Provincial Expenditure Third Quarter 2005/6: briefing by National Treasury and Provinces

NCOP Finance

15 January 2006
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Meeting report

FINANCE SELECT COMMITTEE

FINANCE SELECT COMMITTEE
16 January 2006
PROVINCIAL EXPENDITURE THIRD QUARTER 2005/6: BRIEFING BY NATIONAL TREASURY AND PROVINCES


Chairperson: Mr T Ralane (ANC) [Free State]

Documents handed out
National Treasury Presentation
North West Provincial Treasury Presentation
North West Provincial Treasury Submission
Limpopo Provincial Treasury Presentation
Mpumalanga Provincial Treasury Presentation
Northern Cape Provincial Treasury Presentation
Western Cape Provincial Treasury Presentation
Free State Provincial Treasury Presentation
Gauteng Provincial Treasury Presentation

SUMMARY
The National Treasury reported on provincial expenditure for the first eight months of the 2005/6 financial year and showed that provinces had spent 62,1% of their budgets on average. Expenditure per province was shown for the categories: current payments, transfers and subsidies and capital asset payments. Expenditure by provinces on the social services cluster of health, education and social development for the first eight months was analysed. Capital expenditure trends per province for education, health, public works, roads and transport and housing grants were analysed as well as for all categories of conditional grants.

The North West, Limpopo, Mpumalanga, Northern Cape and Western Cape Provincial Treasuries then presented detailed breakdowns of their expenditure per line department, and indicated the challenges and capacity constraints that resulted in under-expenditure on certain grants. The Chair expressed his dissatisfaction at the fact that the MECs of the Gauteng and Free State Treasuries had failed to attend.

The provincial treasuries were asked to explain the extent to which they had heeded Section 18 of the Public Finance Management Act which required them to take active steps to assist struggling provincial departments to spend their allocated budgets. The North West Treasury noted that its Agriculture department would not spend the full allocation in the current financial year because that department did not currently have a management structure and was thus, essentially, not in existence. It was asked if the Independent Development Trust would permanently be funding their departments of Health and Education with infrastructure development projects. The Provincial Treasuries were asked to indicate the provincial departments that were expected to report under- or over-expenditure in the current financial year, and the mechanisms in place to address the problem. The Committee took seriously the concern raised by the treasuries about Section 33(2) of the Division of Revenue Act. This section did not require provincial treasuries to be informed that certain funds would be withheld.


MINUTES
Introduction by Chairperson
The Chair stated that the purpose of the meeting was not to ask the MECs probing questions about the pertinent details of expenditure on each grant, as those questions were reserved for the Committee’s meeting with the relevant provincial departments themselves. The aim instead was to ascertain the steps that were being taken by the respective provincial treasuries to address the under- and over-expenditure by the departments, which included the possibility of conducting audits to identify and cure the mismanagement.

National Treasury Presentation
Mr Chris Adams, National Treasury: Intergovernmental Relations, provided a detailed breakdown of the aggregated expenditure per province as at end November 2005. He outlined the 2005/6 capital expenditure trends per province, for the education, health, public works, roads and transport and housing grants. The presentation also included details on expenditure and service delivery outcome of each conditional grant by grant type.

Hoe noted that provincial spending over the first eight months stood at R136 billion, or 62% of the total adjusted budget. The highest rate of spending was in Kwazulu-Natal at 63,2% and the Northern Cape and Mpumalange at 63,1%, with the lowest being the Free State and Gauteng at 60,8%. Provinces reported spending figures in the education sector of R46,7 billion or 64,6%, R294 billion in the health sector or 62,3% and R37,4 billion in the social development sector, at 62,8%. The provinces had spent a total of R6,6 billion on capital assets, which stood at 47,2% of the total R13,9 billion adjusted capital budgets.

North West Provincial Treasury Presentation
Ms Maureen Modiselle, North West Finance MEC, apologised formally to the Chairperson for not attending the previous meeting with the Committee, due to a breakdown in communication within her department. She stated that the recovery of backlogs in both the economic and social infrastructure has been a serious challenge for the country’s democratic government. In the first term of the democratic government funding for infrastructure was a huge challenge as evidenced by the gap between available finance and the need at that time. However, during the second term of government more funding has become available and, unfortunately, it has not been matched with the requisite capacity to implement, hence resulting in unspent funds on a yearly basis.

