Kwazulu-Natal's 2013/14 main Budget

KwaZulu-Natal (KZN) has come through stormy waters when it comes to our provincial spending patterns, with 2009/10 being the deepest trough. We are pleased to say today that our provincial bank account has remained with a healthy positive bank balance since May 2010.

Further, while our 2012/13 mid-year projections indicated that KZN would over-spend by some R1.598 billion, this has been managed downward through good fiscal discipline and team work to a projected marginal under-expenditure of R13.907 million as at the end of January 2013.

Over the years, public spending has risen quite substantially in an attempt to boost economic growth through counter-cyclical investment in times of lacklustre economic performance. This growth was facilitated mainly by robust revenue performance. However, in 2009/10, revenue fell short of budget and the country had to borrow to finance the shortfall. The deficit is estimated to be 5.2% of gross domestic product (GDP) in 2012/13.

The growth outlook for the next three years has weakened, and government’s net debt is now expected to stabilise marginally higher than 40% of GDP. The only way of arresting the debt accumulation is moderating public spending and channelling resources towards reducing debt. To this end, there has been a reduction of allocations by National Treasury (known as 1%, 2% and 3% cuts) to spending agencies (including provinces) in the 2013/14 medium term expenditure framework (MTEF).

The 2013/14 budget is therefore tabled in the context of a constrained domestic economic environment and an uncertain global economic outlook, resulting in serious budget cuts. KZN has been dealt a “double whammy:” It has had its equitable share allocation reduced as a result of updates in the equitable share formula with the latest Census data of 2011, in addition to the 1%, 2% and 3% budget cuts mentioned above.

However, prudent fiscal management has certainly cushioned the KZN government against some of these shocks. In fact, our healthy cash flow situation and bank balance have even assisted us to finance some once-off projects (as announced in the Adjustments budget) – details given a bit later.

In the 2013/14 MTEF, nearly all new spending must be funded through reprioritisation of funds by departments and the identification of savings. To ensure sustainability and promotion of growth, we have to shift the composition of spending in favour of greater investment in infrastructure and away from consumption spending. Furthermore, we have taken great care to cut down on wasteful expenditure, but to retain spending on service delivery.

Provincial priorities funded

The Province is able to allocate additional funds to departments as a result of Own Revenue collected by departments, as well as using the provincial cash resources which remain available from the 2011/12 positive net financial position and the 2012/13 budgeted surplus. Some of these resources were allocated to departments and public entities in the 2012/13 Adjustments Estimate, with an indication that some of these receive carry-through funding over the 2013/14 MTEF. Some of these additions to departments’ baselines are discussed here:

• The Office of the Premier receives an additional allocation of R7.555 million for Zimele Developing Community Self-Reliance. Zimele has led social development and women’s empowerment projects in KZN since 2007. Approximately 1 200 women are now involved in the self-sufficiency project and have collectively accumulated savings of more than R350 000. These new business owners invest their funds back into their businesses and communities while also supporting new business and local social development programmes. The aim of these funds is to empower women in rural areas to develop their communities and achieve self-sufficiency by owning and operating small businesses.
   
• Provincial Legislature receives an additional R34.855 million in 2014/15 only. These funds are made up of R7 million towards observing and monitoring the 2014 general elections, and R27.855 million to provide for a special allowance to Members whose tenure of office may be affected by the elections.
   
• Agriculture, Environmental Affairs and Rural Development receives R39.003 million in 2013/14 only for the following:
  • Ezemvelo KZN Wildlife receives R19.003 million in 2013/14 for the fight against rhino poaching in KZN. This is the balance of the R47.140 million allocated to them in the Adjustments Budget.
  • The development of the Makhathini flats initiative receives R20 million for various projects, such as the construction of drainage canals, infield sub-surface drainage, rehabilitation of the main canal and formalising stock watering points and regravelling of infield roads, among others.
     
• Education receives funds held in reserve for allocation to the department once its internal cost containment plan bears fruit. As the department’s projected over-expenditure has vastly reduced in 2012/13, these funds are now allocated to the department amounting to R172.307 million in 2013/14, R218.976 million in 2014/15 and R321.842 million in 2015/16, as was promised by Provincial Treasury.
   
• Provincial Treasury receives funds for various transversal projects, such as Operation Clean Audit (R20 million) to improve departments’ financial management and audit outcomes, Provincial E-Procurement tool (R8 million) being a customised system which will assist departments to electronically find and assess service providers’ quotes and bids, SCM contract management (R10 million) to deal with the management of all contracts entered into by departments and municipalities, Infrastructure Crack Team (R10 million) to allow the Crack Team to assist more departments and municipalities to enhance infrastructure delivery and Forensic investigations (R8 million) for forensic investigations in departments and municipalities when the need arises as part of fighting fraud and corruption.
   
• Health receives R50.580 million in 2013/14 only for the upgrading and refurbishment of the regional laundry in Dundee.

