Expenditure Trends of all Provincial Departments: 3rd Quarter; Budget Process Workshop

NCOP Finance

27 February 2008
Chairperson: Mr T Ralane (Free State, ANC)
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Meeting Summary

The workshop, attended by some members of provincial legislatures, served to explain the budget process and the flow of information that was required by provincial departments. National Treasury explained the formula used for the equitable share for the provinces as well as for local governments and how budgets were allocated.

The provincial expenditure reports for the third quarter were also presented. There was comprehensive reporting on projected and actual spending trends within each provincial department. Conditional Grants were also analysed in terms of spending rates, the objective of each of the seventeen grants and the expenditure details in the first ten months of this financial year.

The Committee suggested that National Treasury go to each province to further explain the formula used to allocate budgets. The Committee was concerned with issues of governance, parity, oversight and accountability. The lack of compliance with the Division of Revenue Act by provincial treasuries was a concern and the Chairperson spoke about the morality of financial compliance when dealing with public finance. Issues of the credibility of budgets and misalignment of priorities had to be addressed. There were some anomalies that were evident in the figures provided by the provinces.

Meeting report

Provincial Budgets and Expenditure as at 31 January 2008
Ms Julinda Gautana (Chief Director: Provincial Budget Analysis: National Treasury) presented the provincial budget expenditures for the third quarter. She made some broad observations including that provincial spending was on track with 79.4% spent. She spoke of some of the challenges that had been addressed through the adjusted estimates of national expenditure, showing the adjusted figures for the provincial equitable share (PES) after national adjustments.

She noted the key highlights in the spending trends of provinces and then focused on the provincial department spending for all aspects: social services, health, education, housing and local government, personnel, capital expenditure. The presentation showed the projected and actual spending trends for each province since 2004/05. 

The last part of the presentation looked at Conditional Grants: the spending rates, the objective of each of the seventeen grants and their expenditure in the first ten months of this financial year.

Mr Lungisa Fuzile (Deputy Director-General: Intergovernmental Relations: National Treasury) added that for the purposes of exercising oversight, the law required that government publish the budget and the actual expenditure. However, within government there was actual information available for what was projected to happen by the time the financial year had ended and this should be made available as well. This was vital information for the purpose of oversight. This would also be beneficial if certain unforeseen circumstances were to arise and budgets needed to be adjusted. Another issue was that there was too much expenditure in the last quarter, month or even the last week. It could imply that payments were not processed on time. If the late payments were made to the same small and medium enterprises (SMMEs) that government was trying to promote, these SMMEs would then not be able to pay their creditors.

Mr E Songoni (Gauteng, ANC) noted that the impact of the demarcation was huge especially in the North West. Also the accuracy of the information for the formula was vital and this was a challenge. He commented that another challenge was the capacity of Public Works. He asked what needed to be done to improve the capacity of the Department of Public Works.

Mr Fuzile replied that as a departmental administration there was a lack of focus on the intermediate steps that had to be taken. There were too few people who checked up on the intermediate steps. If these steps were made, there would be more efficient service delivery and Public Works would improve.

Mr Sam Mazosiwe (Eastern Cape; MPL) wanted clarification on National Treasury processes. In December they were informed that various departments in the Eastern Cape projected under spending and National Treasury took the excess money away from those departments. In January National Treasury once again informed them that there might be more under spending in various departments and more funding was removed. 

Mr Fuzile thought it was a flaw that they only publish small bits of information as per the requirement of the law. There was a plan to add non-financial data. National Treasury was confident that when they showed financial expenditure at any given time it would only be fractionally off the mark. The problem was in the projections. People either deliberately lied or they did not have the ability to properly project. When projections swing by large amounts, it illustrated that those projections were false. It was debatable if the decisions made were the right decisions. The Eastern Cape subsidised schools at the lowest rate per learner.

Mr Bheki Nkosi (Chairperson of the Gauteng Finance Committee) wanted to know if the National Treasury catered for infrastructure backlog allocation.

Mr Fuzile replied that for those that did not have services, there would be a backlog. It was debatable whether the Municipal Infrastructure Grants (MIG) should be used to address these issues. The equitable share formula of the operational expenditure was meant to fund the cost of water and repairing infrastructure.

