Public Sector Financial Management
PFB105
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Prescribed Reading
The prescribed textbook for Public Sector Financial Management I (PFB105) is:
•
Pauw, J.C., Van der Linde, G.J.A., Fourie, D. & Visser, C.B. 2015. Managing
public money, 3rd ed. Cape Town: Pearson Holdings Southern Africa.
[ISBN: 978–1–77595–023–3]
Or
Pauw, JC., Van der Linde, GJA., Fourie, D., Visser, CB. 2025. Managing Public
Money,
4th
ed.
[ISBN:9781779830487]
Cape
Town:
Maskew
Miller
Learning.
Table of contents
Heading
Page number
Contents
WELCOME
1
MODULE PURPOSE AND OUTCOMES
2
TOPIC 1 MANAGEMENT OF PUBLIC MONEY
3
1.1
Introduction
3
1.2
Financial Management
4
1.3
The International Context
5
1.4
Money in the Public Sector
6
1.5
Ownership of Public Money
6
1.6
Accounting to the Owners (Accountability)
7
Summary
9
Self-Assessment Questions
10
TOPIC 2 STATECRAFT AND POLITICS IN PUBLIC MONEY
11
2.1
Introduction
11
2.2
The Political Organisation of the Public Sphere
12
2.3
Managing Public Money by Legislation
12
2.4
The Legislature Controls Public Money
13
2.5
National and Provincial Financial Management Framework in South
Africa – a Summary
14
Summary
15
Self-Assessment Questions
16
TOPIC 3 STATUTORY FRAMEWORK FOR PUBLIC SECTOR FINANCIAL
MANAGEMENT
17
3.1
Introduction
17
3.2
The Statutory Framework for Public Financial Management
17
Summary
31
Self-Assessment Questions
32
TOPIC 4 PUBLIC FINANCIAL MANAGEMENT ACT (PFMA) AND TREASURY
REGULATIONS (TRS)
34
4.1
Introduction
34
4.2
Content of the PFMA and Treasury Regulations
35
4.3
Key Policy Issues
35
4.4
Arrangement of the PFMA
38
4.5
Interpretation, Object, Application and Amendment of the PFMA
38
4.6
National Treasury and National Revenue Fund
39
4.7
National and Provincial Budgets
39
4.8
Departments and Constitutional Institutions
40
4.9
Executive Authorities
40
4.10
Financial Misconduct
40
4.11
General Treasury Matters
41
Summary
42
Self-Assessment Questions
43
TOPIC 5 BUDGETING AND BUDGET PRACTICE
45
5.1
Introduction
45
5.2
Budgetary Dynamics
46
5.3
Operational Aspects of Budgeting
48
5.4
Budget Practice (Process)
49
5.5
Final Destination: Economic Reporting Format (ERF) And Standard
Chart of Accounts (SCOA)
51
Summary
55
Self-Assessment Questions
56
TOPIC 6 PREPARING THE BUDGET
57
6.1
Introduction
57
6.2
Planning and Budgeting
57
6.3
Framework for Strategic Plans and Annual Performance Plans
58
6.4
Annual Medium Term Budget Policy Statement
61
6.5
Prioritising the Budget
62
6.6
State of the Nation Address
62
6.7
Budget Speech
63
6.8
Guidelines for the Preparation of the Estimates of National Expenditure
6.9
(ENE)
63
Medium Term Expenditure Framework (MTEF) Technical Guidelines
63
Summary
66
Self-Assessment Questions
67
TOPIC 7 SUPPLY CHAIN MANAGEMENT (SCM)
69
7.1
Introduction
69
7.2
Concepts of Supply Chain Management
70
7.3
Purchasing and Supply Chain Management
71
7.4
Policy Framework for Procurement
72
7.5
Supply Chain Management System
76
7.6
General Issues in the Procurement Process
78
Summary
81
Self-Assessment Questions
82
TOPIC 8 LOCAL GOVERNMENT FINANCE AND THE MUNICIPAL FINANCE
MANAGEMENT ACT 56 OF 2003
83
8.1
Introduction
83
8.2
Fundamental Elements of Local Government Finance
84
8.3
Policy Framework for Municipal Financial Management
85
8.4
Functions and Powers of Municipalities
85
8.5
Public Institutions, Organisational Structures and Role Players Involved
in Municipal Financial Management
86
8.6
Municipal Planning and Budgeting Practices
86
8.7
Management of Revenue
87
8.8
Management of Liabilities
88
8.9
The Municipal Finance Management Act 56 of 2003
89
Summary
90
Self-Assessment Questions
91
TOPIC 9 ETHICS: COMBATTING FRAUD AND CORRUPTION
92
9.1
92
Introduction
Summary
94
Self-Assessment Questions
95
REFERENCES
96
Welcome
Welcome to Public Sector Financial Management (PFB105).
Sound financial management practices are essential for long-term institutional
sustainability. At the national, provincial and local government levels, they
underpin the process of democratic accountability. Weak or opaque financial
management results in the misdirection and underutilisation of resources and
increases the risk of corruption and highly questionable service delivery.
Although the subject material is very broad, this course will enable you to
understand the basic concepts and implementation processes to establish sound
processes and eventually achieve rigorous financial governance.
The course provides an overview of political regulation and oversight, while also
addressing line and finance managers. The intention is not to make you a skilled
practitioner, but rather to provide you with a holistic view of the discipline and
enable you to navigate through all the principles and requirements of public
sector financial management.
We trust that you will enjoy the exciting issues and challenges you will be facing.
We look forward to accompanying you on this meaningful and positive learning
journey.
© STADIO (Pty) Ltd Public Sector Financial Management PFB105
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Module Purpose and Outcomes
Upon successful completion of this module, the student will be able to:
1.
Discuss the management of public money.
2.
Define and discuss the political organisation of the public (financial) sphere.
3.
Discuss the policy framework for public sector financial management.
4.
Navigate the Public Financial Management Act and Treasury Regulations
and source critical information.
5.
Formulate a basis for budgeting in the public sector.
6.
Understand and explain the background and documents that originate in
planning and culminate in budgeting.
7.
Define and explain supply chain management.
8.
Understand the fundamentals of local government finance management,
including the MFMA.
9.
Discuss the concept of ethics and how South Africa approaches this.
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Topic 1
Management of Public Money
Prescribed Reading
Before continuing with this topic, please read the following:
•
1.1
Pauw et al. (2015: Introduction and Chapter 1)
INTRODUCTION
After completing this topic, you should be able to do the following:
•
Define Public Sector Financial Management.
•
Differentiate between the public and private sectors.
•
Identify the public in the utilisation of public funds.
•
List and explain the international role players influencing South Africa’s
public sector financial management.
•
Explain public benefits derived from public money and how those benefits
are measured.
•
Discuss the need for measuring outcomes rather than outputs.
The first chapter of the prescribed book, Pauw et al. (2015), provides a very
useful description of the importance and place of sound public financial
management in the broader economy of a country such as South Africa. It is
therefore important that one is informed about and able to understand the
context in which public sector financial management takes place.
Before continuing, attentively read Chapter 1 of the book. Try to get an overall
picture of what the writers are trying to say and how you link the outcomes with
the material under discussion. Thereafter reread the chapter, choosing and, if
necessary, marking all the aspects you regard as important. As you work through
the chapter, you will note that not everything has the same importance. Do not
skip over those parts which are not marked as “study” sections. If you do, you
will end up with an incomplete picture and will have deprived yourself of an
empowerment opportunity.
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1.2
FINANCIAL MANAGEMENT
What then is financial management?
According to the National Treasury (2000:157), financial management is not an
end in itself. It is, however, crucial to the successful running of any organisation,
as it relates to how the resources available to the organisation are used. In the
private sector, financial management centres around the examination of
alternative sources of finance, the effective utilisation of such finance, and
cohesion between financial and utilisation decisions. In the public sector, financial
management focuses on the prioritisation and use of scarce resources, on
ensuring effective “stewardship” over public money and assets, and on achieving
value for money in meeting the objectives of government, i.e. rendering the best
possible services in the interest of the People. This must be done transparently
and in terms of all relevant legislation.
Activity 1.1
Study the following sections in the textbook:
•
Section 1, pages 127 and 128: Management is financial management
•
Section 2.2, pages 132 and 133: Management for results
•
Section 3, pages 134–136: What are the fundamentals of financial
management?
•
Section 4, pages 55 and 56: National and provincial financial management
framework in South Africa – a summary
Read Section 4.1, pages 56–59: Functions of the various role players and gain
an insight into the role and functions of each of the role players.
Formative Assessment
1.
Money is entrusted to the government by the People who require sound
management. Explain what effective measures there are to ensure
accountability for this money.
2.
In view of the scarcity of resources and the multitude of needs, managers
should keep the 3Es in mind. See if you can explain the 3Es by referencing
them to the Public Finance Management Act. (More about this later.)
3.
Strong political support is required to support the implementation of
performance measurement and management. Describe the mechanisms
supporting management and accountability for results.
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4.
Answer the following questions, remembering to differentiate between the
private and public sectors:
•
Why do institutions need to manage their finances?
•
What constitutes financial management in lay (simple) terms?
•
How are (or should) finances be managed?
Summative Assessment
The question is often asked: “What is financial management?” Summarise the
concept of financial management in a presentation of no more than five slides.
•
Each slide must indicate which element of financial management you are
addressing and contain a brief explanation.
•
On average, each slide will carry 5 marks, giving you an indication of how
synoptic (taking a general view of the principal parts of a subject) your
explanations should be.
•
You do not have to provide PowerPoint slides, just head each category
accordingly, for example slide 1, slide 2 and so on.
1.3
THE INTERNATIONAL CONTEXT
South Africa does not exercise its public sector financial management in a void.
It is unquestionably part of the global village and is committed to improving the
world through public-private cooperation. Several international institutions have
an impact on or influence South Africa’s domestic financial management. Your
textbook indicates economic and regulatory bodies. SBS hopes that this course
will whet your appetite to be more astute in discovering who in the international
arena are influencing South Africa’s economy because of their perception of our
financial management practices.
Activity 1.2
1.
Study Economic actors and Regulatory bodies, Sections 3.1 and 3.2 on
pages 12 and 13.
2.
Scan
Bretton
Woods
institutions
and
other
forums,
Section
3.3,
pages 13–15.
3.
Brainteaser 1.1 on page 15 is a good question to be asked for 10–15 marks.
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1.4
MONEY IN THE PUBLIC SECTOR
Although it is common to suggest that ‘money makes the world go round’, it is
often not so common for the layperson to distinguish between public and private
money. The next section clearly demarcates these two areas. It also clarifies
“Public Economics” (Public Finance).
Activity 1.3
1.
Study Money in the public sphere, Section 1, pages 7–9.
Explain to a non-financial colleague the difference between public and
private from a financial management perspective.
2.
Study The economic public sector, Section 2, pages 9–11.
Indicate where direct decisions on public money are made and how fiscal
policy is used.
1.5
OWNERSHIP OF PUBLIC MONEY
Pauw et al. (2015:15) remind us that public money belongs to the community of
the citizens of the state. We call them “the People”. We cannot consider them
separately because, among other things, we may have to count other
generations among them. The People is therefore an abstract, if not spiritual
term.
Activity 1.4
1.
Carefully read The ownership, sharing, amounts, sources and safeguarding
of public money, Section 4, pages 15–24. Be sure to understand the content
before moving on.
2.
Also read Public benefit – the purpose of public money, Section 5,
pages 25–31, in preparation for measuring the benefits.
3.
Attempt brainteasers 1.6 and 1.7 to test your understanding of the
principles.
4.
Study Measuring public benefits, Section 6, pages 31–35.
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Formative Assessment
1.
Define outcomes and outputs, providing examples other than the ones in
the textbook. Have a colleague check your understanding. Rewrite if
necessary.
2.
Explain how to deal with the dilemma regarding the accountability for
outcomes.
3.
Check the definitions for the different levels of (improper) expenditure in
the Public Finance Management Act (PFMA) and discuss how they affect
public benefits.
Tip: Find the different categories of expenditure as defined in the PFMA.
Note that they are preceded by words such as “fruitless”, “wasteful” and
“unauthorised”. Put all these adjectives together and they may be
considered as improper and/or inappropriate.
Summative Assessment
The PFMA (38(1)(b)) makes effectiveness a prerequisite for accounting officers
in that they have to commit to attaining predetermined goals. The effectiveness
of activities has several dependencies. Define these dependencies and explain
how the dilemma regarding accountability may be overcome. See the tip above.
1.6
ACCOUNTING TO THE OWNERS (ACCOUNTABILITY)
Accounting is invariably the term used for books of account. These are
consolidated to form the financial statements. Although they support the concept
of accountability by providing data, this process is not under discussion here.
Accountability as a basic financial management principle must enhance
governance, transparency and account through a robust reporting process to
both the benefactors (givers [taxpayers]) and the beneficiaries (receivers) of
government’s service delivery. In the case of public money, they are the same
people – on the one hand, the taxpayers and, on the other hand, the People
(electorate).
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Activity 1.5
1.
Study Accounting to the owners of public money, Section 7, pages 35–38.
2.
Work through Brainteaser 1.11 and then test yourself against the correct
answer on page 38.
3.
List the different types of accountability in “accounting” to the owners of
public money and describe each one.
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Summary
At this stage, you should have a fairly good understanding of the framework in
which public sector financial management takes place. You should also be able
to satisfy the criteria set in the Learning Outcomes and you would do well to
return to them and satisfy yourself that you can in fact do just that.
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Self-Assessment Questions
1.1
Write a short essay indicating what influence “the People” (the public)
could have on the national fiscus (purse). NB: An essay always has an
introduction, a discussion and a conclusion. Mark the constituent parts of
your essay clearly.
Tip: In this particular case, as in so many other examples in PFB105,
the entire “essay” is contained in the textbook. All you have to do is
construct your response in such a way that it has the parts required. Be
smart and borrow from the authors, remembering to acknowledge them,
and soon you will be writing your own words and providing your own
opinions.
1.2
Your boss knows that you have successfully completed PFB105 and asks
you to facilitate a discussion with a group of interns on what public sector
financial management entails. Create a discussion document containing
the following sections:
•
Introduction by the facilitator
•
Questions to be asked to facilitate the discussion
•
The responses to be given, including an explanation of the agency
approach
•
1.3
Conclusion
Here is a question to whet your appetite. You would not be able to fully
answer it now, but after Topic 4, where you spend time getting to know
the Public Finance Management Act (PFMA), it should be a piece of cake.
Accountability, as a basic principle of the management of public money,
requires the use of public money to be transparent. Therefore, the
reporting of activities in the public sphere is of key importance.
Identify the different types of accountability (reporting lines), explain each
one and relate them to the relevant section in the PFMA. (Somewhere
between 10 and 15 marks.) For an additional 10 marks, graphically depict
the relationships (organogram) to show how they all fit together.
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Topic 2
Statecraft and Politics in Public Money
Prescribed Reading
Before continuing with this topic, please read the following:
•
Pauw et al. (2015: Chapter 2, pages 39–64)
Read it carefully and attentively, building on your knowledge base from
Chapter 1. Do not scan the chapter, but read it with the intention of finding new
understanding and knowledge. Consider each new concept and ensure that you
understand its context before moving on.
