The Fourth Quarter Expenditure Report revealed that several departments had underspent on its 2008/9 allocations, and they were asked to account for the underspending to the Committee.
The Department of Water and Environmental Affairs (DWEA) explained the composition of R505 million that had been underspent. The bulk of its underspending was due to the delay in the completion of the De Hoop Dam (as Phase 2A of the Olifants River Project). The money had been rolled over in two financial years, but despite the fact that the Department had then made application to National Treasury to have the funds reallocated to other projects, this was refused and the funding was returned to the National Revenue Fund. Due to its cash based accounting system, payments were still pending to the Water Trading Entity that implemented the project and this accounted for the rest of the underspending. This matter was under discussion with National Treasury as there were still invoices to be paid.
Members expressed great concern about the incomplete state of the De Hoop Dam, and noted that the explanation seemed to be attempting to shift the responsibility to National Treasury. National Treasury gave the reasons why the request for reallocation was refused, and asked that Members not place too great a significance on this project, in light of the fact that elsewhere the Department’s spending track record was quite good. In response to this the Department agreed to report to the Committee on the detailed timeline and planned expenditure of the project. As a general issue, the shifting of funds within the budget was highlighted as an area of concern. Members queried this as a trend they had observed in the Department and felt that it was an imprudent and unacceptable financial practice, even though it was done according to the prescriptions of the Public Finance Management Act (PFMA). Members said that the issue would be reconsidered in the light of what came out of the First Quarter of 2009 report, which would be heard later in the month. The Department was also requested to include an explanation of capacity issues in the report, although it explained briefly that there was a general scarcity of skills, which was further hampered by loss of skills to the private sector, and outlined some of its retention and training strategies.
The Department of Agriculture, Forestry and Fisheries (DAFF) had underspent to the value of R 89 million. It reported the major component of as arising from the stalled Ilima/ Letsema project. Due to the complexities of administration, it was necessary to get the assistance of the Development Bank of South Africa and the Department and Bank had been unable to reach an agreement on the project. Consequently, the funds had remained unspent. The rest of the amount was composed of funds the Department was unable to spend on classical swine fever claims, ongoing renovations of departmental buildings, compensation of employees, due to vacancies, and misclassification of items in the goods and services allocation in the budget. The Department noted that it had done a reallocation of money earmarked for the Ilima/ Letsema projects to some Provincial Departments of Agriculture, and would ensure the money was used in food production projects.
The underspending on the buildings would be used in this year, and the disaster relief funds would be rolled over. Members asked why the funds for compensation of employees were not reflected as current expenditure, questioned the role of the Development Bank, asked whether the disaster relief funds had to be used for swine fever claims, in general commented that disaster spending was slow and inefficient, and agreed that the Department should provide a report on the allocations to provinces. National Treasury commented that the amount of underspending, in relation to the entire budget, was not really out of line. The Chairperson expressed the hope that the revisions to the Public Finance Management Act would allow for greater accountability of accounting officers who did not spend allocated funds.
Fourth Quarter Expenditure Reports: Departmental briefings
The Chairperson remarked that the hearings would focus on the Fourth Quarter Expenditure report, in terms of Section 32 of the Public Finance Management Act (PFMA). The departments had been called to account for some percentage of underspending on their 2008/9 budget. The Committee wished to find out why the underspending had occurred. He noted that the underspending by the Department of Water and Environmental Affairs was very important, as this department was responsible for providing this most basic resource to communities across the country. The problems the Department had had in delivering water to communities had been widely publicised. The Committee wished to hear what were the problems and challenges the Department experienced, and what was being done to address this.
Department of Water and Environmental Affairs (DWEA)
Ms Nobubele Ngele, Acting Director-General, Department of Water and Environmental Affairs (DWEA), stated that the Department was asked to respond to the reasons for underspending by R505, 047 million on its 2008/9 budget. If the Department was unable to respond to any issues at the meeting, then she undertook to revert to the Committee with the answers.
The Chairperson stated that he was aware that, in terms of Section 43 of the PFMA departments were allowed to use a virement of up to 8%, but pointed out that 8% still amounted to a lot of money. He felt that R500 million was quite a large amount of money, considering the challenges with the De Hoop Dam.
Mr Onesmus Ayaya, Chief Financial Officer, DWEA, indicated that the letter Parliament had sent made reference to the adjusted budget estimate of R7 036 616. This was administered through the programmes of the Department, namely: Administration, Water Resource Management, Water Services and Forestry. The Forestry programme was set to move out of the Department to become a functional area of the new Department of Agriculture, Fisheries and Forestry. The bulk of the under-expenditure was under the Water Resource Management programme. The funding for the Olifants River Project was managed under this programme.
