Free State and KwaZulu-Natal on 2012/13 budget performance: briefing by National and Provincial Treasuries

NCOP Finance

12 August 2013
Chairperson: Mr C de Beer (ANC, Northern Cape)
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Meeting Summary

National Treasury (NT) gave an overview of the pre-audited budget and expenditure outcomes for all the provinces.  Broadly speaking, the provinces were moving in the direction of the goals which had been set for them, with the major focus being on the provision of social services, such as education and health care.  Expenditure on education had been R166.4bn (98.9% of budget), on health R122.6bn (99.2%) and on social development R12.1bn (98.5%).  Expenditure on non-social services had been lower, with safety, transport, roads and public works coming in at R42.5bn (95.6% of budget), human settlements and cooperative governance at R21.7bn (95.6%), agriculture at R9.8bn (95.1%) and sport, arts and culture at R4bn (93.3%). 

Analysis of monthly expenditure showed that the March “spike” was still prevalent, as was evidence that the opposite occurred in the first quarter of the financial year.  The Treasury was still grappling with this issue.  Another concern was the level of accruals – invoices that had been received by the end of the financial year, but not yet paid – although this had reduced from R13.36bn in 2011/12, to R10.44bn for 2012/13, which was a movement in the right direction.  One of the highlights was that the compensation of employees (COE) budget had been under-spent for the first time since 2006/07, mainly due to tighter control on personnel numbers.  However, budgeting for goods and services was still poor, with general overspending in the area of medicines and medical supplies, and under-spending on contractors.   Despite improvement, the management of capital budgets and performance was still insufficient.   Conditional grants were the largest contributor to under-spending, and collaboration with national departments was being undertaken to address this challenge on a case-by-case basis.  In the meantime, of the R3.8bn which had been under-spent, provinces had asked for only R1.2bn in rollovers – a situation which called into question the future status of 2013 Medium Term Expenditure Framework (MTEF) allocations.  All the provinces had positive bank balances at financial year-end, and overall these had risen from R14.2bn in 2011/12 to R19.2bn in 2012/13.  After accruals and conditional grant surrenders were factored in, the “real” balances would be closer to R5bn, which meant that some provinces, such as Free State, could experience liquidity constraints.

The NT was rolling out two courses on budget formulation and budget analysis to provide provincial officials the technical skills needed in these areas.  The Infrastructure Delivery Management System (IDMS) was being rolled out in all provinces to prepare for the 2014 bidding process for infrastructure funds.  Through the Treating Customers Fairly (TCF) framework, steps were being taken to address poor spending and cash-flow projections, and poor reporting by departments.  Financial management practices in provinces were being improved through the Financial Management Improvement Programme (FMIP), and a service provider had been appointed to conduct a systematic assessment of the provincial public finance model (PFM).  Finally, an expenditure review project had been launched between NT and the Department of Performance Management and Evaluation, to assess the success or failure of government programmes, and to propose policy reforms that would improve delivery in the future.

Free State
Free State Treasury provided a comprehensive overview of the province’s expenditure, by department, which indicated social services spending (education, health and social development) had reached 99.3% of budget, while non-social services spending was at 98.2% of budget..  There had been a slight over-expenditure on education, mainly due to compensation of employees.   Overall expenditure was 99% of budget.   Conditional grants had been under-spent by R400.5m, or 6.7% of the R5.96bn budget, and this was attributed to planning and capacity challenges.   Total infrastructure spending was also 10.8% below budget.  Tighter controls over cash were being implemented owing to concerns over the province’s cash position.   The province had tabled a breakeven budget, but the amount of unauthorised expenditure reported at the end of March 2013 had put pressure on the provincial revenue fund.   A synopsis of 2012/13 audit opinions showed that 70% of the Free State departments had achieved unqualified opinions, compared to 65% the previous year.  Although this was an improvement, a lot more work needed to be done.

Members asked questions about the size of the budget for the Premier’s office, who was responsible for the “controversial” web site, the outcome of the Special Investigating Unit into the Provincial Treasury, as well as disciplinary action against senior officials, and what was impeding the spending of conditional grants.  Concern was expressed over the effect of the census on the equitable share allocation.

