Free State & Gauteng 2017/18 expenditure outcomes: Provincial Treasury

Meeting report

Free State budget outcomes: National Treasury briefing

Ms Amukelani Xaba, Director: National Treasury, Free State, showed the provincial adjustments from the 2017/18 financial year and areas where there was either over expenditure or under expenditure in comparison with the previous financial year.

In education, she claimed that the province was not far off from the national averages of other provinces. The percentage share of education to total provincial expenditure was 39.3%. Regarding compensation of employees (CoE), education personnel accounted for 51.1% of total personnel expenditure, and 79.3% of total education expenditure.

Although the Free State had a matric pass rate of 86.1%, only 40% of pupils who registered for Grade 2 reached matric. Therefore, instead of focusing on the matric pass rates, one should emphasize the number of pupils that get to complete matric. This was an issue that needed to be resolved in the education sector, which had to monitor the situation and create a solution to enable more students to get to matric. Only 41% of the budget for learner and teacher support material (LTSM) was spent. In practice, the amounts available were much lower than the accruals, and this was a major problem in the province.

There was an overspending of R 71 544 on health preliminary outcomes. This was lower than in all other provinces, partly because of poor recording of data from the province, especially the expenditure. The relevant authorities had responded to this by upgrading their systems and ensuring there was proper monitoring and recording of expenditure and other financial aspects.

There was under-spending by over R116 million on health CoE. This did not mean that the province had made savings, however. It had various other pressures -- for example, there was a decline in the number of medical doctors. Capital expenditure had been lower when compared to previous expenditure. The focus ought to be on making sure that hospitals remained operational and that they had all the equipment and facilities needed.

The rate of conditional grants in the Free State had increased, especially those relating to agricultural activities. Some provinces, including the Free State, had spent 100% of their Human Settlement Development Grant (HSDG). However, the outcomes in the different provinces had been marked by differences.

Regarding expenditure in the Free State, there had been a lot of budget pressure on the officials. The accruals had also posed a problem for the province, as they had gradually decreased. There were a number of issues that were specific to the Free State province, such as education, health, social development, public works – which was struggling with accruals from municipal accounts -- human settlements, police, roads and transport. These were issues that affected the growth and development of the province and prevented the provincial government from achieving its objectives and the mandate entrusted to it by the Constitution and the general public.

The recommendations to the Select Committee included:

• that it notes the preliminary outcomes for provincial government expenditure for the 2017/2018 financial year;
• it notes the overall fiscal risks pertaining to education and health, as well as the high accruals; and
• the Committee should agree that capacity enhancements, better planning and project execution skills should be sought by departments to reduce under-spending on certain items and conditional grants.

Free State: Provincial briefing

Mr Tate Makgoe, Acting MEC: Finance, Free State, said the province was the second smallest in terms of economy in the country, after the Northern Cape, and therefore its interests ought to be perceived differently from those of other provinces. He lamented the grievances and challenges that the provinces faced, such as the immigration problem and education dropout rates, and urged the Committee to look into the issue of what could be done to inject finances in an attempt to grow and stimulate the economy of the province. The economy of the province had declined again by 0.2% in 2017, implying that people would migrate out of the province to seek greener pastures elsewhere. There was a high unemployment rate in the province. The economy of the province for a long time had been anchored by mining and agriculture, two sectors that were now declining because of factors such as mechanisation and the advancement of technology. These were some of the factors that had resulted in the decline in the budget for the province from the national government.

He also requested the Committee to address the fact that the national government continuously keeps reducing the budget to provinces. The Free State was one of only two provinces that had increased funding for bursaries in 2009 in order to prevent students from quitting school because they could not raise the funds to pay their tuition fees. Today, the province had over 1 200 students studying overseas/ internationally. These bursaries were supplemented by other bursaries from countries like Russia and other developed countries. One of the biggest contributors to the distortion of the Free State budget had been the conscious decision taken by the Executive Council to invest in the future. Already, positive results had been received through the graduation of some of the students who had been studying overseas.

The Chairperson observed that the province was investing in the future by investing in the youth.

Mr Godfrey Mahlatsi, Head of Department (HOD): Free State Treasury, said the province had improved when it came to dealing with irregular expenditure. He then went on to discuss what they had done to address the recommendations in the Committee’s report.

