KwaZulu-Natal on its 2015/16 unaudited Annual Report; Land Bank board appointments: deliberations

NCOP Finance

16 August 2016
Chairperson: Mr C de Beer (ANC, Northern Cape)
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Meeting Summary

The National Treasury made a presentation to the Committee on the provincial budgets and expenditure for KwaZulu-Natal (KZN) for the third and fourth quarters of the 2015/16 financial year. Newly identified schools and clinics had put pressure on the Public Works budget, as they had not been budgeted for. Due to the drought, the Agriculture and Rural Development Department’s spending had been down to 58% at the end of the third quarter. The Health Department’s compensation of employees (CoE) and accruals reflected budget pressure of R400 million due to the housing allowance increment. There had been under-spending on CoE due to the moratorium on the filling of posts. KZN had tabled a deficit budget due to budget cuts on account of drought relief, among others. The province would maintain a contingency reserve of R750 million over the Medium Term Expenditure Framework (MTEF) period.

The KZN Provincial Treasury briefed the Committee on the 2015/16 unaudited close-out budget performance report. KZN’s economic performance had suffered due to the contraction in the mining sector, drought and the consequent decline in transport. Health was the only department to have overspent its vote on the whole, while some departments had recorded unauthorised expenditure at main division level. There had been massive unforeseen cuts to the baseline. The province had had to contribute R1 billion to “Fees must Fall.” There were medical-legal claims of close to R10 billion. The Select Committee was asked to intervene in the matter of Department of Public Service and Administration (DPSA) circulars, which were compulsory but not costed, and caused trouble with the unions.

In discussion, there were comments and questions about the non-payment of property rates, supply chain management issues, including training, irregular expenditure, legal advice on fruitless expenditure, accruals, the loss of educators, under-expenditure on libraries, and consequences for irregular expenditure.

Regarding the nomination of candidates for appointment to the board of the Land Bank, the Chairperson advised that the best process had to be followed. There had to be a joint meeting with the Finance Standing Committee on the matter.

Meeting report

Introduction by Chairperson
The Chairperson said that the municipal elections had demonstrated democracy in action. Democracy was alive. The people had spoken and government had to listen, think and act. That was the injunction the former Chairperson of the National Council of Provinces (NCOP), Mr Mahlangu, had always emphasised. The Rand had recently strengthened against the Dollar. Business confidence was rising. There had been a 4.5% increase in manufacturing. He welcomed Mr Schmitt and Mr Rainer from the German Consulate. South Africa had strong ties with Germany, which played a leading economic role in Europe. They were welcome to visit his home region of Namaqua, which was the flower capital of the world.

The engagement with the KZN Treasury was to be the Committee’s last engagement with the provincial treasuries. Revenue had been increased by R3 billion, which put that province in the same category as Gauteng.

National Treasury on KwaZulu-Natal budget and expenditure, 3rd and 4th quarter 2015/16
Ms Ogalaletseng Gaarekwe, Acting Chief Director, National Treasury took the Committee through the main provincial budgets for the period under review. Newly identified schools and clinics were putting pressure on the Public Works budget, as they had not been budgeted for. Due to the drought, Agriculture and Rural Development spending had reached only 58% at the end of the third quarter. In the Health Department, compensation of employees (CoE) and accruals reflected a budget pressure of R400 million, due to the housing allowance increment. KZN provincial expenditure as at 31 March 2016 reflected, with the exception of Health and Human Settlements, that there was under-expenditure for CoE due to the moratorium on the filling of posts. Education had lost 2 340 educators since December 2015, which had caused under-expenditure of R550 million on the CoE. KZN had tabled a deficit budget due to budget cuts and provincial priorities, such as the National Health Laboratory Services (NHLS) shortfall and drought relief. Own revenue was revised downward due to anticipated lower revenue collection against casino and horse racing taxes, due to declining disposable income. The province would maintain a contingency reserve of R750 million over the Medium Term Expenditure Framework (MTEF).

