## tarea2024031 ## Source details **Canonical URL:** [tarea2024031](https://www.imf.org/-/media/files/publications/tar/2024/english/tarea2024031.pdf) ## Other formats - [Markdown version](/-/media/files/publications/tar/2024/english/tarea2024031.pdf.md) - [Structured JSON version](/-/media/files/publications/tar/2024/english/tarea2024031.pdf.json) --- ### Preface — Mission and participants; Key findings - IMF Fiscal Affairs Department (FAD) team conducted a Fiscal Transparency Evaluation (FTE) during July 11 to 25, 2023; mission led by Ms. Carolina Renteria, team members listed. - Consultations included National Treasury (NT) senior officials, State-Owned Companies (Eskom, Transnet), South Africa Reserve Bank (SARB), Statistics South Africa (StatsSA), Office of the Auditor General of South Africa (AGSA), Parliamentary committees and independent institutions (PBO, FFC), civil society, and development partners. - Assessment against IMF Fiscal Transparency Code: - Advanced practice on 12 of the 36 principles. - Good on 9 principles. - Basic on 9 principles. - Not met on 6 principles. - Pillar strengths and weaknesses: - Strongest: Fiscal reporting (Pillar I). - Next strongest: Fiscal forecasting and budgeting (Pillar II). - Weakest: Fiscal risk analysis (Pillar III). - Open Budget Index (OBI): South Africa ranked second out of 120 countries surveyed in the 2021 OBI. - Governance context: Serious governance issues over the past decade, including state capture and corruption (Commission of Inquiry into Allegation of State Capture in 2022). ### Fiscal reporting — strengths, weaknesses, and priorities - Strengths and practices: - Fiscal reports provide a comprehensive overview aligned with GFSM 2014. - Broad coverage of financial assets and liabilities; reporting usually timely. - SARB publishes consolidated general government fiscal statistics quarterly; consolidated general government debt statistics published only for central government. - National Treasury publishes monthly in‑year reporting on revenues, expenditures and borrowing of the budgetary central government within 30 days of month-end. - Financial statements audited per international standards by AGSA; entities usually publish within 9 months; AGSA publishes general report on audit outcomes. - Classifications consistent with international standards; statistical integrity supported by independence of SARB and StatsSA. - Weaknesses and gaps: - Fiscal statistics do not extend to the consolidated public sector. - Institutional coverage varies between main fiscal reports; differences are not explained publicly. - Gaps in coverage of assets and liabilities: - No official estimates of mineral and energy resources; IMF staff estimate over R5 trillion (92 percent of GDP) at end of 2021/22. - Other non-financial assets and land not fully reported. - South Africa Balance Sheet estimates at end of 2021/22: - Public sector net worth: 100 percent of GDP. - Public sector net financial worth: negative 50 percent of GDP. - Tax Expenditures: R252 billion (4.5 percent of GDP) in 2020/21; further analysis and forward-looking disclosure needed. - No reconciliations published between consolidated budget, statistical reports, or financial accounts. - High number of material irregularities (MIs) and audit qualifications. - Selected priorities and recommendations (preserve original numbering and timing): - 1.1 Expand and align fiscal reporting on the public sector using international guidelines — 1.1.1, 2.1.1 — SARB, StatsSA and NT — Medium-term. - 1.2 Enhance fiscal reporting to cover all significant stocks and flows — 1.1.2, 1.1.3 — SARB, StatsSA and NT — Medium-term. - 1.3 Further strengthen disclosure of actual and estimated tax expenditures — 1.1.4 — NT — Short-term. - 1.4 Improve adherence to timelines for compilation, audit, and publication of audited financial statements — 1.2.2, 1.4.2 — NT, AGSA, reporting entities — Medium-term. - 1.5 Strengthen historical revision policies by routinely providing bridge tables — 1.3.3 — SARB and StatsSA — Short-term. - 1.6 Improve comparability of fiscal data by taking stock of differences and publishing reconciliations — 1.4.3 — SARB, StatsSA, and NT — Medium-term. ### Public sector financial overview and experimental balance sheet (2021/22) - Key aggregates: - Public sector expenditure: 49 percent of GDP (R2,833 billion). - Consolidated general government: 42.3 percent of GDP (R2,441 billion). - Of consolidated general government expenditure: 54 percent central government, 28 percent provincial governments, 18 percent local governments. - Public corporations’ expenditure: 9.4 percent of GDP (94 percent spent by public nonfinancial corporations). - IMF staff estimated consolidated public sector balance sheet (2021/22): - Assets total: 233 percent of GDP. - Liabilities: 132 percent of GDP. - Public sector net worth: 100 percent of GDP. - Public sector net financial worth: negative 50 percent of GDP. - Components: - Non-financial assets: 150 percent of GDP (mineral and energy resources estimated at 92 percent of GDP). - Financial assets: 83 percent of GDP. - Liabilities: 132 percent of GDP (central government debt 69 percent of GDP; pension liabilities 30 percent of GDP). - Experimental consolidated public sector estimates: - SARB published experimental consolidated public sector debt estimates in June 2023; experimental estimates are not official statistics and remain under development. - GFS and accounting basis issues: - National and provincial governments: Modified Cash Standard. - Local governments and public entities: accrual basis. - Incomplete coverage: free basic services estimated at approximately R71bn not captured in GFS. ### Tax expenditures — magnitudes, composition, and recommendations - Disclosure: - Budget Review includes a Tax Expenditure Statement (latest available fiscal year 2020/21, two-year lag) with 35 tax expenditures. - Since 2022 includes analysis of selected corporate tax expenditures by sector. - Magnitude and composition (fiscal year 2020/21): - Tax expenditures: R252 billion = 4.5 percent of GDP = 20 percent of gross tax revenue. - Largest tax expenditures (60 percent of total): deductions for pension contributions; value-added relief for basic items; medical tax credits; vehicle manufacturer incentives. - Time series (R Billion): - Personal Income Tax: 2017/18 = 124.4; 2018/19 = 135.9; 2019/20 = 141.3; 2020/21 = 142.3. - Corporate Income Tax: 2017/18 = 18.4; 2018/19 = 27.5; 2019/20 = 21.7; 2020/21 = 15.4. - Value-added tax: 2017/18 = 58.4; 2018/19 = 66.9; 2019/20 = 73.4; 2020/21 = 58.8. - Customs duties and excise: 2017/18 = 33.6; 2018/19 = 38.6; 2019/20 = 44.4; 2020/21 = 35.5. - Total tax expenditure: 2017/18 = 234.9; 2018/19 = 268.9; 2019/20 = 280.8; 2020/21 = 251.9. - In percent of GDP: 2017/18 = 4.6%; 2018/19 = 5.0%; 2019/20 = 4.9%; 2020/21 = 4.5%. - In percent of gross tax revenue: 2017/18 = 19.3%; 2018/19 = 20.9%; 2019/20 = 20.7%; 2020/21 = 20.2%. - Weaknesses and recommendations: - Tax expenditures are not subject to budgetary objectives or caps; report is primarily ex-post. - Recommendation: provide up-to-date historical series and forward-looking estimates; include rationale and sunset-clauses; consider cap on tax expenditures. ### Frequency, timeliness, revisions, and integrity of fiscal reports - Frequency and timeliness: - Monthly budget execution reporting published within 30 days; SARB publishes monthly aggregates; provincial/local data published quarterly. - AGSA publishes audited financial statements usually within 9 months; 2021/22 consolidated finalization: January 26, 2023 (delay noted). - For 2021/22 audits, only 41 percent completed within legislated timelines (national and provincial 47 percent; local governments 26 percent). - Historical revisions: - Revisions to general government deficit over last 4 years averaged 7.2 percent. - COVID-19: deficit for 2019/20 revised by 17.8 percent one year later. - Recommendation: routinely provide bridge tables explaining revisions. - Integrity: - Statistical integrity: Advanced — SARB and StatsSA compile fiscal statistics independently per GFSM 2014; South Africa subscribes to SDDS since 1996. - External audit: Basic — AGSA audits financial statements but frequently identifies material irregularities (327 MIs in 2021/22). - Material irregularities and estimated losses (2021/22 integrated report): - National government: 60 MIs, estimated loss R86 billion. - Provincial government: 82 MIs, combined value R2.1 billion. - Local government: 185 MIs, estimated value R3.9 billion. - Audit opinions: - Unqualified (clean) audit opinions represent 24 percent overall (30 percent national/provincial; 14 percent local). ### Reconciliations and comparability (Internal consistency) - Reconciliations: - Budget Review (Table 7.8) provides reconciliation between financing and change in debt stock; quarterly and budget documents contain reconciliations between fiscal balance and financing. - Reconciliations are not published at the general government level; not presented for provincial or local governments. - SARB does not currently show a statistical discrepancy for their general government data; IMF Statistics Department GFS mission recommends publishing this. - Comparability gaps: - No published reconciliation between budget, statistical reports, and financial accounts. - Recommendation: publish reconciliations and eliminate unnecessary differences to improve comparability and user understanding. ### Fiscal forecasting and budgeting — credibility, public investment, and recommendations - Key strengths: - Solid medium-term budgeting framework; performance budgeting well developed and internationally regarded. - Budget documents include gross revenue, expenditure and financing by budgetary central government, most extrabudgetary entities, social security funds, and provincial governments. - Forecasts presented twice a year with assumptions; MTBPS sets macro-fiscal framework. - Public participation tools and accessible budget information (People’s Guide, Vulekamali portal). - Main weaknesses and findings: - GDP forecasts are overly optimistic: average absolute forecast error for budget year 0.5 percentage points; 1.6 and 2.3 percentage points in second and third year of MTEF. - Persistent optimism undermines credibility and contributes to rising debt. - No numerical or time-bound fiscal objective; MTBPS aims to “achieve fiscal sustainability by narrowing the budget deficit and stabilizing debt” (assessed Not met). - Major gaps in public investment disclosure and procurement deficiencies. - Timeliness: Budget introduced within two months before fiscal year end but passed several months after start of following fiscal year (Not met). - Independent scrutiny: PBO and FFC undertake limited assessments and lack capacity for full independent evaluation. - Public investment and procurement: - Cost benefit analysis (CBA) required for major projects (BFI threshold R1billion) but not systematically published pre-approval (Assessment: Not met). - SOCs are largest investors—about one third of planned public investment over 2023 MTEF; transport, logistics and energy >50 percent of planned expenditure. - Disclosure gap: multi-year project obligations beyond 3-year MTEF not disclosed. - Procurement concerns: deviations and expansions in 2022/23 amounted to deviations R12 billion; expansions R162 billion (nearly 3 percent of GDP); nearly 50 percent of expansions due to Eskom. - Selected recommendations (preserve numbering): - 2.1 Improve budget unity by including gross financial position of higher education entities in the budget — 2.1.1 — NT — Medium-term. - 2.2 Improve transparency of public investment management and address procurement deficiencies — 2.1.4 — NT, OCPO — Short/Medium-term. - Require CBAs for major projects to be published before approval. - Undertake a Public Investment Management Assessment (PIMA). - Assess procurement system using MAPS tool. - 2.3 Bring forward the budget process to ensure Budget approved before start of fiscal year — 2.2.1; 2.2.2 — NT — Long-term. - 2.4 Enact fiscal rules that are precise, time bound and stable over time — 2.3.1 — NT — Medium-term. - 2.5 Strengthen public participation — 2.3.3 — NT — Medium-term. - 2.6 Enhance evaluation of official forecasts with independent comparisons and build PBO/FFC capacity — 2.4.1 — NT, PBO, FFC — Medium-term. ### Credibility, independent evaluation, and forecast reconciliation - Independent evaluation: - Macro-fiscal forecasts are not compared systematically with independent forecasts (Assessment: Not met). - PBO and FFC perform limited comparisons; PBO’s last forecast audit issued in 2018. - Recommendation: include comparisons with forecasts of SARB, IMF, World Bank, AfDB, and private forecasters and explain outliers. - Forecast reconciliation and presentation: - Budget documents present successive vintages of forecasts and explain differences due to new policies, but lack explicit breakdown between policy, macroeconomic, technical, and accounting factors. - Recommendation: present forecast reconciliations jointly for revenue and expenditure and classify drivers. ### Fiscal risks — disclosure, analysis, and management (Pillar III) - General assessment: - NT discloses many fiscal risks in BR and FRS, but depth and coverage vary; by 2022/23 FRS became brief and omitted detail on major risks. - Only two risk principles meet advanced level: financial sector and sub-national governments. - Macro and scenario analysis: - FRS presents alternative macroeconomic scenarios and fiscal impacts; sensitivity analysis focuses on debt portfolio. - Shortcomings: limited explanation of scenario calibration, transmission to fiscal aggregates, and probability discussion. - A Fiscal Risks Committee (FRC) coordinates internal risk identification. - Specific fiscal risks and magnitudes (selected reported gross exposures): - SOC Liabilities: 862.8 R Billions = 13.7 Percent of GDP (Annual Budget Review). - Public Private Partnerships: 7.9 R Billions = 0.1 Percent of GDP. - Explicit Exposure to financial sector: 176.2 R Billions = 2.8 Percent of GDP. - Government Guarantees incl. to SOCs: 568.9 R Billions = 9.0 Percent of GDP. - Road Accident Fund: 357.0 R Billions = 5.7 Percent of GDP (entity insolvent; RAF net liabilities cited as R 345 billion = 5.5 percent of GDP at March 31, 2022). - Provincial medico-legal claims: 109.0 R Billions = 1.7 Percent of GDP. - Provincial arrears: 24.6 R Billions = 0.4 Percent of GDP. - Local government arrears: 58.2 R Billions = 0.9 Percent of GDP. - Long-term risks (examples): Social Relief of Distress Grant 64.9 R Billions = 1.0 Percent of GDP; Benefits-Related Liabilities 61.2 R Billions = 1.0 Percent of GDP. - FRS coverage decline: - FRS coverage decreased over past five years; categories previously detailed (exposure to SOCs, bailout amounts, PPP exposure) are less detailed in recent FRSs. - Recommendation: re-include high-risk categories; publish likelihood/ probability assessments or classify risks by probable/possible/remote. - Long-term fiscal sustainability: - Long-term analysis insufficient (Not met); NT maintains a 20-year model not published. - Recommendation: develop/publish long-term model of at least 30 years including demographic and climate risks; adapt models (e.g., IMF Q-CRAFT). - Natural resources and environmental risks: - Authorities publish revenue by resource class but not reserve volumes/values; DMRE and Council for Geoscience data exist but not aggregated. - IMF FAD methodology estimate: value of natural resources ≈ R5 Trillion included in public sector balance sheet estimation. - Recommendation: resume mineral economics bulletins; publish regular transparent reporting on reserves by volume and value; consider joining EITI. - Disaster fiscal costs: - Recent disaster fiscal costs small relative to GDP (examples: 2018 drought response R6 billion = 0.1 percent of GDP; 2022 floods combined R5.5 billion = 0.1 percent of GDP). - Recommendation: integrate natural disaster risk into contingency planning and disclose fiscal impacts. - Guarantees and PPPs: - Guarantees: gross exposure 9 percent of GDP in 2022/23; Eskom accounts for ~55.8 percent of outstanding guarantees (R313 billion). - Recommendation: introduce legislated ceiling on guarantees; publish probability of calls. - PPP portfolio small (0.1 percent of GDP) but pipeline includes large projects (Gauteng Rapid Rail R65.4 billion; Salvakop Precinct R18 billion; Inkosi Albert Luthuli Hospital R10.4 billion). - Recommendation: strengthen PPP disclosure (project-level rights/obligations, future payments) and consider limits. - Asset and liability management: - NT publishes funding strategy internally; Chapter 7 of BR summarizes funding/cash/debt management and sensitivity analyses. - Key debt management statistics (selected): - Treasury bills as % of domestic debt: Benchmark Range 15.0; 2022-23 Estimate 9.9; 2023-24 Estimate 10.4. - Long-term debt maturing in 5 years as % of bonds: Benchmark Range 25; 2022-23 Estimate 16; 2023-24 Estimate 16.1. - Inflation-linked bonds as % of domestic debt: Benchmark Range 20.25; 2022-23 Estimate 23.9; 2023-24 Estimate 22.0. - Foreign debt as % of total debt: Benchmark Range 15.0; 2022-23 Estimate 11.7; 2023-24 Estimate 11.2. - Term to maturity of total debt (years): 2022-23 Estimate 11.6; 2023-24 Estimate 11.2. - Recommendation: publish medium-term debt management strategy. ### Sub-national fiscal coordination, arrears, and municipal finances - Reporting and borrowing limits: - Provinces and municipalities report monthly/quarterly/annually; borrowing regulated by PFMA and MFMA. - Provinces allowed to borrow only for capital projects with NT authorization. - Municipal borrowing: 97 of 257 municipalities engage in long-term borrowing (Quarterly Municipal Borrowing Bulletin). - Fiscal role and vulnerabilities: - SNG execute 45 percent of general government expenditure. - Revenue sources: transfers dominate provinces (≥95 percent from national transfers); local governments rely 32 percent on transfers. - Key figures: - Provincial arrears/unpaid bills: R24.6 billion = 0.4 percent of GDP (end 2021/22). - Local government overdue payments: R58.2 billion = 0.9 percent of GDP. - Uncollected municipal revenue: R255.4 billion = 4 percent of GDP (June 2022). - Medico-legal contingent liabilities: R109 billion = 1.6 percent of GDP. - Recommendation: implement strategies to enhance collection of overdue service charges and settle unpaid bills; coordinate mitigation to avoid systemic risks. ### State-Owned Companies (SOCs) — reporting, risks, and Eskom initiative - Reporting and disclosure: - Transfers between government and SOCs published in multiple sources; SOC ownership policy not yet adopted; no consolidated report on overall financial performance of public corporations. - Information