Eastern Cape & North West 2016/17 expenditure: Provincial Treasury reports

NCOP Finance

24 May 2017
Chairperson: Mr C De Beer (ANC, Northern Cape)
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Meeting Summary

The briefing by the National Treasury dealt with provincial budgets and their expenditure for the fourth quarter of 2016/17. In the Eastern Cape, all departments had under-spent on their budgets, especially the Departments of Health, Economic Development, and Cooperative Governance and Traditional Affairs (CoGTA). In Health, there had been overspending on medicines. In the North West province, there had been under-spending on conditional grants and infrastructure allocations, and overspending on medicines and the patient food budgets. There had been a failure to attract health specialists and professionals. The Eastern Cape had tabled a surplus for contingencies like medico-legal claims. In the North West province, there had been implementation of strategies over the 2017 medium term expenditure framework (MTEF) for own revenue. More funds had been channeled to agriculture, culture and tourism.

The North West provincial treasury stated that the aim of its expenditure was to redirect resources to townships and small towns for radical economic transformation. There had to be a review of the equitable share (ES) formula. As at 31 March 2017, aggregate pre-audited spending had been 98.12% of the adjusted allocation. There had been improved revenue collection, at 105%. Spending of conditional grants had come to 94.5%. There had been poor spending on infrastructure, at 84% excluding conditional grants. The provincial treasury had engaged with departments to assess their readiness for project implementation and rollout plans.

The Eastern Cape provincial treasury stated that as at 31 March 2017, irregular expenditure had amounted to R3.1 billion, with the chief contributors being the Departments of Education, and Roads and Public Works. The irregular expenditure was due to delays in finalising investigations and taking action against responsible officials. There were low levels of industrialisation and beneficiation in the province, and high levels of structural unemployment and skills development related to market needs. The slow pace of policy reforms and legislative changes in communal land administration was holding back private investment in emerging agriculture. The Eastern Cape had a positive bank balance that could be used to provide access roads in rural areas, electrification and water intervention measures.

In discussion, Members had comments and questions about irregular expenditure and under-spending in the Eastern Cape; social transformation backlogs; the strain on education departments; the staffing of provincial treasuries; fiscal oversight in terms of the Public Finance Management Act; revenue collection by health departments; large accruals in the Eastern Cape, despite a positive cash balance; lack of concrete targets in annual performance and strategic plans; “ghost” teachers and learners; the need for a review of the Equitable Share formula; loss of money due to National Treasury and CoGTA’s control of the Municipal Infrastructure Grant; financial year-end spending spikes; infrastructure and road maintenance challenges; medico-legal claims and medical supply costs; and public entity performances.

Meeting report

Introduction by the Chairperson

The Chairperson said the aim of the day’s meeting was to look at the annual fiscal position of the two provinces. The objectives were good governance and sound financial management. The National Council of Provinces (NCOP) was mandated to account to the taxpayer, in compliance with the Constitution, the Public Finance Management Act (PFMA) and supply chain management (SCM) rules. There had to be accountability by Parliament to the people about service delivery. It was very important that monitoring and evaluation had to go to the lowest level of governance. There had to be more decisive action on consequences for financial mismanagement. Corruption had to be fought with rigour. Clean government was owed to the people. The effect of fiscal consolidation on education and health was most important. Departments could speak to the Committee when the fiscal framework and division of revenue was being dealt with, and when the Committee briefed the provinces.

National Treasury on provincial budgets

The briefing was presented Ms Ogalaletsang Gaarekwe, Chief Director: Budget Analysis, National Treasury, and covered the provincial budgets and expenditure for the fourth quarter of 2016/17.

A summary of observations and fiscal risks for the Eastern Cape indicated that by 31 March 2017, the Education Department had reduced its personnel numbers by 1 077, due chiefly to the high attrition rate. While all departments had under-spent their budgets, the main contributors had been Health, Economic Development and Cooperative Governance and Traditional Affairs (CoGTA). There had been overspending by Health on medicines.

Aggregate provincial spending by North West province had been characterised by under-spending on conditional grants and infrastructure allocations. In the Education Department, personnel numbers had increased by 917 from April 2016, to March 2017. However the increase had been in temporary educators, while permanent educators had decreased by 476. There had been under-spending on the goods and services budget, and overspending on medicine and the patient food budgets. Failure to attract health specialists and professionals remained a challenge.

