Roads & Transport Provincial Conditional Grants & CapEx: 2nd Quarter 2006/07 spending

Meeting report

FINANCE SELECT COMMITTEE
28 November 2006
ROADS AND TRANSPORT CONDITIONAL GRANTS: SECOND QUARTER SPENDING 2006: BRIEFINGS BY PROVINCIAL DEPARTMENTS

Chairperson: Mr T Ralane (ANC)[Free State

Documents handed out:
North West Department of Transport, Roads and Community Safety
Free State Department of Transport, Roads and Public Works
Limpopo Department of Roads and Transport
Eastern Cape Department of Roads and Transport
Western Cape Department of Transport and Public Works
KwaZulu-Natal Department of Transport and Public Works

SUMMARY
Gauteng and KwaZulu-Natal departments did not present because their MECs or Heads of departments had not attended the meeting. There would be no underspending but overspending in the Free State where the entire budget would be spent by the end of December 2006. There were some budget games that provinces were playing. All provinces had something called the Development Fund. There were problems with the budget. Somebody was not doing his or her job accordingly in the provincial treasury if the department had no capacity to spend. The law clearly provided that treasury should look at the department's capacity to spend when allocating money. The Committee was concerned about unnecessary duplications. Monies were being transferred to municipalities despite the fact that such municipalities had their own money and were underspending. Municipalities also had the tendency of going to commercial banks for loans despite the underspending. The issue was how to streamline all the available money. Were there any conditions attached to the money transferred to municipalities?

Road Agency Limpopo (RAL) was a company and almost 70 to 75% of the department’s budget was transferred to it. The new MEC was looking at the possibility of incorporating the agency back to the department. The department had about 2000 employees who were expected to do routine road maintenance and RAL had about 43 employees yet it got a bigger share of the budget. The division of functions were not that clear because RAL was also involved in routine road maintenance activities like grass cutting. A question could be asked as to what the department’s employees were doing.

Members asked questions which included the following:
The extent to which the political decisions taken by executive committees in provinces superseded the Division of Revenue Act.
- How credible were the figures in slide 14: Spending outcomes and budget 06/07 presented by the Free State department? How were the figures aligned to the Strategic Plan of the MEC and budget speech made by MEC? To want extent was the department dealing with the projected overspending in the context of the adjustment appropriations?
- Whether the North West's the budget of the North West department represented a wish to address the poor state of roads. Was the province saying that it would rely more and more on conditional grants to address the problem that it had highlighted over the years?
He asked the other departments if they also made transfers to municipalities. What was the purpose of the transfer?
- What were RAL and the Limpopo Department doing? What were the core functions of the Limpopo department of roads? What was the reason for the existence of the department? What did the department want to do? Would it not be better to do away with it and simply transfer money to some institution like RAL? What was the percentage of the budget that remained within the department after the transfer to RAL?

MINUTES
Presentation by the North West Department of Transport, Roads and community Safety
Mr Nic van Staden (HOD) made the presentation. (See document attached). The 2006/07 infrastructure allocation was R424, 547 out of the total budget of R1, 526, 104. This translated into 28% of the budget. The expenditure was at 51% as at the end of September 2006. 60% was spent on the roads conditional grant and only 14% expenditure was recorded on the Expanded Public Works Programme (EPWP). There was no expenditure on weighbridges. The Department could not get proper contractors in terms of the electronic side of weighbridges. The department’s conditional grant amounted to R320 million and consisted of the Roads Infrastructure grant (R292 million) and the Expanded Public Works Programme Roads Projects (R28 million).

Presentation by the Free State Department of Transport, Roads and Public Works
Adv. Makhosini S Msibi (HOD) made the presentation. (See document attached). He said that the Department had spent 65% of the Education capital budget. The Department had spent 45% of its own capital budget. Expenditure was not that good up to the end of August 2006 but had since picked up from September. There would be no underspending but overspending. The entire budget for roads would have been spent by the end of December 2006.

Discussion
The Chairperson asked the following question to the Free State Department. How credible were the figures in slide 14: Spending outcomes and budget 06/07. How were the figures aligned to the Strategic Plan of the MEC and budget speech made by MEC? He said that he was raising the questions because of a submission made by the provincial treasury. Nine departments were projecting over spending and the highest projection was in this department. There was in fact a possibility of underspending because new priorities were not aligned with the Strategic Plan and the budget. The adjustment appropriations were done not so long ago. To want extent was the department dealing with the projected overspending in the context of the adjustment appropriations?

Mr Msibi replied that one of the key issues that the MEC had indicated was a focus on accelerated infrastructure delivery. This had a bearing on the speech that the MEC had made in the provincial legislature to the province. There was also the issue of transformation in the construction and property industries. The department was moving with speed because it was responding to issue raised by the MEC.

