Madam Speaker
Section 31 of the Public Finance Management Act (PFMA) requires that the MEC for Finance tables the provincial adjustments budget annually. Strictly speaking, adjustments are made to the main appropriation to cater for unforeseeable and unavoidable expenditure as per section 31(2) (b) of the PFMA. These adjustments also accommodate Treasury approved roll-over requests for those departments who could not spend the entire amount voted by the legislature, as per section 31(2)(g) of the PFMA, as well as other commitments.
The adjustments budget further provides for 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. Lastly, the adjustments budget includes funds to be appropriated for expenditure already announced by the MEC for Finance during the tabling of the main budget as per Section 31(2) (d) of the PFMA.
The adjustments budget I am tabling today also includes the implementation of the first charge rule as per section 34 (2) of the PFMA for certain provincial departments. I will return to this issue later.
Furthermore I will also be indicating the amounts that will be shifted from certain departments to cater for the changes in the reconfiguration of the provincial government, particularly the changes in ministries. I will also indicate the additional funding the province has received from National Treasury in this adjustment budget. Lastly, I will deal with the provincial recovery plan which was tabled early in November 2009 to the Finance Portfolio Committee. But before I get into the details of this adjustment budget, let me briefly talk about the prevailing economic scenario in order to contextualise these adjustments.
The economic scenario
This house will recall that the country entered its first official recession in 17 years in the current financial year. The effects of this recession have been very pronounced from a fiscal point of view. The national revenue collection has lagged behind what was budgeted for in the main budget. The effect has been a reduction of funds available for allocation across government, in the country.
While the recessionary pressures still prevail, there seems to be some consensus among a number of private sector economists, the National Treasury and the South African Reserve Bank, among others, that the world economy is starting to recover from the global economic recession. This view is supported by the sharp increases in commodity prices, the emergence once again of significant bull markets in international stock markets, the recovery of the housing market in the United States of America and a number of other economic indicators.
On a seasonally adjusted basis, the South African economy recorded an economic growth rate of three percent during the second quarter of 2009, compared to a growth rate of 6.4 percent during the first quarter of 2009, suggesting a slight recovery or improvement in the state of the national economy. Despite these signs of recovery, it is going to be a while before the South African economy comes out of the recession, as evident from the increase in job losses.
The South African economy lost about 777 000 jobs from the third quarter of 2008 to the third quarter of 2009. There are also signs that the trend in job losses is still continuing, with some labour movements predicting total job losses for the 2009 calendar year to be about one million. In KwaZulu-Natal alone, about 173 000 jobs were lost between the fourth quarter of 2008 and the third quarter of 2009. While the job market has been severely affected by the recession, some economic indicators give us some hope of a recovery. For example:
* the rate of economic decline decreased during the second quarter of 2009 compared to the 1st quarter of 2009
* fuel (both petrol and diesel) consumption increased by 1.62 percent, quarter on quarter during the second quarter of 2009
* buildings reported as completed at constant 2 000 prices increased by 4.90 percent, quarter on quarter during the second quarter of 2009
* cement sales in tons increased by 17.94 percent, quarter on quarter during the second quarter of 2009
* electricity consumption increased by 4 percent, quarter on quarter during the second quarter of 2009.
These are positive signs that point towards an economic recovery. Let me now turn to the details of the adjustments budget.
Ministry budget shifts
As part of the 2009/10 adjustments estimate, the ministries that were affected by the post-elections provincial reconfiguration will be adjusted to take into account the reconfigured ministries. To this effect, R4,711 million moves from vote six: Provincial Treasury to vote four: Economic Development and Tourism in 2009/10, with carry-through costs. Similarly, R1,502 million, (with carry-through costs) moves from Local Government and Traditional Affairs to the Human Settlements Ministry (housed under the Department of Public Works).
The move of the ministry budget of R3,943 million (with carry-through costs) from vote 16: Sport and Recreation to vote four: Economic Development and Tourism was already calculated and undertaken in time for to be included in the 2009/10 main appropriation and is therefore not being effected as part of the 2009/10 adjustments estimate.
Function shifts
A number of functions are being recommended to be shifted to departments whose core functions are aligned to these respective functions. It should be noted that these shifts have no net effect on the provincial budget, as it is merely moving funds from one Vote to another. It will be noted that these shifts are not treated uniformly in the adjustments estimate document, as some of the function shifts see the full function moving to another vote (and are then classified as a function shift in the documents), while some only see a portion of the funding allocated to a Vote for a specific purpose moving to another vote (these are then classified as “other adjustments”).
