Select Committee on Finance Provincial Budgets and Expenditure Eastern Cape, Limpopo and Northern Cape 3rd and 4th quarter 2015/16 National Treasury 1

National Treasury manages fiscal risks in the provincial sphere of government in the following ways: Co-ordinating the provincial budget processes through; Benchmarking provincial budgets, with a special focus on social services and concurrent functions Monitoring and analysis of provincial spending including publishing expenditure reports quarterly including; Conditional grants allocations, monitoring, reporting and rollover co-ordination Compliance enforcement and interventions, including with holding and stopping funds in accordance with the Division of Revenue Act Provincial visits - 1st Quarter spending and infrastructure visits Briefing Finance Minister and MECs on fiscal risks in the provincial sphere through intergovernmental forums such as Budget Council; Capacity building and training Introduction

Adjustments to main budgets: 2015/16 3 3

Provincial aggregated budgets and expenditure as at 31 December 2015 4

Are provinces controlling Personnel?

Eastern Cape Provincial Expenditure as at 31 December 2015

Limpopo Provincial Expenditure as at 31 December 2015

Northern Cape Provincial Expenditure as at 31 December 2015

Summary of observations and fiscal risks - Northern Cape As at December 2015, the NC projected to overspend by R89.8 million or 0.6% , mainly on Health, Economic Development, COGHSTA, and Transport. CoE Projected to underspend by R14.8 million or 0.2% mainly due to funded vacant posts that are not filled and the moratorium. Goods and services projected to overspend by R65.2 million. The projected over expenditure is mainly due to accruals of the previous financial year with Department of Health being the main contributor. Transfers and subsidies projected to overspend by R19.3 million mainly on Sport Arts and Culture, however spending was lower at 54.3 % when expected to be at 75% Payments of capital assets overspend it budget by R18.4 million which was mainly Agriculture, Land and Rural Development, Education and Health. Education Projected to breakeven at the end of the financial year. Goods and services is projecting to underspend by R17.1 million or 4.6 per cent mainly due to implementation of cost containment measures. LTSM spending at end of 3rd Quarter was is very low at 10 per cent due to the commitments that was expected to be paid in last quarter. Health The projected pressure of R82.9 million is largely on goods and services (R98.1 million) due the accruals of the previous financial year. The provinces opened 2015/16 with the accruals of R322.7 million, as at December R313.9 million or 97 per cent was paid resulting to the outstanding accrual of R8.8 million. The department has reported an amount of R198.8 million of accruals in 2015/16 resulting total accruals of R207 million as at December 2015. Summary of observations and fiscal risks - Northern Cape

Summary of observations and fiscal risks - Northern Cape continued … Economic Development and Tourism projected over expenditure of R14 million or 5.2% the projected over expenditure was due to shortfall on the hosting of the Kimberley Diamond Cup. To avoid the over spending on this item, an amount R11 million was sourced from donor (mining sector) and also freezing expenditure on other items. Agriculture, Land and Rural Development Projected to breakeven, however spending was lower than expected at 65.1 %. The slow spending was mainly on conditional grants. Summary of observations and fiscal risks - Northern Cape continued …

Provincial aggregated budgets and expenditure as at 31 March 2016 11

Eastern Cape Provincial Expenditure as at 31 March 2016

Summary of observations and fiscal risks – Eastern Cape As at 31 December 2015, EC province had an overall projected underspending of R566.4m, of which Education, EPT, Health and DEDEA were the major contributors, with projected overspending [R180m] only in Roads and Public Works, CoGTA and Provincial Legislature. By 31 March 2016, that projected underspending drastically changed for the worse, whereby it increased to R2.1 billion (3.2 %) in all departments. Below herein are the main contributors thereto listed by department and in terms of economic classification: Education – R1.6bn (Compensation of employees [R637m]; Payments for Capital Assets [R762m] and G&S [190.4m] Health – R106m (G&S [R320m, of which medicine, medicine supplies, fleet services, minor assets consumables] and Payments for Capital Assets [R47m] DEDEA – R82m (Across economic classification) Provincial Treasury – R223m (Across economic classification, but in the main [R191m] transfer to municipalities and departmental agencies and accounts. With regards to spending on core areas, inadequate spending on LTSM; medicine; medical supplies, and personnel Education] could impact negatively on service delivery. Whilst controls on personnel growth by all provinces are imperative, such controls must be managed with tact to ensure an efficient process of filling of critical positions and verification thereof, as well as the need to curb incessant desire to fill positions that do not impact positively [addition for the sake thereof] on service delivery. Summary of observations and fiscal risks – Eastern Cape

