National Treasury on its Fourth Quarter 2012 Performance

Standing Committee on Appropriations

21 August 2012
Chairperson: Mr E Sogoni (ANC)
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Meeting Summary

The extent to which National Treasury had the right to intervene in government departments in order to help them improve their budget performance – particularly in instances where budgets were under-spent – was the focus of discussions after Treasury had presented its report to the Committee. At issue was the manner in which the legal framework was structured, as Treasury intervention could cause frustration to departments, particularly those with concurrent functions. It was hoped that the Monitoring, Support and Intervention Bill, or other amending legislation, would help to resolve some of the “tricky” issues involved.

Concern was expressed that Treasury, which should be leading other departments by example, had under-spent its own budget by almost R2.5bn in the past financial year, continuing a five-year negative trend. The Director General explained that most of the under-expenditure had occurred in the Jobs Fund project, which had been launched only in June last year, and the R2bn budget had been proved to be over-optimistic. The problem had been one of poor planning, rather than a failure to spend budgeted funds productively.

The persistent March “spike” in expenditure by departments was described by Treasury as a “puzzle”, as payments were required to be made within 30 days of receipt of invoice, so apart from the first month in the budget cycle, expenditure should average out over the balance of the year. However, departments did differ – some might take a while to enter into contracts, and lump the payments into the end of the financial year. But others might fear losing unspent funds, and apart from processing invoices, started buying things they might need in the future – or even things they might not need, rather than lose the money. With a three-year budgeting cycle, one should not see this happening, and departments should rather focus on showing that outstanding projects were worthy of a roll-over of funds. Treasury’s role was to collate financial information, put it into reports, and make it available to Parliament, the provinces and municipalities. It was expected that these entities would use the information to identify their own spending trends, and to guide their spending and accountability. Treasury said it did not merely stand on the sidelines and point fingers, but provided support for the building of service delivery capacity at provincial and municipal level. It was not easy to adopt a similar proactive approach at a national level, as the law allowed Treasury only to offer assistance, and not to intervene without being requested to do so.

Questions were raised about the capacity of the Development Bank of Southern Africa (DBSA), which was running the Jobs Fund project, to handle all the work it was involved in around the country. A suggestion that capacity constraints were leading the DBSA to “cherry-pick” the most lucrative projects was refuted on the basis that it worked with Treasury to ensure it complied with its developmental mandate.

Treasury said that although it had reduced its staff complement from 2 190 to 2 170, following a review of Treasury’s operations, the 19 posts abolished were mainly support functions. However, a number of chief director positions still needed to be filled to help meet capacity challenges within the department.

A Member said Treasury’s mandate included equitably and effectively raising fiscal revenue, while enhancing the efficiency and competitiveness of the economy. About R11bn had not been spent by departments in the past financial year, which meant that taxpayers’ money had been taken away from the productive economy and absorbed into the fiscus, to the detriment of economic growth and job creation.

A proposal was made that the Committee needed to spend time with Treasury at a workshop, where a number of issues raised during the meeting could be clarified. The Director General said such a workshop would help Treasury to understand the expectations of the Committee, as issues such as what Treasury could do from a legal and technical point of view, could be discussed. Then, when Treasury was called to account, it would understand the reasons. It would also ensure that Treasury was not leaving any gaps in its functions.

Meeting report

The Chairperson opened the meeting by asking the National Treasury delegation to comment on the practice by government departments to incur high expenditure in the third and fourth quarters of the financial year, and very little in the first quarter. He also noted that some of Treasury’s programmes were not performing well, and was concerned that the Department had under-spent its budget by almost R2,5bn.

Mr Lungisa Fuzile, National Treasury Director General, said Treasury contributed to three of the Government’s priority outcomes – decent employment through inclusive economic growth, a responsive, accountable, effective and efficient local government system, and an efficient, effective and development-oriented public service and an empowered, fair and inclusive citizenship. Looking back on the past financial year, fiscal policy had contributed to a recovery of economic growth in the face of adverse world conditions, while beginning a consolidation of the public finances, aimed at lowering the budget deficit. Further progress had been made in initiatives to strengthen the financial management capacity of municipalities, with over 10 000 councillors being trained, as well as mayors and members of mayoral Committees.

Treasury’s total budget for 2011-12 had been R23.839bn, and expenditure had amounted to R21.362bn – an under-expenditure of R2.477bn. There were four main areas contributing to this situation:

           Progress had been made in reducing the departmental vacancy rate from 14% to 9,5%, although it had been difficult to attract the right skills for identified positions. The biggest stumbling block had been that although all vacancies needed to be advertised, most were filled by internal promotions, which left vacancies further down the employee chain. This slowed down the process, but the benefit was that it enabled people to grow within the organisation.