Mr B Mkhaliphi (ANC)[Mpumalanga] focussed on the North West department. The total budget on North West R425 million and R320 million came in the form of a conditional grant. Their own budget was less than 25% of the total budget. He compared the presentation to the appeals that the Committee had heard from the province, especially from the MEC of Agriculture about the state of the roads in the province. He asked if the province's own budget represented a wish to address the poor state of roads. Was the province saying that it would rely more and more on conditional grants to address the problem that it had highlighted over the years? He noted that there was additional money earmarked for roads and the province was also intending to have a roads agency.

Mr van Staden replied that Mr Mkhaliphi had raised valid comments about how much the province contributed. The Executive had decided that more and more money should go to the maintenance of infrastructure. An independent study had reveal that an amount of R1, 2 billion was required to maintain the road infrastructure in the province. The province had looked at the South African Roads Agency Limited and Roads Agency Limpopo as a way of getting more funding.

The Chairperson said that the R320 million was from the infrastructure grant. The construction of roads was prioritised by the Executive Committee in the province. It seemed that the province had budgeted very little in the equitable share in relation to roads. There should more engagement on this. The Department had received R320 million out of the R354 Provincial Infrastructure Grant and this meant that other departments or sectors had to share the remaining R34 million. This told a bad story especially if there was no appropriate budgeting in the equitable share.

Mr D Botha (ANC)[Limpopo] also focussed on the North West province. There was a very low spending on EPWP. The EPWP was a job creation programme. Special grant for job creation. The presentation indicated that there was an additional allocation of R20 million through savings. What were the savings? There were no savings in the budget. One could only speak of underspending or overspending. The presentation did not highlight any of the challenges that the department was experiencing. The Free State presentation had identified planning, co-ordination and monitoring as some of the challenges that the province was facing. Provinces knew how much they would get next year. Budgets were no longer a secret. Provinces had the tendency of attributing lack of spending to inadequate planning. Lack of skills had previously been cited as one of the reasons for low spending. Provinces should be able to plan in advance because they knew how much money they would get in the coming years.

Mr van Staden replied that the department had started with the programme in around June/July because this was a dry season. The province had experienced rains up to April. The expenditure would pick up over time. The presentation did not refer to challenges because it would have simply raised the same problems that had been discussed time and time over again. There was a shortage of engineers and technicians. The savings were related to a scholar transport programme that the Department had inherited from the Department of Education. Treasury's bookkeeping was a little bit awkward. They had given the Department a full allocation of R58 million for scholar transport for the financial year. The Department had inherited R15 million from the Department of Education and could use this amount to cover up for roads projects.

Mr Msibi agreed that the presentation listed challenges that the department was facing and said that what was important was to indicate measures put in place to address the challenges. Slide 22 of the presented highlighted the interventions and corrective measures put in place to deal with the challenges. Particular attention was given to planning procedures. Planning for the 2007/08 projects would kick-start in January and not April or May. Projects planned for 2008/09 had been brought forward in terms of planning.

The Chairperson asked if the Free State Department did not receive any money from the Provincial Infrastructure Grant (PIG).

Mr Msibi replied that slide 10 of the presentation gave an indication of what the distribution was all about. There was R183 million for PIG (17% of entire budget), R213 million for Own Infrastructure Grant (20%) and R31 million (3%) in the Own Revenue. The bulk of the money came from the equitable share (60%) and most of it accounted for roads infrastructure. Roads infrastructure accounted for 49% of the entire budget of the province.

The Chairperson asked where the own infrastructure grant (OIG) came from.

Mr Msibi replied that the money came from the provincial grant.

The Chairperson asked if it came from the PIG or equitable share.

Mr Msibi replied that there was a grant in the province that was composed of the revenue that the province had.

The Chairperson said that the budget was composed of three streams: equitable share, conditional grants and the own revenue. Where did the OIG come from?

Ms Msibi replied that the province had decided that there should be a special fund called OIG for the acceleration of the infrastructure. Money would then be allocated to various departments from the fund.

The Chairperson said that OIG came from the equitable share. Essentially, the department should have been given over R800 million from the equitable share. The OIG and the equitable share were from the same kitty. The OIG should have been given to the department earlier as part of the equitable share. The Committee would have to check which areas were compromised. There were some budget games that provinces were playing. All provinces had something called the Development Fund. There were problems with the budget. Somebody was not doing his or her job accordingly in the provincial treasury if the department had no capacity to spend. The law clearly provided that treasury should look at the department's capacity to spend when allocating money.

