report of The Joint Budget Committee on expenditure for the third quarter of the 2007/08 financial year, dated 23 may 2008

The Joint Budget Committee (JBC), having considered Government expenditure for the third quarter of the 2007/08 financial year, reports as follows:

INTRODUCTION

Quarterly oversight over Government expenditure serves as an early-warning system and alerts Parliament to challenges and possible crisis in the spending of individual departments. The JBC exercises its oversight, on a quarterly basis, through examining the monthly expenditure reports issued by National Treasury in terms of Section 32 of the Public Finance Management Act (PFMA).

This report provides an analysis of departments’ expenditure for the first three quarters of the 2007/08 financial year in terms of current, capital and transfer expenditure. Consequently, the Committee makes a number of findings and recommendations. By the third quarter, challenges that have arisen in the first and second quarter should have been effectively addressed, or at least measures to address them should have been developed and implemented.

During the third-quarter national departments were operating on the revised expenditure estimates – that includes additional funding from the Special Adjustments Appropriation Act and the Adjustments Appropriation Act of 2007. The Special Adjustments Act appropriated a further R5.2 billion to the R533 billion appropriated in the main Appropriation Act at the start of the year. A further R11.5 billion was then made available for spending via the Adjustments Appropriation Act in October. Together, the additional appropriations increased the 2007/08 budget to R 547.5 billion.

In examining expenditure for the quarter, the Committee sent requests for information to various national departments. Unfortunately, a number of these departments did not respond within the stated three-week timeframe. These include Home Affairs, Health, Transport, Statistics South Africa, the Independent Complaints Directorate, Public Works and Justice and Constitutional Development.

In accordance with established practice, the Committee intends to hold a workshop on Government expenditure at the end of the fourth quarter. This workshop will focus on specific departments identified by the Committee as having serious budget challenges. National Treasury and some of the departments referred to above will be asked to present before the Committee on their spending. The Committee reaffirms the centrality of the various portfolio and select committees in detailed budget oversight and has accordingly invited the relevant committees to participate in these proceedings.

1. TOTAL EXPENDITURE

In terms of the adjustments budget, total expenditure for the year was estimated at R547.5 billion. In the national sphere, this was reduced to R313 billion. By the end of the third quarter, national departments spent R221 billion or 70.6 per cent of their allocated budget. Although total expenditure increased from 2006/07 in terms of the aggregate expenditure, the level of spending relative to the budget was 2 per cent lower than the 72 per cent spending over the first three quarters of last year.

An overview of expenditure for the first three quarters reveals that six departments spent approximately 75 per cent of their allocated budgets by December 2007. These include the departments of Arts and Culture, Education, Labour, Social Development, Environmental Affairs and Tourism and Science and Technology. This level of expenditure is due to transfers and subsidies and is different when operational budgets are taken into consideration. Annexure I, attached, illustrates the total level of expenditure.

2. CURRENT EXPENDITURE

Current Expenditure is categorized into two main components, compensation of employees or personnel expenditure, and goods and services. Total current payments in the national sphere, after the adjustments, was estimated at R91 billion, an increase of approximately R10 billion compared to the revised estimates for 2006/07. By the end of the third quarter, departments had spent R62.5 billion, or 68 per cent of the allocated budget. It should be noted that current expenditure, and specifically compensation of employees, should be predictable, around 25 per cent every quarter. At 68 per cent, there is therefore an obvious risk of under-expenditure for the year.

A review of current expenditure to date indicates that seven national departments spent less than 60 per cent of the current budgets by December 2007, including Home Affairs, the South African Management Development Institute, Education, Social Development, Statistics South Africa, Sports and Recreation and Transport. In terms of the rand amounts involved – as opposed to percentages – the relatively low levels of spending in the departments of Foreign Affairs, Statistics South Africa, Defence and Land Affairs – all of which had current budgets over R1 billion – was also recognized as a risk. Annexure II illustrates the levels of current expenditure by the end of the quarter.