In the previous financial year underspending on conditional grants and infrastructure was significant, and required special intervention by government. That approach indeed assisted the situation in the North West province. She acknowledged that more needed to be done in some departments to ensure that allocated funds on conditional grants and infrastructure were indeed spent timeously and in a qualitative manner.

The North West province’s projection was that some of its provincial departments would spend their full budget for the current financial year, while others were unlikely to spend the full allocation, in particular the Department of Agriculture. She explained that her department was working very hard to ensure that slow-spending departments accelerated their spending in the last quarter. She stated that she was confident that, with the same level of commitment, the situation would improve further in the next financial year and beyond. She requested that the Chair allow her to explain the political impetus in that department.

The Chair agreed.

Ms Modiselle stated that, simply speaking, there was no Department of Agriculture in the North West provincial government. A new HOD was hired at the beginning of 2005, but has been on suspension since May or June 2005, together with six of her senior managers and a few other officials. There was thus essentially no Department of Agriculture and it was not possible for her to promise that the situation with regard to that department’s conditional grants would improve.

The Chair referred to Ms Modiselle’s last statement and drew the Committee’s attention to Section 18 of the Public Finance Management Act (PFMA), which placed both the responsibility and powers on the provincial treasury to assist the Agriculture Department. He stated that Section 18(2)(e) was of special importance. He encouraged the North West Provincial Treasury to ensure that that department addressed its problems.

Ms Modiselle replied that her department was indeed assisting the North West Department of Agriculture. It had deployed some of its "astute members" to that department.

Mr Phineas Tjie, North West Province Finance Head of Department (HOD), outlined the cumulative spending patterns for the health, education, local government, social development, transport and roads, sports, arts and culture and agriculture conditional grants. He highlighted the capacity challenges that faced the various provincial departments, and provided a breakdown of the conditional grant and infrastructure expenditure per provincial department.

The Chair reminded the North West Treasury that, during its 2005 appearance before this Committee, it pledged to establish a Provincial Budget Committee, yet the presentation it delivered today was completely silent on the matter.

Ms Modiselle replied that the Budget Oversight Committee had in fact been established and was fully operational.

The Chair ruled that the Committee would now hear all the submissions from the various provincial treasuries, after which questions would be posed and answered.

Limpopo Provincial Treasury Presentation
Dr Happy Joyce Mashamba, Limpopo Provincial Treasury MEC, indicated that her HOD would conduct the presentation.

Mr Morore Ben Mphahlele, Limpopo Provincial Treasury HOD, outlined the cumulative spending patterns for the health, education, housing, social development, provincial infrastructure grant (PIG), sport and agriculture conditional grants. He explained that the Department had managed to increase the conditional grant expenditure from R40,67 million (6,27%) in the first quarter to R106,3 million (22,1%) in the second quarter and R241 million (43,5%) in the third quarter.

The Chair stated that the Limpopo Province had a "massive problem in agriculture" yet it projected an 85% spend at the end of the financial year. It was an important matter that needed serious interrogation.

Mpumalanga Provincial Treasury Presentation

Ms Mmathulare Coleman, Mpumalanga Finance MEC, outlined the data trends in the allocations, transfers and actual expenditure of conditional grants and capital and infrastructure expenditure. She provided an assessment of the department’s capacity to monitor expenditure, the challenges to over- and under-expenditure as well as the mechanisms used to deal with those challenges.

Mr Sophney Tshukudu, Mpumalanga Economic Development and Planning HOD, provided the detailed breakdown of the expenditure per conditional grant. He noted that R3,328 billion (65%) of the total allocation of R5,087 billion had been spent by 31 December 2005.

Northern Cape Provincial Treasury Presentation

Mr Penene Pakes Dikgetsi, Northern Cape MEC for Finance and Economic Affairs, provided an overview of the Northern Cape Province expenditure outcomes as at 30 November 2005 by He explaining that the total conditional grant expenditure amounted to R3,3 billion or 63% of the adjusted budget, with projected net underspending at R42 million or 1% of the total adjusted budget. Capital expenditure amounted to R145,8 million or 42% of the total adjusted budget. The province had spent 60% of the adjusted conditional grant budget, but a total of 85% of the available funds as at 30 November 2005. He stated that his HOD would now present the detailed breakdown.

