1. Integrated assessment of PFM performance
 
This PEFA assessment has been carried out to evaluate the performance of public financial management in the Eastern Cape province. The sections that follow summarise the performance of the PFM systems, procedures and practices through six dimensions of PFM:   Credibility of the budget;   Comprehensiveness and transparency of the budget process;   Policy-based budgeting;   Predictability and control in budget execution;   Accounting, recording and reporting; and   External scrutiny and audit.
 
Credibility of the budget
 
The budget credibility is assessed with reference to five performance indicators and the main purpose is to assess whether the budget is realistic, predictable and has been implemented as intended.
 
From a revenue perspective, the Eastern Cape provincial government secures 98% of its funding/revenue via highly regulated transfers from national government (equitable share and conditional grants). Only 2% of revenue is self-generated by the province. On the expenditure side, the compensation of employees is the single largest economic cost and provides some stability in forecasting future expenditure. The province (and the government as a whole) has experienced problems with the recording and payment of arrears and a number of initiatives have been implemented to improve the systems in preceding years.
 
Comprehensiveness and transparency
 
The comprehensiveness and transparency of the budgeting process is assessed with reference to six performance indicators (PIs). The dimension assesses whether the budget and the fiscal risk oversight are comprehensive and fiscal and budget information is accessible to the public.
 
The scores indicate that the budget documentation is complete, understandable and comprehensive. The standards adopted for the budget formulation and execution are based on economic, administrative, programme and sub-programme classification that is consistent with GFS/COFOG. The budget documents are submitted to the provincial legislature when the MEC for Finance presents the budget for the coming year.
 
The provincial government has limited measures in place to monitor provincial public entities and municipalities via the preparation and submission of annual reports and in-year monitoring processes. However, due to the nature of the three spheres of government, (ie national, provincial and local), local government is independent of provincial government.
 
Access by the public to key fiscal information is enshrined in the Constitution and further supported via the Promotion of Access to Information Act. However, in reality, the access to information is not always presented in a useful and user friendly manner. The main source of information is the internet, although relevant information is also made available through other means such as print media and on request to provincial departments.
 
Policy based budgeting
 
The National Treasury is the custodian of the national budget process in line with the legislative framework governing financial management in the country. The main relevant act is the Public Finance Management Act (PFMA) that enables the National Treasury and provincial treasuries to do policy based budgeting. Budgeting and accounting for transactions and balances are done on a universal system (BAS) that standardises accounting and enables real time monitoring at various levels, such as national, provincial, departmental and programme levels. The main source of income for individual provinces and departments is that of equitable share and conditional grants, distributed annually via legislation (the annual Division of Revenue Act and Appropriation Act).
 
Departments are provided with the actual approved allocation for the current year and also the indicative figure for the following two years. At provincial level, departments therefore budget mainly for expenditure in line with nationally determined classifications contained in a standardised chart of accounts (SCOA).

Predictability and control in budget execution
 
As discussed above, departments are funded directly via the National Treasury. Own revenue collected accounts for less than 2% of total revenue allocated to departments and is regarded as insignificant. Expenditure budgeting is the main activity for provincial departments.
 
The adopted regularity framework that enables policy based budgeting also promotes predictability and strengthens control over individual department budgets, by programme as well as by economic classification. The adopted accounting framework (modified cash basis of accounting) allows for real time monitoring of actual expenditure at various levels. This basis of accounting requires a manual calculation of overall exposure, however, as commitments and accruals are not processed on the accounting system.
 
Overspending of a budget is regarded as unauthorised expenditure in terms of legislation and accounting officers (AOs) and chief financial officers (CFOs) could be charged with financial misconduct if such unauthorised expenditure is incurred. The Constitution provides that government spending should be based on a system that is fair, equitable, cost-effective, transparent and economical. The Auditor-General and SCOPA has identified and raised this concern as the highest area of non-compliance, fraud and corruption.
 
Throughout each year various reporting, monitoring, evaluation and review mechanisms are in place to ensure that budgets are executed within limits and against time constraints. Under spending of the budget results in service delivery constraints. The Auditor-General has highlighted five major concerns, i.e. the quality of financial reporting, high level of non-compliance in supply management practices, poor human resource management practices, inadequate general controls over the information technology, and financial health (under spending of capital budgets).
 
Accounting, recording and reporting
 
The accounting system provides for adequate information on a real time basis and detailed to extract relevant information. The Provincial Treasury has direct access into departmental records and ensures that information in each department, and for the province is presented and reported on in a timely, accurate and comprehensive manner. The introduction of reporting of non-financial information (performance management) adds value to budgeting and spending patterns as priorities are aligned to the budget distribution to departments, and allocation to departmental programmes. The PFMA prescribes strict reporting frequency and deadlines that have to be complied with monthly, quarterly and annually.
 
