CABRI 21 – 22 June 2007

1. Reviewing fiscal decentralisation (part 2)“Monitoring of provincial and local government budgets” CABRI 21 – 22 June 2007

2. Overarching role of treasuries • Establish and enforce: • Aggregate fiscal discipline • Budgets must be respected like all laws • Fiscal aggregates stay within set limits • Allocative efficiency • Resource allocation in line with priorities • Good programmes get more and vice versa • Operational efficiency • Delivering more outputs for less resource outlays

3. Context and Background to Presentation

4. 1997 1998 1999 2000 2001 2002 2003 2004 2005 • Accounting Reform • Procurement Reform Budget Reforms in SA Publication of Quarterly Performance Information Improving operational & allocative efficiency MFMA Measurable objectives SCOA SPP tabled Publication of Section 32 & CG information AR tabled Estimates of National Expenditure & Provincial Budget Statements 1 & 2 Public Finance Management Act National Expenditure Survey & IGFR Medium Term Expenditure Framework Intergovernmental System

5. CD: Provincial Budget Analysis • Provincial Budget Preparation • Support and benchmarking • Provincial Budget Implementation • Monitoring, Oversight and Reporting • Provincial Budget Reform • Initiate, facilitate (Champion) and oversee • Provincial Financial Management and Training • Promote and build capacity • Financial and Non–Financial Data • Data management

6. CD: Local Government Budget Analysis • Local Government Budget Preparation • Support and advise municipalities on budgeting • Local Government Budget Implementation • Monitoring, Oversight and Reporting • Collect, consolidate and analyse municipal information and prepare publications • Monitor implementation of intergovernmental grant system • Local Government Budget Reform • Initiate, facilitate (Champion)and oversee • Support the implementation of the MFMA

7. Budget Preparation and Support

8. National Treasury Support National Treasury has responsibility to oversee implementation of PFMA and provide support and guidance to constitutional entities Hence the development of the “Provincial Good Practice Programme” for Provinces: Improve efficiency, economy and effectiveness Facilitate peer learning through collective experiences Provide support measures to assist with the building of capacity and improve financial management processes Various platforms are utilised to execute this mandate

9. National Treasury Support (1) Budget Process Schedule Legislative deadlines for submissions Budget Preparation Guidelines Consistent with national guidelines Sectoral Meetings Engage sectoral issues and revise priority spending 10 x 10 4 x 4 Provincial Visits June/July visits – expenditure status, spending challenges November visits – capital spending, visitation to infrastructure projects MTEC Hearings Attend as observers Benchmark Exercise Assess credibility of provincial budgets prior to tabling in provincial EXCOs

10. National Treasury Support (2) Database Budgets Statements IYM Annual Financial Statements IGFR / Provincial Budget and Expenditure Review Focus on sectoral issues Aggregate picture of provincial and local governmental budgets

11. National Treasury Support (3) • In-Year Management and Reporting • Effective and efficient financial management • Proactive towards possible spending challenges • Interrogate deviations and prompt corrective action • Guidelines • Effective implementation of legislation – PFMA & MFMA • Ensures transparency • Efficient financial management • Budget Formats • Efficient budget allocation • Aggregation and consolidation

12. National Treasury Support (4) Chief Financial Officer (CFO) Forum Meetings Peer learning forum Sharing of imperative information Training Budget Formulation Budget Analysis IYM SCOA Workshops Strategic Planning Budget Processes Financial Management

13. In-year Management, Monitoring and Reporting System

14. Background • Sparked by 1997/98 financial crisis in provinces • Provinces overspent by R5,8 billion in aggregate • Approved by Cabinet • Change the Budget Process • IYM constitutes: • Expenditure management • Revenue management • Cash flow management • Movements in Bank balances • Suspense Accounts

15. Background - continued • Impossible to manage without reliable financial and non-financial information to: • Develop plans • Evaluate alternatives • Institute corrective actions where necessary • Public Finance Management Act, 1999 (PFMA): • New emphasis on accountability, regular monitoring and performance reporting on a monthly basis

16. Legal Requirements • Section 32 of PFMA • Publishing reports on state of budgets • Section 40(4) of PFMA • Treasury Regulations (Part 7 - Section 18) • Sections 10(5), 12(1)&(2) and 32(2) of the Division of Revenue Act, 2007 (CGs) • Acts require monthly expenditure and revenue reporting to the provincial treasuries and National Treasury

17. In-year Management, Monitoring and Reporting • Accountability Cycle: • Strategic and Performance Plans • Budget • In-year monitoring (IYM) (Inform SP targets) • Quarterly Performance Reports • Annual Reports • Purpose: • Focus on performance against budget • Alert managers where remedial action is required • Reports serve as management tool • Feed the Budget Process • Feed into publications such as the Annual Intergovernmental Fiscal Review • Political level to make decisions

18. In-year Management, Monitoring and Reporting • Monthly reports facilitate: • Flow of information • Internal control measures to deal with problems timeously (Early Warning System) • AO is more proactive • Use data to make decisions • Compilation of annual reports and financial statements which complete the accountability cycle • Assist the external auditor • Reduced timeframe for audit - strengthen accountability to legislatures • Reports consolidated and published in Government Gazette

19. Monthly Reporting Process (1) • Accounting officer must submit reports to relevant treasuries and executive authorities within 15 days of the end of each month • To improve accountability, AOs are required to sign-off on the monthly reports before submitting to relevant treasury or executive authority • Contents of reports – legal requirement (S40): • Actual revenue and expenditure • Projections for remainder of financial year • Information on conditional grants • Any material variances • Format determined by the National Treasury in terms of PFMA and annual DoRA • Revised annually

