National and Provincial Treasury briefings on provincial fiscal patterns: Limpopo and Western Cape

NCOP Finance

05 June 2015
Chairperson: Mr C De Beer (ANC, Northern Cape)
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Meeting Summary

National Treasury, and the Western Cape and Limpopo Provincial Treasuries presented briefings on the financial and fiscal position in these provinces, including revenue and expenditure budgets. National Treasury gave an overview of the position, highlighting the main patterns of spending and some of the challenges.

National Treasury noted that Limpopo had been under spending substantially, around R1.3 billion. There were delays in filling vital posts and savings in consumables which led to this under spending. Its cash position was positive, with R3.1 billion while accruals were R102 million. Limpopo was spending up to 71% or 72% of budget on wages and salaries, which was the highest in the country, which would be unsustainable. Unauthorised expenditure had declined from R2.4 billion to R1.1 billion. Two of the major challenges for the province remained as the increasing wage bill on the budget and the out-migration of workers to other provinces which would reduce its equitable share slice of the national revenue. The Western Cape, on the other hand, was in a very healthy position with no qualified reports. There was under-spending of R752 million, mainly related to the delay in the broadband roll-out. The accruals were R61 million and cash reserves were over R5 billion for the province.

The Western Cape Provincial Treasury presentation delved deeper into the financial position. The Western Cape spent 94.3% of its budget in 2013 and 96.8% of the budget in 2014. The province spent R10.4 billion or 98.7% of the total available transfers from National government of R10.5 billion. It was expecting a moderate economic growth of 2.8% in 2016. The Western Cape population was 6.1 million, with around 21% unemployment. The Western Cape had five strategic goals: Increase wellness, sustain the environment, good governance, improved education and create economic opportunities. Over 90% of the budget came from conditional grants and the equitable share. The Western Cape budgets were coming under pressure due to the wage bill increases. The increase in learners was also a challenge at the moment, but it would be balanced with increases in the equitable share.

The Limpopo Provincial Treasury commented that cash flow management had improved tremendously. Collection of revenue achieved was 101.6% of the revenue budget. . R1.296 billion was under spent for the previous year (around 2.5%). Qualified audit reports were received for the Departments of Economic Development, Public Works, Social Development, Limpopo Tourism Parks Board, Sports, Art & Culture and Health. The main challenge was that employee compensation was growing. The Equitable Share Grant was R43 billion or 97.9% of its budget. Conditional grant spending was R6.9 billion or 95.2% of its budget. The Province had over-achieved on its targets for collecting revenue, but unauthorised expenditure amounted to R175 million. The levels of compliance with the Public Finance Management Act, in departments, were described. The agriculture sector was struggling because of drought, and so was the mining industry. Another large challenge revolved around the community and local traditions in the province.

Members asked why the unemployment rate in North West was so high and asked what calculations were used. They questioned the description of under-spending and savings. They asked why critical posts were not being filled in Limpopo. Members asked why people were migrating from Limpopo and suggested that the unemployment figures for that province were skewed because they were reporting only on those remaining in the province and not on those who had migrated because they could not find jobs. Members were optimistic about the degree of turnaround achieved in Limpopo, but noted that the Integrated Financial Management System (IFMS) were key in the provinces to providing much needed support. Members asked why the Limpopo Development Agency was still running, if it was showing a loss, and wondered why there was such a shortage of qualified expertise in that province. Members said they would have liked to hear about larger projects in Western Cape, such as Saldanha, and asked why there were many job vacancies in education in Western Cape, and why tourism was not reflecting higher performance, suggesting the need for provinces to partner with local companies. Questions were raised on the problems at Mitchells Plain hospital, and on why so much of the budget was allocated to the City of Cape Town, and what was being done for other districts. Members asked how Limpopo would be able to move away from disclaimers.
 

Meeting report

Fiscal position of provinces: National and Provincial Treasury briefings
The Chairperson noted that the intention of the meeting was to check whether the provincial priorities on spending were in line with the National Development Plans and provincial mandates.

National Treasury briefing
Mr Edgar Sishi, Chief Director: Provincial Budget and Analysis, National Treasury, noted that his presentation would firstly outline the position in Limpopo, and then in Western Cape. As a general introduction, He stated that the benchmarking process was important. All nine of the provincial budgets must speak to the National Development Plan. Unemployment and the expanded unemployment rates were dealt with via Statistics SA. The absorption rate looked at the ability of an economy to absorb labour into the market. The general tax revenue was redistributed to the provinces. Education was fundamental. He noted that in terms of the Constitution  the exclusive areas of provincial function were ambulances, liquor licences and sport. Provinces needed to balance the social need with the economic need.

