CHAPTER 5

BUDGETING AND FINANCIAL MANAGEMENT

5.1 INTRODUCTION

5.1.1 The Importance of Budgeting

Government budgeting consists essentially of two things:

• Determining what money is available for spending (i.e. the total of anticipated revenues plus the amount of money that it is prudent to borrow);
• Determining what programmes and services to finance (present ones, plus high priority new ones, minus low priority old ones, and minus administrative economies).

In South Africa, where there are three spheres of government -- two of which (provincial and local) rely substantially on revenues that are levied and collected by the National Government, and where constitutionally these revenues must be divided between them -- there is an additional step to budgeting. This is the determination of the share of the national revenues that will be allocated to the national and provincial governments. This is aside from the share of the national and/or provincial revenues that will in the future be allocated to local governments to supplement their own locally collected revenues.

Budgeting is therefore important because the way in which such issues are determined will obviously impact significantly on the material well-being of citizens, as well as on the prospects for the achievement in South Africa of the key goals of reconstruction and development, economic growth and macro-economic stability, and community empowerment and democratic consolidation.

5.1.2 The Importance of Financial Management

Financial management typically consists of the following elements:

• The accounting system, including the form of accounts and account classification
• Budgetary and expenditure control
• Financial planning and reporting
• Cash flow management
• Management of assets and liabilities
• Financial control, particularly payroll control
• Procurement policy

Sound financial management is also vital as a necessary complement to the budgeting process, and in particular to ensure that taxpayers' money is used in an efficient, cost-effective, responsive and accountable way. In developing improved financial management systems, attention internationally has focused in particular on the increasing use of computer technology, the development of staff capacity, and the introduction of mechanisms to promote greater probity, accountability and transparency in the use of public funds.

5.1.3 The Importance of Planning

Effective planning of the budgetary and financial processes is clearly important, not only in its own right but more especially as an integral part of broader strategic plans for social and economic development. If the policy and strategic planning processes are not fully synchronised with the budgetary and financial processes, the likelihood is that policies will be introduced without the necessary funds or capacity for their successful implementation, with the attendant risk of popular frustration and unrest.

The heart of planning and budgeting is how government goes about translating its vision -- its objectives and goals, such as the RDP programme -- into specific policies and programmes and services, and then into operational plans; and how it goes about staffing and financing them over time. This includes such difficult choices as which services should enjoy priority over others; which services will have to be phased in over time; and which new or improved services must be deferred.

5.1.4 Purpose and Structure of the Chapter

The purpose of this chapter is to review the developments that have taken place in budgeting and financial management since 1994 with a view to highlighting strengths and achievements that can be built upon in the future, as well as weaknesses and problems that still need to be overcome. In the process, the following issues will be covered:

• Government expenditure and the budget;
• The domestic and global context of budget reform;
• Current developments in budgeting and financial management;
• Issues and challenges for further reform;
• Recommendations for further reform.

5.2 GOVERNMENT EXPENDITURE AND THE BUDGET

5.2.1 The Impact of Government Expenditure

Government expenditure plays a central role in influencing economic and political outcomes in society. In the first place, it is the largest single component of demand in the South African economy and amounts to about one-third of GDP, when expenditure on all three spheres of government is incorporated (national, provincial and local). Changes in government spending therefore impact significantly on aggregate demand in the economy, and hence on the level of economic activity and the GDP itself.

Secondly, in addition to affecting economic growth through the demand-side of the economy, government expenditure has a significant impact on the growth rate of the economy, through the supply-side. The delivery of public goods and services to households and firms, such as infrastructure, education, or security, are essential complementary factors in the production process, affecting the level of productivity and efficiency of capital and labour inputs.

Thirdly, the level and composition of its expenditure are also a reflection of a government’s political priorities and objectives, particularly with regard to the important issue of redistribution. The Government can affect the welfare of different groups in the society through its provision (or non-provision) of goods and services to members of these groups, so that there is a close link between the budget and policies towards redistribution, poverty alleviation, and inequalities between genders, racial and ethnic groups, and regions.

5.2.2 The Objectives of Public Expenditure and Management Systems

The broad objectives of public expenditure budgeting and management systems follow from the above three impacts upon economic and political outcomes. These objectives are:

• To effectively control the fiscal expenditure aggregates to support macroeconomic stability as far as possible. Without such controls, there will be the risk of large unsustainable fiscal deficits, expressed for example in the form of inflation, balance of payments deficits and high interest rates.
• To achieve technical efficiency in the delivery of public goods and services, that is, to achieve outputs at the lowest possible cost. This affects both the growth and redistributive objectives identified above. The greater the efficiency in the delivery of public goods and services, the more effective their contribution to the productivity of other productive processes, and hence the greater the contribution of the public sector and government spending to the rate of economic growth in the medium term. Similarly, higher efficiency in the delivery of redistributive goods and services is likely to enhance their impact on poverty alleviation and welfare improvement.
• To achieve allocative efficiency in the distribution of public resources, that is, to achieve the highest possible level of social welfare, given the needs and demands of the population, and government’s political priorities. Since demands always exceed resources available, the issue here is to determine the composition of public spending -- the choice of which goods and services to provide, and at what level -- and manage the trade-offs amongst its components in a manner which best meets the public interest, but inevitably leaves some demands unsatisfied. An inefficient outcome in the allocative sense could result in a drop in support for the Government, or to an increase in social conflict, as groups dispute the particular trade-offs chosen and the sacrifices these entail. As with technical efficiency, allocative efficiency is concerned with both the growth and redistributive dimensions of public spending.

5.2.3 Achieving these Objectives

How can these objectives be achieved? Current "best practice" based on international experience focuses upon the appropriate structuring of the different incentives faced by the various actors in the budget and public expenditure process -- decision-makers, public servants who implement and manage the process, public servants who monitor the process, and consumers of public goods and services -- to produce the desired behaviour in each. Considerable emphasis has also been placed on the introduction of various mechanisms to achieve transparency and accountability which can ensure adherence to decisions and help to optimise performance in their implementation.

There are of course wide disparities amongst procedures in different countries, even amongst those, like Australia, New Zealand and the United Kingdom, which have undertaken far-reaching budget reforms in recent years, and are regarded by many as standard-setters in this respect. It is also worth noting that there are important differences between these long-established democracies and a newly-democratic society like South Africa. In the latter, for example, practices and processes in democratic institutions such as Parliament or political parties are less well-established, while principles such as transparency of government activity and accountability of officials are more fragile.

A number of key issues are highlighted below. These emerged from the Commission's study of the budget reform processes in countries such as Australia, New Zealand and the UK.

5.2.3.1 Achieving Fiscal Discipline

Control over the fiscal expenditure aggregates tends to require a high degree of centralisation of decision-making. The decision-making agent -- whether the Finance Minister alone or a Cabinet finance sub-committee comprising key central (non-line) ministers -- needs to be strong enough to impose its decisions on the line ministries. Its ability to do so will be enhanced by the use of a medium-term framework, which illustrates the interaction of budgetary decisions and macroeconomic outcomes, and even more so by the existence of explicit pre-set limits on spending and on deficits which, in turn, will be more powerful if they are legally binding. Accountability occurs through the explicit public comparison of budgeted and actual fiscal aggregates, and of projected and actual macroeconomic outcomes. The Finance Minister can be made personally accountable for fiscal performance reflected in this comparison, which is the case in New Zealand.

5.2.3.2 Achieving Allocative Efficiency

The objective of allocative efficiency requires a combination of centralised and decentralised processes. Overall decision-making needs to be centralised within the Cabinet, perhaps in the form of a "strategic planning and priorities" sub-committee, which would include some line ministers. This committee would have to evaluate policy-based programmes, examining their costs within the constraints of the medium-term framework and the overall fiscal aggregates, and lay down broad spending allocations or ceilings to the line ministries.

Because achieving allocative efficiency is inherently a political process, there needs, however, to be a wide process of decentralised information collection and consultation prior to the actual making of decisions. This takes place through institutions such as parliament, corporatist bodies such as the National Economic Development and Labour Council (NEDLAC) or social partnership forums, as well as through direct contact with the public. Information is collected about needs and demands of different constituencies and groups, while at the same time an attempt is made to build consensus about acceptable trade-offs between conflicting demands.

The decentralised nature of the process, together with the focus on policy programmes, implies a very active role for line ministries and departments in this aspect of the budgeting process. This role can be extended, as has occurred in Australia, by enabling line departments to make programme allocation or re-allocation decisions within their total allocation from the Cabinet.

As the above suggests, allocative efficiency also requires an emphasis on policy-linked programmes, which embody clear connections between the determination of priorities, strategic and operational planning, budgeting and financial planning, and performance and financial management. From an allocative efficiency perspective, programme outcomes reflect whether public needs and demands have been met, and whether government’s political priorities have been achieved.

Accountability for the broad allocative decision rests with the centralised decision-making body within Cabinet and relies, as in the case of overall fiscal control, on explicit public comparison of budgeted and actual outcomes, together with the monitoring and evaluation of programme outcomes. Naturally, institutions and bodies involved in the information collection and consensus-building process also have a central role to play in the accountability process. Accountability for allocations and re-allocations within line departments rests with the individual ministers concerned. A medium-term budgeting framework can enhance accountability in allocation decisions by facilitating comparison between last year’s budgeted estimates and this year's actual expenditure outcomes, as well as between last year’s forward estimates and this year’s budgeted allocations. To the extent that budgeted allocations are in effect agreements over trade-offs during a three year period rather than over a single year, failure to adhere to the agreement over the past year can be more effectively sanctioned by other parties to the agreement, through mid-term adjustments.

