1st Quarter 2015/16 expenditure patterns of national departments: National Treasury briefing

Standing Committee on Appropriations

18 August 2015
Chairperson: Mr N Gcwabaza (ANC) (Acting)
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Meeting Summary

National Treasury said that government expenditure in the first quarter had amounted to R270.4bn, against a budget estimate of R233.6bn, resulting in a deficit of R36.8 bn.  44% of total expenditure (R119.3bn) had been for direct charges against the National Revenue Fund, and included R95.7bn transferred to the provinces under the equitable share agreement, as well as R19.6bn to pay state debt costs – which was R619m less than for the same period last year. Total voted expenditure was R151.1bn, of which 70% (R106.1bn) had been transferred by departments to households, other spheres of government or other organisations and agencies, while 30% (R45bn) had been directly spent by departments on operations, the majority for the compensation of employees.

Total expenditure had been well within scheduled levels. Scheduled drawings from the national revenue fund had been R157.5bn, while expenditure of R151.1bn depicted an overall lag of R6.3bn. The top departments where spending was ahead of scheduled drawings, were Cooperative Governance, International Relations and Cooperation, and Home Affairs. The four departments where spending was lagging behind were Rural Development and Land Reform, with under-expenditure of 39.5% (R968.8 million), Basic Education (12.4% and R1bn), Police (5%) and Social Development (2.5%). The Rural Development lag was due to delays in implementing rural development projects. The Education under-spending was the result of delays in the delivery of workbooks, the Kha Ri Gude project, and the school infrastructure backlogs grant. As regards the Police, the Department had spent R17.4bn of its budget against scheduled drawings of R18.3bn, depicting a lag of R920.2 million. This had been as a result of slower than anticipated spending on fuel, as well as machinery and equipment. The Department of Social Development had spent R33.6bn of its scheduled R34.5bn, leaving a lag of R838 million. The challenge here had been slower than forecast spending on temporary disability grants because of fewer than projected claims.

There had been recurring issues from the Department of Water and Sanitation from the previous financial year. It had spent R1.4bn, as opposed its scheduled drawings of R2bn as a result of slow spending on the regional bulk infrastructure grant and municipal water infrastructure grants. Other contributors to the lag had included delays in finalising implementation plans for projects, and capacity challenges encountered by the Department.

Members’ questions and concerns were centred on the late presentation of the detailed document, the use of the word “lag” in place of “under-spending”, late payment of contractor invoices, increasing debts and declining revenue, underperformance of departments, the operation of departments in silos, the performance of the Jobs Fund, and the consequences of ineffective spending. 

Meeting report

National Treasury on First Quarter Expenditure, 2015/2016

Mr Dondo Mogajane, Deputy Director General: Public Finance, Department of National Treasury, said that government expenditure in the first quarter amounted to R270.4bn, against a budget estimate of R233.6bn, resulting in a deficit of R36.8 bn.  44% of total expenditure (R119.3bn) was for direct charges against the National Revenue Fund, and included R95.7bn transferred to the provinces under the equitable share agreement, as well as R19.6bn to pay state debt costs – which was R619m less than for the same period last year. Total voted expenditure was R151.1bn, of which 70% (R106.1bn) had been transferred by departments to households, other spheres of government or other organisations and agencies, while 30% (R45bn) had been directly spent by departments on operations, the majority for the compensation of employees.

R10.9bn had been spent on goods and services, mainly for police, defence, correctional and justice services, for items including fleet services, computer services, operating leases and property payments. This was an increase of R757m (7.4%), compared to last year. R1.8bn had been spent on capital assets, representing an increase of 23.8%, most of which was for the Departments of Water and Sanitation and Basic Education – mainly for regional bulk infrastructure and the School Infrastructure Backlogs Grant. Spending on these items had also driven the reported increase in capital spending. R9bn had been on administration, representing 20% of operational expenditure, and was primarily to support Police, Correctional Services and Defence. This had been a nominal increase of R7.7bn from the previous financial year. A total of R106.1bn had been transferred by departments, representing a nominal growth of 8.9%. R33.8bn had been transferred to households, representing a growth of 9.1%, primarily for social grant payments, which had been driven by increases in beneficiary numbers and slightly above inflation increases to social grants. R23.2bn had been transferred to provinces and municipalities, representing an increase of 11.6%. This had been due to larger areas of expenditure, such as human settlements development grants and education infrastructure grants.