20. Monthly Reporting Process (2) • Number of steps in the process to convert the millions of individual transactions that occur as a result of government activities into the information to be published monthly • Undertake reconciliations • Check allocation of transactions • Clear errors and suspense items • Balance various type of accounts • Return date 15th of each month to provincial treasuries and 22nd of each month to National Treasury • System resources: BAS, PERSAL and Vulindlela • From 1 April 2004: • New Economic Reporting Format • Migration to BAS • Standard Chart of Account (SCOA) • Single version of the truth

21. A CONCEPTUAL VIEW OF THE MONTHLY REPORTING PROCESS: SOURCE DOCUMENTS FEEDER SYSTEMS ACCOUNTING SYSTEMS MONTH-END REPORTS PRODUCED ANALYSE SIGN OFF AND SUBMIT COLLATE PUBLISH

22. Formats and Projections • Formats determined by the National Treasury in terms of the PFMA and Division of Revenue Act • Require variances between the actual result for the period and that budgeted • Projections to the end of the financial year • Reasons for deviations • What has happened so far? • What will happen for the rest of the year? • What actions to be taken to achieve agreed plan? • The following serves as an example: • In-year Management, Monitoring and Reporting Model in use by provinces • National Government Gazette in terms of Section 32 of the PFMA

23. Screen Shots – IYM Model

25. Screen Shots – Section 32 Publication

26. Screen Shots – Press Release

27. Screen Shots – IYM Dataset

28. Screen Shots – Newspaper Reports

29. Evolvement of the Model • Initially (2000/01) - different formats between provinces • As result, very difficult to consolidate – 8 months to consolidate all provinces (No standardisation) • Decision to standardise format to: • Improve turnaround time in producing numbers • Improve quality of data • Enhance comparability – Education, Health, Social Development

30. Evolvement of the Model (2) • Initial model (2001/02) consisted of 4 files – Extremely cumbersome, not very user friendly • 2002/03, developed model in one file – big improvement, much more user friendly and introduction of data file concept • Following round, introduction of programme level model – separate model but could upload data from data file • Current model – combined two models (dept + prog level) into one file • Over time also expanded data requested – Cash flow, suspense accounts, transfers to municipalities, FET colleges, infrastructure, EPWP, Personnel numbers, etc.

31. Progress in data process • Initially - 8 months to consolidate provinces – Currently 2 hours excl. data verification process – Improved turnaround time • Improved quality of data – balancing between programmes / economic classification, summary and detail • Improved coverage of reporting • Improved capacity in provinces

32. Latest developments • Over past few years – dramatic improvement in quality of data BUT on closer investigation, not there yet – considerable differences between IYM and BAS • Discrepancy in numbers between IYM, AFS and Annual Reports – very difficult to explain • During 2006/07 - model adjusted to include upload functionality from Vulindlela - Reason, one source of data • Vulindlela fixed format created to download data from system in IYM format • Data files are placed on Vulindlela website – file per department, contains a sheet for each programme

33. Data process Vulindlela runs update from BAS (2 days after dept closes for month) User saves applicable file on PC (One file per department, programmes) User uploads data from data file into IYM model

34. One source of data Source National Treasury Reporting IYM, AFS, AR Reserve Bank Vulindlela Stats SA Vulindlela In-year BAS?/Own AFS BAS? AR BAS?

35. Challenge!!! • Incorrect economic classification • Use of items and not objective structure as basis for economic classification • Variances in programme structures in BAS and Budget Statements • Differences between BAS and Budget • Previous years structure not deactivated on BAS • Correction of misclassifications

36. Reports Generated • Section 32 Publication • Press Release • Technical Committee for Finance (TCF) • Budget Council • President’s Co-ordinating Council (PCC) • Select Committee for Finance (NCOP)

37. Conclusion

38. First Lesson from SA • Budget reform goes with fiscal decentralisation • It is even more important for fiscally decentralised • Co-ordinating policy and sector interests across tiers of government is really difficult but necessary • Ignore the nay-sayers and implement 3 year budgets • Budgets should not require line-item political and legislative approval • Reserve line-item budgets (to the extent they are even necessary) for internal management purposes only

39. Budget Reforms and Fiscal Decentralisation • Budget reforms are even more important for fiscally decentralised countries • Are budgets sustainable? • Is consolidated tax to GDP stable or declining? • Is consolidated borrowing or deficit sustainable (i.e. consolidated debt to GDP stable or declining) • Are provincial budgets comparable with each other? • Standard chart of accounts, uniform budget formats etc • How quickly can we produce consolidated budget information? • How much are we spending on school education? • Need to aggregate school budgets from 9 provinces

40. Conclusion - IYM • Over the past five years we have made a great deal of progress in improving quality and scope of data - There are, however still a few areas that need attention • In order to really add value we need to combine non-financial (performance) data with the financials, but let’s eat the elephant one bite at a time

41. LG: Budget Reform Agenda • Mirror image of national and provincial budget reform package • Development of Budget Format Regulations • Budget Statements • Adjustments Estimate • In-year Management, Monitoring and Reporting • Municipal Entities • Annual Reports • Target date: March 2008 • Development of a In-year Management, Monitoring and Reporting System for Municipalities (Early Warning System) – two year project • Initial focus on non-delegated municipalities • Enhance the Publication of Section 71 reports • Include reporting on Conditional Grant spending • Infrastructure spending • Ultimately reporting on all 283 Municipalities • Continue to improve the Publication of the Local Government Budgets and Expenditure Review • Focus on actual expenditure for all municipalities over a seven year horizon • Development of reporting standard – equivalent of Standard Chart of Accounts (SCOA) for Municipalities • 18 Month Project • Database Enhancements

42. Thank You