Fourth Quarter Expenditure Report 2011/12: National Treasury briefing

Meeting report

National Treasury Report on Fourth Quarter 2011/12 expenditure
Mr Andrew Donaldson, Deputy Director General, Public Finance Division, National Treasury, agreed that it was a little late to present the Fourth Quarter expenditure report, but it was nonetheless important that Parliament be aware of the patterns. These figures also helped in budgeting, by providing a baseline for future spending

Mr Donaldson said he would provide a general overview of the expenditure of various departments. There was a tendency to focus on the deviations between budget allocations and spending, especially under spending, but it was important to note that 98% of budgets were spent in 2011/12. He therefore suggested that future presentations might do better by focusing on how money was spent, rather than on areas where it was not spent, in accordance with the directive to increase results for expenditure. He also noted that his report included non-financial outcome indicators.

He highlighted some apparent discrepancies in the first slide, which tracked the percentage difference between budget and expenditure for 2011/12 (see attached presentation). He explained that over-expenditure on the Presidency Vote was being dealt with through the Standing Committee on Public Accounts (SCOPA). He also noted that Parliament had retained under-spent funds over the years, which  explained its perceived overspending. He also noted an error in the representation of Parliament’s over expenditure. The Departments of Home Affairs and Women, Children and People with Disabilities were also noted for their unauthorised overspending (see slide 2). The Departments of Communications, Economic Development, Statistics South Africa, Water Affairs and a few others were notable for their under-expenditure.

Slide 3 focused on the rand value of spending relative to budget, with the majority of significant deviations relating to underspending. He noted the Department of Cooperative Governance and Traditional Affairs (CoGTA), Public Works, the National Treasury, Basic Education, Social Development, Police and Water Affairs as areas of significant underexpenditure.

Slide 4 offered a table summary of spending, showing government’s total spending of 98% of available budget, similar to the previous year. However this only reflected the spending of national departments and was therefore only half of overall spending. It did not include any of the direct charges. He noted that all of departments shown had spent over 90% of their budgets. 

Slide 5 showed expenditure under various categories of spending. Transfers and subsidies, which included funds to provinces, was the largest item. He noted that capital spending was beneath the budgeted amount. Payments for financial assets fell dramatically in 2011/12.

Slide 6 noted the key points of expenditure and their percentage comparison to the previous year. Compensation of employees made up R93.2 billion, a 9.9% increase and 100% of the budgeted amount. Good and services made up R50 billion, a 12% increase and 95% of the budgeted amount. Transfers and subsidies made up R343 billion, a 15.9% increase and 98% of the budgeted amount. Capital expenditure was R11.8 billion, a 16.4% increase yet only 85% of the budgeted amount. He noted that it was ‘probably healthy’ that other types of spending were increasing faster than compensation of employees.

He returned to the specific significant deviations. He noted that CoGTA’s failure to spend R2.1 billion was not properly classified as underspending. For many years, transfers to municipalities for infrastructure spending were not recovered if the infrastructure was not developed. However, now, after an extensive process, unspent funds were recovered through deductions from the municipalities’ equitable shares. This made up the bulk of the R2.1 billion.

National Treasury had failed to spend R2.5 billion, and the bulk of this was accounted for the low spending in respect of the Jobs Fund budget, since there had been delay in implementation and disbursements. Much of the spending would be occurring in the next financial year. There were also delays in a few smaller programmes’ implementation. It was necessary to be cautious in relation to civil pensions and post-retirement health coverage, which explained some of the under expenditure in those categories.

The Department of Basic Education’s spending was R1.2 billion under budget. There were a number of functions that were generally provincial, that had since been taken on by the national Department. There were some delays in targeted school building, as well as delays in processing invoices. Some savings were achieved against the budgets.

The Department of Social Development showed expenditure falling 1.2 billion short of budget. However, Mr Donaldson put this into context, noting that the overall budget for social grants was over 100 billion. The underspending, although seemingly large, amounted to 1%, and was not deemed to be of particular concern, especially as it was important to remain within budget on social grants.

The Department of Water Affairs shortcomings were more of a cause for concern, and arose largely from delays in infrastructure projects.

The Department of Public Works also continued to show some delays in implementing infrastructure spending, and this Department also continued to have some administrative and management challenges.

The Department of Police budget showed underspending, caused by some delays in construction and procurement, but he noted that the under spending was also around 1% of the budgeted amount. He also noted that this Department generally spent its full budget.

