National Treasury on Fourth Quarter Expenditure Report for the 2010/11 financial year

Standing Committee on Appropriations

25 July 2011
Chairperson: Mr E Sogoni (ANC);
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Meeting Summary

The Standing Committee on Appropriations considered a briefing by the National Treasury on the Fourth Quarter Expenditure Report 2010/11 financial year. Six Chief Directors presented the Fourth Quarter Expenditures for the various departments and the recurring theme across most departments was under-expenditure of budget allocation. All but three national departments had under-expenditure. The explanation for the under-expenditure ranged from delays in the implementation of capital works projects, vacancies in posts, favourable interest costs, funds withheld on transfers to the provinces, slow spending on social assistance grants and delays on grant requests. Treasury stated it had approved R158 million in rollovers of the R504 million requested by the various departments. Committee members expressed concern at the picture painted by widespread under-expenditure in the Fourth Quarter report. In many cases committee members felt that the various under-expenditures were unacceptable and oversight needed to be addressed by the various departments. Committee members questioned the reliability and accuracy of the expenditures, as some figures varied between the report and the presentation. Treasury discussed the challenges of cluster budgeting and accountability between departments. The Chairperson stated that Treasury must intervene, if necessary, and apply the Constitution to address the issue of chronic under-spending.

Meeting report

Fourth Quarter Expenditure Report 2010/11 financial year: briefing by National Treasury
Ms Gillian Wilson, Chief Director: Administrative Services, National Treasury, stated that most departments had under-expenditure such as StatsSA, Government Communication and Information System (GCIS), the Department of Public Service and Administration (DPSA), Public Works, Department of International Relations and Cooperation ( DIRCO), and Parliament. Three departments in the cluster that had over-expenditure were the Departments of Women Children and People with Disabilities, Home Affairs and the Presidency.

The main reason that led to the over-expenditure in the Presidency was that a new Deputy Minister for the Department of Performance Monitoring and Evaluation was appointed in November 2010 and the Presidency had not budgeted for it at the beginning of the financial year. There was also over-expenditure related to the Hotline. The Presidency had to pay the service provider for the free calls made by people to the Hotline, thus it was difficult to budget accurately.

Home Affairs had an over-expenditure of R737 million.

It related to expenditure occurred by DIRCO on behalf of the Department in foreign missions for the 2005/06 to 2009/10 financial years. When the Home Affairs Director General was appointed as Chief Financial Officer, he had discovered this outstanding debt that was not taken up in the books of the department. The DG wanted these debts to be reflected in the books of the department related to the previous financial year. Since the DG was appointed, the debt amount of R600 million had been cleared between Home Affairs and DIRCO and had been paid into the National Revenue account.

DIRCO had been under-spending for the past three years. This related to capital projects in foreign countries that could not be completed in time due to delays in construction.

Public Works had an under-expenditure of R797 million mostly related to Expanded Public Works Programme Phase II expenditure of the incentive scheme and the Department’s capital projects.

GCIS had an under-expenditure of R727 million related to the department’s planned move to a new building.

National Treasury had an under-expenditure of R4.3 billion related to three areas: 1) 1.8 billion categorised as savings attributable to favourable interest costs payable to state debt, 2) spending on partnership grants and 3) R2.4 billion for provincial partnership grants.

DPSA’s under-expenditure was related to two projects: 1) Phase 3 of the HR Connect project was incomplete in the Education Department due to the public service strike and 2) the development of a framework to provide training to Chief Information Officers (CIOs) of national departments was finalised late in March of the previous year hence the payments could not go through for the project - even though the project was completed.

StatsSA had an under-expenditure related to the census taking place in this financial year and IT equipment by the State Information Technology Agency (SITA) could not be finalised before the end of the financial year. The department had requested a rollover because there were to be additional expenditures added to the census of November 2011.

Education and Related Departments
Mr Spencer Janari, Chief Director: Education and Related Departments, National Treasury, stated that of the five departments, Higher Education and Training, Labour and Sport all spent just under 100% of their total budget, Arts spent 92.12% and Basic Education spent just under 90%.