fragmented; lacks net impact on public finances. - SOC sector size and structure: - 38 non-financial SOCs identified in PFMA (22 Schedule 2; 16 Schedule 3B). - Eskom dominates: up to 60 percent of all SOC liabilities. - SOC liabilities noted as 13.7 percent of GDP (Table context). - Fiscal risks and recent interventions: - Government financial support to SOCs has increased over past decade. - Eskom Debt Relief proposed: R254 billion = 4 percent of GDP (recorded as financing transactions). - Eskom Debt Relief tranches planned: - 2023/24 R78 billion; - 2024/25 R66 billion; - 2024/25 R40 billion (source text lists two entries for 2024/25; preserved as presented). - Government to take over up to R70 billion of Eskom’s debt in 2025/26. - Recommendation: compile and publish aggregated state ownership report including all transfers and net fiscal effect; develop and legislate state ownership policy linked to policy objectives. - Eskom financial position and governance: - Eskom net losses averaged 0.4 percent of GDP per year between FY 19/20 and FY 2021/22. - Debt-to-equity ratio fluctuates around 1.7−1.9 (well above good practice up to 0.5). - Recommendation: NT to take hands-on involvement in returning SOCs to sustainable operations; exercise caution with SOE holding company design. ### Legal framework for audited financial statements and audits (Appendix IV) - Consolidated financial statements: - PFMA Section 8 requires NT to prepare consolidated financial statements covering national departments, public entities under national executive, constitutional institutions, SARB, AGSA, and Parliament. - Consolidated statements submitted to AGSA within three months after year-end; AGSA must audit within three months of receipt; Minister must submit statements and audit report to Parliament within one month after AGSA’s audit report is received; consolidated statements must be made public when submitted to Parliament. - If Minister fails to submit within seven months after year-end, must provide written explanation to Parliament; AGSA may issue special report on delays. - Timelines for entities: - Departments and Constitutional Institutions submit individual financial statements to AGSA and relevant Treasury within two months after year-end; AGSA audits within two months of receipt; annual report submission within five months after year-end. - Municipalities: annual report and audited financial statements submitted to municipal council within nine months after year-end; individual financial statements submitted to AGSA within two months; consolidated municipal financial statements within three months after year-end. - Material irregularities (AGSA 2021/22) — categories and counts preserved as presented (procurement and payment, resource management, revenue management, interest and penalties, fraud and compliance, harm to public, harm to institutions, misuse of public resources). ### Implementation institutions cited - National Treasury (NT) - SARB - StatsSA - AGSA - Parliamentary Budget Office (PBO) - Financial and Fiscal Commission (FFC) - Government Technical Advisory Center (GTAC) - Department of Mineral Resources and Energy (DMRE) - National Disaster Management Centre (NDMC) - Department of Cooperative Governance (DCoG) - Department of Public Enterprises (DPE) - Office of the Chief Procurement Officer (OCPO) - Department for Planning, Monitoring and Evaluation (DPME) *IMF | Technical Report (FTE mission to South Africa, July 11–25, 2023).* ### Preface ____________________________________________________________________________ 5 ### Preface ### Mission and participants - IMF Fiscal Affairs Department (FAD) team undertook a Fiscal Transparency Evaluation (FTE) during July 11 to 25, 2023. - Mission team led by Ms. Carolina Renteria and comprised Ms. Sagé de Clerck, Ms. Natalie Manuilova, Mr. Vincent Tang (all FAD), Ms. Trish Chiinze (IMF − AFS), and Ms. Foyzunnesa Khatun (STA). - Meetings held with senior National Treasury officials including Mr. Momoniat Ismail (Director General National Treasury) and multiple Deputy Director Generals and directors named in the mission report. - Consultations included: national ministries and agencies, State-Owned Companies (Eskom, Transnet), South Africa Reserve Bank (SARB), Statistics South Africa (StatsSA), Office of the Auditor General of South Africa (AGSA), Parliamentary committees and independent institutions (PBO, FFC), civil society organizations, and development partners (European Commission, UN, World Bank, GIZ, AFD, AFDB, Global Affairs Canada, US State Department, UK FCDO). ### Key findings (Executive Summary) - Assessment against the IMF’s Fiscal Transparency Code: - South Africa meets the standard of advanced practice on 12 of the 36 principles. - 9 principles are assessed as good. - The basic standard on a further 9 principles. - 6 principles are not met. - Pillar strengths and weaknesses: - Strongest: Fiscal reporting (Pillar I). - Next strongest: Fiscal forecasting and budgeting (Pillar II). - Weakest: Fiscal risk analysis (Pillar III). - Open Budget Index (OBI): South Africa ranked second out of 120 countries surveyed in the 2021 OBI. - Governance context: Serious governance issues over the past decade, including state capture and corruption (Commission of Inquiry into Allegation of State Capture in 2022). ### Fiscal reporting: strengths and practices - Fiscal reports provide a comprehensive overview aligned with international standards (GFMS 2014). - Broad coverage of financial assets and liabilities; reporting usually timely. - Consolidated general government fiscal statistics published quarterly by SARB; consolidated general government debt statistics published only for central government. - Published data include sub-national entities and public corporations. - National Treasury publishes in‑year reporting on revenues, expenditures and borrowing of the budgetary central government monthly. - Financial statements audited in accordance with international standards by AGSA; reporting entities usually publish within 9 months of the end of the financial year; AGSA publishes a general report on audit outcomes. - Classifications (administrative, economic, functional, and program) are consistent with international standards. - Statistical integrity supported by independence of SARB and StatsSA. ### Fiscal reporting: weaknesses and gaps - Fiscal statistics do not extend to the consolidated public sector. - Institutional coverage varies between main fiscal reports; differences are not explained to the public. - Gaps in coverage of assets and liabilities, including: - Estimation of natural resources. - Other non-financial assets. - Value of land. - South Africa’s Balance Sheet estimates at end of 2021/22: - Public sector net worth is estimated to be 100 percent of GDP. - Public sector net financial worth is negative 50 percent of GDP. - Tax Expenditures amount to 4.5 percent of GDP; further analysis and discussion needed in budget deliberations. - No reconciliations published between the consolidated budget, statistical reports, or financial accounts. - High number of irregularities and qualifications of audit reports require addressing. ### Fiscal forecasting and budgeting: strengths and practices - Solid medium-term budgeting framework to control expenditures. - Budget documentation includes gross revenue, expenditure and financing by budgetary central government, most extrabudgetary entities, social security funds, and provincial governments (tertiary education institutions are a notable omission). - Forecasts of key economic indicators and components presented twice a year with assumptions. - MTBPS sets out macro-fiscal framework with forecasts for the budget year, three outer years and outcomes for three previous years; material changes require legislature approval. - Performance budgeting system provides information on objectives and results and is well regarded internationally. - Government publishes accessible budget information in various formats and provides opportunities for citizen participation. ### Fiscal forecasting and budgeting: weaknesses and recommendations - Areas needing improvement: - Overly optimistic GDP forecasts. - Need for numerical or time‑bound fiscal objectives to support fiscal and debt stabilization. - Major gaps in public investment disclosure and management. - Timeliness of budget documents for approval before the start of the fiscal year. - Budget timing: budget introduced within two months before fiscal year end but passed several months after start of the following fiscal year. - Independent scrutiny: Parliamentary Budget Office (PBO) and Financial and Fiscal Commission (FFC) undertake limited assessment of government forecasts. - Procurement and public investment: cost benefit analysis for major projects is not systematically published; deficiencies in procurement system noted. ### Fiscal risks: disclosure, analysis, and management - Practices in place: - Budget documents present macro fiscal scenario analysis and disclose main categories of specific fiscal risks. - A Fiscal Risks Statement (FRS) is presented with the MTBPS and Budget Review every year. - Contingency and unallocated reserves are quantified and disclosed; access criteria defined. - Borrowing risks of national government are disclosed. - Government guarantees published with beneficiaries and gross exposure. - Aggregate PPP exposure disclosed; reports on PPPs presented at aggregate level appropriate for small portfolio size. - Regular assessments of financial sector stability and explicit support to the financial sector are published. - Fiscal revenue of major classes of natural resources published. - Risks related to natural disasters identified in various government documents. - Provinces and local governments report fiscal position and performance monthly, quarterly, and annually; borrowing limits exist. - Transfers between government and SOCs are published in multiple sources, though aggregated analysis is not available. - Limitations in risk analysis and management: - Macro risk sensitivity analysis undertaken only on the debt portfolio. - Presentation of specific risks in the FRS is incomplete and lacks discussion on likelihood of materialization. - Long-term fiscal sustainability analysis is not well covered in budget documents. - Utilization of contingency and unallocated reserves is not detailed. - No published overall strategy on managing the government balance sheet. - No legislated ceiling for guarantees. - Information on value and volumes of natural resource reserves not disclosed; fiscal risks from natural disasters not quantified. - SOC ownership policy not yet adopted; no report on overall financial performance of the public corporation sector. ### Summary assessment and selected recommendations (from Table 0.1 and Table 0.2) - Overall assessment against the Fiscal Transparency Code spans three pillars: Fiscal Reporting; Fiscal Forecasting & Budgeting; Fiscal Risk Analysis & Management (principles listed in Table 0.1 of the source). - Selected recommendations (preserve original numbering and timing): - Pillar 1: Improve the comprehensiveness, quality, comparability, and integrity of fiscal reports - 1.1 Expand and align fiscal reporting on the public sector using international guidelines — 1.1.1, 2.1.1 — SARB, StatsSA and NT — Medium-term - 1.2 Enhance fiscal reporting to cover all significant stocks and flows — 1.1.2, 1.1.3 — SARB, StatsSA and NT — Medium-term - 1.3 Further strengthen the disclosure of actual and estimated tax expenditures to facilitate policy discussions and decisions — 1.1.4 — NT — Short-term - 1.4 Improve the adherence to the timelines for the compilation, audit, and publication of audited financial statements — 1.2.2, 1.4.2 — NT, AGSA, reporting entities — Medium-term - 1.5 Further strengthen the historical revision policies and practices by routinely providing bridge tables to explain the difference between the old and new time series and its impact on the data — 1.3.3 — SARB and StatsSA — Short-term - 1.6 Improve the comparability of fiscal data by stock take of differences, eliminating unnecessary differences, and explaining unavoidable differences — 1.4.3 — SARB, StatsSA, and NT — Medium-term - Pillar II: Improve the budget and fiscal forecasting as follows: - 2.1 Improve the budget unity by including information on the gross financial position of higher education entities in the budget — 2.1.1 — NT — Medium-term - 2.2 Improve the transparency of the public investment management system and address deficiencies in procurement — 2.1.4 — NT, OCPO — Short/Medium-term - 2.3 Bring forward the budget process to ensure that the Budget is approved before the start of the fiscal year — 2.2.1; 2.2.2 — NT — Long-term *Preface and Executive Summary, IMF Technical Report (FTE mission to South Africa, July 11–25, 2023).* ### 2.4 Enact fiscal rules that are precise, time bound and stable over time 2.3.1, ### 2.4 Enact fiscal rules that are precise, time bound and stable over time 2.3.1 ### Key recommendations (selected actions and timing) - 2.4 Enact fiscal rules that are precise, time bound and stable over time — 2.3.1, 2.4.1, 3.2.3 — NT, Medium term - 2.5 Strengthen the effectiveness of formal opportunities for the public to participate in the budget process — 2.3.3 — NT, Medium-term - 2.6 Enhance evaluation of official forecasts with independent comparisons and PBO and FFC to develop capability to assess fiscal forecasts and objectives — 2.4.1 — NT, PBO, FFC, Medium-term ### Pillar III: Improve analysis and disclosure of risks to the public finances - 3.1 Strengthen analysis of macroeconomic risk, specific risks, and long term risks in the Fiscal Risk Statement — 3.1.1, 3.1.2, 3.1.3 — NT, Short-term - 3.2 Increase transparency of contingency and unallocated reserves’ use — 3.1.4 — NT, Medium-term - 3.3 Strengthen Asset and Liability Management by publishing a medium-term debt management strategy — 3.2.1 — NT, Medium-term - 3.4 Introduce limitation to guarantee exposure — 3.2.3 — NT, Short-term - 3.5 Strengthen and detail the disclosure of risks arising from PPPs — 3.2.4 — NT, GTAC, Medium-term - 3.6 Introduce regular and transparent reporting on the natural resources’ reserves, by volume and value, based on international standards — 3.2.6 — NT, DMRE, Medium-term - 3.7 Integrate natural disaster risk into budget contingency planning, and disclose the fiscal impacts of natural disasters — 3.2.7 — NT, NDMC, DCoG — Medium-term - 3.8 Strengthen the risk management of SNG arrears and accruals — 3.3.1 — NT, Long-term - 3.9 Strengthen the level of disclosure on SOCs, and develop a state ownership policy for SOCs based on their policy objectives — 3.3.2 — NT, DPE — Short-term ### Implementation institutions cited - NT (National Treasury) - PBO (Parliamentary Budget Office) - FFC (Fiscal and Financial Commission) - GTAC - DMRE (Department of Mineral Resources and Energy) - NDMC (National Disaster Management Centre) - DCoG (Department of Cooperative Governance) - DPE (Department of Public Enterprises) --- ### Public Sector Financial Overview, 2021/22 (Selected figures and ratios) - Public sector expenditure: 49 percent of GDP (R2,833 billion) - Consolidated general government: 42.3 percent of GDP (R2,441 billion) - Of consolidated general government expenditure: 54 percent flows through central government, 28 percent through provincial governments, and 18 percent through local governments - Public corporations’ expenditure: 9.4 percent of GDP, of which 94 percent is spent by public nonfinancial corporations ### Table 0.3 (select line items presented as percent of GDP where given) - Transactions - Revenue: 26.0 4.8 1.4 -2 .8 29.3 11.2 7.8 -13.0 35.2 6.8 2.5 0.1 NA 44.6 - Expenditure: 31.1 4.5 1.5 -2 .8 34.3 11.2 7.0 -13.0 39.4 8.8 0.6 0.2 NA 49.1 - Expense: 30.9 4.2 1.5 -2.8 33.7 10.5 6.1 -13.0 37.3 7.9 0.6 0.2 NA 46.0 - Investment in non-fin. assets: 0.2 0.4 0.0 0.0 0.6 0.7 0.9 0.0 2.1 0.9 0.0 0.0 NA 3.1 - Gross operating balance: -4.9 0.6 -0.1 0.0 -4.4 0.7 1.6 0.0 -2.1 -1.2 1.9 -0.1 NA -1.4 - Net lending/borrowing: -5.2 0.3 -0.1 0.0 -5.0 0.0 0.7 0.0 -4.2 -2.1 1.9 -0.1 NA -4.4 - Stocks (assets, financials, liabilities) - Assets total (select): 27.9 0.0 10.8 0.0 38.6 0.5 19.1 NA 175.0 24.4 67.4 17.4 -51.3 232.9 - Gross debt: 69.1 0.0 0.4 0.0 69.5 0.0 4.8 0.0 74.3 16.2 60.4 17.0 -36.3 131.6 - Net worth: -41.2 0.0 10.4 0.0 -30.9 0.5 14.3 0.0 100.8 0.0 0.0 0.0 0.0 100.8 - Net financial worth: -41.2 0.0 10.3 0.0 -30.9 0.5 1.9 0.0 -28.6 -20.3 -0.8 0.0 0.0 -49.6 - Public sector composition (2021/22) - Number of entities in public sector: 867 - Public Sector: Revenue 44.6, Expenditure 49.1, Balance -4.4 (percent of total shown in table) - General government: 815 entities; Revenue 51.1, Expenditure 55.3, Balance -4.2, Intra-PS expenditure 15.9, Net expenditure 39.4, Percent of total 80.4 - Central government: 304 entities; Revenue 32.1, Expenditure 37.1, Balance -5.0, Intra-PS expenditure 15.9, Net expenditure 21.3, Percent of total 43.3 - Budgetary central government: 4226? (table formatting indicates budgetary central government line) Revenue 26.0, Expenditure 31.1, Balance -5.2, Intra-PS expenditure 15.9, Net expenditure 15.3, Percent of total 31.1 - Extra-budgetary central government: 258? Revenue 4.8, Expenditure 4.5, Balance 0.3, Intra-PS expenditure -4.5, Net expenditure 9.2 - Social security funds: 41 entities; Revenue 1.4, Expenditure 1.5, Balance -0.1, Intra-PS expenditure -1.5, Net expenditure 3.0 - State governments: 201 entities; Revenue 11.2, Expenditure 11.2, Balance 0.0, Intra-PS expenditure -11.2, Net expenditure 22.7 - Local governments: 3107? entities; Revenue 7.8, Expenditure 7.0, Balance 0.7, Intra-PS expenditure -7.0, Net expenditure 14.3 - Nonfinancial public corporations: 386 entities; Revenue 8.8, Expenditure -2.1, Intra-PS -8.8, Net expenditure 18.0 - Central Bank: 10 entities; Revenue 0.0, Expenditure 0.0, Balance 0.0, Intra-PS -0.0, Net expenditure 0.0 - Other financial public corporations: 132.5? entities; Revenue 0.6, Expenditure 1.9, Intra-PS -0.6, Net expenditure 1.1 - Note: table contains complex cell alignments; figures above preserved verbatim as presented in source table --- ### Fiscal reporting: objectives and assessment - Objective for fiscal reports: provide a comprehensive, timely, reliable, comparable, and accessible summary of the government’s financial performance, financial position, and cash flows. - This chapter assesses South Africa’s fiscal reporting practices against IMF Fiscal Transparency Code dimensions: - Coverage of public sector institutions, stocks, and flows; - Frequency and timeliness of reporting; - Quality, accessibility, and comparability of fiscal reports; - Reliability and integrity of reported fiscal data. ### Progress and practices (findings) - Improvements over time in coverage, quality, and timeliness of fiscal reports; key national government information published monthly within 30 days of the end of the month; quarterly information on provincial and local government finances available within a quarter after the reference period. - South Africa scores highly on Open Budget Survey’s transparency score. - Fiscal reports broadly align with international standards: budget execution documents and consolidated financial statements use either accrual based GRAP or Modified Cash Standard (MCS); fiscal statistics published by SARB and StatsSA broadly in line with GFSM 2014. ### Fiscal reports inventory (selected features) - The Quarterly Bulletin (SARB) and other reports provide revenue, expenditure, financing, debt, assets, liabilities; publication frequencies and lags vary across reports (monthly, quarterly, annual) with specified lags such as Mo. 30d, Quart. 