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This report highlights the ways in which the National Treasury manages fiscal risks in the provincial sphere of government, including coordinating budget processes, monitoring provincial spending, and enforcing compliance. It provides specific observations and risks related to personnel control and provincial expenditure in the Eastern Cape and North West provinces.
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Select Committee on Finance Provincial Budgets and Expenditure4th quarter 2016/17 National Treasury
Introduction • National Treasury manages fiscal risks in the provincial sphere of government in the following ways: • Co-ordinating the provincial budget processes through; • Benchmarking provincial budgets, with a special focus on social services and concurrent functions • Monitoring and analysis of provincial spending including publishing expenditure reports quarterly including; • Conditional grants allocations, monitoring, reporting and rollover co-ordination • Compliance enforcement and interventions, including with holding and stopping funds in accordance with the Division of Revenue Act • Provincial visits - 1st Quarter spending and infrastructure visits • Briefing Finance Minister and MECs on fiscal risks in the provincial sphere through intergovernmental forums such as Budget Council; • Capacity building and training
Provincial aggregated budgets and expenditure as at 31 March 2017 4
Eastern Cape: Accruals and Payables not recognized: 2015/16 6 6
Summary of observations and fiscal risks • Education and Health Personnel • By 31 March 2017, Education had reduced personnel numbers by 1077 [i.e. from 67 706 to 66 629] due to amongst others, the high attrition rate, hence the huge underspending in compensation [R514.7m]. Whilst Health, had a reduction of 726 from 40 123 to 39 397 by the end of the previous financial year. This is due to targeted appointments [Annual Recruitment Plan] not being fully realised as well as not re-contracting Community Health Workers. • Spending as at 31 March 2017 • ECPG had spent R69.414 billion or 99.2 % of its adjusted budget [R69 988 billion] with an underspending of R574.3 million [Pre-audited] by all departments. Whilst all departments had underspend their budgets, the main contributors are Health [R169.5m], Economic Development [98.5m], Education R67.4m] and CoGTA [62.9m]. In terms of economic classification, the bulk of underspending [R790.8m] is on compensation of employees and Education [R514.7m], Roads and Public Works [R62.4m], Health [R60.8m] and CoGTA [R40.8m] remain the main contributors. The key reasons vary, ranging from high levels of attrition in Education, non conformance with requirements of filling positions by Roads and Public Works [i.e. critical positions] to inadequate planning for recruitment or filling of targeted positions by health, to mention but a few. • Education had an adjusted LTSM budget of R896 million which was overspent by R163. million or 18.2% despite an additional amount of R235.9 million that was allocated during 2016 budget adjustment. The drastic increase in spending leading to what we term “March Spike” spending of R678.6 million must be looked into by ECPT to understand the reasons and or justifications thereof. • Overspending of R163.9 million or -13.3 % by Health on medicines which could be construed as inadequate provision following a downward adjustment of the main appropriation [from R1 345 billion to an adjusted budget of R1 232.4 billion]. Below herein is the exact opposite, an underspending on medicine supplies by R7.8m or 1.1 percent following an upward adjustment from R671.2 million to an adjusted budget of R718.7 million. Its something that ECPT must look into, whereby you have budget increases leading to underspending vs budget reductions leading to overspending. • Underspending of R88.1 million or 14.9 % by Health on laboratory services which had also happen after downward reductions during adjustment budget process.
North West: Accruals and Payables not recognized: 2015/16 9 9
Summary of observations and fiscal risks • The aggregate provincial spending of R36 billion as at 31st March 2017 is characterised by underspending on conditional grants and infrastructure allocations which stands at 94.5 per cent and 91.7 per cent respectively. • The actual underspending of R686.3 million indicates that the control measures put in place by Provincial Treasury are bearing fruits but it also indicates that departmental projections have not been credible because they have been reflecting some pressures for the past 11 months of the financial year, in particular the Department of Health. • The North West province has maintained the stable personnel spending resulting in a saving of R435,6 million in spite of an aggregate increase in personnel numbers of 411 across all departments and the growth in spending of 7.2 percent between 2015/16 and 2016/17. • Education • The department personnel numbers increased by 917 from April 2016 to March 2017. However these increase was in temporary educators, permanent educators have been reduced by 476 over the same period, hence savings of R196.1 million was realised. • Goods and services budget underspend by R87.9 million mainly on LTSM and property payments. • There is an improvement in terms of procurement and delivery of LTSM to schools, however there are some delays in effecting payments to the new suppliers and spending on LTSM is currently at 88 percent which is the same spending as in 2015/16. This pose a risk of accruals being accumulated. • The department complies with school funding norms and standards for Quintile 1-5 and as at the end of 2016/17 the spending is 103 per cent. • Health • Department started the 2016/17 financial year with accruals of R657 million. However, some measures are being put in place to realise efficiencies which includes centralising payments of non-negotiable items and putting in place finance unit at the medical depot. • The department realised savings of R134.6 million in personnel spending resulting from reduction in personnel numbers by 460 (from April 2016 to March 2017). The savings of R127.9 million was prioritized to non-negotiable items but medicine and patient food budgets still remain at risk as indicated by an overspending of R113.7 million and R46.4 million, respectively.
