Eastern Cape, Free State, Gauteng, and KwaZulu-Natal spending challenges

NCOP Finance

19 June 2015
Chairperson: Mr C de Beer (ANC, Northern Cape)
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Meeting Summary

This was the third meeting in the first round of engagements with Provincial Treasuries, which would happen quarterly to ensure each province was on strong financial footing and if not, what could be done to solve the problem before it became a crisis. The Provincial Treasuries from the Eastern Cape, the Free State, Gauteng and KwaZulu-Natal, as well as the National Treasury, made presentations.

The National Treasury summarised the financial expenditures, financial positions and major issues facing the provinces, and provided an analysis of the financial risk of each province. The Eastern Cape had under-spent by R1.4 billion and had a cash balance of R6.02 billion. Its accruals totalled R1.6 billion. While there were serious issues related to the compensation of employees (CoE), the National Treasury classified the province’s overall fiscal risks as mild. The Free State had over-spent by R441 million, due solely to overspending in the Department of Education. The cash balance of the province stood at R126.6 million, but accruals totalled R1.221 billion. The fiscal risks of the Free State were classified as high. Gauteng had under-spent by R1.5 billion, mainly because of under-spending on CoE in Health and Education. The province had a very healthy cash balance of around R8 billion, with accruals totaling R3.9 billion. While there were issues of cash flow management in the province, fiscal risks were seen as fairly low. KwaZulu-Natal had under-spent by R407.8 million, but had experienced mixed spending sector by sector. The province had a cash balance of R4.2 billion and accruals totaling R3.3 billion. While there were significant challenges that faced the province, it had overall been managed well financially, so the fiscal risks were mild.

All the provinces noted in their presentation the huge impact the wage agreement would have on their provincial budgets, and the high proportion of CoE in those budgets.

In its presentation, the Eastern Cape highlighted the many difficulties facing the province, including the rising cost of CoE, litigation, and other issues. As a province driven by government spending, the tight fiscal envelope was making the management of the province difficult. The province had determined agriculture to be a key sector of development in order to drive the economy.

KwaZulu-Natal, through cost-cutting measures introduced in 2009, had been able to manage its finances rather well in the face of its diminishing proportion of the Equitable Share. An issue facing its own revenue was the migration of vehicles to other provinces for licence registration. The province had made many sacrifices and difficult decisions to place itself on firm financial ground, but greatly feared that the coming wage increase could wipe out its reserves entirely.

The Free State presented a very detailed, comprehensive report to the Committee. The province faced very high CoE for Education. Additionally, there was an excess of 500 teachers. Many different methods were being employed to reduce this number, such as early retirement and an evaluation of the capacity to return to work for teachers on sick leave. The reduction of the Equitable Share due to the relative population reduction had been most felt in this province, as it had not prepared for the budget cuts.

Gauteng discussed its “Ten Pillar Programme,” highlighting its plans for urban integration as well as the development of new sectors of employment. An area of particular interest to the Committee was the province’s new “web board” to deal with invoices in an attempt to solve many of the cash flow issues and the large amounts of accruals.

The Committee asked many questions of clarification on specific tables in the presentation, programmes in place, plans to confront issues facing the provinces, areas targeted for economic development to become drivers of the provincial economies, among others. The Eastern Cape faced a wide range of questions, ranging from specific provincial interventions to municipal debt offenders and road maintenance. The Committee was particularly interested in the new electronic invoice system being implemented in Gauteng and asked for more information on it. Gauteng gave further explanations on the functions of the system and said it was still early in the process of implementation, but it would continue to keep the Committee posted.

Meeting report

The Chairperson welcomed all those in attendance. He remarked that this was the third meeting of the first round of engagement with Provincial Treasuries. This was done in order to look at the fiscal position of each province and further connect the provincial legislature, as represented by the Members of the National Council of Provinces (NCOP), with the Provincial Treasuries. These meetings would happen on a quarterly basis for the next four years (until 2019). These meetings had begun this year because last year was an election year, and legislation took priority. The rationale behind these meetings and their regularity was to measure what was happening in each province. He brought up an example of a province with R1 billion in accruals, but only R250 million in cash. With these meetings, the Committee could see the plans that were in place to ensure good governance and sound financial management.

The Chairperson invited Mr Edgar Sishi, Chief Director: Budget Analysis, National Treasury, to give his presentation.

National Treasury presentation

Mr Sishi thanked the Committee for the opportunity to present and asked if the final point on slide 9 could be disregarded, since the figure was not able to be verified before the start of the meeting. He also pointed out large parts of this presentation had already been presented to the Committee, so introductory and general points might be skipped for the sake of time.

Eastern Cape

The Eastern Cape had under-spent their budget by R1.4bn, mainly due to under-spending in the Education, Roads and Public Works Departments. The province had struggled with delays in awarding tenders as well as in the procurement process. Many service providers also submitted their invoices late, which had led to the current under-spending. Additionally, the province had had many delays in filling a large number of vacant posts, particularly in Health and Education, which had just over 13 400 and 4 070 vacancies respectively.

The province’s accruals (unpaid invoices) were R375 million for greater than 30 days (outside of the allowed provision), and R1 297 million for less than 30 days.

The province had a very healthy cash position of R6.02 billion.

Overall, the fiscal risks of the Eastern Cape were seen as mild, although certain risks did exist within specific spending areas. Although there were substantial vacancies in certain sectors, compensation of employees (CoE) made up 65.5% of the budget, making it the second highest rate in the country. He compared this situation to the situation in Limpopo, where a huge portion of the budget was spent on CoE, yet many vacancies remained in many sectors. The performance with respect to infrastructure in the province had also been quite poor. A main concern financially for the province was the upcoming wage agreement with could negatively affect CoE budget controls. The province also inadequately spent grant money, particularly that of the Education Infrastructure Grant, causing the unspent funds to be surrendered.

In addition to the spending risks of the Eastern Cape, the National Treasury was also concerned over the revenue risks presenting themselves to the province. Due to out-migration, the provincial proportion of the national population had decreased, causing a relatively low growth rate in the equitable share. This meant that the province would need to utilise funds more efficiently, as well as implement cost containment measures.

Free State

The Free State was the only province to overspend, which it did by R230.4 million, or 0.8%. This was based solely on the overspending of the Department of Education by R441 million, which was attributed to accruals. Due to this overspending, the Department of Education had been put under administration by the Provincial Treasury of the Free State. The province had reported a positive cash balance of R162.2 million.

The province’s accruals had decreased by R900 million in the year, but were still far greater than the cash balance, at R561 million for greater than 30 days and R638 million for less than 30 days. The majority of these accruals, R450.9 million, had come from the Department of Health, although its share of the accruals had been declining. Conversely, the Department of Education’s accruals had been increasing.

The province also owed a total of R216.4 million in municipal debts, 71 % of which were over 90 days. Nevertheless, fruitless and wasteful expenditure had decreased from R16.3 million in 2011/12 to R9.8 million in 2014/15.

The National Treasury deemed the fiscal risks of the Free State to be high, with significant service delivery risks requiring stringent management. A large concern was based around the fact that revenue was growing at or below inflation, due to out-migration indicated by the census of 2011. The current state of accruals and the over-expenditure were both above the cash balance of the province. The province needed to significantly trim down spending due to lack of growth.

The National Treasury had engaged with the province on turnaround strategy and a ministerial visit was also planned. The following had been identified as areas that needed to be noted and addressed:

  • The turnaround plan for the Department of Education needed to be swiftly implemented; 

  • Compulsory purchase order reforms needed to be adopted by the Province to reduce
  • procurement costs and value for money; 

  • The Health Department’s budget was adequate, but there needed to be cautious moves in
  • creating efficiency savings because un-quantified budget reductions and under-funding
  • for non-negotiable items (medicines, lab services, etc.) may be detrimental in the longer
  • term;
  • Significant sacrifices were required in respect of non-social sector departments’ budgets, postponement of non-essential spending plans, curtailing or reducing transfers to public entities, and tight management of cash flows and disbursements to departments.


Gauteng underspent by R1.5 billion as a result of the CoE in the Health and Education Departments. The Department of Education mainly under-spent in payments for capital assets due to changed specifications for 15 new schools to align to the “smart schools strategy,” and these had delayed implementation. Contracting had started only in March 2015. 

