Fourth Quarter Expenditure Review: National Treasury briefing

Meeting report

The Chairperson reported that this meeting was the beginning of the Standing Committee on Appropriations' work around the evaluation of the Public Finance Management Act (PFMA) Section 32 Quarterly Expenditure Reports, to identify the departments that needed to be invited to public hearings.

At the outset it was noted that all Departments were referred to by their names as at March 2009 – in other words before the new configurations took effect.

Mr Robert Clifton, Project Coordinator: Technical Assistance Unit, National Treasury gave an introduction to his briefing, and noted that the National Treasury was interested in discussing the “big picture” issues, both sectoral and functional, with the Committee, as they related to the strategic priorities identified by government. He would highlight the increased spending pressure on the education sector and the urban development and infrastructure services sector.

The Chairperson interrupted Mr Clifton at this point and queried the focus of the presentation. He remarked that perhaps there had been a misunderstanding as to what the Committee had wanted. The Committee did need all the information in order to decide which departments to invite to public hearings. He, for instance, had questions on the Department of Health, which would apparently not be covered in this presentation.

Mr M Swart (DA) agreed fully with the sentiments expressed by the Chairperson and added that the Committee could not decide on problem areas if they did not have a full presentation.

Ms B Ngcobo (ANC) asked when the Committee could be briefed on all the information, to allow the Committee to proceed.

Mr N Koorhof (COPE) asked what the time pressures were and when National Treasury would be able to complete the full review to allow the Committee to fulfill its obligations.

The Chairperson stated that this was a matter of timelines. He understood that the National Treasury had this information as early as the last month but that the report took time to prepare. He said that perhaps that Committee had been too lenient. Since the PFMA set out clear timelines, the Committee needed to be informed on the details of the delays.

Mr Clifton clarified that the National Treasury (NT) had not only covered a handful of departments. All the departments were covered in the consolidated expenditure review, with indications of where there was overspending and under spending. He suggested that the National Treasury should brief the Committee in detail, over a couple of days, and that NT could schedule this. He asked the Committee to recommend how it wished to proceed.

Under the heading of Improving Monitoring and Reporting, Mr Clifton stated that National Treasury had worked closely with the Joint Budget Committee (JBC) to produce more detailed Section 32 reports, as required by the JBC. National Treasury had accordingly developed new expenditure reporting system that was more closely tied to the Appropriation Bill.

Mr Clifton said that the new internal National Treasury project was reviewing departments' vote structures according to internally developed best practice guidelines. It was very difficult to find guidelines on programme budgeting. Most countries would adapt the guidelines to their own needs. The guidelines National Treasury had developed could be used for reference, as they reviewed the programme structures. The focus would be on the core functions while catering to the strategic goals of departments. He highlighted that the role of the programme manager would be taken into account during the review. At present, most of the authority vested in the accounting officers, and if the programme manager were to be given more power, this might require an amendment to the PFMA.

The deficiencies of the current Consolidated Spending Overview were reported as being lack of information about spending efficiency (specifically the lack of comprehensive performance indicators and value-for-money assessments) and the lack of expenditure detail below programme level  - in other words, at sub-programme, project and activity levels. The report was furthermore limited in terms of the service delivery evaluation. Related to this, he raised the issue that public entities were treated differently under the PFMA. There were over 300 such entities. He highlighted that the 2008/9 National and Provincial Adjusted Budget amounted to R637,4 billion. Conditional grants and transfers to public entities amounted to R258.7 billion. This showed that a significant proportion of funds was allocated to these entities.

Mr Clifton reviewed a selection of departments and the underlying reasons for their spending problems. He reported upon the Departments (as they were then named) of Home Affairs, Foreign Affairs, Public Works, Health, Labour, Correctional Services, Agriculture, Water Affairs and Forestry, and Housing.

