Briefing by Finance Minister Pravin Gordhan


15 Sep 2009

Minister of Finance, Pravin Gordhan, briefed the media on the Provincial Budget and Expenditure Review for 2005/06-2011/2012. He stated that the provincial governments, the National Treasury and the line function departments worked well together to put an entirely new governmental system in place in just over ten years. This was a system that involved administration, implementation of new policies and the distribution and application of resources. A lot of what the review spoke about was the equitable share of provinces. This was about 50% of the total budget. The provinces had discretion in how they wanted to distribute the money. The review showed the results of those decisions. Funds were spent; however, many challenges were experienced. Given these challenges, it had to be ensured that each sector received value for the money it spent. An intergovernmental fiscal system would have to be put in place to deal with challenges. The Minister stated that they were cutting down on frivolous expenditure and that a new procurement system was being put in place. He explained that the government system suffered at the hands of many bad decisions that were made. He explained that many management processes had been decentralised over the years and he felt that managers on the ground level had to take responsibility for and have the discretion to deal with the necessary procurement within the parameters of the constitutional requirements. This has led to misuse of the system and significant leakage from government, in respect of scarce resources. This was an unacceptable exploitation of government by those in the private sector that supplied goods and services to government. Corruption and tender fraud was not a one-sided story. There were all kinds of over-pricing that was happening and 2000 people were found to have engaged in improper activities. A plan would be made to follow up on these cases. If there was a case to be pursued, the law enforcement agencies would handle it. A journalist noted that officials have appeared before the Standing Committee on Public Accounts (SCOPA) and lied blatantly about steps that they were taking against errant officials. This meant that Parliament's role as an oversight mechanism was an issue. The Deputy Minister of Finance, Nhlanhla Nene, stated that SCOPA would be taking the necessary action against officials who did not give it any satisfactory answers.


Minister Gordhan acknowledged that the education sector faced trade-offs between personnel costs and other costs and that the National Health Insurance scheme was an “end-objective”. The Ministry was now starting to engage with different government entities to see how the revitalisation of the health system would take place and how the scheme would fit in. It would take a few moths to clarify how long this would take and what the costs would be.

Here follows the transcript:

(Provided by GCIS)


Pravin Gordhan: Its my fault, let me apologise, I could not get out off a earlier meeting quickly enough, but thank you very much for being here and today reflects a lot of hard on the part Mr Brown and his team, which managers, Intergovernmental fiscal relations in South Africa.

Perhaps the first thing we are forgetting to remember that the provincial system as we have it is a product of a negotiated settlement both at Kempton Park, the World Trade Centre which created the constitution principles some of you might remember, some of you old enough to have a bit more hair than Don.
And the constitutional principles have to be the framework which 1994 and 1996 the first democratic parliament and government of constituent that we simply had to draft that we had to draft to the constitution that we have currently. Its important to remember the system of concurrent and exclusive powers which is in the schedules to the constitution is a basically what we talking about when we look at the document in front of you.

In other words how does the system of government which is based on that understanding would have come out of the negotiating process.  How is it developed over the last 15 years, and remember the this was completely new process if you like, the first couple of years of democratic government was about creating single administrations, so 18 or 19 departments of Education had to be first consolidated into one and then later if you like you had the division of responsibilities in terms of national and provincial. In other cases you had the division, National, Provincial, and local. So, if you take Health, National responsibilities in Health, provincial in Health and then also Municipalities who have responsibilities in Health as well.
So 15 years down the line the question, how resilient is the system and how well is it working. I think we can certainly say that both provincial government and the treasury and the line function departments have done remarkably well to put in to place an entirely new governmental system in just over 10 years.

And it’s a system that involves the administration itself, it involves implementation of new policies, it involves obviously involves the distribution and application of the resources which national treasury through the constitutional processes that are prescribed makes available.

