Preliminary Provincial Expenditure at 31 March 2007: briefing by National Treasury & Provincial Treasuries

FINANCE SELECT COMMITTEE
9 May 2007
PRELIMINARY PROVINCIAL EXPENDITURE AT 31 MARCH 2007: BRIEFING BY THE NATIONAL TREASURY AND PROVINCIAL TREASURIES

Chairperson: Mr T S Ralane (ANC)

Documents handed out:
Presentation by the National Treasury
Presentation by the FFC (Financial and Fiscal Commission)
Presentation by the Limpopo Provincial Treasury
Presentation by the North West Provincial Treasury
Presentation by the Free State Provincial Treasury
Presentation by the Gauteng Provincial Treasury
Presentation by the Northern Cape Provincial Treasury: Part1, Part2 & Part3
Presentation by the Kwazulu Natal Provincial Treasury
Presentation by the Western Cape Provincial Treasury

Audio Recording of the Meeting

SUMMARY
The National Treasury reported on provincial expenditure for the 2006/07 financial year. The overall spending stood at R185.6 billion (98,7%) of their adjusted budget of R188 billion, which was R24.5 billion (15.2%) more than the audited outcome in 2006. The province with the highest rate of spending over that of the adjusted budget, was the Free State (103.6%), followed by the Northern Cape (101.3%) and Limpopo (100.5%). All other provinces underspent on the adjusted budget, with the North West (96.6%) and Western Cape (96.8%) provinces having the lowest level of spending, all contributing to a net underspending of almost R2.4 billion. In absolute terms, Kwazulu Natal spent the most money (R37 billion), followed by Gauteng (R34.7 billion) and the Eastern Cape (R26.8 billion) with the Northern Cape (R4.6 billion) spending the least.

The teams from the Provincial Treasuries of North West, Limpopo, Northern Cape, Western Cape, Gauteng and Kwazulu Natal 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. They all agreed with the observations made by National Treasury. Most of the under spending in provinces was due to poor project planning and selection. The health sector appeared to have consistent under spending across provinces, particularly with regard to the Hospital Revitalisation Grant and Forensic Pathology Services.

Members expressed concern about health services in the Western Cape province, in particular lack of information on patient number visits and cut backs in bed numbers. There was a suggestion that the Committee look more closely at the equitable shares being received by the provinces to ensure all funds were transferred. Other concerns related to the under spending, and the effects on the Millennium Development Goals and policy objectives, the rising costs of food that impacted on any food-related programmes, the severe congestion on roads, lack of spending of the provincial infrastructure grants, the issue of top slicing, and how this was reported on. It was noted that under spending and budget cut backs could cause instability in the budgeting process and future planning. There was a need for integrated planning. The Committee considered that national departments should brief the Committee on conditional grant allocations and capacity and that perhaps the Auditor General could assist in monitoring. Both the Division of Revenue Act and Public Finance Management Act must be closely observed.

MINUTES
Preliminary Provincial Expenditure Assessments as at 31 March: National Treasury Briefing
Ms Julinda Gantana, Acting Chief Director: Provincial Budget Analysis, National Treasury (NT), briefed the Committee on the preliminary provincial expenditure outcomes as at 31 March 2007. (see document attached), which was published in the Government Gazette on the 30 April 2007, and the press release issued by National Treasury on 3 May 2007. She gave an overview of the total spend. Ms Gantana highlighted the fact that the provinces spent R185.6 billion (98,7%) of their adjusted budget of R188 billion, which was R24.5 billion (15.2%) more than the audited outcome in 2006. Ms Gantana made clear that the 2005/06 figures were adjusted to exclude Social Assistance grants for comparable purposes.

The provinces with the highest rate of spending over that of the adjusted budget, were the Free State (103.6%), followed by the Northern Cape (101.3%) and Limpopo (100.5%). All other provinces under spent on the adjusted budget, with the North West (96.6%) and Western Cape (96.8%) provinces having the lowest level of spending, all contributing to a net under spending of almost R2.4 billion. In absolute terms, Kwazulu Natal spent the most money (R37 billion), followed by Gauteng (R34.7 billion) and the Eastern Cape (R26.8 billion) with the Northern Cape (R4.6 billion) spending the least.