In Arts and Culture the main areas of under-spending were related to investment in culture programmes in Programme 4 where R25 million (21% of the available budget) was not spent. This particular project had had problems for two years and the previous Minister of Arts and Culture stopped the payments on the programme. It was rectified late in the 2010/11 financial year, hence the under-spending. The other area of under-spending was in the Community Library Services conditional grant. The under-expenditure was about R50 million or 10% of the available allocation - withheld from provinces (mainly in Eastern Cape, Limpopo and Mpumalanga) due to slow spending in those provinces. There was also under-spending of R4.5 million (33.5%) in capital assets due to delays in purchasing computers and office equipment for senior management.

In Basic Education, the main under-spending was related to the Workbooks project: R750 million was allocated for workbooks and R166.4 million (22% of allocation) was spent. Under-spending was a deceptive term because the entire project was delivered as planned so it was really a savings. The saving was accrued because the model that they used to put together the project changed significantly during the course of developing the project. Instead of outsourcing the development and design of the workbooks, this was done in house and it resulted in a massive saving.

There was slow spending on the Technical Schools Re-Capitalisation Grant where R16 million of the R80 million was withheld. This was because it was the first year of this grant and there was slow spending in three provinces (Eastern Cape, Limpopo and Mpumalanga), but the spending was expected to pick up in the second year of the grant. Over 90% of the Higher Education and Training budget was transferred either to higher education institutions or the National Student Financial Aid Scheme or through direct charges to the National Skills Fund. R15 million was under-spent in goods and services due to the delay in the establishment of the Quality Council For Trade and Occupations. U
nderspending of R6.6 million for capital assets was due to invoices for purchased IT equipment being received after the end of the financial year and delays in the installation the security system at Indlela. The National Student Financial Aid Scheme allocation was used in five different categories of funding. One of these was the Funza Lushaka Teacher Bursaries where R7.5 million had not been spent by the end of the financial year due to delays in requests for the money or outstanding claims by universities.

In Labour there was very little under-spending. The only under-spending of note took place in capital assets mainly due to a delay in the receipt of invoices from the Department of Public Works for capital projects.

Sport and Recreation under-spending was mainly in goods and services and compensation related to unfilled posts.

Health and Social Development
Dr Mark Blecher, Chief Director: Health and Social Development, National Treasury, stated that the Department of Health spent 96.6% of its budget however the under-spending of R742.9 million had grown significantly from R457 million the year before. There was under-spending in all the economic areas (compensation, travel, capital assets). For the first time the department under-spent R51 million on compensation, which was worrisome because the department had often complained about lack of capacity. There was substantial under-spending on goods and service on the AIDS tender. Although the department pushed for a large increase in the adjustment budget for condoms, there was approximately R183 million worth of under-spending on goods and services including large under-spending on condoms. The big problem in transfers was hospital revitalisation where there was R1.067 billion of under-spending - of which R500 million was not transferred to the provinces and the balance of which (approximately 500 million) was transferred to the provinces but not spent in the provinces. On capital assets, the department only spent 39% of its budget - R17.6 million out of R45 million (see presentation for full details).

Social Development spent 99.1% of its budget. Under-spending was mainly in social assistance grants. Comprehensive social security had an under-spending of R900 million (see presentation for full details).

Justice and Protection Services
Dr Rendani Randela, Director: Justice and Protection Services, National Treasury, stated that with the exception of Defence and Police all other departments under-spent their budgets. Correctional Services under-spent by R728 million mainly as a result of vacant posts, slow implementation of capital works projects and delays in internal processes by DPW. Defence under-spending was negligible at R420, 000. Justice and Constitutional Development under-spent by R130 million - the main reasons were the termination of the Private Public Partnership projects, the under-spending on goods and services and auxiliary services due to delays in the approval of payments. ICD under-spent by R3 million the bulk of which was R1.7 million which could be ascribed to outstanding invoices for software licenses. Police under-spending was R40, 000.

Economic Services
Mr Devan Naidoo, Chief Director: Economic Services, National Treasury, stated that for Public Enterprises, R18 million (3%) was unspent and R7.8 million of this had been requested as a rollover. The major under-spender was its transport programmewith R4 million under-spent mainly due to post vacancies. According to economic classification, the vacancies were the major problem accounting for R157 million of the R175 million unspent.

