Adjustments Appropriation Bill [B 41-2007]: briefing and adoption

FINANCE PORTFOLIO COMMITTEE
7 November 2007
ADJUSTMENTS APPROPRIATION BILL: BRIEFING & ADOPTION

Chairperson: Mr N Nene (ANC)

Documents handed out:
Adjustments Appropriation Bill [B 41-2007]
National Treasury Presentation on the Adjustments Appropriation Bill
Department of Public Enterprises Presentation on the Adjustments Appropriation Bill
Department of Correctional Services Presentation on the Adjustments Appropriation Bill

Audio recording of meeting [Part 1] [Part 2]

SUMMARY
The Departments of Correctional Services and Public Enterprises and National Treasury briefed the Committee on the adjustments in the Adjustments Appropriation Bill.

National Treasury indicated that the amount available for spending in 2006/07 was R 476.2 billion of which 1.3% or R 6 billion was not spent. R 1.5 billion was not transferred to provinces due to capacity constraints or non-compliance with the Division of Revenue Act. It was indicated that departments usually spend slightly less than half in the first six months so that it was too early to indicate if there would be a rise in expenditure during March 2008, the final month of the financial year.

The Correctional Services Department briefed the Committee on their required adjustments. An amount of R 512.9 million was requested for rollover to be utilised for the construction of the new Kimberley Correctional Centre project. The department’s capital budget was reduced by R 1.1 billion from 2007/08 over the MTEF period due to delays in commencing construction of the new correctional centres.

The Public Enterprises Department briefed the Committee on their input to the Adjustment Appropriation Bill. An amount of R 744 400 000 was required to cover the One Time Labour Restructuring costs before 30 November 2007. SAA had experienced significant losses in recent years with only one year of modest profitability. It had been agreed that a fundamental restructuring of SAA was required. The plan was to simplify and right-size the business as well as to re-skill and incentivise SAA’s employees. It was envisaged that the airline would return to profitability within 18 months. Restructuring revolved around group-wide operational, revenue improvement and cost-cutting initiatives to achieve a Profit Before Tax margin of 7.5 % over 12 to 18 months. 

Questions from the Committee for Correctional Services focused on progress with the construction of the Kimberley prison, skills shortages and a lack of project management experience and the shifting of funds. The Committee found the figures supplied by Correctional Services confusing.

Questions to the Public Enterprises Department focused on the cost of grounding the 74 aircrafts, restructuring costs, SAA’s turnaround strategy, non-compliance in the Auditor General’s audit report, government guaranteed loans to SAA, SAA’s losses and Mango.

MINUTES
Mr Kuben Naidoo (Deputy Director General: Budget Office) and Dr Kay Brown (Chief Director: Budget Office) of National Treasury gave a presentation on the 2007 Adjustments Appropriation.

The amount available for spending in 2006/07 was R 476.2 billion of which 1.3% or R 6 billion was not spent. R 1.5 billion was not transferred to provinces due to capacity constraints or non-compliance with DoRA. Departments usually spend slightly less than half in the first six months so it was too early to indicate if there would be a rise in expenditure during March 2008.

The Public Finance Management Act (PFMA) stated that the adjustments budget might provide for unforeseeable events affecting fiscal targets, unforeseeable and unavoidable expenditure if recommended by a parliamentary committee and the rollover of unspent funds from the previous financial year. Unforeseeable and unavoidable expenditure was defined as expenditure that was not foreseen at the time of the tabling of the Budget and was now deemed unavoidable. An amount of R 754 million of unforeseeable and unavoidable expenditure was related to natural disasters and animal disease. Unforeseeable expenditure included an amount of R 100 million on the national Department of Agriculture’s vote for compensation to farmers for the culling of pigs to curb the spread of classic swine fever. A breakdown was given by National Treasury on unforeseeable and unavoidable expenditure per government department.

In terms of Treasury regulations, funds appropriated but not spent in the previous financial year rolled over to a subsequent year subject to approval by Treasury. Unspent funds on payments for capital assets may only be rolled over to finalise projects or asset acquisitions still in progress. Funds may not be rolled over for more than one financial year unless approved in advance by National Treasury. The National Treasury representative gave a breakdown of rollovers per department.