A summary of conclusions and fiscal risks over the 2017 Medium Term Economic Framewoek (MTEF) for the Eastern Cape showed that the province had tabled a surplus to provide for contingencies, like medico-legal claims. Key conclusions and fiscal risks over the 2017 MTEF for North West province showed that the province would continue to implement alternative strategies to improve its own revenue, including the building of weighbridges. More funds were being channelled to agriculture, culture and tourism. The Public Works and Roads Department had to utilise the Public Roads Maintenance Grant (PRMG) to address poor the road conditions.

Chairperson’ comment

The Chairperson commented that it was repeated every year that it was necessary not only to look at the budget, but also at accruals, liabilities, and wasteful expenditure, which made up the fiscal position. It was also important to heed how provinces managed in terms of the Minister of Finance’s speech, when he tabled the national budget. The fiscal framework had to be read back to the Medium Term Budget Policy Statement (MTBPS) of the previous year, which determined the fiscal framework for three years.

North West province would be next to take the floor. It had spent R35.9 billion of its budget. Under-spending amounted to R686.3 million. Accruals came to over R1 billion, unauthorised expenditure to R9 million, and irregular expenditure to R2.6 billion. The province had R1.15 billion in cash, which was a good story. The Eastern Cape had a cash balance of R8.3 billion.

North West Department of Finance: Provincial expenditure report
 

Ms Wendy Nelson, Finance MEC, and Mr Ndlela Kunene, Finance Head of Department (HOD) presented North West province’s expenditure report.

A primary aim of the expenditure had been to redirect resources to townships and small towns, in the interests of radical economic transformation. The Unemployment Insurance Fund (UIF) expenditure had been unpacked by an independent committee. The Equitable Share (ES) formula had to be reviewed, as the rural provinces were under pressure. Criticism was levelled at the National Treasury (NT) and CoGTA for intervening in the spending of the municipal infrastructure grant (MIG). Aggregate pre-audited spending came to R35.902 billion, or 98.12% of the adjusted allocation, with under-spending of R686.334 million as at 31 March 2017. There was improved revenue collection, at 105%. The province had contained spending on the compensation of employees. Spending on conditional grants had come to 94.5%, and there was poor spending on infrastructure, excluding conditional grants, at 84%.

All contracts for projects to be implemented in 2017/18 would be awarded before the end of the first quarter. The Provincial Treasury had engaged departments to assess their readiness for project implementation and rollout plans. The Infrastructure Delivery Management System (IDMS) would be strengthened and sustained within the provincial departments.

Chairperson’s comment

The Chairperson commented that it was important that provinces learn best practices from each other.

Eastern Cape Provincial Treasury: 2016/17 budget outcome

Mr Sakhumzi Somyo, Finance MEC; Mr Dahluhlanga Majeke, HOD: Provincial Treasury, and Mr Jongile Mhlomi, Deputy Director General: Provincial Treasury, presented the briefing.

The withdrawal of General Motors had affected employment in the province. There had been a restructuring of local government through the amalgamation of municipalities. Agriculture was the economic anchor of the province, and there had been movement into the oceans economy, manufacturing, the auto sector and tourism. As at 31 March 2017, irregular expenditure by the province amounted to R3.1 billion, with key contributors being the Departments of Education and Roads and Public Works. Departments continued to have historical irregular expenditure not condoned timeously because of delays in finalising investigations and taking appropriate action against the responsible officials.

The provincial government was concerned at the low levels of industrialisation and beneficiation in the province. There was an urgent need to persuade the main national state-owned enterprises (SOEs) to invest and develop the economic infrastructure of the province. There were high levels of structural unemployment, with skills development related to market needs remaining a challenge. The slow pace of policy reforms and legislative changes on communal land administration continued to hold back private investment in emerging agriculture.

The province had a positive bank balance, and the surplus would be utilised to provide access roads in rural areas, electrification and water intervention initiatives. The Provincial Treasury would issue a circular on cost containment measures, where all departments would have to report on how much would be saved.