Mr Msibi replied that a cursory look at previous expenditure would show an underspending of R40 million. Treasury had said that the department would have to show beyond reasonable doubt that it could spend. The department had given an account of why it had the underspending. The underspending resulted as a result of problems with a road that was designed by a municipality and some consultants. The Department discovered that the design of the road was not in accordance with the law and the Roads Ordinance. The department had to re-do it.

Presentation by Limpopo Department of Roads and Transport
Ms M Makibelo (HOD) and Mr Maphiri (Acting CFO) attended the meeting. Mr Maphiri made the presentation. (See document attached). He said that there was a concern why there was Roads Agency Limpopo (RAL) as well as the Department. The Department had only spent R76 million in the second quarter out of the total amount transferred. There were problems in relations to rain and the adjudication of tenders. There was also a change in the board of directors of RAL. Most of the projects had just started.

Ms Makibelo said that another reason for underspending was the litigation that some of the contractors had against RAL. This had delayed the implementation of projects.

Presentation by Eastern Cape Roads and Transport
Dr M Annandale de Villiers made the presentation. (See document attached). She said that the expenditure was at 45% as at the end of September 2006. The province had experience adverse weather conditions. It could only work for 49 days in 60 days and this had an impact of cash flows. Some projects were delayed due to environmental and expropriation issues. About 60% of the budget was being spent of constructing new roads due to the backlogs on new roads in the eastern part of the province. There was lack of funding for road construction and maintenance. The Department had tried to comply with the provisions of the Public Finance Management Act and the process was sometimes too long.

Presentation by Western Cape Department of Transport and Public Works
Mr T Manyathi (HOD) made the presentation. (See document attached). He said that the province had winter rains and the take off was normally slow on the infrastructure side. The Department was slightly behind and expenditure on the PIG was at 24% and not the projected 34%. Expenditure on the capital side was at 35% and not the projected 44%. The main reasons for slow spending included the excessive amounts of rain received. The focus of the resources had been diverted to deal with floods following the rains. The bulk of the transfers came through in the October period in order to deal with the March spike.

Discussion
The Chairperson noted that the Western Cape department made transfers to municipalities. He asked the other departments if they also made transfers to municipalities. What was the purpose of the transfer?

Ms Annandale de Villiers replied that her department made transfers to municipalities. Ms Makibelo replied in the negative. Mr van Staden replied that his department also made transfers to municipalities and such transfers were mainly for fences. Gauteng did not make transfers.

The Chairperson asked were the departments got the money that they transferred to municipalities. The Eastern Cape had always pleaded poverty yet it was transferring money to municipalities.

Ms Annandale de Villiers replied that the transfers were made in relation to the integrated transport plan.

The Chairperson said that there was the Municipal Infrastructure Grant (MIG) on the level of municipalities and some municipalities were underspending on it. It looked like provinces were compromising some areas in their own jurisdictions. Was the money taken from the equitable share? There was a brand new grant (Public Transport System) which was allocated ate last year. It would address issues of public transport in the long term but the immediate focus was on the 2010 World Cup. Some of the municipalities that had been given part of the money had not yet spent a sent on it. The City of Cape Town was given R68 million and had not spent the money.

Mr Manyathi said that transfers were made in order to address the issue of proclaimed municipal main roads. The second reason was to address the issue of public transport.

The Chairperson said that municipalities had the equitable share and MIG. The departments should go back to the municipalities and see how they were spending on the MIG. They might be underspending on the grant. The issues raised by Mr Manyathi should have been addressed in the municipal budgets and integrated development plans.

Mr E Sogoni (ANC)[Gauteng] noted that the transfers made to municipalities came from the equitable share.

The Chairperson said that the equitable share was fluid and departments could do anything with it. The Committee was concerned about unnecessary duplications. Monies were being transferred to municipalities despite the fact that such municipalities had their own money and were underspending. Municipalities also had the tendency of going to commercial banks for loans despite the underspending. The issue was how to streamline all the available money. Were there any conditions attached to the money transferred to municipalities?

Mr Manyathi replied that there were agreements between the department and municipalities in relation to monitoring.

The Chairperson said that there should be further discussion on the transfers to municipalities.

Mr Botha noted that the Limpopo department had said that projects started late because of changes in the board of directors. What were RAL and the Department doing?

Ms Mchunu (IFP)[KwaZulu-Natal] said that the Eastern Cape had complained of lack of adequate funding for roads and transport. She asked if proper budgeting was done and the needs of the department were taken incorporated into the Integrated Development Plans.

Ms Annandale de Villiers replied that the overall framework was the provincial growth and development plan. It had been acknowledged that there were backlogs.

