A. Economic review and outlook and the fiscal implications
As mentioned by the Hon. Minister of Finance, Mr Nlanhla Nene, in his Medium Term Budget Policy Statement, which he tabled in Parliament in October, the world economy is experiencing low growth with slower global trade, volatile capital flows, weak commodity prices and heightened geopolitical tensions all playing their part. In South Africa, the electricity constraints, weak business confidence and low household demand have limited our economic growth. Government has taken two important steps to adapt to this low-growth global environment. The first is to identify broad structural reforms required to put the economy on a higher growth path, and the other is to reduce South Africa’s vulnerability by implementing fiscal policy measures to maintain the health of our public finances. The capacity of ESKOM to supply reliable electricity, which is key to our industrialisation strategy, has been restored. Also, over the past 10 months, progress has been made in stabilising the electricity supply, promoting measures to manage demand and contracting additional supply from the private sector.
In line with this, the policy statement of stabilising this country’s debt levels and improving the effectiveness of spending remains in place. Minister Nene further indicated that, to ensure sustainable public finances that are not overwhelmed by debt and interest payments, spending limits will remain in place. Within these limits, National Treasury will shift some funds to accommodate the above-budget 2015 wage agreement. To ensure sustainable public finances, we as government need to curtail our spending and remain within the fiscal envelope. We need to continuously strive to protect our social services, while enabling the economic drivers, such as investments in economic infrastructure, to be sustained – better still – to be increased. Our target in the foreseeable future must be to do more with less.
Our focus remains ensuring a better life for all, despite these economic hardships. This is evidenced by the fact that we are making a palpable difference in the lives of our people. To highlight a few provincial milestones – we have reached one million people that need antiretrovirals (ARVs) who are now receiving their medication from our public institutions, and the number of children who receive meals through the school nutrition programme has increased to 2.287 064 million. We have recognised the excellent work done by our social partners in the form of non-governmental organisations (NGOs), and have continued to support them through transfers which we have increased by 6% over the MTEF. We have been able to add significant additional funding to increase the number of housing units being constructed in our province, the number of households who have access to electricity, as well as addressing backlogs in sanitation at schools. I will expand on this a little later. To sustain these services, we need to improve our efficiencies, eliminate wastage, improve productivity of public servants and eliminate corruption. To aid in this area, government has decided that all future legislation and regulations must be subjected to a socio-economic impact assessment before being passed, thereby promoting greater policy co-ordination and highlighting potential implementation risks or unintended consequences.
Government is continuing to bring services to the people – the unprecedented multi-million Rand investment in Ndumo known as Inkululeko 1 is a classic example of this, with government spending R1.400 billion for the betterment of the lives of our people. As a result of the success of this project, we are in the process of replicating this model in Msinga, Cwaka over the MTEF.
We must, however, mention the financial pressures we are facing as a province – the above-budget 2015 wage agreement, medico-legal claims in Health, unfunded mandates, to mention a few. With regard to the 2015 wage agreement, it is important that the negotiations that determine the increases in future take into account the realities of the global economy, as well as our economy. While our public servants help to ensure that we meet the goals defined in the National Development Plan and the Provincial Growth and Development Plan, above-budget public-sector remuneration is not sustainable, without commensurate increases in productivity. Above-budget wage agreements have consequences on the composition of spending, as these increases put pressure on capital and other critical spending areas. Budgets that would have been available to fund vacant positions will now be required to compensate existing employees. National Treasury has had to reduce its Contingency Reserve to accommodate the increase in compensation budgets. The R5 billion national Contingency Reserve was fully absorbed by the wage bill and, as I will detail later, this was not sufficient to cover the full impact of this above-budget wage agreement, with provinces having to pick up more than half of the bill from within their own resources. Important to understand is that the wage bill shortfall persists over the 2016/17 MTEF, as the agreement was a multi-year agreement and the funding allocated from National Treasury over the new MTEF will not be sufficient to cover the carry-through costs.
It is, therefore, imperative that we look within to find resources to unlock economic development in our province. The Richards Bay Industrial Development Zone (IDZ) is showing encouraging progress and is now at a point where they need to acquire more land based on the demand for industrial land in the area.