With regard to spending in the social services sectors, education took the greatest share of the spend of R78.8 billion (98.3%), followed by health with a spend of R53.6 billion (100.6%) and Social Welfare Services with a spend of R5.2 billion (97.8%).

The greatest spending in the non-social services sectors was by Public Works, Roads and Transport,with a spend of R21.7 billion (101%), followed by Housing and Local Government with a spend of R9.8 billion (94.5%), Agriculture with a spend of R5.0 billion (97.5%) and Sports, Arts and Culture with a spend of R1.8 billion (96.8%).

Personnel and capital expenditure stood at R104.0 billion (98.7%) and R15.6 billion (97.3%) respectively.

Ms Gantana highlighted the fact that the preliminary under-expenditure in Education amounted to R1.4 billion, whilst Health reflected an over-expenditure of R328.2 million.

Financial and Fiscal Commission (FFC) Briefing
Ms Tanya Ajam, Commissioner, FFC, tabled the presentation by FFC on the delivery performance and spending. She highlighted the objective of the FFC Budget Analysis model, which was to measure and analyse fiscal performance of provincial government departments. This was done with a view to developing recommendations on improving capacity to raise performance. Performance was defined in respect of the following evaluative criteria: policy performance, spending performance and delivery performance. She further highlighted that the focus was on socio-economic rights as entrenched in Chapter 2 of the Constitution, including Education, Health, Welfare, Housing, Food, Security and Transport.

Ms Ajam highlighted the fact that overspending disrupted macro-economic stability, whilst under spending implied gaps in terms of either institutional coordination, systems development or skills and experience. With the exception of startups, she mentioned that budget growth in excess of 10% annual real growth usually exceeded capacity to supply.

Despite the common pattern of over-budgeting and under spending, reactive budget cut backs were not recommended as these could result in unstable and unpredictable funding patterns. It was further suggested that each programme be defined by and should report on actual and targeted beneficiaries; staff numbers and budgets by occupational skills level; and capital and current items. This would enable measurement of capacity, realistic target setting in respect of progressive realization, cost efficiency and equity between provinces.
 
The FFC further was concerned that the Department of Education (DoE) growth in the budget for the next three years was below average when compared with the average budget growth of the past three years. Regarding Health and Transport, Ms Ajam expressed confidence that both budgets accelerated above average over the next three years, with some reservation regarding certain specific grants in both sectors respectively. With regards to the funding of housing through the conditional grant, concern was expressed that the grant had been declining by 6.15% over the past three years, which was explained by the previously high rates of under spending, and it was highlighted that the current rate of spending would not meet the 2014 targets.

Limpopo Provincial Treasury Briefing
The Limpopo Provincial Treasury reported that the total conditional grants expenditure for the 2006/07 year amounted to R2.2 billion (101%) compared with R1.6 billion (84%) last year, which was a 17% increase in expenditure.

Sectoral increases in expenditure in the province were attributed to Education, Health, Housing and the Provincial Infrastructure Grant (PIG), whilst decreases were attributed to Sport and Agriculture.

The overspending (155%) on the Hospital Revitalisation Grant with the Health sector was explained by the reduction and reallocation of the budget to other provinces in terms of the Division of Revenue Act (DORA).

The Chairperson suggested that the Provincial Treasury take a closer look at payments made to municipalities, as well as assess the formula used, and requested that the province report back to him in two weeks time.

The Chairperson further expressed his concerns with the extent of overspending on the Hospital Revitalisation Programme, as well as his concerns regarding extreme overspending in some instances, and extreme under spending in other instances.

North West Provincial Treasury Briefing
The North West Provincial Treasury reported that there was a substantial improvement in the spending of infrastructure and conditional grant funds during the 2006/07 financial year, largely due to the commitment of Provincial Treasury (PT) and provincial departments to improve their service delivery and spending.

