First Quarter Conditional Grant, Capital Expenditure, Personnel & Non-Personnel Spending by Provincial Treasuries

NCOP Finance

27 August 2008
Chairperson: Mr PF Ralane (ANC)
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Meeting Summary

National Treasury presented an overview of spending and projection rates for all the provinces. Significant levels of under spending and over expenditure were highlighted, with some discussion among members regarding the reasons behind these trends. Each of the provinces treasuries presented their first quarter expenditures with significant under spending of conditional grants in the sectors of education, health and housing. Members expressed frustration at the consistent inability by provinces to spend their budgets and then their tendency to over project for the last three quarters of the year. Lack of capacity, a tendency to abandon plans and projects for new ones, delays due to incomplete business plans or administrative and management inefficiencies all added up to a lack of service delivery. Generally capital over expenditure had occurred mostly in the health sector. Ways of managing this had been exercised by the KZN Treasury department. It was also felt that provincial departments were not being held accountable for their over or under spending and that some form of performance assessment should occur for value for money being spent by the government.

The Northern Cape Treasury head said: He wholeheartedly supported the use of MTEF and would not want to see its abandonment. The problem lay with implementation where planning had to talk to budget. The increase in experience of technical assistants was starting to show results but it would need more time. One should not do away with the MTEF system as it allowed planners to budget into the future. There needed to be more pressure on them to do so properly. This raised the question whether the PFMA did have any teeth. The challenge lay in good governance structures and the need for officials to leave their political ambitions out of the equation. 

 

Meeting report

Presentation
Mr Chris Adams, the Deputy Director of Intergovernmental Relations, presented the Provincial Budgets and Expenditure as at 30 June 2008. Key priorities for 2008 were education, health and social welfare services. The presentation covered provincial spending based on Section 40(4) PFMA reports. Provincial spending was at 24% or R59.8 billion of their main budgets. Key highlights of spending were R24.8 billion for education, R17.1 billion for health and R1.7 billion for social welfare. Provincial aggregated and monthly, as well as forecasting trends were presented.  Compensation of Employees trends showed provincial personnel spending totalling R34 billion or 25% of the main budgets and a projected over-expenditure of R6.1 billion in all provinces.  There was a low level of spending in the Eastern Cape and Western Cape. Payments for capital assets stood at 32%. This was broken down into Education and Health capital spending. The former showed a low rate of capital spending for Gauteng and Western Cape and the highest rate of spending in Northern Cape and Mpumalanga. Northern Cape and Mpumalanga also had highest rates of spending in the health sector and lowest rates in Gauteng and Western Cape. Public Works contained the biggest budgets with 37.6% of the main budget, with spending at 23.9%. Highest rates of spending were recorded in Gauteng and Limpopo provinces.

Conditional Grants allocation was R38.7 billion, including Schedule 4 grants with health making up the bulk of R13.7 billion. Grants that showed low rates of spending were Community Library Services, Land Care Programmes, HIV and AIDS education and mass sport and recreation participation programme. Spending on the FET College Sector Recapitalisation grant was at 47.5%. Mr Adam said more than five provinces had spent less than ten percent of their grants budgets. He went though a detailed analysis of spending rates for each grant type.

Discussion
Mr Ralane commented that the listed improvements in libraries, sports, education and school nutrition were to be congratulated.

Mr Sogoni asked why maintenance was no longer a priority and questioned whether the projections were realistic. He had seen this before with an unsatisfactory outcome.

Ms Robinson questioned why the library grant was not having the desired results. Literacy was low and students were unable to read. The level of education was a great cause for concern, as was lack of capacity of local government. Government asset registers were inaccurate. Ordinary school leavers were not educated enough. She said there should be greater focus on school rather than graduate programmes. It needed an intervention for training school leavers for local government. School leavers should be encouraged to see this as a career option. It was disturbing to see the library grant money, which had been so hard fought for, had not yet been used.

Mr Ralane said National Treasury should be concerned about these projections and asked whether they were delving into the matter. There was a misalignment of plans. A team should be sent to each province treasury for credible projections. According to the projections there would be huge overspending, if the projections were correct. The question was whether this would correlate into visible service delivery. He asked what would happen to those who had not submitted their projections. This required attention.