Position in Limpopo
He turned to the position of the individual provinces, and noted that Limpopo had been under spending substantially, with that figure to date at R1.3 billion. There were delays in filling vital posts and savings in consumables which led to this under spending. The cash position was positive, with R3.1 billion, while accruals amounted to R102 million. In Limpopo, up to 71% or 72% of  the budget was being spent on wages and salaries, which was the highest in the country. The Province had hired Stats SA to run a clean-up programme of people working in the province to make sure that those people on the payroll were actually working there, and there were no "ghost employees". In this province, unauthorised expenditure had declined from R2.4 billion to R1.1 billion. The Limpopo Economic Development Agency was run from the fiscus, even though it should be self-sufficient. A huge chunk of the money from government was for infrastructure in the provinces. Future funding would now be provided, on the basis of a plan and motivation for the infrastructure development, rather than assessing amounts from prior budgets. The biggest risk was the out-migration to other provinces, which reduced the equitable share revenue for Limpopo.  New wage agreements were likely to negatively affect the province. Treasuries were working with Limpopo to improve the procurement processes

Position in Western Cape
Mr Sishi reported that the Western Cape province showed under-spending of R752 million, mainly related to the delay in the broadband roll-out. The accruals were R61 million. Cash reserves were over R5 billion. There had been in-migration, which had increased the equitable share. Infrastructure projects had benefited from the grants. The fiscal risk was low, although unpaid invoices were seen, mostly in education. Expenditure in hospitals had been low. Overall, he summarised that the Western Cape was in a healthy financial position.

Western Cape Provincial Treasury briefing
Ms Jalinda Gantana, Chief Director, Western Cape Provincial Treasury, stated that the province under spent by R752 million. Education was under spent by R28 million due to reduction of relief educators. Health was under spent by R105 million due to delays in journals. R305.9 million in the office of the Premier was under spent due to delay in the roll-out and implementation of the broadband project.  Transport and public works had R190 million short spending, due to under spending on the regeneration projects. The Western Cape spent 94.3% of its budget in 2013 and 96.8% of the budget in 2014. The province spent R10.4 billion or 98.7% of the total available transfers from national government of R10.5 billion. Actual expenditure was 6% as at 30 April 2015, for the 2015/2016 year.

Ms Marcia Korsten, Chief Director, Western Cape Provincial Treasury, stated that the country was expecting a moderate economic growth of 2.8% in 2016. The Western Cape population was 6.1 million but there was a 21% unemployment rate (about 600 000). Youth unemployment was high. Western Cape was mainly a service sector economy, and growth was in the skills-intensive industries. Western Cape policy aligned with the NDP and MTSF. There were five strategic goals:

1. Increase wellness

2. Sustainable environment

3. Good governance

4. Improved education

5. Create economic opportunities

73% of the budget was from the Equitable Share, and 20% from Conditional Grants, and this requirement grew at around 6% over a year. Education received 34% of the budget and health 36%. Transport and public works had R3.7 billion allocated to it. 68.9% of budget was going to the Cape Town Metro. Personal expenditure made up 53% of the budget.

Mr Harry Malila, Head: Provincial Government Finance, Western Cape, stated that broadband was a 10 year commitment that had been signed. Western Cape had a very sound financial policy. The Department had taken note of the accruals and it was something that they look at extremely closely. The budgets were coming under pressure due to the wage bill increases. The increase in learners was a challenge; however this would be sorted with an increase in the equitable share.

Limpopo Provincial Treasury briefing
Mr Gavin Pratt, Head of Department, Limpopo Provincial Treasury, commented that cash flow management had improved tremendously. R1.296 billion was under spent for the previous year, or 2.5% of the budget. Limpopo had R297 million in interest earned during the previous financial year. R35 billion was spent on compensation of employees, which was 98.9% of the wage budget, goods and services was R7.1 billion or 93% of its budget,  transfers and subsidies was R5.5 billion or 95.4% of its budget, capex was R2.2 billion or 95.4% of its budget. The Equitable Share Grant was R43 billion or 97.9% of its budget. Conditional grant spending was R6.9 billion or 95.2% of its budget. Collection of revenue achieved was 101.6% of the revenue budget. Infrastructure was 82% of the budget. Unauthorised expenditure, however, amounted to R175 million.

In the sectors, Health had the most delays in paying invoices beyond 30 days, with only an 80.45% compliance rate. Health and Legislature had the highest non compliance with Public Finance Management Act (PFMA) requirements, with only 28%. Economic Development, Public Works, Social Development, Sports, Art & Culture and Health all received qualified audit reports in this province. There were five departments whose reports were unqualified. The Limpopo Tourism Parks Board was also qualified.

Employee compensation was growing and there would be a major challenge in meeting these needs with the current grant system from government; spending here was now near 73% of the budget. The budget allocation was R52.224 billion. Overall spending was 50.927 billion or 97.5%, with an under spending of R1.3 billion. Total equitable share expenditure was R43.9 billion or 97.9%

Mr Rob Tooley, MEC for Finance, Limpopo, stated that agriculture was struggling with the drought in the province, the mining industry was also struggling. Overall, the biggest challenge was the growing wage bill, there were a lot of community and local traditions that needed to be dealt with in the province.

Discussion
Mr T Motlashuping (ANC, North West) queried why the unemployment rate in North West was so high, and asked what calculations were being used. He noted that Limpopo was under spending, but the presenter stated it was due to "savings" and this did not make sense. He asked why critical posts were not being filled,.