The province reported that total conditional grants expenditure was R1.8 billion, which was 96% of the budget spent – a 1% improvement from the previous financial period.

Under spending was the most significant in the Department of Economic Development and Tourism, with just over half (53%) of the budget spent. The reasons attributed for this under spending were to do with a lack of capacity within the department to manage and drive development projects, as well as issues to do with the fact that Mafikeng Industrial Development Zone (MIDZ) development projects are taking place on land that did not belong to MIDZ.

Regarding Health, relatively low spending was reported on Forensic Pathology Services and Hospital Revitalisation Programmes. These unspent funds had been committed to complete the Moses Kotane and Vryburg Hospitals, as well as transferring mortuaries from the SAPS to the provincial department.

Free State Provincial Treasury Briefing
The Free State Provincial Treasury reported a total expenditure of R12.3 billion, which was 103.6% of the budget allocated.

The departments that had overspent included Works, Roads and Transport (R363.6 million), Health (R105.6 million), Education (R11.9 million) and that of the Premier (R1.8 million).

With the health sector, the grant with the least of the budget spent (75%) included the Forensic Pathology Services Grant. Problems of overspend were explained by contractors and suppliers requiring monies to be paid in advance in order to purchase building materials.

The Chairperson expressed concern about the overspending in the province, and questioned how the deficit would be financed. The Chairperson further requested that a thorough investigation be conducted regarding those contractors who have been paid in advance, and that Treasury must produce a more complete report with such details.

Northern Cape Provincial Treasury Briefing
The Northern Cape Provincial Treasury reported that R836.5 billion was spent from conditional grants, which was 88% of the adjusted budget, resulting in an under spending of R115.8 million, with Health being the sector accounting for the most amount of under spending.

Within the Health sector, the programme with the greatest level of under spending was Forensic Pathology Services (44% of the budget spent), followed by the Hospital Revitalisation Programme (72% of the budget spent).

The poor spending of the Forensic Pathology Services grant was attributed to delays in the granting of permission by the National Department of Public Works (NDPW) to upgrade the SAPS to mortuaries, delays in the delivery of mortuary vehicles, delays in staff training, procurement of uniforms and the installation of IT equipment and systems.

Regarding the Hospital Revitalization Programme, the under spending was attributed to the slow progress of the Mental Health Hospital Project in Kimberley, as well as a request by the National Department of Health to suspend two projects in Upington and De Aar as a result of problems associated with the contractor, and the project management problems of the department in the province.

The province further reported that total expenditure for Capital Assets amounted to R513.3 million, which represented 97% of the adjusted budget. The largest sectoral spend from capital expenditure was in the Social Sector (R277.4 billion), followed by Health (R240.1 billion) and Education (R23.7 million).

Gauteng Provincial Treasury Briefing
The Gauteng Provincial Treasury reported a total spending of R34.7 billion. It was anticipated that R416.1 million of the budget would not be spent, and that the Department of Health was likely to overspend by R372 million due to budgetary pressures facing Central Hospitals. The province further reported that the Department of Education was to under spend by R647.9 million due to personnel issues such as incentives and the delayed appointment of educators.

With regards to conditional grants, a total of R8.662 billion was spent, which resulted in an under expenditure of R193 million (2.2%). The conditional grants with the lowest performance were reported as the Mass Sport Participation Grant (22% under expenditure) and Forensic Pathology Grant (22.3% under expenditure). The highest performance reported was for the Comprehensive HIV/AIDS Grant (102% expenditure) and the Integrated Housing and Human Development Grant (100.1% expenditure).

Total capital expenditure in the province amounted to R2.5 billion, which reflected an under expenditure of 3.5% of the total allocation.

Departments with the lowest capital expenditure included the Department of Community Safety (17.1% of the adjusted budget, which was explained by the lack of implementation of the Integrated Management Information System due to delays in the procurement process); the Office of the Premier (59% of the adjusted budget, which was explained by the upgrading of the Local Area Network) and finally, the Department of Economic Development, spending marginally over 40% of the adjusted budget.