The accruals were very high at R3.9 billion, with the accruals of greater than 30 days being R2.2 billion and less than 30 days at R1.7 billion. From a fiscal risk perspective, it could be noted that the accruals were cash-backed and departments had under-spent and would apply for rollovers to settle outstanding contractual obligations. The province had a very healthy cash balance of R8.2 billion. Concerns were noted in the Departments of Health, Human Settlements, Community Safety and Infrastructure Development, however, as they did not have sufficient cash to pay suppliers and service providers in 2014/15. Cash flow management needed to be improved.

Gauteng had been experiencing large amounts of in-migration, and fiscal risk was fairly low. There were, however, significant service delivery risks:

  • Gauteng Health continued to have challenges paying suppliers, and accruals did not appear to be arrested in this Department, hence hampering the ability to provide services sustainably; 

  • Growth in contingent liabilities, particularly arising out of medical liability litigation, posed a serious threat, as it was now estimated at about R8.9 billion; 

  • Human Settlements commitments amounting to R8.2 billion could not be verified by the Auditor General in 2013/14, and the Department would have to answer to the Standing Committee on Public Accounts for this. The Department’s ability to manage contracts and deliver projects/housing programmes had been adversely affected by this; 

  • The Education Department was recruiting teachers to deal with significant in-migration pressures. The province needed an additional 1 100 teachers. This process was necessary, but needed to be carefully managed to ensure that budgets were not over-shot. 

From a finance perspective, the cash balances were high (R8.2 billion) and were in excess of the amount of accruals. There had also been a decline in unauthorised expenditure in recent years, reflecting better overall fiscal discipline in the province. Spending on personnel was also stabilizing, due to the Identification Verification System introduced by the Provincial Treasury.


Kwazulu-Natal had very mixed spending, but overall had under-spent by R407.8 million at year-end. 
 The Department of Education had recorded the highest under-spending of R276 million. The Department of Health had overspent by R198m on critical goods and services, such as tests, outsourcing of in-patient food, and audit costs (forensic). However, Health had underspent with regard to CoE by R197 million due to delays in the commissioning of new comprehensive health centres and clinics. Additionally, conditional grant spending had increased considerably when compared the previous years; 

The cash position of the province was strong, at R4.2 billion, although there were accruals totaling R3.3 billion, R1.2 billion of which were greater than thirty days and R2.1 billion being invoices within 30 days. A large part of these accruals (R800 million) was due to Education infrastructure commitments. The unauthorized expenditure had decreased from R1.1 billion in 2013/14 to R812 million in 2014/15.

Additionally, the province had the largest Education Department, with more than 100 000 staff members, so the wage agreement was a major concern for the province.

The fiscal risks of the province were mild. There were, however, significant delivery risks:

  • The issue of payments to National Health Laboratory Services for laboratory tests needed to be addressed and closed (“flat fee” vs “fee for service”); 

  • Resignations and retirements in Education had resulted in a reduction of over 3 000 staff members; 

  • Infrastructure accruals in Education were mainly on infrastructure payments subsequent to the Department reprioritising R860 million to COE, and this could have a ripple effect; 

  • As at 31 March 2015, accruals related to capital assets totaled R322.7 million, despite receiving R355 million during the second adjustment budget 

  • The under-spending on COE by R227 million was a concern, particularly after taking infrastructure funding away. This clearly indicated that the Department did not accurately estimate the magnitude of the problem; 

  • There was a concern that non-social sector departments – the Office of the Premier, Human Settlements, and Transport -- were over-spending, and this was highly unusual.

Discussion on National Treasury presentation
Ms E van Lingen (DA, Eastern Cape) commented on the large proportion of budgets that were spent on staff and the effect a salary increase would have on each province. She voiced concerns over whether the reply to this issue would come from the provinces, and how they planned to mitigate the issue. She also expressed her apprehension about this becoming a national trend, where money was taken away from infrastructure spending to pay for staff. In the case of KZN, she suggested that the money be taken from the Office of the Premier instead of infrastructure, because money that was not spent on infrastructure today would come to bite us in the back years from now. This issue needed to be dealt with now, because infrastructure could only last for so long.

The Chairperson acknowledged the question and remarked that this was a question Ms Van Lingen should also ask every province, since it was cross-cutting. Mr Sishi may have a general suggestion, but this was a question more for the provinces.

Mr F Essack (DA, Mpumalanga) expressed his concerns on the financial condition of the Free State. He inquired as to how far back this scenario had begun to develop and why it was still ongoing. As for Gauteng, it seemed like they were in a strong financial position, but on slide 19, concerns had been brought up in Health, Human Settlements, Community Safety, and Infrastructure Development, as they did not have sufficient cash to pay the suppliers. He wondered if this was just poor cash flow management or if the province had some deeper issues.

The Chairperson reworded the question as what was National Treasury’s ongoing engagement with the provincial treasuries to monitor the situation, so that a province did not end up in a similar situation as Limpopo. He reiterated that this was the purpose of these quarterly meetings. No one wanted another Section 100 (1)(b) intervention. This was all about good governance and sound financial management, which was why these meetings took place with multiple provinces’ provincial treasuries and the National Treasury.

Mr Sishi replied that the wage issue was two-fold. The first part was the actual unit cost of wages, or the wage settlement process, which was a national process. This was a matter that had to be dealt with at a national level. The National Treasury had been very candid with the implications of the costs of wages in the system overall, and the flaws in the system of wage determination. The NT had been very open with this issue and agreed that this process needed to be reformed. But this was an issue that must be dealt with by the national government, although its implications for the provinces were huge. The second part was about the actual employees who were being paid the salaries. This was managed by the provinces themselves. While the unit cost was determined on a national level, it eventually came down to the provinces, with their hiring power. The NT’s answer to the provinces on this issues was, notwithstanding the acknowledgement that the national government had a responsibility to deal with the unit cost of wages, that the provinces had a very serious responsibility to manage their head counts as well as recruitment, promotions, and other money-costing responsibilities.

As for Mr Sishi’s discussion on the cost of CoE, he clarified that he was concerned about this mostly in the Eastern Cape, because the other provinces in attendance at this meeting had a level of CoE spending that was below the national average (61%). His discussion today on the topic of CoE was directed specifically at the Eastern Cape, but he acknowledged that every province must manage their hiring. He noted that each province could speak on what they were doing to control the CoE.

As for the Free State problems, as he was certain the delegation from the Free State would explain, the impact of Census 2011 on the proportion of the Equitable Share (ES) awarded to the province had caused major issues for the province. The reduction, relatively speaking, of the population had led to a relative reduction in its portion of the Equitable Share (ES). However, Mr Sishi highlighted that the money must follow the people, not bureaucracy. The important issue was the mitigation of the shock of losing money in the ES. There had been four provinces with a relative reduction in population size: KwaZulu-Natal, the Eastern Cape, Limpopo, and the Free State. The worst affected was KZN. The main difference between KZN and the Free State was that they had managed their finances in such a way that they did not have unfunded commitments. They had a buffer in place to be able to manage the decrease in funding. Mr Sishi described this as a basic principal of financial management. The problem in the Free State was that they had not adequately prepared for difficult financial times. He stated that in the presentation by the Free State, they would surely blame their issues on the decrease in the Equitable Share, but they were the only province of the four with relative decreases which was facing so many issues. The lesson to be learned from this was that one must have good fiscal management and maintain the financial space to be able to navigate difficult times.

Mr Sishi was optimistic, however, that the problems in the Free State could be solved and the province had the correct attitude and plans to deal with this setback. The Provincial Treasury had taken over the finances of Education, which was at the epicenter of the problem.

The apparent contradiction in Gauteng, highlighted on slide 19, was due to the cash allowances of certain departments. The province itself had a large cash supply, but certain departments had gone over their allowances, which Mr Sishi attributed to problems of internal management in those departments.

Mr Sishi drew attention to slide 2 to explain the interaction and prevention efforts the National Treasury had in place to prevent provincial financial problems. These included provincial visits, various hearings and political forums (like the Budgeting Council).

