2014/15 EC BUDGET OUTCOME

PRESENTATION TO SELECT COMMITTEE ON FINANCE

19 JUNE 2015

EC Regional Economic Development Indicators

and Growth Strategy

Fiscal Sustainability

Budget Strategy to mitigate the risks to ensure Fiscal

Sustainability

2014/15 Expenditure and Revenue Preliminary Outcome

Recommendations

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PRESENTATION OUTLINE

EC REGIONAL ECONOMIC DEVELOPMENT INDICATORS

AND GROWTH STRATEGY

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ECONOMIC GROWTH AND EMPLOYMENT

• Economic growth and employment in the province have consistently been lower when compared to national averages.

• Consequently, at 29.6%, Eastern Cape economy records some of the highest unemployment rates in the country (mostly affecting youth, rural, or female groups of the population).

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• Unemployment in the province is widely linked to a wide array of socio-economic challenges. Levels of poverty, literacy and total household income are significantly lower in the EC when compared to neighbouring provinces.

• EC has also seen continued out-migration as a result of a lack of local job opportunities. There is a need for upgrading the population’s skills profile.

• Moreover, challenge of socio-economic development is very unevenly distributed within the province; with the burden of unemployment and poverty most prevalent in the former homelands.

• This requires an emphasis on addressing both spatial and structural inequalities in the provincial economy.

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ECONOMIC GROWTH AND EMPLOYMENT (CONT)

COMPOSITION OF REGIONAL GROSS VALUE ADDED (% of Total GVA)

• A breakdown of the sectoral composition of the EC economy is revealing the health of the local economy.

• Community services (which is largely government services) is the largest sector, followed by finance and lastly retail trade.

• Fact that government is the largest driver in the economy is testimony to under-development of local industry.

• All three of the largest economic sectors in the province fall within the tertiary service sectors which means that they depend on servicing households or industry.

• Primary sector of agriculture, despite our latent comparative advantage therein, remains largely under-developed.

• Historically, province boasted of a significant manufacturing base which continues to be dominated by automotive sector. Over the years, share of manufacturing in the regional economy has been declining (possibly as a consequence of some form of de-industrialisation).

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• Manufacturing activity in the province is highly dominated by the automotive sector – which has always been highly subsidized.

• There remains a need to diversify the industrial base whose production and exports are highly vulnerable to or influenced by global economic events.

• There is a need to assess the impact of the two provincial IDZ’s (or any new SEZ) in terms of enhancing regional exporting capacity – moving beyond the auto sector.

• Also examining the role and impact of past provincial industrial development and jobs strategies in terms of scale and impact.

EC MANUFACTURED EXPORTS (R MILLIONS)

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FIXED INVESTMENT

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• Fixed investment, both private and public, highly concentrated in the country – Gauteng, Kwa-Zulu Natal and Western Cape.

• Businesses services (Finance, Transport and Trade) sector dominate in terms of private fixed investment possibly crowding out investment in country’s manufacturing capacity.

• Investment by public utilities (mainly SOEs) remains concentrated in Gauteng, Kwa-Zulu Natal, Mpumalanga and Western Cape.

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PROVINCIAL GROWTH AND DEVELOPMENT STRATEGY• Ensuring fiscal sustainability through finding efficiencies in baselines and eliminating

wasteful and consumption expenditure.

• Improved institutional capability through better monitoring and accountability.

• Improvements in basic location factors such as water, sanitation, electricity – these add to competitiveness of a region.

• Infrastructure expenditure used to enhance the competitiveness and capacity of local economy and more specifically, the construction industry.

• Addressing structural constraints to growth, by improving labour productivity through improved educational outcomes and skills training, and improving functionality of local government to ensure service delivery.

• Export led growth by capitalising on the two provincial SEZs and the two metros – Buffalo City and Nelson Mandela Bay – as centres of growth.

• Increasing targeted support to small-holder farmers as a way of creating competitive agricultural enterprises.

• Develop the regional tourism potential sector through improved access roads infrastructure.

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PROVINCIAL GROWTH AND DEVELOPMENT STRATEGY (CONT.)

• Minimizing cost of doing business in the region through addressing issues such as broadband, telecommunications, port charges, access roads infrastructure, rail infrastructure (logistics costs).

• Addressing historical spatial inequalities in infrastructure development.

• Promotion of green economy through EPWP-led initiatives (erosion combating, re-forestation, aquatic systems management, thicket rehabilitation, waste management, recycling, etc.).