The revised budget framework made provision for about R 5.2 billion in under spending at a national level, in addition to the R 3 billion contingency reserve set aside in the budget. The total estimated level of spending rose by R 8.5 billion, from a budgeted R 533.9 billion to a revised R 542.4 billion.

Mr Tebogo Motseki (Chief Deputy Commissioner: Correctional Services) briefed the Committee on their adjustment estimates. An amount of R 512.9 million was requested for rollover to be utilised for the construction of the new Kimberley Correctional Centre project. The department’s capital budget was reduced by R 1.1 billion from 2007/08 over the MTEF period due to delays in commencing construction of the new correctional centres. Construction of the Kimberley Correctional Centre commenced in November 2006. Correctional Services indicated that they agreed with Treasury that the best way to fund the shortfall for this project in 2007/08 would be to roll-over the savings from the 2006/07 financial year. Funds were shifted from the Programmes Corrections, Care, Development and Facilities to finance filled posts in Programmes Administration, Security and Social Reintegration under the item Compensation of Employees. An amount of R 1.2 million (revenue collected for hiring of offender labour) was allocated back to the department as incremental income under a transfer payment.

Dr Joachim Vermooten (Acting Deputy Director General) of the Department of Public Enterprises and Mr Clive Else (Acting Chief Financial Officer of South African Airways) briefed the Committee on their adjustment appropriation. An amount of R 744 400 000 was required to cover the One Time Labour Restructing costs before 30 November 2007.

The mandate of South African Airways (SAA) was to be an African airline with a global reach. Internationally, SAA would focus on profitable routes into each of the major continents, linking to key cities and their airports. Regionally, SAA would focus on its profitable African network and increase routes where possible. Domestically, SAA would focus on the heavily traded routes in particular the “Golden Triangle” which consisted of Johannesburg, Cape Town and Durban. SAA has experienced significant losses in recent years with only one year of modest profitability. It was agreed that a fundamental restructuring of SAA was required. The plan was to simplify and right size the business as well as to reskill and incentivise SAA’s employees. It was envisaged that the airline would return to profitability within 18 months. Restructuring revolved around group-wide operational, revenue improvement and cost-cutting initiatives to achieve a Profit Before Tax margin of 7.5 % over 12 to 18 months. 

Once off labour restructuring costs were planned for all employee levels within SAA. Company wide concessions would require extensive negotiations with Unions that would determine the exact amount of liability. All SAA staff has been served with a Section 189 letter and the 60 days negotiation period as per the Act ended on 5 November 2007. It was estimated that if 2 232 retrenchments were required it would result in an estimated Voluntary Severance Package liability of R 704 million. The exact total retrenchment and severance pay liability would only be determinable subsequent to the finalisation of all concession negotiations.

Monitoring by both National Treasury and the Department of Public Enterprises (DPE) was done to ensure that the funds in Vote 30 (5) were properly applied. Inter departmental co-ordination and monthly restructuring meetings took place between Treasury and DPE.  

Discussion
Ms Sibili (ANC) said that there was mention of four new generation centres that the department intended to built. She wanted feedback on progress with the construction of the Kimberley centre. Ms Mokoto also wanted a breakdown of the virements to the amount of R 150 million that was shifted to other projects.

Mr Motseki said that an independent quantity surveyor was appointed. The Correctional Services received late feedback from the quantity surveyor. The quantity surveyor indicated that tenders were in line with market prices. Contractors had to be brought in from other areas, which increased costs. It was indicated that a R 170 million would not be spent in this financial year.

Mr K A Moloto (ANC) referred to the amount of R 887 million mentioned by Correctional Services and wanted to know what the amount was that was budgeted for Kimberley. He also wanted to know how much was spent so far.

Mr Moloto asked the Correctional Services representatives to be more specific with regards to the capacity in Correctional Services to manage projects given that they continuously did not meet intended completion dates. He referred to the report of Correctional Services, which lacked specific detail.

Mr Motseki said that delays were experienced during the Kimberley construction. Delays were questioned by Correctional Services.

Mr B Mguni (ANC) wanted to know what caused delays given that priority projects were delayed for 3 years. 

