Adjustments Appropriation Bill: briefing & finalisation

Meeting report

Mr K Naidoo (Chief Director: Fiscal Policy), Mr T Chaponda (Chief Director: Expenditure Planning) and Mr T Theron (Director: National Budgets) represented the National Treasury.

Introduction
Mr Naidoo explained the process that had been followed. National Departments, provinces and local governments make submissions to the Treasury Committee for allocations that are unforeseen and unavoidable. The Treasury Committee is a Cabinet subcommittee and they decide on the adjustments.

This year the adjustments for the provincial equitable share total R2 billion. There were two main reasons for this amount:
- the higher than expected take-up in social security grants, partly as a result of regulatory changes and partly as a result of a concerted effort to improve the take-up of social grants such as the child support grant.
- the higher cost, over and above the normal inflation adjustments, particularly in health for equipment and also in printing costs for schoolbooks and materials and so forth.

Mr Naidoo told the committee that the unforeseen and unavoidable amount for local government is R22 million. That is as a result of the court case that the Uthukela municipality had won against the government with regard to the powers and functions of category B municipalities. Government had to provide three other municipalities with additional allocations because of the court case.

The total adjustment amount for national government is in the region of R1.2 billion. There were three main reasons for this amount. Firstly Public Work's vote comes to R201 million. Environmental Affairs and Tourism was the second major adjustment, mainly as a result of the World Summit on Sustainable Development (WSSD). The third major adjustment is to the Department of Transport for price escalations in bus subsidies at higher than the normal inflation rate.

Mr Naidoo emphasised that this year inflation adjustments worth R3.4 billion were made. The bulk of that went to personnel costs to cater for the higher difference between what was budgeted (6%) and what was provided (9%).

Discussion
Ms Joemat (ANC) commented on the inflation adjustments and asked whether inflation was not accounted for when the original budget was drawn up.

Mr Naidoo replied that departments are given quite specific assumptions around inflation, which they receive in their allocation letters in November. He added that when they make the allocation letters this month for the next year they specify inflation assumptions, salary increases and exchange rate assumptions.

The Chairperson suggested they go through the Bill and look at the adjustments vote by vote:

1. Presidency - no adjustments were made

2. Parliament - An adjustment of R5.5 million was made. The main reasons for that were the WSSD, the African Union (AU) and the hosting of the Pan African Parliament. There was also additional expenditure on the ACP parliamentary committee.

3. Foreign Affairs - An adjustment of R67 million was made that covers essentially three items:
- the AU launch cost R37 million more than was budgeted for.
- R10 million for the inter-Congolese dialogue.
- R9.3 million for the shortfall on South Africa's account at the Commonwealth Fund for Technical Co-operation.

Mr Mnguni (ANC) asked whether currency fluctuations are taken into account when budgeting.

Mr Naidoo replied that normally one of the largest items that is brought before the Finance Portfolio Committee, in terms of the adjustments, is the currency fluctuation. They had budgeted for a Rand Dollar exchange rate of R10.52 for this fiscal year and so far it seems that no additional amounts would be needed. There are two instances in the adjustments where departments did not take sufficient account of currency fluctuations. There is an adjustment on the Environmental Affairs and Tourism vote in terms of marine vessels and an adjustment on the Home Affairs vote for the HANIS [Home Affairs National Information System] system. At this stage there is no need to make an adjustment for the strategic arms package on the Defence vote.

The Chairperson asked if they had budgeted enough to cover the Rand sharp depreciation at the end of last year and whether the stabilisation of the Rand up till now has helped.

Mr Naidoo replied that they were reluctant to reduce the amounts on budget, partly because they are still dealing with an average for this fiscal year of about R10.50. Treasury will wait until the end of the year to see whether any adjustments need to be made. On the strategic arms deal he told the committee that the contract is extremely tight and the agreement with the Department of Defence is quite clear that that money is returned. Any saving of money, either as a result of a currency saving or as a result of a delay in the delivery of any particular item, means that such money must be returned to Treasury.

4. Home Affairs - The main adjustment is for contractual obligations on the HANIS contract. Treasury found out very late what the exchange rate assumptions for the signed contract were. Treasury was forced to adjust the budget because the exchange rate assumptions given to Home Affairs were not used. Mr Naidoo admitted it was an oversight on both the Treasury and the department's behalf.

The chairperson agreed that the exchange rate fluctuations were unforeseen and unavoidable but wondered if this oversight was really unforeseen and unavoidable. She asked by how much the HANIS assumptions were out of sync with the anticipated exchange rate.