Mr Swart noted that a large proportion of the budget went to local government in form of Municipal Infrastructure Grant (MIG) and equitable share allocations. He added that the Committee did not usually see this detail. He asked if National Treasury used zero-based budgeting.

The Chairperson asked that Members reserve their questions until the end.

Ms Julia de Bruyn, Chief Director: Education and Related Services, National Treasury reported that this sector covered the Departments of Education, Arts and Culture, Sport and Recreation, and Labour. These departments were characterised by transfer dominance. The implications of having transfers as such a large proportion of the budget was that spending was reflected at national level but did not necessarily apply to the transferred funds. Although all departments were handled in a similar way; departments dominated by transfers were very different in structure. She reported specifically on spending for Community Libraries, the National School Nutrition Programme, the 2010 FIFA World Cup Stadiums Development Grants and Umalusi. Umalusi was highlighted as an example that public entities, as distinct from departments, would collect revenue and generate surpluses, which they were allowed to retain and use. For this reason the public entities were more complex than departments and more difficult to monitor. She finally presented the general spending efficiency and spending pressures for the sector.

Mr Mahesh Fakir, Chief Director: Urban Development and Infrastructure Services, National Treasury, reported that the Urban Development and Infrastructure Services sector comprised the Departments of Transport, Housing, Water Affairs and Forestry, Provincial and Local Government, Minerals and Energy, and Communications. He briefly reviewed the departments' spending trends, by way of graphs, the reasons for under spending and the spending pressures the individual departments faced.
 
Discussion
Mr Swart stated that there was a need to engage with every department on this level, particularly focusing on the detailed information on transfers to public entities and local authorities.

Dr P Rabie (DA) stated that the Minister of Finance had reported on the lack of revenue into the State coffers. National Treasury had highlighted many departments whose expenditure had trebled over a six-year period. He expressed doubt that their spending needs could be satisfied under the present recession. He opined that 2010 would be a challenging year for the Government and the Committee.

Dr Rabie noted the reference to nuclear possibilities, on slide 43, and asked if the nuclear programme was ongoing, or if it had been shelved.

Mr Fakir responded that Eskom was a public entity and had been allowed to become the single buyer of electricity. In most countries there was separation between the electricity buyer, the grid operator and those who generated the electricity. Eskom was both a grid operator and generator, and this created a difficult situation. Many foreign companies wanting to operate in South Africa said that this was an unfair system, as it created conflict of interest in the adjudication of the tenders. The current Department of Energy was moving away from this situation, and was drafting regulations that would separate the grid operator and the buyer in independent legislation.

He said that bids were received for nuclear energy provision, but the process was shelved. The same applied to Independent Power Producers (IPPs). Both these groups complained that they were being adjudicated by Eskom, who was acting both as player and referee. Until the separation of generator, grid operator and buyer as achieved, energy would be higher-priced, due to the many risks in an insecure policy and regulatory environment. Nuclear power would be more expensive than the current coal-powered system. South Africa's prices were currently the lowest worldwide.

Mr Fakir added that Eskom would choose pricing comparable with coal-powered electricity generation because it could not guarantee that the National Energy Regulator of South Africa (NERSA) would allow a higher price to accommodate the increased price of nuclear fuel. The bids received meant that own funding was required by the contractor. Government would not need to pay, but would need to provide a guarantee on pricing. This differed from what Government had done already for Eskom, where it had provided loans to enhance the Eskom balance sheet.

Mr Fakir said that although nuclear power generation was shelved, there was still potential for resuscitation, if Eskom was no longer able to borrow and obtain loans from the fiscus. This might become pressure for a guarantee, rather than spending pressure.

The Chairperson remarked that electricity rates had just been raised by 31%.

Mr Fakir responded that South Africa still had the lowest rates for electricity, and that the second lowest price worldwide was about triple the current pricing, per kWh, that South Africa was charging. He offered his opinion that the actual regulator between supply and demand was price. Because South Africa’s price had been low, there had been excessive demand whilst there was inadequate supply capacity.