KwaZulu-Natal
KZN Treasury presented a summary of the province’s unaudited actual expenditure for 2012/13, amounting to R85.6bn, which represented 99.4% of the adjusted final appropriation.   Total revenue came mainly from equitable share (79.7%), with conditional grants (17.2%) and provincial own revenue (3.1%) making up the balance.  A second adjustments estimate had been tabled on March 26, 2013, relating to an amount of R175.5m in respect of the education infrastructure grant, which had been reallocated from Limpopo due to poor spending in that province, indicating that National Treasury was “getting tough” now – it was a case of “use it, or lose it.” 

KZN had accumulated a surplus of R1.756bn by the end of the financial year, having budgeted for a R900bn surplus.  The increase was due to under-spending its budget allocation by R539.2m and over-collecting its own revenue by R331.65m, although NT had withheld R14.6m in grants.  The province had taken a strategic decision in 2008/09, when it was in serious financial trouble, to “get out of that mess”.  This had been achieved in a mere eight months, and budgeting for a surplus was now a precautionary measure, or contingency reserve. 

The MEC pleaded with the Committee to assist in preventing unfunded mandates being passed on to the provinces.  The provinces were not party to wage negotiations carried out at a national level, but were then expected to implement the wage agreements that had not been budgeted for.  Many payments had to be made retrospectively, costing millions.   If provinces said they were unable to implement the wage agreements because they did not have the funds, this led to the risk of labour unrest.

Issues raised by Members included the danger of presenting aggregate figures which could hide poor performance in individual entities, possible steps to reduce the level of accruals, the need for the public service to link wage increases to productivity improvements, the renovation of the Premier’s Parkside official residence, and under-spending of the land care grant.

Conclusion
National Treasury pointed out that fiscal health was primarily about making good decisions, rather than about money, and it was preferable that the decisions were made by choice, rather than when there was a crisis.   Provinces finding themselves in tight situations had to make the right decisions.

The Chairperson said the Committee would continue to maintain a hands-on approach regarding provincial finances, in the interests of good governance,
 

Meeting report

The Chairperson welcomed the delegations from National Treasury and the Free State and KwaZulu-Natal (KZN) provincial governments.  Good governance, sound financial management and value for money required a “hands-on” approach from the Committee, so that the sort of intervention needed in Limpopo would not have to be repeated.  The oversight role of Parliament required that all three tiers of government worked together to improve service delivery and governance,

National Treasury Presentation
Mr Edgar Sishi, Chief Director: Provincial Budget Analysis, National Treasury, gave an overview of the pre-audited budget and expenditure outcomes for all the provinces, before turning his attention specifically to the Free State and KZN.  Broadly speaking, the provinces were moving in the direction of the goals which had been set for them, with the major focus being on the provision of social services, such as education and health care. Expenditure on education had been R166.4bn (98.9% of budget), on health R122.6bn (99.2%) and on social development R12.1bn (98.5%). Expenditure on non-social services had been lower, with safety, transport, roads and public works coming in at R42.5bn (95.6% of budget), human settlements and cooperative governance at R21.7bn (95.6%), agriculture at R9.8bn (95.1%) and sport, arts and culture at R4bn (93.3%). The provinces which under-spent their budgets significantly were Limpopo (4.6% under), Northern Cape (4.7%) and North West (also 4.7%).