Mr D Josephs (DA, Western Cape) asked why people were migrating from Limpopo. What was the reason for the 60 day delay on invoices on education in Western Cape? He then congratulated Limpopo on the turnaround in the province, noting that a stable province stems from a stable treasury. He stated that the Integrated Financial Management System (IFMS) was key in the provinces to providing much needed support.

Mr F Essack (DA,Mpumalanga) queried what was the reason for keeping a company like the Limpopo Development Agency, when it was running at a loss. He asked how Limpopo could congratulate itself for unemployment coming down, when the unemployed were simply migrating from Limpopo to Gauteng. He stated unequivocally that the province should be developing sustainable jobs within Limpopo. He also wondered where Limpopo was heading in terms of qualified expertise, and why was it so low.

Mr S Mohai (ANC, Free State) asked how a province could spend its money better, like the Western Cape. It would have been good to have information on big projects in the province such as Saldanha. He wondered what amount was put aside for prevention of violence in the Western Cape budget? He was pleased that National Treasury was requiring a detailed plan for infrastructure proposals. He wanted to know why there were so many job vacancies in education.

Mr C Basson (ANC) asked why tourism was not listed as amongst the higher performers in terms of economic structure for the Western Cape, and asked that it must investigate how and why tourists were stopping in the the other provinces. He suggested that provinces needed to partner with local companies to create jobs. He asked if the Western Cape could address the issues of the Mitchells Plain hospital, and why so many beds were not available. He said these presentations had given the Committee a clearer picture of where more oversight would need to be done.

Ms T Motara (ANC) stated that with Western Cape, over 70% of the budget was given to Cape Town City, and wondered what were the plans of the province to intervene in the other districts. She asked to be given the reasons for the transversal under spending? For Limpopo, she also wanted more details on the nature of the audit outcomes, and wondered how the province would be working to move away from disclaimers and qualifications.

Mr Sishi responded that the Labour Force was providing the unemployment rate, on behalf of Stats SA. Most of the under spending was due to not spending on infrastructure but it could also be due to savings in providing more competitive contracts. The out-migration from Limpopo was mainly due to economic opportunities. There were two types of entities in the provinces, those that was meant to be running a profit and others that were meant to be not for profit. The departments were not overspending as such, but the issue was how they were managing their case. He noted that the attempts to implement the IFMS had been "a nightmare". Cabinet had now approved the finalisation of this. The pilots for IFMS were Western Cape and Eastern Cape, as well as some national departments. The State Information Technology Agency (SITA) was going to do a bandwidth review as some provinces do not have enough infrastructure for IFMS. The provinces would need to upgrade their own bandwidth.

In relation to the equitable share issue, he said that moving money was easy but moving people was difficult. The Treasury clearly needs to put money where it was needed but he agreed that the sticking points in the system would need to be addressed so that it was easier to have teachers, for instance, move around to areas of need. At the moment, there was still money left in the provinces for non-participants.

Mr Zakariya Hoosain, Head of Department, Provincial Treasury Western Cape, responded that Western Cape was trying to get qualified engineers, but it was difficult due to the competition from overseas. On the transversal issues, there had been substantial buy-in. The Provincial Treasury had met and work shopped with National Treasury. Saldanha and other big projects were covered in the strategic plan which would be forwarded to the Members.

Ms Korsten stated that the needs were found where the populations were, which was why money was going to certain areas, such as City of Cape Town. Most of the smaller regions were covered in the metropolitan allocations. She could furnish Members with the budget overview, which set out the projects and initiatives under way. Tourism, agro-processing and oil and gas were the key areas of focus for the province. The team did go out into the community to see where the need was.

Ms Gantana stated that there was a programme called RSEC, which looked at towns and feasibility studies. The budget for the hospital had grown substantially and there were some challenges to address in this hospital at Mitchells Plain. The province would need to step in and meet this funding need.

Mr Malila stated that there were huge demands on the health system in the Western Cape.

Mr Tooley commented that Limpopo was in dire straits regarding skill shortages and they needed to find a solution. Limpopo was seen as "a backwater" and it was hard to attract the right skills. The influx of foreigners such as Zimbabweans and Mozambiquans added tremendously to the pressure on the system in the province. There could be no appointments, even to key positions unless there was funding to cover them. In relation to jobs, he pointed out that it was very hard to get people out of jobs once they were in, and for this reason, the Province was looking seriously at recruiting the right people for the province.

Mr Pratt noted that  the asset register had been cleaned out, and that the province was moving across to the LOGIS system. "Ghost employment" was, however, still a challenge, and so were dismissals. The Province was looking at  teacher/pupil ratios and head counts to remove ghost employees. Ageing populations and the very young were tending to stay behind in the Province, but those in the economically active brackets were moving to Gauteng. The mining absorption rate was very low due to the economic climate. There was an infrastructure hub in the Department of Public Works, to try to attract the talent into Limpopo.

Mr Motlhanke Phukuntsi, Senior General Manager: Sustainable Resource Management, Limpopo, responded that the Treasury was now working on actual estimates now. The Province had lost R0.5 billion on roads, and so it was looking far more closely at spending, and particularly at compensation issues. The Province was also looking at creating a hub on infrastructure to save on consultants. Limpopo was doing well on wholesale and retail industries.

The meeting was adjourned.  

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