Financial & Fiscal Commission recommendations on Department Mineral Resources budget, & spending patterns

Meeting report

Budget and spending patterns in the Department of Mineral Resources (DMR): Financial and Fiscal Commission briefing and recommendations
Ms Sasha Peters, Senior Researcher, Financial and Fiscal Commission (FFC) and Mr Ghalies Dawood, Programme Manager, FFC, gave a presentation and recommendations on the budget, spending patterns and future priorities of the Department of Mineral Resources (DMR or the Department).

Ms Peters said that the Mineral Resources sector accounted for 8% of gross domestic product (GDP) and close to 50% of South Africa’s exports. Judged against the GDP contributions, South Africa’s mining sector ranked fifth in the world. South Africa possessed a considerable portion of the world’s reserves of alumina-silicates, chromium, gold, manganese, and the platinum–group metals, vanadium and vermiculite. The mandate of the Department of Mineral Resources was to promote and regulate the minerals and mining sector for transformation, growth and development and to ensure that all South Africans derived sustainable benefits from the country’s mineral wealth.

The National Development Plan (NDP) envisaged a key contribution from the minerals sector. According to the NDP, the sector could contribute to greater growth and job creation if certain interventions were implemented. These interventions were a stable regulatory framework, conducting research on improving energy and water efficient extraction methods, developing links with supplier industries and downstream producers, identifying resource-based products to improve beneficiation and improving alignment of the Mining Charter requirements to stimulate development in local communities.

FFC pointed out that mineral resource management went beyond government spending and also included the regulation of ownership, use and disposal, long-term infrastructure development and rehabilitation and intergenerational equity, and balancing of local, social and sectoral requirements which included housing.

Ms Peters outlined some of the challenges in the  mining sector. The first had to do with the global outlook.  If the global growth remained stagnant, the demand for resources would decline, thus softening the price of resources. Regional growth also opened up opportunities for firms with expertise in mining sector.  The second challenge was mining disturbances. The total value of production lost to mining stoppages was estimated by National Treasury at R15.3 billion in 2012. The effect of any prolonged strike action and increase in real wages in the mining sector that outpaced productivity gains would slow down job creation.

Mr Dawood briefed the Committee on the budget and programmes of the DMR. The total budget for 2013/14 was R1.3 billion. The budget allocation was split between four programmes. The first programme was Administration, and this involved strategic support and management services. It received a budget allocation of R271 million. Programme 2: Mine Safety and Health had to do with safe mining of minerals, under healthy working conditions, and this programme received a budget allocation of R163 million. Programme 3: Mineral Regulations, involved the regulation of minerals and mining sectors to promote economic development, employment and compliance, and it received a budget allocation of R222 million. Programme 4: Mineral Policy and Promotion received a budget allocation of R735 million. This programme involved the development of relevant minerals policies that promoted mining industries and attracted investment.

The presentation also highlighted the budget composition across the four programmes. The Minerals Policy and Promotion had the highest budget composition, at 52.8%. This programme’s budget was driven by Council for Geoscience and Council for Mineral Technology. The medium term emphasis within this programme was on rehabilitating derelict or ownerless mines.

The Administration programme showed the second highest budget composition, with a total percentage of 19.5%. The third highest budget composition was Mineral Regulation, with a total of 16%. The programme with the lowest budget composition was therefore the Promotion of Mine Safety and Health with a total of 11.7%.

A comparison of the expenditure composition by economic classification was also given. Transfers and subsidies had the highest percentage of expenditure composition with a total of 45.2%. This included Departmental agencies, public corporations and private enterprise and households. The second highest expenditure composition was for compensation of employees, with a total of 31.2%.  The third highest expenditure composition was goods and services with a total of 22.4%. The economic classification with the lowest expenditure composition was payments for capital assets, which accounted for only 1.1%.

