National Treasury Quarter 2 & 3 performance

Standing Committee on Appropriations

20 March 2018
Chairperson: Ms Y Phosa (ANC)
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Meeting Summary

The Department of National Treasury presented on the consolidated third quarter expenditure report for the 2017/18 financial year, focusing on the main areas of concern regarding the spending patterns of departments. The aim was to enable the Committee to invite identified departments to Parliament and hold them to account.

While some departments had experienced over-spending in the third quarter, the key issues were mainly concerned with the under-spending of departments due to outstanding payments. The main reasons for under-spending included non-payment of invoices, delays in finishing funding agreements, misalignments in spending projections, implementation delays and the filling of vacancies in critical posts. Some departments experienced unusual spending patterns. For instance, the Departments of Rural Development and Land Reform and Tourism experienced under-spending in the first and second quarters, but this had been offset by increased spending in the third quarter.

The Committee was mostly concerned with issues of under-spending due to the non-payment of invoices and the lack of supporting documentation. Given that it was a recurring problem, the Committee was interested in hearing what steps National Treasury had put in place to ensure that problems that kept repeating themselves every year were finally dealt with. It was also concerned with issues regarding the monitoring and oversight of departments. There was a need for improved monitoring and oversight to improve performance, especially in the Department of Transport.

The Committee recommended that National Treasury should train all the monitoring and evaluation units to ensure that they performed their oversight work effectively and efficiently.

Meeting report

The Chairperson said that the primary objective of the Committee was to ascertain whether the spending patterns of departments were in line with the voted budgets. It appreciated the role of played by National Treasury in supporting the objective of value for money in the use of state resources.

The main aim of the briefing was to share information with National Treasury and identify major areas of concern regarding spending performance. This would allow the Committee to follow up on these areas of concern and call the identified departments and hold them to account.
 
National Treasury: Third quarter spending outcomes

Dr Mampho Modise, Deputy Director General: Public Finance, National Treasury (NT) presented on the highlights of the third quarter spending outcomes.

In the third quarter of 2017/18, the adjusted appropriation amounted to R779.8 billion -- an increase of R14.5 billion from the main appropriation in February 2017. The increase was primarily because of higher appropriations for the following departments:

  • National Treasury (R9.8 billion)
  • Telecommunications and Postal Services (R3.6 billion)
  • Home Affairs (R1.2 billion)
  • Water Affairs (R0.5 billion)

These increases were partially offset by reductions in the allocations for Basic Education, Social Development, Police, and International Relations and Cooperation.

The School Infrastructure Backlogs Grant was one of the critical areas of focus. This grant had had a poor record of spending since its inception in 2011/12. In the 2017 adjusted budget, the baseline had been reduced by R415 million. While spending had slightly improved for the second and third quarters, the NT projected that the grant would be under-spent for the year by about R500 million. The Department had indicated that the delays were due to poor performance by some implementing agents and difficulties in replacing them.

The Department of Correctional Services had experienced under-spending on the compensation of employees and office accommodation.  This was mainly due to outstanding payments for occupational specific dispensation (OSD) phase two and non-payment of invoices for the Department of Public Works (DPW) for accommodation charges due to a lack of supporting documentation detailing properties forming part of the invoiced amount, respectively.

Regarding the National Defence Force, there had been over-spending on the compensation of employees. This was mainly due to the compensation budget not supporting the Department's personnel strength, as well as payment for overtime for medical doctors.

Concerning Telecommunications, there was one critical issue relating to the implementation of SA Connect. The broadband project had been delayed due to the Department of Telecommunications and Postal Services (DTPS) not finalising agreements with the implementing agents. Potential under-spending was expected under programme five of this project.

Human Settlements experienced persistent under-performance on the National Upgrading Support Programme (NUSP), which had also not led to the outcome of scaled-up informal settlements upgrading. Good spending by the Eastern Cape province on the Human Settlements Development Grant (HSDG) had been deceptive, as the province had massive accruals from continuing to appoint new contracts for new projects, but existing contracts had not yet been paid in full. 

In the Department of Transport, there were concerns around oversight on public entity spending and performance, such as the Passenger Rail Agency of South Africa (PRASA), the Road Traffic Management Cooperation (RTMC) and the Rail Safety Regulator (RSR).

The Department of National Treasury had experienced under-spending due to delays in the Integrated Financial Management System (IFMS) project. Spending was expected to gain momentum only in the 2018/19 financial year.