The Chairperson remarked that the presentation was factual. The object of meeting with all the provincial treasuries was to ensure that there was good governance, sound financial management and accountability. He referred to fruitless and wasteful expenditure. The question was how healthy a province was in that regard. Lessons had been learnt in Limpopo since 2012. Underspending had to be dealt with by the Appropriations Select Committee. Compliance with the moratorium on the filling of posts had to be questioned. KZN had a contingency reserve of R750 million. Other provinces did not have that.

KZN Provincial Treasury on the unaudited close-out budget performance report
Ms Belinda Scott, MEC: Finance, and Mr Simiso Magagula, Head of the Provincial Treasury, made the presentation, which covered provincial growth, a provincial budget summary for 2015/16, unaudited provincial own revenue for 2015/16, unaudited budget performance for 2015/16, provincial expenditure, bank balances, accruals, and unauthorised, irregular and wasteful expenditure.

Economic performance had suffered because of the contraction of the mining sector, the drought and the consequent decline in transport. Health was the only department to overspend its vote as a whole, while some departments recorded unauthorised expenditure at main division level. The Auditor-General (AG) was reviewing documents on which the Provincial Treasury based its decision to condone irregular expenditure. There had been massive unforeseen cuts to the baseline. The province had had to contribute R1 billion to “Fees must Fall.” There had been medical-legal claims of close to R10 billion. The current approach was to pay people directly, without going to court. The Committee was asked to intervene in the matter of Department of Public Service and Administration (DPSA) circulars. The circulars were compulsory, but were not costed. It caused conflict with the unions.

The Chairperson said that there had to be a joint meeting with the Finance Portfolio Committee to deal with public administration. Taxpayer monies were being dealt with. There had to be engagement with the Western Province about best practice, to improve expenditure and administration. There were excellent provincial and national treausuries. When the Committee dealt with unfunded mandates, the Minister had to be part of the deliberations. It had to happen at the Budget Council level. Parliament had to pronounce, and the Minister had to account to Parliament.

Mr L Gaehler (UDM, Eastern Cape) referred to the non-payment of property rates. He had engaged many times with the Department of Public Works (DPW), which had complained that it was not invoiced properly. He asked if the problem had been solved. What had been done about section 21 schools? Money was lost through non-compliance. He asked if compliance had been proved or not.  He asked how collection of revenue by the Health and Social departments was to be addressed in future. Would supply chain management issues continue into the next budget, or was there was a plan to address them? He referred to irregular expenditure, and asked if it would be continued into the next budget, or whether there would be planning.  He asked about legal advice obtained regarding fruitless expenditure, and whether that advice had been adhered to. Taxpayers had lost money.

Mr F Essack (DA, Mpumalanga) said he had found it a comprehensive presentation. It was clear that the Head of Department (HoD) had a passion for KZN. He asked about the over-collection of property rates. It would add to the R750 million contingency reserve. He was anxious to see what would happen with regard to property rates, going forward. He remarked that R400 million in Health accruals was due to the housing allowance increment, and asked if the Treasury had seen it coming. Educators were being lost. The accruals story was not a good one. He hoped that a different story would be told in the following year.

Mr O Terblanche (DA, Western Cape) remarked that it had been a good presentation. The situation seemed to be under control. There was overspending on personnel in Health, and under-spending on job creation in Agriculture. Creation of employment had to be ensured in Education. Education had to train people. He asked if supply chain errors were due to a lack of training. He was seriously concerned about the situation in Health. Management in the province had to be engaged about what tot do to rectify matters. Accruals had to be attended to.

The Chairperson referred to the statement on page 10, that there was ongoing communication between the National Treasury and the Provincial Treasury about invoices showing that the bulk of withheld funds had been spent, and that the Provincial Treasury was awaiting a response about how to proceed. The National Treasury was present, and could reply. He referred to under-expenditure on libraries. If one went back to the other eight provinces which the Committee had met with, it was clear that there was under-spending year after year. If a man could be placed on the moon, this problem could be dealt with. Processes had to be shorter. The MEC had referred to compliance with the Constitution and the Public Finance Management Act (PFMA). People were not following processes. Consequences for irregular expenditure were set out in section 81 of the PFMA. Auditor General (AG) reports had to be scrutinised. The reports were available in September or October. The roles of the Standing Committee on Public Accounts (SCOPA) and the provincial finance committees were crucial. In future, representatives of the provincial legislatures and the SCOPA Chairperson had to be called in.