There was over expenditure of capital by the Department of Education (12.6% for the acquisition of land for new schools), the Department of Social Development (109.6% above budget), whose over expenditure resulted from the transfer of R19 million to Department of Public Transport, Roads and Works (DPTRW) to construct social welfare centres and finally, the Legislature, with a spending of 4.4% above the budget, which was due to variations in the scope of the work for the Selbourne Hall Project.

Regarding some of the challenges in implementing Conditional Grants and Capital Budgets, the province highlighted the absence of integration in infrastructure and capital projects planning, the absence of infrastructure planning and budgeting skills and incorrect data in the Infrastructure Reporting Model as key challenges.

The province further reported that it had been fully capacitated to allow for closer monitoring and evaluation of expenditure, as well as rigorous analysis of expenditure on a quarterly basis with detailed feedback given to departments on a timely basis.

The Gauteng Treasury expressed its commitment to strive to link financial expenditure with non financial information, such as performance on service delivery.

Kwazulu Natal Provincial Treasury Briefing
The Kwazulu Natal (KZN) Treasury reported that 97.2% of the budget was spent on capital expenditure (R3.512 billion) and highlighted the fact that only the Department of Health recorded an under expenditure of capital, whilst all other departments recorded slight over expenditures. The low spending in the Department of Health was linked to the initial delays experienced in implementing revitalisation grant projects and delays in facilities upgrades, and 57 mortuary vehicles with respect to the Forensic Pathology Services grant (60.2% of the budget not spent).

With regards to conditional grants, an under expenditure of R269.9 million was reported, which represented 8% of the budget. Departments had submitted a request for roll over amounting to R238 million. The lowest spending was recorded by Agriculture, and to a lesser extent Health and Education.

The low spending in the agricultural sector was explained by a host of factors, including a possible incorrect expenditure allocation of the Comprehensive Agricultural Support Programme (CASP) against equitable share funding, the unforeseen procurement delays in the Land Care Grant as well as a lack of agreement reached with the National Department of Agriculture for the Agriculture Disaster Management grant, the funds of which had now been surrendered to the National department.

The low spending in the education sector was largely explained by the National School Nutrition Programme having an under expenditure of R61 million.

The province was pleased to report that it had a number of monitoring initiatives in place, including monthly and quarterly reporting systems, and highlighted the fact that reports shall be submitted to the National Treasury as of next financial period.

In conclusion, the province mentioned that whilst expenditure of capital and conditional grants had improved, it was necessary to prevent roll over and under spending in the departments highlighted above, and that improved planning was necessary in order to reduce the ‘hockey stick’ approach where expenditure as slow at the beginning of the financial year, but increased substantially at the end of the financial year.

The Chairperson expressed his concern that, 13 years into democracy, one of the largest gaps being experienced was the capacity to verify spend. He further expressed his concern that the National Treasury used a ‘blanket approach’ with regard to the Provincial Infrastructure Grant (PIG), highlighting the fact that it was withheld in a few provinces.

Western Cape Provincial Treasury Briefing
The Western Cape Treasury explained the under spending of conditional grants for Local Government and Housing by the problems associated with the N2 Gateway Project, including the decision to release funds only once actual delivery on site had taken place, delays in the finalisation of land availability agreements and amendments being made to policy.

Regarding the agricultural sector, emphasis was placed on the Agriculture Disaster Management Grant (23% underspending) as a challenge. The province reported that implementation plans were in the process of being finalised with the National Department of Agriculture, and that spending would commence in the 2007/08 financial period.

In the health sector, the greatest under spending was accounted for by the Forensic Pathology Services grant (under spending of 57.1%), which was explained by constraints in appointing staff for the Forensic Pathology Services Unit.

Regarding Infrastructure and Capital Expenditure under spending, the province identified some key challenges, including bottlenecks in the procurement process (which the Infrastructure Delivery Improvement Programme (IDIP) aimed to identify and overcome), inefficiencies in the link between planning, budgeting and implementation and skills shortages.

