Eastern Cape Provincial Expenditure 4th quarter, and for year 2012/13: Treasury & Financial & Fiscal Commission briefings

NCOP Finance

13 May 2013
Chairperson: Mr C De Beer (ANC, Northern Cape)
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Meeting Summary

A summary of the total expenditure in the Eastern Cape Province for the 2012/13 financial year, as well as a report on the spending in the 4th quarter, was presented by, respectively, Eastern Cape Provincial Treasury and National Treasury. The province had been allocated R47 billion in the last financial year, of which R9.4 billion was for conditional grants. It also generated own revenue of R1 billion. It had spent about 97% of its adjusted budget, although the Departments of Education, Health, Rural Development and Agrarian Reform, Human Settlements and Sport, Recreation, Art and Culture had all under-spent. The reasons for the under expenditure in each of the departments was given. Compensation of employees was the main contributor to the under expenditure of R1.4 billion, but there was over-expenditure in the category of Goods and Services. The Provincial Treasury described the interventions it had taken to try to curb over-spending. In respect of the conditional grants budget, around 96% had been spent, an improvement on the previous year. However, there was under spending in 17 of the 21 conditional grant programmes, and overspending in four. The reasons were outlined for each of the departments. Rollovers of amounts had been recommended for twelve of the grant programmes. In respect of the R5 billion infrastructure budget, there was 97% spending. A last tranche, amounting to R285 million, had been withheld by the National Department of Human Settlements from its provincial Department, because of major under expenditure, and it was clear that remedial action was needed here. The main reasons for underspending were poor quality of projects and contractor problems. Only 12% of the funds under the Comprehensive Agricultural Support Grant (CASP) were spent, with underspending of R23 million, due to lack of detailed planning by the department and contractor problems. There was overspending on both the Education Infrastructure Grant and the Comprehensive HIV/Aids Grant. Again, various rollovers were requested. Provincial Treasury was engaging with the departments to identify blockages, and a Cabinet Budget Committee for infrastructure had been formed. In the 2013/14 year, it was intended to offer greater support and to strengthen coordination.

Members made the point that had the departments run proper checks, inadequate contractors would not have been appointed and the problems could have been avoided. They questioned the veracity of the reports from departments, and asked how Provincial Treasury checked them, and whether it conducted site visits. They noted that urgent interventions were needed into the provincial Department of Human Settlements, asked about the date for the adjusted budget, wondered why the Department of Health waited so long to advertise posts, and why the problems around invoices could not have been dealt with before the end of the financial year. They also asked if money was released without proper business plans, and wondered if Provincial Treasury had sufficient capacity.

A second presentation on the 4th quarter spending in the provinces was given by National Treasury, setting out the budget and spending, noting under-spending of R1.496 million, with 95.8% spending on conditional grants. Members queried the cash balances. Finally, the Financial and Fiscal Commission acknowledged the efforts being made by the National and Provincial Treasuries, which had improved the situation, but emphasised that accounting officers also had a responsibility to stabilise the situation, and expressed some concern about pending court cases. The Commission shared concerns about the provincial Department of Human Settlements, and urged that Treasury and Parliament must ensure that it was not necessary to intervene in provinces again.
 

Meeting report

Chairperson’s opening remarks
The Chairperson said the objective of these meetings was to hear provincial treasuries’ quarterly reports to the Committee, and to ensure that the kind of reckless expenditure that took place in Limpopo did not happen again. He added that this exercise would help Parliament to monitor and pick up problematic issues, so that they could be dealt with before the annual report stage. It would also ensure that not only the provincial treasuries and the MECs for Finance were held accountable for enforcing the Public Finance Management Act (PMFA), which was intended to ensure good governance, financial management and achieving value for money, but would also assist Committee Members in oversight.

Eastern Cape Provincial 2012/13 expenditure: Eastern Cape Provincial Treasury briefing
Ms Marion Mbina-Mthembu, Head of Department, Eastern Cape Provincial Treasury, said the province was allocated R47 billion for the period and R9.4 billion for conditional grants. However, out of  the conditional grants a total amount of R286 million was withheld, due to slow spending on the Health Professions Training and Development Grant, the Human Settlements Development Grant and the Mass Sport and Participation Programme Grant. The province also generated own revenue of R1 billion from interest earned on bank balances, surplus funds and the over-collection of patient fees. The amount exceeded the adjusted budget by R2.4 million.

Overall, the province spent 97.4% of its adjusted budget, resulting in under expenditure of 2.6%. The Department of Human Settlements spent only 89%, underspending by about R292 million, and the Department of Sport, Recreation, Art and Culture achieved only 91% spending. The reasons given for the under expenditure were varied. The Department of Education cited reasons that included the payment of temporary teachers whose contracts were extended until 31 March 2013, delays in the payment of the Rural Allowance Incentive Scheme and delays in the appointment of temporary teachers. Most of these payments had subsequently been made. In the Department of Health, there were delays in filling critical posts. These post had been advertised in March 2013 and would be filled in the current year. In the Department of Rural Development and Agrarian Reform, the problems included capacity challenges with emerging contractors and lack of detailed planning and implementation of projects. In this Department, there was a withholding of the transfer to the public entity who did not surrender surplus funds. The Department of Human Settlements cited a lack of capacity by contractors, delays in the procurement processes, as well as challenges with housing beneficiary administration and provision of bulk infrastructure. At the Department of Sport, Recreation, Art and Culture, the main problem was the non-filling of vacant library assistant posts and delays in the procurement processes for modular libraries and sport equipment.