R22.8bn had gone to departmental agencies and accounts, representing an increase of 10.4%. The agencies receiving the largest sums were the National Student Financial Aid Scheme (NSFAS), with R3.6bn for student bursaries and loans, South African National Roads (SANR), with R3.1bn, the South African Revenue Service (SARS), with R2.4bn, and the South African Social Security Agency (SASSA), with R1.6bn for the administration of social assistance. R13.2bn had been transferred to higher education institutions, reflecting an increase of 7.6% for the major purpose of providing block grants to universities. R11.7bn had gone to public corporations and private enterprises, representing an increase of 4.5%, primarily to the Passenger Rail Agency of South Africa (PRASA) for its rolling stock fleet renewal programme, and other capital programmes.

Comparing expenditure against the available budget, he said the total expenditure was well within scheduled levels. Scheduled drawings from the national revenue fund had been R157.5bn, while expenditure had been R151.1bn, depicting an overall lag of R6.3bn. The top departments where spending was ahead of scheduled drawings, were Cooperative Governance, International Relations and Cooperation and Home Affairs. Cooperative Governance had spent R2 bn against its scheduled drawings of R825.5m -- overspending by R1.2bn -- due to approved advances to municipalities for the local government equitable share to provide for outstanding municipal services. Consequently, this did not represent an issue for the Department. International Relations had overspent its scheduled drawings by R180.6m due to the depreciation of rand against major foreign currencies. This had been beyond the Department’s control and would be resolved only when the rand strengthened.  The Department of Home Affairs had overspent against its scheduled R1.5bn by R123.3m, mainly due to a transfer payment to the Independent Electoral Commission for the preparation of the local government elections in 2016. The issue would be absorbed in existing baselines and was not expected to constitute an issue for the department.

The DDG then highlighted four departments where spending was lagging behind. These were the Departments of Rural Development and Land Reform, with under-expenditure of 39.5% (R968.8 million), Basic Education (12.4% and R1bn), Police (5%) and Social Development (2.5% respectively). The Rural Development lag was due to delays in implementing rural development projects. The Education under-spending was the result of delays in the delivery of workbooks, the Kha Ri Gude project, and the school infrastructure backlogs grant. Expenditure on workbooks was expected to increase by the end of July 2015, when all the deliveries for workbook 1 had been completed and that the Kha Ri Gude project lag was expected to be resolved by the end of September, when classes had resumed. Expenditure related to the school infrastructure backlogs grant was expected to improve in the 2nd quarter.

As regards the Police, the Department had spent R17.4bn of its budget against scheduled drawings of R18.3bn, depicting a lag of R920.2 million. This had been as a result of slower than anticipated spending on fuel, as well as machinery and equipment. The Department of Social Development had spent R33.6bn of its scheduled R34.5bn, leaving a lag of R838 million. The challenge here had been slower than forecast spending on temporary disability grants because of fewer than projected claims.

There were recurring issues from the Department of Water and Sanitation from the previous financial year. It had spent R1.4bn, as opposed its scheduled drawings of R2bn as a result of slow spending on the regional bulk infrastructure grant and municipal water infrastructure grants. Other contributors to the lag had included delays in finalising implementation plans for projects, and capacity challenges encountered by the Department.

Discussion

Mr Spencer Janari, Acting Chief Director: National Treasury, clarified that the workbooks that had been delayed were those required for the 2016 academic year and not 2015 academic year. It did not represent a delay in the rollout of the project for the year 2015.

Ms S Shope-Sithole (ANC) said that the Department of Basic Education and the Department of Rural Development should be invited to the Committee, as they seemed to be under-performing in meeting their mandates. She also mentioned that interest on borrowing was becoming onerous for the country.

Mr A McLoughlin (DA) said the presentation had been too fast and as a result, it raised suspicion that the Department was trying to conceal vital details. The detailed quarterly report had been delivered too late and there had not been enough time to peruse the document. He said that the revenue should be actual figures, and not just estimates, since the first quarter had ended. There had been difficulty in aligning the detailed report with the summary, as the information had been contrasting. He asked why the country owed more than it did in the previous financial year. Water and sanitation were extremely important basic necessities and a constitutional imperative, but they were the responsibility of the poorest performing department. There was a huge capacity lag and a lot of resources were being spent on compensation of employees. The lags should be reflected as priorities. He was greatly concerned about figures that were not tallying with the main report, and questioned why the problems did not represent an issue for the Department when they were clearly alarming. 

