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November 15, 2016

PFM Reforms in South Africa after the End of Apartheid

An Interview with Trevor Manuel

South Africa

In this extended article for the PFM Blog, Trevor Manuel[1] describes some of his experiences as Minister of Finance in South Africa under Nelson Mandela and subsequent Presidents. Mr. Manuel oversaw huge reforms in the South African public finances as well as the creation of the National Treasury. The article is based on extracts from an interview taped during the Annual Meetings of the World Bank and the IMF held in Washington DC in October 2016. The interview was conducted by Lesley Fisher of the IMF’s Fiscal Affairs Department.

How did you transform the National Treasury into one of the most powerful finance ministries in the emerging world?

The Ministry of Finance started out with two distinct departments. One was the Department of Finance that dealt with macroeconomic and fiscal issues. The other was the Department of Expenditure that—prior to the reforms—was an independent ministry (headed by the Minister for State Expenditure). By about 1999, we started a process that brought together these two departments on very efficient lines, creating the new National Treasury.

We established divisions of the National Treasury that focused on issues such as macroeconomic support, asset and liability management, intergovernmental fiscal relations, public procurement, and tax policy. We also created a division that dealt with financial regulation, and an international division that dealt with our relations with the Bretton Woods institutions and our African profile. We needed to staff all of these competently. It took a few years of working together very closely before we could build the requisite skill set. 

I was always humbled by the fact that we could attract smart people into the Treasury. At the time when the highest paid industry was financial services, we successfully hired very skilled professionals who could have walked into the financial services sector and written themselves checks for multiples of the amount they were earning in the public sector. 

We concentrated on creating a strong learning environment in the Treasury. The ability of our staff to learn from each other, learn to problem solve, and learn to present their analysis and emerging conclusions was of central importance. 

One way we institutionalized the learning process was to have fortnightly meetings of senior staff with either the Minister or Deputy Minister present. In the course of any 12-month cycle, we worked through all the main divisions of the Treasury. There was a strict discipline about ensuring that documents were available ahead of these meetings, so that the discussion was focused and productive. Younger staff members were often asked to lead a discussion, thus exposing them to interaction with their seniors and the Minister.

My sense is that our university system doesn't equip people to deal effectively with the kind of policy issues that arise in a modern finance ministry. The Treasury’s strong learning environment created a discipline that required people to think through policy issues, and prepare documents in a particular style. We had a rule in the Treasury that any presentation should contain a maximum of 12 slides. If you wanted to write a thesis, you could write the thesis. But if you wanted to communicate via PowerPoint, you needed to use the medium appropriately. And it was a very challenging discipline to some people, because it broke with established norms and work practices. 

What were some of the other key changes in PFM?

Following the transition from apartheid to democracy, the PFM reforms comprised a number of steps. The first of those steps was to build a strong Revenue Service. While we debated what the appropriate tax levels would be, we found that by focusing on better administration, we could in fact reduce rates by concentrating on base broadening. And I think the success of the South African Revenue Service—which merged the former customs and internal revenue functions—during this period was very important. 

Another very important step was to establish the Minister's Committee on the Budget, which comprised myself, the Deputy Minister, and Cabinet colleagues. This Committee acted as a filter for the Cabinet. It was a place where we tested our macroeconomic forecasts, and changes to the fiscal envelope. But more importantly, we tried to understand some of the ongoing pressures on public spending, and get collective agreement on issues that needed to be addressed. The Committee also played a critical role in setting the expenditure limits and deciding on the division of resources between national, provincial and local government. In parallel, we institutionalized an annual budget cycle, designed to minimize disruption to the process of preparing and approving the budget, while providing the Parliament with plenty of time to debate the issues and challenge the executive on their proposals.   

At the same time, we started a process of very significant legislative reform. Indeed, the very first law adopted by the Parliament in 1999 was the Public Finance Management Act. The law created new norms of accountability and recast the relationship between the Ministry of Finance and the National Treasury, the relationship with the nine provinces, but also, very importantly, the relationship with Parliament.

What role does the Parliament play in the reformed budgeting system?

The view that we took—Parliament didn't always understand—was that the budget is a statement of a Cabinet collective decision. So it's an executive function, distinctly so. And the executive needs to be held accountable to Parliament for the way in which it seeks to take decisions. Consequently, there wasn't much consultation before the budget was tabled in the Parliament.

I always felt that the relationship between the National Treasury and the Parliament was a rather unfair contest. At the Treasury, we were privileged to have assembled some of the best financial skills in the country. These were people who understood policy issues at both the broad level and in minute detail. And you placed them up against some Members of Parliament who didn't have the necessary skill set, and didn't have much in the way of support.