Agriculture, Forestry and Fisheries under-spent R100 million and R76 million was requested as a rollover. Production programmes spent R426 million of R442 million. The un-spent funds were withheld for the Illima-Letsima delayed payment and for the fencing project. According to economic classification, the payments for financial assets and capital equipment was a 92% expenditure due to delays in starting the Lesotho fencing project.

The Department of Economic Development under-spent by R49 million with R35 million requested as a rollover. This was mainly due to transfers to other organisations like the Small Enterprise Development Agency and the Kula Fund and
under-spending in its four programmes due to vacancies as recruitment had not had the necessary uptake as requested.

Environmental Affairs had an under-spend of R99 million (4% of budget) of which R85 million was requested as a rollover to fund programmework related to the major conference to host the United Nations Framework Convention on Climate Change in Durban in November 2011. Environmental Quality and Protection spent R296 million of R313 million due to slow transfers to the section 21 company, Buyisa-e-Bag.

For Mineral Resources there was a negligible under-spend of R1,2 million against a budget of 996 million. Mineral Regulation had an over-spend of 2% due to the underestimation of vacancies.

Rural Development and Land Reform spent R7.1billion (2%) of the R7.3 billion allocation with no rollover indicated. Science and Technology had an under-spend of R76 million (1,8%) with R19 million requested as a rollover.

Tourism had an under-spend of R40 million with R19 million requested as a rollover. The main under-spending was in countries where the foreign exchange of the Rand’s strength improved significantly which impacted on transfers to SA Tourism. The department was still assessing the merits of these rollover cases. For Trade and Industry there was an under-spend of R400 million of which R298 million had been requested as a rollover. This was mainly due to delays in payments under the incentive scheme.

Urban Development and Infrastructure
Ms Ulrike Rwida, Director of Urban Development and Infrastructure: National Treasury, said all departments in the cluster, with the exception of the Department of Communications, spent over 97% of their budget.

The Department of Co-operative Governance spent 99.7% of budget. Under-spending was largely due to
the provincialisation process which took longer than expected, delaying the appointment of employees and affecting the employee compensation budget. The total expenditure for Traditional Affairs amounted to R61 million (83.45% of budget). The reasons for the under spending were delays in setting-up of the Department of Traditional Affairs, which affected the budget for compensation of employees and goods and services (see document for other underspending).

The Department of Communications spent just under 67% of its budget. This was due to transfers that were not made around the digital-terrestrial migration. Lower spending on goods and service was related to the suspension of the 112 emergency call centre.

The Department of Energy spent 97.3% of its budget. Under-spending related to vacancies across all programmes, good and services spending that was not met and the bulk of the under-spending was related to the integrated electrification programme.

The Department of Human Settlements had a 98.7% expenditure the bulk of under-spending was related to vacant positions across all programmes. An organisational review was underway, thus no new appointments until the organisational restructuring had been completed. Major under-spending also included the new sanitation program, the rural housing infrastructure grant, which had a 66% spending, and the implementation of the accelerated community infrastructure programme.

The Department of Transport spent 99.4% of their budget (see document for details of underspending).

The Department of Water Affairs spent 96.8% of its budget. The under-spend was primarily due to vacancies as it was struggling to fill positions as it had only spent 86% of its compensation budget. Floods led to delays in the expansion of the gauging weir network system. There was a delay in the start of the drought intervention programmein the Ndlambe district municipality. The bulk of the under-spending in goods and services was due to delays in the Masibambane project.

Administrative Services
Mr J Gelderblom (ANC) asked if it was possible for Treasury to indicate what the expenditures were during the fourth quarter of the previous fiscal year of 2009/10 in order to make side by side comparisons and see if the departments were able to improve in certain categories on issues that the Committee had raised to the departments.

The Chairperson agreed with Mr Gelderblom, but cautioned that results may be inconsistent as departments had made comparisons in some instances while others had not. There was a challenge getting information from DIRCO because the work being done in foreign countries was continually reflected as under-spending due to not getting receipts back on time. At some stage the Committee would invite DIRCO so that the problem could be understood. The Committee did not understand whether the delays on capital projects in Washington, Abuja and London were because DIRCO had no control of the process or whether it had to do with its planning.