3m, Annual (FY) 9m–20m depending on report. ### Coverage of institutions (assessment: Good) - SARB publishes consolidated general government fiscal statistics each quarter per GFSM 2014 guidance, but fiscal reports do not extend to consolidated public sector. - In financial year 2021/22 South Africa’s public sector comprised 867 units. - Institutional coverage varies between SARB, NT, and StatsSA; institutional list published by SARB every 5−6 years (most recent list published in 2022). - Recommendation: publishing the public sector institutional list at more frequent intervals would increase transparency. ### Specific coverage issues identified - Municipal entities: Quarterly Bulletin includes municipal entities within local government, though some could be public corporations under GFSM 2014. The 2022 Municipal Entities Report notes 53 municipal entities; 13 largest municipal entities spent R42.8billion in 2019/20 (0.8 percent of GDP and 10 percent of published total local government spending). - Financial public corporations: Quarterly Bulletin excludes SARB, Corporation for Public Deposits, Land Bank, Postbank, and official pension funds from the financial public corporations sector; including them would provide more comprehensive public financial corporations and public sector coverage. - Institutional classification differences stem from PFMA interpretations based on full ownership rather than statistical control, causing inconsistent coverage across reports. ### Implications and recommended alignment - Differences in institutional coverage lead to differing fiscal aggregates (total expenditure, total liabilities) across reports. - No single fiscal report presents a comprehensive consolidated public sector picture. - Authorities should align institutional coverage across fiscal reports using GFSM 2014 guidance and consistent data sources (particularly for local governments). - Examples of good practice: Estonia and the United Kingdom maintain consistent institutional coverage between consolidated financial statements and public sector fiscal statistics and explain deviations. ### Coverage of stocks (assessment: Good) - Balance sheets of general government sub-sectors and some public corporations are published but are not consolidated to produce general government or public sector debt. - Non-financial assets are not covered to their fullest extent in the Quarterly Bulletin and Consolidated Financial Statement. *Source: IMF staff based on official data and the IMF Technical Report content provided.* ### 14. Experimental estimates of public sector gross debt were published by SARB in June 2023. ### 14. Experimental estimates of public sector gross debt were published by SARB in June 2023. ### Experimental consolidated public sector estimates - The Quarterly Bulletin publishes experimental estimates of consolidated public sector debt, building on the SARB’s work on the Integrated Economic Accounts. - Experimental estimates are not official statistics as they are still under development. - The Quarterly Bulletin also publishes assets of non-financial and financial corporations, though these are currently not used to compile consolidated public sector balance sheets. ### Gaps and required improvements for a comprehensive public sector picture - Natural resources and other non-financial assets - South Africa does not have or publish official estimates of mineral and energy resources; therefore these cannot be reported in the balance sheet. - IMF staff estimate this to be over R5 trillion (92 percent of GDP) at the end of 2021/22. - Land values are not reported. Fixed assets (buildings and machinery) are reported in the Quarterly Bulletin, but other produced assets such as inventories and valuables are not reported. - Equity in public corporations - Fiscal reports do not include equity assets held in public corporations. - This is estimated to be almost R1 trillion, or 16 percent of GDP: the difference in total assets and liabilities held by public corporations. - Employment-related pension liabilities - The Government Employee Pension Fund (a defined benefit fund) shows actuarial pension liabilities of R1.85 trillion and assets of R2.3 trillion in its annual reports. - While these liabilities are published in the QB, SARB does not include them in public sector statistics. ### Estimated comprehensive public sector balance sheet (2021/22) - Consolidated totals (IMF staff estimates): - Assets: 233 percent of GDP - Liabilities: 132 percent of GDP - Public sector net worth: 100 percent of GDP - Public sector net financial worth: negative 50 percent of GDP - Main components: - Non-financial assets: 150 percent of GDP, of which mineral and energy resources are estimated to be 92 percent of GDP. - Financial assets: 83 percent of GDP, primarily those of financial public corporations on a consolidated basis. - Liabilities: 132 percent of GDP, primarily composed of central government debt (69 percent of GDP) and pension liabilities (30 percent of GDP). ### Coverage and presentation comparisons - South Africa’s favorable public sector net worth relative to other countries is largely attributable to non-financial assets, notably mineral and energy resources. - SARB, Quarterly Bulletin, and other fiscal reports and financial statements are sources for these estimates; IMF PSBS methodology is used for mineral and energy resource valuation. For 2021/22, the stock of mineral and energy resources as a percentage of GDP has been maintained from 2020 due to unavailable source data for the existing methodology. ### Coverage of flows and accounting basis - Accounting bases across the public sector: - National and provincial governments: modified-cash basis (Modified Cash Standard). - Local governments and public entities: accrual basis. - This difference hampers aggregation and consolidation across public sector levels. - Progress toward accrual accounting: - The NT started moving to accrual accounting but the process is delayed pending the national rollout of the Integrated Financial Management System; no implementation date has been indicated. - Adopting accrual accounting would enable consolidation of general government and public sector fiscal reports and full integration of flows with stock positions. - Specific missing items in GFS: - Free basic services (water, sanitation, electricity, refuse removal) to low-income households are not properly captured; the IMF Statistics Department GFS mission identified approximately R71bn worth of free basic services not captured in GFS. - Authorities should work with the statistics department to record these accurately. ### Coverage of tax expenditures - Disclosure and timing - The annual Budget Review includes a Tax Expenditure Statement estimating revenue loss by sector and policy area; estimates are based on tax administrative data by tax type. - The Statement includes 35 tax expenditures for fiscal year 2020/21 (latest data available, two-years lag). - Since 2022 the Statement also includes an analysis of selected corporate tax expenditures on a sectoral basis. - Magnitude and composition (fiscal year 2020/21) - Tax expenditures: R252 billion, equivalent to 4.5 percent of GDP and 20 percent of gross tax revenue. - The largest tax expenditures (accounting for 60 percent of the total) relate to: deductions for pension contributions; value-added relief for basic items; medical tax credits on contributions to medical schemes; vehicle manufacturer incentives. - Time series (R Billion) - Personal Income Tax: 2017/18 = 124.4; 2018/19 = 135.9; 2019/20 = 141.3; 2020/21 = 142.3 - Corporate Income Tax: 2017/18 = 18.4; 2018/19 = 27.5; 2019/20 = 21.7; 2020/21 = 15.4 - Value-added tax: 2017/18 = 58.4; 2018/19 = 66.9; 2019/20 = 73.4; 2020/21 = 58.8 - Customs duties and excise: 2017/18 = 33.6; 2018/19 = 38.6; 2019/20 = 44.4; 2020/21 = 35.5 - Total tax expenditure: 2017/18 = 234.9; 2018/19 = 268.9; 2019/20 = 280.8; 2020/21 = 251.9 - In percent of GDP: 2017/18 = 4.6%; 2018/19 = 5.0%; 2019/20 = 4.9%; 2020/21 = 4.5% - In percent of gross tax revenue: 2017/18 = 19.3%; 2018/19 = 20.9%; 2019/20 = 20.7%; 2020/21 = 20.2% - Weaknesses and recommendations - Tax expenditures are not subject to budgetary objectives or a cap and the report is primarily ex-post. - Lack of forward-looking tax expenditure estimates limits their usefulness during budget deliberations. - Recommendations: provide up-to-date historical series and forward-looking estimates; consider fiscal implications alongside expenditure proposals; introduce measures to limit growth (or cap) tax expenditures. ### Frequency and timeliness of fiscal reporting - In-year reporting frequency and timeliness - The Statement of National Governments’ Revenue, Expenditure and National Borrowing (budget execution report) is published monthly. - Within 30 days of month-end, NT publishes information on payments into and out of the National Revenue Fund, including detailed tax receipts and non-tax receipts. - SARB publishes monthly aggregates of revenue, expenditure and financing of the national government; NT publishes quarterly expanded reports covering sub-national governments and Quarterly Spending Statistics for National Government; SARB’s Quarterly Bulletin publishes GFS on sub-sectors. - Potential improvements - Data from Provincial and Local governments are collected monthly or quarterly but published quarterly only; more frequent publication of Provincial and Local government finances could aid policy. - Timeliness of audited financial statements - AGSA usually publishes audited financial statements within 9 months of year-end. - Finalization dates of consolidated government audited financial statements (selected years): - 2017/18: December 7, 2018 - 2018/19: October 31, 2019 - 2019/20: February 17 2021 - 2020/21: December 3, 2021 - 2021/22: January 26, 2023* (Note: * Unusual delay due to finalization of the annual financial statements of the NT.) - For fiscal year 2021/22, only 41 percent of audits were completed within legislated timelines; national and provincial entities: 47 percent; local governments: 26 percent. - Delays were driven by the Covid-19 pandemic, lockdowns, extensions, late audit starts, and riots in Kwa-Zulu-Natal and Gauteng. - Recommendations: improve timeliness to ensure audited statements inform policy; consider publishing provisional and audited financial statements. ### Quality of fiscal reports and classifications - Classification - Fiscal reports include administrative, economic, functional and program classifications consistent with GFSM 2014. - The Budget Review presents a national classification and includes COFOG in an annex; Estimates of National Expenditure (ENE) present expenditure by vote, national function and program. - Two standard charts of accounts are maintained: one for National and Provincial governments and another for local governments; these allow bridging to GFSM 2014 and COFOG. - The BR describes main differences between the national functional classification and COFOG; including a numerical reconciliation would improve transparency. - Recording of government interactions with SOCs - 2023 budget reports reflect bailouts as equity investments, which is not in line with international guidance where bailouts are typically capital transfers (a deficit-impacting transaction) unless an economic return is likely. - Recommendation: ensure economic reality of interventions is reflected accurately in fiscal reporting by following international guidance. *Source: IMF staff summary of SARB Quarterly Bulletin, fiscal reports and IMF PSBS estimates as presented in the Technical Report section.* ### 34. Fiscal reports include all three reconciliations required by the FTC for budgetary central ### tarea2024031 - 34. Fiscal reports include all three reconciliations required by the FTC for budgetary central government ### Reconciliations and coverage - Quarterly Bulletin and budget documents contain reconciliations between the fiscal balance and financing, detailing movements in cash and incurrence of liabilities, and show ownership distribution of government debt (public and private sector holders). - The BR (Table 7.8) provides a reconciliation between financing and the change in debt stock. - Approximately 20 percent of countries where FTEs have been conducted follow advanced practice with regards to internal consistency. - Reconciliations: - Are not published at the general government level. - Are not presented for provincial or local governments. - Provincial government spending is equivalent to the budget transfers they receive; local governments have own revenue sources. - Presentation of reconciliations (especially fiscal balance to financing) is important to highlight data issues. - SARB currently do not show a statistical discrepancy for their general government data; IMF Statistics Department GFS mission recommends publishing this. - Debt dynamics: - The budget deficit is the largest contributor to the change in debt. - NT reconciliation of annual increases in debt indicates revaluations and changes in cash balances. - In 2021/22, non-deficit impacts on debt were relatively small compared to the stock of debt. - Over the period from 2023/24 to 2025/26, NT estimates a decrease in the deficit’s contribution, and Eskom debt-relief will contribute 20 percent to 25 percent of the change in debt. - Source note: MoF, Budget Review 2023, Table 7.8. (Note: 2022/23 estimated outcome; 2023/24 to 2025/26 medium-term estimates.) ### Historical revisions (Good) - Revisions reporting practices: - Main revisions to GFS data and source data are reported and explained by SARB and StatsSA with release of revised GFS data, but bridge tables between old and new data are not provided. - Both SARB and StatsSA have internal revision policies to disseminate major data revisions; revisions are explained either as notes to the release or as specific analytical articles accompanying revised data. - Supplemental papers are produced to disseminate comparable revised statistics for specific periods (example: supplement to the March 2013 Quarterly Bulletin published GFS Data for 1994−2012). - Quarterly GFS data of SARB are routinely indicated as preliminary for the most recent two years and updated when final audited financial statements for government entities become available. - Magnitude and frequency of revisions: - Considered by authorities to be insignificant given administrative data origin, but magnitude/frequency could be used to gauge data accuracy and reliability. - Most revisions stem from the trade-off between timeliness and accuracy; provisional quarterly data may be less accurate but provide timely information. - StatsSA is conducting an analytical study on the size and impact of revisions to inform improvements. - Recommendation: Routinely provide bridge tables to show magnitude and impact of revisions. - Measured revisions: - Revisions to the general government deficit over the last 4 years averaged 7.2 percent. - COVID-19 had a large impact: the deficit for 2019/20 was revised by 17.8 percent one year later. ### Integrity of fiscal reports - Statistical integrity (Advanced): - Fiscal statistics are compiled by the professionally independent SARB in line with GFSM 2014. - SARB independence is laid out in Section 224(3) of the 1996 Constitution of the Republic of South Africa; SARB Act governs SARB activities and data collection. - SARB has published statistics in its Quarterly Bulletin since 1946. - Fiscal statistics rely on administrative records and data collected by Statistics South Africa (StatsSA), whose independence is in the Statistics Act (No. 6 of 1999). - South Africa subscribes to the SDDS since 1996 and met all requirements in 2000; National Summary Data Page is maintained on SARB’s website. - The 2022 IMF Annual Observance Report for SDDS noted South Africa met coverage requirements and exceeded periodicity and timeliness for General Government Operations and Central Government debt. - External audit (Basic): - The independent Auditor-General of South Africa (AGSA) publishes annual audit reports on financial statements but regularly identifies material irregularities and often cannot express a true and fair view. - AGSA’s mandate and independence derive from the Constitution of the Republic of South Africa, 1996. - World Bank's Supreme Audit Institutions Independence Index 2021 ranks AGSA Very High (10 out of 10 indicators). - AGSA functions: audits national and provincial government departments, certain public entities, municipalities, and municipal entities; audits cover financial, compliance, and performance audits; special audit reports produced (e.g., on Covid-related spending). - AGSA issues audit reports that include material irregularities (MIs) and estimated financial losses. - Material irregularities and audit outcomes: - Definition of MI (PAA Section 1(1)) includes non-compliance with legislation, fraud/theft, significant financial loss or misuse of public resources, identified during an audit. - 2021/22 integrated report MI findings and estimated losses: - National government: 60 MIs, total estimated loss of R86 billion. - Provincial government: 82 MIs, combined value of R2.1 billion. - Local government: 185 MIs, estimated value of R3.9 billion. - Unqualified (clean) audit reports represent 24 percent of all audit opinions (30 percent at national and provincial level, 14 percent at local government level); a significant portion of audit reports have negative audit opinions. - Table 1.5 audit summary (selected entries): - National and Provincial government: - 2020/21: Number of Audits 117, Total Audits 192, Unqualified with no findings 76, Unqualified with findings 2, Qualified with findings 20, Adverse with findings 15, Disclaimed with findings 4, Outstanding audits 22. - 2021/22: Number of Audits 128, Total Audits 184, Unqualified with no findings 76, Unqualified with findings 1, Qualified with findings 9, Adverse with findings 26, Disclaimed with