Mr Sello Mokoko, Northern Cape Provincial Treasury HOD, provided a detailed breakdown of the aggregate and actual conditional grant expenditure per provincial department, as well as the reasons for slow spending in some of the agriculture, education, health, housing and local government and social development grants.

The Chair informed the Committee that the Eastern Cape, Free State and Kwazulu-Natal Finance MECs had not submitted formal apologies to the Committee for not attending the meeting. He stated that he would be writing "a terrible letter to the respective MECs". Both the Gauteng and Free State Treasuries had sent representatives to the meeting, but unfortunately they were not accounting officers and could therefore not speak on behalf of their departments.

Discussion
The Chair asked Mr Mphahlele to explain the recommendations the Limpopo Treasury wished to place on the table.

Secondly, he asked Mr Mphahlele to elaborate on the 64 NGOs he referred to in the presentation, as well as the extent of the funds that would be allocated to them.

Dr Mashamba commended the Northern Cape Treasury for its user-friendly presentation, and suggested that it set the format that should be followed in future for such report-backs.

Mr D Botha (ANC) [Limpopo] noted that all the provincial Departments of Agriculture generally exhibited very low spending trends on their conditional grants. The North West Department of Agriculture was of special concern, as raised by Ms Modiselle..

Mr B Mkhaliphi (ANC) [Mpumalanga] noted that it was stated that public works and roads and transport would be split into two separate departments, which some provinces had already done. This separation was however not reflected on the slide in the National Treasury presentation entitled "Payments for capital assets – PW, R & T".

Secondly, he noted the delays in implementing projects, especially the issues and concerns raised by the Limpopo Treasury regarding the unavailability of building materials, and questioned whether the Infrastructure Delivery Improvement Programme (IDIP) could remedy the situation.

Furthermore, the Director-General of the Department of Public Works indicated to the Committee during its hearings on the Medium Term Budget Policy Statement (MTBPS) that, during the medium term, government would be engaging big business in supplying the required building materials for the projects government was interested in. He asked whether any progress had been made in this initiative.

Thirdly, Mr Mkhaliphi sought clarity on the "unavailability of the system" in the Mohlabela region, which resulted in the failure to spend R600 000..

Mr Z Kolweni (ANC) [North-West] congratulated the presenters on the good reports they had provided.

Mr E Sogoni (ANC) [Gauteng] stated that credit needed to be given to those provincial departments that had made progress.

Secondly, he stated that the serious problem across the provinces was their general failure to spend infrastructure allocations. Each province must be held to account for the failure to spend those funds, and the generalised defence of lack of capacity cannot be tolerated. The effect of the under-spending on the provincial equitable share must be clarified by the department concerned.

Thirdly, he sought clarity on the R1,1 billion the Limpopo province had spent in conditional grant infrastructure.

The Chair ruled that these questions, which dealt with a general lack of capacity within the specific provincial departments would not be addressed today, as the Committee would take the matter up with the specific provincial departments concerned. He stated that in future the presentations by the provincial Treasuries should instead indicate the specific capacity problems within their departments.

Mr Mkhaliphi sought clarity from the North West Provincial Treasury on the measures it had put in place to monitor under-expenditure in the province, as mentioned in the presentation.

The Chair stated that Section 18(a)(2)(g) stipulated clearly that the provincial treasury had powers to intervene. He stated that the provision clearly indicated that those were not legislative powers, but were instead monitoring and interventionary powers..

Mr Sogoni asked the provincial treasuries to explain the extent to which they were employing Section 18 of the PFMA to effectively monitor the expenditure patterns of their fellow provincial departments, as well as the extent to which they were attempting to assist those departments that were struggling.

Dr Mashamba responded to the questions by stating that her department was aware that budgets were essentially about facilitating service delivery, and for that reason it "intervened politically" to assist in unblocking the blockages. She stated that it was also realised that Private Public Partnerships (PPP) must be used to ensure optimal service delivery.