Discussion
Mr N Singh (IFP) asked whether it was possible to approximate the difference between savings and under spending.

Mr Singh also asked whether it was possible to have a list of municipalities where there had been a need to recover funds, as there might need to be further investigations as to why the funds were not spent as allocated.

Mr M Swart (DA) asked for details about the Jobs Fund.

Mr L Ramatlakane (COPE) asked about the “savings” in CoGTA. He thought that the savings or under spending arose from recovery of funds from the municipalities, which were not spent as budgeted. He asked if this was correct, and also asked what legal framework was in place to trigger the recovery.

Mr Ramatlakane also noted the under expenditure of R1.2 billion by the Department of Basic Education, largely to do with school buildings and delays in providing textbooks, despite information that there was internal capacity to produce workbooks within the Department. He asked for more details behind those shortcomings.

Mr Ramatlakane wanted more details on the Department of Water Affairs’ underexpenditure, saying that not everything had been reflected in the National Treasury report. He wanted to get a full picture of this Department’s budgets and expenditures.

Mr Ramatlakane noted that, overall, there had been R11.4 billion underspending. He asked what mechanisms were in place to ensure that expenditure would be on target, and asked whether Mr Donaldson was happy with the current mechanisms.

Mr J Gelderblom (ANC) asked for clarity on media reports that R3.2 billion was owed by state departments to local governments.

Ms L Yengeni (ANC) noted Mr Donaldson had played down the underspending of the Department of Police suggesting that it was only 1%, yet this underspending was a cause for serious frustration. She was worried that National Treasury seemed to merely be making allocations, without first determining the capacity of the departments to spend the money. She had the impression that National Treasury was “casual” about spending, and pondered to what extent this was because National Treasury itself had underspent. She stressed that Members of Parliament saw each and every rand as vital, as correct spending would address needs of the citizens who had nothing. Members of Parliament heard and had to answer the frustrations of voters, yet National Treasury seemed to be extending too much latitude when it came to underspending and misspending.  National Government had taken over some roles of some provincial governments, yet the challenges had still not been addressed and had in some cases become worse.

Ms Yengeni sought clarification on the role of transfers.

Ms Yengeni was sceptical as to whether departments’ underexpenditure could be attributed to “savings”. She asked for Mr Donaldson to be direct with the Committee and explain what “savings” meant and how they related to underspending.

Ms Yengeni again expressed her view that the National Treasury seemed to be very casual with money, while politicians have to face the frustration of their constituents. She concluded by noting that hers was more of a comment than a question and emphasised her frustration at the casualness of the presentation while there is immense frustration at issues with service delivery that members encounter when they engage with their constituents.

Mr Ramatlakane asked about the reference to the overspending by the Presidency and the fact that it was being addressed by SCOPA.

Mr Ramatlakane asked how National Treasury managed the situation when it was involved with provincial finances.

The Chairperson noted that whilst expenditure for employees  seemed in order, the quarterly reports had shown that there was not always correlation on compensation of employees, as some departments reported spending difficulties, although they did not have a full staff complement.

The Chairperson asked about the recovery of funding from municipalities, and what implication this would have if municipalities would lose current annual budget because of mismanagement in the previous financial year.

The Chairperson asked if the Department of Basic Education underspending was related to issues in the Eastern Cape. He noted the reports that the Committee had collated on its oversight visits and said that there were problems with the programmes, which seemed good in concept, but were perhaps started at the wrong time. There had been R700 million allocated for the previous year, which was underspent, yet the budget was increasing for the next year. The Committee had discovered, on a recent oversight visit to the Eastern Cape, that service providers had only recently been selected. He said it was important that the Department come with a clear plan for 2013/14.

The Chairperson wanted to make a general point that good planning was critical to the proper spending of funding.

The Chairperson agreed with Ms Yengeni’s comment on the underspending, and said that although a percentage figure for underspending may seem small in comparison to a whole budget, its rand value was still very high, especially in challenging economic times and given that underspending was cumulative. He wondered why departments were not being more realistic with their budgets, and said that the Money Bills Amendment Procedure and Related Matters Act (the Money Bills Act) should address this.

Ms Yengeni asked what exactly was meant by the reference to a failure of cash flow in the Jobs Fund. She also wanted an explanation of the delays in payments and the under estimation of the budget in relation to National Treasury, and what was taken into account when National Treasury budgeted for a year, and when it decided to increase spending.

Ms Ramatlakane asked again for a more specific explanation of the issues with Department of Water Affairs. He also asked why this report was being presented at such a late stage.

