Limpopo post-intervention progress report; Rates & Monetary Amounts Amendment Bill [B15B-15]: briefing

NCOP Finance

12 August 2015
Chairperson: Mr C De Beer (ANC, Northern Cape)
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Meeting Summary

In the first part of the meeting, the Committee was given a full briefing by the Limpopo Intervention Team and administrators, on progress made with the section 100(1)(a) intervention into the Province of Limpopo. The Premier and several MECs were present to give input. Unqualified audit reports were achieved in the Office of the Premier, the Department of Health, and Department of Transport. Positive cash flow had been achieved, new IT systems implemented and all the departments were dealing with the disciplinary cases. Many critical posts had been filled. The Provincial Treasury was playing a much stronger role in addressing financial management failures. Challenges included the slow pace of criminal and disciplinary processes, vacancies, poor financial record keeping, a need for forensic audits and irregular tenders that still needed to be addressed. The provincial Department of Education had filled some vacancies but was in the process of invoking section 18 because meetings had not been followed through. The main problem was that head counts showed a number of discrepancies, as well as difficulty in collecting data, and the rural allowances had been stopped because they were not sustainable. In the provincial Department of Health, there had been significant improvements, with seven out of twelve directives achieved, but there were challenges with a pending court case on waste management and funding challenges that would be taken up. In the provincial Department of Public Works, capacity had been built and a project management system implemented, and rental costs were being addressed. Some directives had not been achieved. In the Department of Transport, a skills audit was completed, the audit result had improved, and the Road Agency Limpopo and Gateway Airport Authority Limited (GAAL) were being brought into the fold.

Members asked for details of rental agreements and office space, and asked questions on specific projects of shopping malls, roads and show grounds. Members wanted the complete reports from the administrators, and on cases referred to the Special Investigating Unit,  and commented that education must be addressed. There was concern that the Provincial Treasury needed to be even stronger, with stricter adherence to the Public Finance Management Act.

The second presentation was from National Treasury, on the 2015 Tax Proposals, and draft Rates and Monetary Amounts Bill. The main points outlined were that :gross tax revenue was R986 billion in 2014/2015. Non-tax revenue was R15.7 billion; transfers were R51.7 billion to BLNS/SACU countries. Some taxes were earmarked - such as those for Road Accident Fund, Unemployment Insurance Fund, and Skills Development. A comparison of figures was given for 2014 and 2015, and the change in tax rates was occasioned by an expectation of declining budgets, although in fact there was a R5 billion surplus generated in 2015. Most changes would be targeted towards VAT, companies and individual tax, which accounted for over 80% of tax revenue. The Tax to GDP ratio was around 25%, and the main purpose of taxes was to be redistributive, transparent and accountable. National Treasury (NT) needed to raise R27 billion over two years to meet the budgets. Personal income tax was increased by 1%, the general fuel levy by 30.5c and Road Accident Fund levy on fuel by 50c. Additional tax policy changes included carbon tax, loophole closures, increase in electricity levies, energy saving tax incentives and an increase in excise duties. The real and nominal fuel levy revenue had been increasing, but as a percentage of tax revenue it had come down, due to more fuel efficient cars. Expenditure on roads and transport was higher than the revenue from fuel. The theory behind the changes was to decrease the headline tax rate and increase the average effective rate. All personal income tax brackets were increased to counter inflation, and marginal tax rates were increased by 1% for incomes above R181  00. For company tax, the minimum turnover to become taxable was R335 000. Transfer duties changed to encourage first time house buyers. Members' questions were directed to the impact of the new Bill on inequality, and the effect on the middle income brackets, whether pensions and inheritances were being double-taxed, and the need to find out how effective the system was.

Meeting report

Limpopo Section 100(1)(a) intervention progress report: Limpopo Intervention Team, in presence of Premier of Limpopo
Mr Chupu Mathabatha, Premier of Limpopo, stated that the work and progress made on the Section 100(1)(a) intervention into Limpopo would indicate significant strides forward. For the year 2014/15, the Office of the Premier (OTP) had achieved an unqualified audit report. The OTP had appointed a new senior manager for auditing purposes. The province had maintained a positive cash position. The OTP was going to implement new IT systems. It had made progress with disciplinary measures; the former Director General had been removed, owing to corruption, and the province was determined to remove any negative influences and behaviours. The OTP believed that the province had learnt from past mistakes and believed it was now on the right track. He thanked the team for the oversight the committee has provided.

