ATC170329: Report of the Select Committee on Finance on the Western Cape oversight visit, dated 29 March 2017
Report of the Select Committee on Finance on the Western Cape Oversight Visit, Dated 29 MARCH 2017
The Select Committee on Finance conducted an oversight visit to the Western Cape Province from 31 January to 02 February 2017. The purpose of the oversight trip was to assess efficiency, effectiveness and value for money in services delivered by the Western Cape Province, in line with the fiscal oversight role of the Committee.
Conducting oversight forms part of the Committee’s strategic goal of ensuring effective oversight over government finances to ensure responsiveness to the needs of the people of South Africa. Two of the strategic objectives of the Committee aim at strengthening oversight over finances of provincial departments, their entities and municipalities over a five year period and influencing budget policy decisions through effective implementation of the Money Bills Act, particularly reporting on macroeconomic, fiscal policy position as well as tax and revenue issues.
On the 31 January 2017, the Committee had engagements and received presentations from the City of Cape Town (CCT) Metropolitan Municipality; National Treasury, and the Provincial Treasury.
On the 01 January 2017, the Committee had engagements and received presentations from the Provincial Department of Economic Development and Tourism, Saldanha Bay Industrial Development Zone (SBIDZ) and conducted fiscal oversight over projects implemented by the SBIDZ. These are Offshore Supply Base (OSB) site in the Port, the new 15ML Besaansklip Reservoir, and the Saldoc and Link Road and Bridge sites.
2. Presentation by the National Treasury
It was reported that, the Cape Town Metropolitan Municipality was the first and only metropolitan municipality to receive a clean audit in 2012/13 financial year. The operating expenditure performance was at 92 per cent or R 29.6 billion of R32.4 billion adjusted budget. The CCT reported a R2.1 billion operating surplus against adjusted operating budget deficit R191 million. An operating surplus before capital transfers (capital grants) assists greatly to improve municipal cash flow. It was reported that the CCT had an operating surplus for two years in a row since 2014/15 year.
It was reported that, the City’s operating surplus before capital transfers stood around R 2.2 billion, and that capital grant transfers did not contribute to generated cash flow. The City’s cost to income for year the 2014/15 to 2015/16 was commendable and indicated amongst others, implementation of cost containment measures. National Treasury had a great concern when it comes to the 2016/17 Medium Term Revenue and Expenditure Framework (MTREF) budgeted operating deficit that negatively increased cost to income to above 100 per cent. Treasury reported that they had advised the City to operate within the 93:7 and 95:5 cost to income ratio that would generate cash flow reserves.
It was reported that, the City was steadily improving from capital grant dependency, between 2012/13 to 2014/15, the City’s grants dependency declined from 50 per cent to 39 per cent. The 2016/17 MTREF projections indicates further improvement on grants to 37 per cent. The borrowing had increased from 36 per cent in 2012/13 to 2014/15 period to 44.6 per cent in 2015/16 year. The City should improve own revenue funding through cost to income ratio.
The City’s cash flow indicated a downward trend from R 4.9 billion in 2012/13 to R 3.7 billion in 2014/15. Improvement noted for the audited 2015/16 year from R 3.7 billion to R 3.8 billion. The 2016/17 MTREF indicated slight increase in cash flow from R 1.2 billion in 2016/17 to R 1.7 billion in 2018/19. The City had a long term investment of R 3.9 billion as at 30 June 2016. The R 1.9 billion was sinking fund ring fenced to cover repayments of other loans. The City implemented stringent cash collection strategies to further improve its cash flow.
It was mentioned that the City’s strategies were first driven through political support with well documented end to end business processes
Strategic initiatives included:
- Upfront Credit Control check before providing services;
- Supply Chain Management (SCM) tenders were not considered / awarded to tenderers who owed the City money;
- Staff and Councillor arrears – Salary/bonus/back-pay deductions;
- Business Licences were not granted to those who owed the City money;
- Payment to suppliers were withheld from those who owed the City money;
- Installing Prepaid Electricity Meters (PPEMs) and Water Management Devices (WMD) for regular defaulters;
- Allocating high value accounts to area offices to follow up on debtors within their respective areas; and
- Establishing a Revenue Management Task Team (RMTT) of senior officials from all departments.
