Financial Management Reforms: The Regulation of a “Standard Chart of Accounts” (SCOA) for local government Presented by National Treasury: Chief Directorate Local Government Budget Analysis – 8 October 2012

Outline 1.Problem Statement 2.Envisaged Improvements 3.Legal Framework 4.The Budget Reform Programme 5.Technical Aspects and Project Lifecycle 2

Problem Statement (1) 278 different municipal ‘charts of accounts’ (COA) a ggregation of budget and other information extremely difficult with inconsistent use of account labels and definitions across municipalities Quality of municipal information is compromised due to lack of uniform classifications for revenue and expenditure items (posting level) Lack of consistent information across the IDP, Budget, SDBIP, IYM and AFS Compromises monitoring and oversight by Councils, DCoG, treasuries and legislatures. In illustrating, 4 th Quarter results – 2011/12 municipal MTREF: –Aggregate under spending of the adjusted operating budget – R22.3 bn or 10.2% –Aggregate under spending of the adjusted capital budget – R14,8 bn or 32.3% –Under spending of conditional grants was R5.1 bn or 25.3% –Can this be attributed to ineffective budgeting and financial management practices? Over ambitious expenditure appropriations; unfunded budgets; lack of credibility in reporting (S71) – pure compliance; or a mixture) Compromises government’s ability to formulate coherent policies affecting local government, and its ability to use the budget as a redistribution tool to address poverty and inequality Municipalities continuously change and amend detail COA – No consistency year-on-year 3

Problem Statement (2) In the absence of meaningful and credible management information municipal councils make uninformed decisions; considerable risk Contributing factor to weak audit opinions Lack of ownership by finance practitioners; inconsistency in the application of leading financial management practices corrupting the “chart” COA information not easily obtainable in a useful format Metadata not defined Multi-year budgeting is a relatively new concept; constant changes to the COA impedes the ability to plan over the medium-term Electronic budget returns and in-year reporting not aligned to the adopted budget and budget information published by municipalities 4

Envisaged Improvements Guided by the Constitution and the MFMA Promote transparency and accountability Strengthens the link between policy priorities, planning, budgeting, implementation and reporting Forms the basis for the Medium Term Revenue and Expenditure Framework for municipalities (MTREF) Facilitates inter-local government comparability (to demonstrate the effective use of resources and to inform allocation decisions) Consistent budget and reporting formats that will support GFS Improve golden thread of reporting - adopted budgets, in-year reporting, AFS and Annual Report 5

Legal Framework - Constitutional Requirements Section 216(1) of the Constitution states that: national legislation must establish a national treasury and prescribe measures to ensure both transparency and expenditure control in each sphere of government, by introducing - (a) Generally recognised accounting practice (GRAP – OAG) (b) Uniform expenditure classifications; and (Standard Chart of Accounts / General Leger) (c) Uniform treasury norms and standards (MFMA, Regulations, Circulars and Guidelines) 6

Legal Framework - MFMA Requirements Section 168 (1) of the MFMA states that: The Minister (of Finance), acting with the concurrence of the Cabinet member responsible for local government, may make regulations for, among other things – (a)any matter that may be prescribed …and… (p) any other matter that may facilitate the enforcement and administration of the Act 7

The Budget Reform Programme Improve LG sphere’s ability to deliver basic services to all through: –Improved financial sustainability –Facilitation of medium term planning and policy choices on service delivery The SCOA will achieve this by formalising financial classification norms and standards. This will, in turn, improve: –Credibility, Sustainability, Transparency, Reliability, Relevance; and –Comparability of budgets and in year reports of municipalities and entities Forms part of MFMA financial management reforms and is directly aligned to the MBRR and in-year reporting framework (Section 71 and 72 reporting) Contributes to evidence-based financial management and decision-making More predictable financial classification system for financial practitioners 8

The Budget Reform Programme – Initiatives We have embarked on the long-term local government financial reform programme –MFMA Implementation in 2003 We have issued a suite of regulations: –Draft Municipal Finance Misconduct Regulation (July 2012) –Municipal Budget and Reporting Regulations (April 2009) –Municipal Asset Transfer Regulations (August 2008) –Municipal Regulations on Debt Disclosure (June 2007) –Municipal Supply Chain Management Regulations (May 2005) –Municipal Investment and PPP Regulations (April 2005) We have developed a comprehensive budgeting system (Municipal Budget and Reporting Regulations) We have developed a conditional grant monitoring system Institutionalized annual engagements with the 17 non-delegated municipalities; PT’s need to replicate these processes 9

The Budget Reform Programme - WIP We are finalising a SCOA for Local Government while undertaking other financial management reforms in the following areas: Research into systems solutions and financial applications that support SCOA Revenue value chain Financial modeling and costing methodologies informing tariff setting Reviewing the LG equitable share and conditional grants Exploring options for a differentiated approach in funding municipalities Developing a “early warning system” for identifying municipalities at risk Publishing of payment schedules for provincial conditional grants Reviewing the guidance and formats given on the SDBIP, with a view to establishing a basis for implementing a system of quarterly performance reporting that will be aligned to the section 71 reports Reviewing the guidance and formats given on the Annual Report 10

