2014/15 EC BUDGET OUTCOME PRESENTATION TO SELECT COMMITTEE ON FINANCE 19 JUNE 2015

1. 2014/15 EC BUDGET OUTCOMEPRESENTATION TO SELECT COMMITTEE ON FINANCE19 JUNE 2015

2. PRESENTATION OUTLINE 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

3. EC REGIONAL ECONOMIC DEVELOPMENT INDICATORS AND GROWTH STRATEGY

4. 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).

5. ECONOMIC GROWTH AND EMPLOYMENT (CONT) 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.

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

7. EC MANUFACTURED EXPORTS (R MILLIONS) 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.

8. FIXED INVESTMENT • 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. 8

9. 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. PROVINCIAL GROWTH AND DEVELOPMENT STRATEGY 9

10. 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: • increasing support to municipalities; • leveraging government procurement to increase and maintain industrialisation (50% local content); • funding research to establish baseline environmental data prior to shale gas fracking (NMMU); • capitalisingon regional comparative advantages in agriculture including agroprocessing; and • encouraging entrepreneurship by supporting SMME’s and cooperatives.

11. FISCAL SUSTAINABILITY 11

12. IMPACT OF FISCAL POSITION ON EC PROVINCE 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. 12

13. IMPACT OF FISCAL POSITION ON EC PROVINCE (CONT) • 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’ 13

14. BUDGET STRATEGY TO MITIGATE THE RISKS TO ENSURE FISCAL SUSTAINABILITY 14

15. 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: • comprehensive review on 3 entities and IDZ’s; • regularizing some irregular practices in some entities; and • putting in place a governance framework for all. 15

16. EFFORTS TO MITIGATE FISCAL CONTRAINTS • 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). 16

17. Fiscaloutlook 17

18. 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. 18

19. NON – VOTED FUNDS 2015/16 19

20. 2014/15 Expenditure and Revenue Preliminary Outcome 20

21. Summary of year end revenue outcomes • 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: • R221.1 million mainly generated from positive balances in PRF; • R74.8 million surrender by the Trading Entity to DoT (sale of Kei Rail carriages); • Education over collected by R32.3 million due to recoveries on staff debt ; • Health over collected by R27.5 million due to patient fees payment from RAF; • DEDEAT over collected by R113.03 million mainly due to surrender of the social infrastructure funding from ECDC. 21

22. OWN REVENUE CHALLENGES • 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. 22

23. SUMMARY OF PROVINCIAL EXPENDITURE BY VOTE 23

24. SUMMARY OF PROVINCIAL EXPENDITURE BY VOTE (cont’d) • 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. • Educationunder spent by R691.5 million due to: • Compensation of Employees under expenditure of R153.3 million; • 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. • Payments for Capital Assets - R182.4 million. • Healthunder spent by R178.8 million due to: • Compensation of Employees under expenditure of R69.8 million; and • Payments for Capital Assets under expenditure of R179.9 million. 24

25. SUMMARY OF PROVINCIAL EXPENDITURE BY VOTE (cont’d) • DEDEAT under spent by R104.2 million due to transfers not made to Coega. • Roads and Public Worksunder spent by R202.8 million due to: • Goods and Services under expenditure of R112.8 million; and • Payments for Capital Assets under expenditure of R69.7 million. • Transportunder spent by R54.9 million due to: • Goods and Services under expenditure of R34.8 million; and • Payments for Capital Assets under expenditure of R17.1 million. • Office of the Premierunder 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. 25

26. CONDITIONAL GRANTS 26

27. CONDITIONAL GRANTS (cont’d) • 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: • 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; • 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; 27

28. CONDITIONAL GRANTS (cont’d) • 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; • National Tertiary Services Grant under expenditure of R28.5 million is due to long procurement processes for medical equipmentcentralisedat head office for items over R1 million; • 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 • 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. 28

29. RECOMMENDATIONS • It is recommended that Select Committee on Finance: • Note and support the proposal of agriculture as the game changer for the provincial economy; • Consider the tight fiscal envelope; • Consider the further likely tightening of the envelope going forward; • Consider 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 • Consider the insufficient mitigation of the risk of the provincial budget exposure. 29