Mr S Marais (DA) referred to the Correctional Service budgets for 2006/07 and 2007/08 and said that there seemed to be a reoccurrence of things that happened in the past. Capacity and skills shortages seemed to be a problem. Mr Marais asked for feedback on skills shortages within management levels within Correctional Services.

Mr Marais also wanted to know what Correctional Services position was with regards to vacancy levels. He said that there seemed to be a huge impact related to shifts in votes, which indicate a lack of proper planning given continuous changes.

Mr Marais also wanted feedback on staff remuneration and asked on what level were amounts required and being spent. He wanted to know if Correctional Services spent more on junior or managerial levels.

Mr D Bloem (ANC, Portfolio Committee on Correctional Services Chairperson) wanted clarity given that Correctional Services said that they did not have funds to built the prisons. He stated that since 2002 money was approved for the building of 4 prisons.

Mr Motseki said the Correctional Services decided to build 4 prisons in 2004. It was estimated that one prison would cost R 250 million to built one prison. Tenders were received and the lowest tender was R 380 million and the highest tender was R 560 million. Correctional Services linked in with Treasury. A boom experienced by the construction industry was the reason for high tenders.

Mr Nene asked if the other 3 prisons were built or what happened to them.
 
Mr Motseki said that in terms of regulation 16 of the Public Finance Management Act it was indicated that a feasibility study had to be conducted. Feasibility study was carried out and the Department received a report in 2006 and a decision was taken in January 2007. The Department then decided to proceed with building the Kimberley prison because their budget would only allow them to built one prison.

Mr Nene said that the Correctional Services figures did not add up and he asked for more information on rollovers.

Mr Pieter Leslie (Correctional Services) said that he did not have the figures but would follow it up and provide figures to the Committee. Treasury reduced the Department’s budget by R 1 billion which left no funding to complete the Kimberley project. The Department was advised to use their savings and roll it over and utilise it for the Kimberley project.

Mr Nene referred to the shifting of funds within Correctional Services to go for the Kimberley prison. He wanted the exact amount from Correctional Services.

Mr Leslie said that the total cost was R 818 million for Kimberley.

Mr Moloto said that there seemed to be a lot of creative accounting by the Correctional Services given their shifting of funds. He did not understand the motive for that.

Mr Leslie said that regarding the virements that the department came to a financial year-end there was savings, which was utilised for the Kimberley project.

Ms J Fubbs (ANC) said that figures increased from R 518 million to R 818 million during the presentation of Correctional Services.

Mr Nene wanted more information on the shifting of money from Security to Care.

Mr Motseki said that when the decision was taken to reissue Kimberley the successful bidder’s tender was R 662 million.

Mr Marais wanted to establish who was responsible for the confusion. He asked if it was the Department of Public Works or Correctional Services who were responsible. Mr Marais said that Public Works has the expertise and asked why Correctional Services appointed quantity surveyors.

Mr Motseki said that Correctional Services has the budget and therefore they took decisions. The responsibility for project management and execution was with Public Works. He said that Correctional Service was the responsible department and that they were accountable to National Treasury. Mr Motseki said that Correctional Services had the necessary skills to do what they were required to do. Correctional Services had regular discussions with Public Works regarding projects.

Mr Maloto suggested that Correctional Services, Public Works and Treasury should get together and resolve problems with regards to the projects.

Ms Fubbs was worried that the Kimberley project has been around for 5 years. She wanted clarification on the starting dates and asked how long was it going to take to finalise the construction of the prison. Prices would escalate if contruction took longer.

Mr M Mbili asked when the Kimberley prison would be completed given escalation costs. He wanted to know what the timeframes were for completion.

Mr Motseki said that it was projected that Kimberley would be completed in November 2008. As a result of delays, the revised timeframes was 2009.

The Correctional Service representative explained why money was shifted from different funds.

Mr Moloto said that the shifting of funds raised a lot of issues.

Mr Nene said that a meeting between Correctional Services, Treasury and Public Works needed to take place soon. He said that there were a lot of unanswered questions raised by the Correctional Services presentations.

Mr Maloto wanted to know how much it would cost to ground the 747 aircrafts.

