P Miller: KwaZulu-Natal Appropriation Bill 2004/2005

KwaZulu-Natal Budget Speech 2004/2005 by PM Miller, MEC, Minister Of FinanceE
24 February 2004

INTRODUCTION

Mr Speaker, Honourable Members of the House, it is no secret that this will be the last time I will be tabling the provincial budget before this parliament, coinciding as it does with the end of the current term. It is appropriate in a watershed year such as this to take stock of what we have achieved in the field of budget and financial management reforms in the last five years. At the same time I hope I will be remembered in this house for always being honest, open and realistic in my approach to sharing financial information and statistics with honourable members. I also deem it appropriate to leave this particular parliament with a clear perspective on the socio-economic realities, which prevail in the province, and thus the developmental and fiscal challenges, which the new government will inherit in a few months time.

ACHIEVEMENTS DURING FIVE-YEAR TERM OF CURRENT PARLIAMENT

So much has been achieved in terms of budgeting and financial management reforms during the lifespan of this parliament that it is easy to forget just how parlous the province's financial situation was a little over five years ago, and how rudimentary were the financial systems in place.

In the financial year 1998/99, five years into the new constitutional dispensation, the state of the provincial finances and financial management systems still left a great deal to be desired. The provincial government had accumulated R2,1 billion in debt, forcing the national government to intervene in terms of Section 100(1)(a) of the Constitution. This in turn forced the government to table three consecutive budgets in which especially capital expenditure was severely curtailed to enable the province to redeem its accumulated debt. Inevitably, in the three years in which it took to repay this debt, infrastructural backlogs grew to dangerous levels, and service delivery levels declined in most sectors. Among the causes of this financial crisis were poor financial controls and reporting systems, the lack of a statutory financial management framework, fragmented procurement policies, limited internal audit capacity and outdated and disjointed budgeting, planning and accounting systems.

It is to this government's lasting credit that decisive action was taken to address these deficiencies - to the point where the province of KwaZulu-Natal is now recognised nationally to be at the forefront among provinces in terms of the effectiveness of its financial management, procurement and internal audit systems.

Allow me to review briefly the achievements in each of these areas.

BUDGET AND FINANCIAL MANAGEMENT REFORMS

It is no exaggeration to say that the province's budget and financial management systems have been reformed and modernised beyond recognition. The long-term goal of this reform process was to maximise allocative efficiency and produce balanced provincial budgets on a sustainable basis. The reforms introduced, in conjunction with reforms at national level to the intergovernmental fiscal and regulatory framework, were implemented incrementally in three phases. Key features of the reform phases were:

Phase One (1998-2000)

The development of an in-year expenditure monitoring and reporting system, which evolved into a best practice model in the national context
Improved cash flow management, resulting in significant returns of interest from both short and long term cash investment and
Adoption of the multi-year budgeting and expenditure framework (MTEF).

Phase Two (2000-2001)

Implementation of the Public Finance Management Act (PFMA)
The introduction of performance budgeting and
The implementation of strategic planning as a statutory requirement in terms of the PFMA.

Phase Three (2002 to date)

Better alignment of the budgeting and strategic planning processes within a strategic management framework aimed at integrating the planning, budgeting, monitoring and reporting processes;
Increased focus by the Provincial Treasury on own revenue collection - with the establishment of a dedicated revenue unit;
Establishment of an infrastructure unit within Provincial Treasury to facilitate interdepartmental, inter-sectoral and inter-sphere coordination and cooperation; and finally,
The introduction of reforms to economic and financial reporting formats, to bring the public sector into line with the IMF's internationally accepted (revised) GFS formats and standards - this new economic reporting format is used for the first time in the 2004/05 provincial budget statements and supporting documentation.

These reforms produced balanced budgets, accurate and transparent reporting, and improved service delivery - and have been an outstanding success.

The reforms succeeded in stabilising the province's financial situation, and turned around the province's cash flow from negative to positive. The consecutive years of over-expenditure in 1996/97 and 1997/98 were succeeded by three years of surpluses in the amounts of R392m, R751m and R524m for the years 1998/99, 1999/2000 and 2000/01, respectively. At the conclusion of the 2000/01 financial year, I was in a position to announce in this House that the province was debt free.