Mr Dawood highlighted the Nominal and Real Budget from 2006 to 2016. The real budget was generally consistent at R600 million from 2006/07 to 2009/10. There was a slight increase in the real budget from 2009/10 to 2012/13, and it reached about R700 million. There was a rapid increase from 2012/13 to 2013/14 and the real budget reached R800 million, thereafter the budget would generally be consistent till 2014/15. There would be another increase from 2014/15 to 2015/16.

With regards to the nominal budget there was a general increase from 2006/07 to 2010/11, which was from about R700 million and from 2010/11 to 2011/12 the budget was generally the same. There would be an increase from 2011/12 to 2015/16 which would be from R1 billion to about R1.8 billion. The biggest drop in both nominal and real budget growth rates was in 2011/12. The real budget growth dropped to about -2% and the nominal budget growth dropped to about 3.5%. An analysis of growth rates showed that over the outer two years of 2013 MTEF, the increases were slightly lower.

Mr Dawood then examined the history of the budget over the years. The Department of Mineral Resources was established in 2010/11, having previously been constituted under the Department of Minerals and Energy (DME). Therefore the trends were to be viewed in that light. There was a steady nominal and real growth till 2010/11, and 16% nominal growth in budget in 2010/11. There was minimal growth in the 2011/12 budget, but a negative real growth, and this resulted in a tight fiscal framework and a decline in national revenues. Significantly lower rates were projected for 2014/15 and this slow rate was driven by real declines in Administration and Promotion of Mining Safety and Health Programmes.

Nominal shares and growth per programme
From 2006 to 2009 the Administration Programme showed low and constant growth. This went up from 2009 to 2015/16. The programme on Promotion of Mining Safety and Health was constant throughout the years. Mineral Regulation was also constant from 2006 to 2014 and went up from 2014 to 2016.

Real shares and growth per programme
Mr Dawood tabled the real shares and growth per programme. Mineral policy and Promotion started of from 300.0 in 2006 and went up to around 460.0 by 2016. The other programmes had been regulated between 100.0 and 135.0 from 2006 to 2016.

He noted that the Mineral Policy and Promotion programme consisted of the largest portion of budget over the period under review, having gradually increased over the period to above 50% of the total departmental budget. There was an average growth of 12% over the period in nominal terms, and 7% in real terms. Mineral Policy and Promotion was also the fastest growing programme over the 2013 MTEF and very significant responsibility for key strategic goals fell under this programme - for example rehabilitating 120 derelict or ownerless mines. The Council for Geoscience and Council for Mineral Technology fell under this programme and both were major drivers of expenditure.

The smallest programme was the Promotion of Mining Safety and Health, with a real annual average growth of under 2% over the period reviewed.

Over the outer two years of the 2013 MTEF period, growth across all the programmes was projected to slow down significantly relative to 2013/14.

Trends in DMR expenditure items
The FFC noted that transfers and subsidies had the largest share of department budget at 45.2%.  It was also the highest growing item, at 11% in nominal terms over the period reviewed. As of 2012/13 the figures for growth in employee costs slowed down to 9% per annum, and it had a growth of 6% in nominal terms over the outer years of 2013 MTEF period. There were erratic growth rates for goods and services.

Spending performance and fiscal discipline
Mr Dawood summarised that DMR spent 99% of its budget in 2011/12, compared to 99.8% in 2012/13. All the programmes showed spending within budget in 2012/13, while Administration also improved on the previous year by fully spending its budget, after under spending by R8 million in 2011/12.

The good performance of all the programmes suggested a strong adherence to controls, and monitoring procedures were in place to ensure that budgets were spent as planned. There was a reported under-spending of R1.7 million for Cost of Employment (0.4% of total budget) in 2012/13 as a result of unfilled vacancies. There was also a reported R214 000 underspending on goods and services, due to delays in receiving invoices. In terms of the Department’s spending against its line items over the reported two years, nearly all line items were fully spent and no over-expenditures were incurred. There was also a reasonably good fit between performance indicators achieved or exceeded (80%), and the budget that was spent.