           Budget expectations had not materialised in areas such as banking cost recovery payments to the Reserve Bank (a difficult figure to forecast), economic and policy research consultants (lower requirements than projected), and delays in implementing the Integrated Financial Management System (IFMS).

           Lags in implementing developmental programmes such as the Jobs Fund and the Neighbourhood Development Programme (NDP).

           Delays in completing the refurbishment of the 38 Church Square building.

Mr Fuzile pointed out that overall spending on the NDP grant programme had improved considerably, with R738.4m being transferred to 55 municipalities, against a total budget of R750m. There had been delays at five municipalities, mainly because of changes in their structures, so the balance of R11.6m had not been transferred. During the period, 258 project plans had been approved and 116 completed, compared to 198 approved and 62 completed in the previous 12 months.

The Jobs Fund, on the other hand, had a budget of R1.95bn for the 2011-12 financial year, and only R139.7m had been spent. It was a unique project, challenging the private sector to come up with innovative ideas for partnership-based approaches to long-term job creation, targeting the unemployed, particularly young people and women. The goal was to create 150 000 sustainable jobs through grants to projects over a five-year period, from 2011/12 to 2016/17, at which stage it was expected that the Jobs Fund could be phased out, with the full cost of the projects being borne by the private sector. The programme had been contracted out to the Development Bank of Southern Africa (DBSA), and involved grants totalling R8.156bn being disbursed over the five-year implementation period.

Looking at the budgeted expenditure for the first year, it appeared that Treasury had been over-optimistic. However, there had been a high level of commitment to the programme, and 2 600 applications had been processed, but because of the rigorous evaluation process, only 34 projects with a value of R1.8bn over three years, had been approved in 2011/12. If Treasury had adopted a policy of allocating the funding up front, it would have lost control. Instead, it wanted to see the projects working, so that funding could be released over the three-year period.

It had to be borne in mind that the programme had been launched only in July of last year, and the structure, capacity, and framework had had to be set up to manage its implementation. Treasury had had to enter into an agreement with the DBSA, and far more applications had been received than anticipated, and this had contributed to delays.

Mr Fuzile concluded his presentation by commenting on the “March spike” in expenditure, referred to by the Chairperson in his opening remarks. He described this issue as a “puzzle”, as payments were required to be made within 30 days of receipt of invoice, so apart from the first month in the budget cycle, expenditure should average out over the balance of the year. However, departments did differ – some might take a while to enter into contracts, and lump the payments into the end of the financial year. But others might fear losing unspent funds, and apart from processing invoices, started buying things they might need in the future – or even things they might not need, rather than lose the money. With a three-year budgeting cycle, one should not see this happening, and departments should rather focus on showing that outstanding projects were worthy of a roll-over of funds. Treasury’s role was to collate financial information, put it into reports, and make it available to Parliament, the provinces and municipalities. It was expected that they would use the information to identify their own spending trends, and to guide their spending and accountability. Treasury did not merely stand on the sidelines and point fingers, but provided support for the building of service delivery capacity at provincial and municipal level. It was not easy to adopt a similar proactive approach at a national level, as the law allowed Treasury only to offer assistance, and not to intervene without being requested to do so.

Discussion
Mr M Swart (DA) said he assumed that any municipality could apply for an NDP grant, but wanted to know how the adjudication was conducted.

Ms R Mashigo (ANC) said the DBSA appeared to be involved in projects with every government department, which caused her to doubt whether it had enough employees to give technical assistance in every one. She did not want to undermine the DBSA, but felt that the issue of capacity limitations might be responsible for delays in implementing the Jobs Fund project, as well as the under-expenditure.

Dr S van Dyk (DA) said Treasury’s mandate included equitably and effectively raising fiscal revenue, while enhancing the efficiency and competitiveness of the economy. He understood that about R11bn had not been spent by departments in the past financial year, which meant that taxpayers’ money had been taken away from the productive economy and absorbed into the fiscus, to the detriment of economic growth and job creation. Having unspent money was not good for the economy. When he had raised this issue with other departments, they had replied that even the “watchdog” Treasury had not fully spent its budget.

Ms L Yengeni (ANC) said that Treasury, as custodian of the government’s funds, should be leading by example, but its expenditure against budget had been on a downward trend for the past five years. She also criticised Treasury for not filling all its vacancies, stating that if Treasury could not solve its own capacity problems, it could not expect other departments to do so.