Only when you have an overall picture return to study the areas pointed out. A
reminder: Without an overall picture, you will lose sight of the intended direction,
making it more difficult to piece together all the parts of the whole.
2.1
INTRODUCTION
After completing this topic, you should be able to do the following:
•
Discuss
how
a
democratic
state
politically
structures
its
financial
management to execute the roles of enablement, regulation and service
delivery, all in the interest of the public.
•
Understand and explain the role of the legislature in controlling public
finances.
•
List and describe the structures and role players required for sound financial
management.
You would have noted that the textbook provides more than ample background
to the relevant concepts and it would be superfluous to try and improve on that.
It is well worth noting, though, that before you move into the practicalities it is
important to understand how government structures itself to achieve its
responsibilities as a nation state. It is here where the overarching and most
demanding financial management is executed in the interest of the People.
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2.2
THE POLITICAL ORGANISATION OF THE PUBLIC SPHERE
Democratic states customarily construct their financial management around
three different facets. These are the separation of powers, several levels of
government and the existence of public entities indirectly controlled by
government.
Activity 2.1
Study The political organisation of the public sphere, Section 1, pages 39–44.
Pay special attention to the way the “powers” are separated, yet interact with
one another to ensure a continuous balance. Note also that no power is perfect
in and of itself. All powers have advantages/benefits and disadvantages.
Formative self-assessment
There are three facets to the organisation of a typical contemporary democratic
state that are central to the discussion of the management of public money:
•
The separation of powers or authorities
Explain the different entities contained in this facet and how they contribute
to a sound democracy.
•
The existence of several levels (“spheres”) of government necessitating
orderly intergovernmental fiscal relations
Describe how South Africa constitutes its different levels of government and
how this compares to most other countries.
•
The existence of public entities that are controlled only indirectly by the
government
Explain why any government would want to accept institutions existing at
an arm’s length from the administration (government) of the day.
2.3
MANAGING PUBLIC MONEY BY LEGISLATION
Here we consider the ownership of public money. It is impossible for the People,
as the owners of the money, to have direct control over it. The agent that is
needed to deal with it on behalf of the People comes in the form of the elected
representatives, more specifically the government or the executive. Over time
the task has moved from the executive to the legislature. Note the comment on
page 45 regarding “the power of the purse”.
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Activity 2.2
1.
Before moving on to how the legislature controls money, attentively read
Managing public money by legislation: Taking the reins, Section 2, pages
44–51. Pay special attention to sections 2.1 and 2.2. Here you will find the
PFMA quoted regarding the authorisation of the collection and spending of
public money.
2.
2.4
Ensure that you fully understand the content before moving on.
THE LEGISLATURE CONTROLS PUBLIC MONEY
Although the bureaucracy is manifested in the directors-general (heads of
department), boards in the case of parastatals and municipal managers, it is in
fact Parliament that controls the spending of public money by regulating,
oversight and independent monitoring.
Activity 2.3
1.
Study The legislature controls public money, Section 3, pages 51–55.
2.
Spend some time familiarising yourself with “How to read, interpret and
apply legislation” on page 53.
Note: The relevant legislation will be addressed in separate topics.
Summative Assessment
1.
Prepare a paper (for 25 marks) on what encompasses public money. The
answer is not to be found only in this section. Much of it will come from the
whole semester’s study.
2.
It is the executive, consisting of the administrative authority under the
direction of the political authority, that spends the People’s money. The
executive should not have the control function. This function should fall to
the legislature. Parliament controls the spending of public money by
regulating spending and independently monitoring expenditure. Explain
these two concepts, providing examples to support your discussion.
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2.5
NATIONAL
AND
PROVINCIAL
FINANCIAL
MANAGEMENT
FRAMEWORK IN SOUTH AFRICA – A SUMMARY
The structures established to deal with the management of public funds are not
only well documented, but also extensive. The Constitution, PFMA and Treasury
Regulations are primary sources to consult when addressing these issues.
Parliament and the provincial legislatures take precedence in ensuring the
appropriate provision of services within the ambit of efficiency, effectivity and
economics. Parliament also authorises revenue collection and spending while
overseeing the executive.
Activity 2.4
Study The functions of the various role players, Section 4.1, pages 56–59. You
are not required to reproduce Figure 2.4 on page 59. Spend time aligning the
various role players in Figure 2.3 on page 56 with the role of each one. A
comprehensive understanding of this section builds a sound basis for several
other components in the public sector financial management environment.
Formative Assessment
1.
The
legislature uses
agents
to
carry
out
the
administration
and
management of public money. Identify these agents and explain the role
(function) of each one.
2.
Compare the roles of the National and provincial treasuries and determine
where they are the same and where they differ. Explain why there should
be differences. (The first half of the question is formative. By adding the
second half it becomes summative.)
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Summary
This chapter has provided you with a broad overview of the involvement of the
political sphere in managing public finances. You have also been introduced to
the structures and role players involved in ensuring that the political directives
in the form of primarily legislation and regulations are complied with.
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Self-Assessment Questions
At this stage you should be able to answer the following questions:
2.1
Explain why certain institutions exist at an arm’s length distance from the
government of the day. Simultaneously name these institutions as listed
in the PFMA.
2.2
You have been promoted because of your successful completion of this
course. At the first meeting you attend somebody asks: “How is the
legislature involved in public financial management?” The chairperson
adds the item to the agenda and asks you to be ready to respond to the
question at the end of the meeting. After getting over the shock you start
to scribble a few notes on your pad. The meeting runs late and you do not
use your notes. The chairperson does, however, ask you to provide a
summary to the secretary to attach to the minutes. Having more time to
consult your STADIO notes you decide to explain who (or what) comprises
the legislature, what they do and how they manage public money.
Consolidate all your notes and thoughts into a document that the
secretary can attach to her minutes.
Tip: To respond to this question, you cannot copy and paste from one
section in the study guide. You actually have to deconstruct the question
and look at what is being asked. This question has three components:
•
Who is the legislature?
•
What do they do?
•
How do they manage money?
Great. Now that you know what is required, you have to scan your
material to answer these questions. All the information is not under the
same heading and you need to combine the details into one document.
Good luck.
2.3
The National and provincial financial management frameworks in South
Africa are extensive and include several entities. Identify these entities,
indicate who they are and explain the responsibilities of each one.
Simultaneously indicate which exist at the political level and which operate
at the administrative level.
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Topic 3
Statutory Framework for Public Sector
Financial Management
3.1
INTRODUCTION
After completing this topic, you should be able to do the following:
•
Identify and describe the statutory framework for public financial
management.
•
Identify and explain the key provisions that have to be addressed through
financial management.
•
Identify current discrepancies in public financial management and suggest
corrective measures.
It is important to have an understanding of the statutory framework, structures
and role players in public financial management and the role that the public
manager should play in public financial management, since they provide a
framework and explain the environment in which public financial management is
practised. Without such an understanding public financial management cannot
be
studied
meaningfully.
The
statutory
framework
provides
the
legal
requirements that public officials and managers have to adhere to in the
execution of their duties.
3.2
THE
STATUTORY
FRAMEWORK
FOR
PUBLIC
FINANCIAL
MANAGEMENT
The statutory framework for public financial management includes a vast number
of statutes (laws/legislation). These all have a direct impact on the way in which
financial management is dealt with in the different spheres of government. The
content and, where relevant, the implications of these rules will be discussed in
more detail.
3.2.1
Constitution of the Republic of South Africa, Act 108 of 1996
The Constitution deals, as far as public (national and provincial government)
financial management is concerned, with the following aspects:
•
National supervision of provincial administration – Section 100
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•
Principles of public financial management and administration – Section
195(1)
•
National Revenue Fund – Section 213
•
Equitable shares and allocation of revenue – Section 214
•
National and provincial budgets – Section 215
•
Treasury control – Section 216
•
Procurement – Section 217
•
Government guarantees – Section 218
•
Provincial Revenue Fund – Section 226
•
National sources of provincial government funding – Section 227
•
Provincial taxes – Section 228
•
Provincial loans – Section 230
These sections of the Constitution should be understood to obtain a better
understanding of the implications of these provisions for public financial
management.
3.2.2
Public Finance Management Act 1 of 1999 (As Amended by Act 29 of
1999) and the Treasury Regulations
The Public Finance Management Act (PFMA) 1 of 1999 (as amended by Act 29 of
1999) gives effect to sections 213, 215, 216, 217, 218 and 219 of the
Constitution of the Republic of South Africa, Act 108 of 1996, and specifically
focuses on the national and provincial spheres of government.
The purpose of the PFMA is the following:
•
To regulate financial management in the national government and
provincial governments
•
To ensure that all revenue, expenditure, assets and liabilities of government
are managed efficiently and effectively
•
To provide for the responsibilities of persons entrusted with financial
management in government
Based on the purpose of the PFMA, the objective of this Act is to secure
transparency and accountability, and sound management of the revenue,
expenditure, assets and liabilities (REAL) of the institutions to which the Act
applies.
Government is so serious about the provisions of this Act that it is stated in
Section 3(3) that “In the event of any inconsistency between this Act and any
other legislation, this Act prevails”. In simple, practical terms, this means that
any other legislation has to conform to this provision of the Act.
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The Act adopts an approach to public financial management that focuses on
outputs and responsibilities. The Act avoids bureaucratic rules and allows for
greater management discretion. The Act also focuses on measuring outputs
rather than inputs and provides for greater accountability by clearly defining
responsibilities.
The only reference to municipalities in this Act is at Section 89(1)(a)(iv) where
the Accounting Standards Board is directed to set standards of generally
recognised accounting practice (as required by Section 216 (1)(a)) for
departments, public entities, constitutional institutions and municipalities.
3.2.3
Municipal Finance Management Act 56 of 2003
There are five underlying principles contained in the Municipal Finance
Management Act 56 (MFMA) of 2003:
•
Promoting sound financial governance by clarifying roles and responsibilities
•
A strategic approach to budgeting and financial management
•
Dynamic modernisation of financial management
•
Promoting cooperative government
•
Promoting sustainability
The Act also gives effect to the constitutional principle that recognises that the
local sphere of government is “distinctive” and “independent”, with the power to
determine its own budget and policies. It recognises at the same time the
approval and oversight role of the municipal council as a legislature in its own
right.
3.2.4
Property Rates Act 6 of 2004
The purpose of the Act is the following:
•
To regulate the power of a municipality to impose rates on property
•
To exclude certain properties from rating in the national interest
•
To make provision for municipalities to implement a transparent and fair
system of exemptions, reductions and rebates through their rating policies
•
To make provision for fair and equitable methods for the valuation of
properties
•
To make provision for an objections and appeals process
•
To amend the Local Government: Municipal Systems Act, 2000, so as to
make further provision for the serving of documents by municipalities
•
To amend or repeal certain legislation
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The Act in broad makes provision for the following aspects pertaining to property
rates:
•
Power to levy rates
•
Rates policy
•
Levying of rates
•
Limitations on levying of rates
•
Additional rates – special rating areas
•
Municipal register of properties
•
Liability for rates
•
General valuation of rateable property
•
Municipal valuers
•
Valuation criteria
•
Valuation rolls
•
Valuation appeal boards
•
Updating of valuation rolls
•
National monitoring and reporting
•
Provincial monitoring
•
Property rates regulations – consultative process
•
Copyright of valuation rolls and other data
•
Offences pertaining to property rating
3.2.5
Municipal Fiscal Powers and Functions Act 12 of 2007
The purpose of the Act is to provide for the authorisation of taxes, levies and
duties that municipalities may impose under Section 229(1)(b) of the
Constitution as well as to regulate the exercise of their powers to impose
surcharges on fees for services provided under Section 229(1)(a) of the
Constitution. The taxes that are referred to here are municipal taxes, which are
different from the property rates tax. In terms of sections 4(1) and (2) the
Minister of Finance will have to authorise such a municipal tax by prescribing also
the regulations regarding the imposition and administration of a municipal tax,
based on the requirements of Section 6 of the Act. Municipalities will, however,
have to apply for authorisation of such taxes by the Minister of Finance in terms
of Section 5 of the Act. A municipality authorised to impose a municipal tax is,
in terms of Section 7, considered to be the collecting agent for that municipal
tax, unless the Minister of Finance has designated another person for that
purpose as is allowed for by the Regulations issued in terms of the Act.
As far as municipal surcharges are concerned, Section 8 of the Act states that
the Minister of Finance may prescribe compulsory national norms and standards
for imposing surcharges which may include maximum municipal surcharges that
may be imposed by municipalities.
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These maximum surcharges may be expressed as a ratio, a percentage of the
municipal base tariff or as a rand (monetary) value and provide bands or ranges
within which municipal surcharges may be imposed. It is also envisaged that the
norms and standards will differentiate between different kinds of municipalities,
types and levels of municipal services, categories of users, debtors and
customers, consumption levels and geographical areas. Eventually these norms
and standards for maximum surcharges will also determine the basis and the
intervals at which municipal surcharges may be increased and the matters that
must be assessed and considered by municipalities when imposing surcharges
on fees. The Minister of Finance is, however, allowed in terms of Section 9 of the
Act to exempt a municipality, group of municipalities or organised local
government by notice in the Government Gazette from complying with these
norms and standards for a certain period and on conditions indicated in the
notice, if certain practicalities impede strict compliance with them. Such an
exemption may apply to all municipalities in general or can be limited to a
particular municipality or kind of municipality. It is important that a municipality
annually review any municipal surcharges as part of its budget preparation
process.
3.2.6
Financial and Fiscal Commission Act 99 of 1997
The Financial and Fiscal Commission Act 99 of 1997 was promulgated to give
effect to the constitutional requirements (sections 220, 221 and 222 of the
Constitution) with regard to the establishment of a Financial and Fiscal
Commission (FFC) and related matters.
The Commission acts as a consultative body on financial and fiscal matters for
organs of the state in the national, provincial and local spheres of government.
It must also make recommendations and give advice on financial and fiscal
matters to organs of the state in the national, provincial and local spheres of
government.
The Commission may perform its functions on its own initiative or on request of
an organ of the state. It is imperative that no person or organ of the state may
interfere with the functioning of the Commission.
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3.2.7
Intergovernmental Fiscal Relations Act 97 of 1997
To strengthen the provisions of the Financial and Fiscal Commission Act, the
Intergovernmental Fiscal Relations Act 97 of 1997 was promulgated to:
•
promote cooperation between the national, provincial and local spheres of
government on fiscal, budgetary and financial matters
•
prescribe a process for the determination of an equitable sharing and
allocation of revenue raised nationally
In terms of Section 2 of the Act, a Budget Council must be established consisting
of the Minister of Finance as the chairperson and the MECs for finance of each
province.
In terms of Section 5 of the Act, a Local Government Budget Forum must be
established consisting of the Minister of Finance, as the chairperson, and the
MECs for finance of each province as well as five representatives nominated by
the South African Local Government Association (SALGA) and one representative
nominated by each provincial branch of SALGA.
