Western Cape Third Adjustment Appropriation Bill 2020/21: Provincial Treasury

Meeting report

The Chairperson welcomed the Provincial Minister of Finance and Economic Opportunities who would present the Provincial Treasury Third Budget Adjustment for 2020/21.

Provincial Minister of Finance and Economic Opportunities, Mr David Maynier, said that the Finance Department’s full management team was online. The team included Mr David Savage, Head of Department; Ms Julinda Gantana, Deputy Director-General: Governance and Asset Management; Ms Annamarie Smit, CFO; Mr Malcolm Booysen, Senior Manager: Local Government Budget Management and Ms Naadia Ishmael, Director: Provincial Treasury: Strategic and Operational Management Support.

Third Adjustments Appropriation Estimates for 2020/21
Provincial Treasury Head of Department Mr David Savage said the Department had surrendered R17.3 million to the Provincial Revenue Fund, due to significant cost savings as a result of Covid-19 operational impacts, as well as significantly tightened expenditure controls instituted across the board. This did not impact on the Annual Performance Plan (APP) deliverables because the new way of working of WCPG had allowed it to keep on track, due to revised operating arrangements and work flows. The R1.3 million reduction in the budget estimates for 2020/21 had been spread across compensation of employees. This had been due to resignations and retirements, and some delays in the staffing of critical vacant posts due to the Department undertaking a comprehensive review of critical posts. Goods and Services had been reduced by R10.8 million. Expenditure had also been significantly reduced in travel and subsistence, online training and consumables, due to lockdown working arrangements.

There had been reductions in spending estimates due to delays in approvals of the organisational structure from the Department of Public Services and Administration. WCPG had taken mitigating actions once it had become apparent that things would not proceed smoothly in the financial year, and had launched the appointment process for Chief Director for Infrastructure and the empanelment process for technical support for infrastructure financing options for the province.

Mr Maynier said that the Department had delayed procurement on the empanelment of technical support for municipalities. This had been mitigated by a streamlined internal focus on how vulnerable municipalities were to be supported, and how Department staff were to provide direct support. There had been savings due to efficiencies realised in the production of the Municipal Economic Review and Outlook (MERO) and the Provincial Economic Review and Outlook (PERO), through better alignment between the external services procured and the Department’s internal staff.

On transfers and subsidies, there had been a reduction of a little over R5 million. The Financial Recovery Service Grant had been delayed because the only eligible municipality for that grant, Kannaland Municipality, had been disputing the disruption of departmental interventions, and had taken the matter to court. No allocation had therefore been made.

The Financial Management Support Grant had been reduced due to the findings of Phase 1 of its Local Government Grant Review Process. This had been mentioned in the previous year, and had indicated opportunities in value-for-money improvements.

The next slide showed reductions across Department programmes according to economic classification. The reductions were in Programme 2: Sustainable Resource Management because that was where a significant number of outward-facing programmes were located and where the largest programme in the vote was situated.

Throughout 2020/21 the Department had carried out appraisals of its Provincial Strategic Plan and the Western Cape Provincial Recovery Plan, to ensure that the Department was fully aligned in its strategy and operational planning, particularly in the context of an ongoing and growing set of fiscal constraints. The Provincial Treasury had been very focused on the Covid-19 response, which had required three core interventions.

Discussion
Mr L Mvimbi (ANC) asked if the R17.3 million could be referred to as savings, and if so, if they could be invested in other developmental projects.

Mr A van der Westhuizen (DA) asked about the savings which had resulted from delayed advertisements and filling of critical posts. The filling of critical posts is urgent and he asked Mr Savage to explain how long this process would take, for how long the posts had been vacant, and how the Department aimed to ensure it was not hampered by these long-lasting vacancies.

The Chairperson asked about the Financial Recovery Services Grant and the Kannaland Municipality dispute. Kannaland was disputing the fact that it had been placed under administration. She asked if it had refused the R5 million on that basis.

Mr Savage responded that the R17.3 million represented savings which had been returned to the Provincial Revenue Fund, and directly redeployed in the current budget for the fight against Covid-19. The Health Department had therefore been the beneficiary. Treasury had a policy of spending across the province and according to provincial priorities. Therefore, Treasury preferred not to underspend if savings could be redeployed to frontline anti-Covid operations.

