Executive Summary

This Public Expenditure and Financial Accountability (PEFA) self-assessment was initiated National Treasury (NT) of South Africa with cooperation of the Sub-national Government (SNG) – KwaZulu-Natal (KZN). The assessment adopts the methodology of the SNG Public Financial Management Performance Measurement Framework (PFMPMF).
The Terms of Reference (TOR) identify the main objectives of the sub-national (SNG) PEFA assessments and is not designed to comment upon any aspects of specific fiscal or expenditure policy. It has not considered capacity, except to the degree implicit in the capacity to successfully carry out the assessed PFM procedures. It is important also to underscore that the objective of the assessment is not to evaluate and score the performance of institutions or any PFM offices or officials, but rather to assess the capacity of the PFM systems themselves to support sound fiscal policy and financial management reforms. A key objective of the assessment is to determine whether the SNG meets the central tenets of sound PFM practice, rather than to provide insight into all conditions necessary to conclude that sound PFM is being carried out.
The assessment covers the subnational government departments include Education, Health, Human Settlements, Public Works, Economic Development, KZNPT and Transport. The two extrabudgetary units, linked to the department of Agriculture, are not covered in this assessment because department of Agriculture was not assessed.
Coverage is for three years: 2018/19, 2019/20 and 2020/21; all of which have been audited. The last completed financial year is 2020/21, with the cut-off date of 31 March 2021.

Pillar 1, Budget Reliability as assessed through PI-1 to 3 is sound, signifying a strong correlation between budget formulation, as guided by the National Treasury MTEF guidelines and the Kwazulu-Natal Provincial Treasury (KZNPT) guidelines, budget preparation and execution. Although PI-3 Revenue Outturn is slightly weaker, the SNG’s own revenue makes up less than three percent of provincial receipts.
Pillar 2, Transparency of Public Finances, except for PI-9, is also sound as evidenced by South Africa’s consistent high placement in the Open Budget Index survey. The budget process is transparent and comprehensive in terms of classification and the documentation presented to the SNG legislature is detailed and complete, while the documentation disclosed to the public meets the highest standards. The weakness noted under PI-8, performance information, relates to the lack of independent evaluations of program effectiveness. Performance planning reporting was however noted as strengths. Although a wide array of budget documents is made available publicly, a key requirement of PI-9, Public Access to Fiscal Information, which relates to pre-budget statements and enacted budget laws was not met.

PI-10 and PI-12 under pillar 3, Management of Assets and Liabilities, strengths were noted in the monitoring of entities and municipalities, and monitoring and disposal of assets. The main weakness noted under PI-11, Public Investment Management, was the lack of economic analyses for major capital projects at provincial departments. Investment project monitoring however was noted as a strength.
The key weakness exhibited on pillar 4, Policy-Based Fiscal Strategy and Budgeting, relates to PI-18.3, where the submission of the budget proposal to the legislature is made less than one month before the start of the financial year. While the guideline prescribes a period of two months before the financial year, the timing of the tabling is not entirely within the control of the SNG, as legislation prescribes that the provinces should table their proposals within two weeks of the tabling of the Central Government (CG) budget. Fiscal forecasting PI-14 recorded a strong showing, with the only shortcoming being that a separate forecast is not submitted to the subnational council.
Pillar 5, Predictability and Control in Budget Execution recorded sound performance with the strengths being accounting for own revenue and predictability of In-year resource allocation. However, weaknesses in commitment controls and payment controls were also noted. Payroll Controls, PI-23. also performed poorly, particularly in payroll changes and internal control. Internal Audit, PI-26 scored well in three of the four dimensions, scoring high on coverage, audit standards and reporting. But the overall rating was pulled down by the SNG’s poor response to audit findings, giving rise to repeat findings.
Under Pillar 6-Accounting and Reporting, P-29 recorded the strongest performance on annual performance reports, with the SNG adhering to international accounting standards. The key weakness noted in PI-28 relate to the accuracy of in-year reports. Reconciliation of bank, advance and suspense accounts, PI-27 performed slightly weaker as the SNG only performed reconciliations monthly.
The key weakness noted in PI-30, External Audit was on the poor follow up on audit findings. The other three dimensions on coverage, submissions to the Legislature and SAI independent was rated highly. PI-31, which relates to the Legislature’s Scrutiny of Audit Reports recorded good performance, but a weakness is noted in the follow-up of recommendations.