Regarding Statistics South Africa, although the Department's new head-office building had been completed and occupied about 18 months ago, there were still outstanding items that had not been finalised. This had caused under-spending on capital expenditure as well as unitary fee payments.

The Department of International Relations and Cooperation’s (DIRCO) experience a funding shortfall of R314 million in African Union funding.  This shortfall was due to the increased assessment for membership fees and outstanding contributions for the Peace Security Fund. Prolonged failure to honor the obligation would attract sanctions being imposed on South Africa and limit the states involvement in the AU processes.

The Department of Trade and Industry (DTI) had experienced many key issues, including non-compliance by companies, outstanding site inspection reports, low volumes of claims, companies not meeting mandatory requirements, and delays in finalising funding agreements, which were delaying the payment of incentives. These issues had been reducing the effectiveness of incentives.

The Department of Rural Development and Land Reform had experienced slow spending in the first and second quarters. However, this had been offset by increased spending in the third quarter. There were concerns about spending the entire allocation and the quality of spending in the fourth quarter.

 

Discussion

 

The Chairperson said that the presentation showed that there was an allocation to the New Development Bank that had cost the National Treasury an over-expenditure. She asked the NT to elaborate on that.

The Chairperson noticed that expenditure reports of State Owned Enterprises (SOEs) were missing from the presentation. Under monitoring and evaluations, the Department of National Treasury was expected to monitor SOEs, especially the big ones. Monitoring them and giving them feedback on a quarterly basis would help them improve in areas needing attention, instead of waiting until the end of the financial year. She encouraged the National Treasury to closely monitor SOEs.

The Chairperson addressed the continuation of non-payment within 30 days, which was attributed to the non-availability of invoices. The problem of non-payment due to the non-availability of invoices had been there for a very long time. It was a clear violation the Public Finance Management Act (PFMA). The PFMA said that payments should be made within 30 days. National Treasury needed to be very strict with departments to ensure that there was compliance. She asked the NT to explain what it had done to ensure there was an improvement in that area.

Ms M Manana (ANC) observed that many part-time and contract lecturers at Technical and Vocational Education and Training (TVET) and Community Education and Training (CET) collages were not being employed. She asked the National Treasury to explain the reason for that problem.

She was concerned about the delays in the Integrated Financial Management System (IFMS) project. The last time the Committee had requested a progress report, it had been told that a law firm was dealing with the matter. She asked the Department to indicate the progress it had made in overcoming the problem of delays in the IFMS project.

Ms D Senokoanyane (ANC) expressed her concern regarding NT’s inability to solve recurring problems. Some problems, such as the lack of supporting documentation, as well as the non-payment of invoices, had been happening for many years. The response of National Treasury had been unsatisfactory regarding this issue. She asked the Department to say what it had done or was trying to do in response to the recurring problems.

She said that National Treasury was there to monitor and to oversee what the departments had been doing, and asked it to give its opinion on the matter of recurring problems, instead of just stating the reasons given by the departments.

She asked NT to explain why there was a misalignment in spending projections and grant payments for the Human Settlements Development Grant (HSDG) and the Urban Settlements Development Grant (USDG).

Why had the transfers to the South African National Roads Agency Limited (SANRAL) and the Road Traffic Infringement Agency (RTIA) been made earlier than scheduled?

She was concerned about the massive accruals in the Eastern Cape. Under the HSDG, the province had massive accruals from continuing to appoint new contractors for new projects. She asked what the way forward was in dealing with such accruals. 

Why was there a shortfall in African Union (AU) funding?

Mr N Gcwabaza (ANC) was worried about the Department of Trade and Industry’s (DTI’s) oversight role on incentives given to companies. There was information that companies had not been complying with all sorts of documentation. He asked what the National Treasury had done in response to this problem.

Mr Gcwabaza asked for clarification on the issue of the overspending that was attributed to the New Development Bank.  After the special appropriations bill was passed, the money had been paid to the bank. It was now built into the budget and should not have been recorded as overspending.  He asked the Department of National Treasury to explain why they called it an over spending.

He wondered if the National Defence Force had some redundant personnel. He asked NT to clarify what was meant by personnel not contributing to the strength of the Department, and therefore causing over-spending.

NT’s Response by the Department of National Treasury

Dr Modise commented on the missing quarterly expenditure reports of SOEs. National Treasury had prepared a list of public entities that fell under the responsibility of public finance. She requested that the Committee choose the specific SOEs it was interested in so that the NT could present on their expenditure report the next time it was in Parliament. 