Mr Magagula responded that the Provincial Treasury had received its seventh clean audit in a row. He answered Mr Gaehler that property rates issues had to be solved by the National Department of Public Works. There was a facility in the province that assisted municipalities with sorting out invoices, but up to date the problem had been with the DPW. A relationship had been established with the National DPW, and the problem could be solved. It had been a matter of finding the right person to talk to, as a direct contact. The debt to municipalities would disappear.

Ms Tanya Stielau, Chief Director: Public Finance, KZN Provincial Treasury, said that there was a compliance issue with regard to the Transport Department. There would be discussions with the Department of in that week, and there had been previous bilaterals. The Department did not report in accordance with the infrastructure model. Non-compliance had continued into the first quarter of 2016/17. It was a battle to identify a person to report to the Provincial Treasury and the National Treasury. The KZN Provincial Treasury had to assist with reporting. The interim solution was to get systems up and going and to identify what the Department needed so that it could take over in the long term.

Mr Magagula referred to the capacity to comply. The Transport Department had done well in the past, but had then gone haywire. He told Mr Gaehler that the Health Department was blaming the Road Accident Fund (RAF) for the under-collection of Health revenue. He would have been more worried if the problem lay with patient fees, because that was the incentive part of the arrangement. With regard to whether legal advice was adhered to, he responded that government was not good at defending cases. He referred to a case where the service provider had been at fault. The province had been presented with a fait accompli.  There was an obvious case against him. He should have declared a discount back into the Department, but had not done so. The Department had lost the case. Wasteful expenditure should not have been incurred.  

Once the AG had identified irregular expenditure, an assessment of departments was done. Areas of intervention were identified. It was a pet project of the Premier that each department be gone through. Detailed reports were received from the AG which showed up which departments were not responding in detail. It had been asked what had occurred to cause irregular expenditure, and if supply chain management (SCM) rules were understood. There were people who played dual roles as referee and player. Tailormade solutions could be found. In the end, there was just so much that Treasury could do. If there were no consequences for irregular expenditure, it would continue.

He answered Mr Essack on the issue of property rates. Rates were calculated according to municipalities, and there could not be over-collection. There was over-collection on motor vehicle licence fees. Revenue had “gone south” because of subdued economic activity.

Ms Scott said that a head-counting exercise had been done with regard to employment in the Education Department. In the past, the Department did not answer when the headcount was finished. Employees were given a chance to verify their position. In the end, there had been 2 000 employees who could not be accounted for in terms of the Personnel Administration System (PERSAL). People had come out of the woodwork. Some had not been to work in two years. There was a big lesson for very big provinces to learn. 80 000 people were employed in Education, which was a vast number of people. It was also a moving target. The situation was even worse with regard to supplementary teachers. Education gave a different figure for supplementary teachers every time, and they did not tally with Treasury figures. An excellent process existed in biometric scanning. Gauteng had started the process, and procedures had been copied from it. There was also a headcount exercise with the Health Department. The entire province had to be dealt with. It was hard to believe how many employees did not in fact exist. People were falling through the cracks. There were people who had been on suspended leave for two years. A cut-off had been done on Education Department employees, due to the headcount.

Mr Magagula added that overspending in the Health Department had indeed been foreseen. It had been very high in December of the previous year, but it had been a false eventuality. Health historically employed national laboratory services, but KZN had been against a centralised service. It had stuck to its guns for a long time. The province had paid a flat fee. It had its own laboratories. There was never an issue with costs, and the laboratories were run properly. But the national directive was for KZN to relinquish laboratory services. Unfortunately, this could be blamed on politics. National Laboratory Services (NLS) was tallying KZN debts, as there were also other contributions required. R270 million was owed to NLS, in spite of the flat fee paid.

The Rand was currently strong, which was good for the medicinal side, but its previous deterioration had the effect that there would have to be double the spending in the current year. There were pressures about which not much could be done, even if they had been foreseen. In education, people had exited the system. The PERSAL cutoff in Education was much slower than elsewhere. When a teacher resigned, it could take a month for the resignation to reach head office. It became hard to trace that money. There were defaults with bursaries, money had to be traced. Officials that owed money had to pay it back. Education was trying to recover staff debt.