Ms R Mashigo (ANC) asked for clarification on the categorisation of the terms ‘Financial Assets’ and ‘Capital Assets’. She raised concerns about the National Treasury’s NDPGID (Neighbourhood
Development Partnership Grant: Infrastructure Dialogues) related to how the municipalities could be giving over the responsibility of coming up with programmes so that they could access funds to the provinces. There were challenges in deploying technical assistance and getting buy-in from the provinces. Where they did not have the technical capacity, they may have sat back and not claimed the money. Should technical assistance come from DPSA and was there a better approach that could improve service delivery? Also was there a better approach from Treasury in ensuring that there was the ability for proper oversight because the money was there, but if there was no follow-through and action was not taken, the problem of under-spending would continue.

The Chairperson stated that Treasury should not necessarily respond about the Neighbourhood
Development Partnership Grant: Infrastructure Dialogues because there was to be a full meeting the following day specifically on these matters. He also noted that there was an omission in the presentation as the Department of Women, Children and Persons with Disabilities was not spoken to.

Mr Gelderblom referenced the figures for the Department of Home Affairs in the National Budget and Expenditure Report and the figures in the presentation and asked if the difference of R400 million between them was correct.

Ms Wilson responded that the reason for the difference in the figures in the presentation and the figures in the larger report were because the larger report indicated the preliminary expenditure while the presentation captured the most up to date figures. With regards to the Department of Women, Children and Persons with Disabilities, they did not report their expenditure on a quarterly basis like other departments, therefore up until now they had not reported on the expenditure. The department was busy getting systems in place. Once the information was ready a short report could be presented to the Committee. The Department did have a strategic plan in place and programmes according to the budget, so there were ways to monitor the expenditure.

Mr Naidoo replied that any reference to financial assets referred to liquid payments and capital assets referred to fixed assets such as to property, plant and/or equipment.

Mr L Ramatlakane (COPE) raised a concern about the saving of 64.9% in the Department of Public Works (DPW) that were creating jobs. Could Treasury give an indication of how many jobs were not created due to that under-spend.

The Chairperson replied that the Committee had previously asked DPW to rework its model so that the Committee could review the expenditure. This meeting was scheduled for 2 September.

Mr Ramatlakane stated that he had a problem with the term ‘savings’. What was the distinction between ‘savings’ and under-spending? Was this departmental jargon to avoid saying that they did not spend the money allocated. Was this Treasury’s term or a term borrowed from the departments?

Ms. Wilson replied that in this instance it was under-spending and could not be referred to as a saving.

Mr Naidoo added that in some cases a department may have committed to spending money on certain items but chose not to spend it. This could be regarded as a saving.

The Chairperson replied that Mr Naidoo’s answer was not helpful, as the question was specific to Public Works. On the issue of what savings is, the Chairperson referenced the example of the workbooks project from the presentation on education. Services for the project were budgeted to be outsourced; however the department was able to complete the tasks internally thus resulting in a saving.

Education and Related Departments.
Mr Gelderblom raised a concern about the literacy levels of students. For Arts and Culture there was lots of money withheld from the provinces. What was the reason for this? Had the department seen a trend?

Ms Mashigo asked if there was a fixed time frame for the community library programmeto be completed. If the under-spending continued the effects of the programmewould not be seen.

The Chairperson added that Vote 14 on Basic Education reflected challenges and there had not been proper spending.

Ms Mashigo asked for clarity on Vote 14 as it mentioned how much was spent, but did not reflect how much was saved. This would have helped to reflect the percentage of how much was saved. In terms of the amount under-spent, the report did not indicate where the money was to be spent, where it was kept.

The Chairperson raised the question why there were conflicting reports of delivery of the workbooks project.

Mr Ramatlakane addressed the re-capitalisation grants and the R80 million for transfer and subsidies in the reports from the previous three quarters. He asked if the same reasons were repeatedly advanced as explanations to why the money was not transferred. Was a particular action not warranted? What needed to be done to help resolve the inability to spend?

