Adjustments Appropriation Bill; Finance Bill: briefing by National Treasury

Meeting report

2016 Adjustments Appropriation Bill
Ms Raquel Ferreira, Director: Budget Office, National Treasury, said the presentation would deal with adjustments to the national budget, which needed Parliamentary approval. She would explain all significant budgetary adjustments. Of the seven types of adjustments that could be made to the budget under the Public Finance Management Act (PFMA) of 1999, that were two types of adjustments in this financial year’s budget.

The first budget adjustment fell under “Unforeseeable and unavoidable expenditure recommended by a committee or Cabinet.” The second was “Any expenditure in terms of section 16, which governs the use of funds in emergency situations.”

The most significant adjustment in the former category related to the Department of International Relations and Cooperation’s (DIRCO’s) over-expenditure resulting from exchange rate fluctuations. This was due to the fact that costs incurred in South Africa’s foreign missions were paid in the local currency, and the fluctuation in the rand made it difficult to predict DIRCO’s budget requirements accurately.

The latter type of budget adjustment was to meet the need for drought mitigation, with a further R553.3 million allocated for that purpose.

All virements over R100 million had to have Parliamentary approval as laid out in the PFMA. All of the virements that fell under this classification were indicated in the presentation. Roll-overs were budget adjustments that were allocated in a previous financial year, but for any number of reasons were continued into the following financial year, requiring a budget adjustment.

On the issue of self-financing expenditure, a number of departments required funds for operating costs, with the most significant budget adjustment coming from Home Affairs, which required R962.3 million for the operation of services, such as passports, et cetera.

In conclusion, Ms Ferreira said that there was a total downward adjustment of R9.612 billion, with the main appropriation going from R1.318 trillion, to an adjustment budget of 1.308 trillion. Much of that amount was made up of a R6 billion unused contingency fund, with R3 billion projected under-spending by the national government, and R1.2 billion being National Reserve Fund repayments.

Finance Bill 2016
Mr Isaac Mabena, Senior Budget Analyst: National Treasury, described the main components of the Finance Bill 2016, which outlined unauthorised expenditure, and when and how it affected the budget as laid out in Section 34 of the PFMA.

He said that unauthorised spending, which was subsequently deemed acceptable by either Parliament or a provincial legislature, was then charged against the budget as a relevant expense. If that unauthorised expenditure was not approved, then the amount became a charge against future allocated budget funds.

He said that there was a total of R2.908 billion in unauthorised expenditure for the Finance Bill 2016, of which R1.509 billion was recommended as an additional financial implication to the state.

Discussion
Mr M Figg (DA) said that every year there was unforeseen expenditure by DIRCO due to exchange rate fluctuations, and questioned whether there was any way to make sure this did not continue occurring.

Mr D Maynier (DA) said that there were 75 virements that required Parliamentary scrutiny. He asked the National Treasury delegation if there were any virements that they regarded as inconsistent with the PMFA.

He said he would like to draw the Chairpersons’ attention to R10.73 million worth of virements for the purpose of purchasing ministerial vehicles. He asked for a breakdown of type, model and value of each vehicle purchased for ministerial usage, so that the Committee could satisfy itself that each vehicle was in line with the ministerial handbook.

Mr Maynier said that there was a R200 000 virement for the Progressive Youth in Business, which he said was an ANC front organisation. It was a transfer by the Department of Trade and Industry to a political organisation which, if so, would be an unlawful transaction. Had the Committee scrutinised this virement to see whether it was consistent with the law or not? He thought that the Committee needed a legal opinion on this specific virement.

On vote 26, he had noted that there was a R600 000 virement for furniture for the Department of Labour’s attaché in Geneva. He would like an explanation for this virement, and an answer on whether or not it constituted unauthorised or irregular expenditure.

Mr A McLoughlin (DA) asked if expenditure was restricted until the adjustment and appropriations had been made. What happened to spending in respect of emergencies such as droughts? If money was not allowed to be spent ahead of time, in some cases the funds would be pointless, because the emergencies would have already passed.

On an issue related to vote 7, he said that there was total estimated third party investment target of R3.5 billion, but that in the first six months of the 2016 financial year, this amount had been R1 billion over budget. No additional details had been given as to where that billion rand had come from, or how it was spent.

There was an entry on the leasing of transport aircraft for the Department of Defence, to the amount of R93 million. He asked for clarification on what the airplanes were leased for.

Mr A Shaik Emam (NFP) asked if there were cost implications for roll-overs. What happened to the revenue from the Department of Home Affairs?

Mr O Terblanche (DA, Western Cape) asked about a roll-over which detailed the capital contribution for the construction of a government building.

Mr Figg raised an issue on slide 8, and asked for clarification on a number of virements. He said that when such large amounts go unspent, it may mean that they were needed in the first place. There was an item related to medical benefits for government employees, and he questioned why this was a virement and not budgeted for initially. Why was there a virement for an item that should be in the budget?  Was this an item budgeted for in anticipation of a virement, and a redirection of funds for other usage? He questioned whether this was irregular.

Mr McLaughlin, regarding the question raised by Mr Terblanche, asked who was going to own the building, and why the cost of building was included in the Department of Public Works’ budget.

He said that there were roughly 160 000 land claims, but government sets a yearly target of only 371. He asked why such a small number had been decided upon, commenting that at 371 a year, it would take decades to go through all of the land claims.