3.2.8
Annual Division of Revenue Act 2 of 2013
The annual Division of Revenue Bill must specify the following:
•
The share of each sphere of government of the revenue raised nationally
for the relevant financial year
•
Each province’s equitable share of the provincial share of that revenue
•
Any other allocations to provinces or local government from the national
government’s share of that revenue as well as any conditions on which
those allocations are or must be made
3.2.9
Borrowing Powers of Provincial Governments Act 48 of 1996
The Borrowing Powers of Provincial Governments Act 48 of 1996 was
promulgated to provide for norms and conditions in respect of the borrowing
powers of provincial governments. To give expression to the provisions of this
Act, a Loan Co-ordinating Committee must be established (and maintained)
consisting of the Minister of Finance as the chairperson as well as the responsible
member (MEC: Finance) of each province. This Committee must coordinate the
borrowing requirements of provincial governments during a financial year after
considering guidelines provided in the Act. The Committee must report to the
Financial and Fiscal Commission in such a manner that it will allow the
Commission to fulfil its functions effectively in terms of sections 214 and 220 of
the Constitution
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3.2.10 Preferential Procurement Policy Framework Act 5 of 2000
The Preferential Procurement Policy Framework Act (PPPFA) 5 of 2000 was
promulgated at the beginning of 2000 “to give effect to Section 217(3) of the
Constitution by providing a
framework for the implementation
of the
procurement policy contemplated in Section 217(2) of the Constitution”.
In terms of Section 2(1) of the Act, an organ of the state must determine and
implement its own preferential procurement policy within a prescribed
framework. For this purpose, a preference point system must be followed. The
Act contains a framework for the application of preferences in the public sector
tendering/bidding system. This framework is applicable to the public sector
procurement system of all organs of the state in the national, provincial and local
spheres of government. It implies that if any organ of the state implements the
policy of preferences, it may only implement preferences within the framework
prescribed by the Act.
The objectives of the PPPFA are the following:
•
To address the inequalities in public sector procurement of the past
•
To allow for more flexibility in public sector procurement
•
To eliminate fronting and corruption
3.2.11 Preferential Procurement Policy Framework Act, 2000: Preferential
Procurement Regulations, 2022
The Preferential Procurement Regulations were issued by the Minister of Finance
in terms of section 5, read with sections 2(1)(b)(i) and (ii) and 2(1)(c), of the
Preferential Procurement Policy Framework Act, 2000 (Act No. 5 of 2000), with
effect from 16 January 2023. Since these Regulations were issued in terms of
the PPFA, the provisions contained in them carry the same weight as those
included directly in the Act. This framework applies to national and provincial
departments, trading entities (such as the Government Printer), constitutional
institutions and listed public entities (i.e. all public entities listed in Schedules 2
and 3 to the Public Finance Management Act, 1999, and municipal entities as
defined in section 1 of the Local Government: Municipal Systems Act, 2000).
The important aspects are the following:
•
Organs of the state must clearly stipulate the appropriate preference point
system in the tender invitation.
•
The specific goal(s) to be achieved and for which a point may be awarded
to each goal must also be clearly spelt out in the bidding documents,
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including the number of points that will be awarded, and they must require
proof of the claim for such goal.
•
‘Specific goals’ are defined as specific goals as contemplated in section
2(1)(d) of the Act, which may include contracting with persons, or
categories of persons, historically disadvantaged by unfair discrimination on
the basis of race, gender and disability including the implementation of
programmes of the Reconstruction and Development Programme (as
published in Government Gazette No. 16085 dated 23 November 1994).
•
Note that specific reference, as in the 2017 Regulations, to the use of BBBEE status as a specified goal to be used when allocating preferential
points has been omitted from the 2022 Regulations, after a ruling by the
Constitutional Court of South Africa. Similarly, a regulation of the 2017
Regulations providing for local production and content has also been
omitted since it is outside the scope of the Act and of the Minister’s
regulation-making authority.
•
The phrase ‘tender for income-generating contracts’ means a written offer
in the form determined by an organ of state in response to an invitation for
the origination of income-generating contracts through any method
envisaged in legislation that will result in a legal agreement between the
organ of state and a third party that produces revenue for the organ of
state, and includes, but is not limited to, leasing and disposal of assets and
concession contracts, but excluding direct sales and disposal of assets
through public auctions.
•
The relevant preference point systems are defined in regulations 4, 5, 6 and
7 and are, briefly summarised, the
-
80/20 preference point system for acquisition of goods or services with
Rand value equal to or below R50 million;
-
90/10 preference point system for acquisition of goods or services with
Rand value above R50 million;
-
80/20 preference points system for tenders for income-generating
contracts with Rand value equal to or below R50 million; and
-
90/10 preference point system for tenders for income-generating
contracts with Rand value above R50 million.
•
If an organ of state is of the view that a tenderer submitted false information
regarding a specific goal, it must inform the tenderer accordingly, and give
the tenderer an opportunity to make representations within 14 days as to
why the tender may not be disqualified or, if the tender has already been
awarded to the tenderer, why the contract should not be terminated in
whole or in part. After considering such representations, the organ of state
may, if it concludes that such information is false, disqualify the tenderer or
terminate the contract in whole or in part; and if applicable, claim damages
from the tenderer. (Regulation 9 - Remedies)
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The Regulations also deal to a certain extent with the following:
•
Definitions (other than those already discussed above, e.g. what does
‘highest acceptable tender’ and ‘lowest acceptable tender’ mean)
•
Criteria for breaking deadlock in scoring (“If two or more tenderers score
an equal total number of points, the contract must be awarded to the
tenderer that scored the highest points for specific goals.” But: “If two or
more tenderers score equal total points in all respects, the award must be
decided by the drawing of lots.”)
•
Repeal of the previous 2017 Regulations
In terms of the PFMA, an accounting officer of a public institution must develop,
implement and maintain an appropriate procurement and provisioning system
which is fair, equitable, transparent, competitive and cost-effective, but also
consistent with the PPPFA and its regulations. Such a system will constitute the
supply management of the institution and should provide for at least the
following:
•
Demand management
•
Acquisition management
•
Logistics management
•
Disposal management
•
Risk management
•
Regular assessment of the supply chain performance
3.2.12 Public Service Act 103 of 1994 (Read with the Concurrent Amendments)
The Public Service Act 103 of 1994 provides for the following:
•
The organisation and administration of the public service of the Republic
•
The regulation of the conditions of employment, terms of office, discipline,
retirement and discharge of members of the public service
•
Matters connected to aforementioned provisions
The provisions of the Act apply to employees whether they are employed within
or outside the Republic. Similarly, those persons who were employed in the public
service or who are to be employed in the public service fall within the ambit of
the Act.
Subject to the Labour Relations Act and any collective agreement, the
determination of any conditions of service for (i) employees in general or a
particular category in terms of this Act and (ii) educators or members of the
services in general or for a particular category in terms of the laws governing
their employment, shall be made with the concurrence of a committee of
ministers.
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For the purpose of the Act, “conditions of service” means annual salary
adjustments, salary scales or levels, performance bonuses, pay incentives or
pension benefits.
3.2.13 Municipal Supply Chain Management Regulations, 2005
The Minister of Finance issued the Municipal Supply Chain Management
Regulations on 30 May 2005 in terms of Section 168 of the MFMA. This was done
with the concurrence of the Minister of Provincial and Local Government.
The Municipal Supply Chain Management Regulations deal with the following
matters:
•
Establishment and implementation of supply chain management policies,
including the following:
•
o
The supply chain management policy
o
Delegation of supply chain management powers and duties
o
Adoption and amendment of supply chain management policies
o
Sub-delegations
o
Supply chain management units
o
Oversight role of council
o
Training of supply chain management officials
The framework for supply chain management policies, including the format
of supply chain management policies:
o
Demand Management
o
Acquisition Management
−
System of demand management
−
System of acquisition management
−
Range of procurement processes
−
General preconditions for consideration of written quotations or
bids
−
Lists of accredited prospective providers
−
Petty cash purchases
−
Written or verbal quotations
−
Formal written price quotations
−
Procedures for procuring goods and services through written or
verbal quotations and formal written price quotations
−
Competitive bidding
−
Process for competitive bidding
−
Bid documentation for competitive bids
−
Public invitation for competitive bids
−
Procedures for handling, opening and recording bids
−
Negotiations with preferred bidders
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−
Two-stage bidding
−
Committee system for competitive bidding
−
Bid specification committee
−
Bid evaluation committee
−
Bid adjudication committee
−
Procurement of banking services
−
Procurement of IT-related goods or services
−
Procurement of goods and services under contracts secured by
other organs of state
−
Procurement of goods necessitating special safety arrangements
−
Proudly SA campaign
−
Appointment of consultants
−
Deviation
from
and
ratification
of
minor
breaches
of
procurements processes
o
o
−
Unsolicited bids
−
Combating of abuses of supply chain management system
Logistics, Disposal, Risk and Performance Management
−
Logistics management
−
Disposal management
−
Risk management
−
Performance management
Other Matters
−
Prohibition on awards to persons whose tax matters are not in
order
−
Prohibition on awards to persons in the service of the state
−
Awards to close family members of persons in the service of the
state
−
Ethical standards
−
Inducements, rewards, gifts and favours to municipalities,
municipal entities, officials and other role players
−
Sponsorships
−
Objections and complaints
−
Resolutions of disputes, objections, complaints and queries
−
Contracts providing for compensation based on turnover
−
Commencement
3.2.14 Municipal Investment Regulations, 2005
The Regulations focus on the following aspects:
•
Definitions
•
Applications
•
Adoption of investment policies
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•
Core elements of investment policies
•
Standard of care to be executed when making investments
•
Permitted investments
•
Investments denominated in foreign currencies prohibited
•
Payment of commission
•
Reporting requirements
•
Credit requirements
•
Portfolio diversification
•
Miscellaneous provisions
•
Existing investments
3.2.15 Municipal Public-Private Partnership Regulations, 2005
The Regulations focus on the following aspects:
•
Definitions
•
Initiation of feasibility studies
•
Additional matters to be addressed in feasibility studies
•
Procurement of public-private partnership agreements
•
Basic requirements to which public-private partnerships agreements must
comply
•
Signing of public-private partnership agreements
•
Project officers
•
Responsibilities of accounting officers
•
Amendment of public-private partnership agreements
•
Municipal entities
•
Exemptions
3.2.16 The Public Audit Act 25 of 2004 (As Amended by the Public Audit
Amendment Act 5 of 2018)
The purpose of the Public Audit Act 25 of 2004 is to:
•
give effect to the provisions of the Constitution for the establishment and
assignment of functions to an Auditor-General
•
provide for the auditing of institutions in the public sector
•
provide for accountability arrangements of the Auditor-General
The Constitution establishes the Auditor-General (AG) as a state institution that
has to support constitutional democracy. The Auditor-General is, therefore, the
external auditor of all national and state departments and any other institutions
or accounting entities that have to be audited by the Auditor-General in terms of
national and/or provincial legislation.
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Since the independence of the Auditor-General is recognised by the Constitution,
the AG is only subject to the Constitution and the law. It is therefore required
that the AG be impartial and perform his/her powers and functions without fear,
favour or prejudice.
The Public Audit Act deals, in broad terms, with the following:
•
Status and functions of the Auditor-General
•
Appointment and conditions of appointment of the AG
•
Accountability reports to the National Assembly
•
Audits by the AG
•
Audits of public institutions by auditors in private practice
•
Investigations and special audits by the AG
•
Administration of the AG – staff and financial administration
•
General matters, including delegation of powers, limitation of liability,
disclosure of information, offences and penalties, and regulations.
The Public Audit Amendment Act of 2018 adds the following:
•
Provides for certainty regarding the discretion of the Auditor-General with
regard to certain audits.
•
Authorises the Auditor-General to undertake performance audits and
provide audit or audit-related services to an international association, body,
institution or organisation.
•
Provides for the Auditor-General to refer suspected material irregularities
arising from an audit performed under this Act to a relevant public body for
investigation.
•
Empowers the Auditor-General to take appropriate remedial action.
•
Provides for the Auditor-General to issue a certificate of debt where an
accounting officer or accounting authority failed to recover losses from a
responsible person and to instruct the relevant executive authority to collect
the debt.
•
Provides for the establishment, powers and functions of a remuneration
committee.
•
Provides for consultation between the Independent Commission for the
Remuneration of Public Office-bearers and the remuneration committee
•
Provides for additional reporting requirements.
•
Provides for the defraying of certain excess audit fees as a direct charge
against the National Revenue Fund.
•
Revises the provisions relating to the appointment of an audit committee
for the Auditor-General.
•
Authorises the Auditor-General to make regulations on specific issues; to
substitute certain expressions; and to provide for matters connected
therewith.
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3.2.17 South African Revenue Service Act 34 of 1997
The purpose of this Act is to make provision for the efficient and effective
administration of the revenue collecting system of the Republic of South Africa
and, for this purpose, to reorganise the South African Revenue Service and to
establish an Advisory Board.
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Summary
It should be clear from the discussion in this topic that there are several statutes
governing public sector financial management and that it is necessary to have a
clear understanding of what the implications of these laws are for public
managers. At the same time, it should also be evident that these statutes
prescribe the structures and role players in public sector financial management.
This emphasises the importance of knowledge about the Acts that were
introduced by government after 1994.
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Self-Assessment Questions
After completing this topic, you should be able to answer the following selfassessment questions:
Formative Assessment
3.1
Scan the Constitution and list the items that have an impact on public
financial management.
3.2
Separate the public financial management legislation into relevancy at
national, provincial and local (municipal) levels.
3.3
Discuss the PPPFA and what it seeks to achieve.
3.4
Summarise the statutory framework in respect of individual purposes.
Summative Assessment
3.5
Explain why, in your opinion, the Public Service Act should form part of
the statutory framework for financial management.
3.6
State which of the statutes apply to the revenue side and which to the
expenditure side of the budget. Substantiate your position by quoting the
relevant sections in the Acts, where appropriate.
3.7
Group the Acts and Regulations in this topic together under the following
headings:
•
Financial management in general – national, provincial and local
government
•
Revenue and loans – all three spheres of government
•
Structures
providing
for
financial/fiscal/budget
commissions,
committees, etc.
3.8
•
Procurement and supply chain management
•
Independent oversight, for example auditing
•
Others – specify
At https://www.gov.za/SONA2020 [Accessed: 7.7.2020] there is a
diagram entitled “SONA: WHY IT MATTERS”. The question of why it
matters is answered by the statements below:
•
Informing the public of government’s work
•
Reflecting on the country’s domestic affairs and international
relations
•
Highlighting plans and projects for the year ahead
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•
All three arms of the state: the Executive, the Judiciary and the
Legislature
•
Two houses of Parliament: the National Assembly and the National
Council of Provinces
•
Creating a transparency with the public and accountability on the
part of government
Apply what you know and identify which of these items have any relevance to
public sector financial management and why. Answer the question now and then
again after you have worked through the whole study guide. Compare your
answers and note how both your knowledge and your understanding have
increased.
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Topic 4
Public Financial Management Act (PFMA) and
Treasury Regulations (TRs)
Prescribed Reading
Before continuing with this topic, download a copy of:
•
the PFMA from the National Treasury website
•
TRs from the National Treasury website.