5.2.3.3 Achieving Technical Efficiency

Technical efficiency is best accomplished by a thoroughly decentralised process giving line ministries a high degree of autonomy over programme implementation and management. As with allocative efficiency, the focus is on programmes, and hence with the linked steps of strategic and operational planning, budgeting and implementation. However, technical efficiency evaluates the relation between programme inputs (public servants’ labour, use of public buildings and consumed goods and services) and programme outputs (the public goods and services delivered by the programme), in contrast to the concern of allocative efficiency with programme outcomes (the broader social impact of the outputs on public welfare).

The achievement of technical efficiency is more of an operational issue than a political one, so that decisions about how to allocate financial resources are best made by managers in the delivery departments, rather than by central agencies. For optimal effectiveness, this would require greater delegated powers for managers over hiring and firing decisions, as well as procurement issues.

Accountability mechanisms for the effective decentralisation of implementation depend on the timely availability of independent financial and performance audits. Accountability also rests on managers being held personally accountable, via performance-based contracts, for delivery of outputs.

It should be noted that the three objectives of fiscal, allocative and technical efficiency are not independent. Each interacts with and affects the others. The relation between outputs and outcomes reflects the interface between allocative and technical efficiency, between technical and political issues, and between ministries and their associated departments.

5.2.4 Budgeting and Financial Management in South Africa

The principles articulated in the previous section point towards a system of budgeting which:

• Is heavily decentralised, especially at the operational level, allowing line department managers substantial autonomy within broad allocative decisions made centrally;
• Closely integrates the strategic, operational and financial aspects of the policy process, in regard to the dimensions of planning, implementation and monitoring;
• Is concerned with budgeting for outcomes and outputs as well as inputs;
• Relies heavily for accountability on its transparency, based on the rapid generation and publication of sufficient accessible information, and on sufficient pressure from both inside and outside the state.

5.3 THE DOMESTIC AND GLOBAL CONTEXT OF BUDGET REFORM

5.3.1 The Constitution

The contrast between pre-1994 realities in South Africa and current international best practice could hardly be more stark. However, the new Constitutional framework (both Interim and Final) has put into place a new set of principles and institutions that necessitate a move away from the former and in the direction of the latter. In particular, this framework commits government as a whole firmly to the principle of decentralisation, through the establishment of three distinctive but inter-related spheres of government: national, provincial and local governments. The Interim Constitution of 1993 devolved some authority over public resource allocation to sub-national governments. The final Constitution of 1996 affirmed the move towards fiscal decentralisation and strengthened in particular the role of local governments. The provisions of the Interim Constitution remain in force until 1 January 1998 when Chapter 13 of the Constitution (1996), which deals with inter-governmental fiscal relations comes into effect. Provincial powers and functions are either exclusive or concurrent with those of national government. Thus provinces do have some degree of autonomy, as we have seen in Chapters 2 and 3, though this is weighed up against the national interest. Nonetheless, this implies considerable decentralisation in the budgeting process.

A key feature of this framework is the principle of cooperative governance. This requires that the three spheres of government coordinate their actions and legislation, and exercise their powers in a manner which does not encroach on the geographic, functional or institutional integrity of government in another sphere. To enable provinces and local governments to exercise the powers devolved to them and provide services, they are constitutionally entitled to an equitable share of nationally-collected revenue. Section 227 of the 1996 Constitution states also that lower spheres of government may receive other allocations from national government revenue, either conditionally or unconditionally.

The 1996 Constitution also places considerable emphasis on the principles of accountability and transparency, and on the public participation necessary to realise these principles. Section 92(2) states that members of the Cabinet are accountable collectively and individually to Parliament for the exercise of their powers and the performance of their functions. Section 133 provides similarly for the accountability of members of the Executive Council of a province (EXCO). Sections 215 and 216 explicitly require transparency and accountability in the budgetary processes of all three spheres, and on both the revenue and expenditure sides. Section 216 requires the treasury to ensure expenditure control. Section 195 requires the public service to provide the public with timely, accessible and accurate information, so that public participation in policy-making processes is encouraged.

The Constitution vests the legislative authority of the respective spheres of government in the national parliament, the provincial legislatures, and the municipal councils. The budget, an appropriation bill, is a money bill, which only the Minister of Finance may introduce in the National Assembly. In the provinces, only the MEC for Finance may introduce a money bill in the legislature. In the past, Parliament had no power to amend the budget. However, the 1996 Constitution makes provision for Parliament to amend money bills, including the budget. This could strengthen the oversight role of Parliament including the monitoring and evaluation of policy implementation, particularly through the work of the Parliamentary committees. Equivalent provisions exist for the provinces.

To operationalise the system of inter-governmental relations, the Interim Constitution also established the Financial and Fiscal Commission (FFC) as an independent statutory body to make impartial recommendations to all relevant legislatures regarding the financial and fiscal requirements of all three spheres of government. It makes recommendations, inter alia, about how government revenue should be shared among the various spheres of government, financial allocations, taxation, borrowing, and the criteria used in determining these matters. In making its recommendations on the equitable division of resources among national, provincial and local governments, the FFC is obliged by section 214(2) of the 1996 Constitution to take a number of criteria into account. These including provision for the national debt, the obligations of all three spheres to provide services and meet their other obligations, their fiscal capacity to do so, economic disparities within and among provinces, and the desirability of stable and predictable allocations of revenue shares.

The FFC is an advisory body and its recommendations are therefore not legally binding. Greater clarity on its powers and the precise nature of its interface with other institutions is anticipated from the forthcoming FFC Bill and the Inter-Governmental Fiscal Relations Bill.

The role of the Auditor-General (AG) in ensuring the accountability of spending agencies is crucial. The Constitution specifies the existence, independence and impartiality of the Auditor-General. Among other things this requires giving the Auditor-General's office sufficient resources, guaranteeing its independence from interference, and providing political support for its role in upholding the principles of transparency and accountability. Section 188 of the 1996 Constitution requires the Auditor-General to "audit and report on the accounts, financial statements and financial management" of all state institutions or other recipients of public money. It also enables additional powers to be prescribed by national legislation, which could include monitoring the efficiency and effectiveness of public spending.

5.3.2 The Domestic Policy Environment

Since 1994, the Government has committed itself, through a series of policy documents and enabling legislation to the fundamental reconstruction of government structures, institutions and processes. Some of the key documents are reviewed briefly below. It should be noted, however, that the actual implementation of the policy recommendations contained in them has been somewhat uneven and inconsistent (as demonstrated elsewhere in the PRC's report).

5.3.2.1 The RDP White Paper

This White paper, published in September 1994, expressed the Government’s view of the RDP "Base Document" formulated prior to the election. The RDP re-affirms the constitutional principles of transparency and accountability, while also committing government to greater efficiency and effectiveness in its activities. The RDP explicitly identifies the need for greater integration between strategic and operational planning and budgeting processes. It also emphasises the need for performance monitoring systems, as part of the accountability mechanism. Finally, the RDP emphasises the need for sustainable macroeconomic balances in the effort to transform the state and the society.

5.3.2.2 The White Paper on the Transformation of the Public Service (WPTPS)

Published in November 1995, and discussed extensively elsewhere in this report, the WPTPS identified eight key transformation priorities for the public service, including rationalisation and restructuring, institution building, representivity and affirmative action, and perhaps most importantly the transformation of service delivery.

A key component of the rationalisation and restructuring of the public service would be the creation over time of a leaner and more cost-effective service. This would involve, amongst other things, a reduction in consumption expenditure as a proportion of total government spending, and a corresponding reduction in the wage bill as a proportion of consumption expenditure (from its relatively high level of 60 per cent to a figure - in the region of 40% - that is more in line with countries at a similar stage of development). The rationale, as we saw in Chapter 3, was not merely to save money, but rather to release resources for productive investment in RDP-related initiatives.

In the Chapter on Institution Building and Management the WPTPS also strongly advocates the move towards the decentralisation of managerial responsibility, and increased accountability for results through the introduction of performance-related contracts for DGs. The White Paper emphasised that for such reforms to be effective there would also be a need for them to be accompanied by a corresponding increase in flexibility over financial and human resources control.

5.3.2.3 GEAR

In June 1996, the Cabinet adopted GEAR as an integrated policy package aimed at attaining a GDP growth rate of 6% per annum and 400 000 new jobs per annum by the year 2000. These targets are to be achieved through increases in investment levels in response to sustained macroeconomic stability, enhanced international competitiveness in a more open economy, and a re-configured relationship between the private and public sectors.

A number of the policy positions re-affirmed in GEAR have implications for budgetary processes. Macroeconomic stability rests on a tight fiscal and monetary stance to keep inflation under control. Under GEAR the Government commits itself to a fiscal deficit reduction programme, from 4.5% of GDP in 1996/97 to 3.0% by 1999/2000. In addition, a tax-to-GDP ratio of about 25% would be maintained over this period, thereby determining the total resource envelope available to government. GEAR also commits or re-commits government to increased efficiency in revenue collection and financial management, and to improved expenditure planning and control. The re-configuration of the relationship between the private and public sectors involves re-prioritising spending, to expand significantly the role of the private and non-governmental sectors in the provision of goods and services previously delivered by the public sector. This has obvious and important implications for budgetary allocative decisions and processes.

5.3.2.4 The Batho Pele White Paper on Transforming Public Service Delivery

Published in 1997, this White Paper identifies and suggests ways of operationalising eight key principles of improved service delivery -- consultation, service standards, access and entitlement, courtesy, information, openness and transparency, redress, and value for money.

In aiming to enhance public service delivery, the White Paper acknowledges the need for a fundamental management shift to a culture of public service or "people first" (hence the subtitle of the document, Batho Pele, which is the Sesotho term for people first), including assignment to individual line managers of the responsibility for delivering specified results for a given level of resources, matched with managerial authority for decisions about resource use. This requires the delegation of managerial responsibility and authority to the lowest possible level, as well as transparency about results achieved and resources consumed.