Eastern Cape presentation

Mr Sakhumzi Somyo, Eastern Cape Treasury MEC, acknowledged the struggles facing the province identified in the Treasury’s presentation, but the province had made significant efforts to ensure the financial stability of the province. He said that the presentation would highlight the areas of emphasis. As for the CoE, he believed that by this time next year, the provincial government of the Eastern Cape would have taken a particular position on the matter, because currently there was a recommendation to the Executive Council which related to the response of the province to this huge challenge. He noted this would be covered in the presentation.

The Chairperson thanked the Emissary for his attendance and context, since he provided insight into the political workings of the Cabinet, and hoped that more Emissaries would be able to attend future meetings, although he acknowledged the legitimate reasons for absence of many of the MECs.

Mr Qonda Kalimashe, Actting Head of the Eastern Cape Provincial Treasur,said he would be skipping the first eleven slides, which provided context. He briefly summarized that the province was one of the poorest and had serious issues regarding its economy. Many of the jobs in the province came from government spending. He believed the province’s strengths lay in agriculture, so a shift would be made to that sector in the medium term. The province had worked hard to build a financial buffer, but there were many challenges that faced the province and threatened to use up that buffer. The Provincial Treasury was particularly concerned with the impending wage agreement, which could have a drastic effect on the finances of the province. An additional challenge of the province was the fact that the province had lost R7.9 billion due to the re-appropriations based around the 2011 Census.

The fiscal position of the Eastern Cape had been created by many converging developments. The province had employed top-slicing to the 2015/16 Medium Term Expenditure Framework (MTEF), and had allowed for a function shift of R2.2 billion to the Health and Education Departments.

The province had conservatively estimated the impact of the wage agreement at R1.5 billion for the province, which would have a huge impact on the provincial budget.

The province also had contingent liabilities totalling R8.5 billion, up from R4.9 billion in 2013/14 until now, mainly due to health litigations. Education litigations totaled R110 million, and Infrastructure Department’s litigations were R400 million. Employee benefits for the province totalled R6.72 billion, of which capped leave was R4.3 billion. Additionally, lease commitments (office space) had cost the province R266 million. Also, accruals of R1.7 billion for 2014/15 were payable in 2015/16.

The 2017/18 fiscal cliff was also approaching and needed to be appropriately prepared for, as National Treasury’s cushioning for the Census 2011 data impact would cease. Additionally, Section 139 interventions (Makana, King Sabata Dalindyebo and Inkwanca municipalities) had to be budgeted for.

The province’s budget strategy to mitigate the risks to ensure fiscal sustainability was multi-faceted. Firstly, public Entities played important roles in realising the government’s economic and social mandate. A review had been started and the first phase status quo report was being processed through the Executive Committee. The second phase would deal with a comprehensive review on three entities and industrial development zones, regularising irregular practices in some entities, and putting in place an appropriate government framework.

In an effort to mitigate fiscal constraints, key service delivery areas and non-negotiable items in Education and Health would be protected. Meanwhile, rigorous implementation of austerity measures, belt tightening and fiscal discipline would be used to mitigate the risk of fiscal instability. Non-core items had been kept at the 2014/15 expenditure level, excluding conditional grant allocations.

The fiscal outlook for the province had several areas of uncertainty. National transfers were insufficient to cover the total provincial budgeted expenditure, resulting in a deficit. The province’s own sourced revenue supplements to the budget had resulted in the surplus, but this surplus was guaranteed only in 2015/16. The 2015/16 surplus was already over-committed due to accruals, litigation, and other areas. The contingency reserve, as well as the surplus fund (cash position), were definitely not sufficient to mitigate the risk of the budget exposure.

In summary of the year-end revenue outcomes, the province received its entire equitable share transfers from National Treasury. Only R368 000 in conditional grant funding had not been received for the Social Development Substance Abuse Treatment grant, due to the non-submission of invoices.
Over-collection on own receipts amounted to R485.7 million.

The province did face some challenges pertaining to its own revenue. The Department of Transport, assisted by the Provincial Treasury, was liaising with the Kouga municipality to recover the outstanding R21 million owed from licence fee collections dating back from 2010/11. The municipality had agreed to pay the outstanding amount back in instalments. The Department of Health was targeting the insured patient population and reconciliations were under way to recover outstanding medical hospital fees from the Police Service Medical Scheme and Road Accident Fund. Discussions were under way with the Government Employees Medical Scheme to reconcile the outstanding medical hospital fees for recovery.

Additionally, departments did not benchmark tariffs with the annual tariff reviews that had an impact on revenue maximisation. The capacity in departments to manage revenue collection was also lacking, as these posts were not prioritised to be filled.

The recommendations of the Eastern Cape to the Committee were as follows:

  • Note and support the proposal of agriculture as the game changer for the provincial economy;
  • Consider the tight fiscal envelope;
  • Consider the further likelihood of the tightening of the fiscal envelope going forward;
  • Consider the impact of the wage settlement, as well as the Labor Relations Act amendments which had to be funded from within (conservatively estimated to be R1.5 billion);
  • Consider the insufficient mitigation of the risk of the provincial budget exposure.

It was hoped the Committee would be able to persuade the NT to deal with the province favourably.

The Chairperson remarked that this was why the Emissary of the province sat on the Budget Council, but Parliament had specific procedures. However, this was the place to bring requests to the Committee on a regular basis and make the province’s case. As for the Money Bills Act, Parliament could amend the Act.

The Chairperson thanked the Eastern Cape for their presentation and agreed that the development of agriculture was crucial to the province’s success. He also suggested that spending on agriculture could improve in all the provinces.

KwaZulu-Natal presentation

Mr Sipho Nkosi, Chairperson of the KwaZulu-Natal Provincial Legislature Portfolio Committee on Finance, said that the presentation included the economy of the province, as well as the growth and development strategy. Due to time constraints, not all of the presentation may be covered, but all the information was there to be reviewed.

The aggregated preliminary revenue collected amounted to R3.148 billion, compared to the Final Appropriation of R2.784 billion, resulting in a substantial over-collection of R364.4 million (13.1%). The bulk of the KZN’s own revenue was derived from four main sources – motor vehicle licences by the Transport Department, casino and horse racing taxes by the Provincial Treasury, interest, dividends and rent on land by the Provincial Treasury, as well as health patient fees by the Department of Health.

The departments largely responsible for the over-collection were Economic Development, Tourism and Environmental Affairs and Transport, followed by Health, Human Settlements, Education, COGTA, Provincial Treasury, Public works and Agriculture and Rural Development.

After Gauteng, KZN had had the second largest amount of own revenue collection since 2011/12.

There were, however, revenue issues that threatened the province’s finances. A huge issue was in the Department of Transport, due to the migration of motor vehicles, especially heavy trucks, to cheaper provinces. This had caused a large decrease in revenue related to licensing and registration. The KZN’s tariffs were high, hence the deliberate reduction in the inflation of licence fees to reduce leakages to other provinces. Increases in these costs have been slowed to increase the attractiveness of registering in KZN.

The Provincial Treasury had also faced a slowdown of economic activity, which had been directly related to gaming and betting activities.

The Department of Health had a backlog in the submission of accounts to the Road Accident Fund (RAF). The Department had begun a manual revenue collection system that targeted those who should be paying as opposed to those who could not.

Additionally, the Department of Economic Development, Tourism and Environmental Affairs had faced delays in the implementation of new tariffs due to delays in the promulgation the KZN Liquor Licensing Act.

There were many new recent developments and initiatives that dealt with revenue in KZN. Casino and horse racing taxes, with effect from April 2014, had been moved from the Office of the Premier to the Provincial Treasury. Transport and the Provincial Treasury were now the two largest generators of own revenue for the province. The province had developed a Revenue Enhancement Strategy for Health, which included a revenue retention incentive for over-collections on patient fees. There had been revenue forums and bilateral meetings with departments to share best practices. Health had engaged a service provider to assist with the submission of accounts to the Road Accident Fund (RAF). Additionally, all departments were now charging for tender document fees. There had also been closer collaborative efforts between the provincial treasury and departments. Closer monitoring of staff debt growth was also in effect.

