1

FINANCIAL AND FISCAL COMMISSION

2010/2011 ANNUAL REPORT

2

Mandate of the Commission The Commission is established in terms of Section 220 of the Constitution

of the Republic of South Africa Act No. 108 of 1996 as amended

Key enabling legislation is the Intergovernmental Fiscal Relations Act of

1997, the Financial and Fiscal Commission Act of 1997, the Money Bills

Amendment Procedures and Related Matters Act of 2009, the Municipal

Systems Act No. 32 of 2000 as amended, the Provincial Tax Regulation

Process Act of 2001, the Municipal Finance Management Act of 2003, the

Intergovernmental Relations Framework Act of 2005 and the Municipal

Fiscal Powers and Functions Act of 2007

The primary mandate of the Commission is to provide recommendations to

the three spheres of government and other organs of state on

The division of revenue between and among the three spheres of

government and,

Any other financial and fiscal matters

3

Overview

2010/2011 has been a productive year for the Commission:

The Commission has met all its legal mandates

Research has progressed rapidly in the areas of local

government, budget analysis, and economic modelling

Commission response times to ad hoc requests has improved

without negatively impacting on the Commission’s long-term

research

There has been a significant increase in the amount of work

that the Commission Research Team has published in

accredited journals and presented at conferences of note

There has been an exponential increase in stakeholder demand

for Commission services and products

4

Overview

All of the this was achieved in the face of some serious challenges:

Deputy Chairperson has been acting as Chairperson and Chief Executive

Officer of the Commission for over a year

The positions of Chairperson and Chief Executive Officer of the

Commission continue to be conflated and this is antithetical to good

governance

The Acting Chairperson and Chief Executive as sole Executive

Commissioner carries an onerous administrative load

There are long standing vacancies in the ranks of part-time Commissioners

The employment of unqualified personnel (Finance) and the need to review

the delivery model to address resource constraints

The continued pressure on the Commission’s budget

The struggle to resuscitate an antiquated Information Technology

Infrastructure

5

Overview

The Commission was given an unqualified audit opinion with

matters of emphasis for fruitless and wasteful expenditure,

irregular expenditure and going concern

Fruitless and Wasteful Expenditure

The penalties imposed and interest charged by SARS were

reversed after the audit

The penalties and interest were attributable to an allocation error

on the part of SARS

Irregular Expenditure

The irregular expenditure was incurred through the employment

of a service provider who post-engagement was unable to

produce a valid Tax Clearance Certificate .

6

Overview

Relying on the advice that was provided by SITA and the provisions of

Treasury Regulation 41(2) (c) on Supply Chain Management relating to

risk avoidance, Management decided against the summary termination

of the Contract.

The Commission has formally dismissed the fruitless and wasteful

expenditure finding

The Commission has condoned the irregular expenditure finding as

justifiable and reasonable in the circumstances

Going Concern

The Auditor General expressed concern about the Commission's

ability to continue operating because of the existence of a substantial

deficit

The Commission is negotiating with Government to resolve this

concern.

7

Strategy of the Commission 2010/2011 Commission Strategy informed by goals of undertaking cutting

edge research focusing on innovation, the developmental impact of public

resources, and providing stakeholders with coherent and appropriate IGFR

policy advice:

Research

The appropriate consolidation of public deficits and debt reduction

following increased expenditures as an aftermath of the 2008/2009

global financial and economic recession.

The appropriateness of countercyclical stabilisation policy, increased

intergovernmental grants and other transfers to generate high

employment, and reduced inequality and poverty.

The creation of favourable conditions for economic development in the

urban environment as this would provide the foundation for long-term

national economic and social development and success.

8

Strategy of the Commission The need for Government in the face of fiscal consolidation to

focus more closely on fiscal responsibility, improving the quality

of services, and pay attention to the issue of unfunded mandates.

Internal Dynamics

The need to address uncertainty in the Commission

The need to resolve the legislated conflation of directing and

executing authorities of the Commission in the Financial and

Fiscal Commission Act which conflicts with the provisions of the

PFMA continues to remain unresolved

The need to adapt to an ever shrinking resource envelope and

adopt a lean, highly-networked, research-focused delivery model

9

Strategy of the Commission

The requirement to deal with an antiquated Information Communication

Technology (ICT) infrastructure and systems which were at the brink of

total collapse.

