Opinionista Dirk De Vos 14 September 2018

Time to dump the red-tape Acts that govern public finances

The country's finance managements Acts appear to tie government and public servants that want to comply with the rules in endless red tape but, as we see, the corrupt seem undeterred by them as the series of Auditor General’s annual reports show us every year.

As South Africans are becoming more aware of the sheer scale of the plunder of public finances, it may seem counterintuitive. But we should now dump the Public Finance Management Act (PFMA) and its local government equivalent, the Municipal Finance Management Act (MFMA) as the legislation that governs public finances.

While the PFMA and the MFMA impose some of the highest standards of financial management anywhere in the world, they have actually weakened the public sector and perhaps contributed to State Capture.

The Auditor General’s most recent reports on PFMA and MFMA entities demonstrate the point. For national, provincial departments falling under the PFMA, just 30% of them achieved the desired target of “unqualified audits with no findings” also known as clean audits. Even this outcome hides huge variations in performance between the different provinces. The Western Cape does much better than the second placed Gauteng which, in turn, outperforms the rest of them. The position of State-owned Enterprises (SoE), also falling under the PFMA is also not good at all. Just 26% of them achieved clean audits. Once again, there is variability. Eskom and Transnet might just be two entities but they collectively represent 86% of total SoE expenditure.

If PFMA entities perform poorly, then municipal entities are even worse except for the usual exceptions. Here is the Auditor General in his own words: Not only did the unqualified opinions (one step below clean) on the financial statements decrease from 68% to only 61%, but the financial statements provided to us for auditing were even worse than in the previous year. Only 22% of the municipalities could give us financial statements without material misstatements. In addition, the performance reports of 62% of the municipalities that produced reports had material flaws and were not credible enough for the council or the public to use” A specific finding was that Irregular expenditure increased from around R16-billion to R28-billion.

The PFMA and MFMA require a fairly rigorous processes across a number of functions within government and a natural response to widespread lack of compliance might be to double down and insist that standards be met via greater accountability and by imposing consequences for failure to meet them. Other responses might be having National Treasury permanently take over failing provinces or municipalities and running them from Pretoria. Both responses are wrong.

In a paper published in 1956, entitled The General Theory of Second Best, the authors Richard Lipsey and Kelvin Lancaster, argue that if one of the conditions required to produce some optimal (the best) outcome is not present, one cannot infer that the next best outcome is secured by ensuring the presence of all the other conditions. Likewise, the absence of two or more conditions will not produce the next best result if all the remaining conditions are met. Instead, the second-best outcome might be served by completely different starting conditions, perhaps all different from those conditions required for the optimal outcome. In the context of real world politics and policy making, going for second best is preferable to the unobtainable optimal outcome.

One intuitively understands this. Consider card games where players have to build a hand to win the round. Everyone knows that the optimal outcome, a Royal Flush, can’t be beaten but the conditions required for that hand are so unlikely that it is not worth considering. Instead, most players do what they can, given the cards (the conditions) that they are dealt and go for much lowlier but still potentially winning hands. Two cards of the same number would exclude any flush potential (an unbroken sequence) and might even be good enough to win a round but a pair also gives the player a chance at a triple, full-house or a virtually unassailable four-of-a-kind.

Helen Zille writing here gives an insider’s perspective on how things play out with the labyrinth of rules and measures required to secure a clean audit. As she points out, clean audits include questions of whether a department achieved its “predetermined objectives” according to set criteria and whether it complied with all laws, regulations and directives. One outcome of the requirement to meet “pre-determined objectives” is that government departments looking to get a clean audit avoid “stretch targets”. She says instead, government departments set the bar a little lower than they should.  It also drives out all types of innovation. When things get desperate and something has to be delivered then invariably, it only gets done by relaying on all sorts of deviations on the basis of urgent need.

Consider the important question of energy efficiency in public buildings. Energy efficiency is good for the public purse and for the environment. It should be done far more than it is but achieving these worthwhile results often requires longer-term contracting with private sector specialists. National Treasury recognised the need for energy efficiency contracting and got their technical support division to produce a guide on how this should be done whilst being compliant with legislation and regulations. The result is a labyrinthine “guide” that runs 119 pages long. The result? Not many government departments do it and therefore continued and needless energy wastage.

The PFMA and MFMA and the myriad regulations attached to them appear to tie government and public servants that want to comply in endless red tape but, as we see, the corrupt seem undeterred by them as the series of Attorney General’s annual reports show us every year.

Public finance legislation is somewhat different to other legislation because it is mandated by the Constitution. Chapter 13 requires a whole lot of legislation: for example, section 214 requires an annual Division of revenue act to be passed: section 215, legislation of how budgets in all spheres of government should be done; section 216, establishes Treasury control over all budgets and requires legislation mandating measures for transparency and budgetary controls; and section 217, mandates legislation on how government must procure goods and services.