Ms Coleman replied that her department did in fact strive to implement Section 18, yet it could not be implemented by the provincial treasuries alone. The department could only recommend steps to be taken, but it was for the executive council as a whole to support the recommendations or not. She stated that her department addressed the matter during its November 2005 Lekgotla because it wanted provincial departments to very clearly indicate their problems with expenditure. All the under-expenditure was redirected to other departments, as required by the Division of Revenue Act (DORA).

Ms Modiselle responded that her department included communities in increasing awareness on the PFMA. However the interpretation of Section 18 was "foggy" and there were even debates about it in the provincial legislature. She assured the Committee that her department did in fact implement Section 18. For example, her department had since taken over the operations of the provincial department of agriculture’s parastatal called the Directorate of Entrepreneurial Development, which was tasked with assisting that department with infrastructure development etc.

The Chair encouraged the MECs to seriously consider the possible unintended consequences of Section 18, in order to guard against any misinterpretations of the provision. He also welcomed positive suggestions as to how the conditional grant framework could be improved to make them more implementable.

Mr Kolweni noted that the North West Provincial Treasury presentation indicated that both their provincial departments of Health and Education employed the Independent Development Trust (IDT) for some infrastructure development projects, which was in turn reluctant to make use of the North West Department of Public Works. He sought clarity on the arrangement as well as the "highest provincial level" involved.

Mr Tjie responded that three financial years ago his department experienced major problems in planning for infrastructure. It approached the South African Management Development Institute (SAMDI) and the IDT to assist departments to ensure proper planning for infrastructure. SAMDI then withdrew but the province retained the IDT. As a result the provincial Department of Education created a trust into which funds were deposited and from which external funding was sourced from various donors, so that the school-building programme could be accelerated. Unfortunately the trust had not yet been legalised due to a problem between the provincial Departments of Education and Public Works, even though it had built many classrooms, and thus no funds had been transferred to it. The North West Department of Education was thus currently using the skills and expertise of the IDT.

He stated that the "highest provincial level" referred to the MEC.

The Chair asked the Provincial Treasuries to explain whether there were specific departments in their province which they expected to report under- or over-expenditure in the current financial year. He sought clarity on the mechanisms the provincial treasuries had put in place to address the problem, as well as the possibility of financial dumping by those provincial departments..

Mr Dikgetsi replied that the executive council of the Northern Cape did put steps in place to improve the state of financial management broadly within the province, and to ensure that the quality of spending targeted the proper areas. During the previous financial year his department dealt successfully with the previous year’s problem with over-expenditure. He predicted marginal over- and under-expenditure in certain areas, and the problem with the Agriculture Department would be receiving urgent attention. He stated that his department was thus doing its level best to address expenditure problems, and it was continuously reporting both to the Premier and the executive council on those risk areas. .

The Chair asked whether the problem raised by the Committee during the previous year’s hearings regarding the financial management problems in the Northern Cape Roads and Public Works Department had since been resolved.

Mr Dikgetsi responded that his department did follow-up the matter with the Roads and Public Works Department as well as with the Premier, but it remained a challenge. He believed that it was an institutional problem within that department, and the Premier was currently addressing the problem together with the MEC for Public Works and the MEC for Health. The IDIP process was already underway in an attempt to unlock some of the problems, and he believed the initiative would be successful.

Dr Mashamba stated that a very gloomy picture was painted of the department at last year’s meeting with the Committee, but there were marked improvements in the operations of her department over the last financial year.

Western Cape Provincial Treasury Presentation
Dr Johan C Stegmann, Western Cape Finance HOD, tendered a formal apology of the Western Cape MEC for Finance, Economic Development and Tourism who was unable to attend the meeting. He outlined the conditional grant allocations and transfers for 2005/6, the conditional grant cash flow management process, the monitoring of transfers and expenditure per grant type, the process of review of the Division of Revenue Act and the way forward for the province.

Discussion
The Chair encouraged Ms D Robinson (DA) [Western Cape] to interact with the Western Cape Provincial Treasury as well as the Western Cape Provincial Legislature Standing Committee on Finance on the concern raised by the presentation regarding the lack of a formalised process within the DORA framework to properly monitor over- and under-expenditure. He stated that it was an interesting an important point, and it could be entertained when the Committee considered the DORA.

