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FINANCE SELECT COMMITTEE
8 June 2005
NORTH WEST DEPARTMENT OF TRANSPORT AND ROADS: CONDITIONAL GRANT HEARINGS
Documents handed out:
PowerPoint presentation by National Treasury
PowerPoint presentation by North West Department of Transport and Roads
The Committee was briefed by the North West province on its conditional grant for roads. Provinces were expected to submit quarterly reports on the 22nd of the month following the end of the quarter. It was out of this report that Treasury aggregated and analysed the infrastructure spending. Treasury had always experienced problems with the quality of reports to the extent that it was at times ashamed to use the figures in public.
Treasury had realised that part of the problems faced by provinces was planning. It would, for the 2006/7 financial year, employ consultants who had been working on the infrastructure delivery improvement programme to help provinces with their planning so that there would be compliance with the Division of Revenue Act (DORA). This would also ensure that budgets were informed by what had been planned.
The Committee was disappointed with underspending by the province on roads. The North West Department did not agree that it was underspending. It had managed to spend over 90% of its budget in the last two financial years. The Department required approximately R1.4 billion to maintain the current road network. This excluded the funding for new developments, which required another R1 billion. It stressed the importance of maintaining the current road infrastructure.
The Department was still facing the following constraints: the capacity of contractors, contractors' inexperience with cash flow management and project management and contractor liquidation. Another problem was contracts awarded by the Tender Board to contractors who did not comply with the proposed Construction Industry Development Board (CIDB) requirements that would come into effect in November 2005.
National Treasury briefing
Treasury was represented by Mr I Lesang (Deputy Director). He said that the figures for the 2004/5 road programme budget and total infrastructure as a percentage of capital expenditure for North West were supposed to be zero. The Northern Cape had not reported on any of its infrastructure spending by 31 March 2005. With regard to budget by category, the percentages for upgrading for Limpopo and North West were 34% and 23% respectively. The percentages for both Limpopo and North West for upgrading of bridges or culverts should be 1%.
Mr Lesang said that provinces were expected to submit quarterly reports on the 22nd of the month following the end of the quarter. It was out of this report that Treasury aggregated and analysed the infrastructure spending. Treasury had always experienced problems with the quality of reports to the extent that it was at time ashamed to use the figures in public. Since the advent of the 2005 Division of Revenue Act (DORA), Treasury had made it clear to provinces that it would use whatever figures they had presented to it. The nation deserved to know. Treasury had highlighted the importance of reporting and also organised training for reporting in the manner required by DORA.
The Chairperson asked if the figures (321%) for the actual expenditure at the end of March 2005 for Gauteng were correct.
Mr Lesang agreed. The figures indicated massive overspending by Gauteng. Mpumalanga had overspent by 23%. Treasury had tried to question the overspending as it analysed the figures and engaged with provinces.
Mr E Sogoni (ANC) (Gauteng) asked if the Northern Cape had not provided any quarterly reports.
Mr Lesang replied that Treasury had consistently had problems with the province since the first quarter. Their engagements with the head of Treasury had indicated that they had sorted out the capacity problems that they had. It was expected that the Department would soon report on its overall spending for the financial year. As per the conditions of DORA, Treasury had not transferred any funds to them because that had not yet happened.
Limpopo and North West had budgets of 34% and 23% respectively for the upgrading of roads. On average, all provinces had budgeted 33% for the upgrading of roads. Routine maintenance in Limpopo and North West seemed to have taken a higher percentage. The maintenance figures tended to combine the rehabilitation and routine maintenance. Maintenance as a percentage of the total budget for Limpopo and North West stood at 66% and 71, 6% respectively and this was a combination of rehabilitation and routine maintenance. This was a heartening because Treasury had always been saying that provinces should move away from the tendency of providing new infrastructure and get into the mode of investing in rehabilitation of what they had. In the future there might be demand for the supply of new infrastructure caused by lack of rehabilitation of existing infrastructure.
Provinces were beginning to align themselves with the new thinking of how to provide infrastructure. Provinces had indicated that they would not be building any new roads in the last financial year. The Northern Cape had presented no figures on budget by type of structure. There was a reporting problem in the province. Limpopo had budgeted 82% for tarred roads, 17% for gravel roads and 1% for bridges and culverts. North West had budgeted 85% for tarred roads, 14% for gravel and 1% for bridges and culverts. The 82% for tarred roads in Limpopo was probably linked to rehabilitation and maintenance.