As such, it is proposed that the following functions be shifted with effect from the 2009/10 adjustments estimate, and over the 2010/11 medium term expenditure framework (MTEF):
* Museum services to move from the Office of the Premier to the Department of Arts and Culture (R7,292 million in 2009/10, R7,869 million in 2010/11, R8,320 million in 2011/12 and R8,825 million in 2012/13). This is classified as a “function shift” in the adjustments estimate document
* Expanded Public Works Programme (EPWP) incentive grant, the bulk of this grant will be moved from the Department of Public Works to the Department of Transport, starting in 2009/10. This follows an instruction by National Treasury in this regard, as well as the gazette published by National Treasury on 17 April 2009. Of the R84,180 million allocated to the province in 2009/10, R83,900 million moves to the Department of Transport, while R280 thousand remains with the Department of Public Works. This is classified as a “function shift” in the adjustments estimate document
* Some of the soccer development funding to move from the Office of the Premier to the Department of Sport and Recreation and to the Department of Arts and Culture. It was agreed that R7 million of the soccer development and 2010 provincial strategy funding of R90,085 million allocated to the Office of the Premier, be moved to the Department of Sport and Recreation during the 2009/10 adjustments estimate for 2010 soccer clinics and KwaZulu-Natal Further Education and Training Coastal College for youth training on soccer and construction of sports fields at the college. R1 million will be moved to the Department of Arts and Culture in 2009/10 for a crafts programme related to 2010. This is treated as an “other adjustment” in the adjustments estimate document
* An amount of R108,109 million currently housed under Treasury for the occupation specific dispensation (OSD) for doctors is moved to the Department of Health. This is treated as an “other adjustment” in the adjustments estimate document. Apart from the above mentioned funding shifts, the province needs to fund other commitments in the 2009/10 adjustments budget, including the roll-overs that have already been approved by Cabinet.
Commitments:
Local government levy
As per Section 76(1)(b) of the KwaZulu-Natal Gambling Act 1996, local municipalities that have gaming activities in their area of jurisdiction are entitled to a 0.5 percent levy on gross gaming revenue. This levy has to be appropriated by the legislature annually. R9,646 million is therefore allocated to the respective municipalities in the 2009/10 adjustments budget. A list of the amounts due to the respective municipalities is contained in the adjustments estimate document.
Provincial legislature, statutory obligation
R1,709 million has to be provided for the re-imbursement of surplus own revenue collected by the provincial legislature during 2008/09, in terms of section 22(1) of the PFMA. In addition, provision has to be made for the statutory increase to the remuneration paid to members of the provincial legislature. This amounts to R9,8 million.
Provincial legislature, 2009 elections monitoring and observation
An amount of R4 million is allocated to the provincial legislature for the monitoring and observations undertaken during the 2009 elections.
Public Works, Msunduzi Innovation and Development Institute (MIDI) Children’s City project (Old Boys’ School)
In terms of a Cabinet recommendation, an agreement is being finalised with the Msunduzi Innovation and Development Initiative (MIDI) to convert the Old Boys’ Model School to a facility for the benefit of the children of Pietermaritzburg under the auspices of MIDI. An amount of R600 000 is allocated in 2009/10 for the design and tender stage of the project.
Rollovers:
Equitable share
Provincial departments had requested a total of R326,365 million. Of this, only R26,220 million is approved for roll-over and relates to various infrastructure projects in the Department of Agriculture, Environmental Affairs and Rural Development.
Conditional grants
National Treasury approved the roll-over of three conditional grants, the details of which are discussed below. It should be noted that these amounts had not been paid back to National Treasury at the end of the 2008/09 financial year and are therefore treated as provincial roll-overs:
* National School Nutrition programme, R38,279 million
* Devolution of property rate funds grant to provinces, R1,118 million
* Community library services grant, R1,442 million.
The first charge rule
In tabling the main budget in June 2009, I indicated that all departments’ budgets will be reduced by 7.5 percent in order to finance the cumulative over-expenditure of 2007/08 and 2008/09 financial years. However, for the Departments of Health, Education and Transport, the 7.5 percent reduction was not sufficient to fully finance their over expenditures relating to these two years. As such, they are being affected by the first charge rule in accordance with section 34 (2) of the PFMA which is being implemented against them over two years, starting in 2009/10.
As a result, amounts of R758 million, R111,466 million and R185,492 million are being deducted from Health, Education and Transport, respectively. It should be noted though, that while these amounts are being deducted from various programmes in these votes, they are being allocated back to programme one: administration against the category unauthorised expenditure to allow for the necessary accounting treatment of this unauthorised expenditure. It is very important to note that these amounts are not available for spending by the departments.
Additional funding received from National Treasury
The 2009/10 adjustments budget includes additional funding allocated by National Treasury to the province of KwaZulu-Natal.
The following additional amounts have been allocated:
* R949,407 million for the higher than anticipated 2009 wage agreement
* R880,025 million for the occupation specific dispensation for educators
* R147,531 million for the occupation specific dispensation for medical doctors, dentists, medical and dental specialists, pharmacists, pharmacy assistants and emergency medical services personnel
* A further R6,079 million for Occupation specific dispensation for health
* R240,916 million is added to the comprehensive HIV and AIDS grant in health to meet the greater demands that arise due to the faster antiretroviral take-up rate
* R3,581 million, a new conditional grant is allocated to health to fund the final FIFA 2010 World Cup preparation strategies that are to be implemented by the health sector.
It should be noted that the amounts provided by National Treasury for the higher than anticipated 2009 wage agreement and the various occupational specific dispensations in Education and Health, are insufficient to cover the full cost implications of these agreements. The allocation letter from National Treasury indicates that provinces should fund the difference through internal reprioritisation of the departments’ baselines.