The province concluded that a number of monitoring systems were in place, and that it worked with other provincial departments through continuous engagements in a cooperative manner in order to jointly seek solutions, and prevent fiscal dumping. Apart from monthly and quarterly reporting systems, the PT reported that the CFO intergovernmental forum was also a monitoring mechanism for spending.

Discussion
Ms D Robinson (DA, Western Cape) expressed her concern about health services in the Western Cape province, highlighting the fact that Tygerberg Hospital and Groote Schuur Hospital should have more information about patient number visits and patient utilisation. She further added that the biggest problem in Groote Schuur was the cut back in bed numbers. She suggested that the committee needed a serious discussion on what was happening and must take a closer look at the equitable share provinces were receiving so as to ensure that funds were being transferred, or else the health system will collapse.

Mr B Mkhaliphi (ANC, Mpumulanga) expressed his overall concern with under spending, and the effect it had on any grant, especially with regard to the Millennium Development Goals (MDG) and other policy objectives of government.

Mr D Botha (ANC, Limpopo) expressed his concern about the food prices that were constantly rising, and the shortages, which may have an impact on the delivery of some of the programmes that related to food. Additionally, he was very concerned about the transport matter, and the fact that the roads could not cope with the amount of cars and traffic congestion.

Mr E Sogoni (ANC, Gauteng) highlighted the lack of spending of the PIG, particularly in Gauteng, as a concern. The FFC had made interesting observations, and the information, such as to what extent some of the grants had reached the target beneficiaries, would be very useful in the new financial year. He was aware of some of the problems being experienced in the nutrition programme that resulted in the under spending.

The Chairperson expressed concern with projections, and asked Treasury to explain what the problem was. He urged that each provincial treasury explain what the problems were in their own provinces. He further expressed concern around the issue of top slicing, and how this was reported on, and how special projects and development grants are being dealt with. He mentioned that it was well known that provinces were opposed to provincial grants, yet these continued.

The National Treasury explained that forecasting could sometimes be used as a tool for considering ability to spend the initial allocation. Cash flow management could be problematic.
 
Ms Ajam (FFC) noted that under spending and budget cut backs caused instability in the budget process and could compromise future planning. A further problem might relate to over budgeting. In general, provincial and district hospitals were not growing in accordance with average predictions. In regard to Mr Botha’s comment on transport, the FFC said that it would be most helpful if it could have figures for national and provincial, explaining that the Department appeared to be losing staff, which was of a great concern. In regard to Mr Sogoni’s comment, she urged the Committee and Treasuries that they needed to pay more attention to financial data, and to report on provincial expenditure. She added that under spending could lead to a cycle of cut backs.

Ms Ajam addressed the Chairperson’s concerns about provincial migration and top slicing, by saying there was a need to spend some time looking at the issue and the legality surrounding this. The Equitable share was top slice, and it may be necessary to seek a legal opinion. Conditional grants ensured that national priorities were proportionally allocated.

The Chairperson responded, in regard to the top slice in the equitable share, that anything in the context of equitable share could be compromised. He said, for example, some may go toward the provision of water and the provision of electricity. However, municipalities were under spending. He further added that the building of schools was delayed because the money was sitting somewhere else. He added that the Eastern Cape had a situation in the last financial year where they were hasty to spend their budget, and had built 52 clinics, but did not have a coordinated plan in place as there were no roads leading to the clinics, no electricity and no medical equipment in place.

Mr Sogoni said that he had appreciated the submissions made by the Provincial Treasuries, and in many instances, the frankness with which some Treasuries acknowledged the problems and challenges that they were facing. He also questioned to what extent Provincial Treasuries were following Section 18 of the PFMA, and wondered whether provincial politics had a role to play in the lack of delivery.

The Chairperson mentioned that in the next quarter, National Departments should be invited, especially regarding the conditional grant allocations, so that they could account to the Committee, and could give feedback on more specific issues to do with verification of capacity. He further added that such monitoring could not be the sole responsibility of the provincial treasuries, and that some responsibility should be delegated to the Auditor General.

The meeting was adjourned.