Of the adjusted budget of R2.5 billion allocated to the Department of Home Affairs (DoHA) only R1.4 billion, i.e. 56 per cent, was spent by the end of the third quarter. The continued under-spending and significant shifting of funds between compensation of employees and other programmes remains a cause of concern. The Committee will pursue the reasons for these trends during the fourth quarter and the extent to which the turn-around strategy has improved spending and service delivery in the department.

Of the adjustments budget of R992 million allocated to the Department of Education (DoE), R514 million, i.e. 52 per cent, was spent by the end of the third quarter. The department indicated that the level of expenditure on compensation of employees was on track while the low level of expenditure on goods and services was mainly due to delays in tendering processes in respect of the Education Management Information System project, the Systemic evaluation project and the Adult Mass Literacy Project, which were not finalized by December 2007. Because procurement processes are regulated and have specific timeframes which should be adhered to, further information is required for these delays.

Of the adjusted budget of R199 million allocated to the Department of Sport and Recreation (SRSA), R115 million, i.e. 58 per cent, was spent by the end of the third quarter. Of that amount, R30 million was spent on compensation of employees and R84 million on goods and services. The department explained that under-spending was the result of various reasons including:

Persistent vacancies, especially in the middle and senior management levels;
Delays by certain provinces in submitting dates to verify clubs: verification of clubs being a prerequisite before payments can be made; and
Delays in the finalization and implementation of norms and standards.

The Committee does not fully accept the reasons given by the department for the low level of current expenditure, especially on the persistence of vacancies. Effective budgeting must take strategic account of human resources.

Of the adjusted budget of R385 million allocated to the Department of Social Development (DSD) R212 million, i.e. 55 per cent, was spent by the end of the third quarter. The department, in its written response, made a number of contradictory statements with regards to spending on compensation of employees and service delivery, which will be followed up by the Committee. Furthermore, the inability of the department to fill its funded vacant posts has a negative impact on poverty alleviation programmes, designed to meet the basic needs of the vulnerable members of society.

The Department of Defence (DoD) has the largest current budget of all departments, at R16 billion. The department must therefore ensure that it minimizes under-spending in this category as unspent funds could be better utilized elsewhere. The Committee also noted that the department has received a qualified audit for the past five years. The DoD spent R10.9 billion, or 69 per cent, by the end of the third quarter. Regrettably, the department did not provide the Committee with adequate details for the level of current expenditure.

Of the adjusted budget of R380 million, the Department of Public Services and Administration (DPSA) spent R236 million, i.e. 62 per cent. In its response the department indicated that under-spending was the result of delays in the finalization of various initiatives including the Community Development Workers (CDW’s) Conference, payments for single public service projects, and radio campaigns on anti-corruption. The department expects to accelerate expenditure in the last quarter. The question is why should expenditure always be accelerated in the last quarter?

The department also indicated that it would submit a request to roll-over of R13 million as “this expenditure could not be incurred due to unforeseen circumstances”, which could not be explained to the Committee. Additional clarity is required in this regard, because under-spending on current payments in the DPSA impacts negatively on other departments.

Of the allocated adjustments budget of R70 million, the South African Management Development Institute (SAMDI) spent R33 million, i.e. 47 per cent. The institute received an additional R60 million during the adjustments appropriation, R28 million for the expansion of the staff induction programme and R32 million for new buildings. Although expenditure may increase during the final quarter, the Committee was concerned that these funds were rolled-over from the previous year and were not additional resources as suggested by SAMDI.

As reflected in the previous years, under-spending on compensation of employees was mainly attributable to vacancies. This again led to considerable virements during the adjustments budget. As indicated in their responses, a number of departments identified expenditure on good and services as a challenge due to delays in procurement processes. The Committee is of the view that under-spending on vacancies, procurement and good and services are ultimately due to weaknesses in departmental planning, budgeting, human resource management and monitoring. Many of these concerns were noted during the first quarter and were not satisfactorily addressed despite the Committee’s recommendations.

