The 2011/12 financial year has come to an end now, and all provincial departments have submitted their books to the Auditor-General for the annual statutory audit. It is therefore appropriate at this stage, to reflect on the 2011/12 financial year and to assess where KwaZulu-Natal is in terms of provincial spending and revenue collection.
The numbers included in this media statement are therefore preliminary at this stage, as they may change once the annual audit of the departments’ books has been completed.
Background
It should be remembered that the province’s financial position was dire about mid-way through the 2009/10 financial year, with the projections at mid-year indicating that the province was heading for a projected over-expenditure of some R5.6 billion.
It should also be remembered that a fair proportion of this projected over-expenditure resulted from the shortfall in funding provided for the implementation of various Occupation Specific Dispensations (mainly affecting the Health and Education departments), and the higher-than-budget wage agreement for public servants. The shortfall on these two expenditure areas in KwaZulu-Natal at the time was some R1.1 billion.
As is well known by now, the province implemented a plan to turn the province’s dire financial position around. This plan entailed a multi-pronged approach of improved financial discipline and included the implementation of the by now renowned cost-cutting measures.
This plan began to bear fruit for the province after a relatively short period of time, with the province repaying its overdraft in a space of 18 months rather than the three years it was originally anticipated it would take to repay the overdraft. The public will recall that the province ended the last financial year with a fair amount of under-spending and that this under-spending by provincial departments then gave the province the fiscal space to pay off the overdraft.
Where are we now?
KwaZulu-Natal budgeted for a contingency reserve of some R948 million in 2011/12 to protect it from any fiscal shocks that may occur in-year. This has become a norm for the province over the last few years and will remain so, in line with National Treasury practice.
This reserve has been used in previous years to fund unforeseeable expenditure such as above-budget wage agreements. It is fiscally prudent to retain a contingency reserve in the provincial baseline. This reserve is not meant to be a bail-out in cases of poor budget management, but a cushion for unforeseeable expenditure.
At the end of the 2011/12 financial year, the province has over-collected its provincial own revenue by R759.936 million, based on the preliminary provincial outcome. At the same time, however, the provincial departments have over-spent the provincial budget allocation by R360.272 million.
The net effect of the over-collection of own revenue, the over-expenditure against budget and the budgeted contingency reserve results in a year-end net surplus of R1.344 billion. As such, the province has ended the financial year being cash positive.
This indeed is good news, as it indicates that the province continues to exercise fiscal prudence.
To provide more clarity and detail on how the province faired in terms of expenditure by department, we will begin by indicating the spending at an aggregated level. As at the end of 2011/12, the aggregated actual expenditure for the year amounted to R78.692 billion compared to the budget of R78.332 billion, resulting in over-expenditure of R360.272 million, as mentioned above.
While this over-expenditure is far lower than in previous years, it is worth noting that the main spending pressures exist in the personnel budget of the provincial departments. This is largely due to spending pressures, mainly in Education, brought about by the carry-through effects in the shortfall in funding provided for the various Occupation Specific Dispensations affecting educators.
Five departments over-spent their budget at year-end, with the most significant by far being the Department of Education at R591.293 million, followed by the Department of Health at R130.181 million. The other 11 departments under-spent their budget allocation with the most significant under-expenditure being reflected by Provincial Treasury (with under-spending of R119.703 million) largely due to the department budgeting to pay interest on the provincial overdraft. However, as the provincial bank account has remained cash positive since May 2010, this budget remained unused and resulted in under-spending by Provincial Treasury.
The five departments that over-spent their budget allocations are Education (over-spent by R591.293 million), Health (over-spent by R130.181 million), Transport (over-spent by R6.472 million), the Royal Household (over-spent by R489 000) and Arts and Culture (R68 000). These are discussed in more detail here.
The Department of Education over-spent its budget by R591.293 million, even after additional funding was provided to the department in the 2011/12 Adjustments Estimate, due to the carry-through effect of the shortfall in funding for the Occupation Specific Dispensation (OSD) for educators and previous years’ wage agreements.
It should be noted that the year-end over-expenditure includes the fact that the department reversed the journal processed in the latter part of 2010/11 (amounting to some R576 million) in respect of the ‘no work, no pay’ deductions relating to the 2010 strike action, and this has added to the personnel cost pressure (which was at R1.579 billion as at the end of March 2012).
The department has been requested to provide a detailed report to Provincial Treasury on the over-expenditure against their personnel budget and to unpack the various areas which resulted in this significant over-expenditure. Provincial Treasury and the department are jointly working on a plan to control this cost pressure going forward and the department has already implemented an internal cost containment plan which is beginning to bear fruit.
The reduction in the level of expenditure from that reported in the department’s February expenditure report, when the department projected over-expenditure of R743.502 million, is an indication that some of these interventions are bearing fruit and should continue to do so in 2012/13.
The Department of Health over-spent its budget allocation by R130.181 million at year-end. This over-expenditure relates to the increased cost of the National Health Laboratory Services (NHLS). The negotiations with NHLS for the increase in the contract are currently underway. An arbitration process is almost complete and a decision is expected early in the new financial year.
The latest information indicates that the flat fee has been raised from R32 million to R38 million per month, backdated to 1 April 2010. It is also reported by the department that they are close to agreeing with NHLS on a flat fee format going forward.
Provincial Treasury has advised that this agreement be made in writing to allow for budgeting processes going forward. The final spending on this item was R566.009 million, which was R53.120 million more than budget for the year. Also contributing to the over-expenditure is an additional payment of R70 million on the PPP, made by Inkosi Albert Luthuli Central Hospital to address backlogs in quarterly payments as the department had been paying a quarter in arrears in previous years and rectified this in 2011/12 by making five payments.
The Department of Transport over-spent its budget allocation by R6.472 million, due to the higher than anticipated cost of repairs to roads and infrastructure damaged by floods, mainly in the Ladysmith area.
The Royal Household over-spent by R489 000 mainly due to the department making payments for functions that were anticipated to be taken over by the Royal Trust.
Arts and Culture was only minimally over-spent by R68 000.
The provincial departments, in the main, are commended for their adherence to their budget allocations and the continued implementation of the cost-cutting measures. This positive net surplus in the provincial books was not something Provincial Treasury could have done on its own, but required the tireless dedication of all the members of Cabinet and the officials in the various departments.
Way forward
While the province has ended the 2011/12 financial year on a good note in terms of achieving a net surplus in the provincial books, it would of course have been better to have ended the year with no over-expenditure at all by any of the departments. And this continues to be our goal.
To this end, departments have again been notified that the list of cost-cutting measures continue to be in place in the 2012/13 financial year and for the foreseeable future. I am confident that this will have a positive effect on departments’ spending levels, and that these savings will be redirected toward service delivery spending for the betterment of the lives of our people who we serve.
As I mentioned in my provincial budget speech in March this year, the fiscal austerity measures we have implemented across the province will remain in place, even after the provincial over-expenditure has been eliminated as these measures are pillars of fiscal prudence and good governance. By keeping these measures in place, the province will be able to augment its fiscal capacity to enable it to finance core service delivery and invest in projects that will improve the economic performance of KwaZulu-Natal.
For more information call:
Musa Cebisa
Cell: 071 687 8777