On critical posts, the entire department programme had been reviewed in terms of the appointment and retention of staff, which was an area of ongoing concern. Treasury required specialised skills which were both hard to find, and experiencing a high churn rate. At a systemic level churn was positive, because younger staff had the opportunity to be exposed and work under experienced senior leadership. They did however become very marketable, and the challenge had been to retain them within Treasury. This related in particular to supply chain management. The Department was in the process of advertising, shortlisting or interviewing candidates for a number of supply chain and other critical posts. These posts were also to do with local and provincial government, finance and accounting. During its Critical Skills Review, Treasury had aligned this process with a broad talent management strategy which he would elaborate on later.

Mr Savage replied that Kannaland had been in an unstable coalition the past year, and this had disrupted its cooperation with the intervention. The legal action which Kannaland had undertaken was being contested by the Province. A lack of collaboration with the Administrator deployed there by the province had made it likely that the resources for financial recovery might not be used to optimal effect. The Municipal Financial Recovery Service Unit at National Treasury was in the process of revising the Financial Recovery Plan for the municipality. Due to the disruption of support, it was deemed inappropriate to transfer the resources in the current financial year, because of doubts about the grant being used to optimal effect.

Mr van der Westhuizen asked if in the previous financial year there had been vacancies dating six months and longer.

The Chairperson asked for clarity on Kannaland’s dispute with the Province.

Mr Savage replied that Treasury had not been holding back the money. Rather, Treasury had been unwilling to transfer money into an environment where there was no collaboration. No funds had been allocated, whereas the Department had been looking at developing the financial sustainability of the municipality. Binding conditions needed to be in place to account correctly to the legislature.

Mr M Xego (EFF) asked if withholding funds from the Kannaland municipality had been politically motivated, and why funds could not be allocated to support a contested recovery plan.

Mr Maynier replied that the case had not been politicised. Financing the municipality at this stage would have been irresponsible, and would have amounted to a bail-out. The Provincial Treasury was working to support a return of financial stability in the municipality.

Mr Maynier explained that the delays in recruitment had been due to the assessment of criticality. The recruitment processes underway were for infrastructure analysts, two systems controllers, a systems manager, two economists, two local government revenue and expenditure specialists and one provisioning and assets management post in Programme 1. The Department had been unable to find the skills through conventional recruitment process, and had therefore resorted to head-hunting.

Third Adjustments Appropriation Estimates for 2020/21 (continued)
In the course of the year, Mr Savage said that Provincial Treasury had been very focused on the Covid-19 response, which had required the Department to make three core interventions:
• The first had been an agile, responsive and multi-phased budget process. More budget had been tabled than in previous years, because of the need to respond to the pandemic. There had been support to supply chain management around the pandemic, and ensuring that province-wide systems were efficient and compliant.
• Key to this had been the establishment of a central Procurement Advisory Committee consisting of senior supply chain and financial management specialists to guide all departments. There had also been the publication of the monthly and quarterly Procurement Disclosure Reports.
• There had been extensive financial governance support, to guide department and municipal responses to changing regulatory requirements, in response to exemptions by National Treasury and disrupted audit processes which had had a knock-on effect on the governance cycle.

The Provincial Treasury had four strategic priorities:
• Integrated provincial governance
• Efficient infrastructure investment
• Effective and strategic supply chain management systems
• Effective local government.
They cut across the two main branches of the Department: Fiscal and Economic Services, and Governance and Asset Management.
Mr Savage said three critical levers had been strengthened:
• Talent Management: Provincial Treasury needed to work systemically to enhance the talent pipeline for Western Cape provincial and local government as a whole. It was about investing in staff, and attracting staff to the Treasury, through external bursary programmes, and giving them work experience after they had completed their studies. He spoke of the Chartered Accountants Academy and the internships and mentoring programme.
• Knowledge Management: in a fiscally constrained environment, the Department needed to reach its developmental goals. Expenditure reviews, improving performance management, developing intelligence dashboards especially at municipal level, and vulnerability management in municipalities.
• Digital Transformation involved pioneering platform development, legacy systems maintenance and transformation, expanding online collaboration and process automation including the development of artificial intelligence, especially machine-based learning.
Overall, the challenge was about joined-up management for strategy execution.

The CFO presented the revised medium-term expenditure framework (MTEF) estimates.

The first table gave an indication of what the estimates had been per programme: Programme 1 Administration: R 55 347 million; Programme 2 Sustainable Resource Management: R 139 227 million; Programme 3 Asset Management: R73 935 million; Programme 4 Financial Governance R51 477 million. That totalled R319 608 million, which was a decrease between the revised estimate and the 21/22 financial year. In 22/23 there had been a slight decrease because of the reduction in the baseline allocation. There had been a slight increase for the 23/24 financial year.