The PFMA of 1999 and MFMA of 2003 are mandated by the Constitution but they also go well beyond what the constitution requires. They are as much a creature of the Constitution as they are about ideas on the public sector that emerged in the 1980s in the UK and the USA. The New Public Management (NPM) principles provided the foundation for the reform of their public sectors to achieve greater cost-consciousness, better customer service, performance budgeting, human resource management, information technology, performance control and evaluation of results. The principles of NPM are about increased productivity, greater efficiency, better value for money. NPM advocates took the view that management practices already established in the private sector should guide the public service as well.

In the spirit of NPM. The PFMA and MFMA, seeks to decentralise power to managers, require performance management, contract management, performance objectives, corporatisation and, so it appears, reams of additional wonkish terminology loved by graduates of business schools and, especially, graduates of schools of public management.

Besides a global review of private sector management practices, most of our public sector doesn’t have anywhere near the required skills, competence or, frankly, the integrity to administer the country according to NPM principles. Besides the high-level skilled personnel found in National Treasury, the Reserve Bank and in a handful of other departments and vanishingly few local governments, not much competence exists. The disparities in basic ability is one of the reasons why National Treasury finds itself so often at odds with the rest of the government.

The never-ending red tape and unevenly implemented rules has other deleterious impacts. Many young, promising and ambitious (and mostly black) public servants that should be doing important work find that instead their spark is slowly crushed. The inertia of this complex system suffocates officials who want to make a difference. After a while, it is just a matter of pitching up at work, doing not much at all, but also not getting relevant work experience that could remotely justify the salaries they earn elsewhere.

There are different debates about how appropriate it is for a country like South Africa to have government expenditure making up nearly 30% of GDP which is at the high end of peer countries. Within that debate, there is another – about the appropriateness of the structure of government expenditure where public sector wages, already a third higher than private sector equivalents, are crowding out much need capital investment. The public sector wage bill now exceeds the tax receipts from all personal income tax collected in the country. Of course, there are others that argue differently: they point to advanced, mostly European countries, where government expenditure is greater than 40% of GDP and sometimes approaches 50%.

Mainstream economists advocate that the state sector should be slimmed down and re-orientated towards investment and that this ought to be done before future stand-by creditors, the IMF, impose this type of restructuring on the country. We all know that doing this is just not politically feasible.

The theory of second best here would accept that we cannot have a public service that is as big and expensive as ours is AND as incompetent as it is. Not only are too many public servants employed at extremely generous rates but as a recent study showed, by 2013, procurement budgets as a proportion the budget on national, provincial and local government levels was already at 42% of total government expenditure. Key public sector functions are being sub-contracted out wholesale to the private sector. It is just easier to contract out than to perform the function yourself combined with a myriad of small subcontracts to do specialist work. The large high-value single tender is also a honeypot for corrupt politicians wanting to secure a slice of the action for themselves.

Let’s return to government expenditure. Roughly speaking, the government’s total budget is around R1.45-trillion. Of this around, R510-billion is transferred to the provinces and another R100 billion to local government. Collectively, all local governments’ expenditure is around R340-billion financed by central government allocations (R100 billion), the sale of utility services (R180-billion) and property rates (about R55-billion). Collectively, the largest commercial SoEs spend around R300-billion per annum. It’s an awful amount of money.

The Auditor General’s reports on PFMA and MFMA entities divides non-compliant expenditure into the following categories: unauthorised expenditure; irregular expenditure; and fruitless and wasteful expenditure. Using the 2015/2016 reports, unauthorised expenditure for all of them amounted to R13.6-billion, irregular expenditure, R48-billion; and fruitless and wasteful expenditure at R2-billion. Together, this amounted to about R64-billion. It is a big number but a drop in the ocean against all government spending. We know however that much, much more is lost or does not represent anything close to value for money.

One of the early initiatives of the democratic government was to introduce Outcomes Based Education (OBE). There is a lot to recommend OBE as a learner-centred learning model compared to the alternative rote learning. But unless there are suitably qualified teachers who are able to teach (facilitate?) OBE outcomes, it is a very bad system. South Africa, having failed to make progress and recording very low levels of basic reading, writing and numeracy capability. The education department eventually had to relent and re-introduce teaching that could be done by teachers who themselves have very low skill levels.

The National Development Plan is still the government’s blueprint but it is premised on having a “capable state”. Well, we just don’t have one. It is also not possible for National Treasury officials to be dispatched to fix every dysfunctional department as if they were hyper tiger moms. Our public finance legislation needs to be adapted to the kind of public service we have, not the one that the PFMA and MFMA is premised upon. Insisting on Olympic standard hurdles serves no purpose if your athletes knock all of them over.

How public finance legislation and rules for different departments should look like is another debate but having a standard at a level that is at least reachable in a scarce-skill context makes sense. It might also free up honest public servants to do what they can without massive compliance and reporting requirements. We should start modestly, insist on compliance on whatever standard is selected, do more within departments and build from there. DM

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