Analysis of the monthly expenditure showed that the March “spike” was still prevalent, as was evidence that the opposite occurred in the first quarter of the financial year.  The Treasury was still grappling with this issue.  Another concern was the level of accruals – invoices that had been received by the end of the financial year, but not yet paid – although this had reduced from R13.36bn in 2011/12, to R10.44bn for 2012/13, which was a movement in the right direction.  One of the highlights was that the compensation of employees (COE) budget had been under-spent for the first time since 2006/07, mainly due to tighter control on personnel numbers.  However, budgeting for goods and services were still poor, with general overspending in the area of medicines and medical supplies, and under-spending on contractors.   Despite improvements, management of capital budgets and performance was still insufficient.   Conditional grants were the largest contributor to under-spending, and collaboration with national departments was being undertaken to address this challenge on a case-by-case basis.  In the meantime, of the R3.8bn which was under-spent, provinces had asked for only R1.2bn in rollovers – a situation which called into question the future status of 2013 Medium Term Expenditure Framework (MTEF) allocations.  All the provinces had positive bank balances at financial year-end, and overall these had risen from R14.2bn in 2011/12 to R19.2bn in 2012/13.  After accruals and conditional grant surrenders were factored in, the “real” balances would be closer to R5bn, which meant that some provinces, such as Free State, could experience liquidity constraints.

Looking specifically at the Free State budget of R253.7bn for the past year, the province had over-spent on personnel by R235.9m, and under-spent on capital projects by R256.6m.  The personnel costs were due to the employment of over 900 staff during the year.  On the infrastructure side, the expenditure on housing had not worked out the way it should have. Conditional grants had been under-spent, particularly in the health sector.   The province’s projected expenditure for the first quarter of the current financial year, as required by the Public Finance Management Act (PFMA), were purely for information and not considered reliable.  This issue had been raised with the province, and Treasury was working with Chief Financial Officers (CFOs) to improve their projections.

Mr Sishi said that while KZN had under-spent its budget by R539.1m, this had to be seen against the background of the size of its overall budget, which was much larger than any other province. The figures were much better than last year, and the trajectory was in the right direction, although there was still over-expenditure on employees’ compensation and under-expenditure on capital projects.   The province’s first quarter projections, like Free State’s, should be “taken with a grain of salt!” 

He asked the Committee to take note of the initiatives that had been introduced by the National Treasury (NT) to resolve the issues which had been identified.  The NT was rolling out two courses on budget formulation and budget analysis to provide provincial officials the technical skills needed in these areas.  The Infrastructure Delivery Management System (IDMS) was being rolled out in all provinces to prepare for the 2014 bidding process for infrastructure funds. Through the Treating Customers Fairly (TCF) framework, steps were being taken to address poor spending and cash-flow projections, and poor reporting by departments. Financial management practices in provinces were being improved through the Financial Management Improvement Programme (FMIP), and a service provider had been appointed to conduct a systematic assessment of the provincial public finance model (PFM).  Finally, an expenditure review project had been launched between NT and the Department of Performance Management and Evaluation, to assess the success or failure of government programmes, and to propose policy reforms that would improve delivery in the future.

Mr Sishi concluded his presentation by saying that the South African financial management system was relatively good. The challenges were in its implementation, and the focus of the NT’s strategy was therefore on the need to capacitate the individuals involved, and to provide them with the necessary skills.

Discussion
Mr B Mashile (ANC, Mpumalanga) suggested that provincial CFO’s should “make some sense” of the inflated bank balances in relation to the level of accruals, and wanted to know why the invoices of service providers were not being settled.   He asked whether there might be a correlation between protest marches over lack of service delivery, and the under-expenditure on capital projects while there was over-expenditure on employee compensation.  He said there had been reservations expressed about the March “spike” in the past, and the time had come to find out what was happening.  Was fiscal dumping being used as a means to reduce under-expenditure?

Mr Sishi agreed that much work still needed to be done to sort out the cash balances issue, although once the accruals had been factored in, the balances were much lower.  What was needed was a determination on what the minimum balance should be for each province to manage its affairs, and the NT was currently working with the Minister to resolve this.   The compensation of employees compared to the level of capital expenditure was a complex issue, and provinces were still battling to get their goods and services budgets right.  When service providers were not paid, this meant the process was not being properly managed and created problems with the service providers that could have wider repercussions.  However, there was a trend in the right direction to control the level of staffing.   The March “spike” had been analysed and a thick report had been put together.  A wide range of reasons had been identified, but they all seemed to suggest that people were trying to spend money quickly, including examples where there were nefarious intentions.