Mr Ayaya reported that for 2007/8, an amount of 250 million was allocated and earmarked for the De Hoop Dam (Phase 2A of Olifants River Project). In addition to this amount, the Department requested a roll-over of R260 million from the 2006/7 financial year, to the 2007/8 financial year, which was approved. However, by the end of 2007/8, the funds were not fully spent and the Department again requested a roll-over of the R 260 million for the 2008/9 financial year, which was agreed to. By the end of 2008/9, the amount allocated for the Olifants River Project was R 800 million in total (before the roll-over). This was comprised of R550 million that was allocated for Phase 2A, and R250 million allocated for Phases 2B to 2G. The roll-over (R 260 million) then came in through the Adjustments Budget in October 2008
By the end March 2009, the Olifants River Project should have utilised R1. 06 billion. The Department resolved, in discussion with the National Treasury, to utilise the R260 million on water services related projects in the 2009/10 financial year as opposed to asking for a new allocation. Based on its quarterly monitoring of expenditure, the Department was by then aware that it would be unable to spend the R260 million on the De Hoop Dam.
Disbursements of the funds for the De Hoop Dam were not made as a result of the delays in the conclusion of the negotiations to finalise a Memorandum of Agreement with the 23 different mines. The Memorandum recorded the principles for the sharing of the project costs, and was essential to conclude the negotiations prior to the commencement with preparations for project implementation.
The Department requested the National Treasury for permission to utilise the funds that could not be spent on this project for other projects: Nandoni and Inyaka water treatment works and the Hluhluwe regional water scheme. Application to do so was made on 18 August 2008, to be presented to Parliament for approval in the Adjustments Budget in October 2008. The request was not approved. The request was formally declined on 21 March 2009.
The Department was consequently unable to spend the R260 million because National Treasury had refused the request and thus the funds remained earmarked for the De Hoop Dam. He noted that the De Hoop Dam project was classified as water resource management and the other projects, Nandoni, Inyaka and Hluhluwe, were classified as water services. The Department had thus essentially proposed to shift the allocation from water resource management to water services. Had approval to do so be given in time then the money would have been transferred, and the R260 million would not have been classified as unspent funds.
He then explained how the R1 billion was spent. Due to the Department’s cash based accounting system, the Water Trading Entity (WTE) that was the implementer of the spending: had done its spending, and later submitted an invoice to the Department to be reimbursed for the equivalent sum of the costs. The Department did not transfer the money in advance.
He noted that VAT had to be subtracted from the R1 billion as this was taken as revenue by the WTE. He explained the ramifications of this (see attached presentation).
The Chairperson asked if the R260 million came from the resource side.
Mr Ayaya responded that it was earmarked for the resource side.
Ms M Mashigo (ANC) asked for clarity on whether the funds were redirected.
Mr Ayaya clarified that out of the R1 billion, R260 million was a roll-over from 2007/8. This was the second time the amount had been rolled over. The water resource management De Hoop Dam project was not its only capital project. The Department was also in charge of the Nandoni, Inyaka and Hluhluwe water services projects to serve the community with potable water.
When the Department became aware that the negotiations would not be concluded in time and that they would not be able to spend the R 260 million on the De Hoop Dam, it requested the funds for use on the water services projects mentioned, which were close to completion. He reiterated that if approval had been given, the Department would not have recorded underspending of R 505 million.
He further clarified that the money that was not spent had been returned to the National Revenue Fund, and remained on the appropriations statement. The unpaid invoices for R227 million were earmarked funding for the De Hoop Dam not included in the roll-over. In this financial year, the Department would have to request this amount from National Treasury, in order to pay these invoices during the 2009/10 financial year.
Dr Cornelius Ruiters, Deputy Director General: Infrastructure, DWEA, noted that work had been done using the funds allocated to the Department. The particular water services projects were located in Limpopo, Eastern Cape and Kwazulu Natal, all of which were in serious need of water services. The Department would continue the implementation of these projects to provide water to these communities. The De Hoop Dam still faced the fundamental problem around negotiations with mines. The De Hoop Dam project was of fundamental importance as it would provide 800 000 people with water. Currently there was engagement with National Treasury on the need for the R227 million, referred to earlier, to pay the unpaid invoices.