At the end of 2014/15, the aggregated expenditure for the year amounted to R97.4 billion, compared to the final appropriation of R97.453 billion, resulting in under-spending of R52.758 million (0.1%). The final appropriation contained all additions to the budget which had been formalised in the 2014/15 adjustment estimate, as well as the R236 million additional funding for the Human Settlement Development Grant and other provincial allocations which were formalised in the second adjustments estimate, and the post-adjustments estimate virements undertaken thus far. Education, however, had not included the additional funding of R355 million in their preliminary March in-year monitoring (IYM), which meant that if this had been included, KZN had actually under-spent by R407.758 million.

The province had also vastly improved in the usage of conditional grants, with nearly every area using 100% of their grants. Together, the conditional grant allocation was over-spent by R14.894 million, bringing the province to a year-end spending of 100.1% of the annual conditional grant budget. The main contributor to the overspending was the Department of Transport. The notable exception in the spending of the conditional grants was the Department of Economic Development, Tourism and Environmental Affairs, which used only 78% of its conditional grant.

Spending on infrastructure of the year was at 103.3% of the annual budget, showing an over-spending of R380.497 million. This amount was made up of various over- and under-spending in departments, notably Education, Health, and Human Settlements. Education over-spent by R354.57 million. The Department had stopped various infrastructure projects as a result of the budget repioritisation undertaken during the adjustments estimate. However, the R860 million budget reprioritisation undertaken in the adjustments estimate to ease spending pressures against CoE, had included projects that had already been committed and contracted. As mentioned, the Department had been allocated an additional R355 million in the 2014/15 Second Adjustments Estimate to assist with outstanding payments relating to projects which were already committed and could therefore not be easily stopped. The Department had not included this amount in their budget column in the IYM. Once this additional funding was taken into account, the Department would reflect minor under-spending of R430 000. Additionally, the Treasury was saddened by Education’s inability to process payments.

Health had overspent by R21.53 million due to higher than anticipated maintenance and repair of health facilities.

Human Settlements had over-spent by R75.669 million due to higher than anticipated spending on the maintenance and repair of housing stock.

As for fiscal sustainability, cost-cutting austerity measures had been in place in KZN since 2009/10, when the Provincial Recovery Plan had been implemented. The province had been projecting over-expenditure of R5.6 billion that year, which meant that the province was on the verge of not being able to pay salaries. Since 2011/12, KZN had had a less than 1% variance in terms of provincial over- and under-spending. The province had remained cash positive since May 2010.

KZN reported on its spending trends to the Provincial Executive Council on a monthly basis, which allowed for immediate corrective action to be undertaken if there was projected over-expenditure. KZN also reported mid-year and closeout spending to the provincial Finance Portfolio Committee, which had developed good team work in terms of oversight between the Provincial Legislature and the Provincial Treasury. The Provincial Treasury also had formal bilateral meetings with all departments three times a year to look at budget and spending, with informal engagements on a nearly daily basis.

KZN reported the effectiveness of the Provincial Recovery Plan of October 2009, which included the implementation of various cross-cutting austerity measures. These austerity measures were reviewed annually to see if they were still applicable or to see if they could be strengthened. Cost-cutting would remain in place in KZN for the foreseeable future and was viewed as an element of good governance rather than a once-off initiative to contain costs.

KZN had turned the corner very quickly when it came to repaying its overdraft, which had also led the province into positive balances since May 2010. KZN recently undertook an assessment on just four of the spending items that were targeted for cost cutting, including catering, leave gratuities and travel claims. The aggregate saving over the period under review – 2009/10 to 2014/15 -- was approximately R2 billion.

Table six (slide 19) indicated the cuts that had been made and would be made to the province’s Equitable Share over the 2013/14, 2014/15, and 2015/16. The decrease in funding had been dealt with by cutting all departments’ budgets proportionately. This had come after all departments’ goods and services budgets had been cut by 7.5% as a part of the Provincial Recovery Plan.

Table seven (slide 20) showed changes to KZN’s allocation over the 2015/16 medium term expenditure framework (MTEF), made by the National Treasury:

  • The phasing in of the data that informed the ES formula resulted in a decrease over the MTEF of R159.36 million, R87.769 million and R271.402 million;
  • Buffer funding was supposed to fall away in 2016/17, but the NT had agreed to leave this for a further year due to fiscal consolidation cuts – R321.958 million would be given in 2016/17;
  • Various function shifts in Education resulted in R280.136 million, R295.547 and R310.123 million being moved from the provincial to the national sphere;
  • Various function shifts in Health resulted in R92.387 million, R96.885, and R101.663 million being moved from the provincial to the national sphere
  • Fiscal consolidation cuts resulted in KZN’s ES being cut by R561.725 in 2015/16 and R843.789 million in 2016/17;
  • Unlike other years, no additional funding was given by NT.

The fiscal consolidation cuts and data updates to the ES budget reductions were, once again, quite significant for the province. Considering that significant cuts had already been made to all departments’ budgets in 2009/10 during the provincial recovery plan period, and again when the census data cuts were implemented in 2013/14, it was felt that the departments would be unable to cope with another major cut.

The province had realised it must think differently in terms of funding this cut. Besides this, despite the NT not funding any portion of the 2014 wage agreement shortfall, it was felt that Education and Health should at least receive a portion of the carry-through costs of the 2014 wage agreement (funded from the provincial fiscus). The provincial fiscus therefore provides 40% of the required amount to these two departments, with the balance having to be sourced from within their baselines. As the NT was not funding this, the 40% also had to be sourced from within the provincial budget.

Some tough choices and large amounts of prioritisation had had to be made, but this was a natural consequence of a period of fiscal consolidation. The following were identified as areas where the KZN had sourced the required funding to cover these shortfalls:

  • The Strategic Cabinet Initiatives fund of R100 million per annum had been put on hold during this period of fiscal consolidation;
  • The government office precinct project, for which R600 million had been allocated, was put on hold during this period;
  • KZN had continued to budget for a contingency reserve, with this being set at just above R1 billion per annum over the 2014/15 MTEF. This contingency reserve had now been capped at R750 million per annum over the 2015/16 MTEF, and this had released some funding to finance the budget cuts.
  • R240 million had been carried forward from the 2014/15 net financial position to fund parts of the 2015/16 MTEF equitable share reductions.

This financing plan therefore meant that none of the department’s equitable share budgets had been cut and service delivery spending had been protected.

Table 8 (slide 24) showed KZN’s fiscal framework, taking into account the baseline cuts, function shifts, changes to conditional grants, own revenue updates and the provincial cash resources used to fund various provincial priorities. Departments were planning on spending R101.961 billion, R106.882 billion and R112.773 billion over the MTEF.

KZN was budgeting for a contingency reserve of R750 million per annum over the MTEF. The contingency reserve was being kept for a number of reasons:

  • - The outcome of the 2015 wage negotiations was not known when the 2015/16 MTEF was tabled. If the National Treasury did not fund any portion of this, the province would have had to fund this from within its baseline;
  • - The negotiations regarding the amount that the province owed to NHLS) were still ongoing. This debt could place a significant demand on the provincial fiscus.

It was prudent to keep a contingency reserve that would act as a buffer in the event that these potential cost pressures became a reality.

KZN’s conditional grant allocations were also being affected by the fiscal consolidation. NT had indicated that all provincial conditional grants would be reduced by the same proportion, with the exception of a few grants that were linked to essential service delivery programmes or were smaller grants that funded important operational expenditure (certain Health and Education grants)

Despite various cuts, there was still growth in departments’ budgets (slide 28). Areas of crucial importance for the budget were cutting fat and maintaining the contingency reserve. Overspending by the Office of the Premier was due to the abolition and absorption of the Department of the Royal Household, which meant it had to cover its liabilities.

The lack of a strong population growth rate had led to a decrease in the province’s population proportion of the country. There had been rapid urbanisation of the province. It was anticipated that by 2024, more than 50% of the province’s population would live in urban areas. Unemployment issues had continued to plague the province and the rate had increased from 38.53% in the second quarter of 2011 to 40.42% in the first quarter of 2015.

There had been an improvement in primary industries from the fourth quarter of 2014 to the first quarter of 2015. However, many of the indices were showing negative growth, particularly the manufacturing index. Some specific areas had done relatively well recently, such as transport equipment, buildings, civil construction, machinery, ICT equipment and transfers. While the income distribution had improved over the last two years, the Gini coefficient was off from its 2003 levels.