The Chairperson said that the NT initiatives to capacitate employees with financial management skills would not succeed unless participants were tested to ensure they had acquired these skills.

Mr Sishi assured the Committee that not only were participants tested, but they also had to submit an assignment.  One of the problems was the high turnover of CFOs, whose average “life span” in a department was just two years.  This resulted in a loss of institutional memory, and the constant need to re-train.

Free State Provincial Treasury
Ms Elzabe Rockman, MEC Finance, Free State Provincial Treasury, provided a comprehensive overview of the province’s expenditure, by department, which indicated social services spending (education, health and social development) reached 99.3% of budget, while non-social services spending was at 98.2% of budget..  There had been a slight over-expenditure on education, mainly due to compensation of employees.   Overall expenditure was 99% of budget.   She expressed disappointment that conditional grants had been under-spent by R400.5m, or 6.7% of the R5.96bn budget, and said this pointed to planning and capacity challenges.   Total infrastructure spending was also 10.8% below budget.

Tighter controls over cash were being implemented owing to concerns over the province’s cash position.   The province had tabled a breakeven budget, but the amount of unauthorised expenditure reported at the end of March 2013 had put pressure on the provincial revenue fund.  The controls included budget blocking – if there were no funds against an item used to place an order, the transaction would not go through – and there were limitations on the levels at which cheques could be issued.  All supplier payments above R1m and PERSAL salary administration system payments above R5m had to be verified and approved by the provincial Treasury before implementation by the bank, while disbursements for all departments also have to be approved by the provincial Treasury.   The supply chain management process was also being closely monitored.

A synopsis of 2012/13 audit opinions showed that 70% of the Free State departments had achieved unqualified opinions, compared to 65% the previous year.  Although this was an improvement, a lot more work needed to be done.  There were still a number of areas for concern over unauthorised expenditure, which had amounted to R251.7m in 2012/13, compared to R65m the previous year, and was related mainly to overspending on compensation in the health, education and police, roads and transport departments.  Several plans and systems had been put in place to deter fraud and corruption

During the next three years, the Free State had budgeted to spend an amount of R84bn, of which more than two-thirds would be spent on health, education and social development.

Discussion
Mr R Lees (DA, KZN) asked why the budget for the Free State Premier’s office had been R255.3m, which was even more than the R205.9m allocated to the legislature.

Ms Rockman explained that over 300 community development workers had been transferred from the Department of Cooperative Governance and Traditional Affairs, and had been transferred as a pilot project to the Premier’s office, and this had had a significant impact.

Mr Lees said that one of the “own revenue enhancement initiatives” referred to the production of dairy facilities and other agricultural products, and asked for an explanation of what that meant.

Ms Rockman said this referred to the Vrede dairy, where the Department of Agriculture was contributing R347m in three equal instalments over three years.  Further details could be provided, if required.

Mr Lees asked who was being held accountable for the “controversial” web site, which was reputed to have cost R140m.  Did this also fall under the budget of the Premier’s office?  He asked for confirmation of the cost, who authorised the expenditure, and whether it was being investigated in any way.

Ms Rockman said the web site was funded jointly by the office of the Premier and COGTA, and as the Auditor General and the Public Protector were both considering the matter, she did not want to pre-empt their findings.

Mr Lees asked what the outcome had been into investigations into the provincial Treasury by the Special Investigating Unit (SIU).

Mr Mashile commented that although it was apparent from the measures being implemented that the Free State knew what needed to be done, yet problems with issues like accruals and unauthorised expenditure were continuing.  This raised the question of whether the remedies were producing the desired results.

 Ms Rockman said a new approach had been tried in dealing with unauthorised and wasteful expenditure.  Each department had been asked to explain why the expenditure had been incurred, to go and investigate, and to account for it.  So far, results suggested that no-one could be held accountable, which meant insufficient progress had been made and the issue needed to be revisited.

Mr Mashile asked what challenges were hindering the spending of conditional grants.

Mr Itumeleng Moses, Senior Executive Manager: Free State Treasury, said a sub-unit had been established to monitor conditional grant spending, and it provided feedback to the accounting officers, indicating where there was slow spending, so that corrective action could be implemented.