Limpopo Provincial Expenditure as at 31 March 2016

Summary of observations and fiscal risks – Limpopo As at 31 December 2015, Limpopo province had an overall projected overspending of R230.5m, of which Health was the main cause thereof, with varying projected underspending, whilst others were to break even. By 31 March 2016, Limpopo had drastically changed whereby all departments had underspent their budgets by R922m. This could denote a sign of unreliability of projections on the part of departments. Below herein are the main contributors thereto listed by department and in terms of economic classification: Education – R138m (G&S [R83.3m]; Transfers [R90m] and Payment for Capital Assets [10m]. The realignment of over allocation for Compensation in favour of funding for norms and standards and has also helped to avert major underspending on Compensation of Employees. Health – R68.4m (Compensation of employees [R16.5m]; G&S R36.6m] and Payments for Capital Assets [R15m]) Social Development – R68m (Payment for Capital Assets [19.6m] and Transfers and Subsidies [7.6m]) Public Works, Roads and Infrastructure – R71.5m (Compensation [R36m] and Payment for Capital Assets [R57.5m]); Co-operative Governance, Human Settlements and Traditional Affairs – [R511m]) The reasons which the province will talk to, range between the delays and late appointment of contracts in Human Settlements; as well as late submission of invoices by service providers, including delays in processing invoices leading to accruals for the ensuing years. The province has had serious underspending in Human Settlement grant in the recent past, and it will be critical that this matter receive necessary attention and through demonstrated plans to avert this situation in the next MTEF. Inadequate spending on core areas remain an issue in Limpopo with regards to medicine and medical supplies (despite downward adjustment), whilst lab services had exceeded its budget allocation in spite of additional allocation during adjustment budget process. Summary of observations and fiscal risks – Limpopo

Northern Cape Provincial Expenditure as at 31 March 2016

Summary of observations and fiscal risks – Northern Cape The aggregate provincial spending is at R14.5 billion or 98.8% as at 31st March 2016 resulting to R177.5 million underspending. All provincial departments underspent its allocation including departments which projected to overspend as at the 3rd quarter. Conditional grants spending is at R3.7 billion or 98.2%. The main contributors to the reported underspending on CG is mainly Sport, Arts and Culture, Health and Human Settlements. The departments have since applied for rollover of the committed funds. The total CoE spending for the provinces is at R7.8 billion or 99.1%. Recorded under expenditure of R72.3 million or 0.9 % due to funded vacant posts that are not filled due the personnel control measures which includes the moratorium. Goods and services reported under spending of R41.9 million. However, the following five provincial departments overspent its goods and services allocation for 2015/16: Education, Health, Social Development, Provincial Treasury and CoGHSTA. Total transfers is at 101% against the adjusted appropriation resulting to over spending of 1 per cent due to the leave gratuity with education being the main contributor due teacher who resigned during the financial year Payment for capital assets spending is at R1.4 billion or 94.4%, underspending by R81.8 million. The under spending is mainly due to the infrastructure related conditional grants mainly on Health and Sport, Arts and Culture. Education Spent R5.1 billion or 99.6%, resulting in under spending of R19.1 million. The under spending is mainly on CoE due to delay in filling the funded vacant posts and the implementation of cost containment measures by the province. Summary of observations and fiscal risks – Northern Cape

Summary of observations and fiscal risks – Northern Cape continued … Health Spent R4.2 billion or 98.6%, resulting to under spending of R57.5 million, the under spending is mainly on Payments for capital assets underspending by R125.8 million while other items reported over spending. Under spending on CG due to the slow construction of the ongoing infrastructure projects including mental hospital, conversion of EMS vehicles and procurement of medical equipment the new De Aar Hospital. CoE over spent is allocation by R1.3 million. Goods and service overspent its allocation by R60.9 million due to the accruals of the previous financial year. The following items are the main contributor to the under spending: Contractors, Medicine , Fleet services (including government motor transport), Operating leases and Property payments Sport, Arts And Culture Spent R341.3 million or 92.9%, underspending by R26.2 million or 7.1% The under spending is mainly on goods and services due to delays in slow delivery on Nelson Mandela legacy projects. CoE under spending is due to funded vacant post that are were not filled. Payments of capital assets is due to the slow delivery of libraries in the provinces Cooperative Governance, Human Settlements And Traditional Affairs Underspent by R13 million due to the under spend on EPWP and Human Settlement, the department has since applied for rollover of the committed funds. Provincial Legislature Spent R159.4 million or 80.2%, under spending by R39.3 million. The under spending is mainly on payment of capital assets due to delays in tender processes relating to the procurement of refurbishment and rehabilitation of the building. Summary of observations and fiscal risks – Northern Cape continued …

