability Management
to the Governance and Financial Analysis sub-programme, the department set a
target to review three major metros (
Under the Liability Management sub-programme, with regard to finance government’s gross borrowing requirement, the department has set a target to achieve gross issuance of R191.7 billion during the year under review. However, the report indicated that the gross borrowing requirement of R156.2 billion was financed during the reporting period.
The department further indicated that debt service costs will be managed at a target of 2.6 per cent of Gross Domestic Product (GDP). However, the target was not met, as the report highlighted that debt service costs were 2.5 per cent of GDP.
Programme 4: Financial Management and Systems
Under the Supply Chain Policy sub-programme, the department set a target to introduce strategic sourcing principles to all spheres of government. However, the target was not met due to a decision to reprioritise implementation of the Integrated Financial Management Systems (IFMS).
Financial Systems sub-programme, the department set a target to implement the
Procurement Management Module in the Department of Defence. However, the target
was not achieved due to delays experienced with the State Information
Technology Agency (SITA). Another target was set to implement the Human
Resource Management Module in the Department of Public Service Administration
and Free State Provincial Department of Education. However, in
Programme 5: Financial Accounting and Reporting
Under the Technical Support Services sub-programme, the department had set to contribute toward development of local and international standards on accounting, auditing and risk management; as well as to attend all International Public Sector Accounting Standard Board (IPSASB) meetings and submit a report within 7 days of attendance. However, the 2010/11 Annual Report indicated that the 3 of 4 meetings were attended and reports submitted. The report further stated that the February meeting could not be attended due to unforeseen circumstances, which are not explained.
Under the Internal Audit Support sub-programme, the department had targeted 70 workshops to support the implementation of audit committee guidelines. The report indicated that the target was not achieved, thus the workshops were abandoned because the need had been reduced, and as most of the audit committee had been trained in the previous financial year.
Under the Risk Management Support sub-programme, the department had targeted 15 learners for Risk Management Learnership (RML) implementation. Although the preparation for roll out had been put in place as reported, the target was not achieved due to funding constraints.
Programme 6: Economic Policy and International Financial Relations
Under the Tax Policy sub-programme, the department has set a target to publish a discussion document to explore options dealing with the tax treatment of financial instruments, carried interest in private equity transactions and the deductibility of interest payments. However, the 2010/11 Annual report indicated that the target was not achieved and the document would be completed in the 2011/12 financial year.
1.9 Report of the Accounting Officer
The report of the Accounting Officer cited that among key challenges faced by the department are the attraction and retention of scarce skills despite the successful internship programme of the department. The Chartered Accountant Academy Programme suggests real collaboration between the department and the South African Institute of Chartered Accountants and the local government metros to expand the programme to the wider public sector.
The report indicated that the wider income inequality necessitates reforms that are focusing on reducing this imbalance through sustained job creation, combating the abuse of market power and realisation of greater income security. The report further stipulated that the department undertook several initiatives to monitor the implementation of the Public Finance Management Act (Act No: 1 of 1999) (PFMA) and Municipal Finance Management Act (No 56 of 2003) ( MFMA), such as the introduction of a Financial Management Capability Maturity Model.
The introduction of the Financial Stability Board in 2009 in response to the global economic meltdown by the G20 necessitated the alignment of the South African financial sector policy to the global regulation of the financial services industry. The report cited that the rationale is to ensure regulation in important areas through bolstering a methodological risk approach to mitigate risk by hedge funds and over the counter derivatives and improving bank resilience to market volatility. With regard to regional integration, the National Treasury placed an emphasis on encouraging integration and development through the Southern African Development Community (SADC) and fostering new partnerships.
The Accounting Officer’s report further indicated that the department’s revenue during the year under review amounted to R3.3 billion (2009/10: R3.5 billion) and consisted of sales of goods and services of R51 million (2009/10: R300 million), fines, interest and dividends of R2.6 billion (2009/10: R2 billion) and other recoveries amounting to R0.7 million (2009/10: R1.2 billion).
The Local and foreign assistance received in cash amounted of R11 million (2009/10: R15 million) during the year under review. The expenditure incurred amounted to R12 million (2009/10: R16 million) and other funds amounting to R34.2 million (2009/10: R10.3 million) were transferred to external spending agencies on behalf of the Reconstruction and Development Fund.
The report indicated that payments of R193 million (2009/10: R71 million) were processed during April 2011, which relate to the 2010/11 financial year. These payments were not included in the financial statements for the 2010/11 financial year, which were prepared on the modified cash basis of accounting. Departmental revenue amounting to R190 million (2009/10: R203 million) was received after year-end and surrendered to the National Revenue Fund.
The report indicated that through the human resource business partnership model, there has been an improvement with regard to internal hiring, which increased to 54 per cent against the target of 45 per cent, and the quality of hiring new employees has improved to 85 per cent, there is still need for critical and scarce skills. However, the skills database is being implemented to assist in this regard.
The internship programme has improved with a conversion rate improving to 71 per cent, the department employee base comprises of 6 per cent of interns in this regard, which reflect 4 per cent higher than the target of 2 per cent as recommended by the Department of Public Service and Administration (DPSA). The training remains an important element of capacitating the Department and as such the Human Resources Development business unit has expanded its training portfolio and provided an average of 8.15 training days per employee during the year under review. To further the training, the business unit also introduced its Leadership Development Programme (LDP) for senior management; from Deputy-Director to Deputy Director-General (DDG) level. During the year under review, 53 per cent of staff in these positions has already attended the training. The human resource management has improved its performance agreement to 95 per cent whilst escalating the submission of performance reviews to 78 per cent.
In terms of the Information and Communication Technology (ICT), the department has adopted the COBIT compliance framework as recommended by the DPSA, as its operational standard. This is in line with the business unit’s strategy of developing its strategic information systems plan that includes revision of existing ICT governance policies, processes and procedures that will also support its implementation of an Enterprise Architecture.
With regard to facilities management, the report indicated that provision of parking is a significant challenge to the department. Facilities Management is now providing an ergonomic working environment in all business environments as well as 100% subsidised parking for all of National Treasury’s level 9 and above employees. The department also achieved 100 per cent effectiveness rating for its delivery against occupational health and safety standards and 84 per cent client satisfactory rating on its service call resolution.
The report has cited that programme 8 was administered by the Government Employees Pension Fund (GEPF) and recently by the Government Pensions Administration Agency (GPAA) since 2010. During the period under review, an irrecoverable accumulated loss of approximately R419.7 million of pension benefits was realised which resulted from ineffectiveness of control activities.
1.10 Analysis of Financial Statements
The Auditor-General (AG) expressed an unqualified audit opinion on the financial matters of the National Treasury as at 31 March 2011. His opinion means that that the financial statements present fairly, in all material respects, the financial position of the National Treasury as at 31 March 2011, its financial performance and its cash follow for the year then ended, in accordance with the Departmental Financial Reporting Framework prescribed by the National Treasury and the requirements of the Public Finance Management Act No 1 of 1999 (PFMA) and Division of Revenue Act No 1 of 2010 (DoRA).
The following are emphasis of matters as reported by AG report:
1.10.1 Irregular expenditure
The irregular expenditure to the amount of R11 million (2009/10: R12.1 million was incurred as a result of contravention of the Special Pension Act No. 69 of 1996) and treasury regulations (TR) 8.2.1 and 8.2.2.
1.10.2 Material losses
The report indicated a material loss to the amount of R3.6 million (2009/10: R4.5 million) were reported as a result of criminal conduct and ineffectiveness of control activities within programme 8: special pension
1.10.3 Financial reporting framework
The financial reporting framework prescribed and applied by the National Treasury is a compliance framework. It reflected that the financial statements had been properly prepared instead of fairly presented as required by section 20(2)(a) of the Public Audit Act of South Africa, Act No. 25 of 2004 (PAA), which requires an opinion on the fair presentation of the financial statements of the National Treasury.
1.10.4 Predetermined Objectives
The findings of the AG indicate that there are no matters to report on the predetermined objectives.
1.10.5 Compliance with the laws and regulation
The report of AG has indicated the following finding with regard to the compliance with laws and regulations:
· The accounting officer did not prepare adequate quarterly reports on the progress made in achieving measurable objectives and targets were as required by Treasury Regulation (TR) 5.3.1.,
· The accounting officer did not submit the annual performance report in time as required by Part C of General Notice 1111 of 2010, issued in Government Gazette No. 33872 of 15 December 2010,
· The accounting officer submitted financial statements for auditing that were not prepared in all material aspects in accordance with the Departmental Financial Reporting Framework prescribed by the National Treasury as required by section 40(1)(b) of the PFMA. The material misstatements identified by the AG of South Africa with regard to irregular expenditure, material loses and liabilities not fully quantified and disclosed subsequently corrected,
· Expenditure was incurred without approval of a delegated official as per the requirements of section 44 of the PFMA and TR 8.2.1 and 8.2.2, and
· Payment that were made and identified within programme 8: special pensions were in contravention of the Special Pension Act and PFMA.
Management did not adhere to the internal policies and procedures and as a result there were instances of non-compliance with the PFMA and TR. Internal control deficiencies and misinterpretations of the Special Pensions Act resulted in instance of non-compliance thereof.
· A forensic investigation was conducted by the internal audit unit and an independent consulting firm into allegations received from the Public Service Commission. The investigation was initiated based on the allegations of possible procurement irregularities, the use of public resources for private purposes and leave irregularities. The investigation has been finalised and the matter is now being dealt with through internal disciplinary processes.
· An investigation is being conducted by the Specialised Audit Services (SAS) into an allegation received from the Public Service Commission. The investigation was initiated based on the allegation of possible irregularities in the appointment of a transversal contract. The investigation is still in progress
· An investigation is being conducted by the Public Service Commission into an allegation received by their office in terms of irregular appointment of service providers by the National Treasury. The investigation is still in progress
1.11 Human Capital
The department’s total staff complement of 1 111 comprises of the following:
The National Treasury had a vacancy rate of 14 per cent (179 posts) at the end of the 2010/11 financial year.
A total of 140 critical skills positions were filled during the 2010/11 financial year. One (1) appointment was made in August 2011 and five (5) more internal staff members have declared their status after awareness sessions. There is a concerted effort to recruit more people with disabilities through relevant networks.