Mr T Chaane (ANC, North West) asked for details on the students being assisted through the provincial bursary scheme.

Ms Rockman said that 6 400 students were benefiting from bursaries costing a total of R380m a year, administered by the Department of Education.

Mr Chaane asked for the province’s comments on the NT’s assertion that the Free State might experience liquidity constraints.

Ms Rockman said the Free State acknowledged there were liquidity constraints, and was taking cash management very seriously to avoid going into overdraft. The departments of health and education, in particular, had been told to rein in their expenditure.

Mr D Bloem (COPE, Free State) said the MEC had reported on investigations and disciplinary processes that had been undertaken, and that the one involving the police, roads and transport department had been concluded. How many people had been disciplined?  Could she provide details on the ongoing disciplinary processes involving the human settlements department, and the SIU investigation at the Treasury?

Ms Rockman said the police, roads and transport issue was related to 23 road contracts. The former Deputy Director General (DDG) and Chief Director of Roads had both been dismissed, and another three or four officials had resigned over related issues.  In the case of human settlements, six senior managers were currently suspended while disciplinary processes were continuing. And seven other officials had been related on related matters. The investigation into the Treasury emanated from 2007, and dealt with the misuse of the R14m Free State Development Fund intended to support small business development.  By the time the investigation had been completed last year, not a single official involved with the Fund was still at the Treasury. Where possible, criminal prosecution could be considered, but the “burden of proof” was a problem. Internal action was no longer possible.

Mr Chaane asked about the Free State’s concerns over its equitable share allocation.

Ms Rockman said the concern related to the effect of the census on the allocation.  The equitable share did not take into account the high cost of service delivery to the predominantly rural areas.

Mr Lees asked for a more detailed response on the Vrede dairy project to be provided to the Committee.  He also argued that the web site issue could not be considered sub judice, and asked for a specific answer to his questions on the matter.

Ms Rockman said that both she, as Director General in the office of the Premier, and the Acting Director General of COGTA, had signed off on the project as accounting officers. The total expenditure to date was R44m. The Auditor-General and Public Protector were looking into the matter, and should be allowed to complete the process.

KwaZulu-Natal Provincial Treasury
Ms Ina Cronjé, MEC Finance, KZN Provincial Treasury, presented a summary of the province’s unaudited actual expenditure for 2012/13, amounting to R85.6bn, which represented 99.4% of the adjusted final appropriation.  Total revenue came mainly from equitable share (79.7%), with conditional grants (17.2%) and provincial own revenue (3.1%) making up the balance. She said it was worth noting that a second adjustments estimate had been tabled on March 26, 2013, relating to an amount of R175.5m in respect of the education infrastructure grant, which had been reallocated from Limpopo due to poor spending in that province, and commented that National Treasury was “getting tough” now – it was a case of “use it, or lose it.” 

KZN had accumulated a surplus of R1.756bn by the end of the financial year, having budgeted for a R900bn surplus. The increase was due to under-spending its budget allocation by R539.2m and over-collecting its own revenue by R331.65m, although NT had withheld R14.6m in grants. The province had taken a strategic decision in 2008/09, when it was in serious financial trouble, to “get out of that mess”.  This had been achieved in a mere eight months, and budgeting for a surplus was now a precautionary measure, or contingency reserve. One of the reasons the Provincial Treasury had increased its own revenue substantially was the additional interest it was receiving on its positive bank balance, instead of paying interest.

While KZN had ended the year with an under-expenditure of R539.2m, compensation of employees had been overspent by R432.5m, due mainly to education and the carry-through effects of the shortfall in funding for Occupation Specific Dispensation (OSD) and various wage agreements, as well as the carry-through effects of the conversion of 600 teacher assistants to teacher aids, and the provision for rural incentivised mathematics and science teaching posts, which had been made in 2011/12 without funding.  Ms Cronjé pleaded with the Committee to assist in preventing unfunded mandates being passed on to the provinces. She pointed out that the provinces were not party to wage negotiations carried out at a national level, but were then expected to implement the wage agreements that had not been budgeted for. Many payments had to be made retrospectively, costing millions.  If provinces say they are unable to implement the wage agreements because they do not have the funds, this leads to the risk of labour unrest.