Mr Nkosi said that there should be a mechanism in place that prevented under spending so that it became more of an exception than a rule. He asked if National Treasury knew what the aggregates were for personnel expenditure, especially in terms of Gauteng. This could directly impact on service delivery.

Mr Kenneth Brown (Chief Director: Intergovernmental Policy Planning: National Treasury) noted the comments and would take them into consideration. In the budget statement, there was a personnel component, however, it was an aggregate. They might show per level the personnel component in the budget statement. They did have in their Annual Report a sense of the actual status of expenditure and they would be able to make an analysis. They could also track it on a month-to-month or quarter-to-quarter basis.

Mr Nkosi referred to the decline in the expenditure in the educational budget and claimed that it was a result of the revision in the baseline, and asked what the impact of that was.

Mr Fuzile replied that the decline was simply the comparison made by three quarters last year to three quarters this year. Most of the provinces were facing capacity issues and the National Treasury was working with them

Mr Nkosi remarked that often provincial departments would state to the provincial legislature that they required an adjustment to their budget. He asked if there were a way to determine whether the departments would be able to spend the adjustment budget, as often once the adjustments had been made, the departments would then underspend.

Ms Gautana replied that the provincial treasury and all those involved in oversight looked at capacity-to-spend that included looking at the national department with the concurrent function. There had to be a business plan in place. On those terms, an allocation would be made in accordance with the cash-flow projection outlined by the provincial department. It was not a simple exercise; it was the ability to find a balance between having and building capacity.

Mr B Mkhaliphi (Mpumalanga; ANC) noted that there was under spending even in the decreased budgets given. He mentioned an oversight visit to an upgraded hospital. This hospital attracted patients from various areas. When this hospital was upgraded, the district hospitals and clinics were not upgraded. The issue was that the three spheres of government were not working together.

Mr Mkhaliphi asked if the National Treasury could give a holistic picture of the effects of demarcation in the various provinces. As it seemed that only the North West was having problems with the demarcation.

Mr Fuzile replied that North West was clearly the only province that struggled with the impact of the demarcation. The scope of the adjustment they had to make was one of the problems. North West completely miscalculated the education budget. He did not pretend that there were not problems in other areas however as time passed they learnt to cope.

Mr Brown added that when the discussion was raised, Limpopo had stated that they had inherited parts of Mpumalanga that lacked infrastructure. Gauteng stated that they had inherited parts of North West that were neglected. This illustrated that there were areas that were being neglected and this unevenness meant that government was not doing its job properly. This issue needed to be addressed.

Mr Mkaliphi knew that in his province, Mpumalanga, there was a huge backlog in education. He wondered when this would be addressed.

Workshop on the Budget Process
Mr Kenneth Brown (Chief Director: Intergovernmental Policy and Planning: National Treasury) explained that the budget process was guided by policies, priorities and making trade-offs. The budget preparation involved consultation with provinces and local government through the Budget Council, Budget Forum and Extended Cabinet. The budget would then go to the Finance Committees for approval. The budget process went through four stages. The first stage began from 1 March and ended 31 May which was the deadline for the submission of financial statements. Stage two dealt with provincial expenditure review from 1 June until 31 August which was the deadline for submission of provincial draft budgets. The third stage ended 30 November and dealt with Division of Revenue (DoR) to the Medium Term Budget Policy Statement (MTBPS) which was published at the end of October. The fourth stage was from 1 December to 31 March when the budgets were assessed and tabled. Also the projected expenditure for that financial year based on actual expenditure up to end of December became available. 

Mr Fuzile explained in particular detail the weighting of the equitable share. The percentages for education and health were determined in terms of the average share of the two sectors in total provincial expenditure of the past three years excluding conditional grant expenditure. It was important to remember that the 51% excluded conditional grants. The education portion for each province was determined by how many learners were enrolled in the province as per school dates stipulated and also how many people in the province were 5 to 17 years old. The health component was determined by those that had medical aid as generally they would not use public health care. Therefore their portion was smaller than those without medical aid. The concept would be that if the province tended to have unemployment and therefore many without medical aid, it would receive more than a province that had more people employed. The third component basically stated that the more people in the province, the more the demand for basic services. The poverty component attempted to say that if there was a larger share of the poor population, that province should receive more money. The economic activity component recognised that the province that generated a lot of economic output would have to be maintained. The institutional component was for the maintenance of other administration that was not necessarily linked to the size of the population. Budget reform altered the weighting of shares as new data reflected changes in these components.

