Honourable Speaker
Premier
Members of the house
Heads of departments
Guests, comrades, ladies and gentlemen
In budget speeches across nations, a common gloomy message of deficits, reduction in revenue and the negative impact of the global economic crises will be proclaimed. As we are starting to get a glimpse of the full extent of the impacts of these factors on our financial resources and our ability to accelerate the implementation of the electoral mandate we are correctly filled with grave concern.
Accordingly Honourable Speaker, we have had to make difficult decisions, led by our commitment to achieve the electoral mandate of this administration. As you will see, we have had to refocus our resources towards areas where we will receive the highest possible yield without compromising service delivery, which is truly a difficult and painful task.
However it is critical to note at the outset of this budget speech that unless we yield the immortal words of Theodore Roosevelt to “do what we can, with what we have, where we are”, we will fail our people.
Honourable Speaker, my main task today is to table an adjustments budget for the financial year 2009/10 for the approval of the legislature. This adjustment budget speech is therefore not a message of doom and gloom, but at its core it is a clarion call to the administration to emphatically increase its effectiveness and efficiency, to creatively do more with less. We will not allow the provincial government to fail the people of the Eastern Cape.
I wish to speak on five areas today, and while doing, give a snapshot of various fiscal issues confronting us at this time:
Firstly I wish to briefly reflect on the economic and fiscal context of the proposed adjustments budget, and the general implications of this context going forward.
Secondly I will comment on the spending patterns of provincial government that are emerging so far this financial year, and the implications of these for the proposed budget adjustments.
Thirdly I will outline our turnaround implementation plans for the Departments of Education and Health.
Fourthly I wish to very briefly present the purpose of an adjustments budget in terms of the Public Finance Management Act (PFMA) and
Finally I will provide the expenditure budget adjustment proposals and explain how these are to be financed.
Economic and fiscal context
A report by the International Monetary Fund (IMF) for a G20 meeting earlier this month noted that:
- there has been a return to positive global economic growth following dramatic contractions
- global recovery is uneven and not yet self sustaining
- financial conditions have continued to improve, but are still far from normal and
- global economic recovery is expected to be sluggish.
We are all very much aware that South Africa and the Eastern Cape have not escaped the effects of this global recession. South African real gross domestic product (GDP) stopped growing in the third quarter of last year, and has contracted significantly since the final quarter of last year. The quarter on quarter GDP contraction was 6.4 percent in the first quarter of this year and three percent in the second quarter.
This morning Statistics South Africa will release the third quarter GDP figures. These could show further contraction, but hopefully not as severe as the first and second quarters. These GDP contractions are having a devastating impact, both on employment incomes and on Government revenues from taxation. In this province employment incomes have been hit by company closures, retrenchments and short-time working in all sectors, but particularly manufacturing, where we seem to be facing the very real possibility of the complete disappearance of certain portions of our manufacturing industry.
As regards tax revenue, we note that South African government’s income from taxation is likely to be some R70 billion lower than anticipated at the beginning of this financial year. So tax revenues this year will be some 10 percent less than originally expected. Tightening fiscal conditions are now a given. This confirms the view expressed earlier in this house.
Looking forward, it seems unlikely that economic conditions will suddenly become much more favourable next year, particularly if the IMF is correct about a sluggish global recovery, and the fact that the South African economy lags behind the global economy. Also, job growth lags behind GDP growth. There is consequently a real possibility of a jobless recovery. This underscores the need for government and its entities to be more proactive and robust in driving economic recovery linked to an active and far reaching industrial strategy.
What are the implications of this for the Eastern Cape, in terms of the management of the provincial fiscus?
In a nutshell, as a result of the recession, the social needs to be met by public spending are increasing, while the resources to meet these social needs are contracting. It is therefore incumbent on us to protect public spending on priority services from inefficiency and abuse.
The continued recession or weak recovery will further expose the inherent vulnerabilities of our economy, in terms of the exacerbation of deindustrialisation, poverty, inequality and uneven development of the private sector. These negative consequences are brought into sharp relief in the Eastern
Cape and require decisive government action if they are to be mitigated.
As provincial government we have developed a mechanism for engaging with both industry and organised labour to jointly develop innovative solutions to the crisis, and to ensure we are able to leverage national support measures. To achieve enhanced service delivery in a tightening fiscal environment will necessitate a much greater focus on the outcomes of provincial government spending and value for money, the critical interrogation of existing service delivery models and generally improved public sector management.
Spending patterns
Honourable Speaker, I now turn to a brief review of provincial government spending in the first six months of this financial year. An overview of the current spending patterns reveals a mixed bag of positives and negatives. From a positive perspective, the following trends can be discerned.