In terms of budget management, planning and reporting, furthermore, the impact of the introduction of performance budgeting principles into the provincial government's budget and strategic planning processes has been profound. Among the advantages has been improved and more transparent reporting, improved accountability to the public, and greatly improved parliamentary oversight of departmental performance and service delivery.

REFORMS AND ACHIEVEMENTS IN ACCOUNTING CONTROL AND SYSTEMS

Achievements in this area have been equally impressive.

The implementation of the PFMA in May 2000 brought about numerous additional financial reporting requirements, and necessitated the roll-out of a comprehensive programme to build capacity in provincial departments to implement the accounting control and reporting measures required. In previous budget speeches, I have provided considerable detail about the Financial Management Improvement Programme (FinMiP), an initiative by Provincial Treasury aimed at assisting Accounting Officers in all provincial departments to meet their responsibilities in terms of the PFMA.

The FinMip programme extended over two years from 2000 to 2002. It is one of the Provincial Treasury's signal achievements in the period under review that the process of implementing the PFMA throughout the provincial government was managed very successfully and efficiently.

A more recent challenge in the area of financial and accounting systems, has been to convert the provincial government from FMS to the Basic Accounting System (BAS). The movement to BAS is in line with National Treasury's drive to align government to a single integrated financial management and accounting platform. Like the earlier task of implementing the provisions of the PFMA, the onus has fallen on the accounting control division of the Provincial Treasury to rollout this programme in phases. The target date for the completion of this conversion to BAS is 1 April 2004.

BAS will bring specific benefits to the province, in terms of on-line access to financial information, including payments to suppliers. The process of converting from one system to another has required extensive training, communication and mastering change management with all users of the system from junior levels to senior management. All provincial departments, with the exception of Health and Education, have already migrated successfully from the Financial Management System to the Basic Accounting System. The departments of Health and Education will migrate on 1 April 2004 and a comprehensive plan is in place to ensure success.

PROCUREMENT

The provincial government's achievements in the area of procurement during the last five years have not lagged the financial management reforms. In June 2001 the KwaZulu-Natal Procurement Act, 2001 became effective. The Act introduced a more decentralised provincial procurement system, giving more procurement powers to Accounting Officers. This decentralisation became necessary due to the impact of the PFMA, with Accounting Officers having greater responsibilities.

In terms of the KwaZulu-Natal Procurement Act of 2001, internal departmental structures, namely Tender Evaluation and Tender Award Committees, were established. Higher procurement delegations (R1m per contract) were issued, so making Departments more independent in the awarding of their contracts.

This 2001 Act also brought about the replacement of the KwaZulu-Natal Tender Board with the Central Procurement Committee. The majority of the members are senior public officials, (including some Accounting Officers and Chief Financial Officers,) the balance being made up of private sector members. This promotes the accountability of Accounting Officers, again as required by the PFMA.

A new procurement preference point system was introduced to bring the legislation in line with the Preferential Procurement Policy Framework Act, 2000 - KwaZulu-Natal being the first province to do so. The Regulations issued in terms of the provincial Procurement Act of 2001 make specific provision for Historically Disadvantaged Individuals, SMMEs and local manufacture.

The Tender Appeals Tribunal was re-appointed in terms of the aforementioned legislation - another first for the province. This independent body successfully assisted in resolving disputes over contract awards, without the expense of the alternative legal process of the High Court. The Tender Appeals Tribunal has dealt with one hundred and forty (140) appeals since its inception. This has resulted in manifest improvements to the fairness and transparency of the provincial procurement system.

An electronic Suppliers Database was launched on 1 May 2001, providing an easily accessible central pool of Provincial suppliers. The database enabled Departments to find suitable suppliers more easily, and allowed for quicker evaluations of suppliers when considering quotations/tenders submitted. On 1 October 2003, an improved version of the Suppliers Database was launched, which provided a stable and reliable environment for housing more than 20 000 suppliers currently provisionally registered. As suppliers' data is updated on the new system, so more accurate searching by Departments will be possible. Detailed economic classification of suppliers on the Database has also been made possible.

As part of the ongoing procurement reforms, the functions allocated to the Procurement Administration Office have been expanded, placing particular emphasis on the rendering of advice to various role players in the procurement process. An important development has been the establishment of a Policy Development section, with the responsibility of developing new procurement legislation, policies and procedures, in order to ensure consistency, uniformity, fairness and equity.

Another development of great significance has been the establishment of a Compliance Monitoring unit in the Procurement Administration Office. This unit monitors compliance by departments and suppliers with provincial procurement policies and procedures.