Entities under National Treasury
2. South African Revenue Services (SARS)
2.1 Mandate and Role of SARS
African Revenue Service was established by legislation to collect revenue and
ensure compliance with tax law. Its vision is to be an innovative revenue and
customs agency that enhances economic growth and social development, and
with the South African Revenue Service Act 34 of 1997, the service is an
administratively autonomous organ of the state: it is outside the public
service, but within the public administration. Although
SARS aims to provide an enhanced, transparent and client-orientated service to ensure optimum and equitable collection of revenue.
2.2 Economic Context of 2010/11
The Commissioner of SARS reported that the fiscal year ending showed significant improvement from the previous year in both the global and economic environments. Strong growth levels persisted in emerging economies, while in developed markets it remained uneven.
Towards the fourth quarter of 2010/11, geographical instabilities in the Middle East and North Africa, natural disasters in Asia, huge fiscal imbalances in Europe and United States, as well as rising global inflation caused by high food and energy prices, began to gather momentum and increased uncertainty for economic growth and investment.
The year in review tested SARS’ resilience in the face of the economic pressure and continuing organisational change. This added to the significantly more demanding environment to meet revenue targets in an economic downturn. SARS performed strongly, collecting a total of R674.2 billion, R2 billion above target. This reflected a growth of R76 billion, or 13 per cent against revenue collections in 2009/10.
Six of the seven categorised tax types showed an increase year-on-year, with only Corporate Income Tax (CIT) showing a marginal decrease. The main contributors to the overall increase were Personal Income Tax (PIT), R21.6 billion, and VAT, R35.6 billion, which collectively added to R57.2 billion.
2.3 Cost of Collections
The cost of collection remained steadily in the 1 per cent to 1.2 per cent range over the past six years, with the 2010/11 figure at 1.1 per cent or 0.1 per cent lower than the previous year.
This cost of around 1 cent for each R1 collected is in line with international practice and places SARS among the more cost efficient revenue administrators globally.
2.4 Debt and Credit Books
During the 2009/10 financial year, SARS reported a 30 per cent increase in the debt due to it to R79 billion, which was attributed to a combination of the economic difficulties of the financial year and its own challenges, as well as those of taxpayers in managing their accounts.
SARS made significant investment through the modernisation programme in account maintenance and debt management, providing further checks and balances and providing taxpayers the ability to view and manage their own accounts. This is already having a significant impact on both the debt and credit books, and the Commissioner reported that during the 2010/11 financial year SARS were able to make significant gains into curtailing the growth in the debt due to just R6.6 billion, or 8.3 per cent.
On the credit side, SARS ended the financial year with a total of R49.8 billion in payment liabilities, compared to R49.2 billion in 2010. The credit book saw an overall decline in credits for all tax types except VAT and is further evidence of the improvements which the modernisation programme is delivering for both taxpayers and SARS. PAYE credits dropped from over R8 billion at the end of the 2009/10 financial year to R5.9 billion last year as a result of PAYE enhancements.
The modernisation of VAT, which began at the start of this financial year, is already beginning to show similar impact on the speed and accuracy with which SARS is able to process VAT declarations and pay refunds. Currently over 80 per cent of VAT declarations are processed within 24 hours and, where due, refunds are paid within 48 hours. This has seen the VAT credits reduce from R27.8 billion at the start of the financial year to R22 billion currently, a decline of almost 21%. Further, improvements are anticipated as the VAT modernisation continues. As part of the new VAT risk process, VAT vendors selected for further verification of their refund claims are requested to submit documents in support of their declaration or to revise their declaration where an error is suspected. To date, almost a quarter of all vendors given this option have opted to revise their refund claims downwards in the total amount of over R2 billion rather than to submit supporting documents.
SARS have recently introduced a self-management functionality for VAT vendors in which they are able to see and more importantly manage their own VAT accounts. These enhancements will continue to be an important focus of their work in modernising VAT, Customs and Corporate Income Tax areas over the next three years.
2.5 Tax and Custom Compliance
A tough economic environment resulted in a decline in compliance. However, SARS’s effective approach of educating taxpayers of their tax obligations, providing efficient service to the compliant while taking the appropriate enforcement actions to detect and deter non-compliant taxpayers and traders, has helped to mitigate this trend.
Some key highlights in compliance gains during the year include:
This growth will not necessarily translate into direct revenue gains, as these
individuals were and are already being taxed by their employer under the SITE system while others are below the tax threshold.
The significance of having all those in formal employment on the tax register is twofold, firstly, it recognises the contributions of all taxpayers rather than just those who are required to submit a return each year and allows for a direct engagement between SARS and these taxpayers; and secondly it provides for a more comprehensive compliance approach by providing insight into all taxpayers.
2.6 Enforcement achievements
Visible and effective enforcement is an important motivator for compliance. In this regard, SARS reported a range of successes on both the tax and customs front during the year in review, including:
2.7 Customs Modernisation
In addition to ensuring maximum compliance with tax and customs legislation, SARS has a second and equally important mandate, to facilitate trade and to protect our country’s borders.
At no time has this mandate been more crucial to support of our government’s
priorities of job creation through economic growth.
Facilitating trade is about speeding up the movement of goods in and out of
verification, often physically.
The way SARS and other customs authorities around the world are attempting to balance service and enforcement is through a risk-based approach in which low risk goods are allowed to move relatively unimpeded while high risk goods are subjected to more stringent verification processes. This is at the heart of SARS’ Customs modernisation programme which they embarked on in 2009 and which seeks to provide an automated, electronic risk-based process of goods clearance.
The new Customs Risk Engine has given SARS the ability to move from being a gate keeper to a risk manager, targeting specific consignments with a higher it rate. The Customs Risk Engine has been redesigned to such an extent that it enables more precise risk targeting and selection, thus driving better efficiency and output. This precision has enabled declarations to be controlled by the risk engine, thereby ensuring that cargo that are stopped for inspection have a more likely chance of being non compliant. This reduces time and resource inefficiencies being employed on legitimate traders and enforcing compliance on illegitimate traders.
SARS reported that another aspect of the Customs modernisation programme is a re-engineered and more robust inspection process. Importantly, this contributes significantly in the fight against corruption in that inspectors are no longer allowed to select the cases they work on. Instead, in line with SARS’ tax reforms, Customs now uses the “get next item” concept in which cases identified by the risk engine are randomly assigned to inspectors.
SARS are increasingly focused on textile and other imported products to target undervalued imports by working with industry through NEDLAC along with historical data gathered over a number of years to improve and update their list of prices in a valuation database.
cornerstone of the modernisation programme is the replacement of the Customs
legacy system. SARS’ investment in the subsidiary company Clidet
967 (Pty) Ltd provides the basis for the development of a world-class customs
software platform not only for
The ‘Preferred Traders’ initiative continues to grow. These are traders that have demonstrated a greater assurance of their compliance and will therefore be rewarded with greater service benefits and more rapid movement of goods. At the end of the financial year, a total of 125 client engagements were conducted, 49 audits were finalised and 39 clients were recommended. The majority of clients that were engaged with, have welcomed the initiative and are showing high levels of commitment to the process.
2.8 Service Enhancements
SARS reported that significant progress has been made over the past 3 years and this has realised dramatic improvements in return processing turnaround times, increases in service levels and efficiency improvements to the extent of releasing resources to focus on higher value-adding activities.
Further improvements to the income tax process for individuals together with enhancements to the PAYE process have been realised in 2010. The modernisation programme has simultaneously commenced with the modernisation of the CIT and VAT. Some of the key highlights during this year were:
SARS reported that during the past three years, they have also invested significantly in a Customer Service Programme. To date, considerable progress has been made in the programme. Some key achievements have been:
2.9 Human Capital
SARS headcount increased very marginally during 2010/11, compared to the previous financial year with a total of 15 296 employees, or 33 more than the previous year. This included the recruitment and training of an additional 625 Customs and Border Control agents.
SARS reported that their commitment toward employment equity continues to grow with the number of black employees, woman and woman-in-management on the upward trend.
The year under review saw the total percentage of black employees rise to 69 per cent from 67 per cent a year earlier, comprising 52.32 per cent Africans, 10.64 coloureds and 6.2 per cent Indians. At the management level, more than 60 per cent of management staff are African, coloured or Indian and 45 per cent are women.
The Auditor-General has given SARS an unqualified audit report for 2010/11, the seventh in a row which reflects their on-going commitment to good governance.
SARS’s physical offices are established to provide ready access to taxpayers that are unable to utilise their electronic channels. SARS leases property for its physical footprint to ensure that it remains agile and responsive to the shifting patterns of commercial centres and transport routes. For the year ended March 2011, the total lease cost was R462 million relative to R412 million in the previous financial year.
SARS attributed this variance to the contracted escalation rates
applicable to lease agreements, expansion of the branch office footprint, and
increase in charges by the Department of Public Works for government buildings
in terms of the devolution of budget as well as the commissioning of Riverwalk in
SARS reported that they place extremely strict controls on S & T expenses. These include a reduction of the budget on a year-on-year basis, utilisation of low-cost carriers where possible and practical, discounted rates with preferred hotel suppliers and deduction of travel expenses directly from employee salaries if the expenses are not acquitted within 7 days. For the year ended March 2011, the total travel expenses were R96 million relative to R79 million in the previous financial year.
3. Financial and Fiscal Commission (FFC)
The FFC is coordinated by the Minister of Finance and
consists of a full time chairperson and deputy chairperson (nominated by
national government), who is also the chief executive and accounting officer of
the FFC. There are seven other commissioners (two national, three provincial
and two organised local government [SALGA] nominees).
All appointments are made by the President of the
3.1 Mandate of the FFC
The primary mandate of the FFC is to provide recommendations to the three spheres of government and other organs of state on: the division of revenue between and among the three spheres of government and, any other financial and fiscal matters.
In the discharge of its mandate, the FFC timeously tabled submission and recommendation on the following:
· 2011/12 Division of Revenue
· 2011/12 Division of Revenue Bill
· 2011 Fiscal Framework and Revenue Proposals
· 2010 Medium Term Budget Policy Statement(MTBPS)
· 2011 Appropriations Bill
· Additional 2010/11 Submission
Submission on the Financial Management of
- Submission on the Local Government Municipal Property Rates Amendment Bill, 2010 to the Department of Cooperative Governance and Traditional Affairs
Submission on the Challenges Encountered With The
Funding Norms Applicable To
3.2 Report of the Accounting Officer
The Accounting Officer report indicated that the commission research has progressed rapidly owing to the Commission’s Five Year Research Strategy and its response to challenges faced by the municipalities. The research work has benefited the commission researchers as well though the presentation and journal publications and commission plan to disseminate its work through the use of social networks with aim of enhancing the quality of its output.