The Chairperson supported her views, and said there was a need for Treasury to improve its performance.

Ms A Mfulo (ANC) said she believed the under-spending was simply a matter of lack of capacity. The DBSA could be found everywhere, and they were so overwhelmed with work that they were unable to handle it all, and in the end undertook only the most lucrative projects. Was Treasury not bombarding it too much?

The Chairperson commented on the DG’s assertion that it could not adopt the same proactive approach at national level as it did at provincial and local level. Section 216(2) of the Constitution stated that Treasury “must enforce compliance with the measures established in terms of subsection (1), and may stop the transfer of funds to an organ of state if that organ of state commits a serious or persistent breach of those measures.” Section 6 of the Public Finance Management Act (PFMA) stated that Treasury “must…assist departments to build capacity.” In the light of this, he believed Treasury had a right to intervene, and the Committee might be correct in thinking Treasury was not doing enough.

Answering questions about the Neighbourhood Development Programme, Mr Fuzile said all municipalities were entitled to apply for grants. The beauty of the grant was that it had two components. The first was the technical assistance provided to help under-capacitated municipalities to prepare an application, followed by initial funding to launch the project. Once the project was up and running, full funding was allocated.

When he described the downward trend in Treasury spending as “misleading,” he was challenged by the Chairperson and Ms Yengeni, but said the context in which the decline had occurred should not be ignored. A disaggregation of the figures showed a different picture. For instance, in 2010/11 the biggest area of under-expenditure had been the R1,1bn infrastructure grant to the provinces. While Treasury could have “looked good” by transferring the funds to the provinces, it had followed the approved processes – including its right to “stop the transfer of funds” – if it was clear the provinces were not able to spend the funds on the projects for which they were intended. The funds would have ended up in provincial treasuries, and Treasury would have lost control over their use.

Ms Yengeni said the Committee was no longer impressed by transfers, for the sake of transfers. Funds were being dumped in the third quarters, but not being used, and the Committee expected Treasury to resolve this problem.

Ms Mfulo said that with its own under-spending record, Treasury could not shift the blame to the provinces, and needed to develop a system to pick up problems.

The Chairperson said he understood that the DG had explained that the funds had not been transferred, and that was why there had been under-expenditure in Treasury. The DG confirmed this was the case.

Mr G Snell (ANC) said the manner in which the legal framework was structured could cause frustration to departments, particularly those with concurrent functions. It was not clear how far Treasury could go in providing assistance to government entities, and he hoped the
Monitoring, Support and Intervention Bill, or other amending legislation, would help to resolve some of the “tricky” issues involved.

Mr J Gelderblom (NP) said there needed to be a plan to stop the dumping of funds into departments towards the end of each financial year.

Mr Fuzile said that while Treasury made personnel available to the provinces to assist in financial management, there was no basis in law to compel this facility to be used. Where help was offered it was sometimes accepted, and in others, not.

Ms Yengeni said it was well known that Treasury had people in every department. They could be used to monitor the transfer of funds, and if they recognised there were capacity problems, they should do something about it.

The Chairperson said he thought that this was Treasury’s role. That was the Committee’s interpretation.

Mr Fuzile explained Treasury’s relationship with the DBSA.. When Treasury wanted to implement a short-term programme linked to development, it called on the DBSA as it had the capacity to source temporary expertise to get it started. This expertise could be phased out when the programme matured, or if it was taken over by the government. When they were asked to assist with the Jobs Fund, however, they had had to employ people and develop systems within the entity to handle it, and this had taken some time at the start of the project. It had established an investment committee, which included representatives from government.

He returned to the issue of Treasury’s responsibilities. When it came to financial management, it was Treasury’s responsibility not only to develop the framework and guidelines, but also to interact so that people understood and complied with the rules. However, the running of departments – implementing projects, hiring people and so on – was the responsibility of the departments themselves. When assistance was needed, Treasury could provide it “on application,” but could not intervene on its own initiative.

The Chairperson asked if departments had the right to ignore Treasury, taking into account that the Constitution had conferred certain responsibilities on Treasury.

Mr Fuzile said that on financial matters, guided by the Constitution, Treasury could enforce compliance with the requirements of the PFMA and what was prescribed in Practice Notes, and when issues were identified in the Auditor General’s reports, Treasury took action “without waiting for an invitation.” If there was a poor audit report, it helped the entity involved to improve its performance. He said it seemed the Committee was concerned about Treasury’s role where departments were unable to spend money, and pointed out that if, for instance, the Department of Water Affairs was having problems building dams, or Public Works erecting buildings, Treasury did not have the expertise to assist. This was not Treasury’s job.