External scrutiny and audit
 
The provincial auditor audits all provincial departments and public entities every year within four months of the financial year end (i.e. by the end of July). A full range of audits is performed, including systems, financial statements, compliance, procurement, IT and programme performance related audits. The provincial auditor applies INTOSAI/ISSAI standards and good practices. The audit reports are not tabled in the legislature in July, but included in the department annual reports. As a result, the department’s audited financial statements are submitted to the legislature within six to seven months from the end of the FY. Even though formal responses are provided to each department in the final management letters, and commitments are obtained from them to implement corrective measures to resolve audit findings, the provincial auditor’s report often shows limited improvement on some systematic issues identified in the previous financial years, affecting negatively the impact of external audit findings.
 
The scrutiny of audit reports by SCOPA, the provincial committee responsible for overseeing the provincial government’s financial performance, has been extensive, and hearings for all entities with negative findings on their audit reports are held by SCOPA. Presentations are done to SCOPA through the committees responsible for these departments. SCOPA passes mandatory resolutions whose implementation should be monitored by the internal auditor and audit committees of the department and public entities. 
 
Most recommended actions are generally acted upon by the executive, as set out in the following year's annual report. However, some sensitive resolutions are not entirely performed and disciplinary measures not communicated.
 

2.   Implications for budgetary outcome
 
An efficient PFM system is essential for the implementation of policies and the achievement of developmental objectives by supporting aggregate fiscal discipline, strategic allocation of resources and efficient service delivery. This PEFA assessment indicates that there are major strengths in some areas of PFM in the province, which have led to appropriate funding of budget operations, adequate financial recording and sufficient reporting.
 
Aggregate fiscal discipline
 
The fact that budget preparation takes place in a transparent medium-term expenditure framework (MTEF) is conducive to maintain aggregate fiscal discipline. This is assisted by MEC-approved budget ceilings, which are generally respected in departmental budget submissions. In spite of deficiencies in certain expenditure management controls that led to important overdrafts in specific departments in the past, the province has been able to contain expenditure in line with its current revenue. The amendments and expansion of the budget with formal ex-post regularisation did not hinder fiscal discipline.
 
Strategic allocation of resources
 
A number of positive elements contribute to a more strategic allocation of resources in the province including the preparation of the budget on three year rolling basis under MTEF, reference to sectoral strategic plans in some cases, and the systematic approach to the budget process supported by detailed guidelines to be followed by each provincial department. The strategic policy and sector objectives set out in the government’s medium-term budget policy statement for service delivery also contributes to guiding sector allocations. Nevertheless the provincial government is in the process of finalising the detailed costing (investment and recurrent) for the provincial development strategy and medium-term sector plans, strengthening the linkage with the MTEF and subsequent year’s ceilings to adopt a more consistent allocation policy.
 
Efficient service delivery
 
The deficiencies in internal audit follow-up, together with insufficient responsiveness from the Executive to the Auditor-General and legislative recommendations, do not contribute to sufficient accountability.  Consequently efficient delivery of public services might be suffering. Moreover, insufficient public information on the results of procurement processes is likely to undermine the credibility of institutions and their ability to deliver efficient public services. The ability to plan and deliver quality services could also be affected by the adjustments to budget allocations during the year.
 
Conclusion
 
Overall, the performance of PFM systems in the province is fair but not yet sufficient to contribute effectively to achieving developmental objectives. Important areas in the budget execution, control and external scrutiny have to be improved in time to increase accountability and the likelihood of contributing to fiscal discipline, strategic allocation of resources and efficient service delivery. The overall legal and institutional framework of South Africa is generally conducive to efficient PFM. However, the national systems that are provided to the provinces (such as BAS etc.) must be efficient and effective tools for the provinces so that their PFM can be improved and not just be requisites from national government that introduce further administrative burdens or similar complications for provincial PFM.
 
3.   Prospect for reforms
 
The implementation of a fully Integrated Financial Management System (IFMS) is essential for Eastern Cape PFM reform. The province currently uses basic accounting system (BAS) for financial management, PERSAL for human resource management and payroll administration and financial efficient strategic system (FINEST) for managing and generating purchase orders. These systems are not fully integrated. PERSAL is interfaced with BAS, but FINEST is neither integrated nor interfaced with BAS. Although the existing systems appear to capture financial information as required, their use in terms of reporting and data querying and mining is cumbersome.
 
The planned activities for improvements to the financial management systems involve implementation of LOGIS2 to address the shortcomings of FINEST and will cover all the provincial departments. LOGIS, a provisioning, procurement and stock control system which is highly adaptable to the requirements of any government department, supports the complete order-to-cash process of procurement and adheres to sound supply chain management best practice. Furthermore, it will offer a functionality to support financial interface with BAS. It is scheduled to be implemented in phases and it is anticipated to take approximately three years to complete.
The National Treasury has initiated a reform effort that aims to upgrade and modernise all financial software programmes and integrating them to serve as a single integrated financial management information system (IFMS). The National Treasury has decided to employ standard platforms customised to meet the needs of the PFM systems and procedures.
 
The province faces various challenges with the IFMS planned reforms, ranging from allocation of adequate resources to deployment of sufficiently skilled and experienced personnel. The commitment to continuing improvements in PFM in South Africa has political championship at the very highest levels through the Minister of Finance. At provincial level, commitment by the executive that represents political leadership is one of the critical success factors for any reform undertaken.