3. Presentation by the Provincial Treasury
The Provincial Treasury reported that the City was well on track with the implementation of the operating budget and that on aggregate, the operating revenue budget performance for the period up to 31 December 2016 amounted to 52 per cent of the total adjusted budget of R 34.93 billion. An under performance was noted on the Fines revenue collected to date. The Year to Date (YTD) collection was only at 29 per cent. Operating expenditure amounted to 44 per cent of the total adjusted budget of R 34.96 billion and the spending performance was affected by the annual processing of non-cash items. The YTD performance on transfers and grants reflected an underspending as it was only at
36.78 per cent. The YTD capital expenditure amounted to 34.2 per cent. It was reported that progress on the top 10 capital projects was being tracked on a monthly basis by the Provincial Treasury.
The total outstanding debtors amounted to R 7.58 billion, of which the most significant income sources contributing to total debt was water services and property rates. The total outstanding debtors, older than 90 days, amounted to R5.31 billion and it equated to
70 per cent of the total aggregated outstanding debtors. Households reflected the largest over 90 day’s customer category with the largest overdue debt relating to water (38.4 per cent) and property rates (16.88 per cent).
The total accounts payable as at 31 December 2016 amounted to R 256.65 million, and the negative amount was due to a legal dispute that awaited legal directive.
It was reported that, the monthly cash coverage was 1.20 times as at the end of December 2016. This indicated that the cash inflows exceeded cash outflows. The cash coverage YTD was1.01 and the short term debt was expected to be met for the year ahead. The closing balance on the Investment Portfolio indicated an amount to R9.85 billion as at end of December 2016. The closing balance indicates an amount of R 6.51 billion as at end of December 2016. Included in this amount, was the municipality’s external loans of R2.31 billion and Bonds (Local Registered Stock) of R 4.20 billion. The sinking fund amounted to R 2.06 billion for the month of December 2016.
The Provincial Treasury reported that they were providing the following support to the City of Cape Town:
· Regional economic review;
· Sectoral growth, employment and skills per municipal area;
· Value chain;
· Infrastructure spending, review and analysis; and
· Municipal socio-economic analysis.
4. Presentation by the City of Cape Town Metropolitan Municipality
The CCT reported that they had received an unqualified audit opinion, as well as a clean audit status, from the Auditor-General of South Africa for the 13th and 4th consecutive years, respectively. Through the Expanded Public Works Programme (EPWP), the City had managed to create 44 942 job opportunities. There were 2 297 subsidised electricity connections that had been installed.
The percentage of informal settlements receiving door-to-door refuse collection service was reported to be at 99.74 per cent, with the number of new water service points (taps) that had been provided being at 919. The number of new sanitation service points (toilets) that had been provided was 3 058.
The City reported that in order to be able to provide the required basic services, the following improvements were required:
- Vandalism and armed robberies
- Protest action
- Slow delivery from contractors
- Contract terminated due to underperformance
Potable water not billed
- Improvement above set targets but national average is 34 per cent.
Capital budget spend
- Appeals against tenders and poor contractor performance
Status of the 294 initiatives as of 31 December 2016
IDP initiated completed
IDP initiatives target reached but progamme continues
At risk of non-completion
Initiatives that go beyond tern of office
The above table shows the percentages of the IDP programmes that are being implemented by the CCT with 44.61 per cent of those being completed and 47.23 per cent still ongoing.
The City has achieved exceptional performance, ensuring that the IDP was being implemented with only 1.36 per cent of initiatives that WERE still at risk as at 31 December 2016, based on progress updates from line departments. Initiatives that were still at risk will be prioritised to ensure that they will be implemented before the end of the 5 year term on 30 June 2017. Five months of the current term of office was still remaining, giving adequate opportunity to implement the full IDP.
5. Briefing by the Department of Economic Development and Tourism
The Department of Economic Development and Tourism (DEDAT) reported that the SBIDZ was an entity on its own governed by a board. The Province through the DEDAT funded the operational expenditure and the National Department of Trade and Industry (DTI) funded the infrastructure projects.
It was reported that Transnet was also playing a major role and Eskom also being involved. There investors were coming on board but first looked for the following: global competitiveness, investor confidence, and how well government was working together.
By 2019, the SBIDZ looked at having 32 500 artisans on the field of oil and gas, and they made use of the public colleges and are having 15 agreements and the Department of Higher Education playing a major role. The provincial DEDAT was engaging firms to take interns and skill them on oil and gas sector.
The DEDAT made use of the Auditor General’s findings in monitoring its entities. The Head of Department had meetings with entities in playing an oversight and monitoring of funds transferred to the entities.