Mr Sogoni asked whether certain accounting methods were causing inaccurate reflection of figures.

Ms Malijeng Ngqaleni (Chief Director Intergovernmental Policy and Planning) admitted some numbers were doubtful, especially those allocations for infrastructure. The Department needed to decide on norms for prioritization. Public Works was supposed to be in charge of rehabilitating the unsafe structures.

Mr Ralane said there was no norm or benchmark. He could not understand that the Free State was only targeting three schools and Limpopo only four schools. There was a substantial difference in the cost of schools between the provinces.

Ms Nggaleni said the figures only reflected the cost of spending for the year.

Mr Sogoni thought the figures unrealistic.

Ms Nggaleni said some projects were still in the planning stage. The figures did not reflect how much a school cost as this could vary between R30 to R40 million. They were all different sizes and one could not compare costs between provinces. There was no norm for a school as far as size or cost was concerned.

Mr Adam said the figures did not cover maintenance and stripping out. This would ensure that schools would not be allowed to deteriorate.

Ms Nggaleni said maintenance did not get spent as there was no incentive in the system to spend on maintenance. Money allocation for every facility in a life cycle costing exercise would include costs for operating maintenance.

Mr Adam said lack of capacity and systems resulted in non-delivery. Treasury had started addressing this issue by requiring a qualifications report from provincial treasuries and a qualifications assessment. They had held CFO forums on budget and planning, sharing information with them in planning predetermined targets. There had been huge deviations between targets and actual spending. The problem stemmed with target setting. Departments had to set more realistic targets. Performance data should be more considered. Expenditure needed to be monitored and related to performance and delivery. Annual performance plans would place a larger focus on non financial data. Intervention could be devised according to audit outcomes and interventions to negative audit outcomes. The gathering of this information would address these issues. Provincial visits would take place with two-day engagements with provincial treasuries in order to look at their challenges. Reports would be drafted and sent to the MEC.

Ms Robinson said she was encouraged by this. It seemed that better management skills were needed.

North West Expenditure Report for the First Quarter ended 30 June 2008
Mr Johannes Mohlala, Head of Department of Finance: North West, said total expenditure for this quarter amounted to R3.811 billion or 22.46% of the total provincial budget. Infrastructure spending of R12 million had constituted 16.53% of the budget, with Education and Agriculture spending the lowest percentages of their budget and Public Works the highest at 37.6%. Total provincial conditional grants spending stood at 58% of the total amount of R746.5 million transferred by treasury. Public works showed a zero spending on the grant due to the fact that a transfer of R58 million was still forthcoming. Other low spenders on conditional grants were agriculture with 3.9% and Sport, Arts and Culture with 6.1%. Conditional grants for infrastructure in health was R120 million or 17% of the budget. The hospital revitalization programme had progressed slowly with the delayed completion of the iVryburg and Moses Kontane hospitals. The spending of the training and development grant had been hampered by the reclassification of business plans and their resultant redoing. The HIV/AIDS programme spending was delayed due to late transfer of funds. Pathology unspent funds were reserved for building a mortuary at Klerksdorp/Tshepong Hospital.

Conditional grants for infrastructure had been under-spent in Sports, Art and Culture. The building of the Khuma library had been delayed because the site belonged to Health. A meeting had been held with the community and they were planning the recruitment of staff. Conditional grants spending on mass sport and recreation had been zero thus far.

The Department of Economic Development and Tourism had spent nothing on infrastructure in the quarter.  This was due to a land issue that needed to be resolved. The operating permit had also not yet been approved. Education showed low spending. They had received the whole R12 million from treasury in order to use when needed. It was suggested that a common standard or norm for schools be developed. School building, maintenance and infrastructure stood at 3.5% of the budget. The Department of Housing spent 18.3% of their budget, with reasons for under expenditure cited as no spending on bucket replacement due to lack of readiness by municipalities in terms of capacity, registration of contractors causing delay, no business plans by municipalities for disaster management. The Department of Transport, Roads and Community Safety under-spent due to reprioritization of projects and various other delays. Mr Mohlala was asked halt his presentation.

Discussion
Mr Ralane said he could not understand how municipalities who had been claiming poverty in the last year were now struggling to spend their budgets. He suggested a gazetting of allocations and that ad hoc allocations were ineffectual.