The economic outlook for KZN was somewhat less optimistic than last year and earlier (January 2015) expectations, despite the lower oil price, which had already and would continue to put pressure on inflation which in turn would keep interest rates lower for longer. The lower oil price had also, to some degree, improved the current depressed levels of consumer confidence and had given consumers some debt breathing space. The weaker exchange rate and moderate improvement in global economic conditions should also support the KZN manufacturing and transport sectors. Unfortunately, continued electricity constraints, labour concerns, logistical bottlenecks, digital un-competitiveness and the economic policy divide would hamper the growth prospects for 2015. Provincial economic growth was therefore estimated at 1.8 per cent for 2015, compared to the 2.1 per cent estimated in January 2015.

Free State presentation

The Free State delegate outlined the key demographic issues that affected the economy and finances of the Free State.

While fertility rates had steadily declined in all the provinces, the Free State was estimated to have had the second lowest fertility rates after the North West between 2011 and 2016. The implication of this was a shrinking relative share of the province’s population to national population, further resulting in a lower share of Equitable Share. 

The Free State had the lowest life expectancy at birth. Overall, the life expectancy at birth for the Free State had improved in recent years. He highlighted there had been a 25% improvement in male life expectancy since 2001.

Maternal mortality (per 100 000 live births) had fallen from 267 in 2008 to 124.5 in 2012, and below the national average of 31.3 in 2015. 
Infant mortality (per 1 000 live births) had fallen from 54.1 in 2008 to 37.8 in 2015, above the national average of 31.3 in 2015. HIV incidence had fallen from 14.1% in 2008 to 12.3% in 2015, still marginally above the national average of 11.3% in 2015. The male percentage had decreased, but there were still major issues with combating HIV in females. The mother-to-child transmission rate of HIV had fallen from 9.2% in 2008 to 2.5% in 2012, still marginally above the national average of 2.4% in 2012.

Although the Grade 12 pass rate had consistently improved, the number of learners writing matric had declined significantly.

The Free State’s share of national output had decreased to 5.1% in 2013 compared to 5.5% in 1998. The province had the second smallest economy in the country. The economy was largely driven by public expenditure. During the period 2003 to 2013, the provincial economy had grown below the national average growth rate. Agriculture was an important aspect of the Free State economy.

Since the 2009 recession, the Free State’s growth had been positive, but there had been an overall trend of large negative growth in the mining and quarrying sector. After the 2009 recession, both the national and provincial economies had struggled to register significant growth rates averaging 2.8% and 2.1% respectively. IHS Global Insight forecast the provincial economy to grow by 2.8% on average between 2014 and 2018.

In the first quarter of 2015, the Free State unemployment rate had decreased to 30.4% from 32.2% in the last quarter of 2014, representing a 1.8% decline. The Free State had the second highest unemployment rate in the country. If the discouraged work seekers were included, the province’s unemployment rate jumped to 38.4%.

The government had adopted the National Development Plan (NDP) as a blueprint for future economic and socio-economic development strategy for the country. The strategic perspectives of the NDP offered a long-term vision for the country until 2030, and aimed to ensure that all South Africans attained a decent standard of living through the elimination of poverty and the reduction of inequality. Similarly, the Free State Provincial Government had developed the Free State Growth and Development Strategy (FSGDS) embedded within the NDP. The FSGDS was an elaborate framework to profoundly redefine the long-term provincial inclusive growth and development landscape. Like the NDP, the Strategy outlined the future of the province and mapped a shared development trajectory towards 2030. 

The province had overspent by R291.1 million, but this was due to the fact that Education had overspent by R442 million. The bulk of over expenditure was on goods and services as a result of accruals, similar to the past issue with health.

Health had under spent on capital, goods and services and CoE. Economic Development’s bulk of under-expenditure was due to the delay in implementation of projects. Legislature’s under expenditure was due to savings on CoE. The under expenditure on Human Settlements had been caused by a delay in the delivery of Military Veterans’ houses - funds had been allocated late in the financial year.

The majority of the presentation would focus mainly on the Departments of Education and Health, and particularly on their CoE, since that was where most of their financial problems were based.

The province had worked very hard to decrease its spending on CoE in Education through agreements with employees and other measures. There had been an enormous unavailability of funds for goods and services in Education due to the astronomical costs of CoE.

Efforts by the province to curb the salary bill had led to savings on CoE. Additionally, the non-filling of posts had also rendered some savings.

There had been a complaint from the Department of Education that they had been under-funded. The province believed it had appropriately funded social departments with the available money -- the Free State spent the second most proportionally on CoE in Education. The current wage discussions could add an additional R200 million to what the province needed to pay. The spending on Education CoE in the Free State had increased from R4 519 million in 2007/08, to R9 442 million in 2014/15. In the next three years, the plan was to shift money away from CoE in order to properly fund other aspects of education. Currently there was an excess of 500 educators.

In the previous financial year, the CoE had been fully funded whilst other priorities had been under-funded. In order to contain the COE budget, the following initiatives had been introduced: 

  • Centralised all school-based appointments;
  • Management of excess educators (matching and placing within 30 km, whilst beyond 30 km resettlement costs would be considered);
  • Targeted delay in filling of some promotional posts at schools and public servants’ posts at offices;
  • Abolishment of some non-critical posts as they become available due to natural attrition at schools;
  • Aggressive management of incapacity leave;
  • Identification and profiling of employees who were to go on retirement to determine need for appointment(s);
  • Development of a database on potential vacancies (retirees, resignations, temporary employees);
  • Conducting a headcount;

  • Instruction notes on CoE regarding the decrease, as well as on the appointment of personnel.

Progress on these initiatives would be reported to the Steering Committee in subsequent meetings.

For the size of its economy, the Free State had done rather well over the years on its own revenue collection. This year, the province had under-collected by R46 889, mainly due to outstanding patients’ fees (especially from the Lesotho government).

Revenue collected had increased by R29 million, or 3%, when compared to 2013/14 actual collection. Over the years under review, revenue collection had grown by 2.0% and was projected to grow by 4.9% over the MTEF period ahead. 

An area where the province sought to gain some revenue was in ex-employee debt. In March 2015, there were 3 347 cases that had been handed over, totaling R38.8 million. The service provider hired to analyse the costs of collecting the debt had indicated that 1 943 cases were irrecoverable, but the rest could be collected.

The province had had serious issues recently with accruals. Positively, 2013/14 accruals had decreased dramatically from R2.1 billion to R1.4 billion.

Since 2011/12, there had been some decrease in fruitless and wasteful expenditure. Most of the fruitless and wasteful expenditure was due to the interest incurred as a result of accruals, mainly from the Department of Education. 
The debt owed to municipalities was mainly in Provincial Public Works (46.3%) and Education S21 Schools (35.4%).

An Inter-Governmental Debt Steering Committee (IGDSC) had been established to fast track payments to municipalities. Since the intervention of the IGDSC, debt had decreased significantly. The process to visit municipalities and to correct information was an on-going process. 

The paying departments were in a process to correct all accounts with municipalities on the municipal system. The Department of Public Works and Infrastructure was committed to settle municipal debt and to pay accounts on time. During April and May 2015, the Department had processed total payments amounting to R211.161 million towards municipalities to clear debt, of which R125.927 million was for property rates and R 85.234 million was for municipal services.

The province had recorded an over-expenditure of R291.1 million, due to the Department of Education (R442.7 million). All other departments had recorded under-expenditure of between a maximum of R33.4 million and minimum of R1.1 million. The province had collected R29 million more than in the 2013/14 financial year, and would continue to enhance cash management with a view to realising financial sustainability. Progress on strategies undertaken by the province would be reported to the Education Steering Committee, as well as the Provincial EXCO.

The Chairperson thanked the Free State for their presentation and stated that establishing and implementing a plan was the most important aspect of improving financially. He was optimistic about the plan laid out by the Free State and looked forward to the next meeting to see how the implementation was progressing.

Gauteng presentation

The Gauteng delegate said the province had determined its new priorities within the context of transformation, modernisation and re-industrialisation, which had resulted in the “Ten Pillar Programme.”