Summary of observations and fiscal risks • Health continues • During 2016/17 adjustment budget R134.3 million was transferred from Education compensation of employees to fund Health accruals. • Failure to attract health specialists and professionals remains a challenge in providing quality health care for the citizens of the province. The province is currently the highest in maternal mortality at 148 per 100 000 births as per 2015-16 statistics.(Source: Health Trust System) • Public Works and Roads • Public Works and Roads underspend by R147.1 million of which R130.4 million is on maintenance and repairs on road infrastructure projects due to delays in supply chain management processes such as finalising tender specifications, advertising and warding of tenders. This posses a risk of Provincial Roads Maintenance Grant (PRMG) funds amounting to R111.9 million being surrendered back to National Revenue Fund. • Human Settlements • The department underspend by R 249.6 million of which R200 million is from Human Settlements Development Grant, this is due to the unpaid invoices as a results of delayed infrastructure projects. • Capital/infrastructure • Provincial capital expenditure underspend by R477 million of which R366.2 million underspending is funded through conditional grants. The affected grants mainly being HSDG (R200.6 million), Provincial Roads Maintenance Grant (PRMG) (R111.9 million) and Health Facility Revitalisation Grant (R36.7 million).
Summary of key conclusions and Fiscal Risks over the 2017 MTEF - Eastern Cape • In a nutshell, the overall 2017 MTEF Budget for ECPG grows above inflation, hence healthy growth is also evident in the social sector departments. The province has tabled a surplus budget over the 2017 MTEF and positive cash position as a contingency measure so as to provide, alleviate and or reduce the effect of some of the contingency liabilities [i.e. medico legal claims, leave gratuity etc.] and or any other eventuality such as fiscal risk in the country. • The province has tabled a surplus to provide for contingency, alleviate or reduce to anticipate the effect of some of the contingency liabilities [i.e. medico legal claims, leave gratuity etc.] and or any other eventuality such as fiscal risk in the country. • Of the R74.4 billion budget of the province, compensation of employees accounts for 64.6 % and 17.9 % for goods and services. The CAPEX however, is only 6.2 per cent and thereby there is a need to work towards gradually increasing this provision for capital investment purposes in order to make adequate stride in growing the economy of the province, which is consider to be one of the poorest province. • It’s a tricky endeavour though on how do you manage and or control compensation growth with the view of making additional provision for infrastructure investments that make a difference and thereby reducing the poverty levels in the province. This is include the issue of using surpluses to generate inclusive growth in the province. The next slide, demonstrated adequate provision for compensation of employees, particularly in the social sector [i.e. Education and Health].
EC - Summary of key conclusions and Fiscal Risks over the 2017 MTEF - Eastern Cape • Some of the risky areas for the Province over the 2017 MTEF include: • the contingent liabilities, particularly within Education and Health, stemming largely from employee benefits as well as claims against the departments. • Medico-legal claims in Health which has accumulated to over R14 billion. • In summary, the province should be able to manage its financial liquidity risks over the 2017 MTEF considering the MTEF budget surplus and its cash position. More efforts though, needs to be made in making the identified strategic priority projects [i.e. Agriculture as a “game changer”) to generate opportunities for inclusive growth in the province and thereby reduce levels of poverty, unemployment and inequality.
NW - Summary of key conclusions and Fiscal Risks over the 2017 MTEF • Social sector services are as far as possible protected from the cuts; • departments of Education and Sports Development, Social Development as well as Health by 8.4 percent, 8 percent and 12 percent respectively • health 12 percent is adequate given pressures within the department largely emanates from the payment of 2015/16 accruals. The department budget is also expected to grow by 8.6 percent over the MTEF. 4 percent year on year improving to 6.6 percent over the MTEF. • Medicine and agency and support likely to experience pressure in 2017/18 • Cost cutting measures • The province has moratorium in place on which only the critical position are being filled. This measure was put in place to deal with the overcrowding by compensation of employees and contain the wage bill. However, some funding is made available for inflationary adjustments and pay progressions hence the overall growth year on year growth of 10.2 percent and 8.1 percent over the MTEF. • Non-essential items were identified and spending have been reduced or growing at a bare minimal this includes advertising, catering for departmental activities, communication, venues and facilities, minor assets as well as travel and subsistence. • Own Revenue Generation • In response to fiscal consolidation the province will continue to implement alternative strategies to improve own revenue which includes; increasing number of licensing stations, building new and repairing current weight bridges with South African Post Office as a new agent from 2016/17 for motor vehicle licence renewals. Health department is also implementing ITC System in 2017/18 financial year to fast track the collection of revenue. Consequently own revenue is expected to grow slightly by 2.4 percent year on year and 4.6 percent over the MTEF.
NW - Summary of key conclusions and Fiscal Risks over the 2017 MTEF • More funds has been channelled to provincial priorities sector which includes Agriculture, Culture and Tourism each growing annually by 7.6 percent, 10.8 percent and 14.1 per cent respectively. • There is a need for more funds being released to the social sector more particular Health. • In Health, non-negotiable items and other core items reflect a growth below inflation despite the increasing demand for health services. • This under collection in indicated in medical suppliers and Patient food expected to grow by 0 percent and 3 percent, respectively. • Public Works and Roads department need to ensure that their supply chain management processes are in place since this has a huge implication in project delays and funding not utilised Provincial Roads Maintenance Grant to address the poor road conditions issue. • Own Receipts growth rate is below inflation at 2.4 percent even with the implementation of new patient system to verify occupation. Hence, there is a need to strengthen revenue enhancement strategies and collection approach.
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