Limpopo had overspent by 139% on its budget for bridges and culverts and "one supposed that this could be justified". The North West had only spent 14% of their budget. The average spending of the infrastructure budget was 34.4% in Limpopo and 30.2% in North West. Capital spending had reflected a higher figure. It was possible to see that there was very low spending on infrastructure and therefore low delivery on infrastructure. The question was whether these were real figures or whether there were classification and reporting problems. Treasury had tended not to dwell on the problems because part of infrastructure delivery improvement was to start improving on reporting by provinces. Treasury had always encouraged provinces to be more accurate and even pedantic in reporting. There had been some improvements but one had to question the level of spending in North West and Limpopo. There might be situations where Departments would say that they had reported to provincial treasuries. Treasury’s argument was that what it had received from provincial treasuries what was presented by provincial Departments. It was important to solve the communication and reporting problems in provinces. This would avoid the presentation of an unfavourable picture in situations where a favourable one existed.
Treasury had realised that part of the problem was planning. It would, for the 2006/7 financial year, employ consultants who had been working on the infrastructure delivery improvement programme to help provinces with their planning so that there was compliance with DORA. This would also ensure that budgets were informed by what had been planned. In the past, one used to get a presentation of the budget followed by allocations for infrastructure. Infrastructure had been treated as a peripheral requirement and Treasury was trying to bring it to the fore.
North West Department briefing
The Department of Transport and Roads was represented by Mr P van Staden (Deputy Director-General), Mr K Odame-Takyi (CFO), Mr T Kotsoe (Chief Director: Transportation) and Mr K Jacobs (Director: Roads). Mr Van Staden made the presentation. (See document attached).
The Department managed a total road network of 23 698 km comprising of 7 140 km surfaced and 16 558 km gravel roads. According to the 2004 Road Network Management System report, the provincial roads had deteriorated over the past four years. It indicated that 22% of the surfaced roads and 25% of the gravel roads were in poor or very poor condition. The reason for the deterioration could mainly be ascribed to a lack of sufficient funds for maintenance and rehabilitation. National Treasury could argue that the province had a problem of underspending but the province could prove otherwise.
According to the Road Network Management System report, the Department required approximately R1.4 billion to maintain the current network. This excluded the funding for new developments, which required another R1 billion. The funds allocated to the Department for road maintenance and development, including the conditional grant, was R195.8 million for 2004/05 and R241.7 million for 2005/06. The first allocation for this year had only been received in mid-May and resulted in the 73.8% expenditure. New developments included the upgrading of gravel roads. According to engineers, the fair volume of traffic on a road was between 500 and 700 vehicles per day. It was more cost-effective to upgrade gravel roads to tarred roads. The province had about 980 kilometers of gravel roads that would be more effective and cheaper to maintain as paved roads.
The former Department of Roads and Public Works had spent 97.8% of its conditional grants in 2003/04. For 2004/05, it managed to spend 91.4% of the conditional grants. It had already spent R16.9 million of the R23 million that it had been allocated for 2005/06. The spending could have been more if the Department had received the allocation on time. It had only received the money in the middle of May 2005.
In January 2002, the Department of Transport, Roads and Public Works had overspent by R300 million. Treasury intervened and stopped payments to the Department. In March, the Premier decided to split the Department into a Transport wing and a Roads and Public Works wing. Systems were put in place in the Roads wing through which the Department started to work on a two/three years rolling plan. The plan allowed the Department to plan ahead for various projects. As the budget was known in advance, tenders would be awarded in advance so that work could start immediately at the beginning of the financial year.
The Department was still facing the following constraints: the capacity of contractors, contractors' inexperience with cash flow management and project management and contractor liquidation. Another problem was contract awards by the Tender Board to contractors who did not necessarily comply with the proposed Construction Industry Development Board (CIDB) requirements that would come into effect in November 2005. In the 2004/5 financial year, a forensic audit by the Provincial Tender Board had caused a delay of almost six months and a monitoring value of R100 million. Nothing was found to be irregular and tenders were eventually awarded as originally recommended by the Department. The capacity to recruit and retain personnel was still a big problem. The Department was forced to offer very high salaries which were not within the generally accepted conditions of the Public Service. The private sector was also quick to recruit the very few skilled personnel the Department had managed to attract. The Executive Council had stated that the Department should look at budgeting for filling posts or using the money to pay for consultants if it could not find the right people after a specified period of time.
Each tender had an amount of R95 000 built in to ensure technical and financial training to contractors. The Provincial Tender Board was abolished on 1 April 2005 and the Department was managing the procurement process internally.
For a number of years now, all conditional grants and earmarked funds had to be motivated with proper business plans. The Provincial Treasury would not release any funds if the business plans had not been evaluated and found to be viable and contributing to the development of the province. All plans for 2005/6 had been submitted and approved.
