Northern Cape, North West, Mpumalanga spending challenges

NCOP Finance

17 June 2015
Chairperson: Mr C De Beer (ANC)
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Meeting Summary

The North West, Northern Cape and Mpumalanga provinces have a higher unemployment rate than the rest of the country. They were invited to speak about their revenue and expenditure and their fiscal position. Accruals and underspending were the main topics discussed.

National Treasury provided its perspective on each province first and noted that:
- For Mpumalanga, underspending was R678 million, accruals were R432.9 million (unpaid invoices) and the cash balance was R1 billion. A big concern was the transfers of significant funds to the Mpumalanga Economic Growth Agency (MEGA) with no discernible results.
- The Northern Cape underspent by R140 million, the accruals were R1 billion whilst the cash position was R295 million, which was a serious shortfall. There was a large amount of unauthorised expenditure which was a big concern.
- For the North West, underspending was R432 million, accruals were around R1.5 billion while the cash balance was around R1.1 billion.

North West commented that the unauthorised expenditure will be greatly minimised through the reporting and structures put in place. The underspending was a result of delays in implementation of infrastructure projects. They have set up a central recruitment process to assist in the infrastructure projects and monitoring of the projects.

Mpumalanga said it is creating a database of existing personnel to transfer skills where the need exists internally and remove all vacant posts. This will hopefully reduce compensation of employees from rising. The province is a pilot project for the implementation of a new supply chain management system to reduce underspending.

Northern Cape said that its underspending revolved around education and health with delays in the delivery of infrastructure projects and training commitments. In Agriculture, they had delays in funds being transferred for droughts and because service delivery protests prevented projects from going ahead. The accruals related to duplication of invoices in the health department.

In the discussion, the Committee focused on underspending, MEGA, the accruals and the process for disciplining financial misconduct.  A new person has been appointed from the IDC to run MEGA and the mandate was looked at and clarified to partner with businesses more closely. There is a draft amendment to give teeth to allow provincial treasuries to charge a person directly in a case of misconduct, if the departments do not. Provinces have indicated that they will meet more regularly to manage infrastructure and supply chains more effectively and discipline will be paramount. Biometric systems have been introduced into one province to assist with head counting and a soaring compensation of employees.

Meeting report

The Chairperson offered a special welcome to the provinces. The meeting would look at the fiscal framework to ensure the priorities of the National Development Plan and the provincial mandate are met, specifically in the North West, Northern Cape and Mpumalanga. Accruals and the equitable share needed to be discussed.

National Treasury briefing
Mr Edgar Sishi, Chief Director: Provincial Budget and Analysis for National Treasury, noted that there was a minor change to his report as section 32 of Public Finance Management Act (PFMA) had been completed. For the three provinces discussed today, the unemployment rate is higher in these three provinces than the rest of the country.

There has been significant underspending of R678 million in the province. It had struggled to spend on infrastructure, especially in Health. Treasury noted about 1 000 resignations in education which has led to low spending on compensation of employees (COE). There seems to be a very slow implementation of projects. Accruals are R432.9 million (unpaid invoices) but with a cash balance of R1 billion this should be paid. Overall fiscal risks are mild, but there are spending risks. Unauthorised expenditure is extremely high reaching R900 million in 2013/14. Other risks are the inability to complete infrastructure projects, resignation of educators and growing transfers to the provincial public entity, Mpumalanga Economic Growth Agency (MEGA)

Northern Cape
This province has underspent by R140 million. There are serious concerns in this province. There is a large amount of unauthorised expenditure. They have created commitments above what they are able to spend, which equals unauthorised expenditure. The accruals are R1 billion whilst the cash position is R295 million, which is a serious shortfall. The individual provincial departments will need to report to the Standing Committee on Public Accounts (SCOPA) about this. The Northern Cape 2015 MTEF is very good; personnel budgets have been well managed despite some challenges with education and health. Accruals are a big concern being 5.1% of the budget.

North West Province
There was a net underspending of R432 million. The absorption of community workers was approved, however it has not been funded, leading to unauthorised expenditure. The accruals are around R1.5 billion while the cash balance is around R1.1 billion. The education department overspent its budget and has been placed under administration. The 2015 MTEF is broadly credible.  There are a number of inadequately funded projects, specifically two road projects to the value of R424 million that are not budgeted for.