The need to respond to the Increasing demands on the services of the

Commission because of among others changes in legislation and the

Commission’s aggressive stakeholder awareness and engagement

programme

The need to address a legacy R3.4m deficit that the Commission has

been seeking to erase for more than four (4) years through the

imposition of financial discipline and motivations for an increase of the

Commission’s baseline

The need to address the ever increasing costs of compliance which were

now consuming more than 8% of the budget of the Commission on audit

fees

10

Commission Achievements In the discharge of its Mandate, the Commission

Timeously Tabled its 2011/2012 Submission for the Division of Revenue

Responded to the 2010 Medium Term Budget Policy

Statement

Responded to the 2011 Division of Revenue Bill

Commented on the 2011 Fiscal Framework and Revenue

Proposals

Commented on the 2011 Appropriations Bill in April 2011

Finalised research on the 2012/2013 Submission for the

Division of Revenue that was tabled in May 2011

Tabled its 2009/2010 Annual Report in August 2010

Responded to all ad hoc stakeholder requests

11

Commission Achievements

Individual Commissioners and Staff published technical

reports based on the work of the Commission in academic

journals and thus contributed to the knowledge base on IGFR

issues to the broader community

The Commission continued to host and share experiences

with other African Countries in discussions around their own

intergovernmental fiscal relations systems and efforts at

fiscal decentralization

The Commission continues to maintain its profile as one of

the best practice institutions in the world in the area of fiscal

decentralization and intergovernmental fiscal relations.

12

Commission Achievements

The Commission sits as expert advisor on the Department of

Education’s Heads of Education Committee, the Sub-

Committees on Finance and Infrastructure, Department of

Transport’s Roads Coordinating Body, the Health

Department Data Advisory Group and the Water Research

Commission.

13

Challenges

The implementation of a complex change management strategy intended

to change the beliefs, attitudes, values, and structure of the organization

so that it can better adapt to new circumstances and to change itself

remains work in progress

The Commission’s Research Programme has been affected by many of

the challenges that are faced by the majority of public sector institutions

namely, limited resources to fulfill very broad mandates.

Dealing with instances where institutions have failed to consult with the

Commission in circumstances where such consultation was legally

prescribed and was also a requirement for the validity of legislative or

executive action

The conflation of the positions of Chairperson and Chief Executive Officer

of the Commission

14

Challenges

Lack of definition of the ‘Executive Authority’ of the Commission for

purposes other than those of the PFMA

Three vacancies that remain unfilled including the position of

Chairperson/CE in respect whereof the substantive Deputy Chairperson

has been acting since September 2010, and one local government

position which has been vacant since July 2008

Commissioner allowances have not been reviewed since 2008 which are a

potential disincentive to the recruitment and active participation of

suitably qualified part-time Commissioners.

The costs of compliance which take up 8% of the Commission’s budget

for audit purposes only

Delays in the downsizing of premises which have negative implications

for the Commission’s budget which is already under pressure

15

Challenges

The need to correct perceptions about the Commission

The need to disseminate the products of the Commission to a broader set

of stakeholders

16

Commission Recommendations for the year

Some of the recommendations that the Commission made in

its 2011/2012 Annual Submission for the Division of

Revenue and Government’s Response to them are the

following:

Global Economic Crisis, Fiscal Frameworks and Coping with

Vulnerabilities

The expansion of child support and old age pension grants

The maintenance of high levels of access to education and health

services

The reprioritisation of expenditure towards repair and maintenance by

emphasising existing projects and initiating new ones

Government agreed that the implications of the global economic crisis

and reduced fiscal space necessitated fiscal consolidation.

17

Commission Recommendations

Social Assistance Reform during a Period of Fiscal Stress

The protection the overall amount of social-assistance expenditure

as far as possible during the fiscal consolidation

Government supported this recommendations with the exception of the

piloting of a workfare programme.

Design and Administration of Conditional Grants

The introduction of a mandatory, systematic process for designing

and planning individual conditional grants that covers incentive

effects, administrative accountability arrangements and stipulates

regular review periods and exit strategies of the grant

An independent evaluation of grant performance at entry, midterm

and end of the grant

Government agreed with these recommendations

18

Commission Recommendations

Municipal Revenue Improvement and Collection

Government should adopt standard indicators or early warning systems

to measure and detect fiscal stress in municipalities and use them as

pre-conditions for instigating mandatory provincial intervention.