Mr Janari agreed that the literacy performance of students was poor and thus libraries were critical to the development of that skill. Since the inception of the library conditional grant there had been poor spending on the grant. Not all of the funds were transferred by the provinces to the municipalities. A lot of the funds were used to build or renovate existing structures and a lot of the under-spending was on capital projects. While the library grant was improving, it would have been beneficial for the Department of Arts and Culture to brief the Committee on the progress and outputs of the grant. The library grant was not for a fixed period it was an ongoing development of the community library services. The grant was not to replace the funds for library services that were there. They were to provide additional library services in areas where there were none.

Mr Janari replied that Basic Education under-spending was mainly due to the workbooks programmeand delays in the annual national assessment related to the teachers strike where exams were run in February rather than October. The outputs for the national departments were to develop, design, print and distribute the workbooks. Payments had taken place however there were conflicting reports as to the delivery. In the Department’s defence, if an insufficient number of books were delivered, there was a telephone number that the principal was meant to call to have additional books delivered. The re-capitalisation project funds were committed for three years and the provinces would not lose out on funds that were not spent initially. Resolving the inability to spend was a procurement issue. The engagement happened between Treasury and the National Department of Education not the provincial department. Procurement engagement must happen between the national and provincial departments.

Health and Social Development
Ms Mashigo raised concerns about Social Development and stated that it was unacceptable for there to be under-spending in this programmeas families and beneficiaries of social assistance programmes were not benefiting from social services grants. Social Development was not telling the truth on efficiency savings on travel, accommodation, venues and facilities and she called for a detailed breakdown from the department on all its spending.

Mr Gelderblom referenced Program 3 on Health Planning and Monitoring and asked why there was 14% under-spending on compensation of employees. According to the chemist divisions of many hospitals, there was a lot of corruption taking place. This was an important programmebecause it was a monitoring of the goods of the department. Was there any indication that saving had been made in purchasing of foreign medicines due to the strong Rand.

Ms Mashigo asked what was the way forward from the Treasury on ‘Love Life?’

The Chairperson added that the question of spending on ‘Love Life was an important one because it was a recurring issue of under-spending on this programme.

Mr Gelderblom added that if the money was not being spent, Treasury must say no to funding the programme.

Dr Blecher responded that spending was only 86% (under-spending of R9 million) in Program 3 because setting up the office was a priority and about R18 million was budgeted to set up the office. He believed that the department miscalculated as it continually asked for more money, did not spend it and then put a freeze on filling of posts. The department had moved far too slowly to get the office functioning. In a year or two the office would have R50-R60 million on budget, so it needed to get going as it was not spending anything near that. Most medicines were bought by the provinces, thus evidence of medicine procurement achieving savings was not reflected on the national budget. Overall spending on medicine had increased to around R7-R8 billion a year, so while unit costs may go down, volumes had increased. Previously medicine data was hidden in goods but were recently added as an independent category so data on medicine spending would be much easier to track. On ‘Love Life’, the Department of Health did not transfer the funds to the programmeand did not ask for a rollover due to an unresolved conflict on AIDS prevention strategies between both parties.

Dr Blecher acknowledged Ms Mashigo’s unhappiness with slow uptake on social development however one needed to recognise that social grant numbers were nevertheless growing strongly, by about 70 000 new people per year, totalling over 14 million receiving grants.

Justice and Protection Services
Ms Mashigo stated that the problem with this cluster was that spending on one Department impacted on the performance of the other. There needed to be a proper explanation on coordination and funding of clusters.

Mr Ramatlakane asked about under-spending of R238 million by Correctional Services (DCS) and which IT project resulted in this happening.

The Chairperson stated that perhaps because the Committee and Treasury were not directly involved, they were kind of naïve in terms of programmes.

Dr Randela responded that Ms Mashigo was correct in that certain activities performed by one Department affected the other, for example, the issue of overcrowding in prisons. If the police made the arrest and courts made the conviction but there were delays in the construction of correctional facilities then overcrowding would take place. There needed to be an integrated justice programmebudget for the modernisation of the system so that reference numbers were recognised by all three departments (Police, Justice and Correctional Services). Regarding under-spending, DCS wanted a penalty clause to be included in the service level agreement of the Facilities programmedue to delays from DPW. The IT projects that resulted in under-spending by Correctional Services were the upgrade of the servers, the mainframe hosting services and upgrading the local area networks.