The report further cited that the recent perception survey and the commission impact assessment had established the need for the commission to interact with its stakeholders while at the same time responding to their needs. However, the challenge in this matter is the requirement of adequate budget and the presence of the Commissioner.
The report cited that although the staff turnover has been reduce the human resource dimension still continue to remain a challenge. During 2010/11 the Commission review its operating model with specific focus to a more specialised research and support structure that would benefit from the outsourced specialist and technical skills. The vacant posts were freeze, except in core business areas of the commission. This has impacted severely in the finance section, where inexperienced staff are kept and trained to perform in high risk areas such as procurement. However, this challenge is addressed through increased supervision for the staff. This challenge can be attributed to the inadequate budget of the commission.
Information and Communication Technology still remain a challenge for both Midrand and
indicated that with regards to finance, the commission budget is under immense
pressure, as a result of exorbitant audit fees, travel and accommodation costs
with increase stakeholder focus. The decision to reduce office space in both Midrand and
In terms of governance, the report indicated that the submission has being made to the Finance Minister with regard to the conflation of the role of chairperson, Accounting Officer and Chief Executive of the commission and two vacancies for part time commissioners that have been vacant since 2008.
The Accounting Officer report indicated the key development as underpinned by the Commission’s theme of its continued focus on expenditure outcomes, accountability institutions, equitable growth and redistribution of resources, and flexible response in an effort to realise the ideal of positive public expenditure outcomes. The report further cited that as part of the stakeholder focus, the Commission will continue its effort to reach a broader set of stakeholders, strive for accountability to Parliament, provincial legislatures and general public in the its alignment of allocated resources with expected outputs.
The total appropriation of the Commission for the year under review was R31.8 million. The programme allocations during the year under review were as follows:
· Research and Recommendations Programme was R12.9 million (expenditure was R11.3 million, which is 87.9 per cent of the programme allocation);
· Corporate Services Division was R8.1 million (expenditure was R8.7 million, which is 108 per cent of the programme allocation);
· Finance Division was R3.8 million (expenditure was 4.4 million, which is 113 per cent of the programme allocation); and
· Administration was R8.9 million (expenditure was R8.9 million, which is 136 per cent of the programme allocation.
Of the total revenue of R31.8 million received by the Commission, R31.4 million was from government grants and R401 661 thousand from other income. The report indicated that the Commission did not incur any expenditure in respect of a major non-mandate event during the year under review. The report indicated that with regard to internal policy review, the Executive Committee approved among others the following governance policies and prescripts for implementation:
· Facilities Policies and Procedures
· Human Resource Policies and Procedures
3.3 Highlight/Achievement and Challenges
The report indicated that the significant issues that the FFC sought to address was the appropriate consolidation of deficit and debt reduction following an increased expenditures as a result of aftermath of the 2008/09 global financial crisis. The report indicated further that the FFC had to address issue pertaining to the appropriateness of government countercyclical stabilisation policy, increase intergovernmental grants to generate employment and reduce the inequalities and poverty. The creation of favourable condition for economic development in the urban environment was the other issues that the FFC had to address. The other issue that the FFC has to address was the need for government to focus more closely on fiscal responsibility, improving the quality of services and pay attention to the issues of unfunded mandates
The reported indicated that, with regard to internal strategic dynamics, the Commission was concerned by ever shrinking resource envelop and the need to adopt lean, highly-networked, research focus delivery model. The second issue was the antiquated Information Communication Technology and systems which were at the brink of total collapse, and impacted negatively on Commission’s effort on research, Information Management (IM), Enterprise Content Management (ECM) and Knowledge Management (KM) as well as day to day operations. The increase demand on the service of Commission brought about by among other changes in the legislation and stakeholder education, engagement, and awareness programme. The report cited the legacy of R3.4 million deficit that the Commission has been seeking to erase for more than four years. The report indicate the important issues of the compliance, which consumed more than 8 per cent of the Commission’s budget
· The Commission indicated that it met all its constitutionally mandated obligations as documented in the Commissions’ submission for the 2012/2013 Division of Revenue. The submission indicated three pillars that sustainable economic growth and development relies on, that is macroeconomic stability, progressive realisation and sustainable development. These pillars suggest that government intervention should not only be financed in a sustainable, non-inflationary manner at national, provincial and local government levels, but that attention also needed to be paid to the allocations and technical efficiencies of public expenditure as well as to their potential impact on the environment.
· The report indicated that the Commission has responded timeously to all stakeholder requests in line with the requirements of the Financial and Fiscal Commission Act.
· The Commission strengthened its engagement with Parliament, provincial legislatures, local government, national and provincial executives, Institutions Supporting Democracy, as well as a variety of non-state and non-government organisations.
· The reported indicated further that the Commission published detailed research reports, made supplementary submissions, provided advisories and detailed technical comments on a number of important intergovernmental fiscal relations issues.
· The Commission staff published articles in local and international accredited journals and contributed book chapters in the field of intergovernmental fiscal relations.
· The Commission, in partnership with the Poverty and Economic Policy Analysis Research Network, provided training in modelling of the impact of macroeconomic policies with the objective of further knowledge on the microeconomic impact on macroeconomic policies and shocks.
· The report cited that the Commission has assisted other African countries in thinking around their own intergovernmental fiscal relation.
· The report indicated that under the human resource the complex change management strategy is still remains work in progress. The Commission hope to complete the work by the end of current financial year,
· Under the Research unit, the productive capacity has been challenge by the resource constraint to fulfil broad mandate and this resulted in suspension of necessary staff training and development,
· The failure of the institution to consult with the Commission in situations where such consultation is legally prescribed and the failure by line departments to response to the Commission’s recommendations,
· The serious issues of governance remain unresolved, that is the conflation of the position of the Chairperson and Chief Executive Officer continue to pose an unacceptable and unmitigated risks,
· The Commissioners allowance has not been reviewed since 2008 and it pose as a disincentive to the recruitment and active participation of suitably qualified part-time Commissioners,
· The report indicate that the three vacancies within the rank of Commissioner remains unfilled, and
· With regard to compliance, the report indicated that the compliance has its own financial implications, and audit fees currently stand in excess of more than 8 per cent of the Commission’s budget.
3.4 Performance overview
The method or approach followed in this section is to draw attention to targets that were not met during 2010/11 fiscal year. The focus is on output (deliverables) performance, targets, actual performance and reason why they are not met.
3.4.1 Strategic objective: Generate quality, innovative, pioneering research that informs key Intergovernmental Fiscal Relation strategic debate and choices
· The report indicated that the financing of Natural Disasters in South Africa Research Project has not been achieved during the year under review and the Research project was extended to the 2011/12 research cycle,
· The report further indicated that the Building Accountable Provincial Government Institutions Research Project has been partially achieved, and the delay was attributed to data constraints,
· The Role of Intergovernmental Fiscal Relations in Promoting Innovation in South Africa Research Project has not been achieved during the year under review, however, it is work in progress, and
The National Planning in a Decentralised
3.4.2 Strategic Objective: Compliance with legislation and adherence to relevant corporate governance best practice
· The report highlighted that the Protected Disclosure mechanisms initiative for the Fraud Hotline was not achieved during the year under review due to pending written authorisation from the Public Service Commission (PSC) for use of ITS Fraud Hotline,
· The FFC Budget Performance project to spend as per the approved Business Plans and Budget was partially achieved with an unqualified audit opinion but with matters of emphasis, and
· The report indicated that the Commission and Committee Meetings as measured by Part 3 of Financial and Fiscal Commission Act was partially achieved. However, 3 meetings of different outputs under this project did not quorate due to vacancies.
3.4.3 Strategic Objective: Progressive and Innovative management of human resources that attracts, develops and retains key talent and leverage external expertise
· The report indicated that the Review of the Delivery Model as measured by the Commission’s approval of the New Delivery Model Concept was partially achieved. The delay was due to the Organisational Development and Risk Assessment that is in progress,
· The report indicated that the Recruitment of Talent programmes measured by appointment of qualified personnel is on hold, pending reorganisation.
3.4.4 Strategic Objective: Coordinated, coherent, high-quality, innovative and cost-effective approach to ICT that meets the needs of the Commission, the Commission Secretariat and stakeholders
· The report highlighted that the ICT governance as measured by the best practice approved ICT strategy was not been achieved during the year under review due to prioritisation of stabilising the system, and the implementation of the ICT Policies and Procedures have not been achieved, and
· The report goes further to indicate that the upgrade of ICT infrastructure and streamlining of the ICT network and connectivity have not been achieved mainly due to budget constraints.
3.4.5 Strategic Objective: Facilitate engagement between stakeholders on key IGFR issues
· The report cited that the Development of the stakeholder-inclusive engagement programme was not achieved during the year under review due to funding constraints.
3.4.6 Strategic Objective: Adopt a Prudent and Transparent Approach to the Management of Finance
· The report indicated that the Budget under Austerity programme as measured by savings was not achieved due to the budget inadequacy, and
· The Commission report goes further to pinpoint that the Alternative Revenue Sources initiative have not been achieved due to the absence of convergence.
3.5 The report of the Auditor-General (AG)
The report of the AG indicated that the financial statements present fairly, in all material respects, the financial position of the Financial and Fiscal Commission as at 31 March 2011, and its financial performance and cash flows for the year ended in accordance with SA Standards of Generally Recognised Accounting Practice (GRAP) and the requirements of the Public Finance Management Act (PFMA) (Act No 1 of 1999). However, the following were the emphasis of matters that the AG drew attention to:
3.5.1 Irregular expenditure
The AG cited that the Commission incurred irregular expenditure of R203 719 thousand, as the expenditure was incurred in contravention of Treasury Regulation 16A9.1 (d) relating to supply chain management.
3.5.2 Fruitless and wasteful expenditure
The AG indicated that the Commission incurred fruitless and wasteful expenditure of R132 324 due to interest and penalties arising from the late submission of EMP 201 returns and late payments to SARS.
