ATC110310: Report on First Quarter Spending Patterns on the Hospital Revitalisation Grant in the 2010/11 Financial Year, dated 09 March 2011

NCOP Appropriations

Report of the Select Committee on Appropriations on the First Quarter Spending Patterns on the Hospital Revitalisation Grant in the 2010/11 Financial Year, dated 09 March 2011

 

1. Introduction

 

The Select Committee on Appropriations (the Committee) convened hearings on the spending levels on the Hospital Revitalisation Grant (HRG) for the first quarter of the 2010/11 financial year.

 

The hearings emanated from the HRG second and third quarter public hearings held by the Committee on 4 May 2010 on under/overspending of the Grant allocation for the 2009/10 financial year. During the deliberations, the provincial departments of health raised a number of challenges that contributed to the under-spending of the HRG allocation. Among other things were the appointment, by the provincial departments of public works, of under-performing contractors; poor construction work by contractors; and late payment of contractors.

 

The Committee resolved that the national and provincial departments of health and public works should be invited when the Committee conducts hearings on the HRG. The meetings took place on 19-20 October 2010 at the Townhouse Hotel and Committee Room V227 at Parliament of the Republic of South Africa, respectively.  

 

2. Terms of reference

 

The hearings formed part of the Committee’s ongoing interaction with provinces to monitor their spending patterns on conditional grants allocated to them. A framework for each grant sets out the purpose of the grant, measurable objectives, conditions, allocation criteria, and past performance, among other things.

 

Provinces were requested to make oral presentations on the Comprehensive HIV and AIDS Grant, Hospital Revitalisation Grant, and Forensic PathologyGrant and take into consideration the following:

• Data trends in allocations, transfers and actual expenditure of conditional grants of the department  for the first quarter of the 2010/11 financial year;
• Assessment of the department’s monitoring capacity for the 2010/11 financial year, indicate under/overspending and what capacity constraints impacted on these outcomes;
• Coordination of the Hospital Revitalisation projects;
• Performance of the contractors and consultants; 
• Reporting and coordination between the health and public works departments;  and
• Capacity to implement the HRG programme.

 

The national and provincial departments of Health and Public Works were invited to appear before the Committee. The National Department of Health was in attendance, unfortunately, the National Department of Public Works could not honour the invitation. 

 

The provincial departments of Health and Public Works made joint presentations during the course of the hearings. National Treasury was also invited to brief the Committee on the subject.   

 

3. Presentations

 

3.1 National Treasury

 

National Treasury reported that the total adjusted budget for the 2009/10 financial year was R 3.5 billion, and at the end of the financial year the provinces had spent R2.5 billion. The provinces underspent the grant allocation by a total amount of R944 million.

 

For the 2010/11 financial year, the main budget for the grant is R4 billion and the provinces projected to spend R3.9 billion by the end of the 2010/11 financial year.  As at 30 June 2010, the provinces spent R836 million or 20.8 per cent. National Treasury further reported that only three provinces had projected under-spending, that is the Province of the Eastern Cape by R15.4 million, the Province of the Free State by R48 million and the Province of the Northern Cape by R70 million. On the other hand, the Province of Mpumalanga had projected over-spending by R40 million. Treasury further reported that, as at 30 September 2010, R1.487 billion or 37 per cent had been spent against the HRG allocation.

 

Table 1 (below) presents the HRG allocation to provinces:

 

Table 1: Hospital Revitalisation Grant Expenditure by Provinces as at 30 June 2010

Province	Main budget	Projected outcome	Actual spent as at 30 June 2010	Actual spending percentage of the main budget	Over-spending	Under spending
Eastern Cape	360 660	345 231	50 921	14.1%		15 429
Free State	378 426	330 424	28 888	7.6%		48 002
Gauteng	798 609	798 609	256 378	32.1%
KwaZulu-Natal	500 815	500 815	52 535	10.5%
Limpopo	323 425	323 425	37 346	11.5%
Mpumalanga	331 657	371 875	72 797	21.9%	(40 218)
Northern Cape	420 218	350 061	60 669	14.4%
North West	326 303	326 303	154 459	21.9%		70 157
Western Cape	580 554	580 554	121 872	47.3%
Total	4 020 667	3 927 297	835 865	20.8%	(40 218)	133 588

 

National Treasury reported that quarterly reports submitted by provinces are not adequate and lack details with regard to reason/s for project delays and timeframes within which projects need to be completed.