Mr Naidoo replied that to Treasury's surprise a Rand/Dollar exchange rate of about R6 to the Dollar was still being used. That was the exchange rate used in the 2000 budget. The contracts had not been adjusted and the Department did not alert Treasury that those contracts still needed to be amended. He emphasised that Treasury had found this out very late and that it was also a surprise for the senior management of the Department of Home Affairs.

Mr Naidoo stated that the second biggest adjusted amount is for the Lindela repatriation centre. There was an increase in the average daily occupancy rate at the centre. That increase warranted higher levels of expenditure.

5. Provincial and Local Government - The only adjustment is the R22 million arising from the Uthukela court case.

6. Public Works - Mr Naidoo said that this is one of the biggest adjustments and there are two main reasons for that. Firstly rates have been adjustment on a number of government buildings. A number of national departments, provincial departments and local government buildings' rates have not been adjusted for a couple of years. Individual municipalities have made fairly significant adjustments to the rates of government buildings. The Treasury is of the view that it is appropriate for government buildings to be rated the same as private sector buildings. Mr Naidoo added that it would affect investment decisions of public entities and government departments. He mentioned that there have been meetings between themselves, SARS, SALGA (South Africa Local Government Association) and the departments of Public Works and Provincial and Local Government. At these meetings they attempted to negotiate a phased approach to increases and they were able to achieve significant phasing.

In reply to Ms Hogan asking when the changes to the rates had taken place, Mr Naidoo said that it was when municipal budgets were tabled in July. Ms Hogan asserted that it was therefore unforeseen and unavoidable. She added that is all the more reason to coordinate budgets.

Mr Naidoo told the committee that the second adjustment is R20 million for occupational safety reasons. The Department of Labour had issued writs against certain government departments for buildings not complying with occupational safety standards. The Treasury has given this amount to the Department of Public Works to repair those buildings that the Treasury thinks they can repair this year.

7. GCIS (Government Communication and Information System) - An adjustment was made for the amount of R5.5 million to provide for publicity for the 17 April Cabinet declaration around HIV/AIDS. This amount also included the government publicity campaign around the privatisation strike.

8. National Treasury - no adjustments were made

9. Public Enterprises - no adjustments were made

10. Public Service and Administration - no adjustments were made

11. Public Service Commission - no adjustments were made

12. SAMDI (South African Management Development Institute) - A turnaround strategy for SAMDI was put in place a couple of years ago and it has been fairly successful. One of the unintended consequences of that success is that SAMDI is starting to recover money from departments and that flows into departmental receipts, which then have to be appropriated. In addition there is a tapering off of European Union (EU) funds for SAMDI and adjustments had to be made to cater for that.

Mr Mnguni queried the unforeseen and unavoidable salary adjustments.

Mr Naidoo explained that in SAMDI's case they had to take on a number of people who are on EU contracts. In general there should not be salary adjustments that are called unforeseen and unavoidable.

The chairperson said that the question that arises is whether there is a contract between SAMDI and the EU that specifies that SAMDI will over time assume financial and other responsibilities for staff that have been seconded by EU or are EU related staff.

Mr Naidoo replied that there is an agreement that over time EU funding for the core SAMDI operations will be phased out. The pace at which EU funds are being phased out is faster than what Treasury would have liked. They would have preferred an approach where they have more certainty where the contracts are multi-year contracts and it can be better managed. They have attempted to negotiate this with the EU, but the EU is of the view that they prefer to finance projects.

13. Statistics South Africa - Due to the acquisition of new technology, the processing of census forms has been faster than planned. Treasury has taken took R50 million away from their 2003/4 budget and added it to this year's budget. Mr Naidoo said that they are hoping to see the results of the census in March/April instead of July/August as was planned.

14. Arts, Culture, Science and Technology - no adjustments were made

15. Education - no adjustments were made

Mr Mnguni asked for more clarity on rollovers.

Mr Naidoo said that rollovers are different from unforeseen and unavoidable expenditure. They have made good progress in bringing the amount of rollovers down from R1.5 billion to R1.2 billion. The Public Finance Management Bill and the Treasury regulations do place limitations on how long the departments have to take to pay accounts and so forth. There has been significant improvement but the problem of paying bills late has not been eradicated. The type of accounting used by government is adjustment cash flow accounting, which is not quite accrual accounting. After the end of the financial year the books are kept open for a certain period of time for payments that were due in the previous financial year. That should take account of most of the rollover problems.

The Chairperson expressed her frustration with the unsatisfying process of the Adjustment Appropriation Bill being put before the Finance Committee without their being able to change anything. She also felt that the Joint Budget and Public Accounts should also have been part of the process. She emphasised that adjustment estimates is an area that you have to be vigilant over.