3.5.3 Going concern
The Commission incurred net losses of R1.7 million as at 31 March 2011, and as of that date the Commission‘s total liabilities exceeded its total assets by R3.1 million. These conditions indicate the existence of a material uncertainty that may cast significant doubt on the commission’s ability to operate as a going concern.
3.5.4 Restatement of corresponding figures
The corresponding figures for 31 March 2010 have been restated as a result of an error discovered during 2011 in the financial statements of the Financial and Fiscal Commission, and for the year ended 31 March 2010.
3.5.5 Predetermined Objectives
The AG indicated that the reported performance against predetermined indicators and targets was not consistent with the quarterly reports.
3.5.6 Procurement and contact management
The AG indicated that goods and services were procured from suppliers who failed to provide written evidence from SARS that their tax matters were in order, as per the requirements of Treasury Regulation 16A9.1 (d). The report further stipulate that contracts were extended or modified to the extent that competitive bidding processes were circumvented, contrary to the requirement of a fair, equitable, transparent, competitive and cost-effective supply chain management system in terms of Treasury Regulation 16A3.2.
The AG also stated that the Accounting Officer did not take effective and appropriate steps to prevent irregular, fruitless and wasteful expenditure as per the requirement of section 38(1)©(ii) of the PFMA and Treasury Regulation 9.1.1.
The AG indicated further that payments due to creditors were not settled within 30 days from receipt of an invoice, as per the requirements of section 38(1)(f) of the PFMA and Treasury Regulation 8.2.3.
3.5.7 Oversight responsibility regarding reporting and compliance
The report of AG indicated that the accounting officer did not exercise adequate oversight over the financial statements, report on predetermined objectives and the compliance process resulting in material adjustments to the financial statements, findings on predetermined objectives, and non-compliance with laws and regulations.
3.5.8 Financial and performance management
The AG cited further that the financial statements and the report on predetermined objectives contained a number of misstatements that were corrected. This was mainly due to staff members not fully understanding the requirements of the financial reporting and performance reporting framework. Furthermore, non-compliance issues were not identified due to the lack of adequate processes over compliance-related issues.
3.5.9 Review and compliance with laws and regulations
The AG report identified instances of non-compliance with laws and regulations that were not prevented by the commission. This was mainly due to the lack of oversight and implementation of processes to monitor compliance with all laws and regulations requirement of a fair, equitable, transparent, competitive and cost-effective supply chain management system in terms of Treasury Regulation 16A3.2.
The AG also stated that the Accounting Officer did not take effective and appropriate steps to prevent irregular, fruitless and wasteful expenditure as per the requirement of section 38(1)©(ii) of the PFMA and Treasury Regulation 9.1.1.
The AG indicated further that payments due to creditors were not settled within 30 days from receipt of an invoice, as per the requirements of section 38(1)(f) of the PFMA and Treasury Regulation 8.2.3.
3.5.10 Oversight responsibility regarding reporting and compliance
The report of AG indicated that the accounting officer did not exercise adequate oversight over the financial statements, report on predetermined objectives and the compliance process resulting in material adjustments to the financial statements, findings on predetermined objectives, and non-compliance with laws and regulations.
4. Financial Intelligence Centre (FIC)
The FIC was established in terms of The Financial Intelligence Centre Act No 38 Of
2001 (FIC Act). The FIC
Act establishes the FIC as
The FIC receives information for analysis and processing from ‘accountable institutions’. It refers information to Law Enforcement such as the South African Police Services (SAPS), Hawks, South African Revenue Service (SARS), and the Intelligence Services. It also exchanges information with similar and equivalent bodies in other jurisdictions, such as other financial intelligence units, and Interpol.
The FIC coordinates SA’s policy on the Anti-Money Laundering (AML) and Combating of Financing of Terrorism (CFT) and administers the FIC Act. It liaises closely with National Treasury, other departments and all stakeholders in public and private sector and internationally. It gives guidance to the supervisory bodies (South African Reserve Bank and Financial Services Board), and accountable institutions. The FIC monitors and inspects for compliance where no supervisory bodies exists, such as the Post Bank, Ithala, and Kruger Rand dealers. It leads SA in the Financial Action Task Force (FATF) and participates in other international bodies. It also maintains efficient and secure data systems.
4.1 Strategic Objectives
Unlike other reporting institutions, the FIC is not funded along programmes lines, and as such, the FIC reports on the following six pre-determined strategic objectives:
· Improve consumption of FIC products and Services,
· Improved Compliance by Accountable Institutions,
Laundering/Combating Financing of Terrorism Capacity in the Eastern and
Laundering/Combating Financing of Terrorism Framework in
· Develop and Commissioning of The FIC’S Information and Communications Technology System, and
· Become a More Sustainable and Capable Institution.
4.1.1 Improved Consumption of FIC Products and Services
In this case there were two objectives and accompanying targets of which only one was successfully achieved. The focus below is on the one not achieved:
The FIC had planned to provide timely responses to requests for financial products by law enforcement agencies and investigating authorities. The set target was 90 per cent requests responded to within agreed response time; however the FIC only responded to 59 per cent of requests within agreed period. As such the target was not achieved.
Reasons for not achieving the set target include:
· capacity constraints,
· the sharp increase in the number of requests for information, and
· significant scope of work in some matters
4.1.2 Improved FIC Act Compliance of Accountable Institutions and Society in General
In this case the FIC had three objectives of which two were convincingly achieved; therefore the focus below is on the one in which the set target was not achieved as planned.
The FIC had planned to undertake administrative actions and assist in criminal prosecutions relating to non-compliance in pursuit of improved compliance of the FIC Act. Target and actual performance was as follows:
· To establish inspectorate and regulatory enforcement capability in the fourth quarter. As at the end of the financial year the FIC had not met the target as planned despite having made progress.
· Administrative action taken. Again, completion was not met despite progress made.
· Report on support provided in the fourth quarter. This target was met as planned as reports were compiled based on 122 joint compliance reviews conducted with supervisory bodies.
4.1.3 Improved Anti-Money Laundering/Combating Financing of Terrorism Capacity in the Eastern and Southern African Anti-Money Laundering Group (ESAAMLG) Region
In this case there were three objectives and accompanying of which two were successfully achieved. Below are details on the unachieved objective and accompanying target.
The FIC had planned to improve the FIC’S understanding of the scope of and need for technical assistance within the ESAAMLG region necessary to strengthen the region’s anti-money laundering/combating financing of terrorism regimes. The target was to have a report on priorities and needs for technical assistance within the ESAAMLG region approved in the second quarter. The target was not achieved.
4.1.4 Development and commissioning of the FIC’S Information and Communications Technology System
The FIC had planned to establish a business continuity plan and business continuity system; and the target was to have the business plan approved and the business continuity system implemented in the fourth quarter. However only the business continuity plan was approved but the business continuity system was not implemented. So the latter was not achieved.
4.1.5 Become a more Sustainable and Capable Institution
In this case the FIC had set three objective accompanied by their respective indicators and targets; and only one was achieved convincingly. The focus below is on those that were either not achieved or not clearly/convincingly achieved.
The FIC had planned to secure appropriate premises for it in the medium to long term. To achieve this objective, the FIC had set a target of having an accommodation needs delivery plan approved in the fourth quarter of 2010/11. As at the reporting period, the FIC has not clearly indicated if such target was achieved or not.
The FIC had planned to maintain human resource capacity to sustain the business of the FIC; and the target was to ensure 16 per cent staff increase year-on-year. The FIC reported that despite having achieved the set target; the high staff turnover rate offset its recruitment efforts. Ultimately, year-on-year staff increase stood at 1.36 per cent instead of the targeted 16 per cent.
4.2 Financial Information
The FIC funds are voted on the National Treasury budget. It has received an allocation of R181.4 billion during the year under review.
During the period under review, the FIC materially under spent by R45.4 million on its allocated budget. The main determinant of this under spending is the FIC’s inability to expand human resource capacity at the anticipated rate. There under spending impacted adversely on certain operations such as those of analysis and compliance enforcement.
In addition to the under spent funds, the FIC had savings on Information Communication Technology (ICT) expenditure.
The FIC’s statement of its financial position reflected a short term financial positions as it had operating capital amounting to R54 million. Basically current financial assets exceed current financial liabilities, which shows that the FIC is managing its debts and other liability well, therefore not susceptible to short-term financial risks.
The FIC reported a surplus of R45.4 million, a 117 per cent increase from the previous year’s surplus of R20.9 million.
4.3 Report of the Auditor General
The financial statements presented fairly in all material respects. The FIC Financial performance and cash flows for the period under review ended in accordance with South African Standards of Generally Recognised Accounting Practice (SA Standards of GRAP) and the Public Finance (PFMA) Management Requirements. Therefore the FIC received an unqualified audit with the following matters as follows:
4.3.1 Emphasis of matters
188.8.131.52 Irregular and fruitless and wasteful expenditure
The report indicated that the FIC incurred irregular and fruitless and wasteful expenditure of R4.9 million with regard to contravention of the National Treasury Practice Notes and Treasury Regulations requirement relating to supply chain management, R47 000 thousand due to interest and penalties arising from late payment of supplier invoices, and R281.9 thousand due to poor performing contractors appointed and the work later scrapped and started over again.
184.108.40.206 Material under spending of the budget
The FIC has materially under spent its budget by R45.4 million due to capacity constraints resulting from shortage of specialised skill in the market. As a consequence the entity did not achieve 25 per cent of its planned targets for the year under review and this impacted adversely on the analysis and compliance enforcement.
220.127.116.11 Compliance with laws and regulations
The AG had a finding on the following non-compliance with laws and regulations:
· Procurement and contract management
Goods and services were procured without inviting at least three price quotations as per the requirement of Practice Note 8 of 2007-08 issued in terms of section 51(1)(a)(iii) of the PFMA. Goods and services were not procured through competitive bidding and the deviation not approved in terms of Treasury Regulations 16A6.4. Awards were made to suppliers who did not submit a declaration on whether they are employed by the state or connected to any person employed by the state as per requirements of Treasury Regulations 16A8.3 and Practice Note 7 of2009/10.
· Expenditure Management
According to the AG, the Accounting Authority did not take effective and appropriate steps to prevent irregular expenditure, as per the requirements of section 51(1)(b) (ii) of the PFMA.