Government stated that it has an early warning system that monitors

municipal finances

Reform of the Local Government Equitable Share formula

Government should update the data of the Local Government Equitable

Share more frequently

The institutional component of the Local Government Equitable Share

should be used to assist poor municipalities

Government should remove the step structure of the differentiated tax

mechanism of the Revenue Raising Component, as this is inefficient.

19

Commission Recommendations

Government agreed that changes were required to improve the way the

local government equitable share is allocated between municipalities.

Government was of the view that the method used for predicting

municipalities’ capacity to raise own revenues was the fairest and most

accurate method available it

Government agreed that the removal of the stepped structure from the

revenue-raising correction and to the use of a smooth curve to calculate

the differentiated “revenue correction” rate applied to each municipality

Regionalising Municipal Services

In the absence of an assessment of the specific performance

challenges that the different municipalities face in implementing the

functions listed in part B of schedules 4 and 5, a blanket

regionalisation approach is not supported

20

Commission Recommendations

Government argued that the Commission’s recommendations were

moot.

Intergovernmental Fiscal Issues in Urban Public Transport

A comprehensive review should be conducted into the costs

associated with current urban form in a selection of major South

African cities in order to improve the efficiency of land use patterns

Government recognised the need to review fiscal and financing

arrangements for large cities and looked forward to the

Commission’s analysis and recommendations on key fiscal issues,

options and risks regarding this issue.

Key Issues

21

 Objectives

Targeted Outcome

Actual Outcome

Variance

2010/11 (R)

2010/11 (R)

2010/11(R)

Major Objectives 23,736

27,521

(3,785)

Generate quality, innovative pioneering research that promote and influence intergovernmental, legislative and intellectual discourse and facilitate engagements between stakeholders on key IGFR issue

13,500 15,185

(1,685)

Compliance with legislation and adherence to good corporate governance

4,546 5,476 (930)

Adopt a Prudent and Transparent Approach to the Management of Finances

3,730 4,892 (1,162)

Progressive and innovative management of human resources that attracts, develops and retains key talent, and leverages external expertise

1,960 1,968 (8)

Other Objectives 5,656

5,703

(47)

Coordinated, coherent, high-quality, innovative and cost-effective approach to ICT that meets the needs of the Commission, the Commission Secretariat and stakeholders.

1,044    

Coordinated, cost-effective and innovative management of Commission assets in support of delivery on the Commission’s mandate

4,612    

Total expense 29,392

33,224

(3,832)

22

Financial Highlights

Financials audited on GRAP basis

Obtained an unqualified audit report with matters

of emphasis

Financial Performance

Revenue

Personnel Costs

Professional Fees

Operating Expenses

MTEF

23

Financial Performance and Position Indicators

Description Movement % Variance Remarks

Revenue 16% Increase in allocations

Staff Costs 10%Developing and attraction of appropriate skills Benchmarking to public sector scales

Depreciation -34% Non acquisition of Fixed Assets

Professional Fees 45%Commissioned Research, audit fees

Operating Expenses 28% Growth in business

Asset Base -9% Non acquisition of assets

Liabilities   42%FFC's baseline needs to be corrected.

Revenue 2010/2011

24

RevenueApproved Allocation 31,391,000 99%Other Income 401,661 1%

31,792,661

Personnel Costs Per Division 2010/2011

25

Divisions Salaries Bonuses Total Head Count

Commissioners 1,897,553  1,897,553 2

Support Services 8,222,427 194,669 8,417,096 20

RRP 9,271,365 78,414 9,349,779 16

Total 19,391,345 273,083 19,664,428  

Professional Fees 2010/2011

26

External Audit Fees 1,443,292Internal Audit Fees 1,187,820Commissioned Research 1,023,347HR and Legal Fees 309,056Risk Management 124,000Other Consulting Services 451,532

Operating Expenses 2010/2011

27

28

F/Year NT Allocation Budget Required Varience2008/9 26,125 29,870 3,745

2009/10 26,580 36,606 10,026

2010/11 31,391 40,523 9,132

2011/12 33,036 42,186 9,150

2012/13 37,438 40,000 2,562

2013/14 39,332 41,973 2,641

2014/15 40,512 43,430 2,918

MTEF Required Funds vs. Allocation

29

The End