INTERNAL AUDIT

Finally, mention must be made of the very significant advances in the field of internal audit.

The Provincial Internal Audit Unit, located in the Treasury, has played a pioneering role as far as the internal audit function in the public sector is concerned. Many national and provincial government departments have used this unit as a role model in establishing their own internal audit units.

Consider for example the following major achievements since 1998:

The passing of groundbreaking legislation in this House to govern the establishment and functionality of Internal Audit i.e. the KwaZulu-Natal Internal Audit Act of 1998.
The appointment of a Provincial Audit Committee in 1998.
The establishment of the Internal Audit Exchange Program between KwaZulu-Natal and the Provincial Government of Ontario in Canada.
The implementation of uniform and standardised audit methodology.
The creation of a fully functional and specialised Risk Management and Forensic Investigative Unit to assist Provincial Departments in dealing with risk management strategies and fraud and corruption investigations.
The completion of a 'Control Environment Assessment Exercise' for all Provincial Departments.

This exercise assessed all the internal controls in each department and resulted in the following outputs:

Control Environment Assessment Reports that identified strengths and weaknesses
A Departmental Risk Profile
A Fraud Prevention Plan based on the Risk Profile
A Three Year Strategic Plan for all Departments; and
An Annual Audit Plan to guide the activities and focus of Internal Audit in protecting Government's assets.
The acquisition of uniform and standardised audit software to assist in conducting and management of all audits.
The creation of a Fraud and Forensic Database to assist in the management and reporting of all forensic and fraud investigations handled by the Internal Audit Unit.
The completion of the following number of audit assignments between 1998 and 2003:
- 207 Internal Control Audits
- 93 Forensic Investigations

In summary, I am proud to record that this province's Internal Audit Unit has succeeded in remaining at the forefront of internal audit best practice in the public sector, with consistently high standards against which future achievements and progress can be benchmarked.

SOCIO-ECONOMIC REALITIES IN THE PROVINCE

Budget and financial management reforms, however, do not take place in a vacuum, but rather within a particular context. This context is the desire to achieve inter alia maximum allocative efficiency and carefully targeted expenditure in terms of pre-determined priorities and objectives.

The success of any financial management reform programme should be measurable improvements, over time, in the socio-economic profile of the province, since government is the single largest contributor, in terms of expenditure, to the regional economy.

During last year's budget speech I spent considerable time sketching the socio-economic realities in the province. I do not propose to repeat all the detail I provided last year on the province's socio-economic profile. A significant development in the interim period, however, has been the publication of the demographic and socio-economic data from the 2001 census. This brings significant advantages from a budgeting and planning perspective. Instead of a multiplicity of unofficial sources, the provincial government now has a single updated and valid official source on which to base its planning and budgeting activities.

For this reason, honourable members will notice that, with few exceptions, the sources used to compile this year's Budget Statements derive from Stats SA, in particular the various publications emanating from the 2001 census. Honourable members are invited to study the Budget Statements for the detail of the findings of the census and if possible to use these facts as to regional GDP etc, so ensuring that everyone is singing from the same hymn sheet.

In most essentials, the 2001 census results confirm the accuracy of the socio-economic data presented in last year's budget address and accompanying documentation. We remain the most populous province, predominantly rural in nature, and characterised by relatively weak economic growth, high levels of poverty and unemployment, high levels of income inequality measured by race and gender, and spatially uneven development. Taken together, it is these socio-economic features of the province, which continue to define the comparatively high levels of spending on social services, which is an embedded feature of the provincial budget.

THE DEVELOPMENTAL CHALLENGE - FISCAL AND BUDGETARY REALITIES

These socio-economic realities show that, despite major achievements in financial management and related reforms, government targeted interventions and government 'spend' have not been successful in improving most poverty-related socio-economic indicators in the province in the decade since the birth of our new democracy.

This in turn implies that there is a need in the second decade of the new dispensation to develop mechanisms to improve effective targeting of government actions and resources - i.e. to achieve better outcomes for the money which we deploy every year in the form of the provincial budget. I cannot stress sufficiently the need to improve the quality of the provincial spend. We must get 100 cents value for each R1 spent.