The effect of this is that the departments have had to reprioritise to fund the shortfall of R476,525 million for the higher than anticipated wage agreement. In addition, Department of Education has to fund the shortfall with respect to the occupational specific dispensation for educators of R597 million, and Health with respect to the occupational specific dispensation for doctors and specialists of R11,438 million.
The total amount of the shortfall is therefore close to R1,1 billion. As a result of this, departments have, in certain instances, no choice but to move funding from capital to current, and in some instances to reduce transfer payments to fund this shortfall.
Capital budgets under pressure
As a result of constant under-funding of wage agreements and occupational specific dispensations for educators and health practitioners, we are now witnessing an untenable situation where current expenditure is beginning to “crowd out” infrastructure expenditure. This is clearly visible in some departments’ budgets where funds have been moved from capital to current expenditure. These movements require legislature approval, in terms of the PFMA, and these are clearly indicated, per vote, in the 2009/10 adjustments estimate Bill.
If capital budgets continue to be under this pressure, we will not be in a position to develop the much needed infrastructure, to improve the competitive advantage of the province and create the much needed employment opportunities going forward.
Before I conclude, let me briefly deal with some of the issues that arose during the tabling of the mid-term expenditure review to the Finance Portfolio Committee on e November 2009. The report dealt at length with the projected expenditure outcome for the 2009/10 financial year. At that time, the projections indicated that KwaZulu-Natal will over-spend its budget by R5,681 billion largely as a result of the higher than budgeted for wage agreement and the implementation of occupational specific dispensation as indicated in table one below. After providing for various commitments, as seen in the table (and provided for in the adjustments estimate), this projected over-expenditure reduced to R3,896 billion.
Having considered the seriousness of this projected over-expenditure, Cabinet requested all departments in the province to indicate by how much they will be able to decrease their expenditure in order to reduce the level of over-spending. Table two indicates these agreed to amounts, per department. If the province manages to reduce its projected over-expenditure by the R2,1 billion as indicated in table two, and over collects its budgeted revenue by R105,9 million as projected, the over expenditure will decline to about R1,7 billion by the end of the current financial year.
In addition to this agreed to cut back in spending, Cabinet has implemented stringent cost cutting measures to reduce the level of over expenditure even further. The following cost cutting measures were then approved by Cabinet and endorsed by the Finance Portfolio Committee:
* Freezing of all posts (in exceptional circumstances, the executive authority can approve the filling of essential pr critical posts, with a report being sent to the Office of the Premier and the Provincial Treasury)
* Freezing of all capital projects for which tenders have not yet been awarded (excluding those that are funded by conditional grants)
* No furniture or equipment to be bought where orders have not already been placed (excluding those that are funded by conditional grants)
* Essential training is done in-house (exceptions to be approved by the head of department)
* Overseas trips be rationalised
* Business class travel be restricted to MECs and heads of departments only (and member of the provincial legislature, where applicable)
* Utilisation of in-house capacity to make travel arrangements
* Car hire or bookings, class of vehicle to be lowered
* Catering for meetings be stopped
* Kilometre controls be implemented on travelling (1 750 kilometres per month per official unless there are exceptional circumstances, the exceptions should be approved by the head of department)
* Officials to travel together unless absolutely unavoidable
* Only essential trips be undertaken
* Meetings, strategic planning sessions and workshops to be held in departments’ offices instead of private venues
* Air travel is limited to important meetings with only one representative to attend on behalf of the department, unless otherwise required
* No team building exercises or year end or Christmas functions (only permitted if paid for by the staff themselves)
* Cut down on unnecessary overnight accommodation. Staff to sleep over only if the total distance to and from the destination is more than 500 kilometres
* Where there are one day meetings in other provinces, officials must travel there and back on the same day (where possible)
* No performance bonuses to be paid from 2010/11 until further notice
* No promotional items to be purchased (t-shirts, caps, bags, etc)
* No leave conversion payments (leave to be taken)
* Strict control of overtime
* Re-evaluation of the hosting of provincial events (including budget dinners)
* All departments are to take immediate steps to eradicate fraud and corruption which continue to be a drain on the provincial fiscus.
I strongly believe that if all departments implement these cost saving measures, and adhere to the agreed to cut back in spending amounts indicated in table two above, the provincial financial position will improve significantly in the next two to three years. I therefore call upon the legislature to assist us in monitoring the implementation of these measures.
In conclusion, I would like to convey my sincere appreciation to the Premier, my Cabinet colleagues as well as the members of the Ministers’ Committee on the Budget (MinComBud) for their assistance in finalising this adjustments estimates Bill. The support received from the Finance Portfolio Committee is also acknowledged. Lastly, I would like to thank all the Treasury officials, including the ministry staff for ensuring that the budget documentation we are tabling today is accurate and of high quality.
It is my honour to formally table the 2009/10 Adjustments Appropriation Bill for consideration in this House. I look forward to the debate on this Bill.
Thank you.
Issued by: Department of Finance, KwaZulu-Natal Provincial Government
25 November 2009