The next table gave an indication of Economic Classification and employee compensation (COE). The following slide showed that the COE had been 62% of the budget because of the need for the Human Resources department to achieve its priorities. There had been a 3.7 % increase over the MTEF per year, and there had therefore been a slight increase in COE over the MTEF period.

As indicated by the HOD, there had been a historical challenge of a high churn rate and it had not been possible to obtain the skilled staff complement, which had been linked to the Talent Management Strategy ensuring good recruitment policies. There was a COE committee which critically looked at all vacancies and identified critical posts that could be funded within the 2021 MTEF period. Six of those positions were in the senior management category. The selection process had begun for critical posts such as Chief Director: Infrastructure and SCM analysts. 10% (32 posts) mainly in support services could not be funded. These related to Research Analysts and LG coordinators and analysts, and economist, coordinators, cash flow analysts, PPP unit, system controllers and LOGIS clerks. In total there were 337 unfunded posts and 305 funded posts.

On the Goods and Services budget, the priorities mentioned by the HOD included Integrated Financial Governance. The Goods and Services input was for support of PERO, advisory services for expenditure reviews and fiscal futures research, and review of the gambling policy. In Efficient Infrastructure Development, provision had been made for the Infrastructure Technical Support Panel to assist with Project Preparation Facility (PPF) appraisal and review of infrastructure financing options.

On Supply Chain Management, provision had been made for SCM reform implementation (EPS), and Supplier Evidence Bank and Walk-in Centre. For effective local governance, it was the support for MERO, the training for municipal officials, the subscription to the municipal sustainability index, municipal vulnerability support, and the internal audit quality assessment reviews. This provided a view on linking the budget to the strategy or priorities.

Mr Maynier explained that Transfers and Subsidies had been a key element of strategy and last year the Department had indicated that it would be undertaking a review of local government grants in particular. Phase 1 of that review had indicated that there were significant opportunities for consolidation and redesign of grants across WCPG. This was to ensure that it was not only funding inputs, but that it was also targeting outputs and intermediate outcomes. In doing so, it could improve the coordination of support and respond to strategic gaps faced by municipalities. But importantly and in response to municipal concerns, WCPG would also blend financial with non-financial support. This was often very important in the case of vulnerable municipalities. Giving them additional resources and making them work independently, while they still had to traverse supply chain management and contract management processes, ended up putting a greater burden on them without really alleviating the critical gaps that they were facing.

It was therefore better to blend financial and non-financial support. Provincial Treasury was currently adjusting its transfer framework to enable that alignment, within a more programmatic and output-to-outcome-level design.

He noted a significant transfer on the vote to the Western Cape Gambling and Racing Board.

Even while the transfer framework had been adjusted, overall support to local government had been expanding over the MTEF. Provincial Treasury had been making sure that proportionally local government grew, as the overall budget votes grew at the margin. Relative allocations might be adjusted, particularly between Goods and Services and transfers in the votes. WCPG had been looking to extract ever greater value for money around the combined support to local governments, as the effective local government priority for the Provincial Treasury. He presented a slide showed growth over time across the various teams collaborating on the local government agenda in the Provincial Treasury.

Appropriated priority allocations that supported municipalities were used for compensation to employees, and services from the empanelment of specialized technical support which municipalities could not obtain themselves, such as the financial recovery grant and other grants.

A slide was shown of the growth in support of the Integrated Talent Management strategy over the MTEF, both in terms of capacity building activities, Chartered Accountants Academy, Bursary Programme and other Training and Development activities.

Discussion
Mr van der Westhuizen said that in 2020 Mr Savage had said the Department would not be providing training for interns as there would be insufficient support and interaction due to social distancing and people working from home. He was pleased that money would now be made available for bursaries. In previous years, academically deserving students who received bursaries had been expected, under contractual arrangements, to work for government for the same number of years they had been financially supported to complete their tertiary studies. He asked if there was a bursary scheme, and if the students of the “missing middle” might be assisted by the Western Cape Treasury with funding for their studies, with Treasury benefitting thereafter from a similar contractual agreement. He appreciated that Treasury had informed the Committee about the existence of vacancies, and suggested that a resolution be made on this.

Mr Mvimbi asked if headhunting was a policy of WCPG, and if examples could be provided of how it had been used.