6. Presentation by the Saldanha Bay Industrial Development Zone
On 01 February 2017, the Committee conducted an oversight visit at the SBIDZ, received a presentation, engaged its management and visited the projects currently underway.
The SBIDZ is a public entity reporting to the (DEDAT). The SBIDZ had been established as South Africa’s first sector-specific zone in support of the upstream oil and gas services; marine repair and engineering sector. The Industrial Development Zone’s enabling legislation act as a catalyst to create and sustain economic development, facilitate job creation by way of industrial investment and efficient development in the Saldanha Bay Region, through the establishment of an upstream oil and gas services complex. The SBIDZ is a competitive and highly efficient Cluster that is a leading, investor-responsive location for upstream oil and gas; marine repair and fabrication activities servicing the African continent.
The SBIDZ was designated by the Minister of Trade and Industry on the 31 October 2013, with the total land area of 330ha designated across Industrial Development Corporation (IDC) and Transnet Port Authority owned land. The SBIDZ was currently designated across the Port and was expected to operate the zone as a contiguous Freeport.
The SBIDZ reported that they had received R 741.7 million (100 per cent) of their funding, R 442.6 million (60 per cent) from the IDC for Land Development and Municipal upgrades and R 299.1 million (40 per cent) from the TNPA Land Development. The infrastructure spending was reported to be at R 247.3 million (33 per cent) with the committed funds amounting to R 218 million (29 per cent) and the available funds being at R 276.4 million (37 per cent).
The SBIDZ received an amount of R 95.2 million from the Western Cape DEDAT and spending amounted to R 81.6 million. In order for the SBIDZ to be able to fulfil its commitments, it would require the following:
- R100 million will be required in 2016/17 to conclude the land sale transaction with the IDC (transfer payment agreement in progress);
- To give full effect to the operationalization of the SBIDZ over the next 3 to 5 years, additional funding will be required to fund the requirements in terms of managing the estate and meeting investor requirements at an estimated cost of R15 million per annum; and
- Long-term leasing of the TNPA land will require an estimated additional amount of R 36 million per annum for the 75 ha site.
The SBIDZ was expected to sign lease agreements with three tenants before the 31 March 2017. It was reported that from the first Operation Phakisa lab in July 2014, focusing on the Oceans Economy, a number of initiatives were launched in the Port of Saldanha Bay to encourage investment and stimulate growth in the oceans economy.
- The Offshore Supply Base (OSB) 20 year concession: Bids closed on 12 October 2016 and recommended outcome was approved by TNPA 21 November 2016.
- Placing the Port of Saldanha Bay as TNPA’s flagship oil and gas services and marine repair and fabrication port with two additional concessions, namely for a new Mossgass quay and a new rig repair berth (Berth 205). The EOIs closed on 02 August 2016 and TNPA Excois currently reviewing the bids received.
The challenges and future prospects included:
- Socio-economic challenges continued to influence success rates of training and labour recruitment particularly on construction projects;
–Substance abuse, health, and safety and security challenges.
–Higher black youth unemployment.
- Labour Relations: As the investor pipeline realises, good labour relations becomes paramount. SBIDZ-LC initiated exploratory discussions with Trade Unions last year and will continue this year.
- SBIDZ must split SMME development into two streams, the construction-related development and oil and gas related development as the investor pipeline realises.
- The low price environment seeks cost and quality efficacy through innovation. The next evolution of the zone must be into a place of research, design and learning with close ties to industry to commercialise ideas.
6.1 Offshore Supply Base (OSB) site in the Port
The project was meant for the repair of vessels and rigs. An amount of around R 150 million was spent on the project. Transnet has invested on the project which will integrate sea and land. The project would serve investors in terms of customs duties, but only when goods exit the premises only then they would be liable for custom duties.
The Offshore Supply Base would reduce the travel time of the vessels in terms of going for repairs to Asia. The infrastructure for the refilling of vessels was already in existence. It was also mentioned that Transnet was having a skills centre based in Saldanha Bay and learners were being sent for training.
6.2 The new 15ML Besaansklip Reservoir
An increase in the water storage capacity in the supply system of the municipality was required to enable sufficient water supply to the zone. A 10 to 15 year water demand period was set in accordance with engineering best practice. The new 15Ml reservoir is located adjacent the existing 85Ml reservoir at the Besaansklipsite. The Department of Trade and Industry provided the SBIDZ with a total budget of R33 934 330 of which R15 520 429 (46 per cent) was spent to date.
