presented by Billy Nel MEC for Finance
24 March 2006
Introduction
Madam Speaker, Honourable Members of the House, I could not agree more with
Richard Hemming, when he wrote in his book âPublic Expenditure Managementâ that
managing public resources is a complex and daunting task. To undertake the
business of managing public expenditure effectively and efficiently requires a
number of important considerations. Firstly, a strategy needs to be developed,
and this strategy should include an assessment of the objectives of government
interventions, policies needed to attain such objectives efficiently, and an
evaluation of the broader implications of these policies. While it may be
relatively easy to determine, for example, whether a highway has been
constructed in a cost-effective manner, it is more difficult to assess whether
the highway is the best transportation option.
Secondly, the principles and criteria to be used in assessing the level and
composition of public expenditure need to be addressed in a transparent and
objective manner. One has to distinguish between productive and wasteful
expenditure. This is a straightforward question if the issue is to choose
between two expenditure programmes that share an identical objective. In such a
situation, the choice should be in favour of the more cost-effective project.
In practice, however, competing programmes are not directly comparable, making
expenditure decisions increasingly complex and judgmental. To this end,
productive expenditure should be distinguished from wasteful and fruitless
expenditure by reference not only to the cost of achieving program objectives,
but also by assessing whether the objectives are themselves appropriate.
Madam Speaker, the Eastern Cape Provincial Treasury has been subjected to
intense haemorrhage in recent years. In less than three years, the department
has had four Accounting Officers, greatly undermining the process of providing
direction and meaning to the organisationâs mission and vision. Over the same
period, many critical staff left the department, making the organisation an
extremely demanding workplace for the remaining employees. Since the beginning
of 2006, however, the department has been fortunate to have a substantive
Accounting Officer and Head of Department, in the person of Professor Newman
Kusi. Supported by his Management Team, the new HOD has been systematically
increasing the departmentâs agility to achieve maximum impact. Fundamental
changes in how the department conducts its business are taking place. Measures
are being put in place to ensure that the department has the right people on
board, the right systems in place, and the right organisational culture and
employee attitude. An enabling working environment is continuously being
created through the replacement of fear with hope, repression with freedom, and
exclusion with inclusiveness. At the same time, the performance integrity of
the department is being enhanced by the day. Within these complex matrix of
changes, the ultimate vision of the department remains in focus: to make the
Provincial Treasury the leader in service excellence, serving the people of the
Eastern Cape with honesty, humility and integrity.
2005/062005/06 budget performance
Madam Speaker, last year around this time, I presented a budget of R180,4
million. During the first adjustments estimates in November 2005, the
department surrendered some R44 million due to under-spending on services and
personnel. During the second adjustments estimates in February 2006, the
department again surrendered R29 million, resulting from slow spending on goods
and services relating mainly to the Public Finance Services Agency (PFSA)
contractual arrangement. This left the department with an adjusted budget of
R107,4 million, the bulk of which totalling R57 million, or 53% was allocated
for compensation of employees. The adjustment process also saw the allocation
for goods and services reducing from R89,8 million to R30,8 million. An amount
of R15,4 million was also allocated for payments to the Rapid Infrastructure
Development Agency (RIDA), for services rendered in the previous financial year
which could only be paid in the current financial year due to the late signing
of a Service Level Agreement with the entity.
Madam Speaker, as at the end of February 2006, my department has spent R89,9
million of its adjusted budget of R107,4 million. The projection is that the
department will spend a total of R106,2 million, leaving unspent funds of R1,3
million. The projected expenditure of R106,2 million represents 99% of the
departmentâs total adjusted budget. A total of R61,4 million, or 58% of the
projected end year total expenditure is accounted for by compensation for
employees, 31% for goods and services, and 9% for the payment to RIDA.
Madam Speaker, due to the efficient management of the Revenue Fund, the
provinceâs bank account with the First National Bank (FNB) remained positive in
each month of the financial year. As a result, the department was able to
generate interest income totalling R79,8 million to the Revenue Fund by
February this year. The projection is that the interest income will increase by
R8,3 million this month, bringing the total to R88,1 million for the
2005/062005/06 financial year.
2006/07 budget
Madam Speaker, Honourable Members of the House, I wish to turn now to the
2006/07 Budget for my department, beginning with the policy issues.