3. CAPITAL EXPENDITURE

Capital spending is a key driver of economic development and job creation, a stated priority of government. Given the under-spending on capital projects over the first three quarters, it is clear that departments have not prioritized improvement on this category.

Capital spending 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.

Total capital payments in the national sphere, after the adjustments, were estimated at R8.3 billion. As in previous years, average departmental capital spending is low. By the end of the third quarter, departments had spent R4.1 billion, approximately 49 per cent or half of the allocated budget. Although there may in many cases be legitimate reasons for this, with many departments suggesting that capital spending is likely to increase during the last quarter year, this level of expenditure is cause for concern. This is especially problematic given that departments also spent around 50 per cent of the capital budget during the last quarter of 2006/07. The question remains whether departments actually spend this money on capital projects? This trend should not be allowed to persist. Accurate and detailed departmental strategic planning is important especially in respect of capital and infrastructure projects due to the associated high risks and hidden costs.

A review of capital expenditure indicated that 18 departments spent less than 50 per cent of the allocated budgets by December 2007. Four departments, including National Treasury, Labour, Transport and Water Affairs and Forestry spent less than 20 per cent. It must be stressed that road and water infrastructure leaves much to be desired in many provinces. As noted in previous years, a number of departments also spent above their allocated budget including Government Communications and Information Systems, SAMDI, Environmental Affairs and Tourism and Public Enterprises. The different levels of spending in the departments of Public Works, Foreign Affairs, Correctional Services, Safety and Security and Justice and Constitutional Development and Land Affairs – all of which had capital budgets of over R500 million – was also noted. Annexure III illustrates year-to-date departmental capital expenditure.

Of the adjusted of R31.7 million, the Department of Labour (DoL) spent R3.9 million, i.e. 12.4 per cent, by the end of the third quarter. In its written response, the department pointed to a number of delays in procuring equipment. While the department reported that it took various measures to reduce the risk of under-spending, the Committee believes these were insufficient. Under-spending of this nature should not reoccur in 2008/09.

Of the adjusted budget of R1.4 billion, the Department of Correctional Service (DCS) spent R535 million, i.e. 38 per cent. The department’s capital budget was adjusted upward in October 2007 by an amount of R513 million, which was rolled-over from the previous year. In its explanation to the Committee, the department indicated that the execution of capital works projects was done by the Department of Public Works (DPW), which had experienced a number of challenges during the period, for example, the industrial strike action and delays in procurement. While noting various efforts by the department to accelerate delivery, it is again evident that the DCS will under-spend for the year. This is not satisfactory given the continuous trend of under-spending and whilst departments are overcrowded. This department has also continued to receive qualified audits since 2001/02.

Of the adjusted capital budget of R42 million, the Department of Transport (DoT) spent R2.5 million, i.e. 6 per cent. DoT recorded the lowest level of capital spending across national Government. This is of particular concern given that the department also under-spent on capital by 66 per cent during 2006/07 (and over-spent in 2005/06). The Committee sent questions to the department but a response was not received. Given the ongoing budgeting weaknesses in the department, especially for capital and infrastructure question spending, the Committee will engage the department on these trends during the fourth quarter assessment.

Of the adjusted budget of R436 million, the Department Water Affairs and Forestry (DWAF) spent R 90 million, i.e. 19 per cent. The department therefore looks likely to repeat the trend of under-expenditure for this category whilst there are many infrastructure, water and sanitation backlogs in communities. The department under-spent by R93 million during 2006/07. Unfortunately, the department did not respond to the Committee’s questions within the stated timeframe.

Of the adjusted budget of R6.4 million for capital, the Department of Environmental Affairs and Tourism (DEAT) spent R12 million, i.e. 195 per cent, by the end of the quarter. The department explained that its staff establishment had increased during the year and the progressive filling of posts resulted in a demand for capital equipment. R2.7 million was added to the capital budget during the adjustments for this purpose. Given the growth in staff establishment and the explanations provided, a decline in the vacancy rate is expected. The Committee also expects improved budgeting practices for the forthcoming period, specifically that as the department budgets for additional posts it must also budget for the necessary equipment.