Chairperson’s comment

The Chairperson noted that the Auditor-General (AG) was also present. A picture had been provided of economic growth strategies in both provinces. At the national level, the President and the Finance Minister partnered with SOE structures. He asked if something similar happened in the provinces. The Appropriations Select Committee had furnished a report 14 days before, with recommendations about the ES formula. It was on the agenda of that Committee. Money had to be retrieved from officials for mismanagement. The irregular expenditure in the Eastern Cape was huge. By the previous year, there was only one weighbridge in the Eastern Cape. It was important for revenue collection. The Finance Minister had made statements about fiscal consolidation and expenditure ceilings. MECs had to understand the implications, as well as the CFOs, line managers and provincial legislatures. People had to be given the real picture, and were not to be misled.

Discussion

Mr S Mohai (ANC, Free State) remarked on education and health issues in the Eastern Cape. There was a huge backlog in terms of social transformation. It took up a large chunk of the budget. He referred to under-spending , and asked if the Provincial Treasury had invoked the relevant Public Finance Management Act (PFMA) sections. There was a serious strain on the education departments in the provinces. There were poor results due to under-spending. He asked if provincial treasuries were appropriately and qualitatively staffed, so that the National Treasury could intervene. The AG was frustrated. Were provincial treasuries in a position to apply fiscal oversight in terms of the PFMA to all provincial departments? He asked if the National Treasury was capable of fiscal oversight. What inhibited revenue collection by health departments? What were the glaring challenges with regard to the under-collection of revenue?

The Chairperson remarked that the Northern Cape Health Department was also under pressure.

Mr T Motlashuping (ANC, North West) commented that the Eastern Cape had over R8 billion in the bank, and also large accruals. The backlog was great, and yet the provincial government had a lot of money. Departments would assert that they would do certain things, but there was no indication of what would be done in the Annual Performance Plans (APPs) and strategic plans. It was easy to dream of going to the moon. Concrete targets had to be set and achieved. It had been stated that new teachers had been employed in the Eastern Cape, but the province had been in the news about “ghost” teachers. He asked why there was no report on this issue, because it had to be clarified.

He told the North West MEC that he was happy that issues of radical economic transformation had been identified. The Finance Portfolio Committee had also reflected on a review of the ES formula, according to its mandate. The NT had also proposed the removal of the bias against rural provinces. Gauteng was more urbanised than North West, and yet its ES was larger. The NT had to say why a municipality had lost R123 million in MIG money, when it had taken over the administration of that grant. He appreciated that the North West MEC had declared that the UIF would be dealt with. The NT briefing had indicated that 1 000 education employees had been lost. He asked if they had been retrenched or were dead.

There were the triple challenges of unemployment, inequality and poverty. How would the Eastern Cape’s Education and Health Departments address accruals, taking into account its big bank balance? He pointed out a spending spike which did not conform to spending on a monthly basis. Under-spending on education had been R574 million. Infrastructure in the country was a serious challenge. Under-spending by Human Settlements had been R250 million. North West had to account about the challenges related to its roads. Overspending on medicines had to be clarified. The Eastern Cape medico-legal claims in the health sector had accumulated to over R14 billion. Something was wrong, and had to be clarified. How would the deficits in the North West be sourced from the reserves?

Mr Mohai said that he wished to propose a round table discussion to the provinces on the Equitable Share formula. The South African Local Government Association (SALGA) had also requested a discussion, and should be invited to a round table discussion that took current constraints into account. The NT was saying that municipalities were not able to calculate the formula. Constraining factors could be learned from the provinces, with the help of the Financial and Fiscal Commission (FFC). Both MECs had stated that the economy was vulnerable. There was disinvestment and crisis. He asked if there was major restructuring in the provinces. The Finance Minister had advised that fiscal consolidation should be looked into. Debts had to be serviced. Expenditure reduction was bound to become more problematic in the future. Public entities could reinforce growth, and job creation had to be retained. Public entities tended to rely too much on allocations from the provinces. He asked if that was being rationalised. Audit outcomes for public entities looked bad. Public entities had to generate useful ideas.

The Chairperson thanked Mr Mohai for the suggestion that all stakeholders had to be brought together for a discussion. The Free State University, through Mr Neels van Rooyen, had done a study on ES, in which the Free State had been used as a case study. He himself had asked for documents to be sent to his province (Northern Cape). North West could do the same. During November and December, 1 000 nurses had graduated in the Eastern Cape. The Northern Cape could produce only 100, as that was all it had room for. It was a good story.