Attacking Poverty
When I tabled the provincial budget in the House on 20 February 2006, I said
that the budget places the province on a virtuous cycle of sustainable growth.
Eradicating poverty is the single most important challenge confronting the
province. Without doubt, economic growth is central to the success in poverty
eradication. Although economic growth in itself cannot guarantee poverty
alleviation, restoring high rates of sustained growth is critical for poverty
alleviation. Indeed no poverty alleviation strategy can be sustained without
restoring economic growth. Economic growth can increase peopleâs incomes,
support education and health expenditure, create employment opportunities, and
raise living standards. More importantly, greater participation of the poor in
the growth process and sharing in the benefits of the growth reduces poverty
and inequality and widens the growth potential. This is the cardinal objective
of the Accelerated Shared Growth Initiative of South Africa (AsgiSA).
Poverty is an outcome of economic, social and political processes that
interact and reinforce each other in ways that worsen the deprivation poor
people face everyday. To generate the dynamics for sustainable poverty
reduction requires an expansion of economic opportunities for the poor by
stimulating the overall economic growth, and by building up poor peoples assets
and increasing the returns on these assets. The most important domain for
government action in building the assets of the poor is the budget. The budget
can be used to support asset accumulation by the poor and asset redistribution
in favour of the poor. The critical requirement in this regard, however, is the
willingness and capacity to mobilise adequate revenues and devoting a
significant share of the revenue to developmental programs that benefit the
poor. Public spending can provide services directly to the poor through the
construction of roads, schools, health clinics, sanitation, or water supply
schemes. Redistribution, by providing services for free or subsidising their
demand, can also help poor people expand their assets. Free primary education
for the poor, for example, is critical for expanding the human asset of the
poor.
More often, however, governments face difficulties in raising resources and
making public spending pro-poor. In countries such as ours with high
inequality, the non-poor are often reluctant to contribute their fair share to
the poverty agenda. Unblocking this resistance requires actions to build
pro-poor coalitions. Madam Speaker, the real problem though is that often the
limited public resources are not spent on activities such as education, health,
slum upgrading, and rural development that help poor people move out the
deprivation trap.
The recent years have witnessed slow and low levels of infrastructure
spending in the province, attributed mainly to inefficient poor project
management and poor planning. This development has dire consequences, both for
reducing poverty and inequality and sustained private investment. Although
macroeconomic reforms are necessary conditions for sustained growth and private
investment, without the accompanying improvement in the public sectorâs
performance, particularly in the area of infrastructure provision, the private
supply response to the policy reforms is unlikely to make a significant dent in
poverty reduction. Inadequate social infrastructure also constrains the
governmentâs capacity to reduce poverty and inequality. The Treasuryâs
contribution to resolving this problem is geared towards the unblocking of the
constraints to infrastructure provision, namely the slow and low levels of
infrastructure spending, poor infrastructure planning, and inadequate
mobilisation of more own revenue to support infrastructure funding.
Underspending on Infrastructure
While the infrastructure budget has been increasing over the years, this has
not been matched with similar trend in infrastructure expenditure, contributing
to the build-up of backlogs in infrastructure. The provincial infrastructure
budget has grown steadily from R1,2 billion in 2001/02 financial year to R2,3
billion in 2005/06 financial year. The budget is set to increase sharply,
reaching R4,3 billion in 2008/09 financial year. Actual spending on
infrastructure has however been increasing very moderately. The expenditure
increased from R1,0 billion in 2001/02 to R1,8 billion in 2003/04 financial
year, and then to R2,1 billion in 2004/05. As of January 2006 infrastructure
spending was R1,6 billion, and the indications are that the province may
under-spend the budget for the year. As I said last month, a shortage of funds
is one thing, but the inability to spend the already inadequate available funds
is unacceptable. This problem of slow and low infrastructure spending needs to
be arrested. In the coming financial year, Treasury will provide R1,5 million
to fund an investigation into the causes of under-spending of infrastructure
budget and other conditional grants. The study will also recommend effective
interventions to deal with the problem of infrastructure under-spending.