Mr Monde Tom, Administrator: M&E oversight, Limpopo Provincial Treasury, stated that senior managers from the Limpopo Provincial Treasury, Education, Health, Public Works, Roads and Infrastructure, Transport and the Premier met with the Auditor-General (AG) recently. They looked at instances of progress made, corrective measures, validation of reports and consolidated reports. There was good functioning and co-operation between the departments and the Monitoring and Evaluation (M&E) team. Progress had been made in four departments in respect of Cabinet directives. The Department of Health had received an unqualified report. The overall fiscal position remains strong, and critical posts had been filled. The Provincial Treasury was playing a much stronger role in addressing financial management failures. The Department of Education continued to experience management challenges, and there were also some irregularities in tender processes. Criminal and disciplinary processes were slow. There were still some vacancies with the departments. Provincial Treasury had accomplished some key appointments, whilst skills audit and contract management reviews were commended. Challenges included poor financial record keeping, and the disciplinary cases of heads of departments and senior management needed to be followed through. There was a need for forensic audits on pieces of land, and accountability and irregular tenders needed to be addressed. The national government continued to engage actively with the province. Co-ordination mechanisms were in place to manage the disciplinary cases.

Mr Mzwandile Matthews, Head of M& E oversight for the Department of Education process, commented on the filling of vacancies within the department. There were still five circuit manager vacancies, out of the original 25 vacant positions. A meeting was organised with the Head of Department (HOD) and Department of Education, but this meeting did not take place. Section 18 had been invoked, National Treasury officials would be sent to the Department of Education and the acting HOD would move back to the Chief Financial Officer role. The Compensation of Employee (CoE) budget needed to be addressed and a new post "basket" of schools was to be finalised to manage this budget. Head counts for schools were conducted and there seemed to be serious discrepancies in the data. Over 70 schools had not been visited and officials were blocked from accessing these schools. The rural allowance had been stopped. The Department had been inundated with educators looking to get a rural allowance, and the result was the payment of over R300 million for around 7 000 people. This was not sustainable in the long run. Infrastructure delivery was fast-tracked, but the correct documentation was not kept. This had led to irregularities.

Ms Valerie Rennie, Deputy Director General: Corporate Services: National Department of Health, stated that the Limpopo Health Department had improved tremendously. Seven out of the twelve directives had been achieved, most being once-off projects. The main directives were to improve the effectiveness of the organogram and organisational structure and to achieve an unqualified audit report. The directives not completed included procurement management and disciplinary cases, but the aim was to finish most of the remaining five cases by the end of the year. There was one pending court case on waste management. Funding challenges would be addressed with the Provincial Treasury. The recommendations were to sustain the current improvements through increasing the capacity of leadership and financial management.

Mr Mathabatha Mokonyama, Administrator, commented on the achievements in the provincial Department of Public Works. Directive 2, relating to the immovable asset register had been moved to achieving an unqualified audit report. This department had built capacity for technical skills and implemented a project management information system. Directive 1 was aimed at reducing rental costs and this was in progress. Directive 5 was about implementing a strategic hub to attract technical capacity. Directive 7 dealt with the development of an organisational structure. There had been inadequate progress in the Directives 6, 10 and 9, which included bringing in more capacity into the CFO office, work on movable assets and enforcing disciplinary action.

Mr Gregory Makoko, acting HOD, spoke about the work in the Department of Transport, noting that a skills audit had been completed. This department received an unqualified audit report. A feasibility study was completed and Road Agency Limpopo (RAL) was kept as an agency with a turnaround plan. The Department would be assisted in implementing Gateway Airport Authority Limited (GAAL). Implementation of IT systems had taken place. The intervention team needed to work closely with the disciplinary processes in this department. RAL should finalise complex disciplinary cases and deal with the litigation, and GAAL figures must be shared with the Office of the Premier for inclusion in the central database.