5.3.2.5 The Public Service Laws Amendment Act

This important act, which is covered in greater detail in Chapters 2 and 3 of this report, was promulgated by Parliament in 1997 and gives legislative backing to move towards greater delegation and decentralisation. One of the main aims of the act is to remove the rigidities imposed by the 1994 Public Service Act, and the associated regulations and staff code, and by so doing to pave the way for the introduction of a much more decentralised management system, in which the responsibility and capacity to make decisions is devolved to the most appropriate levels of management. Although focusing in the main on the decentralisation of personnel matters, the act clearly has major implications for budgetary and financial reform.

5.3.2.6 Public Works Towards the 21st Century

This document advocates a gradual devolution of responsibilities from the Public Works Department to line departments. From 1998/99, the annual capital and current expenditure budgets of national departments will include provision for rental of offices and other accommodation, as well as for the delivery of services such as maintenance. For the subsequent three years, line departments will be obliged to purchase property and facilities management services from Public Works. This is to allow the Public Works Department to reposition itself on a more competitive basis with private sector providers.

5.3.2.7 The Green Paper on Procurement Policy

This 1997 document addresses a controversial issue. Current tender regulations and Tender Board procedures are regarded as a major impediment to prompt and effective service delivery by many provincial and national departments, as expressed in their presentations to the PRC. Departments see the procedures as far too bureaucratic and not transparent enough. The Green Paper seeks to address this issue, by permitting greater decentralisation and flexibility, whilst at the same time guarding against possible abuses of this new-found flexibility by proposing the introduction of an effective control and monitoring system to ensure that departments and provincial administrations comply with nationally laid-down legislation, norms and standards.

5.3.3 The Global Context

The emergence of a democratic order in South Africa and the magnitude of the subsequent political, constitutional and administrative changes are, in many respects, unique. Nevertheless, many of the challenges faced in transforming the public sector in this country, especially within the area of financial planning and budgeting, are mirrored in other countries. Globally, from Malaysia to the United Kingdom, Sweden to New Zealand, there is a growing trend toward budget reform as part of a broader thrust towards improving public service delivery. The rich experience overseas in budgetary reform can therefore provide a valuable resource to draw on in crafting a system which is appropriate to the South African context, with the obvious proviso that differences in constitutional structure, institutional framework, political culture and available technology and skills render attempts to slavishly replicate systems devised elsewhere highly inappropriate.

5.3.3.1 The Focus of Budgetary Reform

Below are some of the common challenges and problems which have prompted reforms in a number of countries studied by the Commission (including the Australia, Malaysia, New Zealand and the UK).

• In many governments the processes of strategic planning and prioritisation, financial planning and resource allocation, and performance management have tended to be discrete processes with very little integration and synergy. This has resulted in policies which were unconnected with budgetary provision, and thus prone to implementation failure.
• An agreed set of priorities in the form of a clear, integrated statement of overall public sector policy goals and outcomes have often been lacking.
• Horizontal fiscal coordination across ministries and departments has tended to be poor.
• The budget and financial management processes have frequently failed to generate adequate information to assist political decision-making (especially in terms of the future fiscal implications of current and new policies).
• There has often been a missing link between the national vision and the annual departmental priority setting and budgeting processes.
• Frequently there has been little or no link between budgeting and the macroeconomic framework, together with an absence of detailed estimates of revenues over the medium term.
• The determination of staffing levels has often been divorced from annual budget formulation.
• The lack of effective budgetary guidance by treasuries to spending agencies has often been accompanied by poor budgetary preparation by spending agencies.
• Budget implementation has frequently been characterised by rigidity in the release of funds; excessive reliance on central controls; and the absence of reliable cost, output and efficiency data.
• Financial information systems have frequently failed to generate timely reports. Reports have tended to account for how money was spent, not about whether value-for-money was obtained.
• The role of the budget office or treasury has largely been to specify items of expenditure (personnel costs, supplies etc) and monitor compliance with regulations, rather than to strategically plan and monitor the achievement of outputs and outcomes.
• The primary focus has therefore been on control and adherence to regulations rather than the promotion of accountability and the achievement of results.
• Centralised financial control seems to have absolved departmental managers from accountability for performance (managers in effect "administered" their budgets, they did not "manage" them).

5.3.3.2 Themes Underpinning Reform Initiatives

The above list of challenges and problems is not meant to be exhaustive, but merely to give some indication of the factors which have stimulated reforms in the fiscal, allocative and technical aspects of the budgetary and financial management processes. The precise nature of the reforms has naturally varied from country to country, but a number of broad common themes have begun to emerge. These include:

• The introduction of effective aggregate expenditure control frameworks to promote greater fiscal discipline and macro-economic stability;
• The introduction of right-sizing measures to reduce consumption spending, release resources for productive investment, and in particular to achieve a more optimal allocation of resources (both human and financial) in line with government priorities;
• Contracting-out of services to the private or community sectors (sometimes on a partnership basis) to promote greater efficiency, effectiveness and competition in service delivery;
• The introduction of medium-term expenditure frameworks to promote improved planning and greater stability and continuity in the budgetary process, and to overcome some of the well-known problems associated with annual incremental budgeting;
• The development of systems and mechanisms aimed at forging closer links between strategic planning, budgeting, financial management and performance management systems;
• The introduction of tighter political (Cabinet, Ministerial) control over vision-building, priority setting, and the establishment of central goals, norms and standards;
• The corresponding decentralisation of greater managerial autonomy at the operational level, to promote flexibility and responsiveness to local needs;
• The introduction of incentives and controls (such as performance-related contracts) to ensure that greater managerial responsibility and autonomy is matched by accountability for the achievement of centrally-established goals and priorities;
• The establishment of improved forms of coordination between and within departments;
• The move towards an output, outcomes, programmes-based and results-oriented approach to budgeting, rather than the traditional input-based approach;
• The introduction of systems of programme management and budgeting to institutionalise these new outcomes and results-based approaches;
• The introduction of incentive systems to reward and promote improved performance, productivity and probity amongst civil servants, as well as more effective monitoring and disciplinary systems to discourage corruption and waste;
• The increasing use of computerised information systems as a key component of budgeting and financial management;
• The introduction of skills development programmes to upgrade the capacity of financial managers and staff, as well as to make non-finance staff more knowledgeable and aware of their financial responsibilities;
• The promotion of greater transparency and accountability to the public in budgetary matters;
• The introduction of improved systems for financial monitoring and review.

The experience of countries like Australia, Malaysia, New Zealand and the UK has shown that budget reform, buttressed by wider public sector reforms can significantly improve service delivery and restore government’s credibility among domestic citizens and overseas investors. In fact, in an increasingly integrated global economy, good fiscal management itself constitutes a competitive advantage.

5.4 DEVELOPMENTS IN BUDGETING AND FINANCIAL MANAGEMENT

The budget process in South Africa has undergone substantial re-organisation since 1994. This was necessary in light of the constitutional shift towards decentralisation and devolved powers to sub-national governments. The challenge of transforming budgeting practices to conform with the unfolding inter-governmental fiscal framework was compounded by the tight time frames in which these fiscal structures had to be established, and key enabling legislation put in place. During the transition period, government operations had to continue. Instead of starting from a blank slate, therefore, elements of the new system, which is taking shape, were superimposed on existing institutions and structures. Furthermore, the evolution toward a decentralised approach seems to be unfolding without a systematic transition plan.

This section reviews the changes which have been introduced, discussing in turn government committees and structures, inter-governmental fiscal relations, the budget process, and other measures being put in place, including the Medium Term Expenditure Framework (MTEF).

5.4.1 Government Committees and Structures

A large number of different bodies play a role in the budget process. The evolving nature and functions of some of the most important ones are summarised below.

5.4.1.1 The Cabinet

The Cabinet operates through three standing committees: on Economic Affairs, Social and Administrative Affairs, and Security and Intelligence Affairs. These committees make recommendations to the full Cabinet. All of them are attended by the Deputy President. Each standing cabinet committee is supported by a secretariat, as well as a parallel technical committee consisting of heads of departments and other senior departmental officials. Filtering down Cabinet decisions to departments is the responsibility of the individual ministers.

In addition, a number of ad hoc inter-ministerial committees have been established for particular purposes. Two of these deal with budgetary matters. The first is the Ministers Committee on the Budget (MinComBud), chaired by the Minster of Finance and consists of the Deputy Minister of Finance, and the Ministers of Public Service and Administration, Trade and Industry, Arts, Culture, Science and Technology, Health and Education. This committee identifies broad strategic priorities and reviews broad indicative allocations, for cabinet approval. The finer details are reviewed by the MTEF Committee (see below).

The second Cabinet committee dealing with the budget is the Treasury Committee, which is also chaired by the Minister of Finance, and includes the Deputy President, the Ministers of Home Affairs, Labour, and Trade and Industry, the Deputy Minister of Finance and the DGs of Finance and of State Expenditure. One of the most important aspects of its brief is to evaluate all requests for additional funds and to determine whether such additional expenditure is unforeseen and affordable. The committee may recommend an investigation into the financial/management position in a spending agency before supporting additional expenditure.

5.4.1.2 The Departments of Finance and State Expenditure

Aside from the Cabinet, the central structures within the National Government are of course the Departments of Finance (DoF) and State Expenditure (DoSE). The former department is primarily responsible for identifying affordable fiscal aggregates within the Government's macro-economic strategy; initial estimates of revenue; and developing a Medium Term Expenditure Framework (MTEF). The DoSE is responsible for evaluating budget planning submissions by spending agencies, and negotiating with the latter about savings and resource allocations. It prepares recommended allocations for consideration Cabinet and its committees.

5.4.1.3 The MTEF Committee

The MTEF Committee is essentially a technical committee consisting of the Minister and Deputy Minister of Finance, and the DGs and officials of the DoF and DoSE. This committee reviews the recommendations of the DoSE, and submits its own recommendations to Cabinet. The accounting officer (until recently the DG) and financial manager of each spending agency is invited to attend when the departmental inputs and the recommendations of the Department of State Expenditure are considered.