The project start date was August 2016, and the project being projected to be completed by the end date August 2017 and by the end of September 2017 it would be operational. An estimated average of 30 construction jobs had been created to date. At completion, the reservoir would be the property of the Saldanha Bay Municipality and they would have to maintain it.
6.3 The Saldoc and Link Road and Bridge site
The zone as a Freeport requires continuity from the IDC land to the Port and to be separate and secure from public traffic and accommodate heavy vehicles and weights. A “link” road and bridge was thus required. The total budget R41 094 901 of which R25 833 769 (63 per cent) was spent to date. The project start date was April 2016. And the completion of the project was projected to be the end date March 2017. An estimated average of 60 construction jobs had been created to date. Local Economic Development (LED) target was 5 per cent of contract value. Low due to nature (reinforced structural concrete) of the project.
7. Committee observations
Having engaged with the City of Cape Town, the National Treasury, the Western Cape Provincial Treasury and the Department of Economic Development and Tourism and the SBIDZ leadership, the Committee observed the following:
7.1 The Committee acknowledged the support provided by the National Treasury to the CCT through the IDP, budget and MTREF processes, in line with the MFMA. This includes Socio economic profiling of the CCT, the publication of the Municipal Economic Review and Outlook, the IDP and MGRO processes. The support aim to determine whether the CCT’s plans and budget are aligned to the NDP and broader service delivery priorities;
7.2 The Committee noted with concern that the CCT has budgeted for an operating deficit over the 2016/17 MTREF and that this could, if not addressed, lead to financial stress;
7.3 The CCT’s expenditure on capital projects was not operating or performing under the norm and there appeared to be much reliance on capital expenditure grants;
7.4 The Committee noted that the water crisis in the WC has generated more money for the CCT but raised concerns about the ability of the consumers to pay the amounts charged and the capacity of the CCT to collect this revenue;
7.5 The City generally spend only 75 per cent of the allocated capital project grants and this could be due to poor planning and poor management;
7.6 With regards to the SBIDZ, the Committee observed that its operations are aligned to policies of government; that there were effective structural and institutional arrangements governing the Zone; that there was collaboration between various stakeholders and the memorandum of understanding had been signed working together with the local community of the Saldanha Bay municipality, three spheres of government, across different sectors and departments;
7.7 The Committee noted that the Board of the SBIDZ comprised of appropriately qualified representatives across a wide spectrum of sectors, including the DTI, Transnet, the Saldanha Bay local municipality, the Western Cape Provincial government, the private sector and the IDC. The Board reported to the provincial government, its shareholder, which in turn reported to the Western Cape Provincial Parliament, governed by the PFMA and the Company’s Act;
7.8 The Committee noted that the IDZ started collaborating with the community and have signed charters in community wards eight business organisations and SMMEs. A Central business portal was used for sharing business information and a supplier database had been developed. All sub-contracting was done through the IDZ from the construction through to the final phase. These are some of the requirements of the IGFR;
7.9 The IDZ had a good working relationship with the six public TVET colleges in the Western Cape, including the Northlink College. They had an agreement with 15 of the 16 SETAs in the Province, where the businesses funded the teacher posts for career awareness, work readiness, increasing maths pass rates and getting learners get placed at jobs through the internship programme;;
7.10 The Committee was concerned that some of the rail lines for goods and passengers are lying dormant and could be revived and be used to generate revenue across the country and that the IDZ could work with other stakeholders to take advantage of that;
7.11 The Committee observed that the oil and gas project was launched in 2013, envisaging to create about 40 000 jobs in four years, amongst other benefits, but only 10 000 jobs were reported to have been created;
7.12 In terms of skills for growth and development, a project that forms part of the deliverables of the Operation Phakisa oil and gas Project, the Committee noted the importance of the role that the TVET colleges and SETAs could play to assist the IDZ with its skills development programme.