• Promoting re-industrialisation by:

o increasing support to municipalities;

o leveraging government procurement to increase and maintain industrialisation (50% local content);

o funding research to establish baseline environmental data prior to shale gas fracking (NMMU);

o capitalising on regional comparative advantages in agriculture including agroprocessing; and

o encouraging entrepreneurship by supporting SMME’s and cooperatives.

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FISCAL SUSTAINABILITY

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• R 7.9 billion lost due to 2011 Census results and learner numbers decrease

amongst others (2013/14 and 2014/15 MTEFs).

• R2.2 billion in 2015/16 MTEF top-slicing and function shift in Health and

Education.

• No ICS adjustment now and 5.8% salary adjustment increase in 2015/16 for

only existing warm bodies (final settlement is 7%, housing R1 200 per month

(R900) and medical aid is 28.5% (16.5%), coupled with the new LRA

amendments regarding contract workers. Impact of these is conservatively

estimated at R1.5 billion). This estimate is very conservative as it does not

include attrition and new appointments.

IMPACT OF FISCAL POSITION ON EC PROVINCE

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• Contingent liabilities R8.5 billion up from R4.9 billion in 2013/14 till now (health

litigation). Education litigations @ R110 million and Infrastructure depts. @

R400m.

• Employee benefits is R6.72 billion of which capped leave is R4.3 billion.

• Lease commitments (office space) of R266 million.

• Accruals of R1.7 billion for 2014/15 payable in 2015/16.

• 2017/18 fiscal cliff, as National Treasury cushioning for Census 2011 data impact

will cease .

• Section 139 interventions (Makana, KSD & Inkwanca municipalities) have to be

budgeted for.

DO MORE WITH THE LITTLE WE HAVE’

IMPACT OF FISCAL POSITION ON EC PROVINCE (CONT)

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BUDGET STRATEGY TO MITIGATE THE RISKS TO ENSURE FISCAL

SUSTAINABILITY

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REVIEW WITH INTENTION TO RIGHTSIZE PUBLIC ENTIITIES

• Public Entities play important roles in realizising government’s economic and social mandate.

• Review has started and the first phase status quo report is being processed through EXCO.

• Second phase is dealing with:

o comprehensive review on 3 entities and IDZ’s;

o regularizing some irregular practices in some entities; and

o putting in place a governance framework for all.

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• Key Service delivery areas and Non-negotiable items in Education

and Health are protected.

• Rigorous implementation of austerity measures, belt tightening and

fiscal discipline to mitigate the risk of fiscal instability.

• Non-core items have been kept at the 2014/15 expenditure level

excluding conditional grant allocations.

• Baseline of transfers to 3C and 3D Public Entities was reduced as

(3D entities operational cost will not be funded).

EFFORTS TO MITIGATE FISCAL CONTRAINTS

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FISCAL OUTLOOKProvincial Receipts

Main

Appropriation

Adjusted

Appropriation

Revised

Estimates

2011/12 2012/13 2013/14 2015/16 2016/17 2017/18

Transfers from national 53 485 911 57 256 953 59 908 794 62 000 452 62 000 452 62 000 452 64 372 141 67 687 193 70 934 641

Equitable share 44 644 170 47 559 888 50 256 614 52 154 185 52 154 185 52 154 185 54 311 819 57 367 961 60 069 069

Conditional grants 8 841 741 9 697 065 9 652 180 9 846 267 9 846 267 9 846 267 10 060 322 10 319 232 10 865 572

Total receipts from National 53 485 911 57 256 953 59 908 794 62 000 452 62 000 452 62 000 452 64 372 141 67 687 193 70 934 641

Total provincial payments 53 417 085 55 809 401 60 366 261 61 747 237 61 747 237 61 296 092 64 994 777 67 688 798 71 207 744

Surplus/(deficit) 68 826 1 447 552 (457 467) 253 215 253 215 704 360 (622 636) (1 605) (273 103)

Provincial own receipts 845 876 1 100 679 1 281 188 919 640 965 674 1 290 162 1 090 615 1 175 222 1 266 555

Less: Legislature receipts (4 784) (1 583) (696) (351) (351) (1 096) (367) (386) (405)

Surplus/(deficit) before financing 909 918 2 546 648 823 025 1 172 505 1 218 538 1 993 426 467 612 1 173 231 993 047