Study the contents pages of both documents and note the correlation between
them. Carefully note the frameworks within which they are constructed.
Then follow the instructions in this study guide carefully as they will provide you
with a road map of many of the cardinal issues that need attention to effect
sound legislative financial management.
4.1
INTRODUCTION
After completing this topic, you should be able to do the following:
•
State the key policy issues undergirding the PFMA and explain the scope of
the PFMA and TRs.
•
Demonstrate how the PFMA is the foundation of public sector financial
management in South Africa.
•
Use the PFMA (and TRs) to reason through any public sector financial
argument to satisfy the conventions of sound financial management.
•
Illustrate how each component of financial management is contained within
the PFMA and how the PFMA prescribes the implementation and utilisation
of those components.
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The PFMA regulates financial management in the national government and
provincial governments to:
•
ensure that all revenue, expenditure, assets and liabilities of those
governments are managed efficiently and effectively
•
provide for the responsibilities of persons entrusted with financial
management
•
provide for matters connected therewith
4.2
CONTENT OF THE PFMA AND TREASURY REGULATIONS
Scan the contents pages of the PFMA (Arrangement of sections, pages 2–7) and
TRs to obtain an overall perspective.
4.3
KEY POLICY ISSUES
4.3.1
Division of Responsibilities
The Act assumes:
•
The political head of a department (cabinet minister or a provincial MEC) is
responsible for policy matters and outcomes; this includes seeking
Parliamentary (or provincial legislature) approval and adoption of the
department’s budget vote.
•
The head official (director-general of a national department or provincial
head of department) is responsible for outputs and implementation, and is
accountable to Parliament or provincial legislature for the management of
the implementation of that budget.
4.3.2
Application of the Act: Departments and Public Entities
This Act gives effect to Section 216 and other sections of the Constitution. It
applies to national and provincial spheres, and public entities under their
ownership
control.
Parliament,
provincial
legislatures
and
independent
institutions established by the Constitution are covered in this Act. Local
governments are covered in a similar Act.
The Act puts in place a more effective financial accountability system over public
entities. All entities are required to be listed. The major public entities listed in
Schedule 2 (of the Act) enjoy full managerial autonomy, with government only
able to intervene in its capacity as a majority or sole shareholder. Other public
entities are listed in Schedule 3 and enjoy lesser degrees of autonomy.
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Activity 4.1
1.
See how many public entities you can list before you rush to the schedules.
It would be interesting to know how well informed you are.
2.
In your own words, indicate what the difference between the responsibilities
of the Minister and the DG are in a national department.
4.3.3
Accounting Officers (AOs)
The Act confers specific responsibilities on accounting officers (AOs), of which
the following four are the most important:
•
To
operate
basic
financial
management
systems,
including
risk
management and internal controls within the departments and entities they
control
•
To ensure that departments remain within their budgeted programmes
(main divisions) and not overspend their budgets
•
To report on a monthly and annual basis, including the submission of annual
financial statements two months after the end of a financial year
•
To publish annual reports in the prescribed format and in so doing ensure
all-encompassing performance reporting
Accounting officers who are negligent and make no effort to comply with these
requirements will face strict disciplinary sanctions, including dismissal. Similar
sanctions will apply to treasury officials failing to carry out their responsibilities.
Accounting officers are expected to appoint chief financial officers as part of their
senior management to enable them to fulfil their responsibilities.
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Activity 4.2
Using the “find” icon, search the following issues in the PFMA (and TRs) and list
the relevant sections next to them:
1.
Systems to be implemented by the accounting officer
2.
Steps to be taken by the accounting officer to ensure compliance with
his/her prescribed general responsibilities
3.
Inappropriate/improper expenditure (see unauthorised, irregular, fruitless
and wasteful expenditure and overspending)
4.
Reporting
5.
Financial impropriety (discipline)
Note: There is often more than one section involved.
4.3.4
Voting by Main Division and Virement
The Act requires Parliament to vote by programme (main divisions within a vote)
rather than applying departmental votes. This will require further information on
outputs per programme and limits the powers of accounting officers to move
funds between programmes. Such movement is restricted to 8% of the total
allocation for a programme.
Budget programmes and subprogrammes are extensively described in the
National Treasury’s publication “Framework for strategic plans and annual
performance plans”. You will encounter this publication again in Topic 6.
Activity 4.3
1.
Google the word “virement” and then compare it with Section 43 of the Act.
2.
Make a mental note of this activity, as it will appear again in the
adjustments budget process.
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4.4
ARRANGEMENT OF THE PFMA
The section before Chapter 1 sets out the arrangement of the PFMA. Carefully
work through the section and consider which parts affect you personally in your
day-to-day work. Remember to consider the intent of the writer(s) as you work
through it. Often the letter (written word) may be interpreted differently from
the intent (spirit). It is only when you consider the whole document, in this case
the PFMA, that you realise the full impact and what is ultimately required of the
user.
Activity 4.4
Without looking at the scope (arrangement), see how many items you can list as
being part of the PFMA.
4.5
INTERPRETATION, OBJECT, APPLICATION AND AMENDMENT OF
THE PFMA
Activity 4.5
Study Chapter 1 of the PFMA.
1.
List and describe the different structures and role players. Note the
difference between the role players in the textbook (previously covered)
and those provided in the Act.
2.
List and describe the different types of expenditure. Indicate where there
are similarities.
3.
Indicate what the financial statements comprise.
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4.6
NATIONAL TREASURY AND NATIONAL REVENUE FUND
Activity 4.6
Read through Chapter 2 of the PFMA thoughtfully and carefully. Then return and
study the following sections:
•
Section 6: Functions and powers (of the National Treasury)
•
Section 8: Annual consolidated financial statements
•
Section 11: Control of National Revenue Fund
•
Section 13: Deposits into National Revenue Fund
•
Section 16: Use of funds in emergency situations
Test your understanding by answering the following questions:
1.
Outline what role the National Treasury plays in setting up the budgetary
process.
2.
What process must be followed in setting up the annual financial
statements?
3.
If a CFO wanted to claim money for an emergency situation, what would
the Treasury accept as a legitimate claim?
4.7
NATIONAL AND PROVINCIAL BUDGETS
Activity 4.7
Study Chapter 4 of the PFMA.
1.
What are the essential elements to be included in the budget?
2.
Indicate how the budgeting process at national level differs from the process
at provincial level.
3.
Explain to a colleague what the adjustments budget is and what it seeks to
achieve.
4.
At what point may a legal purchase be regarded as unauthorised?
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4.8
DEPARTMENTS AND CONSTITUTIONAL INSTITUTIONS
Activity 4.8
Study Chapter 5 of the PFMA.
1.
List and explain the systems that the AO must implement to ensure sound
financial management.
2.
Explain what the AO’s responsibilities are in respect of expenditure control.
3.
List which reports the AO must submit. Indicate to whom and the timescales
attached to the submissions. This is easy to read if it is presented in a table.
Column 1: Period, e.g. annually (February); Column 2: Type of report, e.g.
cash flow; Column 3: To whom, e.g. National Treasury.
4.
Does the PFMA address operational (line [non-financial]) officials? If yes,
what are their responsibilities with regard to financial management?
5.
4.9
What is a fiduciary duty and to whom does it apply?
EXECUTIVE AUTHORITIES
Activity 4.9
Study Chapter 7 of the PFMA.
1.
What are the financial responsibilities of executive authorities?
2.
What must the AO do if an instruction from the executive authority will
result in unauthorised expenditure?
4.10
FINANCIAL MISCONDUCT
Activity 4.10
Study Chapter 10 of the PFMA.
1.
Explain what is meant by financial misconduct.
2.
What does the PFMA prescribe when a case of financial misconduct is
discovered?
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4.11
GENERAL TREASURY MATTERS
Activity 4.11
Study Chapter 9 of the PFMA.
Scan the Treasury Regulations and satisfy yourself that the Treasury has
complied with Section 76 of the PFMA.
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Summary
The PFMA gives effect to sections 213, 215, 216, 217, 218 and 219 of the
Constitution for the national and provincial spheres of government. The Act
adopts an approach to financial management that focuses on outputs and
responsibilities and aims to ensure sound governance and comprehensive
financial management in the public sector. The Act is reliant on dedicated and
knowledgeable officials to enhance the level of financial management. After
having worked through this topic, you may add your name to the list of
knowledgeable individuals.
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Self-Assessment Questions
Formative Assessment
4.1
Summarise the general responsibilities of the accounting officer and
explain what power he/she has in ensuring that all the responsibilities are
satisfactorily executed.
4.2
Write a letter to a cabinet minister in which you explain what his/her
responsibilities are regarding financial management.
4.3
Prepare a performance agreement for the AO in which you list his/her
responsibilities and powers.
4.4
Prepare a performance agreement from the AO to the CFO.
Summative Assessment
4.5
The PFMA differentiates between the financial and line (operational)
officials in a department. Identify and explain the relevant sections in the
Act, emphasising the differences and similarities.
4.6
The executive authority and the head of the department must have a
symbiotic working relationship to ensure sound governance and an
unqualified audit report. Use the PFMA to prepare a paper in which you
explain each one’s responsibility, functions, oversight/control and how
they should structure their working relationship to ensure that they do not
appear before the Select Committee on Public Accounts.
4.7
The Pan African government is assessing its approach to public sector
financial management. At their next sitting each delegate representative
is being given a one-hour slot to present his/her country’s approach to
public sector financial management. As you are currently employed by the
National Treasury to attend to the amendments of the PFMA, the Minister
of Finance has delegated the responsibility to present the paper on behalf
of the RSA to you. Your guideline, within the framework of SBS’s
curriculum, includes:
•
A brief background
•
The overall purpose of the PFMA
•
The key policy issues
•
The construct of the Act, including brief notes on each element
•
The extent to which South Africa has been able to establish sound
financial practices
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•
4.8
A conclusion/summary
An international pandemic has hit South Africa. The consequences are
politically, socially, physically and financially far-reaching. Prepare a brief
in which you explain to the top management what a standard budget
contains and how this budget may be adjusted should the situation require
this.
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Topic 5
Budgeting and Budget Practice
Prescribed Reading
Before continuing with this topic, please read the following:
•
Pauw et al. (2015: Chapter 3)
By now you should be in the habit of initially reading the chapter to get a feel for
the content. Again, place it in the bigger picture and determine how it makes up
part of the whole. Once you are satisfied, move on to the selected areas
prescribed by this study guide.
Be reminded that this chapter is not the definition of budgeting in the public
sector. It only forms the basis for extended study. If you wish to understand all
the complexities and present yourself as an expert on the discipline, you will
have to extend your studies.
Recommended Reading
The latest copy of the MTEF Technical Guidelines for National Departments
(guidelines for the preparation of budget submissions and expenditure estimates
for the 20XX Medium Term Expenditure Framework (MTEF)).
5.1
INTRODUCTION
After completing this topic, you should be able to do the following:
•
Identify and explain the foundational elements of budgetary dynamics.
•
Describe the operational elements of the budget.
•
State the purpose and construct of the Economic Reporting Format (ERF)
and the Standard Chart of Accounts (SCOA).
Government budgets and budgeting are probably the most recognisable feature
of public sector financial management. Inevitably, government budgets and
budgeting are the focal point of government’s financial management. There is a
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simple reason for this assumption. The budget is the only document which
actually provides the sum total of government’s expenditure.
That total is used as the basis to determine how much tax the government
requires to fund its activities and functions. The budgets also reflect the specific
functions and services of all state departments and all the other entities funded
through tax income. Financial control is largely based on the budget, since it
forms the point of departure for payment authorisation, internal controls and
accounting, auditing and performance management (to ensure that departments
achieve their objectives).
This topic prepares you to set up a budget.
5.2
BUDGETARY DYNAMICS
The budget seems to be the most dominant aspect of public sector financial
management. The most likely reason for that is its visibility in the public domain.
The Minister of Finance’s annual budget speech, during which an exposition of
government expenditure against prevailing and expected economic conditions is
discussed, is a physical manifestation of what government is doing with public
funds. Linked to the budget speech is the invariable taxation implications, which
normally arouse public interest and speculation about whether the budget is
“good”, whether the budget includes and/or promotes economic growth
components and development or is rather aimed at social investment. Whatever
the case may be, the budget is the most important element with regard to public
sector financial management. The reasons for this are as follows:
•
The budget is the primary instrument which guides government functions
and services.
•
It is the only document identifying and describing the functions of every
institution funded by public funds.
•
It is a clear and distinctive indication of government policies.
•
It provides a basis to determine performance, effective use of public funds
and accountability.
Budgetary dynamics, however, for our purposes pertain to the use of public funds
to pursue particular policy objectives and also deal with the issue of scarce
resources. From our point of view, government is faced with the universal truth
of having to decide between alternative spending objectives or, in other words,
the question of which priorities deserve preference since not all priorities can be
funded owing to a lack of resources (money). Emanating from this aspect is the
extent to which government utilises its funds in terms of optimal gains. These
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two elements form the basis of budgetary dynamics owing to the fact that
government spending remains a public issue.
5.2.1
Scarcity of Resources
It should once more be emphasised that government does not generate income
of its own, but uses legislation to gain revenue by means of taxation. The public
acknowledges the fact that government is providing functions and services on
their behalf and accepts the reality of contributing towards its expenses.
However, an economy can grow only if the private sector reinvests savings and
investments in their businesses and create jobs in the process.
If government, for instance, announces a drastic increase in tax earnings, it
simply means that the private sector has less money left to reinvest and
consumers have less money left to spend. That means the budget is always in a
position of compromise to find a balance between state spending and economic
growth and, therefore, the utilisation of money as a scarce resource. The
assumption also prevails that the private sector utilises money more effectively
than government because they operate on a profit principle, whereas the
government necessarily needs to fund “non-profit” communal functions, such as
the maintenance of a defence force.
5.2.2
The “Value-for-Money” Approach
Competition for available resources between government and the private sector
seems to be a continuous plight. The undeniable role of government as a provider
of communal services and functions must be considered against the role of the
private sector which is primarily responsible for job creation and economic
growth. This scenario is also underpinned by a continuous increase in
unemployment, which can only be addressed by an increase in economic growth
that will result in higher employment. However, an increase in unemployment
simultaneously implies an increase in the demand for social services provided by
government, thus resulting in a catch-22 situation.
It should, therefore, be evident that since financial resources are limited in terms
of the demands by government and the private sector, the emphasis shifts to
the utilisation of money. Government operates on a basis of providing services
and functions with public money, therefore the profit principle is absent in its
approach in doing its business. This element, however, does not mean that profit
principles should also be absent. In other words, those practices and principles
applied by the private sector in order to utilise available resources to its optimal
potential to realise profits should be applied in government as well.
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The approach to performing services and functions is therefore the same as in
the private sector, but the result would be the effective achievement of objectives
instead of profit generation. This is actually a very simplistic approach to a
complex problem that illustrates the dilemma of economic growth versus
government provision of public services and functions.
Activity 5.1
1.
What are the dynamics that make the budget the most dominant aspect of
public sector financial management?
2.