Mr Mohlala said the Department of Transport, Roads and Community had under spent on their infrastructure conditional grant of R451 million by spending only R72 million and that this was due to reprioritization of projects and delays in the tendering processes. 

Mr Ralane asked why it was possible to change things midstream.

Ms Robinson expressed deep concern for the lack of budget being spent on even the bucket replacement system. There seemed to be no accountability.

Mr E Sogoni (ANC, Gauteng) reiterated his question whether the system of using the Medium Term Expenditure Framework (MTEF) does assist provinces to spend their budget appropriately because every one of them without fail had failed to spend their first quarter allocation. It seemed that the system was not working on the ground. The process had been meant to assist people to plan. The Public Finance Management Act (PFMA) was meant to guide this process as well as to provide for consequences should provinces not fulfil requirements. The very reason for monthly or quarterly reports was to assist provinces and departments with this process rather than doing it merely for the sake of compliance. The responsibility of provinces was clearly laid down in law by the PFMA and they had to take that responsibility. Provincial treasuries also had to ensure compliance and there needed to be pressure exercised on provinces in this regard.

Mr Ralane asked why there was a trend in spending, where the first quarter was exceedingly slow and then picked up during the third and last quarters. This had become prevalent and yet there was no valid reason for it.

Mr Sello Mokoko, Head of Department of Finance: Northern Cape,  said there had been an instance where section 18 was used to intervene. This had caused a huge outcry, despite the fact that the Department in question was consistently breaching the PFMA.

Mr Ralane said this should be verified.

Mr Lesley Magagula, Senior General Manager: KZN Provincial Treasury, said that there had been an instance where National Treasury had withheld R100 million, but not without agreement of the executive.

Ms Nggaleni said poor spending was partly due to poor planning and because budget did not talk to budget. They had seen how planning and budgeting resulted in a change of plans and budgets being spent on something else entirely. The control and monitoring of this issue would mean more work for treasury. It had to be strong in infrastructure oversight. Treasury had to ask whether they were getting value for our money. Regarding the low spending on housing, she suggested some problems might be resolved with bridging finance needed in order to get money flowing.

A member suggested that in order to prevent chopping and changing of plans there should be benchmarks. This would guide plans and obviate unnecessary changes. Infrastructure was suffering and being affected by politics.

Mr Ralane said people were sitting in ivory towers and out of touch with communities. These needed to be informed of what was going on with regard to things like new schools being built. Schools had been built by communities and now they were being razed to the ground.

Mr Sogoni suggested that full schools should be built instead of smaller schools.

Northern Cape Provincial Treasury presentation

Mr Sello Mokoko, Head of Department of Finance: Northern Cape, gave a summary of the province’s capital expenditure and conditional grants. A total of R132 million or 18% on payments for capital assets, R180 million or 19% on infrastructure and R217 million or 17% on conditional grants was spent. It was of concern to see the low percentage spent by Health at 11% at end of the quarter, while Sports, Arts and Culture were at zero percent. Total amounts spent on infrastructure capital and maintenance stood at a low 19% when the norm should be 25%. Capital expenditure on infrastructure in health was low due to a lack of capacity. Agriculture spent R3.3 million or 8% on infrastructure. Sports, Arts and Culture had not spent its infrastructure budget as projects like the libraries and archive repository were still in planning and design stage and would be implemented in the second and third quarter. The spending of conditional grants compared to the same period in the previous year, indicated under spending in agriculture and health. This was disturbing as this could result in those departments not getting those budgets back. The Health Department cited under spending in National Services due to expenditure being transacted in the wrong programmes. Two chartered accountants had been appointed to deal with these and other discrepancies.  Housing under spending was due to the delayed awarding of tenders, because they were higher than the approved subsidy quantum of R43 506 to build a 40 square metre house. Mr Mokoko commented that these houses were smaller than the fifty square metre houses before the dispensation. Finally programmes within the conditional grant framework could not be implemented due to the high staff turn over within the grant. Various delays were responsible for the under spending of the community library services grant.