From a budgetary perspective, the challenge is to shape the provincial budget to support the achievement of the long-term strategic goals of the Provincial Growth and Development Strategy currently being revised. The harsh reality, however, is that this will have to be done within the limitations of an increasingly constrained fiscal framework. In the forthcoming MTEF, as I will shortly disclose, there is very little additional new funding over and above the existing MTEF available for allocation to departments. This is because of a much tighter macro-fiscal framework, caused primarily by reduced levels of revenue owing to slow economic growth and lower tax collection.

Expenditure pressures have also increased across all three spheres of government.

Taken together, these fiscal realities and the scale of the developmental challenges confronting the provincial government reinforce the need for every government department to reprioritise, plan and budget effectively, in order to achieve better value for money in its expenditure at every level - in short to produce more outputs with less resources.

BUDGET AND FINANCIAL MANAGEMENT CHALLENGES IN THE NEXT TERM

Continued progress in budget, financial management, procurement and internal audit reforms is essential if the government is to succeed in achieving its developmental objectives in the next decade. Government is simply going to have to become more efficient, and there is plenty of room for such efficiency improvements.

We will have to consolidate and capitalise on the recent reforms in the budget management and strategic planning processes in the provincial government. There is still much to be done in many areas of the budget management reform process. Departmental strategic plans still do not always demonstrate strong links to the MTEF budgets prepared by departments. The issue of planning, prioritisation and performance measurement is going to become critically important in the years ahead, as the province implements its Provincial Growth and Development Strategy. This should include a complete review and reengineering of the existing departmental programme structures, with major implications for the departmental budgets. Departmental planning processes, moreover, will have to take cognisance of planning priorities in other spheres of government, particularly at the municipal level.

It will be especially important to ensure that departmental strategic planning is really strategic. It must involve a comprehensive study of the national and provincial policy priorities, which inform the province's growth and development strategy and consequently departmental mandates and core functions. The latter should be thoroughly analysed and interrogated to ensure alignment with stated national and provincial policy priorities. We must ensure that the provincial policy priorities should drive the strategic planning and budget formulation processes, and not the other way around as has so often happened in the past.

It also means that the province will have to use and manage its assets much more effectively and efficiently than in the past. A core objective must be to give effect to section 38(1)(b) of the PFMA, which refers to the need to make 'effective, efficient, economical and transparent use of the resources of the department ...' In this regard, the Treasury has identified the need to develop a suitable asset management system in the province as one of the major challenges in the forthcoming MTEF period.

Core Asset Management Principles have already been developed and agreed upon by provincial departments. This will pave the way for the implementation in due course of asset management in its true sense throughout the provincial government. In November 2003, a tender was advertised for the development and implementation of a comprehensive asset management system for the province, to be rolled out in the course of 2004 as a pilot project for adoption in the country as a whole. Extensive research was undertaken to ensure that provincial departments' long-term needs were incorporated into the system specifications before tenders were invited for the procurement of the system.

When the process of appointing a suitable vendor of a provincial asset management system is finalised in the next month, it is intended to commence with a provincial asset count. This will ensure that the province has a record of all assets with their respective value. The system will furthermore provide management information, which will ensure adequate and accurate budgeting for both capital expenditure and maintenance costs.

On the procurement front, government will continue with its efforts to use this powerful tool to advance the objectives of job creation, empowerment and capacity building in the previously disadvantaged and currently unemployed sectors of the population. To this end, the Province will in due course introduce a Supply Chain Management system (SCUM), which is intended to improve financial management, cost effectiveness and departmental service delivery in every aspect of procurement - to the ultimate benefit of all sectors of KwaZulu-Natal society. The national Minister of Finance on 5 December 2003 promulgated Regulations in terms of the PFMA setting out a framework for Supply Chain Management in the public sector. This framework may well require amendments to our own provincial procurement legislation - this is a matter, which will receive urgent attention in the coming weeks.

A Supply Chain Management system includes features of demand management, acquisitioning management, logistics management and disposal management. An e-Procurement system will be established and implemented to supplement the Suppliers Database as part of the acquisitioning process.

With specific reference to the issue of empowerment, the Broad Based Black Economic Empowerment Act, signed into law by the President last month, will also play a key role in the revision of procurement policies and practices. Procurement strategies will need to be implemented to ensure that economic empowerment principles are effectively carried out to benefit the people of this Province.