In year spending profile
In year spending trends for the Department in 2011/12 and 2012/13 were similar. The pattern was also regular, with incremental differences from month to month. This suggested that the Department had an efficient cash flow system in place and spending disbursements to public entities (41% of the Department’s expenditure in 2012/13) were well planned to smooth out cash outflows during the year.

Irregular spending
Irregular expenditure was recorded, related to procurement processes not followed (R16.3m) services rendered before orders issued, and overtime exceeding 30% of basic salary. The amounts awaiting condonation from the 2011/12 financial year made up the bulk of the irregular expenditure.

How well did the department do in 2012/2013?
Mr Dawood summarised that as far as performance was concerned, the DMR met or exceeded 79% of all its targets in 2012/13. By area, the financial and administrative sections met or exceeded 84% of its targets, Corporate Services had reached 79%, Mine and Safety 77%, Mineral Regulation 72% and Mineral Policy formulation 92%.  The targets for indicators that were not achieved included irregular expenditures, occupational injuries, dangerous occurrences and the non-filling of vacant posts. The DMR did not overspend its budget, despite the fact that it had exceeded 37% of the targets. This was because programmes were either implemented efficiently, or there had been some fat built into the budget.

Quality of non-financial information for oversight purposes
Good quality non-financial information was necessary for effective oversight and accountability purposes. In the DMR, the  indicators were generally of good quality. However, there were some instances where no baseline information was available, so that the FFC had been unable to compare the exact extent of achievement - for example the reduction in staff turnover. The Department implemented a good practice by reporting the way that actual targets calculated. Proposals to address targets not achieved were also included. This suggested the Department had a well-established performance information system in place.

Mr Dawood did note that some of the indicators were not entirely in the Department’s control, for example jobs created through mining, and therefore could not be achieved on its own. The Auditor-General (AG) found no material findings on the performance report.

Auditor Generals audit findings
Mr Dawood noted that in the 2012/13 financial year, the DMR had received a qualified audit. It was financially qualified on Departmental revenue received from royalties and prosecuting fees, which had been misstated by R151.2 million.  There had not been full compliance with all legal and regulatory requirements because of
- misstatements of contingent liabilities in financial notes
- no effective procedures to collect all money due
- the fact that mining rights holders did not submit regular monthly and annual financial reports
- the revenue system was not integrated with other systems such as BAS.

Financial performance of DMR public corporations and entities
The Department’s entities and agencies performed well financially. Entities spent efficiently and effectively and met their goals and objectives. The entities all obtained unqualified audits in 2011/12 to 2012/13. The Department played an effective monitoring role over entities and agencies.

Departmental challenges
The FFC noted that the first challenge had to do with Human Resource Management. There was a high turnover of senior management, at 17%, especially in posts that were linked to financial procurement, and a high turnover rate of 21%, of financial clerks and controllers. There were also capacity constraints in Legal Services, from an increase in litigation and appeals.

The second challenge the Department faced was that the revenue management and accounts receivable were experiencing severe challenges.

FFC Recommendations for the following years
The FFC made a number of wide ranging recommendations on intergovernmental fiscal relations, as part of its 2014/15 annual submission to Parliament.

Specifically in relation to the DMR 2014/15 annual submission, the FFC wanted to refer to its general recommendations on fiscal consolidation. The government explicitly considered economic growth as an important factor for fiscal consolidation in South Africa. The most obvious manner in which South Africa could improve its fiscal situation was if the economy grew faster. This would help generate higher tax revenue, which would result in budget deficits declining more rapidly, and in a reduction in public debt.

FFC wanted to stress that section 86 of the Public Financial Management Act (PFMA) must be rigorously enforced by national and provincial Accounting Officers. Section 86 provided for the initiation of criminal and disciplinary proceedings for persistent contraventions, especially for wasteful and unauthorised expenditure. Where individuals were found guilty, consistent sanctions should be applied, commensurate with the seriousness of the offence.

The AG had reported that the DMR had completed investigations into cases of irregular expenditure. Adequate sanctions would be enforced where applicable.