New money from National Treasury

Besides this, KZN receives new money from National Treasury, but ring-fenced for various national priorities. The amounts added are R1.465 billion, R1.854 billion and R3.064 billion over the 2013/14 MTEF.

These funds are intended to be used for particular policy priorities discussed below and not as general funds to compensate for the equitable share cuts mentioned earlier. Although they have the effect of off-setting the reduction, this is not their purpose and they are therefore reflected against policy priorities in provincial budgets. The nationally-funded priorities are discussed here:

Carry-through cost of 2012 wage agreement (Education and Health, totalling R5.595 billion over the MTEF).

Funding of R170.455 million is added to Education in 2015/16 to increase the number of Grade R teachers. The Education sector has a target of universal provision of Grade R by 2014, and by 2011 the average enrolment in public ordinary schools across the country was around 70%. Please note that this funding is only available in the 2015/16 financial year.

Education also receives R215.518 million in 2015/16 to increase the number of teachers in Quintile 1 schools. While the average learner: teacher ratio at public ordinary schools is just over 30:1, this ratio does not reflect the actual class size in poorer schools which cannot afford to fund additional governing body posts. Additional funding is therefore allocated in 2015/16 only to enable poorer schools to increase their number of teachers.

Health receives R6.517 million, R17.213 million and R48.622 million over the 2013/14 MTEF for improved diagnostic tests for TB (GeneXpert).

Social Development receives R26.070 million, R65.645 million and R109.303 million over the MTEF for the absorption of social work graduates. From 2012/13, provincial Departments of Social Development have been under pressure to absorb an increased number of social work graduates funded through the social work scholarship programme run by the national Department of Social Development.

The provincial departments’ personnel budgets have not grown sufficiently to accommodate the number of social work graduates that need to be employed. A policy decision was taken that social work graduates from the scholarship programme could also be employed within the Non-Governmental Organisation (NGO) sector, but still funded by provincial departments. Funds are therefore made available over the MTEF to enable the provincial departments to fund the employment of more graduates in provinces.

Support to the NGO sector under Social Development receives R21.725 million, R43.032 million and R63.921 million over the MTEF. The NGO sector is currently experiencing financial challenges with some closing down, retrenching staff and scaling down services.

This is having a negative impact on the delivery of social welfare services. It is important that provincial Departments of Social Development play a much bigger role in supporting NGOs in terms of reporting, governance, administration and financial management, which are often the reasons for non-transfer of funds to NGOs by departments.

This line indicates the total new money received by KwaZulu-Natal, with this amounting to R1.465 billion in 2013/14, R1.854 billion in 2014/15 and R3.064 billion in 2015/16, giving us a total over the MTEF of R6.383 billion.

Reduction in funds from National Treasury

The 2013/14 MTEF budget is certainly one of the most difficult ones the province has had to contend with. While there were some welcome additions to our baseline, these are largely earmarked for specific national priorities.

Table 2 below shows the impact of the 2011 Census data and the 1%, 2% and 3% equitable share reductions on KwaZulu-Natal:

• Line 1 shows the Census data cuts, totaling R6.772 billion over the MTEF. The 2011 Census data has had implications for the equitable shares allocated per province. Some provinces (such as Gauteng and Western Cape) receive additional resources as a result of increased service delivery responsibilities resulting from increased population numbers. Others (such as KZN and Eastern Cape) receive reduced allocations as a result of the reduction in its proportion of population numbers.
• Line 2 indicates the allocations by National Treasury to buffer the impact of the 2011 Census. To enable provinces with reduced populations to adjust to smaller budgets, some additional funding has been provided to cushion the impact of phasing in the new Census data. This will only provide relief in the 2013/14 MTEF, and from 2016/17 the equitable share will be allocated solely through the formula with no additions to support provinces with declining populations. This means that provinces must use the three years to adjust to their new baselines.
• Line 3 shows KwaZulu-Natal’s total cuts after the buffer, i.e. R4.602 billion over the MTEF.
• Line 4 shows the further R1.084 billion that KwaZulu-Natal has lost over the MTEF as a result of the 1%, 2% and 3% cuts which National Treasury has implemented across all three spheres of government on 20% of the equitable share allocations, as mentioned earlier.
• Line 5 reflects the total equitable share cuts for KwaZulu-Natal, of R5.686 billion over the MTEF, after taking into account the three-year buffer funding provided.

Taking these changes to the baseline into account, KwaZulu-Natal’s fiscal framework is shown below:

KZN’s total budget allocation from National Treasury over the 2013/14 MTEF is therefore R88.090 billion, R91.771 billion in 2014/15 and R97.770 billion in 2015/16, giving us a total of R277.631 billion over the three-year period. When we add our Provincial own receipts, the allocation comes to R90.595 billion in 2013/14, R94.391 billion in 2014/15 and R100.547 billion in 2015/16, giving us a total of R285.534 billion over the MTEF.

Our planned spending by departments over the 2013/14 MTEF is R89.792 billion, R93.459 billion in 2014/15 and R99.579 billion in 2015/16, giving us a total of R282.830 billion over the three-year period.

