Province of the Eastern Cape 2010/11 Treasury policy statement by Honourable MEC of Finance, Economic Development and Environmental Affairs Mcebisi Jonas
24 Mar 2010
Members of the Executive Council
Honourable Members of the Provincial Legislature
Members of the House of Traditional Leaders
Heads of departments
Ladies and gentlemen
In 1994, with the attainment of formalised freedom, the struggle turned to the achievement of a better life for all, and the transformation of society. These two terrains of struggle, although distinctly different, seem to us to have a number of similarities: First, they are both long, spanning several decades in duration. Second, they are both subject to periodic setbacks.
The global recession is the most recent temporary setback in the struggle for improved prosperity. Third, the ANC played a critical role in the first terrain of the struggle. We also intend to play a similarly critical role in the second terrain of the struggle to attain a better life for all and to transform society.
Fourth, both struggles were, and will be, sustained by a number of critical pillars. Those of the struggle for freedom included armed operations, mass mobilisation, underground operations, and international solidarity. Today we wish to focus on one key pillar of the current terrain of struggle.
This is growing the value of public sector activity in building a developmental state. As has frequently been observed, provincial government spending now amounts to nearly 30 percent of provincial Gross Domestic Products (GDP).
Whether the provincial government genuinely contributes 30 percent of provincial economic production or value-added is a moot point. There are two possible scenarios in which the state contribution to the provincial economy can be conceptualised:
In the second scenario, the value produced by the public delivery system grows steadily over the years. This increasing value is not derived from increasing public revenue allocations, but from the progressively improved utilisation of scarce public funds in more efficient and better organised public delivery.
That is, the unit costs of public delivery steadily fall. Public health and education services steadily improve, as does infrastructure provision and the effectiveness of our development services. This increasing public value creation lays a sound basis for moving towards a developmental state.
The journey towards a better life for all and a fairer society is more easily conceptualised, probably accelerated, and indeed attained.
In the first scenario provincial public expenditure ends up merely sustaining tertiary economic activity and a consumptive salaried class in the form of state employees. It also supports a highly dependent private sector, with little impact on the productive economy.
There is little relationship between the cost of state inputs (employee costs, capital expenditure, goods and services), and the value of the services delivered by the state. The value production of the public delivery system gradually degenerates and ultimately collapses. In this scenario, the journey towards a better life for all and a transformed society is slow, perhaps even prevented from taking place.
The Provincial Treasury can play a decisive enabling role in promoting scenario two over scenario one. This will be achieved by harnessing the already evident commitment across government to achieving value-driven public delivery outcomes. We know that our people should and must derive more value from the public funds allocated to this province.
“Ja, nee duidelik” as they say in Afrikaans, “E hlakile ka ho totobetseng” as they say in Sesotho; “ngokucacileyo” as the Xhosa say; and “blindingly obvious” as the English say.
The pertinent questions now are “How can the Provincial Treasury leverage its resources and legislative mandates to derive more value from our public delivery system? How can Provincial Treasury maximise the outcomes achieved through clear policies and strong fiscal management?” How? That is the subject of this speech.
Mister Speaker, we shall proceed as follows:
Firstly we shall very briefly review, in general terms, the means at Provincial Treasury’s disposal to improve the management of public funds by provincial departments, public entities and municipalities.
Then we will assess our performance since our previous policy speech last June, and outline our priorities and the scope of work to be undertaken going forward. We do this in six key areas: budgeting, expenditure control, financial management capacity, procurement, asset management and municipal support.
Before delving into these key areas, we would briefly like to explain our method and mechanisms of engagement with the institutions for which we are responsible.
The functions of a provincial treasury are clearly laid out in section 18 of the Public Finance Management Act (PFMA, 1999). The methods of engagement implicit in the language of the PFMA are both “hard” and “soft”.
The “hard” methods of engagement are signalled by words such as: “exercise control”, “enforce”, “intervene” and “ensure compliance”. The “soft” methods of engagement are signalled by words such as: “promote”, “monitor and assess”, “assist”, and “investigate”.
The Provincial Treasury therefore sees its role as both a “business partner” of provincial departments and municipalities and a “legal enforcement agency”. There is clearly a delicate balance between the two methods of engagement. Circumstances will dictate whether “soft” or “hard” measures are legally required by the PFMA.