She explained why there was a shortfall in the AU funding. When preparing the budget for the 2017/18 financial year, National Treasury had not known that the AU membership was going to be increased during the year.  The decision to increase membership had been made after National Treasury had already budgeted for the current membership.

National Treasury did the monitoring of the departments, but as the PFMA stated, the Director General (DG) of the department was still accountable for what happened in the department. She asked the Committee to call these departments so that they could account. It was difficult for the departments to account to the Department of National Treasury because they knew that they were accountable only to Parliament.  Summoning the departments to Parliament would provide the Committee with more information on why the departments were facing certain challenges.

Mr Owen Willcox, Chief Director: Economic services, National Treasury, said that the problem of non-payment within 30 days was a complicated matter and did not result from departments being lazy about paying it. The main reason was the disputes between departments and service providers. Usually, there were conflicts between the departments and the service providers concerning agreements on the amount on the invoice.

He explained the cause of the delay with the IFMS project. The delay resulted from an audit that had been implemented on the project, so all payments had been stopped. This was what had been reflected as under-spending. The understanding was that the audit would be finished soon and the payments would be going off from June 2018. 

Mr Willcox explained why there was the issue of non-claiming of DTI incentives. When DTI gets an allocation for the incentives, the companies apply for incentives. Companies qualified for incentives if they met certain requirements, such as increasing Black Economic Empowerment (BEE) levels, increasing job numbers or committing not to reduce job numbers. These incentives were paid out only when the company had invested. For example, if companies bought machinery to increase production, the DTI would pay 40% towards that investment. However, the companies had not been making the investments because of the slow growth of the economy. Instead of increasing capacity, they had decided to stay at the current level of capacity. This resulted in major issues of non-claiming of the DTI incentives. National Treasury was currently in the process of designing a better incentive system suited for the current state of the economy.

He clarified the issue of over-spending concerning the New Development Bank. The payment had been due to be made in quarter four. However, when the Treasury saw what was happening on the foreign exchange market, it had decided to make the payment early to take advantage of the strong currency. Although it appeared as an over-expenditure in quarter three, it was always budgeted for.

Dr Rendani Randela, Chief Director: Justice and Protection Services, National Treasury, said the NT had been grappling with the Defence Force when it came to them staying within their compensation ceiling. The ceiling did not accommodate all the members employed by the Force. This meant that their compensation for employees was not enough for its current members. National Treasury had had an engagement with the Defence Force. Part of the difficulty was one needed to be fit to be in the Force.  Internationally, if one got to the age of 40, one would be classified as an un-deployable member. National Treasury had been engaging with the Force to come up with an exit strategy for un-deployable forces. For security reasons, there was fear that if let go, they may cause instability in the country. There was a need for an exit strategy specifying what needed to be done after reaching the age of 40. The Defense Force had taken a deliberate decision to maintain their numbers at 75 500. This number was not even accommodated by the CEO’s ceiling. However, National Treasury had continued to engage hence, the over-spending of R120 million in the third quarter.

Ms Ulrike Rwida, Chief Director: Urban Development and Infrastructure, National Treasury, said that in community colleges, the part-time lecturers were there to teach programmes that required them to be available for only a few hours a week. Therefore, it did not make sense to have somebody contracted for the full time when they were available for only a few hours. The Department of Higher Education and Training (DHET) was working on making the short-term contracts at technical and vocational education and training (TVET) colleges into fulltime contracts. However, there had been no indication as to how long the process would take to convert short-term contracts into full-time contracts.

She explained why there seemed to be a misalignment in the payments on the HSDG and the USDG. Specifically in the case of human settlements, the Division of Revenue Act required the national Department to pay provinces on a specific date. When the required date was not aligned with Department’s projections, they would not indicate it their spending plans that were submitted to National Treasury. They would say that they projected that the payment of the HSDG would go to provinces in a specific month, but in their projections, they would show that it would happen a month later.

A similar situation had happened in the Department of Transport (DoT) which transferred funds to SANRAL and the RTIA. The Department paid SANRAL on a quarterly basis,s and the fourth quarter payment was made in the third quarter.  Part of that was because of the December holiday, and they were not expecting that anybody would be around to make the payment that they needed to make in January, which was why they made the payment in December.

Ms Rwida explained why the Eastern Cape had massive accruals. What was creating the accrual was that the invoices were coming in for work done, and the Department had not been paying. At the end of the financial year, that would partly hide over-spending.