They were working closely with the Department of Health to maximise revenue collection from patient fees. Although there were a number of challenges, they were working with the Department to foster a working relationship, as well as with the Lesotho government, which brought its patients to the province. They had also established and funded revenue enhancement programmes, such as the case management programmes in the Health Department. They had an integrated information technology (IT) system to enhance processes and revenue collection, and had developed capacity management forums in the province to ensure and promote capacity building, as well as to ensure that there was compliance with procurement processes in the province.

A relationship with the Construction Industry Development Board (CIDB) had been established to ensure compliance on infrastructure development, and had built capacity in the infrastructure development department, which had received incentive grants for a period of two years because of its performance. Cash management had also improved, especially in the Department of Health, as it had closed the financial year with a positive bank balance. They had also realised an irregular expenditure reduction from R300 Million in 2016/17, to R20.9 Million in 2017/18.

The Department of Education was still under administration and the intention was to terminate this intervention before the end of the second quarter. There had also been a decline in unauthorized and irregular expenditure within the department. They were also supporting the Department of Human Settlements to make sure that they investigated cases of irregular expenditure.

Mr Mahlatsi added that the Free State, in line with the rest of the country, focused mostly on the tertiary sector, which incorporated finance, trade, transport, government, personal services etc. He outlined the Free State economy in the context of the rest of South Africa, indicating that the province was not performing well when it came to the primary and secondary sectors. The salient socio-economic features of the Free State were that it had the second smallest population, the fifth lowest poverty headcount rate, it was the second smallest economy -- underlined by the overall lacklustre growth performance and a largely undiversified economy, with a high reliance on the government sector -- and it had a high unemployment rate of 32.8%.

There were efforts in place to deal with socio-economic factors. These included measures aimed at reversing out-migration by using the province’s strengths to change its image amongst the people, measures to accelerate growth through transformation and inclusivity -- for example, implementation of Strategic Infrastructure Projects (SIPs), and strengthening linkages between general government spending and the provincial economy etc -- and enhancing job creation and employability of the labour force through enhancing labour-intensive public works programmes, education, training and skills development.

The province also had a provincial growth and development strategy (PGDS), with six main pillars (see slide 14). Each of the pillars had several drivers. There had been significant progress on the PGDS, such as the introduction of an agri-park programme which promotes agro-processing. Coal had also been discovered in various areas in the province, the N8 corridor development project continued to attract investment, there were partnerships with the health sector to promote PPPs, and skills development that was supported through the provincial bursary programme.

The province had conducted several studies in the province, with the focus areas covering economic and financial issues, education infrastructure, socio-economic matters, work opportunities and tourism. An annual Provincial Treasury (PT) research colloquium had also been conducted, where several papers had been presented, including from PhD students.

The province had exceeded its revenue collection target by R11.8 million. The PT had also managed to raise about R16 million for the province as a result of investments it had made. There had been a number of ongoing interventions to enhance revenue. The province had established close working relationships with the Road Accident Fund to enhance recovery systems. It had also engaged with the Ministry of Health in Lesotho on outstanding invoices, which was continuing and bearing fruit. It worked closely with all provincial departments regarding potential revenue projects.

A summary of the provincial expenditure showed that of the total budget of R33.162 billion, R33.020 billion (99.6%) had been spent. The issues of either over or under-spending had been dealt with in the NT presentation, and were also explained in detail in the Free State presentation document (slides 30-46).

Mr Mahlatsi also highlighted problems such as unauthorized expenditure and out-migration as major reasons why the province was not developing at as quick a rate as had been expected.

The Chair emphasised the importance of fiscal consolidation in the various departments in every province, mainly in the health and education departments.

Gauteng budget outcomes: National Treasury briefing

Mr Michael Rammabi, Director: National Treasury, Gauteng, said the province had a budget of R108 billion, and a further R3.7 billion had been added. A large proportion had gone to social services, particularly health and education, particularly towards the employment of educators. Compared to 2017, expenditure had increased by R2.5 billion, representing an 8.2% year-on-year increase. Despite this, the province had still underspent by R1.2 billion.

The budget for education in the province was about 37% of the total expenditure for the province. As from 2019, the health budget would surpass the education budget in the province. Compared to 2016/17, the province had added 1 233 educators in the 2017/18 period, and there had been overspending in this area by over R900 million because of the immigration of students from other provinces to Gauteng. The province was moving towards a paperless system, thus justifying why expenditure on issues such as the procurement of textbooks for learners was decreasing.

The throughput matric pass rate in Gauteng was the highest in the country. If one looked at the learners who started Grade 2 in 2007, one would notice that the learners usually studied until they completed matric. This was commendable on the part of the province.

