1. 1 FINANCIAL AND FISCAL COMMISSION 2010/2011 ANNUAL REPORT

2. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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.

21. Key Issues 21 Objectives Targeted Outcome Actual OutcomeVariance 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 13,50015,185 (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. 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. 23 Financial Performance and Position Indicators DescriptionMovement% VarianceRemarks Revenue16% Increase in allocations Staff Costs10% Developing and attraction of appropriate skills Benchmarking to public sector scales Depreciation-34% Non acquisition of Fixed Assets Professional Fees45% Commissioned Research, audit fees Operating Expenses28% Growth in business Asset Base-9% Non acquisition of assets Liabilities 42% FFC's baseline needs to be corrected.

24. Revenue 2010/2011 24 Revenue Approved Allocation31,391,00099% Other Income401,6611% 31,792,661

25. Personnel Costs Per Division 2010/2011 25 DivisionsSalariesBonusesTotalHead Count Commissioners 1,897,553 2 Support Services 8,222,427194,6698,417,09620 RRP 9,271,36578,4149,349,77916 Total 19,391,345273,08319,664,428

26. Professional Fees 2010/2011 26 External Audit Fees 1,443,292 Internal Audit Fees 1,187,820 Commissioned Research 1,023,347 HR and Legal Fees 309,056 Risk Management 124,000 Other Consulting Services 451,532

27. Operating Expenses 2010/2011 27

28. 28 F/YearNT AllocationBudget RequiredVarience 2008/9 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 37,43840,000 2,562 2013/14 39,332 41,973 2,641 2014/15 40,512 43,430 2,918 MTEF Required Funds vs. Allocation

29. 29 The End