Mr A Shaik Emam (NFP) asked why social grants had increased by 9.1% from the previous financial year, yet the Department of Social Development still had under-spending. He said some schools were still expecting books for the current academic year, and there had been a lot of under spending. Why was there so much emphasis on rural development when there was such huge under-spending? The Committee and the Department of Basic Education should be involved in further engagements, as that Department had always reflected the same issues of under-performance. In previous engagements, details of under-spending and root causes had repeatedly been requested in an attempt to identify the “culprits”. Effective spending should also be appropriate – over-spending was not a way of justifying under-spending.

Ms E Louw (EFF) confirmed that the report documentation had been received extremely late and there had not been enough time to peruse it prior to the briefing. She also commented that the presentation had been too fast, and the word “lag” should not be substituted for “under spending” in an attempt to “sugar-coat” it. She asked about the names of the “other departments” that had been reflected in the graphs.

Dr C Madlopha (ANC) voiced her concern about the under-spending issues, and the fact that there seemed to be no sense of urgency in the Departments of Rural Development, Basic Education and Water Affairs, as under-spending in those departments directly affected the livelihood of citizens. Rural development was a priority of the current government, to bridge the gap created by the apartheid regime. She then expressed her relief that the delayed workbooks were for 2016 and not 2015, but said delivery should still be hastened. She sought clarity on the Jobs Fund performance – issues of getting value for money, the amount spent to date, and the total budget allocated. She also asked about the
Treasury’s impressions of the expenditure performance of the Department of Small Business Development (DSBD), given its newness. Why were there vacant positions in the Department while there was a high unemployment rate in the country?  The Treasury could not keep on acquiring loans for departments that were under-spending. The under-spending departments should be invited and actively engaged.

Ms S Nkomo (ANC) said that information should be given promptly to facilitate an active engagement, and added that it was totally unacceptable to get such vital information late. She inquired why the Treasury’s first quarter operational expenditure was 18.9%, when clearly the threshold was 25%, and also why the transfers from National Treasury were 17.4% from April to June 2015, instead of 25%. What consequences were in place for under-spending departments? She asked if the word “lagging” was a new financial term, and why it was substituted for “under-spending”. Certain departments should be invited to get a clear understanding of their respective challenges and to account for their spending. She asked for a detailed monthly breakdown of the R19.66bn spent on debt servicing costs.

Ms M Manana (ANC) also mentioned that the report had been received late and suggested that such briefings should not be honoured if reports arrived late in the future. She agreed with Ms Nkomo’s comments about the word “lagging”, and also inquired about breakdown of the debt servicing costs.

Ms R Nyalungu (ANC) asked if departments were making improvements as a result of the monthly monitoring of departments, as stated by the DDG. Why did the lags not represent an issue for the department, and did how the department intend to deal with the issue?

The Chairperson clarified issues around the late arrival of documents. He explained that the documents had been received on the morning of 18 August. The Department had previously requested to present its report at the end of August, but could not get a slot as the Committee had other engagements. This had consequently pressurised the Department to present within a short notice. The department would be invited on 15 September to engage again, especially on issues of performance of the Jobs Fund.

The Chairperson then sought clarity on the composition of the household transfers reflected in the report. He asked why vacant posts were funded and not filled, and why there were issues of non-payment of invoices within 30 days which had contributed to issues of under-spending as regards operations. He also questioned why there had been no swift reaction to the under-, over- and inefficient spending. He commented that the National Treasury, as the custodian of all public funds, should prioritise addressing its own challenges first before approaching other departments. 

The DDG apologized for the late arrival of documents, claiming that according to the Public FinanceManagement Act (PFMA), reports could be generated only at the end of July. In future, the Committee would be duly furnished with documents. The word “lagging” would not be used again -- the word “under-spending” was not used because the year had not ended – and would rather be substituted with “slow spending”.

Dr Mark Blecher Chief Director: National Treasury, said that the national deficit for the year was laid down at the beginning of the year. Deficits were beyond the control of the department, as they could be dealt with only at the beginning of the year, as they formed part of the budget that had been approved. He highlighted that spending was growing faster than revenue, and there was consideration as to whether spending should be massively cut or not. Regarding the increasing social grants and the reflected under-spending, he explained that the number of elderly was increasing yearly by 3%, and child support grant increases by 2%. During the re-registration campaign for social grants, over 900 000 beneficiaries had been taken off the database, which in turn had given rise to under-spending. Over 600 000 beneficiaries had re-registered, and over-spending would be reflected in the next few years. A major increase in social grants would cater for the under-spending reflected.