Mr Donaldson addressed the timing of the report, noting that it had been ready in June but that the recess had delayed its presentation. Ideally, it should have been presented in June.

The Chairperson interrupted to ask when, in general, reports could be expected, to improve this in the future.

Mr Donaldson said that the reports on spending were generally finalised two months after the end of the financial quarter. In future, meetings should be scheduled for the first two weeks of the third month after the end of the quarter.

Mr Gelderblom requested that the reporting be scheduled as early as possible.

Mr Ramatlakane expressed the view that the problem was more likely to arise from the side of the Committee.

Ms Julia De Bruyn, Chief Director responsible for Education-related departments, National Treasury, said that the National Treasury’s figures would be audited in the fourth quarter, although departmental figures would not.

Mr Donaldson answered the points raised in relation to savings versus under spending. This report did include details as to why spending targets were not met in each department. However, there were often shifts within departments, especially the bigger departments, and these adjustments were tracked. Changes in the exchange rate could lead to savings, and that was a real instance in which a saving would lead to less expenditure. However, the largest portion of so-called savings arose from delays in large projects, often due to departments under-estimating the time required for procurement processes. In these cases, departments would generally be allowed to roll over the budgeted amounts into the next year, when they would be spent.

Mr Donaldson agreed with Ms Yengeni that often National Treasury could be perceived as being very casual about spending. However, he was adamant that since the Department of Police normally spent its budget in full, its failure in this year to spend fully was perhaps more excusable than the shortcomings of other departments.

Mr Donaldson answered queries on the municipalities by noting that the legal provision for the recovery were derived from the Division of Revenue Act, and there had been extensive consultation with municipalities on this point, as it directly affected their position. The CoGTA report would offer more details on the specific instances, and all of the documented amounts would be noted in this report.

Mr Donaldson then turned to the Jobs Fund questions. The Development Bank of Southern Africa was the implementing agency. The Jobs Fund had accepted two and half thousand proposals by the end of July 2011. Some of the delays were due to the time it took to review these applications, which stretched through to November 2011, and not until February 2012 were the allocations made for the first projects. Most of the disbursements would be made in 2012/13. There were four types of projects funded by the Jobs Fund: namely, enterprise development, work seeker support, infrastructure development (especially by municipalities to support local enterprises, which was showing the lowest level of interest) and capacity building to match labour needs and labour availability.

Mr Swart asked what form the Jobs Fund payments took.

Mr Donaldson noted that they were generally in grant form.

The Chairperson asked whether the whole Fund was administered by the Development Bank.

Mr Donaldson mentioned that there were Treasury staff on the Committee that oversaw the Fund, and that there was extensive engagement between the Jobs Fund and National Treasury. He also noted that there was also engagement with provincial and municipal bodies.

Mr Swart asked who monitored whether jobs were created.

Mr Donaldson noted that this was one of the reasons for delay. Each implementer must have a plan for monitoring and evaluation, and a separate independent monitoring and evaluation team was also being set up, which would check to see that jobs were created and would also try to establish where the successes were in creating jobs, to replicate this in other areas.

The Chairperson asked where interested individuals could access more information.

Mr Donaldson responded that the Jobs Fund had a call line and office to which inquiries could be directed, and that National Treasury could also provide information.

Ms Yengeni asked for clarification on the delays in establishing monitoring plans, and asked whether these were linked to the delays in implementation.

Mr Donaldson said that new programmes often were over-optimistic in their budgeting, and the spending was likely to pick up. He also said that underspending should always be seen in the context that budgets were maximum allowances for spending, so that there would always be some level of underspending, in cases of uncertainty, to allow for flexibility, and to ensure that there more was not spent than was available. He stressed that this was not to be seen as a casual approach, but the reality was that 100% spending was rarely possible

Ms Yengeni understood these reasons for under spending, but said that in practice many departments repeatedly underspent, and wanted to know what could be done to address this. She noted the challenges around infrastructure development, and, referring to the Committee’s recent visit to Eastern Cape, said that lack of capacity was a significant factor for the difficulties in the Department of Basic Education’s infrastructure development.