In the area of risk management and fraud prevention, the internal audit component will continue to enhance the investigative services that it renders to client departments. This will involve inter alia building on already established relationships with the other law enforcement agencies, the prosecuting authority and the revenue services. Finally, there will be increased focus on the strengthening of internal control structures within the provincial government departments in accordance with the Public Finance Management Act.

THE ROLE OF OWN REVENUE COLLECTION AND INFRASTRUCTURE EXPENDITURE

There also needs to be an ongoing focus on own revenue collection and the quantum and quality of expenditure on provincial infrastructure in the forthcoming MTEF. Both these interventions have the potential to significantly contribute to meeting some of the developmental challenges facing the province.

In both these areas, I am pleased to report that the Provincial Treasury is taking decisive action.

Infrastructure

In line with infrastructure investment being made a key policy priority of both national and provincial government, a number of reforms and new initiatives have been introduced with regards to infrastructure management in the province.

In 2003 the Provincial Treasury established an infrastructure unit, with a mandate to facilitate inter-departmental, inter-sectoral and inter-sphere coordination and cooperation in respect of the planning and delivery of infrastructure in line with the national framework on infrastructure. Among the objectives of the unit will be to identify public private partnership opportunities for the delivery of social and economic infrastructure in the province, and assist departments with contract finalization and implementation arrangements.

As from the 2003/04 financial year, a new reporting format that separates infrastructure expenditure from total capital expenditure, was introduced. The new format allows for monitoring of expenditure trends by departments on infrastructure. In addition, a new quarterly reporting regime has been introduced in order to periodically monitor implementation of projects contained in departmental infrastructure plans, and where necessary to enable departments to take timeous corrective action when problems arise.

A major challenge facing the unit will be to improve the planning process with regards to infrastructure management within departments, and the coordination of departmental infrastructure plans in order to produce an overarching provincial infrastructure plan that is credible. The Infrastructure Unit has commenced formulating a Provincial Statement of Infrastructure Needs, the purpose of which is to develop a credible provincial infrastructure plan which will be used as a basis for raising capital investment funding for infrastructure projects, and for integrated implementation of infrastructure projects.

Own revenue collection

The need to increase the levels of provincial own revenue collection remains an important priority for the provincial government. Increasing levels of own revenue collected has the potential to make a significant contribution to meeting the province's strategic goal of poverty alleviation. I reported in last year's budget address that a dedicated revenue component had been established in the Budget Office of the Provincial Treasury. The main focus of the unit is to investigate the entire own revenue policy, systems, structures and processes with a view to raising the levels of revenue collection within the existing legislative framework.

To this end, a major revenue research project was commissioned in 2003 to investigate the existing revenue base and collection effort and to recommend improvements to revenue collection systems.

Included in the terms of reference of this study was a comprehensive evaluation of the existing sources of revenue with a view to determining their proper bases, ensuring regular adjustments to tariffs, enhancing management and collection systems, and determining the feasibility of appropriate revenue retention and incentive schemes. Another important objective was to establish a more scientific model for the forecasting of revenue in the province.

The final report emanating from this research project became available just last month. The report contains a number of recommendations aimed at improving the revenue collection effort in provincial departments. If these recommendations are taken seriously and implemented by departments, I am confident that in the forthcoming MTEF period own revenue collection can be significantly increased.

2004/05 REVENUE AND EXPENDITURE PROPOSALS

Mr Speaker, I turn now to the provincial budget itself and the revenue and expenditure estimates for the 2004/05 financial year as contained in the Appropriation Bill, which I will table shortly. I believe we have fashioned a budget this year, which is aligned to meeting the province's developmental challenges. For details of the process followed in arriving at these proposals, I refer honourable members to Budget Statement One.

Available funding

As mentioned, the quantum of additional funding received by the province in the form of national transfers in this MTEF is considerably less than in the previous two years. Total additional funding available for distribution (including the MTEF Balance and excluding conditional grants) this year amounts to just R1,756 billion, compared to R3,339 billion last year.

Table 1 in the printed speech provides details of the source of this additional funding.