The Chairperson said she was satisfied the criteria for providing grants to municipalities had been reviewed. There could not be a grant without a binding contract on how such a grant would be monitored and measured. She referred to pages 89-90 and 106-108 of the Budget Book within Provincial Treasury Vote 3, and also referred to the slide on Artificial Intelligence and e-Procurement Solution, and a previous briefing 18 months earlier on the supply chain management system. The slides mentioned the Tech pilot in municipalities. She asked for details of the Tech pilot. Also, the Budget Book spoke to the aim of putting more money towards technology within the supply chain system to maximise going digital as much as possible. The example cited was the e-Pay slip system which would be good innovation. However, when it comes to the digital revolution, local, provincial and national government were two digital/industrial revolutions behind the private sector. Would it be possible to use block chain technology within the supply chain management system?

In the same way we pulled the weakest link in the digital economy towards us when we started taking physical meetings on online during Covid, could provincial and local government digital systems be pulled to 2021 because we are in 2021 but the digital systems are not? Digital systems needed to be in the context of the 2021 digital revolution existing in the private sector.

Response
Mr Maynier replied that there was a work-back requirement for bursaries from the Provincial Treasury; in some cases bursary holders were still studying and in others, they were working, notably in the Chartered Accountants Academy, a flagship programme that had worked well to jumpstart careers. Vacancies were managed within the Integrated Talent Management Strategy because the staff turnover rate was very high, and vacancies needed to be filled. The Provincial Treasury attracted talented and skilled people, but also needed to allow them to leave. Headhunting was a stage of the recruitment process and part of provincial policy. It was used when a suitable candidate had not been found during the first round of the open recruitment process. A number of posts were at that time being headhunted, particularly in the supply chain environment, ICT and economic services at senior level. Headhunting did not exclude the panel interview and assessment process. It would involve a number of candidates who would be shortlisted and subjected to the same interview, assessment and approval process, permitting a degree of competition for the position. The process was well regulated. In some functions, Provincial Government was competing directly with the private sector to recruit personnel.

WCPG would continue with the grant review process, looking at both input and impact. It was necessary to ensure that grants did not displace municipal spending, but came as an additionality. There was a range of criteria in putting a grant in place, and the conditions of the grant needed to be applied to protect the impact of the spending.

Mr Maynier replied that in Digital Transformation, WCPG was not sufficiently advanced. To ensure a radical transformation in a short space of time meant working with existing resources. Provincial Treasury had highly skilled managers who would work with the means at their disposal. On e-Pay slips, it had been difficult but WCPG had managed to put the system in place.

Ms Julinda Gantana, Deputy Director-General: Governance and Asset Management, referred to the legacy systems being used by the Department. Although the fiscus is shrinking, it remained important for WCPG to do more to assist provincial departments and local government. It was therefore necessary to implement artificial intelligence, machine learning, e-procurement and such strategies to explore various avenues.

Mr Aziz Hardien, Chief Director: Financial Governance and Accounting, who heads up Programme 4: Financial Governance, replied about artificial intelligence. Provincial Treasury had rolled out a programme of technical assistance to municipalities to deal with audit time, by outsourcing a service provider. Over 1 000 queries had been fielded for management reports and audit outcomes. Currently, during an audit, WCPG had received email queries from the Auditor-General to which the municipalities had not been able to respond fast enough, because of delays in the system. Under a new service being funded by WCPG, a municipality was now required to load information onto a web portal.

The robotics would then provide a range of previously-asked questions so that municipalities could select responses from Treasury that was applicable to its circumstances. If there was no adequate response, the system allowed the question to be routed to the appropriate person in Provincial Treasury. This process significantly reduced research time and the amount of time to respond to a municipality. This was just the beginning, because more functionalities were available within this system. It was advantageous because if Provincial Treasury had had to create such a system, this would probably have exceeded the allocated 300 million.

On machine-based learning (MBL), Provincial Treasury was funding a system which provided continuous auditing of its transactions, independently of the auditing by the Office of the Auditor-General. As transactions were entered into, the programme accessed the system of the service provider allowing every transaction of Treasury to pass through 28 doors of control. The machine would pick up any control errors and so allow Provincial Treasury to focus only on these areas of risk. If successful, the programme would be rolled out to other areas of work of the Western Cape Government. In addition, the system would be able to make projections over time, based on current expenditure and allowing a degree of budget flexibility.

