report of The Joint Budget Committee on expenditure for the Fourth quarter and YEAR-TO-DATE 2007/08 financial year dated 20 JUNE 2008

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

INTRODUCTION

National government managed to increase its level of aggregate expenditure as well as its spending relative to the budget when compared to previous years. Spending levels also improved across all economic classifications. Notwithstanding this improvement, under-expenditure, the shifting of funds and virements remain evident in certain sectors and departments. Poor planning, budgeting and financial management continue to hamper effective service delivery and the efficient use of resources.

Monitoring expenditure is one way through which Parliament can track and respond to Government performance during the year, and provides an important starting point for more detailed enquiries into policy outcomes and delivery. The Joint Budget Committee is mandated to monitor expenditure and report on a quarterly basis. It does this through a examining the monthly expenditure reports issued by National Treasury in terms of Section 32 of the Public Finance Management Act (PFMA). This report examines departments’ expenditure for the final quarter and complete year, based on the preliminary expenditure estimates, and makes a number of findings and recommendations.

In keeping with established practice, the Committee held a workshop on expenditure at the end of the fourth quarter and over the financial year. National Treasury and selected departments, namely Transport, Home Affairs, Housing and Agriculture and Land Affairs, appeared before the Committee. The report therefore covers expenditure trends generally but has a specific focus on these departments.

The Committee reaffirms the centrality of the various portfolio and select committees in detailed budget oversight. Thus the relevant committees were invited to participate in these proceedings. In this context, the Committee considers it best practice for the various committees to regularly assess, and report on, departmental expenditures.

1. TOTAL EXPENDITURE

According to the Estimates of National Expenditure (ENE) 2007 and Adjusted Estimates 2007, total expenditure for the 2007/08 year was predicated at R547.5 billion. In the national sphere, this was reduced to R313.2 billion. By the end of the fourth quarter, national departments spent approximately R308.3 billion or 98.5 per cent of the allocated R313.2 billion[1]– an under-expenditure of R4.5 billion or 1.5 per cent, compared to R5.4 billion or 2 per cent in 2006/07. Compared to the previous year, total aggregate expenditure increased by around R48 billion, while the level of spending relative to the budget grew by 0.3 per cent.

Departments that recorded the highest under-expenditure for 2007/08 in terms of percentage deviation from their budgets are highlighted below[2]. Of note is the fact that these departments also underspent in 2006/07. In monetary terms, National Treasury underspent the most, approximately R782 million, followed by the departments Water Affairs and Forestry and Housing. These departments are reflected on in the subsequent sections.

Table 1: Lowest Total Expenditure as a Percent of Budget Allocation

Departments

Total Budget

Total Expenditure

Variance

Percentage Spent

Statistics South Africa

1,157,286

912,030

245,256

78.8%

Public Works

3,759,464

3,404,421

355,043

90.5%

Water Affairs and Forestry

5,862,513

5,389,895

472,618

91.9%

Home Affairs

3,520,898

3,258,569

262,329

92.5%

Housing

8,928,358

8,598,172

330,186

96%

R millions

In terms of the economic classifications, departments spent R88.5 billion, or 97 per cent of the available current budget, R8 billion or 96 per cent of the capital budget and R211.7 billion or 99 per cent on transfers and subsidies. This again represents an improvement on 2006/07, when departments spent approximately 95.5 per cent, 107 per cent and 98.8 per cent of their current, capital and transfer budgets respectively.

As is the case in previous years, quarter-by-quarter spending accelerated during the year, from R66.7 billion or 22.3 per cent of the budget in the first quarter, to R86 billion or approximately 27.5 per cent of the adjusted budget in the fourth quarter. Fourth quarter spending grew by R12.7 billion compared to the previous year, although the level of spending relative to the budget remained the same. A review of the final quarter indicates that a high number of departments spent above 25 per cent of their budgets between January and March – 25 per cent being a general quarterly benchmark if departments are spending at regular intervals. Departments that spent well above 25 per cent in the final quarter are noted below. Excessive spending in the final quarter is of particular concern as it can be indicative of “fiscal-dumping” and lead to a “March-Spike”. The Committee consistently seeks explanations for these practices.