Infrastructure Planning
Another major problem with the infrastructure spending in the province is
that it does not distinguish between economic and social infrastructure and/or
prioritise each type. And neither does it distinguish between spending on
infrastructure that target the poor and those for the non-poor. This lacuna is
not at all trivial. For one thing, the lack of such a distinction works against
the design of effective infrastructure programs and beclouds the trade-offs in
investing in either type of infrastructure. Moreover, it complicates the task
of selecting the right financing mechanisms, resulting in inefficiencies, both
in terms of timeliness and value for money. It also means that the objective of
public spending facilitating the accumulation of assets by the poor is
inappropriately targeted. Hence under-performance against the objectives would
certainly result. The solution to this problem lies in the formulation of a
Provincial Infrastructure Plan, which would indicate which infrastructure type
is a priority, what kinds of infrastructure projects should be prioritised, and
the relative contributions of the infrastructure projects to the reduction of
poverty and inequality. The department has made a provision of R2,5 million in
the 2006/07 budget to fund the formulation of the Provincial Infrastructure
Plan.
Enhancing own source revenue mobilisation
As you are aware, Madam Speaker and Honourable Members of the House, the
provincial revenue is composed of the equitable share, conditional grants, and
our own source revenue, notably hospital patient fees, gambling and casino
taxes, motor vehicle licenses, and interest income. The provincial own revenue
constitutes, on average, about 2% of the total provincial revenue. In recent
years, the provincial own revenue has assumed a downward trend. The revenue
fell from R637 million in 2002/03 financial year to R323 million in 2004/05
financial year. In the current financial year, the revenue is projected to rise
to R424 million, much lower than the 2002/03 level. Actual own revenue
collected compared to budgeted revenue also shows huge disparities. In 2004/05
financial year, for example, the budgeted revenue was R457,8 million. Actual
revenue collected amounted to R324,6 million. In the current financial year,
the budgeted revenue in the main appropriation was R325,7 million. This was
revised up in the 1st and 2nd adjustments estimates to R423,9 million. The
projected actual collection for the year, however, is R554 million.
The trend with own revenue has generally been to collect more than the
budgeted figure. This trend can be attributed to a multiplicity of factors,
including efficient collection, growing revenue bases, upwards adjustment in
rates, fees, licenses. In addition, some departmentsâ attitude to own revenue
planning and collection has not been encouraging. Although some departments
have established their own revenue collection and administration procedures, a
large number of them is of the view that it is not prudent to establish revenue
units because of the small amount of revenue they collect. As a result, the
administrative capacities with regard to own revenue vary considerably from
department to department, complicating the co-ordinating role of the Treasury.
Given the critical need to enhance revenue from our own sources to support
government pro-poor interventions and also establish some degree of certainty
in revenue collection to facilitate proper planning, the Treasury will
commission a comprehensive study on own revenue in financial year 2006/07. The
study will seek to establish among others, the bases and potential growth of
the existing own revenue sources, the proportion of the potential bases that
can be mobilised, the appropriate tariffs, rates, fees, fines, etc., to impose,
and measures to enhance the revenue administration.
Financial Management Improvement Programme
Effective and efficient management of public resources now occupies the
heart of economic policy making in the country. The renewed interest in the
need for having responsive, responsible and effective government that works
better and costs less is one of the many factors contributing to the impetus,
and indeed the new urgency, for addressing the issues of public financial
management. Governments are also increasingly realising the importance of
efficient and effective public finance management as a tool for achieving
socio-economic objectives, particularly in the area of poverty reduction. The
new approach also emphasises accountability. Public accountability has for many
years been a central issue in the area of public resource management. Indeed,
it has over the years framed the discourse on financial management in
government. The renewed interest in public accountability and its attempt to
dominate current debate seems to imply that the normal prescripts, processes
and procedures associated with it have not been fulfilled.
Indeed, in the area of expenditure management, the major issue confronting
the provincial administration revolves around budget planning and preparation,
budget execution, and cash management. A full understanding of the budget
planning and preparation process is essential, not just to derive expenditure
projections but to be able to advise policymakers on the feasibility and
desirability of specific budget proposals from both social and economic
perspectives. Recent developments in the province seem to suggest serious
weaknesses in this area.