Mr Sogoni asked if the figures that were in the main Appropriation Bill represented conditional grants. It would be appreciated if the Committee were to get a short briefing on how provinces received conditional grants. There were a number of provinces that had overspent.
Mr Lesang replied that the infrastructure allocation was not only a conditional grant but a combination of the conditional grant and the provincial allocation. The Division of Revenue Act required provinces to report on both conditional grants and their total infrastructure allocations. Conditional grants gave guidelines in terms of providing infrastructure. In terms of the allocation of grants, more money went to rural or poorer provinces and less to richer provinces. The allocations were not based on the equitable share formula. Overspending was in some instances due to projects overrunning. Costs escalated tremendously if projects ran longer than what had been anticipated. Projects overran because of poor planning, monitoring and poor implementation.
The Chairperson said that Members should take into account the type of infrastructure that existed in provinces when interrogating the figures.
Mr Z Kolweni (ANC) (North West) asked if the Department was confident that it had submitted quality reports to Treasury. There was a dire need for a connecting road between Johannesburg and the Merafong area given the 2010 Soccer World Cup. It was important to know if the maintenance of roads would also address the existing backlogs. There were shortages of storm water drainage systems. He asked the Department to motivate why it should get more funds if it could not spend the little that it had. He noted that lack of capacity remained a major problem in the province. He asked if the Department had investigated the possibilities of issuing bursaries to students to address the problem.
Mr Van Staden could not comment on the quality of the reports that had been submitted to National Treasury. However, he felt that the Department had always submitted quality reports to the Provincial Treasury. The reports had always been submitted on time. The Department had bursaries but the problem was that big companies had the money to buy people out of their contracts.
Mr Kolweni asked the reasons from Treasury for the delayed transfer of money to the Department. Mr Van Staden could not offer any real answer. The delay could have been encountered in the process of National Treasury transferring the money to the Provincial Treasury or the Provincial Treasury transferring it to the Department. The Department could have spent the whole allocation had it arrived on time.
Ms Mchunu said that in rural areas it was very difficult for teachers and learners to go to schools and for ambulances to reach the clinics. He asked if the Department had looked at portions of roads that required special attention. For example, uphill portions of the roads that did not respond to ordinary grading, might require that it be tarred so that it could also be used on rainy days. Some portions of roads in rural areas were in mountainous areas and rocks usually protruded during the rainy season and made the roads unusable. Such areas might also need to be tarred and not necessarily surfaced.
Mr Van Staden replied that there was a very thin balance between maintenance and new development. The idea was to spend money on existing infrastructure in order to protect it. The value of the North West infrastructure (paved and gravel roads) was almost R15 billion. There was a need to protect the value but the province was sitting with a legacy. The over 16 000 kilometers of gravel roads were in the former Bophuthatswana area. The allocation for roads was problematic. Mpumalanga, the Eastern Cape, Limpopo and North West needed more money. The R1.4 billion that the North West had received was only enough for the maintenance of existing infrastructure and would not cover new developments or backlogs.
North West had mining companies and cement manufacturers who were doing tremendous damage to the roads. Most roads were built for light vehicles and not heavy trucks. New roads would also not last long given the loads that were being carried by heavy vehicles. He was aware that the national Department of Transport was talking about moving from "roads to rail" but this also required infrastructure. One could talk of resealing the roads and improving drainage systems, but the reality was that one had to do a lot of things with very little resources. There were gravel roads that presented a lot of problems during the rainy season. One could not keep on re-graveling such roads but had to surface them. The problem was that surfaced roads had to be resealed every seven years in order to maintain their quality. The value of the road network in the province had deteriorated from R23 billion to R15 billion.
Mr Jacobs added that there was a need for a holistic approach to funding that took into account weigh bridges and traffic officers. This would go a long way to ensuring success in the maintaining of the road network. The problem was that too many heavy vehicles were being overloaded and this had caused tremendous damage to the roads.
Mr Sogoni said that the Department had indicated that 22% of the surfaced roads and 25% of gravel roads were either in poor or very poor condition, but yet the Department had spent 78% of the funds allocated to roads. One would have expected the Department to have spent the whole budget or even overspent given the state of the roads. He asked why only 78% of the funds had been spent. The Department had said that it had already spent 73.8% of the allocation it had received for this year. He asked for more information on the expenditure taking into account that we were still in the first quarter of the financial year. He also asked if the Tender Board had already been phased out. Treasury had indicated that the Department had spent 39% at the end of the third quarter of 2004/05. The figure had risen to over 70%. He asked if the increased spending represented clear delivery of services or if the money had just been committed. Some provinces would indicate that they had spent so much, yet they were not able to quantity the expenditure. They would normally say that the funds had been committed but this did not always translate into actual service delivery.