The expenditure figures showed that the province was under-spending by about R2.5 billion on health. However, the year-on-year expenditure was increasing partly because of the immigration of patients from other provinces to Gauteng. The biggest issue in this sector was that claims against the Department of Health amounted to more than R22 billion. These were claims against the state, and reflected that the Department was not being managed properly. These claims eroded the funds available to the province for providing essential healthcare and other services. The management of the province was urged to look at these issues and try to mitigate the expenditures by the state on such claims by attempting to mediate some of the claims, for example.

The CoE had been affected by the Department employing more than 2500 employees in 2017 without the necessary budget, resulting in overspending in this area by over R900 million. Although the Department was trying to stabilise the numbers, the effects of overspending in this area had already been felt in the 2017/18 budget, which showed overspending by R119 million. The Department was going to prioritise spending on laboratory equipment in this financial year.

On the payment of capital assets, there had been provision for infrastructure development in the budget. On conditional grants, there had been poor performance by the Department of Agriculture, Forestry and Fisheries.  

The main issues in the Health Department concerned matters of governance. For example, there were high levels of irregular expenditure amounting to around R9 billion. This was in addition to the R22 billion claims against the Department, which deplete the financial resources for the Department and steer them away from their intended purpose of promoting service delivery and growth and development in the various sectors of the province.

The province had R9.5 billion in accruals. In respect of the conditional grants, the human settlements sector needed to be coordinated better by the Department and the funds budgeted must be properly utilized to promote development. The Department had acknowledged that there was a need to increase capacity amongst its personnel as well as its services.

Gauteng: Provincial briefing

Ms Barbara Creecy, Member of the Executive Committee (MEC): Finance, Gauteng, said the province was under severe pressure as a result of constant immigration, with over 150000 people moving into the province every month. This put a lot of strain on all the agencies in charge of social service delivery. Therefore, in response to this, they had tried to reduce spending and had taken steps to fight fraud and corruption. They had also tried to increase their own revenue and find alternative sources of funding for various infrastructure projects. Apart from these areas, they had tried to maintain funding, especially on health and education services.

In their initial budget, they had predicted they would collect R5.4 billion, which had then been adjusted to R5.8 Billion. They had surpassed these projections in this financial year by collecting R6.1 billion. The main reasons for this were income generated from motor vehicle licences, interest on short term investments, and patients’ fees, which had exceeded the set targets. There had been an increase in the revenue collected from patients at public health institutions, the majority of whom were not South African nationals. Generally, revenue collection had improved drastically. It used to be a major challenge for the Department.

On the issue of aggregate provincial spending, which the National Treasury had alluded to, the province had spent 98.6% of their budget. 79% of the spending had been on health, education and social development. The Department was striving to maintain such high amounts of spending on these sectors.

Ms Creecy pointed out that from a national perspective, there was a policy of fiscal consolidation, which meant that the equitable share of conditional grants was not increasing as they had done in the past. Gauteng was in fact maintaining spending on social spending from its own revenue, which was why consolidate its spending was very important. It also tried to maintain spending on CoE below 60% the budget, and the cost of spending on goods and services had been 21%.

In the Department of Health, CoE spending had been maintained at a consistent level of 57%, compared to previous years. There was enormous pressure on the health personnel budget, however

In the Department of Education, 76% of the budget was on CoE, 10% on goods and services and a further 10% was also spent on other important issues. They had tried to keep the cost of personnel below 75%, as it was the national benchmark. However, there was concern that the CoE was exceeding the 75% mark, thus piling pressure on the goods and services budget.

There had been 94.4% spending on conditional grants. The biggest spenders here were the Department of Agriculture and Rural Development, and the Department of Recreation, Arts and Culture.

The budget for infrastructure was R11.6 billion, of which 97% had been spent. The Department of Infrastructure Development had introduced a system that ensured all requirements for asking for funds from the national government for certain projects were satisfied.

A lot of money would be saved if the health sector reduced wastage and used its resources more efficiently, instead of always trying to buy more equipment for hospitals and clinics. This involved an effort to promote financial management, which was one of the key areas of focus of the Executive Council political sub-committee.  Other areas that the sub-committee prioritizes are:

• human resource management -- making sure they do not overspend;
• health operations management --making sure there was no wastage of resources;
• information management -- trying to make sure they have current records and put them online;
• medico-legal -- doing proper inventory of cases, establishing who was dealing with each case, and paying if it was justified; and
• corporate governance -- ensuring proper governance of hospitals and clinics, which was linked to the medico-legal issue.