Ms Mashigo remarked that it was unfortunate that, although the De Hoop Dam would be the focus of the discussion, the presentation did provide detail. The De Hoop Dam was very important as the most important priority of government was ensure that people have access to basic needs, including water. She noted that essentially the Department was saying that money could not be utilised for the benefit of people in poor communities. These people did not have the resources available to mines and had to rely on grants. She said that it was unacceptable that DWEA requested roll-overs, when a clear guideline of Parliament was to avoid roll-overs. The Committee specifically needed information on what the Department was doing with the De Hoop Dam and how far it had gone to reducing its underspending. She asked that the presenters be frank in telling the Committee what the problems were.
The Chairperson pointed out that the Department had created the impression in its explanation that the cause of the underspending emanated from National Treasury’s side. However, the Department had explained that the R260 million was being rolled-over for the second time in the 2007/8 financial year. The figures were not telling the true story, which seemed to be that the Department was shifting money around, as funding that was meant to be used for capital expenditure was being shifted to its agencies. He commented that this showed a lack of accountability. This pointed to human resources and capacity problem as the real reason for shifting the money around.
The Chairperson stated that the report revealed low spending on the social component. He asked why exactly the Department was unable to spend the R260 million allocated. He asked what had happened during planning, and why had DWEA had not informed National Treasury from the beginning that it would not be able to use the allocation. DWEA had allowed the funds to come into its coffers for capital expenditure on water resource management, knowing that it needed more funds for water services.
The Chairperson asked National Treasury how many times roll-overs were allowed. He commented that redirecting money was a trend in the Department.
Mr Andrew Donaldson, Deputy Director-General: Public Finance, National Treasury, responded that the Water Affairs vote was extraordinarily complicated one. Many projects were supported under the vote, including capital and recurrent costs. This was further complicated by the fact that the cost was partly recovered from water users and the Department was also supported in part by the fiscus. Sorting through all these aspects was not straightforward. National Treasury usually only allowed a roll-over once.
Specifically in relation to the De Hoop Dam issue, he noted that there were delays in finalising the agreement on funding the dam, which had to do with the mines' position in the circumstances of the economic decline over the last two years. The mines were keen to see the project get under way, due to the prospect of expanding the platinum mining base in the area. As the platinum prices dropped, mines then became reluctant to sign the deal. There had been progress in the last few months and the deal would go ahead, pending the negotiations.
Mr Donaldson noted that it was understandable that the Department had had difficulty in getting the agreements signed. It was no surprise that there was a delay in finalisation, and therefore a delay in spending. The project would go ahead, but would be completed later than the parties had initially anticipated. The National Treasury understood fully that major projects were subject to considerable uncertainty in timelines, and that the funding would have to be rescheduled. He noted that this was a larger issue than a straightforward roll-over. This was rescheduling of the spending on a planned infrastructure project. Just as Eskom had to revise spending plans on its new power stations every quarter, and Airports Company of South Africa had to reschedule its spending plans on the completion of airports, so too did the DWEA and the WTEs have to reschedule the outlays on the De Hoop Dam. In next year's budget the National Treasury would show a revised cash flow projection for the completion of the De Hoop Dam.
Mr Donaldson explained that National Treasury had not agreed to shifting the money, as requested, because Parliament had appropriated money for the specific project and earmarked the allocation accordingly. It did not make sense to shift that funding at the end of the year to fund other things. Oversight and transparency to Parliament was necessary for all of the major projects. The Water Trading Entity was a complex set of accounts, and National Treasury understood that there was still work to be done in restructuring the account so that Treasury and Parliament would understand it better.
Mr Donaldson added that although the number was large, Members should not overplay the significance of this rescheduling. The rest of the Department's spending record was very good and sometimes there was in fact spending ahead on some projects.
Ms Mashigo asked when the De Hoop Project started, and requested a comprehensive report in this in terms of the timelines and expenditure. She asked if this project was solely dependent on mines, as the delay seemed to be at the expense of the people. She suggested that the National Treasury and Department could provide this report to the Committee within three days.
The Chairperson thanked Mr Donaldson for the explanation. He commented that the PFMA regulations stipulated that requests for roll-overs must be submitted on or before the last working day in April. The Committee heard that the DWEA request had been made in April last year. He remarked that although Mr Donaldson had outlined the challenges, he was not in favour of the Department playing the innocent party.
The Chairperson, referring to Section 6(3) of the PFMA, asked from which part of current payments the Department was allowed to shift funds, as the regulation stipulated that this should not affect the compensation of employees.