findings 4, Outstanding audits 24. - Local Governments: - 2020/21: Number of Audits 41, Total Audits 100, Unqualified with no findings 83, Unqualified with findings 4, Qualified with findings 26, Adverse with findings 3, Disclaimed with findings 2, Outstanding audits 57. - 2021/22: Number of Audits 38, Total Audits 104, Unqualified with no findings 78, Unqualified with findings 6, Qualified with findings 15, Adverse with findings 16, Disclaimed with findings 2, Outstanding audits 57. - Independent and published audits of government financial information are important safeguards; audit recommendations should be followed up to ensure timely corrective measures. ### Comparability of fiscal data (Basic) - Section 32 budget execution reports: - Prepared on the same basis as the fiscal forecast/budget. - Reconciliations with fiscal statistics and final accounts (financial statements) are not available. - Section 32 of the PFMA requires publication within 30 days after the end of each month a statement of actual revenue and expenditure with regard to the National Revenue Fund; publication dates announced in advance in a press release. - Section 32 report includes summary Statement of the National Government’s Revenue, Expenditure, and National Borrowing; schedule of borrowing; detailed tables on revenue, expenditure, financing, cash-flows; additional information on National Revenue Fund receipts and payments. Tables present budgeted amount, latest month data, year-to-date cumulative amounts, and comparable information for the previous budget year. - Provincial and local reporting: - Section 32 requires provincial governments to report after the end of a prescribed period, at least quarterly, within 30 days; reports include comparator data between budget and actual receipts/payments, cumulative amounts in nominal values and percent of budgeted amount. - NT publishes a Quarterly Municipal Borrowing Bulletin for municipalities engaged in long-term borrowing (97 of the 257 municipalities are engaged in borrowing); bulletin compares actual borrowing with original and adjustment budgets. - Gaps in reconciliation and harmonization: - Currently no reconciliation between the budget, statistical reports, or financial accounts is published. - BR Annexure W2 contains a narrative about main differences between statistical tables in budget documentation and GFS dataset but does not provide a reconciliation of the impact of these differences. - Financial statements and audit reports reference compliance with budgeted amounts but do not present reconciliation between the budget and financial accounts. - SARB and StatsSA perform internal reconciliations between source data and GFS, but these are not publicly available. - Best practice: eliminate unnecessary differences in compilation bases; where methodological differences persist, publish reconciliations and clear explanations to inform users. ### Recommendations and overall assessment - Overall: fiscal reporting generally performs well per the FTE assessment, but room for improvement remains. - Key shortcomings to address: - Inconsistencies across reports regarding coverage of institutions, transactions, and stocks without clear public reconciliations. - Additional disclosures on reconciliations are lacking. - Quality and timeliness of financial statements could be improved. - Some published information, such as the tax expenditure report, is not effectively used to inform policy discussions. - Implied action points: - Publish reconciliations between fiscal balance and financing and between budget, statistics, and financial accounts. - Publicly disclose statistical discrepancies for general government data. - Provide bridge tables when revising data to show magnitude and impact of revisions. - Follow up on AGSA audit recommendations to ensure corrective measures are implemented. - Improve timeliness and quality of financial statements and better integrate tax expenditure reporting into policy discussions. *IMF | Technical Report* ### 53. Based on the assessment (see Table 1.6) the evaluation highlights the following priorities ### 53. Based on the assessment (see Table 1.6) the evaluation highlights the following priorities for improving the transparency of fiscal reporting ### Priorities and Recommendations (Fiscal Reporting) - Recommendation 1. Expand and align fiscal reporting on the public sector using international guidelines by: - Maintaining one comprehensive list of public sector institutions that is used for all fiscal reports; - Including the universities and technical colleges as part of the central government sector in budget reporting; - Ensuring that provincial and municipal entities are classified according to sector classification rules in GFSM 2014; - Utilizing non-financial and financial corporations data already published and consolidating with general government data; - Expanding the reporting of the financial public corporations sector in GFS data by including public financial corporations such as GEPF, PIC, Land Bank, that are currently reported in capital market statistics. - Recommendation 1.2. Enhance fiscal reporting to cover all significant stocks and flows by: - Estimating and including the value of mineral and energy resources in non-financial assets; - Identifying and reporting other non-financial assets such as land; - Reporting data for the value of non-financial assets of the sub-sectors of general government; - Reporting liabilities beyond debt securities and loans, for example pension liabilities and accounts receivable/payable; - Implementing fully accrual reporting for national and provincial government departments. - Recommendation 1.3. Further strengthen the disclosure of actual and estimated tax expenditures to facilitate policy discussions and decisions by: - Including in the Budget Review’s Tax Expenditure Statement the rationale and budgetary objectives of all tax expenditures, and up-to-date and forward-looking estimates of its value to allow an assessment of their budgetary impact and a discussion on the impact that tax proposals may have on tax expenditures and tax collections; - Establishing and disclosing sunset-clauses for all tax expenditures; - Considering introducing a cap on the overall size of tax expenditures. - Recommendation 1.4. Improve the adherence to the timelines for the compilation, audit, and publication of audited financial statements by: - Providing capacity building support to entities that have difficulty to complete the compilation of their financial statements in a timely manner; - The NT, provincial treasuries, and municipal councils enforcing the deadlines for the compilation and submission of individual financial statement in line with the legal provisions; - AGSA to further improve the adherence to the timeliness of completion of audits; - Considering publication of provisional data, pending the completion of final audits. - Recommendation 1.5. Further strengthen the historical revision policies and practices by routinely providing bridge tables to explain the difference between the old and new time series and its impact on the data. - Recommendation 1.6. Improve the comparability of fiscal data by: - Taking careful stock of all the differences between budgetary, statistical, and accounting data; - Eliminating all unnecessary remaining differences in the data; - Compile and present routinely a reconciliation between the budget data, statistical data, and financial accounts to users of the differences. ### Key Findings from Table 1.6: Summary Evaluation — Fiscal Reporting - Principle 1.1.1 Coverage of Institutions - Assessment: Good: Consolidated general government is reported in fiscal statistics, but fiscal reports do not extend to the consolidated public sector. - Importance: Medium: Excluding large financial public corporations from fiscal statistics results in 40 percent of PS liabilities not reported in fiscal statistics. - Recommendation references: 1.1 - Principle 1.1.2 Coverage of Stocks - Assessment: Good: Fiscal reports include most financial assets and liabilities. Non-financial assets are not fully covered. - Importance: Medium: Significant stock (92 percent of GDP) of mineral and energy resources are not included in the balance sheet. - Recommendation references: 1.2 - Principle 1.1.3 Coverage of Flows - Assessment: Basic: Fiscal reports are primarily on a modified-cash or cash basis. - Importance: Medium: Accrual reporting allows more accurate reconciliation of changes in balance sheets. - Recommendation references: 1.2 - Principle 1.1.4 Coverage of Tax Expenditures - Assessment: Good: Historical and sectoral analysis of tax expenditures by type is performed. There are no controls over tax expenditure, nor public discussion. - Importance: High: In 2020/21 revenue of almost 5 percent of GDP was forgone through tax expenditures. - Recommendation references: 1.3 - Principle 1.2.1 Frequency of In-Year Reporting - Assessment: Advanced: Monthly reports on national government revenue, expenditure, financing and debt are published within 30 days after the end of the month. - Importance: Low: Key information is made available in a timely manner. - Principle 1.2.2 Timeliness of Annual Financial Statements - Assessment: Good: Audited financial statements are published within 9 months. - Importance: High: Only 41 percent of audits performed during fiscal year 2021/22 were conducted in the legislated timelines. - Recommendation references: 1.4 - Principle 1.3.1 Classification - Assessment: Advanced: Fiscal reports include administrative, economic, functional and program classifications. - Importance: Low: Fiscal reports present information with clear classifications. - Principle 1.3.2 Internal Consistency - Assessment: Advanced: Fiscal reports include reconciliations of fiscal balance and financing debt ownership and financing and the change in debt. - Importance: Low: Reconciliations allow inconsistencies in data to be identified. - Principle 1.3.3 Historical Revisions - Assessment: Good: Major revisions to GFS data are reported and explained by SARB and StatsSA. A bridge table between the old and new data is not provided. - Importance: Low: Knowledge about the magnitude and frequency of fiscal revisions could be used to gauge data accuracy and reliability. - Recommendation references: 1.5 - Principle 1.4.1 Statistical Integrity - Assessment: Advanced: Fiscal statistics are compiled by independent and professional SARB and StatsSA. - Importance: Low: SARB and StatsSA are able to perform their functions independently. - Principle 1.4.2 External Audit - Assessment: Basic: Annual financial statements are subject to a published audit by AGSA, which validates their reliability. - Importance: Medium: Material irregularities are often found in audit reports. In 2021/22 327 MIs were found. - Recommendation references: 1.4 - Principle 1.4.3 Comparability of Fiscal Data - Assessment: Basic: Budget is comparable with budget execution reports. Reconciliations with financial statements and statistics are not made. - Importance: High: Lack of comparability of budget with financial statements and statistics hinders understanding of users and does not give assurance of quality. - Recommendation references: 1.6 ### Fiscal Forecasting and Budgeting: Main Findings - Objectives and desired characteristics - Budgets and fiscal forecasts should: - Be based on credible projections of macroeconomic developments; - Provide comprehensive information on the government’s fiscal objectives and budgetary plans, facilitate policy analysis and accountability; - Give the legislature enough time to scrutinize and approve the plans before the budget year begins. - Transparency and accessibility - South Africa’s budget transparency is strong: Budget documents available back 30 years; People’s Guide, Budget Highlights, and Vulekamali portal broaden accessibility; Open Budget Survey ranks South Africa second in the world for transparency. - Credibility challenges - Credibility undermined by forecasting biases and lack of accountability to clear fiscal objectives. - Medium-Term Expenditure Frameworks have relied on optimistic growth projections that consistently failed to materialize, contributing to debt rising in almost every year since 2009 contrary to the objective to stabilize debt. - Independent institutions (Parliamentary Budget Office and Financial and Fiscal Commission) could play stronger roles with bolstered capacity. - Public investment and procurement - Need to improve transparency and effectiveness of public investment management and address public procurement deficiencies. - Recommendation for full disclosure of total multi-year investment obligations and appraisals of major projects prior to approval. - Suggested review of the effectiveness of the 4 percent of GDP spent on public investment, potentially supported by a Public Investment Management Assessment (PIMA). - Significant procurement deficiencies affect approximately 10−15 percent of GDP procured publicly each year. - Coverage and budget unity - Budget documentation covers gross revenue, expenditure, and financing by budgetary central government, most extrabudgetary entities, social security funds, and provincial governments. - Notable omission: tertiary education institutions (universities and TVET colleges) are not covered on a gross basis; their omission makes up a significant portion of central government finances. - StatsSA 2021 Financial statistics of higher education institutions: approximately half of operating revenue of higher education institutions received from central government as grants and the other half from fees; together these receipts make up almost 30 percent of the receipts of extrabudgetary units as reported by SARB. - Macroeconomic forecasts - Forecasts of key economic indicators are presented twice a year with underlying assumptions (MTBPS and BR). - Alternative scenarios for economic growth are briefly presented; analysis could be strengthened by expanding implications, including fiscal impacts. - GDP forecast errors: - Forecasts of GDP growth for the budget year are on average 0.5 percentage points higher than outturn for the past 10 years, rising to 1.6 and 2.3 percentage points in the second and third year of the MTEF respectively. - Persistent optimism in GDP forecasts has significant implications for the Medium-Term Budget Framework and deficit targets. - Medium-Term Budget Framework performance - Budget documents provide medium term forecasts over 3 years, estimates for the current year, and outturns for 3 previous years; consolidated expenditure presented by vote, function, and economic classification. - South Africa has a strong record of delivering credible aggregate expenditure against medium-term plans: - Over the past 10 years, the budget has underspent by an average of 0.1 - 0.2 percent of GDP in each of the three years ahead relative to plans. - Revenue forecasting underperformance: - On average, revenues have underperformed by 0.8 percent of GDP in the year ahead relative to forecasts, rising to 2.1 percent of GDP in the third year. - Fiscal deficit slippage relative to forecasts: - Fiscal deficit higher on average by 0.4 percent of GDP in the year ahead, rising to 1.9 percent in the third year ahead. *IMF | Technical Report* ### 65. A systematic analysis of underlying causes of revenue forecast errors should be ### 65. A systematic analysis of underlying causes of revenue forecast errors should be ### Revenue forecast errors: findings and recommended action - Finding: Reducing revenue forecast errors would strengthen the credibility of the fiscal framework and ensure that expenditure ceilings are consistent with the government’s fiscal objective to stabilize debt. - Recommended action: A systematic analysis of the drivers of forecast errors should be undertaken and published. - Scope of analysis: Investigate the extent to which revenue underperformance is due to: - systematic errors in macroeconomic assumptions, - policy costing errors, - modelling errors. - Institutional arrangement suggested: This could be undertaken jointly between NT and SARS. ### Investment projects: appraisal and publication (Not met) - Finding: Cost benefit analysis is undertaken for major projects but are not systematically published prior to inclusion into the budget. - Legal/regulatory context: The PFMA requires a system for properly evaluating all major capital projects prior to a major decision. Major infrastructure projects above R1billion are submitted for consideration to the Budget Facility for Infrastructure (BFI). - BFI procedures: Submissions to the BFI require detailed appraisal, including options analysis, cost benefit analysis, and a risk statement. Appraisal guidelines are provided in the NT Infrastructure Planning and Appraisal Guideline. The BFI conducts independent appraisal and challenge, and GTAC provides analytical support to project sponsors, but these analyses are not made public. - Finding: Smaller projects have a less unified appraisal methodology. The NT Capital Planning Guidelines (2018) provides an overview and encourages departments to have their own planning and appraisal processes. There is no central standard-setting methodology at a high level, or challenge function for appraisals, unlike that for major projects. ### Public sector infrastructure investment composition and disclosure issues - Finding: SOCs are the largest investors in public infrastructure, making up a third of planned public investment over the 2023 MTEF period respectively. Provinces and local government each make up about a fifth of planned public investment over the same period. National departments directly implement six percent of infrastructure expenditure. - Sector concentration: Investment in transport, logistics and energy make up over 50 percent of total planned expenditure. - Disclosure gap: Total public infrastructure spending plans by sector are presented in the budget, but total obligations for multi-year project costs are not disclosed beyond the 3-year MTEF horizon. Annexure D of the BR shows costs only for the 3-year MTEF horizon. - Recommended action: To support legislative oversight, budget documents should show total obligations of capital projects that extend beyond the 3-year MTEF. - Note: Under the Vulekamali initiative, approved projects can be viewed in more detail in the portal, including appropriated project costs, and progress in budget execution. ### Procurement framework, practice, and risks - Legal framework: Centered on the Preferential Procurement Policy Framework Act (2000) and Preferential Procurement Regulations (2022), overseen by the Office of the Chief Procurement Officer (OCPO). Constitution Section 217(1) and PFMA Section 51(a) set the requirement for procurement to be “fair, equitable, transparent, competitive, and