Mr Van Staden replied that the 73.8% was not out of the budget for the whole year but from the R23 million that had been transferred so far. In theory, one should have spent 100% as the money was allocated. The Department was a good spender and received good value for money. The Tender Board existed until March 2005. All Departments were now using internal procurement committees. The Department now had an additional duty of adjudicating in the tender process.
Mr Lesang replied that the Tender Board should have been abolished a long time ago. This was to ensure compliance with the Public Finance Management Act (PFMA).
Mr E Sogoni (ANC) (Gauteng) said that it was important to have training for contractors. He said that the government had established the Extended Public Works Programme with certain conditions relating to training. He asked if the same conditions applied to the training referred to the Department.
The Chairperson said that the Department had stated that, as the budget was known in advance, tenders were awarded in advance. He asked if this was practical and how the Department dealt with issues of litigation and disputes if a tender had been awarded in advance. It was important to know how the Department had experienced underspending if everything was known in advance. The Department had a Capex Manager who did monthly reporting. This should enable the Department to pick up any underspending that occurred. He could therefore not understand the underspending.
He noted that each tender had an amount of R95 000 built in to ensure technical and financial training to contractors. He asked how this figure had been arrived at and whether it was market related. He asked if the process of submitting business plans to the Premier and Provincial Treasury was done simultaneously. The question was raised in order to see where bottlenecks had been occurring.
Mr Van Staden replied it was less important who received a report first, but teamwork was most important. With respect to underspending, he reminded Members of the merger of Roads and Transport that took place last year. R100 million could not be spent as a result of the investigations by the Tender Board. Big contractors had a tendency of claiming for services very late in the year.
He said that the awarding of tenders in advance was possible because the Department already knew how much it was going to receive over a three-year period. The normal tendering process still had to be followed. Consultants and construction companies knew that the money was available and that things might change. They did not go all the way and overcommit themselves.
The R95 000 was fixed for any tender. R15 000 was for the social programme that the Department might want to establish for the contractor and R80 000 was for accredited training. It was not correct to conclude that R95 000 would be spent on each contract because the training requirements of contractors differed.
Mr Kotsoe replied that the Department would appoint consultants to do scoping and related activities. The appointment of constructors would normally take place around March and April. The Department would normally know by the end of November how much it would cost to maintain or construct roads because the consultants would have already finished their jobs.
Mr Odame-Takyi could not understand the differences in some of the figures presented by the National Treasury and those presented by the Department. He would investigate the matter.
The Chairperson said that roads grew the economy. He asked what the implications of underspending on roads were. There had been farmers who wanted to build roads themselves because government was not interested in building them. The Department could not plead poverty because money had been allocated to it. The lack of underspending was gross negligence on the part of the Department. He asked if underspending was a result of a lack of capacity or if it was a performance problem. He asked which programmes had been compromised due to lack of spending and what the implications were. He wondered why the Department wanted an extra R1.4 billion if it could not spend its current budget.
Mr van Staden replied that the Department was not underspending. It had spent 97, 84% of its 2003/04 budget and had spent 91.4% of its 2004/05 allocation. Some projects were delayed due to the merger of the Departments and the investigation by the Tender Board. The Department was not saying that it would be able to spend the R1.4 billion that was needed. He admitted that there were gaps in terms of capacity in the province but maintained that the Department was doing very well. The expenditure figures would have been higher if it were not for the problems that the Department encountered during the course of the year. His performance contract stipulated that he could not underspend by more than 10%. He had been in the job for close to four years and this meant that his Department was spending over 90% every year.
Mr Lesang said that the Department was reporting on conditional grants only. Treasury had focussed on the whole of the infrastructure grant and provincial allocation. The figures put forward by Treasury were based on the total infrastructure budget.
The Chairperson instructed Treasury to investigate how Gauteng was able to spend a lot of money within a short period of time. The reliability of data should be adequately addressed. It seemed that there were provincial treasuries who wanted to be seen to be performing whereas they were not. He cited an example of the North West Department that had indicated that it was spending its allocation reasonably well. The national Department of Housing had accused the Department of being "in the intensive care unit".
Mr Sogoni said that Treasury should clean up the mess caused by systems. Various Departments had complained that the Basic Accounting System caused some of the problems.
The meeting was adjourned.
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