Northern West Province briefing
Ms Wendy Nelson, North West MEC of Finance, Economy and Enterprise Development (FEED), stated that the province has R660 million in accruals in Public Works. They are busy with compensation of employees and are analysing these figures. On unauthorised expenditure, the risks will be greatly minimised through the reporting and structures put in place.

Mr M Kunene, HOD for FEED for North West Province, continued that the agriculture, culture and tourism sector is the focus of this province. Under expenditure is around R432 million. This is for education and sports development as a result of delays in implementation of infrastructure projects which resulted in a roll-over of R131 million on conditional grants. There was overspending on compensation of employees by 1.8%, mainly in Health of R286 million, through the appointment of Cuban doctors and absorption of bursary holders. Health, Education, Sports Development, Public Works and Roads account for 88.4% of provincial accruals. Monitoring of infrastructure spending is going to be key. There will be a central recruitment process to assist in the infrastructure projects, the EXCO has approved the co-management initiative to restore the cash position. Initiatives to collect revenue and increase it are underway.

Mpumalanga Province briefing
Ms Nombededo Nkamba, HOD for Mpumalanga Provincial Treasury, stated that the province has spent 97.9% of the budget, R36 billion out of R37 billion. Accruals are around R432 million over 30 days and total accruals are R973 million for under and over 30 days. This is compared to R923 million for 2013/14. The EXCO has declared a moratorium on all vacant posts. Each department is expected to go through a “fit for purpose” exercise around job placement. They are creating a database of existing personnel to transfer skills where the need exists internally. Economic Development and Tourism has been tasked with looking at duplications between departments and entities. Back to Basics has helped the province work on its roles especially in compensation to employees. Procurement plans are required for purchases in excess of R500 000 for goods and services. The province is a pilot project for the implementation of a new supply chain management system. The province has spent R14.5 million on financial governance support to NGOs and schools. 39 NGOs and 201 schools were identified for assistance and support in preparing their financial statements. 2 571 administrative clerks were trained in basic accounting principles. They have set up a document that looks at economic performance.

Northern Cape Province briefing
Mr Vuyisile Gumbo, Acting HOD for Northern Cape Provincial Treasury, stated that there were technical adjustments which resulted in a total reduction of R252 million in the provincial equitable share over the 2015 MTEF. National Treasury could not help with the additional funds required and the province has had to cushion this decline by reprioritising funds and resources. The accruals in Public Works relates to rates and taxes. The transfer of land to Health is underway.  Under Health, the accruals relate to duplication of invoices. Another risk is the new infrastructure projects. National government is investing in new infrastructure (hospitals) in provinces without covering the operational costs. This is eating into the reserves of the province.  This includes the new Upington Hospital and De Aar Hospital. The collection of revenue is also under threat with municipalities not paying licence fees over to the province. The baseline may need to be reduced. There was massive underspending under Health, around R69 million of the Hospital Revitalisation Grants. The Health conditional grants underspending was due to delays in the delivery of infrastructure projects. With Education, the underspending in the province related to training commitments. Under the Expanded Public Works Programme (EPWP), it related to delays in the procurement process. With Transport, it was due to payment made in a subsequent month to the services delivered. R18 million was underspent under the Culture budget for delays in the tender process for the construction of libraries. Under Agriculture, R50 million was allocated to assist farmers in a drought, this money only came through two days before the end of the financial year. It could not be spent in time and fell into underspending. R7.6 million was underspent on agriculture projects that were delayed due to service delivery protests in certain districts. The majority of the underspending was due to departments holding back to pay for goods and services.

Ms E van Lingen (DA; Eastern Cape) stated that under the Northern Cape, the mental hospital has taken 14 years to come to this point. This is ridiculous. The Committee needs to investigate the three hospitals under construction, comparing budget and expenditure. There was money available, what happened to it? The library grant is an absolute shame, why were there late appointment of contractors. The R50 million for the drought was paid over in the previous financial year, why was it not spent? Under North West, what kind of administration was the department placed under? The tender process was not completed in time, what held up the process for roads? Under Mpumalanga, what does the rationalisation process mean?