By line item, Ms Mbina-Mthembu noted that Compensation of Employees (CoE) was the main contributor to the under expenditure of R1.4 billion, for reasons already set out. The province employed measures to manage CoE expenditure, which included scrutinising all appointments by the provincial coordinating and monitoring team, centralising the appointment function for the Departments of  Education and Health in Treasury, creating greater efficiencies in leave management, and doing head count and personnel verification.

In the goods and services area, there was overspending, mainly due to budget pressures on key items such as medicine emanating from accruals, the centralised procurement and payment of section 21 schools, and communication and lease costs.
Conditional Grants Performance
Overall, the province spent about 96% of its conditional grants adjusted budget, resulting in an under expenditure of R422 million. This was an improvement from the 2011/12 year, where the province spent 84% of its conditional grants budget. Only 12% of the funds under the Comprehensive Agricultural Support Grant (CASP) were spent, an underspending of R23 million, whereas there was overspending, for both the  Education Infrastructure Grant and the Comprehensive HIV/Aids Grant adjusted grants budget, by R22 million and R41 million respectively.

Reasons given for over and under expenditure were varied. For CASP and the Agriculture Disaster Management Grant programmes, the underspending was due to a lack of detailed planning by the department, as well as credit worthiness and cash flow challenges with emerging contractors, which resulted in delays in implementing projects. An amount of R4.5 million had been recommended for rollover.

In the Education Infrastructure Grant, over expenditure was due to a misallocation of expenditure between infrastructure projects. However, the Department of Education still managed to improve on its overall infrastructure spending through various interdepartmental initiatives, as well as close monitoring through the Centralised Project Management Unit (CPMU). Other reasons included procurement challenges, late submission of invoices by service providers, labour unrests and the liquidation of a contractor.

Rollovers of amounts had been recommended for the Ilima/Letsema Projects Grant, the Land Care Programme Grant, The National School Nutrition Grant, the HIV/Aids Grants, the Technical Schools Recapitalisation Grant, the Health Professions Training and Development Grant, the National Health Insurance Grant, the National Tertiary Services Grant, the Nursing Colleges and Schools Grant, the Community Library Services Grant and the Mass Sport and Recreation Participation Programme Grant.

Infrastructure Performance
The province spent 94% of its total adjusted infrastructure budget of R7.3 billion (equitable share and conditional grants) as at 31 March 2013. Total infrastructure spending, excluding in the Department of Human Settlements, amounted to 97% spending out of the total budget of R5 billion. The total underspending amounted to R468 million. However, in respect of the provincial Department of Human Settlements, the last tranche amounting to R285 million was withheld by the National Department for Human Settlements (NDHS) because of major under-expenditure. Ms Mbina-Mthembu said the NDHS was looking to impose remedial action and would meet within the next two weeks to discuss this.

Various programmes and structures had been put in place to arrest underspending. Treasury engaged with the Departments of Roads and Public Works (DRPW), Human Settlements and Health and Education, which together accounted for 96% of the infrastructure budget, to determine the blockages which caused smaller departments to under perform on infrastructure spending. They identified poor quality of projects delivered and contractors commencing work without orders as the main stumbling blocks. The engagements with the respective Heads of Department (HODs) and the CPMU had already commenced to resolve the bottlenecks. The implementation of the Interdepartmental Accounting Model (IDA) had led to infrastructure gains in Education, evidenced by a 98% expenditure against budget. There had also been robust engagement with project managers responsible for conditional grants, as well as the establishment of a Cabinet Budget Committee for infrastructure to unlock bottlenecks in the infrastructure value chain.

The province had identified key delivery focus areas for the 2013/14 financial year. These included continued strengthening of the capacity of DRPW and CPMU to support the role of DRPW as the formal implementing agent of the province, prioritising the improvement of the provincial roads network and improved coordination to avoid duplication and to ensure optimal utilisation of limited resources.

Discussion
Mr B Mashile (ANC, Mpumalanga), referred to capacity challenges experienced by emerging contractors and asked whether the problem lay with them, or the processes for procurement of these emerging contractors. If the checks to ensure that they had the capacity to execute the work had been done properly, then he suggested that the problem would not exist. He sought clarity on the precise reasons.

Ms Mbina-Mthembu admitted that the procurement chain was tricky in that it was not interlinked. National Treasury was looking at ways to strengthen it, but had not found the ideal solutions yet.

Ms Pumulo Masualle, MEC for Finance, Eastern Cape, replied that Provincial Treasury was currently in the process of introducing a centralised system to improve delivery. Already, Treasury was helping out to such an extent that it was actually taking over these functions from departments.

