Public Finance Management Act, 1999 (Act No. 1 of 1999) Understanding and Using this Act Guide for Accounting Officers 1. Introduction

 

Purpose of this Guide

 

This Guide is designed to familiarise accounting officers with the changes to their responsibilities that were introduced by the Public Finance Management Act (PFMA), a key element in a series of government budget and finance reforms. This introductory chapter explains the rationale behind the Act and accompanying Treasury Regulations, and the behavioural changes necessary to upgrade financial management throughout Government.

 

Structure of this Guide

 

Chapters 1 and 2 are introductory and set out the context within which the Act has been drafted and the vision its seeks to achieve. Chapter 3 details the most urgent steps accounting officers will be expected to address in the next 6–12 months. The remainder of the Guide provides more detail on implementing the steps in Chapter 3, and concludes with sections dealing with the responsibilities of executive authorities and the way forward.

 

Background to the Act

 

Government has prioritised the transformation of the public sector to enable it to meet the needs of the people and the objectives of the Reconstruction and Development Programme (RDP). Given the enormous demand for services and the limited resources available to satisfy that demand, all available resources must be used as effectively and efficiently as possible. Government is determined to modernise the management of the public sector, to make it more people friendly and sensitive to the communities it serves.

 

Budget and financial management reforms

 

Budgetary and financial reforms were initiated soon after the 1994 elections. The first phase of reforms began with the introduction of a new intergovernmental system, which required all three spheres to develop and adopt their own budgets (decentralised budgeting). This was complemented by a system of significant transfers to provinces and municipalities. In addition, multi-year budgeting through the Medium-term Expenditure Framework (MTEF) was introduced in 1997/98 to replace the one-year incremental system. The final elements in this phase of reforms were to deepen the budget process and better align policy, planning and budgeting.

 

Second phase reforms

 

The adoption and implementation of the PFMA signalled the second phase of the programme of reforms. Its objective is to modernise financial management and enhance accountability. This will be complemented by changes to the procurement system.

 

Third phase reforms

 

The third phase of reforms will include the introduction of service delivery indicators, performance budgets and generally recognised accounting practice (GRAP).

 

Table 1: The series of financial reforms

 

 

Managers must manage and be accountable

 

Other elements of these changes to public sector management can be seen in the ‘Batho Pele’ White Paper, the new Public Service Regulations, the imminent reforms to the property management and procurement systems, and the promotion of private sector involvement in the delivery of services. A basic principle is that managers must be given the flexibility to manage, within a framework that satisfies the constitutional requirements of transparency and accountability. This is the context within which the PFMA was drafted. The aim is to provide a framework of best practices to assist managers in ensuring that their departments deliver services to communities as efficiently and effectively as possible.

 

Defining responsibilities

 

The Act clarifies the division of responsibilities between the head of department (the accounting officer) and the political head (called the ‘executive authority’ – either a Minister or an MEC). The executive authority is responsible for policy choices and outcomes, while the accounting officer implements the policy and achieves the outcomes by taking responsibility for delivering the outputs defined in the departmental budget. In this way, the Act empowers accounting officers by unambiguously conferring on them a clear set of responsibilities. The accounting officer prepares the departmental budget (specified in terms of measurable objectives) for the Minister or MEC to approve and present to the legislature for voting. The accounting officer is then responsible for implementing and managing the budget.

 

From instructions to frameworks

 

In addition, the traditional ‘micro-control by the Treasury’ approach is replaced by the specification of minimum requirements in the Regulations (and exemplified in the best practice guidelines). This gives accounting officers significant powers for managing their budgets to achieve the defined outputs. It is therefore essential that the accounting officer’s performance contract is consistent with the outputs defined in the budget.

 

In the transition from detailed Treasury Instructions to the new approach in the Regulations, accounting officers must ensure that no vacuum is created – they may decide to adhere to the former Instructions until new systems, processes and procedures have been developed specifically for their department.

 

Modernisation of financial management

 

In the past, financial processes were controlled by centrally prescribed bureaucratic rules that allowed little scope for managerial discretion, and even mundane issues had to be referred for ‘Treasury approval’. This was, in fact, financial administration, regulating how money was used to ‘buy’ inputs, and diverting attention from the delivery of the outputs that the inputs were intended to achieve. This approach did not clearly define responsibilities, and resulted in poor accountability and value for money. The incremental (one-year) budgetary system undermined planning and the prioritisation of programmes.