 

They further reported that many hospitals are experiencing delays and there are significant variation orders as a result of poor planning. The variation of projects can be costly because an initial budget can escalate and may double the original budget. The King George Hospital project in KwaZulu-Natal was mentioned as an example. In addition, poor performance of contractors impacts negatively on the quality and timely completion of projects. Kimberley Mental Health Facility in the Northern Cape and the Thabamoopo Hospital in Limpopo are but two examples. New contractors have now been appointed for these two health projects. National Treasury further reported that the planning stage for projects does not take full account of the cost, including cost related to procurement and maintenance of equipment. Mamelodi Hospital in Gauteng is a point in case as it did not procure equipment and now the hospital can not provide any services. Treasury recommended that the National Department of Health enhances its monitoring and evaluation capacity, and that project sites should be visited at least twice a year.

 

3.2 The National Department of Health

 

The National Department of Health (NDoH) acknowledged the challenges in relation to the Hospital Revitalisation Grant (HRG) and further said that these challenges have been of a recurring nature for the past sixteen years. The NDoH reported that the HRG is underperforming and that the persistent underspending of the Grant doubles from year to year.

 

The NDoH reported that it has established an Infrastructure Unit (IU) that will accelerate progress in respect of the Health Revitalisation projects. They reported that provinces are in the process of establishing their own IU’s and some have already done so.

 

The following deficiencies are the contributing factors to many challenges that the Grant is faced with: 

•          Poor management of the professional service providers in many cases;

•          Poor management of the implementing agent;

•          Inadequate norms and standards;

•          Poor input into quality planning, design, specification. Voluminous but very inadequate project briefs (poor planning), inadequate and wrong design, wrong health technology and other equipment and frequent  and costly modifications (poor planning);

•          Frequent and costly changes on the scope of works;

•          Poor quality and quantity of project spending contributing to late payments;

•          Lack of, or poor involvement of the management of the facilities under revitalisation and to some extent other stakeholders;

•          Poor oversight, communication, coordination and reporting;

•          Poor performance of the roles and responsibilities by the health departments in the project development and management cycle;

•          Inadequate project management systems in place;

•          The State is always the  loser in fee negotiations (if any) with professional service providers;

•          Ignoring the potential savings on repetitive designs and documentations in many instances;

•          Poor and lengthy procurement process, sometimes taking eight to nine months before the contract is awarded;

•          Poor contract management, administration and communication contribute to  high costs and time over-run; many variation orders; abandoned projects or never-ending projects; poor quality workmanship of the contractors and late payment; and

•          Non-closure of many projects. Files are still open and retention moneys are not paid as building plans and manuals are not produced or are not delivered to the client. Some projects are outstanding for the past seven years.

 

The NDoH presented figures that show the HRG underspending pattern and how the underspending have doubled from year to year. 

•          Year 1   -2006/07: R 199. 158 million

•          Year 2   -2007/08: R  273. 226 million

•          Year 3   -2008/09: R 472. 564  million

•          Year 4   -2009/10: R 813. 614  million

•          Year 5  -2010/11: R 1.6 billion (NDoH projected figure for underspending)

 

The NDoH reported that based on the first and second quarter reports of the 2010/11 financial year, it appears as if the Grant would be underspent by R1.6 billion (projected under-expenditure). For the first quarter, the Grant was underspent by 16 per cent. The NDoH added that, based on the spending patterns by provinces, only R2 887 854 will be spent by the end of the 2010/11 financial year.

 

The NDoH indicated that provinces are not compelled to use the services of the public works departments as implementing agents.

 

 

3.3 The Province of Mpumalanga

 

The Province of Mpumalanga (Health) reported that it has spent R166 million (50 per cent) of its HRG budget. Greater co-operation with the North West Provincial Department of Public Works has facilitated improved spending of the HRG allocation and project implementation.

 

The Province reported that it had three HRG projects, namely, the Rob Ferreira Hospital project, the Themba Hospital project and the Ermelo Hospitalproject. The Province further reported that the actual completion dates are not the same but the last project will be finished on or before 04 March 2011. They added that these projects are divided into 20 sub-projects.                .