Mr Else said that the 747 were outdated and that SAA lost money every time that the 747 were used. They were not technology or fuel-efficient.

Mr Maloto asked what the cost would be of the SAA restructuring for the state.

Mr Else said that capital reserves were depleted given the losses it suffered. An amount of R 1.3 billion restored the equity base of the company. This was done by raising funds within the commercial market through using a government guarantee. SAA intended to repay their loan and understood their responsibility to honour their financial obligations.

Mr Maloto said that there were 2 major costs to SAA, which was labour, and operating leases. He wanted more information on the increases of operating leases.

Mr Else said that all the major airlines around the world were caught by costs that rose faster than revenues. There was not enough of a focus on being lean and mean. Companies could purchase aircraft or lease them. SAA was not in a position to pay cash for buying aircrafts and most international airlines leased their crafts from other companies. Cost of leasing aircraft has grown but SAA’s revenue was currently covering its costs. Mr Else said that SAA was reskilling its revenue department to ensure that they sell the appropriate mix of seats on flights.

Mr Mguni wanted clarification on the SAA turnaround strategy, which involved reskilling and rightsizing. He indicated that there were previous turnaround strategies, which resulted in losses.

Mr Else said that their current consultant, Seabree, was on the ground with SAA helping them with the turnaround strategy. Seabree assisted SAA in a developing a cash conservation office
which turned around the cash position of SAA within the last 6 months. SAA’s current management were committed to make fundamental changes to SAA. SAA was becoming more focused and was moving into being a full serviced legacy networked airline. Its intention was to move away from being a low cost airline.

Mr Mguni referred to Mango where an R 100 million rand was invested. He wanted to know how long it would take for Mango to break even or to become profitable.

Mr Else said that Mango’s costs were on par with companies like Ryan Air in Europe. Mangos were complying with the Competition Act and did lose money in the short term. It was expected that Mangos would be profitable within 3 years.

Mr Mguni referred to page 19 of the Public Enterprises report where it was indicated that the PFMA was onerous. He wanted clarity on this statement given that the PFMA guided government department’s spending.

Mr Else said that non-compliance came from the 2005/ 06 financial year and that during the current financial year there were no instances of non-compliance. Mr Else said that the PFMA was onerous because even the smallest non-compliance rendered SAA in contravention of the PFMA. He said that a chief risk officer was appointed and a new procurement system was established to ensure that there was compliance with the PFMA.
 
Ms Sibili referred to the Director’s report on page 19 of the Public Enterprises report where government guaranteed loans provided to SAA. She said that she has problems if SAA was allowed to borrow money and later decide not to pay the money back.

Mr Marais asked who the contributors were to SAA’s loss situation. He asked if losses and returns on investments on loss were identified. He asked what the core business should be of SAA, what they should concentrate on, and what should be cut.

Mr Else said that there were many contributors to losses. Income statements were analysed and benchmarks for all operating costs were introduced. It was found that SAA paid too much for services. Excessive ground handling was identified in the USA and costs were renegotiated. Labour costs were reduced and the re-engineering of the business was introduced.

Mr Marais also said that the timeframes for the SAA turnaround was very short and he wanted to know if they were realistic timeframes. He was concerned that with such a severe program that staff expertise would be lost.

Mr Else said SAA endeavoured to withold packages from people who were essential to the company. They were committed to retain the necessary skills in SAA. Mr Else said that it was necessary to restructure faster rather than slower. SAA was cautiously optimistic about its future. Its processes were being re-engineered to ensure a profitable company.

Mr Nene asked for clarification on SAA’s view that they complied with the PFMA within their Annual Report.

Mr Else said that none of the non-compliance items related to the current financial year but the previous financial years.

Mr Mbili asked for clarification on the role of SAA in regional integration. He made the example that in the case of South Africa identifying the Democratic Republic of Congo (DRC) as a regional partner. He asked what would happen if SAA considered the DRC as a non-profitable route.

Mr Vermoeten said that regional economic integration was still slow. There were a number of countries where additional flights were necessary but the Department of Transport did not manage to get rights for having for flights. An integrated aviation centre was not achieved yet. DRC was identified as a profitable route and there were flights to Kinshasa.