cost-effective”. - Thresholds and publication: - Procurements above R1 million are required to be tendered through an open and competitive process and advertised on the government E-tender portal. - Below R1 million, a Request For Quotations (RFQ) process is followed which does not require open competition or use of the E-tender portal. - Transparency tools: Documentation, TORs and awards for open tenders are published, and Open Contracting Data Standards (OCDS) were adopted in late 2022. - Tender statistics: Of 24,440 tenders published on the E-tender portal, only one percent were listed as limited tender. - Deviations and expansions: In 2022/23 there were 2,555 deviations and contract expansions, with deviations amounting to some R12 billion, and expansions worth R162 billion (nearly 3 percent of GDP). Of the contract expansions, nearly 50 percent was due to Eskom, with cited reason as ‘poor planning’. - Findings from audits and inquiries: - Successive independent reports identify significant deficiencies in procurement. - Open Reports from the Commission of inquiry in allegations of State Capture (2022) illustrated misuse of the preferential procurement system for corruption, state capture, and rent seeking. - A 2020/21 Auditor General report shows findings of ‘uncompetitive or unfair procurement process’ in 76 percent of municipal audits. - Reform efforts and diagnostics: - A draft Procurement Bill is being considered to standardize the framework for procurement and preferential procurement across public entities. - Procurement issues could be further examined through conducting an IMF Public Investment Management Assessment (PIMA). ### Fiscal orderliness: legal framework and timetable - Legal architecture: Chapter 4 of the PFMA and the MFMA governs budgetary processes, supplemented by the Money Bills Amendment Procedure and Related Matters Act of 2009, Treasury Regulations, Annual DORA and the Annual Revenue Amendment Act. - Budget timetable and limits (national): - Section 27 of the PFMA: Minister must table the national annual budget before the start of the financial year or as soon as possible after. - Section 29 of the PFMA: If an annual budget is not passed before the start of the financial year, funds may be withdrawn from the relevant Revenue Fund as a direct charge against the Fund until the budget is passed. For national government these withdrawals: - may be utilized only for services for which funds were appropriated in the previous annual budget or adjustments budget; and - may not (i) during the first four months of that financial year exceed 45 percent of the total amount appropriated in the previous annual budget; (ii) during each of the following months, exceed 10 percent of the total amount appropriated in the previous annual budget; and (iii) in aggregate, exceed the total amount appropriated in the previous annual budget. - Provincial and municipal timelines: - Provincial budgets must be tabled in the provincial legislature not later than two weeks after the tabling of the national annual budget; the Minister of Finance may approve an extension. - Example: Western Cape legal provisions allow a withdrawal of 33 percent of the previous annual budget for the first four months. - Municipal budgets: Section 16 of the MFMA requires a municipal council to approve an annual budget before the start of the financial year; municipal budget year starts on July 1; the mayor must table the annual budget at least 90 days before the start of the financial year. - Content requirements: Section 27 (3) of the PFMA requires an annual budget to contain estimates of all revenue, all expenditure (including interest, debt service payments, capital expenditure, standing appropriations, and direct charges against the revenue fund), financing proposals and impact of borrowing on debt or liability, updated projected revenue, expenditure and borrowing of the year preceding the budget year, and any other information that may be required, including multi-year budget information. Accounting officers must submit measurable objectives for each main division. Section 17 of the MFMA sets similar municipal requirements, including cash flow projections and amendments to the integrated development plan. - Budget amendment powers and limits: - Minister of Finance may use funds from the National Revenue Fund for emergencies that are exceptional in nature and cannot be postponed; these amounts may not exceed two percent of the total amount appropriated in the budget for the current financial year. - Section 30 of the PFMA allows the minister to table an adjustments budget in the National Assembly when necessary. Section 31 makes similar provisions for provincial governments. - In-year virements by accounting officers may utilize savings within a vote up to eight percent of the amount appropriated under that main division, subject to prohibitions in certain cases. ### Timeliness of budget documents (Not met) - Practice: The Appropriations Bill, accompanied by the BR and ENE, is presented to the legislature in February ahead of the fiscal year ending March 31. The Fiscal Framework must be tabled within 16 days of the budget being tabled. The Division of Revenue Bill must be passed within 35 days of adoption of the fiscal framework. The Appropriations Bill is required by law to be passed by July 31, four months after the start of the fiscal year. - Basic practice gap: This does not meet the basic practice of the FTC of approving the budget before the beginning of the financial year. - Interim constraints: In lieu of an approved budget, expenditures for the first four months of the fiscal year are constrained as set out in Principle 2.2.1. - Tax legislation timing: Changes to tax and revenue policies are enacted from the start of the fiscal year, but the relevant bills are tabled only in October and passed in the following January, through the Taxation Laws Amendment Bill, Rates and Monetary Amounts and Amendment of Revenue Laws Bill. - Practical mitigation: In practice, disruption is limited because the budget is almost always approved with no amendments. The MTBPS, presented in October, contains near-final expenditure ceilings for departments, provinces, municipalities, and other entities. If the political dynamics change (for example, formation of a coalition government), amendments after tabling could lead to greater disruption. ### Policy orientation: fiscal objectives (Not met) - Finding: South Africa does not have a numerical or time bound fiscal objective. The 2022 MTBPS states the fiscal strategy aims to “achieve fiscal sustainability by narrowing the budget deficit and stabilizing debt”. - Assessment: The aim is described as vague and difficult to assess over the forecast period. - Debt trajectory: According to the 2023 BR, public debt as a share of GDP continues to rise every year of the MTEF period, falling only after end of the three-year projection period. - Historical context: - Since 2020, the MTBPS has stated commitments to stabilizing the debt to GDP ratio. - Debt as a share of GDP has increased almost every year since 2009, rising from 27 percent of GDP to 71 percent of GDP between 2009 to 2022. - Past targets: In 2019, a target was proposed to reach a main budget primary balance, excluding financial support for Eskom, by 2022/23 (set prior to COVID-19). - Role of expenditure ceilings: Successive MTBPS’ have noted that expenditure ceilings have anchored fiscal policy since 2012. While these ceilings have largely been respected, this has not been successful in stabilizing public debt. *IMF | Technical Report* ### 84. Setting clear fiscal rules that strike a balance between flexibility and credibility is a priority ### 84. Setting clear fiscal rules that strike a balance between flexibility and credibility is a priority ### Fiscal rules and anchor - The government is considering alternative fiscal rules including a debt anchor. - Objectives for rules: - Provide credibility. - Ensure sustainability of public debt. - Provide flexibility to respond to shocks. - Assessment of current anchor: - The expenditure ceiling relied on to anchor fiscal policy does not necessarily ensure fiscal sustainability even if complied with, particularly if revenues persistently underperform. - Reference to literature: - Caselli, Francesca, Hamid Davoodi, Carlos Goncalves, and others. 2022. The Return to Fiscal Rules. IMF Staff Discussion Note 2022/002. ### 2.3.2. Performance Information (Advanced) - Publication and coverage: - Results on selected performance indicators and targets are published in budget documents in the ENE for each policy area. - Achievement against a selection of performance indicators for each vote are provided for the past three years, estimated performance for the current year, and targets for the three years ahead (about 5-10 key indicators for each department). - A fuller set of performance indicators are provided in departmental Annual Performance Plans, at the program and sub-program level. - Performance information is detailed, provided by program and sub-program, and linked to broader governmental priorities set out in the 5-year Medium Term Strategic Framework (MTSF). - Indicators are used during budget negotiation to guide reprioritizations. - Institutional linkage: - Performance information is linked to a comprehensive planning framework managed by the Department of Planning, Monitoring and Evaluation (DPME). - The performance budgeting system was introduced in 2002 and is tied to the planning system guided by key national, sectoral and provincial planning documents. - These plans are integrated to the National Development Plan 2030, and the MTSF which sets out 561 indicators across government, aligned with 81 outcomes and 7 priorities. - All national, provincial and local government institutions must ensure that the National Development Plan priorities are reflected in their institutional Strategic Plans and Annual Performance Plans. - Planning framework (Table 2.3): - National Development Plan (NDP) 2030: Planning horizon 2012-2030; Level: National; Purpose: Long term plan to ‘eliminate poverty and reduce inequality by 2030’. - Medium Term Strategic Framework (MTSF): Planning horizon 5-year (current: 2019/20-2023/24); Level: National; Purpose: Implementation plan of the NDP, aligned with government priorities. Sets out performance indicators. - Strategic Plan (SP): Planning horizon 5-year (current 2020/21-2024/25); Level: Departmental/Provincial; Purpose: Articulates strategy and interventions for delivering MTSF by sector and related performance targets. - Annual Performance Plan (APP): Planning horizon Annual; Level: Departmental/Provincial; Purpose: Reports on annual plan and performance against the SP. - Source: Department for Planning, Monitoring and Evaluation; IMF staff. - Implementation challenges: - The very large number of indicators creates burdensome reporting requirements and monitoring of results. - Some indicators are set at a very operational level (such as number of reports finalized), rather than being strategic. - Difficulties exist in understanding the meaning of indicators, the consistency of targets across years, and alignment between the budget and planning system. - It is not clear whether performance indicators’ results are used sufficiently in the process of adjusting policies and setting budget allocations. ### 2.3.3. Public Participation (Advanced) - Information provision: - The government publishes accessible information on the Budget in various formats and provides opportunities for citizens to participate in deliberations throughout the budgetary cycle. - The People’s Guide to the Budget is published in all eleven official languages of the country. - NT publishes a Budget Dashboard, Budget highlights document, and various sections of the budget on the NT’s website. - NT hosts the Vulekamali and Municipal Money websites that facilitate a database with access to different levels of details of the respective budgets. - NT publishes a Tax Pocket Guide and a “Frequently asked questions” section. - Participation mechanisms: - Section 59 of the Constitution requires the National Assembly to facilitate public involvement in the legislative and other processes of the Assembly and their committees, conduct business in an open manner, and regulate public access to work of the Assembly and its committees. - Parliament has developed a Public Participation Model and a Public Participation Framework; processes are managed through Parliamentary Committees when they consider new legislation, including the Budget, MTBPS and Division of Revenue and tax laws. - Every citizen has a right to make inputs or proposals to the budget when the MTBPS or the Budget are submitted for Parliament’s consideration. - Committees invite inputs via national and community newspapers, the Parliament’s website and social media platforms; committees compile a report to Parliament listing contributors, comments, proposed changes, and recommendations. - Example reference: https://pmg.org.za/tabled-committee-report/5405/. - Additional initiatives: - NT invites “Budget Tips” to the Minister of Finance via a standard form; information on tips received and responses are not published. - Section 7(4) of the Money Bills and Related Matters Act (2009) requires the Minister of Finance to publicly respond to recommendations made to them. - SARS and AGSA facilitate engagement: draft tax bills are published for 30 days of public comment; NT and SARS conduct public workshops; AGSA provides briefings, public lectures, workshops, and outreach to stakeholders. - See: https://vulekamali.gov.za and https://municipalmoney.gov.za. - Stakeholder views and pilots: - Civil society organizations feel more opportunities could be available, timing of budget consultations could be improved, and their voice could be used more effectively. - South Africa participated in a pilot of the Fiscal Openness Accelerator Project of the International Budget Partnership of the Global Initiative for Fiscal Transparency (GIFT) for two years between 2021 and 2022 to enhance pre-budget consultation. - Pilot outcomes: limited responses but valuable opportunities for citizen engagement; well received by CSO; highlighted need to enhance budget literacy, clarify the role of treasury, and strengthen engagement of other departments with the public. - Comparative evaluation note: - OBI evaluation for South Africa ranked South Africa at 14/100 in 2021. Although this is a relative low score it is 36 percent better than the average score. South Africa’s rating corresponds to Limited participation. ### 2.4. Credibility #### 2.4.1. Independent Evaluation (Not met) - Current practice and gaps: - Macro-fiscal forecasts presented in budget documentation are not compared to forecasts of other independent institutions. - Including forecast comparisons with institutions such as SARB, IMF, World Bank, the African Development Bank, and reputable private institutions would provide valuable context and support credibility of the official forecasts. - Where official forecasts appear to be outliers relative to independent forecasts, these should be explained where possible by comparing and justifying contrasting judgements of underlying macroeconomic assumptions. - Existing independent scrutiny: - The independent Parliamentary Budget Office (PBO) and Financial and Fiscal Commission (FFC) undertake some limited assessment of government forecasts. - PBO and FFC publish comparisons of official forecasts of GDP growth with select independent forecasters. - The PBO produces and compares its own fiscal forecasts, constructed based on independent forecasters such as Reuters or Bloomberg, against NT forecasts. - There is no underlying explanation of the reason for differences; in recent years PBO fiscal forecasts have been significantly more optimistic than official forecasts. - The PBO previously undertook forecast audits, but the last report was issued in 2018. - The PBO does not assess the extent to which the government is meeting its fiscal objectives to stabilize debt, but has often issued opinions on whether the government’s fiscal strategy is appropriate. - The FFC provides in depth summaries of economic and budgetary developments and provides recommendations on policy issues rather than evaluating the credibility of official forecasts or fiscal objectives. It also undertakes analysis and provides recommendations on issues that may put pressures on the fiscal framework, such as the risks from inflation and growth shocks, and from SOCs. - Table 2.4. Roles of PBO and FFC in Assessing Fiscal Credibility (summary): - PBO: - Mandate: Money Bills Amendment Procedure and Related Matters Act of 2009, Section 15. - Role: Supports Committees on Finance and Appropriations; external comparisons of growth forecasts; comparisons with own fiscal forecasts; provides opinion on appropriateness of government’s fiscal objectives. - Key budget publications: Pre-budget reports; Appropriations Bill and DORA reports; MTBPS reports; Special Appropriations briefs; Other special analyses on request of Committees. - FFC: - Mandate: Constitution of South Africa of 1996, Section 220. Reports to Parliament and Provincial legislatures. - Role: Must be consulted on financial matters, including equitable division of revenue; explains budgetary and economic developments; external comparisons of growth forecasts; provides policy recommendations. - Key budget publications: Submission on MTBPS; Submission on Budget; Submission on the Division of Revenue; Technical reports: submission for the division of revenues (special topics). - Source: IMF staff, PBO, FFC. #### 2.4.2. Supplementary Budget (Advanced) - Legislative authorization: - Legislative authorization through an adjustments budget is required before substantive amendments to expenditure are made. - Virements between budget programs within a vote are limited to up to 8 percent of program allocation without requiring legislative approval. - Some additional approvals by accounting officers are required from the NT for transfers from capital to recurrent expenditure, or increasing personnel expenditure. - Larger virements, virements between votes, or increases to allocations require legislative approval through an adjustments budget. - PFMA Section 16 permits the use of funds for emergency circumstances up to 2 percent of total appropriations without legislative approval; this has only been used in a modest number of occasions in the past decade. - Amendments to the PFMA are being considered, including a review of virement rules; the review should consider analysis of historic virements and whether current rules strike the right balance of flexibility and parliamentary intention. - Reference: Treasury Regulations 2005, Section 6.3, 6.6. - Adjustment Appropriations