Table 2: Vote Highest Expenditure in the Fourth Quarter

Departments

Total Budget

Fourth Quarter Expenditure

Percentage Spent

Communications

1,924

874,0

45.4%

Home Affairs

3,520

1,225,0

34.8%

Defence

26,291

9,015,0

34.2%

Public Enterprises

4,604

1,510

32.7%

Justice and Constitutional Dev.

7,538

2,448,7

32.4%

Correctional Services

11,384

3,329,4

29.2%

R million

2. CURRENT EXPENDITURE

Current Expenditure is categorized into two main components, compensation of employees or personnel expenditure, and goods and services. The total current budget in the national sphere after the adjustments was R91 billion, an increase of approximately R10 billion compared to 2006/07. By the end of the fourth quarter, departments spent R88.5 billion, or 97.2 per cent – an under-expenditure of approximately R2.5 billion. This is an improvement on 2006/07, when departments spent R77.5 billion, or 95.5 per cent, of the available budget, with an under-expenditure of R3.6 billion. As in previous years, however, there were again a number of virements and shifts[3] within current payments during and after the adjustments budget. Virements and shifts were largely attributed to vacancies and delays in procurement, which impacted negatively on goods and services.

National Treasury should also consider more stringent monitoring and enquiry processes before granting additional funding for compensation of employees. Departments must motivate their ability to fill vacancies within a particular budgeting cycle before additional funding, over baseline, for compensation is provided.

Table 3: Total Current Expenditure in National Government

Current Budget 2006/07

Current Budget 2007/08

Budget

Adjustment

Virements

and Shifts

Expenditure

Budget

Adjustment

Virements

and Shifts

Expenditure

81,425

79,199

(1,893)

77,716

89,968

91,517

(1,807)

88.538

R million

More than twenty departments underspent for current payments. Departments that recorded the highest under-expenditure for this category, in terms of percentage deviation from the allocated budgets, are highlighted below. All these departments and institutions underspent in 2006/07, although by varying amounts. Of particular concern is that three of the five departments fall within the social services. The continued lack of capacity and under-expenditure therefore has a direct impact on service delivery including poverty alleviation efforts.

Table 4: Lowest Current Expenditure as a Percent of Budget Allocation

Departments	Total Budget	Total Expenditure	Percentage Spent
Transport	725,586	512, 456[4]	67.6
Statistics South Africa	1,062,913	862, 232[5]	78.2
Social Development	385,375	319,972	83.0
Education	987,512	858, 550	86.5
Health	833,193	739, 908[6]	86.0

R thousands

The Department of Transport (DoT) spent R16.2 billion of the available R16.5 billion, an estimated under-expenditure of R281 million, or 1.6 per cent. Excluding transfers and subsidies, the department spent R515 million of the available R767 million, an under- expenditure R213 million or 24.4 per cent. Of this amount R137 million was underspent on goods and services, this despite the R43 million added to goods and services during the adjustments budget. The department also spent only R3 million of its adjusted capital budget of R42 million – see Section 3 below on Capital Expenditure.

In its presentation to the Committee, the department highlighted challenges with vacancies, weak procurement processes, apparently unpredictable expenditures (e.g. Transport Month and international events) and the lack of clarity regarding certain departmental functions. Intergovernmental co-ordination and monitoring also remain shortcomings. With the need for expanded transport infrastructure it is important for the department to overcome these challenges within the shortest possible time. The recorded progress in the filling of certain posts, with a 5 per cent reduction in the vacancy rate during the year, albeit from a high base, and the accelerated expenditure for the taxi recapitalisation, with 53.3 per cent of recapitalisation allowances being paid in the last month of the year, are nevertheless positive.