On budget execution, the key issues are whether the budget intent and
outcome are congruent, and whether any problems, such as the build-up of
payments arrears, under-spending, misapplication of funds, unauthorised
spending, wasteful spending, etc. are encountered in the budget implementation
and how might they be avoided or overcome. The evidence seems to suggest that
effective budget execution poses serious challenges to some departments. Issues
such as poor quality of Annual Financial Statements, poor cash management,
non-clearance of suspense accounts, inadequate and incorrect disclosure of
performance information, poor management of capped and normal leave, poor
management of records, delays in the termination of resigned or transferred
employees from the system, ineffective implementation of the Supply Chain
Management (SCM) framework, weaknesses in internal controls, inadequate and
incorrect responses to management letters and audit queries, non-filling of
funded vacant posts, unauthorised, irregular, fruitless and wasteful
expenditure and many others abound in some departments of the provincial
administration.
In the coming financial year, the Treasury supported by the Swedish
International Development Co-operation Agency (SIDA) will design and implement
a comprehensive âFinancial Management Improvement Programâ in the whole
provincial administration to address the following critical issues: budget
preparation and execution, cash planning and management, payroll management,
commitments and suspense accounts, creditor/debtor management, supply chain
management, contract management, unauthorised, fruitless and wasteful
expenditure, financial management capacity building and support systems. The
project which is envisaged to last between 12 and 18 months will be taken in
three phases. Provision has been made in the 2006/07 budget of the department
to support this important initiative.
Financial management skills development
As part of the proposed Financial Management Improvement Programme, the
Treasury is in serious discussions with the Public Finance Services Agency
(PFSA), with the view to impressing on them to broaden the range of financial
management courses and training they offer to officials of the provincial
administration. In particular, Treasury is proposing that the PFSA include in
their training programmes courses on strategic planning and budgeting,
financial management, policy analysis, fiscal forecasting, and supply chain
management. Already, Treasury has an agreement with the PFSA under which an
amount of R100 million is to be provided over five years to support financial
management training offered by it. In addition, Treasury is in discussions with
AFREC of the University of Cape Town, GTZ, and the PFiQ (the commercial wing of
the South Africa Institute of Public Finance and Auditing) with the view to
securing an agreement with them to provide training to officials in the Finance
Units of departments of the provincial administration.
Provincial Electronic Suppliers Database
Madam Speaker, participation in government supply chain system provides
enormous opportunities for black economic empowerment (BEE) and the development
of small, micro and medium enterprises (SMMEs). The opportunities manifest
themselves directly through tendering for the supply of goods and services to
government departments and agencies, and indirectly through the forging of
partnerships with the government to provide facilities and services to the
government itself and/or to the community at large. The ability of the
government to use the supply chain management framework to advance the interest
of BEEs and SMMEs, however, depends crucially on the sagacity of framework. As
a vehicle for economic empowerment, any supply chain process, regardless of the
volume and value involved, should be seen to be equitable and transparent. The
process should provide a fair opportunity to all suppliers through open and
recognised channel of media or publicity. It should also have established
procedures, and any changes in the rules of the game should be conveyed to all
participants. Above all, the profile of the participants, including the nature
of business, location, ownership, status, applicable preferential treatments,
etc. should be documented and be easily accessed. To address these and other
issues, including the prevention of fraud and adherence to standardised supply
chain management processes and procedures, the Treasury will maintain a
Provincial Electronic Suppliers Database beginning in the 2006/07 financial
year. When fully functional, the Database will provide for supplier
registration and categorisation process, information optimisation, award of
contracts, verification processes, supplier management and accreditation, stock
optimisation, expenditure analysis, etc. The provincial Treasury has budgeted
R10 million for the procurement and installation of a system to support the
Database development.
Municipal oversight
Madam Speaker, the implementation of the Municipal Finance Management Act
commenced in 2004. As the first phase of the implementation process, the
National Treasury has developed a 12 pointpriorities for implementation. The
key priority areas include the following:
* preparation of MFMA implementation plans
* allocation of appropriate responsibilities under the Act to the Accounting
Officer
* establishing Top (Senior) Management Teams
* implementing appropriate controls over municipal bank accounts and cash
management
* meeting of financial commitments
* reporting on revenue and expenditure
* revising policies for Supply Chain Management
* implementing reforms in relation to municipal entities, public-private
partnerships, long term contracts and municipal borrowings
* completing past Financial Statements and advising National Treasury (for
2002/03 financial year and before)
* completing 2003/04 financial statements and tabling annual reports
* complying with provisions for tender committees and boards of municipal
entities in relation to forbidden activities
* complying fully with the Division of Revenue Act.