Financing 1 027 424 557 841 1 785 030 (100 598) 367 019 367 019 763 347 781 100 872 155

Provincial Roll Overs 71 426 44 491 38 310 58 366 58 366

National Roll-Overs 823 050 217 744 104 891 19 073 19 073

Other 132 948 295 606 1 641 829 (100 598) 289 580 289 580 763 347 781 100 872 155

1 937 342 3 104 489 2 608 055 1 071 907 1 585 557 2 360 445 1 230 959 1 954 331 1 865 202

Audited OutcomeMedium Term Estimates

2014/15

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FISCAL OUTLOOK (CONT’D)

• National transfers are insufficient to cover the total provincial budgeted expenditure resulting in a deficit.

• Provincial own sourced revenue supplements the fiscus which results in surplus.

• Surplus is guaranteed only in 2015/16.

• 2015/16 surplus is already over committed due to accruals, litigation, etc.

• Contingency reserve as well as surplus fund (cash position) are definitely not sufficient to mitigate the risk of the budget exposure.

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NON – VOTED FUNDS 2015/16

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2014/15 Expenditure and Revenue Preliminary Outcome

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• Province received its entire equitable share transfers from National Treasury.• Only R368 thousand CG funding was not received for the Social Development

Substance Abuse Treatment grant due to non submission of invoices.• Over collection on own receipts amounts to R485.7 million and is mainly due to:o R221.1 million mainly generated from positive balances in PRF;o R74.8 million surrender by the Trading Entity to DoT (sale of Kei Rail carriages);o Education over collected by R32.3 million due to recoveries on staff debt ; o Health over collected by R27.5 million due to patient fees payment from RAF; o DEDEAT over collected by R113.03 million mainly due to surrender of the social

infrastructure funding from ECDC.

SUMMARY OF YEAR END REVENUE OUTCOMES(R'000) Total

Provincial

Reciepts

2014/15

Adjustment Adjusted

budget

2014/15

Actual

Receipts to

date

Over (-) /

Under +

Collected

Actual as

% of

Adjusted

Budget

Equitable Share 52 154 185 - 52 154 185 52 154 185 - 100.0%

Conditional Grants 9 846 267 233 500 10 079 767 10 079 399 368 100.0%

Ow n Source Receipts 919 641 46 035 965 676 1 451 441 (485 765) 150.3%

TOTAL 62 920 093 279 535 63 199 628 63 685 025 (485 397) 101.2%

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• Transport (assisted by PT) is liaising with the Kouga municipality to recover the outstanding R21 million owed from licence fees collections dating back from 2010/11. Municipality has agreed to pay the outstanding amount back in instalments.

• Health is targeting insured patient population and reconciliations are under way to recover outstanding medical hospital fees from POMED and Road Accident Fund. Discussions are under way with GEMS to reconcile the outstanding medical hospital fees for recovery.

• Departments do not benchmark tariffs with the annual tariff reviews which impact on revenue maximisation.

• Capacity in departments to manage revenue collection is lacking as these posts are not prioritised to be filled.

OWN REVENUE CHALLENGES

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SUMMARY OF PROVINCIAL EXPENDITURE BY VOTE Department (R'000) Original