TABLE 1: ADDITIONAL FUNDING AVAILABLE FOR DISTRIBUTION - 2004/05
(R000) 2004/05
2004/05 Baseline revenue estimates
National transfers - 35 593 099
Equitable share - 31 937 519
Conditional grants - 3 655 580
Provincial own revenue - 840 784
Total revenue allocated (as per 2003/04 Budget Statements) - 36 433 883

2004/05 Revised revenue estimates
National transfers - 36 905 750
Equitable share - 33 058 939
Conditional grants - 3 846 811
Provincial own revenue - 901 175
Total revenue available for 2004/05 - 37 806 925

Total additional funding - 2004/05
National transfers - 1 312 651
Equitable share - 1 121 420
Conditional grants - 191 231
Provincial own revenue - 60 391
Total additional funding - 2004/05 - 1 373 042

Funding available for allocation - 2004/05
Increase in equitable share (new funding) - 1 121 420
Increase in provincial own revenue (new funding) - 60 391
MTEF Balance (existing funding) - 574 379
Funding available for allocation - 2004/05 - 1 756 190

I must emphasise that, apart from the additional R1,121 billion received from the national government in the form of additional equitable share funding, the province has contributed an additional R634,8 million of its own money to the budget for 2004/05. This is made up of an increased estimate for provincial own revenue collection in the amount of R60,4 million, and R574,4 million, being the MTEF balance which was held on Provincial Treasury's vote. This means that all funds available to the province for allocation in the 2004/05 financial year, and indeed the outer two years of the MTEF, have been allocated - there is not a cent left in reserve anywhere in the provincial budget.

Honourable members will recall that in the 2003/04 Adjustments Estimate, all the accumulated provincial cash reserves were allocated to departments to meet various expenditure pressures.

We now come to the revenue and expenditure proposals.

Revenue

For the 2004/05 financial year, the province is budgeting for total revenue of R37,807 billion. This represents an increase of R4,899 billion over the original budget for 2003/04, or 14,9 per cent. The 2004/05 budgeted revenue is an increase of R4,414 million over the adjusted revenue budget for 2003/04, or 13,2 per cent.

The budgeted revenue for 2004/05 is made up as follows:

Equitable Share - 33 058 939
Conditional Grants - 3 846 811
Provincial Own Source Revenue - 901 175
Total Revenue - 37 806 925

Expenditure

Turning now to the expenditure proposals, the province is aiming at a balanced budget for the 2004/05 financial year and outer two years of the MTEF period. The full amount of revenue available to the province for the 2004/05 financial year, namely R37,807 billion, is allocated to the various provincial departments. This includes all amounts previously held in the MTEF reserve. A serious implication of this is that there is no provision in the 2004/05 budget for redemption or repayment of over-expenditure incurred in the 2003/04 financial year, which according to the latest projections could be in excess of R450 million. I will return to this point later.

Details of the allocations to Departments for the 2004/05 financial year are contained in Table 2 of the printed speech. (See http://www.kwazulunatal.gov.za)

SIGNIFICANT FEATURES OF THE 2004/05 MTEF BUDGET PROPOSALS

Mr Speaker, the full details of the budget proposals I am placing before this House can be found in the Budget Statements. There are, however, numerous significant and special features of the budget, which I wish to highlight:

Budget objectives/strategy

Close analysis of the budget will show that it is aimed at addressing the developmental challenges I mentioned earlier, within the limitations of the available funding envelope - in line with previous budgets in this term, the 2004/05 MTEF budget is again strongly redistributive in nature
Funds allocated to the social sector of the provincial budget increase from 83,9% in 2000/01 to 86,8 % in 2006/07 - probably the highest proportion of social spending of any province
The budget focuses on poverty reduction strategies and job creation in line with the province's long-term strategic goal.

Aggregated and sectoral growth rates

Total revenue available to the province increases in both nominal and real terms - this should translate to higher real expenditure on social and other services, leading to improved levels and quality of service delivery
All major departments' budgets grow in real terms over the MTEF period.

Balanced funding of social sector departments

Social welfare's share of the budget continues to increase at an alarming rate - from 19,9% in 2000/01 to 30,4% in 2006/07. This trend is not sustainable. For this reason, a deliberate decision has been taken in formulating this budget to try to balance the funding requirements within the social sector, with health and education receiving a fairer share of additional funding. We could in fact have allocated the entire additional funding to social welfare, as the projected additional expenditure of the department over baseline exceeds the total amount of additional funding available to the province. This would not, however, have been in the interests of the country or the province. In this budget therefore, we have taken the stand that all social services are underpinned by constitutional obligations, and all are equally deserving of financial support to meet their respective service obligations and expenditure pressures
Thus education and health together receive 44% of total additional funding available in this budget, compared to 38-40% in previous budgets. Despite this decision, average real growth rates over the MTEF continue to reflect the disproportionate allocation to social welfare, viz a 2,6% real growth rate for education, 3,5% for health, 0,9% for 'other' departments and 9,5% for welfare.