The other areas we must focus on is the way we procure goods and services. In KwaZulu-Natal, we spend about R20.644 billion on goods and services and a further R7.728 billion on capital. We are a major player in our provincial economy. National Treasury has introduced various reforms to make procurement more efficient and transparent. This includes the provision of an eTender portal which provides a single point of entry to identify business opportunities with government. Tender documents will be made more user-friendly and a single procurement bill is being developed to replace the more than 80 different legal instruments, guidelines and instruction notes that govern public procurement.
It is within this economic and fiscal context that this Adjustments Budget is tabled.
B. Proposed adjustments
Section 31 of the PFMA requires that MECs for Finance table the provincial Adjustments Budget annually. Adjustments are made to the Main Appropriation in terms of Section 31 of the PFMA which stipulates under what circumstances budget adjustments may be made. These include the appropriation of funds that have become available to the province, funds to be appropriated for expenditure already announced by the MEC for Finance during the tabling of the main budget, the shifting of funds between and within votes, the utilisation of savings under the main division within a vote for the defrayment of excess expenditure under another main division within the same vote, commonly referred to as virements, Treasury-approved roll-over requests for those departments who could not spend the entire amount voted by the Legislature in that particular year, to name a few.
Provincial Treasury has held various bilateral meetings with the departments and public entities over the last few months to assess in-year spending patterns, as well as to discuss any spending pressures that may have arisen since the Main Budget was tabled in March 2015. Due to the tight fiscal position that currently exists, largely due to the fiscal consolidation cuts, as well as the fact that National Treasury has not fully funded the above-budget 2015 wage agreement, the province was able to accommodate only a few additional funding requests.
B.1. Financing of the Adjustments Budget
KZN continues to maintain a healthy cash positive position, as it has since May 2010. The cost-cutting measures, which were first introduced in 2009/10, continue to be implemented by departments and public entities. In addition, due to the fact that National Treasury has not fully funded the above-budget 2015 wage agreement, as mentioned, a few more cost-cutting measures were introduced in-year. These include the freezing of vacant posts, with critical posts being permitted to be filled but with the express approval of the Premier and the MEC for Finance, after consultation with the Executive Authority concerned. Also, the procurement of VIP services at events is no longer permitted.
The net financial position of the province determines the amount of funds available for allocation in the Adjustments Budget. The starting point is to always look at the previous year’s over- or under-spending, as well as the previous year’s revenue over- or under-collection. In this case, KwaZulu-Natal under-spent its 2014/15 budget allocation by R443.887million and over-collected Own Revenue quite significantly by R365.304 million. The province also continued to budget for a Contingency Reserve in 2014/15, with this Reserve being R274.871 million at the end of the year. A portion of the revenue over-collection was already allocated to departments in the 2014/15 Adjustments Budget and must, therefore, be excluded from the net financial position calculation. As such, R142.937 million is deducted from the net financial position. These factors all resulted in the province ending the year with a surplus of R941.125 million. These funds are now available for financing various provincial commitments, the details of which I will provide below.
This Adjustments Budget also deals with the changes made to KwaZulu-Natal’s allocation by National Treasury.
C. Net financial position - 2014/15
Table 1 is a snap-shot of the adjustments that are included in the Adjustments Budget that is being tabled today.
The table provides an analysis of the province’s net financial position, taking into account:
- conditional grant funds that have to be returned to the National Revenue Fund.
- the roll-overs that have been approved (both equitable share and conditional grants).
- the provincial commitments that have been funded.
- the 2015/16 Contingency Reserve.
What this table does not take into account, is the additional funding allocated to KwaZulu-Natal in the National Adjustments Budget. These national adjustments are discussed in more detail later.
D. Provincial drought relief programme
As mentioned earlier, the province is allocating R33 million to COGTA to aid with water provision in the Umkhanyakude District Municipality. Besides this, the national Department of Water and Sanitation has allocated R352 million for drought relief in the province. Of this, R90.500 million was allocated to the Umkhanyakude District Municipality. The provincial Department of Agriculture and Rural Development has set aside R114 million from their budget for drought relief for the agricultural sector and this includes assisting with scooping of communal dams, feed and other agricultural extension services to support farmers affected by the drought. Ezemvelo KZN Wildlife has started carting water to the game reserves to sustain tourism activities and are currently drilling boreholes to augment its water source with an estimated spend of R3 million. The Department of Human Settlements has allocated R5 million from its budget for the provision of water storage tanks to RDP houses. Further drought relief efforts that are currently taking place in the province include the following:
- Engineers are being deployed to assist with the roll-out of water infrastructure in the districts;
- Desalination plants will be constructed shortly to augment water capacity in the coastal municipalities;
- Drilling of new boreholes to assist in the supply of water to affected communities;
- Procuring and installing water storage tanks at strategic points within affected communities;
- Repairing water schemes to function optimally;
- The Department of Transport will assist with the excavation of trenches to fast-track the implementation of some water schemes, as well as the digging of communal dams, where required;
- The protection of wetland areas is receiving the attention of the Department of Economic Development, Tourism and Environmental Affairs and the national Department of Environmental Affairs will fast-track environmental authorisations where they relate to emergency or disaster related projects.