budget

2014/15

Adjustment Adjusted

budget

2014/15

Actual

Spending to

date

Over (-) /

Under +

Spending

Actual as

% of

Adjusted

Budget

EDUCATION 27 934 965 348 439 28 283 404 27 591 856 691 548 97.6%

HEALTH 17 509 011 170 031 17 679 042 17 500 194 178 848 99.0%

SOCIAL DEVELOPMENT 2 158 958 (2 240) 2 156 718 2 134 395 22 323 99.0%

OFFICE OF THE PREMIER 467 203 18 630 485 833 451 747 34 086 93.0%

PROVINCIAL LEGISLATURE 435 627 29 093 464 720 443 083 21 637 95.3%

ROADS AND PUBLIC WORKS 4 025 444 4 025 444 3 822 550 202 893 95.0%

CO-OPERATIVE GOVERNANCE AND TRADITIONAL AFFAIRS 876 196 11 143 887 339 871 653 15 686 98.2%

RURAL DEVELOPMENT AND AGRARIAN REFORM 1 867 163 3 315 1 870 478 1 853 191 17 287 99.1%

ECONOMIC DEVELOPMENT AND ENVIRONMENTAL AFFAIRS 1 444 359 (111 000) 1 333 359 1 229 112 104 247 92.2%

TRANSPORT 1 708 027 35 571 1 743 598 1 688 666 54 932 96.8%

HUMAN SETTLEMENTS 2 487 602 233 500 2 721 102 2 719 831 1 271 100.0%

PROVINCIAL TREASURY 377 779 (45 550) 332 229 323 091 9 138 97.2%

SPORTS, RECREATION, ARTS AND CULTURE 769 929 5 190 775 119 755 791 19 328 97.5%

SAFETY AND LIAISON 78 941 4 995 83 936 82 995 942 98.9%

TOTAL 62 141 204 701 117 62 842 321 61 468 155 1 374 167 97.8%

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• Province spent R61.4 billion or 97.8 per cent of its adjusted budget of R62.8 billion resulting in an under expenditure of R1.3 billion.

• Education under spent by R691.5 million due to:o Compensation of Employees under expenditure of R153.3 million;o Goods and Services under expenditure of R355.8 million: Learner Teacher Support Material (LTSM) - R21.5 million; Contractors - R57.7 million;Training and Development - R97.014 million; and Inventory other supplies - R72.8 million.o Payments for Capital Assets - R182.4 million.

• Health under spent by R178.8 million due to:o Compensation of Employees under expenditure of R69.8 million; ando Payments for Capital Assets under expenditure of R179.9 million.

SUMMARY OF PROVINCIAL EXPENDITURE BY VOTE (CONT’D)

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• DEDEAT under spent by R104.2 million due to transfers not made to Coega.

• Roads and Public Works under spent by R202.8 million due to:o Goods and Services under expenditure of R112.8 million; and o Payments for Capital Assets under expenditure of R69.7 million.

• Transport under spent by R54.9 million due to:o Goods and Services under expenditure of R34.8 million; ando Payments for Capital Assets under expenditure of R17.1 million.

• Office of the Premier under spent by R34.1 million mainly due to a delay in finalisation of the procurement of LAN and WAN maintenance.

• Departments have applied for a roll-over of unspent fund that are committed with the remaining funds to be surrendered to the PRF.

SUMMARY OF PROVINCIAL EXPENDITURE BY VOTE (CONT’D)

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CONDITIONAL GRANTSConditional grant (R'000)

Original

budget

2014/15

Adjustment

Adjusted

Budget

2014/15

Actual

Spending

to date

Over (-) /

Under +

Spending

Actual as %

of Adjusted

Budget

Agriculture: Comprehensiv e Agricultural Support

Programme grant 228 810 3 315 232 125 217 246 14 879 93.6%

Agriculture: Ilima/Letsema Projects grant 46 062 - 46 062 45 601 461 99.0%

Agriculture: Land Care Programme grant: Pov erty

Relief and Infrastructure Dev elopment 10 853 - 10 853 10 186 667 93.9%

Basic Education: Dinaledi Schools grant 13 342 - 13 342 13 001 341 97.4%

Basic Education: Education Infrastructure grant 1 177 914 - 1 177 914 904 590 273 324 76.8%

Basic Education: HIV and Aids (Life Skills

Education) grant 37 023 - 37 023 35 807 1 216 96.7%

Basic Education: National School Nutrition

Programme grant 984 548 - 984 548 976 787 7 761 99.2%

Basic Education: Technical Secondary Schools

Recapitalisation grant 32 928 - 32 928 24 359 8 569 74.0%

Health: Comprehesiv e HIV and AIDS grant 1 449 237 - 1 449 237 1 347 670 101 567 93.0%

Health Facility Rev italisation Grant 599 231 - 599 231 594 622 4 609 0.0%

Health: Health Professions Training and

Dev elopment grant 199 874 1 386 201 260 206 757 (5 497) 102.7%

Health: National Health Insurance grant 7 000 1 049 8 049 1 602 6 447 19.9%

Health: National Tertiary Serv ices grant 786 007 10 334 796 341 767 774 28 567 96.4%

Higher Education and Training: Further Education

and Training Colleges grant 319 517 - 319 517 311 464 8 053 97.5%

Human Settlements: Human Settlements

Dev elopment grant 2 159 218 233 500 2 392 718 2 392 718 - 100.0%

Human Settlements: Housing Disaster Relief grant - - 0.0%

Arts and Culture: Community Library Serv ices

grant 109 418 1 898 111 316 84 443 26 873 75.9%

Sport and Recreation SA: Mass Sport and

Recreation Participation Programme grant 64 895 1 091 65 986 64 602 1 384 97.9%

Public Works: Prov incial Roads Maintenance grant 1 294 279 - 1 294 279 1 175 291 118 988 90.8%