· Income Tax Act
Deductible tax from personal service providers were not affected by the FIC as required by the fourth schedule of the Income Tax Act.
· Annual financial statements
The financial statements submitted by the Accounting Authority were not prepared in all material aspects in accordance with accounting practice (and supported by proper records) as per the requirements of section 55(1)(a) and (b) of the PFMA. The AG had to correct material misstatements regarding capital assets, expenditure and disclosure items.
The AG found that the FIC did not exercise oversight responsibility regarding compliance with laws and regulations. Internal control processes are not in place to prevent and detect irregular and fruitless and wasteful expenditure.
· Financial and Performance Management
The AG found that reliable, complete and accurate monthly and quarterly financial statements are not prepared and reviewed. Lack of appropriate means for monitoring compliance with applicable legislation and Treasury Regulations on a regular basis resulted in the findings reported above. The appropriate level of management does not regularly review compliance with Treasury Regulations, practice notes and PFMA requirements.
· Other Reports by the AG
The AG also reported that in 2009 an investigation was conducted for a case of fraudulent misconduct by an employee who has since been dismissed. Criminal proceedings and investigations by the relevant authorities against the employee in question are on-going.
5. Public Investment Corporation (PIC)
The mission of the PIC – having been established by an Act of Parliament to provide for the investment by the Corporation of certain monies received or held by, for or on behalf of the Government of the Republic and certain bodies, councils, fund and accounts – will:
The PIC is an investment management company focussing on public sector entities, and is registered with the Financial Services Board (FSB). Its investments are governed through client mandates. The PIC was established in 1911 as the Public Debt Commissioners.
5.1 Highlights of the year under review
· The report indicated that the Assets Under Management (AUM) of the PIC exceeded R1 trillion in the year of celebrating its centenary,
· On the 1 February 2011, 14 new PICeeds were recruited, leaving the organisation with a group of 20 PICeeds. The PICeeds programme intake increased by 33 per cent,
· The report cited that R45 billion was earmarked for development investment, with the focus being on social and economic infrastructure development, environmental sustainability, job creation, enterprise development and Broad-Based Black Economic Empowerment (BBBEE),
· The purchase of 50 per cent of the Victoria and Alfred Waterfront was one of the most important transaction that the PIC undertook on behalf of the GEPF in the year ended March 2011,
· The report indicated that the consolidation of the property division with regard to the amalgamation of Advent Asset Management into the PIC Properties Division as well as the acquisition of CBS Property Management business was finalised, and
The GEPF revised mandate allows for 5 per cent
offshore investment and 5 per cent in
5.2 Key operational development for the year under review
In 2010 the organisation concluded the amalgamation of Advent Asset Management into the PIC Properties Division as well as the acquisition of CBS Property Management business to form a new properties division called PIC Real Estate Asset Managers (PIC REAM). The strategic priorities of the PIC for the next 10 years include:
· Grow the property assets under management;
· Outperform IPD benchmarks;
· Streamline Property Management business (service and profitability);
· Enhance management capabilities; and
· Incorporate ESG into the Property Investment process
5.3 Performance against predetermined objectives
Objectives 1: Conduct sustainable and efficient PIC Operation
The report indicated that the target to enhance reporting within the Customer and Stakeholder relationship management system was not achieved but in the process due to the procuring of electronic system. The target to Review the Fixed Income Portfolio and manager diversification has not been achieved, but work is in progress.
Objective 2: Invest funds in funds targeted for development
The report indicated that the target to achieve gross total quantum invested in Isibiya Funds of R14 billion was not achieved, however, the outcome was that R13.9 billion was invested during the year under review.
Objective 3: Meet returns objectives for invested return
The target to achieve the investment return (General) (Isibiya), of 10 year plus 500 basis points (bps) was not achieved due to asingle transaction that adversely affected the performance of Isibiya. The target to achieve performance that exceeded benchmark by 50 per cent of average tracking error assumed (internally managed funds) was not achieved (42 per cent achieved) because performance was affected by the strategic and transition funds which were implemented per client decisions. The target for Directly-held portfolio total return was not achieved.
5.4 Financial report
In terms of operating performance, the revenue increased to R347 million during the year under review, which is an 11.9 percentage increase from the previous year of R310 million. The operating expenses has increased to R246 million, which is a 7.4 percentage increase as compared to the previous year of R229 million. The report cited further that the operating expenditure is mainly driven by employee and Information Technology (IT) costs. This represent between 55 per cent and 65 per cent of the revenue and 75 per cent to 85 per cent of the operating expenditure. The report indicated further that the net profit of the organisation has recorded an increase of R111 million during the year under review, which is a 54.2 per cent increase as compared to the previous year of R72 million. The net assets have recorded an increase of R561 million, which is a 25.5 per cent increase from the previous year of R447 million.
In terms of the dividend policy, the report cited that the PIC did not pay dividend to the shareholder (2010: R78.1 million). During the year under review the report cited that there have been no significant changes to the organisation except for the Advent whose operation was absorbed into PIC’s operations and the subsidiary company discontinued. The report indicated that the PIC exceeded the financial sustainability targets during the year under review, with return on equity at 26.8 per cent, Earnings before income and tax at 39.9 per cent, personnel cost/management fees at 45.5 per cent and IT cost/management fees at 5.3 per cent.
5.5 Auditor-General report
The report of Auditor-General (AG) indicated that the financial statements present fairly, in all material respects, the financial position of the PIC as at 31 March 2011, and its financial performance and cash flows for the year then ended in accordance with SA Standards of Generally Accepted Accounting Practice (GAAP) and the requirements of the Public Finance Management Act (PFMA) (Act No 1 of 1999) and Companies Act (Act No 71 of 2008). The AG opinion had no findings with regard to emphasis of matter.
6. Land Bank
Land Bank is a specialist agricultural bank guided by a government mandate to provide financial services to the commercial farming sector and to agri-business and to make available new, appropriately designed financial products that would facilitate access to finance by new entrants to agriculture from historically disadvantaged backgrounds. Today, the Bank is a true South African development finance institution that serves all farmers equally. The mission of Land Bank is:
· To develop and provide appropriate products for commercial and development clients;
· To leverage private sector investment into the agricultural sector;
· To develop partnerships with intermediaries for on lending;
· To develop techniques for financing high-risk agriculture and new business areas;
· To support programmes of the Ministry of Land Affairs and Agriculture by aligning the Bank's products with these programmes; and
To contribute to rural development by linking up with government structures and activities.
6.1 Financial analysis
The Business and Corporate Banking provides mostly wholesale funds to agriculture cooperatives and/or businesses, which in many instances lend funds to their customer base. The net operating income for the 2010/11 financial year declined significantly from R183.6 million in 2009/10 to R10.1 million the current financial year. This translates in a 95 per cent reduction from the previous financial year.
On Retail review, the net operating income increased significantly from R94.6 million in 2009/10 to R269.0 million in the 2010/11 financial year which is an increase of more than 100 per cent.
6.2 Government imperatives
Over the past financial year, the Bank has given extra attention to this strategic area, including the drafting of a development policy. The approved policy provides a basis for the Bank’s role in agriculture and rural development. There are three instruments which are currently in place, among others, an emerging farmer support facility, approved by Cabinet and in its pilot phase.
6.3 Remuneration report
The remuneration increase of executive officers has increased significantly compared to the previous financial year. Most importantly are bonuses which increased from R580 000 in 2009/10 to R2.5 million in the 2010/11 financial year. Basic salaries of the executive officers increased from R9.8 million to R13.1 million in the 2010/11 financial year. In total these salaries increased from R10.8 million in 2009/10 to R15.7 million in the 2010/11 financial year.
6.4 Learning and Development
The revitalised personal development plan for employees is encouraging academic (educational qualification) and skills development (leadership, management and technical) amongst staff.
Ten bursaries in the fields of agriculture (primarily), information technology and finance were awarded to previously disadvantaged individuals.
6.5 Performance against predetermined targets
The Bank has achieved most of its key performance indicators which is commendable, however, there are areas where the Bank did not perform as expected. Some of the areas where the Bank did not achieve include these key performance areas: Mainstream development into the operating model; emphasise employment equity; and diversify income stream.
In terms of environmental performance; the Bank has recognised that it has an important role to play in addressing global environmental concerns such as water quality and sustainable agriculture. Going forward the Bank will place more emphasis on the environmental impact when granting credit.
6.6 Financial Statements
In terms of cash and cash equivalents, the Bank does not show any significant improvement in this component. However, it should be noted that the Bank’s overall trade and other receivables increased remarkably from R47.9 million in 2009/10 to R189.2 million in the 2010/11 financial year. This is attributed by the new line item of dividend receivables which amounted to R50 million. The LBIC-Intercompany balances, one of the items for trade and other receivables also increased significantly from R22.3 million in 2009/10 to R109.2 million in the 2010/11 financial year. Loans to employees increased from R1.1 million in 2009/10 to R1.2 million in the 2010/11 financial year.
Industrial share for local equities decreased from 43.25 per cent in 2009/10 to 40.13 per cent in the 2010/11 financial year.
The Bank had granted an amount of R333.4 million to individual farmers but not yet disbursed at the end of the financial year.
6.7 Fruitless and wasteful expenditure
This refers to expenditure which was made in vain and would have been avoided had reasonable care been exercised. The Land Bank incurred an amount of R0.1 million in the current year which shows an improvement compared to the 2009/10 financial year of R0.9 million. This includes late payment and penalty interest charges regarding the non-timely payment of utility and Telkom accounts.
7. Development Bank of
The Development Bank of Southern Africa exist as a juristic person by the name the ‘Development Bank of Southern Africa Limited’ and its role, powers, functions and duties are defined by the Development Bank of Southern Africa Act, 1997. Published in Government Gazette No17962 –Vol. 382 on 25 April 1997 – No 641.
The DBSA is registered as a company in terms of the Companies Act, 1973, but is exempt from the provisions of the Companies Act, 1973 (Act 61 of 1973). The Minister may however by notice in the Gazette apply any provision of the Companies Act, 1973, the Banks Act, 1990, or such other law to the Bank, in so far as such provision is not inconsistent with the provisions of the Development Bank of Southern Africa Act, 1997 (Act 13 of 1997) with such modifications as the Minister may deem fit and may specify in that notice, and may withdraw or amend any such notice.