Mr Gelderblom asked for clarification on Detective Services of Vote 24 Police Services, the first indicated the Justice programmespent 44% of its budget and the second indicated the justice programmeas spending 56.1% of its budget.

Dr Randela replied that since 2001, there had been an allocation available for the Integrated Justice System (IJS) where the revamp of the criminal justice system began. The challenge with cluster budgeting was that the accounting officer of a department was directly accountable for the funds allocated to his own vote although the funds were for a sub-cluster. Part of this funding was with justice as a sub-cluster. Also SAPS had a misclassification problem where funds were classified under goods and services only to find that these projects were of a capital nature and then the money was re-allocated from goods and services to capital assets.

The Chairperson stated that although the SAPS budget was reflected as 100% spent, the way that SAPS budgeted and spent left much to be desired. Many of these departments would be invited to the Committee in the near future.

Economic Services
Mr Ramatlakane asked about decisions made on rollover requests.

Mr Naidoo replied that several recommendations had been made on the merits of rollover requests. Vote 10 Public Enterprises recommended R3.4 million in respect of financial modelling that the department needed to undertake for South African Airways and SA Express and R1.5 million for the performance monitoring of State Owned Enterprises (SOEs). Vote 25 on Agriculture, Forestry and Fisheries recommended R3 million for the fencing project, R20 million for the project register project, R5 million for a grant for the Illima Letsema and R10 million for the Comprehensive Agricultural Support Program. Vote 27 Economic Development recommended R2 million for a course to be run by Wits University and R1.3 million in legal service fees for the Walmart-Massmart court action currently underway. Vote 29 Environmental Affairs recommended R5 million for the air quality monitoring project. R80 million had been treated as a Forex gain arising from the strength of the Rand. This amount had been rolled over to the current financial year for any depreciation of the Rand that may occur. A R19 million Tourism rollover had been recommended in the light of the occupation of new offices. All such procurements had to meet the standard terms and conditions for government procurement systems as well as the space norms of DPW had been written into the rollover. Vote 35 Department of Trade and Industry recommended R31 million of the R298 million requested for the Automotive Production and Development Program payable to the Ford Motor Company.

Mr Ramatlakane asked for the total figure of the requested rollover for Economic Services.

Mr Naidoo replied that the total amount of requested rollovers was R540 million for Economic Services and the total amount of recommended rollovers was R158 million. Any project approved for a rollover ought to have been accrued and payable in that financial year.

Mr Gelderblom asked what was the lifespan of a department’s office.

Mr Naidoo replied that typically the life of a building in accounting years was roughly 60 years for the entire building, but DPW had particular norms and standards regarding square metering for staff and if the department outgrew its premises then it would need to find new premises suitable for it size.    
The Chairperson opened the floor to questions for Urban Development and Infrastructure.

Mr Gelderblom asked about delays concerning the under-spending of the Department of Communications.

Ms Rwida replied that the under-expenditure related primarily to the transfers to Sentech for the digital-terrestrial transmission migration from analog to digital. There was a review of the standards late in the financial year which meant that the infrastructure would need to be reviewed and the department did not transfer the money so there was a hold on the funds to Sentech. The other major transfer that did not happen was under-expenditure surrounding the World Cup and a commitment from Telkom to put in the network infrastructure. The Department of Human Settlements under-spending was related to the compensation of employees, it was not appointing people due to accommodation problems and a turnaround strategy, which was reviewing the organisational structure.

The Chairperson noted that in terms of the Constitution, the Public Finance Management Act (PFMA) was very clear on the functions and powers of the National Treasury and it seemed that at times the National Treasury was reluctant to apply the Act. Section 6(2)(f) stated that National Treasury must intervene in taking appropriate steps, which may include the withholding of funds. In cases where Treasury had tried to assist departments and saw no progress, there must be a way to address the issues. The Committee would invite the departments to discuss how going forward, such departments were going to address under-spending.
The meeting was adjourned.

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