We publish information routinely… Consolidated MTREF budget information for all municipalities –Once a year and it takes 5 months to complete Quarterly Section 71 reports –2 month process State of Municipal Finances report – annually –Used for Parliamentary oversight Over and under expenditure report to Parliament –Annually Local Government Budgets and Expenditure Review –Biennial and it takes 18 months to complete Report on the Tabling of budgets to Parliament –Compliance with deadlines for the tabling and approving of municipal budgets –annually 11

Technical Aspects and Project Life-cycle of SCOA

Municipal Accountability Cycle

Understanding SCOA Detailed Classification System –Not GFS, GRAP or Budget Formats but classification system (Posting Level Detail) = SCOA –Provide sufficient detail for reporting through combining/selecting from segment detail into reporting formats prescribed by recognised stakeholders –Reporting Formats – Provides report writer within financial systems application or stakeholder databases What does this mean? –Provide for detail to be added by municipalities –Clearly defined account labels (Metadata) –Accounts to be standardised for all Munics/ME/Agencies –Comprehensive “Design Principles” for segments and account groups –“Grid” to select what is applicable to the municipality 14

Overall Design Principles for SCOA Classification framework limited to financial information International standards, guidance and best practices Comply with legislative framework for local government Labels and accounts to be clearly defined Comprehensive framework (grid) to satisfy stakeholders needs Information to be easily extracted Alignment of financial and budget reporting formats Integration of GRAP standards Standardisation of terminology Standardisation of transaction classification Reporting on “whole-of-local government and government” Simple classification Financial system integration with optimised business and programme rules 15

Segments of SCOA for Municipalities 16 Categories Funding Function Item Project Regional Indicator Standard Classification: Org Structure “To which cost centre does the transaction get allocated?” “Against which function/sub- function should the transaction be recorded?” “What is being bought or money received for?” “Does the transaction relate to a specific project and if so, what type of project?” “In which region does the service get delivered?” “Against which source of funding should the payment be allocated?” 16 ?

Project Phases (1) Phase I: January to October 2010 –Version I completed –Compiled primarily through desktop review and consultation Phase II: Completed September 2011 –Version II completed –Consultation based on External Stakeholders Communication Plan –Various charts interrogated –Greater understanding of municipal financial systems –Broader understanding of Standards of GRAP and impact on SCOA Phase III: Completed 5 October 2012 –Definitions to be provided for accounts taken up in segment of SCOA –Drafting of SCOA Reference Guide –Version III of SCOA to inform second engagement with stakeholders being: Provincial Treasuries and Municipalities National Departments Professional Bodies (SAICA, IMFO, ASB) SALGA and COGTA Regulatory Institutions (NERSA and SARB) System Vendors Professional Advisors and Consultants AGSA Project Champions National Treasury – Internal Stakeholder 17

Project Phases (2) Phase IV: Pre-regulation –Consolidate comments, evaluate and update SCOA –MBRR and GRAP (AFS) reporting and terminology alignment –Financial modelling integration –Business process integration –Conclude NERSA engagement; aligned of reporting –SQL Database: Develop Record typical transaction “current information” and historic budget information Test report extraction to confirm SCOA design –Financial systems minimum requirements –Drafting of Regulations –System Development –Pilot Sites Running –Other Municipalities Implementation –Change Management (Guidelines, Training and Simulations, Call Centre, Technical Committee, etc) –LG Data Base Upgrade 18

Timelines MilestonesFeb’ 13May ‘13Jul ‘13Jun ‘14Jul ‘15 Draft Regulations completed Formal consultations ito Regulation (3 months ) Finalisation of Regulation Parliamentary process tabling of regulation completed Systems development by vendors Implementation at Pilot Sites Change Management LG DB Upgrade Full implementation

What do we expect from you? 20 Local government finance practitioners to internally workshop SCOA Version 3; involving all municipal departments Provide comments on the adequacy and completeness of the classification framework together with the definitions provided e.g. catering versus entertainment Municipalities need to indicate if they interested in piloting SCOA prior to implementation Must not be concerned about implementation issues; focus on technical aspects Do not start with refinements to the financial application/systems; premature changes will not facilitate implementation Local government finance practitioners to internally workshop SCOA Version 3; involving all municipal departments Provide comments on the adequacy and completeness of the classification framework together with the definitions provided e.g. catering versus entertainment Municipalities need to indicate if they interested in piloting SCOA prior to implementation Must not be concerned about implementation issues; focus on technical aspects Do not start with refinements to the financial application/systems; premature changes will not facilitate implementation

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