The next fundamental to also remind ourselves about which Mr Brown might have covered with is the re that we are talking, the equitable share of the provinces. In other words that’s about 50 per cent of the total budget.  The provinces in terms of that constitutional regime have discretion in terms of how they can distribute that money or there are constraints in terms the way expenditure is currently built and different provinces have operated or exercised different prerogatives in terms of how they spread that money.  So then over the years there might have chosen to back education rather than something else, or take money from Health and used it for a particular project and what we see in this review is the result of all of those decisions.
Perhaps the next point I want to make is that by and large the system works, given its youth if you like and given the fact that we are still in early stages of embedding the system, it works. Everyday Education resources do get spent, Health resources do get spent, but as you’ve learned thought the briefing there are many challenges that we face at the same time, but I don’t think that the challenges must overwhelm the fact that day in and day out; the system actually works in South Africa.

Now, given the challenges that we face, what is the next stage of our development and that is what this report helps us to begin to understand, that the challenges that we face is to in each of the sectors ensure that we get better value for money, in each of the sectors ensure that the outputs that we get and outcomes of those are contribute to need to be much better than they are currently and you’ve heard that message many times so there is no point in me just repeating it.

The challenges in education are challenges of the Minister of Basic Education has talked about, our job is to make sure that we put in a intergovernmental fiscal system that supports the meeting of those challenges.

From a financial point of view, the stresses in Education are quite clear and they are how do we balance employment of new teachers versus expenditure on learning aids. Is that what we call them? And expenditure on wages and salaries and creation of new jobs and how do you get these balances going as we go down into the next year or 2.  Is the challenge that we going to face. The minister of Education is against basic education has built a necessity to upgrade teacher, the necessity to get better learning aids into schools and to get a higher quality of education but also a higher quality of context if you like. More time spent teaching; more time spent learning and so on. So as the education one, Health is actually no doubt that the Health system has suffered as a result of many decisions that have seem to have been made

But, we have an energetic minister of Health who is very determined to put in place a process which will ensure that we strengthen the Health system, that we strengthen our hospital system, that we deliver ARV’s on time, and where they require the quantities required, but importantly lay the platform lay the for national health insurance to over in a period of time. And there is a relation between our ability to fix the foundation for the health system and the introduction of the National Health Insurance Scheme, which all of us will actually support and the details actually need to be worked out.

Equally in the respect of Human Settlements, our challenge there is multifold is to deliver more housing, but also to deliver more housing in a different spatial arrangement from the ones we have currently again the Minster of Human Settlements have talked about that, we carry with us still the spatial arrangement of apartheid, and very little has been done in order to overcome that spatial challenges. And the report talks about it in parts, so our challenge together with the Minister of Human Settlement is going to be about how are we now create not just housing but communities in a space where we bring about greater densities in cities, we actually close down this gap between human communities rather 15/20/30/40 km away from urban centres.
We will make sure that we make our contribution with in that particular space. Without saying too much more, let me say, perhaps the last of the challenges we want to talk about, the administrational finance and here we have many good success stories, where systems actually worked, but equally we have areas where we have challenged, we need better qualified Chief Financial Officers much close tighter financial management, we need to ensure that we get appropriate value for money, we need to take a tough look of procurement process off the ground, and ensure that the opportunities for fraud and corruption is shut down as much as possible.

Where human beings are in involved it’s hard to shut it down completely. But we have task team in place that has been hard at work over a month, and in the next month or so, we will able to announce a completely new way of undertaking procurement on all levels of government which will shut down the opportunity that many people have exploited the surety where we have had huge leakages in the procurement systems and given the fiscal pressures we have currently quiet clearly we need to ensure not only do we spend more efficiently but we spend differently on the one hand and one the other hand cut down on the leakages which results in loss of finances at a time when we can actually least afford.
Let me pause, Lendani lets see how we can address the questions the colleagues might have.

Journalist: Minister, in the earlier briefing Mr Brown that the target of saving on frivolous expenditure was R2billion this year, which is less than one per cent than total previous expenditure and at less 1 per cent and that is less half the rate the recession, would d you not be looking at taking 2 per cent and match the match the loss on the recession side, very interesting comment you just made, there is absolute no doubt that the health system has suffered of mainly decisions have been made.
Would you care to expand on that, are we talking more than just the HIV/Aids controversy?