Firstly the issue of under expenditure is not a serious threat this financial year indicating that the spending capacity of departments has undoubtedly improved over the last few years. For example, the Department of Housing in the first six months of the last financial had only spent 35.7 percent of their budget, whilst their expenditure as percentage of budget is sitting at 53.8 percent in the same period in this financial year. This is in no small part due to the service delivery.
Acceleration plan which ramped up spending and project management in targeted service delivery departments.
Secondly, we are also pleased, in view of the recession, that collection of provincial government revenues was 17 percent higher than projected. R418 million was collected as against R357 million projected. We are currently exploring ways of building on this positive trend.
Honourable members, as I indicated earlier it is appropriate to highlight a number of areas that are of concern. We raise them because they are already part of the programme that will inform the actions of government over the next six months. In the six months to end September 2009, provincial government spending amounted to R22.6 billion, representing 53 percent of the budget. In our observations, informed by critical analysis of current expenditure patterns, reveal the following key drivers of over expenditure:
- personnel cost (Occupational Safety Dispensation (OSD), human resource backlogs, in particular for Health, Education and Agriculture).
- goods and services (accruals in particular for Health and Education) and
- infrastructure (over exposure by Education).
In addition to cost pressures identified above, the other area that should receive our attention is costing of goods and services. An analysis of 53 renovated schools that include administration, classrooms, toilets, fencing, demolition of hazardous buildings, and addition of limited classroom space in certain schools indicated a cost range per classroom of between R326 268 and R2 295 930.
An analysis of 62 new schools indicated a range of between R394 563 and R1 738 509 per classroom. It is clear that if this analysis is done pertaining to goods and services which we procure, similar startling variations are likely to be found. Cost benchmarking therefore requires our urgent attention.
Looking forward to the end of this financial year it is clear that the tendency will be towards over spending, rather than under spending. In preparation for this adjustments budget, Provincial Treasury had to exercise prudence in dealing with requests from departments in order not to fuel this trend. In essence, demand for government services will continue to outstrip resources at hand.
Based on an analysis of spending in the first six months, in the absence of any new austerity measures and before adjustments, an over expenditure of R3.1 billion is projected. Two-thirds of this projected over-spend is derived from increased compensation of employees. This directs to the need for increased attention to be given to human resources management throughout the provincial administration system.
It is important that we contextualise the patterns outlined above within the context of national public spending patterns. A national review indicates that provinces are projected to overspend by an estimated R17 billion. The highest overspending province is sitting at R3.7 billion. Through a combination of measures we must work towards eliminating the risk of over expenditure.
Honourable Speaker, in the face of both a tightening fiscal environment (due to the recession) and increasing employee costs, there is a clear danger that departmental non-personal expenditure will be squeezed, with obvious negative implications for improved service delivery. The six months ahead of us present a serious challenge to our collective ability to manage the limited resources at our disposal, to steer the tide of growing demand of government service, and to protect spending in key areas of service delivery and social need.
Education and Health turnaround plans
Honourable Speaker, at the beginning of this speech I referred to the necessity for an increased focus on improving the outcomes of provincial government spending. A major concrete expression of this increased focus is the new turnaround. Implementation plan for the Departments of Education and Health recently approved by provincial Cabinet, and already subject to detailed design processes.
Honourable Speaker, it is no secret that the provision of quality public education and health services will remain an intractable challenge for the foreseeable future. In addition the departments of Education and Health absorb close to 72 percent of the provincial budget and are therefore critical in our drive to improve financial governance and management. The intervention is being driven jointly by the MECs for Health, Education and Finance. The intervention will run over the next two to three years, and aims to:
- restore public and state trust in the departments
- eliminate corruption
- deliver on departmental mandates in an effective and efficient manner
- employ appropriate capacity at both management and operational levels and
- achieve unqualified audit opinions from the Auditor-General.
A service level agreement will be entered into with an independent monitoring facility to ensure that the intervention is open to public scrutiny, and that gains are appropriately communicated to external stakeholders.
Purpose of adjustments budget
Honourable Speaker, before I present the details of the adjustments budget, let us briefly reminds us of the purposes of such a budget. A provincial adjustments budget is provided for in terms of Section 31(2) of the Public Finance Management Act as amended to deal with:
- The appropriation of funds that have become available to the province
- Unforeseeable and unavoidable expenditure recommended by the provincial executive council of the province within a framework determined by the Minister
- Any expenditure for emergency situations in terms of section 25 of the act
- Money to be appropriated for expenditure already announced by the MEC for Finance during the tabling of the annual budget
- The shifting of funds between and within votes or to follow the transfer of functions in terms of section 42 of the act
- The utilisation of savings under a main division within a vote for the defrayment of excess expenditure under another main division within the same vote in terms of section 43 of the act and
- The roll-over of unspent funds from the preceding financial year.