5.4.1.4 Intra-Governmental Co-ordinating Structures

A new unit, the Coordination and Implementation Unit, is being established in the Office of the Deputy President. Although planning and policy development are the brief of line ministries, this unit will coordinate policy development and monitor implementation. It will complement the support role of the Cabinet Secretariat, by catalysing and facilitating inter-ministerial and inter-governmental coordination. It will also necessarily work closely with the Departments of Finance and State Expenditure, to ensure adequate linkages between policy and strategic planning, on one hand, and budgetary and financial planning on the other.

5.4.1.5 Inter-Governmental Co-ordinating Structures

There are a range of committees designed to facilitate coordination between the National Government and provincial governments. The Budget Council (Finance MINMEC) comprises the Minister and Deputy Minister of Finance, the 9 provincial MECs for Finance, DGs and heads of finance departments, and the FFC as an observer. It enables the exchange of information and coordination of legislation. The Council recommends to Cabinet the vertical and horizontal division of resources after taking into account national priorities and FFC proposals. The Technical Committee on Finance (TCF) supports the Budget Council in its work.

The Inter-Governmental Forum (IGF) consists of all national ministers and provincial premiers, with the President and Deputy-President ex officio. As noted in Chapters 2 and 3, it meets quarterly to promote inter-governmental consultation and decision making on important matters relating to inter-governmental cooperation and coordination, including financial matters.

5.4.1.6 Legislative Bodies

Turning to the legislative arm of government, the National Parliament includes both a Portfolio Committee on Finance in the National Assembly and a Select Standing Committee in the National Council of Provinces. Following the first reading of the budget in parliament, the Appropriation Bill (which gives departments the legal power to spend the allocations made to them), and any proposed changes in tax legislation are submitted to the Portfolio Committee on Finance for consideration. The Select Committee has tended to focus on fiscal issues at provincial and local government level.

Provincial legislatures also have standing committees on finance and on public accounts, which play an oversight role over provincial budgets. Since their election in 1994, provincial legislatures have been asked to approve provincial budgets, which were simply the totals of predetermined allocations of the now disbanded function committees. Approving the provincial budget was thus a mere formality, rather than an exercise in accountability. Since provinces will in future have greater discretion to allocate revenues including grants from national level, provincial legislatures will have more scope to articulate fiscal policy and to oversee the provincial executive, while also being more accountable to the electorate.

5.4.1.7 Other Bodies

A number of other bodies also play a role in the budgetary process. The FFC and the Auditor-General have been discussed in Section 5.3.1 above. Another body which plays a role is the NEDLAC, which provides a forum for dialogue and negotiation amongst government, business, labour and community organisations. Although NEDLAC constituencies have no capacity to veto or oversee budgetary allocations, these are presented to them for comment. This is an important step in the consensus-building process which as noted earlier is critical for allocative efficiency in budgeting.

5.4.2 Inter-Governmental Fiscal Relations

As noted earlier, the 1997/98 budget was the first budget prepared under the authority of the Interim Constitution, following the disbanding of the function committees after the 1996/97 cycle. The recommendations of the FFC on inter-governmental fiscal relations thus became an important element of the budgetary process, although such recoomendations currently only have the force of advice.

In seeking to give substance to inter-governmental fiscal relations, the FFC faces two major dilemmas. Firstly, there is a substantial mismatch between the revenues which provinces could potentially raise and their increased spending obligations under the Constitution, since almost all revenue is collected nationally. Secondly, there are significant disparities amongst provinces in terms of income and required public expenditure per capita. To overcome these imbalances, the FFC has proposed a system of inter-governmental grants. The pool of available revenue would be split between national and provincial spheres on the basis of assigned expenditure responsibilities. After this vertical split, the aggregate provincial allocation would be split horizontally among the nine provinces.

A formula has been devised by the FFC to implement the vertical and horizontal splits. This is intended to minimise subjective and undue political manipulation of the shares of available revenue for any particular year. The goals of the formula are to achieve effective and efficient resource allocation; fiscal equity in the provision of services and the raising of provincial taxes; and the development of fiscally sound and democratically responsive provincial governments. The FFC has argued that the formula should be applied for a three year period before being revised, to enable provinces to carry out effective medium term planning. The formula is linked mainly to population (with additional weight to rural populations to reflect differential poverty levels).

5.4.2.1 The Vertical Split

The vertical split between national and provincial governments takes account of the need to service the national debt, as well as adjustments to conditions of service (as agreed in the central bargaining chamber). These amounts are "top-sliced" from total revenue before the pool is split vertically. This split will be determined annually by the Budget Council, with due regard to the needs of provincial governments with respect to the delivery of services such as health, education and welfare. The FFC has proposed that the ratio should be shifted in favour of the provinces by 0.5% per annum over the course of the five year phasing-in period. It has also recommended that provinces should have the right to levy provincial taxes to supplement funding received from the National Government (including a proposed provincial surcharge on personal income tax).

5.4.2.2 The Horizontal Split

The horizontal split is based on the following provincial grants formula:

• A Basic Grant to enable provinces to establish and maintain the institutions necessary for the fulfilment of their constitutional obligations according to their own priorities. The basic grant is awarded to provinces on a weighted capitation basis (rural residents of a province are weighted 0.25% more than their urban counterparts).
• A Minimum National Standards Grant to enable the provinces specifically to provide primary and secondary education and primary and district health-care.
• A Spill-over Grant to provide for the financing of those services which have inter-provincial spill-over effects.
• A Fiscal Capacity Equalisation Grant to ensure that provincial functions are financed from an equitable provincial taxing capacity and to encourage accountability and democratic institutions associated with provincial legislatures.
• An Institutional Grant to provide funds for each province to finance the core of its legislature.

Infrastructural backlogs are to be addressed separately, through ad hoc grants from national government. For the 1997/98 fiscal year, provincial discretion over spending was increased as funds were transferred to provinces as lump sums. The 1997/98 provincial budgets reflect increased input of the provincial legislatures. Minimum standards legislation has not yet been enacted but, in future, national norms will be specified, and provinces will have discretion over spending above these norms.

Whereas the Interim Constitution and the 1997/98 budget process were concerned only with national/provincial revenue-sharing, the final Constitution requires that local government revenues also be allocated out of the national revenue pool. The Inter-Governmental Fiscal Relations Bill (IFR) addresses this issue. Once enacted, it will require the FFC to submit to the Minister of Finance, at least 10 months before the start of the financial year, recommendations regarding this three-way vertical split, the horizontal split amongst provinces, and ad hoc grants from national government to the other two levels. The Minister of Finance will make the decision after consulting the Budget Council, the FFC and the Local Government Budget Forum, on which the South African Local Government Association (SALGA) is represented. The IFR Bill also contains proposals for enhancing accountability for allocative efficiency in the division of revenue amongst spheres of government is to be enhanced. The Bill requires the Minister of Finance to table a Revenue Sharing Bill each year together with the Budget in the National Assembly. This revenue bill must spell out the revenue division that has been made, and justify it in terms of the constitutional requirements for equitable revenue shares, and the FFC’s recommendations.

5.4.3 The Budget Process

While the 1997/98 budget was prepared under the auspices of the Interim Constitution, the 1998/99 budget cycle is the first to reflect fully the impact of the new constitutional dispensation. As such it may be regarded as a precursor of the future system. A flow chart presented below details the sequence in which major decisions in the national and provincial budget processes are taken, and the associated time frames. The aim of the diagram is simply to provide an overview of the complex inter-governmental and inter-departmental interactions which result in national and provincial budgetary allocations. It will be evident from the diagram that budgeting has become more of a "bottom-up"" process in contrast to the previous regime’s centralised and "top-down"" approach.

Eight stages of the budget process can be identified. These are outlined briefly below. Several key features are worth emphasising. The first is the iterative nature of the process which involves at least five submissions to the national Cabinet or one of its committees, of increasingly more detailed and firmer allocations. This reflects extensive political involvement in the allocative process. The second point concerns the somewhat limited opportunities for popular consultation in order to assess needs and demand. Negotiation over allocation appears to take place almost exclusively within the executive arm of government, between politicians and officials in the national and provincial levels. Public documentation appears for the first time in Stage Six, in the form of the Medium Term Budget Policy Statement. Nonetheless, and thirdly, the fact that this document was indeed published (on 2 December 1997) represents a major advance in transparency for budgetary procedures in South Africa.

Stage One: The Fiscal Framework

Between January and March the medium-term fiscal framework is developed by the Department of Finance, using its macroeconomic model to project GDP over three years. The GEAR strategy provides targets for revenue and borrowing as shares of GDP, enabling the maximum expenditure figures to be calculated. Based on this scenario, the Cabinet sets objectives and broad priorities.

Stage Two: National and Provincial Spending Agencies Submit Three-Year Budget Inputs

Towards the end of May, national departments submit their three year budget submissions to the Department of State Expenditure. Budget submissions are approved by the appropriate Minister before submission. Such submissions are required to reflect two scenarios. The first is the costing from base zero of all ongoing and new activities. This includes an evaluation in terms of economy, efficiency and effectiveness. Spending agencies are now also required to describe line function activities in terms of measurable quantity indicators (such as accuracy, completeness, accessibility compliance with legal standards, timeliness, and the satisfaction of customer needs).

The second scenario assumes no expenditure growth in nominal terms for 1998/99, and maintains that level in real terms for the subsequent two years. The implications of this latter option are spelled out, indicating in particular activities to be scaled down. New activities are motivated in terms of the mission of the spending agency, and requests for capital funds submitted in consultation with the Department of Public Works.

From May to June the DoF and DoSE then evaluate inputs from line ministries and other spending agencies, in consultation with the agencies, and in the light of the indicative fiscal aggregates and national priorities set in Stage One. The central departments then consolidate the revised submissions into a draft national MTEF presented to Cabinet early in July.