Is there a comparison to be drawn between the private and public sectors
when it comes to the provision of services?
5.3
OPERATIONAL ASPECTS OF BUDGETING
Activity 5.2
•
Study Operational aspects of budgeting, Section 2, pages 68–73 of the
textbook.
•
Read Section 2.1 for a general background.
•
Study Role-players in budgeting, Section 3, pages 73–80.
After studying this section, you must be able to respond to questions requiring
you to explain the issues below:
1.
What are the operational aspects of budgeting?
2.
Illustrate the functions/purposes/advantages of the budget by using a
diagram.
3.
What is the basis for budgeting in the national and provincial spheres or
what, by international standards, is the best way to format the budget?
4.
How do you distinguish between current and capital expenditure?
5.
Why is revenue regarded as a part of the operational aspects of the budget?
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5.4
BUDGET PRACTICE (PROCESS)
Budget practice refers to all the various aspects related to the preparation of the
budget. It is not simply a matter of taking the previous year’s budget and adding
a few percentages and then submitting it to Parliament for approval. Consider
the case where new services need to be added and/or certain services may no
longer be required.
Departments receive a mandate from Parliament in the form of legislation to
execute government policy. An example is to provide and promote accessible
health to all citizens. The National Department of Health should then identify the
necessary and appropriate functional objectives through which the government’s
health policy can be executed. All of these objectives cost money and must
therefore be included in the budget. Parliament may then approve (or not) their
spending objectives. This implies (requires) a process that needs to be followed
before a budget can be submitted for approval and thus forms part of budget
practice. Here are the elements of the process:
5.4.1
Estimates
An estimate is the tool used to determine the potential financial costs linked to
a specific objective before it is actually included in the budget. One of the
advantages is that it provides decision makers with a tool to decide on alternative
options, or to determine the actual costs of a new policy objective. Of course, as
with any other process, the success of estimates as a planning instrument
depends on the dedication of the officials.
5.4.2
Financial Planning
A budget allows the state to plan its finances, not only in terms of current
expenditure, but also over the medium term. It is especially on the revenue side
where government needs to ensure that the income levels are sufficient to make
provision for the envisaged expenditure.
The following role players in particular are involved in this aspect:
•
The Commissioner of Customs and Excise
•
The Commissioner of Inland Revenue
•
The Accountant-General
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5.4.3
Priority Determination
Priority determination or, otherwise, the determination of those functions and
activities (government policies) that government will pursue is the result of a
dedicated and structured planning process. However, in the process of
determining such priorities particular principles are also considered, such as
specific objectives per department, time frames if appropriate, calculation of
financial implications, long-term implications, evaluation of the effectiveness of
programmes and revision and adjustment of policy objectives over a five-year
period.
5.4.4
Programme and Objective Description
In budget terminology, a programme identifies the primary focus area of a
spending entity or, in this case, a state institution such as a state department. A
programme describes the overall policy objective of a department in very broad
terms for purposes of the budget and also serves as the point of departure for
the determination of functions emanating from the programme description.
5.4.5
Evaluation of Objectives
Functional objectives need to be evaluated to ensure their necessity in terms of
the allocation of funds and include the following:
•
Continuation of services
•
Extraordinary and non-recurring expenditure
•
Extension of services
•
New services
•
Priorities
•
Classification of priorities
Activity 5.3
Formative Assessment
Prepare a brief (a few paragraphs) to a new colleague in which you tell him/her
in your own words what the process is to set up the budget. Remember to
introduce the subject (introduction) and then explain the main elements
(discussion). End your discussion with a summary or conclusion. In an
examination, this response may be worth up to 25 marks.
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5.4.6
The Budget Cycle
Activity 5.4
Study The budget cycle, Section 5, page 85 only. You should realise that the
explanation given here is at the highest level and does not discuss the operational
budget (annual performance plan (APP)).
5.5
FINAL DESTINATION: ECONOMIC REPORTING FORMAT (ERF)
AND STANDARD CHART OF ACCOUNTS (SCOA)
The standardisation of expenditure classification is contained in Section 216 of
the Constitution while Section 27(3) of the PFMA provides for the minimum
requirements of the annual budget. The reporting format is the responsibility of
the Minister of Finance and he/she is empowered by legislation to prescribe the
presentation. In 2004, the National Treasury implemented a new Economic
Reporting Format (ERF) and Standard Chart of Accounts (SCOA).
Better-quality information to legislatures lies at the core of the new approach. It
also improves the ability of decision makers to construct more resilient policies.
The consequences being alignment with best international practices, improved
transparency, modernised government accounts and more robust accountability.
5.5.1
Link between ERF and SCOA
ERF is the high-level presentation format of the economic classification of all
government receipt and payment items for reporting purposes. It provides
meaningful information to parliamentarians, financial practitioners, economic
analysts and other users of government financial data. ERF is supported at the
more detailed level by SCOA, which serves as a data entry collection tool where
each detailed item is recorded at the posting level.
SCOA comprises the coding of items used for classification, budgeting, recording
and reporting of receipts and payments within the financial system. It serves to
facilitate and systemise the recording of all transactions and is directly linked to
ERF.
The coding structure comprises eight segments. When recording a transaction,
a selection must be made from each of the eight segments. One transaction can
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thus be broken down into all of the eight different segments. The diagram below
illustrates this:
Regional
segment
Infrastructure
classification
Project
segment
Fund
segment
Objective
segment
Transaction
Assets
segment
Responsibility
segment
Item
segment
Figure 5.1
SCOA Coding
When establishing the appropriate classification code from a segment, the
following questions arise for each segment:
•
Infrastructure classification: Does the transaction relate to an infrastructure
or non-infrastructure asset?
•
Item segment: What is the nature of the payment and what is the nature
of the receipt?
•
Assets segment: Does the transaction relate to an asset or the use of an
asset and if so, which class of asset?
•
Project segment: Does the transaction relate to a specific project and if so,
what type of project?
•
Objective
segment:
Against
which
programme/activity
should
the
transaction be recorded?
•
Fund segment: Against which source of funding should the payment be
allocated and against which source should the receipt be allocated?
•
Responsibility segment: To which cost centre should the transaction be
allocated?
•
Regional segment: In which region does the service get delivered and in
which region is the beneficiary that benefits from the transaction?
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5.5.2
Economic Classification (Budget Formats)
The economic classification of government transactions serves to provide
policymakers with information about the sources of receipts and the uses of
funds. Broadly, the main purpose of operations is to use the public resources to:
•
regulate relevant aspects of society and the economy
•
provide services to the community in areas where there is market failure
•
build, improve and maintain infrastructure
•
redistribute wealth according to nationally determined criteria
Of particular significance is the fact that the economic classification is part of the
twofold format for budget submissions. On the one hand, the budget must reflect
the programme structure and, on the other hand, it must reflect the economic
classification.
Format of Summary Receipts Table
Economic classification of receipts:
•
Tax receipts
•
Sales of goods and services (excluding capital assets)
•
Transfers received
•
Fines, penalties and forfeits
•
Interest, dividends and rent on land
•
Sales of capital assets
•
Transactions in financial assets and liabilities
Format of Summary Payments Table
•
•
•
Economic classification of payments:
o
Current payments
o
Goods and services
o
Compensation of employees
o
Interest and rent on land
o
Provinces and municipalities
o
Universities
o
Foreign governments and international organisations
o
Households
Transfers and subsidies
o
Departmental agencies and accounts
o
Public corporations and private enterprises
o
Non-profit institutions
Payments for capital assets
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o
Buildings and other fixed structures
o
Cultivated assets
o
Land and subsoil assets
o
Machinery and equipment
o
Software and other intangible assets
Note
Details of all of the items listed above may be sourced from the relevant
references at the end of this study guide.
An example of the use of the ERF and SCOA is provided at the end of this topic.
It is an extract from the Department of Water and Sanitation as it is contained
in the 2019 Estimates of National Expenditure. Consider for the purpose of this
topic tables 36.2–36.8.
Activity 5.5
1.
What is the purpose of the ERF and the SCOA?
2.
Itemise the economic classification of receipts and payments.
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Summary
In terms of public sector financial management, budgets and budgeting are
perhaps its most pivotal aspects. It is important to understand the construct of
the budget and that it involves several elements. Budgeting takes places
according to a process of planning, determining priorities, estimating, draft
budgets and the eventual submission to Parliament for approval.
It must also be considered that the budget is the primary document reflecting
government’s policy objectives and therefore an indication of why parliamentary
debates prior to the approval of the budget is a vital component of the democratic
process in South Africa.
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Self-Assessment Questions
5.1
Government is perpetually performing a balancing act between limited
resources, on the one hand, and a never-ending list of priorities, on the
other hand. Within this dynamic there are two elements that must held in
a healthy tension in satisfying the citizens’ needs. Explain these elements
and add your own perspective as to the success government is achieving
in providing basic services.
5.2
The budget is a financial plan that sets out how government will achieve
its objectives. Consolidate all the operational aspects and explain them,
placing each element under a relevant subheading.
5.3
Several role players play important parts in compiling the budget. Identify
all of them, separating them into internal and external role players, and
state, very briefly, what the responsibility of each one is.
5.4
In a formative question you could be asked to prepare an elementary
estimate of expenditure (budget) for 25 marks. After working through this
topic and the next one, you should be able to score full marks.
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Topic 6
Preparing the Budget
Prescribed Reading
Before continuing with this topic, please read the following:
•
6.1
Pauw et al. (2015: Chapter 4)
INTRODUCTION
After completing this topic, you should be able to do the following:
•
Understand the political will in satisfying the constitutional requisites of
healing; democracy; improved quality of life; individually acknowledged and
realised potential; and sovereignty in the way it is articulated in the words
of the President, Minister of Finance and National Treasury, and ultimately
manifested in the National and subordinate budgets.
•
Understand and explain the background and documents that originate in
planning and culminate in budgeting, thus providing the primary financial
management framework.
•
Develop the ability to assess priorities, and to apply them in the allocation
of programmes, subprogrammes and activities.
Use Section 3, Planning and budgeting (introduction), on page 97 of the textbook
as the introduction to this topic.
6.2
PLANNING AND BUDGETING
Activity 6.1
Attentively read the rest of Section 3, Planning and budgeting, pages 97–108.
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6.3
FRAMEWORK
FOR
STRATEGIC
PLANS
AND
ANNUAL
PERFORMANCE PLANS
Activity 6.2
Download and read the ‘Revised Framework for Strategic Plans and Annual
Performance Plans’ from the National Treasury website, www.treasury.gov.za. It
is also easily obtained via a Google search using the title of the publication.
Notes:
a. If your search renders a document entitled ‘DPME Revised Framework for
Strategic Plans and Annual Performance Plans’, it is the same document.
b. However, if your search renders a similar document entitled ‘Framework for
Strategic Plans and Annual Performance Plans’, published in August 2010, do not
download it. It is the original version, which has been replaced by the Revised
Framework document.
In addition, you must also download the ‘Guidelines for Implementation of the
Revised Framework for Strategic Plans and Annual Performance Plans’, using the
same methods as above for the Framework. Among others, this document will
be very useful if you have to deal with these tasks in your work environment.
After the PFMA, this document is arguably the most important budgeting
prescript you are going to need during your study of this subject, although you
will not be expected to study all its content in detail – see Activity 6.3 below. It
provides the framework within which the budget comes into being. In brief: a
sound budget should reflect the approved and affordable strategic and
operational plans in financial terms. For that reason, its content must be fully
understood. Ensure that you completely appreciate the construct of strategic
plans and how the various components/elements link and interact to bring about
the best possible service delivery using the resources available at any given time.
The Revised Framework for Strategic Plans and Annual Performance Plans was
compiled by the Department of Planning, Monitoring and Evaluation for
implementation by the national and provincial spheres of government (although
some of its elements are also useful at local government level). Its main channel
of publication seems to be via the National Treasury (National Treasury
Instruction no 10 of 2020/21 promulgated the Revised Framework, effective from
15 August 2020).
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Activity 6.3
1.
In the main document (Revised Framework for Strategic Plans and Annual
Performance Plans) pay special attention to the foreword. It provides the
overarching background to planning in the South African public sector and
the origins of the original 2010 Framework and now the Revised Framework
documents. The 2010 Framework provided a standardised approach to
strategic and annual performance planning, promoted accountability for
performance and service delivery, and alignment between the planning,
budgeting and reporting processes. The Revised Framework was introduced
to further improve government planning systems and processes and to
institutionalise development planning in government. It provides the
requirements for strategic and annual performance planning, operational
planning, implementation programme planning, infrastructure planning,
and monitoring, reporting and evaluations.
2.
Then study the next section, CONTEXT OF THE REVISED FRAMEWORK. Note
that the aims of the 2010 Framework were to achieve improved results
through
better
planning
and
performance;
obtain
more
reliable
performance information; support learning and improvement in the public
service; improve the quality of strategic and annual performance planning;
and strengthen accountability in the public service, with better strategic
planning and management arrangements leading to improved policy
delivery. The purpose of the Revised Framework is to build on the
foundation of the 2010 Framework for Strategic Plans and Annual
Performance Plans, reaffirm the planning logic and institutionalise planning
to enable better service delivery. It also provides the logic for evaluating
and monitoring plans (and budgets based on such plans) and for the use of
related reporting instruments, and their results, at the different stages of
the planning (and execution) cycle.
3.
Read and familiarise yourself with Chapter 1: INTRODUCTION. Note that
one of the aims of the Revised Framework is to describe the relationship
between the planning, budgeting, reporting, monitoring and reporting
processes. This chapter also deals in some detail with the relationship
between legislation, plans and budgets. Without this insight, compiling a
budget is a futile exercise. Also pay special attention to the sections at the
headings: 1.5.5 Budget Prioritisation Framework, 1.5.8 United Nations
Sustainable Development Goals, and 1.6.1 Results-Based Approach,
including Figure 1.1: Results-Based concepts.
4.
In Chapter 2: PLANNING PROCESSES, work through sections 2.3 Alignment
of the policy, planning, budgeting and monitoring processes (including
Figure 2.3: Planning and budgeting, and Figure 2.4: Reporting); 2.6.3
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National Treasury and Provincial Treasuries; and 2.7 Planning timeframes
(Table 2.1: Planning and budgeting timeframes for national and provincial
institutions).
5.
In Chapter 8: MONITORING, REPORTING AND EVALUATIONS, concentrate
on Table 8.3: Roles and responsibilities for reporting: National Treasury,
and Table 8.6: Roles and responsibilities for reporting: Provincial
Treasuries.
6.
For general background, you can merely scan through: Chapter 2:
PLANNING PROCESSES (its parts not mentioned above); Chapter 3:
STRATEGIC PLANNING; Chapter 4: ANNUAL PERFORMANCE PLANNING;
CHAPTER
5:
ANNUAL
OPERATIONAL
PLANNING;
Chapter
6:
IMPLEMENTATION PROGRAMME PLANNING; Chapter 7: INFRASTRUCTURE
PLANNING; and Chapter 8: MONITORING, REPORTING AND EVALUATIONS
(its parts not mentioned above). Although the aim of this module is not to
train you to be planning experts, it is important that if you are in some
manner involved in public sector financial management, you should at least
be aware of the various planning approaches and techniques, as it may –
indeed, should - affect budget planning and execution. It is also very likely
that you may be required to participate in these processes, e.g. as an
advisor on budget/financial matters.