Mr Emam, on the issue of unspent funds, asked whether this was because of poor planning. He pointed out that although the country had a 27% unemployment rate, there were vacancies in government, and he enquired whether this was due to poor budgetary planning.

Mr C de Beer (ANC, Northern Cape) asked for clarification on unspent funds and compensation for employees, and wondered whether this could be better planned for so it did not recur.

Mr F Essack (DA, Mpumalanga) wanted an explanation for a virement of R162.3 million from International Financial Relations, to Civil and Military Pensions, Contributions to Funds and Other Benefits.

National Treasury’s response
Ms Kay Brown, Chief Director: Budget Office, National Treasury, on the issue of legal fees for the Presidency, said that those pertained to cases that had been initiated in this financial year, and therefore were not in the budget.

On the issue of the expenditure adjustment for DIRCO exchange rate-related fees, she said that there were two ways of dealing with it. Firstly, it would be possible to allocate more funds in the initial budget, and then have under-spending, which would then show up as declared unspent funds at the end of the financial year. The alternative, which was the current practice, was to work on the forecast, and then adjust after the fact.

Ms Brown said that there were no virements that her department had found that were inconsistent with the law as laid out in the PFMA. On the issue of the virements for vehicles, she said that they had been approved by the departments’ accounting officers, as was their lawful right. The budget department did not have the requested information, but the specific accounting officer would have it.

On the issue of the Department of Labour’s spending in Geneva, the funds had not been used for office furniture, but for the attaché’s residence instead.

Regarding whether spending could occur before the financial bill had been passed, such as with the issue of the drought, roll-overs allowed the Minister of Finance to allow some spending to continue unabated before the bill was passed. She said that roll-overs were granted only if the departments did not have enough funding to cover the additional costs.

On the target for the debt service cost, the fluctuation in the financial markets may have been the reason that the target had not been changed.

Ms Brown said that the spending on aircraft leasing was for transportation for the President, as a short-term solution. The Department of Defence was undertaking a study for a long-term solution.

Some of the issues resulting in roll-overs and under-spending were because of poor planning, but many were unavoidable. Much of the unforeseeable expenditure was unavoidable, such as construction that had to stop because of poor weather.

Ms Brown said that there were certain cases of under-spending that were not corrected year after year.  The Department of Social Development under-spent every year with its social grants, but the Budget Office was cautious about running too tight a budget in these areas.

Regarding the question on Home Affairs, she said that the revenue from the Department’s services went into the National Revenue Fund, and then that money was reallocated as needed. For that department to operate more like a business, it would have to be setup as a semi-private entity.

On the issue of virements, and the moving of funds from employee compensation to other areas by the Department of Higher Education, Ms Brown said that the concern in this area seemed to be related to the issue of departments budgeting for employees that were unlikely to be hired. That extra funding would then be rerouted to other areas of the department, effectively giving the department a larger budget. National Treasury was concerned about this, and for the 2016 financial year it had unilaterally taken over the appropriations of employee compensation funding allocation. Henceforth, the departments required permission for virement transfers from employee compensation budget sections.

On the issue of the declared unspent funds, Ms Brown said that this was an in-year adjustment, and in this case, was an estimation of what would be spent and where it would be needed. In addition, there was little benefit to having declared unspent funds, because National Treasury now had to approve all virements, leading to more scrutiny of intra-departmental transfers.

Some of the unspent employee compensation were a result of departments cutting down their budgets, and were not necessarily a result of poor planning.

On the question of land claims, National Treasury wanted the target to be a reflection of what the budget could afford, hence the number of 371. The budget was a set of priorities ranked relative to each other, and the amount allocated to any one area reflected the interest of the country as a whole. What Mr McLoughlin was perhaps stating was that this issue was not being prioritised as it should be.

Mr Mabena, referring to alternatives to DIRCO requiring constant budget adjustment, responded that the Department of Home Affairs had tried to establish a foreign currency trading account. However, the Auditor General had found a number of issues with the trading account, and a decision to halt its operation had been taken. The Department of Home Affairs had decided to not re-establish it, because the trading account would not satisfy the Auditor General. Self-funding had been decided as the best way to handle the issue of foreign currency payments by DIRCO.

Mr Maynier acknowledged that National Treasury could not be expected to have the information about the vehicles, but asked if the Committee could be furnished with that information. On the issue of the National Youth in Business, he said that the Committee would have to decide whether or not to oppose that virement, and to do so would need legal advice on the legality of it. Mr Maynier asked for the particulars of how the R600 000 virement for office furniture in Geneva was actually spent. His concern with that specific virement was that the money had been spent for a different purpose than what was stated in the Adjustments Appropriations Bill.

Co-Chairperson Mohai said that the National Treasury should give clarification on the virement related to the Progressive Youth in Business before the Committee called for a legal opinion.

Mr N Gcwabaza (ANC) asked that if there were written responses to the questions raised, that they be directed to the Committee itself, and not to individual Members. He added that the questions raised were in respect of government departments, and not the individuals.

Co-Chairperson Phosa said that under Rule 286 Section (i), the Committee must hold a motion of desirability on the Adjustments Appropriation Bill and the Finance Bill.

The heads of the ANC and the DA both stated their parties’ agreement with the bills.

The meeting was adjourned.