Mr Koornhof observed that National Treasury had been presented on the situation in the past year, and asked what was currently going on in the departments. The Committee must have this information in order to appropriate funds, to get efficient spending and value for money. He asked if there was more recent information available to assist the Committee in its decision-making on appropriations.

Ms de Bruyn responded that the Committee would have to advise National Treasury how Members wished to see the information. There were 34 national budget votes and National Treasury was divided into sectors. The Committee would have to decide which sectors they could accommodate on one day, and National Treasury would request the relevant officials to present the details on the departments in those sectors.

Ms de Bruyn answered the earlier question on timelines by indicating that 30 June 2009 was the end of the first quarter of the 2009/10 fiscal year. The departmental expenditure report was due on 15 July 2009. National Treasury then did a number of accuracy checks and preliminary evaluations, which would take about two weeks. She suggested that, in view of the limited time available, National Treasury could thus report to Parliament by the end of July 2009, and could liaise with Parliament on the details of that meeting.

Mr Fakir said that his personal view was that examining both the past and future were important. He used the example of the De Hoop Dam, where National Treasury had never adopted a punitive stance to cut funding, in light of under spending on the project, but had rather reasoned that people needed the water and that the project should proceed. The simple solution to cut funding in instances of under spending was not always the most practical.

The Chairperson responded that Members had questioned why there was under spending. He added that the Department of Water and Environmental Affairs (DWEA) would be best placed to provide an answer to this question. Particularly under the current circumstances, Government did not want to waste funds when there was also budgetary pressure. The question was asked in the context that departments must spend the resources given to them.

Mr Fakir agreed, but reiterated that the merits of every case had to be individually considered. Referring back to the De Hoop Dam, he noted that there were geological problems. National Treasury could not simply take away the funding if there was good reason for the under spending.

The Chairperson responded that in future, the Committee would not try to deal with the whole report in one day. He proposed that one National Treasury sector should be addressed each day, to ensure that Members could do justice to the process by fully examining all issues.

Ms Ngcobo added that most Committees were planning two to three day workshops after recess, to engage with departments on various issues.

The Chairperson responded that the Standing Committee on Appropriations would follow suit.

The Chairperson made a comparison between the Standing Committee on Appropriations and the Standing Committee on Public Accounts (SCOPA). Whereas SCOPA received Annual Reports and the Auditor-General’s reports, the Standing Committee on Appropriations received quarterly reports on expenditure and were thus privy to more updated information.

The Chairperson referred back to his earlier remark about reports being released in time. He noted that the PFMA had specific provisions about timelines. The Committee needed the information timeously to examine whether there was over expenditure, under expenditure and the quality of spending. Unfortunately the Committee could only monitor after this information was complied into reports by National Treasury.

Mr Swart made the point that the Committee would not be able to make decisions about the future if they did not know about the past. Members used this past information to make decisions on departmental spending, and if a department had not spent in a certain area, the Committee could decide that the department should not receive more funding for that area. This was particularly pertinent in light of the recession.

The Chairperson responded that members should be mindful of the fact that spending in the fourth quarter was often inflated, but decreased sharply in the first quarter of the new fiscal year. He pointed out that in view of the Medium Term Expenditure Framework (MTEF) the Committee would like to see more continuity across quarterly spending. Departments should spend according to the planning outlined by the MTEF. The Division of Revenue Act (DORA) was also clear on when and how departments should be spending, yet the expenditure review detailed tenders that were not completed in time and other delays in spending. He said that Members would have to ask departments if they took the provisions of the DORA into account.

Ms Ngcobo noted that National Treasury had stated that there was not enough information around municipalities. She asked what information was available from provincial and local government to address the questions raised.