Mr Mbili wanted to know what would happen if there were a deadlock with the unions during the negotiations if people did not wanted to take the voluntary severance packages.

Mr Else said negotiations with unions were successful and that there was not a deadlock. SAA would prefer not to have a strike.

Mr Moloto referred to the management of interest rates on page 78 of the SAA Annual Report where it was indicated that the SAA portfolio was highly sensitive to USA interest rates. He wanted to know how much of the cash regime was fixed and how much was floating.

Mr Else said that he would provide the figures at the end of the meeting.

M Moloto asked if SAA would do away with their credit card venture given that they want to get rid of non-core assets.

Mr Else said that the Voyager venture was significantly profitable and that SAA would like to continue with it.

Mr Moloto referred to the total amount of R 3.2 billion asked for recapitalisation. He wanted to know if it would be the last time that SAA would come back for money. Mr Moloto said that state owned enterprises have a tendency to keep on coming back for more money.

Mr Else said that the R 3.2 million was for the bulk of restructuring. Estimates were that for Voyager to continue a further R 2 billion would be required during the next financial year.

Mr Mguni said that he detected a laissez fair attitude given that SAA were bailed out each time by Treasury. He wanted SAA’s comment on his view.

Mr Else said that the SAA Board of Directors and senior management were committed to ensuring the financial success of the company.

Mr Marais was still concerned about core issues that contributed to SAA’s loss. He wanted to know what the loss was incurred by Mango and also to compare the loss to the money that SAA were asking for. He asked SAA to clarify their approach with Mango.

Mr Else said that the initial setting up of Mango was estimated as R 100 million start-up costs. Mango has forced the SAA group to focus on market segments.

Mr Marais said that SAA operated in an environment where there should be service excellence. He referred to media reports, which indicated that Errol van Dyk lost his wheelchair twice while flying with SAA.
 
Mr Else said that service excellence was taken seriously by SAA but that it was a complicated issue. SAA was working hard with the Airports Company to improve service delivery.

Mr Nene said that the Committee needed to satisfy themselves that the rollover for Correctional Services and the Public Enterprises should take place. He expressed his unhappiness with Correctional Services saying that they would under spent on money that would be rolled over.

Mr Moloto proposed that Committee members should identify areas where they were not satisfied and inform Treasury about these issues. He also referred to issues related to Justice and Constitutional Development where more information was required. He said that the Committee required a comprehensive report on this issue.

Mr Nene said that it was important that some of the appropriations took place but that the Committee needed to state their questions with some departments in the Committees report.

Mr Mguni wanted clarity on the R 200 million to the Department of Education for the Recovery Plan. He also mentioned that some teachers in the Free State indicated to him that they were not paid

Mr Mguni said that virements were kept to 8 % of the total budget of a department. He wanted to know from how many programs could departments shift funds from

Mr Marais asked how the Committee could approve the rollover if they know that the money asked by Correctional Services would not be spend.

Mr Naidoo said that when Correctional Services asked for money they gave Treasury the assurance that the money would be spend on completing the Kimberley prison. He also said that if Correctional Services did not spend the money it would be illegal for Treasury to roll over the money again.

Mr Naidoo said that he would provide the Committee a report from the Department of Justice and Constitutional Development. This department did not have a good track record on spending in general but they had a good record on spending on capital expenditure.

Mr Nene said that there were other adjustments that needed to happen. He implored the Committee to pass the adjustment with reservations. National interests should not be compromised which would happen if the Bill was not agreed to.

Ms Fubbs expressed her unhappiness about National Treasury because they did not properly identify the problems with the Correctional Services figures. She said that the Committee were able to identify the Kimberley problem, which National Treasury could not do.

Mr Marais was disappointed because the Committee had to passed the Bill for the sake of the bigger economy. He indicated that there were a lot of unanswered questions that Correctional Services did not clarify. Mr Marais supported a qualified approval with reservations of the Bill.

Voting on Adjustment Appropriation Bill
Mr Nene read the motion of desirability for the Adjustment Appropriation Bill. The Committee approved the adoption of this Bill.

The meeting was adjourned.