7.13 The Committee noted that the WC Provincial Treasury set a deadline for the IDZ to become self-sustainable in its operations, which is 3 to 5 years, after which the PT will discontinue funding;
7.14 The Committee noted that the sustainability of the IDZ depended on the effectiveness of the value chains and when the time that the IDZ would start making money but asserted that the three spheres worked well from the feasibility study phase to date;
7.15 The Committee noted that the skills challenges included the type of skills and expertise required compared to the skills that could be supplied by the local municipality of Saldanha Bay in five key sectors, namely, energy, agro-processing, ICT and oil and gas;
7.16 Members noted the importance of the role and potential of SMMEs in creating job opportunities in Saldanha Bay municipality and cautioned the SBIDZ that it should work with the relevant stakeholders to avoid the situation that happened during the Saldanha steel period, where more people moved into the area in anticipation of the job opportunities. The Municipality must be prepared for such possibilities in its future planning;
7.17 The Committee noted that the IDZ requires that government or the NCOP facilitates the ease of doing business to enable the IDZ to function efficiently and effectively;
7.18 The Committee observed that the three projects visited, which were under construction were expected to be completed on time between April and September 2017. The contractors appointed local labour to minimise the possible in-migration to the area, which may increase the demand for other basic services. The Committee noted that there were project managers on construction sites and that they were from the provinces’ infrastructure units;
7.19 The Saldanha Local municipality assisted or worked with the IDZ during the planning phase even though it does not provide funding for the projects implemented. Upon completion of the projects, the IDZ would hand over the assets to the municipality in terms of charging rates and taxes and maintenance.
8.1 The Committee have to engage further with the CCT on their service delivery plans, the measurability of and alignment of the IDP, budget and its economic growth strategy with the NDP objectives, in the next financial year;
8.2 The CCT should improve its long term planning and budgeting, budget for an operating surplus before capital transfers to ensure sustainable delivery of basic services and avoid the financial distress trap;
8.3 The CCT must improve on its portfolio and programme management to better manage its delivery of large infrastructure projects and better manage its revenue collection and flows and reduce reliance on capital expenditure grants. The CCT’s infrastructure and management systems must function effectively;
8.4 While the Committee acknowledges the City’s robust revenue collection strategy, it cautions that the City guards against committing the revenue billed based on level three water restrictions imposed on consumers but not yet collected, in light of the current unfavourable economic conditions. The CCT should develop an action plan, set the time frames and measure progress on its debtors and creditors over time;
8.5 The CCT must improve its capital spending, address challenges with contractors and develop a database for all contractors to better manage its suppliers or contractor’s performance to ensure that services are provided on time
8.6 The CCT must address informal settlements in their planning and budgeting of key strategic projects and utilise the Human settlements Urban Grant effectively to assist in flooding areas in Cape flats and other low lying informal settlements. The CCT’s spatial development plans or long term vision should take into consideration the fact that more people are likely to move into these areas in future;
8.7 The CCT should develop and implement a strategy that addresses flooding and fires that occur yearly, particularly in informal settlements; and ensure that the poor people in the province get basic service delivery on time;
8.8 The CCT need to implement the EPWP projects that address youth unemployment, poverty, inequality and drug abuse in affected areas;
8.9 The IDZ should explore and tap into the rail infrastructure built by Transnet given that the rail system assets in South Africa are largely underutilised and underdeveloped. The IDZ should take advantage of that and also help reduce the number of delivery trucks off the road;
8.10 The IDZ should collaborate with others like Coega in the Eastern Cape and Richards Bay in KZN to share best practices in areas of common interest such as the Customs Control Area, one stop shop models, notwithstanding the different sectoral focus areas;
8.11 The Committee saw the IDZ as an opportunity to link with the TVETs and SETAs to bridge the skills deficit and create more development opportunities and ensure sustainability. The Committee recommends that in implementing its projects including the skills development programme, the IDZ should prioritise women, the disabled and the previously disadvantaged individuals in the local community of Saldanha in order to reduce poverty and dependency on government grants;
8.12 The Committee recommend that the Western Cape Department of Economic Development and Tourism monitors the IDZ to deliver on its funded programmes and report periodically on the budget implementation, actual value of new investments, jobs created and whether that is in line with the set targets;
8.13 The Committee noted that currently, there were three big companies operating within the IDZ and recommend that the IDZ takes the role of SMMEs in creating jobs and generating revenue into consideration and also support their growth through partnerships, sub-contracting and tendering in general;
8.14 The Committee recommends that the Western Cape Provincial Treasury and the Department of Economic Development and Tourism closely conduct fiscal oversight over the IDZ to ensure that it meets all set targets, and that it operates within the set and agreed deadline and conditions for self-sustainability;
8.15 The Committee recommends that the coordinates various parties across three spheres of government, across departments, SETAs and TVETs to ensure a successful implementation of the programmes aimed at youth development.
Report to be considered.
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