Education - Learner and Teacher Support Material

Health - Medicines and Medical Supplies

Health - Laboratory Services

2016 Tabled Provincial Budgets 22

2016 MTEF Proportionate Budgets 23

2016 Provincial Fiscal Framework – Eastern Cape 24

Summary of key conclusions and Fiscal Risks over the 2016 MTEF - Eastern Cape Overall provincial budget growth over the 2016 MTEF. The province has tabled a surplus budget to provide for unauthorised expenditure. Education: Overall budget is growing above inflation, however, the CoE budget is crowding out the goods and services budget which shows negative growth (-6.5% in 2016/17 and no growth over the MTEF). The Capex budget grows by 119% in 2016 and 28% over the MTEF despite current underspending. Health: Overall budget growing above inflation, however Provincial Hospitals are not adequately budgeted for (-33.3% growth in 2016/17 and -10% over the MTEF). There is a risk of service delivery in newly built clinics due to delays in procuring medical equipment for the clinics. Social Development: Below inflation growth in Children and Families programme, and goods and services budgets also reflect below inflation growths over the MTEF. Possible MTEF funding risks for social services: A concerning trend noted in the 2015/16 financial year is the increase in top management personnel (employees at salary levels 13, 14 and 16) while there was a decline in the number of frontline service delivery personnel. Education: The high turnover of educators leaving the public service causes the risk of credible leave gratuity budgets. Cost cutting measures Management of personnel has improved in terms of numbers and expenditure. Compensation of employees spending is under control in most departments owing to central process run by OPT and ECPT. Non-essential items were identified and spending have been reduced or growing at a bare minimal this includes advertising, catering for departmental activities, communication, venues and facilities, minor assets as well as travel and subsistence. In summary, the province should be able to manage its financial liquidity risks over the 2016 MTEF considering the MTEF budget surplus.

2016 Provincial Fiscal Framework - Limpopo 26

Summary of key conclusions and Fiscal Risks over the 2016 MTEF – Limpopo Overall provincial budget for Limpopo grew by 5.7 percent over the 2016 MTEF. The province has tabled a surplus budget to provide for unauthorised expenditure. Both Education and Health budget growth is above inflation, whilst Social Development ahs inadequate growth rate which will certainly pose challenges for the department. Cost cutting measures The province has a coordinated process of managing the process of filling positions, which include prior approval by LPT before departments advertise positions. This measure is meant to control and manage adequately the process of filling critical positions to deal high proportions [71.6 %] of the total budget that goes to the compensation of employees, which is a huge risk for the province. Non-essential items were identified and spending have been reduced or growing at a bare minimal this includes advertising, catering for departmental activities, communication, venues and facilities, minor assets as well as travel and subsistence. Measures recommended to manage fiscal risk include the following: Concerted efforts to find innovations to increase own revenue streams, including increasing the collections of payments into properties of the state under Public Works, Roads and Infrastructure. Continue to increase [utilisation of infrastructure allocations for personnel] and development of the current capacity in infrastructure departments, to capitalise on conditional grant spending and the incentive component which has been a challenge to the province. Extra ordinary measures to deal with high proportions of compensation budget, including helping to retain and or avert the continual loss of educators in the province. Need to review the role of business enterprise public entities and their role in helping the province to address the triple threat of unemployment, poverty and inequality.

2016 Provincial Fiscal Framework – Northern Cape 28

The provincial budget reflects a surplus of R1 billion over the 2016 MTEF before financing. A portion of the surplus is for the debt redemption strategy. Personnel management. The Northern Cape Provincial EXCO imposed the moratorium on filling of vacant posts across departments and public entities. Provincial Treasury and the Office of the Premier are moving forward with the full implementation to formalise the decision through treasury directive to cap the head count. Health Overall budget shows minimal growth of 2.3% in 2016/17 and 4% over the MTEF. However District Health Services and Health Sciences And Training show an increase above the inflationary projection. CoE is growing below the CPI+1 by 5.6 per cent in 2016/17 and 5.6 per cent over the medium term. The growth on this item is a matter of concern while personnel numbers project to increase. Accruals continue to poses high risk particularly in of Health. Provincial Treasury has seconded an official to the Department of Health to assist in various areas especially internal controls including: Centralization of payments to determine the real extend of accruals; Identification and protection of earmarked funding (including non-negotiables) in the system; Overall budget control including districts; Proper cash flow management Summary of key conclusions and Fiscal Risks over the 2016 MTEF – Northern Cape 29

Cost cutting measures The province has imposed expenditure ceiling and budget growth on most of the goods and service items to ensure that they do not increase above the inflation, except the items driven by conditional grants. The following areas of cost containment will require treasury approval includes: Request for events, outbound mission, new expenditure items/projects/ mandates, donations and sponsorship made by departments and entities towards events. All equitable share rollovers will be critically assessed by provincial treasury before it is submitted to EXCO for approval. Provincial Own revenue. The main provincial own revenue items have under collected against the projected revenue targets in the current financial year, and poses a risk of under collection over the MTEF. The province has indicated the following on their budget to improve revenue collection: The province is focusing on assisting department of Health to improve revenue collection by strengthening systems at center of collection. Establishment of inspectorate unites which will assist in strengthening internal control in all revenue collection centers. Increase number of inspectors to eradicate the illegal gambling in the province. The Provincial government has resolved to move the function of motor vehicle license fees to the South African Post Office due to challenges experienced with municipalities in the province. Summary of key conclusions and Fiscal Risks over the 2016 MTEF - Northern Cape continued … 30

Compensation over the 2016 MTEF Year-on-Year headcounts

Thank You 32