PRASA had a board that did not have a quorum, and one way to fix that was to appoint a new board, which the Department was in the process of doing. A board was needed to play the role of accounting authority. Without a board, PRASA could not get any budget approvals or issue tenders for certain things, which then resulted in significant under-spending by PRASA, to the detriment of the metro rail service. National Treasury anticipated that within two to three months, PRASA would have a new board. Once they had governance resolved around the accounting authority, PRASA would then start overcoming some of its current challenges.

The Road Traffic Management Corporation (RTMC) was slightly special, because its governance structure was different from that of other entities. The executive authority of national public entities would usually be one minister. However, with the RTMC, the executive authority was a shareholder's committee made up of the Minister of Transport and the MECs of Transport. The RTMC had taken on additional functions, and Nt was not sure if they had met the PFMA requirement of getting the executive authority’s approval. The additional functions were causing some instability in the budget. National Treasury was currently in the process of finding out if the functions had the executive authority’s approval, and how to function the funding around that.

The Railway Safety Regulator (RSR) had a slightly different problem. RSR had been scaling up in anticipation of the additional rail work that was happening, such as the expansion in Transnet, and the additional capital expansion was happening within the new rolling stock fleet at metro rail. They had scaled up the capacity of all the staff coming to them, because they had to do inspections on the capital work to ensure that the safety standards were there, and that the interface between the train and the station was aligned and safe etc. However, they were not sure whether they had complied with the PFMA, and had got the Minister of Transport’s approval before they started, which was creating operational pressures within the RSR budget.

Follow-up questions

Ms Senokoanyane said that Statistics South Africa’s new head office building had been completed and was occupied. However, there was information that there were still outstanding items that had not be finalised. She asked NT to provide more information on the matter. 

She had observed an unusual spending pattern with Rural Development and Tourism. There had been under-spending in the first and second quarters, but this had been offset by increased spending in the third quarter. She asked if National Treasury wanted such spending patterns to continue.

She said there was a reason National Treasury existed, and the Committee needed to intervene only once NT had done its best. Departments were usually summoned to appear before the Committee to account. However, it would be appreciated if the National Treasury would engage with the departments before the Committee stepped in.

The Chairperson said that quality education was an issue. The government needed improvement in that area because education was an investment in the learners who could assist in the contribution to economic growth and the development of the country. A key issue was the lack of water and proper sanitation in schools. This had been contributing towards the lack of quality education, because learners would miss classes just to go and help themselves in the bush. She asked National Treasury if there was a measure in place to ensure that schools had proper sanitation.

Last year, in the engagement between the Committee and National Treasury, it had been agreed that the monitoring and evaluation unit was key.  However, over the year, the unit had not been correctly used. It was also agreed that National Treasury would train the unit so that they did their oversight work effectively and efficiently. She asked how far NT had gone with that.

National Treasury’s response

Mr Willcox responded that there were disputes between Stats SA and the public-private partnership (PPP) company that had built the building. It was a question of whether the building had met the specifications that had been laid out. Payments were not being made until the disputes were resolved. That was why there seemed to be under-spending.

The spending patterns of Rural Development were not good. National Treasury would be interacting with the departments, particularly Rural Development, to try and change the pattern. Pushing so much expenditure into one quarter would raise concerns about the quality of that expenditure.

Ms Rwida said that part of the problem with proper sanitation in schools was linked to the school infrastructure grant, because it was the grant that should have been paying for improving schools. One of the difficulties was how to use some of the innovations that the Water Research Commission had done around all of this so that there was immediate safety around sanitation services. One of the things National Treasury had been doing was connecting departments in order to have these kinds of conversations and alternative technologies to support safety, quality and dignity in sanitation. One of the things National Treasury had to do again was to put the Department of Water and Sanitation in touch with the Department of Basic Education to thinkabout what could be done quite quickly to support proper sanitation.

Ms Rwida said that at both provincial and national level, the National Treasury had introduced the infrastructure delivery management system (IDMS). This was not only about training for monitoring and evaluation, but also about strengthening capacity for planning and infrastructure delivery. One of the things that IDMS had done was to look at setting up organisational structures for infrastructure planning, monitoring and oversight. This had been done successfully in the housing and basic education sectors, and it was now moving towards transport. The aim was to strengthen capabilities within departments.

Dr Modise assured the Committee that the Department of National Treasury would ensure that it did its part in dealing with departments before seeking help from the Committee.

The Chairperson thanked National Treasury for presenting on the specific areas that needed good monitoring by the Committee. She advised the Department to take seriously the Committee’s recommendation on the training of the monitoring and evaluation unit.

The meeting was adjourned.

 

Present

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