Of the allocated adjustments budget for capital payments of R3.6 million, SAMDI spent R4.4 million, i.e. 122 per cent, by the end of the quarter. This was due to computer and software licenses which were budgeted for in 2006/07 but only paid for in the period under-review. As usual funds were moved from compensation of employees during the adjustments budget to cover the shortfall. In addition, the Committee noted that the institute overspent on capital for the past two years.

4. TRANSFER EXPENDITURE

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. 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. There is a clear danger that the lack of transparency with transfer and subsidy payments can obscure inefficient spending trends. The Committee will focus on the transfers and associated reporting practices in future reviews.

Total transfer payments in the national sphere, after the adjustments, was estimated to reach R213 billion. By the end of the third quarter, departments had spent R155 billion, approximately 72 per cent, of the allocated budget. This is consistent with previous years - by December 2006/07 departments had spent 73.7 per cent. Departments with the highest transfer and subsidy budgets – over R8 billion – include Provincial and Local Government, National Treasury, Education, Health, Social Development, Defence Housing and Transport. Annexure IV illustrates year-to-date departmental transfer expenditure.

National departments transferred R130.6 billion or 75 per cent of the provincial equitable share and R23 billion, or 72.9 per cent, of conditional grants by the end of the third quarter. Excluding general grants, provided for in Schedule 4 of the Division of Revenue Act, conditional grant expenditure amount to R11.8 billion of the adjusted budget of R19.6 billion, approximately 60.4 per cent. Specific grants that showed a low rate of spending included the Agricultural Disaster Management, at 5 per cent, the Community Library Services at 38.3 per cent, the Forensic Pathology Services, at 45.9 per cent, and the Land Care Programme Grant, at 46.3 per cent.

The Committee will in future give more attention to transfer payments because they can conceal serious spending problems in departments, provinces and other entities.

5. COMMITTEE FINDINGS

5.1 National government managed to increase its level of aggregate expenditure during the first three quarters of 2007/08. Nevertheless, spending relative to the budget allocation has declined by 2 per cent compared to the 2006/07. This decline was mostly evident in current payments, which decreased by 2 per cent, and transfer payments, by 1 per cent, whereas capital spending remained constant.

5.2 The Committee, in reviewing expenditure for the first three quarters, noted a number of issues with regard to under-expenditure. There is a clear misalignment between the stated priorities and actual spending. This is indicative of weak financial management and the lack of regular monitoring of the alignment between departmental annual plans and actual expenditure. In addition, the Committee discovered that departments use vacancies as a strategy to request more funds.

5.3 Furthermore, the Committee noted serious challenges with procurement and tendering processes, both in respect of goods and services and larger capital acquisitions. These occur within departments and within service providers. These challenges are ultimately attributable to inadequate departmental planning and a lack of alignment between planning, budgeting, implementation and monitoring.

5.4 The Committee noted that capital expenditure, at 49 per cent for the first three quarters, is low when compared to other economic classifications. The low capital spending was also evident in previous years, when 50 per cent of the allocated budget had to be spent in the final quarter. This trend should not be allowed to persist given that capital spending is pivotal to economic growth and employment creation.

6. RECOMMENDATIONS

Based on the findings noted above, the Committee makes the following recommendations:

6.1 All departments with high vacancy rates must develop sharp and focused measures to attract and retain staff. Departments should fully utilize the skills available in the economy to reduce virements from compensation of employees and strengthen skills development programmes and training institutions, specifically SAMDI.

6.2 To improve efficiency in expenditure and minimize delays, departments must ensure compliance with the relevant supply chain legislation, policies and regulations and develop the necessary expertise in procurement.

6.3 Departments should take urgent steps to improve budgeting and expenditure on capital projects. This should involve more accurate departmental strategic planning and cash flow management.

6.4 National Treasury and national departments should consolidate monitoring and reporting systems to ensure that transfer expenditure and outcomes are reflected at national level as per the voted amounts.

Report to be considered.