Continued funding shortfall in social welfare department

I wish to place on record that, despite the allocation of some 74% of the additional equitable share funding received from national government for 2004/05 to the Department of Social Welfare, there is still likely to be a serious funding shortfall in the department in the forthcoming financial year - and indeed in the two outer years of the MTEF. In 2004/05 alone this could amount to over R1 billion, if the current growth rates in especially the disability grant continue. This is an issue that requires immediate action and intervention by the national government if the credibility of provincial budgets is not to be permanently compromised.

Growth rates in other social sector departments

The trends in the education budget are extremely encouraging, and confirm the importance, which this government attaches to this critically important function. The share of personnel expenditure to total budget actually falls from 93,1% in 2000/01 to 80.7% in 2006/07 despite additional funding for the recruitment of educators. In contrast, expenditure on learner support material and infrastructure rises from 4,3% and 1,0% to 9,0% and 6,1% of the budget respectively over the review period
The trends in the health budget are equally encouraging - the Non Compensation Non Capital (excluding transfers) share of the total budget increases from 26% in 2000/01 to 32,4% in 2006/07, reflecting increased expenditure on medicines, and non-capital medical supplies - both capital and NCNC expenditure experiences healthy, positive real growth over the MTEF.

Growth in 'other' departments

The budget provides for real increases in key 'other' departments - housing, transport, agriculture etc. Special allocations are made to:

The Department of Agriculture and Environmental Affairs for projects aimed at boosting the agricultural potential of communal farm land, supporting small scale farmer development, and alien weed control, while Ezemvelo Wildlife receives funding for alien weed control and investment in conservation infrastructure and eco-tourism. The Department of Agriculture also receives a new conditional grant to support the implementation of the Comprehensive Agriculture Support Programme (CASP)
The Department of Transport receives additional funding to boost road safety through the installation of intelligent road studs, for road maintenance and for the P577 and P700 road projects.

Labour intensive infrastructure projects

The increased allocation from the National Treasury infrastructure conditional grant is distributed to the departments of Health, Education and Transport in the amounts of R25 million, R20 million and R20 million respectively for 2004/05 for labour intensive infrastructure projects under the auspices of the Expanded Public Works Programme (EPWP).

Key ratios - structure of the budget much better than five years ago

The basic structure of the budget is much better than five years ago, when the last of the provincial debt had to be redeemed, and the province was not receiving its full share of equitable share funding in terms of the decision to phase in the Equitable Share formula
Personnel expenditure for example (excluding the capitalised portion), continues to fall as a percentage of total provincial budget, from 57,2% in 2000/01 to a projected 43,9% in 2006/07
Capital expenditure on infrastructure, on the other hand, continues to grow at a very healthy rate over the MTEF - in 2004/05 the province has budgeted to spend R3,240 billion on capital projects, an increase of 16,6% on the estimated actual capital expenditure of R2,778 billion which will be spent in 2003/04.

Conclusion - what the 2004/05 budget will buy in terms of service delivery outputs

In summary, the 2004/05 budget proposals will enable key provincial departments to achieve the following service delivery outputs.

In education:
Funding to:

build 1 322 classrooms and 1 375 toilets, reducing the learner: classroom ratio from 41.9:1 to 40.4:1 and
supply approximately 300 schools with permanent potable water supply
increase the amount spent per pupil on learner support material from R195 in 2003/04 to R263 in 2004/05 and no less than R352 in 2006/07 - well above the national average.

In health:
Funding to:

increase the number of sites available for voluntary testing and counselling for HIV/AIDS cases from 450 to 600
increase the number of admissions at community health clinics from 17,4 million to 18,3 million
complete the construction of 71 new facilities
complete 49 rehabilitation and replacement projects and
complete 307 upgrade projects.

In social welfare:

Additional funding to pay for an increase in total number of beneficiaries from 1 736 958 to 2 182 392.

In transport:
Funding to:

construct 81 kilometres of surfaced roads, 420 kilometres of gravel roads and 76 causeways and bridges
rehabilitate 660 000 sq metres of surfaced roads
maintain 740 000 sq metres of surfaced roads
create 131 000 employment opportunities and
award 20 390 Zibambele maintenance contracts.