 

On the Grant challenges, the Province reported that the Rob Ferreira Hospital project had been delayed due to the termination of a contract as a result of under-performance by a contractor. The project has been completed after it was taken over by another contractor. The Province added that poor project management at Themba Hospital by the principal agent led to an extension of the completion time (sometimes doubling the project’s time) which has led to compromised service delivery.

 

Furthermore, in some projects, consultants and contractors do not supervise projects and that leads to slow progress. They added that the design architects duplicate bills of contracts and that some designs do not comply with health norms and standards. In addition, inadequacy of the project scope leads to variation orders.

 

3.4 The Province of Gauteng

 

The Province of Gauteng (Health) reported that it had spent 49 per cent (R391 million) of its allocated budget. Thereare five Hospital Revitalisation projects for the 2010/11 financial year, namely -

• Chris Hani Baragwanath Hospital (accident emergency and trauma unit; radiology and pharmacy);
• Germiston Hospital (300 beds);
• Mamelodi Hospital (250 beds);
• Natalspruit Hospital (76 beds); and
• Zola/Jabulani Hospital (equipping and commissioning of the Gateway Clinic: 300 beds).

 

The Province reported that it is not experiencing any challenges with respect to contractors and consultants. The main challenge has been cash flow that affected the performance of sub-contractors on site as payments are not done on time. The Province indicated that it has implemented a 21 day invoice system to ensure timely payment of creditors.

 

The Province indicated that it has a good working relationship with the Provincial Department of Infrastructure Development.  The Province further reported that a task team was formed at the beginning of the 2010/11 financial year, comprised of the NDoH, Gauteng’s provincial departments of Health and Social Development, Infrastructure Development and Provincial Treasury. This task team meets on an ad-hoc basis for special interventions on contractual and financial matters regarding projects.

 

3.5 The Province of North West

 

The Province of North West (Health) reported that it has a huge health infrastructure backlog. Five Hospital Revitalisation projects are currently being rolled out. They are as follows:

 

3.5.1 Vryburg Hospital

The Province reported that R47 million was budgeted for this project but R54.9 million had been spent as at 30 September 2010. According to the outstanding work, the Province is projecting to spend R93.9 million on this project by the end of the 2010/11 financial year.  

 

3.5.2 Moses Kotane Hospital

For this project, the Province reported that a sum of R46.5 million was budgeted  but R79 million had already been spent as at 30 September 2010 and the total expenditure is projected to amount to R96 million when the project is completed by the end of the 2010/11 financial year. The Province reported that the main contractor on this project failed to deliver the project on time and some of the installations were of poor quality and had to be reinstalled.

 

3.5.3 Brits Hospital

On this project, the Province reported that the budget was R96 million and R43 million had been spent as at 30 September 2010. They added that there is outstanding project work, including extensions to the makeshift hospital, staff accommodation and feeder facilities. A total of R111 million is projected to be spent on this project by the end of the 2010/11 financial year. The Province further reported that the first contractor on the project was liquidated and the contract was terminated on 08 March 2010. A second contractor was appointed on 27 July 2010.  

 

3.5.4 Bophelong Hospital

The Province reported that R96 million was budgeted for this project and R24.7 million had been spent as at 30 September 2010. The Province further reported that it has projected to spend R96 million on this project by the end of the 2010/11 financial year.

 

3.5.5 General De la Rey/Lichtenburg Hospital

The Province reported that R35 million was budgeted for this project and nothing has been spent as the project is still at the planning stage.

 

In total, R204 million (63 per cent) of the Hospital Revitalisation Grant has been spent. The Province explained that the majority of its spending was on medical equipment for the commissioning of Moses Kotane and Vryburg Hospitals. Two projects, namely Klerksdorp Regional Hospital and RustenburgRegional Hospital, are still in the planning stage.

 

3.6 The Province of KwaZulu-Natal

 

The Province of KwaZulu-Natal (Health) reported that no contracts have been terminated for the 2010/11 financial year. However, where necessary, corrective procedures will be implemented. They indicated that delays experienced as a result of tender appeals processes had a negative impact on expenditure at the Lower Umfolozi War Memorial Hospital and the ing George V Hospital’s crèche.