Provincial line departments submit their budget planning inputs to their own treasuries, making use of provincial guidelines on planning and budgeting. The provincial treasuries evaluate the inputs and generate initial draft provincial MTEFs for the provincial Executive Councils (EXCOs). These are forwarded to the national DoF in mid-July.

Stage Three: Revenue Sharing

This stage overlaps Stage Two. In May the Budget Council recommends vertical and horizontal divisions of resources. After considering the recommendations of the FFC and the Budget Council, the Minister of Finance decides on the proportions in which nationally collected revenue is shared for the 1998/99 and the two subsequent fiscal years. First the total revenue pool is "top-sliced" (debt-servicing currently running at approximately R40 billion being the major component). Provision is also made for a contingency fund of R5 billion in 1998/99, increasing to R10 billion in 2000/01. This is available for allocation by Cabinet just before Budget Day, to allow for flexibility in altering the vertical split. After the top-slice the remaining revenue pool is split vertically (the current provincial-national split being in the ratio 53:46), and then divided horizontally between the provinces. These indicative allocations, once they are known, drive the MTEF budget input formulation process. But currently it remains unclear exactly how the Budget Council reaches its decisions.

Stage Four: Consolidating National and Provincial MTEFs

From July to September the national and provincial MTEFs are consolidated to produce an MTEF for the country as a whole. National spending agencies and provinces receive their indicative allocations. Programme officers of the DoSE then negotiate with the national spending agencies to cut their budget inputs in line with the indicative allocations. There do not appear as yet to be explicit and transparent criteria for suggesting these cuts. The MTEF Committee reconciles the revised submissions with the draft MTEF. As noted, the accounting officer (DG) and financial manager of the spending agency under review attend the MTEF Committee’s discussion of their budget inputs and DoSE recommendations.

In early September MinComBud signals priorities for approval by Cabinet in mid-September. MTEF sectoral work teams from national and provincial departments and treasuries develop expenditure models of the five major spending areas: defence, criminal justice system, education, health and welfare. These models provide an analysis of policy choices and formulate proposals for conditional grants. The MTEF Committee presents its recommendations to the Minister of Finance, MinComBud and the Budget Council. MinComBud reviews allocations for national and provincial departments and the Cabinet approves the draft national MTEF in October or November.

Stage Five: Budget Council Recommendations on Revenue Sharing Adjustments

The draft consolidated MTEF is submitted to the Budget Council, which recommends allocations to national departments and provinces to the Extended Cabinet (which combines national Cabinet members and provincial premiers).

Stage Six: Extended Cabinet Discussion of Final Indicative Allocations

The final indicative allocations for all spending agencies are approved by the extended Cabinet in November. A menu of options will be discussed in determining the trade-offs required to close the gap in balancing the budget within available resources. The draft national MTEF is published for parliamentary and public debate.

Stage Seven: Finalising National and Provincial MTEFs

National spending agencies and provinces receive their final allocations and adjust their budgets accordingly. The MTEFs of the spheres of government are finalised, considered by the Budget Council, and given final approval by the Cabinet in February.

Stage Eight: Compiling Budget Documents and Tabling National and Provincial Budgets

Final documents are submitted to the Department of State Expenditure by national departments (mid-January) and provinces (mid-February). The Minister of Finance makes his Budget Speech in mid-March, and tables the Printed Estimates of Expenditure (known as the "White Book"). Provincial budgets are tabled in the nine provincial legislatures by the MECs for Finance shortly thereafter.

5.4.4 Other Measures

A number of pieces of legislation have been placed before Parliament, or are due to be shortly. Once enacted, they will have a significant impact on budgetary processes. These include:

• The Financial and Fiscal Commission Bill, which establishes the FFC as an independent, impartial consultative body;
• The Public Finance Control Bill, which is expected to establish a national treasury with uniform norms and standards; to restructure budget formats especially for capital budgets; to re-examine the roles of accounting officers, MECs for Finance and provincial treasuries; and to examine sanctions on unauthorised expenditure;
• The Provincial and Municipal Taxation Bill;
• The Municipal Borrowing Powers Bill;
• The Money Bills Amendment Procedure Bill, which will enable Parliament to amend money bills, including the budget, which it previously could only accept or reject (Parliament will not be allowed to alter tax rates, and will only be able to suggest revisions of the allocation within a particular vote, rather than across votes).

A draft Budget Reform White Paper is also expected to be completed very soon. This will address central objectives including fiscal discipline, strategic prioritisation across programmes and projects, efficiency in the use of resources and the translation of policy into delivery. Themes underpinning the White Paper are likely to include decentralisation, incentives and accountability, transparency and the contestability of fiscal structures and processes.

5.5 ISSUES AND CHALLENGES FOR FURTHER REFORM

The previous section reflects the substantial progress already made in South Africa towards budgetary and financial reform, and indicates that further legislative and policy changes are in the pipe-line to build upon and consolidate the achievements that have been made. Whilst the Commission acknowledges and applauds such progress, its investigations have revealed a number of outstanding issues and challenges that still need to be addressed. These relate in particular to:

• The nature, costing and accountability of the budgeting system;
• Unfunded mandates;
• Structures and processes;
• Financial management and administration;
• Procurement policy;
• The Role of Information Management, Systems and Technology (IMST);
• Human resources development and capacity building;

These related issues and challenges will be described and discussed in the present section. Recommendations for addressing them will be made in the next section of the report.

5.5.1 The Nature of the Budgeting System

5.5.1.1 Programme Budgeting and Output-Based Performance

The budgeting system historically used in South Africa has been incremental budgeting. As the name suggests, the focus here is on allocating additional revenues which become available, with little examination of existing spending, in regard to either allocative or technical efficiency. The implicit presumption is that existing activities are optimal. Reforms to date have not fundamentally affected the budgeting system, which remains essentially an incremental one.

At the opposite extreme to incremental budgeting is zero-based budgeting, a system where each item of expenditure is newly justified each year. In other words, each year, all programmes must be shown still to be relevant to government priorities, and to be effective and efficient. Whereas incremental budgeting overemphasises continuity, zero-based budgeting underemphasises it, assuming constant flux throughout government. In addition, the process of zero-based budgeting is very costly in terms of staff time.

As mentioned in the previous section, the 1998/99 budget will be based on a combination of incremental and zero-based scenarios. Combining as it does the defects as well as advantages of the two systems, this approach is likely to be problematic. There is, however, another approach which, in the view of the Commission, would be preferable to either incremental or zero-based budgeting (or the current combined scenario), and would add-value to the new MTEF approach to budgeting outlined in the previous section. This is performance-based programme budgeting (PBPB), variations of which are becoming increasingly popular in many of the countries studied by the Commission.

As goals and priorities change over time, programmes can be expanded or phased out, and new programmes introduced. A systematic approach to this aspect is the A-B-X budget. This divides spending allocations into three categories. The "A-base is the base spending, the cost estimate of existing programmes. This includes cost escalations external to the programme itself, such as inflation and improved conditions of service for public sector employees. The second category, the "B-base," is the sum of proposed new spending initiatives, either the expansion of existing programmes or new programmes. Included here are cost increases internal to the programme, such as higher minimum standards or extended coverage within the population. The last category is the "X-base," the sum of proposed spending reductions resulting from programme phase-downs and cancellations, and from increased efficiencies, for example resulting from programme re-design.

Naturally, a balance will need to be found in practice between encouraging departments to achieve marginal efficiency gains which can be reallocated within their mandate (otherwise the incentive to improve efficiency will be lost) and the principle of reallocation across government as a whole. Generally, only economy and efficiency measures that are substantial in size and political impact will find their way into the expenditure reduction component of the draft budget. Departments should retain any residual efficiency savings they to address specific priorities, as an incentive to further economize.

In recommending the move towards a PBPB system, the Commision is aware that programme budgeting is not a novel or unproblematic concept. Probably the most ambitious attempt at implementing it was the Program Planning and Budgeting Systems initiative in the USA in 1965. However, until recent reform experiences, programme budgeting largely failed to deliver the goods. The principle reason for failure was that the preconditions for success (such as clear objectives, a high level of political support, support from the bureaucracy, and the effective integration of planning and budgeting) were simply not put in place. Such preconditions will clearly need to be established if an effective PBPB system is to be introduced.

5.5.1.2 Costing and Accounting Systems

To enable a greater focus on output data, an accounting system needs to be developed that organises financial data by programme activity, so that all input costs associated with a particular programme can be summed. It is also essential to develop output measures that specify the level or quantity of service associated with existing programmes, which can then be used for reporting and evaluation purposes.

There are two main methods of costing for financial planning. Resource-based costing is commonly used in the current system of financial planning in the South African Government sector. All personnel, equipment, buildings and facilities that are currently at the disposal of the department are budgeted for in cost projections, whether they are actually needed for current service delivery or not. Furthermore, expenses are categorised in such a way that it is not automatically obvious how much different services cost. All administration costs are lumped together. So too are a vast number of support services. Economic costing or pricing of the various services is thus impossible.

The are also two main methods of accounting -- cash accounting and accrual accounting.

In South Africa, the general government uses cash accounting. This system of financial accounting recognises only cash inflows and cash outflows. Within this system there are cash books but no balance sheets because there are no assets or liabilities in the books other than cash balances. Sales are only recognised when cash is received (so there are no debtors); purchases are only recognised when cash is paid (so there are no creditors). There are no stock adjustments because the accounts are not concerned with registering usage, only with the fact that cash has been paid for purchases (so there is no closing stock figure). There are no fixed assets, for the same reason. Cash accounting systems have a number of major disadvantages. In particular they provide little or no incentive for the managers to monitor asset utilisation, maintenance, option appraisal or opportunity cost analysis.