Mr Fakir responded that the Department of Co-operative Governance and Traditional Affairs (formerly Department of Provincial and Local Government) had a large detailed database on MIG funded projects, including project descriptions, costs, what portion of the cost was funded by MIG, the desired output of the project, and which phase the project was currently in. There was a wealth of information in that database, so that it was possible to request any necessary information on particular projects from that Department. The Committee could compel delivery of the information. At the moment there was very detailed information on between 6 000 and 9 000 projects around the country.

He added that the Department of Human Settlements (formerly the Department of Housing) had the same system, and it was likely that they would give Parliament more information than they would be willing to provide to National Treasury.

Ms Ngcobo asked what happened to a surplus generated by public entities, and what National Treasury did in that instance.

Ms Ngcobo referred to the over spending highlighted in the presentation, particularly for the Department of Housing. She asked if there was value for money from this over spending. In the housing sector, the quality of houses built was an issue. She felt that the Committee should look into that and that National Treasury could make enquiries of the Department.

Mr Fakir responded that this was a matter that National Treasury had taken up with the Department. There was an anomaly in that whenever homes were privately built, the National Home Builders Registration Council (NHBRC) was always involved, charged its fee, and ensured that the contractor was doing the job properly. National Treasury wanted every Reconstruction and Development Programme (RDP) State-built house to go through the same NHBRC process to assure quality control. Taxpayers could not afford loss of value if the houses crumbled after only a few years. The NHBRC required a registration fees of a few hundred rand for each home, and some of the provinces were starting to get NHBRC involved.

The Chairperson stated that it was clear that coordination was needed between this and other Committees, so that all could benefit from the information presented to this Standing Committee on Appropriations during the hearings with departments.

Mr J Maake (ANC) remarked that the National Treasury process of appropriating budgets to departments only went down to the programme level, but did not include sub-programmes and activities. He asked whether National Treasury had the power to check the programmes, cut funding to them, or compel a department to make changes. If this existed, he wanted to know how it was exercised. He also asked how the problem of allocations only down to programme level would be dealt with.

Mr Maake noted that delays in contracting with service providers were presented as a normal cause of under spending in departments. He asked what the National Treasury intended to do about this and what the real reason for this problem was.

Ms de Bruyn replied that National Treasury was aware that many explanations for under spending sounded very similar to each other. However, this related to how departments were working. They often underestimated how long it would take to fill a vacancy. Sometimes the vacancies resulted from slightly different causes. This was illustrated by the Department of Labour, whose proposed salary levels for labour inspectors were too low to attract suitable candidates. National Treasury suggested a solution of employing less labour inspectors, but at a higher salary level. The Department of Labour then had to refer back to the Department of Public Services and Administration to re-evaluate the job, meaning that the process took even longer.

Mr Maake was horrified to see, from slide 22, that there had been under spending by Gauteng and Kwazulu-Natal on the National School Nutrition Programme (NSNP), stating that the learners were simply not being fed.

Mr Maake referred to the suggestion that there be a special unit in each of the departments to conduct oversight of their public entities. He asked what the current situation was, and wondered if this suggestion, which would involve a direct report back to the departments, would not compromise objectivity.

Ms de Bruyn stated that that public entities were somewhat autonomous and reported directly the Minister, and not to the Director-General of the relevant department, and were adamant that they should not report to the Director General. A person from the Office of the Minister was therefore needed to help conduct the oversight of the public entities under the purview of the department. This separation had resulted in the oversight role over the public entities not having been played. She also pointed out that although the size and individual arrangements may differ, public entities all shared the same governance arrangement, which could present the Minister and departments with challenges in oversight. A case in point was the Department of Arts and Culture (DAC), whose public entities were situated all over the country, presenting logistical travel problems in carrying out the monitoring.

National Treasury could assist by providing the Committee with information of how many public entities fell under every individual vote, and the amount allocated to them. Ms de Bruyn was unsure how the Committee wanted to deal with the constitutional entities set up under Schedule 1 of the PFMA. They were unique in the sense that they did not report to any department or to National Treasury, but were to report to Parliament.

