Adjusted Estimates 2019/20 & Provincial Quarter 2 Performance & MTBPS

Meeting report

Western Cape MTBPS and Adjusted Estimates of Revenue & Expenditure
Quarter 2  spending amounted to R32.185 billion (47.8%) of the R67.306 billion adjusted budget. The main budget was increased by R114.339 million, to account for the approved roll-overs of national conditional grants for the Departments of Education and Human Settlements, as well as the Department of Social Development whose expedited roll-over was approved by the Provincial Treasury. At 30 September 2019, the Province reflected a net projected over expenditure of R469.144 million for 2019/20, which will be addressed as part of the 2019 Adjusted Estimates process. Provincial own revenue collections at the end of Quarter 2 amounted to R1.498 billion (50.9%) of the 2019/20 main budget of R2.942 billion.

The Votes contributing to the projected net over or underspending, included the following:
• Transport and Public Works: Projected net over spending was R314.648 million, largely as a result of the Transport Hub, to modernise and strengthen information management. The projected overspending is also related to agency fees payable to municipalities, Compensation of Employees for staff capacity, as well as the Immovable Asset Management E-merge project.

• Health: Projected net over spending was R168.281 million, mainly due to the projected shortfall on the Human Resource Capacitation Grant allocation for critical posts, the expansion of the Grabouw Community Health Centre, the implementation of the increased prescribed minimum wages to be paid to Community Health Workers, and various Global Fund projects. Projected under spending on the Tygerberg Hospital Maintenance project was R66.455 million.

• Human Settlements: Projected net over spending was R38.621 million, largely related to roll-over and revenue retention requests, towards bulk services for Catalytic and other Departmental Priority Projects, as well as approved disaster funding for the Wuppertal fires.

• Provincial Parliament: Projected net over spending was R2.151 million due to the new Sixth Parliament, as a result of higher than anticipated exit gratuity payments. This will be addressed in the 2019 Adjusted Estimates process through increasing Direct Charges.

• Community Safety: Projected under spending was R15.5 million due to challenges experienced in the resource funding for the establishment and support of a K9 Unit.

• Premier: Projected net under spending was R11.224 million, and was largely influenced by the under spending on Compensation of Employees as a result of vacancies, and the unforeseen and unavoidable additional VAT costs on the new Microsoft Licensing Enterprise Agreement.

• Environmental Affairs and Development Planning: Projected net under spending was R11.009 million, mainly attributed to under spending on Compensation of Employees, and the reprioritisation of project costs.

• Local Government: Projected net under spending was R9.600 million, mainly attributed to delays in the filling of posts related to drought capacity.

• Provincial Treasury: Projected under spending amounted to R7.224 million, and relates to Compensation of Employees. This is due to attrition within the Department, as well as the lag-time in filling vacant posts.

Provincial Public Entities
Quarter 2 reflects spending of R363.295 million or 44.5% of the R815.862 million adjusted budget. At the end of September 2019, provincial public entities had a net under spending of R7.289 million, which mainly relates to Western Cape Nature Conservation Board's under spending of R6.851 million due to its restructuring process which has impacted on the filling of vacant posts.

Provincial Own Receipts
As at 30 September 2019, provincial own revenue collections were R1.498 billion or 50.9% of the 2019/20 main budget of R2.942 billion. Key revenue drivers were:

• Transport and Public Works: Own revenue collection amounted to R974.316 million at 30 September 2019, projecting an over collection of R10.694 million by end of 2019/20. Own revenue is mainly derived from Motor Vehicle Licence (MVL) fees.

• Health: Own revenue collected amounted to R373.957 million, compared to R328 million in the same period in 2018/19. Increased collection is due to higher than anticipated collection of hospital patient fees.

• Human Settlements: Own revenue collections amounted to R108.502 million or 171.2% of the main budget, and largely comprises of funding received from City of Cape Town (R88.419 million) Urban Settlements Development Grant, for bulk services for the Forest Village Housing Development project.

• Provincial Treasury: Own revenue was R1.560 million. The decrease in revenue for 2019/20 is due to the 2018/19 audit finding, which stipulated that gambling and racing taxes received by Provincial Treasury as a conduit to the Provincial Revenue Fund is not deemed to be departmental revenue. This will be rectified as part of the 2019 Adjusted Estimates process. Gambling and racing taxes by 30 September: R324.325m.

Second Quarter 2019/20 performance
The Department of Premier achieved 19 (86%) out of 22 performance indicator targets. Provincial Treasury achieved 45 (96%) out of 47 performance indicator targets. Local Government achieved 29 targets (100%). Education achieved 5 out of 7 targets (71%). Health achieved 50 out of 68 targets (78%).  Human Settlements showed concerned only achieving 6 out of 13 targets (46%). Of great concern was Transport & Public Works (including GMT) that achieved only 11 out of 35 targets (31%).