Because of this many countries have moved or are moving towards systems of accrual accounting. These recognise revenue and expenses as they are earned and incurred, not as money is received or paid. Operationally, this means that revenue is taken to mean that invoices have been issued; costs are incurred when services are received. Revenue and costs are therefore recognised one step earlier than under cash accounting. The most important advantage of accrual accounting technique is that it encourages sound resource utilisation, by forcing managers to be concerned with the efficient utilisation of public assets.

Another advantage of accrual accounting is that it generate more comprehensive financial and performance management information. The information provided by the cash accounting method is incomplete, since it does not report the value of stocks of non-cash assets, liabilities (which may involve cash flows in future periods) or the cost of providing the service (important for assessing efficiency). In cash accounting capital expenditure (i.e. for an asset that lasts for more than one year) is recorded as an operating cost in the year in which the asset is acquired or built. In accrual accounting the cost is spread over the useful life of the asset as an annual depreciation charge. This facilitates true costing of outputs and performance measurement.

The skills complement required to implement an accrual system is substantial. The potential benefits will therefore need to be weighed up against the costs associated with implementing this form accounting system, before making a choice of which system is most appropriate.

5.5.1.3 Managerial Responsibility and Accountability

The continued predominance of incremental budgeting, as well as the ambivalent engagement with the MTEF in its first year of application, suggest that the orientation towards programmes and outcomes-based performance measures is still very limited within the line departments. This also reflects limited progress in decentralising managerial authority over inputs and service delivery. What is needed here are more powerful incentives to line managers to exercise responsibility and ensure accountability for outputs and outcomes (in line with national priorities, norms and standards), matched by increased flexibility in regulations governing the employment of staff and the procurement of inputs.

5.5.1.4 Broadening Participation in the Budgeting Process

The transparent disclosure of public spending and service delivery is a powerful overall control mechanism in the new system of budgeting proposed by the Commission, particularly in ensuring the accountability of the operational aspects of the budget. As noted in Section 5.4.3 above, while recent reforms in the budget process have resulted in a more transparent and "bottom-up" approach, opportunities for popular consultation and participation still remain quite limited. Up to stage six in the process, when the Medium Term Budget Policy Statement is published by the Minister of Finance in December, negotiations over allocations appear to take place almost exclusively within the executive arm of government, between politicians and officials at the national and provincial levels. This affords little time for effective consultation and involvement by civil society groups before the MTEF is finalised by the extended Cabinet in January.

5.5.1.5 Monitoring, Evaluation and Review

Effective mechanisms for monitoring, evaluation and review will are vital in the budgeting and financial management processes, particularly in enabling government to identify and introduce new ways of reallocating resources towards the priorities it has established, as well as improving the efficiency and effectiveness of existing programmes of service delivery. This will especially be the case if the Government moves towards the kind of performance budgeting system advocated in this report. Regular programme review is central to the concept of performance budgeting, in which quantifiable measures and indicators are used to assess the efficiency and effectiveness of programme outputs and outcomes.

Such improved systems will need to operate in an integrated and coordinated fashion at three main levels:

• The operational or departmental level, to enable departments to track and evaluate programme outputs and outcomes and to feed this information into an effective and on-going process of strategic planning, budgeting and review.
• The strategic management level within national and provincial governments -- to facilitate the monitoring and review of the broader impact of government programmes as a whole; to evaluate the extent to which individual departments have established effective systems of operational review; to assist departments in doing so where this is not the case; and to ensure effective coordination in the monitoring and review processes (essential given the inter-departmental implications of many service delivery programmes).
• The political level -- to enable ministers, MECs, the Cabinet, EXCOs, the National Parliament and provincial legislatures to play a more proactive role in the monitoring and review processes.

In devising and implementing such systems, the Commission believes that it will be particularly important:

• To ensure effective linkages with other public service monitoring and review structures (particularly those proposed in Chapters 2 and 3 of this report);
• To ensure the involvement and participation of service users and civil society organisations in the above processes, especially though not exclusively at the operational level;
• To upgrade existing information systems, particularly IT systems, to increase the accessibility and reliability of information, as well as to improve communication between and within departments, and between different spheres of government;
• To upgrade the skills and capacity of staff.

The issues of IT and staff development will be explored in greater detail later in this section.

5.5.2 Unfunded Mandates

Unfunded mandates are new or additional spending obligations arising from policy decisions when the source of funding for the additional cost has not been made explicit. There are three main types of unfunded mandates:

• The adoption of enhanced norms and standards to provide more equitable and accessible delivery of basic services, without having identified the cost implications or new funding sources;
• The transfer of programme responsibilities from national to provincial governments without an associated transfer of fiscal resources;
• The assumption of new input costs, for example improved conditions of service, without having identified new sources of funding.

The issue of unfunded mandates is particularly important in relation to policy documents such as White Papers. When White Papers propose specific programmes and policies, the fiscal implications should be made explicit in the document itself. A White Paper that sets out new programmes but excludes costs is tantamount to an unfunded mandate, by reason of the public expectations it arouses. As such, the cost implications should be treated as any other new initiative, as the policy proposal moves through the process of approval by Cabinet. Very often in the past, this has not been the case.

The A-B-X budgeting system provides a particularly simple approach to dealing with unfunded mandates. Where costs associated with new mandates have been explicitly identified and approved by the national cabinet or provincial EXCO, that is, where new mandates are funded, their costs should be included in the "A-budget." It would be unusual however for new mandates to be funded outside of the annual budgetary process, since this would imply that new funding sources had become available, or that spending limits were not being respected. Self-evidently, when new mandates are unfunded, their costs should be included in the "B-budget," since they are in effect new programmes or expansion of existing ones. When the unfunded mandate relates to a shift in the division of delivery obligations between national and provincial governments, the vertical split of the revenue pool should clearly be adjusted accordingly.

5.5.3 Structures and Processes

The budget process described in Section 5.4 above reflects political and especially Cabinet involvement at important points in the cycle, particularly in relation to the approval of the macroeconomic projections and fiscal aggregates, of the indicative allocations to spending agencies, and of the MTEF in both initial draft and final form. However, much of the focus of collective ministerial involvement in budgetary allocations appears to be driven more by technical rather than political considerations, and to be concerned with the division of the overall aggregates between spheres of government and rather less with their allocation within such spheres. This is illustrated by the fact that the review of expenditure estimates of national spending agencies is undertaken at Cabinet level by the MTEF Committee, which is largely a technical committee drawn from the Ministry of Finance and its two associated departments, Finance and State Expenditure. The MTEF Committee appears to interact and negotiate with the managers of line departments, rather than their political heads. Furthermore, ministerial review of national departmental estimates does not appear to happen across portfolios or through a collective Cabinet process.

In the opinion of the Commission, this gap may weaken the achievement of allocative efficiency in the budget, since consensus within Cabinet on trade-offs will be weakened. Allocative efficiency, to repeat, is primarily a political process, rather than a managerial or financial one. The lack of ministerial involvement in this step of the budgetary process may be linked to the absence from the Cabinet of a formal sub-committee responsible for strategic planning and priority setting. The standing cabinet subcommittees -- on investment, social administration and security and intelligence -- develop strategy within their mandated areas, but are not well suited for the task of developing a holistic perspective.

One illustration of this, as Chapter 3 shows, is the experience with "rightsizing." Although originally located by the WPTPS within a broad strategic and developmental perspective aimed at achieving a more optimal allocation of human and other resources within and between departments and spheres of government, right-sizing has increasingly been situated within a fairly narrow budget-driven perspective. As a result, and as the Minister for the Public Service has acknowledged, right-sizing has largely failed to meet its original objectives and has resulted in a number of unintended adverse consequences for service delivery, staff morale, and the transformation process more generally.

This committee would be chaired by the Minister of Finance, and its decisions would take the form of recommendations to full Cabinet. The key functions of this new committee would be to review departmental priorities and budget estimates; proposals for new programme/service expenditure and for programme/service reductions or savings; and proposed amendments to the budget during the fiscal year. Similar finance committees should be established in the provinces. These would be chaired by the MEC for Finance and would report to the provincial EXCO.

The need for more emphasis on an integrated approach to strategic planning within the national cabinet (as well as provincial EXCOs), and closer alignment and coordination with finance, is paralleled at the level of the technical bodies charged with the responsibility for supporting cabinet and the finance ministries. The Cabinet Secretariat and the new Coordination and Implementation Unit need to put more emphasis on strategic planning and prioritisation across departments. Together with officials from Finance and State Expenditure, they also need to work more closely to ensure greater harmony between the planning and budgeting processes. This could be initiated, for example, through the establishment of a Technical Planning Committee to support the Cabinet Finance Committee proposed above.

Whilst the institutions charged with responsibility for promoting effective inter-governmental relations in the budgetary and financial fields (such as the FFC, the Budget Council, the Inter-Governmental Forum, and the associated technical support committees) have achieved significant success, scope for further improvement continues to exist, especially in relation to the coordination of sectoral programmes with national and provincial budgets. Problems and challenges facing inter-governmental relations are discussed in greater detail in Chapters 2 and 3, together with recommendations for overcoming them.

Parliament is the ultimate custodian of the public purse, exercising influence over both resource allocation and monitoring. The annual enactment of the budget, via the associated appropriation bill, enables the legislature to exercise control and judgement over public resource allocation. Parliament is also a central conduit for public participation in policy making. This indirect role of the legislature is critical for deepening democracy. However this de jure power is not sufficient to provide a meaningful role for the legislature. Under apartheid, for example, Parliament was reduced to a mere rubber stamp for the executive.

Given the recently increased powers of provincial legislatures with respect to budgetary control and oversight (referred to earlier in this section), the same two issues will need to be addressed at the provincial level.