Dr Blecher commented that transfers to households included employee benefits, social grants, bursaries, housing programmes, land reform issues, and many more. The monthly monitoring of departments involved giving written comments, and the Department of National Treasury gets audited on such interventions as part of its performance assessments.

Mr Rendani Randela, Acting Chief Director: Department of National Treasury, referred to compensation versus actual expenditures and lagging performances, and said a huge proportion of the compensation budget went to the security cluster. The cluster was extremely labour intensive and consequently up to 100 employees quit labour intensive jobs monthly. He said that lags in access to services were not condoned. The security cluster was the main client of the Department of Public Works (DPW) which sometimes contested the invoices submitted and as a result, payments of invoices within 30 days were not always facilitated.

The DDG explained that the statement “estimated revenue” would be used throughout the financial year until the report had been audited by the Auditor General.

Mr Owen Willcox, Acting Chief Director: Department of National Treasury, addressed questions centred on human development. He explained that the low performance of the Department was subject to the slow rate of land restitution in the current year, slow land reform projects, and a few other causes. He agreed that it did not constitute an issue for the National Treasury because the department had a track record of slow payments, which speeded up later in the year. He said the DSBD was still in the building process, and mentioned that there were lots of vacancies which were fairly senior posts. He added that the building currently occupied by the department did not possess the capacity to accommodate new officials, and as a result had limited the filling of vacant posts. He also mentioned that the monthly monitoring process would cater for the under-performing departments.

Mr Janari said the issue of the late delivery of books should be taken up with the Department of Basic Education. The department had not made payments because the workbooks had not been delivered. He reiterated that Workbooks One and Two for 2016 were scheduled for delivery in September and December respectively. The projection of the department was to make payments by the first quarter of the year, which had not occurred. The issues were temporary and as a result, they were not seen as major problems for the department.

The quarterly benchmark was measured against what a department had planned to spend for the quarter, which might be either greater or less than 25% of its yearly budget. When the benchmark was below 25%, departments were advised to revise and change their requested drawings from the National Revenue Fund so that they matched the revised spending plan, which would change the percentages against their drawings spent as they went forward.

Mr Victor Ngobeni, Director: National Treasury, commented on issues raised about the Department of Water Affairs (DWA). The DWA had a yearly budget of R16.4bn, of which 70% was comprised of transfers and subsidies, inclusive of the Regional Bulk Infrastructure Grant (RBIG). Only 9% of the entire budget was allocated to administrative services. The under-spending in the Department was directly related to the RBIG and other transfers and services, which referred to grants the Department administered on behalf of municipalities. They were termed slow spending because they were timed grants in terms of the trajectory revealed by the Division of Revenue Act (DORA). The main challenges of the RBIG were implementing agents and capacity issues, as it was a highly skilled stream requiring engineers. The Department had reported about its failure to attract suitable engineers and had also raised concerns of insufficient funds. A costing in response to that effect was expected on 21 August 2015. Proposals had been made to move funds from long under-performing housing grants to the RBIG to solve its capacity issues. Regarding the late submission of invoices, he said that a good measure would be to include stringent measures in the contracts of service operators, as the performances of service operators and the departments were mutually dependent.

Ms Gillian Wilson, Chief Director: National Treasury, addressed questions related to the Jobs Fund. Up to March 2015, R2.5bn had been disbursed and the fund had leveraged R3bn from private project partners. Since its inception, 47000 new jobs had been created, 13600 beneficiaries had been placed in short term jobs, and 98 800 training opportunities had been created. 86 of 90 projects had been disbursed according to targets up to March 2015. The slow spending of the National Treasury during the first quarter was subject to cost of living adjustments and the wrapping up of projects for the second quarter.

Mr Mogajane said that the South African Treasury had always been a leader in terms of transparency regarding the national budget, and it sought to empower the Committee to the best of its ability. The Department was extremely thorough when dealing with other departments and suggested that the National Treasury be invited as well when the Committee engages with them. He said that the meeting scheduled for 15 September would deal thoroughly with concerns around the Jobs Fund.