Mr Magagula answered Mr Terblanche’s question about supply chain management, saying that one did not have to be a rocket scientist to read the PFMA. It was achievable, but there had to be a will to do the right thing. There had to be a will to know the right procedures, and this could be lacking. There was rather a will to not know, because benefits could accrue from not knowing. He said that it sounded like gibberish, but he hoped that the implication was understood. Sometimes there was deliberate flouting of regulations. It benefited corruption. There had to be consequences. There were cases in KZN that had dragged on for years. Disciplinary matters did not move.

The Chairperson remarked that the implication was that agencies did not get what they wanted, like the anti-corruption task team in Limpopo.

Mr Magagula suggested that the matter be discussed one-on-one with the Chairperson. Health needed assistance with accruals. The provincial Accountant General had to be approached to see what could be done. The national trajectory for accruals had to show a decline, as it did in Transport and other departments. He agreed with the Chairperson that under-spending on libraries was not good.

Ms Gaarekwe referred to the withholding of the Provincial Road Management Grant (PRMG). At the national level, there were two processes. If the province under-spent on the grant, there could be a provincial rollover process, because money sat with the provinces. Letters were written to provincial treasuries if funds were withheld. Approvals for payment were asked for. It was part of the national budget process.   The National Treasury recommended that money be approved as part of the rollover. There would be a meeting on 16 September, at which it would be decided whether provinces received the money or not.

Deliberations on nominations to the board of the Land Bank
The Chairperson remarked that it was the first time the Finance Select Committee had received a referral of that kind. The Minister of Finance had invited the relevant Parliamentary committees to nominate candidates to the board of the Land Bank.

Mr Zolani Rento, Committee Secretary, said that the matter was had been referred to Agriculture in the National Assembly (NA) and the NCOP. He had met with colleagues in the NA and NCOP. They had referred him to section 4.2 of the Act. The Minister had to inform through the Gazette and other media, the appointment of board members who were not disqualified in terms of section 10 to serve on the board. Sections 9 and 10 stated who were disqualified. There was to be no advertising or public hearing. The same process of previous years was to be followed. Members had to nominate from the floor. Members of the Agriculture Committees in the NA and NCOP nominated. However, the Chairperson had advised that it should be advertised.

Meeting plans
The Chairperson said that there would be a meeting with the Finance Standing Committee on the following day. He would engage with Mr Carriem, the Chairperson. Arrangements had to be made to deal jointly with the matter. It was part of the Standing Committee programme. Costs could be reduced. He asked that it be minuted that the Committee was dealing with the matter. It had to be dealt with through best process. The Committee would meet on the following day with the Standing Committee about legislation, for example, the Rates and Monetary Amendment Bill. Second semester obligations were raining down. The Select Committee was going to be the busiest committee in the NCOP.

Adoption of minutes
The minutes of 25 May were adopted.

Study tour to Mexico
The Chairperson said that the initial date for the study tour had been moved because of the ANC Lekgotla. The trip to Mexico would take up two days. That meant that there would be only two days to spend in the Mexican parliament. The date had been moved from 27 August to 3 September. Political approval had been applied for on 16 June. The financial application had been submitted, and approval was still awaited. It had to be concluded between that day and the coming Friday. There were eight working days left. The Committee had to work with the Governor of the Mexican Bank, the parliamentary finance committees, and the banking fraternity. Decisions about Mexican appointments had to be made by the coming Friday. Plan C was to shift the date to the last week of the constituency period, at the end of September.

Mr Rento said that the study tour was not like the oversight visit to the Western Cape. The issue of stakeholders had been dealt with through the Department of International Relations and Cooperation (DIRCO). DIRCO had taken two weeks to deal with ground transport, and had not come back about stakeholders.

The Chairperson said that he would be meeting with Mr Roy Havemann, Chief Director, National Treasury, who had helped the Finance Standing Committee with its trip to the United Kingdom the year before.

The meeting was adjourned.


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