7.
Next, turn to the second document, the ‘Guidelines for Implementation of
the Revised Framework for Strategic Plans and Annual Performance Plans’,
and study only its following parts: 1.3.4 Activity-based costing; 2.8.1
Budget Programme; 2.8.2 Budget Sub-programme; and 2.9 Budget
concepts and documents. Note the sections ‘FORMATS FOR STRATEGIC
AND ANNUAL PERFORMANCE PLANS’ and ‘EXAMPLES OF PLANS’. For the
same reasons as stated above, you are again encouraged to scan through
the rest of this document.
8.
Assessment questions with regard to both the Revised Framework for
Strategic Plans and Annual Performance Plans, and the Guidelines for its
implementation, will be based mainly on the sections above to which you
were directed to pay attention and study. They may be presented in many
forms. Consider, for example, populating a template; defining concepts with
the possibility of having to give examples; the preparation of a diagram
explaining key concepts; or possibly just explaining why plans and budgets
should be linked, in your own words, of course. Formative assessment
questions may also include ones from the sections you were encouraged to
‘scan’.
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6.4
ANNUAL MEDIUM TERM BUDGET POLICY STATEMENT
The Medium Term Budget Policy Statement (MTBPS), issued by the National
Treasury in October of each year, aims to communicate government’s policy
stance and to encourage Parliament and the public to debate options for the
economy and the public finances. It is a government policy document that
communicates to Parliament and the country the economic context in which the
forthcoming budget will be presented, along with fiscal policy objectives and
spending priorities over the three-year expenditure period.
The policy statement is an important part of South Africa’s open and accountable
budget process. It empowers Parliament to discuss and shape government’s
approach to the budget.
The Money Bills Amendment Procedure and Related Matters Act (2009) requires
government to table the MTBPS in Parliament at least three months before the
national budget is presented. The statement must include the following:
•
A revised fiscal framework for the current financial year and the proposed
fiscal framework for the next three years
•
An explanation of the macroeconomic and fiscal policy position, and
macroeconomic projections and assumptions underpinning the fiscal
framework
•
The spending priorities of government for the next three years
•
The proposed division of revenue between national, provincial and local
government for the next three years
•
Any substantial proposed adjustments to conditional grant allocations to
provinces and local governments
•
A review of spending by each national department and each provincial
government between 1 April and 30 September of the current financial year
Parliament’s finance committees consider the revised fiscal framework for the
current year, the proposed medium-term fiscal framework, the explanation of
the macroeconomic and fiscal policy position, and the projections and
assumptions. The appropriation committees examine national spending priorities
for the next three years, the proposed division of revenue and adjustments to
conditional grant allocations.
These committees report to their respective houses of Parliament on the
proposed fiscal framework and division of revenue.
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A report may include amendments to the proposed fiscal framework and division
of revenue. The adopted reports serve as a mandate for government to prepare
the forthcoming budget in accordance with the policy approach of the MTBPS.
Activity 6.4
1.
Scan the latest MTBPS available at www.treasury.gov.za.
2.
The construct invariably covers:
3.
•
an introduction/background
•
an economic overview
•
fiscal policy
•
expenditure priorities
Consider the following questions:
•
What is the general outlook for the planning environment?
•
What impact does the outlook have on revenue collection?
•
How should new developments be factored in to the envisaged future?
•
What should your institution consider in preparing the budget within
its current priorities/programmes? Provide reasons for your choice.
•
What interventions are required to reconcile the expectations of – and
services promised to – the People and the availability of resources?
6.5
PRIORITISING THE BUDGET
Activity 6.5
Study Section 4 in the textbook, Prioritising for the budget, pages 108–114.
6.6
STATE OF THE NATION ADDRESS
Activity 6.6
Obtain a copy of the State of the Nation address (SONA) – available at
https://www.gov.za (or simply Google it) – that applies to (follows on from) the
MTBPS you have just worked through.
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6.7
BUDGET SPEECH
Activity 6.7
Scan the latest budget speech by the Minister of Finance, available at
www.treasury.gov.za.
Specifically note the headings of the presentation and determine what is of
significance.
Using the MTBPS as a basis, consider the correlation between what is reemphasised in the SONA and the budget speech and what is not. Form an opinion
on why there are differences.
6.8
GUIDELINES FOR THE PREPARATION OF THE ESTIMATES OF
NATIONAL EXPENDITURE (ENE)
Activity 6.8
Read the latest Guidelines for the Preparation of the Estimates of National
Expenditure (ENE) (available at www.treasury.gov.za).
Concentrate on the scope of the ENE and critical dates.
6.9
MEDIUM TERM EXPENDITURE FRAMEWORK (MTEF) TECHNICAL
GUIDELINES
Through the budget process, a large number of public institutions plan,
collaborate, negotiate and decide together on a comprehensive government
spending plan for the next three years. Given fiscal limits, resources must be
allocated in the most effective and efficient way to meet the policy objectives of
South Africa as a democratic state, as set out in the Constitution, the National
Development Plan and government’s Medium Term Strategic Framework.
The Medium Term Expenditure Framework (MTEF) Technical Guidelines provide
national departments with guidance on preparing budget submissions and
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medium-term expenditure estimates. They are issued in accordance with Section
27(3) of the Public Finance Management Act (PFMA) 1 of 1999. While primarily
intended for national government departments, they may be used, with
appropriate amendments, to guide submissions by other institutions such as
public entities, trading entities, government components and constitutional
institutions.
The aim of the technical guidelines is to ensure that the documentation prepared
by national government departments provides relevant and useful information
on
their main strategic
proposals to enable the preparation
of
clear
recommendations in respect of the budget.
The Ministers’ Committee on the Budget Technical Committee (MTEC) – which is
composed of the directors-general of several centre-of-government departments
– will prepare an “issues and recommendations report” for consideration by the
Ministers’ Committee on the Budget (MINCOMBUD) and Cabinet. This report will
draw on departmental budget submissions and engagements on these
submissions in the course of the budget process.
Activity 6.9
Download a copy of the latest version of the MTEF Technical Guidelines from the
National Treasury website and work through the activities listed here.
1.
The construct of the document usually covers the following elements:
•
An introduction. Work through the introduction carefully as it contains
invaluable information regarding the principles to be applied when
compiling the budget.
•
Components of the primary submission. This is broken down into a
narrative report and a data submission. Pay special attention to the
requirements listed in the narrative report as it explains the context
for the budget and provides an evidence-based rationale for decision
makers to formulate their expenditure recommendations. The data
submission supports the narrative report via several workbooks.
•
The guidelines also provide the costing assumptions to be used in the
preparation of the budget.
•
Separate or supplementary submissions. A typical example of a
separate submission would contain elements that may be considered
in the budget process. Such elements could be budget programme
structure changes; conditional grant change proposals; and/or a
bottom-up costing exercise.
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•
MTEF budget process. The MTEF budget process provides you with the
process dates. These dates will always be provided and the relevance
for you is to know that there is a predetermined point at which each
handover takes place. A sound budget can be submitted only if the
officials involved in the process have set up a work programme which
provides for each and every eventuality.
2.
Consider the following questions:
•
What are the main principles guiding the next financial year’s budget
submission?
•
Compare the MTBPS, the SONA, the budget speech and the MTEF
Technical Guidelines and identify the similarities regarding the needs
of the nation. Indicate what you think needs to be added (or deleted)
from the list and state why you have made these particular choices.
•
Discuss the prescribed primary submission that must be presented to
the National Treasury to satisfy the budgetary parameters set.
•
Relate what you believe is meant by a data submission.
•
Employ
National
Treasury’s
description
of
programmes
and
subprogrammes and explain to a layperson what is meant by them.
Do not forget to provide two or three examples to support your
explanation.
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Summary
Budgeting is as complex as it is diverse. The preparation is extensive and the
necessity to do it well cannot be overstated. As with all financial management, it
is not the exclusive domain of the financial practitioners, as the operational (line)
officials must set the vision, mission, strategic plans and day-to-day activities for
the institution to provide the services in pursuit of government’s goals and
objectives. The budget provides the framework to incorporate the future
requirements, including the means to achieve them, the in-year execution and
the accountability to satisfy the people that their money (taxes) has been used
in the interest of the People and that it has been achieved efficiently, effectively,
economically and ethically.
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Self-Assessment Questions
6.1
Government has the accountability to ensure responsible spending. Thus,
the costs of initiatives must be linked with results to ensure value for
money. Without redrawing the actual model, name the various (strategic
planning) concepts, as published by the National Treasury, that
government has created to outline the different levels set to achieve the
above objective. The table should be presented as follows:
Concept
6.2
A Layperson’s Question that
Assists in Understanding the
Concept
Definition
Identify each of the accountability documents that institutions should
produce
in
relation
to
each
stage
of
the
planning,
budgeting,
implementation, reporting, monitoring and evaluation cycle. Provide the
purpose of each one.
6.3
The annual appropriation is initiated with strategic planning and
culminates in the annual performance plan. Explain the focus and purpose
of the strategic plan and the annual performance plan, and the
relationship between the two.
Tip: When sourcing your material and preparing your response, some of
the material within the prescribed sections of the study guide, the
textbook and additional material may appear irrelevant. Discern very
carefully what you retain and what you leave out. A good indicator is
always to look at the mark allocation and to get an idea of how much is
required. If you are using Arial font 11 single spacing, 5 marks normally
equates to approximately half an A4 page.
6.4
What is the MTBPS and what does it cover?
6.5
Tabulate the differences between the MTBPS and the MTEF Technical
Guidelines. Conversely, state the purpose of each document (in a table).
6.6
Write an essay in which you explain the value of the MTBPS and indicate
how it is supplemented by the MTEF Technical Guidelines.
6.7
In the budget speech the Minister of Finance usually mentions several
items requiring government action. Using the most recent budget speech,
list these items, indicate which department would be responsible and
state, as you understand it, which programme in that department should
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incorporate the relevant item in its strategic and annual performance
plans.
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Topic 7
Supply Chain Management (SCM)
Prescribed Reading
Before continuing with this topic, please read the following to obtain an overall
view:
•
Pauw et al. (2015: Chapter 8, pages 223–246)
Do not start highlighting what you regard as salient issues until you get to the
specific directions in this study guide.
7.1
INTRODUCTION
After completing this topic, you should be able to do the following:
•
Define supply chain management (SCM).
•
Identify the advantages of SCM.
•
Explain the construct and management stages of SCM.
•
Understand and describe the Procurement Policy Framework.
•
Discuss the general issues in procurement management, including
government’s procurement guidelines.
Ironically, governments cannot exist without spending money. They spend
money to pay salaries (government officials, ministers, members of Parliament,
teachers, nurses, and so forth). However, governments also exist to provide
services and functions to the public and in order to do that they need supplies.
They need textbooks for schools, medicine and medicinal supplies for hospitals
and clinics, arms and ammunition and equipment for the defence force and police
services, and a huge range of every conceivable product.
Supplies and products for government are acquired through a formal process
known as the Supply Chain Management Process. Government acquires its
materials, products and services from the private sector. Obviously, this would
therefore imply that government spending has a direct impact on the private
business sector.
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For instance, if government decides to build 200 new schools and 50 new clinics,
construction companies will get more business and be able to provide more jobs.
Proper supply chain management is one of the most vital aspects of government
functions since it relates directly to service delivery. For instance, if the
Department of Education (provincial) neglects to order textbooks for Grade 12
learners, this will have a huge impact on their matric results and probably
compromise their future careers as a result. Similarly, if the Department of
Health orders fewer incubators than planned for, newborn babies can die owing
to a lack thereof. These are examples indicating the seriousness of and
responsibility related to supply chain management and its relative importance as
part of public sector financial management.
7.2
CONCEPTS OF SUPPLY CHAIN MANAGEMENT
The concepts of supply chain management are quoted directly from the STADIO
PSC100 study guide and provide the linkage between public sector financial
management and the discipline commonly referred to as supply chain
management. Additional information may be obtained from scanning the PSC
study guides.
The following quotation indicates what the “Policy strategy to guide uniformity in
procurement reform processes in government” applies to (National Treasury,
2003a:17):
the acquiring and disposing of all goods, services, construction and
roadworks and immovable property of all constitutional institutions,
public entities as defined in Schedule 3A and 3C of the PFMA, national
and provincial departments, trading entities, municipalities and
municipal entities as defined in the MFMA and all school governing
bodies whether or not they have been assigned additional
responsibilities in terms of Section 21 of the South African Schools Act,
1996.
SCM is an integral part of prudent financial management. It introduces
internationally accepted best practice principles, while at the same time
addressing the government’s preferential procurement policy objectives.
Integrated supply chain management aims to add value at each stage of the
process – from the demand for goods or services to their acquisition, to the
management of the logistics process, and finally, after use, to their disposal. In
doing so, SCM addresses deficiencies in current practices related to procurement,
contract management, inventory and asset control, and obsolescence planning.
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SCM involves the management of working capital that is invested in goods, stores
and services with the objective of optimising the economic return on such
investment. It entails proper planning in the budgeting phase, careful
product/service
selection,
supplier
selection
and
management,
bidding,
requisitions, catalogue management, ordering, invoicing and payment, customer
service, and asset and inventory management.
The process begins when the needs are identified during the strategic planning
phase of the organisation when service delivery targets are identified and
continues to the point of finally disposing of an asset.
Uniformity in bid and contract documentation and options as well as bid and
procedure standards, among other things, will promote standardisation of supply
chain management practices.
The supply chain encompasses all activities associated with the flow and
transformation of goods from the raw material stage (extraction) through to the
end user, as well as the associated information flows. Material and information
flow both up and down the supply chain (Handfield & Nichols, 1999:2).
SCM is a systems approach to managing the entire flow of information, materials
and services from raw materials suppliers through factories and warehouses to
the end customer (Leenders & Fearon, 1997:295).
SCM is a management philosophy aimed at integrating a network (or web) of
upstream linkages (sources of supply), internal linkages inside the organisation
and downstream linkages (distribution and ultimate customers) in performing
specific processes and activities that will ultimately create and optimise value for
the customer in the form of products and services which are specifically aimed
at satisfying customer demands (Hugo, Badenhorst-Weiss & Van Rooyen,
2002:29).
7.3
PURCHASING AND SUPPLY CHAIN MANAGEMENT
The purchasing of goods and materials and the acquisition of services probably
constitute major government expenditure through which service delivery is
achieved. Goods and materials may vary from schoolbooks to medicine, uniforms
and acquiring specialised services such as consultants and training. Government
purchasing therefore impacts on society and the economy since most or all of
the goods and/or services are obtained from the private sector. Therefore, it
should be evident that government can influence certain sectors in the economy
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by awarding bids to suppliers in order to achieve certain political or other socioeconomic objectives.
However, it should be reiterated that government exists in the first place since
the electorate mandated them to perform particular functions on behalf of
society, which they cannot provide on their own, or because the private sector
does not provide those services mainly because of its non-profitable nature.