7.1 The Chief Executive Officer’s report
The Bank, through the Siyenza Manje project has deployed 826 professionals to 186 municipalities and 20 provincial departments; has assisted municipalities by deploying 1 114 technical and 1 994 non-technical DBSA officials and expedited Municipal Infrastructure Grants projects to the value of R8.7 billion. In the Siyenza Manje project; the Bank contributes 30 per cent of the total allocation, while the National Treasury contributes 70 per cent of the funding.
7.2 Sustainability overview
The Bank is mandated to provide technical, financial and other assistance in pursuit of the objectives as set out in section 3 of the DBSA Act. The Bank focuses its investment on infrastructure funding, which is broadly defined in the Act and acts as a catalyst to maximise the private sector access to opportunities in the provision of public sector funding.
7.3 Development impact overview
The report indicates that some organisational goals relating to capacity development and deployment, community development facilitation and rural development were achieved.
7.4 Financial performance overview
The overall financial performance and position of the DBSA is fairly sustainable, however there are a few issues with regard to the position of specific line items. Cash and cash equivalents have been increasing over the past four years up to the 2009/10 financial year. In 2010/11, the Bank recorded R1.2 billion in cash and cash equivalents which is below the average of the five year period (R1.9 billion between 2006/07 to 2010/11). The financial market assets declined from R5.5 billion in 2009/10 to R4.2 billion in the year under review.
In terms of its liabilities, the DBSA has reduced the value of its total debts (liabilities) for the year under review from R27.3 billion in 2009/10 to R29.5 billion. Total equity slightly increased from R17.8 billion in 2009/10 to R17.9 billion in the period under review.
With regard to the financial performance of the Bank, interest on investments decreased from R525 million in the 2009/10 financial year to R469 million for the 2010/11 financial year. The profit for the year (before transfer to the Development Fund) decreased significantly from R875 million in the 2009/10 financial year to R332 million for the year under review.
7.5 Annual Financial statements
The report of the independent auditor showed that the financial statements of the Bank presented fairly, in all material respects, the financial position of the Bank as at 31st March 2011, and its financial performance and cash flows for the year ended in accordance with International Financial Reporting Standards and in the manner required by the Public Finance Management Act 1 of 1999 as amended by Act 29 of 1999, (PFMA) and the Companies Act of South Africa, sections 284 to 303, as specified in the Bank’s Act of 1997.
One of the challenges faced by the Bank as indicated earlier is the growing developmental needs and the increasing risk levels of the Bank’s existing loan book.
8. South African Reserve Bank (SARB)
The South African Revenue Service Act 34 of 1997, gives SARB the mandate to perform the following tasks:
· collect all revenues that are due;
· ensure maximum compliance with the legislation; and
8.1 Overview of the Accounting Officer (Governor)
The Accounting Officer indicated
that owing to the recent global financial crisis, and the persistent global
imbalances and volatile capital flows, the international monetary system and
international monetary mechanism are at the centre of debate on global reform.
These conditions happen to direct the bank’s focus on stability, which include price stability, financial stability and the stability
of the banking system. Global
developments have continued to impact on the domestic economic condition and
policy environment, with significant risks that emanate from
Domestic inflation has remained within the target range of 3-6 per cent since March 2010, and as such the bank was able to reduce the repurchase (repo) rate to 5.5 per cent, the lowest nominal level of the policy rate in 30 years. However, the expected challenge for monetary policy going forward might be caused by the global commodity price increases since this began to pose a risk to the inflation outlook.
The recent global financial crisis has taught a lesson that financial stability should be seen as a separate objective with price stability. This has led to the Bank’s Financial Stability Committee to be reconstituted and given responsibility for macro prudential oversight and policy implementation (work is under way to determine the exact nature of such oversight and appropriate policy instruments). The Accounting Officer’s report indicated that the credit market is subdued and there is no evidence of incipient assets market bubbles.
The bank is an active member of Basel Committee on Banking Supervision, and as such it has been an active participant on banking regulatory reform, which resulted in the publication of the global regulatory framework for more resilient banks and banking systems, which incorporates the details of global regulatory standards on bank capital adequacy and liquidity. However, the report indicated that these changes should not have a material impact on South African banks which remain well capitalised and characterised by low leverage ratios.
Capital flows to emerging markets including South Africa moderated in the final quarter of 2010 and early 2011, and between November 2010 and March 2011 there were cumulative net sales of bonds and equities by non-residents. However, the report indicated that despites the unstable pattern of cash flow, the bank, with the assistance of the National Treasury, has been able to continue with its policy of foreign exchange reserves accumulation. In the 2010/11 financial year the Bank purchased approximately US$10, 3 billion foreign reserves. However, the need to sterilise the impact of these purchases of foreign exchange on domestic liquidity resulted in the Bank reporting an after-tax loss for the second consecutive financial year, amounting to R1, 2 billion.
8.2 Strategic Overview
During February 2011, the bank reviewed its strategy in light of recent and envisaged future development in the global and domestic environment, which includes:
scenarios for global economic developments and possible implications for
· the current domestic economic outlook;
· developments in the regulatory environment in respect of both macro- and micro prudential challenges;
· organisational priorities, including a review of the legal framework of the Bank, with a focus on the necessary authorities required, especially as this affects financial stability and macro prudential regulation, as well as the need for alignment of other relevant pieces of legislation;
· the value statement of the Bank; and
· challenges facing central banks as a consequence of the global financial crisis, now in its fourth year
It was therefore agreed that the following strategic focus areas will guide the bank’s activities:
· Giving effect to the bank mandate: Monetary policy formulation and implementation shall be in accordance with the Constitution (Act No 108 of 1966) of the Republic of South Africa and within the context of the elaboration of the Bank’s mandate contained in the letter addressed to the Governor of the Bank by the Minister of Finance date 16 February 2010,
· Understanding the regional, continental and global environments: The Bank will draw on its participation in forums such as the Committee of Central Bank Governors (CCBG) in the Southern African Development Community (SADC), the International Monetary Fund (IMF), the Group of Twenty (G-20) and the Bank for International Settlements (BIS) to evaluate and analyse developments, so as to be able to implement policies and risk mitigation measures appropriate for South Africa,
· Building the institution and investing in people: New impetus will be given to organisational effectiveness and operational efficiency, and to enhancing a culture of excellence where people and values matter, and
· Understanding the domestic environment and enhancing the role of the Bank in society: The Bank will continue to be a constructive role-player in society, actively engaging with stakeholders and working to build the country.
8.3 Monetary Policy
report indicated that the subdued growth performance and slow recovery of
economic growth in developed economies have resulted in a prolonged periods of
abnormally low global interest rates. This has encouraged continued capital
flows to more dynamic, higher-yielding emerging –market economies.
Domestically, the gross domestic product (GDP) growth has remained below
potential and growth has been relatively slow compared with that of
The World Economic Outlook published by the IMF projected in April that global growth would average 4,2 per cent in 2010, compared with the 3,1 per cent forecast in October 2009. Domestic economic growth prospects had also improved, and the domestic inflation outlook remained favourable. However, the monetary policy report further stipulated that the risk to the global growth outlook were viewed as having changed for the worse. Domestically, employment trends appeared to be lagging the recovery. The Quarterly Labour Force Survey published by Statistics South Africa and released ahead of the May 2010 MPC meeting reported that employment had contracted by 171 000 jobs in the first quarter of 2010. The report indicated that the MPC noted a concern over the level of wage increase in the economy.
During the July 2010 MPC meeting, the immediate liquidity concerns relating to the sovereign debt crisis appeared to have abated somewhat, although longer-term solvency risks and uncertainties remained. Growth in a number of advanced economies appeared to be losing momentum and planned fiscal consolidation and austerity programmes in a number of countries were expected to lead to persistently low growth going forward.
The report noted that the MPC stated that it was very aware of the impact of both the level and volatility of the exchange rate on the economy, particularly on the manufacturing, export and import-competing sectors, and that it was ready to continue to play its part, in a considered manner, such as by way of increased foreign-exchange purchases when conditions permit. However, it should be noted that the rand exchange rate was influence by a number of exogenous factors
report indicated that the inflation expectations in the financial markets had
also improved, and the Bank’s inflation forecast had been revised downwards,
with Consumer Price Index (CPI) inflation now expected to average 3,7 per cent in the third quarter of 2010, rising to 4,8 per
cent in 2011 and 5,2 per cent in the final quarter of 2012. The biggest risks to
the inflation outlook at the March MPC meeting remained food and administered
prices, in particular oil prices. International oil prices had already
accelerated in the latter part of 2010 in response to strong global demand and
this upward trend had been reinforced by the geopolitical events in North
Africa and the
The report cited that by contrast, there were indications that high real wage settlements, which had been a significant upside risk to the inflation outlook, might be moderating. According to Andrew Levy Employment Publications, the overall average wage settlement rate in collective bargaining agreements amounted to 8, 2 per cent in 2010, compared with a rate of 9,3 per cent in 2009. The MPC decision at the March 2011 meeting was to keep the repo rate unchanged at 5, 5 per cent per annum. This is because the MPC was of the view that the risks to the inflation outlook were on the upside, but that these risks and underlying pressures were mainly of a cost–push nature
8.4 Operational Review
The operations of the bank are related to the activities covered under the market operations, and are the following:
The report indicated that during the 2010/11 financial year, domestic money-market liquidity expanded with an injection of R80.8 billion, owing mainly to foreign-exchange purchases by the Bank. The increase in the money-market liquidity was also partly neutralised by the transfer of the National Treasury’s tax and loan account balances with commercial banks to the Bank amounting to R42, 5 billion and through longer-term foreign-exchange swap transactions
The report highlighted that the official gross gold and foreign-exchange reserves increased from US$42, 0 billion on 31 March 2010 to US$49, 3 billion on 31 March 2011. The increase of US$7,3 billion was mainly due to foreign-exchange purchases for purposes of foreign-exchange reserve accumulation amounting to US$6,0 billion, valuation adjustments of US$2,0 billion, and the proceeds of the government’s foreign bond issuance, which were deposited with the Bank, amounting to US$0,8 billion, while US$1,6 billion was used to fund foreign payments on behalf of government departments.