It is Treasury’s programme to build relationships of collaboration with the provincial departments, public entities and municipalities through interactions with the Cabinet Budget Committee and Cabinet.
Achieving these levels of collaboration necessarily require Treasury to find the balance between the two methods of engagement. This also implies that we as Treasury will have to redefine our structure and operations to reflect these changes in our operating environment.
2. Assessment of Provincial Treasury performance 2009/10
The PFMA initiated a move from an input-oriented expenditure control system to a more performance-oriented system. That is to say, financial management is now not simply about controlling money, it is about controlling money to achieve specified objectives in an economical way.
At the end of the 2010/11 financial year, the Auditor General will, in fact, be expressing an opinion on performance information, underlining the focus on outcomes in this policy speech. We are definitively moving to focusing on both efficiencies and effectiveness of public spending.
In the following sections we will provide an honest assessment of how well Provincial Treasury has been performing its functions. In some cases this assessment can be made on the basis of readily available performance measures, and in other cases an interpretation of a complex array of facts is required.
Provincial treasuries are responsible under the PFMA for preparing provincial budgets. To assess our performance we should ask the following questions:
- Was the provincial budget prepared on time and to National Treasury specifications?
- Was the provincial budget aligned to our political priorities?
- Was the budget used as an effective tool to increase the impact of provincial government spending?
As regards the first question, our assessment is positive: the budget was delivered on time and to specification. As regards the second question, we begin by noting that provinces have fairly limited budgetary discretion, because of:
- increasing conditionality of grants
- nationally imposed norms and standards for service delivery
- centrally bargained wage settlements.
Despite these limitations, we are of the opinion that the 2009/10 budget was broadly aligned with our electoral mandate and our Medium Term Strategic Framework. As regards the third question our assessment is more mixed.
You will recall, Mister Speaker, that in our policy speech last year we stated our intention to undertake a budget base-line study. The first phase of this has been completed, and this assisted us to identify duplication and wastage in provincial spending and enabled us to cut budgets for non-core goods and services (travel, accommodation and catering etc) by R403 million, as already announced in the budget speech three weeks ago.
Savings were then re-directed to high-priority budget items, such as medicines. We were also able to reduce budgets for consulting services. We are fully aware that this is a start towards deriving benefits from increased efficiencies.
Going forward, future phases of our budget base-line study will involve detailed performance evaluations of specific sectors, focusing on economy, efficiency, effectiveness and equity of service delivery, as per the guidance of the PFMA. We will continue to assist departments to improve their performance measures, and we are determined to progressively cut unit delivery costs over the coming years.
4. Expenditure control
Provincial treasuries are required by the PFMA to exercise control over the implementation of provincial budgets. To assess our performance in this regard we should ask two questions:
- Were monthly and quarterly reports prepared to National Treasury specifications to monitor departments spending against budget?
- Was requisite action sufficient to prevent under or over-spending? As regards the first question our assessment is positive. As regards the second question, once again the answer is more mixed.
As reported in our recent budget speech, in 2009/10 there was over-spending on the cost of employees in the Departments of Health and Education. While requisite action was taken, it was not sufficient to prevent over-expenditure in the 2009/10 financial year, and highlighted the difficulties experienced as a result of a decentralised system in the absence of an appropriate capacity in those multiple centres charged with controlling functions.
Therefore the three critical points to be made here are that full cooperation and collaboration of departments is critical in ensuring greater integration of the financial management function; the importance of building and monitoring departmental financial management capacity; and tightening expenditure control through introducing real-time expenditure data extraction, analysis and response. We will also continue guarding against under-spending on conditional grants and infrastructure.
Supporting interventions regarding tightening expenditure management will include the following in 2010/11: Oversight by MECs will be strengthened through providing guidance on financial management functions, and enforcing accountability by accounting officers through the implementation of an accountability model.
The purpose of this model is to address issues of accountability between Treasury and the other role players with respect to financial management, in compliance with the relevant legal framework.
State procurement (supply chain management) will be strengthened, with attention being paid to cost management.
Human resource management practices will be strengthened through collaboration with the Office of the Premier. This will include embarking on a personnel verification exercise for the Departments of Health and Education, ensuring that budget controls are strictly implemented on all financial systems so that payments are not made without available budget.