Therefore, government’s first and primary objective is service delivery, and in
the process it buys supplies and goods of every conceivable nature.
The intent and purpose of supply chain management by its very nature does not
negate service delivery per se, it actually serves to achieve other objectives in
tandem with service delivery as its primary objective.
In the preface of the Guide for Accounting Officers/Authorities regarding the
integrated Supply Chain Management System (SCM) issued by the National
Treasury in February 2004, the philosophy behind the introduction of the SCM
lists the following factors necessitating the changes:
•
Procurement and provisioning procedures are rule driven and value for
money is usually equated to the lowest price tendered – the emphasis is on
monitoring inputs.
•
Procurement and provisioning activities are not linked to budgetary
planning.
•
Asset management is limited to the control of inventory, rather than
focusing on ensuring a satisfactory return to the community for the funds
invested.
•
Bid documents are not uniform, causing uncertainty to bidders and
practitioners.
•
The Preferential Procurement Policy Framework Act 5 of 2000 (PPPFA) and
its associated Regulations are complex and difficult to implement correctly,
and procurement practitioners are not adequately trained in their
application.
•
Costs and outcomes of the PPPFA are not fully quantified, hence it is
impossible to evaluate the merits of the system.
7.4
POLICY FRAMEWORK FOR PROCUREMENT
The policy framework within which the procurement function must be executed
is established by means of legislation, regulations and manuals. At national level
these are invariably formulated by the National Treasury, whereafter each
subordinate department, legislative authority and institution must derive its own
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policies and procedures. The most significant elements of the framework have
been discussed previously, but in a different context. They are repeated below
to link them to the procurement function.
7.4.1
Constitution of the Republic of South Africa
Section 195(1) of Chapter 10 of the Constitution states: “Public administration
must be governed by certain democratic values and principles” which include the
“efficient, economic and effective use of resources”. In addition, Chapter 13 and
other sections specifically refer to procurement:
•
Section 217(1): When an organ of state in the national, provincial or local
sphere of government or any other institution identified in national
legislation contracts for goods or services, it must do so in accordance with
a system which is fair, equitable, transparent, competitive and costeffective.
•
Section 217(2): Subsection (1) does not prevent the organs of state or
institutions referred to in that subsection from implementing a procurement
policy providing for:
(a)
categories of preference in the allocation of contracts; and
(b)
the protection or advancement of persons, or categories of persons,
disadvantaged by unfair discrimination.
•
Section 217(3): “National legislation must prescribe a framework within
which the policy referred to in subsection (2) may be implemented.”
The provisions with regard to procurement established in the Constitution serve
as the point of reference to which policies must adhere.
7.4.2
Public Finance Management Act 1 of 1999, as Amended by Act 29 of
1999 (PFMA)
The Public Finance Management Act 1 of 1999 (PFMA), as amended by Act 29 of
1999, is probably the most influential directive issued in terms of public sector
financial management and also with regard to procurement. Section 38(1)(a)(ii)
of the PFMA stipulates that the accounting officer of a department must ensure
that the department has and maintains an appropriate procurement provisioning
system, which must be fair, equitable, transparent, competitive and costeffective. Section 76(4)(c) states that “the National Treasury may make
regulations or issue instructions concerning the determination of a framework for
an appropriate procurement and provisioning system which complies with the
same criteria”.
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7.4.3
National Treasury Regulations
The Treasury Regulations of March 2005, issued in terms of Section 76 of the
PFMA, address the procurement function in terms of:
•
management of losses and claims
•
procurement in the case of public-private partnerships
•
disposal of assets by trading entities
In terms of Section 16A3.2 of the Treasury Regulations, a supply chain
management system must:
(a)
be fair, equitable, transparent, competitive and cost effective
(b)
be consistent with the Preferential Procurement Policy Framework Act 5 of
2000
(c)
be consistent with the Broad-Based Black Economic Empowerment Act 53
of 2003
(d)
provide for at least the following:
(i)
demand management
(ii)
acquisition management
(iii) logistics management
(iv) disposal management
(v)
risk management
(vi) regular assessment of supply chain management
The Treasury Regulations provide a comprehensive framework directing the
purchasing and acquisition function of government from a centrally controlled
perspective. This means that the National Treasury also controls the execution
of government policy through the issuing of directives and official circulars.
7.4.4
Preferential Procurement Policy Framework Act 5 of 2000 (PPPFA)
This Act gives effect to Section 217(3) of the Constitution by providing a
framework for the implementation of the procurement policy. The Act requires
any organ of state to determine its preferential procurement policy and
implement this within the legislative framework.
The objectives included as an essential element of this Act include contracting
with persons or categories of persons historically disadvantaged by unfair
discrimination. Basically the Act makes provision for the awarding of bids to
previously disadvantaged persons, especially by targeting small and mediumsized enterprises, and therefore promoting economic development and growth in
that section of society. Also, procedures and processes need to be simplified and
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made more accessible in order to provide more opportunities in terms of the
award of bids.
Practically, a points system is used to evaluate bid applications in terms of, for
instance, broad-based black economic empowerment (Broad-Based Black
Economic Empowerment Act 53 of 2003).
The two sections of the Act, excluding Part One, deal specifically with the
following:
•
Planning and stipulation of the preference point system to be utilised,
evaluation of bids on functionality, preference point system and broadbased black economic empowerment status, award of contracts to bidders
not scoring the highest number of points and the cancellation and reinvitation of bids.
•
Local production and content, B-BBEE status level certificates, conditions,
declarations, remedies, tax clearance, repeal of regulations.
Activity 7.1
1.
List the items that make up a procurement policy framework.
2.
Indicate how the PPPFA affects the procurement process. (Study guide 7.3)
7.4.5
Preferential Procurement Policy Framework Act, 2000: Preferential
Procurement Regulations
The Preferential Procurement Regulations are repeated here as part of the policy
framework to
ensure
completeness.
The discussion
may
be found
at
Topic 3.2.11.
7.4.6
National Treasury Policy Objectives of SCM
In terms of the basic policy objectives of SCM as indicated in the Guide for
Accounting Officers/Institutions the following apply:
•
Transform government procurement and provisioning practices into an
integrated SCM function.
•
Introduce a systematic approach for the appointment of consultants.
•
Create a common understanding and interpretation of the preferential
procurement policy.
•
Promote
the
consistent
application
of
“best
practices”
government’s supply chain.
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throughout
Activity 7.2
Study Supply chain management in Chapter 6 in the textbook, Section 6, pages
243–246.
1.
Define SCM.
2.
Rewrite the related perspectives of SCM (as contained in the textbook) in
your own words.
3.
The National Treasury provides AOs with SCM policy objectives. What are
they?
7.5
SUPPLY CHAIN MANAGEMENT SYSTEM
The Supply Chain Management System issued by the National Treasury
comprises five elements that are managed in sequence to form the supply chain
system.
7.5.1
Demand Management
This is the beginning of the supply chain:
•
A needs assessment is done to ensure that goods or services are acquired
in order to deliver the agreed service.
•
Specifications are precisely determined.
•
Requirements are linked to the budget.
•
The supplying industry has been analysed.
This phase strives to bring the supply chain practitioner closer to the end user,
ensuring value for money.
7.5.2
Acquisition Management
Provisioning administration in the past focused primarily on this aspect of
acquisition. The advent of SCM introduced particular management principles to
enhance their procedural aspects, which are the following:
•
To decide on the manner in which the market will be approached
•
To establish the total cost of ownership of a particular type of asset
•
To ensure that bid documentation is complete, including evaluation criteria
•
To evaluate bids in accordance with published criteria
•
To ensure that proper contract documents are signed
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7.5.3
Logistics Management
This aspect refers to the situation where the actual transaction has been
concluded and the logistics are being addressed, which include:
•
setting inventory levels
•
receiving and distributing material
•
stores, warehouses and transport management
•
the review of vendor performance
Payments are generated from the activation of these processes.
7.5.4
Disposal Management
The disposal phase assumes a condition and stage where consideration should
be given to:
•
obsolescence planning (old stock)
•
maintaining a database of redundant material
•
inspecting material for potential reuse
•
determining a disposal strategy
•
executing the physical disposal process
7.5.5
Supply Chain Performance
This is basically a monitoring process, undertaking a retrospective analysis to
determine whether the proper processes have been adhered to and whether, or
the extent to which, the desired objectives were achieved. The following
considerations are applicable to this process:
•
Compliance to standards and norms
•
Cost-efficiency of SCM process (cost of process)
•
Whether supply chain practices are consistent with government’s broader
policy focus
Activity 7.3
Explain, in sequence, the five elements to be managed to ensure sound SCM.
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7.6
GENERAL ISSUES IN THE PROCUREMENT PROCESS
7.6.1
Spending in Accordance with the Budget
Activity 7.4
Study the following sections in the textbook:
•
Section 4.7.1: Spending in accordance with the budget, pages 241–242
•
Section 4.7.2: Value-for-money, page 242
•
Section 4.7.3: Control principles, page 242
Work through the brainteasers on page 242.
7.6.2
Government’s General Procurement Guidelines
The General Procurement Guidelines are issued by government not only as a
prescription of standards of behaviour, ethics and accountability, but also as a
statement of the government’s commitment to a procurement system which
enables the emergence of sustainable small, medium and micro businesses which
will add to the common wealth and the achievement of enhanced economic and
social well-being of all South Africans (adapted from the General Procurement
Guidelines issued by the government of South Africa).
In terms of these guidelines, it is maintained that government procurement is
based on the so-called five pillars that prescribe a minimum set of standards.
•
Value for money
Prices are not necessarily a reflection or indication of whether value for
money will be achieved as an essential outcome. In terms of the
procurement guidelines, a principle is adhered to that best value for money
means the best available outcome when all relevant costs and benefits over
the procurement cycle are considered, and to this effect, aspects to be
considered are:
o
Avoid any unnecessary costs and delays for themselves or suppliers.
o
Monitor the supply arrangements and reconsider them if they cease to
o
Ensure continuous improvement in the efficiency of internal
provide the expected benefits.
processes and systems.
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•
Open and effective competition
You would recall that one of the aspects related to government legislation
is to effect particular objectives in society. You should also reflect about
some of the deficiencies inherent in the market system (Topic 2 of the study
guide), which restricted persons from participation in the economy. With
that in mind, it is therefore logical that the second pillar of the General
Procurement Guidelines refers to “open and effective competition”, which
requires:
o
A framework of procurement laws, policies, practices and procedures
o
Openness in the procurement process
that are transparent, i.e. they must be readily accessible to all parties
o
Encouragement
o
Observance of the provisions of the PPPFA
of
effective
competition
through
procurement
methods suited to market circumstances
Therefore, departments need to get the best possible outcome from the
market by ensuring that:
o
Potential
suppliers
have
reasonable
access
to
procurement
opportunities and available opportunities are announced at least in the
Government Tender Bulletin.
•
o
Where market circumstances limit competition, departments recognise
o
Adequate and timely information is provided to suppliers to enable
o
Bias and favouritism are eliminated.
this fact and use procurement methods that take account of them.
them to bid.
o
The costs of bidding for opportunities do not deter competent
o
Costs incurred in promoting competition are at least commensurate
suppliers.
with the benefits received.
Ethics and fair dealing
With regard to ethics and fair dealing, officials dealing directly with suppliers
or potential suppliers are required to:
o
recognise and deal with conflicts of interest or the potential therefor
o
ensure that they do not compromise the standing of the state through
o
be scrupulous in their use of public property
o
•
o
deal with suppliers even-handedly
acceptance of gifts or hospitality
provide all assistance in the elimination of fraud and corruption
Accountability and reporting
Openness and transparency in administration, by external scrutiny through
reporting, are one of the primary elements of public sector accountability.
Therefore, within the procurement framework:
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o
Heads of department are accountable to their ministers for the overall
o
Heads
management of procurement activities.
of
accountable
procurement
to
heads
and
senior
procurement
of
department
for
directors
various
are
high-level
management and coordination activities.
•
o
Individual
o
All people exercising procurement functions must regard these
procurement
officers
are
accountable
to
heads
of
procurement, and to their clients, for the services they provide.
guidelines and are accountable to management.
Equity
In terms of the General Procurement Guidelines, the word “equity” means
the application and observance of government policies that are designated
to advance persons or categories of persons disadvantaged by unfair
discrimination. In accordance with the Reconstruction and Development
Programme, SMMEs and HDIs need to play a bigger role in the economy.
Therefore, greater participation in the economy and more diversified
representation of black people and gender in ownership is essential. The
Preferential Procurement Policy Framework Act is the foundation on which
all procurement activities are based, with the aim to:
o
advance the development of SMMEs and HDIs
o
create new jobs
o
promote women and physically handicapped people
o
promote local enterprises in specific provinces, in a particular region,
o
support local products
in a specific local government, or in rural areas
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Summary
Government spends millions annually on the acquisition of goods and services.
Controversy often surrounds the award of bids and therefore officials should
persevere in adhering to all the prescribed procedures and policies regarding this
vital function of government. Eventually, supply chain management is a process,
comprising specific procedures and managed according to prescribed policies
with service delivery as the outcome. Therefore, all officials should pursue their
functional activities in terms of supply chain management prescripts with due
regard to promoting the general well-being of all citizens in South Africa.
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Self-Assessment Questions
7.1
SCM
incorporates
demand,
acquisition,
logistics
and
disposal
management as well as supply chain performance. Describe each one in
detail and use the Auditor-General’s latest report to identify the most
troublesome areas. Provide an indication of how these problem areas may
be addressed.
7.2
What would you regard as the primary piece(s) of legislation in the policy
framework for procurement? Substantiate your answer by quoting the
relevant sections and indicating how they apply (where appropriate).
7.3
Imagine for the moment that you are the official who has to deal with and
respond to the Auditor-General on SCM issues. You have just received the
latest audit report and have to discuss the content with the accounting
officer. Prepare a brief in which you identify the primary problems,
categorise them according to the National Treasury’s framework and then
offer some proposals on a way forward.
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Topic 8
Local Government Finance and the Municipal
Finance Management Act 56 of 2003
Prescribed Reading
Before continuing with this topic, please read the following:
•
Pauw et al. (2015: Chapter 9)
•
Municipal Finance Management Act 56 of 2003
This topic is partially sourced from Chapter 9 in the prescribed textbook and
partially from the Municipal Finance Management Act 56 of 2003 (available at
www.gov.za or the National Treasury website). It does not qualify you in the area
of local financial management, but provides you with a substantial introduction
and a basis from which to move forward.
Please make sure that you follow the study guide carefully as it allows you to
work through the material progressively.
8.1
INTRODUCTION
After completing this topic, you should be able to do the following:
•
Understand
the
policy
framework
within
which
municipal
financial
management takes place.
•
Source and list the functions and powers of municipalities.
•
List and describe the organisational structures and role players involved in
municipal financial management.
•
Explain what the Integrated Development Plan (IDP) and the Service
Delivery and Budget Implementation Plan (SDBIP) are.
•
State the requirements
pertaining to revenue management within
municipalities to the point of being able to assess shortcomings and
recommend corrective interventions.