Ms Nadia Ebrahim, Provincial Treasury Director: Asset Management, spoke about the supply chain interventions of WCPG, which did not have a proper system in place. The legacy system had been purely financial. Over the previous 15 to 20 years, WCPG had used an e-procurement model for quotations. It was, however, critical to have line of sight, and to place procurement processes in an automated system to be able to do the analytics, the value-add and value proposition considerations, all of which need to be taken into account within a procurement process. This was particularly important for the Provincial Treasury, because this would link up to budget allocations, value-for-money, questions of performance and service delivery. This had now been taken in-house and developed. The delay in the delivery of National Treasury's Integrated Financial Management System (IFMS) had held them back but WCPG was looking at building onto the current system; there would be particular focus on the financial and payments systems. Technically, the province had three alternate systems, also linked to specific commodities such health, infrastructure or pharmaceuticals.

One key issue was how to bring these features together. The e-procurement system, looking at goods and services and higher-value purchasing, could bring items into an automated process. Secondly, she spoke of procurement planning such as linking the budget to actual purchasing models found in the province. There was need to have line of sight from the time of budget allocation and prior to it, and the need to look at planning and demand management, linking these to purchasing. Due to fragmentation across different systems, a business intelligence model had been developed for the supply chain. This had not necessarily been budgeted for but took place at the back end of the Centre for e-Innovation (CEI) component in the Province, using a business intelligence (BI) technology model to bring the information together. This features in WCPG reports such as the PDR. The National Treasury reporting on Covid-19 linked in to this model. In the new financial year, it was important to begin to look at the non-financial information set, such as gaps or key issues in procurement. This linked to the issue-management system and the e-gap tool related to departmental requirements, being used by WCPG. Pulling these aspects together gave Treasury line of sight, enabling it to focus on key challenges. She said that this was a generic and simplified description of the systems currently being used.

Mr Maynier described the work being done in a mass transactions environment, focusing on the alignment of large data sets to enable a next round of analysis. It was about incrementally rolling out technologies. Much of the work was experimental, to find out what worked on the existing legacy systems of WCPG. It had an expert data team in the strategic and financial services team, led by Mr Mzomba. It focused on the legacy systems and how WCPG could innovate with them, while Mr Paul Pienaar headed a large data team dealing with budget issues. Together, they formed the nerve centre leading the reform process in Provincial Treasury. This in turn linked to the work of CEI and both were big province-wide systems. The Centre for e-Innovation was a key partner in the process. He was not in a position to say where block chain was being deployed as WCPG had not begun implementing it. He appreciated the interest shown in the work of WCPG.

The Chairperson said ICT and AI were being implemented according to existing legacy systems, which may be slowing the process down. How long would it take to decide whether to roll out the new systems to the rest of the Western Cape? How could current programmes be used to establish value? Block chain was a possible means of bringing about agreement. She asked how one could establish value within transactions under the current systems. Current systems might benefit small, medium and informal businesses over big businesses. She asked how to better register and capacitate smaller business, or those run by young entrepreneurs. Ways needed to be found to make smaller businesses more competitive.

In response, Mr Savage conceded that legacy systems held back innovation and change. Government had recognised that the bigger legacy systems such as PERSAL and the Basic Accounting System (BAS) were a constraint, and should be replaced with the Integrated Financial Management System. At national level the IFMS process had been patchy and slow. WCPG had decided to use the benefits of the legacy systems. They constituted a huge repository of data, were stable and broadly functional, and stability was not always present in some of the more modern systems. WCPG would try to build in modular components to allow their gradual adaptation. The development of the e-procurement platform was a good example of in-house technological changes.

He agreed that the e-procurement platform offered many advantages, and this was embedded in the supply chain management strategy of WCPG. He referenced strategic commodity-based sourcing and the importance of data. At a transactional level, this was about introducing prospects for easy entry into the platform, and for automated reverse-auctioning procurement processes. This would enable clearing the market rapidly and in real time for standardised commodity items. These were some of the known possibilities for progressively placing building blocks for the e-procurement system being gradually implemented, giving WCPG greater control, without being held back by the legacy systems. It was too early to know when roll-out would be implemented; it was necessary for the technical teams to continue to innovate freely, and to assess the risks of what they had learned. By their very nature, pilot programmes were limited in scope and in scale and their in-built assumptions could not be tested beforehand.

Mr Savage referred to Mr Hardien’s discussion of the pilot of 100% continuous auditing in the Treasury environment. This contained in-built assumptions of the nature of the transactions of Treasury. Too rapid a roll-out might cause a failed wider-scale deployment.

Ms Gantana added that every department had a different service delivery model. A pilot programme may appear straightforward, but might differ significantly from that of other departments.

The Chairperson called for a streamlining of government service delivery processes, and gave her support to the processes underway as implemented by WCPG. She thanked them for an informative presentation.

The meeting was adjourned.