The Public Finance Management Act empowered Parliament to strengthen their own oversight over government spending by publishing monthly expenditure reports within 15 days of the month end. The law also required all government departments to close their books within two months of the end of the fiscal year on March 31st. The final accounts were then audited by the Auditor General, before being submitted to the Parliament for review, and then published by the end of August. So I think we've drawn from best international practice in determining our system of accountability. 

As Minister of Finance, why did you place such emphasis on fiscal transparency? 

In many ways, the budget is at the epicenter of government policy. It is the financial expression of policy intent. It is the one place where you can take the manifesto of the ruling party, and convert it into practical effect. For that reason, the budget has to be above all an expression of collective interests. 

Now, achieving such a consensus is very difficult, because I've always felt that Ministers of Finance stand between their colleagues in the cabinet room and the dreams of these colleagues. And so certainly around budget issues, Ministers of Finance tend to be very unpopular. But when the budget is adopted, it is still an expression of collective interest, and that is very important because how else do you get accountable government? 

The budget speech addresses very complex issues, but needs to communicate with people who have a variety of interests, whether the person concerned is the recipient of a state old age pension, or a trader on the floor of a financial institution.

In particular, the Parliament’s ability to understand what is being communicated through the budget is fundamentally important. Many of our parliamentarians are quite ordinary people. We need to ensure that when they adopt the budget, they actually understand what a deficit is, what debt service costs are, and why if you run a deficit that's too high now, the cost of debt will have to be taken out of future budgets. Understanding how real time expenditures, especially on public services, impact on different social and income groups is very important in a highly unequal country such as South Africa.

The focus was therefore on providing sufficient information to Parliament so that it could exercise its oversight role. The budget review document which is placed before Parliament in February contains about 300 pages. The estimates of national expenditure is a heavy tome of about 1,000 pages. It deals with past spending and future trends for each department and its agencies. It breaks down every department's budget into programs and provides for each program a set of measurable objectives. The big idea was that the estimates of national expenditure should provide a form of contract between each department and the people of South Africa, through the agency of Parliament, on how the resources needed to finance the budget would be raised, and how the money would be spent. 

In crafting the budget documentation, we revised radically the old formats. The new documents not only provided all the essential numbers, but also explanations of fiscal trends and spending proposals that made sense to people. These documents thus provided the essential link between transparency and accountability.

What were your objectives in redesigning the system of intergovernmental finance?

South Africa’s constitution established nine new provinces with different boundaries to those that had existed under apartheid. The system of intergovernmental finances is a hybrid, neither based on the principle of a unitary state nor a fully federal system. The Public Finance Management Act recast the relationship between the federal government and the nine provinces. We tried to ensure that the each of the three spheres of government (central, provincial and local) received their fair share of resources. And the national Parliament—specifically the National Assembly[2]—if lobbied, could look only at the national sphere of government, because all provinces have their own legislatures. And those legislatures, to all intents and purposes, are independent but interdependent with the national sphere. So we had to deal with a rather complex process. 

Now, because provinces spend without reference to the national government, they frequently exceed their fiscal envelope. We tried to deal with this problem by setting up a Budget Council comprising the Minister of Finance and the nine provincial Ministers of Finance that would meet five or six times a year. One of those occasions was a two-day off-site meeting, where the teams got to know each other and understand fiscal trends and spending pressures. This informal procedure created quite a useful esprit de corps which was also helpful in maintaining overall fiscal discipline. 

As a final question, what more needs to be done, or what needs to be done differently in South Africa?

A former colleague used to say that just when you think you're out of the woods, a flock of birds with diarrhea flies over. And I think that remains very much the difficulty, because the whole of the budget and fiscal process involves the interactions and decisions of people. Some of these interactions you can entrench in law, but you can't overregulate them because you are dealing with human beings. And so what's very important is to keep alive the kinds of discussion involving the Minister’s Committee on the Budget and other interest groups inside and outside government. 

In 2008 and 2009, South Africa took a big knock as a result of the global recession. The crisis impacted on our tax take, partly because the commodity super-cycle imploded. There was less money available for spending. And sometimes in governments, as in the private sector, when you have less revenue, you actually need to recalibrate all of your expenditures—in particular the public sector wage bill. And when you have circumstances that South Africa is now living through—the IMF is forecasting annual GDP growth of around 0.5 percent—you can't spend as if the economy is growing at 5 percent a year. 

At such times, the ability to reenergize the discussions and debates on economic and fiscal policy becomes vital, which means that the quality of the institutions where you debate these matters is fundamentally important. To achieve this high level of discourse, you need the same intellectual energy in the Treasury to prepare documents that people can debate and discuss, and the Cabinet must be apprised of developments so that your decisions are properly taken and properly recorded.

[1] Trevor Manuel was the Minister of Finance of South Africa for 13 years, from 1996 until 2009, after the transition from apartheid to democracy. He subsequently became Minister for National Planning in the Presidency.

[2] The Upper House of the Parliament.

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.

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