Journalist: I just want to know if you could elaborate Minister on the new procurement system I know you we working on this, if you could be more specific, precisely where the problems lie, that you want address with the new system, thanks.

Journalist: Minister, 2 questions, firstly you mentioned in Education the issue a kind of trade off between personals costs and other costs, the same seems to be the issue in Health, could you maybe just elaborate, what sort of room is that should grow, for personal costs to expand to further, or personal numbers to expand in the future. And secondly, you talk about the modernization of delivery in this book, and I think one of the green papers it also talked about you having signaled a complete reprioritization, the rethink on government spending, could you just elaborate on that, are we going to expect kind of reject budget next year?

Pravin Gordhan: Okay, Brendan, we would like to take it to 3 percent if you can, this is still a work in progress, this is a four month administration although some of us look old in the job already, and there is a very passionate commitment of the part of all cabinet colleagues to ensure that we do the best we can on the question, lets call it unnecessary spending or misdirected spending, the message will be repeated a million times to the point where there is absolute boredom, that the fiscal situation that we find ourselves in and many countries around the world find themselves in, is a tough one and that tough situations require for us to look at a bold approach to how spend money particularly to ensure that the priorities are to this government that they have the funding they require. Lets take funding from rural development to example, if we have to fund money for rural development within the current context then we must make sure that that is not necessary which is not in our current way looking at government spending must be cut or, reduced, or delayed in order that money is available for rural development.

Similarly if health is a priority as it is, then we must make sure that we can put the resources that are necessary to ensure for example the ARV program has the funding that is required to enhance the objectives that we have actually set there. So this is still work in progress it will be done at a provincial level, we will be meeting SALGA shortly to ask that even within the local government sphere that the kind of luxuries we are use to or the kind of sponsorships that we offer or the golf days we organise, and so on, should be a thing of the past for the next three years. We need to have a franker understanding both amongst the South African public and amongst people who work within government that these tough times require us to actually make the right kind of moral and financial decisions which will ensure we make government programs sustainable.

Similarly on the health system, Minister Motsoaledi, wants to very quickly get down to ensuring that those dysfunctional parts of the health system where South Africans have to be content with at a day to day level are put right as quickly as possible and we are working with him to, I don’t want to go into to many details right now, but to ensure that he has the financial support that’s necessary, in order for him to meet his ambitions.

On the new procurement system, over the last six, seven years we decentralised a lot of procurement management if you want to call it that and thought that, managers on the ground must take responsibility and have the discretion to do the necessary procurement within the parameters of the constitutional requirement for open competitor, transparency, etc. Clearly that has led to misuse and clearly that has also led to a significant leakage from government in respect of vary scares resources that we have, but also it has led as we have said many times before to an unfortunate and unacceptable exploitation of government by people within the private sector, small and big who supply, these services and goods that government purchases and we have made this appeal before, we will make the appeal again, that corruption and tender fraud is not a one sided story, its not government that engages in that, in fact the actual beneficiaries are business people who are on the other side of the tender.

So when you pay R25.00 for this bottle of water when it’s R4.00 across the street, the R21.00 doesn’t go into, maybe a part of that comes into an official’s pocket, but a large part of it get’s into a businessman’s pocket or a businesswoman’s pocket, just to get the gender balance right. So, when you pay R26.00 for a loaf of bread as part of a school feeding scheme the same things applies as well. The are bigger items as well, like IT systems where there is all sorts of overpricing that is happening, an example was given to be recently of the purchase of a fax machine. If I’m not mistaken in a particular, let’s call it shop, a fax machine is R1100, by the time it gets delivered to the particular government entity the invoice says R4000 for the same fax machine. Now who is writing that invoice, and who’s paying for that invoice and how many of these fax machines phenomena are actually occurring at this point in time, and that’s unacceptable. So we are looking at all of this and the team that we have set up, already has a fairly good analysis, both of if you like, the systemic issues we face within the procurement system and on top of at least 2000 people who have engaged of one or other form of let’s call it politely improper activity and we will soon have a plan on how those matters are actually followed up and we will take the public into confidence in terms of how we intend to pursue that.