Mr Ayaya agreed to the need for a report on De Hoop Dam. He responded that the shifting of the funds had been done according to the prescripts of the PFMA. The auditors had concluded an audit on the Department on 31 July 2009. The Department could table the auditor's report. He added that the letter the Department had received from the Committee had merely asked the officials to explain the underspending of R 505 million. This was the reason why the Department did not have explanations ready for Members on the other issues raised, such as the shifting of funds.
The Chairperson responded that the National Treasury should look at how freely shifting of funds should be allowed. He asked if this was the purpose of acquiring funds.
Mr Ayaya responded that the Department did not do this. The shift took place because capital expenditure had been recorded as on the same line with the capital used in the Department. The Department had to get permission to do this shift of funds. It was not true that the Department requested money in order to shift it around.
The Chairperson referred to the previous year’s report and stated that the Committee had seen from experience that the Department did in fact do this.
The Chairperson noted that on 28 August 2009 the Committee would receive the First Quarter Expenditure Report for 2009/10, and would assess matters on that basis. He felt that the officials and Members were now arguing past each other, and that they should continue the discussion based on the next expenditure report.
Dr Ruiters echoed Mr Ayaya's sentiments and reiterated that the Department did not ask the National Treasury for permission to move funds merely for the sake of doing so.
The Chairperson asked if Dr Ruiters was saying that the Department did not shift funds.
Dr Ruiters replied that the on the Olifants River project, certain funding was received directly from the water users. The distribution network was a major component, and it was intended that this be funded by the mines. The project was under the administration of the Trans Caledon Tunnel Authority (TCTA). The De Hoop Dam’s due completion date was set for October 2011, in order to catch the summer rains. The social component would be done in part by the Department, and partly by open tender. The rescheduling posed difficulties in terms of spending, and DWEA would engage with the National Treasury on this.
Ms Ngele assured the Committee that the Department took spending seriously. The Department stayed within the prescripts and acted with integrity, and would ensure that the report requested was clear on the pertinent issues.
Ms Mashigo asked the Department to bear in mind that the Committee also required information on capacity levels in the report.
Ms Ngele replied that across the board, the Department required technical capacity. Due to the scarcity of skills and competition with the private sector, it was difficult to attract talent. The Department did have a retention strategy for those they employed. The Department was hopeful that under the Occupation Specific Dispensation (OSD) it would be able to address the broader problem of salaries to stem the migration to the private sector. In those cases where the Department could not employ people with the required skills, it would outsource. The Department also had a learning academy, where it gave bursaries and put graduate engineers into a five year training programme.
Department of Agriculture, Forestry and Fisheries (DAFF)
Dr Shibu Rampedi, Acting Director General, Department of Agriculture, Forestry and Fisheries, noted at the outset that the Director General, Ms Njabulo Nduli, was on leave, and apologised that this had not been notified to the Committee in writing.
The Chairperson responded that Parliament was not happy with people who took leave at these pivotal times of the year in Parliament and Governments' schedule. The Director General was the accounting officer in the Department, and needed to account on matters of expenditure to the Committee. He noted that apologies should have been made in writing. He then noted that there was also an Acting Chief Financial Officer present.
Dr Rampedi noted that this was because the previous Chief Financial Officer (CFO) had recently passed away, necessitating the appointment of the Acting CFO, Mr Johan Venter. Her own full-time position had been that of Deputy Director-General responsible for Forestry in the former Department of Water Affairs and Forestry.
She noted that the DAFF had no presentation, but would explain the component of the underspending to the Committee. She said that for ease of understanding, the numbers would be expressed in rounded terms.
She said that, working in rounded off numbers, out of a total budget of R2,9 billion (composed of the original allocation of R2,5 billion to the former Department of Agriculture plus an additional appropriation of R400 million), the DAFF had underspent by R89 million.
She explained that R 60 million had been earmarked for the Ilima/ Letsema food production projects. The Department had initially planned to work with the Development Bank of South Africa (DBSA) on this project. The Department had been unable to reach an agreement with the DBSA, as the DBSA did not sign the Memorandum of Understanding with the Department. For this reason the funds disbursed for the Ilima/ Letsema projects were not spent.
She noted that in addition, R20 million out of the R140 million earmarked for swine fever claims under the Disaster Management allocation, had not been spent. The Department could only disburse money in respect of claims by farmers for loss of livestock due to classical swine fever.
A further underspending occurred in the area of R140 million allocated to the Department of Public Works for the renovation of DAFF buildings, and here R3 million had not been spent.