Mr F Essack (DA; Mpumalanga) asked the North West what kind of business common sense was used in handing over projects in December. Why was there underspending, what remedial action was put in place in the province? For Mpumalanga, MEGA has been bleeding this province dry. What does MEGA do? On the personnel head counts, what is being done? What is being done by consultants to empower the provinces with skills?  How are provinces conducting action for financial misconduct?

Mr S Mohai (ANC; Free State) asked which areas of economic growth are the provinces focusing on? What plans do they have?

Mr C Basson (ANC) stated that supply chain management is an issue; the time to build projects cannot take that long. They built World Cup stadiums in a record time. The Committee and provinces must learn from each other. On the motor licence fees, the bodies in charge must be brought in to rectify this situation.

Ms T Motara (ANC; Gauteng) asked the North West if the ward based budgeting system is working? How do they plan to offset the overspending? For the North Cape, what system does it have to correct the duplication of invoices? For Mpumalanga, the equitable share is mostly for education and health, however the most underspending is in this area, what are the reasons for this, other than infrastructure delays?

Mr T Dithebe (ANC) asked for clarity on the proper time frame for the budgets and whether Treasury could elaborate on accruals.

Ms Nkamba, HOD for Mpumalanga Provincial Treasury, stated that under Education, underspending was due to an exodus of educators. This was due to the rumour about the pension fund which was unfounded. In Health, the allocation for hospital refurbishment and other infrastructure projects was underspent. This could have been requested to go back to Treasury until it was needed. They are bringing in a new biometric system to assist with personnel headcount. Consequence management has been implemented; in the Health Department 1,000 cases were taken to legal. The information about the issue around MEGA will be provided within seven working days. Often money is shifted from compensation to other departments.  Rationalisation is about making sure they do not have an excess in the number of employees needed and are able to move skills from one area to another, where needed.

Mr Lennard Van Vuuren, Director of Economic Analysis for Mpumalanga Provincial Treasury, stated that MEGA must be about attracting investment.  A new person has been appointed from the IDC to run MEGA. The mandate for MEGA was looked at and clarified. The missing link for MEGA is around strategies that link up with the private sector to form Local Economic Development units. They have created around 160 000 in government linked jobs.

Mr Gumbo, Acting HOD for Northern Cape Provincial Treasury, stated that the "capturing" component is the main problem causing the duplication. They are now forcing the department to capture correctly and centralise the process. If the accounting officer does not discipline, how does the Provincial Treasury intervene? The PFMA is not clear on this. There is a draft amendment to give teeth to allow Treasury to charge the person directly in this case. About the report on the hospitals, they are trying to fast-track hospital delivery, they will be hands on and monitor it on a 30 day basis. On the disaster relief fund, the disaster happened in the year 2013/14 but the money was only made available at the end of the year. This led to underspending as stock was lost and animal feed was not required. On the libraries, there was poor planning; human capital was an issue.

Mr Sishi replied that Treasury has been very clear about wage agreements - they must stick to inflation only increases. There is a complex balancing act in getting rid of vacancies. When it comes to expenditure, no projects should go ahead if there is no money available. The time value of money needs to be understood, On the Kimberley Hospital, the budget went from R230 million to R1 billion, which ate into the operational costs. The country needs quality chief financial officers.

Ms Nelson, North West MEC of Finance, Economy and Enterprise Development,  commented that ward based budgeting is no different from other budgeting. They plug projects into wards from the municipalities. In the end they have one document that covers provinces from national to municipalities. This will be sent to the Committee. Overspending on compensation of employees is a problem. Students who go to Cuba for training need to be absorbed. An action plan is in place to deal with this. There has been a Premier Infrastructure Coordinating meeting held on a quarterly basis to track and make sure they have value for money in infrastructure. There has been some discomfort when Provincial Treasury gets involved in departments per the PFMA; however it needs to be done. They do have a growth and development plan in place. The people in the North West do not benefit from mining. They are looking at a provincial tax to claim some of this revenue

Mr Kunene, HOD for FEED for North West Province, replied that they are looking at strengthening the capacity in the departments. Under EXCO, consequence management has been implemented. Where there are instances of irregular spending, people would be disciplined.

The meeting was adjourned.



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