On education, these are tough choices Carol that many of our departments will face. How much do you spend on goods and services, how much do you spend on  learning material, how much do you spend on new personnel costs of existing personnel and how much do you spend on new personnel that we actually want to bring on board. So everybody has become aware that there are trade offs we have to become aware of and have to exercise as we go on, and in terms of room to grow numbers. Well the more we spend on one particular cost item, that will compromise another cost item. Now another phenomena which Mr. Brown kindly points out to me which is an important one, is the number of number of personnel involved in administrative jobs versus the number of personnel involved in delivery jobs. So that’s another area that we want to relook at, we need to trim down the administrative jobs in health, education or whatever, and get more people involved the frontline of delivery, so that is where the citizens can actually benefit from those processes. I will answer the next question and then the deputy minister can take the next round, so that he knows he has a job here as well.

On the modernization of delivery, I think in essence what we are saying Carol is that tough times require at tough look at oneself, and it demands that we actually ask where do we spend the scares money that we have and how do we meet current requirements and current program needs on the one hand, but also how do we begin to feed money into the new priorities that we have as well. So that’s the exercise that all of us are engaged in currently and you will get the first public signals of that exercise when we give the medium term budget policy statement towards the end of October, but we certainly are all as a cabinet collective very aware of the responsibilities that we have and are working in a co-operative way to achieve that. I have to be in parliament in five minutes, so can we take two questions.

Journalist: Just on the centralisation of procurement, does that in any way infringe the constitutional division of powers between spheres of government if it was centralised, other examples of centralisation of procurement like the SETA, haven’t worked very well, I mean creating delays, bureaucratic kind of hiccups. Is centralisation the way to go and can you argue that case. Thank you.

Journalist: Just a point of clarity minister, you spoke about 2000 people engaging in improper behaviour, are these people that you have indentified as a result of this investigation and that you are going to be taking action against. Then you also spoke about laying the foundation for the National Health Insurance Scheme, could you tell us specifically what that aspect of the health spending reform involves and could you give us some idea as to where the planning for the NHI is at this stage.

Pravin Gordhan: Let me take those two and the deputy minister can handle the others as I leave. I didn’t use the word centralise Linda; I said we are taking a tough look at procurement. You can assume, but I didn’t use that word. So there are different, that’s why I say there are systemic issues so we need to change the system, some of it might mean that for economies of scale you are going to centralise or and there are different ways of centralizing as well, you can buy, you can sort of order a million roles of toilet paper but they can be delivered on a decentralised basis to everyone for example. We also want to ensure that we don’t compromise small business and the kind of opportunities that they get from the procurement processes. On the other hand if everybody is looking for financial IT system, why do we all have to go and do different things, maybe there is a way of setting up a common standard and making that work. So we are going to look at all of those possibilities, there is no computation that I want to put forward now, its safe to send out the signal that hopefully in three to six months time, life is not going to be easy to extract free rands from the state and we owe that to the South African public and the taxpayer to ensure that money is spend in the right kind of way.

The 2000 number is the number of people we are looking at currently and clearly if there is a case to be pursued the law enforcement agencies will actually do that. Laying the foundation of the NHI and spending. The NHI is something that we agree on as an end objective and we will now start engaging with the different government entities to see how on the one hand the revitalisation of the health system can take place and how that fits in with the kind of foundation that a good NHI system will actually require as well. So there is work going on at a number of different levels and it will take a few months before we can clarity exactly what the costs are and where that goes. If you don’t mind, I’m going to excuse myself and thank you very much. You are in excellent hands with the deputy minister.

Journalist: The AG has lifted the lid on sort of procurement fraud and corruption, is there an indication to what extent this has affected the fiscus, what is the overall figure of monies lost to the state. Would this be fair to say that this is the tip of the iceberg, given the fact that this is a nebulous sort of region? Thanks.