Bill: - Purpose: Provides for changes that primarily relate to unforeseeable and unavoidable expenditures and rollover of unspent funds from the previous fiscal year; limited to reasons set out in PFMA Section 30. - Also allocates expenditure for announcements earmarked by the Minister of Finance during the budget speech that have not been fully elaborated. - These allocations have averaged 0.4 percent of appropriations in the past 10 years, and averaged 0.7 percent in the past five years. - There is usually one Adjustment Appropriation Bill each year; the associated explanatory memorandum, the Adjusted Estimates of National Expenditure (AENE) is published in October. - A second Adjustment Appropriations Bill in 2020 was enacted in response to COVID-19. - Over the past 10 years, adjustment budgets have had modest aggregate expenditure impacts, increasing expenditure by 0.4 percent of appropriations on average. - Special Appropriation Bills: - Purpose: Handle significant and specific events requiring appropriations, separately to the Adjustment Appropriations Bill. - In the past 10 years these have primarily provided transfers to troubled SOCs, and for the response to the unrest of July 2021. - The size and number of Special Appropriation Bills has risen in recent years; Eskom has received more than half the allocations in the past decade. - On average Special Appropriation Bills have increased expenditure by 0.9 percent of total appropriations. - Aggregate in-year adjustments: - Taken together with Adjustment Appropriations Bills, in-year adjustments increase expenditure relative to the initially approved budget by an average of 1.3 percent of total appropriations. - Revenue and deficit revisions: - Adjustment budgets reflect updated revenue estimates, which on average have seen downward revisions. - AENEs update estimates of revenue collection for the year, which on average have been revised downwards by 0.4 percent of GDP each October. - Mid-year adjustment budgets tend to revise estimates of revenue down and increase expenditures, leading to an average worsening of the budget deficit by 0.8 percent of GDP. - Source: NT Adjusted Estimates of National Expenditure (AENE). *Source: tarea2024031 - 84. Setting clear fiscal rules that strike a balance between flexibility and credibility is a priority* ### 101. Budget documents present successive vintages of forecasts of revenue and expenditure, ### tarea2024031 - 101. Budget documents present successive vintages of forecasts of revenue and expenditure, ### Presentation of forecast reconciliations and borrowing forecasts - Chapter 3 of the BR shows comparisons of different vintages of forecasts of gross tax revenue and the implied buoyancies (Appendix VI). - Impact of new tax policy measures for the budget year are presented separately in Chapter 4, including explanations for tax proposals. - Reconciliation of expenditure estimates in Chapter 3 provides a breakdown by policy measure and includes sources of revision in the estimates of the previous year’s spending. - There is no explicit breakdown of changes due to technical and accounting factors. - Presenting forecast reconciliations together for both expenditure and revenue would provide a more coherent and transparent summary of drivers of changes in successive borrowing forecasts. - Drivers of changes could be presented and classified between: - policy changes, - macroeconomic factors, - technical factors (such as modelling changes), and - accounting adjustments. ### Recommendations (Section 2.5) - South Africa’s fiscal forecasting and budgeting system is strong, but areas for improvement include comprehensiveness of budget coverage, credibility of the fiscal framework, effectiveness of public investment management, and opportunities for public participation. - Recommendation 2.1. Improve the budget unity by including information on the gross financial position of higher education entities in the budget. - Recommendation 2.2. Improve the transparency of the public investment management system and address deficiencies in procurement by: - Requiring that CBAs for major projects, already required for proposals through the BFI, are published and made readily accessible before being approved. - Undertaking a Public Investment Management Assessment (PIMA). - Conducting an assessment of the public procurement system against international standards using the Method of Assessing Procurement Systems Initiative (MAPS) tool and integrate key findings into draft Procurement Bill as necessary. - Recommendation 2.3. Bring forward the budget process for national government to ensure that the Budget is approved before the start of the fiscal year. - Recommendation 2.4. Introduce numerical fiscal rules that are time bound, and stable over time by: - Undertaking a review of fiscal rules, considering appropriate balance of credibility, flexibility, and simplicity for South Africa. - Recommendation 2.5. Strengthen the effectiveness of formal opportunities for the public to participate in the budget process by: - Analyzing the outcomes from the Fiscal Openness Accelerator Project pilot and developing a permanent forum to increase the opportunities to influence the budget. - Recommendation 2.6. Enhance the credibility of official forecasts by: - Developing capabilities of PBO or FFC to independently assess performance against fiscal policy objectives and including comparisons of independent forecasts of economic and fiscal indicators into budget documents. ### Summary evaluation: Fiscal Forecasting and Budgeting (selected findings from Table 2.5) - 2.1.1 Budget Unity - Assessment: Basic: Budget documents include all central government units except tertiary education institutions under the control of government. - Importance: Medium: Tertiary educational institutions omitted from budget documents represent 30 percent of extra-budgetary institutions. - Rec: 2.1 - 2.1.2 Macroeconomic Forecasts - Assessment: Advanced: Forecasts of key economic indicators and their components are presented twice a year, with underlying assumptions. - Importance: Medium: Persistent forecast optimism. Absolute GDP forecast error is 0.5 percent points for budget year rising to 1.6 and 2.3 percent points for the two outer years. - 2.1.3 Medium-term Budget Framework - Assessment: Advanced: Budget documents provide medium term forecasts of revenues, expenditure and financing over 3 years, estimates for current year and outturns for previous 3 years. - Importance: Low: Strong credibility of expenditure ceilings, averaging 0.1-0.2 percent of GDP underspend over the medium term, although revenues optimistic by average of 1.1 percent of GDP resulting in significant slippage in fiscal deficits. - 2.1.4 Investment Projects - Assessment: Not met: Cost benefit analysis is undertaken for major projects but not systematically published. Significant deficiencies in public procurement. - Importance: High: Independent reports highlight procurement deficiencies as avenue for rent seeking. Procurement around 10 percent of GDP. - Rec: 2.2 - 2.2.1 Fiscal Legislation - Assessment: Advanced: The legal framework determines the timetable for the preparation of the budget, key contents, as well as powers to amend the budget. - Importance: Low: Legal arrangements for timetables and rules for virements and adjustments are working. - 2.2.2 Timeliness of Budget Documents - Assessment: Not met: The national budget is introduced to the legislature within 2 months of the end of the fiscal year but generally approved 4 months after the start of the fiscal year. - Importance: Low: Low risks of disruption to budget execution if legislature makes significant adjustments after start of fiscal year. - Rec: 2.3 - 2.3.1 Fiscal Policy Objectives - Assessment: Not met: South Africa does not have a numerical or time bound fiscal objective. - Importance: High: Public debt as a percent of GDP has risen almost every year since 2009, rising from 28 percent to 71 percent GDP in 2022/23. - Rec: 2.4 - 2.3.2 Performance information - Assessment: Advanced: Results on selected performance indicators and targets are published in budget documents in the ENE for each policy area. - Importance: Low: MTSF sets out 561 indicators across government, aligned with 81 outcomes and 7 priorities. Some challenges in usability of information. - 2.3.3 Public Participation - Assessment: Advanced: Various documents published to support accessibility to the public. Some opportunities for the public to participation in the budget. - Importance: Medium: Timing of budget consultations could be improved to facilitate input into budget proposals. - Rec: 2.5 - 2.4.1 Independent Evaluation - Assessment: Not met: Macro-fiscal forecasts presented in budget documentation are not compared to the forecasts of other independent institutions. - Importance: High: Fiscal deficit higher than forecast on average by 0.4 percent of GDP in the year ahead, rising to 1.9 percent in the third year ahead. - Rec: 2.6 - 2.4.2 Supplementary Budget - Assessment: Advanced: Legislative authorization through an adjustments budget is required before substantive amendments to expenditure are made. - Importance: Low: Adjustment budgets deteriorate fiscal balance by 0.8 percent of GDP on average. - 2.4.3 Forecast Reconciliation - Assessment: Good: Budget documents present successive vintages of forecasts with differences due to new policies explained. - Importance: Low: Changes to forecasts of revenues should be explained by macroeconomic factors. ### Fiscal risks: overview (Chapter III) - Assessment structured against three dimensions of the IMF’s Fiscal Transparency Code: - General arrangements for disclosure and analysis of fiscal risks; - Reporting and management of risks from specific sources (government contingencies and guarantees, PPPs, financial sector); - Coordination of fiscal relations and performances between central government, provincial and local governments, and PCs (SOCs). - South Africa discloses information on fiscal risks in several regularly published reports (e.g., Fiscal Risk Statement as an Annexure to the MTBPS, Consolidated Financial Statements of the State, Annual Estimates of National Expenditures). SARB, sector Departments, and AGSA provide information to the NT on fiscal risk analysis. - Disclosure and analysis varies across risk categories; only two principles meet the advanced level of risk disclosure—financial sector and sub-national governments. - By 2022/23, the FRS has become brief and omits sufficient detail on largest categories of specific risks and emerging issues such as environment and climate change. ### Macroeconomic risks (Principle 3.1.1 and 3.1.2) - The MTBPS Fiscal Risk Statement (FRS) presents alternative macroeconomic scenarios and their fiscal impacts, based on risks such as further waves of COVID-19 and continued challenges from the energy sector (“loadshedding”). - Sensitivity analysis presented focuses on debt portfolio and debt service costs to changes in GDP, inflation, and exchange rates. - Shortcomings identified: - Need for more detailed explanation of scenario calibration, underlying economic assumptions, and transmission channels to fiscal aggregates. - Unclear whether general impacts on government revenue and expenditure and resulting public debt dynamics are fully captured. - Unclear whether shocks simulated are severe enough to constitute realistic adverse scenarios. - A Fiscal Risk Committee (FRC) coordinates identification and management of key fiscal risks within the NT and produces internal fiscal risk briefs. - Historical notes: - Volatility of nominal GDP growth is lower than in comparator countries (nominal GDP growth has fallen negative only once in the past 30 years). - Average elasticity of revenues to GDP between 2001 and 2022 is 1.6, indicating revenues respond more than proportionately to changes in economic performance. ### Specific fiscal risks (coverage and magnitudes) - The NT regularly discloses main categories of specific fiscal risks, their magnitude, and potential mitigation measures, but often lacks discussion on the likelihood of materialization. - Major categories include government guarantees to SOCs, Renewable Energy Independent Power Producer Program guarantees, public-private partnerships, obligations to the Road Accident Fund (RAF), Unemployment Insurance Fund, and other social security funds. - Financial condition of SOCs and their contingent liabilities are identified as main sources of fiscal risks; NT performs regular assessments focused on largest entities but information is fragmented and does not show net impact of SOCs on public finances. - RAF: net liabilities reached R 345 billion (or 5.5 percent of GDP) at March 31, 2022; the entity is insolvent. - Table of Selected Specific Fiscal Risks, Gross Exposure (as reported) - Non-financial Public Sector - SOC Liabilities: 862.8 R Billions, 13.7 Percent of GDP, Reporting: Annual Budget Review - Public Private Partnerships: 7.9 R Billions, 0.1 Percent of GDP, Reporting: Annual Budget Review - Financial Sector - Explicit Exposure to financial sector: 176.2 R Billions, 2.8 Percent of GDP, Reporting: SARB Annual Report, Annual Budget Review - Contingent Liabilities - Government Guarantees, incl. to SOCs: 568.9 R Billions, 9.0 Percent of GDP, Reporting: Annual Budget Review - Road Accident Fund: 357.0 R Billions, 5.7 Percent of GDP, Reporting: Annual Budget Review, FRS - Provincial Governments’ Medico-Legal Claims: 109.0 R Billions, 1.7 Percent of GDP, Reporting: FRS - Provincial Governments’ Arrears: 24.6 R Billions, 0.4 Percent of GDP, Reporting: FRS - Local Governments’ Arrears: 58.2 R Billions, 0.9 Percent of GDP, Reporting: FRS - Natural Disasters: N/A, N/A, Not Reported - Long-term risks - Social Relief of Distress Grant: 64.9 R Billions, 1.0 Percent of GDP, Reporting: FRS - Benefits-Related Liabilities: 61.2 R Billions, 1.0 Percent of GDP, Reporting: Government Employees Pension Fund Annual Report *Source: Excerpt from IMF technical assessment (as provided).* ### 116. The coverage of the FRS has decreased over the past five years, but it can be ### tarea2024031 - 116. The coverage of the FRS has decreased over the past five years, but it can be ### Coverage of the Fiscal Risk Statement (FRS) - Findings: - The coverage of the FRS has decreased over the past five years. - Previous years’ FRSs covered: exposure to SOCs and bailout amounts (latest available – in 2020 Budget Review), scenario-based macroeconomic forecast (latest available – in 2019 FRS), and a comprehensive assessment of PPP-related exposure. These categories are no longer detailed in more recent years. - The FRS currently omits other risk categories that would be useful, such as litigation risks within and outside of the country, and risks arising from natural disasters and climate change. - Recommendations: - Strengthen the FRS by re-including high-risk categories previously detailed (exposure to SOCs, bailout amounts, scenario-based macroeconomic forecasts, PPP-related exposure). - Include other risk categories such as litigation risks and climate- and natural disaster-related risks given the rise of climate-related events. - Publish an analysis of the likelihood of risks’ materialization and provide a longer-term perspective of risks to fiscal forecasts. - Where probability estimates are difficult, classify risks into categories (e.g., probable, possible, and remote). - Summarize all information on specific fiscal risks in a single dedicated FRS, even if details appear across other documents (BR, MTBPS, reports on public debt, Financial Stability Report, and others). ### Long-term Fiscal Sustainability Analysis (Not met) - Findings: - The FRS presents an eight-year fiscal projection focusing on different economic growth scenarios but has not consistently factored in other long-term fiscal pressures. - Projections go beyond the three-year MTEF but are usually not far-sighted enough to capture potentially significant long-term pressures and do not model drivers such as demographic changes. - The 2019 MTBPS explored a selection of long-term social spending pressures over a 20-year horizon, including social assistance grants, health and education, due to demographic and economic changes. - Recommendations: - Develop a long-term model spanning over 30 years that explicitly models a wider range of fiscal pressures to provide a more comprehensive overview and inform policy choices. - Feed existing analyses (e.g., 2019 MTBPS 20-year social spending pressures) into a long-term fiscal sustainability model. - Include demographic-related costs in long-term fiscal projections, such as old-age benefits and healthcare as relevant. ### Demographic risks and projections - Findings: - The population of South Africa is projected to rise from 60 million in 2023 to 76 million in 40 years according to the United Nations Population Division, with strong growth in the working age population. - If fewer jobs are created to absorb new labor market entrants, this creates risks of weaker revenues needed to support social spending needs of the aging population. - Recommendations: - Include demographic projections and related fiscal costs in long-term fiscal projections. ### Other long-term risks - Findings: - The Road Accident Fund (RAF) presents a substantial long-term fiscal risk: outstanding claims have nearly doubled as share of GDP over the past decade, reaching 5.3 percent of GDP in 2022/23, and could rise further. - Long-term revenues from mineral resources currently make up about 0.5 percent of GDP and should be considered, drawing on total mineral reserves and potential changes to commodity prices. - Recommendations: - Comprehensively identify and analyze other long-term risks such as RAF provisions and mineral resource revenue trajectories. ### National Treasury (NT) long-term modelling - Findings: - The NT’s Macroeconomic Policy Unit maintains a long-term fiscal projection model used for costing new policy initiatives and assessing sustainability under specific economic and demographic assumptions. - The model is updated annually, produces projections for a 20-year horizon, but is not published. - Recommendations: - Extend the NT’s model to at least a 30-year horizon and assess fiscal implications from a broad range of spending, revenue pressures, and other debt-creating flows. - Adapt the model to include implications of climate risks; the IMF’s Q-CRAFT model could support this modelling. *Italic line: IMF | Technical Report (content unit excerpt)* ### Risk Management — Budgetary Contingencies (Good) - Findings: - Contingency reserves and unallocated reserves are quantified and disclosed regularly; access criteria are defined, but utilization is not detailed. - Contingency reserves fluctuate around 1.3 percent of total expenditures. - From 2021, an unallocated