 

Overall, the Province reported that there were 11 HRG projects by the end of the second quarter of the 2010/11 financial year, and R101 million had been spent. Moreover, the Province reported that the absence of a project management system by implementing agents makes Grant management ineffective. However, the Provincial Department of Public Works is in the process of sourcing a web-based project management tool. In addition, the Province indicated that scarcity of project managers within the health sector poses a serious challenge. In summary, the Province’s projects are on track, but at different stages.  

 

3.7 The Province of Limpopo

 

 The Province of Limpopo (Health) reported that it had spent R65.5 million (20 per cent) of its total HRG budget at the end of the second quarter of the 2010/11 financial year. They indicated that the high volumes of complex health infrastructure projects against a limited pool of experienced built environment health professionals, pose a serious challenge.

 

The Province further reported that omissions and additions above 20 per cent (allowable) variation, were approved by the Provincial Department of Public Works, but not supported by the Provincial Department of Health.

 

On HRG challenges as a result of under-performing contractors, the Province reported that although mechanisms to deal with non-performing contractors are covered in the contracts, there are delays in invoking the penalties. They added that project delays have a negative effect on projects with dependencies - where a particular project phase needs to be completed in order to embark on another project phase. The Province further reported that there are inconsistencies in adherence to the reporting and coordination requirements within the service level agreements. The Province acknowledged that there is low spending on the Grant.

 

3.8 The Province of the Northern Cape

 

The Province of the Northern Cape (Health) reported that it had spent R120 million (14.4 per cent) of its HRG budget by the end of the second quarter of the 2010/11 financial year. The following projects are being rolled out:

 

3.8.1 Mental Health Hospital project

This project has been delayed due to slow delivery by the contractor. The contractor has been replaced, but the project has additional costs to the amount of R380 million, and it is making good progress.

 

The Province reported that the initial cost of the project was R290 million which has escalated to R740 million. This project was started in 2006 and should have been completed in 2008.

 

3.8.2 Upington Hospital project

The budgeted cost of this project was R836 million of which R278 million had been spent by the end of the second quarter of the 2010/11 financial year and this project is expected to be completed in 2012.

 

3.8.3 De Aar Hospital project

This project was started in 2010 and is expected to be completed in 2012 at a cost of R400 million (initial budget). 

 

3.8.4 Prof ZK Matthews Hospital project

This project was started in 2006 and was completed in 2008. However, in 2009 additional work was added at a cost of R80 million and the project is 98 per cent complete.

 

The following three projects are at the planning stage:

• Kimberley Hospital;
• Kuruman Hospital; and
• Postmasburg Hospital.

 

The Province also reported that contractors are unable to meet the monthly deliverables as per their set programmes due to insufficient capacity in their companies. Under-performance by contractors leads to underspending on the Grant. In addition, the Province reported that poor coordination between the contractors, consultants and implementing agents leads to further delays on projects.

 

 

3.9 The Province of the Free State

 

The Province of the Free State (Health) reported that the HRG programme started in the 2003/04 financial year with the Pelonomi and Boitumelo Hospitalprojects. Five additional business cases, namely Ladybrand, Trompsburg, Mangaung, Free State Psychiatric Complex and Dihlabeng, were approved in the 2006/07 financial year. Of the five approved projects, only the Ladybrand and Trompsburg projects have been completed.

 

The Province further reported that the Free State Psychiatric project was at the technical documentation stage where the bill of quantities was being processed and it was expected to be finalised by the end of November 2010. The Province also reported that Mangaung District and Dihlabeng RegionalHospitals are still at the initial planning stage.  

 

The Province reported that only R62.8 million (19 per cent) of the 2010/11 financial year HRG budget had been spent by the end of the second quarter. The Province explained that the underspending was due to a lack of internal capacity; poor planning, delays in bid evaluation and adjudication, poor contract management, delayed decision making, and transfer challenges.