FFC noted again that the minerals sector was a key contributor to economic growth, which earned the country foreign exchange and contributed to reduction in the growing trade deficit. The leadership role that the DMR played was therefore crucial to ensure that the minerals environment was stable so that costly disruptions to production were avoided.

Discussion
The Chairperson asked about the programmes on rehabilitation of mines. She asked under which programme these interventions fell, and how far the FFC had gone to ensure rehabilitation.

Mr Nico Steythes, Commissioner, FFC, responded that it was the National Treasury who would examine exactly how departments were spending. The FFC was not in a position to comment much about rehabilitation.

The Chairperson asked about the revenue system, and whether this was aligned with and coordinated with the licensing system that was being set up.

Mr Daniel Plaatjies , Commissioner, FFC, responded by saying that the mandate of this presentation  was to brief the Committee on the spending patterns only. However, if the Committee wanted answers to deeper issues, these should be taken up with the National Treasury.

Ms Peters said that she could report that R328 million was budgeted for revenue over the 2011/2014 period. This would fall under Programme 4, which dealt with Mineral Policy and Promotion.

Ms K Khunou (ANC) said that she did not understand the presentation, especially at the end. She said she was hoping that the presentation would be clearer, and would expand on what had been done programme by programme.

Ms Khunou asked if there were any records around the irregular expenditure. She asked the department to expand on some of the figures, and particularly on the fact that 79% of targets were met or exceeded in 2012/13.

Ms Khunou asked about the challenges, and wondered what the high rate of senior management turnover implied.

Mr J Lorimer (DA) also asked about high turnover, and asked what was regarded as normal with regards to the turnover. He also asked for more information about the human resources and wondered whether the FFC was making any specific recommendations.

The Chairperson responded that high turnover meant that people were leaving the Department

Ms Khunou asked how much funding was the Council for Geoscience getting from the Department.

Ms Peters responded that the Council received R265 million, but the total allocation was R882 million for the whole financial year.

Mr S Mohai (ANC) welcomed the presentation. He asked about the separation of the department, and what had been the developments

Ms Peters noted that the peaks in the financial charts showed growth in the year that the Department was established.

The Chairperson said that the Committee should move on from considering the separation of the DMR from the former DME. That had already been finalised, and the financial problems had been accounted for. She said that it could just be used for reference system

The Chairperson asked that the Committee bear in mind that the FFC was asked to investigate how money was being spent, but it was not responsible for the allocation of funding.

Mr Mohai asked about the intergovernmental fiscal contributions, and asked if the FFC believed that the Department was properly structured

Mr Plaatjies clarified, following the remarks of the Chairperson, that the FFC was asked to investigate departmental spending but also indicate any matters that might be of importance for the Committee to focus on. The FFC had, over the last few years, not focused much on the DMR, because of the national mandate. There were implications for local government.

The FFC’s report tried to give some sense of what the information could mean to the spending of resources. FFC could not answer some of the Committee’s questions – for instance, the questions around staffing, and in this regard the Committee should rather speak to the Department of Public Service and Administration (DPSA)).  Anything resulting from the separation of departments was a difficult issue. He urged the Committee to rather consider asking the DPSA for some answers..

The Chairperson said that ideally a representative from the DMR should have been available at this meeting to give some guidance and respond on how the DMR would be acting further

Mr Steythes said that the Department should look at the Inter-Governmental fiscal framework and deal with some of the issues raised in that regard. The NDP looked at the stability of the generic system.

Ms Khunou asked what the stakeholders should do after this presentation.

The Chairperson asked about the oversight role.

Mr Steythes responded by noting that the oversight role was with this Committee. However, the information that it would receive in order to do that oversight came from the Department and Auditor-General.

Mr Plaatjies added that the FFC had responded in so far as it could, but there were several questions that simply fell outside the mandate of the FFC. For instance, many questions seemed to arise around the function of the Department. He had noted the questions asked, but said that the FFC would have to seek guidance from other departments on those issues.

The Chairperson said that the Committee would write to the FFC if they needed more information

The meeting was adjourned.