According to Section 34 (1) of the MFMA, the national and provincial
governments must by agreement assist municipalities in building capacity for
efficient, effective and transparent financial management. Section 34 (2)
requires the national and provincial governments to support the efforts of
municipalities to identify and resolve financial problems. To this end, the
National Treasury has entrusted the monitoring, evaluation and reporting on the
12-point priorities to Provincial Treasuries. To enable the Treasury to
successfully undertake this task, the Municipal Finance Unit of my department
will undergo a significant organisational review during the 2006/07 financial
year. The review will involve the manpower, systems, facilities, etc.
requirements for the new mandate.
Europ[ean Union (EU) Local Economic Development (LED) Programme
Madam Speaker, Honourable Members of the House, the 5-Year Local Economic
Development Programme funded by the European Union fully got underway in
October 2005 with the deployment to the province of the Long Term Technical
Assistance Team. The Programme now has operational offices established in the
Treasury, ECDC, Department of Economic Affairs, Environment and Tourism, and
the Department of Housing, Local Government and Traditional Affairs as key host
department for implementation purposes. The programme, which was launched by
the Honourable Premier in Lusikisiki on 23 February 2006, has three Funds to
support local economic development. These are the Local Government Support Fund
(LGSF) that provides support to local government institutions; the Local
Competitive Fund (LCF) that provides support to public-private partnerships in
the development and implementation of action plans that will lead to the
creation of sustainable jobs; and the Financial Innovation Fund (FIF), that
provides support to financial institutions to enable them support beneficiaries
under the LCF to finance the private goods element of their action plans. It is
envisaged that the first grants under the LGSF and LCF will be awarded in
August/September to enable implementation take place by the end of the
year.
In terms of the Financing Agreement entered into between the province and
the EU, the EU funds 70% of the total programme costs while the remaining 30%
is funded by the host provincial departments. As the contracting authority on
behalf of the government, the Treasury will follow up with the host departments
to ensure that the 30% counterpart fund is made available in the 2006/07
financial year for the successful implementation of the Programme.
Budget allocation
Madam Speaker, I now wish to move to the budget allocation to the provincial
Treasury for the 2006/07 financial year. The provincial Treasury has been
allocated R196,762,000 for the 2006/07 financial year. Compared to the 2005/06
adjusted appropriation of R128,762,000, the allocation for financial year
2006/07 represents an increase of 52,8%. This allocation is distributed in
terms of programmes as follows:
Programme 1: Strategic Management Services
This programme consists of the Office of the MEC, Management Services,
Corporate Services, and Financial Management. Madam Speaker, the Treasury
intends to get real with innovation and ingenuity in the 2006/07 financial
year. To this end, an Office of Strategic Management has been created and
charged with the responsibility of ensuring that new ideas that percolate up
through the department are filtered and developed. The Office will also be
responsible for the alignment of employee competency development plans and
their personal goals and incentives with the departmentâs strategic objectives.
It will also monitor the implementation of the departmentâs Strategic Plan to
ensure the achievement of the programmes impact and outcomes.
For the 2006/07 financial year, the Strategic Management Services Programme
is allocated a total of R103,727,000, representing an increase of 107%. The
bulk of the allocation to the programme, totaling R38,988,000, or 37,6%, is
provided for compensation for employees. It is also from this programme that
many of the financial management reform initiatives proposed by the department
will be launched and managed.
The key projects include the following:
Financial Management Improvement Programme: R32 million
Provincial Electronic Suppliers Database: R10 million
EU LED Counterpart Fund: R5 million
Municipal Finance Oversight Initiatives: R3 million
Mentorship and CFO Support Programme: R2,5 million.
