ATC080307: Report on Expenditure for Second Quarter of 2007/08

Budget Committee on Appropriation

1. Report of the Joint Budget Committee on Expenditure for the Second Quarter of the 2007/08 Financial Year, dated 7 March 2008

The Joint Budget Committee, having considered government expenditure for the second quarter of the 2007/08 financial year, reports as follows:

INTRODUCTION

The Estimates of National Expenditure (ENE) of 2007 states that ... “Medium-term budgeting is more than just numbers – it is about policy prioritisation, planning and reaching agreement on spending plans that support government’s objectives”.[1] The Joint Budget Committee (JBC) hereby presents its “in-year” oversight report in assessing the executive authorities and accounting officers’ actions of implementing the allocated budgets to meet government objectives for the second financial quarter of 2007/08: from 01 July to 30 September 2007.

“In-year” oversight is conducted through the interrogation of national expenditure as  published by National Treasury in the monthly “Statement of the National Revenue, Expenditure and National Borrowing” The statements are published by the National Treasury so as to comply with the Section 32 reports of the Public Finance Management Act (PFMA). The JBC expenditure review is intended to draw attention to spending patterns of the national departments. It is important to note that the underlying expenditure review is brought together prior the adjustments allocation that were tabled by the Minister of Finance on 30 October 2007.

A REVIEW OF SPENDING ACCORDING TO GOVERNMENT CLUSTERS

The expenditure review below is arranged according to the functional groupings of government departments, namely the (1) Central Government Administration, (2) Financial and Administration Services, (3) Social Services, (4) Justice and Protection Services, and (5) Economic Services and Infrastructure Development.

CENTRAL GOVERNMENT ADMINISTRATION CLUSTER

In the second quarter of 2007/08 financial year, it was observed that the departments’ grouped under the Central Government Administration cluster increased their total spending relative to the first quarter of the year under review. This is reflected in Figure 1 below:

Figure 1 indicates that the most increased spending was achieved by the Department of Provincial and Local Government (DPLG), which managed to spend 49.67 percent of its budget in the second quarter (relative to 5.41 percent total spending in the first quarter) of 2007/08.  The Department of Public Works spent 44.51 percent of its allocated budget in the second quarter (relative to 23.73 percent in the first quarter).

The second quarter spending in this cluster has much increased in relation to the first quarter. The total spending of the cluster was 46.11 percent in the second quarter (relative to 9.09 percent in the first quarter).  However, the Committee was not satisfied with the uneven spending pattern and the significant variations between the first quarter and second quarters.

FINANCIAL AND ADMINISTRATION SERVICES CLUSTER

Most of the departments in the Financial and Administration Services cluster increased their total spending in the second quarter except for the Government Communications and Information Systems (GCIS): GCIS spending decreased from 30.69 percent in the first quarter to 25.68 percent in the second quarter. The GCIS is primarily responsible for setting up and consolidating a government communication system that ensures that the public is informed about government’s policies, plans and programmes.

The total spending of the cluster nevertheless increased to 35.03 percent in the second quarter (relative to 21.87 percent in the first quarter). This is illustrated in Figure 2 below:

SOCIAL SERVICES CLUSTER

Half of the departments grouped under the Social Services cluster managed to increase their spending in the second quarter of 2007/08 as reflected in Figure 3 below:

The three departments that increased their spending include the Department of Arts and Culture (from 25.07 percent in first quarter to 34.79 percent in second), the Department of Health (from 23.81 percent the first quarter to 34.04 percent in the second) and lastly the Department of Social Development (from 26.68 percent in the first quarter to 33.18 percent in the second). The remaining departments (Education, Labour, and Sport and Recreation South Africa) decreased their total spending. In particular, the Department of Education reduced its spending from 48.91 percent in the first quarter to 25.34 percent in the second. This is predominantly due to the transfers in the first quarter to tertiary institutions and Provincial Departments.

The total spending of the cluster has improved to 30.91 percent in the second quarter (relative to 29.94 percent in the first quarter). Despite the improvement in expenditure, however, the Committee’s ultimate focus is on whether spending has achieves its intended impact and outcome or not.

JUSTICE AND PROTECTION SERVICES CLUSTER

The Department of Correctional Services, the Independent Complaints Directorate, and the Department of Safety and Security spent above the 20 percent average in both the first and second quarters of the year under review.  The two departments that sequentially increased their total spending are the Department of Defence (from 16.01 percent in first quarter to 37.13 percent in the second quarter), and the Department of Justice and Constitutional Development (from 18.96 percent in the first quarter to above 34.68 percent in the second quarter).  This is reflected in Figure 4 below:

The total spending of the cluster amounted to 34.63 percent in the second quarter (relative to 19.54 percent in the first quarter). Spending has therefore improved in line with national objectives of promoting public safety and security. The question remains, however, whether the resources allocated to the cluster, and specifically the Department of Safety and Security, achieve the desired outcomes and satisfactorily reduce the levels of crime. Although there is increased spending and additional personnel and capacity, the public still find it difficult to access police services at crucial times.