Public Entities: Western Cape Heritage, Western Cape Language Committee and Western Cape Nature Conservation Board achieved 100% of their performance indicators – achieving 5/5; 2/2 and; 3/3 targets respectively. Western Cape Cultural Commission and Saldanha Bay IDZ Licensing Company (SOC) Ltd achieved 50% of their performance indicator targets – achieving 1/2 and 1/2 targets respectively.

Discussion
Mr R Mackenzie (DA) referred to the "expenditure ceiling" on slide 3 and reminded the Provincial Minister of Finance that there had been talk that another R2 billion was needed for South African Airways. He asked for clarity if it would happen since South African Airways had signed the agreed 5.9% salary increase. Slide 9 refers to the budget cuts likely to happen in December and he asked if cuts occurring in December were normal. On the budget cuts that would occur at the start of  the 2020/21 financial year with planned large reductions to Provinces and Municipalities, he asked if the Department had been preparing for it and if it had looked at additional cuts that could occur after that. He asked if the conditions had been set for the R130 million that would be going to the City of Cape Town and when that would be occur. When looking at additional revenue streams, he asked why properties owned by National and Provincial Government were not being sold to raise additional funds. He wanted clarity on the strategy to deal with the shortfall of taxes that may occur. He asked what the impact would be on service delivery if the envisaged cuts occurred.

Ms N Nkondlo (ANC) asked if the Budget Committee had sent out any invites to the public; and if they did – what were the numbers around that. Slides 4, 5 and 7 gave context to the fiscal environment; however, she wanted clarity on the impact of income inequality as declared by the StatsSA report which was recently released. The presentation shed light on the limited scope to pose additional taxes given the economic climate. She called the income gap striking and emphasised that it would make things even more difficult for the people of the Western Cape. She asked if the income gap was a considered part of the fiscal framework.

She referred to slide 7 and noted the contextual issues that the Committee had always raised and the extent to which these were integrated into the planning and design of the fiscal framework for the province. She was very interested to know if those were catered for when Provincial Treasury contextualised this. Referring to slide 9, Ms Nkondlo , asked if reductions were balanced with the reality of underspending. She asked that in future the Provincial Minister and Treasury could delve deeper on the topics of allocative efficiency and fiscal sustainability, and what action items they comprised of. Provincial Treasury should share more in-depth than what they had. She asked what would be done to be more innovative in managing the fiscus.

Mr C Dugmore (ANC) referring to slide 6 where the MTEF 2020 Very Important Priority (VIP) 4 made reference to more opportunities for people to live in better locations; he asked if those words held meaning or if they were just empty words. He reminded the Committee that Provincial Government was currently stuck between court hearings after trying to sell the Tafelberg property owned by Provincial Government to a private buyer instead of using the well located land for affordable housing.

He asked if Provincial Treasury had done estimates for the instance where the equitable share would be reduced by R7.3 billion in conditional grants – he presumed they were national figures. He asked what the possible reduction was that Western Cape could face and if that was part of the planning. He sought guidance on the state of the current reserves of the province; along with the capital amount in the finance reserve base from which the allocations were made. He asked what the projected state of the reserves would be by the end of the medium-term.

Response
Mr David Maynier, Provincial Minister of Finance and Economic Opportunities, replied that he needed to be frank and direct – he was not sure about the conditions set by National Treasury for any further support to South African Airways, however, there was a R5.5 billion bailout pencilled in for the current financial year; alongside the R9.2 billion over the medium-term that was stated by the Minister of Finance in his Medium-Term Budget Policy Statement. Beyond that he could not answer – only time would tell.

On additional revenue streams, he explained that in the medium-term they would have to relook at all aspects, of which property would be one of them. He emphasised that it was a blow to him when the Minister of Finance made very specific reference to ‘additional measures’ in excess of R150 billion would be required over the medium term in his Medium-Term Budget Policy Statement – something he had not previously done. It appeared to be an expectation that the R150 billion would be clawed back almost exclusively from compensation of employees; however, over time that appeared to have shifted.

He explained that as he mentioned in his Provincial MTBPS speech, tax hikes and spending cuts were possible. The Minister of Finance in his MTBPS made no specific announcement on tax increases. He believed that the Minister of Finance used the MTBPS o set the scene and indicate to the public and market that there was a possibility of tax increases. There is a possibility that he would make an announcement on tax increases in the Budget Speech in February 2020.