The first pillar was Radical Economic Transformation. Although the plan stretched to 2030, there were specific projects and inititiaves for this year. Township economy revitalisation and support of SMMEs and cooperatives was deemed as crucial for this pillar. The Township Economic Strategy had already been approved by the executive, and there were certain projects which had already begun. The public employment programmes were targeting youth unemployment.

The second pillar, Decisive Spatial Transformation, aimed to ensure proper planning of human settlements as well as strive for an integrated urban development.

The third pillar, Accelerated Social Transformation, focused mainly on school infrastructure. The priority was maintenance of the schools, but also alternative uses of unused schools. There was demand for additional schools in certain areas, particularly the new human settlements. Information and communication technology (ICT) development in education was also a priority. The province was working on implementing its Smart Schools initiative. The province was also seeking to strengthen health systems and the National Health Insurance rollout

The province, due to its large amounts of in-migration, was also exploring the prevention and reduction of the burden of disease. Combating substance abuse and gender-based violence were also great challenges facing the province.

Pillar four was the Transformation of the State and Government, seeking to improve the capacity of the state, but seeking mainly to reduce and eradicate fraud and corruption.

Modernisation of the Public Service, the fifth pillar, was based around the implementation of e-Governance.

Pillar six, Modernisation of the Economy, was based around cultivating an innovative “Smart Economy,” as well as ensuring its environmental friendliness.

Pillar seven, Modernization of Human Settlement, sought universal access to basic services as well as integrated urban and spatial development.

Pillar eight, Modernisation of Public Transport, focused on strategic transport infrastructure, which sought actual integration of public transportation.

The province believed that pillar nine, the Reindustrialisation of Gauteng, could provide a new area of growth and job creation for the province. Agro-processing was seen as an area of potential development as well as developing partnerships with state-owned enterprises.

Pillar ten, taking the lead in Africa’s new industrial revolution, sought to strengthen intra-African trade and investment as well as develop partnerships with BRICS countries. Gauteng saw itself as the key financial driver of Africa and was in a special position for the development of the continent and the BRICS nations.

Relating to the socio-economic indicators of the province, Gauteng’s population grew by 3.6% per annum, from 10.5 million in 2009 to 12.9 million in 2014 – an increase of 2.4 million. The number of households increased from 3.8 million in 2009 to 4.2 million in 2014. The average household size was 3.1 people. In the province, 67.5% of the population had secondary education, 20.8% had tertiary education, 9.6% had primary education and 2% had no schooling.

The Gauteng province contributed more than a third of SA’s GDP, accounting for 36% in 2012. The forecast predicts a gradual increase of the share to 36.1% of GDP by 2017. The large share of the economy held by Gauteng was due in large part to the finance and business services sub-sector and administrative arm of government.

Particular sectors were major contributors to the provincial economy. While the finance sector was enormous for the province, it did not provide many jobs. The province was looking into developing manufacturing, transportation, retail, and other sectors to provide jobs.

Gauteng was the highest producer of own revenue, compared to the other provinces. Motor vehicle licences made up a large part of this revenue.

The biggest issue for the province on fiscal sustainability was the funding of the wage agreement that had just been agreed upon. If this was dealt with positively, this should not have a huge impact on the province.

Total provincial receipts amounted to R90.5 billion, of which R68.7 billion was equitable share, R16.9 billion conditional grants, and R4.9 billion own revenue collection.

The total provincial outflows were R89 billion, of which R87 billion was departmental requisitions, and R1. 8 billion was direct charges.

Total collection for the 2014/15 fiscal year was R5 billion. The R4.3 billion target was exceeded by R700 million (16%). The Provincial Treasury contributed R402 million more than its appropriation, due to interest income.

The overall preliminary expenditure was R85.7 billion. Gauteng recorded an overall under-expenditure of R1.5 billion. Health and Education were the main contributors of under-spending.

The province spends roughly 55% of the budget on CoE, which it strives to keep under control to not crowd out goods and services.

Gauteng Provincial Government (GPG) as whole appeared to have remained within the 2014/15 CoE budget. Under spending was recorded for the Departments of Infrastructure Development, Economic Development, and Roads and Transport.

Conditional grant spending was at 99%. The areas of challenges were in Education, Health, Housing and Transport.

Infrastructure expenditure was R9.8 billion or 99% of the budget. R117.8 million remained unspent.
Human Settlements and Education contributed to the under spending.

The issue the province faced of paying invoices before the 30-day mark was highlighted. The issue arose because the province had a centralised system of capturing invoices into the system. The time taken for the invoices to make it to the centre had caused many late invoices. A decentralisation process had begun, especially in major departments like Health and Education.

An initiative called the “web board” had also been implemented. The web board was an internet application where suppliers were registered online, and where they could scan their invoices in addition to sending the hard copy. Using this system, the suppliers could also track where their payments were in the system. This was a new initiative and they would see how the implementation worked.

The Chairperson thanked Gauteng for their presentation. He highlighted the importance of looking at the best practices of each province and seeing what could be implemented within each Member’s respective province.

Mr Neels Van Rooyen (ANC), Chief Whip: Free State Provincial Legislature commented that within the Free State, there was political will from all sectors to improve its financial standing. The Finance Committee also called in the provinces to discuss their finances, although they mainly looked at expenditure. He acknowledged the discussion on the decrease in the proportion of equitable share and the shift in focus to increasing the province’s own revenue. He commended the effort of the Provincial Treasury to curb unemployment. Regarding accruals, he highlighted the improvement of R1 billion which was mainly due to the Provincial Treasury’s intervention in Education and Health. He was looking forward to seeing further improvement from the various sectors that had been put under administration. He reiterated that the struggles were difficult, but there was a political will to improve the situation. It was also important to compare what was told to one in the province and what was reported to the Committee.

The Chairperson agreed on the importance of comparing what was told and what was reported. He emphasised the importance of learning from what had happened in the past, particularly the administration of Limpopo – especially when putting a department under administration.

Ms Van Lingen thanked all the provinces for their excellent presentations and commended the Free State in particular on their comprehensive report. She thanked them for the perspective they were able to bring to the system.
She wondered why tourism had not been included as an income sector in the National Treasury’s presentation. She also asked for clarification on certain slides that went only to 2012 or 2013.

For the Free State, the six Strategic Infrastructure Projects (SIPs) were listed exactly as they were in the SIPs document, and the projects identified in the province were not specified. It would be nice to know how the province was spending that money and what progress was being made on the SIPs. She remarked that while 500 teachers in excess may seem like a lot when you were footing the bill, it paled in comparison to the Eastern Cape’s excess. She indicated her apprehension over the upcoming wage increase. She would also like to know how much the municipalities owed the province on vehicle licences.

As for KZN, she also asked about the omission of tourism in the charts. She asked how many casinos the provinces had to have, for such a high level of own income. She expressed concern over Economic Development spending only 78% of its conditional grant. As for the Contingency Revenue Fund, she noted the significant efforts to bring the number down, but expressed concern that the additional money would meet all the province’s obligations for salaries, taking into consideration the graph in the Free State’s presentation, which showed the amount spent on salaries as being significantly higher than the other provinces. She also asked about the results of the intervention in the Education Department in terms of Section 18 of the Public Finance Management Act (PFMA) and whether additional measures could be used to get the department under control.

She asked for the name of the new electronic system for sending invoices being implemented in Gauteng.

Staff structure organograms must go to the Department of Public Service and Administration (DPSA) for approval. She asked the Eastern Cape what went wrong.

The Eastern Cape had received an additional Human Settlements grant, either this financial year or the previous, to the amount of R238 million. She asked where that money had been spent. She was very worried about the contingent liabilities of the province, at R8.5 billion. She asked if there was a plan or measure to address this issue. She asked if the issue of leases mentioned in their presentation were all managed by the Department of Public Works (DPW) and if they were in all provincial departments. She knew that some had been sorted out with the DPW, so she asked for a comprehensive list of all the leases submitted to the Committee because this should not become a problem. She pointed out that the accruals were stated at R1.7 billion, but there had been no indication of which were above and less than 30 days. She suspected that the Eastern Cape was not good in this regard.

Ms Van Lingen spoke about the interventions in various areas and highlighted the high cost of the administrator in a particular region. She worried that the debts incurred during this period for the municipality would eventually be passed on to the province.