Statistics South Africa (StatsSA) spent R912 million of the available R1.1 billion, an estimated under-expenditure of R245 million, or 17 per cent. Most of this was under current payments due to vacancies and a lack of human resource capacity. There were also delays in the finalization of certain projects, including the Independent Asset Verification and the Internal Audit. Importantly, under-expenditure was recorded despite significant shifts and virements both during and after the adjustments budget, repeating a trend from 2006/07. StatsSA has a considerable budget and the Committee believes that more accurate planning is necessary to avoid excessive under-spending.

The Department of Social Development (DSD) spent R67.0 billion of the available R67.2 billion, an estimated under-expenditure of R144 million, or 0.2 per cent. Most of the department’s expenditure is for transfers and social grants. In terms of the current budget of R384 million, however, the department underspent by approximately R66 million or 17 per cent. This is a marked decrease from 2006/07 when under-expenditure amounted R15 million, or 5 per cent. This is a concern given the projected growth in the department’s current budget: compensation of employees is expected to grow at an annual rate of 14 per cent over the medium term. Strategies to fast-track appointments and reduce turnover should therefore be prioritized if the risk of under-spending is to be reduced to acceptable levels.

The projected growth in the social grants must also be accompanied by more effective budgeting and reporting systems. The Committee will monitor progress with these matters, together with the proposed revisions to the social security system, in the next financial year. The Committee was not satisfied with the lack of clarity regarding how funds are utilized by the South African Social Security Agency (SASSA). This is indicative of the Committees concerns regarding transfer expenditure generally.

With the persistent challenges in the education and health sectors, under-spending in the relevant departments is of particular significance. Preliminary estimates indicate that the national Department of Education (DoE) spent R16.2 billion of the available R16.3 billion, and estimated under-expenditure of R145 million or 0.9 per cent. Of this amount, R129 million was for goods and services due to the late receipt of invoices by the SITA and other departmental suppliers. The department also continued to experience challenges with personnel expenditure and vacancies, with 25 per cent of posts unfilled. In terms of transfer expenditure on conditional grants, spending improved compared to previous years although significant under-expenditure was still recorded in the provinces for the HIV and Aids Grant (Life Skills Education) and the National School Nutrition Programme Grant (NSNP). These grants provide for critical services, especially to children from poor households.

The national Department of Health (DoH) spent R12.7 billion of the available R13 billion, an estimated under-expenditure of R328 million or 2.5 per cent. R111 million of this was for good and services, due to delays in the procurement of condoms because of concerns over quality. This issue has still not been resolved. Under-expenditure was also registered at national level for the Hospital Revitalization Grant and Forensic Pathology Services Grant, with R62 million and R105 million withheld respectively. Of the funds transferred, provinces underspent by R205 million for Hospital Revitalization and R18 million for Forensic Pathology Services. Related to these expenditures, the Committee has noted delays in the construction and renovation of certain health facilities such as the Upington Hospital.

Owing to their critical roles in the economy and previously identified concerns, the Committee agreed to specifically examine expenditure in the departments of Agriculture (DoA) and Land Affairs (DoLA). The Committee accordingly invited these departments to clarify and explain their expenditure and budget-related processes. The DoA has improved its spending slightly from previous years, from 93.7 per cent in 2006/07 to an estimated 95.9 per cent in 2007/08. As in 2006/07, however, there was again significant under-spending in Programme 3: Bio-Security and Disaster Management. The high number of virements and shifts in current expenditure, and the low spending on a number of conditional grants, are also matters of serious concern. The Committee expects marked improvements in these areas in the forthcoming year.

The DoLA spent R5.8 billion of the available R5.9 billion, an under-expenditure of approximately R30 million. This was reportedly due to protracted negotiations associated with purchasing of land. Although spending was generally in accordance with the budget, the considerable virements and the vacancy rate of 27 per cent, which increased to 35 per cent at management level, are of serious concern. Issues of under-capacity must be addressed if the department is to meet its delivery targets.

3. TRANSFER EXPENDITURE

Transfers and subsidies include all unrequited payments made by Government departments or entities. Both current and capital transfers are included in this item. Transfers and subsidies represent the single largest economic classification and it is therefore imperative that Parliament, and the JBC in particular, 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, especially in respect of local government and state entities, can obscure inefficient spending trends. The Committee will focus on the transfers and associated reporting practices in future oversight activities.