Ms Mfulo suggested that Mr Fuzile was becoming “emotional” and that while some of the challenges might not be Treasury’s responsibility, it should be able to say what needed to be done.

Ms Yengeni said that when departments were allocated money, Treasury should have the means to ensure that the departments had the capacity to spend the money.

Mr Dumisa Hlatshwayo, Chief Investment Officer of the Jobs Fund, gave a brief description of how the DBSA’s project management capacity could be rapidly mobilised to handle government projects. It had a Development Fund, which was a specialised unit which “ring-fenced” funds for specific projects.

He said the DG had explained clearly the reason for the under-expenditure on the Jobs Fund in its first year. This was when the Fund was being set up. The implementation period was from 2012/13 onwards. When the Fund was launched on 7 June last year, there had been no people yet working on the Fund, so the DBSA had had to create the necessary application forms and develop a website.

Mr Swart said the fact that R2bn had been budgeted for the Job Fund in 2011/12, when it was still in the process of being set up, was a case of bad planning. There would not have been under-spending if there had been better planning, and the unused funds could have been put to productive use.

The Chairperson said that the budget for the project had been approved on 17 April, and asked if there had been no planning between that date and the launch on 7 June.

Mr Fuzile said that the establishment of structures within the DBSA had taken place only after the launch, but as a result of the interaction between Treasury and the DBSA, the application forms were ready and a website was in place by the launch date. He conceded that he had himself doubted the Fund’s ability to spend R2bn in its first year. Although projects worth R1,8bn had been approved, the money could not flow in this period, as this would have amounted to fiscal dumping. Over the next few years, Treasury would be able to align its expenditure with the progress of the projects.

Mr Hlatshwayo confirmed the DG’s comments, saying that future budget amounts would mirror the expected Jobs Fund spending. Claims would be paid in arrear. He explained that a factor slowing down payments was DBSA’s requirement that a project had to indicate how many people would be employed by the end of its first three months of operation. If this target was achieved, this triggered payment for the second quarter, with the same procedure for subsequent milestones. He said that as the DBSA was running the programme, only it was dealing with the applications, although there were other websites offering to assist applicants with their applications. Since the DBSA operated in all nine provinces, it was able to give wide publicity about the Jobs Fund. It was ironic that there were suspicions the DBSA was “cherry-picking” by choosing only lucrative projects for the Jobs Fund, as it was currently conducting a business review, in liaison with Treasury, to ensure compliance with the development mandate.

Ms Yengeni questioned whether the DBSA had the capacity to handle all the projects with which it was involved, pointing to the infrastructure projects in the Eastern Cape, such as the schools building programme, which had not been completed.

Mr Hlatshwayo said that by the very nature of contracting, there would be delays. There had been construction problems at six schools, and these projects had been reallocated to other builders. The difficult terrain, with poor roads and wetlands, hampered the delivery of materials, resulting in delays. These were the realities of the situation.

Ms Yengeni said these realities should be taken into account when planning, as this also resulted in the miscalculation of the funding required.

Ms Mfulo suggested that the DBSA had moved away from its former role of going into communities and developing skills, and needed to align itself with “real development” rather than focus on consultancy.

Mr Hlatshwayo said there were about 30 Jobs Fund projects, spread around the provinces, where the DBSA was providing assistance. However, the Fund did not have the resources to assist individuals, and rather entered into partnerships with intermediaries to create small businesses employing young blacks and women.

The Chairperson agreed with a proposal by Ms Yengeni that the Committee needed to spend time with Treasury at a workshop, where a number of issues raised during the meeting could be clarified.

Mr Stadi Mngomezulu, Deputy Director General: Corporate Services, addressed Members’ concerns regarding Treasury’s personnel vacancy situation. He said that following a review of Treasury’s operations, it had reduced its personnel establishment from 1 290 to 1271. The 19 posts abolished were mainly support functions. However, a number of chief director positions still needed to be filled to help meet capacity challenges within the department.

Mr Fuzile said the proposed workshop would help Treasury to understand the expectations of the Committee, as issues such as what Treasury could do from a legal and technical point of view, could be discussed. Then, when Treasury was called to account, it would understand the reasons. It would also ensure that Treasury was not leaving any gaps in its functions.

The meeting was adjourned.

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