Ms de Bruyn noted that an unusual situation pertained at the moment, with the national government taking responsibility for the Eastern Cape’s provincial spending. There were some general issues around infrastructure spending in the Eastern Cape, and the failure to build schools arose from similar reasons as the failure to build houses and other buildings. By way of background, she offered some information on the rollout, and said it was expected that the infrastructure plans could be completed within three years. She noted some of the reasons for delays in the rollout. One was linked to the selection of contractors. It had originally been envisaged that one large contractor would manage the bulk of the work, but subsequently there was a decision to use local contractors, which led to delays. She personally was convinced that new schools must be built to replace the unsafe structures.

Ms Yengeni acknowledged this explanation, but encouraged National Treasury to be more proactive in monitoring expenditure.

The Chairperson would have liked to discuss specific challenges in the Eastern Cape, but said that time was limited in this meeting.

Mr Ramatlakane also understood the reason for delays in school infrastructure rollout, but was worried that this could lead to further escalation of costs. The commitment of government to support small and medium enterprises, for instance, must be balanced against the needs of children for schools.

Ms Yengeni asked that the National Treasury revise its decision on the delay, in view of the possibility of additional costs, and asked that a clear route be set out, with a proper costing, to address the challenge.

Mr Gelderblom asked whether it was possible for the Treasury to set out the costs spent on consultants, which he feared would be significant. This could be provided at a later date.

Ms Yengeni reiterated her request for a revised deadline and a clear plan for addressing the issue of schools in the Eastern Cape.

Mr Singh noted that the purpose of this meeting was to get a general overview, and the primary issue was the lack of capacity in departments to spend money effectively. He wondered whether the Committee was directing its questions to the right people. It was important that the departments cited as under spending should be called collectively to address their issues. He encouraged the Chairperson to call for full day meetings with departments and relevant portfolio committees, to address these issues. He also asked who was responsible for spending in the public entities.

The Chairperson noted the suggestion. He felt that the questions were appropriately directed to National Treasury, as it clearly had a role in budgeting, spending and monitoring.

Mr Swart asked about how changes of spending within departments could be more effectively tracked and monitored.

The Chairperson noted that Mr Swart had raised this question repeatedly, yet it had not yet been answered adequately.

Mr Donaldson continued his answers, and said that in the Department of Water Affairs, the water trading entity (WTE) generated revenue from water schemes, as set out in a more detailed report on this department.

Mr Donaldson referred to questions about local and provincial accountability, and how National Treasury could address failures in spending and service delivery, by saying that the Intergovernmental Relations Team should be involved in the reporting. His report had focused on national spending rather than provincial and municipal spending.

Ms Yengeni was not satisfied with this response, nor with the referral to the intergovernmental team rather than providing a direct answer. She asked that the Director General of National Treasury be asked to attend the next meeting, with a full supporting team, to address all questions directly.

Mr Donaldson noted that it was impossible to always address all challenges.

Mr Donaldson said that there were some issues around public entities, consultants and similar issues, that could be answered by the details of the line-item reports, including the spending on consultants.

The Chairperson clarified that Mr Gelderblom had specifically asked for a detailed answer as to spending on consultants by government generally, rather than spending in specific departments.

Ms Yengeni noted that more information was needed on use of consultants in view of general concerns that consultants were “ripping off” the government.

Mr Donaldson noted these queries and expressed the view that National Treasury itself was considering these challenges and would offer more specifics in the future. National Treasury was working with the Department of Public Enterprises to get more details. 

Mr Swart noted that it was becoming increasingly important for National Treasury to determine what the actual results of spending were; in other words, an assessment of the outcomes was crucial.

Mr S Van Dyk (DA) asked on what basis the finances were monitored. He noted the shift in departments to using the accrual basis of accounting, which was more restrictive. Departments were able to do spending on  bulk purchases that would seem to indicate that the full budget had been spent. He asked what controls existed in this regard.

Mr Donaldson noted that accrued invoices were tracked. There was not yet enough capacity to move fully to the accrual-based accounting systems. Only when all the systems were in place would there be a full transition. At the moment, the “quasi-accrual” accounts and tracked invoices were included in the annual report of expenditure, but were not checked on a quarterly basis.

Mr Singh asked about the absence of references to rural development, asked why there was no Chief Director in charge of rural development, and urged that this must be examined to fit in the bigger picture.

Mr Donaldson noted this comment.

The Chairperson said that departments would shortly be tabling their Annual Reports. This Committee needed to decide how best to manage departments’ presentations, which may repeat some aspects of Treasury presentations. It would be helpful if representatives from the National Treasury joined the Committee on its oversight visits. He hoped that National Treasury had taken the Committee’s points and concerns into account, and interaction with National Treasury must continue.

The meeting was adjourned.