Ms Robinson indicated that she would indeed want to meet with Dr Stegmann to discuss some of the issues in greater detail. She informed the Committee that she had visited the Brooklyn Day Hospital in Cape Town and was absolutely appalled at the conditions of the hospital.

The Chair interrupted Ms Robinson and stated that such specific questions would not be entertained today, but would instead be postponed to the meeting with the individual provincial health departments themselves later this week. He stated that the question to be posed instead should be what steps were being taken by the provincial treasury, in collaboration with the relevant line department, to address that infrastructure problem.

Dr Stegmann replied that he wished to inform the Committee that his department engaged in a quarterly process with the provincial departments of Health and Education, which involved the maintenance of their current facilities There were also processes in place between the provincial department of Public Works and Health which dealt with the maintenance and alteration of its buildings.

Mr Sogoni asked whether Section 33(2) did not require provincial treasuries to be informed that funds would be withheld.

The Chair answered in the affirmative, and stated that that was the very reason for the concern raised by the presentation. It was an important point which must be considered. The provincial treasuries must be informed of the intention to withhold, as that would further strengthen the DORA process.

Dr Stegmann responded that he welcomed any discussions with the Committee on the amendments to the DORA. The department’s recommendations were based on practical experience with the Bill, and believed that the Bill must be very clear in its intention and must not hinder service delivery.

Mr Sogoni expressed concern with the "negligible quantities" in the grants, which was a perennial concern. Provincial departments held billions of Rands and even though a grant of R2 million might seem ‘negligible’ in comparison, R2 million was not an insignificant amount.

The Chair ruled that the matter would not be discussed today, but agreed that every cent was not insignificant.

Dr Stegmann replied that there were instances in which a small grant was justified, such as if it was used as a catalyst. Yet in such cases the grant must be phased out in a year or two because the administrative costs and the effort of maintaining the grant would eventually outweigh the benefits of the grant.

The Chair encouraged Dr Stegmann to consult with the provincial departments on the various capacity constraints they experience, as raised in the presentation, so that the Committee could be informed of the specific capacity constraints that plagued the departments.

Dr Stegmann responded that both the provincial department and National Treasury went through a restructuring process, and capacity constraints were constantly discussed at the budget Council Lekgotlas. The treasury departments across the board generally experience a shortage of staff in the key fields of chartered accountants, auditors and economists. More innovative means needed to be devised to encourage learners to study in those fields post Grade 12.

He stated that the key personnel for development infrastructure were the technical personnel, such as civil engineers, architects, quantity surveyors and artisans. His department had a human resource development plan in place to deal with scarce skills.

The Chair referred to the recommendation in the presentation that business plans be signed off on at an early stage, and questioned whether the real question in fact was not that proper financial planning had to be ensured within the department. He asked whether any under-expenditure was foreseen within the Western Cape Provincial Departments and, if so, which departments were expected to underspend. The Chair asked Dr Stegmann to indicate the steps his department was taking to work together with those provincial departments to prevent the underspending..

Dr Stegmann responded that if one uses the Comprehensive Agricultural Support Programme (CASP) as an example, although the amounts used each year were indicative in the budget, the perennial problem was that the numbers changed from year to year and such unpredictable inevitabilities could not be factored in at an early stage. Secondly, the conditions published in the DORA legislation also changed from year to year. Thirdly, the requirements for the business plans in the agriculture sector changed constantly.

Mr J Pillay, Western Cape Provincial Treasury: Asset Management Unit Head, added that National Treasury drove the Infrastructure Delivery Improvement Programme (IDIP) which was aimed at highlighting inefficiencies and capacity and planning constraints within provincial departments. It sought to address the bottlenecks in the system by doing away with the long and drawn-out procurement process, and aimed to align financial planning with the budget. The IDIP aimed to ensure that plans for infrastructure were produced and signed off on well in advance, and introduced capacitation plans to be provided.
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Dr Stegmann replied that at this stage of the cycle he only foresaw an under-expenditure in Health infrastructure. All the other provincial departments would be very close to their budget allocations.

Concluding remarks
The Chair thanked all the presenters for their valuable input, which would be taken into account during the upcoming DORA deliberations.

The meeting was adjourned.

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