The report cited that the management of the gold foreign-exchange reserves is guided by three main objectives, namely capital preservation, liquidity and the enhancement of returns. The Bank aims to achieve a market-related rate of return on the reserves within the constraints of a framework of approved risk parameters. The bank gold and Special Drawing Rights (SDR) holdings are managed passively; however, the foreign-exchange reserves are managed actively by the Bank and by six external private-sector fund managers, plus the Bank for International Settlements (BIS) and the World Bank. Due to the numerous risks that the bank is exposed to, the Governor Executive Committee (GEC) approved the revised investment policy for the management of the foreign reserves.
The report indicated that the policy decisions on exchange controls vest with the Minister of Finance and the Bank is responsible for the administration of exchange controls in terms of authority delegated by the Minister. In his 2010 Budget Speech, the Minister of Finance announced a tax and exchange control Voluntary Disclosure Programme (VDP). The VDP provides, inter alia, the basis for and deals with the procedures and processes applicable to regularise exchange control contraventions. Furthermore, the Minister announced a project to modernise the exchange control legislation and policy. The Financial Surveillance Department of the Bank and National Treasury are in the process of preparing recommendations in this regard.
The report indicated that a key objective of the Bank is to ensure that the legal framework for the regulation and supervision of banks and banking groups in South Africa remains relevant, reflects local and international market developments, and that it complies with the applicable international regulatory and supervisory standards and best practice. The Bank has commenced with a formal process to refine and, where necessary, amend the regulatory framework in accordance with the latest internationally agreed regulatory and supervisory best practice and standards
February 2011 the National Treasury released a policy paper entitled: A Safer
Financial Sector To Serve South Africa Better, on
proposed reforms to the financial regulatory structure in
Internal control is a priority focus area and an integral part of the Bank’s management and accountability function. The Internal Financial Control (IFCs) constitute an important component of an overall internal control structure in the Bank and is designed and implemented to enhance the probability of providing assurance on the integrity of the Bank’s financial information. The Internal Audit Department (IAD) is mandated to evaluate and independently contribute to the improvement of control process, governance and risk management of the Bank and its subsidiaries. The full mandate and authority of the IAD are contained in an Internal Audit Charter approved by the Board and the charter is revised and updated annually to ensure that the internal audit function remains relevant, current and in line with changes to the International Standards for the Professional Practice of Internal Auditing of the Institute of Internal Auditors (the Standards), codes of ethics, governance and legislation.
The report indicated that at the start of the of the 2010/11 financial year, the Bank had a total permanent staff complement of 2 033, which increased to 2 101 by the end of 31 March 2011, excluding the Governor and deputy governors. However, the overall turnover rate during the year under review was 4.72 per cent compared with a turnover rate 3.36 per cent in the previous financial year. Among the most reasons that resulted in an increase turnover during the year are the better prospect and remuneration, retirement, voluntary separation (termination in terms of competency to work programme), retirement (enhanced early retirement- 5 years). During the year under review the number of contract worker amounted to 114, while people living with disability constituted 1.7 per cent of the Bank‘s permanent workforce
In terms of equity, Africans constituted 63 per cent of the Bank’s total workforce, with African females constituted 28 per cent. The report further indicated that the Bank’s expenditure on staff training amounted to R26.1 million (R18, 7 million for local training and R7, 4 million for foreign training) in respect of 1 190 employees of which 108 attended international training.
The report highlighted that the bank provides bursaries for higher education for dependants of all staff and pensioners. Bursaries were provided to 393 dependants at a cost of R9,0 million during the review period (298 dependants at a cost of R6,6 million in the previous review period). During the year under review, 31 completed their studies, compared with 16 in the previous financial year.
8.5 Financial Statements
The director’s report indicated that the preparation of the bank financial statement are prepared on a going–concern basis, taking cognisance of certain unique aspects relating to the Bank’s ability to create and withdraw domestic currency, its role as lender of last resort, and its responsibilities in the area of financial stability, and in its relationship with government concerning foreign-exchange and gold transactions.
The report indicated that the remaining profits due to government in terms of the South African Reserve Bank Act over the past two years are as follows: R52.9 million as at March 31, 2011 (this payment emanated from Corporation Public Deposit) and R37.5 million as at March 31, 2010. The report indicated that under the year under review the bank incurred a loss after taxation amounting to R1.2 billion. This was reported as the result of the high cost associated with holding the country’s gold and foreign reserves
In terms of dividends declared, the bank declared a final dividend of 5 cents per share on 1 April 2011 and paid on 13 May 2011, bringing the total dividends paid to R200 000 for the year 2010/11.
In terms of financial position, the bank total assets during the year under review amounted to R363 billion, (R330.8 billion: 2009/10) which is an 8.9 per cent increase. This increase was largely caused by an increase of R26.8 billion in gross foreign assets and domestic assets increase of R5.4 billion. During the year under review, the total liabilities have increased to R354.3 billion, which is a 9.4 per cent increase from the previous year.
8.6 Auditor’s opinion
The Auditor-General expressed an unqualified audit opinion on the financial matters of the SARB as at 31 March 2010. His opinion means that the financial statements of the South African Reserve Bank have been prepared, in all material respects in accordance with the basis of accounting described in Note 1 to the financial statements and in the manner required by the South African Reserve Bank Act. There was no emphasis of matter.
9. Financial Services Board (FSB)
The FSB was established in 1990, to
regulate and supervise the non-banking financial sector of
The FSB is a
unique independent institution established to oversee the South African
Non-Banking Financial Services Industry in the public interest. The FSB
is committed to promote and maintain a sound
financial investment environment in
The mission of the FSB is to promote, amongst other:
· Fair treatment of consumers of financial services & products;
· Financial soundness of financial institutions;
· Systemic stability of the financial services industries; and
· Integrity of financial markets and institutions.
The FSB administers the following Acts of Parliament:
9.1 Report by the Chief Executive Officer (CEO)
The Chief Executive Officer’s (CEO) report indicated that the organisation reviews human resource policy and procedures annually, in consultation with its employees to ensure best practice. The staff complement, which includes contract staff, was 449; an increase of 7 per cent from the previous year when it totalled 418. In addition, 1.6 per cent of the staff are people with disabilities. During the year under review, the staff turnover was 10 per cent, 2 per cent of which was employer controllable (retirement and dismissal) and 8 per cent employee controllable (resignation). The FSB spent R2.5 million on staff training and other development programmes during the year under review. During the period under review, 3 bursaries were awarded to full-time students (non–FSB staff). The Information Communication Technology (ICT) system was upgraded and approved for implementation on 30 September 2010.
In terms of ICT application development and maintenance, the FSB reported that the organisation focus area was to streamline interaction with regulated industries, the regulator and the general public through the use of system-to-system communication, online web applications and batch imports of bulk data into various FSB systems. The project to develop a system that will enable the FSB’s Collective Investment Scheme (CIS) department to receive fund data electronically from the Association for Saving and Investment in South Africa (ASISA) has been initiated, and its completion was scheduled for 1 July 2011.
9.2 Financial position and financial performance analysis
For the year under review, total net assets as indicated in the statement of financial position amounted to R154 million, which is an 11.2 per cent increase when compared to the previous year’s R138.5 million. During the year under review, FSB revenue increased to R408.6 million, which is a 20.4 percentage increase from the previous year of R339.4 million. This resulted to a total net surplus of R15.0 million during the year under review as compared with the deficit of R14.6 million in the previous reporting period. The FSB income from investment accounted for R14.1 million during the reporting period, which is a 6 per cent increase from the previous reporting period.
For the year under review, the total amount of incentive bonus paid to Executive management amounted to R1. 8 million (2009/10: R1.2 million), while Non-Executive member’s fees amounted to R870 790, which is an 8 per cent decrease from the previous year of R946 000.
9.3 Analysis of performance against predetermined objectives
Strategic Focus Area 1: Clients/Partners
The objective of this focus area is to facilitate communication processes with clients and partners to enhance performance, accountability and public confidence. However, the report indicated that the FSB strategic objective, which was measured against the approval of the plan, was not achieved in other divisions, such as Insurance and Capital Market department. The reasons given for this is that there was a delay in finalising the plan due to coordination with other supervisory departments in other divisions and the formal regulatory and supervisory plan was not approved.
The project to implement a regulatory and supervisory plan, which was measured against a 90 per cent target, was not achieved in the Retirement Fund division (73 per cent achieved). The reason for the underperformance was that the time required to visit large administrators was underestimated, as well as the resignation of 5 staff members.
The project to annually prepare a comprehensive industry and stakeholder based engagement plan, measured against the approval of the plan by 28 February 2010 was not achieved. The reason for the underperformance was that apart from the FAIS and the Actuarial (Retirement Funds) Department, none of the departments prepared the plan, and regular communication to stakeholder to provide knowledge and guidance was not incorporated into the plan.
The project to review and update Service Level Commitments (SLCs) which was targeted to be approved by 28 February 2010 was 82 per cent achieved. The reason for this is that there were 6 vacant positions during the period due to resignations and internal movements. One staff member is reported to be on disability. The project was only reviewed in the Insurance division, but the internal process was not finalised. The delay in this regard was that the review of the SLCs did not highlight the need for substantial change.
The project to design a policy to achieve consistency in regulatory action measured against the annual industry survey was not achieved. The reason is that the annual industry survey was not conducted. However, random checks are report to have been performed by the managers of the Retirement Funds division.
Strategic focus area 2: Internal process
The objective is to protect all investors by ensuring integrity and confidence in financial services. The project to compile an enforcement policy (DMA, Pensions, Insurance, FAIS, and Capital Markets) as measured by the approval of the enforcement policy by 30 June 2010 was not achieved. The reason was attributed to the nature of the new enforcement process, and the FSB opted for a set of guidelines in the form of an enforcement manual rather than a policy. The manual was drafted, approved and implemented and based on the second manual that was created for the Enforcement unit, the FSB decided to execute the enforcement function based on the two manuals to build up history before compiling a policy
The report indicated further that the effective utilisation of committee and consultation processes with industry as measured against the meetings of the advisory committee held (at least quarterly) was not achieved within the FAIS division. The reason was that there was no specific submission for the meeting held in May 2010 and members agreed to issue a report on on-going issues, while the September meeting moved to August 2010.
The project to implement processes and procedures required by relevant legislation as measured by 90 per cent adherence to SLCs was not achieved within the Insurance division. The reason was that short-term process was programmed and tested. Only 75 per cent was achieved and the delay in finalisation was due to additional functions that were added and staff turnover experienced by service providers.