In housing:
Funding to:

complete 47 projects in terms of the Provincial Housing Development Plan
build 20 000 houses in terms of the project Development Programme and
upgrade 2 300 hostel units.

THE STING IN THE TAIL

Positive as these budget proposals are, there are a few implications, which I need to bring to the attention of Executing Authorities and Accounting Officers of departments.

There are no reserves whatsoever left in the MTEF budget, either in the form of accumulated cash reserves in the provincial bank account or in the MTEF balance in Provincial Treasury's budget - every single last cent of provincial funds is allocated over the MTEF period.

This makes expenditure control and careful planning/budgeting absolutely critical, as departments and Accounting Officers will not - cannot - be bailed out if they overspend their budgets. This means in turn that departments, which overspend, must find the money from their own budgets. The policy of closing negative balances at the end of the financial year becoming the opening balances in the new financial year will be strictly applied at the conclusion of the 2003/04 financial year - Accounting Officers take note, you have been fairly warned!

I also want to reiterate what I have said repeatedly in previous budget addresses. The whole point of MTEF budgeting is that departments know in advance, as soon as the budget is introduced, what they will be getting in each of their programmes and sub-programmes in each of the three years of the MTEF. This enables departments to plan well in advance for the delivery and implementation not only of major capital projects, but also for the procurement of critical goods and services such as school textbooks. I find it quite unacceptable, for example, that the Department of Education should blame delays in the procurement of learner support materials for delivery at the commencement of this school year on the fact that they did not know what budget was available for this purpose until September of last year - as they did in a sworn affidavit to the High Court!

CONCLUSION

Mr Speaker, in conclusion allow me to make a few general points on issues of financial management and the provincial budget process before I formally table the budget proposals.

Firstly, honourable members who have accompanied me through the tabling of successive budgets in the last five years will recognize that we have achieved hard-won fiscal stability in the province.

The journey to achieving this has not been easy, especially in the first two years as we struggled to balance budgets, repay debt and yet still meet pressing expenditure pressures.

As I have mentioned, the financial management control and reporting systems and processes are now in place for continued sound management of provincial finances into the future - I do not foresee a repeat of the 1997/98 financial crisis. This said, I have also made it clear that the need for financial discipline, and sound planning and budgeting processes is greater now than ever - with limited funding, and continuing expenditure pressures in all sectors, there is simply no room for error.

During the last five years, the emphasis was necessarily on reforms to the financial management and budget processes in government - the priority now is to consolidate these reforms and pay greater attention to improving the efficiency of delivery systems across the board, so achieving better value and more outputs for the money we spend.

In particular, the incoming provincial government will need to pay greater attention to issues of good governance and the operationalisation of the PGDS - the linkages between the developmental aims of the PGDS and the budget allocation process will have to become more explicit and measurable.

In closing, Mr Speaker, allow me to pay special tribute to everyone who has worked together with me over the five year term of this parliament to enable this government to table a series of realistic, credible and soundly structured budgets which have placed this province on a firm financial footing.

My special thanks, therefore: to my colleagues in Cabinet, to members of the Ministers Committee on the Budget, and to honourable members of the House, who have invariably supported the budget proposals tabled with enthusiasm and in good spirit. In particular, I would like to single out the Finance Portfolio Committee and its chairpersons, who have visibly grown in stature and the quality of work performed in matters financial over the last five years, and who have contributed in no small measure to an effective provincial budget process. My thanks also to the Accounting Officers of departments and their financial support staff, who have borne the brunt of the many reforms and changes in financial management and accounting systems during the last five years. I pay special tribute to the Office of the Auditor-General, which has played an extremely positive and supportive role in helping to improve the standards of financial management and accountability in the province in the new dispensation. It would be especially remiss of me not to thank the national Minister of Finance and his team in the National Treasury for their able leadership and guidance during my term as Finance MEC. My membership of team finance through the Budget Council has been the highlight of my 25 years in the service of the province. Finally, but not least, my thanks to my Head of Department and his officials who have ably supported and assisted me through thick and thin in preparing the annual budget proposals.

It is now my privilege to formally table the Appropriation Bill, 2004, and the Budget Statements for the Province of KwaZulu-Natal for the 2004/05 MTEF period.

Issued by: Provincial Treasury, KwaZulu-Natal Provincial Government
24 February 2004