Transport: Public Transport Operations grant 195 282 - 195 282 195 277 5 100.0%

Expanded Public Works Programme

Integrated grant for Provinces69 544 - 69 544 68 230 1 314 98.1%

Education 3 115 3 115 2 812 303 90.3%

Health 2 000 2 000 3 026 (1 026) 151.3%

Social Development and Special Programmes 2 000 2 000 952 1 048 47.6%

Roads and Public Works 46 791 46 791 46 791 0 100.0%

Local Government and Traditional Affairs 2 000 2 000 1 933 67 96.7%

Rural Development and Agrarian Reform 2 681 2 681 2 486 195 92.7%Economic Development, Enviromental Affairs

and Tourism 2 102 2 102 1 472 630 70.0%Transport 4 099 4 099 3 141 958 76.6%Human Settlements 2 654 2 654 1 257 1 398 47.3%

Sport, Recreation, Arts and Culture 2 102 2 102 2 170 (68) 103.2%

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• Province spent R9.4 billion or 94 per cent of its R10.09 billion adjusted budget resulting in an under expenditure of R602.5 million. Conditional grants contributing to under expenditure for which roll over was requested for committed funds are:

o Comprehensive Agricultural Support Programme grant under expenditure of R14.8 million is due to delays in construction of the Tsolo Veterinary Clinic, delivery of kitchen equipment at Fort Cox College and the implementation of training programme resulting from poor planning and response on tenders by service providers;

o Education Infrastructure grant under expenditure of R273.3 million is due to challenge of availability of land for projects relating to Special Schools and Environmental Assessments which delays the rolling out of projects;

CONDITIONAL GRANTS (CONT’D)Conditional grant (R'000)

Original

budget

2014/15

Adjustment

Adjusted

Budget

2014/15

Actual

Spending

to date

Over (-) /

Under +

Spending

Actual as %

of Adjusted

Budget

Social Sector Expanded Public Works

Programme Incentive grant for Provinces41 714 - 41 714 38 729 2 985 92.8%

Education 2 580 2 580 2 127 453 82.4%

Health 31 242 31 242 31 079 163 99.5%

Social Development and Special Programmes 2 580 2 580 2 654 (74) 102.9%

Sport, Recreation, Arts and Culture 2 732 2 732 2 869 (137) 105.0%

Safety and Liason 2 580 2 580 2 191 389 84.9%

Occupational Specific Dispensation for Education

Sector Therapists Grant 6 571 - 6 571 6 562 9

99.9%

Substance Abuse Treatment Grant 13 000 13 000 13 000 - 100.0%

TOTAL 9 846 267 252 573 10 098 840 9 496 318 602 522 94.0%

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o Comprehensive HIV and AIDS grant under expenditure of R101.5 million is due to new NPO individual contracts not complying with SARS requirements, shortage in supply of condoms and misallocations where grant expenditure was paid from equitable share;

o National Tertiary Services Grant under expenditure of R28.5 million is due to long procurement processes for medical equipment centralised at head office for items over R1 million;

o Community Library Services Grant under expenditure of R26.8 million is due to library books delayed as they are overseas publication, modular libraries whose tender had to be advertised more than thrice since it was non-responsive and procurement of furniture for Mdantsane Library which was not delivered timeously; and

o Provincial Roads Maintenance grant under expenditure of R118.9 million is due to late awarding of disaster projects.

• Over expenditure on Health Professions Training and Development grant amounting to R5.4 million is due to 11 medical officers appointed against registrar posts funded by this grant at Frere hospital and replacement of 6 old registrars at Livingstone and Dora Nginza hospitals that were supposed to be funded against Programme 4.

• From the R602.5 million underspending R271.9 million is expected to be rolled over from the national processes.

CONDITIONAL GRANTS (CONT’D)

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• It is recommended that Select Committee on Finance:

oNote and support the proposal of agriculture as the game changer for

the provincial economy;

oConsider the tight fiscal envelope;

oConsider the further likely tightening of the envelope going forward;

oConsider the impact of the wage settlement as well as the LRA

amendments which have to be funded from within (conservatively

estimated to be R1.5 billion); and

oConsider the insufficient mitigation of the risk of the provincial budget

exposure.

RECOMMENDATIONS

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