 

Accounting officers adopted a passive approach to their budgets during the financial year, and did little to avoid overspending or underspending. This was compounded by delays in producing financial information, which was often only available well after the end of the financial year.

 

Promoting efficient and effective use of public resources

 

The Act aims to modernise financial management in the public sector and, in the process, to reduce fraud, corruption and waste. More efficient and effective use of public resources will maximise the capacity of Government to deliver services. The PFMA enables accounting officers to manage but, at the same time, holds them accountable for the resources they use. It establishes clear lines of accountability and broad frameworks of best practices that managers can adopt or, where necessary, adapt. The Act is not intended to make managers so cautious that they fail to deliver the outputs agreed in their departmental budgets for fear of contravening the PFMA. Any accounting officer underspending or underperforming (both of which must be monitored regularly by the executive authority) will also be transgressing the Act and be open to the sanctions specified.

 

What is financial management?

 

Financial management is not an end in itself. It is, however, crucial to the successful running of any organisation, as it relates to how the resources available to the organisation are used.

 

In the private sector, financial management centres on the examination of alternative sources of finance, the effective utilisation of such finance, and cohesion between financial and utilisation decisions. In the public sector, financial management focuses on the prioritisation and use of scarce resources, on ensuring effective ‘stewardship’ over public money and assets, and on achieving value for money in meeting the objectives of Government, i.e. rendering the best possible services. This must be done transparently and in terms of all relevant legislation.

 

However, public sector organisations can learn from the private sector, where the success and survival of an organisation depend on its financial results. This is not to suggest that the public sector should pursue profits, but rather to acknowledge that public spending is an investment made by taxpayers, which should therefore be managed optimally.

 

Future directions

 

Several elements of private sector financial management provide a sound basis for practices in the public sector and, over the coming years, the Act will introduce:

 

The Act emphasises the importance of generating and using information to improve financial management. Financial management can encompass almost all activities within an organisation, and the PFMA significantly changes a number of these elements, in particular:

 

The principles involved are outlined in the remainder of this Guide:

 

Behavioural aspects of the changes

 

The changes introduced by the Act are not purely technical. For implementation of the PFMA to be successful, it is crucial that ‘change leadership’ skills are utilised to drive the process. Both finance and non-finance professionals should be suitably capacitated to implement the reforms. This will require mindset changes by all stakeholders – accounting officers, departmental officials, treasuries, political office-bearers, the Office of the Auditor-General and parliamentarians or legislators.

 

Empowering accounting officers

 

Departments will no longer continually need to request treasuries to exercise procedural controls and approvals. For example, accounting officers will have the authority to write off losses, but will have to report on and justify the decisions they take, if necessary to the Auditor-General or to the public accounts committees. Should they be unable to do so, the sanctions prescribed in the Act will come into effect.

 

Approach to implementation

 

Implementation will be a collective learning experience for all involved, as practices that have been in place for many years will be challenged, rethought and modified. The more qualitative changes will be phased in over several years. However, significant improvements are possible and necessary over the next 12 months.

 

Accounting officers will need to ensure that the essential components for effective implementation are in place. Preparations will include employing appropriately qualified and experienced chief financial officers (CFOs) and accountants, setting up effective internal controls, constituting an audit committee, and ensuring that the in-year management requirements are met.

 

Regulations will become less prescriptive

 

The new Regulations (which took effect on 1 June 2000) are a significant shift from the previous approach in the Treasury Instructions, in that they provide more flexibility and place responsibility for decisions in the hands of the accounting officer.

 

Although less prescriptive than the Exchequer Act Instructions, certain sections of the Regulations still contain considerable detail, to address any potential temporary legislative and capacity gaps. This allows accounting officers to prepare their departments for full implementation, and the Accounting Standards Board (ASB) to define GRAP, as required by the Constitution. As further reforms of accounting practices, procurement, provisioning and budgeting are introduced, the Regulations will be revised to become even more flexible.

 

The national Treasury recognises the demands these changes will place on accounting officers, and has developed a range of support mechanisms to assist with the short-term implementation of the Act.

 

These include best practice guidelines on various topics, to be launched at workshops over the coming months.

 

Conclusion

 

The objective of the Act is to enable managers in the public sector to manage, while being accountable for the use of the resources made available to them.

 

The long-term vision behind the Act sees a public sector that has:

 

In the short term, progress towards this vision will require each accounting officer to address the immediate steps set out in Chapter 3.