Total transfer payments in the national sphere after the adjustments were estimated to reach R213.8 billion. By the end of the fourth quarter, national departments spent R211.7 billion[7] – an under-expenditure of approximately R2.1 billion or 1.8 per cent. Compared to 2006/07, this represents an improvement of approximately R34 billion in terms of aggregate expenditure, although spending relative to the budget declined by 0.6 per cent. Departments that recorded the highest under-expenditure, in terms of percentage deviation from the allocated budgets, are highlighted below.

Table 5: Lowest Transfer Expenditure as a Percent of Budget Allocation

Departments	Total Budget	Total Expenditure	Percentage Spent
Independent Complaints Directorate	48	3	6.25%
Statistics South Africa	1,301	907[8]	74.55%
Department of Water Affairs and For.	2,439,639	2,051,539	84.09%
Department of Foreign Affairs	666,835	605,279	90.77%
Housing	8,601,112	8,228,563	95.66%
National Treasury	17,347,767	16,750,613	96.56%

R thousands

Importantly, 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. In monetary terms, National Treasury underspent the most, by approximately R643 million, followed by the Departments Water Affairs and Forestry by R426 million, and Housing by R372 million.

National Treasury spent an estimated R18.9 billion of the available budget of R19.7 billion, an under-expenditure of approximately R782 million – more than any other department. The great bulk of under-spending, approximately R643 million, occurred in transfers and subsidies, specifically in respect of the transfers associated with the Neighbourhood Development Partnership Grant, the Provincial Infrastructure Grant and the African Development Bank. This is a marked deterioration compared to 2006/07 when around R280 million remained unspent. With the large amounts allocated, it is important that National Treasury take all possible measures to assist recipient entities in meeting the conditions associated with these transfers as unspent funds could have been allocated elsewhere. Significant under-expenditure was also recorded in current payments and specifically goods and services.

The Department of Housing (DoH) spent R8.5 billion of the available budget of R8.8 billion, an under-expenditure of R400 million. According to the department, in its submission to the Committee, this was due to transfers withheld for the Integrated Housing and Human Settlement Development Grant and the Social Housing Regulator. In terms of Integrated Housing and Human Settlement Development Grant, the department explained that, despite an increase of R105 million during the adjustments, amounts of R500 million and R100 million for the Eastern Cape and Free State respectively had been withheld due to concerns over capacity. The R180 million allocated to the Social Housing Regulator had not been spent as the enabling legislation was still in the process of being finalized.

Together with these challenges, the Committee also noted the irregular spending patterns in most of the provinces, and specifically the customary last quarter spike. The serious backlogs and capacity constraints notwithstanding, these trends must be reversed if the projected budget growth in the sector is to be justified. This necessitates, amongst other things, improved planning as well as intergovernmental co-ordination and monitoring.

The Department of Water Affairs and Forestry (DWAF) spent R5.4 billion of the available R5.8 billion, an estimated under-expenditure of R477 million, or 8.1 per cent. Most of this was attributed to delays in transfers related to the construction of the De Hoop Dam. This was not the first delay in the construction of this project, in 2006/07 the department recorded under-expenditure of R300 million for similar reasons. Although this is a complex project, the Committee remains concerned about the associated planning, budgeting and contracting. Apart from transfers, the department’s vacancy rate also remained high at 19.8 per cent with a large variance between the department’s vacancies and that of the Persal database.

A substantial portion of transfers is allocated through conditional grants to provinces, approximately R33 billion. By March 2008, departments had transferred a total of R32.1 billion, or 98.8 per cent, of the available budget to the provinces, with health grants making up the bulk at R11.9 billion. Specific grants that showed a low rate of spending by the provinces included the Agricultural Disaster Management at 34 per cent, the Land Care Programme Grant at 83.2 per cent, the Community Library Services at 83.8 per cent and the Forensic Pathology Services and HIV and Aids Grants.