The underspending thus far totalled R 83 million. There was a further R6 million that was not specifically earmarked to any programme, but was intended for services within the Department. Dr Rampedi asked the Committee to note that this constituted only 0.02% of the total available budget, and was acceptable in terms of the norms. Part of the R6 million was intended for the compensation of employees. The remainder of this sum was accounted for as the incorrect classification of amounts for intangible and cultivated assets as Assets, instead of it being classified under Goods and Services. This had subsequently been rectified.
The DAFF had done a reallocation of the R60 million earmarked for the Ilima/ Letsema projects to the Provincial Departments of Agriculture in the Free State, Kwazulu-Natal, Gauteng and Eastern Cape, and would ensure that the money was used in projects aimed at food production.
The R3 million underspend would be used by the Department of Public Works on the renovation of DAFF buildings in this financial year.
The R20 million allocated for response to disasters such as swine fever would remain in the Department's budget, due to its request for the funds to be rolled-over, and would be used to assist in disasters that may come up in this year.
Ms R Mashigo (ANC) asked why the funds intended for the compensation of employees were not recorded as current expenditure
Mr Johan Venter, Acting Chief Financial Officer, replied that a portion of the R6 million was current expenditure for compensation of employees in terms of vacancies at a time when the Department had a vacancy rate of 16%, and a portion related to the underspending on Goods and Services contracts. The latter was composed of R1 million for a fencing contract in the Eastern Cape that was not concluded, and payment toward colleges to roll-out a programme on which a Memorandum of Understanding could not be signed in time.
Ms Mashigo referred to the unspent R20 million earmarked for payment of claims for disaster compensation. She asked if there had been no disasters on which the money could be spent.
Mr Donaldson responded that the disaster spending was earmarked for classical swine fever claims. In this case the Department received and assessed claims, and could not anticipate what the claims would be. There was inherent uncertainty in setting these funds aside.
Dr Rampedi added that other types of disasters had their own allocations.
The Chairperson asked if the National Department managed the total disaster allocation. As an NCOP member, he had received many complaints that people had not received money when disasters occurred. He asked if the provinces could administer the allocation.
Dr Rampedi replied that the National Department was responsible to provinces for these funds. The Department could provide the records of the allocations to the Committee. This report would contain details on how much was transferred to and spent by provinces.
The Chairperson agreed that such a report should be sent.
Ms Mashigo noted that the Ilima/ Letsema project was intended to assist very rural communities to increase their food production. She asked for clarification on the role of the DBSA in this project.
Mr Donaldson replied generally that out of an available budget of R 2,9 billion, the underspending by DAFF was less than 3%, and this was not unreasonable. Ilima/ Letsema was a relatively new programme. It was not straightforward to administrate, and the DBSA's help was necessary.
Mr Venter reported that a total amount of R650 million was allocated for the Medium Term Economic Framework starting in 2009/10. This allocation went through the Division of Revenue Act process to provinces. Some of the funds for 2009/10 went to provinces and some went to implementing agencies.
The Chairperson asked if this was a conditional grant.
Mr Venter confirmed that it was a conditional grant and complied with all the criteria, conditions of payment, schedule of payments and allocations to provinces. All this information had been published.
The Chairperson remarked that, as a member of the NCOP during the Third Parliament, he had experienced many provinces crying for support in disasters. He said it was of great surprise to him that there was not transfer of the unspent funds. He asked, in general, what the problem was with transfers, and why it took so long for people to be compensated.
The Chairperson added that the Money Bills Amendment Procedure and Related Matters Act made it clear that if there was persistent underspending, Parliament could not allow departments to continue to get the funding. Parliament would therefore prefer that departments should ensure that the people directly responsible for the underspending appear before the Committees. At present, there was no penalty for officials who did not spend allocated funds. He also hoped that the review of the Public Finance Management Act (PFMA) would result in mechanisms that allowed for these matters to be addressed.
Dr Rampedi responded that the Chairperson's comments were valid and serious attention would be given to them.
The meeting was adjourned.
- Fourth Quarter Expenditure Reports: Departments of Water & Environmental Affairs,Agriculture, Forestry & Fisheries
- Standing Committee on Appropriations (National Assembly), [Public Hearings on the Fourth Quarter Expenditure Report for the 2008
- Standing Committee on Appropriations: Public Hearings on the Fourth Quarter Expenditure Report for the 2008
- Standing Committee on Appropriations: Public Hearings on the Fourth Quarter Expenditure Report for the 2008
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