ECONOMIC SERVICES AND INFRASTRUCTURE DEVELOPMENT CLUSTER

The quarter-to-quarter total spending of the departments grouped under this cluster reflect inconsistency as Figure 5 below illustrates:

The Department of Public Enterprises overspent in the first quarter with 98.84 percent of its budget. The JBC highlighted in the First Quarter Expenditure Review the anomaly of excessive spending and requested an explanation. National Treasury revealed that contingency reserves of R2 billion were guaranteed and committed to the Department. The JBC was not satisfied with commitment of the contingency reserves for certain departments.

All other departments increased their spending in the second quarter.  The total spending of the cluster has improved to 35.15 percent in the second quarter (relative to 22.15 percent in the first quarter).

A REVIEW OF SPENDING ACCORDING TO ECONOMIC CLASSIFICATION OF EXPENDITURE

The ENE groups the economic classifications of expenditure into three categorises, namely the current payments, transfers and subsidies, and capital expenditure (CAPEX).[2]  A review of economic classification expenditure is conducted below:

A REVIEW OF YEAR-TO-DATE CURRENT PAYMENTS

Current Payments is a fiscal provision for spending on compensation of employees, goods and services of not more than R5 000 per unit and rent on land. Figures 6, 7, 8, 9 and 10 reflect year-to-date-current payments.

CENTRAL GOVERNMENT ADMINISTRATION CLUSTER

Apart from Parliament, the lowest expenditure on current payments was recorded by the Department of Home Affairs (41 percent). The Department of Provincial and Local Government, the Department of Foreign Affairs and the Presidency spent 42 percent of their allocated budgets (and are left with 58 percent to spend in the third and fourth quarter).  This expenditure is clear indication of vacancies.

FINANCIAL AND ADMINISTRATIVE SERVICES CLUSTER

Statistics South Africa and National Treasury were the lowest spending departments of Current Payments (both spent 38 percent) by the end of the second quarter.  The two departments will have to spend about 62 percent of their Current Payments Budget in the third and fourth quarter.

SOCIAL SERVICES CLUSTER

To date, the Department of Sport and Recreation SA utilised the lowest Current Payments (31 percent) followed by the Department of Health and Social Development (both spent 34 percent). The Department of Sport and Recreation SA was the third lowest spending department out of all the 34 Budget Votes of 2007/08.

JUSTICE AND PROTECTION SERVICES CLUSTER

The Department of Justice and Constitutional Development (42 percent spending) and the Department of Defence (44 percent spending) were the lowest Current Payment in the Justice and Protection Cluster at the end of the second quarter. The two departments will have to spend considerably more than 50 percent of their allocated budget in the remainder of the year.

ECONOMIC SERVICES AND INFRASTRUCTURE DEVELOPMENT CLUSTER

The Department of Transport recorded the lowest spending on Current Payments (of 24 percent) out of all the 34 Budget Votes.  This is followed by the Department of Housing at 25 percent.  The two departments will have to spend about 75 percent of their current budgets in the final two quarters.

A REVIEW OF THE YEAR-TO-DATE (YTD) TRANSFER AND SUBSIDIES

Transfers and subsidies include all unrequited payments made by Government departments or entities. A payment is unrequited if the Government department or entity does not receive anything directly, financial or otherwise, in return from the recipient party. Both current and capital transfers are included in this item. Notably at R202 billion, transfers and subsidies represented the single largest economic classification and it is therefore imperative that Parliament is able to monitor and oversee the manner in which these funds are utilized.

CENTRAL GOVERNMENT ADMINISTRATION CLUSTER

The Department of Foreign Affairs (DFA) had the lowest Transfer Payments (of 24 percent) followed by the DPLG (37 percent spending on Transfers and Subsidies) at the end of the second quarter.

FINANCIAL AND ADMINISTRATIVE SERVICES CLUSTER

The Public Service Commission was allocated R27 000 for transfers and subsidies and ended up spending R297 000 (1 100 percent) at the end of the second quarter.  This is a clear indication of shifting of funds from one programme to another (virements).