4. CAPITAL EXPENDITURE

The total current budget in the national sphere after the adjustments was R8.3 billion, an increase of approximately R2.3 billion compared to 2006/07. By the end of the fourth quarter, departments spent R8 billion or 96 per cent – an under-expenditure of approximately R329 million. Capital spending comprises 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.

Capital expenditure accelerated dramatically though the year, from 11 per cent in the first quarter to approximately 47 per cent in the fourth. Although there may be legitimate reasons for this, with many departments suggesting that capital spending is linked to the procurement, which is only finalized late in the 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. In addition, as in previous years, capital expenditure varied dramatically between departments: 12 underspent by 25 per cent or more, while 5 spent considerably more than their allocations. Such expenditures are ultimately attributable to poor planning and financial management. 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.

Departments that recorded the highest under-expenditure for capital payments in terms of percentage deviation from the allocated budgets are highlighted below. In monetary terms, the Department of Public Works (DPW) underspent the most, by approximately R348 million, followed by the Department of Correctional Services (DCS), and the Department of Home Affairs (DoHA).

Table 6: Lowest Capital Expenditure as a Percent of Budget Allocation

Departments	Total Budget	Total Expenditure	Percentage Spent
Transport	42,134	3,238	7.7%
Arts and Culture	855	110	12.9%
Labour	31,741[9]	11,070[10]	34.8%
Housing	11,021	4,950	44.8%
National Treasury	31,548	14,610	46.3%
Health	43,627	21,181	48.5%
Statistics South Africa	91,842	48,828	53.1%
Education	12,432	7,168	57.6%
Public Works	880,142	530,395	60.4%
Home Affairs	353,908	286,285[11]	80.1%

R thousands

The Department of Transport (DoT) only spent R3 million of the available R42 million for capital, an under-expenditure of R38 million or 92.3 per cent. This is of great concern given that the department also underspent on capital by 66 per cent during 2006/07 (and over-spent in 2005/06). These funds were meant to support the Sani Pass, overload controls and the Rural Transport Strategy. To ensure that delivery takes place, National Treasury indicated that it would reallocate these funds to the relevant provinces and municipalities. The Committee will not tolerate under-expenditure of this magnitude as it indicates a cavalier approach to budgeting and a dereliction of duty.

The Department of Public Works (DPW) spent R3.4 billion of the available R3.7 billion, an under-expenditure of approximately R350 million, or 10 per cent. Although aggregate expenditure increased slightly from the previous year, the percentage spent relative to the budget is lower. Almost all under-spending occurred in capital, specifically for the provision of land and accommodation. The lack of implementation for Repair and Maintenance Programme (RAMP) projects was a key reason cited for the under-expenditure, highlighting shortcomings with departmental capacity, planning and monitoring. During its deliberations, the Committee also noted that many departments experienced difficulties with the DPW in terms of capital and infrastructure expenditure. With the evident disrepair of many government properties, and the lack of regular maintenance, it is imperative that these challenges are resolved.

The Department of Home Affairs (DoHA) spent R3.2 billion of the available R3.5 billion, an under-expenditure of approximately R270 million, or 8 per cent. In its submissions to the Committee the department indicated that departmental capacity to spend had increased. This was partially attributable to progress with the turnaround strategy. The Committee nevertheless noted under-expenditure in key capital projects, specifically RAMP and HANIS, as an ongoing concern. In addition, the Committee is aware of persistent planning, budgeting and management weaknesses, which continue to hamper spending and service delivery. With the projected growth in the department’s budget, as well as challenges such as xenophobia and the 2010 World Cup, these weaknesses must be urgently addressed.

The Department of Correctional Services (DCS) spent R11.2 billion of the available R11.3 billion, an under-expenditure of R262 million. Of note is the fact that the department overspent on current and transfer payments, by R53 million, but underspent on capital by R315 million. This was due to delays in the construction of Kimberley Correctional Centre. The Committee has previously expressed concern with the delays in the construction of the facility and the associated cost escalations. The department is therefore expected to apply lessons learnt from the construction of the Kimberly facility to ensure that future projects are not unduly compromised.