reserve was introduced to accommodate changes in the economic environment. - In 2022, the government decided to increase the size of the contingency reserve in the outer years from the typical R5 billion to R6 billion in 2023−2025, and further to R10 billion in 2025/26 fiscal year to improve responsiveness to emergencies such as natural disasters. - Detailed guidance on accessing contingency reserves is provided by NT Circulars. Use of contingencies is regulated by the Appropriation Act and is reported to Parliament. - Recommendations: - Strengthen disclosure on the allocation and use of contingency reserves to raise transparency, linking usage to the events they funded to inform future estimation of amounts for unavoidable costs such as natural disasters. ### Risk Management — Asset and Liability Management (Good) - Findings: - Borrowing by the government is authorized by law and the Budget Review (BR) discloses risks surrounding national government assets and liabilities, but no overall published strategy for managing the government balance sheet exists. - A detailed budget funding strategy is prepared annually and signed off by the Minister of Finance for internal use; Chapter 7 of the BR summarizes funding, cash, and debt management plans, including sensitivity analyses against inflation rate, exchange rate, and interest rates. - Government’s financing strategy aims to finance borrowing at the lowest possible cost within strategic risk benchmarks. - Main risks identified in the 2023 BR: higher interest rates in developed economies with low domestic growth reducing demand for domestic bonds; further rand depreciation raising cost of outstanding foreign-currency debt; materialization of contingent liabilities at SOCs increasing funding needs and costs. - Key statistics (Table 3.3 excerpts): - Treasury bills as % of domestic debt: Benchmark Range 15.0; 2022-23 Estimate 9.9; 2023-24 Estimate 10.4 - Long-term debt maturing in 5 years as % of bonds: Benchmark Range 25; 2022-23 Estimate 16; 2023-24 Estimate 16.1 - Inflation-linked bonds as % of domestic debt: Benchmark Range 20.25; 2022-23 Estimate 23.9; 2023-24 Estimate 22.0 - Foreign debt as % of total debt: Benchmark Range 15.0; 2022-23 Estimate 11.7; 2023-24 Estimate 11.2 - Weighted term-to-maturity of fixed-rate bonds and Treasury bills (years): Benchmark Range 10-14; 2022-23 Estimate 11.2; 2023-24 Estimate 10.6 - Weighted term-to-maturity of inflation-linked bonds (years): Benchmark Range 14-17; 2022-23 Estimate 12.8; 2023-24 Estimate 13.6 - Term to maturity of total debt (years): 2022-23 Estimate 11.6; 2023-24 Estimate 11.2 - Term to maturity of foreign debt (years): 2022-23 Estimate 12.2; 2023-24 Estimate 12.2 - Findings on public sector assets: - The remainder of public sector debt and liabilities are monitored by NT but managed by various subsector institutions; some net asset position information is presented in budget documents without detailed asset/liability strategies. - The Road Accident Fund has a negative net asset position and a long-term provision for claims significantly larger than its assets. - Government cash holdings consist of deposits at commercial banks and the Reserve Bank used as bridging finance. - Government’s largest contingent asset is the Gold and Foreign Exchange Contingency Reserve Account administered by the SARB. - The largest public sector asset portfolio is managed by PIC, which manages R2.5 trillion of assets. - The PIC controls over 10 percent of the Johannesburg Stock Exchange through listed investments. ### Risk Management — Guarantees (Basic) - Findings: - The NT regularly publishes information on government guarantees, disclosing beneficiaries and gross exposure, but there is no legislated ceiling for guarantees. - Guarantee requests and fees are approved by the NT Fiscal Liabilities Committee based on credit risk assessment; detailed guarantee disclosure is published in the BR with multi-year tables for outstanding guarantees per beneficiary. - As per 2023 BR, total volume of guarantees exposure reached 9 percent of GDP during 2022/23 financial years, with Eskom dominating the guaranteed portfolio taking up to 60 percent of all outstanding guarantees. - Total guarantees issued increased from R225 billion (or 6 percent of GDP) in 2012/13 to R569 billion (or 9 percent of GDP) in 2021/22. - The largest share of outstanding guarantees are to Eskom: R313 billion or 55.8 percent of all outstanding guarantees. - Eskom Debt Relief deal approved in February 2023 aims to improve Eskom’s commercial viability by the Government taking over its debt obligations with stringent covenants; authorities expect Eskom guarantees to reduce to R118.9 billion by the end of 2025/26. - Guarantees to other SOCs declined and stood at R27 billion or 0.4 percent of GDP at 2021/22. - Guarantees to independent power producers reached R166 billion (or 2.6 percent of GDP) in 2021/22 and are considered low risk by NT. - Information on the probability of guarantees being called is not disclosed in the FRS. - Recommendations: - Consider establishing a legislated overarching limit on the maximum guarantee exposure to reduce vulnerabilities and potential impact on public finances, as the existing PFMA and NT Instructions are not sufficient to manage growing guarantee volumes. *Italic line: IMF | Technical Report (content unit excerpt)* ### 135. The NT regularly publishes an aggregate PPP exposure, related contingent liabilities and ### tarea2024031 - 135. The NT regularly publishes an aggregate PPP exposure, related contingent liabilities and ### Public-Private Partnerships (PPP): Disclosure, Framework, and Pipeline - The NT regularly publishes an aggregate PPP exposure, related contingent liabilities and potential termination amounts in their Annual BR. - The FRS and the Annual BR disclose the total PPP exposure for each level of the public sector—national, provincial, and public entity level; the Annual BR offers further details on advancing and pipeline PPP transactions, including sector, region, total size, and progress status. - Additional disclosures, such as fees paid or capital created, are offered in the Government’s consolidated financial statements (Note 38 and Note 51). - Disclosure of an aggregate level of PPP related contingent liabilities is deemed sufficient, as the country’s PPP portfolio is presently insignificant at only 0.1 percent of GDP (Figure 3.13). - Institutional framework and oversight: - South Africa operates under a solid PPP framework, with NT holding final decision-making power. - NT applies a multi-stage approval process to ensure contingent liabilities from PPP contracts are assessed and measured for fiscal risk acceptability. - The Government Technical Advisory Center (GTAC), operating under NT mandate, provides technical support to sector departments proposing PPP transactions, assisting with document preparations, processing bids documentation and bids evaluations. - NT monitors these liabilities on an ongoing basis and publishes respective amounts per level of the public sector in the BT and FRS. - GTAC possesses all necessary information on PPP transactions, elements of which could be publicly disclosed by NT should it choose to provide transaction level detailed disclosure on PPP portfolio. - Reform and transparency efforts: - NT undertook a comprehensive review of the PPP regulatory framework and is revising PPP regulations to better inform decision-making, improve PPP-related fiscal risks assessment, management of contingent liabilities and public disclosure on PPPs and blended finance projects. - If introduced, additional disclosure on existing PPPs, their direct and contingent liabilities, total rights, expected annual receipts and payments, and related fiscal risks will improve PPP transparency. - The review should consider establishing limits to accumulated obligations and bringing such limits into legislation to reduce potential accumulation of PPP liabilities at high levels. - Pipeline and project-level exposures: - Some large PPP projects in preparation include: - Gauteng Rapid Rail Network Extension (R65.4 billion) - Salvakop Precinct Project (R18 billion) - Inkosi Albert Luthuli Central Hospital (R10.4 billion) - The revised PPP framework should facilitate timely transactions processing, prudent risks assessment, and ensure detailed disclosure of PPPs’ main features, including related rights, obligations, and other exposures. ### Financial Sector Exposure and Stability - Regular assessments and stress tests: - SARB and its Prudential Authority perform regular assessments of financial sector stability twice per year; stress-testing of the banking system is carried out every two years. - SARB runs stress tests of systemically important financial institutions (SIFI) based on two scenarios—baseline and adverse—derived from historic simulations and main risks to the economy. - Individual bank results are not published; a summary of SIFI results is included in the Financial Stability Report. - Financial Stability Report is updated twice a year and includes assessments of main risks, vulnerabilities, and policy recommendations. Explicit support provided to the financial sector is published when relevant. - Government exposures: - Two main government exposures: equity investments into three state-owned development finance institutions, and several standard guarantee schemes offered by commercial banks. - The government has no equity in commercial banks, but owns three development financial institutions with development mandates. - Total exposure to such financial institutions via their liabilities and outstanding guarantees was around R154 billion (or 2.5 percent of GDP) at 2021/22 (Table 3.4). - Additional exposure from guarantees for several standard guarantee schemes reduced since origination in 2020 and currently stands at R21.7 billion (or 0.3 percent of GDP), mainly comprising Loan Guarantee and Bounce Back schemes. - Summary of exposures to state-owned development financial institutions (R billions): - Industrial Development Corporation - Total Assets: 2018/19 144.6; 2019/20 109.7; 2020/21 143.7; 2021/22 174.1 - Total Liabilities: 2018/19 49.3; 2019/20 49.5; 2020/21 57.7; 2021/22 59.5 - Equity: 2018/19 95.3; 2019/20 60.2; 2020/21 86.0; 2021/22 114.6 - NT Guarantees Outstanding: 2018/19 0.1; 2019/20 0.2; 2020/21 0.1; 2021/22 0.1 - Development Bank of Southern Africa - Total Assets: 2018/19 89.5; 2019/20 100.5; 2020/21 100.0; 2021/22 100.0 - Total Liabilities: 2018/19 52.3; 2019/20 62.9; 2020/21 60.8; 2021/22 57.1 - Equity: 2018/19 37.2; 2019/20 37.6; 2020/21 39.2; 2021/22 42.9 - Financial Support Received: 2018/19 3.0; 2019/20 -; 2020/21 -; 2021/22 - - NT Guarantees Outstanding: 2018/19 4.3; 2019/20 4.7; 2020/21 4.9; 2021/22 5.2 - Land Bank - Total Assets: 2018/19 47.7; 2019/20 44.1; 2020/21 40.2; 2021/22 34.7 - Total Liabilities: 2018/19 45.8; 2019/20 43.8; 2020/21 37.6; 2021/22 30.7 - Equity: 2018/19 1.9; 2019/20 0.3; 2020/21 2.6; 2021/22 4.0 - Financial Support Received: 2018/19 -; 2019/20 -; 2020/21 2.9; 2021/22 - - NT Guarantees Outstanding: 2018/19 1.0; 2019/20 2.5; 2020/21 2.4; 2021/22 1.9 - Source: NT 2023 Annual Budget Review, Annual Estimates of National Expenditures, individual financial statements. - Legislative reforms and deposit insurance: - Financial Sector Laws Amendment Act and Financial Sector and Deposit Insurance Levies Act establish the deposit insurance guarantee scheme. - SARB will assume overarching authority over failing financial institutions with powers to transfer assets and liabilities, assume control of management and restructure banks, replacing the curatorship arrangement. - Deposit insurance will cover all deposits in the country up to R100 thousand per depositor per bank (retail and corporate), aiming to reach around 90 of all customers in the country. - Legislation establishes the Corporation for Deposit Insurance, enabling the scheme to take effect in April 2024. ### Natural Resource Stocks and Flows: Data Gaps and Valuation - Revenue disclosure: - Authorities regularly publish fiscal revenue per major classes of natural resources, but lack information on value and volumes of available natural resource reserves and sensitivity analysis to price and quantities. - SARS regularly publishes annual revenues collected as MPRR per major class of natural reserves in the annual Tax Statistics Report. - Statistical publications and reserves information: - DMRE used to publish sectoral mineral dynamics until 2017; the Mineral Economics Directorate compiled volumes of extraction, price dynamics and sector trajectory per mineral until 2017. - The Council for Geoscience maintains and updates information on South Africa’s mineral reserves at exploration-site detail; this information is available to the public but is not aggregated. - Recommendations and valuation: - Authorities should resume mineral economics bulletins, supplemented with quantitative and qualitative disclosure on total reserves of major groups of minerals. - Applying an IMF FAD standard methodology, the value of natural resources in the Public Sector Balance Sheet is estimated at R5 Trillion, resulting in a high value for non-financial assets. - Estimating and including the value of mineral and energy resources in non-financial assets is a recommendation of this FTE (Pillar I, Principle 1.1.2). - Global positions in mineral reserves (Table 3.6): - 1st — Platinum Group of Metals: 63,000,000 kilograms; Global Share 90% - 1st — Manganese: 640,000 thousand metric tons; Global Share 70% - 3rd — Fluorspar: 41,000 thousand metric tons; Global Share 16% - 3rd — Gold: 5,000 metric tons; Global Share 10% - 4th — Vanadium: 3,500 thousand metric tons; Global Share 13% - 4th — Diamonds: 120 million carats; Global Share 9% - 6th — Uranium: 447,700 tons; Global Share 5% - Source: Uranium 2020. Resources, Production and Demand (OECD Nuclear Energy Agency); US Geology Survey Mineral Commodity Summary 2023 (other minerals). ### Environmental Risks and Disaster Fiscal Costs - Risk identification and management: - Risks related to natural disasters are identified across government documents but are not quantified, consolidated or managed according to a published strategy. - Floods and storms are the most common natural disasters since the 1980s. - The National Disaster Management Centre (NDMC) promotes an integrated and coordinated system of disaster management with emphasis on prevention and mitigation; DFFE plays a role in wildfire management. - NDMC identifies floods, droughts, fires, oil spills as key environmental risks and oversees Provincial and Municipal Disaster Relief Grants. - NDMC reports on use of funds from Disaster Relief Grants but does not undertake broader quantified analysis of fiscal costs of natural disasters; lack of single reports reflects multiple financing streams used for disaster response. - Fiscal responses and costs: - Fiscal responses to natural disasters were prominent in 2018 and 2023 budgets due to floods and drought, though such disasters are not identified and analyzed in the FRS. - Relative to GDP, fiscal costs of recent natural disasters have been small (less than 0.1 percent of GDP). - Examples: - 2018: R6 billion (0.1 percent of GDP) allocated to the water sector in response to droughts; almost R2.3 billion (0.03 percent of GDP) allocated to disaster relief grants to provinces and municipalities. - 2022 floods in KwaZulu-Natal and Eastern Cape: R2.9 billion (0.04 percent of GDP) allocated to Transnet to restore infrastructure damage; R283.3 million (0.004 percent of GDP) added to the education infrastructure grant; combined R5.5 billion (0.1 percent of GDP). - Strategic planning and climate risks: - NT acknowledges need to intensify strategic role and coordination on climate responsiveness. - IMF Q-CRAFT may be used to estimate potential fiscal costs from climate change. - In a joint exercise with the World Bank, NT estimated the average funding gap for financing disaster response in South Africa of R2.3 billion, and is considering a revised financing strategy that could reduce fiscal costs by about R100 million on average per shock event and R7.5 billion for large shock events. - Further developments due to be presented in the 2023 MTBPS; the 2022 MTBPS indicated intention to increase the size of the contingency reserve over the next two years. - Risk analysis could be strengthened by including climate transition risks from carbon pricing, border carbon adjustments, and by highlighting the importance of investing in climate resilient infrastructure. ### Fiscal Coordination: Sub-National Governments - Reporting and borrowing limits: - Provinces and municipalities report fiscal position and performance to NT on a monthly, quarterly, and annual basis; frequency of in-year reporting meets “Advanced” practice. - Borrowing by provincial governments is regulated through the PFMA; MFMA governs borrowing by municipalities. - Provinces are allowed to borrow only for capital projects with NT's authorization. - Section 50(c) of the MFMA authorizes a municipality to guarantee debt of a municipal entity or any other person only with National Treasury approval; such borrowing is restricted to up to 45 percent of operating revenue and NT is notified. - Revenue composition and fiscal role: - Provinces and local governments comprise sub-national government (SNG) and are largely responsible for service delivery. - Revenue sources: equitable share of national revenue pool, conditional grants, tax collections, and service charges. - At least 95 percent of provincial government revenue is transferred from national government in the form of grants; for local government that share is 32 percent. - SNG execute 45 percent of all general government expenditure. - Monitoring system: provincial governments submit monthly in-year performance reports by the 15th day to provincial treasuries, who report to NT’s IGR unit by the 22nd day. - Transparency and financial health: - Budget performance of individual municipalities, including annual financial statements and annual audit reports from 2002/03, are available on the municipal portal, which also provides simplified analysis of receipts and spending. - A consolidated position of local government is presented in the annual State of Local Government Finances and Financial Management Report with quantitative analysis of the 257 municipalities. - Arrears, unpaid bills, and vulnerabilities: - Provincial governments’ arrears and unpaid bills estimated at R24.6 billion (0.4 percent of GDP) as at end of 2021/22. - Local government debt overdue for payment: R58.2 billion (0.9 percent of GDP). - Uncollected revenue for municipalities estimated at R255.4 billion (4 percent of GDP) as of June 2022. - Contingent liabilities from potential legal claims against provincial medical departments