Journalist: Deputy Minister in the previous administration we had issues of under spending by provinces. Provinces were given money and they only spend at least 60% to 70% of budget, are we going to be see more of that in this coming budget and my second question is with regards to global recession, how is that affecting government spending in total, are we going to foresee less government spending in the future.

Journalist: Deputy Minister, I wonder if you can tell us from a political perspective whether this report gives you any insight into the kind of value for money one has with 9 provincial administrations and perhaps whether you are getting any kind of ideas what kind of value the 9 provincial legislatures and oversight that you have at a provincial level are actually delivering.

Journalist: Do you have a figure for the annual procurement budget of government, if not the total government then national government, whatever you’ve got. Thanks.

Nhlanhla Nene: Thank you, Kenneth will deal with the figure if you don’t mind. The AG report on procurement irregularities also the exact amount, a number of amounts have been given, but it’s a matter that is being looked at, different departments are taking the respective officials to task, those that are involved because some of them their issues have since been clarified and they were not entirely at fault, but that matter is with the departments, both processes are going to be unfolding. Firstly at departmental level, people will have to be dealt with and if there is also any criminal act that has been committed, those people will have to be charged.

The issue of under spending, we are unlikely to see any under spending in terms of this report we have the direct opposite this time, but the quality of that spending which takes us to the next question as to what has been debated in the report. One of the things that you would know, the Auditor General is now going to be auditing non financials as well to be able to see whether we are getting value for money. One of the things we said yesterday that even though we have seen rising expenditure in areas like education we still are not able to see improvements in that level, but its one of the things that have been highlighted and the departments are actually working on that to ensure we are spending more. Inaudible
Some research has shown that we are actually benefitting less then the countries that actually spend less resources than ourselves, so it’s a matter that’s being taken seriously and I would imaging use this as a tool, our legislatures are going to assist us in making sure we are able to achieve that. Recession, whether that will have an impact on government spending, indeed it will and that its why we are embarking on a process of reprioritising, because even though we don’t intend to spend less, but a number of things are going to happen, one in order for us to be able to meet our objectives we are going to be borrowing more than we have in the past, that would actually put a squeeze on our budget, because servicing that debt would be costly. One of the things that we said repeatedly is that we are not going to compromise our priorities like health, education and social development.
Mr. Brown, the figures with regards to procurement.

Kenneth Brown: Provincial spending in total in 2008/09 was about roughly about  R263bn, In total, the budget for provinces, I am just giving you for province, of that about 55% is personnel so they spent roughly around R120bn, the rest would be scope for procurement, so it depends what you say. If, let me break it down further, of that you have got capital spending which is roughly last year alone was about R22bn

(Inaudible), if you add another roughly about R6bn for (inaudible). Roughly that is to the order of about R50bn, so only in provinces, at least a the provincial level, we are looking at a total of very close to about R80bn that could be relatively large areas of procurement, I won’t be able to give the extent of what it is at a national level.

Nhlanhla Nene: As indicated firstly the amounts as I did also indicate, so you won’t be able to tell whether that’s just scratching the surface, but also that, I mean having seen what has come out of the Auditor General’s report, departments are then taking it up on themselves to make sure they take the necessary action against those staff members that are involved. But other than what the AG has unearthed, it would be difficult for us to say whether there is more underneath.

Journalist (inaudible):
Nhlanhla Nene:
I actually don’t get the just of your question because, if we say this is what the AG has identified and this is our instrument of actually telling us whether there are shortcomings in system and if anything else is discovered through other means, government will take the necessary action.

Kenneth Brown: There is a bit of a bigger picture here, if you have listened to the Minister, the Minister said, a fax machine that cost a R1000, is costing government R4000, so it goes beyond even that particular kind of report that you are talking about.