•
State the requirements pertaining to the management of liabilities within
municipalities to the point of being able to assess shortcomings and
recommend corrective interventions.
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•
Define the MFMA, describe the object of the Act and be able to quote from
it.
Local government finance, or municipal finance, relates to all the financial and
financial management affairs of a town, city or similar entity, as indicated in the
Act. The affairs and services provided by a municipality affect every citizen
directly, since they involve the provision of water and electricity, refuse removal,
libraries, health clinics, the issuing of trading permits, maintenance of law and
order, roads, traffic lights and a variety of other functional activities. A properly
managed municipality is of vital importance to the citizens of any country, since
people experience government services most directly at this level. It is therefore
imperative that you know the basic aspects of financial management at local
government level.
8.2
FUNDAMENTAL ELEMENTS OF LOCAL GOVERNMENT FINANCE
Up to now, you have dealt with public sector financial management at central
and provincial government levels. One of the particular reasons why local
government finance forms part of public sector financial management is the
interdependence between government levels. A typical example is the matter of
intergovernmental fiscal relations (cooperative government) between the various
provinces and the local governments within each, respectively, where transfers
occur between the provincial government and specific municipalities. This aspect
exists owing to the fact that municipalities are a logical extension of the services
provided by provincial governments and also because of aspects related to the
division of revenue resources within provincial and municipal boundaries.
Two distinctive features distinguishing local government finance from central and
provincial financial management are the sources of revenue and the operational
aspects of service delivery. Whereas central and provincial governments receive
funding primarily from tax revenue, municipalities are reliant on rates, taxes and
levies, among other things, as a source of revenue. The management of the
processes involved in local government finances is designed and prescribed to
suit the specific environment in which it functions, which differs from the
environments of central and provincial governments.
From an operational point of view, municipalities interact with their clients on a
daily basis in terms of service delivery. Therefore, aspects such as revenue
collection, debt management and functional service delivery vary from the
processes employed by entities on central and provincial levels of government.
The Municipal Finance Management Act makes provision for the management of
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finances at local government level owing to its particular functional peculiarity
and it provides for particular practices and procedures of financial management
in the local government sphere.
Activity 8.1
What distinguishes local government finances from central and provincial
financial management? Explain your answer.
8.3
POLICY
FRAMEWORK
FOR
MUNICIPAL
FINANCIAL
MANAGEMENT
The policy framework for municipal financial management is found in Section 3
on pages 250–251 of the textbook. You will note that it is extensive, diverse and
based on the provisions of the Constitution. Read it carefully and attentively. You
do not have to commit it to memory, but you must understand its content and
context. (Formative (assignment) questions could be asked from this section,
but not summative (examination) questions.)
8.4
FUNCTIONS AND POWERS OF MUNICIPALITIES
Similarly, the functions and powers of municipalities are wide-ranging, placing
an onerous responsibility on the officials within the municipality’s management.
These functions and powers are contained in the two schedules in the
Constitution, underscoring their importance.
They are to be found in Section 4 on pages 251–252 of the textbook. Again, read
them carefully and attentively. Recognise the scope and consider the impact they
have on the overall financial well-being of the municipality. Here, too, you do not
have to commit them to memory, but you must understand the content and
context. (Formative (assignment) questions could be asked from this section,
but not summative (examination) questions.)
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Activity 8.2
1.
Separate the functions and powers of municipalities into financial and nonfinancial items.
2.
8.5
Now separate the financial items into revenue and expenditure items.
PUBLIC INSTITUTIONS, ORGANISATIONAL STRUCTURES AND
ROLE
PLAYERS
INVOLVED
IN
MUNICIPAL
FINANCIAL
MANAGEMENT
It is essential that you familiarise yourself with the institutions, structures and
individuals who are involved in ensuring sound municipal financial management.
You will note that they are separated into political and administrative functions
and they are not necessarily all finance specialists.
Activity 8.3
1.
Study sections 5.1 and 5.2 in the textbook (pages 253–260): Public
institutions, organisational structures and role players involved in municipal
financial management. Your study should not include the detail of each one.
By the time you are done, you should be able to list the structures and role
players and provide a brief description of each.
2.
Briefly explain the political structures involved in municipal financial
management.
3.
List the structures and role players at the administrative level involved in
municipal financial management. Separate them into structures and role
players.
8.6
MUNICIPAL PLANNING AND BUDGETING PRACTICES
Read the introduction to Section 6 in the textbook (pages 262–263): Municipal
planning and budgeting practices.
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Activity 8.4
Study the following sections:
•
Section 6.2 (page 263): The IDP as strategic plan
•
Section 6.3 (page 266): The Service Delivery and Budget Implementation
Plan (SDBIP)
Explain to a colleague in your own words what these concepts are about.
8.7
MANAGEMENT OF REVENUE
Read the introduction to Section 7 in the textbook (page 277), Management of
revenue, expenditure assets and liabilities.
The collection of revenue has been the downfall of many a local government and
the significance of this section must not be underestimated.
Activity 8.5
Study Section 7.1 (pages 277–283), Revenue management, and answer the
following questions:
1.
Explain the concepts of non-apportionable and non-exclusive collective
services as they apply to rates and taxes.
2.
Identify and define particular services and the legislation in terms of which
municipalities are mandated to provide these services within their municipal
boundaries.
3.
Outline the principles and requirements of tariff policy.
4.
Explain how the revenue base of a municipality is affected by the Municipal
Fiscal Powers and Functions Act.
5.
Name the person whom the MFMA identifies as ultimately responsible for
revenue management within the municipality and describe what steps this
official must take to ensure full compliance.
6.
Do you think that citizens within the municipal boundaries of a local
authority should be treated as customers? Discuss the reason for your
position.
7.
Summarise the most important measures municipalities should adopt when
considering debt collection and credit control.
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8.8
MANAGEMENT OF LIABILITIES
What is a liability? Within our context, it is a person to whom money is owed.
There are other interpretations, but we will remain within the context of public
financial management and, more specifically, accounting.
By way of example, consider the following two cases:
•
An article published by BusinessTech on 30 October 2019 under the title
“These 10 municipalities and Soweto owe Eskom billions” states that
municipalities owe Eskom over R36.5 billion.
•
Similarly, Business Day, on 13 October states: “The office of the auditorgeneral is burdened with outstanding debt of R744m in unpaid audit fees,
with nearly half of it being due by municipalities.”
For students at this level it is surely not necessary to elaborate on the impact
that this debt has on the operational processes of these organisations,
notwithstanding the fact that it is prescribed practice at every level of
government that government entities must settle their debt within 30 days of
receipt of invoice. Imagine just for a moment how it would affect your household
if you had provided a service and are not paid for it.
Activity 8.6
Study Section 7.4 (pages 289–291), Management of liabilities.
Prepare a brief in which you explain the management of liabilities at municipal
level. Your document should contain the following:
•
An introduction
•
A discussion clearly indicating the various elements that need to be
addressed
•
A view on how well local governments are dealing with their outstanding
accounts – for this purpose, consider the Auditor-General’s latest opinion
regarding this issue
•
Some suggestion(s) on how the situation can be improved
•
A conclusion/summary
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8.9
THE MUNICIPAL FINANCE MANAGEMENT ACT 56 OF 2003
The preamble to the Municipal Finance Management Act (MFMA) states its
objective as the following:
To secure sound and sustainable management of the financial affairs
of municipalities and other institutions in the local sphere of
government; to establish treasury norms and standards for the local
sphere of government; and to provide for matters connected
therewith.
Activity 8.7
Download a copy of the Municipal Finance Management Act 56 of 2003.
•
Study Section 2: Object of the Act.
•
Read through and note sections 7–11: Municipal bank accounts.
•
Read through and note Section 17: Contents of annual budgets and
supporting documents. Page through the remainder of the chapter as a
general background.
•
Read Chapter 7: Responsibilities of mayors. You will recognise this material
from having studied it a little earlier.
•
Read Section 52: General responsibilities and Section 77: Top management
of municipalities.
Respond to the following questions:
1.
How does the object of the MFMA differ from that of the PFMA?
2.
Explain in non-legislative language what the MFMA requires from mayors.
Do not forget to quote the relevant sections in the MFMA.
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Summary
Effective municipal management is essential for the prosperity of all citizens,
since it influences their lives directly. This aspect, in conjunction with the
principles of sound financial management and accountability, necessitates the
existence of legislation. In this case, the Municipal Finance Management Act
makes provision for the sound and sustainable management of the financial
affairs of municipalities as indicated in the preamble to the Act. Therefore, it
should also serve as the basis of any study of the management of local
government finance. The fact that so many South African municipalities
experience financial and other difficulties cannot be ascribed to a lack of policy
and guidance, but rather to non-compliance with such guidelines.
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Self-Assessment Questions
8.1 Compare sections 60–79 of the MFMA: Responsibilities of municipal officials
with Section 5 in the textbook: Public institutions, organisational structures
and role players involved in municipal financial management. Determine
whether you are able to improve on the work of Pauw et al.
8.2 Outline the strategic planning process within a municipality up to the point
where the IDP has been adopted by the municipality and must be submitted
to the MEC for local government.
8.3 Identify the structures and role players within municipal financial
management and describe the role of each one.
8.4 Outline how revenue is managed within local municipalities and comment
on the current success rate. Test yourself by preparing responses worth 10,
20 and 25 marks.
8.5 Pauw et al. (2015:283) quote Kapp in suggesting that there are “core
difficulties and complexities of credit control and debt collection that pose a
challenge to municipalities”. Identify these challenges, define them and
provide examples of and solutions for each of them. In responding to this
question, you may want to consider the Auditor-General’s sentiments
regarding local governments.
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Topic 9
Ethics: Combatting Fraud and Corruption
Prescribed Reading
Before continuing with this topic, please read the following:
•
9.1
Pauw et al. (2015: Chapter 10, pages 295–311)
INTRODUCTION
After completing this topic, you should be able to do the following:
•
Understand and explain ethical principles and how they affect service
delivery.
•
Review examples of fraud and corruption through the initiatives government
has implemented to mitigate the phenomena.
•
Provide a model against which ethics may be measured and interventions
to address breaches.
It is not difficult to understand why A. Camus would suggest that “A man without
ethics is a wild beast loosed on the world”. This would advocate a measure of
recklessness and if one were to consider the impact of a lack of ethics by those
entrusted to concern themselves with the interest of the People, it is nothing less
than recklessness. Poor ethics has a parasitic character as it robs individuals and
communities of opportunities of actualisation and growth. This study introduces
the subject and considers the reasons for fraud and corruption; and then offers
some guidance on corrective measures.
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Activity 9.1
Study the following sections in the textbook:
•
The nature of ethics, Section 1 on pages 295–298
•
Ethics in our time, Section 2 on pages 298–300
•
Pathology: Fraud and corruption, Section 3 on pages 300–304
•
Putting things right, Section 4, pages 304–307
•
Upholding public ethics standards in South Africa, Section 5, pages 307–
311
Answer the following questions:
1.
Define the term “ethics”.
2.
What are the three main philosophical approaches to ethics?
3.
Respond to Brainteaser 10.2.
4.
Define fraud and corruption.
5.
Quote examples of contemporary fraud and corruption in both the private
and public sectors.
6.
Provide initiatives to mitigate the examples mentioned in Question 5.
7.
Identify and explain issues in the policy realm that might promote a culture
of honesty and dedication to the public interest.
8.
Discuss typical circumstances where there might be weak consequences in
respect of poor ethical standards and how government might introduce
strong and appropriate consequences.
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Summary
Ethics
in
the public sector, especially regarding
financial management
performance, is about ensuring trust in the public sector and its officials. Elected
officials and the administrators responsible for the bureaucratic processes must
consistently champion professional and ethical principles in both the legislative
process and day-to-day execution of government’s objectives. Their work is to
inculcate a culture of ethical standards and practices through establishing robust
systems that deal with employment practices, organisational structures and
procedures, and financial management.
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Self-Assessment Questions
Formative Assessment
9.1
Explain three concepts of ethics (i.e. the three meanings of the term
“ethics”) using examples.
9.2
List at least five categories of corruption and briefly describe each one.
9.3
The government has introduced four pieces of legislation to discourage
unethical behaviour. Identify them and indicate how each one contributes
to establishing an improved ethical environment.
9.4
What institutions in South Africa may be regarded as “pro-ethics and anticorruption”?
Summative Assessment
9.5
You have been appointed as the chairperson of the institution’s risk
committee. At your first meeting you choose to explain, in your own
words, what is meant by the pathology of fraud and corruption. Ensure
that you provide definitions and examples other than those offered to you
by SBS. Also ensure that you indicate the origin of your sources. For this
assessment you must submit your speech notes, clearly labelled and
referenced.
9.6
It is widely contended that there are three essential prerequisites for acts
of corruption to take place. They are dishonesty, opportunity and motive.
It would, therefore, make sense that any changes to the measures we use
to reduce the incidence of corruption should aim to reduce the existence
of these three conditions. Continue this discussion by explaining to a
colleague, in an essay, how this situation comes about and how may it be
remedied.
Tip: There is no lack of factual content in the textbook (pages 304–307).
Your essay must be in your own words, meaning that should you cut
and paste from the textbook, it would be far too long (and would
frustrate your examiner). Your essay should be no more than two-anda-half pages. Consequently, you must choose the salient (important)
points and develop them in your response.
9.7
To address vulnerabilities and ethics, South Africa has taken certain steps
that may be described as the public sector’s “pro-ethics and anticorruption” regime. Discuss the most important elements of this regime.
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References
Ensor,
L.
2019.
Municipal
debt
to
the
Auditor-General
keeps
rising.
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Handfield, R.B. & Nichols, E.L. 1999. Introduction to supply chain management.
Upper Saddle River, NJ: Prentice Hall.
Hugo, W.M.J., Badenhorst-Weiss, J.A. & Van Rooyen, D.C. 2002. Purchasing and
supply chain management, 4th ed. Pretoria: Van Schaik.
Leenders, M.R. & Fearon, H.E. 1997. Purchasing and supply management, 11th
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Pauw, J.C., Woods, G., Van der Linde, G., Fourie, D. & Visser, C.B. 2015.
Managing public money, 3rd ed. Cape Town: Pearson Holdings Southern Africa.
South Africa. 1996. Borrowing Powers of Provincial Governments Act, No. 48 of
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South Africa. 1996. Constitution of the Republic of South Africa, Act No. 108 of
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South Africa. 1997. Intergovernmental Fiscal Relations Act, No. 97 of 1997.
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South Africa. 1997. South African Revenue Service Act, No. 34 of 1997.
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South Africa. 1999. Public Finance Management Act, No. 1 of 1999 (as amended
by Act 29 of 1999). http://www.gov.za.
South Africa. 2000. Preferential Procurement Policy Framework Act, No. 5 of
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South Africa. 2003. Municipal Finance Management Act, No. 56 of 2003.
http://www.gov.za.
South Africa. 2004. Property Rates Act, No. 6 of 2004. http://www.gov.za.
South Africa. 2004. The Public Audit Act, No. 25 of 2004. http://www.gov.za.
South Africa. 2007. Municipal Fiscal Powers and Functions Act, No. 12 of 2007.
http://www.gov.za.
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