16. Health - Mr Naidoo told the committee that there are four adjustment items in Health. Additional legal costs for the Treatment Action Campaign was R5 million. The Cabinet decision to extend the provision of retrovirals to rape survivors was R50 million. The April 17 Cabinet declaration decided on two things: the rollout of the mother to child transmission that was budgeted for, and the provision of post exposure prophylactics, which were not budgeted for. The R147 million spent on cholera was for emergency operations. They were the provision of water by tanker, the provision of emergency clinics and the provision of emergency pit latrines. The fourth adjustment was R5 million for vector control to prevent the spread of malaria, which was very successful. The Treasury is moving towards making this program a permanent part of the Health's budget.

17. Housing - no adjustments were made

18. Social Development - no adjustments were made

19. Sport and Recreation - no adjustments were made

20. Correctional Services - no adjustments were made

21. Defence - Mr Naidoo said that R60 million went to VIP-protection in Burundi. R14 million were additional costs for the World Summit on Sustainable Development. R6.9 million went to additional personnel in the Congo. He reiterated that no adjustments were made for the strategic arms deal. He added that although the Rand has strengthened significantly against the Dollar it has not strengthened as significantly to the Euro. About 66% of all contracts are in Euro, a quarter in Sterling and a very small amount in Dollars.

22. Independent Complaints Directorate - no adjustments were made

23. Justice and Constitutional Development - no adjustments were made

24. Safety and Security - The adjustment here is essentially the WSSD. He added that although they would like to tell the public how much the WSSD cost, it is important that departments budget for their parts of the WSSD

Mr Mnguni remarked that he has so far counted the adjustments for the WSSD as R213 million.

Mr Naidoo confirmed that the total amount was R513 million at this stage, of which R300 million was budgeted for.

25. Agriculture - R4 million was adjusted for foot-and-mouth disease prevention in three provinces.

26. Communications - SARS has issued an instruction that VAT (Value Added Tax) has to be paid on transfers to public entities. It is a huge issue that the Treasury and SARS are trying to sort out before next year's budget. The big public entities are VAT-able, the Treasury pays VAT to SARS on their transfers. However there were a number of public entities that VAT has not been paid on in the past. Essentially that has to be provided for.

Ms Hogan asked if it would include all the categories of public entities, which total 400 or 500.

Mr Naidoo replied that they already pay VAT on transfers to the business public entities and they pay VAT to the three or four biggest public entities. The universities are exempt because they are public benefit organisations. Treasury has calculated the additional VAT costs at about R1 billion per year. Negotiations with SARS are still on-going.

27. Environmental Affairs and Tourism - R157 million went to the WSSD.

28. Labour - no adjustments were made

29. Land Affairs - There are two amounts under this vote: R26 million went to land restitution, of which 70% went to the Eastern Cape, and R 24 million went to land reform.

30. Minerals and Energy - The largest item is the VAT on the electrification program. Mr Naidoo said that it is quite clear that the government is purchasing a service from Eskom and it is appropriate to pay VAT. He added that when they were approached with this they had two choices: scale down the electrification process or provide for the VAT. He added that this year there is a combination of the two. Next year another R117 million must be added to the budget to offset the VAT effect.

31. Trade and Industry - no adjustments were made

32. Transport - Mr Naidoo said that this is essentially the escalator in the contracts for the rail and bus subsidies. They had asked for much more but the Treasury Committee did not feel it was justified as unforeseen and unavoidable. The Treasury Committee has asked the Minister of Transport to look at renegotiating these contracts. There is a fine line between very long contracts to ensure sustainability and having shorter contracts that are more manageable and more competitive. Currently there are too many long-term contracts with fixed inflators.

Ms Taljaard (DP) asked how long these long-term contracts are and when do they come up for renegotiation.

Mr Naidoo admitted that Treasury had discovered, only the previous day, that the two longest are lifetime contracts. One of them is with Golden Arrow bus services. The government is trying to get out of it legally.

Ms Hogan expressed her shock and stated that lifetime contracts exist as long as a company exists.

Mr Naidoo emphasised that the Minister has taken this to court and lost.

Ms Taljaard commented that there have been a number of similar arrangements within the realms of public enterprises where there were evergreen contracts that are very similar to these lifetime contracts, and there have also been legal challenges there. She asked whether anybody is aware of a cancellation of an evergreen contract or a case that has actually gone in favour of government.

Mr Naidoo replied that he is not aware of any such case.

Ms Joemat wanted to know from when these contracts have been in existence.

Mr Naidoo replied that most of these contracts were signed in the mid 1980s. He emphasised that the Treasury Committee was asked for additional money, not because of the contracts, but because of the escalators in the contracts that make the contracts unsustainable. All the escalators place all the inflation risk on government, there is no risk sharing in the contracts. The North West government let North Star bus services go bankrupt to get out of their contract.