Discussion
Mr Sogoni said the same problems with under spending were in every province. This was having a direct impact on service delivery which meant people were not getting the service they were supposed to be getting. It was very frustrating. He was not sure what needed to be done. Treasury seemed reluctant in applying the PFMA. He felt they should flex their muscles. Provinces could not sit on money and their performance should be assessed accordingly.

Mr Ralane agreed with him. He was concerned about late business plans from municipalities and the problems with housing, since last year the Department had received an extra R100 million, which should have been spent. One could not proceed along this trajectory. There was serious fiscal dumping and this was unacceptable. The Committee should go to these departments. They had a meeting outstanding with the Premier as well in which these matters had to be addressed.

Mr Mokoko said he wholeheartedly supported the use of MTEF and would not want to see its abandonment. The problem lay with implementation where planning had to talk to budget. The increase in experience of technical assistants was starting to show results but it would need more time. One should not do away with the MTEF system as it allowed planners to budget into the future. There needed to be more pressure on them to do so properly. This raised the question whether the PFMA did have any teeth. The challenge lay in good governance structures and the need for officials leaving their political ambitions out of the equation.     

KwaZulu-Natal presentation on 1st Quarter Expenditure of 2008/09
Mr Lesley Magagula, Senior General Manager: KZN Provincial Treasury, said an amount of R2.2.billion over-expenditure was largely due to health and education.

Mr Ralane asked for information on the amount allotted to the Royal Household of R10 million.

Mr Magagula said this budget was kept under a tight leash since it had been placed under the auspices of the Office of the Premier. The Royal Household had previously had problems with over-expenditure. They had recruited a new CFO in that department. The only concern was always whether purchases could be legitimately accounted for as public or private purchases. Aggregate total expenditure at the end of the first quarter was R12.8 billion or 25.1% of the main budget, with Department of Health and Education being responsible for high spending against compensation of employees. This was mainly as a result of the implementation of the respective Occupational Specific Dispensation for these two sectors.  Capital Expenditure was lowest in the Department of Education with 9.9%, followed by Health and Transport. Looking at the actual and projected expenditure per quarter, however, for each of these sectors it could be seen to have a fairly normal distribution across the four quarters. Focusing on conditional grants, Mr Magagula said the figures could not be correct for agriculture. Management problems in this department were still not sorted out. It had been through three heads of department in the last few years. The quills were falling off, staff morale had suffered and there was a culture of undermining of authority. The acting head had been planted to fix things, but according to general opinion he was also a problem. Administration problems were causing poor service delivery. It was his personal recommendation to perhaps close down the department completely and have staff reapply and reopen the department from scratch.

Mr Ralane agreed the idea was not far fetched. He said they would be meeting with these departments on a national and provincial level over the next twelve months.

Mr Magagula said the conditional grant for the FET Recapitalisation Grant in Education was going well. Conditional grants in Health had been less effective in the revitalisation programme where it had been his experience that departments had to be physically brought together to determine where a lapse in service was taking place, up to the point of actually doing their work. It was found during this process that their expenditure of this grant was actually a lot higher. Invoices that had been submitted had not yet been paid without any reason other than the one of bureaucratic inefficiency. The conditional grants for Housing were actually spent till the end of the year.

Discussion
Mr Sogoni asked what was going to be done. He referred to a comment made in a newspaper recently where it said there was no agriculture in this province. It seemed to be an ongoing problem. He asked why this problem had not yet been addressed. Communities in KZN were dependent on agriculture and yet there was no service delivery.

Ms D
Ntwanambi (ANC, Western Cape) said the problem was long standing. Squabbles made it difficult to work towards solving this. There were farms where seemingly nothing was going on and yet the owners were driving expensive cars.

Mr Ralane said these questions would be posed to the relevant departments and MECs. It was unacceptable to have groupings in a department. They had to deal with work ethic, which had to be instilled.  
 
Mr Magagula said they had started with a deficit due to health over-expenditure of R1.5 billion. They had dealt with this by charging the amount to next year’s budget. This year the over-expenditure in education was more due to a cash flow problem. They had levied a hospital tax and had taken steps to sensitize managers to their budget. Hospital managers had the use of a full team of three to four accountants to assess exactly where expenditure pressures were taking place. Intervention was needed in health in order to help solve their problems. The problem in agriculture was more with regard to conditional grants.

The meeting adjourned.

 

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