E. Suspensions of funds to 2015/16
The following suspensions are being formalised in this Adjustments Budget:
- Vote 16: Sport and Recreation asked for funds to be suspended from 2015/16, for spending in 2016/17 and 2017/18. The department was allocated R30 million in 2015/16 for the province’s contribution towards the construction of a sports development centre in Durban. The department has requested that R10 million be kept in 2015/16, but that R20 million be suspended from 2015/16 and be allocated back to them in 2016/17 (R10 million) and 2017/18 (R10 million).
- Vote 1: Office of the Premier is suspending R15.960 million from their 2015/16 budget for these funds to be allocated back to them in 2016/17. This relates to funding for the construction of a new Training Academy in Westville. Public Works has not fully spent the R15 million that was transferred to them in this regard in 2014/15 and the current year’s allocation will, therefore, only be required for this project in 2016/17.
- In the Second Adjustments Estimate tabled in the Legislature on 10 March 2015, various departments had asked that funds be suspended from their 2014/15 budget for re-allocation in 2015/16. These amounts are therefore also included in the 2015/16 Adjustments Estimate:
- R5 million is suspended from 2014/15 and allocated in 2015/16 relating to the Nelson Mandela Golf Championship under Vote 4: Economic Development, Tourism and Environmental Affairs.
- R10.200 million, relating to the livestock identification programme, is suspended to Vote 3: Agriculture and Rural Development. The department indicated to Provincial Treasury that they will be using these funds for another purpose as the livestock identification programme in its current form is being reviewed by their National Department of Agriculture, Forestry and Fisheries.
- R28.700 million, relating to rural development initiatives, is suspended to Vote 3: Agriculture and Rural Development for spending in 2015/16.
F. Revisions to equitable share and conditional grant allocation
The 2015 above-budget wage agreement, which includes a 7 per cent increase (as opposed to the 5.6 per cent provided for in the budget), R300 housing allowance increase for Level 1 – 10 staff (effective from 1 July 2015) and a 28.5 per cent increase in the employer’s contribution to GEMS, resulted in a shortfall of R1.749 billion for the province. National Treasury is providing some R877 million towards this shortfall, with the province having to fund the balance of R871.642 million from within the provincial fiscus. This is the only amendment that National Treasury is making to the province’s budget in this Adjustments Budget.
G. Technical adjustments/internal reprioritisation
Other than these adjustments, the Adjustments Budget also contains virements and shifts undertaken by departments in re-organising their budgets in-year.
As a reminder, a virement is the utilisation of savings or under-spending under one main division/sub-division/economic classification of a vote toward the defrayment of excess expenditure under another main division/sub-division/economic classification of the same vote. That is, the original purpose of the funds has changed.
A shift on the other hand is the re-allocation of funds incorrectly allocated during the 2015/16 Estimates of Provincial Revenue and Expenditure budget process, or where funds are shifted due to the re-classification of expenditure. This also includes functions shifted within a vote to follow the internal transfer of functions. That is, the original purpose of the funds remains the same.
H. Conclusion
In conclusion, I convey my sincere appreciation to the Hon. Premier, my Hon. Provincial Executive Council colleagues, as well as the Hon. Members of the Ministers’ Committee on the Budget (MinComBud) for their assistance in finalising this Adjustments Estimate Bill. The support received from the Finance Portfolio Committee, under the capable chairmanship of Hon. Nkosi, is also acknowledged with appreciation. Lastly, I would like to thank all the Treasury officials for ensuring that the budget documentation we are tabling today is accurate and of high quality.
It is my honour to formally table the KZN Adjustments Appropriation Bill, 2015, for consideration in this House. I look forward to the debate on this Bill.
Thank you.