5.5.4 Financial Management and Administration

It is well-known that there are serious problems with systems of financial management in the public sector in South Africa, particularly though by no means exclusively in the provinces. Such problems have been the subject of official reports (most notably by the Auditor-General and the DPSA's Provincial Task Teams), as well as frequent and sometimes sensational newspaper accounts. The persistence of serious shortcomings in financial management and administration can be attributed, inter alia, to:

• The lack of reliable and up-to-date information and computerised management information systems, as well as human resources capacity (see later in this section);
• The lack as yet of an effective ethos of probity within the public service;
• The lack of effective monitoring, control and disciplinary procedures to identify waste and corruption, and to deal promptly (as well as fairly) with offenders when identified;
• The disappearance of large amounts of financial and personnel records during the transition period;
• The lack of complete information regarding state assets, rendering effective asset management a serious problem, especially in relation to the running of government garages and the management of government vehicles.
• The lack of clarity surrounding the respective roles and responsibilities of Ministers/MECs and senior officials in relation to budget decision-making and control.

Without under-estimating the seriousness of such problems, it should nevertheless be borne in mind that many of these problems were inherited from the previous regime. Moreover, it should also be recognised that the substantial time and effort invested since 1994 in creating the new system of governance in South Africa has undoubtedly narrowed the time available for rectifying deficiencies in financial administration, and in the development and training of financial management resources.

In addressing these problems and challenges, the most urgent task is to establish functioning processes for financial and payroll control, cash management, and asset and liability management. But this creates a dilemma for the budgetary reform process. On the one hand, this task could be most effectively be accomplished in the short term by improving the capacity of existing systems, and by centralising their operation as far as is feasible. On the other hand, a move towards a programme and performance-based system of budgeting and financial management, as advocated in this report, requires increased decentralisation of systems, including financial management, as well as a complex and time-consuming shift to different systems, such as accrual rather than cash accounting. Paradoxically therefore, restoring the health of the system in the short-term may well create disincentives and institutional obstacles to longer-run transformation.

In addition to restoring the functionality of financial management systems, it is essential that they be complemented by performance management processes, to enable programme review and evaluation on the basis of outputs. Financial management should itself be re-oriented to focus on output-linked expenditures, rather than simply controlling inputs, so that budgeting based on programme outputs can be effectively monitored. An important part of this process will be the production of financial and performance reports (as a critical ingredient of transparency), more timeously, more frequently and in a more accessible form than currently is the case.

5.5.5 Procurement

Procurement policy is a controversial and much debated area in the South African public service. Tender regulations and Tender Board procedures are regarded as problematic by a large number of national and provincial departments, judging from their presentations before the PRC. Departments often see the procedures as too bureaucratic and not transparent enough. In many cases, delegation limits are perceived to be set too low to be appropriate. Unnecessary delays occur as even very small purchases are referred to provincial Tender Boards. Protracted tender procedures are one of the main explanations given by departments for the frequent delays in service delivery, especially in infrastructure departments.

The Green Paper on Procurement Policy now being assessed and debated focuses on two main aspects of procurement reform. One relates to socio-economic objectives including simplification, the elimination of corruption and the creation of an enabling environment for small, medium and micro enterprises (SMMEs). The other aspect is good governance, including procurement practices and auditing to ensure good and sound financial control. The reforms proposed in the Green Paper appear to be well in line with the general principles of efficient financial management -- decentralized management authority, based on a comprehensive legal framework (including rules for documentation), and a control and monitoring system to ensure that agencies comply with national legislation. Similar institutional arrangements have worked well in other countries. The recommendations in the Green Paper are also broadly in line with those in the special study on procurement commissioned by the PRC.

5.5.6 The Role of IMST in Budgeting and Financial Management

As Chapter 6 shows in more detail, it is anticipated that Information Management, Systems and Technology (IMST) will play an increasingly important role in public service performance and delivery, including the performance of budgeting and financial systems. Currently, however, the contribution of IMST, though growing in importance, is constrained by a number of factors, including:

• The absence of an overall IMST strategy and implementation plan for the public sector;
• The widespread use of incompatible platforms, networks and applications;
• The lack of a coordinated approach to the use of IMST;
• Information is not shared or re-used in any organised manner;
• Unnecessary duplication of functions and systems between line departments and provinces;
• The low level of investment in IT training, especially for Black people and women;
• The lack of executive and senior manager awareness;
• Problems in procurement.

More specifically, there are particular problems with the main legacy systems used for financial and personnel planning and management. All national departments and most provinces (Mpumalanga and the North West are the exceptions) utilise the Financial Management System (FMS) as their main financial information system, despite the fact that it is generally regarded to be out-dated and inadequate for the new types of budgetary and financial management proposed in this report. Another set of problems has been documented in the management and control of expenditures on personnel. All departments are reported to be using the PERSAL system, although not all are reported to trust the data in it. The difficulties appear to arise from amalgamating data, keeping it up to date, locating records, and establishing effective controls. Chapter 6 of this report proposes a range of recommendations for addressing these and other problems related to IMST.

5.5.7 Capacity Building for Budgeting and Financial Management

A recurrent theme throughout this chapter, as well as the report as a whole, is the need for a major investment in public service training, staff development and capacity building as an indispensable precondition for the success of the public service reform process in general, and the reform of budgetary and financial management systems in particular. Current problems and challenges relating to human resources development are discussed in greater detail elsewhere in this report (especially in Chapter 4), together with proposed strategies for addressing them. Many of these problems and recommendations apply equally to the areas of budgeting and financial management. But there are also a number of specific points that need to be raised in this context.

The first is the fact that the shortage of and trained qualified staff in the financial field is particularly acute. This is attributable in the main to the general shortage of such skills in South Africa as a whole, competition from the private sector, problems in post classification which are frequently too low to attract and retain the most qualified people, and the large loss of experienced staff that has resulted from the granting of voluntary severance packages. The second and related issue is that the lack of financial and related skills (in economics and planning for example) is particularly pronounced amongst Black people and women, with obvious implications for strategies for improving representivity in such areas.

The third issue concerns the question of the current versus future purpose of human resources development. Should staff be recruited and trained to operate existing systems more effectively (involving skills in procedure and control), or should the focus be on preparing staff for the new performance and results-oriented approaches to budgeting and financial management advocated in this report (involving skills which are more creative and analytical)? There is no easy answer to this question, but one obvious implication is that current systems of human resources planning (the limitations of which are detailed in Chapter 4) will need to be dramatically improved if they are to cater effectively for both current and future needs. Catering for future needs will involve, inter alia:

• Anticipating and devising the budgetary, financial and associated competencies required at different levels;
• Conducting a comprehensive of current competencies;
• Working with SAMDI, tertiary institutions, professional councils and other education and training providers to design appropriate forms of training and staff development that can effectively address the gap between current and required competencies.

5.6 OBSERVATIONS AND RECOMMENDATIONS FOR FURTHER REFORM

This chapter of the Commission's report calls for a new approach to budgeting and finance that is mission-driven and capable of linking purpose, resources and results to promote a more effective system of service delivery that combines quality with value for money. Such an approach should encourage long-term thinking and help political leaders and senior managers to make better choices and set effective but realistic priorities. It should also help to remove needless constraints on managers' use of resources, to encourage innovation and provide positive incentives to manage effectively, to cut wasteful spending, and to convert accountability for spending money to accountability for achieving results.

The Commission welcomes and endorses the progress that has already been made in this direction, particularly through the MTEF framework, but recognises that there is still some way to go and a variety of obstacles to overcome in the process. This section offers a number of recommendations that the Commission feels could help to move the process forward. These flow from the issues raised in the previous section, and are also based on our study of international best practice.

5.6.1 Programme Budgeting and Output-Based Performance

The Commission recommends:

• That plans for a Performance Based Programme Budgeting (PBPB) system be prepared for discussion and approval by the extended Cabinet. Support from the extended Cabinet should signal political commitment at the highest level for the introduction of this new budgetary approach.
• That this PBPB system be based along the A-B-X lines outlined earlier in this chapter, whereby:
  • the A-budget reflects the costs of continuing existing programmes and services;
  • the B-budget reflects the costs of new programmes;
  • the X-budget reflects the cost savings to be achieved through efficiencies and through discontinuing or redesigning programmes that do not meet government priorities.
• That after adopting the PBPB system, the extended Cabinet should approve a specific phased plan of transition to the new system and communicate it to all departments/ agencies within government. The timing and sequencing of the phased implementation is crucial since it would determine the critical resource needs (human and financial) and skills to ensure successful implementation.
• That the extended Cabinet consider the formation of an implementation task team headed by the Minister of Finance, and composed of senior officials drawn from the DoF, the DoSE, the DPSA, provincial heads of finance, outside experts with competencies in financial management, and other relevant stakeholders. This task team would be responsible, inter alia, for:
  • Project managing the entire transition from the current to the proposed PBPB budgeting system;
  • Identifying potential risks associated with each step prior to implementation and taking adequate precautionary measures;
  • Ensuring that the necessary human resource capacity (with special emphasis on financial planning and management skills) is developed before a new phase is initiated.
  • Developing written guidelines and instructions to outline and explain the main components of the A-B-X system;
  • Providing a common set of assumptions and methodologies for developing consistent A-base costs and B- and X-budget options.

5.6.2 Costing and Accounting Systems (to support the new approaches to budgeting and financial management)

The Commission recommends:

• That, to facilitate the implementation of the PBPB approach to budgeting, a system of activity-based costing be devised and introduced throughout the public service. Such a system will be designed to ensure:
  • that all the input costs associated with a particular programme can be identified (through apportioning where appropriate) and summed;
  • that the analysis of estimated future costs of such inputs is used effectively to forecast future programme costs;
  • that the MTEF based on the new approach to PBPB reflects the true cost of service delivery.
• That the design of this new costing system be included in the terms of reference of the implementation task team proposed above.
• That current computerised systems are modified and up-dated to provide the necessary information required by activity-based costing.
• That appropriate guidance, support and training is provided to ensure that success of this new costing system.
• That serious consideration be given to the phased introduction of an accrual accounting system. Given the magnitude of the task involved, the relative costs and benefits of moving towards such a system would need to be researched and evaluated in detail, possibly by the implementation task team mentioned above or perhaps more appropriately by a special team set up for this particular purpose.