Programme 2: Sustainable Resource Management
This programme covers budget planning and preparation, monitoring and
evaluation, and policy analysis and research. The municipal finance oversight
functions are also located in this programme. Given the enormity of support
expected to be extended to municipalities, it is envisaged that the Municipal
Finance Unit will in no time grow to become a programme itself. In the 2006/07,
the Sustainable Resource Management Programme is allocated a budget of
R20,038,000, representing an increase of 95,5% over the previous yearâs
adjusted budget. Of this amount, R14,577,000, or 73%, is provided for
compensation for employees, R1,5 million will fund the âUnder-Spending on
Infrastructure and Conditional Grantsâ and another R1,5 million is provided to
fund the âProvincial Own Revenue Studiesâ.
Programme 3: Assets and Liability Management
As the name implies, the core function of the Assets and Liability
Management Programme is to manage the provinceâs physical assets (supply chain
management), financial assets (cash management), and liabilities. In addition,
the programme provides for the oversight and management of existing financial
systems and the transition to the Integrated Financial Management System. In
the 2006/07 financial year, the programme has been allocated a budget of
R57,898,000, representing an increase of 2,4% over the 2005/06 adjusted budget.
As usual, the bulk of the programmeâs allocation totalling R29,771,000, or
51,3% of the total is provided for compensation of employees. Other key
initiatives that will be funded from the programmeâs allocation include the
following:
PFSA Contractual Arrangement: R10 million
RIDA Payments:R7 million
Provincial Infrastructure Plan:R2,5 million
Programme 4: Financial Governance
The purpose of this programme is to promote accountability through vigorous
monitoring and evaluation of financial activities of the province as well as
compliance with financial norms and standards. The key activities therefore
include the provision of accounting services, risk management, compliance to
financial legislation and regulations, and internal audit services. At this
stage, the internal audit services are located in the Office of the Premier. It
is envisaged that the function will move to its rightful place in the
provincial Treasury before the 2006/07 financial year ends. For the 2006/07
financial year, a total of R15,099,000 has been allocated to the Financial
Governance Programme. This amount represents an increase of 27,2% over the
previous yearâs allocation. The bulk of the programmeâs allocation, totalling
R11,670,000 or 77% of the total is provided for compensation of employees.
In terms of economic classification, the allocation to Treasury is
distributed as follows:
Current Payments R186 187 000 (94,6%)of which
Compensation for Employees R95 006 000 (48,3%)
Goods and Services R90 181 000 (45,8%)
Transfers and Subsidies R7 284 000 (3,7%)
of which Departmental Agency (PFSA) R7 051 000 (3,6%)
Payments for Capital Assets R3 291 000 (1,7%)
of which Machinery and Equipment R3 291 000 (1,7%)
Total: R196 762 000 (100,0%)
Conclusion
Madam Speaker and Honourable Members, the budget I have tabled today for
consideration of this House is a budget of inspiration and budget of hope. It
is a budget that begins to establish the basis for sustained economic growth
and also make departments of the provincial administration to get real with
financial management. The budget reflects a careful operationalisation of the
strategic priorities, goals and legislative mandates of the provincial
Treasury. The Treasury has developed a strategic Plan that does not only
demonstrate that it is in substantive harmony with the strategic priorities of
the PGDP and other provincial and national imperatives, but also is
synchronised with its legal mandates. The process of operationalisation of the
priorities is manifested in the design of the departmentâs programmes and
sub-programmes, identification of objectives, performance measures, and targets
linked with the priorities, goals and objectives. The budget allocations to
programmes and sub-programmes reflect and are linked with the priorities and
planned activities.
Madam Speaker, I wish to extend my sincere gratitude to the Premier for her
leadership and support and to my Cabinet colleagues for their untiring support
and guidance. I also wish to extend my appreciation to the Chairperson of the
Finance Portfolio Committee and Members of the Committee for always keeping the
department in check and on its toes.
Madam Speaker, I wish to thank the officials of my department for the
untiring effort with which they undertake their duties. My special thanks go to
Professor Newman Kusi, the Superintendent General and Head of official of
Treasury for the new enthusiasm, sense of urgency, and encouragement he has
brought to the department.
It is now my privilege to formally table the Budget proposals for Treasury
for 2006/07 financial year, the Strategic Plan of the department, and the
Annual Performance Plan.
Thank you and God bless all of you.
Issued by: Department of Finance, Eastern Cape Provincial Government
24 March 2006