As for municipal debt, the biggest offender was Kouga Municipality for not paying their vehicle licence fees to the department. In November last year, the amount stood at R23 million, and the interest on it was only getting worse by the day. She insisted that there must be financial discipline used in that municipality. The councillor in charge of finances went on about the previous regime, but he had been the councillor then as well.

As for Education, what was the Provincial Treasury doing in regard to the excess of teachers, which once stood at 7 000, but was now at around 5 000.

She also brought up that the road maintenance contracts, especially for gravel roads, had not even had their tenders awarded by November last year, so no maintenance had been done on gravel roads, and maybe others, because the Independent Development Trust (IDT) and Community Development Centre (CDC) had not implemented the tender processes. She was badgered constantly about the condition of the roads, since it was such an important part of the province. One just needed to drive through the province to see to what she was referring. As for the Department of Transport itself, there was only one acting professional left, and even he was a mechanical engineer, and not a civil engineer. She was asking what could be done to retain and attract professional staff in the department.

She asked if there were salary bans in provinces in terms of Health. She had noticed in emergency services (EMS), that there were discrepancies amongst provinces for certain workers in health services, like ambulance drivers. She was wondering why this was happening. She thanked the Eastern Cape for appointing the ambulance drivers on a permanent basis instead of an annual contract.
Ms T Motara (ANC, Gauteng) suggested that at some point, the Committee should delve into the Equitable Share programme, because as much as the money followed the people, the infrastructure did not. If a school was built in one province, one could not move it to another province when the population shifted. As a Member from Gauteng, she cited the importance of making sure the money followed the people, but acknowledged that at no point could a province adequately prepare for out/in-migration and changes in the Equitable Share. She wanted to eventually have the government tackle this formula to balance these issues and mitigate these pressures.

The Chairperson noted this was a very important point and asked her to raise this at the Appropriations meeting the following Tuesday.

She said that this would continue to be an issue because provinces like the Free State would continue to complain that their portion of the Equitable Share was being diminished. She would definitely raise this issue at the Appropriations meeting.

She also noted that the question regarding the overspending of the Office of the Premier in KZN had been preemptively answered, but she would be certain to check next year’s report to ensure the overspending did not happen again.

She asked the Gauteng’s Provincial Treasury to expand on their centralised procurement system and the new electronic system. She was curious about how this was progressing and any challenges they had faced so far. During the past week, they had heard about the horrific procurement process in the Northern Cape. The purpose of this Committee was to check on the provinces, but also to determine best practices that could be used in other provinces.

The Department of Health had been placed under administration, but no statement had been given on that process regarding its progress or time frame. Maybe in another meeting, the litigations facing the Department of Health needed to be discussed to see what could be done. While one could never properly budget for litigation, one could see what the drivers of it were and try to confront them.

She would like the Head of Department (HoD) to expand on the factors of the Human Settlements backlog, given that most of the informal settlements were in the province and there were three metropolitan areas.

She also thanked the Free State for a very detailed presentation. She asked about the reasons for putting the Department of Education under administration. She was asking because the Northern Cape had indicated it would not be placing any departments under administration due to legal issues.

She also wondered first what ex-employee debt was, and why there was such a huge amount of it.

In other provinces, key economic drivers had been narrowed done to three or four areas. She did not get that sense from the Eastern Cape. What were these drivers? Where did one see tourism in regard to the economic drivers? Since there was significant out-migration, it was crucial to draw others with liquid cash to visit the province and spend money.

She reiterated the twofold migration occurring in and from KZN - leaving the province, and moving to urban areas within the province. How did one plan with municipalities to cushion that migration from one’s own rural areas to the urban areas?

The Chairperson also drew attention to the importance of the conference industry for tourism and drawing tourists to the less traditional areas of tourism.

Eastern Cape response
Mr Kalimashe explained that when the decision was made to intervene in a municipality, it meant there had been a breakdown on issues of good governance, financial prudence, efficiency, and others. An intervention was made to provide the skills needed to rectify the situation and stabilise the municipality. Each intervention was different due to different needs. As for the cost, this also depended on the municipality. If the problem was deemed as crucial to the province, some of the costs may be shifted to the province for the intervention. He agreed that these interventions were costing the province money. They had not prepared for them and they must make these preparations going forward. In some cases, an intervention may be incremental or only affect certain areas, if capacities were still in place. However, in others, the entire system may have to be remade. The Department of Cooperative Governance and Traditional Affairs (COGTA) had recently released a list of municipalities grouped into various degrees of risk. This needed to be considered to plan and budget for future interventions.

As for accruals, the classification was important. In Health, for example, there were certain non-negotiable items like medicine, but also additional expenses that arose like the rand/dollar exchange rate when procuring those medicines. The cost of a policy intervention had also increased, causing compounded accruals.

The Department of Road and Public Works managed leases. They were custodians of these buildings. The Cabinet of the Eastern Cape had decided to build a precinct in Bisho which would allow the province to move away from leases by having a building which accommodated multiple departments at the head office. This was a medium to long-term move. Now, all government buildings were managed by the Department of Roads and Public Works, so they had no control over the leases.

The Human Settlements grant had come right at the end of the fiscal year, but had been spent immediately due to the previous years’ under-spending of conditional grants. If this intervention had not taken place, the rate of accruals would have been even higher. This did help the province’s revenue position.

Mr Kalimashe agreed that tourism was an important economic driver for the province. Tourism countrywide accounted for 9.1% of the GDP and was a significant driver of economic growth. In the province, tourism was also important and represented about 3.5% of the GDP. The pristine environment of the province lent itself well to tourism. This was an area the province would be looking into to developing. In terms of cost, the areas of tourism the province was looking to develop -- the gateway to the Western Cape and the Wild Coast -- there was little expenditure required, except for accessibility.

The province was looking to diversify its economy and had begun to develop agro-processing. The province was looking to build a third special economic zone in the eastern section to grow agro-processing further. Areas of renewable energy were also being explored – particularly wind, which had assisted growth and led to the lowering of costs. The ocean economy was also very important to the province.

The intervention in the Department of Education was largely to face the huge issue of excess teachers. The province was using the retirement option and reviewing sick leave to allow space for the excess teachers. A difficulty was also geographical, as the excess was normally on the western side of the province and the need was on the eastern side. The province believed many of the issues would be resolved once the redundancies arising from individuals who were on sick leave and were incapable of returning to work, was dealt with.

The lack of people with professional skills in departments was very difficult to manage. Due to the scarcity of the professionals, they would rather be consultants than actually in the departments. There were policies of scarce skills allowances that attempted to retain people with professional skills, but because of private competition, it was difficult to retain these employees.

As for the contingent liabilities, there currently was no solution. The Treasury did have some capabilities in regard to employment, using early retirement and other methods. But cash was needed to make this happen, with a large upfront investment, in the hope that over time these savings would help bring the CoE down to appropriate levels.

He agreed with the comment made by Ms Motara regarding additional variables that made the transferring of funds difficult. These could be geographical, as was the case with teachers in the Eastern Cape, or take other forms. These variables needed to be considered to determine things like whether a structure should be temporary or permanent. Considering the trends, and making plans to take them into consideration, was a major effort for the province in the medium-term.

KZN Response
Mr Nkosi believed there were five casinos in KZN, and they contributed well to the provincial revenue fund. The province felt that it needed to exploit the tourism industry as much as possible. Its view was that, for the most part, tourists had the propensity to spend and would not feel the pinch if a tourism levy was introduced at a provincial level. This needed to be balanced with the cost of imposing the tax in relation to the yield. The province needed to look at where it saw additional streams of revenue. He believed that constitutionally, it was able to impose a tourism levy as a province.

Ms Van Lingen clarified she had been talking about sector performance, and was wondering why tourism had not been included in that breakdown. She stressed that they did not advise the province to tax tourism, as there were already certain taxes in place. One should not raise taxes but develop tourism instead. The question was how much of the economy came from tourism.

The KZN delegate thanked Ms Van Lingen for her clarification. He could not remember the ranking of the tourism industry exactly, but knew it was substantial. He would provide that information to the Committee upon looking it up.