Mr Shaik Eman sought further clarity on the Jobs Fund, asking if the 47 000 new jobs included the 13 600 short term jobs. What measures were in place to mitigate the risk of increased spending and reduced revenue? He voiced his dissatisfaction about the response given about the late payment of invoices and commented that sometimes the late payment of contractors was a product of the incompetence and laziness of officials. He asked if borrowing would not continue to increase. Was the economy not being subjected to undue pressure as a result of trying to resolve issues too soon?

Mr McLoughlin said that the percentage of revenue kept decreasing while that of debts kept increasing in terms of total budgets, and asked about the arrangements in place to address this issue. He requested a detailed breakdown of the amount spent on employee compensation and goods and services. He sought clarity on the amounts spent paying foreign governments, and queried why the Passenger Railway Agency of South Africa (PRASA) had ordered 600 trains which had not yet arrived, yet the expenditure had already been reflected in the first quarter report.

Ms Madlopha appreciated the honesty of the Department in highlighting their challenges. She inquired about the sustainability of the jobs created by the Jobs Fund. Why were departments not meeting their own set targets? As regards the DSBD, she commented that the planning should have been more effective, and research conducted beforehand. She sought clarity on the non-compliance measures or mechanisms in place to address the under-performance of departments.

The Chairperson questioned the lack of capacity of the DSBD, and inquired about the most important key posts to be filled when it started up.

The Chairperson referred to the late payments of invoices, and said many departments lacked an integrated internal structure, and that poor monitoring and outdated filing systems were silently killing small businesses. He asked why departments worked in silos.

Ms Shope-Sithole said that when service providers were not paid within 30 days, small companies were prone to bankruptcy and citizens lost faith in the government. The Parliamentary budget group should conduct research to identify the departments that refused to pay service providers on time. She added that the use of Information Communication Technology (ICT) should be included in the training of departmental staff. A public hearing might be the solution to the non-payment of invoices.

Mr Mogajane commented that more effort would be channelled into ensuring the prompt payment of service providers. Accounting officers in departments should take relevant responsibility, and reports should be generated to expose departments that did not make prompt payments. Details of the Jobs Fund would be provided at the next engagement. He mentioned that there appeared to be a structural gap between revenue and non-interest spending, adding that efforts were being made to close the gap. A scores list would be presented soon, and counter-cyclical policies had assisted in keeping non-interest spending up. The DDG confirmed that there were culprits in the system with unacceptable spending levels. In terms of compliance penalties, he confirmed that two Chief Directors in the department had been demoted in 2015 for recurrent non-performance. He said the working of departments in silos was pre-empted by under-spending in the training and development budget.

Mr Randela said that the Department of Defence had requested to do its own maintenance and as a result, funds had been shifted from the Department of Public Works (DPW).

Mr Ngobeni said that the repayment of Development Bank of South Africa (DBSA) loans had been reflected under transfers and subsidies in the DWA, and it related to a bilateral water project between South Africa and Swaziland. The projects included the Maguga dam in Swaziland and Driekoppies dam in Nelspruit. South Africa was paying a huge part of the cost on both sides due to budgetary issues, and an aim to foster bilateral relationships.

The DDG mentioned that the Department subscribed to the Government Financial System (GFS) classification system, and as a result, the project was reflected under international transfers.

Ms Wilson commented that in terms of sustainability of jobs created by the Jobs Fund, details would be provided at the next engagement. There were limitations of the fund in terms of creating permanent jobs over the long term.

Ms Shope-Sithole expressed her suspicion of corruption in departments, and said that late payment of invoices might be an attempt to pressurize contractors to pay tokens before their payments were facilitated, hence her insistence on a public hearing to address the issue of non-payment of invoices within 30 days. The transparency of the government, as mentioned by the DDG, was not widely believed by the public.

The Chairperson said that an effective communication between departments and members of the community was imperative. He added that citizens must be empowered to deal with every form of corruption.

Mr Shaik Emam inquired about the implications of increasing expenditure and declining revenue.

The DDG highlighted that the country would continue to borrow, because the economy was not doing well, but that the borrowing would be done responsibly rather than recklessly.

The Chairperson said that questions relating to expenditures of PRASA should be responded to in writing.

Ms Nelia Orlandi, Policy Analyst: Parliamentary Budget Office, said that the Committee should obtain a performance report of departments, especially on the key performance indices indicated in the budget.

The Chairperson thanked the Department for their presence and the Committee for their insightful engagements.          

The meeting was adjourned. 

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