estimated at R109 billion (1.6 percent of GDP). - SNG unpaid bills to Eskom, the Department of Water and Sanitation and the water boards stem from large uncollected service charges of R255 billion (4 percent of GDP) as at end June 2022. - Government’s municipal debt relief initiative has not yet yielded desired results; a municipal debt relief initiative is proposed. - Resolving SNG financial issues requires a coordinated and properly sequenced mitigation strategy to avoid systemic risks. *IMF | Technical Report (excerpts from the supplied content)* ### 153. The authorities publish information on transfers between the government and State- ### tarea2024031 - 153. The authorities publish information on transfers between the government and State-Owned Companies (SOC) ### Reporting and disclosure of SOCs - Authorities publish information on transfers between the government and SOCs in multiple sources, but: - An SOC ownership policy is not yet adopted. - There is no report on the overall financial performance of the public corporation sector. - Existing sources and coverage: - The Budget Review and FRS contain brief financial analysis of the major SOCs. - The ENE contains detailed transfer information to SOCs by each national government department. - Each Department reports on the SOCs under their mandate in their Annual Reports (e.g., Department of Public Enterprises (DPE) includes analysis on major SOCs under their control). - The information is fragmented and does not show the net impact of SOCs on the public finances. - The six SOCs under the DPE ownership include: (i) Eskom SOC Ltd, (ii) Alexkor SOC Ltd, (iii) South African Forestry Company SOC Limited (SAFCOL), (iv) Transnet SOC Ltd, (v) South African Airways SOC Limited, and (vi) Denel SOE Limited. ### Aggregate coverage, transactions, and missing reporting - The country does not report on its aggregate SOC portfolio, lacking a complete picture on SOC performance, operations, and quasi-fiscal activities. - Comprehensive reporting would typically include all (or major) SOCs and cover all transactions with the state budget, including: - SOC expenditures: dividends, taxes, royalties, license fees, product shares paid by the SOCs to the budget. - SOC revenues: subsidies received, capital transfers for write-off of debt or public investment, cost of public service obligations compensated to the SOCs. - Transactions in assets and liabilities including equity injections, loans and on-lending received from the government. ### Size and structure of the SOC sector - The size of South African SOCs, as measured by their liabilities, appears comparable to those of peer countries. - Eskom dominates the sector with up to 60 percent of all SOC liabilities. - There are 38 non-financial SOCs identified in the PFMA: - 22 major SOCs defined in PFMA Schedule 2 (operate on a commercial basis, aim to generate profit, owned by the national government). - 16 SOCs defined by PFMA Schedule 3B (operate on a commercial basis by local governments, including regional water utilities). - Most of these entities are subject to the Company Act, in addition to the PFMA. ### Key SOCs and operational challenges - Eskom is the largest non-financial SOC and dominates fiscal risk in the sector. - Transnet (second largest SOC) is an integrated freight and logistics company operating pipelines, ports and cargo rail. - Transnet operations and performance have been negatively affected by: - High levels of vandalism to physical infrastructure (rail network). - Infrastructure maintenance backlog. - Shortage of locomotives. - Consequences include longer supply times of coal between mines and coal-powered power plants, contributing to the country’s energy crisis. - In 2022, Transnet benefitted from two packages of state funding of R 5.8 billion to finance their locomotive maintenance, and to provide emergency support to the flood affected area of KwaZulu-Natal. - The SOC sector includes several large corporations and a number of smaller, yet important, public service providers and security companies across Infrastructure, Transportation, Communications, Defense and Mining. ### Fiscal risks and recent interventions - SOCs remain a major source of fiscal risks for the government. - Over the past decade, government financial support to SOCs via equity injections and loans has increased. - The Eskom Debt Relief deal proposed via a dedicated Debt Relief Bill in February 2023 totals R254 billion or 4 percent of GDP; it is recorded by the NT in the budget documents as part of financing transactions. - Other major SOCs have received financial support from the budget, although at a much lower scale compared to Eskom. - State interventions to date have not been satisfactory in returning major SOCs to a sustainable profitable path and will require more hands-on involvement from the NT. - Guarantees and exposures: - Total volume of guarantees issued by the Government increased from 6 percent of GDP in 2012/13 to 9 percent of GDP in 2021/22. ### Quantitative indicators and notable figures (as presented) - Eskom: up to 60 percent of all SOC liabilities (sector dominance). - Number of non-financial SOCs identified in PFMA: 38 (22 in Schedule 2; 16 in Schedule 3B). - Transnet state funding in 2022: R 5.8 billion (two packages). - Eskom Debt Relief proposed amount: R254 billion or 4 percent of GDP. - SOCs’ existing and potential liabilities: 13.7 percent of GDP (noted as the most significant and growing risk). - Guarantees: increased from 6 percent of GDP in 2012/13 to 9 percent of GDP in 2021/22. - Contingencies (from Table 3.7 context): growing from R5 billion to R6 billion in 2023/25 (0.5 percent of GDP) and expected to reach R10 billion in 2025/26 (0.7 percent of GDP). - PPP portfolio: 0.1 percent of GDP. - Total exposure to development financial institutions: 2.5 percent of GDP in 2021/22. - Estimated value of natural resources in the Public Sector Balance Sheet (IMF FAD methodology): R5 Trillion. ### Governance reforms and institutional proposals - Authorities are implementing wide-ranging reforms of SOCs in response to findings of the Judicial Commission of Inquiry into Allegations of State Capture, Corruption and Fraud in the Public Sector including Organs of State. - The mission was informed that: - The DPE has drafted an SOC ownership policy. - An SOC bill will replace the existing ownership and governance framework. - Caution advised: - Authorities should exercise care when restructuring the ownership system, especially regarding establishing an SOE holding company. - Global experience with placing SOCs under holding companies has been diverse and has sometimes led to state capture and power abuse, including political and private corporate interference. - Centralization options: - Centralization of SOC ownership and oversight can take multiple forms; one form is establishing a centralized oversight body within a central Ministry or Department to carry the ownership mandate while maintaining government control and avoiding governance pitfalls. ### Recommendations (Evaluation priorities and specific actions) - The evaluation highlights priorities for improving fiscal risks management and transparency. Authorities may consider utilizing the IMF Fiscal Risks Toolkit, including the Fiscal Risks Assessment Tool (FRAT). - Recommendation 3.1. Strengthen analysis of macroeconomic risk, specific risks, and long-term risks in the Fiscal Risk Statement (FRS) by: - Undertaking sensitivity analysis of the impact of changes in key macroeconomic indicators on government expenditure, revenue, borrowing and debt over the medium term. - Expanding scenario analysis to explain how the scenarios are calibrated, underlying economic assumption, and key transmission channels to the economy and fiscal aggregates. - Expanding the FRS coverage and analysis to include other categories, such as financial sector, litigation, environmental, climate change, others. - Increasing the visibility of the FRS and its outreach by publishing the FRS as a separate document of the annual budget documentation. - Producing and regularly publishing long-term fiscal forecasts covering at least 30 years for the main fiscal aggregates with multiple economic, demographic and risk scenarios. - Recommendation 3.2. Increase transparency of contingency and unallocated reserves’ use, by: - Introducing utilization disclosure for contingency and unallocated reserves, including in-year reporting. - Informing contingency reserve estimation with the historical data on natural disasters recovery costs (see Principle 3.2.7). - Recommendation 3.3. Strengthen Asset and Liability Management by publishing a medium-term debt management strategy. - Recommendation 3.4. Introduce limitation to the guarantee exposure by establishing a ceiling that can apply to the total stock of guarantees or to the annual issuance of new guarantees. - Recommendation 3.5. Strengthen the disclosure of risks arising from PPP projects by: - Regularly publishing financial information on PPP projects, including total rights, obligations, future service payments and receipts for the duration of the projects (see IMF Fiscal Risks Toolkit). - Recommendation 3.6. Introduce regular and transparent reporting on the natural resources’ reserves, by volume and value, based on international standards by: - Introducing centralized disclosure of the estimated volume and value of natural resource assets per major mineral type, based on international standards, and subjecting the reserves estimates to different scenarios including those from the market prices fluctuation. - Consider joining the EITI initiative to instill greater transparency on the use and availability of the country’s natural resources. - Recommendation 3.7. Integrate natural disaster risk into budget contingency planning, and disclose the fiscal impacts of natural disasters by: - Continuing to develop, complete and publish its review of a financing strategy for natural disasters, and integrate risk analysis into budget contingency allocations. - Recommendation 3.8. Strengthen the risk management of SNG assets and liabilities by implementing strategies to enhance collection of overdue service charges and settle unpaid bills. - Recommendation 3.9. Strengthen the level of disclosure on SOCs, and develop a state ownership policy for SOCs based on their policy objectives by: - Compiling and publishing regular aggregated report on state ownership, including summary of all transfers between SOCs and the government in one document, to demonstrate the net fiscal effect of SOCs on the budget. - Defining and legislating the explicit rationale for SOCs ownership, amending primary and secondary legislation accordingly. *IMF | Technical Report — Excerpt covering paragraphs 153–160 and related recommendations and table content* ### APPENDIX IV . SOUTH AFRICA: LEGAL FRAMEWORK FOR THE COMPILATION OF AUDITED ### APPENDIX IV . SOUTH AFRICA: LEGAL FRAMEWORK FOR THE COMPILATION OF AUDITED FINANCIAL STATEMENTS ### Legal requirements and scope - Section 8 of the PFMA requires that the NT prepares consolidated financial statements in accordance with generally recognized accounting practices covering: - the national departments, - public entities under the ownership control of the national executive, - constitutional institutions, - the SARB, - AGSA, and - Parliament. - The consolidated financial statements must be submitted to AGSA for audit within three months after the end of the financial year. - AGSA must audit the consolidated financial statements and submit an audit report within three months of receipt of the statements. - The Minister of Finance must submit the financial statements and the audit report to Parliament for tabling in both houses within one month after AGSA’s audit report is received. - The consolidated financial statements must be made public when submitted to Parliament. - If the Minister fails to submit the statements and reports within seven months after the end of the financial year, the Minister must submit to Parliament a written explanation setting out the reasons for not submitting, while AGSA may issue a special report on delays. - Similar arrangements for provinces: Section 19 of the PFMA requires the Member of the Executive Council for finance to submit reports to the provincial legislature according to similar timelines. ### Timelines for individual entity financial statements and reporting - Departments and Constitutional Institutions must: - submit their individual financial statements to AGSA and the relevant Treasury (National Treasury for national government and provincial treasuries for the respective provinces) within two months after the end of the financial year to enable auditing and the preparation of the consolidated financial statements. - AGSA must audit these individual financial statements within two months after the receipt of the statements. - submit within five months after the financial year end to the relevant treasury and the executive authority responsible for that department or entity an annual report on the activities of the entity, including the audited financial statements and the audit report on those statements. - In the case of constitutional institutions, these reports need to be submitted to parliament within one month after receiving the audit report. - The same timelines are required for the financial statements of public entities. ### Municipal requirements (MFMA, Section 121) - Every municipality and every municipal entity must prepare an annual report and submit these to the municipal council within nine months after the end of the financial year. - The annual report must include: - the annual financial statements, and - the AGSA report on those financial statements. - Individual financial statements need to be submitted to AGSA within two months after the end of the financial year. - The municipality’s consolidated financial statements must be submitted within three months after the financial year. - Auditing requirement: the law requires that the statements be audited within three months after receipt; if not, the Auditor-General needs to submit a report outlining the reasons for the delay to the relevant municipality or municipal entity, and to the relevant provincial legislature and Parliament. ### Nature of material irregularities identified in 2021/22 (AGSA, Integrated Annual Report 2021/22) - Procurement and payment: 41 Cases - Non-compliance in procurement processes resulting in overpricing of goods and services procured or appointed supplier not delivering: 8 Cases - Uneconomical procurement resulting in overpricing of goods and services procured: 77 Cases - Payment for goods or services not received / of poor quality / not in line with contract or to ineligible beneficiaries - Resource Management: - Assets not safeguarded, resulting in loss: 16 Cases - Loss of investments: 13 Cases - Inefficient use of resources – no / limited benefit derived for money spent: 19 Cases - Revenue Management: - Revenue not billed: 17 Cases - No measures taken to recover debt and interest was not charged on unpaid debt: 6 Cases - Receipts not recorded / deposited: 1 Case - Interest and penalties: - Eskom, water boards, lenders and suppliers not paid on time resulting in interest: 60 Cases - Payroll and value-added tax returns not paid on time or incorrectly calculated resulting in SARS interest and penalties: 21 Cases - Fraud and compliance: - Suspected fraud, resulting in loss: 4 Cases - Non-compliance, resulting in penalties: 3 Cases - Harm to the general public: - Non-compliance with environmental legislation resulting in pollution of water resources: 8 Cases - Landfill site mismanagement resulting in harm to the public: 1 Case - Harm to public sector institutions: - Full and proper records not kept as evidenced by repeat disclaimed opinions – resulting in substantial harm to municipalities: 24 Cases - Non-submission of financial statements: 7 Cases - Misuse of material public resources: - Under-utilization of a material public resource: 1 Case ### 2023 Eskom Debt Relief Initiative (Appendix VII) - Context and causes: - Eskom struggled with operating performance for the past decade, especially during the state capture period between 2010 – 2018. - High level of corruption led to stripped cash flows, rigged procurement and bad maintenance and forward planning management practices, causing deterioration of power generation infrastructure and financial position. - Prolonged load-shedding employed since as early as 2007 and became progressively more frequent and longer. - Eskom continuously benefitted from a government loan guarantee facility equivalent to about 6 percent of GDP. - Despite support, Eskom registered net losses which averaged 0.4 percent of GDP per year between FY 19/20 and FY 2021/22. - Government intervention and relief package: - The NT proposed the Eskom Debt Relief Bill for a total of R254 billion (4 percent of GDP) to provide Eskom with convertible subordinated loans to finance its debt service costs and capital investment. - Relief planned in three tranches over the following financial years: - 2023/24 R78 billion; - 2024/25 R66 billion; and - 2024/25 R40 billion. - These loans shall be converted to Eskom’s equity upon compliance with the NT’s loan conditions and therefore should be recorded as capital transfers according to international guidelines. - The amount is further supplemented by the government’s taking over of up to R70 billion of Eskom’s debt in 2025/26. - The arrangement is safeguarded by strict conditions to safeguard public money and achieve operational and financial improvement; effectiveness remains to be established. - Financial position and solvency indicators: - Eskom remains overleveraged and undercapitalized due to prolonged underinvestment into maintenance of existing facilities and new investment infrastructure. - Concurrent losses over the past years deteriorated Eskom’s equity and negatively impacted its cash flows. - Eskom’s debt-to-equity ratio fluctuates around 1.7−1.9 over the past three years, by far exceeding the good practice of up to 0.5. - The Eskom Debt Relief deal aims to alleviate its high debt burden, which combined with insufficient operational cash flows, reduces Eskom’s options to be financially viable without government support measures. - Comparative performance: - Comparative charts of Eskom performance against its peers indicate that Eskom is performing far below its sector and income group peers (Graph V). *Source: IMF Technical Report — APPENDIX IV . SOUTH AFRICA: LEGAL FRAMEWORK FOR THE COMPILATION OF AUDITED FINANCIAL STATEMENTS; AGSA, Integrated Annual Report 2021/22; Eskom Debt Relief Bill; NT Annual Budget Review; IMF Staff assessment.* --- _Source: https://www.imf.org/-/media/files/publications/tar/2024/english/tarea2024031.pdf_