There had been a vast improvement in infrastructure spending. About two years ago, it had been decided to establish a “crack” team of built environment experts to provide the technical expertise.  Although this was an additional cost, it was money well spent.  It was necessary because there was a lack of technical expertise in the departments.  It had been a demonstrable success, to the extent that it was now being extended to the municipalities, where service delivery challenges existed, even though funds were available.

Discussion
Mr Mashile said the fact that the province had under-spent its overall budget by only 0.6% did not reflect the true situation, as there were individual entities where as little as 51.1% of the budget had been spent, and this could be hiding a “crisis.”

Ms Cronjé replied that she was fully aware that the 99.4% expenditure was an aggregate figure.  However, this was against a budget of R86bn, an the amount not spent was miniscule. KZN had a very good record, as was the best spending province on infrastructure.

Mr Mashile commented that the level of accruals could be reduced to minimal levels through departments advising suppliers to submit all outstanding invoices by the middle of March, so that they could be processed before the financial yearend. 

He said he was worried that Public Works had over-estimated property rates in KZN, as this indicated they did not know the value of the properties which they themselves managed.  The provincial Treasury would need to deal with this issue in order to budget accurately.

Mr S'miso Magagula, Head of Department: KZN Treasury, said Public Works was only slightly to blame for the over-estimations, as it had asked the municipalities to supply their property valuations.  Some of these had subsequently been reduced, following challenges to the valuations, which accounted for the over-estimation.  It would have taken years to authenticate all the valuations, and this would have delayed the process.

Mr D Joseph (DA,Western Cape) said the Treasury needed to come up with a solution to the unfunded mandate problem, as all spheres of government – and particularly municipalities – were struggling with it.  He said it was clear that the increases for education that the provinces had to live with, were not linked to productivity.

Mr Magagula said that it seemed the public service did not have “a consciousness” to link salary increases to productivity improvements, and it would be helpful to have a methodology that addressed this issue.

Mr Joseph expressed concern that the R93.9m under-expenditure on the National School Feeding Fund grant necessitated a roll-over.  He suggested that a service provider should be allowed to submit an invoice within two weeks of the financial yearend, and have it accounted into the final figures.

Ms Cronjé said that the province was forbidden by law to pay for a service before it had been rendered, but was working on finding a solution to the problem.

Mr Lees asked why the R21m land care grant had been under-spent by almost R5m, as it appeared a lot of money was being wasted on seed and fertiliser which was being dumped and rotting, and farm equipment which was not being used for a year and rusting.  The money that was not being spent indicated a lack of financial control.

Mr Magagula agreed that this appeared to be a problem area. The land care project was ideal for an Expanded Public Works Programme (EPWP) approach, with the fixing of dongas to combat erosion, which required unskilled labour. This issue needed to be sorted out with the Department of Agriculture.

Mr Chaane asked whether the R5.7m renovation of the Premier’s Parkside residence included refurbishment and upgrading.

Ms Cronjé said she wanted to make it clear that this was not the house in which the Premier and his family lived.  Parkside was the official residence, and a national monument, and was used for occasions such as visits by foreign delegations.

Mr Magagula added that the whole building had been condemned by Public Works, so the renovations were effectively a complete overhaul.

Conclusion
Mr Sishi said that the comments arising from the presentations had been noted by the Treasury. He pointed out that fiscal health was primarily about making good decisions, rather than about money, and it was preferable that the decisions were made by choice, rather than when there was a crisis.   Provinces finding themselves in tight situations had to make the right decisions, and KZN had shown, when they were R5bn in the red, how this approach could turn things around.

The Chairperson said that the Committee would continue to maintain a hands-on approach regarding provincial finances, in the interests of good governance, and looked forward to engaging with the provinces again in the fourth quarter. He thanked the Free State and KZN delegations for their presentations, and closed the meeting.
 

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