Mr Jonathan Patrick (Director: Local Government Budget Process: National Treasury) explained the Local Government equitable share formula. The formula components were basic services, development, institutional capacity, revenue raising capacity correction, and correction and stabilisation factor. He explained the purpose of each and how the amount was arrived at for each. Accuracy in measurement of variables was important. Measurement was dynamic and did have its challenges but the allocation process was subject to regular changes and innovation.

Mr Nkosi noted that there were people that were unemployed that had access to medical aid.

Mr Fuzile agreed that the unemployed included people who were covered by medical aid because of a spouse.

Mr Mazosiwe asked if the budget for road maintenance was based on the number of cars in each province.

Mr Fuzile replied that the formula captured relative needs and relative demands. Costs for road maintenance were not explicitly stated. There were conditional grants that would capture more explicitly these other requirements.

Ms Jacqueline Mofokeng (MPL: Gauteng) asked for further clarity on demarcation and allocation on the proportion of population.

Mr Fuzile replied that the population used in the formula was as estimated by StatsSA. Once there had been a re-demarcation, the remunerator area data would stipulate what re-demarcation had taken place.

Mr Sogoni asked for clarification on the economic activity component and wanted to know why Kwa-Zulu Natal was receiving a larger proportion than any other province besides Gauteng.

Mr Fuzile replied that it was important to note that although Gauteng received more from the economic activity column, it was a percentage of 1% that was distributed amongst the province. It was offset by the fact that Kwa-Zulu Natal received a larger percentage from the education component (which was a distribution of 51% amongst the provinces). Gauteng might have had a larger share of population and more people that spend money but it had smaller numbers of learners and, therefore, less of a percentage for the education component.

Mr Fuzile made additional points. The formula would show that Kwa-Zulu Natal and the Eastern Cape received more for education than the rest of the provinces. However, at the provincial budget and expenditure reviews, it was found that Eastern Cape had the lowest per-learner expenditure in the country. However, Gauteng, where it was presumed that people were more able to pay for education, spent more money per learner in subsidies.

The allocation issue was also difficult as there was the problem of allocating funds to provinces that continually under spend. Furthermore, if the excess funds were removed from the province, service delivery was reduced and lack of funds is blamed. He suggested that during the course of the year when projections were made and under spending became noted, then the re-allocation and gazetting of funds should happen early in the year.

The Chairperson asked that the National Treasury team go to each province to further explain the formula.
Ms Mofokeng referred to the economic achievements especially those of Gauteng. Since Mpumalanga provided electricity and coal for the country, she asked how was that province was compensated.

Mr Brown replied that the province’s contribution to the GDP was covered in the amount that was allocated. The deterioration of roads in Mpumalanga needed to be dealt with as the roads were vital for the transportation of resources.

Mr Songoni asked for further clarification on basic services and how the decision was made. He specifically mentioned municipalities that might be lacking in being able to provide basic services.

Mr Brown replied that provision was made for that in the formula. The revenue-raising component in the formula would re-allocate from one component and add to another component that required more assistance.

In conclusion, the Chairperson noted some problems that the municipalities were experiencing, such as the suspension of key officials that compromised service delivery and also the problem of large salary budgets. The Committee would compare capital versus operation budget. The Committee was urging the Department of Public Service and Administration to become involved in the financial viability within municipalities in all market streams. The division of revenue had grown in its accuracy by tightening up the loose ends. He did note that in equitable share there was money set aside for children between the ages of 0 – 4, yet it was never seen practically although it was constantly growing.

The Chairperson added that National Treasury should take a look at Limpopo. The Committee was concerned with issues of governance, parity, oversight and accountability. He was concerned by the decline of certain budgets yet there was talk about growth in the economy.  He also pointed out the lack of compliance with the Division of Revenue Act by provincial treasuries. He spoke about the morality of financial compliance when dealing with public finance. Issues of credibility of budgets and misalignment of priorities had to be addressed. There were some anomalies that were evident in the figures provided by the provinces.

The Chairperson adjourned the meeting.

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