Discussion

Mr V Mtileni (EFF, Limpopo) noted that R200 million was lost in office space in Limpopo, and asked for detail on what was happening there. He wanted to commend good work of the Office of the Premier, in respect of the work on hospitals. He wanted more detail on the mall being constructed, and asked if the site was leased or sold, and who was involved, and also wanted specific details on a show ground that had been sold, and work on particular roads in Limpopo.

Ms E Van Lingen (DA, Eastern Cape) asked whether section 100(1)(a) orders were still in place. She then asked that a complete report from Mr Tom be circulated. Education was a matter of concern, along with the IT side of the asset register.

The Chairperson stated that Cabinet would be in charge of the section 100(1)(a) rulings, and confirmed that the order was still in place. He noted that the accruals were R105 million last year, but this has dropped dramatically. There had been a great turnaround. The message was that corruption would not be allowed. 

Mr S Mohai (ANC, Free State) commented that the Limpopo Provincial Treasury needed to improve to allow the rest of the departments to improve. There needed to be a stricter adherence to the Public Finance Management Act overall. He asked that the cases referred to the Special Investigating Unit (SIU) be reported on.

Dr Phophi Ramathuba, MEC for Health, Limpopo, responded that the waste management issues would be resolved. On the hospitals, the organisational structure has been improved; there was a now a district health system. She maintained that it was very hard to attract the right people to the Department of Health, but that it was working on the issue.

Mr Jerry Ndou, MEC for Public Works & Roads, Limpopo, stated that the case involving the Director General of this department would be finalised and that the other disciplinary matters were in progress. Speaking to the show ground queried earlier, he noted that the Department of Public Works was not involved, as it was municipal land. In relation to the lease of the land, 32 lease reviews had been completed, around 90 remained to be reviewed. 13 engineers from Cuba would be assisting with the strategic hub, .

Mr Maselaganyi Matji, Chief Executive Officer, Road Agency Limpopo, commented that on the specific road discussed by the Member, the RAL was reconstructing 3.5 km of road and for the rest of the road it was busy with tenders to put this out for contract.

Mr Rob Tooley, MEC, Provincial Treasury, Limpopo, stated that the Provincial Treasury had managed to secure skilled personnel for the departments. There were a myriad of issues in the Department of Education. The Provincial Treasury and administrators were dealing with them on a case by case situation. They were in the process of reviewing the financial management controls system. There was a heavy focus on education.

Ms Makoma Makhurupeptje, MEC for Water and Sanitation, Limpopo, stated that the waste management project was taken over, and that this department was presently doing a budget and it would be completed by September.

Mr Ishmael Kgetjepe, MEC for Education, Limpopo, commented that in his department, there was a recruitment process in place to fill the remaining posts, and he agreed that education had been prioritised.

Mr C Mabuwda, Office of the Premier, Limpopo, stated that there was one HOD that still had to be dealt with, but the other disciplinary processes were under way. There was a detailed register for these cases which could be sent to the Committee.

Premier Mathabatha said that the litigation was becoming very expensive, and Limpopo did not have the budget to deal with it, and would need to shift money to that area. He confirmed that the Section 100(1)(a) intervention was still in place. The province was largely focusing on financial management control.

Mr Matthews answered the questions raised about the Limpopo database, saying that Statistics SA had been employed to rectify this. In relation to the disciplinary cases, he noted that the Aurecon case was lost although the company had been paid around R42 million.  This needed to be followed up to see whether the company had indeed completed the work it had been contracted to do.

Mr Mokonyama commented that the departments were moving away from Excel sheets to an intelligent project management system which tracked a project from conception to finalisation and improved the immovable asset register.

Mr Edgar Sishi, Chief Director: Provincial Budget Analysis, National Treasury, commented that the main outstanding problem was with the Department of Education, and a plan was in place to address this. Only after all the gaps had been closed would the new formula for remuneration be implemented. The turnaround being done in Limpopo was a long term solution. The fact that it was such a large rural province with many people working for government made the process of head counts and collection of data quite tricky.

