Transfers are an important part of the intergovernmental system in South Africa. Since 1994, a number of different forms of transfers have been introduced, including those made as conditional grants to other spheres of government, or as transfers to public entities, constitutional institutions, NGOs and households. In total, these transfers comprise more than half the expenditure on the national Budget. Whilst accounting officers have full responsibility for their expenditure, the treatment of transfers has tended to create confusion, a point noted in several recent reports of the Auditor-General (e.g. non-compliance with the previous Treasury Instruction K5).

Both the income and expenditure aspects of any transfer must be considered. The transferring accounting officer must ensure that all funds are deposited in the provincial revenue fund or, in the case of a municipality, into an authorised bank account. The receiving accounting officer must account for the money received and the manner in which it is spent. The PFMA and DoRA both clarify these accountability responsibilities, and a much more specific regime is in place from the current financial year.

Accountability

The arrangements for auditing the recipient entity must be considered by the transferring accounting officer, as these may determine the degree of caution and oversight necessary before any funds can be released. The audit arrangements will differ according to the type of body receiving the transfer, as follows:

Table 7: Transfer audit arrangements

General principles

Transfers or grants not authorised in terms of an appropriation Act and/or DoRA constitute unauthorised expenditure. Accounting officers transferring grants must ensure that:

In assessing the degree of accountability, the following considerations should apply:

Avoiding unnecessary delays

Should national departments delay approved transfer payments, service delivery may be compromised. While the Regulations specifically require accounting officers making transfer payments to organisations (but not to households) to ensure that the money is used effectively, this must not cause unnecessary delays in the transfer.

Payment schedules should be finalised before the financial year begins.

Fiscal dumping

Accounting officers must not transfer funds (to a province, municipality, public entity or NGO) to conceal underspending in their own departments (fiscal dumping); this may constitute financial misconduct. Any intentions to transfer should be outlined during the budget preparation process, before the financial year begins. The recipient organisation must be encouraged to have plans in place for spending the funds before the financial year commences.

Division of Revenue grants

Accounting officers transferring grants must eliminate any ambiguity as to which department or municipality will be audited for spending such transfers. The basic considerations are that:

Where any of these considerations apply, the grant should be treated as a transfer, and the transferring accounting officer is accountable only for the transfer itself: the receiving accounting officer will be responsible for the actual spending.

Grants-in-kind

However, there are grants where the beneficiary is not the spending agency (for example, grants-in-kind, which are benefits rather than cash transfers). These are transitional and are being phased out, as they should be on the budget of the benefiting province or municipality. Grants-in-kind must be reported in terms of sections 9 and 10 of the DoRA, which set out special reporting requirements for agency payments and capital grants.

For example, a national department that builds a provincial road transfers a benefit to the province as, even if the national department undertakes construction and procurement, the ownership or maintenance responsibility will reside with the province. Accounting officers transferring a benefit in kind to another sphere must seek the prior written approval of the relevant treasury, and report the matter to the national Treasury in terms of sections 9 and 10 of DoRA.

An accounting officer receiving a grant or benefit in kind must ensure that future commitments are taken into account.

Agency payments

Agency payments, however, are not transfers, and full accountability for spending these funds always resides with the transferring accounting-officer. Agency funds should not be on the budget of the entity performing the agency service, but should rather be treated in the same way as an outsourced service (for which the agency performing the service may, with prior approval, charge a fee). The agency agreement must comply with the DoRA, and all such agreements must be reported to the relevant treasury. The transferring accounting officer is responsible for ensuring that funds are only deposited in bank accounts which have been authorised by the relevant treasury.

An accounting officer should not accept an agency payment without a good reason: any permanent employment created in relation to an agency payment may leave the department with long-term commitments.

Transfers by provinces to municipalities

Transfers (in whatever form) by provincial accounting-officers to municipalities must be reported monthly in terms of the DoRA, and provincial treasuries are expected to ensure that normal cash management arrangements apply. These reports will include grants such as health and ambulance subsidies, or for municipal infrastructure, housing, roads etc.

Stringent reporting requirements

Accounting officers of departments making or receiving grants to or from other spheres of government in terms of the annual DoRA must comply with the reporting requirements of that Act (see Chapter 4), which includes a requirement to monitor the actual expenditure of funds. These reports should be submitted together with the monthly reports required by the PFMA, as part of a single reporting process.

No transfer, grant or agency payment can be made outside the terms of the DoRA. Any such payment will constitute unauthorised expenditure, unless it has been gazetted before funds are transferred.

The national Treasury will only grant approval for items to be gazetted in exceptional circumstances.

Other transfer payments

Transfer payments are typically made to assist other levels of government or non-government entities in delivering outputs and achieving objectives that would not otherwise be feasible. (They may also be made direct to individuals to meet the welfare, educational or other objectives of national Government.) Efficiency, effectiveness, economy and transparency in the use of the money by the end users are as important as they are for Government’s own programme delivery.

For this reason, accounting officers, through their CFOs, must ensure that entities receiving government money have appropriate financial management and control systems.

Requirements before transferring funds

Before funds are transferred to an entity (not to a household or individual) outside Government, the accounting officer must obtain the most recent audited statement and annual report, together with a written assurance that the entity has or will implement effective, efficient and transparent financial management and control systems.

Where this assurance is not forthcoming, the transfer must be subject to conditions and remedial measures requiring the entity to establish and implement such systems. Should the accounting officer make a transfer having failed to insist on such measures, he or she may be liable to a charge of financial misconduct.

Education legislation requires that individual schools receive ‘grants’, and similar circumstances apply to hospitals and clinics. A number of matters remain to be addressed in this area, and hence an accounting officer transferring funds to a school, hospital or clinic may delay implementation of this clause, but not beyond 31 January 2001.