The project for approval of the Information Technology (IT) strategy and plan as measured by the approval by February 2010 was not achieved. The reason was that the rolling out of the IT strategy and plan was only approved by the Board on 30 November 2010.
Strategic focus area 3: Learning and Growth
The objective is to implement organisational development strategies that will positively impact the work environment. The project to compile a leadership development programme as measured by the approval of the plan by 28 February 2010 was not achieved. The reason was that the project was deferred to the following financial year (2011/12).
The project to conduct a staff survey by 30 September 2010 was only conducted during November 2010. As such, the target was not achieved within the timelines.
Strategic focus area 4: Financial
The objective is to ensure long-term financial sustainability by improving revenue collection, investing strategically in the organisation, and improving financial reporting and managing it cost-effectively. The project to approve a debtor policy by 28 February 2010 was only approved by the Executive Committee (Exco) on 8 April 2010 and by the Board on 30 June 2010.
9.4 The report of the Auditor-General (AG)
The Auditor-General expressed an unqualified audit opinion on the financial matters of the FSB as at 31 March 2010. His opinion means that the financial statements present fairly, in all material respects, the financial position of the FSB as at 31 March 2011, its financial performance and its cash follow for the year then ended, in accordance with the South African Statements of Generally Recognised Accounting Practice (SA Statements of GRAP) and in the manner required by the Public Finance Management Act (No: 1 of 1999) and FSB Act (No 97 of 1990).
The findings of the AG indicate that there are no matters to report on the predetermined objectives and on compliance with laws and regulations. The report of the AG considered internal control relevant to the audit of financial statements and the report on predetermined objectives and compliance with Public Finance Management Act (Act No. 1 of 1999 (PFMA) and the FSB Act, but not for the purposes of expressing an opinion on the effectiveness of internal control.
10. Pension Fund Adjudicator (PFA)
The office of the Pension Funds Adjudicator was established with effect from 1 January 1998 to investigate and decide complaints lodged in terms of the Pension Funds Act (No. 24 of 1956). The purpose of the Pension Funds Adjudicator is to resolve disputes in a procedurally fair, economical and expeditious manner. The Adjudicator’s office investigates and determines complaints of abuse of power, maladministration, disputes of fact or law and employer dereliction of duty in respect of pension funds.
10.1 Operational report of the PFA
The report indicated that the major challenges faced by the PFA related to compliance with the PFMA, Treasury Regulations, implementation of the new policies drafted and approved by the Financial Service Board (FSB), and an out-dated Information Technology (IT) and case management system. In the finance division, the challenge was exacerbated by the sudden resignation of two key personnel. The turnaround times in dealing with complaints remains a challenge for the PFA. However, it is reported that a new case management system should alleviate a number of problems once it is fully implemented and fully functional.
The report indicated that with regard to case management, 6 220 new complaints were received during the year under review, 894 complaints were settled by conciliation, 1 430 were determined and 3 799 were resolved without requiring determination.
In terms of human resources management, the PFA has reported to have 55 staff members, compared to 54 staff members in the previous financial year. The report indicated further that in an effort to improve the quality of drafting, all staff members were required to undergo legal training, which would result in improvement in the quality of work. The report further indicated that no funds have been spent on the purchase of tickets for the 2010 FIFA World Cup. However, R8 666 had been spent to purchase of 60 scarves, mugs and gift bags, and seven flags for staff members. Most of the challenges faced by the PFA were reported to have been addressed or are in the process of being resolved.
In terms of employment equity, out of 55 staff members, 37 were females and 18 were males. Africans make 81.8 per cent of the total staff, while coloureds make 10.9 per cent.
10.2 Report of the Auditor General (AG)
The Auditor-General expressed an unqualified audit opinion on the financial matters of the PFA as at 31 March 2010. His opinion means that the financial statements present fairly, in all material respects, the financial position of the PFA as at 31 March 2011, its financial performance and its cash follow for the year then ended, in accordance with the South African Statements of Generally Recognised Accounting Practice (SA Statements of GRAP) and in the manner required by the Public Finance Management Act (No: 1 of 1999) and the Pension Fund Act (No 24 of 1956). However, the AG draws attention the following emphasis of matters:
10.2.1 Irregular expenditure
During the reporting period, the Office of the Pension Funds Adjudicator incurred irregular expenditure of R1 216 609.
10.2.2 Fruitless and wasteful expenditure
During the reporting period, the Office of the PFA incurred fruitless and wasteful expenditure of R590 164.
10.2.3 Predetermined objectives
In terms of reliability of information, the AG reported that the performance information was deficient in respect of accuracy and completeness. The reported performance against targets is not accurate and complete when compared to source information.
10.2.4 Compliance with laws and regulations
In compliance with section 51 (1) (a) (i) of the PFMA, the report indicates that the accounting authority did not ensure that the entity had and maintained an effective, efficient and transparent system of internal control with regard to performance management, which describes and represents how the institution’s processes of performance planning, monitoring, measurement, review and reporting are conducted, organised and managed.
The AG report indicated that with regard to procurement and contract management, goods and services with a transaction value of between R10 000 and R500 000 amounting to R1 080 357 were procured without inviting at least three written price quotations from prospective suppliers, as per requirement of National Treasury Practice Note 8 of 2007/08 issued in terms of section 76(4)(c) of the PFMA. Furthermore, the AG report indicated that there was no evidence that goods and services with a transaction value of between R2 000 and R10 000 amounting to R136 252 were procured by obtaining at least three verbal or written price quotations from prospective suppliers, as per requirement of National Treasury Practice Note 8 of 2007/08 issued in terms of section 76(4)(c) of the PFMA.
In terms of expenditure management, the report cited that the accounting authority did not take effective and appropriate steps to prevent irregular and fruitless and wasteful expenditure, as per requirements of section 51(1)(b)(ii) of the PFMA.
The financial statements submitted for audit purposes did not comply with section 55(1)(c)of the PFMA. Material misstatements were identified during the audit, some of which were corrected by management, as well as some that were not corrected, are included in the basis for qualified opinion paragraph.
10.2.5 Property plant and equipment: Basis for qualified opinion
The AG indicated that the fixed assets of the PFA did not meet the audit criteria and as such the AG did not express an audit opinion on the depreciation calculation of R 699 341 and the amortisation charge of R23 314 during the year under review. The accuracy of the fair value adjustment of R 424 653 could not be verified.
The PFA has re-valued its assets for the first time in the current financial year. However, it has not applied GRAP3: Accounting Policies Change in Accounting Estimates and Errors correctly in that no retrospective application per GRAP17: Property, Plant and Equipment, has been affected.
10.2.6 Internal control
The AG report did not indicate significant matters with regard to internal control.
The following were raised by the AG’s report:
The Accounting authority did not exercise oversight responsibility regarding financial and performance reporting and compliance and related internal controls.
Management did not implement proper record keeping in a timely manner to ensure that complete, relevant and accurate information is accessible and available to support financial and performance reporting.
The accounting authority did not prepare regular, accurate and complete financial and performance reports that are supported and evidenced by reliable information.
Management did not review and monitor compliance with applicable laws and regulations
10.2.8 Other reports
The AG indicated that two investigations were held during the year in respect of financial misconduct with management:
· A forensic investigation into possible fruitless and wasteful expenditure was conducted for year ended 31 March 2010.
· Matters identified in the management report of the Auditor-General in respect of the Office for the Pension Funds Adjudicator for the year ended 31 March 2010.
10.3 Financial Analysis
The total assets of the PFA amounted to R11.6 million during the year under review, which is a 3.7 per cent increase from the previous financial year. The liabilities for the reporting period amounted to R 2.2 million, which is a decrease of 55 per cent as compared to the previous financial year amount of R4.9 million. Total revenue during the reporting period amounted to R35.3 million, a decrease of 7.0 per cent compared to the previous financial year R38 million. Total expenses amounted to R32.2 million, which is a 7.7 percentage decrease, compared to the previous year figure of R34.9 million. This resulted in a surplus of R3.1 million, which has increased by 1.2 per cent when compared to the previous financial year.
11. Committee’s Observations
To adequately address
the challenges faced by
· To advance economic growth and job creation through appropriate macro-economic, fiscal and financial policies.
· To play a pivotal role in the management of government expenditure, setting financial management norms and standards for state departments, monitoring their performance and reporting any deviations to the Auditor-General.
Within this specific mandate, the Committee raised a number of issues with regards to expenditure trends. A number of government departments are allocated substantial amounts of monies to address challenges, but further engagement is needed with National Treasury on the manner in which these challenges would be addressed.
The Committee commended the work of National Treasury and the entities that report to it, and commended entities with clean audits and for the well drafted annual reports, but also raised its concern with the audit outcomes expressed by the Auditor General for some of the entities.
The Committee further stated that a lot of public funds were being wasted on irregular as well as fruitless and wasteful expenditure and that processes and procedures need to be tightened in order for this to be rectified.
The Committee also found it alarming that a lot of money was wasted on rent, parking, travelling, and subsistence and travel allowances, and urged the entities to exercise caution and to tighten up where that was concerned.
The Committee further noted that fraud was rife in some entities, and that criminal charges should be laid against those found guilty of abusing public funds.
The Committee noted that strategic objectives of entities would assist the Committee in its oversight role and in determining what was achieved against financial allocations.
The Committee further noted that in some entities, strategic plans do not directly link with the annual reports, and urged entities to clearly link the strategic plans with their annual report for the next financial year.
The Committee noted that some key positions in entities remained vacant; some for long periods, resulting in entities paying professional fees to companies contracted to do the work, and urged entities to fill these positions with the urgency it deserves.
The Committee noted that some entities that had pending legislation should speed up the process of it being considered by Parliament, as this may help the Committee to exercise better oversight.
12. Conclusion and Recommendations
The Standing Committee on Finance, having considered the annual reports and related documentation from the National Treasury, the South African Revenue Services (SARS), the Financial and Fiscal Commission (FFC), the Financial Intelligence Centre (FIC), the Public Investment Corporation (PIC), the Land Bank, the Development Bank of South Africa (DBSA), the South African Reserve Bank (SARB), the Financial Services Board (FSB) and the Pension Fund Adjudicator (PFA), recommends that:
Report to be considered.