Finally, in line with National Treasury practice, we continue to budget for a Contingency Reserve Fund with this kept at some R1 billion per year over the MTEF. The budgeted surplus protects the Province against any unforeseen eventualities.

Changes to conditional grants

Various conditional grants have received additional allocations while others have been reduced. National Treasury advised that savings were made on several conditional grants to provinces as part of the exercise to identify funds that could be reprioritised towards government priorities.

Also, in view of the constrained economic outlook, some of the grants are reduced to effect lower government spending. While some reductions are effected against the conditional grant allocation of provinces, there are also some increases being made. KZN’s conditional grant allocation reduces by R985.543 million in 2013/14, R2.777 billion in 2014/15 and R1.075 billion in 2015/16. The most significant changes are discussed here:

• The Devolution of Property Rate Funds grant is being phased into KZN’s equitable share from 2013/14 onward. Therefore, while this has contributed to the reduction in the conditional grant allocation, the equitable share of KZN increases by these amounts (i.e. R470.240 million, R496.766 million and R519.617 million over the MTEF).
• The Education Infrastructure grant decreases by R19.588 million in 2013/14 and increases by R58.151 million in 2014/15 and R637.874 million in 2015/16 to improve the delivery of school infrastructure in provinces. R15.886 million within this grant is earmarked in 2013/14 for repairs to flood damaged schools.
• The FET College Sector grant is reduced by R613.038 million, R644.645 million and R622.424 million over the MTEF to give effect to the decision to convert a portion of the grant transferred to colleges into a subsidy which will now flow directly from the national Department of Higher Education and Training.
• The Health Infrastructure, Hospital Revitalisation and Nursing Colleges and Nursing Schools grants have been combined into one grant, namely the Health Facility Revitalisation grant. The combination gives greater flexibility to the department to shift funds between the three grant components, with the approval of National Treasury, so the department can avoid under- or over-spending in any one area of health infrastructure. This grant is cut marginally across the MTEF in National Treasury’s bid to realise savings in the public sector.
• The National Health Insurance grant is cut by R67.300 million, R96 million and R95.207 million over the MTEF. These funds have been centralised under the national Department of Health as an indirect grant to provinces to support the national health insurance scheme pilots in provinces.
• The Human Settlements Development grant increases by R86.692 million in 2013/14 and then decreases significantly by R1.620 billion in 2014/15 and R1.630 billion in 2015/16.

The 2011 Census data has shown large shifts in the need for housing toward larger urban areas. The current formula for this grant does not sufficiently respond to these shifts, which therefore necessitates a review of the formula. The full amount of this grant is allocated to the Province in 2013/14, and only half the allocations are allocated to provinces in 2014/15 and 2015/16 (the balance of the two outer years remains unallocated in the interim at National Treasury).

Of this amount, KZN may receive some funding back once the formula has been finalised. Also, of this grant, R878.400 million, R468.800 million and R514.557 million is earmarked for allocation to eThekwini. A further R51.720 million in 2013/14 is earmarked for repairs relating to disasters.

The Provincial Roads Maintenance grant increases by R162.269 million in 2013/14, rising to R577.017 million in 2015/16. Therefore an additional R899.956 million is allocated to KZN over the MTEF, with the grant total amounting to R2.168 billion in 2015/16, after these additions.

A new allocation formula was developed for this grant for implementation from 2013/14 onward, which results in significant reductions to the allocations of four provinces (Eastern Cape, Gauteng, Limpopo and North West). Increased allocations through the new formula were allocated to the Free State, Northern Cape and KwaZulu-Natal.

Equitable share baseline cuts

The 2011 Census data cuts and the 1%, 2% and 3% baseline cuts were effected proportionately against all 16 provincial departments, with only Education and Health receiving carry-through costs for the 2012 wage agreement (all other departments have to fund this from within their baselines).

Departments were urged, in preparing their reduced baseline budgets, not to cut any service delivery spending areas as far as possible, especially infrastructure budgets. The directive given was to focus on efficiency savings, with an expanded set of cost-cutting measures implemented in all departments and public entities. This includes placing an immediate moratorium on the filling of non-critical posts, a review of all organograms to be undertaken and a head count exercise to be done (a full list can be seen on pages 16 and 17 of the Budget Speech).

In addition to the extended cost-cutting measures, departments indicated what steps they were taking to ensure that their spending will stay on track following their reduced baselines. Some have indicated that the organogram reviews, headcount and strict implementation of cost-cutting will ensure that they remain within their baselines, while others have had to adjust programmes and projects without impacting on long-term service delivery as far as possible.

Infrastructure spend

Over the next three years, R827 billion is planned to be spent by the national fiscus and state-owned companies to build infrastructure. The Province is budgeting to spend R11.498 billion in 2013/14, R12.348 billion in 2014/15 and rising to R13.613 billion in 2015/16 on various infrastructure projects. This equates to R37.460 billion over the 2013/14 MTEF.

For more information call:
Musa Cebisa
Cell: 071 687 8777