The under-spending on the Expanded Public Works Programme (EPWP) conditional grant for economic development could be explained by the function shift determined by the Office of the Premier. For example, the environment portion -- particularly wildlife, which was under agriculture – had been moved to economic development and tourism. This shift had confused the system and led to the under-spending. Subsequently, R2.5 million had been committed to projects, so it had been expected that that portion of the conditional grant would be rolled over.

Mr Nkosi was slightly confused over the question on the contingency reserve. He reiterated that in 2015/16, it had to be reduced from R1 billion to R750 million in order to finance the diminished proportion of the Equitable Share, as well as the Financial Consolidation Programme. In truth, should all the province’s liabilities be due and payable now, the province would not be able to cover the cost. The upcoming wage negotiations may also wipe out the contingency reserve.

Intra-migration was a crucial phenomenon globally, where people usually moved to seek opportunities, whether economic, social, or other. But what could KZN do about it? If one wanted to keep people in their own area, one had to bring development to where they were. KZN had approached this by joint planning with local municipalities and district municipalities, to ensure projects were properly implemented. Secondly, the Inkululeko Development Project targeted deep rural areas with significant amounts of investments, in order to build all the amenities of an urban area, from a school to a shopping mall to a clinic, so that rural communities could enjoy the same lifestyle as people in urban areas. This project needed no new money, just a different way of thinking among government departments. The bottom line was that to slow the rate of urban migration, the rural areas had to be developed.

Free State Response
The Free State delegate responded to the question regarding the use of quarterly unemployment figures as well as yearly figures. Yearly unemployment rates had been used on the slide in question to smooth the fluctuation of the statistics.

The Free State had reduced the number of excess teachers from 1 200, to just below 500.

The Strategic Integrated Projects (SIPs) that had been included in the presentation were 13 of the 18 that the province had identified as areas that needed to be supported or developed to increase economic growth. As for specific SIPs, the Gauteng/Free State/Durban Logistics Corridor was under SIP 2, as well as the attempt to attract the production of motor vehicles, where Toyota had expressed an interest. SIP 8 talked to green energy and SIP 9 refered to power generation. There were plans under way to construct a large solar generation plant at Bethulie. For SIP 11, which dealt with agro-logistics and rural infrastructure, the province, with a Chinese partnership, had built a fish hatchery that appeared to be successful. The province was also focusing on apple production in the Bethlehem region and developing their agro-processing capacities. In Ladybrand and Trompsberg, new hospitals had been built focusing particularly on trauma. For SIP 15, expanding access to communication technology, there had been a summit the previous month and the province was working closely with Telkom regarding the rolling out of optic fiber in the province. For water and sanitation infrastructure, SIP 18, there were plans to bring water from a dam and river to improve the infrastructure.

The Provincial Treasury had indicated that at this moment, it would not be able to provide an accurate amount of the licence fees owed to the province by municipalities, but it would provide that information in writing to the Committee.

The Public Finance Management Act, Section 18E, allowed Provincial Treasuries to assist and build the capacity of the departments to develop an efficient and transparent system of financial management. The province was also using PFMA Section 36A as a legal mandate to replace the Head of Accounting. That was the nature of the takeover of the Department of Education. The province was working closely with the Department of Education. It had established a standing committee that included the Department of Education and the Treasury. They were doing their best not to simply impose, but to collaborate. Reports had to be made often to various committees, to ensure progress on the matter.

Ex-employee debt was the amount owed to the province by former employees for various reasons. This was the debt that the province had been failing to recover. The province had decided that instead of writing it all off, to try to collect as much as possible.

Gauteng Response
The Gauteng delegate said that in Gauteng, there had been centralisation of the back office, which included procurement, human resources, and IT. To a certain extent, this had been done away with, moving certain functions to different offices and departments. The province was using a SAP system for procurement. To make a payment to suppliers, there should have been a purchase order, but the department had to capture in the system that the goods had been received. They then also had to bring to the centre an invoice to be captured and then finally the supplier could be paid. Gauteng realised that they did not actually need the invoice to physically come to the centre for capturing. This had been decentralised to enable faster capturing of the invoices.

The Web Board was an Internet application that now involved suppliers. The previous decentralisation of capturing invoices was only for the government. This had helped, but the province had taken it a step further to register every supplier to the Web Board. They could now submit invoices electronically themselves when something was delivered. This was in its early stages, but there was hope that this would be able to bring the payment time to below 30 days. This would also allow the suppliers to track their payment, and to ensure their payments were being processed. This was a phased approach, so the province was first targeting its biggest suppliers and would eventually move to its smaller ones.

The intervention in the Department of Health had been done in 2013 and was specifically a two-year intervention. This was not a total takeover in terms of having their accounting officer losing responsibility. The Provincial Treasury focused on resources management. This was a team effort that was dealing with supply chain management, since this was a struggle for the Department. They had had difficulty procuring what they needed and there were large amounts of unathorised expenditure. There also was not an appropriate staff establishment. The previous hiring was too haphazard. Now the Department could ensure that it was hiring for an actual need and make sure it was funded. There had also been complaints that suppliers were owed huge sums of money. The province had sat down with suppliers and reviewed its invoices in order to rectify the situation. They had received legal opinion on the matter and brought in an audit form to audit the requests for money -- some dating back to 2001. In some cases, it was found that they should not be paid, but credible invoices were paid. The Provincial Treasury believed that the administration of the Department of Health had been successful. Previously, accruals had stood at R3 billion, but now they were around R1.6 billion. While the Department was no longer under administration, they were working closely to ensure proper management and implementation of the items put in place.

She described the litigation issues as a huge challenge facing the province. The biggest contributor was the Department of Health. The province had lost a number of cases in Health that would cost the Department large sums of money.

The backlog in Human Settlements was largely due to the challenge of in-migration. This not only meant the population was growing, but the number of households as well. The province was working very closely with the metros and their bylaws to ensure that when houses were being delivered, there was integrated planning and collaboration. This was an issue the province was looking into, particularly the acceleration of getting people their houses. She admitted the backlog was so huge that the problem would not be solved quickly.

National Treasury response
The National Treasury agreed that tourism should be included in the templates, so the NT would get those figures from the Tourism Board. It believed the reason given had been because when tourists went to a place, they spent money in many different sectors. The money on tourism was then factored into all the other sectors where money was spent.

Health workers, including ambulance drivers, were paid on a uniform salary level, unless they were on contract.

Contingent liabilities in Health had been taken to the highest level -- the National Health Council, which was chaired by the Minister of Health. National Treasury had taken the matter as far as they could, but now it was out of their control.

Mr Sishi was glad that the Committee would be having a meeting on the Equitable Share Formula, and as pointed out that the formula could not create money, it could only distribute the money. If there were less money, less money was distributed. It was important to remember that if the formula was changed, it would still only distribute the exact amount of money that was there. During the boom period of the mid-2000s, increases to the Equitable Share were in the double digits, and all the while population numbers had been taken into consideration. This phenomenon of population numbers changing and affecting the Equitable Share had always been there. The issue was not the formula, but simply the fiscal position of government was more constrained. He highlighted that conditional grants, and not the Equitable Share -- particularly in the social sector -- funded most infrastructure spending. Conditional grants were much more up for discussion and input, so he was comfortable with the current system of funding infrastructure. The Equitable Share was used mostly to fund current expenditure. Additionally, there was a cushion in the fiscal framework that was designed to help provinces losing money to mitigate the shock and make adjustments. The presence of this cushion had also created resentment in the “gaining” provinces, because they complained they were not gaining what they should be in terms of the Equitable Share.

The Financial and Fiscal Commission (FFC) does a lot of work on reviewing of the Equitable Share and shares this with National Treasury. The changes made in regard to the Health calculations had come largely from their input.

The Chairperson thanked Mr Sishi and all the Provincial treasuries.

He added that there were serious challenges facing the provincial budgets. Addressing accruals must be a priority. Spending in Health and Education also needed serious attention. Provinces also needed to look into cost containment measures. He gave the example of video conferencing in his province, because of the sheer size of the Northern Cape. He said that it was also crucial to collaborate with the metropolitan municipalities, which were the engines of growth in the country.

He said the Committee would meet again with the provinces in September or October.

The meeting was adjourned.


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