The Chairperson responded that National Treasury should list all the entities, and categorise them according to their reporting arrangements. This was important, as they would be heard before other Parliamentary committees. It was a concern that departments were not able to get accountability reports from certain public entities.

Mr Fakir responded that the Assets and Liabilities division of National Treasury did look at State Owned Entities’ (SOEs) management in greater detail. This related mainly to the PFMA Schedule 2 and Schedule 3 entities, which included most of the major public entities. They would get information on corporate plans, annual reports and financial statements.

Mr Maake asked that National Treasury expand upon the statement, during the presentation, tat there had been a "refusal to include township establishment infrastructure in the housing grant".

Ms R Mashigo (ANC) stated that the issue of libraries had been on the table for a long time. Since the lack of libraries really affected children, she asked what interventions the National Treasury could make.

Ms de Bruyn responded that the libraries grant started in the 2007/8 fiscal year, after National Treasury had recommended funding, being aware of the importance of the libraries. Ms de Bruyn added that National Treasury often recommended a phased appropriation to departments, giving incremental transfers over time, rather than having a single large appropriation, although departments would repeatedly contend that they would be able to spend the full appropriation. The libraries grant started at R163 million in 2007/8. The Department of Arts and Culture complained bitterly that this was insufficient. The 2008/9 appropriation was substantially increased to R344 million. In this particular instance, where National Treasury was aware that the relevant Department struggled with spending, a person from the Technical Assistance Unit of National Treasury would work in the Department and help build spending capacity. She asked the Committee to be mindful of this problem and urge departments to carefully consider whether they were prepared for the responsibility that came with funding, when making their requests. National Treasury could only continue to make recommendations. The Directors General were the accounting officers, and needed to explain these issues to Parliament.

Ms Mashigo asked if the National Treasury was able to hold back funds when it came to public entities. She also queried the extent to public entities’ surpluses were interrogated.

Mr Fakir clarified that the National Treasury did not give funds to government departments, but merely made recommendations to the Minister and the Ministers’ Committee on the Budget. Cabinet allocated, and Parliament appropriated. In effect this meant that Cabinet and Parliament gave the money to departments. Every time National Treasury reported over expenditure, which was unauthorised, this would have to be approved or authorised by  Parliament. The PFMA and Appropriation Act were also both passed by Parliament.

Ms de Bruyn stated that this was why the National Treasury did the quarterly reviews and consistently warned departments about their concerns. The National Treasury rarely, if ever, recommended that money be withdrawn from a department. She added that she personally always felt it unfair that the people were effectively being punished if a department did not deliver. The general approach in National Treasury was to put pressure on the departments to deliver. The withdrawal of funds would have far reaching consequences for the people and was an almost irreversible action. It was not an easy process to decide to allocate more money. It was equally difficult to recommend taking money away. It was a difficult balance to strike.

Ms Mashigo referred to the progress report on the De Hoop Dam, in slide 36. This was an important project that would benefit the most rural and disadvantaged people. She asked if National Treasury could explain the social aspect, to provide the Committee with background information for the meeting with the Department of Water and Environmental Affairs (DWEA).

Mr Fakir replied that the detail of this was better left to DWEA. There were large pipeline systems from the dam that supplied raw and potable water to the mining activities. This was priced separately because the mines paid for the pipeline. The fiscus would have to pay to provide water to other areas, as this was done for poorer people who would not necessarily be able to pay for the expansion through tariffs. There was a government grant for the bulk pipeline as well as the water treatment plant. This would be supplied to the municipalities, who, in turn would pay for the water received. The municipalities would then charge individual households for the reticulation. He reiterated that DWEA should have full details.

Ms Mashigo asked if there were clear procurement policies.

Ms de Bruyn replied that the National Treasury encouraged the use of the Preferential Procurement Policy Framework Act (PPPFA) as the overarching legislation in the development of procurement policies for public entities and departments.