Income inequality would have to be dealt with by putting measures in place to obviously grow the economy and create jobs. However, when it came to the budget, he had indicated in his speech that they would endeavour to protect expenditure for education, health and social development in the Western Cape.

He explained that the so-called VIPs were not just words but were part of the Provincial Strategic Plan which would be finalised and published in 2020. The sort of details Mr Dugmore referred to would be fleshed out in 2020 in the State of the Province Address. He agreed that procurement strategies and new ways to deliver infrastructure would be looked at and explored in the Medium-Term. He agreed that there were many opportunities, particularly in procurement to claw back savings.

Ms Julinda Gantana, Acting Accounting Officer: Provincial Treasury, replied that Provincial Government was exploring ways to raise additional revenue. However, with the current Tafelberg court case, it was an area where they decided to tread on the side of caution – when dealing with property. The current Medium-Term Budget Policy Statement made no indication on the increasing of tax or adding of additional tax. In the Western Cape, a reduction in compensation of employees (COE) may not be the best solution because the spending on COE is not to maximum, in fact it was underspent. A response to the underspending was the 80/20 principle in which Treasury informed Departments that 80% of their underspend would be returned to the fiscus and 20% would remain with the Department to use for other causes such as job employment. She agreed that it was difficult to balance the reductions with the underspending.

The need for services were forever on the rise and therefore there needed to be a balance between the ability to deliver services and a desire to contain or be more efficient in COE spend. It could not be just in terms of a number, it had to be looked at more broadly. Allocative efficiency and fiscal sustainability was something they took to Cabinet; once they had gone back to Cabinet they could share the feedback with the Committee. She emphasised that the idea was to work over the medium-term to try and deal with challenges – especially on supply chain, allocative efficiency and fiscal sustainability.

The Chairperson referred to percentage of targets achieved and asked why it did not include a pro-rata calculation for partially achieved targets – as partially achieved meant that some part of the targets were achieved. Saldanha IDZ stated 50% which was actually only 1 of 2 targets achieved, she asked how the metrics and calculation were done.

Mr Dugmore wanted more details on Saldanha IDZ 1 out of 2 targets achieved which reflected as 50% of targets achieved in comparison to other departments with a bigger number of targets. What target was not achieved? Referring to Departmental Performance, it was concerning that Human Settlements had 15% unachieved targets and Economic Development & Tourism had 14% unachieved targets. Transport and Public Works had the highest unachieved targets. He asked if Treasury could give a sense as to the contributing factors for the three departments who performed poorly.

Ms Nkondlo reminded them of her first question which was unanswered. Referring to slide 13 (Adjusted Estimate principle) she asked if Treasury would be introducing new guidelines to departments and if so, by when would that be done as it could form part of the introduction principle. She asked if Provincial Treasury had concluded filling the vacant directorate positions as those roles were important for the oversight of municipalities.

Ms Gantana replied about the vacancies that there had been some progress. They had presented a senior manager position to Cabinet and would be able to make an appointment by 1 January 2020.

Ms Analiese Pick, Director: Provincial Government Finance, Provincial Treasury, explained that Chapter 6 of the Public Finance Management Act indicated the rules around roll-over. For an application to be considered there were rules. The Roll-Over Circular informed Departments about meeting those requirements in terms of the PFMA. Subsequent to the Roll-Over Circular there was the Medium-Term Budget Policy Statement; and the Allocation Letter from National Treasury. The MTBPS indicated that spending cuts will be determined by the outcome of discussions with trade unions to rein in the wage bill. If the trade union agreement did not come off then the strategy was to inform Provinces to make cuts. If they were preparing for reducing baselines for the new financial year, that meant that they could not add baselines to the current financial year as it would not be sustainable for departments with the reductions for the future.

Ms Zeenat Ishmail, Chief Director: Strategic Management Information, Department of Premier, replied about the performance indicator calculations that one had to look at a number of factors. The method of calculation consisted of a number of processes as the indicator in itself had a value chain. There were two levels: Firstly, the processes – what you actually did to deliver on those indicators. Secondly, the data value chain – because you want to measure that indicator. That is where the partial delivery came into full delivery and how their indicators were defined. A lot of effort went into the calculations to help departments to improve their performance indicators.

In terms of overall performance and the reason as to what defined the criteria boundary between performance and non-performance, one had to look at the entities. If one looked at Saldanha Bay IDZ, it was about dependency on other stakeholders. There were two indicators. It looks like 50% however only 1 of 2 targets were done. Important to note was that the indicator in Saldanha Bay was the number of beneficiaries participating in the skills development programme per annum. There had been a delay in the transfer payment from the SETA which led to no beneficiaries participating in the skills development programme.

The Chairperson thanked the Provincial Treasury and the meeting was adjourned.