IMF Fiscal Transparency report points out glaring holes in South Africa’s financial reports

Although South Africa has a solid medium-term and national budget framework, there is still room for improvement when it comes to fiscal reporting, according to the Fiscal Transparency Evaluation Report released by the International Monetary Fund (IMF) this week.

National Treasury said South Africa has a strong record of fiscal transparency and consistently ranks among the top three countries worldwide for transparency, according to the International Budget Partnership.

The IMF’s Fiscal Transparency Evaluation report suggests improvements in three areas:

• Fiscal reporting: Expand and align fiscal reporting to international best practice by including other spheres of the public sector, strengthening tax expenditure disclosure, and improving adherence to audit timelines for published financial statements.
• Forecasting and budgeting: Implement precise, time-bound and stable fiscal rules. The Fiscal Transparency Code takes a bird’s eye view of public investment, in the case of South Africa the total multi-year costs are not disclosed in budget documents, cost benefit analysis is undertaken for major projects but not systematically published and there are deficiencies in the procurement system.
• Fiscal risk analysis: Enhance analysis of risks in the fiscal risk statement, publish public-private partnership financial data regularly, consolidate transfers to state-owned companies to show fiscal impact and set limits on government guarantees.

National Treasury says that work is underway on all these areas. “Government is committed to addressing these areas to enhance fiscal credibility and ensure continued transparency and accountability in the management of public finances,” the department said yesterday.

The IMF report further notes that no reconciliations between the consolidated budget, statistical reports, or financial accounts are currently published; and the high number of irregularities and qualifications of audit reports should be addressed.

The sorry tale of SOEs and bailouts

When it comes to public corporations, the IMF report points out that although National Treasury includes the financial data of major State-Owned Enterprises (SOEs) in its budget reviews and consolidated financial statements, these reports do not include the Public Investment Corporation (PIC), Land and Agricultural Bank, and Postbank.

Importantly, South Africa’s 2023 budget reports are not in line with international guidance when reflecting the impact of bailouts as they show it as equity investments. South Africa’s SOEs (Eskom, Transnet) have faced financial difficulty over the last decade requiring several interventions from the national government, often through capital injections, bailouts or calls on guarantees. Government has, over the last decade, approved multiple bailouts for Eskom, South African Airways (SAA), the South African Broadcasting Corporation (SABC), the South African Post Office (Sapo) and more recently, Transnet.

Finance minister, Enoch Godongwana has taken a hard line in the last two years, and as recently as January this year, he admitted he was wary of giving troubled Transnet a financial injection, citing the hundreds of billions that have disappeared down the Eskom drain.

In some cases, an intervention made by government may provide additional returns in the future, in other cases there may not be a likelihood of a return. “Bailouts typically do not result in a return for government in the same manner as other investments and would usually be considered a capital transfer which is a deficit-impacting transaction,” the IMF says.

Provision of free basic services not captured

One significant item not currently captured properly in South Africa’s government fiscal statistics data concerns the provision of free basic services, primarily water, sanitation, electricity and refuse removal, to low-income households. The question is whether these statistics are not captured because government is so sorely lacking when it comes to actual service delivery. The IMF statistics department identified that approximately R71-billion worth of free basic services are not captured, and noted that authorities should work with the statistics department to record these accurately.

Although the National Treasury collects data from provincial and local governments on a monthly or quarterly basis, the data is only published on a quarterly basis. “Reporting more frequently on provincial and local government finances could aid policy-making and management of public finances. As an example, the United Kingdom publishes its monthly public sector finances statistics within three weeks of (month end),” the IMF says.

Audit timelines in place but not observed

While there are firmly established timelines for the compilation, audit, and publication of audited financial statements, in practice these are not always adhered to by all entities.

The Integrated Annual Report of the Auditor General of South Africa for 2021/22 indicates significant delays in the adherence to this legal framework. For example, only 41% of audits performed during fiscal year 2021/22 were conducted within the legislated timelines. National and provincial audits performed better than local governments with 47% completed in time by national and provincial entities while only 26% of local government audits were completed on time. It is worth noting, however, that in this instance, the Covid-19 pandemic impacted negatively on the timeliness of audit reports.

Delays were mainly caused by the hard lockdown, extensions granted to auditees in the previous audit cycle and the late start of audits for the new year. The delays were further impacted by the riots in Kwa-Zulu-Natal and Gauteng. DM