Ms Nelson replied that she was grateful that the issue of the municipality losing its MIG had been taken up. The documentation about the Free State study had been received. The North West Provincial Treasury was sufficiently resourced. Expertise had to be invested in the municipalities. The Treasury often had to assist. Strategies with regard to entities presented major issues related to audit outcomes, where the same strategies were followed as for departments. Post-audit action plans were monitored.

Mr Kunene responded to Mr Motlashuping that under-spending was unacceptable, as the budget was related to needs. There had been a meeting with the NT during the previous week on the matter. R192 million had been committed for rollover, and there was a R65 million rollover for roads. There were measures in place to avoid repetition. The Municipal Finances Management Act (MFMA) had been resorted to, in order to address capacity issues at municipal treasuries. The Accountant-General had been called on for interventions. There was little capacity in the entities. Treasury officials were being placed in the entities to close the gaps, or expertise was being brought in from outside.

The Chairperson asked if there were people in the entities who could manage.

Mr Kunene replied that issues were being escalated. There had to be competent CFOs. It was better to have the existing people to solve the problems, rather than to replace them.

Ms Nelson added that skills audits were conducted across the provinces and municipalities.

Mr Kunene said that fiscal consolidation was supported, without creating challenges at national and provincial levels. Surplus financing of deficits through donor funding had to be disclosed. 2017/18 expenditure required contributions from both the ES and own revenue. There had been under-financing by an amount of R60 million.

The Chairperson commented that it was important for Parliament -- both the National Assembly (NA) and the NCOP -- to engage with the quarterly reports of departments and entities. It was unacceptable for challenges to be picked up only at the end of the year. Challenges had to be identified, and the AG could be called in to assist.

Mr Somyo said that section 18 had been invoked to intervene in education. There were senior officials who were in an acting capacity, and no CFO. There had been positive results. Expenditure currently stood at 99.8%, which was a great improvement for Education. The appointment of an HOD had contributed to stability. It was hard for large departments to function without capacity. The numbers of teachers and learners had had to be confirmed to avoid there being “ghost” teachers and learners. Revenue collection in Health was being dealt with, and broadband connectivity was being improved. A focus on the technology aspect could improve revenue collection. Provincial Treasury teams had visited a number of hospitals.

He commented on the issue about accruals versus bank balances. There were challenges in terms of liability. If there were huge problems that could not be backed up by cash, it led to crises. There was cushioning through the reserve. The Provincial Treasury was conscious of the issue, but as a going concern it had to prepare for medico-legal claims. There had to be a cash balance to face liabilities. He asked the Committee not to frown on that. It was cushioning itself against the drought. Its own resources had to be sufficient when exposed to liabilities. Budgets for small town development had been improved. The reserve was used to the benefit of the province. General education expenditure had improved, with spending at 99.8%.

Medico-legal claims were not restricted to the Eastern Cape. The Minister of Health had pronounced on the issue. The area of births was mostly affected. The occurrence of cerebral palsy led to exorbitant claims. The responsibility for risk was given over to public institutions. People visited gynaecologists, but the hospital had to carry the risk if the child was not normal. The Minister of Health had referred to that. Liability had been passed over. Hospitals had been visited to see if there was the technological capacity to face the risks. When cases were heard, they had to be backed by medical expertise. Ombuds were appointed to assist before cases went to courts. The MEC for Health had stated that there was an improvement when cases were given to the ombuds. Money destined for families ended up with legal firms.

Mr Majeke referred to procurement, and said that there had been a review of the financial management accounting framework, and a process to escalate the matter. Departments departed from procurement plans. They delayed until the last quarter and then did deviations. With regard to consequence management, no names had as yet been linked to activities. The concern of the Committee on this matter had been noted. The procurement department was being capacitated, with management capacity brought into it. Procurement capacity was being monitored and evaluated. Capacity would never be sufficient, but it could be determined what could be done with what was available.