Impact of PFM systems on the three main budgetary and fiscal outcomes

Aggregate Fiscal Discipline

Figure 2 above shows that the SNG was able to achieve sound aggregate fiscal discipline, supported by strong PFM laws, regulations and processes. Because the SNG is largely dependent on the CG for transfers to fund budget allocations, it does not incur debt, borrow, or issue guarantees. Transfers to SNGs are based on an allocation formula (Provincial Equitable Share) that is primarily population driven. A key component of the formula considers the net migration between provinces, with the ones that register net out-migration having their share of revenue reduced proportionally. The SNG KwaZulu-Natal (KZN) has over several years, including the assessment period, experienced net out-migration resulting in the receipts from the CG being reduced over successive MTEFs. The SNG is therefore not fully in control of their fiscal resources, as fiscal policy decisions taken by central government, such as wage determinations and fiscal consolidation, affects the resources of the SNG. The SNG however does have a voice at various intergovernmental and budget forums that take decisions which affect provincial finances.
The SNG recorded excellent performance on aggregate expenditure outturn. Even more commendable, is that they maintained their performance through the Covid-19 pandemic which necessitated an additional adjustment budget. Given the systems and processes in place, reporting outside financial reports is unlikely and may very well be negligible. Financial reports of extrabudgetary units are however submitted to the KZNPT within two months of the end of the financial year. Revenue outturn variance fared slightly better largely due to overcollections most likely caused by under forecasting. Public investment management and public asset management scored even lower, mainly because the SNG while complying with most of the guidelines fell short in making information publicly available.
Key weaknesses were recorded in internal control of non-salary expenditure and in year budget reports, with deficiencies noted such as ineffective commitment controls and incomplete documentation for processing of payments.

Strategic Allocation of Resources

Figure 3 above shows that the SNGs strategic allocation of resources is sound at an aggregate level, although there are some weaknesses noted. The budget is comprehensive and transparent in terms of required documentation that is publicly available. Budget classification is detailed and meets international standards, contributing to strengthening the strategic allocation of resources. This correlates with budget comprehensiveness and the low level of expenditure composition variance, which indicates that that resources are being allocated to originally approved priority areas and programmes.
Key weaknesses were noted in public investment management and in-year budget reports. Besides the publishing of information, key deficiencies noted in public investment management was that the SNG departments do not conduct economic appraisals for their major capital projects, and uncertainty around standard criteria for project selection.
The Legislature scrutinises the budget and its associated Medium Term Expenditure Framework during the mid-term review in November each year. It reviews the macro-economic policies and priorities of the Provincial Government during the Budget Speech in March each year. The legislature scrutinises the pre-determined objectives and future year budget during the Portfolio Committee’s interaction with departments during budget preparation and after the tabling of the Estimates of Provincial Revenue and Expenditure (EPRE). It does not cover the analysis of the impact of new policies done at central government. Note that the revenues are composed of transfers from the National Treasury (equitable share), National departments (conditional grants) and own provincial revenues (Motor vehicle licences, gambling fees, liquor licences etc.).
As both procurement and payroll functions are not efficient, hindering both adequate forecasting and value for money, strategic allocation of resources is not achievable as resources are allocated to inefficient spending. The supplemental budget process that is run every year, and the difficulty to control under and overspending which, also negatively impacts the allocation of resources. This is a concern that was raised by the Finance Portfolio Committee.
The SNG runs a smooth budget preparation process with a comprehensive and clear budget circular issued to departments, covering total budget expenditure for the full fiscal year, and reflecting ministry ceilings approved by the cabinet prior to the circular’s distribution to budgetary units, contributes to the strategic allocation of resources. The timely approval of the annual budget enables budget units to begin their annual programmes and activities on time to ensure maximum utilisation of allocated resources.

Effective Service Delivery

As in indicated in figure 4, on an aggregate level, the SNG recorded sound performance in line with many elements of good international practices for effective service delivery.
Efficient service delivery is derived from the quality of the planning and how this is translated into the annual budget and execution. It is further impacted by the performance of the payroll, procurement and internal controls functions. Efficient service delivery is affected by the challenges faced in maintaining fiscal discipline. With rising accruals and tightening fiscal space, efficiency gains need to be achieved, especially in procurement and payroll, but those gains require better linkages between the three-year rolling MTEF, the 5-years departmental plans, the procurement plans and cash flow projections. They further require securing adequate funding for the staff establishment and reining in absenteeism. Efficient service delivery is well supported by the cash management in place, though it would improve if commitment control were more effective. Cash management is well supported by the low variance between budgeted revenues and actuals transfers from the National Treasury and national departments. Own revenues collection seems robust but consistent overcollections may point to inaccurate forecasting. Payroll controls is the weakest indicator under effective service delivery because of weak internal controls and payroll audits. In addition, the absenteeism reported, and failure to introduce controls to rein it in, places major pressure on the wage bill of the largest two departments and restricts their ability to deliver services efficiently.
A key weakness is that detailed procurement information is not readily available to the public. Internal and external audits have many strong points, but they fall short on responses and follow ups respectively. Similarly, legislative scrutiny of audit report recorded some strengths but has shortcomings in following up on recommendations.