Ms Mabe (ANC) asked if there has been any attempt by the Department of Transport to renegotiate these contracts because lifetime contracts are unacceptable. She added that it is not enough that the Department says that it has lost a court case and there is nothing else to do.

Mr Naidoo agreed with Ms Mabe. He added that every year in the budget one of the toughest fights is on the bus subsidy issue. There is a trade-off between how tightly the bus subsidy budget is squeezed and essentially how to change those contracts. Squeezing it too tightly will force the Minister of Transport to cancel certain routes, which would have consequences that one cannot afford.

The Chairperson suggested that they incorporate the issues that have arisen in their report.

33. Water Affairs and Forestry - The adjustment here is a restructuring agreement, signed this year, with labour unions to provide for a retrenchment period. One of the significant areas of retrenchment at national level is the Department of Water Affairs and Forestry. There are two reasons for that. Firstly you have to provide severance packages when you transfer forestry workers to a private company. Secondly severance packages have to be provided when a municipality does not want to absorb Water Affairs employees when a water scheme is transferred.

34. Arts and Culture - The President has approved the separation of the Department of Arts, Culture, Science and Technology into two separate departments.

35. Science and Technology - see 34

Discussion
Dr Woods (IFP) referred to rollovers of accounts that have not been paid. He said that one can assume from that that anything that is not paid in time is automatically approved by Treasury as a rollover. Were there any other types of rollovers which Treasury approves or disapproves? His other concern was the swelling of the bureaucracy instead of increased delivery. He asked if Treasury in any way exercises any oversight, because these issues are open to manipulation.

Mr Naidoo answered that the criteria used for rollovers is that where money has been committed, in other words when a contract has been signed, but for some reason there is a delay in payment, the requests are approved. Treasury normally does not approve rollover requests for general unpaid bills because these things normally work themselves out. According to the Public Finance Management Act and Treasury regulations, departments can move up to 8% of a program amount. That power has been decentralised to departments. No requests have been received this year.

Mr Hanekom (ANC) commented that it was a mistake that the entire Budget Committee was not there for this meeting. He was worried to hear from the Department of Public Works that money that they are contractually committed to has not been allocated to them. He asked if Treasury could explain this.

Mr Naidoo replied that there are two categories of amounts. The first is lease contracts and the second is rates and taxes. In terms of the lease contracts the Treasury have not been happy with the number of leases that have escalators built into them. In theory a rental lease does not need to have an inflator built into them. Treasury has essentially forced the Department of Public Works to renegotiate those leases and therefore the entire amount was not recommended. Another factor is that a significant proportion of the buildings are either inefficiently used or not used. This is Treasury's way to try and force efficiency in the way the money is being released.

Ms Taljaard commented that many of the actual expenditure items one can argue were merely unforeseen but not necessarily unforeseeable.

Mr Naidoo agreed with the principle that the adjustments budget should be used for unforeseeable and unavoidable expenditures. In presenting to the Treasury Committee they had to take this into account and they had to weed out more than half of the requests from departments, because they were not unavoidable. He mentioned that the discussion on whether the HANIS adjustment had been unforeseen and unavoidable was the Treasury Committee's longest deliberations.

Ms Taljaard questioned whether some of the expenditure of the WSSD, across departments, was unforeseeable.

Ms Hogan reminded her of the difficulties of organising conferences and also that at a late stage the numbers of delegates had not been settled on.

Mr Hanekom added that the granting of the hosting of the summit in South Africa happened at a very late stage.

Mr Chaponda (Treasury) commented that the nature and scale of this event has never been seen in South Africa.

Mr Naidoo said that they budgeted for the summit using figures from the Rio de Janeiro summit.
They inflated that and translated it into Rands. That is why R300 million was budgeted. He admitted that they did not anticipate the scale of the event.

Dr Woods stated that the Finance Committee is disadvantaged in considering what they are trying to consider here and is totally reliant on the judgement of Treasury in having assembled this column. That means relying on second-hand situation.

The Chairperson noted that there are only two issues that they have picked up on for their Committee Report on this Bill. One is the HANIS-system and the other is the escalator in bus and rail subsidy contracts. It was also decided to draw to the attention of the Joint Budget Committee the imperfection of the current process dealing with the Adjustments Appropriation Bill and the question of whether government allocations are simply unforeseen or unforeseeable.

Mr Naidoo remarked that they fully understand the frustration that is being expressed at the imperfection of the process. He added that as Treasury officials they are not sure whether they are representing Treasury or the Treasury Committee of Cabinet. He added that he fully supported any measures that can improve the process.

The Committee then agreed to the Bill and the meeting was adjourned.