 

 

3.10 The Province of the Eastern Cape

 

The Province of the Eastern Cape (Health) reported that it had spent 25 per cent of the R360 million allocated for the 2010/11 financial year in the seven project areas funded by the Grant. The projects are listed as follows:

 

1. Frontier Hospital

2. Dr Malizo Mpehle Hospital

3. Madzikane Kazulu Memorial Hospital

4. St Elizabeth's Hospital

5. Madwalweni Hospital

6. St Patrick's Hospital

7. Cecilia Makiwane Hospital (phase 4)

 

The Province reported that it did not have capacity challenges, however, some of the projects have been delayed due to, among other things, pending court decisions, delays in awarding contracts and poor performance by contractors.

 

The Province indicated that the performance of contractors and consultants varied between very good and poor. The Provincial Department of Public Works had terminated the services of consultants and contractors whose performance was poor, for example Setkor Engineers and Ilima Projects, the latter for poor performance at the Holy Cross and Komani Hospitals.

 

3.11 The Province of the Western Cape  

 

The Province of the Western Cape (Health) reported that R272 million (47 per cent) of the HRG had been spent by the end of the second quarter of the 2010/11 financial year. The Province reported on the following HRG projects which it said were progressing well:

 

1. George Hospital

2. Khayelitsha Hospital

3. Mitchell’s Plain Hospital

4. Paarl Hospital

5. Tygerberg Hospital

6. Valkenberg Hospital

7. Vredenburg Hospital

8. Worcester Hospital

 

The Province indicated that its projects are on schedule and the contractors are doing well to meet deadlines.  The contractor at the Khayelitsha Hospitalproject has indicated that that project would be completed six months ahead of schedule and that expenditure would exceed the projected budget.

 

4. Key Observations

 

After interacting with the provincial departments of health and of public works, and the National Department of Health and National Treasury, the Committee observed the following:

 

• The majority of the HRG projects are experiencing delays and significant variation orders because of poor planning by the provincial health departments;

 

• The awarding of contracts to incompetent contractors contributes to the poor quality of work and poor performance by contractors. This has a negative impact on Government, as it may appear as if Government is not committed to improving the health infrastructure;

 

• The national and provincial health departments have limited technical capacity to monitor and oversee contractors;

 

• The Free State Province is not spending as per the planned spending targets set in respect of the HRG;

 

• The Eastern Cape Province is underspending even though the Province claims that it has enough capacity to roll out projects and that principal agents are doing well in relation to the HRG projects;

 

• The quality of work produced by contractors is below standard;   

 

• The HRG may be underspent by R1.6 billion if provinces continue to spend at the current rate;

 

• The late payment of contractors, either by the departments or the principal agents, is contributing to the liquidation of small emerging contractors;

 

• The majority of provinces are still in the process of appointing their own resident engineers to assist in planning, cost estimation, monitoring and evaluation; and

 

• Although the Committee convened these hearings with specific reference to the HRG spending in the first quarter, most provinces reported on their spending up to the end of the second quarter.

 

 

5. Recommendations

 

Having considered the joint presentations by the provincial departments of health and public works on the spending patterns on the Hospital Revitalisation Grant in the first and second quarters of the 2010/11 financial year, the Select Committee on Appropriations recommends that the National Council of Provinces considers the following:

 

• The National Department of Health should accelerate the implementation of the   Health Infrastructure Delivery Plan;
• The Free State provincial departments of Health and Public Works should establish a joint implementation committee with the aim of improving the coordination of the HRG projects and cooperative governance between them. They should furthermore improve monitoring and evaluation activities by jointly identifying challenges and risks to projects that are planned or underway and developing strategies for alleviating the adverse impact of the identified challenges and risks;
• The provincial health departments should fast-track the establishment of the Infrastructure Units and the appointment of resident engineers should be a priority;
• Contractors should be penalised for failing to complete projects on time;
• The provincial health departments should improve the management of the HRG, specifically monitoring and evaluation activities;
• Provincial departments should ensure that emerging contractors create value for money;
• Joint ventures between experienced and less experienced contractors should be carefully monitored because, in most cases, the experienced contractors leave the implementation of projects to less experienced, usually small, contractors which compromises the quality of work done. The lack of transfer of skills impact negatively on efforts to improve the capacity of smaller contractors;
• Coordination of the Grant and cooperation among the provincial departments of health and public works should be strengthened; and
• The National Department of Health should address the issue of standard plans and norms in relation to structures for clinics and hospitals to avoid the costly exercise of commissioning designs for new structures by the provincial health departments.

 

 

Report to be considered.