Ms Mashigo referred to spending by the Department of Foreign Affairs on the Ekhaya Hospitality Centre at the 2008 Beijing Olympic Games. She asked if this spending fell within the fourth quarter and, if so, what action was taken when the money could not be recovered.

Ms Mashigo also felt that more information on the expenditure of the Department of Correctional Services was needed. She asked what the Treasury's response was to the overspending due to increased overtime payments to guards.

Ms Mashigo noted that, outside of overspending on bus subsidies, the Department of Transport had generally under spent. She sought more detail on this Department’s under spending trends.

Mr Fakir replied that it was correct that the DoT had overspent on bus subsidies and under spent on the majority of their other programmes. A number of programmes in this Department had the sole output of producing strategy documents, some of which had been ongoing for many years. The detail of what the spending was actually producing was worth examining. With regard to the Public Transport Integrated System (PTIS) jointly administrated by the DoT and National Treasury, National Treasury had, upon insistence by the Director General, allowed the DoT to run the grant themselves.

The Chairperson referred to the review of the monitoring and reporting processes. He stated that once there was a clear document, it might be necessary for the Committee to have a workshop that would assist Members in ensuring that departmental programmes were in line with the strategic plans.

The Chairperson referred to Section 6(2) of the PFMA and noted that national Departments simply transferred funds to public entities, and did not revisit the spending of those funds by public entities. He saw this as a problem. The NCOP’s Select Committees on Finance and Appropriations would go into detail with this information.

The Chairperson said that the National Assembly needed to discuss how to keep track of expenditure, as a way to improve mechanisms governing the approval of budgets. He commented that transfers and expenditure were not necessarily mutually exclusive. In 2008, for instance, Eastern Cape received over R1 billion for housing but spent only about 30% of that. Those provinces that recorded close to 100% spending may have transferred their allocated funds to other provinces and local government. When the committees conducted visits, there was no tangible evidence of spending, and this was due to the fact that a transfer had been reported as spending. Clearly, approving the transfers was not enough, and the Committee had to find a way to deal with this. The Money Bills Amendment Procedure and Related Matters Act, in section 4(4)(d), stated that the Committee also had to produce an expenditure review report and the Committee must consider how these would be used.

The Chairperson asked if the funds currently allocated to the 2010 Soccer World Cup would be redirected to the fiscus after the event was concluded, and whether they would be reallocated to relieve stressed areas in government spending.

Mr Fakir responded that the reallocation of the stadium money would bring some relief. This was not an ongoing grant, and when the projects were completed, the funds could be used for something else. This also applied to other large and specific infrastructure projects, such as Gautrain and the De Hoop Dam. This differed from infrastructure programmes such as housing and MIG projects, where the funding was ongoing.

The Chairperson stated that water was essential to life, and for this reason the Committee needed to engage with the Department of Water and Environmental Affairs concerning the alignment problems that were leading to water shortages in South Africa.

Mr Swart pointed to the numerous reports on the bad quality of housing built by the government and the large-scale need for repairs of these houses. He believed that municipalities held millions of rands in housing reserve funds that they were not allowed to use. He asked if it was possible to allow municipalities to use that money to repair houses that were badly built.

Mr Fakir did not have the authority to see what those reserves were at present. National Treasury was gearing its local government section to address this, now that the relevant Municipal Finance Management legislation was in force. The Intergovernmental Relations Unit would be able to answer what was in municipal housing reserves, and the National Treasury could forward that response to the Committee. He added that another aspect of the problem concerned accreditation, because municipalities were not accredited to act independently on housing. National Treasury had continually suggested that it should be allowed to directly appropriate money to municipalities, who would then undertake the spending and report on performance. This had been an ongoing battle and hopefully the Committee could address the issue.

Mr Clifton concluded that the National Treasury welcomed the idea of a workshop and could arrange that for August, but would liaise further with the Committee staff.

The meeting was adjourned.