Overall cash management and reaction times will be improved, especially in response to indications of cash pressures. The management of departmental suspense accounts will be improved so that reported expenditure is not distorted.
Escalating legal costs have also necessitated the implementation of a legal fees and expenditure audit.
5. Financial management capacity
Provincial Treasury is responsible, in terms of the PFMA, for improving financial management by provincial departments, and for generally ensuring compliance with the PFMA in the province. Our performance in this regard can be readily measured, albeit with a lag, by reference to the opinions of the Auditor-General of departments’ and public entities' accounts.
We are pleased to report, Mister Speaker that provincial departments are improving standards of financial management, as measured by Auditor-General opinions. In the latest available year, 2008/09 we had:
- Nine unqualified audit opinions [from six in 2007/08] (although with issues that are of concern)
- Three qualified audit opinions [from five in 2007/08] (Public Works, Transport and DEDEA)
- Two adverse opinions: Education and Health (that is, financial statements are misleading and/or incomplete). In terms of public entities, we have had a strong improvement, moving from six unqualified audits in 2007/08 to 11 in 2008/09 and reducing the number of qualifications from six in 2007/08 to 2 in 2008/09.
However, it is clear that we still have a long way to go to achieve our target, which must be clean audit opinions for all departments and public entities. Clearly, we must reduce to a minimum any “unauthorised, irregular, fruitless or wasteful expenditure”.
Mister Speaker, we think we should make it clear that we are not interested in AG’s opinions simply for legal compliance sake, but for what these opinions reflect of the state of departments’ financial governance.
It is of serious concern that our two big-spending Departments, Education and Health, continued to receive “adverse opinions”, particularly as these two departments were also responsible for the over-expenditure just mentioned.
In this regard Provincial Treasury has established a Technical Support Unit to support departments in key areas such as human resource management, financial management, supply chain management and improving business processes.
This Unit, which will be highly mobile, responsive and flexible, and will be empowered to respond to issues as they arise. At the same time, the Unit will be able to provide monitoring and support in areas that have been persistently “sore points” in our financial management system. This multidisciplinary team will be operational by 1 May 2010.
The weaknesses in our procurement system have been articulated in various public platforms and in a plethora of reports. Some of these relate to inherent weaknesses in the system, whilst others point to subjective factors linked to corruption, capacity deficiencies, inefficiencies and wastage.
We are also fully aware that our public procurement system is being abused by private profiteering, often in collusion with our own officials. In many cases, we are paying far above market prices for goods and services.
The other inherent weakness in our procurement system is the absence of a linkage between our procurement system and our stated developmental objectives. Last year we undertook a study of provincial procurement.
This report found that an urgent intervention is needed to ensure that:
- A pervasive lack of planning and monitoring of procurement expenditure is addressed
- Departments get more serious about efficiently managing their expenditures
- Government exposure to unwarranted and avoidable risk and wastage is avoided or minimised
- The information handling capabilities as well as information management system of the provincial government are improved to better assist government in monitoring and assessing the impact of expenditure on the provincial and local economies
- The capabilities of especially the Provincial Treasury are expanded and improved to address the aforementioned concerns and provide strategic support to departments and the Executive Council.
Going forward, our focus for 2010/11 includes the following:
Establishment of an independent verification unit to check procurement contracts, as well as the audit of supply chain management performance:
- Strengthening the role of the Interim Bid Adjudication Committee (IBAC) in the monitoring of the implementation of their tender award recommendations
- Development of a procurement price index for setting benchmarks, and a prohibition of procurement at prices above benchmark.
- Strengthen the state’s capacity with regards to contract management through targeted training programmes
- Grading of service providers per professional/service category and developing a regulation framework, including the standardisation of service levels
7. Asset management
Provincial Treasury is responsible, together with the departments, for ensuring the effective management of provincial assets. Mister Speaker, I’m sure you are aware that many departments were faced with audit issues relating to asset management.
Therefore, in the 2009/10 financial year there was a concerted effort to improve the control environment for movable assets. At this point, we are happy to report that all provincial departments now have compliant asset registers in place, although a few issues relating to reconciliation, verification and additions still persist.
The implementation of the Government Immovable Asset Management Act of 2003 (GIAMA) has proved challenging, at both national and provincial levels.