Nhlanhla Nene: You see one of the things we are saying, this expenditure review, even at national departments, not only in provinces, this expenditure review is actually meant to assist people exercising oversight, to be able to see where figures just don’t  gel, and to be able to dig deep into it, I think it’s important, I agree with you that should signal that there are even deeper problems and all departments are actually urged to take this quite seriously, but also when the non financials are also audited to see how, then what is the impact also of the money we spent on whatever department that also becomes an issue.

Journalist: I’ll just follow on Deputy Minister because I don’t know if you are aware, I’m sure you are but I mean the SCOPA hearings for example into the AG’s on entities doing business with government departments and abalone confiscation processes and the N2 Gateway and various others have yielded really unsatisfactory results, in fact what’s happened is that you’ve had mendacious officials appear before SCOPA and lie blatantly about steps that they are taking against errant officials, and I would really appreciate your comment on this because you are looking bang for back, surely parliament’s own role as an oversight mechanism is at issue here, what needs to happen?

Journalist: Deputy Minister, Donald Presley from Business Report, the focus on road infrastructure, there seems to be increased spending in the provinces but is this spending enough to keep the roads maintained or are we going backwards, secondly, the rand reform matter, are we putting enough money into land reform, 30% target program ?

Journalist: Minister, can I just get some clarity on your remarks saying that government is likely to overspend?

Nhlanhla Nene:
SCOPA hearings are yielding the desire to (inaudible). In time to come we will see what’s the plans. The issue of overspending, Lindani has referred you to the page that shows you the magnitude of that, I don’t know whether Mr. Brown wants to talk about that as well.

Kenneth Brown:
It is roughly about R5.8bn, the overspending, R3.5bn of that is in Gauteng and R2.3bn of that is in KZN, it’s predominantly on those two. In the case of Gauteng it is basically in the Public Works Department that they have overspent that, but is has got to do with Gautrain, it was merely just a financing matter, they have moved have moves faster with the project than anticipated, and then they are financing actually that part basically this year.

The overspending in both KZN and in Gauteng the other parts has got to do with the pressures they are faced within health and in education and currently they are collectively taking steps to resolve those, if you can recall the information that you sometimes also bring to us, MEC Mahlangu in Gauteng is taking active steps actually to realign that entire budget so that the challenges that are faced with by the province are addressed. In KwaZulu-Natal the Provincial Treasury is assisting physically actually the Department of Health to really deal with the overspending that is there, but what one is expecting in any case is a realignment of these budgets through the savings exercise, here what we are talking about, the R2bn you are talking about, it’s not R2bn that will revert back to the coffers, but it’s the R2bn that will be redirected to deal with these kinds of precious that are there in those budgets.

Journalist: The Minister said 2000 people have been found out in various forms of fraud, in answer to Andre’s question, he seemed to suggest that was a new group but with your discussion with Wendell it seemed to be the group already uncovered in the Auditor General’s report, was the Minister referring to 2000 people that we did not know about before now, or was he referring to the Auditor General’s report.

Nhlanhla Nene: I would want to believe that is an all encompassing figure because it says beyond, I mean 2000 includes the ones uncovered by the Auditor General, the Auditor General’s one was not a large number, it was just a few officials that are doing business.

Nhlanhla Nene: About 600, but the 2000 also includes the 6000 because the investigation deals with that.

Journalist (inaudible)

Nhlanhla Nene:
Look like I indicated earlier, I think this is a wakeup call, you pick up something like that in the Auditor General’s report it shows that there are problems and I think it’s important as government that we do not rest and make sure because particularly in the light of our systems, making sure that our systems make sure that we pick up those things in future because we could be dealing with this 2000 in future, we still have more but it’s important that we also begin to close the gaps that that might, that is why we are talking about  the modernization of the systems, the issue of the integrated financial management systems that we want to put in place which is already underway, it’s to make sure that we are able to identify those as and when they arise.
Journalist: Deputy Minister can you give us sense just in terms of revenue collection so far, where are we at this point in time, do we still stand by the figure announced earlier in the year of 60bn.

Nhlanhla Nene: Yes we still stand by that figure of about 60bn but that is a projection, things could be worst, things could turn out for the better, but at the moment that’s the projected revenue shortfall.


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