5. FINDINGS

National government managed to increase its level of aggregate expenditure as well as its spending relative to the budget. By the end of the fourth quarter, national departments spent R308.3 billion or 98.4 per cent of the adjusted budget of R313.2 billion – an under-expenditure of R4.5 billion or 1.5 per cent, compared to R5.4 billion or 2 per cent in 2006/07. Notwithstanding challenges, spending levels improved across all economic classifications.

In reviewing expenditure for the year, the Committee again noted differences between stated priorities and actual spending. This is evident from the general acceleration in expenditure through the year – from R66.7 billion or 22.3 per cent in the first quarter, to R86 billion or 27.5 per cent of the adjusted budget in the fourth quarter – as well as the continued virements and shifting of funds between certain line budgets. This is ultimately indicative of poor planning, implementation and financial management.

As in previous years there were again a number of virements and shifts within current payments during and after the adjustments budget. Virements and shifts were largely attributed to vacancies and to delays in procuring goods and services. The Committee has repeatedly raised the negative impact of vacancies on the budget and called on departments to take innovative steps to ensure that funded posts are filled within a particular budgeting cycle.

The Committee has also noted the serious challenges with procurement, both in respect of goods and services and larger capital acquisitions. As mentioned in the Third Quarter Expenditure Report, departments must ensure compliance with the relevant supply chain legislation, policies and regulations and develop the necessary expertise in procurement.

Transfers and subsidies remain the single largest spending category. It is imperative that Parliament, and the JBC in particular, is able to monitor and oversee the manner in which funds are utilized. The Committee requires additional information in this regard, specifically on expenditure related to concurrent functions and transfers to provincial and local government, and state entities.

Capital expenditure continued to pose challenges for many departments, with over 50 per cent of the allocated capital budget 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. The Committee remains concerned about probable cost escalations in a number of mega-infrastructure projects. The Committee also noted that many departments experienced difficulties with the DPW in terms of capital and infrastructure expenditure.

In engaging with expenditure for the fourth quarter and year-ending 2007/08, the Committee agreed to focus on specific departments including the departments of Transport, Home Affairs, Housing, Agriculture and Land Affairs. A number of queries arose during the proceedings on which the Committee requested supplementary written responses. Regrettably, the departments of Transport, and Housing did not respond within the specified timeframes.

Finally, the Committee is looking forward to an increased level of qualitative reporting by Government on the budget in the new financial year, both on expenditure through the implementation of the Quarterly National Programme and Economic Classification Report, and performance through the progressive implementation of the Framework for Managing Performance Information.

6. RECOMMENDATIONS

Based on its oversight activities and deliberations, the Committee recommends the following:

Under-expenditure and virements due to vacancies and good and services continue to impact negatively on service delivery and budget outcomes in a number of departments. In this regard, the Department of Public Services and Administration (DPSA) should set specific timeframes for departments to fill their funded vacant posts as well as reconcile and maintain the Persal database. The DPSA should closely monitor progress in this regard. These measures should be implemented during the 2008/09 financial year. National Treasury should also consider more stringent monitoring and enquiry processes before granting additional funding for compensation of employees. Departments must motivate their ability to fill vacancies within a particular budgeting cycle before additional funding, over baseline, for compensation is provided.

In light of the lack of clarity regarding the use of transferred funds, National Treasury and the relevant departments should further consolidate reporting systems to ensure that the timing of transfers and expenditure outcomes, especially to provinces, local government and state entities, are reflected at national level for the voted amounts.

3. Together with the consolidation of the expenditure reporting practices, National Treasury should, within the 2008/09 financial year, develop an in-year expenditure report for mega-infrastructure projects, with the purpose of making such reports available to Parliament and other stakeholders. National Treasury should present this report to Parliament by the end of October 2008, for the first six month of the financial year. At the same time, the DPW should co-ordinate and strengthen its working relations with other departments to ensure the government infrastructure is developed and adequately maintained.