Mr Mkhaliphi asked what the core function of the Limpopo department of roads was. What was the reason for the existence of the department? It seemed that the department was saying that lack of skills implied that there should be outsourcing of functions. At one stage the department was trying to outsource traffic vehicles. What did the department want to do? Would it not be better to do away with it and simply transfer money to some institution like RAL? What was the percentage of the budget that remained within the department after the transfer to RAL? Scarce skills had to be rewarded. It had been said that RAL had been able to raise the salaries of skilled people that it employed and it was able to retain them. It was cleat that people would leave the department and join the agency in search for better salaries. He asked if the current situation was sustainable.

Ms Makibelo replied that a study had been conducted on the outsourcing of traffic vehicles and it was decided that the function would not be outsourced.

Mr Sogoni said that the Committee had undertaken to go to Limpopo so that it could understand what was happening there. The Committee had worked with the department for some time and had never been able to understand what was happening. This could explain the questions raised by Mr Mkhaliphi. Questions should be asked about the existence of RAL and not the department. The Committee was holding meetings with the departments so that they could assist each other in discharging their mandates. At one stage the MEC and the head of the department had different explanations as to the existence of the agency. The objective of the department was to ensure that there was efficient delivery. He wondered if all departments had copies of the Division of Revenue Act (DORA). It seemed like there was a lot of confusion at Treasury level. What guided the transfers of monies to municipalities? Gauteng had said that it did not make any transfers to municipalities but in the past municipalities could apply for funds from departments. The national department of transport should be in present during the next Committee meeting on provincial quarterly spending report. The Minister of Transport had made some money available during the adjustment period. Departments should be guided by law and not simply use their discretion.

Mr Botha said that the Committee should visit Limpopo provide to get more clarity on RAL. Was RAL the boss of the Department? There had been no clarity on the issue of the airport for the past two years. Who was in charge of the airport? About 70% of the department’s budget was being transferred to RAL for roads. The agency had its own staff that did not fall under the department and it determined its own salaries.

Ms Makibelo replied by saying that she was going to paint the picture as it was and that it was not a good picture. The unit of Roads was formed in public works four years ago. There was a realignment of functions and it was said that the unit should fall under transport. RAL was already in existence when the department of Roads and Transport was formed. RAL was a company and almost 70 to 75% of the department’s budget was transferred to it. She said that she had undertaken to have a closer look at the agency because some members had indicated that it appeared as if the department reported to the agency and not the other way round. It was unfortunate that the decision that gave rise to the present situation was taken at Cabinet level. The new MEC was looking at the possibility of incorporating the agency back to the department. The department had about 2000 employees who were expected to do routine road maintenance and RAL had about 43 employees yet it got a bigger share of the budget. The division of functions were not that clear because RAL was also involved in routine road maintenance activities like grass cutting. A question could be asked as to what the department’s employees were doing.

She said it was a struggle for the department to buy equipment for road maintenance because it would always be said that the bulk of the maintenance was done elsewhere. This was an internal provincial problem and she hoped that the Cabinet would be able to resolve it. The core function of the department was public transport and roads. The functions included everything that RAL was doing. She felt that the agency should simply be one of the chief directorates of the departments with the same salaries earned by other staff members of the department. The challenge was to attract and retain the necessary skills.

Ms Makibelo replied that the airport was a subsidiary of the department. Transfers were being made from the public transport side of the department to the airport. There was an underspending in relation to the transfers. The department did not transfer the money to the airport because it had not provided a compliance certificate. The money would be transferred now that the certificate had been provided.

The Chairperson asked if RAL and the airport could not sustain themselves.

Ms Makibelo replied that RAL was 100% dependent on the department since it did not raise funds. The airport was not yet self sustainable although it could raise funds. It appeared that it would still depend on the department for the next three to four years.

The Chairperson said that departments should provide a list of municipalities to which they transferred money. The Eastern Cape had indicated that there was a lack of funds but it was still making transfers. The departments should provide compelling reasons as to why it made the transfers. Municipalities could raise their own revenue. Were there compelling reasons for transferring monies to them? The Committee was not saying that the transfers should be stopped.

He said that departments would not go wrong should they follow DORA to the letter. He referred them to section 9 (3) (b) of the Act. Some of the departments had said that the percentage referred to the section was too little. Perhaps there should be a discussion on the percentage. The creation of agencies was creating problems because the agencies ended up raising salaries of their employees. They used the very same money that the department could have used for salaries to poach staff from the department. The engineers left the department for its own agency. To what extent did the political decisions taken by executive committees in province supersede DORA? He referred the Committee to section 9(3) (a). The Committee expected provinces to comply with the Act without any reservations.

Gauteng and KwaZulu-Natal departments did not present because their MECs or Heads of departments had not attended the meeting.

The meeting was adjourned.