Mr Mashile wanted to know how authentic the reports were that Provincial Treasury had received from the departments, and how it would verify that the figures and assertions made in the report were both correct, and actually spoke to issues on the ground.

Ms Mbina-Mthembu replied that Provincial Treasury used two login systems where departments had to submit their details. If they did not submit true reports, then Treasury would be able to verify the information on the systems. The Treasury had also appointed a budget monitor to do these checks, and had also introduced site visits to departments.

Mr Mashile asked what steps were to be taken to correct underexpenditure in the Department of Human Settlements.

Ms Mbina-Mthembu replied that Provincial Treasury had tried to address this issue by setting up a project management and project support office to assist the department. It was a very complex matter, because it also involved land under restitution, which the Department had to handle, yet over which it had no control.

Mr R Lees (DA, KwaZulu-Natal) asked on what date the adjusted budget was determined.

Ms Mbina-Mthembu replied that it was determined on 20 November 2012.

Mr Lees referred to the Department of Health and asked why the province waited until March, the last month of the financial year, to advertise posts. He also asked why Provincial Treasury did not get an answer from the Department of Health as to why the advertising of posts only took place in March.

Ms Mbina-Mthemba replied that the Department of Health had no leadership in HR earlier this year, and that was why there was a delay in appointing staff.

Mr Lees noted that for the Comprehensive Agricultural Support Grant one of the excuses for under spending was given as a lack of detailed planning. He wanted to know if business plans were prepared and submitted when conditional grants were given, and if it was done in this case.

Ms Mbina-Mthemba replied that she agreed that business plans should be in place before agreeing to the payment of a grant, but that in practice this did not always happen. Sometimes, Provincial Treasury had no option other than to sign off on grants without proper business plans, otherwise communities would suffer. She stressed that it was not a Treasury function but a sectorial department function, to ensure that business plans are in place

Mr Lees said that late submissions of invoices were given as an excuse for some conditional grants underspend. He wanted to know why this could not be dealt with during the year.

Ms Mbina-Mthemba replied that the late submission of invoices was a problem, because the departments operated on a modified accounting system where the transactions were only recorded on payment, and not on receipt of services. That could create problems if suppliers did not adhere to invoice date submissions. The only way to solve this problem was to move to an accrual accounting system.

Mr Lees said that so much of the Provincial Treasury’s presentation was remedial in nature, but there was not enough emphasis on what it had already done and what the results and improvements were.

Mr T Chaane (ANC, North West) asked if the Provincial Treasury had the capacity to deal with the matters, taking into account the huge under expenditure in the province.

Ms Mbina-Mthemba admitted that it did not have the capacity, and that it was not easy to build capacity in the Eastern Cape, as former residents did not want to move back here.

National Treasury report on Eastern Cape Provincial Spending: 4th quarter 2012/13
Mr Edgar Sishi, Acting Chief Director, National Treasury, outlined the main budget figures for said the province’s main budget for 2012/13 stood at R56.2 billion and was adjusted to R57.3 billion. The overall spending for the fourth quarter differed from the figure shown by Provincial Treasury’s amount, as it included an additional R726 000, which was described as an “unbudgeted financial transaction”. He set out the full figures for the spending (see attached presentation for full details).

In the fourth quarter, the Eastern Cape Province had under spent by R1.496 million, with Compensation to Employees underperforming by R1.036 million and Transfers and subsidies by R558 million (see report for full list of figures). The overall expenditure of conditional grants stood at 95.8% of the total available funds, with under spending of R421 million. The overall underspending was mainly recorded under the Departments of Basic Education with R692 million, Human Settlements with R292 million, and Health with R169 million. He said the conditional grant expenditure of 95,8% as at 31 March 2013 was “not that bad”. The provincial government planned to request a rollover after evaluating the departments’ individual requests for rollovers of amounts.

Discussion
Mr B Mashile asked how Mr Sishi could celebrate the cash balance, as it had resulted not from efficient usage, but rather from under expenditure.

Mr Sishi replied that he did not celebrate under spending, but was rather indicating that some departments showed healthy cash balances.

Comment by Financial and Fiscal Commission
Mr Bongani Khumalo, Acting Chairperson: Financial and Fiscal Commission, acknowledged the effort that was put in by the National and Provincial Treasuries and said that this was evident in the improvement in the finances of the province. However, he also emphasised that the Accounting Officers in the province also had a responsibility to help stabilise the situation. He said there were still a number of court cases pending in the Eastern Cape that could easily reverse the good work that had been done. That was why it was so important that those accounting officers also helped in the efforts to stabilise the province.

The Financial and Fiscal Commission shared the concern of Treasury for what was happening in the Provincial Department of Human Settlements. He illustrated how much that department had under-performed, by quoting figures of the performance of the development grant over the last four years. These showed that it spent 100% of its budget in the 2009/8 financial year, but gradually lost ground, to record its lowest expenditure of 82% this year. He said it was the duty of Treasury and Parliament to ensure that what happened in Limpopo should not be allowed to happen again in any other province. The Commission had come up with a recommendation that would deal with and anticipate problems. This would be tabled in Parliament on 24 May 2013.

The meeting was adjourned.
 

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