Budget adjustments and financing
The original budget for this financial year was R42.6 billion. The proposed adjustments to the 2009/10 budget will make available to departments an additional amount of R1.9 billion. This amounts to a 4.5 percent increase on the original annual budget. Most of this adjustment will be financed by additional allocations from National Treasury of nearly R1.5 billion, which is intended to cover the increased cost of provincial government employees that has resulted from, among other things, national collective bargaining agreements.
In addition, R226 million will be funded from the roll-over of unspent funds from last year, and R244 million will be funded from the draw down of reserves in the provincial revenue fund.
Honourable Speaker, you will note that this R1.9 billion adjustments budget is considerably less than the R3,1 billion projected over-expenditure mentioned earlier. This necessarily implies that departments will need to very carefully manage expenditures over the remaining period of this financial year to avoid over expenditure, and to do this without harming core service delivery.
The Provincial Treasury will shortly release a circular to introduce various austerity measures in all provincial departments and public entities. This circular will look at curtailing expenditure at such items as travelling, entertainment, and consultants. At this stage it does not seem that it will be necessary to take such drastic measures as, for example, instructing that all infrastructure projects where letters of award have not been given to contractors should be delayed.
The adjusted appropriations per vote are as follows. You will note that I round to the nearest million for ease of presentation:
Vote one: Office of the Premier
An additional R6 million is proposed to cover a shortfall for the Youth Commission for youth month celebrations, ex-youth commissioners’ settlement agreements and the takeover of a National Business Initiative mentoring programme.
Vote two: Legislature
An additional R21 million is proposed, to cover exit benefits for Member of Parliament whose term ended in April 2009, increased constituency allowances, maintenance of information technology (IT) infrastructure, and nationally funded improvements in the conditions of service.
An additional R446 million is proposed, to fund Occupational Specific Dispensation (OSD) and improvement of conditions of service.
Vote four: Social Development
An additional R21 million is proposed to cover extraordinary litigation costs and the Expanded Public Works Programme (EPWP) incentive grant.
Vote five: Public Works
An additional R66 million is mainly a roll-over proposed for the payment of property rates, transversal coordination of the implementation of the Government Wide Immovable Asset Management Act (GIAMA).
Vote six: Education
An additional R1.082 billion is proposed, to cover the wage adjustments and OSD and funding of the historical schools restoration project.
Vote seven: Local Government and Traditional Affairs
An additional R111 million is proposed, mainly to cover salary adjustments for headmen, and for specific municipal interventions, including payments for the Auditor-General.
Vote eight: Agriculture
An additional R66 million is proposed to fund improvements in conditions of service, R20 million for the disaster management conditional grant and R10 million for strengthening rural development initiatives.
Vote nine: Economic Development and Environmental Affairs
This department is releasing R30 million of its 2009/10 main allocation back to the provincial revenue fund.
Vote 10: Roads and Transport
A R43 million adjustment is proposed to fund improvements in conditions of service.
Vote 11: Housing
An additional R57 million is proposed to cover additional personnel cost.
Vote 12: Treasury
An additional R1 million is proposed. This is a roll over.
Vote 14: Sports, Recreation, Arts and Culture
An additional R40 million is proposed to cover a variety of projects including a range of 2010 FIFA World Cup events.
Vote 15: Safety and Liaison
An additional R723 000 is proposed to fund improvement in conditions of service. Having presented the details on the adjustments, it is important that we summarise measures to eliminate or reduce the quantum of over expenditure in an effort to secure the fiscal platform for service delivery.
These include:
- A focused intervention to reduce spending on non-core expenditure
- Curtailing the spend on consultants
- Strengthening internal controls pertaining to cash and supply chain management
- Establish price benchmarks on big budget items. This entails inter alia reviewing the current prices at which these items are procured, market analysis to determine prices in the market and finally developing price guidelines for the administration
- Better management of administrative costs
- Improving contract and project management and
- An administration-wide turn-around intervention in human resource management
Conclusion
Honourable Speaker, I do not think it is an exaggeration to say that our world has changed decisively since 2008. The hardening economic landscape necessarily implies that difficult choices will have to be made, both by public and private sector agents. In this new world, nothing should be taken for granted and nothing should be taken as sacrosanct. New, different and improved approaches to the delivery of priority services have now become an urgent necessity. The best of our collective wisdom will be required in the difficult times to come.
In conclusion, Honourable Speaker I wish to thank the Premier for her guidance and support, my Cabinet colleagues for their critical input in shaping the adjustment budget. I also wish to thank the members of the Portfolio committee on Finance for their critical and constructive engagement with all matters we presented to them. Finally, I thank the team at Provincial Treasury for helping compile this adjustment budget.
Honourable Speaker, I hereby table the adjusted estimates of provincial expenditure for 2009/10 financial year, the Appropriation Bill 2009 and the 2009 provincial medium term budget policy statement
I thank you.