5.6.3 Managerial Responsibility and Accountability

The Commission recommends:

• That the current move towards performance-related contracts for heads of department be expedited to provide the necessary incentive for them to exercise effectively and accountably the responsibility that has been decentralised to them by recent policy and legislation (notably the 1997 Public Service Laws Amendment Act).
• That the process of formulating clear and appropriate performance measures and indicators also be expedited as a matter of urgency;
• That effective monitoring and review processes be put in place to evaluate the workings of the new system of decentralised management (see below for more details).
• ·That other issues central to the successful decentralisation of managerial responsibility be addressed, through enabling legislation where necessary. Such issues include, inter alia:
  • Arrangements regarding the Central Bargaining Chamber
  • Centralised staff recruitment and retrenchment procedures
  • Centralised procurement
• That, in order to ensure that effective, timeous and responsible decision-making takes place at all levels within the public service, a similar process of decentralisation be encouraged and expedited to individual cost centres within departments, again tied to the achievement of specific performance objectives.
• That appropriate levels of support and guidance be provided to managers to enable them to exercise these decentralised powers efficiently and effectively.

5.6.4 Broadening Participation in the Budgeting Process

The Commission recommends:

• That more effective structured opportunities be created for popular debate and involvement in the budget process, especially in the earlier priority setting stages.
• That more time be structured into the budget process to allow for public hearings by the relevant national and provincial financial committees.
• That budgetary information should be provided in a more accessible, timely and user-friendly form.

5.6.5 Monitoring, Evaluation and Review

The Commission recommends:

• That the National Government and each provincial government should establish a Programme Review Unit, most probably within the Finance or State Expenditure Departments. Such a unit will help to create a coordinated framework for conducting programme reviews and administrative efficiency reviews.
• That such units, together with departments and central planning units, should establish a timetable for the review of programmes and administrative efficiencies on a regular basis.
• That each programme review unit should focus on developing a core team of skilled staff and external expertise to supplement and guide specific programme review teams.
• That co-ordinating machinery be put into place to ensure that these units liaise effectively with other monitoring and evaluation structures outlined or recommended in Chapters 2 and 3 of this report.
• · That each department or agency be required to produce an annual report that would include, inter alia:
  • An account of service delivery over the year with an associated cost analysis
  • A description of key operational changes that the department intends implementing in the light of the current year’s service delivery performance
  • An assessment of how the service delivery outputs produced by the department contributes to achieving its sectoral outcomes
  • An assessment of how the department’s service delivery outputs contributes to overall government goals (i.e. a cross-sectoral analysis of how a department’s service delivery outputs are likely to impact on outcomes in other sectors).
• That the Department of Finance in its annual report should, in addition to the above, also include:
  • An account of the unfolding of the PBPB system relative to the phased plan approved by Cabinet;
  • A report on measures adopted with regard to increasing legislature involvement and civil society participation, as well as an assessment of their success;
  • A evaluation of the operational efficiency of cross-sectoral coordination within government;
  • An evaluation of progress in relation to fiscal discipline, allocative efficiency and technical efficiency across government.
• That, as the Auditor-General’s traditional role as the watch-dog of procedural financial control will be diminished under the new budgetary system, the role of the AG be re-focused on the performance evaluation of all key service delivery departments at national and provincial level.

5.6.6 Unfunded Mandates

The Commission recommends:

• That, when new norms, standards, programmes or policies that have cost implications for one or more spheres of government are adopted outside the normal annual budgeting process, the financial implications should be presented to Cabinet/EXCO as part of the decision-making process before final approval is given. In this case, these costs should be included in the A-budget (the base budget) during the normal budget process.
• That, if specific new norms, standards, programmes or policies have not received Cabinet/EXCO approval for funding by the time the budget process is under way, these costs should be included in the B-budget, for explicit consideration by Cabinet/EXCO.
• That, when a national decision or policy imposes costs on provinces, the National Government should make provision for those costs in its budget, or in the vertical split of nationally collected revenues. If the National Government’s position is that the costs should be borne by the provinces, it should seek provincial EXCO concurrence in respect of such costs before giving final approval for the policy.
• That, when considering White Papers, Cabinet should follow the same approval process as any policy decision outside the normal annual budgeting process, including explicit consideration of the fiscal implications.

5.6.7 Structures and Processes

The Commission recommends:

• That a Finance Committee be established as a sub-committee of Cabinet to promote the effective integration of the strategic planning and budgetary processes, and ensure effective political oversight of them. This committee would be chaired by the Minister of Finance, and its decisions would take the form of recommendations to full Cabinet. Key functions of this new committee would include:
  • review of departmental priorities;
  • review of departmental budget estimates;
  • review of proposals for new programme/service expenditure and for programme/service reductions or savings;
  • review of proposed amendments to the budget during the fiscal year.
• That similar finance committees be established in the provinces. These would be chaired by the MEC for Finance and would report to the provincial EXCO.
• That appropriate technical planning committees be established to support the work of these finance committees at both the national and provincial levels.
• That these technical committees work closely with the Cabinet Secretariat, the new Coordination and Implementation Unit, and officials from Finance and State Expenditure, to ensure greater harmony between the planning and budgeting processes.
• That Ministers and MECs, both individually and collectively, should play a more proactive role in the budget process.
• That the anticipated Treasury Control Act should clarify more clearly than at the present the respective roles and responsibilities of Ministers/MECs and senior officials with respect to budgetary decision-making, control and accountability.
• That reforms take place in the structures of inter-governmental relations, in line with recommendations contained in Chapters 2 and 3 of this report, to facilitate the more effective reconciliation and harmonisation of national and provincial priorities, and the coordination of sectoral programmes with national and provincial budgets.
• That the important role of the National Parliament and provincial legislatures in the budget process should be enhanced, inter alia, by:
  • Modifying the timing of the budget cycle to allow a minimum of four months for Parliament to evaluate the budget and forward estimates, to consider and propose possible alterations, and to conduct effective public hearings;
  • Revising the format of the "White Book" of budget estimates to furnish MPs/MPLs with as much relevant information in as accessible a manner as possible;
  • Enabling Parliament to alter appropriations across votes within the overall aggregate budget constraint (in line with the general thrust of the Amendments to Money Bills Procedure Bill);
• Instituting effective capacity building programmes for parliamentarians and their support staff, especially in the areas of financial control and accountability.

5.6.8 Financial Management and Administration

The Commission recommends:

• That priority should be given in the short to medium term to reforming the fundamentals of finance administration -- namely:
  • systems for financial and payroll controls, that are required to ensure not only budgetary control, but also the probity and honesty of individual transactions;
  • cash management, relating to financial flows;
  • asset and liability management -- having to do with complete and accurate records of assets and liabilities, and with honesty and probity in the use and disposition of such assets; and in the processes for managing liabilities.
• That more radical reforms of the accounting system (in particular the replacement of cash accounting by the more preferable accrual accounting system) should be deferred until these fundamentals of financial administration are in place.
• More specifically, that a series of task teams be established to work with departments and provinces in developing and strengthening their capacity in the above areas. These task teams should be mandated:
  • To assess the effectiveness of current systems, processes and capacities;
  • To identify specific changes, training and other support required;
  • To provide appropriate "on-the-ground" training to key staff on new systems or processes, or on existing processes that are not currently fully utilized;
  • To provide opportunities on the task teams for "interns" from departments and provinces who would gain valuable experience by working alongside more experienced practitioners;
  • To develop, in conjunction with departmental and provincial staff, a written financial reference guide that provides a detailed step-by-step description of standard processes as a further aid to staff training, development and awareness.

5.6.9 Procurement

The Commission recommends:

• That, in implementing the decentralised system of procurement proposed in the Green Paper on Procurement Policy (which the Commission endorses), a phased and gradual approach be adopted. This may well entail the retention of the Tender Boards whilst capacity to operate the new system is developed.
• That appropriate guidance and support is provided to departments/provinces to assist them in balancing the needs for cost-effectiveness in procurement with the broader socio-economic aims related to the development of SMMEs.

5.6.10 The Role of IMST in Budgeting and Financial Management

The Commission recommends:

• That a major development and upgrading of IMST takes place, in line with recommendations in Chapter 6 of this report, to assist the processes of reform and performance in the public service in general, and in the areas of budgeting and financial management in particular.
• More specifically, that FMS and PERSAL be supplemented by a system of financial management and monitoring designed to generate regular reports on service delivery and associated expenditure. The focus of such reports should be on areas such as expenditure patterns, service delivery and performance measures and indicators.

5.6.11 Human Resources Development and Capacity Building

The Commission recommends:

• That a major investment in HRD takes place in line with the recommendations in Chapter 4 of this report, and within the new framework recently laid down by the White Paper on Public Service Training and Education. This will be vital to ensure that the necessary skills and capacity are built for the new systems of budgeting and financial management proposed above.
• With regard more specifically to budgeting and finance, that special attention needs to focus on issues such as :
  • The recruitment and retention of capable staff;
  • Changes in the post classification and salary structures to ensure that competitive salaries are paid for those staff whose skills are in scarce supply;
  • The recruitment, training and fast-tracking of officials from previously under-represented groups;
  • Anticipating and devising the budgetary, financial and associated competencies required at different levels for the new systems and approaches proposed in this chapter;
  • Conducting a comprehensive audit of current competencies;
  • Training and capacity building for MPs/MPLs and their support staff to strengthen legislative oversight over budgetary and financial matters.

Contents Chapter1 Chapter 2 Chapter 3 Chapter 4
Chapter 5 Chapter 6 Chapter 7 Appendicies