Mr Tom stated that the disappearance of documents was a deliberate act, and said that in future the documents would need to be imaged straight away, at the time that contracts were put in place.  

2015 Tax Proposals, and draft Rates and Monetary Amounts Bill: National Treasury briefing
Mr Chris Axelson, Director: Personal Income Taxes and Saving, National Treasury, briefed the Committee on the 2015 Tax Proposals and the draft Rates and Monetary Amounts Bill (the draft Bill). He emphasised that is was vital that the Tax Bill be finalised as tax must be collected. It had not been signed as yet.

He noted that the gross tax revenue was R986 billion in 2014/2015. Non-tax revenue was R15.7 billion; transfers were R51.7 billion to BLNS/SACU countries. Some taxes were earmarked - such as those for Road Accident Fund, Unemployment Insurance Fund, and Skills Development. Comparing the figures for 2014 and 2015, he commented that in the latter year there was a drop of R14 billion on the tax budgets ,hence the change in tax rates. However, a comparison of the actual and budget figures showed that in fact there was a R5 billion surplus generated in 2015.

VAT, companies and individual taxes accounted for over 80% of tax revenue, and this was where the changes needed to be targeted. He commented that the tax to GDP was around 25%. South Africa's ratio was high compared to most African countries, but low compared to European countries. Taxes needed to be redistributive, transparent and accountable. There needed to be a sense of morality between the government and public. National Treasury (NT) needed to raise R27 billion over two years to meet the budgets. Personal income tax was increased by 1%, the general fuel levy by 30.5c and Road Accident Fund levy on fuel by 50c. Additional tax policy changes included carbon tax, loophole closures, increase in electricity levies, energy saving tax incentives and an increase in excise duties. The increase in the bracket for incomes below the taxable threshold helped the poor. Personal Income Tax (PIT), as a percentage of GDP was 9.1%, and as a percentage of employee compensation it was 20%. The real and nominal fuel levy revenue had been increasing, but as a percentage of tax revenue it had come down, due to more fuel efficient cars. Petrol pump prices in US$ were not out of sync, and South Africa sat at around $1.23, which was in the middle of the pack. Expenditure on roads and transport was higher than the revenue from fuel. Companies Income Tax (CIT) was 28%, and here South Africa sat in the top third of OECD countries and in the middle of the African countries. The theory behind the changes was to decrease the headline tax rate and increase the average effective rate.

Ms Yanga Mputa, Chief Director: Tax Design, National Treasury, commented on personal income tax adjustments. She said that all income brackets were increased to counter inflation, as people would pay more tax due to inflation of salaries. The marginal tax rates were increased by 1% for incomes above R181  00. On company tax, the taxable turnover at which businesses start to pay tax increased from 150  000 to R335  000. There was an increase in excise duties for alcohol and tobacco. Transfer duties changed to encourage first time house buyers, for a property up to R750  000 there were no transfer duties. An increase in fuel taxes had been implemented.

Discussion
The Chairperson asked what the impact of new tax bill on inequality and middle income bracket was.

Mr Mtileni stated that the wealth of a widow or widower was double taxed, both in the estate and when the inheritor received the inheritance, and he asked why this was done. He also asked for the National Treasury to comment on the Nkandla spending.

Mr S Mohai (ANC - Free State) commented that the Members need to drill down hard into the tax system to see how effective it was. They may need to look at capacity and holding workshops to deal with these issues. He asked why one tax mechanism was chosen over another.

Ms Mputa responded that pension contributions were tax-deductible, and the position at retirement was that there was in fact no double-taxation. She noted that estate duty would only be paid for estates greater than R3.5 million value. SARS had released statements but it seemed that road shows and more workshops were needed to clarify the issues and she said that National Treasury would consider offering a workshop to for the Finance Committee.

Mr Axelson stated that money was lent out to other countries but a separate unit dealt with this. The budget review covered the income and distribution concerns. Overall, the changes could be summarised by saying that those earning over R500  00 would pay more tax and people that earned less than R500  000 would pay less tax after these changes came into effect. Small adjustments were better than a major adjustment, hence the reason for the 1% tax rate change.

The meeting was adjourned. 

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