The Department was also currently negotiating payment plans in order to make sure it maintained as much financial resources as possible for the purpose of service delivery. This included, for example, paying off medical and other suppliers in the next two years, in order to ensure there was no longer accruals in these areas.

Because the Department was prioritizing health and social services, it meant that it was seeking other sources of funding for infrastructure, and there was an agency that was responsible for developing public-private partnerships (PPPs), doing feasibility studies and maintaining projects, in order to leverage infrastructure finance.

Regarding procurement, there was a Township Economy Revitalization strategy that regulated spending at enterprises in the townships. In the last financial year, R4.5 billion had been spent in procuring goods and services from township enterprises, amounting to 24.2% of the amount spent, broken up amongst various departments and entitles.

Ms Creecy emphasised that the Department of Health was not doing well because of the accruals, and they lacked the funds to pay invoices. The Department of Infrastructure Development was also not doing well. However, the Department of Health was paying 85% of its invoices within 30 days. 

The major intervention to try and deal with the issue if irregular expenditure and to make sure there was full compliance with supply chain management, was through the open tender process (OTP). Auditors had been appointed to make sure that all the supply chain regulations were complied with, and ensured that decisions on tenders were open to the public. This promoted transparency in order to build public confidence in the procurement process.  

She concluded her presentation by informing the Committee that they were in the process of taking a Bill before the Legislature to counter the problem of irregular expenditure. A draft had already been published for public comment and the intention was to submit the Bill to the Legislature in August 2018.

The Chairperson emphasised that the crucial issues were leadership and a hands-on approach, to restore public confidence.

Discussion

Mr O Sefako (ANC, North West) sought clarification on why there was a mushrooming of informal settlements in Gauteng, and what effect this was having on the province. He also wanted to know why there had been under-spending in some provincial departments, yet essential services were desperately needed by the people of the province.

Mr O Terblanche (DA, Western Cape) asked the provincial department in the Free Sate why there had been under-spending in the education sector, specifically on the compensation of employees. During the Committee’s visit to the Free State, they had discovered that there was medicine that was being returned and a lot being kept in storage that was not accounted for, yet the Department of Health had claimed that there was a shortage of medicine. This needed clarification, because it did not add up. Regarding Gauteng, he lamented the fact that a lot of people had been appointed by the provincial government without provision in the budget. He also needed to know why there had been overspending on medical supplies in the province.

Mr M Sibande (ANC) complained about poor planning in the departments and urged the treasury in particular to make sure it had proper plans for utilizing its budget in every financial year. He also asked for the finance department to explain the grants that were under-performing.

Gauteng’s response

Ms Creecy said that in the Department of Health, 2500 staff had been absorbed into the system, but the appropriate budget adjustments had not been made to cater for this. This was what had led to the accruals in this sector, and was what the Executive sub-committee on health was trying to resolve.

On the issue of overspending on medical supplies, the Department ensured that each hospital had to have a health centre for medical supplies, and must understand what their budget was, and it was up to the hospital management to control this. The head of the hospital had a budget and had to monitor what was being spent according to that budget, and control the budget in terms of supply. This system was working much better now, and was resolving the problem.

The Department was embarking on a process to determine whether there was validity in the claims brought against them, and ensuring they were all defended and the files were all in order.

They were concerned about the historical irregular spending in the provincial government, and a system had been put in place to tackle this.

The current plan on human settlements had not been approved until recently. This meant that the Department had been unable to spend in the first quarter. This trend had been seen in every year of her tenure as MEC of Finance. It was therefore important for the Committee to support the Department by piling pressure on the national government to approve these plans sooner.

Free State’s response

Mr Makgoe claimed that the major problem affecting the province was insufficiency of skilled personnel in the various departments. He also emphasised the importance of accountability in the issuance of grants. In the field of education, more teachers were needed, especially at the foundation level, to improve the teacher-student ratio. This was an area that must be looked at, and would require a budgetary increment. Budgeting for education had been a problem, for example in determining how much should be spent on bursaries. He also asked for the intake at medical schools to be increased in order to solve the challenge of insufficient doctors and medical personnel in the province.

Mr Mahlatsi added that the Department of Health was redirecting its funds towards maintenance and rehabilitating of facilities, and was also focusing on the “ideal clinics.”

Mr Rammabi said that National Treasury was having legal discussions with the National Department of Human Settlements, and they would be writing letters to all provinces to ask them to account for the money that they spent in every financial year, and to send the money that was not spent back to the National Treasury.

The meeting was adjourned.