There were provincial oversight reports to determine value for money. It was not possible to oversee all projects, so a particular one would be selected. It was then taken to the Executive Committee (EXCO) to decide whether there was value for money or not. Such oversight happened over and above what was done from a management point of view, in terms of Section 14 reports on expenditure. A Member had referred to R1 billion spent in the last quarter. The system assessed when payments went through. Payments were verified before they went through. The HOD of Education had standardised the system, so that it was not necessary to pay what was not due. It could be decided which payments could go through, and which could not. It formed part of Provincial Treasury’s oversight.

The Chairperson had asked about weighbridges. Weighbridges were referred to in the 2017/18 budget, as it was foreseen that there would be questions about it. Money had been allocated for the planning of weighbridges at Queenstown and Middelburg. It was starting to happen. The Chairperson had referred to the R8.3 billion cash balance. Capital projects were multi-year projects, and this made it possible to fund projects like weighbridges appropriately, and so money was taken from that.

Ms Gaarekwe replied about the ES formula. It was being reviewed, with all provincial treasuries represented on the task team. The matter of plurality had to be decided upon, including decisions about whether education and health had to be treated as a single component, or as two separate components. There was a high turnover of employees in Education. 1 000 employees had been appointed. People were resigning or retiring early. There had been a rumour about pension reforms that made people think that they were going to lose their pensions, and so they had taken their pensions. It also happened that people took their pensions because of financial problems, and retired, and then came back to work again, which caused challenges. With regard to the R530 million referred to by a Member, she said that the Eastern Cape had improved its performance over 2015/16. The NT had commended the spending, but had also recognised that it had allowed the growth of accruals. Invoices were usually paid in March, as contractors tended to bring invoices at the end of the financial year, which caused March spending to be higher than average, which had led to a spike in spending in March.

Overspending on medicines was a challenge. R21.5 billion had been spent across departments on medical costs in the previous year. 48% could be attributed to Health, with the bulk of that being medicinal costs. It started with invoices that had to be paid from the 2015/16 financial year. Accruals from 2016/17 were partly due to that. No money had been received from the provincial health departments. Exhange rates had had an effect, as some medicines were imported. With regard to indirect grants, there was a benchmarking process to see if a budget was funded. The NT could return to the Committee in the following week with a response, or could provide a written response.

The Chairperson noted that Mr Jan Hattingh, Chief Director: Local Government Budget Analysis at National Treasury, had to deal with the matter. The Appropriations Select Committee had called Mr Hattingh and the Treasury to appear before it regarding the withholding of funds, and the processes relevant to that. However, it would be fine if the NT could respond on the matter.

Ms Nelson commented that it would be in order to look at the procurement of medicines. A large proportion of medicines were imported. It would be good to know what was being paid for both imported and locally available medicines.

Mr Mohai said that the issue had been flagged in the division of revenue report. Some medicines were not available locally. Dealing with supply chain challenges had to be looked into. There were challenges around the sourcing of equipment in the Free State, which were distorted negatively by the current economic environment.

The Chairperson commented that the impact of inflation on medical supplies also had to be reckoned with. The NCOP could be the game changer to assist provinces. Ties between the NCOP and the provincial legislatures had to be strengthened. Every circuit had to have a circuit manager, capable of supplying credible information about every school in the circuit, as regards teachers, learners, books and toilets. The agri-extension officer had to roll out the APP of the department in that zone. He met with that officer every week. Governance in rural areas needed attention. There would be a second meeting in the following week.

Committee business

The Committee would meet with the Northern Cape and Limpopo provinces in the following week. The Limpopo fiscal position and post intervention report had to be looked at. The intervention had to be monitored, even after the termination of the section 100 intervention. Oversight had to continue, especially with regard to Education, Health, and Roads and Public Works. The meeting would continue until 14h30. There was a magnitude of work to be performed. There would be meetings on 7 and 9 June, with the latter being a Friday meeting, as KwaZulu-Natal was available only on that day. The meeting of 27 June would be a joint meeting of the Appropriations and Finance Select Committees, to look at reports. The Money Bills Act would be dealt with on 28 and 30 June. Although it had been referred to the NCOP, there had to be a joint sitting with the Finance Standing Committee. Thirteen referrals had been received. The Finance Select Committee would deal with the Land Bank, the Development Bank of South Africa (DBSA) and the ombud for financial services.

The Chairperson adjourned the meeting.
 

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