SOCIAL SERVICES CLUSTER

The Department of Labour (DoL) recorded the lowest transfer expenditure of 42 percent at the end of the second quarter.  It is noted that the national DoL is responsible for the programme of national skills development strategy to meet the skills shortage, the acceleration of broad based black economic empowerment (BBBEE) and better alignment between the further education and training sector, business and the sector education and training authorities (SETAs).

3.2.4 JUSTICE AND PROTECTION SERVICES CLUSTER

The Independent Complaints Directorate was allocated an amount of R48 000 for transfers and subsidies and ended up spending R49 000 (equivalent to a negative 2 percent overspending) at the end of the second quarter.  On the other hand, the Department of Defence (DoD) only utilised 35 percent of its allocated budget. The DoD will therefore have to utilise about 65 percent of its budget in the last two quarters.

3.2.5 ECONOMIC SERVICES AND INFRASTRUCTURE DEVELOPMENT CLUSTER

The Department of Agriculture (42 percent), Transport (43 percent), Housing (44 percent), Communications and Water Affairs and Forestry (which both spent 45 percent) had the lowest spending of transfers and subsidies in this cluster.  All of these departments will be required to spend considerably more than 50 percent of their allocated budgets in the last two quarters.

3.3 A REVIEW OF YEAR-TO-DATE CAPEX

CAPEX is comprised of five main categories, namely buildings and other fixed assets, machinery and equipment, cultivated assets, software and other intangible assets and land and sub-soil assets. Expenditure on goods, such as items worth less than R5000, are not included under capital expenditure but categorised as goods and services. It is also important to highlight that capital and specifically infrastructure spending, is a key driver of economic development and job creation. Under-spending during the first half of the financial year therefore reflects serious problems. Figures 16, 17, 18, 19 and 20 highlight CAPEX in the various government clusters.

3.3.1 CENTRAL GOVERNMENT ADMINISTRATION CLUSTER

Parliament and the Department of Home Affairs recorded the lowest spending on CAPEX over the first two quarters with 5 and 9 percent respectively.  Apart from these institutions, the lowest spending on CAPEX is the Department of Public Works (20 percent) and the DPLG (24 percent).  .These departments will be required to spend 80 percent of its CAPEX Budget only in the third and fourth quarter.

3.3.2 FINANCIAL AND ADMINISTRATIVE SERVICES CLUSTER

SA Management Development Institute (SAMDI) was allocated R1.617 million for CAPEX and spent R2.588 million (thus overspending by a considerable percent) at the end of the second quarter. The low CAPEX spending in National Treasury (32 percent) and the Public Service Commission (24 percent) are also cause for concern.

3.3.3 SOCIAL SERVICES CLUSTER

The Department of Arts and Culture only spent 2 percent (R108 000 out of R5.142 million) of its allocated CAPEX budget over the first two quarters. This is followed by the Department of Labour 8 percent), the Department of Health (20 percent) and the Department of Social Development (29 percent). The Department of Sport and Recreation South Africa was allocated R980 000 and actually spent R1.47 million. This is equivalent to 150 percent overspending.

3.3.4 JUSTICE AND PROTECTION SERVICES CLUSTER

The first two quarter CAPEX spending in this cluster was below 40 percent.  All the departments that are grouped under this cluster will be required to spend over 60 percent of their budgets for in the last two quarters of the financial year.  The most notable underspending of CAPEX was recorded by the Independent Complaints Directorate which spent R850 000 of its R4.316 million CAPEX Budget (equivalent to 20 percent actual spending).

3.3.5 ECONOMIC SERVICES AND INFRASTRUCTURE DEVELOPMENT CLUSTER

The Department of Transport only spent 5 percent of its CAPEX budget, followed by the Department of Minerals and Energy which spent 14 percent.  The two departments will be required to spend the remaining 85 percent in the third and fourth quarter.  The Department of Housing and the Department of Water Affairs are also in the red, with 24 percent and 36 percent spending over the first two quarters.

FINDINGS AND RECOMMENDATIONS

Many national departments have not implemented previous Parliamentary resolutions as recommended by the JBC. Consequently the same general weaknesses prevail in expenditure and financial management across government. In this regard, the Committee re-issues the following recommendations:

Departments must ensure that they spend their budgets in line with the national priorities and their strategic plans, and avoid the current ad hoc utilisation of virements;

National Departments should report to Parliament on spending, including transfers to provinces and public entities in meeting the national priorities.  Such reports should routinely include non-financial performance information;

Departments should accelerate the establishment of sound administrative and financial systems to create an environment for effective and efficient financial management. The development of realistic key performance indicators should be included in this exercise;

To effectively reduce the high vacancy rates, affected departments should establish specific timeframes and furnish Parliament, on quarterly basis, with the progress in the filling of funded vacant posts

Report to be considered.