As a result, the Provincial Treasury will, in the 2010/11 financial year, focus on assisting departments with the development of departmental asset strategies which will help place issues of asset management at the centre of departmental planning. We will also strengthen working relations with both the National and Provincial Public Works Departments to implement GIAMA.
Furthermore, we anticipate better audit results relating to asset management in the current financial year as most of the issues raised during previous audit processes were promptly attended to through collaboration between departments and Provincial Treasury.
A major concern going forward is the maintenance and repair of assets. Generally about four to five percent of the replacement value is required on an annual basis for asset maintenance. Provincial Treasury will be ensuring that these budgets are planned and utilised effectively.
8. Municipal support
National Treasury has transferred to the Provincial Treasury its obligations for the oversight of municipalities in terms of the Municipal Finance Management Act (MFMA).
Provincial Treasury sees its role and focus being on strengthening the financial management capacity of municipalities. The Department of Co-operative Governance and Traditional Affairs will be focusing on co-ordinating the provincial and national response in support of the functional areas of local government.
These include, among others, issues of ward-based and integrated planning, strengthening governance, strengthening technical services and local economic development initiatives.
Once again, the opinions of the Auditor General in respect of municipal financial statements provide an invaluable “birds-eye view” of the quality of municipal governance and the degree of MFMA compliance.
The Auditor-General reported as follows for the 2008/09 financial year:
- Five municipalities did not submit their annual financial statements by the legislated deadline date, and so could not be audited. A further seven were not audited because of late submissions.
- Ten municipalities received a “disclaimer” (that is, no opinion can be expressed because the financial statements are so inadequate)
- Four municipalities received an adverse opinion
- Twelve municipalities received a qualified opinion
- Only seven received an unqualified opinion.
Qualified, adverse or disclaimed audit opinions, or non-submission of annual financial statements, are a cause for great concern, as they could point to serious financial mismanagement, and certainly indicate MFMA non-compliance. Our target is for all municipalities to have clean unqualified audit reports by 2014.
It is clear that we face a huge task in improving municipal financial governance to acceptable standards. To improve financial management and audit outcomes, Provincial Treasury is adopting a hands-on approach in supporting municipalities, and hence is up-scaling the financial management support programme.
This programme involves recruiting and deploying Senior Managers and unemployed graduates to targeted municipalities. The support includes developing policies and strategies on revenue generation, ensuring the existence of financial policies and effective systems of internal controls, and ensuring best practices on bookkeeping and recording of transactions.
At a strategic level the programme will also look at exploring shared services models on issues like procurement, accounting systems, corporate services and governance structures.
At the end of 2009, National Government announced a Local Government Turnaround Strategy which is due to run till 2014. One of the five priority areas is improved financial management. Provincial Treasury will be playing a key role in this national initiative.
Specifically, we will in 2010/11:
- upscale the implementation of the Financial Management Support Programme to local government
- strengthen our efforts to attract and retain scarce financial skills in municipalities
- step-up our Clean Audit outcomes campaign
- look into establishing service excellence centres.
9. Budget and programme allocations
Mister Speaker, I now present the budget proposals that will support the initiatives highlighted above. A budget of R304,5 million is proposed for the 2010/11 financial year, with programme allocations indicated below:
Programme 1: Administration R95,8 million
Programme 2: Sustainable Resource Management R60,5 million
Programme 3: Assets and Liability Management R71,3 million
Programme 4: Financial Governance R76,8 million
In terms of economic classification the breakdown is as follows:
Current Payments R300,1 million Of which:
- compensation of employees is R223,5 million
- goods and services is R76,6 million
- transfers and subsidies R1,9 million
- payment for capital assets (Machinery and equipment) R2,5 million
In our budget speech three weeks ago we already outlined the fiscal challenges that this province now faces and our responses to these challenges. So inevitably there must be a sense of “déjà vu” in this house.
But on reflection, Mister Speaker, we believe that the critical role that Provincial Treasury must play in upgrading the performance of provincial departments and municipalities, and the need for this role to be well understood, far outweighs the risks of tedious repetition.
Mister Speaker, I now formally table the policy speech, the strategic and annual performance plans and the service delivery improvement plan for Provincial Treasury: Vote 12, for the 2010/11 financial year.
I thank you.
Issued by: Eastern Cape Provincial Treasury
24 Mar 2010
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